Purchasing A Commercial Building?
Learn How the Pros Do It!
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From Craig Melby, CCIM, founder of LeaseSmart.com
This week I wanted to talk about purchasing property. I know we’ve spoken mostly about leasing. That’s because so many businesses make a higher yield on their investment by investing in their company whether it’s new locations, Research and Development, new employees, etc… So they make more money that way but there are circumstances where you’re making money and you don’t necessarily need to put it in your business. You’d rather put it into your real estate and own the real estate at the of 10 or 20 years or whenever. Examples might be a law office that does not plan to open up additional locations or medical offices. There’s a whole segment of business out there where it makes sense to buy your facility.
Of course there’s investors too which we work with and know that a good piece of commercial real estate is a beautiful thing. Today, I will address the secrets the Pros use to acquire real estate. I want to address 6 main things that might not be so common to the inexperienced real estate purchaser.
Number 1: The first comes right at the very top of the contract and that is the “buyer”. Who is the buyer? I personally put my name in there. Craig Melby and/or assigns or we could use a partner and/or assigns but I always use the “and/or assigns” because while we’re in due diligence putting this deal together, we will form an LLC which will take title to the property. What we run into sometimes, rightly so, the seller will say no matter who the buyer is “Show me proof of funds”. There’s a good reason for that because some Buyers cannot close on a piece of real estate. What they’re trying to do is control it. Put in under contract and flip it for more money. That’s not very fair to the seller because the seller is thinking he’s going to sell it. Then the deal falls apart. He may have turned down another buyer. The market may have changed. So that is a problem that sellers need to be careful of so I understand that. But we’re legitimate, we close on properties and we do exactly what we said we’ll do. When they say, “Show us proof of funds”, well that’s irrelevant to us because this is going be a new LLC. Sometimes I don’t even know who the final partners are going be. You have to check me out and decide if I’m credible. I can tell you about other deals that I’ve done etc. Usually we get over that with some discussion and they realize we’re legitimate and we intend to close and the only times we haven’t closed is when there was something wrong with the real estate and everybody can understand that. The point would be, as a buyer, you would want to put your name “and/or assigns” and most likely form a new LLC for each property that you purchase.
Number 2: The other thing is the Escrow Money. We don’t see any reason to provide Escrow money with the offer, in case the offer is not accepted. We always refer to a deposit in the purchase offer but it’s due 3 days after acceptance of the contract by seller. That way, we’re not cutting checks and dispersing and putting the money back in. It just saves a lot of time and trouble and we haven’t had any trouble with sellers agreeing to that. So that’s when the deposit gets paid: after the contract is accepted.
Another thing on the deposit: This could be a big property and the deposit could be a pretty big too, rightly so. But until the due diligence is complete and the money is still refundable, there’s no reason to put down all this money. So we split fund our deposit. We put a little bit of deposit down the 3 days after the contract and then we put additional earnest money upon removal of contingencies. That’s when it becomes more relevant because you can back out of the deal at any time during the contingency period. So really what relevance is the deposit at the early stage.
Number 3: We use a special custom contract similar to what most sophisticated buyers will use. The standard stuff that your Real Estate Commissions want you to use, I find very frustrating. They don’t cover a lot of things we want covered, and when they do, they do it differently than we want. Most of the sophisticated stuff we see is not mentioned in the standard form contract. A contract written by a real estate attorney in your state is much better, with some investors using the same contract for decades.
Number 4: The other thing, and this maybe more common in standard purchase contract but you want to make sure it’s in there because we’ve been burned before, is that you want to see some sort of title insurance within a short period after contracting for the property. The reason is, if you spend a lot of time and trouble and money doing your due diligence and lining things up to buy a property, you don’t want to find out later in the game that there is a title problem that could screw up the whole deal. So you want to be sure before you spend all that time and money that the title is good and you can close and receive a good title.
