Tag Archives: Buying commercial real estate

How to Prospect for Apartments

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The answer to how to prospect for apartments in order to find a real estate investing opportunity can be as easy as turning on your computer or driving around town or picking up your cell phone. The best sources for locating properties are:

Commercial Brokers

Local brokers can be found by driving around or through apartment areas and taking down the information on the “For Sale”, “For Lease” or “Space Available” signs. You can then call the broker directly or visit the website if it was listed on the sign. Another way is to enter “Apartment Brokers” in your search engine and check out the websites you come up with to find someone in your local area.

Although in most areas of the country there is not an MLS (Multiple Listing Service) for apartments like there is for residential properties, apartment brokers have their own listings of properties for sale, as well as a database of properties that other brokers have for sale. They will have properties locally as well as nationally. Utilizing a broker usually does not cost you anything as a buyer because the brokers will typically be compensated by the seller. In cases where the buyer does pay all or part of the commission, it is worth the cost if the broker has found you a great deal and probably saved you more than the cost of the commission.

Internet Sites

A number of good websites can lead you to potential apartment deals. The most well known is Loopnet, which is similar to a multiple listing service for apartments. To find other sites such as CIMLS is to google “Apartments For Sale”. Please note that most of the sites will ask you for a city or state. You can usually narrow your search once you are onto the site.

You can also go directly to the websites of national apartment brokerage firms where you can see their listings and get valuable market reports. The beauty is that if the property you’re looking for is no longer available, you can sign up for property availability alerts or contact one of the brokers directly. By talking with a broker, you may find that the property you were checking on is no longer available, but that they are getting ready to list another property that may meet your criteria.

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Real Estate Investment Clubs

Most of the larger cities in the U.S. have a number of local real estate investment clubs. These groups provide great opportunities to network and meet with other investors who have a similar interest in apartments. The members typically include just about everyone: beginning, as well as seasoned investors, brokers, attorneys, title company officers, appraisers and others who make their living from the various real estate investing professions. Most of these associations meet once a month to discuss current events, share information and have an expert speak to the group.

To find clubs in your city, enter “real estate investment club” in your search engine or try going onto the National Real Estate Investor Association website and then search for the nearest club in your area.

Newspaper Ads and Publications

You can often find owners of apartments who want to sell by looking at newspaper classified ads, craigslist and real estate publications ads. Magazines that are good are Real Estate Forum and publications by France Publications. Newspapers can include your local paper, The Wall Street Journal, The New York Times and the Los Angeles Times.

Other Sources

Others who may be able to assist you in your search include your own personal network of contacts, a local realtor or the realtor you bought your house from, your banker, your attorney or your accountant, any of whom can possibly assist you in your search.

Whatever you do, have fun learning how to prospect for apartments. Talking with others increases your knowledge and expands your network.

As I say throughout my blogs, if I may be of assistance with your apartment questions please contact me, I truly want to help.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

If you want some tips on how to sell my apartments fast click on this link.

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How to Prospect for Commercial Real Estate

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The answer to how to prospect for commercial real estate in order to find a real estate investing opportunity can be as easy as turning on your computer or driving around town or picking up your cell phone. The best sources for locating properties are:

Commercial Brokers

Local brokers can be found by driving around or through commercial areas and taking down the information on the “For Sale”, “For Lease” or “Space Available” signs. You can then call the broker directly or visit the website if it was listed on the sign. Another way is to enter “Commercial Real Estate Brokers” in your search engine and check out the websites you come up with to find someone in your local area.

Although in most areas of the country there is not an MLS (Multiple Listing Service) for commercial properties like there is for residential properties, commercial brokers have their own listings of properties for sale, as well as a database of properties that other brokers have for sale. They will have properties locally as well as nationally. Utilizing a broker usually does not cost you anything as a buyer because the brokers will typically be compensated by the seller. In cases where the buyer does pay all or part of the commission, it is worth the cost if the broker has found you a great deal and probably saved you more than the cost of the commission.

Internet Sites

A number of good websites can lead you to potential commercial property deals. The most well known are Loopnet and Costar, which are similar to a multiple listing service for commercial properties. To find other sites such as CIMLS is to google “Commercial Real Estate For Sale”. Please note that most of the sites will ask you for a city or state. You can usually narrow your search once you are onto the site.

You can also go directly to the websites of national commercial brokerage firms where you can see their listings and get valuable market reports. The beauty is that if the property you’re looking for is no longer available, you can sign up for property availability alerts or contact one of the brokers directly. By talking with a broker, you may find that the property you were checking on is no longer available, but that they are getting ready to list another property that may meet your criteria.

Real Estate Investment Clubs

Most of the larger cities in the U.S. have a number of local real estate investment clubs. These groups provide great opportunities to network and meet with other investors who have a similar interest in commercial property. The members typically include just about everyone: beginning as well as seasoned investors, brokers, attorneys, title company officers, appraisers and others who make their living from the various real estate investing professions. Most of these associations meet once a month to discuss current events, share information and have an expert speak to the group.

To find clubs in your city, enter “real estate investment club” in your search engine or try going onto the National Real Estate Investor Association website and then search for the nearest club in your area.

Newspaper Ads and Publications

You can often find owners of commercial properties who want to sell by looking at newspaper classified ads and real estate publications ads. Magazines that are good are Real Estate Forum and publications by France Publications. Newspapers can include your local paper, The Wall Street Journal, The New York Times and the Los Angeles Times.

Other Sources

Others who may be able to assist you in your search include your own personal network of contacts, a local realtor or the realtor you bought your house from, your banker, your attorney or your accountant, any of whom can possibly assist you in your search.

Whatever you do, have fun learning how to prospect for commercial property. Talking with others increases your knowledge and expands your network.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me, I truly want to help.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

Exit Strategies in Commercial Real Estate|Buying with the End in Mind

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One of the most important things that you can do when you purchase a property is to think about your exit strategy. You should have more than one exit strategy when you purchase an asset and you should think about the worst case scenario which will involve “how do I exit this under-performing investment?”.

