Understanding Insurance (not what you think) in Commercial Real Estate
Many of my readers are associated with the real estate market. And, they all have an expertise. Tom Peters, years ago, wrote a book called “In Search of Excellence.” One of his points was for folks to “stick to their knitting.” It was a basic point that implored professionals to do what they do best. Now let me swing this back around to insurance.
I often see non-commercial real estate professionals thinking they can handle a transaction out of their own respective expertise. I see this from Realtors, Mortgage Loan Originators, Escrow Account Reps, etc. First, most do a decent job in their own world. However, they do not know what they do not know. The enticement of doing a deal in commercial has them exposing both themselves and their clients to undue risk.
Now, please understand that these people mean no harm. Yet, they are playing in a field that can get messy very quickly. And, there is a good chance that they are walking a high tightrope without a net. For example, many residential realtors do not have errors and omissions insurance coverage for a commercial transaction. If they do have coverage, then they do not realize the rather substantial deductible involved should a mistake occur.
In fairness, one can get lucky and manage through a transaction without causing clients financial harm. But, going back to the concept of “you do not know what you do not know,” there is absolutely no way that an inexperienced person will know the potential pitfalls. And, that lack of knowledge is putting clients’ money at risk greatly.
The reason most of us use experienced professionals in any undertaking is to ensure and insure that we are protected. In a commercial real estate transaction, things will go wrong. Clients employ experienced teams to manage that chaos and to ensure that the deal can be completed.
Commercial Real Estate is not simple. There are typically two ways that professionals in the field communicate the complexity. Some will explain in painful detail all of the potential minefields that can occur. The goal is to get the business partners and clients to understand that they better not try to navigate through the maze without the proper assistance.
The other is to take all of the chaos and simplify it for both the business partners and the clients. The problem with this approach is that it emboldens those to think that they can go the path alone or with less experienced folks. Now with the large sums of money on the line, does it really make sense to do a transaction without the important insurance of the proper expertise? All it takes is that one time where luck does not protect the parties involved. I recommend that all stick to what they are good at; and then bring in the necessary expertise to ensure clients are protected.
Protecting the client should be the number one priority. And, you still can get a piece of the transaction typically (finders fee) without unnecessarily risking financial loss to you and your clients.
Investments Opportunities for Purchase with Strong Cash Flow:
Back on the January 15th update, I wrote about “Creating Residential Listings Using Commercial Opportunities.” Each week, I am presenting some of those investment opportunities to better educate all on what is actually available. Note that these are all Single Tenant Net Leased properties that have listed in about the last 10 days. In addition, I assumed a 5% loan with 50% down. This is just a small sample of what is actually available.
If you assume investors in the Bay Area are getting a cash flow of 3.5%, then you can see the potential improvement with these properties above. This approach is great for the investors desiring increased cash flow, an opportunity to get out of daily property management, and/or taking the challenges of rent control off the table. Should you wish to discuss any of these or others, then give me a call.
Articles of Interest:
Bloomberg reported “The Retail Real Estate Glut Is Getting Worse.”
NREI reported “Are Chinese Shifting from Real Estate Buyers to Sellers?”
The SJ Mercury News reported “San Jose Berryessa transit village pushes forward near BART station.”
|Apartments||4.495% – 5.020%||3 to 10 year (30 yr amortization)|
|Commercial||4.805% – 5.320%||3 to 10 year (25 yr amortization)|
|SBA Lending||Call for Options||Call for Options|