Common Mistakes to Avoid When Buying Commercial Property

Buying commercial property can be a profitable move, with a promise of significant financial rewards. Because of this, it’s easy for investors and business owners to get swept up in the excitement and overlook potential risks. Whether you’re a first-time or seasoned commercial real estate investor, it’s common to make mistakes. Unfortunately, these mistakes can be quite costly. To help you navigate the purchase of a commercial property, take a look at the pitfalls to be avoided.

Failing to Do Proper Research

Avoid the mistake of diving into a purchase before conducting proper market research. Aside from the building, you must consider factors like location, business environment, and long-term potential. Compare property rates, assess average rental yields, and evaluate nearby amenities and infrastructure to ensure you buy in the right area. A lack of proper research can make you vulnerable to being misled by brokers or sellers. The more you know about the market, the stronger your negotiating position will be.

Failing to Verify Zoning and Use Restrictions

While a property may be in what looks like a great location for your business, it doesn’t necessarily mean it’s zoned for what you want to do. Local zoning laws can limit how a property can be used. Contact the local zoning authority and confirm the property's current zoning designation. Ask whether your intended use is allowed or if it requires a special permit or variance. It’s also wise to consult with a local land-use attorney who understands how likely you are to get approval if a zoning change is needed.

Not Preparing a Budget and Underestimating the Total Costs

Another common mistake to avoid is failing to set a clear budget. Before you start viewing properties, first determine how much you’re able and willing to spend. Note that your budget should go beyond the purchase price. Consider associated costs like legal fees, taxes, insurance, inspections, appraisals, and possible renovation expenses. All these will add up to the total cost. Therefore, have a well-prepared budget to keep your investment grounded and your expectations realistic.

Not Forming a Legal Entity Before Buying

Purchasing commercial real estate in your name exposes you to liability. If something goes wrong, like a tenant slipping and falling, you could be personally sued. That’s a major risk. Instead, create a limited liability company (LLC) or another appropriate legal entity to hold title to the property. This adds a layer of legal protection and provides tax advantages. Consider talking to an attorney about what structure is best for your situation.

Overlooking Operational Expenses

Once you purchase a commercial property, there are ongoing costs you’ll encounter on a regular basis. These include operational costs such as maintenance, utilities, insurance, pest control, trash removal, and any management fees. Unfortunately, new investors focus on property acquisition and overlook these recurring expenses that keep the property functional. These costs will vary depending on the type and location of the property. That said, ensure these expenses don’t exceed your profit margins.

Overlooking the Lease Agreements If Tenants Are Involved

If you’re buying a commercial property that already has tenants, don’t assume the leases are in your favor. There could be problematic clauses, rent concessions, or looming disputes. Ask for and review all existing leases and amendments. Look for key terms like rent rates, lease length, termination clauses, renewal rights, and responsibilities for repairs or property taxes. Check for any side agreements that may not be in writing. If something seems off, flag it and consult your attorney.

Failing to Understand Financing Terms

Another common mistake to avoid is not taking the time to understand how commercial real estate loans work. These loans often have shorter terms, higher interest rates, and large balloon payments. Some buyers sign up for a loan they don’t fully understand, only to regret it when the repayment terms kick in. Take the time to read the fine print. Know your interest rate, term length, amortization period, prepayment penalties, and what happens if you miss a payment. Work with a lender experienced in commercial deals, and don’t be afraid to ask questions.

Prioritizing Emotions Over Logic

Letting emotions drive your investment decisions is one of the easiest ways to make costly mistakes. It’s natural to feel excited about a property that looks impressive or seems to “just feel right.” However, those emotional reactions can cloud your judgment. Successful investing requires a fact-based approach. That means relying on thorough research, market data, and financial projections. It’s good to step back and ask whether that investment aligns with your goals. In commercial real estate, logic must always take the lead.

Making Verbal Agreements

Even though verbal agreements can sometimes be legal, they are risky. The biggest danger is the lack of written proof, making it hard to enforce terms if a dispute arises. Aside from that, key details can be forgotten or misunderstood. Without documentation, it becomes one person’s word against another’s. Agreements like property sales or long-term leases should be in writing to be legally enforceable. To protect your interests, always get important agreements in writing, no matter how trustworthy the other party seems.

Not Working with the Right Team

Trying to manage a commercial property purchase on your own can seem like a way to save money, but it might lead to costly mistakes. These deals are complex, and without the right support, you may overlook serious issues. One of the most important professionals you can have on your side is a real estate attorney. They will help you navigate contracts, conduct due diligence, and address zoning or title issues, among other things. In addition to legal counsel, your team should include a local commercial broker, a CPA, and a qualified inspector. The right team spots problems early and helps you move forward with confidence.

While investing in a commercial property has the potential for significant returns, it also carries risks that can catch you off guard. Whether you're a first-time investor or expanding your portfolio, having the right legal team can make all the difference. At Curcio Law, we help clients navigate real estate transactions. If you're considering a purchase, reach out to us. We would be happy to walk you through it and help you avoid costly mistakes.