The Art of Making an Offer in Commercial Real Estate

[Transcript Summary] Whether you’re an experienced or new investor, this video will guide you through the underwriting and offer-making process to achieve success. Get your pen and paper ready as we share valuable tips and tricks that have enabled us to build a large portfolio over the years. Welcome back to Money Mondays, where we provide content every Monday to help you become a better investor. And if you prefer a more hands-off approach, we have exciting investment opportunities coming your way.

The Commercial Real Estate Buying Process 

Let’s begin by understanding the buying process. It involves identifying potential opportunities, performing thorough underwriting, making offers, and successfully closing deals. First, let’s explore how to find these opportunities, whether in commercial or residential real estate. The key is to determine your specific buying criteria – the types of properties and markets you’re interested in. Once defined, it’s about establishing relationships with reliable sources, such as real estate brokers, who can provide access to deals. Local REIA groups and online MLS listings can also be valuable resources for residential properties.

In our case, we focus on acquisitions, networking, and building strong relationships with brokers who trust our ability to close deals. By positioning ourselves as reliable and efficient investors, we ensure that we are contacted first when opportunities arise.

The Art of Underwriting

After identifying opportunities and establishing relationships, evaluating whether a deal is worth pursuing becomes crucial. Remember, there are many deals out there, but only a few are truly exceptional. This is where the art of underwriting comes into play. Take the time to analyze the financials thoroughly and projected returns to ensure the deal aligns with your investment goals.

By following these steps – defining your buying criteria, building relationships, and conducting thorough underwriting – you’ll be well-prepared to navigate the world of real estate investing and identify the most promising opportunities that meet your objectives.

For example, let’s say you’re considering buying an office building. Although it may seem appealing, assessing the numbers carefully is important. Underwriting is the process of analyzing risks, which involves evaluating current and potential revenue, expenses, and the amount of capital required to make the purchase. By considering all these aspects, you can determine the potential returns on your investment.

Sometimes, a deal may yield only a modest 3% cash-on-cash return and a 10 % annualized return, which may not align with your investment criteria. However, with thorough analysis, you might find a better opportunity that offers an eight to ten percent cash-on-cash return and a 15 to 20% annualized return. Through careful calculations and analysis like this, you can identify the deals that meet your expectations.

Identifying the Return Profile

Once you have found a property that meets the desired returns for you and your investors, you can move forward confidently with the investment.  It’s important to identify the desired return profile for both you and your investors, as every deal has satisfied investors behind it.

Once you have determined the target type of deal and market, drafting an offer that the broker and seller will accept becomes the primary focus. Enter the non-binding letter of intent (LOI), typically a concise one to three-page document capturing the business points. It covers crucial aspects such as purchase price, closing timeline, earnest money, and in the commercial realm, non-refundable earnest money. Understanding the seller’s motivation is paramount to negotiating beneficial terms for both parties.

This information can be gleaned from a knowledgeable real estate broker like Feras, who excels at uncovering a sale’s driving factors. Remember, it’s not always about the price alone. Ultimately, crafting an offer that resonates with the seller leads to acceptance. 

The Closing Process

But there are instances where a quick close or assurance becomes crucial. Perhaps a bad experience elsewhere or a looming deadline, like a loan payment, necessitates a lower price in exchange for a guaranteed deal closure. Gathering such nuanced information is crucial, as it adds depth to the LOI. Many people tend to fixate on price, but terms also hold significance. So, crafting the offer with all the necessary details, submitting it to the real estate broker, and entering a competitive process against other buying groups begins.

The real estate agent reviews all offers with the seller, often selecting a handful for the best and final offer round. The less favorable contenders are subsequently eliminated. The top five groups are now given updated information, prompting them to refine their offers. It’s essentially an opportunity to present a better deal. The process continues with a series of back-and-forth negotiations until one group emerges as the chosen buyer. 

The next step? The closing process. This typically spans 60 to 120 days and is outlined in the LOI and the binding purchase and sale agreement (PSA) between the buyer and seller

The closing process involves outlining the necessary steps and timelines, typically 60 to 120 days. Executing these tasks efficiently is crucial to maintain enhanced speed and performance. During this period, you’re putting all the pieces together, engaging partners, lenders, brokers, legal advisors, and investors to secure funding, finalize the business plan, and gather quotes for renovations. Managing this process feels like juggling eight simultaneous projects, each progressing at its own pace.

The goal is to reach the closing with a happy seller, satisfied buyer, approved legal documents, funded deal, raised equity, and necessary insurance. While it may get intense, especially in the final days, proper planning and diligence ensure success. Unfortunately, many procrastinate until the closing week, leaving a flurry of last-minute activities. To avoid this, we put in consistent effort throughout the year. 

The entire closing process, from offer to completion, holds immense importance. However, it is crucial to recognize that the true hard work starts once the deal is finalized. We have previously discussed the significance of property management, so feel free to check out those episodes. 

Closing is Just the First Step

Nevertheless, it is worth noting that closing is merely the first step in purchasing a deal; the operational aspect is where the real challenges lie. We hope this video has provided you with a helpful understanding of the offer process and its associated nuances. Take the time to thoroughly prepare your offer, considering all relevant factors, and approach it with confidence to secure your first successful deal. If you have any questions or comments, please leave them below, and remember to subscribe to our YouTube channel for more insightful content about making offers and everything else in the realm of commercial real estate. We will explore each topic in depth in future episodes and look forward to your continued presence.

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