Buying a commercial building for your business is a big step, with many aspects to the process.
PART ONE explained the criteria you need to set before you begin looking to buy a commercial building for your business. Today’s post will focus on choosing your location, what you need to know before you make an offer, and the sales price.
Locating Properties and Setting Tours
- Start with an internet search at LoopNet
- Drive through your intended area and write down any locations with “for sale” signs on the building
- Call the listing agent or owner and set up an appointment for a site tour
A Word of Caution:
It is much harder to find a good “fit” when buying a building than when you are leasing. Unless the economy is in horrible condition it might take you a while to find a building. Be patient and don’t settle for less than what you want and can afford.
Before You Make an Offer:
- Are you qualified for the mortgage?
- Will the building meet the current and future needs of your business?
- Is the building zoned for your use?
- If the building needs zoning changes what is the cost and timing required?
- What legal entity will buy the building? Talk to an attorney about this decision
- What information do you need to know about the building?
- How old is the building?
- Hold old is the roof? The mechanical systems?
- Who owns the building now, and to whom do you make the offer?
How to Determine the Sales Price
What is the building actually worth? Go in person to the city assessor’s office. Yes, can go online and search buildings that have sold, but the people working in the assessor’s office have a lot of information about what is going on in the city, and may save you hours of searching through online records.
While you are at the municipal offices, stop in the planning department and see if they have any records on the property. Again, these people can give you a lot of information, such as if something like a fire or other accident happened at the property, and any existing zoning issues. Make sure your intended use is allowed in the property!
If you have some sales comps (comparable sales listings) drive by the buildings or research them on line to determine if those sold buildings are actually similar. Figure out the average cost per square foot of several similar buildings and average them out to get a true average. I never use the highest or lowest comp as there is usually a reason they are outliers. Take this average cost per square foot multiple by your buildings square footage and you have a general idea what the price should be.
This is a very complicated business! I’m trying to give you the simplest way to understand it, but suggest hire a commercial broker or appraiser to provide you with an opinion of value. While you will have to pay for that opinion, you will know when you make your offer that the valuation is going to allow you to get a mortgage. The bank will appraise the building so if you entered into a purchase agreement for more than it is worth you won’t get a loan, the deal will fall through, and IF your attorney put the right clauses in the purchase agreement, you should get your deposit back. Better to do your homework before you get involved.
Requesting Information to Make the Decision
Sometimes owners won’t provide much information about their tenants until they know you are a serious about the building. Or they want you to sign a confidentiality agreement in which you agree to not share any information about the building. This might require you to put out a binding letter of intent to the seller with a number of contingencies. Part Three will focus on the Letter of Intent, the Due Diligence Phase, and the Closing.