Commercial Deal Breakers and How to Avoid Them

If you’ve been to any of my boot camps or read any of my books, one thing you’ve heard me say is “take only intelligent risks”. Sure. There’s money to be made in commercial real estate deals, but along with any business comes the potential pitfalls that you must learn to navigate yourself through in order to have a successful deal. Here are a few commercial investment deal breakers and what you can do to avoid them as you start making offers.

Deal Breaker #1: Bad Numbers

If I had to define what bad numbers were, I would tell you that bad numbers are the ones you don’t get or they’re the ones called pro forma. Regarding no numbers, I’ve looked at a lot of properties and let me tell you that there were some situations where I’ve been told that the seller didn’t keep those kinds of records. I’ve also been told that previous management companies took the records; not the owner. The bottom line was that the seller couldn’t produce any valid numbers. Never enter a deal without being able to look at actual numbers – actual income and actual expenses. Without actual numbers, there’s no way you can properly analyze a deal. At best, you’ll have estimates and in this business, “probably” doesn’t work.

Along the same lines of “no numbers” are pro forma numbers. Pro forma numbers are potential projections of what the property might do rather than how it has actually performed. I’ve heard many agents tell me that pro forma numbers are standard and they might be, but what you and I are both interested in is whether the property made money or not. Like I said earlier, you want to see actual numbers.

Now let’s sum it all up. Bad numbers are deal breakers because banks won’t lend money without seeing actual numbers. Banks also don’t use pro forma numbers either.

Deal Breaker #2: Property Condition

Assessing the true property condition is so important in structuring a deal. You may have already heard me say that you want to find a property that’s not in the best of condition. But I also need to point out that you don’t want a property that will turn out to be a head ache either. If you’re a new investor in commercial property, I don’t recommend working with properties that have structural issues, old mechanical systems, or large amounts of deferred maintenance. Leave those kinds of deals to other investors that have more experience and greater access to resources that new investors don’t. The reason I say that is because these kinds of challenges with property condition can potentially tie up the property for months longer than you planned. Also, any financial resources you had could easily be wiped out with one simple oversight in reviewing the commercial property condition.

What I strongly recommend is making sure that you do a thorough property inspection using a certified property inspector.

Deal Breaker #3: Financing Back Out

My best advice with this deal breaker is to have financing lined up before moving ahead with closing the deal. What I mean by that is have a lender selected and ready to fund your deal. In fact have a couple of back up lenders as well. Lenders back out of deals more often than I’d like to admit and they back out for all kinds of reasons – they don’t like the location of the property, they changed their mind, and so on. As an investor, you’ve got to be prepared to respond with solutions when situations like these happen.

Risk is part of the commercial real estate game, but so are multiplied profits. In order to ensure and maximize your profits, you must learn to eliminate the risks you can and take only intelligent risks. That means eliminating deal breaking situations such as using bad numbers in property analysis, underestimating extremely poor property condition, and working with lenders who back out at the last minute. Save yourself time, energy and money by eliminating commercial property deal breakers.