Each commercial real estate transaction has its specifics, but they still follow the same algorithm. The stages of a commercial real estate deal can be divided into five main steps and called the life type of the deal. Investors need to know and understand what activities occur in each stage and recognize when another replaces one phase. This article will look at how commercial real estate transactions arise and their stages.
Identity and Origin
The very first stage of a transaction is to find potential properties that could be a potentially lucrative investment. It seems easy at first glance, but easier said than done; at this stage, investors need to:
- Search the Internet for key criteria
- Work with local brokers to let them know what they are looking for and help them find properties that fit their criteria
- Come around the market (on foot or by car) looking for potential acquisitions
- Interact with other investors, lawyers, lenders, accountants, and architects who can also help you find a property to invest in; the broader your circle of acquaintances among these professions, the easier your search will be
- After finding, pay attention to those legal documents to determine motives for the sale
- Do direct mailings to property owners
All of these activities are designed to make sure you find a few potential properties worth the investment, but before you get to that point, you’ll have to look at dozens or hundreds of options.
Underwriting
Underwriting is a thorough analysis of the potential properties you’ve chosen. It would help if you did the following:
- Get financial data on the property
- Develop a financial proforma to model employment, income, expenses, and property valuation
- Start working with lenders and investors to learn about the terms of debt and equity increases
- A thorough analysis of the market and submarket
- Analysis of market conditions and demographics
- Calculate key return on investment metrics
- Start working with the seller to initially shape the deal
Due Diligence
No purchase agreement goes through without additional due diligence on the property. Performing due diligence should confirm that your choice is appropriate and in order with the law and other aspects. The due diligence should:
- Have a conversation with the property owner about the property’s maintenance issues and repair history
- Order an appraisal of the property to determine its real value
- Order technical reports
- Survey the property and review the serviceability of faucets, outlets, and lights
- Consult with a structural engineer to make sure the building is built based on safe construction
- Review all necessary legal, financial, and organizational documentation to ensure there are no potential pitfalls
Closing
During the closing phase, you need to coordinate all the details and sign all the documents for the legal title to pass to you. In the closing stage, you need to:
- Record the final value of the loan or your equity, and get a commitment letter from the lender
- Complete the title insurance policy
- Finalize all of your loan documents
- Transfer funds to the seller
Asset management
Asset management is an ongoing process that keeps the property you purchase in good working order. Sometimes this process is done by an outside firm, but mostly by the property owner. To perform the process, you need to:
- Do a business plan for the property
- Constantly monitor actual operating costs and adjust them if necessary
- Collect rents and transfer funds to the property’s bank account
- Track overdue reports and monitor current rents
- Maintain basic repairs
- Control capital expenditures
- Track market dynamics, and if anything, match rents to the current market