7 Common Mistakes to Avoid When Buying Commercial Property

Introduction
Thanks for downloading my special report – you’re in for a real treat.
Before I go over the ...

“7 Most Common Mistakes Investors Make
When They Buy Commercial Income Property”
I’d like to back up and cover the basics of why you should be looking at commercial real
estate in the ﬁrst place.
There are a lot of places you can invest these days, and you should know the reasons
WHY before you move forward.
Even if you’re doing a “No Money Down” deal, you’re going to be investing time and energy
into the project, and you will be a whole lot better off if you are made aware of the 7 Most
Common Mistakes Investors Make When They Buy a Commercial Income
Property .....
.... Let’s get started.

“7 Most Common Mistakes Investors Make
When They Buy Commercial Income
Property”
Avoiding the Surprises that Can Cost
Thousands of Dollars.”
By Paul Forsberg
Page 1
Copyright Paul Forsberg 2013 Reprint permission contact Paul@FLCRES.com
www.FloridaCommercialRealEstateServices.com
2485 Jen Dr. #1 Melbourne, FL 32940 (321) 300-6123

1. Not Putting Yourself In The Buyers
Shoes 5, 10, 20 Years From When You
Buy The Property.
This is pretty simple but does require some thought.
You almost want to buy the project over again in
your mind 10 years down the road and ask yourself
this question: “Based on the future of the location
and condition of the property will a buyer ﬁnd the
property attractive?” If you hesitate in saying “yes”
you must deﬁnitely do more analysis as to the
salability of the project and the area. Do a little more
digging and answer the question before you go any
further.

There are 3 types of people in real
estate
1) Flippers
2) Traders
3) Investors
Flippers have a job and need to work
every day
Traders jump from one deal to
another - all based on yield
Investors, on the other hand are in it
for the long haul. They take along
term view - they own real estate
because it pays them monthly and
gives them HUGE tax advantages.

You wouldn't think that someone would have to tell you this. You'd think it's one of those
'common sense' bits of wisdom but it’s not.
As the saying goes, 'Common sense is anything but common.'
The main thing I tell investors to do is to walk the entire property…then come
back and do it again at night. Preferably a Friday or Saturday night…

Are
there 5 or 6 cars up on blocks with oil dripping away under them?
Are there groups of people hanging out in the parking lot after dark?
Does the guy in Unit #104 have a lot of ‘visitors’ that seem to just stop by and enter
the building via the back door for 5 minutes and come out glossy-eyed with a dumb
smirk on their face?
Check out the entire property AND the surrounding neighborhood both during the day and
at night. Bring your dog and take ‘em for a walk around the area.
Is the area appreciating, or is the growth heading elsewhere and growth is going to stop.

Page 2

Check it out and ask yourself if this will be a desirable area if you were looking to buy all
over again - well into the future.

2. Not Inspecting The Entire Property Prior To Closing.
Most commercial properties you invest it, you will initially look at the building and do your
due-diligence before you release the contingencies in the offer and then take control of the
property within 30 – 90 days. Be sure you do a thorough “Walk-Through” of the ENTIRE
property prior to closing.
I can’t stress this enough - go through the building AGAIN to make sure that you will not
have any surprise repairs (that may have happened between the escrow period) once
you take over.
You might think this is another ‘duh’ idea, but you’d be surprised how many buyers jump
right into a building without having it properly inspected.
Especially when it comes to older properties that can hide a myriad of plumbing
and electrical issues behind the scenes. I’ve even seen big problems with
newer properties as well.
Fork out the cash for a professional inspection. These guys look at properties every day,
and they know WHERE to look and WHAT to watch out for. Check with your broker and
other investors on who they recommend – DON’T look in the Yellow Pages…

3. Work Only With An Experienced Commercial Property Lender.
I don’t care if you have good credit or have taken a couple of dings on your credit history.
This one is a BIGGIE!
Save yourself a ton of time and money by working with a banker or mortgage broker that
truly understands Commercial Buildings and Properties.
This almost more than anything can make or break a good deal for you.
I’ve seen problems so many times where even investors with A+++ perfect credit wanted to
work with “their bank”… and ﬁnd out the loan package that was agreed upon changed a
week before closing.
Don’t let this happen to you. If you’re working with an experienced Commercial Broker, they
can help big time in this area.
A solid Commercial Broker and Commercial Lender are worth every nickel.

4. Do Not Buy On The Assumption You Can Immediately Raise Rents –
BEWARE - Only Under Special Circumstances Will This Happen.
Page 3

Do not buy on the word of a broker or owner that all you have to do is raise rents and
everything will work out just fine. Every seller – and I mean E-V-E-R-Y Seller – claims that
you can easily get more rents. Just jack up the rents and the money will pour in.
Yeah right… If you believe that, I have some really nice waterfront property in Arizona for
sale .... cheap.
If simply raising rents was that easy, why didn’t the seller raise them already? Why wait?
Make sure you do your homework as to the validity of the claim.
Then when you can make the increases, you’ll be increasing the income in a way that
Remember: Almost ALL owners say that their rents are too low.

