Negotiating

The most important aspect of negotiation is information gathering, this is when you determine the value of the property and the price you are willing to pay for it. It is wise to have a solid team in place upon entering this phase that includes a real estate lawyer. A good lawyer will also be able to introduce you to bankers, brokers and other deal makers.

Unless you are a seasoned negotiator with experience in commercial real estate investment, utilize your broker to conduct the negotiations.

A broker will:

1. Make an offer on his or her principal’s behalf
2. Relay the seller’s counteroffer to the principal
3. Allow the principal time to consider
4. Engage the seller in negotiation.
   

A commercial real estate investor also will need to negotiate or renegotiate leases. Know the market and what similar space is renting for.

Upon conclusion of the negotiation process, a formal contract of sale is prepared that outlines the terms to which you and the seller have agreed.

This document includes the following:

1. The property address and legal description(s) of the property
2. Agreed-upon price and terms (all cash or subject to financing)
3. A financing contingency clause (how much time the buyer has to get a loan – usually three months in a commercial transaction).
4. An inspection contingency clause (how much time the buyer has to physically inspect the property)
5. A good faith deposit (usually based on a percentage of the ultimate down payment after financing, usually 1/4 of the equity). This money is held in escrow by the seller’s attorney, title insurance company, or escrow company.

At this time, more thorough inspection needs to be conducted including hiring a professional engineer to check the property and an environmental inspector. The title company will check the local property records to verify the seller is “rightful” and authorized to sell. During this process, the company is charged with gathering deeds and mortgages, information on tax arrears, old unpaid mortgages or anything that may cloud the title and must be cleared up before the closing. The buyer is given an owner’s title insurance policy.

Financing

Lenders will need to see copies of leases and service contracts plus a projected income statement. Other documents will be resume and financial statements of the buyers, income analysis, property description and official physical inspections by a professional engineer. Once the lender determines a buyer meets all criteria, they will give the prospective buyer a letter stating that they are willing to make a loan, but the buyer needs to agree to additional requirements including payment of a commitment fee of 1 to 2% of the loan, updated surveys, appraisals, physical and environmental inspections, title inspection, personal credit checks, etc.

Lenders offer several types of mortgages including adjustable rate mortgages (ARMs), self-liquidating, fixed-rate, balloon and others. Each has their own advantages and disadvantages.

Mortgage brokers may be hired to help a borrower find mortgage money. The broker’s fee is a percentage of the loan. Brokers may be a good choice for the novice real estate investor as they may access to many lenders and may know where to place a particular loan, expediting the process if the borrower has to apply to several different lending institutions. A mortgage broker also acts as an advisor and intermediary between the borrower and lender during the negotiation of the terms of the loan. He or she will also assist in completing loan documentation.

The Closing

After the property passes all inspections, the bank has given a formal loan commitment and all contingencies have been removed, the chain of title is acceptable to the buyer, etc. it is time to meet to exchange assets with the seller. A letter should be prepared notifying tenants of the change in ownership.

The seller must present the following to the buyer:

1. Selling price
2. List of prepaid expenses to be reimbursed by the buyer such as real estate taxes.
3. Statement of any escrow money being held
4. List of any brokers’ commissions that are the seller’s responsibility

Likewise, the buyer must present:

1. Purchase price
2. Prepaid expenses that have to be reimbursed to the seller
3. Any accumulated portions of unpaid bills on the property such as real estate taxes

Once all the above terms and any other considerations have been agreed to, the seller then hands over a key and the exchange takes place.