For those looking to make a commercial property purchase, I’d give this one piece of advice: go carefully.
Not because commercial property is a bad move, it can have incredible returns and make for a solid investment with ready-to-go passive income, far more so than residential investment properties. The tricky part is that there are so many shifting layers and unique fine details to take into consideration that, to the untrained eye, it’s easy to be overwhelmed, overlooked or undervalued.
Some possible factors that can come into play with commercial property purchases.
• Vastly varying prices. Unlike purchasing a residential home, where the value of the property is likened to other properties of it’s kind, there can be significant fluctuations between commercial property prices. Which ones are accurate and fair?
• Return on investment both short and long term
• Current purpose, licences and permits
• Current tenancy including the terms of the current lease agreements
If the property you are looking at doesn’t quite tick all the boxes, don’t lose heart. So many moving parts to a potential commercial property purchase means a lot of room at the purchasing end for negotiations.
Negotiating these terms on your own can be difficult and stressful. In order to know if the investment in front of you can clean up in your favour here’s a list of considerations to take into account when negotiating.
Negotiate face to face
Yes emails are easier, and you have it all on record, however, it’s not as personal and you don’t have that person’s undivided attention. A face to face meeting means that your issues have to be addressed then and there by the person representing the property owner, they can’t find a fancy answer through another agent in the office, or online. The second best option is a phone meeting.
They will want to please you and keep everything smooth, that’s their job, it’s also a chink in the armour you can take advantage of. Do your due diligence ahead of time and make sure your are armed with all the facts you need to avoid coming out red-faced. For buyers new to commercial property it is well worth paying a professional to go in with you and do the talking. If in doubt on a deal, say nothing, let the awkward silence draw out. The less you say the better, let the other party talk themselves into a better deal for you.
Their reason for sale
Knowing why the other party has their property up for sale can help grease the buying wheels in your favour. If you are in a position to help them out without damage then you can suggest some strategies that can work well for both of you. It’s a great way to close a deal in your favour while looking like you are the good guy.
The best way to get this information is through casual and friendly conversation. If you ask upfront and outright you are not likely to get a revealing answer. Instead, make small talk, share some stories and ask out of curiosity.
Before you start negotiations know in advance what your conditions will be so you can state them simply and clearly as part of your deal.
i.e. They may be looking to cash in to invest elsewhere or pay off debts, in which case you can look at offering to decrease the settlement period if they can meet some of your conditions.
Again, have a professional check over these recommendations and negotiations well before your meeting and always back up agreements and special conditions with legal documents from your commercial property conveyancer.
A good conveyancer
Get a commercial property conveyancer on board as early as you can in the buying process. Have a meeting to explain your purchase goals, that way when you find the property you want to go forward on they already know your expectations and can make sure your contract meets all requirements and can lay down terms for those that do not.
Quality is imperative here. You want to find a conveyancer with experience and a great history or work. The money you spend here will be all important in the long run.
Where can you afford to lose some ground?
Property prices can come down if you are willing to agree to tighter terms and a bigger deposit. On the flip side, property prices can also come down if you place fewer conditions on the vendor. That said there are some elements you should never budge on.
• Removal of hazardous materials and waste
• Repair of structural or environmental assessment issues
• Lack of compliance
• Title issues
• Zoning issues
• Permit issues
Have your finances secured
There is nothing more damaging than negotiating a great deal and then not having your bank come forward to meet your end of the bargain. Well before you start browsing properties know your budget, have serious discussions with your lender about all the terms and conditions to your loan, and/or getting access to your deposit funds. It’s up to you to and know exactly where you stand with your finance turnaround times so that any agreements made can be honoured in the real world.
If possible have a back up emergency financial go-to you can lean on to get you out of a tight spot. Remember, word travels fast in the business world, you need to be cautious about burning bridges early in your property bid, it may have long term consequences.
Up to date fittings
Whether your potential commercial property purchase is tenanted or not you need to take a good look at the current property fit-out and see if it is up to scratch. Check any existing lease agreements to see if there are existing terms and conditions for upgrading fittings every few years (this is usually a standard inclusion as it helps both owner and tenant if the property looks and feels up to date). If the agreed fittings have not be honoured or if the property looks dated and needs a lift you can look at negotiating this as part of your buying conditions or to get a decrease on the price, just be sure you are not left out of pocket if you chose to go ahead with a facelift after purchase.
Do the research to know all the costs connected with day to day running and maintenance so you are not left in the lurch when a bill comes rolling in.
Make sure you know of any potential impacts neighbouring buildings might have on contamination, waste and noise pollution. Service stations in particular can cause headaches around safe waste disposal. Negotiate the treatment or removal costs to be covered, or for the issues to be dealt with before you take possession of the property.
Not all the benefits are going to be up front and obvious. Before you weigh in on a property make sure you know what you are looking at. A good match here with your financial requirements will ensure you get the pay out that works best for your situation.
Of course strong returns means high rent and long lease terms so that is a factor that many commercial property investors jump on, however, there are alternatives when it comes to pay offs.
For those properties that offer significant depreciation you can offset your taxable income to compensate for equipment and building wear, tear and maintenance. For commercial properties this can be a significant income break that lasts a lot longer than the depreciation periods on residential properties.
Cast a wide net
Nothing will corner you into the bad end of a deal faster than desperation. Play the field and have a number of potential properties on your list where possible. This way you can confidently say no to a property buy if the cards don’t fall your way. If you don’t have other properties you are interested in, at least pretend you do in your mind so that you do not become locked into an emotional buy, this is a business deal after all.
A buyer who has nothing to lose by walking away will be more likely to demand negotiations and get them completed.
If the selling agent realises you are desperate, they are less likely to enter into negotiations. At the same time, you want to give a definite indication that you are interested and you’re worth their time and consideration. If you play it too cool, they won’t bother looking into compromises, figuring you will walk away from the sale no matter what.
That cool and motivated air is hard for new buyers to pull off, so be prepared to practice right from the first email you send.
If the selling agent knows their stuff your potential commercial property will be as stated, however, it’s worth doing some digging to find out for sure. If there are any discrepancies between the listing and the actual buy, you have instant room for negotiations. It pays to walk the floor yourself and measure the work surface size. Previous tenants may have restructured the working area space, changing the available work space measurements.
If the property is currently tenanted, make sure the rent payments are up to day and paid on time, it’s not an income to you if it turns out your inherited tenants are in arrears.