Demystifying the Commercial Real Estate Transaction Process in 7 Steps
A commercial real estate transaction can be anything but simple. There are countless steps from the initial search for a quality investment to the inception of a deal and the final signature —and for the new-to-commercial-real-estate investor, the process can be quite overwhelming. This feeling is compounded by an industry that has traditionally been anything but transparent. However, as technologies continue to improve and the industry adapts, these behind-the-scenes, multi-faceted processes are continuing to be demystified.
Here’s a quick synopsis of a typical commercial real estate deal:
The beginning of the process is sifting through hundreds of properties that may be suitable acquisitions for an investor’s portfolio. This process is really driven by the investor determining specific criteria they are looking for in a property to help narrow down this list from a macro view to a micro view.
The investor narrows the list of potential investments based on their short-term and long-term goals (Will the investor renovate and sell? Does the investor have a long term hold strategy? etc.). The investor should receive pre-approval for financing in order to ensure a seamless process in the purchasing of an asset. The timing needs to be concrete or there is a risk that the deal may fall through if financing cannot be obtained in time.
The next step is for the investor to survey the market again and find any and all potential properties that match the investor’s requirements. Once a few properties have been identified, the investor will then tour and inspect the properties to see if they qualify to begin the underwriting process. The underwriting process involves an in-depth financial analysis that combines current data with assumptions related to future performance.
Step four is to focus on all qualified properties, and then tour of the properties that have met all requirements. Once the investor has identified which properties they would like to pursue to add to their portfolio, the investor needs to ensure that the properties pass the underwriting process.
If a property passes the underwriting process, the investor can then make an offer to the property owner and negotiations can begin. Once an investor submits a first round bid, the chase is on and eventually the seller will narrow it down to two potential buyers, in which they will interview and determine the right buyer.
After the buyer has been chosen, the investor will then introduce legal counsel, execute a purchase and sale agreement and conduct due diligence.
More Transparency in CRE
CRE transactions in the past have been very secretive with very limited insight mainly due to the financial incentives that are offered to keep information private in the traditional system. As technologies such as blockchain are introduced, there will be increased levels of transparency during each step of the CRE process. For example, the underwriting and due diligence processes can both be simplified by having a blockchain network verify listings and all those involved in the CRE process.
If you’re interested in taking the first step toward investing in real estate, or if you’d like to discuss adding another real estate investment to your portfolio, Founders Grove can help. Contact our team to set up a strategy session so we can discuss your needs in greater detail.