What is the Difference Between Commercial and Residential Real Estate Purchases?

Pin It

Commercial Real estateThe biggest difference between commercial and residential real estate purchases revolves around the rigid procedures involved in finalizing the transactions to convey the title properly. Whether residential or commercial, transactions that deal with real property are typically big-ticket matters ranging from a few thousand to millions of dollars. Understandably, deals of this magnitude will require documentation and compliance with established and mandatory procedures.

Commercial Deals Involve Bigger Amounts

While it is not always the case, a difference between commercial and residential real estate purchases has to do with the amounts involved. Data from the National Association of Realtors indicate that the median sales price for residential properties ranged from $260,000 to $300,000 between 2013 and 2015. Residential real estate purchases typically involve a single unit of property, and the median home price includes land values.

On the other hand, commercial purchases may encompass several units of properties that have been assembled to create a larger unit. Land values alone drive up median values in areas with commercial zoning especially those that are designated for retail and office developments. The sheer size of commercial properties would drive up the purchase amounts.

Residential Real Estate Purchases are Simpler

The steps involved in taking a residential transaction from purchase offer to closing are fairly well established. The time frame may vary especially for transactions that involve buyer financing because lenders usually dictate the pace. Nonetheless, residential deals follow a similar pattern. After the buyer makes an offer, a counter-offer may be made, after which earnest money is deposited into escrow. Various reports including home inspection, appraisal, pest inspection and property survey and title policy are prepared within the closing deadline. Failure to complete these requirements may invalidate the deal. The buyer’s escrow deposit may be at risk for failure to meet the agreed closing deadline. The closing cycle for a residential deal may take from four to eight weeks.

Commercial deals are governed by a different set of rules. A major difference between commercial and residential real estate purchases is that the former is defined by different guidelines. A lengthy study period involving engineering, permitting and other due diligence matters is the typical route of commercial deals. Buyers will make closing contingent on successful fulfillment of these requirements. The transaction cycle for a commercial purchase may take several years. Buyers may end up losing some sunk costs in the process, but the earnest money deposit is protected by fulfillment of these contingencies.

Parties to the Transactions Differ

The lines of communication are well defined in residential transactions because the parties involved in the deal are usually the buyer and seller or their authorized representatives. On the other hand, commercial sales and purchases are usually made under a corporate name to manage liability issues. The business entity may be represented by a single person, but unlike residential buyers and sellers, the representative may not be the decision maker. This creates a longer lag time and a more convoluted process for commercial property purchases.

Related Resource: Merchant Cash Advance

The Art of the Deal

Breaking into commercial and residential real estate requires the same basic education and licensing requirements, according to Rain City Guide. However, the differences between commercial and residential real estate purchases may define whether you are a better off specializing in one area to increase the chances of professional success and personal fulfillment. Both commercial and residential deals require persistence, attention to detail and the ability to negotiate with parties focused on same goal but with contrarian interests.

Pin It