My Commercial purchase experience

[Loren Howe]

Just posting this in case my beginner’s case study might help others and also to get any feedback.   I own a half dozen residential rentals, but with high prices lately decided to move into commercial real estate for the first time, which seems to be a much more depressed market at the moment.  

I had about 1 million cash to invest, didn’t want to take a loan, and always purchase in one coastal mid Atlantic area where I have connections, know the market, and growth prospects are strong.  The first thing I had noticed from watching LoopNet over the years and limited research was that dealing with commercial brokers appeared even trickier than residential. Pocket listings almost seemed the norm for any good deal, and people online said you had to schmooze and build a relationship with a commercial broker to have a chance of finding the best deals.  This was precisely my experience.  The commercial returns available on loopnet or auction sites for public viewing generally seemed no better than I could’ve gotten buying overpriced residential property.  I made a list of a dozen of the commercial agents who showed up most often on LoopNet listings.  Upon phone messaging or emailing them my first big surprise was that quite a few commercial agents wouldn’t even return the call or seemed standoffish. This was despite my explaining that I would be making a cash purchase and already owned residential rentals in the area.

Eventually, I found one or two agents who were enthusiastic to work with me although not after first promoting their own noncompetitive pocket listings. I just continued to reiterate what I was looking for, and sure enough, suddenly an agent sent me a couple great deals, which did not show up on loopnet or the free version of Crexi.  So I guess that was my lesson number one: all the issues you’ll have with residential agents are magnified in commercial agents and finding a good agent to work with is more vital in commercial.  By the way, anyone please feel free to jump in and correct me or add to any of these points.

The next vague impression I had been given about commercial property is you’ll be dealing with more hard nosed and knowledgeable people. I found this to be exactly the opposite.  During the sales and escrow process everything was much more loosely goosey in commercial.  It was extremely hard to get information about properties while owners and brokers seemed a lot more careless and missed basic things.  There also seemed to be a lot more room to renegotiate management or purchase contracts versus residential where people tend to tell you things are set in stone. This ends up working out as an advantage to careful buyers, however, it also ends up wasting quite a bit of everyone’s time.

One thing I never quite understood was that everyone seemed adamant that the commercial sale should go through a lawyer versus an escrow company. This ended up costing me many thousands of dollars more but I didn’t want to hold up the process arguing about it, and since I was new and thought I might be missing some reason a lawyer was needed. In reality, the lawyer didn’t seem to have as much experience as an escrow company and the sale may have been delayed a bit in addition to costing more.  It also took me down the rabbit hole of the safety of escrow deposits which seems quite frightening. Apparently, neither lawyers nor escrow companies are generally bonded for more than $50,000? and in the extremely rare instance that someone runs off with your money it appears to me you’re out of luck.  I’d love to hear more from anyone with experience on this lawyer versus escrow company issue and how to protect your money while in escrow.   

The sale went through and the deal overall was much better than I could've found in the residential market in my opinion. Dealing with the management company has also entailed their typical issues, but at least you have far more leverage on a larger property. I've been able to get them to make concessions they never would've made if you were just an owner in an HOA. Overall, I'm quite happy to have ventured into commercial real estate. My impression is also that no one should be intimidated by it and that the people you deal with in commercial are actually less careful and hard-nosed than in residential real estate. Happy to answer any more specific questions and would love to have feedback on what I should've done differently.