Commercial property sales generated over $400 billion in transaction volume in 2020, with apartment buildings for sale and office properties leading the charge. One of the biggest challenges that commercial building owners face however, is understanding when and how to sell.
This article explores some of the primary exit strategies commercial property sellers use to market a commercial building.
When is the Right Time to Sell?
Sophisticated commercial real estate investors always have an exit strategy to help maximize profits by selling when the time is right. There are three main exit strategies to consider when selling commercial real estate:
Most commercial real estate loans have a 25-year amortization with a 5- or 10-year term. Even though monthly loan payments are amortized over 25 years, the loan will be called or become due between five and ten years. Rather than refinancing the existing loan, some investors begin the building sale process at least 12 months before the loan is due to mature.
The net operating income (NOI) a property generates largely determines the commercial real estate value in space for rent. In a 6% cap rate market, a building with an annual NOI of $500,000 is worth about $8.3 million ($500,000 NOI / 6% cap rate). On the other hand, a property with an NOI of $300,000 in the same market is valued at $5 million. Once a commercial building is leased up and reaches maximum occupancy, it may be the perfect time to sell.
Many commercial real estate investors hold the property and collect cash flow until major capital expenditures (CapEx) are on the horizon. Items such as replacing a roof or repaving a parking lot can take a serious bite out of profits. Owners who aren’t willing to invest additional capital in their property may decide to sell to another investor, even if the selling price is slightly below market.
Three Ways to Sell Commercial Real Estate
When the time is right, there are three main ways for an investor to sell commercial real estate, including lots of land or apartment complexes for sale:
1. Sell directly to another investor: Motivated buyers with financing arranged or cash in hand may be willing to close quickly on the right property with the right price. Sellers should know the fair market value of their property by ordering a commercial appraisal and compiling buyer documents to help the buyer move fast.
2. Work with a commercial real estate broker: Depending on the market size, commercial brokers may specialize in specific real estate niches, such as medical office space or workforce multifamily housing. A good broker will guide an investor through the selling process from start to finish, although sellers should plan on paying a sales commission of between 4% – 10% depending on property type and sales price.
3. Sell as a FSBO: “For sale by owner” commercial real estate deals are very common in some markets. FSBO sellers choose to represent themselves and cooperate with buyers represented by a commercial real estate broker. Because there’s no co-broker involved, sales commissions are usually less. However, sellers representing themselves must understand the local commercial real estate market trends to avoid leaving money on the table by selling too low.
Documents That CRE Buyers Need
Before listing a commercial building for sale, sellers should gather the documents buyers need. Having the correct information makes it easier to attract qualified buyers and avoids having the property fall out of escrow due to unknown defects:
- Order a title report through a real estate attorney or escrow officer, allowing seven to ten days for a complete report.
- Update the Phase I environmental survey if it is more than six months old, allowing two to three weeks for the environmental survey to be complete.
- Compile a list of repair and service records on key building components such as plumbing and electrical, fire and safety equipment, HVAC, roof, and parking lot.
- Put together a rent roll with information on each tenant, including payment history, lease abstract, and scheduled rent increases.
- Run profit and loss statements for the current year and previous two years to demonstrate the revenue growth the property is generating to potential buyers.
Prepare the Property for Sale
Sellers should do these things before listing and marketing a commercial building:
Pre-listing property inspection
Hire a professional inspector to review the overall condition of the building and identify necessary repairs. This avoids a seller being caught off guard when a buyer does its inspection once the property goes under contract.
Make the repairs discoverable by the pre-listing inspection to help increase the sales price. Sellers who sell with deferred maintenance can adjust the asking price accordingly, letting a buyer know the lower price is compensation for repairs that need to be made.
Appraise the property
After repairs have been made, hire a certified commercial real estate appraiser to walk through the property, run comparables, and determine fair market value. Factors affecting commercial property appraisal include location, rent roll, property condition, market trends, and recent sales of comparable properties in the market or submarket.
How to Market a Commercial Building Sale
Sellers should be prepared to proactively find the most qualified buyers for their property instead of waiting and hoping a buyer comes to them. Key parts of a commercial real estate marketing campaign include:
- A property marketing flyer with high-quality photos, a location map, a list of surrounding amenities, and current rent rates and building information.
- Add the property to the listing page of the commercial real estate firm representing the seller, and include a downloadable link to the flyer, detailed listing information, and multiple ways to contact the listing broker.
- Virtual tours make it easy for prospective buyers to preview the property without having to go on-site, especially for out-of-town investors who are narrowing down their top choices before coming into town.
- List the property on free commercial real estate listing websites like Crexi, the industry’s fastest-growing marketplace with over 500,000 commercial listings totaling more than $1 trillion in property value.
Understanding the transaction from both sides of the closing table helps savvy owners sell fast and for a fair price. By knowing the local commercial real estate market and comparing similar properties, sellers can better appreciate and communicate the true value of their commercial building to potential buyers.