Originally most people think that they will own the property forever and you may very well do that. However, I suggest that you review each of your properties on an annual basis to make sure that they are meeting your current investment and personal goals. Priorities in life will change over time and your investments should adjust with those priorities.

I believe that one of the best investment strategies that you can have is “buy low and sell high”. This would mean that when you are at the height of the market you would sell your property or properties, hold the cash in a low risk investment, keeping your money liquid and then get back in when the real estate market is down. You will probably be into your new properties for less than you were into your previous properties. Remember that you make your most money when you have bought the property at its lowest point.

Following are some exit strategies for you to think about when you purchase that special investment.

STANDARD SALE BY HIRING A REAL ESTATE PROFESSIONAL

The first exit strategy is the one that most people go through which is to hire a real estate broker and sell the property. You will want to calculate your breakeven point taking into consideration not only the amount of money you have invested in the property, but also the liens, commissions and closing costs. Plan and discuss the sales strategy thoroughly with your broker, and have him run the comparable sales in the market so that you can price your property accordingly.

Remember the 80/20 rule when it comes to brokers. The rule is that 20% of the brokers do 80% of the sales. Look for that broker in the 20% arena.

To help your broker get the most offers and to maximize the sales price, it‘s a good idea to spruce up the property and/or stage it. Aim to look better than your competition.

FSBO – FOR SALE BY OWNER – SELL IT YOURSELF

Your next exit strategy might be to sell the property yourself. You can save some commission money; however, in commercial real estate I always suggest that you add the commission money into the sales price and let a broker handle things. Doing it yourself will take some time and work from you as you will need to come up with a marketing strategy. If you do belong to an investment club or are well connected in the commercial real estate community, then you may do well to put a marketing strategy together and do it yourself.

The marketing strategy should include these four essential components: defining the investor or buyer, understanding your competition, clearly presenting the benefits that you are offering and structuring your pricing and terms.

PROVIDING SELLER FINANCING

The third exit strategy that you might want to consider is Seller Financing. The benefits of seller financing include:

  • receiving monthly payments without having to worry about all of the ownership issues such as procuring tenants, maintenance issues, etc.
  • deferring taxes as you will only have to pay taxes on your yearly gain (check the current tax laws with your accountant on this)
  • makes the property easier to sell as the new buyer won’t have to go out and get a new loan
  • draws more potential buyers as some buyers won’t qualify for a traditional loan due to income documentation, self-employment or minor credit blemishes
  • provides a greater likelihood of getting full market value for your property
  • gives you a liquid asset as you can sell the note at a later date also giving you an opportunity to strategize or plan for the gain
  • allows you to receive a higher interest rate on your money than if you put it into other things such as bonds, savings accounts, etc
  • provides the peace of mind that your security is the real estate that you have owned and thus know quite a bit about
  • saves you money on the closing costs

The major negative of seller financing is that you may have to go through the foreclosure process if the buyer defaults, and the house may need repairs once you have foreclosed. If you are going to do seller financing I suggest that you get at least 10% down, run a credit check on the buyer so that you understand your risks and have the loan secured by the property.

UTILIZING A LEASE OPTION

Another exit strategy is to utilize a Lease Option. In this scenario, you put the tenant in a lease with the option to purchase the property at a set price at a future date. At a minimum, the monthly rent should cover your monthly costs and you should require a non-refundable deposit that is applicable to the purchase price for the option right. The pluses to this strategy are:

  • it’s a great strategy in a slow market where you would have to take a loss if you sold the property today
  • this type of tenant will typically take better care of the property
  • you may not have to pay a real estate commission if the tenant buys the building

The negatives are (1) if the market goes up and you have to sell it at less than market as you cannot sell it to anyone else during the option period;  (2) your current mortgage may have a “due on sale clause” and this event may trigger that clause.

DO A 1031 EXCHANGE

If you have done a great job with your investment and you are looking at substantial capital gains if you sell the asset, you might want to consider a 1031 exchange. This is the Unites States government’s way of allowing you to exchange all or a portion of your capital gains through the purchase/exchange into another property. There are many guidelines and rules to follow in this process, but they can be well worth looking into as you can “move up” in your investments through time without paying taxes until you fully divest yourself of the investments.  You may also be able to pass them along to your heirs “tax free”.

DECLINING GROWTH

If your strategy is to get into properties, fix them up or re-tenant them and resell it, your financial model will tell you when to sell. A property’s internal rate of return is a metric that tracks the total return of the investment over its holding period. As you stabilize the property, its income goes up and the rate of return goes up with it. Once you’ve gotten the property optimized, it earns a good return, but the rate stops going up. At that point, you’re no longer creating value, and it’s probably time to sell.

BALLOON PAYMENTS

Most owners hope to pay down their loan every year while growing their income and the property’s value. The longer you own it, though, the less of an effect these changes have on your overall position. For example, if you have a 20 percent equity position and it goes to 22 percent, it’s a 10 percent increase while going from 50 to 52 percent is a 4 percent increase. Many commercial real estate mortgages call for balloon payments between seven and 10 years into the loan. Given that the loans are inconvenient and expensive to refinance, the balloon payment due date is an excellent time to take your money out, reinvest it by trading up into another property and start again.

CONCLUSION

As you can see, there are many exit strategies. The key is to have a few in mind when you purchase the property and to review your goals each year to make sure that your portfolio is performing as your current goals require. I’ll leave you with the thought “Always buy with the end in mind” and you will always sell with a clear profit.

As I say throughout my blogs… if I may be of assistance with your real estate questions, please contact me.  I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.

Why Invest In Commercial Real Estate?

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“It’s tangible, it’s solid, it’s beautiful. It’s artistic, from my standpoint, and I just love real estate.”

Let me ask you a very simple, yet profound question: Why would you invest in real estate? Understanding the answer or answers to this question will help you along your investment career.