Number 5: The fifth item that is not necessarily in all contracts and you want to make sure it’s there if this is a property with tenants in it. The seller might tell you about the tenant: how long their lease is and what they’re paying and all of the terms as well they should. You also have the tenant acknowledge those facts, and so that’s what an Estoppel Letter is. The tenant signs a letter that says these are the facts and they better agree with what the landlord says. Funny story: I was buying a foreclosed property from a bank and the contract said the Seller had to supply Estoppel Letters. After due diligence while we’re waiting to close, I get a call. The bank wants to talk me about the contract. Well fine. So I go up to the Executive Office and there’s me and about 6 attorneys and 5 executives in their big Board Room. “What is this all about you guys?”. Well the bottom line is they decided they didn’t want to provide Estoppel Letters and they gave me all kind of song and dance on why it’s not necessary and blah blah blah and they’re just not going to do it. I listened as I do, courteously. When they’re all done I said “Okay, well fine. If you decide not to provide the Estoppel Letters and then after I close, I find out that what you’ve told me is not accurate then I’ll just have to sue you. You could hear a pin drop I could tell you because they thought they just going to bowl me over with all this massive negotiating power.
“There’s a reason for Estoppel Letters”
I said “Guys, the smoke and mirrors don’t matter.” There’s a reason for Estoppel Letters and they protect everyone and there’s no reason you can’t go to the tenants and say “Here’s the way we think the deal is. Sign here.” Now is the time prior to closing to discover if there’s some difference because the tenant could say “Oh no no! My lease expired. Or the landlord promised me certain improvements that hadn’t been done yet. All kinds of changes. Maybe that lease document that we are all looking at is not the most recent one or whatever. So Estoppel Letters are common and you need them. I always recommend all my clients who are tenants to go over them, sign them, they’re a necessary part of doing business.
Then the final issue which is fairly typical but we do it a little more stringent than most contracts and that is the Contingency Period. Our contract is contingent upon A. B, and C: A. Physical Inspection – You’re checking out the roof, the interior, the HVAC, the plumbing, the wiring, all those things you need to check out and you have X days to do it. We usually use, depends on the difficulty of it, but 30 days after the acceptance of the contract, we can do that. Then, under the Contingency Period there’s B. Seller shall deliver the following to buyer within 10 days after acceptance of the contract. That’s architectural drawings and plans and specs as are available, copies of all contracts, leases, documents, agreements, etc. which affect the ownership of the property and the current survey. Then the last sentence of B says – Buyer shall have 30 working days after receipt of the last of the items with which to approve or disapprove items, and if one of these items fail upon inspection, we can terminate the contract. If you didn’t supply me with this document, the clock didn’t start ticking until it’s provided. Now, sometimes the sellers didn’t read carefully enough, didn’t realize they have to provide these things and many times we’ll work with them. We’ll amend the contract or let them know “You don’t have to provide that, we understand.”. Sometimes we do but you know we’re trying to protect ourselves and make sure all of our “I’s” are dotted and our “T’s” are crossed. Maybe you heard me mention the current survey. A survey is important and it needs to be current and you’re going to need it if you’re going to finance the property and many sellers don’t have a current survey and even providing an old survey is a big help but if you don’t provide the survey that’s going to be a contingent item that you really should have done. It’s going to cost money; it’s going to take time. You might have to extend the contract and by the way, with many of the properties we purchase, there will be a contract amendment before closing because something came up, things are taking longer and as long as we’re sincere and working hard and the sellers understand what we’re trying to accomplish, they always give us an extension because we’re saying “Hey! We’d like to purchase the property. This is what we’re attempting to do but we can’t unless we have these things so you tell us. Do you want us to continue on and purchase this property or not?”. Usually they do want us to continue on so they give us an extension when we need it. Finally, Contingency C is – Buyer obtaining acceptable appraisal. So that would be yet another contingency and there’s no timeline on that. A real sharp seller or seller’s attorney might address a few of these items quite frankly, and put some strings on and some time frame and that’s all fine. But this is the way we like to start out. Many times we get it exactly this way and many times we close on the deals just like this. You know, we need to protect ourselves. There’s nothing worse than wishing you could hit a do-over button instead of owning a piece of real estate you really would rather not own. That can be a nightmare.
So, if you’re thinking of buying a property, in addition to the normal things, those are what I see the Real Estate Pros do when they purchase a property.
For personal assistance with leasing or purchasing commercial real estate anywhere in the United States, contact us for a free, initial consultation, at 800-640-9141, or contact Mr. Melby directly at CraigMelby@LeaseSmart.com