So you just caught wind of an exciting new lead. Now, what? What do you need to move the deal along? It is now time to collect some details. It’s essential that you map out some preliminary information before taking any of your deals further. It can be hard to know which details to take into account, and in this article, we will help direct you to answers for questions you should be asking. These details will help you decide how you should go further into the deal, by providing proper insight into margins, timelines, and processes you will need to go through. They form the basis for underwriting any deal, and you can view them below.
Inquire About Income And Expenses
The first thing to take into consideration is the property’s Gross Income, which will help calculate the Gross Operating Income (GOI). You should also find out what the expenses are. This will help you determine the business strategy for the property, in other words, how you can make yourself a profit from the deal, and what resources you will need to make it market-ready. How quickly can you sell it? Should you form a syndicate? Are there any other positive return applications for the property?
As we mentioned in our other article, your ROI is the most important factor to take into account. I mean, at the end of the day, we want to make money, and maximize the ROI for our time!
Gathering certain information can give you more than just a little insight. One of the most important terms in Commercial Real Estate is Net Operating Income or NOI, understanding this is crucial. You will need to educate yourself on the different formulas there are and how to use them. Below is the formula for calculating your Net Operating Income.
Gross Operating Income (GOI) – Operating Expense = Net Operating Income (NOI)
As you can see, there is other information that is needed in order to get down to the real grit: THE PROFITS!!!
In our article about calculating net operating income(link bold to appropriate article), we dig deeper into what information is needed to fill in all the formulas.
What Is Property Vacancy?
Another crucial detail that you must find out about is the vacancy. This can be a key factor in ascertaining long-term gross income from the property. The NAR found that;” Among respondents, the average commercial vacancy rate across commercial types (multi-family, industrial, retail, and hotel) was 7.3% in 2019 Q4.”.
Here are some details that you should find out about the tenants and the vacancy in general.
Firstly, you’ll need to find out the number of tenants. This number will influence tremendously the value of the property. While you will not need to gather information about every single tenant, you should get a clear idea of the individual rental incomes, names of tenants, and find out if there are annual property progression benefits.
Additionally, you should learn if they have some Estoppel certificates that they can provide. Estoppel certificates will be extremely beneficial to you. They pretty much confirm that the owners are following the terms of the agreements with the tenants. This makes the owners seem more trustworthy.
What Are The Owners’ Motivations?
Another essential detail you should find out if you are looking to invest in commercial real estate should be the owner(s) mortgage info and story. These background details may not seem that important, but you should always look to get the full picture.
The owner’s story is fundamentally important as well:
Why did they decide to buy this property?
Why are they considering to sell?
Is there any specific motive?
Is the owner in a rush to sell?
Does the owner have a plan to invest their money after selling the property?
Another and more important reason for learning more about property owners is to get a better understanding of the surrounding property potential. Does he/she know other property owners in the area, who may also be looking to make a deal?
These are all questions that owners should answer. Usually, the owner will not mind divulging these details if they have nothing to hide, and this can be a huge jump on to some off-market properties that could be on the way to market. Perhaps, a great opportunity to intercept and capitalize.
Be On Top Of Collecting & Analyzing Property Details
Another essential detail that you should learn from the owner is the best use for the property. This can make or break a deal. Fortunately, there are a lot of digital tools available to help make this collection process smoother. Great resources like Reonomy, house huge databases of property details, and other amazing insights and statistics.
You should also get as much info as you can from surveying around the property. Ask the tenants about the owner and the actual property. Maybe ask people that live or work near the property about any details that you want to know. If you don’t like going around talking to people, then the internet is your best friend. We guarantee that you will be able to find tons of information online about your potential property.
One more thing to take into consideration is the real estate entitlements that you can obtain. If you have any plans to use your property for a specific reason, you should get an entitlement for that. The entitlements will also allow you to re-develop your property. Overall, entitlements are something you need to know about when you’re in the Commercial Real Estate business.
Deep Dive Into Financials And Payment Details
So, you’ve talked to the owner, gathered a lot of essential information about the property, what’s next? Now it’s time to find out more details about the financial side of the deal.
1. Is this an off-market property opportunity?
To begin with, you should find out If you are dealing with an off-market opportunity. More specifically, if you are unsure of the properties current acquisition state, utilizing powerful technologies like 1PropertyMarket, can help bypass the headaches of back-and-forth in order to vet good deals from great deals, by allowing you to set asset parameters and territories. From there, opportunities are generated and further steps can be done to also nurture these opportunities.
2. Is the seller open to doing Seller/Owner Financing?
Speaking of budget, you should find out if the owner is interested in seller financing. Seller financing (or Owner Financing) usually creates a win-win for both the buyer and seller, especially if you can work out a good deal. But, this can depend on the situation, and you should find out if it is a possibility.
3. Are they interested in a 1031 exchange?
On the topic of payment, you need to find out if the owner wants cash-out refinancing or a 1031 exchange. And, on the same note, you should learn about the interest amount and the down payment. These factors will be vital when it comes time to seal the deal.
The Final Details
The last few details you need to gather are contract details. Are you setting escrow terms, agreement durations, and other contract details?
You should invest in developing a contract, and if you need help or don’t know where to start then consider joining MTIP Systems platform to get your hands on the contracts we use. A good contract will make the difference for you between making a bank or going broke.
Lastly, you need to set or discuss how many days it will take for all parties to close the deal and get proper signage and documentation in order for finalization.
Success Is In The Details
These were some of the most essential details you should gather from the property owners when you are considering a commercial real estate deal with a potential seller. You should now have a much clearer idea of the things you have to ask. This will save you a lot of stress and effort in the future. Whenever you get a new lead in the pipeline, it is vital to take these aspects into account.
