In commercial real estate, underwriting is a crucial part of the investing process.
Whenever you make a big purchase, you take a risk, whether you are buying a home, buying a car, making a business investment, or buying a commercial property. In any of these situations, you would naturally be wise to limit your risk as much as possible. In personal purchases, this means doing as much research into the product or company as possible. In real estate investing, that research means underwriting, a crucial process for any investor to practice.
What Is Underwriting?
Investment underwriting is essentially very thorough research that comes down to two major components: the investment property and the sponsor. This process often begins with the sponsor, or the owner of the project. Most underwriters look for a degree of experience in the project type and ideally a well-capitalized sponsor. This means that this part of the underwriting involves looking keenly at the sponsor’s finances, including credit history. From there, the research moves on to the actual investment plan. This portion of the process begins at the surface level with a preliminary overview of the proposal. If the investment passes that, a more thorough underwriting can begin.
At this stage, the investor scrutinizes the project even more closely through site visits, an appraisal, extensive risk-return analysis, and thorough review of the project’s budget. There is also an investigation into occupancy history (which could take more time for a residential property than a commercial one), comparison to other similar properties, and other measures. The process is often long and rigorous because it protects the various participants involved in the transaction.
What Is A Lemon?
Most people have heard of a “lemon” in terms of a poor-quality vehicle. In that case, it refers to one that has serious issues that weren’t disclosed to the buyer, so that it ends up costing much more than it should. In many states, there are “lemon laws” to protect car buyers from these situations. In real estate investing, the term “lemon” has a similar usage. A “lemon” in real estate investing is an investment that seems promising and reliable but is actually a bad investment. There are many reasons that a property might turn out to be a bad investment, and the only way to save yourself from falling for these “lemons” is through thorough research – underwriting.
Trust the Professionals at Clagett Enterprises for Your Realty Needs
If you’re looking for an experienced property management company, the perfect realtor for your property, or a professional to assist you during your purchase of any home, you can rely on Clagett Enterprises. Clagett Enterprises is a full-service real estate company with almost 30 years of experience in the Frederick and Western Maryland area. For assistance with commercial sales, leasing, management, and development and consulting, contact us online or give us a call at 301-665-6009. To meet our team and see some of our beautiful homes, follow us on Facebook and Linkedin.