Costs
Part of Commercial buying: risks, safeguards and decisions, in plain terms
The costliest commercial buying mistakes, explained
Twelve commercial buying mistakes traced to three confusions: business against investment, price against cost, and the building against the title you acquire.
Almost every expensive mistake in buying premises comes from one of three confusions. Confusing the business decision with the investment decision. Confusing the price with the cost. Confusing the building with the title. Sorted that way, twelve familiar errors become three things to watch.
What to take away
- Running a business and owning property are two investments. Judged together they hide each other's returns.
- The price is one number in a much longer list, and most of the rest arrive after completion.
- What you buy is a legal interest, not a building. The survey and the title search answer different questions.
Confusing the business decision with the investment decision
1. Buying because the payment resembles the rent.
Two payments of similar size are not equivalent. One buys occupation and one buys an asset with maintenance, illiquidity and an opportunity cost attached. Model both properly before the resemblance persuades you.
2. Not asking what else the deposit could do.
Capital tied into a building is capital not in stock, equipment or hiring. For a growing business that is often the real cost of ownership, and it never appears in the comparison.
3. Buying a building sized for the business you hope for.
Excess space you own is excess space you maintain, insure and heat. If you buy for growth, have a plan for the space in the meantime, and be honest about whether letting part of it makes you a landlord.
4. Not deciding who buys it.
The operating company, a separate entity, or the owners personally: each has different consequences for tax, liability, financing and what happens when the business is sold. Changing this after an offer is expensive and sometimes impossible. Settle it with an accountant and a property lawyer before you bid.
5. Ignoring what happens when you stop.
A business is easier to sell without a building attached, and an owner may want the property to remain as income. Deciding that at the start changes the structure; deciding it at the end changes very little.
Confusing the price with the cost
6. Budgeting the purchase and not the professional work.
Valuation, survey, environmental assessment, title work, legal fees and lender charges arrive before completion, and they arrive whether or not the deal happens.
7. Forgetting what the building will need spent on it.
Roofs, systems and surfaces have finite lives, and as owner you are the person who replaces them. Ask for maintenance records, and treat their absence as a finding rather than as a neutral fact.
8. Estimating the running costs instead of measuring them.
Utilities, taxes, insurance and maintenance are measurable. Energy in particular can be tracked rather than guessed, which is the purpose of the EPA's Portfolio Manager. Ask the seller for a year of actual bills rather than an estimate.
9. Not reading the financing program's own rules.
Where a purchase is financed through a government-supported program, eligibility and structure are specific and published. For small businesses the SBA sets out 504 loans and its general 7(a) program. Read the program pages rather than a broker's summary, because what qualifies is narrower than the summaries suggest.
Confusing the building with the title
10. Treating a marketing plan as a boundary.
It is a drawing made to sell. A survey is what tells you where the boundary runs, what encroaches, and where recorded rights physically fall.
11. Skipping the title work or reading it too late.
What you are buying is a legal interest with other people's rights over it. The process that finds them is a title search, and the most common surprise is an easement that does not stop the purchase but does stop the plan.
12. Assuming the existing use is lawful.
Long practice is evidence that nobody objected. It is not proof of approval, and it does not transfer to a different activity. That question is answered by the offices described in zoning and permits, before contracts.
The twelve, in three columns
| Confusion | What resolves it |
|---|---|
| Business decision against investment decision | Model the property as a separate investment with its own return |
| Price against cost | List every cost before completion, at completion, and every year after |
| Building against title | Commission a survey and a title search, and read both before you are committed |
Three exercises. All are cheaper than any one of the mistakes above, and all have to happen inside an investigation period you negotiated at the offer stage.
What to do instead
Order the slow reports first, because the environmental assessment and the title review control the timetable and both can produce a second stage. Put the professional costs in the budget as certainties rather than as contingencies.
Ask the transport authority and the planning office what is planned nearby, since the mechanism that can eventually affect a site is eminent domain and nobody volunteers that information. Then compare the whole thing against the honest cost of continuing to rent, which is set out in commercial leasing.
The full sequence, from framing the question to the day after completion, is in commercial buying. Where the question is really whether you should commit to anywhere at all yet, location selection comes first.
Common questions
Which of these costs the most?
Usually the structural one: buying a building that suits a business you turn out not to have. The most frequent is underestimating what the building needs spent on it.
Is a building survey worth it on a small property?
Yes. The expensive items are invisible, and they are yours the moment you complete.
Can I do the title work myself?
You can read the results yourself and you should. Producing them is specialist work, and the point of paying for it is that somebody is responsible for the answer.
How do I stop the deal running away from me?
Negotiate the investigation period at the offer stage and order the slow reports on day one. Almost every rushed decision is a report that arrived after the date it could still change anything.