The following are a few common answers I have picked up on when I see this question asked:

Top 5 Financial Reasons to Invest in Commercial Real Estate

Let’s first look at the top 5 reasons to invest in real estate from strictly an investment standpoint:

1. Cash Flow – whether you buy with all cash or use today’s favorable financing with a low mortgage payment, positive monthly cash flow will occur when the monthly rent is greater than the monthly expenses. This gives you a monthly income from your real estate investment.

2. Appreciation – Appreciation is the increase in the property’s value, which generally occurs over time and can also be increased by an investor who adds value to the property through repairs and/or enhancements. This is also a great way to create equity in the property.

3. Depreciation – Even with an increase in the property’s value, the government allows owners a tax deduction on their property after they’ve owned the property for at least a year. This annual deduction is called depreciation which when added to the equation, protects the cash flow so that you receive some or all of it tax free. If you are an investor with an income from other sources such as a regular job, it can protect all or some of that income from state and/or federal income taxes. If you really want to understand how great this is, talk to an accountant.

4. Tax Benefits – In addition to depreciation, an investor can usually claim the interest portion of his monthly mortgage payment as a tax deduction.

5. Leverage – Leverage is a very powerful reason for investing in real estate. If an investor used 100% cash to acquire a house worth $100,000, and the house increased in value by $5,000 in one year, then the investor made a return of 5% (assuming no other costs in this case). However, if the investor obtained 80% financing, only $20,000 cash would be required at the closing table, and a bank or other lender would loan the remaining $80,000 to acquire the property. Assuming the same $5,000 increase in value, the investor’s cash contribution of $20,000 would yield a 25% return on investment ($5,000 increase in value divided by the $20,000 investment) in the same one year period of time.

With the above example, if the investor is able to bring in even a conservative amount of cash flow per month of $200, this will result in an additional $2,400 per year added to the increased appreciation. Your return for the year would now be $7,400 ($5,000 appreciation plus $2,400 cash flow) and your return on investment would now be 37% ($7,400 divided by $20,000). Even if the property value stayed stable with no appreciation, you would still see a positive return on your investment of the $2,400 in cash flow with a return on investment of 12%.

Adding to these benefits the low interest rates for financing and you can see how easy it is to accumulate wealth and become a successful investor.

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Major Personal Reasons People Invest in Commercial Real Estate

Freedom:
Frankly, this is why most people start investing in real estate. They get star struck with the idea of riches that would give them the freedom to stop working for someone else. They may have a great job that they absolutely love that pays the bills but they still want to achieve long-term freedom. Or they may want extra money to eventually travel and do the things they want to do. And, if you buy and hold cash flow properties over time, sacrificing and delaying gratification, in five, ten or twenty years, you should have a pile of monthly cash flow and be able to attain that desired freedom.

Control:
Some investors I speak with want real estate to give them some level of control over their financial lives because, let’s face it, we have zero control in financial investments outside of real estate investing. If you invest in the stock market or money market funds, you don’t have any control over the return you may make on them. With real estate, there are things that you can do to control your return on investment as shown above.

Alternatives:
For some investors, real estate is nothing more than a portion of their overall investment portfolio. Perhaps you have divided your portfolio to include mutual funds, stocks, and real estate investment, etc. Or maybe you’re looking to achieve higher returns out of your cash through active management.

Career, Job, or Escape:
A few investors look at real estate investing as a career or a chance to own their own company. Others look at real estate as a means to eventually replace the job or career they may currently hate. And I’ve also seen many dive in head first, as if they’re running away from something versus running towards something.

Creating Value or Thrill of Hunt:
Many investors love the thrill of the deal and love telling you about the thrill of chasing a deal down or their last remodel. They pursue that addictive feeling and are always looking for the next rush or opportunity to turn another ugly duckling into a beautiful swan.

Options:
After many years of real estate investing, I have come to realize that in the end people love investing in real estate because it has given them so many more options. They have the options of continuing to work their current job, buying real estate as a full time career, and/or traveling, etc. The more they invest the more option doors open.

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The Real Reason to Invest in Commercial Real Estate

People fall hard for the sexy pitch of earning freedom. Frankly, freedom is good but I think what people are really after is options. I believe that is why they keep working so hard to find the next deal, to find the next investor, and to keep building their growing portfolio.

Some might think freedom and options are the same things. But to me, freedom really means that they can stop doing something while options mean they can do other things. Having lived through this realization, I can tell you firsthand that having options is even better than having freedom. I would say you get freedom first, and then you build or acquire options.

As you read this, I hope you will be honest and figure out what Real Estate Investing means to you. I suspect that no matter why you think you are investing, if you peel back the onion, you are really looking to create options for you and your family.

Good luck in your investing, no matter your reasons!

As I say throughout my blogs, if I may be of assistance with your real estate questions, please contact me…I truly want to help. My way of giving back is to give away my knowledge. Thank you for visiting my blog.

No Money Down Commercial Real Estate Deals

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I am frequently asked if you can buy commercial real estate with no money down. My answer is yes, you can buy commercial real estate with no money down, however you need to be careful and conservative in your approach. The other big thing that you need is your creativity.  There are several no money down concepts including seller financing, using other people’s money, taking on a partner, utilizing home equity loans or lines of credit, wrap around financing, lease with option to buy, using private or hard money, assume some of the sellers debt, wholesaling properties and financing to 100 to 110 percent of the cost of the property through private lenders or USDA or VA loans. In the commercial real estate market, the two most common are seller financing and using other people’s money.

Seller financing is where the seller carries back a portion of or the entire purchase price. This is common in a market or economy where the banking industry has strict lending requirements making it very hard to get a loan.  When you approach a seller about carrying back financing you will want to point out to them the advantages of seller financing which are: they don’t have to take all of the gain immediately, they can delay some of the gain as you make your payments, saving them some taxes on the gain, the note you negotiate can be sold at any time if they want to get out of it for any reason, you can pay them a higher interest rate than if they put the money in the bank or invested it in bonds, they will have the real estate as security for their note and they can potentially save money on closing costs.

