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Whether you’re a real estate investor, property manager, asset manager, developer or other real estate stakeholder, it’s essential that you understand multiple key real estate documents. From commercial real estate purchases to evaluating multifamily deals, these documents are vital for successful real estate transactions, highlighting everything from a property’s financial overview to its legal underpinnings.
Here are five real estate documents you need to know:
1. Purchase Agreement
The purchase agreement, which is also known as a purchase and sale agreement, or PSA, is the key legal document for any real estate transaction. The purchase agreement outlines the terms and conditions between the buyer and seller, and includes everything from the purchase price to financing to the conditions for closing. This negotiated agreement is intended to protect both the buyer and seller in a real estate deal, and it is the governing document when a property is bought and sold.
When analyzing a purchase agreement, it is crucial to review the purchase price and payment terms, whether the property is being purchased with cash or financing (or a combination), and if there are any contingencies, such as property inspections or financing, that must be met before the sale is finalized. Contingencies are especially important because they provide investors with an exit opportunity should major issues arise during the due diligence process, which could enable the investor to cancel the deal.
2. Title Report
The title report provides a detailed history of the property’s ownership and any legal claims or liens that may affect that ownership. Before purchasing a property, every buyer must run a title report to protect the buyer’s interests. This document ensures that the seller has the legal right to transfer ownership to the buyer and that there are no hidden claims, such as unpaid taxes, mortgages, or easements that could interfere with the sale. Some buyers want free and clear properties only, while other buyers are willing to assume the legal and ownership risk so long as there is a price reduction and other legal carve-outs, for example.
For investors, the title report is essential because it helps identify any potential legal complications that could impact the property’s value or transferability. A title reports includes a legal description of the property, a record of prior ownership, and any licensor encumbrances that could affect the value of the property. It’s essential for real estate stakeholders to work with a reputable title company to review the report thoroughly. If any red flags, such as liens or ownership disputes, are discovered, the seller typically must resolve these issues prior to closing.Investors may also consider purchasing title insurance to protect themselves from future claims against the property’s title.
3. Rent Roll
Any commercial or residential landlord must be well-versed with rent roll. A rent roll is a detailed report of all the tenants currently occupying a property, including the terms of their leases, the amount of rent they pay, and other financial details. This document is especially important for investors looking to acquire rental properties, as it provides insight into the property’s revenue.
The rent roll helps investors not only evaluate the property’s income but also the stability of its rental income. The rent roll includes the names of tenants, lease start and end dates, rental amounts, and details about any vacancies or delinquent tenants. By reviewing the rent roll, investors can assess the property’s current cash flow, identify trends, and determine if rental rates are in line with the market. Investors should use the rent roll to analyze whether there are opportunities to increase rents or improve occupancy rates after the acquisition. Raising rent, in many cases, not only can increase cash flow but also raise the valuation of the underlying property.
4. Profit and Loss Statement
The profit and loss (P&L) statement of a property provides a summary of the property’s financial performance. The P&L includes the income generated by the property, operating expenses, and the net operating income (NOI). Overall, the P&L provides investors with a clear picture of the property’s profitability.
Real estate stakeholders will use a P&L to evaluate the financial health of a property and determine whether the property will generate a strong return on investment. The P&L typically includes all sources of income, such as rental income, parking fees, laundry or other revenue streams, and details the property’s expenses, including taxes, maintenance, insurance, and utilities. Reviewing the P&L over several years allows investors to spot trends and assess the property’s overall financial stability. It’s also a valuable tool for identifying areas where operating costs can be reduced or revenue can be increased. Investors should use historical P&L statements to create their own projected P&L, which can provide a baseline opportunity to manage the property under new ownership.
5. Loan Agreement
For real estate investors using financing, the loan agreement is one of the most critical documents in the transaction. If a buyer will use financing, in part or in whole, to finance the transaction, a loan agreement is the governing financing document. This agreement outlines the terms and conditions of the mortgage or loan used to purchase the property, including the interest rate, repayment schedule, and any fees associated with the loan.
Understanding the loan agreement is essential for investors because it dictates how much they’ll pay over time, the total interest accrued, and any penalties for early repayment or default. The loan agreement includes details such as the loan amount, whether the interest rate is fixed or variable, the term of the loan, and any additional fees or penalties. A buyer who has strong relationships with traditional and alternative lenders can often secure advantageous terms, which can increase an investor’s return on investment.
Conclusion
When it comes to essential real estate documents, these five documents are not the only important documents. In addition to the key documents outlined above, there are several other important documents that real estate investors should know. For example, zoning reports help investors understand the property’s permitted uses (including residential, commercial or industrial, for example) and any potential restrictions on future development. Environmental reports are crucial for identifying any contamination or environmental hazards that could affect the property’s value or use. Lease agreements provide the terms and conditions that govern the rental relationship between a tenant and landlord, while due diligence reports summarize inspections, property conditions, and other considerations buyers find before purchasing a property. Finally, appraisal reports offer an independent valuation of the property, which can be crucial for financing and ensuring that the purchase price aligns with the property’s market value. By mastering these documents, investors can make more informed decisions, reduce risk, and maximize their returns.
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