Commercial Properties-Inspection Guidelines
When buying commercial properties, due diligence is even
more important than it is with residential properties.
That's simply because there's so much more money at stake.
In the worst case, unexpected repairs and expenses can
empty your pockets in the blink of an eye. At the other end
of the scale, it can create a long-term and slow-motion
drain on your bank account that ends up with the same
result-money gone and a clunker property on your hands.
I'm sure you can see my point-never, ever acquire a
commercial property without closely checking its condition
first. By doing that, you'll end up with an investment
which can produce considerable profit and appreciation over
the long-term. In this article, I'll outline the basic due
diligence required for the physical inspection of
commercial buildings.
Who Should Inspect Commercial Buildings
If you're new to commercial investments, then definitely
hire a professional to inspect the building you're
considering. The building structure and the HVAC,
electrical and plumbing systems are much more complicated
than those found in residential properties and require
specialist inspectors.
Therefore, it's wise to hire an experienced contractor,
architect, or other expert to do the jobs for you. Verify
references and contact other investors to see what kind of
job the specialists have done for them so you can hire the
best.
When you work with specialists that do a great job at
reasonable prices, treat them well and fairly. Remember,
your reputation is everything, especially in the commercial
or industrial market, so you want to guard it at all costs.
Getting a bad reputation in the commercial market is a
particularly deadly sin since it can dry up funding sources
in a hurry, not to mention the fact that "movers and
shakers" will not want to work with you.
Maintenance Types
There are two types of maintenance in commercial and
industrial investments. One is deferred maintenance. This
refers to any major or minor defects in a building.
Naturally, you want these defects exposed before you invest
any money in a building. For example, one of the first
things to have checked is the condition of the roof. The
damage caused by water leaks to electronics and wiring can
create some very expensive repair bills.
The other type of maintenance is routine. Just what it
sounds like, this is such regular activity as cleaning,
painting, servicing of HVAC, escalators, elevators, fire
safety systems, etc.
Since laws require regular maintenance, check all the
building logs to make sure routine checkups have been
completed, but don't take the log entries for granted!
Always talk to the companies doing the maintenance to
ensure the work was really done.
If you've already found that equipment hasn't been kept in
great shape, hire a different company to do inspections to
make sure that you're getting objective opinions.
Talk to the tenants as well to get their opinions of the
maintenance. This is not only a chance to get a realistic
picture of the building, but it's also a chance to build
good relationships with them should you decide to purchase
the property.
Routine Items You Can Check Yourself
Quite often, defects are obvious and don't need the trained
eye of a professional inspector. During a walk-through, you
can check for the following items:
Ceilings-look for evidence of stains or broken tiles that
indicate leaks from the roof. *
Walls-check for significant cracks caused by uneven
settlement of the foundation.
Floors-warping or cracks can indicate problems with the way
they were laid or with the foundation.
Rest rooms-check out the condition of the plumbing to make
sure it's not leaking, rusted, or otherwise not performing
property.
Security components-these should all be functioning
properly; e.g. doors lock as they should, exit signs are
illuminated, stairways are in good shape, etc.
Lighting-interior and exterior. All lights should be
working.
Door hardware-by this, I mean automatic and/or hydraulic
door openers and closers should be functioning well.
Paint-at points like common areas, check to see if the
paint is in good shape and doesn't show peeling,
"alligatoring," and the like.
Tenant spaces-check their condition very carefully. After
all, if they're not in great shape, the tenants will want
you to fix them up once you take ownership of the building.
Make a list of maintenance/repair items and get bids from
contractors to see what the costs will be.
Grounds-check to see what kind of shape they're in. This
not only includes landscaping, but the condition of parking
lots, curbs and the like.
Red Flags
Never put your money into any property with one or more of
the following problems: Asbestos Dry rot Duct contamination
Hazardous waste pollution Lead contamination Mold, etc.
If you find these problems, cancel the escrow and look
elsewhere! You want to buy a profitable property, not a
money pit.
Purchase Agreement Recommendations
Always write a condition into the agreement that requires
the seller to do one of two things before the close of
escrow: Correct all problems, or Lower the price so you can
do the repairs. The advantage of this strategy is that you
can hire your own contractor to do the repairs, and you'll
know they'll get done correctly.
What To Do Once You've Purchased the Commercial Building
Once you've bought the building, you want to keep it in the
best shape possible at the lowest cost possible. For office
buildings, your "foot soldiers" in the maintenance war are
the maintenance staff. Make sure they understand their
duties clearly and carry them out on a regular, scheduled
basis.
If you have an industrial property, shopping center or
similar property, then your manager should oversee the
maintenance staff.
Maintenance Costs How to Pay for Them
Maintenance may seem expensive, but it's a lot less
expensive than having those income-producing tenants bail
on you because you've let the building run down.
The tenants should pay for these costs through the lease.
As long as the expense is reasonable, they'll be happy to
pay for maintenance and repairs since it directly affects
their bottom lines.
Key Idea: Never, ever acquire a commercial property without
checking its condition thoroughly first!
----------------------------------------------------
Jack Sternberg is a nationally recognized expert on real
estate investment and the creator of the renowned "Buyers
First Program" who's been in the business for more than 30
years. Sternberg's deals have totaled over $750 million and
he's been to the closing table more than 1,500 times. For
more, visit http://www.askjacksternberg.com
No comments:
Post a Comment