Using other people’s money is where you find an investor or investors who will front you all of the required money. The investors can be a family member, a friend or a business acquaintance. The investor is usually looking for a certain percentage return or ownership or both.  As you can see, the investor can be a lender and/or a partner, based on their wants and needs.  Using this method, in the beginning you will be pledging a lot of your profit, however as you get experience and a solid track record, you will find that you will keep more of the profits for yourself.  This method also requires that you put together a buying strategy and an exit strategy as your investors will want to know how long you will need their money and the return that they can expect.

One of the keys to no money down deals is that you need to bring something to the table.  Some of the things that you can bring are your time, your experience, your creativity, your intelligence, your connections, your education and/or your confidence.  As you do deals, all of these areas will grow, along with your bank account.

In my opinion, the best properties to do a no money deal with are those that have upside potential such as properties with 30% or more vacancy, properties with rents 40% or more below market, properties that you can expand because there is excess land or you can expand upward by adding levels and/or properties that have poor management where you can substantially cut expenses. These types of properties typically assure you that you can create immediate equity and/or cash flow through fixing a problem.  In other words, this is where you utilize your creativity to solve a problem that a particular asset has.  You need to learn how to see problems as opportunities.

I do not suggest that you buy a property for no money down that has a small initial return or breaks even or loses money on a monthly basis even if the property gives you tax advantages and cash flows after the tax advantages. If for some reason something goes wrong with the property and you have to put money into the property you will not appreciate this investment.

One of my favorite quotes when talking about no money down deals is “If you don’t think that you can do a no money down deal, then you can’t”.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

Letter of Intent to Buy Commercial Real Estate

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A letter of intent (LOI) is the initial offer to the seller of a commercial property that you want to buy. The commercial real estate letter of intent should tell the broker and/or seller that you’re a serious buyer who is ready to close at the price and the terms you have spelled out, provided that you can work out the details of a contract. Your letter of intent should get the ball rolling.

The main purpose of a letter of intent is that it’s a simple, time efficient way to get the basic points of a deal down. Besides, a one or two page document is easier to get a seller to agree to right away so that you can go on to making the deal. The disadvantage is that you don’t have the property under contract until the formal agreement is fully executed, thus make sure that you get the formal contract out quickly.

The easiest way to explain a LOI is to give you an example of a standard one as shown below, however please note the following as it relates to the LOI:

The opening clause lets them know that you are a serious buyer. I always suggest that you put in and/or his Assignee so that you can assign it to a company or LLC that you might want to set up or in case you have a problem trying to close this deal, you can either partner up with another party or assign the Contract and probably make some money on the assignment. There are many ways to make money in real estate and assigning contracts is one of them.

Under Property Description, do as thorough a job describing the property as you can.

Your due diligence period should be the amount of time you anticipate that it will take you to do your inspections. Make sure that your period doesn’t start until the seller has given you all of the required information and that it is acceptable only in your discretion. You will also want to waive these rights or accept the information in writing only.

Your deposit delivery and closing timing are negotiable, but should be reasonable.

The loan contingency usually will prompt a discussion with the seller wherein they will want to know if you have a good source for a loan or if you have received loans in the past, etc. You should be ready to convince the seller that you are experienced at getting loans or that you have a broker that is experienced.

Closing costs are a negotiated item typically based upon what is normal in your particular market. You can ask an escrow officer or a real estate broker in your area about this.

One of the most important clauses in the letter of intent is the clause spelling out that the letter is not a contract and not legally binding until a contract is fully executed.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me, I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.

SAMPLE LETTER OF INTENT

Date:
Seller or Seller’s Agent Address:
Re: LETTER OF INTENT FOR THE PURCHASE OF (Subject Property):

Dear [Name]:

