Buying a property for your small business can be a great investment. However, just like any form of investment, commercial real estate comes with some risks. Those risks increase if you don’t know the common pitfalls to avoid. We spoke with the experts to find out the common mistakes most business owners make in commercial real estate investing.
The top 25 mistakes when investing in commercial real estate include:
1. Buying Commercial Real Estate in Your Own Name
Antonella Colella, Lawyer and Real Estate Broker, Snyderman Law Group
A common mistake some business owners make is buying commercial real estate in their own personal name instead of the business entity’s name. By their nature, commercial properties bring a whole host of liability. You don’t want to be held personally liable for whatever issue may arise.
Read our guide to forming a real estate holding company for more info.
2. Incorrectly Assessing Your Space Needs
Bruce Ailion, Realtor and Attorney, LocationLocationLocation.com
If you don’t correctly assess your space needs and don’t take into consideration your future needs, you might end up buying a property that doesn’t provide for expansion. You can always lease out excess space but without adequate provisions for growth, it may ruin your business. Running out of space means overcrowding, and it can cause lower productivity. It can also force you to move, and that can be costly.
3. Failure to Investigate the Prior Uses of the Property
Robert R. Pellegrini, Jr., CEO, PK Boston Law
If you fail to investigate the prior uses of the property you’re buying, you might end up with an environmental issue. For instance, if you’re buying a property that will incorporate a children’s facility and it used to be an auto dealership or hardware store, it’s going to be a concern to lenders or insurance companies. This could pose an obstacle you can’t overcome.
4. Buying a Property When the Business is Relatively New
Jim Jacobs, President, Focus Insite
One mistake a business owner makes is buying a commercial property when the business is just relatively new. This means the business is not yet financially ready for such investment. You’re better off investing in your business to make it grow than investing in brick and mortar. A building is illiquid. It’s best to grow your business first before deciding to buy a commercial property.
5. Forgetting About Occupancy Licenses
James Timothy White, Founder and Broker, WeSaySold.com
Just because a building seems physically ready to be occupied doesn’t necessarily mean it really is. A business owner needs to obtain all necessary licenses for the building to be utilized and occupied. Forgetting to obtain such licenses can be very costly. Make sure to call your city or county to secure the required occupancy licenses.
6. Failure to Check the Zoning Ordinances
Jason Rittie, Zoning Attorney and Partner, Einhorn, Harris, Ascher, Barbarito & Frost, PC
Before buying a property, you should first evaluate and investigate the current land use and zoning ordinances. This is to determine whether your intended use of the property is permitted under current zoning ordinances. Failure to check the zoning ordinances may result in certain violations or you may not able to use the property as intended.
7. Investing in a Property That Is Difficult to Liquidate
Tobias Owen, Salesperson, WeOpenDoors4You.com
Without careful consideration, it could be easy to buy properties that are actually difficult to liquidate eventually. Circumstances change, and a business owner may have to let go of the property for the sake of his business. It’s best to be careful in buying a property; ensure you’re not wooed by the least expensive option and invest into a property that can’t be readily liquidated.
8. Choosing the Wrong Location
Jonas Sickler, Marketing Director, ReputationManagement.com
Choosing a commercial property for a new business goes beyond analyzing traffic patterns and neighborhood demographics. There are many things that you need to consider when choosing a location, such as your target market, the neighborhood community, your and your employees’ residences, and the safety and security of the place, among others. Choosing the wrong location may cause the business to fail.
9. Not Knowing Your Rights Against an “As Is” Clause
John Vukmanovic, Co-founder and Partner, Delman Vukmanovic LLP
When a seller sells a property “as is,” it doesn’t mean the seller can fail to disclose issues they should reasonably disclose. The seller isn’t completely absolved for not reporting what they should have just because there is an “as is” clause. As a buyer, you should know your rights about this and be aware that you may have legal recourse if the seller didn’t fully disclose certain issues about the property.
10. Relying on Information in Public Listings
Russ Moroz, Associate Director, Marcus & Millichap
One common mistake in buying a commercial property is relying solely on publicly available listings as your source of information. This limits your options, and chances are you won’t find the best fit for your business. It’s best to work with a knowledgeable broker who knows about many other available properties not listed on public websites that you’ll never find yourself.
11. Failing to Consider the Timing of Your Move
Jamie Barati, Managing Director and Principal, Cite Partners
If your company is currently leasing space, you need to consider the timing of the move to the property you’re buying. The purchasing process can take up to 60-90 days, depending on the building and any complex issues that might arise. The property may also need improvements before you can take occupancy, which can take another three to six months. It’s best to consider this to time your purchase strategically without being pressured because you’re squeezed for time.
12. Not Shopping for Commercial Real Estate Loans Early On
Brian L. Peart, President, Nexus Financial Group
Even if you are a good borrower, you might still get turned down by a lender. Failure to shop for commercial real estate loans early on may cause delays in your purchase, and this may also affect your business. It’s important to check on several loan options even before you decide on buying a particular property.
