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 clean out your pockets in the blink of an eye. At the other end of the scale, they can cause a long-term and slow-motion drain on finances that ends up with the same outcome-money gone and a dud of a property on your hands.
I'm sure you can see my main point-never acquire a commercial or industrial property without closely examining its condition first. With close examination, you'll secure an investment which can produce considerable profit and appreciation over the years. In this article, I'll outline the basic due diligence required for the physical inspection of commercial and industrial buildings.
Who Should Inspect Commercial Buildings If you're new to commercial investments, then you definitely need to hire professionals 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.
So, hire an experienced contractor, architect, or other expert to do the job for you. Check out references and contact other investors to see what kind of job the specialists have done for them so you can hire the best.
When working with specialists that do a great job at reasonable prices, treat them well and fairly. Keep in mind that your reputation is everything, especially in the commercial and industrial markets, so you want to guard it at all costs. Acquiring a bad reputation in the commercial or industrial market is a particularly deadly mistake since it can dry up funding sources in a hurry, not to mention the fact that important people will not want to work with you.
Types of Maintenance There are two types of maintenance in commercial investments. One is deferred maintenance. This refers to any major or minor defects in a building. Obviously, you want these defects uncovered 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 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 about their views 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 relations 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 sink 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 sinkhole.
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 Acquired 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 members of 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 Point: Never, ever acquire a commercial property without checking its condition first!
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Jack Sternberg is the creator of the renowned "Buyers First Program". As the "gurus' guru", he is well known by the professional creative real estate community as "Obi-Won Kenobi". Having been a full time investor since 1977, Mr. Sternberg has been "at" the closing table more than 1,500 times. Mr. Sternberg has the depth of experience that lend value to his associations. Contact Mr. Sternberg at http://www.askjacksternberg.com
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