This Letter of Intent sets forth the terms and conditions upon which [Name of Buyer] and/or his Assignee will purchase the above-referenced property. It is understood that this constitutes an expression of our intent only and that any final and binding agreement shall be subject to the preparation, negotiation and execution of definitive legal documents (hereinafter referred to as the “Purchase and Sale Agreement”). Subject to the foregoing limitations, it is our intention to enter into a Purchase and Sale Agreement that contains, among others, the following terms and conditions:
1. Purchaser: _________________[Name of Buyer] and/or his Assignee or Nominee.
2. Seller: __________________[Name of Seller]
3. Property Description: (Address) __________________________together with any and all improvements therein and all of Seller’s right, title, and interest in all common areas, amenities, appurtenances, fixtures, chattels, and all personal property and the underlying fee land (collectively referred to as the “Property”). Seller shall sell Purchaser a 100% fee simple interest in the Property. Assessor’s Parcel Number: ________________.
4. Purchase Price/Terms: The Purchase Price of the Property shall be $___________, all cash. The Purchase Price shall be adjusted in accordance with generally accepted accounting procedures and customary real estate practice for pro-rations, credits and other adjustments, including, but not limited to, credit to Purchaser for security and other deposits paid by tenants.
5. Purchase and Sale Agreement: Seller and Purchaser, shall in good faith, prepare and execute a mutually acceptable Purchase and Sale Agreement within ten (10) business days after Seller has accepted this Letter of Intent. Seller shall not accept any offer with respect to the sale of the Property during the duration of the contingencies.
6. Other Conditions: Conditions precedent to closing this transaction shall include:
A. Due Diligence Period: The satisfactory approval of Purchaser’s inspection of all aspects of the Property during an investigation period of ___________ (__) days (the “Due Diligence Period”), which will commence on receipt of all of the due diligence materials (“Due Diligence Information”) shown on the attached Exhibit A. Within ten (10) business days after the execution of the Purchase and Sale Agreement, Seller shall make available to Purchaser the Due Diligence Information. Review and acceptance of Due Diligence Information is subject to the approval of Purchaser, in its sole and absolute discretion.
B. Title/Survey: Seller, at Seller’s expense, shall cause the title company [Title and Escrow Company] to issue a preliminary title report (the “Title Report”), accompanied by legible copies of all recorded documents relating to easement, right-of-way, and all other matters of record affecting the Property. Seller, at Seller’s expense, shall cause to be delivered a current ALTA plat of survey of the Property, prepared by a duly licensed land surveyor acceptable to the Purchaser and the Title Company (“the Survey”). The Title Report and Survey shall be updated by Seller within ______________ (___) days of closing to the satisfaction of the Purchaser.
C. Deposits/Closing: An earnest money deposit of ________________ ($____________) to be held for the benefit of the Seller and applicable to the Purchase Price, shall be delivered to the Escrow Agent within two (2) business days of execution of the Purchase and Sale Agreement. The deposit will become nonrefundable only: (1) following Purchaser’s satisfactory review of the Due Diligence Information; and (2) upon delivery of title and survey to Purchaser’s approval. Closing shall occur within __________ (__) days following the end of the Due Diligence Period.
7. Financing Contingencies: This offer is contingent upon Buyer obtaining from an insurance company, financial institution or other lender, a commitment to lend to Buyer a sum equal to at least ______% of the Purchase Price, at terms reasonably acceptable to Buyer. Such loan (“New Loan”) shall be secured by a first trust or mortgage on the Property. If this Agreement provides for Seller to carry back junior financing, the Seller shall have the right to approve the terms of the New Loan. Seller shall have 7 days from receipt of the commitment setting forth the proposed terms of the New Loan to approve or disapprove of such proposed terms. If Seller fails to notify Escrow Holder, in writing, of the disapproval within said 7 days it shall be conclusively presumed that Seller has approved the terms of the New Loan.
Buyer hereby agrees to diligently pursue obtaining the New Loan. If Buyer shall fail to notify its Broker, Escrow Holder and Seller, in writing within ______ days following the Date of Agreement, that the New Loan has not been obtained, it shall be conclusively presumed that Buyer has either obtained said New Loan or has waived this New Loan contingency.
If, after due diligence, Buyer shall notify its Broker, Escrow Holder and Seller, in writing, within the time specified in the previous paragraph hereof, that Buyer has not obtained said New Loan, this Agreement shall be terminated, and Buyer shall be entitled to the prompt return of the Deposit, plus any interest earned thereon, less only Escrow Holder and Title Company cancellation fees and costs, which Buyer shall pay.
8. Conveyance and Encumbrances: The property shall be conveyed by recordable grant deed, free and clear of all liens and encumbrances, excluding: (a) real estate taxes, which shall be the obligation of the Seller until date of closing and subject to pro-ration; and (b) such liens and encumbrances as Purchaser elects to have remain against the Property.
9. Closing Costs: Seller shall pay the costs of ALTA title insurance, transfer or sales taxes, and any title curative work it elects to undertake. Purchaser shall pay recording fees, extended title insurance costs and all costs in connection with the physical inspection, accounting audit and other investigations made in connection with Purchaser’s due diligence review.
The Purchaser and Seller shall each pay for their respective attorney fees and out-of-pocket expenses. All escrow fees shall be paid equally by Purchaser and Seller, except as otherwise provided in the Purchase and Sale Agreement.
10. ADA: Please be advised that an owner or tenant of real property may be subject to the Americans With Disabilities Act (the ADA), a Federal law codified at 42 USC Section 12101 et seq. Among other requirements of the ADA that could apply to your Property, Title III of the ADA requires owners and tenants of “public accommodations” to remove barriers to access by disabled persons and provide auxiliary aids and services for hearing, vision or speech impaired persons by January 26, 1992. The regulations under Title III of the ADA are codified at 28 CFR Part 36. We recommend you review the ADA and regulations.
11. Hazardous Materials: Owner agrees to disclose to Broker and to prospective purchasers and tenants any and all information which Owner has regarding present and future zoning and environmental matters affecting the Property and regarding the condition of the Property including, but not limited to, structural, mechanical and soils conditions, the presence and location of asbestos, PCB transformers, other toxic, hazardous or contaminated substances, and underground storage tanks, in, on, or about the Property. Broker is authorized to disclose any such information to prospective purchasers or tenants.
12. Brokers: In the event [Name of Buyer] completes a successful purchase of the property, Seller shall pay ___________________ a sale commission equal to ____ percent( %) of the sales price. The sale commission shall be paid upon closing and through escrow.
13. Representation and Warranties: The Purchase and Sale Agreement shall contain such covenants, agreements, representations and warranties as Seller and Purchaser may agree upon, including but not limited to Hazardous Materials; Mold, Mildew and Fungus, etc.
14. Assignment: Purchaser shall have the right, after giving written notice to Seller, to assign its rights under this Letter of Intent and the Purchase and Sale Agreement to any entity controlled by, or under common control of, Purchaser.
This letter/proposal is intended solely as a preliminary expression of general intentions and is to be used for discussion purposes only. The parties intend that neither shall have any contractual obligations to the other with respect to the matters referred herein unless and until a definitive agreement has been fully executed and delivered by the parties. The parties agree that this letter/proposal is not intended to create any agreement or obligation by either party to negotiate a definitive lease/purchase and sale agreement and imposes no duty whatsoever on either party to continue negotiations, including without limitation any obligation to negotiate in good faith or in any way other than at arm’s length. Prior to delivery of a definitive executed agreement, and without any liability to the other party, either party may propose different terms from those summarized herein, or unilaterally terminate all negotiations with the other party hereto.
It is understood that the foregoing outline is not a binding agreement. Furthermore, it is understood that the purpose of this outline is to work toward acceptable terms by which to draft a Purchase and Sale Agreement which will be mutually acceptable to both parties. If the above terms are acceptable to Seller, please so indicate by executing below and returning the enclosed copy by the close of business [Date].
Sincerely,
AGREED AND ACCEPTED:

PURCHASER:
By:_______________________________
Its:_____________________________
Date:______________________
SELLER:
By: ______________________________
Its: _____________________________
Date: ____________________________
Attachment

Introduction to 1031 Exchanges

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What is an IRC 1031 Tax Deferred Exchange?

Simply put, an IRC 1031 tax deferred exchange allows owners of real or personal property to defer the recognition of a capital gains tax when they have sold their property.

