More goes into buying commercial real estate than into residential purchases.
A lot of questions need to be answered before purchasing a commercial building. — Getty Images/Opla

Buying commercial real estate is more challenging than purchasing a single-family home, so you’ll want to do your due diligence first. Here are six things to consider before buying a commerce building.

Location

Anytime you’re purchasing a property, you’ll want to consider the location, especially if you plan to use the building for business purposes. The infrastructure and surrounding neighborhood can either raise or lower the value of the property.

Here are some questions to consider about the location:

  • Are there any similar businesses located nearby?
  • Will you have access to any support services like parking?
  • What are the market trends for that area?
  • What are the zoning laws where the building is located?

Considering these factors from the start could save you from having to deal with a lot of potential problems down the road.

How the building is classified

A commercial building is a property that’s used for business purposes. But there are different classifications for different types of property.

For instance, office buildings are typically classified as Class A, Class B or Class C. Class A buildings present the lowest level of risk, while Class C buildings come with the highest level of risk.

Industrial buildings and retail stores have their own designations as well, so it’s important to understand how the property you’re considering buying is classified and what it means for you as a business owner.

Condition of the building

Knowing the building classification is useful, but you’ll also want to consider the current condition of the building. What was the building previously used for and what kind of wear and tear has it been through over the years?

Most properties come with some kind of hidden cost, so you’ll want to know about these things ahead of time. Before you buy the property, have it thoroughly inspected so you can uncover any potential problems, like mold or asbestos.

Financing options

You’ll need to find the right financing options to purchase the building. The type of financing you’re able to secure will depend on your personal and business credit scores, the type of property you’re buying and your lender.

It’s a good idea to get pre-approved before making an offer on the building. Your accountant can help you figure out what you can reasonably afford based on cash flow predictions.

You can consider the following types of commercial real estate loans:

  • Conventional mortgage
  • Bridge loan
  • SBA 504 loan
  • Hard money loan

[Read More: SBA Programs Every Business Owner Should Know About]

There’s a lot that goes into buying a commercial building, so you want to have the right people to help you through this process.

Earnest money

Once you’ve found the property you want to buy and have worked out all the details, it’s time to close on the property. At this point, it’s common for the seller to ask for earnest money, which is a deposit that proves you’re serious about purchasing the building.

Earnest money is usually around 1% of the purchase price, though sometimes it’s lower. However, the seller could request more if the property is located in a highly desirable location.

Once the deal goes through, the earnest money is a credit toward the purchase. Keep in mind, even if the deal falls through, the earnest money is not always fully refundable. However, it may be refundable if the seller decides to back out of the agreement.

Find the right experts to help

There’s a lot that goes into buying a commercial building, so you want to have the right people to help you through this process. Having the right team of experts will increase your odds of securing financing and spotting potential problems from the beginning.

Here are some of the experts who can help your commercial real estate deal go as smoothly as possible:

  • CPA
  • Contractor
  • Commercial real estate attorney
  • Commercial realtor
  • Mortgage broker
  • Tax attorney

The terms of the deal

Once you’ve made your offer and come to an agreement with the seller, it’s a good idea to take some time to review the terms of the deal. You'll want to check any paperwork provided by the seller. This will give you a chance to catch any problems with the property and avoid making a decision that could hurt your business in the long run.

[Read More: Guide to Property Insurance for Businesses]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published September 17, 2020