When people think of real estate, they typically envision it as a broad category that includes land and anything attached to it, such as buildings, homes, factories, or warehouses. However, within the real estate industry, residential and commercial properties are often treated very differently. Working with an experienced real estate transaction law firm ensures that every stage—from contract to closing—is handled correctly under Washington law.
Residential real estate transactions are generally subject to more federal, state, and local regulations for buyer protections compared to commercial real estate. However, much more due diligence is required for commercial transactions, particularly regarding environmental concerns for prior uses. Commercial transactions also come with more complex requirements for commercial lending.
Being a commercial purchaser does not necessarily mean they are purchasing commercial property. Oftentimes investors purchase residential property for investment purposes. For example, residential developers may purchase property for the purpose of developing single-family or multifamily housing. So while these developers may be considered commercial purchasers, they are purchasing residential property.
When considering residential or commercial real estate transactions, it is vital that you have the guidance and representation of trustworthy and experienced real estate attorneys.
What Is the Difference Between Residential and Commercial Real Estate Transactions?
An important key difference between residential and commercial real estate transactions lies in their intended purpose and usage. Residential properties are designed for private living, providing individuals and families with places to call home. Buyers in this market seek comfort, emotional connection, and a sense of belonging. Our real estate transaction attorneys assist clients in determining how zoning, usage, and ownership structure impact their purchase or sale in Washington.
Conversely, commercial properties are aimed at business activities. These include spaces for offices, retail stores, industrial operations, and multifamily housing complexes. Buyers in the commercial sector focus on strategic and financial considerations, such as location, foot traffic, and investment returns. Washington commercial real estate transactions are governed differently than residential real estate transactions.
Each municipality establishes its own rules for permitted property uses. It is essential to know these rules and to consult with your real estate attorney to understand how these local laws impact the goals of your property.
Who Typically Buys or Sells Residential vs. Commercial Real Estate?
The participants in residential and commercial real estate markets differ markedly. Residential transactions typically involve individual buyers and sellers, families, and investors interested in rental properties. Emotions are a significant factor in residential deals, with buyers imagining their lives in the new home and sellers reflecting on their experiences there.
In commercial real estate, the players include corporations, real estate investment trusts (REITs), developers, and wealthy investors. These transactions prioritize financial performance, lease terms, and income potential, with less emphasis on personal sentiments. Because these markets involve very different parties and motivations, a real estate transaction lawyer can help level the playing field and ensure each agreement protects your interests.
How Do Negotiations Differ Between Residential and Commercial Real Estate Transactions?
Negotiations in residential and commercial transactions also vary. Residential negotiations tend to be emotional and personalized, with parties discussing price, contingencies, and necessary repairs to reach a satisfactory deal. An experienced real estate transaction attorney can help identify negotiation points that are often overlooked—such as assignment rights, financing contingencies, and inspection timelines.
Commercial negotiations are more formal and focused on business details. Critical points of discussion include lease terms, rental rates, tenant improvements, and escalations. These deals often involve multiple stakeholders and require more time to finalize due to the complexity of contracts and legal issues.
How Do Financing Requirements Differ in Residential and Commercial Real Estate Transactions?
One of the most significant distinctions between residential and commercial real estate lies in the financing options available. Residential real estate buyers benefit from various government programs and loans that enable them to purchase homes with little to no down payment and at lower interest rates. For instance, individuals with lower credit scores can often qualify for a 30-year fixed-rate mortgage with minimal down payment requirements.
In contrast, commercial real estate financing involves a much stricter scrutiny of the buyer’s creditworthiness. Lenders in the commercial sector require borrowers to have strong credit scores and substantial assets to secure the loan. Unlike residential loans, commercial loans do not benefit from government programs, resulting in higher interest rates and shorter loan terms (typically 15-20 years, often with a balloon payment due at the end). Commercial lenders also require larger down payments, usually a minimum of 20% for those with excellent credit, but often 30% or more of the purchase price. Because of these stricter lending standards, consulting a real estate transaction lawyer before finalizing loan terms can help avoid unfavorable conditions or hidden liabilities.
What Are the Tax Implications for Residential and Commercial Real Estate Transactions?
In Washington, property owners may face up to 28.8% in taxes when selling their investment properties due to capital gains and depreciation recapture (note – this percentage is subject to change). However, a 1031 Exchange offers a way to defer, reduce, or even avoid these taxes.
What is a 1031 Exchange?
A 1031 Exchange, named after Section 1031 of the U.S. Internal Revenue Code, allows real estate investors to defer capital gains taxes by reinvesting the proceeds from a recently sold investment property into a like-kind property of equal or greater value.
Eligibility for a 1031 Exchange is determined by how the property owner uses the property. Residential properties and mixed-use properties are often exchanged by owners who use them as investment properties rather than for their personal residences.
In fact, when a portion of the property is used for an owner’s personal residence, the remainder of their interest is still eligible for an exchange. Our real estate transaction law firm assists Washington investors in structuring 1031 Exchanges to defer taxes and protect long-term investment value.
How Can a Washington Real Estate Transaction Law Firm Help With Your Purchase or Sale?
Whether you are looking to buy or sell residential or commercial property, or want to make a 1031 Exchange, we can support you with your real estate transaction needs. At North City Law, our real estate transaction lawyers provide comprehensive guidance for buyers, sellers, developers, and investors throughout Washington.
Schedule a consultation with an experienced real estate transaction attorney at North City Law today to ensure your transaction is legally sound and financially secure.