They have been around in one form or another since 1921 and in its current form since 1986.

An exchange is structured just like any other sale or any other purchase, but with the inclusion of a qualified intermediary to structure the transaction as an exchange. It is very important to involve the qualified intermediary before you start your transaction.

Exchanging allows you to reinvest money into a new business or an investment property that you otherwise would have had to pay in taxes to the government.

If you prefer a video on 1031 Exchanges, please look at this one from the REI Club. Below the video is additional important information about the 1031 Exchange.

yH5BAEAAAAALAAAAAABAAEAAAIBRAA7 - Introduction to 1031 Exchanges

What types of properties may be exchanged?

Exchanges can involve real property or personal property. Property to be exchanged must be held for business or investment purposes and not primarily for resale purposes or personal use.

The properties that are exchanged must be “like kind” to each other. Concerning real estate exchanges, the properties do not have to be the same type. As long as they are both held for business or investment purposes they are considered like kind. Personal property like kind rules are generally more restrictive.

As an exchanger you have the opportunity to purchase replacement property of any type. As an example, you can sell vacant land and purchase a strip mall; or sell an apartment building and buy an industrial complex. Although 1031 exchanges are governed by federal law, it is state law that determines what is and what is not real property. Exchanges of real estate interests such as air rights, easements, timber, conservation easements and development rights may be possible. Thus, all property held for business or investment purposes is like kind to all other property held for business or investment purposes.

How long do I have to identify property?

When completing an exchange, an exchanger has 45 days from the date of the sale of the first relinquished property to identify potential replacement property or properties; and a total of 180 days from the original sale date to purchase the replacement property or properties.

Identification rules make it easy for exchangers to pick multiple properties that they might purchase, but the fact is that once the 45 days are up, the exchanger’s choices on that list are set in stone. The identification is a written letter or form which is signed and dated by the taxpayer, and contains an unambiguous description of the property. A property which is identified is not required to be under contract or in escrow to qualify. Exchangers acquiring an undivided percentage interest (“fractional interest”) in a property should identify the specific percentage that will be acquired.

However, there are restrictions on the number or value of the properties an exchanger can identify. To qualify for the exchange, the exchanger must comply with the following identification options:

1)  The Three Property Rule; The three property rule allows an exchanger to identify up to three replacement properties. There is no value limitation placed upon the prospective replacement properties and the exchanger can acquire one or more of the three properties as part of the exchange transaction. The three property rule is the most commonly used identification option, allowing an exchanger to identify fall back properties in the event the preferred replacement property cannot be acquired.
2)  The 200% Rule; The exchanger can identify an unlimited number of properties, provided that the total value of the properties identified does not exceed 200% of the value of all relinquished properties. There is no limitation on the total number of potential replacement properties identified under this rule, only a limitation on the total fair market value of the identified properties. In other words, if an exchanger sold relinquished property for $1,000,000 under the 200% rule, the exchanger would be able to identify as many replacement properties as desired, provided the aggregate fair market value of all of the identified properties does not exceed $2,000,000 (200% of the $1,000,000 sales price of the relinquished property).
3)  The 95% Exception Rule; The exchanger may identify an unlimited number of replacement properties exceeding the 200% fair market value rule, however the exchanger must acquire at least 95% of the fair market value of the properties identified. This rule is utilized in limited circumstances as there is a much higher risk of the transaction failing. In other words, assume an exchanger identifies ten properties of equal value. In order to satisfy the rule, the exchanger would be required to acquire all ten identified properties within the exchange period to complete a successful exchange. If one of the properties fell through, the entire 1031 exchange would be disqualified because the exchanger did not acquire 95% of the fair market value identified. This rule should only be utilized in situations where there is a high level of certainty pertaining to the acquisition of the identified properties and the other two rules do not meet the exchanger’s objectives.

In addition, to obtain a complete deferral of the capital gains tax, the taxpayer must acquire replacement property of equal or greater value, obtain equal or greater debt on the replacement property, reinvest all the net proceeds realized from the sale of the relinquished property and acquire only like-kind property.

What is the structure of a delayed exchange?

In the case of a simultaneous or delayed exchange, the exchanger first enters into a contract to sell the relinquished property or properties. Contrary to popular belief, there is no “exchange contract” for a delayed exchange. The exchanger enters into a contract that they would normally use if they were not structuring the transaction as an exchange. However, the addition of an exchange cooperation clause is recommended to secure the cooperation of the buyer or seller of the relinquished property or replacement property. A person or entity that is not a disqualified party, usually a Qualified Intermediary, thereafter assigns into the rights, but not the obligations of the contract. This assignment creates the legal fiction that the Qualified Intermediary is actually swapping one property for another. In reality, the exchanger sells the relinquished property and purchases the replacement property from whomever he wishes in an arms length transaction.

In addition to the assignment of contract, there must be an exchange agreement entered into prior to the closing of the first property to be exchanged. The exchange agreement sets forth the rights and responsibilities of the exchanger and the entity acting as a qualified intermediary, and classifies the transaction as an exchange rather than a sale and subsequent purchase. In addition, the exchange agreement must limit the exchanger’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property before the end of the exchange period. In other words, the exchanger may only use the exchange funds to purchase new property and to pay most of the expenses related to the sale and purchase of the properties.

Once the exchange agreement and assignment of contract are executed, the exchanger sells the property; however instead of collecting the proceeds at the closing, they are sent directly to the Qualified Intermediary. When the replacement property or properties are located, the exchanger enters into a contract to purchase same, and thereafter uses the exchange funds to complete the purchase. This, in a very basic form, is the structure of a delayed tax deferred exchange.

What should I look for in a Qualified Intermediary?

