A property condition survey, also known as a property condition assessment (PCA), is considered a staple of commercial real estate transactions. PCAs represent a valuable form of due diligence that protects both the buyer and the seller in a deal.
To get the most out of a PCA, buyers must know when to request one. Let’s explore the question of when to request a survey and discuss the benefits of taking this critical step.
What is a Property Condition Survey?
A property condition survey is exactly what it sounds like – a survey designed to assess the physical condition of a property. During these surveys, inspectors will review critical areas of a building to assess its condition.
The scope of a PCA varies based on the property being assessed. However, every PCA includes the following four components:
- Building evaluation
- Building systems survey
- Site improvements assessment
As part of the fieldwork, assessors will:
- Conduct a site assessment
- Conduct interviews
- Conduct research at the city building department
During the building evaluation, assessors will examine the following parts of the building:
- Interior finishes
- Building envelope
They will also inspect several building systems, including the following:
- HVAC systems
- Fire suppression systems
Finally, inspectors will examine any spots that may need improvements, such as:
- Exterior lighting
- Pavement/parking lots
The assessor’s findings will be documented in a property condition report (PCR), a copy of which will be provided to the buyer. The seller may also receive a copy of the PCR upon request.
When Should PCAs Be Booked?
Owners should always book a PCA before purchasing commercial property. A PCA is especially critical if you plan to finance the purchase.
The PCA will reveal any red flags about the property and inform the buyer about the property’s current condition. The survey will outline what items need immediate repair and highlight any items that need to be repaired soon.
If you wait until after purchasing the property to request a PCA, then you will be unable to use the PCA to negotiate a better price. More importantly, you may have purchased a property that requires tens of thousands of dollars worth of repairs, diminishing the return on your investment and endangering the viability of the project.
Property Conditions that May Warrant Inspections and Surveys
A PCA should always be scheduled as a precautionary measure. The findings of a PCA may reveal that other inspections or surveys are warranted.
For instance, let’s say your PCA reveals that the roof is in poor condition. The PCA inspector will bring in an expert to determine the full scope of the damage. For example, a contractor can provide an estimate of the repair cost and recommend how to remedy the problem.
Benefits of a Survey
A property condition survey provides many benefits to buyers. Specifically, the survey and associated report can assist in the following ways:
1. Help with Negotiations
A PCA is a valuable negotiating tool in a variety of commercial real estate deals.
Let’s say that you want to purchase an apartment complex. Naturally, you’d schedule a PCA before buying the property. Then, you receive the report, which reveals that the property needs new HVAC units, with the estimated cost for the units being $100,000. You can use this data to negotiate the price of the building or ask the seller to cover these costs.
But, without a PCA, you may have bought the property and immediately incurred $100,000 worth of repair expenses out of your own pocket.
2. Uncover Major Issues
A PCA will reveal any big-ticket repair issues. To be fair, a PCA will not uncover every imperfection, but the good news is that a property condition survey will reveal serious problems that could cost you big bucks.
The PCA focuses on major building systems, including HVAC, electrical, roofs, and plumbing. If there is an issue with any of these core systems, the PCA will determine what problem exists and how serious it is.
3. Protect Buyers from Making Bad Investments
One of the top perks of scheduling a PCA before completing a transaction is that you will be protected from a bad investment. While you may be willing to take on some repair costs, the last thing you want to do is incur surprisingly exuberant expenses.
A PCA will provide you with a reasonable estimate of any repair costs you will incur. You can use this information to determine whether a property is a respectable asset for your portfolio or if it is ultimately a liability.
4. Assist with Refinancing
If you already own a property and are interested in refinancing the property, you can benefit from a PCA.
PCAs help lenders verify the value of a property. The site is more valuable if your building’s systems are in good working order. As such, lenders will be more open to refinancing your loan and providing you with more favorable loan terms.
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