5. Work With An Experienced Broker To Find A Property That Will
Work And Protect Your Interests At The Same Time.
This may sound a bit self-serving, but hear me out.
The best brokers specialize in Commercial Property have either have a designation such as
CCIM, or they OWN properties themselves.
Do Not work with a Realtor that has open houses on Sundays and expect them to know
how to assist you in a profitable analysis of a project.
And make dang sure you don’t work with your cousin Betty to “help her out” on her first sale.
Prior to working with anyone be sure to ask how many commercial or apartment properties
they have sold!
One final qualifier that I might add… Do Your Best To Work with a broker that actually
OWNS investment property.
They will know the language and be 100’s of times better able to steer you in the right
direction when you’re looking to buy.
The old adage that ‘You make money when you buy’ has a lot of truth to it. This is a VERY
important time to have all your ducks in a row and work with true professionals that have
Page 4

some experience under their belt. Take chances now, and you’ll be paying for it for years to
come.

6. Not examining income and expenses CLOSELY. Ever heard of a little
company called ENRON!?!?
Before you say YES to the project, you MUST ask to see the sellers last two years of
“Schedule E” or partnership/corporation return for the property. Put it in the Offer as part of
the Due-Diligence required documents. I don’t mean to say that have to match the proforma provided by the seller or listing agent exactly, but if things are really out of whack,
you need to start asking serious questions. If the information provided is out of whack there
may very well be an easy explanation. Especially if the property is held in a corporation.
This, more than anything will give an accurate reading to you on the performance of the
property.
Compare the to the figures the owner gave you.
One other little tidbit on a huge expense we all face… TAXES.
Here’s a simple process that could save your butt on the dreaded “T Word”:
Call the Assessor’s Office and ask them 4 questions:
1. What is the current tax valuation on the property?
2. What is last year’s tax valuation on the property?
3. s the tax valuation scheduled to go up from the current amount?
4. When you’re on the phone with the Treasurer’s Office, ask
them what the current taxes are and HOW MUCH
VALUATION those taxes are based on. If it’s based on
last year’s valuation and you know from talking to the
Assessor that the value has jumped up… well guess
what… you’re gonna see it on your bill and wonder what
the hell just hit you!
Many times the current taxes are based on last year’s
valuation… so the pro-forma the seller handed you is
technically correct, but fails to mention the valuation is increased $40,000 this past year
when the city needed to find some extra money to spend.
Every jurisdiction is a little different but basically make sure that the valuation hasn’t jumped
up recently, which may not be reflected on the past taxes the seller is reporting. This tip
could literally save you thousands of dollars alone.

7. Not Factoring In Enough Vacancy & Reserves.

Page 5

During your ownership of the building, you will undoubtably encounter vacant units, empty
space and a building(s) needing capital improvements.
This is a fact of life for those of us brave enough to sign on the bottom line…
Don’t rely on just the owner’s representation of vacancy, because some owners don’t really
‘get it’ that when a tenant moves out.
It typically takes a few days to get the unit rent-ready again. At a minimum you or your
maintenance person needs to thoroughly go through it and check to make sure everything
is in working order.
Not only that, but I guarantee that over the years you will want to do little improvements
here and there to help increase the amount of rent you can
get for a unit. These things take time and money, and you
should be sure to put at least some percentage in there –
even in hot markets.
Reserves are a little more tricky. Bankers sometimes tell you
to use a percent of rent, or X$ amount per unit, but I prefer to
look at every property differently. Think forward to any large
expenses you anticipate, such as the roof, AC units, hot
water heaters, parking lot sealing, painting of the building,
signage, cabinets, appliances, etc. Depending on what type
of commercial property you own, the type of repair or
replacement may vary, but the result is the same. You need to factor in SOMETHING for
reserves. Everything has a useful life span. If an AC unit on the building’s useful life is 12
years and the building is 12 years old, the AC unit is working on borrowed time. Sooner or
later it is going to go and you will need to replace it. Better to have planned for it ahead of
time and have the funds to make repairs. ESPECIALLY for new purchased.
Simply ﬁgure in X amount per year toward that ‘goal’ of replacing the roof, or putting in new
AC system. It’s not an exact science, to be sure, but use your best judgement and think
ahead a little bit.

Factor these costs in to your operating statements to give
you a TRUE idea of how the property will cash ﬂow. The
lenders and appraisers will do this – why shouldn’t you?
OK…So now you have a better idea of how you can literally
save a ton of money when you Buy an Apartment Building or
Property.
It can be tough out there, especially when buying – and I
don’t want to see you get taken for a ride. This report - and
the 7 Mistakes to Avoid When Buying Apartment Buildings is
a great start on your road to true wealth and independence.
Page 6

All the BestPaul Forsberg
Commercial Real Estate Specialist

It
peeves
me
to
to
end
how
many
real
estate
agents
and
brokers
try
and
value
a
property
on
the

projected
rents
and
they
do
it
in
a
very
deceptive
way.
I
can’t
stress
this
point
enough
-‐
you
need
to
insist
on
getting
TRUE
copies
of
the
rent
rolls

I
get
top
page
of
each
and
every
lease.
It
will
provide
the
lease
term,
price,
and
most
times
automatic
rent

increase
schedules.
You
also
need
to
get
copy
of
a
current
and
year
to
year
P&L
statement
of
the
property.

