Resource Library
The Difference between Residential & Commercial Real Estate
While caution and good judgment needs to be exercised in a residential purchase, the final decision in a residential property transaction often comes down to emotion. In a commercial real estate transaction, while emotion plays a part, the commercial transaction is infinitely more complex. There are issues of:
- Zoning: Do not automatically assume the property can be legally used for your intended purpose. If a property is zoned for a use, many times a municipality will sometimes restrict uses even though the use would be allowed in the code. This occurs most often in a redevelopment zone.
- Business Sense: One of the most heartbreaking occurrences for a commercial real estate person to see is a “Closed for Remodeling” sign. We all know what that means outwardly. But what it means inwardly is that some family has more than likely, lost most or all of their life savings in a business that has failed. While business failure has many reasons, one of the most prominent is lack of customer traffic. Don’t make the mistake of thinking that your product is so great customers will seek out your business. Place your business in a location where they can drop in on an impulse and see you frequently. The least expensive location can many times be the most expensive. A commercial broker helps you analyze traffic counts, area demographics and issues of plain ingress, egress.
- Investment Property: Investment properties are judged by the Net Operating Income (N.O.I.) they produce. The higher the risk to receiving a steady stream of that income the higher return you should demand. To get to the real N.O.I. the entire property’s operation must be analyzed on an annual basis. Work being done by an owner needs to be charged back and perks an owner is taking need to be added back in to arrive at a true N.O.I. A $500/month error in computation can mean as much as a $60,000 error in the price an investor pays. It makes sense to have a professional analyze the property for you.
All of these issues should be examined in what is called Due Diligence.
A Due Diligence period is usually a 30 to a 120 day period that a buyer of commercial property has to examine the property to be sure the property is right in every legal way for their intended commercial use or that they are truly getting the investment return for which they paid.
If a commercial real estate property is in your future we hope our Resource Library helps.
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