When choosing a Qualified Intermediary it is important to look for the following items:

1)  What is the experience of the person who you are speaking with? How long have they been in the industry? Are they a tax or legal professional such as an attorney or CPA? Remember, the person on the other end of the phone may be from a big company but they may only have a few months experience. It is important to ask.
2)  Does the Qualified Intermediary segregate the exchange funds into separate Qualified Escrow Accounts as provided in the Treasury Regulations or do they co-mingle the exchange funds? A Qualified Intermediary that uses internal “memorandum accounts” is not providing you with the maximum protection that the Safe Harbors of the Treasury Regulations allow.
3)  Have you received a copy of the Fidelity Bond and Errors and Omissions coverage before you have started your exchange? Is the amount of coverage for each transaction greater than the cash proceeds that you will be sending? Have you verified the Fidelity Bond and Errors and Omissions coverage are in full force and effect? Does the Fidelity Bond provide for principal liability? Many fidelity bonds only provide protection from employee malfeasance but leave the exchanger uninsured in the case of malfeasance of a principal.

It goes without saying that service is an extremely important part of an IRC 1031 tax deferred exchange and that exchanges are subject to strict guidelines and requirements. Having a financially strong, experienced and capable Qualified Intermediary is an important step in getting you through the tax deferred exchange process.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me, I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.

Buying Commercial Property|Making Offers and Negotiating Deals

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MAKING OFFERS

Most successful investors only work on deals that they feel they can close. This means that you need to have a plan in place that eliminates the deals that won’t work for you. Here’s how to develop that plan:

• Develop a qualifying system of identifying the types of properties that you want to buy using factors such as age, condition of property, upside income potential, rehab or rezoning possibilities, etc.

• Approach each offer with a strategy that will work for you such as knowing the amount of time you’ll need to do your Due Diligence, how much money you can put down, etc.

• Lastly, put together a system for making offers:

(a) Set up your parameters for the deal such as the top price you can pay to get the return you require.
(b) Have a follow-up system to make sure that your deal is moving along.

There are two methods of presenting an offer to a Seller. One method is to utilize a Letter of Intent and the other is to use a Formal Purchase Agreement. The Letter of Intent tends to save the Buyer time and can quickly tell you whether you and the Seller are on the same page. On the other hand, the Purchase Agreement tends to make the Seller feel like they are receiving a “solid” offer.

My preference – and what is used most often – is a Letter of Intent, but whichever way you go, try to present the offer in person to the Seller and/or their Broker.

If you use a Letter of Intent, make sure that you insert a clause that states that both parties will move forward in good faith toward signing a formal contract within ten days of signing the Letter of Intent so that your offer will look serious to the Seller. Also, make sure that once the Letter of Intent is signed, you write up the Contract immediately.

NEGOTIATING DEALS

A couple of very important tips to successful negotiating:

1. Always start with the end in mind so that you know where you want the deal to go.

2. Understand the Seller and what they need.

You’ll be much more successful in closing deals if you solve the Seller’s problem by understanding what they want. Those buyers who also connect emotionally with the Seller create trust and rapport which opens the Seller up to discuss what they’re really looking for. If you’re sincere and willing to truly listen to the Seller, you’ll be more successful at putting together an offer that may be acceptable to them.

And when you understand the Seller’s motivation, i.e., why they’re selling the property, you’ll be in a better position to negotiate.

Here are some examples of typical deal points that come up for negotiation, with some suggested solutions for each point:

PRICE

If the Seller has to get a certain price and can’t be negotiable on that point, you may be able to negotiate certain terms:

1. Ask the Seller to carry back part of the financing so that you put less money down.

2. Ask the Seller to guarantee income for vacant spaces or spaces coming up for renewal in a short period of time to give you time to lease the space

TIMING

To understand negotiating timing issues, you need to understand that the Seller’s position will be that he’s taking his property off the market with no assurances that you will be able to close.

Here are a couple of examples of timing issues with possible solutions:

1. Seller wants a shorter period to close than is required for you to complete all facets of the Due Diligence, i.e., Seller wants a 30 day close, but you want 30 days for Due Diligence and 30 days to close.

Possible Solution 1: Set up periodic times to waive certain issues in your Due Diligence Process. Example: If you have a list of 40 items that you need to verify during Due Diligence, you can stipulate that you will clear 10 items at the end of 15 days, 10 more items at the end of 30 days, etc. This assures the Seller that you’re moving through the process.

Possible Solution 2: If you need more time to complete certain facets of the Due Diligence process, for example, you don’t have time to have a roof inspection done, you can go ahead and close but set aside funds to pay for any roof repairs which the roof inspection discloses are necessary.

2. The building is vacant and you don’t want to close until you can find a tenant for the vacant space.

Possible Solution: Buy 2 extensions of 30 days each by putting in more hard money. (Note: The money becomes non-refundable but applicable to the sales price.) This gives you 90 days to determine whether or not you’ll be able to lease the vacant space.

By putting in more non-refundable money to extend your time, you’re giving the Seller money in his pocket to pay for taking his property off the market for that period of time. Also, he feels that you have more money in the deal so you’re more likely to close.

These are only a few of the problems and possible solutions you may run into when negotiating a deal.  Always try to listen closely and understand why the seller is selling the property or making an objection to the offer.  Remember, don’t take anything personally, it’s just a deal point that needs to be dealt with or an objection that needs to be overcome.  Try to overcome any objections, but don’t get emotionally tied up in any purchase offer and walk away from properties that do not fit your criteria.

As I say throughout my blogs, if you have any questions please feel free to contact me.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

Commercial Property Online Auctions|Why Buy or Sell on Them?

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AS A BUYER SHOULD I PARTICIPATE IN THEM?

As a buyer, the reason you participate in an online auction is because you anticipate getting a good deal.  If you are an experienced buyer of commercial real estate you should participate in auctions if you see a property that meets your criteria.  As a first time buyer or inexperienced buyer if you are going to participate you should get help from an experienced broker who has helped people buy through the auction process.

Buying property from an online auction requires that you put up a deposit to bid on a property and verification that you have funds to close the deal if you win the bid.  If you require financing you will need to have that set up beforehand as you will need to close the deal within 30 days.  Financing is not a contingency.  All purchases must be funded in cash at closing.

All properties are sold “As Is, Where Is With All Faults and Limitations” so you need to inspect the property prior to bidding on the property.  You need to do this process with the professionals that can help you to properly assess the property.

