Commercial & Residential Escrow – What’s the Difference

Buying or selling real estate property can be very overwhelming. As a real estate agent, your clients will be looking to you to help them through the process. Often ignorance of the steps involved can lead to frustrated and weary clients.

In this blog, we discuss the difference in a commercial and residential escrow. An individual looking to purchase commercial property may think the process is the same as when they were buying their home. It is up to you to clearly explain the difference between a commercial and residential escrow closing process.

More Parties Involved

Residential sales transactions include at most, two purchasers and two sellers. However, a commercial transaction can include far more parties since these acquisitions tend to be far larger financial investments. Even if there is only one legal entity buying or selling the property, there are usually several individuals behind the scene who are critical to the decision-making process of each particular commercial real estate deal.

Highly Time Consuming

Multiple factors contribute to longer closings when dealing with commercial real estate transactions. Namely, commercial sales invite far more legal stipulations, which can result in longer closing times than residential transactions. Additionally, title searches and other title-related due diligence may also require more time.

It is important to warn clients in commercial real estate deals that delays are not signs of procrastination but extra time to ensure that each party is well-protected. After all, buying a commercial property involves a sizable amount of funds. Both the buyers and sellers can understand the need to ensure that legal requirements adhere to the terms of the escrow and sales agreement.

Higher Risks

There are much higher risks associated with commercial real estate transactions. While some buyers may have business intentions for their residential purchases, more often than not consumers buy homes to live in them. Accordingly, there are lower risks associated with residential real estate transactions than commercial purchases. Both escrow companies and the other involved parties are acutely aware that there is much more at stake when a commercial sale goes bad.

Unlike residential real estate transactions that involve individuals, commercial deals occur between legal entities. Another key distinction is that even if a commercial deal goes bad, investors in a legal entity can protect their personal assets as they generally enjoy limited liability.

Different Legal Requirements

The residential home sales are governed by the Real Estate Settlement Procedures Act (RESPA). This law regulates how residential real estate closings are handled. Of importance, it protects a purchaser by reducing the risk associated with buying residential property. This law only applies to residential real estate transactions.

More Due Diligence

Since the Real Estate Settlement Procedures Act doesn’t apply to commercial transactions, they require the purchaser to exercise a substantial amount of due diligence. Accordingly, more time is spent researching not just the title of the property, but also the parties to the transactions. Further, since there are no legal stipulations dictating the structure of the sale agreement, each sales agreement is different, and they’re usually complex.

The higher levels of risk and investment, along with the lack of legislative protection result in far more due diligence in commercial transactions. The delays may frustrate your clients. However, it is all in the name of protecting their interests in the transaction. In addition to title searches, commercial transactions include due diligence relating to tenant occupancy, the seller’s accounting records, any outstanding tax cases or liens, zoning compliance and much more.

There is no doubt that a commercial real estate deal is far more complicated and time-consuming than buying a home. Your client will always be anxious about wrapping up a real estate transaction, but explaining the difference between the commercial versus the residential escrow process can help your client see the value in the time it takes to close a commercial real estate sale.