As real estate professionals, we tend to be familiar with a single market area. A licensed real estate agent may be more comfortable helping buyers and sellers directly within a transaction, while a loan officer may understand the ins and outs of home loans. Title and escrow agents likely know specifics about the closing itself, from recorded documents and title insurance to taxes and escrow accounting. However, it’s common for certain real estate professionals to only work within residential or commercial worlds. The two transaction types can differ in big ways, so let’s explore some of what makes them unique.
Starting With the Basics
The key element that divides real estate is the “use” of the land. At its core, a residential property is most commonly used as living space, while commercial properties are used for business purposes (usually for profit). Commercial properties can cover a wide range of uses, with the most common being retail space, office space, multi-family, restaurants, healthcare, and hospitality. Real estate agents, loan officers, and title agents typically complete residential or specific types of commercial transactions, so it can be difficult to understand the other type of transaction.
Protecting Your Investment
Conditions generally exist within each transaction agreement, providing your client the time to perform certain research or due diligence, prior to settlement on the property. If your client is purchasing a home, they have certain legal protections with specific guidelines in place to help protect their interests. Originally passed in 1974 and most recently updated in 2011, the Real Estate Settlement & Procedures Act (RESPA) mandates certain disclosures for the transaction process and prohibits unlawful acts by settlement parties. In short, RESPA helps to educate your buyers on their transactions so they can make informed decisions throughout the process.
However, RESPA protections only apply to certain types of loans. Most commercial transactions fall outside of RESPA, as the act doesn’t cover any commercial, business, vacant land, large land tract, or construction only loans. This lack of regulation frees the parties to structure deals and the type of closing documents to be used based on mutual agreement. There is no standardization in these agreements, as every word is up for negotiation.
With no regulated guarantees, commercial transactions do require independent due diligence to be done. This often involves in-depth investigations by independent, third-party firms to protect themselves from any issues with their investment. Depending on location and type of transaction, due diligence evaluations may include an Environmental Site Assessment, Property Condition Report, Seismic Risk Assessment, ALTA Land Survey, Zoning Report, Flood Reports, or more. Ultimately, the results of these reports can either halt the transaction in its tracks or satisfy the agreement for moving forward.
Ownership and Title Insurance
A residential transaction is typically either a purchase or refinance, meaning it’s usually easy enough to identify your borrowers, buyers, and sellers. However, determining legal ownership within a commercial transaction can often be difficult. Though both transactions include the purchase of a title insurance policy insuring free and clear title to the property, they are different policies. Due to the use, size, or type of property, the commercial policy is typically much more complex. This policy can offer an array of endorsements or exclusions from coverage based on specific owner, lender, or insurer. Commercial policies are carefully reviewed to make sure all exceptions and endorsements are accounted for. But this process often involves a legal review and filing of any objections or concerns, and if objections cannot be overcome, either side of the transaction may walk.
Escrow and Recording
While both residential and commercial transactions require settlement agencies to hold escrow, commercial transactions often deal with large sums of money coming from a number of different sources. That can create confusion and complexity. This process is part of the negotiation of an escrow agreement that must be verified by all parties prior to releasing any funds.
Recording for both residential and commercial transactions, however, is more similar. The transfer ownership still occurs using a publicly recorded deed. The type of deed is generally settled upon early on in the transaction. A residential closing generally involves a warranty deed. Commercial transactions typically utilize a quitclaim deed or a special warranty deed. Once the document is recorded the transfer of ownership take place.
Whether your clients' “use” involves settling into their new family home or embarking on an investment adventure, understanding the process for both types of transactions can help. And while there are similarities between residential and commercial, there are aspects to each type that are key to truly understanding how the transactions work. If you’re anticipating a professional move to one to the other, be sure to take the time and learn the in-depth details for your locality.
About the Author
David Herrin is the National Marketing Director for National Due Diligence Services (NDDS), a division of American Surveying & Mapping, Inc. (ASM). NDDS/ASM is one of the nation’s premier, commercial land surveying and due diligence firms. David has been with NDDS/ASM for over 9 years and offers over 35 years of real estate experience. This experience includes working as a licensed real estate broker, sales management for a major title insurance company and taught hundreds of continuing education programs nationwide.