Pitfalls To Avoid In Commercial Real Estate

Pitfalls To Avoid In Commercial Real Estate

As wonderful and​ constant as​ commercial real estate is, there are some major pitfalls that can completely ruin the​ interest, investment and​ return on a​ property. Besides inaccurate assessments and​ risks that are beyond your comfort zone, the​ only real reason these pitfalls occur is​ because of​ the​ lack of​ due diligence that you perform. By not investigating deeply enough, not overturning every rock, and​ rushing into what seems like an​ awesome deal, you can experience some horrible events that can literally cost you hundreds and​ thousands of​ dollars.

These are setbacks I hope you never experience by asking every question, verifying everything, and​ assuming nothing.

Below you will find some unfortunate and​ common mistakes that can occur if​ you are not completely on your game.

Some of​ the​ major pitfalls in​ commercial real estate are related to​ the​ zoning and​ use of​ a​ property. Brokers may offer information that is​ not accurate about the​ rezoning and​ use capabilities of​ a​ property. Although many of​ the​ people in​ this business are honest and​ have integrity, you can bet you will run across a​ few brokers or​ agents that will do and​ say almost anything to​ sell a​ property.

Some problems that arise may include not checking with the​ city planning and​ zoning decision makers to​ see if​ a​ property can and​ will be able to​ be rezoned to​ the​ zoning that is​ expected. Also, just because the​ zoning may include your use, you must check with the​ city to​ make sure there are no special contingencies regarding use.

The last thing you want is​ to​ have a​ property you believe can be re-zoned to​ a​ higher and​ more profitable use, and​ after you purchase it, realize you cannot do what you intended! This can mean a​ less of​ a​ return on investment, or​ a​ complete loss of​ an​ investment. Believe me, situations can get very bad regarding the​ rezoning and​ use of​ a​ property, and​ fighting with the​ city will take more money, energy and​ time than it​ is​ often worth.

Another pitfall that can arise is​ purchasing a​ building that is​ leased, and​ then losing tenants due to​ leases or​ rental agreements being up! it​ is​ important to​ see and​ verify the​ leases of​ a​ building to​ make sure you will have some income to​ cover the​ debt service while you change, renovate, or​ do whatever it​ is​ you are going to​ do with the​ property. Verify you will have tenants when you purchase the​ property; otherwise, you may not have enough income, and​ this can leave you in​ the​ red.

It must be acknowledged that every property and​ situation can differ greatly from another. Because of​ this, there can be many different ways that a​ property can go. for​ this reason, all “what ifs” must be addressed, as​ well as​ exit strategies created for​ every scenario. When you limit yourself on exit strategies, you increase your possibility for​ failure.

With every property you must ask yourself, “What is​ the​ worse that can happen?” Weigh the​ risks and​ the​ probability of​ the​ worst happening, and​ either plan an​ exit strategy for​ this possibility, or​ don't move forward. You must look at​ everything from the​ worst to​ best case scenario, and​ have an​ exit strategy for​ each. Not only will you be prepared for​ anything that comes your way, but you will have less of​ a​ chance of​ really getting buried and​ losing money on an​ investment gone badly.

In commercial real estate, I often see a​ person trying to​ save a​ few thousand dollars that ends up costing him or​ her hundreds of​ thousands, just because they try to​ play hard ball with negotiations. it​ is​ always important to​ know what you are willing, and​ not willing to​ do when you go into negotiations regarding the​ purchase or​ selling of​ a​ property, as​ well as​ leasing and​ rental agreements.

For example, asking for​ $35.00 per square foot and​ being offered $30.00 per square foot, (reasonable in​ this situation), and​ assuming the​ interested party is​ very motivated about the​ space, and​ coming back with $33.00 a​ square foot and​ nothing less, my cause the​ loss of​ the​ three year leasing agreement, and​ the​ income for​ another two months from the​ property because it​ is​ not leased out is​ definitely not worth it!

Take the​ $30.00 per square foot; get the​ property leased up, and​ make an​ agreement that the​ rate will increase two or​ three dollars every year after. Don't lose the​ tenant because you want to​ play hard ball in​ negotiations when, really, you can make it​ work!

As you become more educated and​ get closer to​ reaching your goal of​ being a​ real estate insider, you may want to​ branch out into new markets and​ expand your comfort zone. This is​ great. However, you must realize there are many differences between various types of​ properties. Doing a​ deal with a​ 120 unit apartment complex is​ different than a​ 55,000 square foot office building.

When moving into different markets, items can easily be overlooked, and​ major problems can arise, simply because you are not aware of​ them. it​ is​ often a​ good idea to​ partner with someone already in​ that new market so that you may have the​ benefit of​ experience and​ know-how on your side. Learn form this venture so you will be more familiar with the​ market, property, and​ how it​ should be addressed. it​ is​ easy to​ get in​ over your head with new markets that can lead to​ major and​ expensive problems.

As you continue on your adventure in​ commercial real estate, be sure to​ do all your homework regarding a​ property. You will be less likely to​ run into problems, or​ better yet, be prepared to​ fix the​ problems if​ financially worth it. Never assume everything is​ as​ it​ appears, because, more often than not, it​ isn't! You must play smart in​ this game, or​ you can lose everything. Use you resources to​ get the​ best and​ most accurate information and​ you can avoid these pitfalls in​ commercial real estate.

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