Buyers: Do you know what happens once you’ve signed your contract?
Deals can happen fast in Commercial Real Estate. But speed isn’t guaranteed. It’s possible to spend months, even years, searching for the right property. Then, negotiating the deal can be intense. When it’s finally under contract, buyers feel relieved.
But this is the wrong time to sit back and relax!
The contingency and due diligence period (which is between 30 and 60 days, depending on the contract) has buyers and brokers running to get everything done:
- Securing the loan.
- Satisfying the lender’s requirements.
- Managing structural, environmental, and other inspections.
- Completing and reviewing the title search and land survey.
- Gaining zoning approval.
- Bringing in architects, building contractors, or other professionals to prepare the property for you.
Additionally, it’s easy to forget about the costs associated with buying property. During the contingency period, buyers need to hire a variety of inspectors, contractors, and often an attorney. They’ll need to put down earnest money and prepare their down payment.
Those who don’t understand this will have a difficult time crossing the finish line.
However, the job of a Commercial Real Estate Broker is to prepare buyers for the contingency period. We’ve been through it many times before and serve as guides, project managers, and consultants during this period.
You can rely on a qualified broker to tell you what you need to do, where you need to be, and whom you need to contact. That person will also orchestrate the processes and the people, keeping things running on time and on budget.
Here’s what we tell our clients.
First, a Word about Contractors
Qualified Commercial Real Estate brokers (like your friends at Hilliker) cultivate a broad network of contacts. They know those who have been successful at projects similar to yours in the past. They probably even know whom to avoid.
As you require it, your broker will provide a list of the pros you’ll need during the contingency period. However, we stop short of making recommendations. When it comes to the final choice of who does what, we let you, the client, decide.
Then, your broker will help ensure you’ve hired every contractor you need — and that you’re spending the correct amount of money to get the deal done in time. We help you manage those contractors so that you won’t miss a single contingency deadline.
Step 1: Get Your Lender On-Board
The first time you meet with your broker, you’ll discuss how much you intend to spend. Hopefully, you’ll confirm that number with your lender as well. Once you’ve signed the contract on the property, you’ll typically have 30-45 days to obtain a loan and satisfy all of your lender’s requirements.
Don’t wait to find out what those requirements are! Though it’s possible to get everything done without a previous conversation, we want to get ahead of the curve as much as possible.
Part of what lenders need to do is examine your creditworthiness and collateral. Have this information ready for them to review:
- Your liquid capital.
- Buildings you already own (including your home).
- Other assets you own.
- Tenants you have (or expect to have).
- Businesses you own.
- Financial statements from the last three to five years plus your projections over the same period.
Also, you’ll need to prepare your down payment. It’s usually 20% of the purchase price, though some loans require less. This is a massive amount for many investors. They’ve spent much of their life acquiring it. Don’t get caught off-guard when it comes due.
Step 2: Complete Physical and Environmental Inspections
The physical inspection of the property will ensure that it’s structurally sound. You’ll be able to rely on a single commercial building inspector for most everything. They’ll be able to catch problems like:
- Leaky or damaged plumbing.
- Dangerous or outdated electrical systems.
- Foundational cracks, erosion, or leaking.
- Issues with the land, including drainage, parking, or outdoor lighting.
- Termite or other pest-related damage.
- Places where the building falls short of safety, air quality, fire code, or ADA requirements.
We’ll also want to bring in separate inspectors who can determine the efficacy of the big-ticket items: usually an HVAC specialist and a roofer. They’ll catch details generalists might not, saving you time and money in the long run.
We’ll also need to complete a Phase I Environmental Survey to determine if the property has been contaminated by previous use. During the Phase I, a surveyor will provide an investigation into current and historical uses of the site to determine the likelihood that contamination is present. If we find any issues, a properly structured contract will allow you to back out.
Sometimes sellers don’t seem motivated to complete the required work with excellence. It only makes sense — they’re on their way out! They’re likely only to do the bare minimum.
In cases where it seems like environmental concerns will be a problem, we can negotiate for the buyer to choose the contractors and oversee the repairs — even though the seller is paying for it. It’s less work for the seller. And you, as the buyer, will get a better result.
Step 3: Engage a Title Insurance Company
During your contingency period, we’ll also choose a title company to make sure the person or entity selling the property has the right to do so.
You or the seller will pay for title insurance, which insures the buyer against someone else coming along and claiming ownership of the property.
The insurance is contingent on the title company’s research of the title and survey of the land. And it’s incredible the things that can stand in the way of a “clean” title: Business partnerships that have gone sideways, divorce decrees that weren’t followed, decades-old liens, or a history of unpaid taxes.
The title company will also perform an American Land and Title Association (ALTA) Survey. This will help them determine if the property’s boundaries are the same as claimed by the seller.
It will also help them discover “encroachments”: a legal term for building or installing something on another person’s land. Common encroachments include outbuildings, driveways, underground pipes, and retaining walls.
If so, we’ll want to know if that entity has obtained:
- An easement (legal permission to encroach on the land). Easements can be granted to a variety of private individuals, corporations, or government entities. (Many properties have easements granted to utility companies.)
- A license (an informal agreement with the current owners which is not legally binding).
If this comes up, your broker will help you determine what your options are and, if appropriate, help you negotiate with the third party.
Sound complicated? (It is!)
Too many entrepreneurs and investors enter this process without help. Or they enlist the advice of someone who isn’t an expert in Commercial Real Estate — a world with its own quirks, rules, and pitfalls.
We want you prepared for the journey of buying your commercial property. Though there may be challenges, there’s no reason for you to encounter them without a trusted guide. You can partner with someone who’s been there before. Someone who has access to the resources to help you complete a successful — and profitable — transaction.
Whether you’re beginning your search or already well into it, bring an experienced expert onto your team.
Jon Wilsonholme helps investment, industrial, office, and retail clients close real estate deals throughout St. Louis. Leveraging his previous experience as a leasing agent, he’s also worked as a tenant representative throughout the US. You can learn more about Jon here.