(I
go
into
this
in
detail
in
#6
below)

In My Opinion,
The ONLY Way To Go....
Is To Negotiate The Purchase Price
Based On The Existing Rents - Period.

Page 7

Buying a Commercial Retail Investment Partners Wanted
I closed another great commercial investment deal for a client last week. Here’s the case
study:
1. THE CLIENT
The client was a Canadian National who lives in Canada and
SW Florida. He is a successful contractor/investor with
commercial investments in Germany, Canada, and the United
States. He feels the European Economy is in way too much
trouble and believes 10 years down the road his investments
there will be worth very little, so he is liquidating the
European properties and moving the money into the US.

2. THE REQUIREMENT
The purchase price requirement was:
+ Anywhere from $700k to $1.5M US.
+ A cap rate of at least 9.5% for professional building, and 11% for Industrial/Warehouse space.
+ Must be within 25 miles of his residence in SW Florida.
+ Preferred multiple tenant NNN deals but was willing to look at other options

3. THE HUNT
We analyzed numerous deals but each was disqualified for various reasons:
Town Growth going the opposite way
Business Growth Not conducive to the buildings available
Vacancies too high and projected rents out of line
Etc.
Eventually we started looking at Gross Lease deals. Their leases are not quite as long as NNN
deals but they provide other benefits i.e. it’s extremely unlikely
that all tenants will vacate the property at the same time.

4. THE PROPERTY
Eventually we found a deal that looked promising. The
asking price was just over $875,000. The cap rate was
9.75%. It was a medical center with two tenants.
Upon further analysis I found:
The property is within a mile of two hospitals
It is the way of town growth
The average had 5% annual
current leasesrent for the units was in line with the market, and
rent increases built in already.
The building was built in 2007 so it was still in very good condition
The property was within a few 100 yards of a CVS
Page 8

The crime rate was low, schools were good & locals confirmed
It was a Bank Owned property and they were willing to finance the property.

5. THE DEAL
We negotiated a purchase price that gave my client an 10% cap rate.
This is an extremely good result as cap rates have been falling due to heavy demand from
investors. An 10% cap rate basically means that that is the return an investment will generate if
you paid cash for it. However, due to the fact that in this deal the investor was getting very
affordable financing at 4.5% interest, (I negotiated a deal with the bank) his “cash-on-cash”
return was even higher.
We worked with a well-known local Law Firm to review the title commitments & the purchase
contract. Our phase 1 inspection came back clean, our building inspection had no big red flags,
just some minor maintenance items which the seller readily corrected.
The new owner never left his office in Canada - the closing was done via Federal Express and the
internet. I did the walk through inspections, notified the tenants, and did everything else that
needed to be done for a smooth closing.
He will be down in 2 weeks and all the work will have already been done.

6. IN SUMMARY
The complete process from first meeting the client to closing the deal has taken about two
months. The end result, the new owner has a nice investment, completely stabilized, 100%
leased out in a great location.
He is looking at a 27% Cash-on-Cash Return in year one, and going up from there.
Not bad - he owns the property and i is paying him monthly income to own it, he will get tax
deductions, depreciations, and the property is going up in value every single day.

In closing, I am looking at commercial investment opportunities every
single day.
In the above case, my investor only wants leased up properties.
Quick down and dirty example:
AC System: Cost $12,000. Useful life:12 years. You should put $1,000 per year in
reserves for the AC System. If you buy a building with a 10 year old AC system, you
should plan on putting $6,000 per year away for replacement reserves - or
something close to that number.
The same goes for appliances, carpet, roof’s, exterior painting, etc.
The repairs are going to come - best to plan ahead and be prepared rather than
caught with you pants-down.

He does not want anything to do with buying half vacant properties and going through
Page 9

the rent-up stages. even though I would gladly do it for him).
There are numerous opportunities in SW Florida to invest in partially vacant properties,
get them rented up and stabilized for nice monthly cash flows.
Hold them for a year or two and either re-finance them and pull the investment cash
out, or to simply sell them and take the capital gains profit, or 1031 exchange them into
bigger projects.
If you’d like to invest in commercial property, or partner up with someone like me who
is the “Boots on the ground” person who can handle lease-ups, repairs, management,
and anything else that comes up .....
..... Feel free to shoot me an email with your contact info and a brief summary of what
you ate looking to do.
Email me at my PERSONAL email address: Paul@FLACRE.com

Page 10

7 Common Mistakes to Avoid When Buying Commercial Property

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7 Common Mistakes to Avoid When Buying Commercial Property