Fresh young entrepreneurs and seasoned businesspeople alike love the return a healthy commercial real estate investment brings. Commercial Real Estate generates passive revenue for investors month after month and year after year. Investors can force appreciation through simple changes to the property and see their equity build over time. Later, they can leverage that equity to boost other areas of their business. Because of its long-term nature and inflation resiliency, CRE is often a lot safer than other types of commercial investing.
However, no investor can realize these benefits without first going through the sometimes arduous acquisition process. This process itself, especially the financing portion of the deal, often discourages would-be investors from pursuing properties with a likely high rate of return. To help answer some questions about CRE acquisition, this article will cover key tools that clever investors use to reduce deal complexity and acquire new property quickly so they can keep their business growing. If these solutions pique your interest, talk with our brokers who can help you dive into the details and customize a plan specifically for your business.
The first step, of course, is to identify commercial property that will add value to your portfolio. Identifying the right property is a process in itself that deserves its own article, so we won’t detail that here, except to say it is worth looking at multiple properties in a class of real estate that you have chosen to target. Once you’ve found multiple properties that fit into your investment plan, you need to approach the sellers. The transaction begins with a letter of intent or LOI, then a commercial purchase agreement is drafted while you go through your due diligence process. At the same time, you and your loan broker seek financing to fund the deal. Finally, once all terms and conditions are agreed upon, you, the seller, and your financing team go to the closing table.
Throughout your survey of the market, you’ll ideally submit several Letters of Intent to various sellers. So what is an LOI and why should you use one?
Letter of Intent
An LOI declares your intent to buy the property the seller has for sale. It’s a non-binding agreement that outlines the big-picture terms that you and the other party agree on. It may or may not end up being the same set of terms you agree to in the final sale, but it won’t be nearly as detailed as the final purchase agreement.
Most LOIs are just a few pages and they’re free or low cost to produce – one reason why it’s advantageous to you to create several of them. This is in contrast to the sales/purchase agreements typically 10-20 pages long that require the services of an attorney. You and the seller can change the terms of the LOI as you see fit before you go to closing on the property.
One way that commercial real estate deals are different from home mortgages is that in commercial real estate, a seller may receive many LOIs from multiple prospective buyers and it does not lock either party into a commitment. That means you’re free to purchase any other property you’re interested in and the seller is free to accept another offer. The seller wants to close on their property as soon as they find the right deal. As a buyer, the faster you can back your offer up with cash, the less likely you are to be passed up in favor of another buyer. This is especially vital in a competitive market where investors are fighting to close.
In the old days, you’d wait for your deal to be accepted and then move on to the due diligence process before closing. Due diligence is part of the escrow process and you’ll work with an escrow agent who will verify all the terms of the purchase agreement have been met before funds are released to buy the property. As mentioned, this part can take several months to complete.
Why speed up the acquisition process?
In many markets buyers are purchasing for appreciation as much as for cash flow. That means when a property comes available, they often have multiple offers and may even go through a private sale without even going on the market. Purchasing in this type of environment often means going to market with cash in hand. For buyers that can’t write a check for commercial properties, that might spell doom, but there are options that make fast closing funds accessible.
How to Speed Up Closing
These days, there are several ways to speed up the closing process. One is to make sure that you provide all of the required documentation at the right time. Submitting complete paperwork on schedule saves a lot of back and forth that slows down the process. Secondly, use professionals to conduct due diligence. Third, the faster you can offer payment to the seller, the better. But what happens if, despite your best efforts, financing is too slow for your scenario?
If you’ve presented your LOI to the seller and they’re comparing it to other LOIs, the choice they make will be highly influenced by how fast you can pay for the property. Commercial mortgages from traditional institutions can take months to approve. So, what if you can offer to cut that wait time in half or better? If you were the seller, would you rather get paid in a few weeks or several months?
The stand-out benefit of Private Loans is their speed. They shorten the time between application and funding. Private Loans streamline the process because lenders go by the LTV or loan-to-value ratio on the property. Lenders want to lend on valuable properties, but they want to see your equity in the property be high enough that they can get their money back quickly if you default on the loan.
Private Loans also come with higher interest rates than a standard commercial mortgage to offset loan risk. The upside to this is that you’ll be replacing the Private loan with a commercial mortgage AFTER you have the keys to the property you targeted for acquisition.
With Private Loans your main objective is to close on the deal fast, before your efforts can be usurped by another offer. If you’re set on having the property in your portfolio, Private Loans give you a big advantage. So, how do you find a Private Loan?
The answer to that is to hire a commercial loan broker with a broad network of private and traditional lenders. Our loan brokers can help you close the right deal quickly, making sure you get the best loan for your property. There are many lenders out there who offer Private Loans, but they’re not all the same. Cut the time it takes to find the best one by connecting with a qualified, trustworthy broker. Make one part of your CRE investment team today.