Once the online auction is final, you have agreed to purchase the Property, including those sales which are subject to the seller’s confirmation. That is why it is important for you to conduct all of your due diligence prior to the auction and prior to bidding on the Property. Winning bidders may be subject to liquidated damages if they fail to complete the transaction in addition to losing their bidding deposit.  Make sure your carefully review the Auction Terms and Conditions

In addition to the standard and customary costs related to the closing of the transaction such as escrow/closing fees, title updates and reports, the winning bidder will pay a Buyer’s Premium on the transaction’s closing date in an amount equal to five percent (5%) of the Winning Bid Amount   (the Buyer’s Premium is added to the Winning Bid Amount to determine the Total Purchase Price paid by the Buyer).

A successful bidder will be required to deposit additional funds with the escrow/closing agent in an amount stated in the Purchase and Sale Agreement. Such funds must be posted within 24 hours of being declared the winning bidder. The winning bidder will be required to pay the Earnest Money Deposit by wire transfer within 24 hours following the conclusion of the online auction. You will be provided with a receipt by e-mail showing that the escrow/closing agent received your Earnest Money Deposit. There are no exceptions to this requirement.

AS A SELLER SHOULD I DO THIS?

The benefits of the auction process are numerous.  The major advantages to selling on an online auction are the access to potential investors, the sales process is accelerated and has a set timeframe, there are non-negotiable seller documents, typically no fees are involved, usually there is a massive, multi-faceted marketing campaign that maximizes bidder participation and achieving a price through competitive bidding is, oftentimes, the only method available to determine an asset’s true current market value.

By having access to several potential investors the price of your property may get bid up as a bidding war may commence if two parties feel that they have to have the property.

The sale process can be greatly accelerated as a date certain is set and if you receive an acceptable offer the property is sold and closed usually within no more than 30 days.  Thus your total process of selling the property can be shortened.

The documentation is usually standard and thus non-negotiable and favors the seller in the transaction.  There are typically no fees due by the seller.  In the documentation the property is typically sold with the buyer paying all of the escrow fees.

Most online auction companies have a large list of buyers that they mail to, they run advertising campaigns to make sure that the auction is well attended, thus maximizing bidder participation.  If your property is in need of repair, the property is typically sold “as is” and the buyers at auction are typically not intimidated by doing repairs and usually feel that they can get a bargain on the property for a minimal outlay of cash for the repairs.

The biggest benefit to sellers is that you achieve a true current market value for your property as the bids set this value.  You can set a minimum value to assure that you get at least that price, however this sometimes has a way of setting a price in the buyers mind and you don’t get the bidding war that you expected and possibly the true current market value.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me, I truly want to help.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

9 Keys for Finding the Best Location for Your Commercial Property

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One of the most important aspects of commercial real estate investing is finding the right property.  And location is a major factor in identifying that property.  Location includes many factors as you will see below.

For a retail property especially, it is a big key to its success.  A good location attracts tenants – and their customers.  The result for you as the property owner is the ability to charge higher rents and to create a higher value for the property.

The features – and benefits – of a good location are:

1.  Close to major streets and freeways – This makes driving to the property easy for customers, as well as making the property visible for your tenants and potential clients.

2.  Signalized corner – When cars stop at the traffic light, people in the cars have time to see the stores.  This also slows down traffic thus increasing the properties visibility.

3.  On or close to a busy street with high traffic volume – High traffic is important to the tenants.  Always check commercial property listings for CPD (cars per day) or ADT (average daily traffic) information.  Also, review this information and compare it to other traffic corners in the area or region.  In addition, find out if the counts are going up or down over the last couple of years.

4.  Area – Check demographics to make sure the property is located in a growing area with population growth, not in a declining neighborhood.  Demographics can also tell you the household income, racial makeup, daytime population, and the number of households in the area.  Check to make sure that the tenants match the demographics.  An example would be if there is a McDonald’s on the property, you want to make sure that the demographics show a lot of families in the area.

5.  Near anchor tenants – Anchor tenants are the major retailers like Home Depot, Best Buy, Wal-Mart, grocery stores, and drug stores.  Tenants located close to an anchor benefit from their traffic.  Also. make sure that the type of anchors line up with the mix of the other tenants in the property.  An example would be that grocery stores tend to bring daily traffic which would be good for fast food tenants such as Subway or a Wal-Mart might tend to bring a customer looking for bargains, so other tenants that are discount oriented should do well in this type of project.

6.  Easy ingress and egress – If it’s hard to make turns into the property or there are not enough entryways and exits to easily get traffic in and out of the property, the property is less attractive to tenants because they feel their customers may choose another destination.  An example of hard ingress, would be if a property is in a mid block location and there is not a left turn lane into the property and the car has to go past the property and then do a u-turn to come back to the property or you can’t make a left turn out of the property, as you might have to exit right and go down a couple of blocks and do a u-turn.

7.  Signage – Good signage – especially a large monument sign in front of the property – makes it easier for customers to find the stores.  Also, there should be a uniform signage program for the store front signs.  The program should be such that the tenants signs are highly visible from the surrounding streets or even freeways.  The signage program should also include that the signs should be illuminated.

8.  Parking – Plenty of spaces and a well-lighted parking lot are important.  A parking ratio of 4 or 5 parking spaces per 1,000 sf leasable space is preferable.  If there is only a food tenant on the parcel parking needs to be greater.  The parking lot also needs to be properly maintained with minimal potholes and cracking and with properly marked spaces and drive aisles.

9. Appearance – Properties that are well maintained – good landscaping, clean, well-lighted and buildings in good condition – attract the most customers for the tenants.  If you are looking at a property that is not well maintained or have a clean appearance, make sure that you put the costs to upgrade the property into your purchase costs.  A good appearance also attracts potential tenants.

One of the tenets that you always hear about when real estate is discussed is location, location, location.  As you can see, there are several things that make up a good location.  As you review a property you can use the above for the pluses and minuses of a sites location.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.