Investing in commercial real estate has huge potential for capital gain, however, there are a few often overlooked facts that should have been considered before choosing one property over another. Location is usually a big part of the problem and if there are any inherent problems a real estate agent/broker is required by licensure law to tell you of any elements they are legally obligated to disclose. Unfortunately, even real estate agents may not know some of the underlying issues so it behoves you to do a little checking before signing a buyer’s contract. Here are some of the potential risks that you may not be aware of.
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Can You Get the Right Insurance?
One of the issues that many commercial real estate buyers have run into is properties that are located in a flood plain. If you can get flood insurance at all it will be sky high and may not be cost effective in the long run. Why? If you can get coverage at all in a flood plain, the reason why the premiums are so high is because the insurance underwriter is taking on greater risk. What about properties in California that are in known fire zones? Could they get the insurance they need?
Commercial Insurance Based on Historical Losses
Also, look at what happened to Miami after that record setting hurricane season of 2005 where there were so many named storms the alphabet didn’t hold enough names for them all! Many insurance underwriters wouldn’t offer hurricane type coverage in following years as they lost their proverbial shirts after Wilma hit, the last in a long line of storms to hit Florida that year. Because companies didn’t have enough insurance adjusters, Miami independent adjusters had to step up to the plate. That was added to the overall losses those companies sustained so you can see why they were reluctant to issue new policies the next year!
Insurance Companies Are in Business to Make Money
Finally, as a business man or woman looking to invest in commercial real estate, you must realise that insurance companies are out to make money just like you are. For this reason, they never actually ‘like’ to pay on losses you’ve sustained and will do whatever they can to pay as little as possible if they can be made to pay at all. It may take a lawyer to fight your claim for you and you may even need to resort to hiring an independent insurance adjuster to appraise and value your losses. This shouldn’t stop you from buying that investment property, just be aware that you may need to call in the ‘big guns’ to duke it out with your commercial insurance provider.
These are all things your real estate agent may fail to discuss with you when you are looking at a piece of real estate but they are all things within your control. Make sure to investigate whether you are in a flood plain or a fire zone before signing anything. If you are, get insurance quotes prior to signing a contract. A letter of intent would be good, but that buyer’s contract needs to be on hold until you do your homework. Once you know that you can adequately insure your investment, it’s time to make a deal.
