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Basic Differences Between Commercial and Residential Real Estate


Just getting started with real estate? Before you go any further, be sure you understand the basic differences between commercial and residential real estate. Otherwise, you could end up missing some important components of a transaction that may cost you thousands of dollars. Commercial and residential real estate might as well be two separate worlds even though they share some commonalities. Here’s what makes them different according to the real estate legal experts at Prudent Law.

Agreement of Purchase and Sale

Right off the bat, the first difference between commercial and residential real estate can be found in the Agreement of Purchase and Sale. With residential sales, there are often multiple offers on the table at once, which means time is of the essence. The buyer’s offer usually goes directly to the seller for immediate consideration. At that point, there may be some back and forth between the seller’s agent and the buyer’s agent to get to a mutual agreement. In general, the buyer’s offer is usually amended after the seller sees it.

With commercial real estate, the buyer’s offer is reviewed and amended after a client meeting between the real estate agent and the buyer, but before it goes to the seller. This is because without multiple offers on a single piece of property, the buyer can take more time to consider their offer and position so that the amended offer that goes to the seller is a true reflection of a deal that works best for them. This doesn’t mean there won’t be additional negotiation, but it’s not as time sensitive as it is with residential real estate.

Conditional Period

Commercial real estate transactions typically have a longer conditional period than residential real estate transactions because more due diligence is required on both the buyer and seller’s parts. The seller has to produce warranties, representations, and deliveries so that the buyer is confident that everything is being disclosed about the property. There are sometimes even clauses in the agreement that allow the buyer to speak with engineers, designers, planners, and other professions who have worked with the seller to verify what the seller is telling them, all of which lengthen the conditional period.

Financing

Financing is usually much more complicated in commercial real estate than in residential real estate because often, the seller provides short-term financing until the buyer can obtain various permissions that qualify them for conventional financing. Additionally, they may be financing the purchase through a third-party law firm, which adds another layer of complexity to the process. Moreover, property that generates income is treated differently for financing considerations than property that’s not generating income. Residential property has no such complexities to delay the transaction.

Post Closing

Owners of residential property usually get the key at the closing and can move right into their new home. With commercial property, the owner may be able to begin working on the property, but there will always be follow up with the seller, particularly as things arise that the buyer wasn’t aware of and they have to invoke the warranties and representations from the seller.

Conclusion

The differences in commercial and residential real estate go deeper than just the difference between a house and a commercial building. The differences mentioned here are just the beginning, so if you’re considering a commercial real estate transaction, think about consulting a real estate lawyer to guide you through the process.

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