For more information, read our article about the best commercial real estate loan providers.
13. Letting Your Emotions Influence Your Decisions
Phillip Walter, Leasing and Retail Property Professional, Real Commercial
The biggest mistake when buying a property that you should avoid committing is to let your emotions influence your decisions. A strategic purchase should be based on a property’s size, historical performance, location, and usage. Don’t simply buy a property because you consider it to be affordable or because you fell in love with it.
14. Failing to Plan Ahead
Richard Lorenzen, CEO, Fifth Avenue Brands
Failing to make ground-level planning is one of the common mistakes business owners make when buying a property. Before you make any move, you should outline your expectations and plans thoroughly. Proper financial planning should also be included in this plan, especially the upfront costs, ongoing expenses, mortgage payments, and how much income you need to be able to afford them.
15. Failing to Understand the Lender’s Underwriting Requirements
Michael Blank, Founder, Syndicated Deal Analyzer
One common mistake most property buyers commit is not understanding the requirements of lenders before they spend a lot of time, money, and energy looking for a property. It’s essential to conduct a preliminary discussion with some lenders to know the amount of loan they can lend you and the requirements that you need to comply.
16. Relying Too Much on Your Broker
Brian Good, CEO, iBorrow
A big mistake business owners make is relying too much on the broker. Buyers need to independently and objectively verify the information provided to them, especially by brokers. As a business owner, you should do your own due diligence and be prudent and cautious when dealing with brokers.
17. Not Hiring an Attorney with a Commercial Real Estate Background
Tom McHale, Regional President, The 504 Company
There are many borrowers who try to close commercial real estate deals with an attorney who doesn’t specifically specialize in commercial real estate transactions. An attorney skilled in real estate can help you fully understand important details such as closing costs early on, and will know when to negotiate due diligence periods and extensions that allow for unforeseen closing delays.
18. Buying the Property in a Rush
Chad Bermingham, Vice President, Avison Young
One of the biggest mistakes is buying a property in a hurry. Some business owners set their hearts on the first property they see and don’t give themselves leverage to negotiate by considering other locations. It’s best to take your time when buying a property. Consider all angles, such as the location of competitors and talent pool, transportation, parking, local community, taxes, proximity of neighbors, and budget.
19. Unwilling to Spend Money for Proper Due Diligence
Gordon C. Duus, Chair – Environmental Law Department, Mandelbaum Salsburg
Some property buyers refuse to spend the money for proper due diligence when they are buying a property. Failure to do proper due diligence may lead to a more costly legal cleanup later on when certain issues are discovered after the purchase. Problems such as environmental and legal issues can possibly arise after the property is bought, but these could have been discovered early on with proper due diligence.
20. You Don’t Plan to Stay in the Same Location for 7 Years or More
Evan Tarver, Staff Writer, Fit Small Business
Buying commercial real estate is a better option if you plan to stay in the same business location for seven years or more. If you are not sure about this, or if you foresee your business moving to a different location, then buying a commercial property is not a wise decision.
21. Not Consulting an Experienced Lawyer
Hunt Mortgage Group, Staff Writer, Hunt Mortgage Group
Failure to consult an experienced lawyer to help you with legal matters for both the purchase and financing processes is a costly mistake that you should avoid early on. The lawyer will assist you with all the legal requirements in buying a commercial property as well as negotiating with the lender when it comes to loan terms and requirements.
22. Failure to Align Business Strategy with Real Estate Decisions
Verity Commercial, Staff Writer, Verity Commercial
One big mistake most business owners make is the failure to align and connect their real estate decisions with their overall business strategy. This can result in adverse effects on your cash flow, the flexibility of your business, and productivity. As a business owner, you should always remember that it’s not really about buying a property, but more about growing your business.
23. Failing to Get an Accurate Valuation of the Property
Gyanendra Mohan Rashali, Staff Writer, 99acres.com
One common mistake you should avoid when buying a commercial property is failing to assess the correct valuation of the property before purchasing. Making a rush decision is not good when it comes to commercial real estate investing, so it’s important to spend a considerable amount of time browsing through other commercial properties in the market and comparing their prices before finally deciding on buying.
To learn more, read out article about how to determine fair market value.
24. Failure to Inspect the Parking
Rockpoint Commercial, Staff Writer, Rockpoint Commercial
Parking is a significant attribute of a property. Avoid committing the mistake of not thoroughly inspecting the available parking slots when buying a commercial property, especially if your customers need to visit you from time to time. It’s best to visit the property and inspect the parking space during busy times.
25. Overlooking Upfront & Ongoing Costs
Property 24, Staff Writer, Property24
When buying a commercial property, you need to know the upfront costs and should be financially prepared to pay that. You should also not overlook the ongoing costs of owning a commercial property. Failure to take these costs into consideration may negatively affect your business’ finances.
Buying a commercial property is a great breakthrough for your business. You should spend more time in making strategic decisions when purchasing a property, as this is both your business asset and investment. Make sure to avoid the above common mistakes when it comes to commercial real estate investing.