Five Assumptions You Should Never Make in CRE Negotiations

You’ve searched far and wide for a commercial property, gone to both ends of your planned budget, diligently researched, inevitability became frustrated, almost gave up. And then. You found it. The diamond in the rough. On paper it works and your gut agrees. Not. So. Fast.

Following are five common assumptions that commercial real estate buyers make, no matter if they are first-time investors or tenured portfolio managers. When the assumptions turn out to be wrong, they can make a healthy negotiation go sour. Get the most for your dollar — and avoid surprise costs — by taking extra steps for validation before heading to the closing table.

Assumption 1: The real estate is properly valued
This could happen deliberately or accidentally; do your homework. Contact other appraisers and agents to ensure the price you’re being offered is the price that should be offered. It could be a highball attempt to make you think you’re getting a deal.

Assumption 2: Loans will cover financial needs
Talk to a lender before you make anything official. See that they’re willing to put the amount on the property that you’re suggesting. A blanket pre-approval based on your finances can quickly decrease if the property is considered a risk to the lender.

Assumption 3: Buildings are up to code
Regulations change, work is completed without a permit, there are many reasons building code and compliance can slip through the cracks. Contact the municipality the property is located in to review records and schedule a code inspection, if necessary. The cost to fix any violations will only be the seller’s responsibility if they are identified before closing.

Assumption 4: Lease income is guaranteed
Don’t take any lease information on face value. Some have provisions that allow for early termination or contractions under certain circumstances. Others put caps on the expenses the tenant is responsible for. Read each lease agreement carefully to fully understand the terms.

Assumption 5: You are receiving full disclosure
The seller wants to make the property as appealing as possible, not tell you all of the negatives that may have convinced them to put it on the market. When getting to know a property, make a list of potential surprise issues you may face as an owner, such as equipment failure and strained tenant relationships. Then calculate for the disparity and account for it in your overall budget.

In the end, commercial real estate ownership is a business decision, and should be treated as such. It’s all at once inspired, envisioned, scrutinized, and analyzed. Going into the buy with this mindset will save you time, money, and aggravation.