Selling commercial real estate has always been a complex process, due to the multiple steps in the sales process and the uniqueness of each transaction. Despite new transaction trends which have accelerated post-pandemic, the fundamentals of selling commercial real estate remain the same.
In this article, we’ll discuss the six most important things to consider when selling commercial real estate for sale.
1. Conduct In-Depth Market Research
The most successful investors know it’s never a good idea to try and time your sale with the top or bottom movement of the commercial real estate market. With that being said, there are steps you can take and trends you can monitor to better understand if you’re getting the best value when you sell commercial real estate:
- Location, including neighboring properties and ease of access for tenants and customers
- Tenant and lease documentation, including rent rolls, actual vs. market rents, vacancy history, tenant credit quality, and aging of tenant receivables
- Future supply and demand metrics such as absorption rate and new construction in the pipeline
- Historical change in property prices and rents in the immediate market over the past five years
- Average days on the market before vacant space is leased to help measure demand
After you’ve completed your market research, you’ll be able to identify the best buyers for your specific property and determine the right asking price or whether to price at all. However, before you list your property for sale, you’ll want to conduct a “reality check” of your property value by reviewing the most recent sales comparables.
2. Review Real Estate Sales Comps
Comps are recently completed sales transactions of properties most similar to yours. While market research is used to determine the price you hope to receive, sales comparables tell you the price you’re most likely to receive based on current market conditions.
There are four main ways that buyers value income-producing real estate. Comparing your sales comps to each of these four methods can help you gain a better understanding of how buyers are currently pricing commercial property for sale:
- Income capitalization approach compares the net operating income (NOI) to the property sales price and is expressed as a capitalization rate.
- Gross rent multiplier (GRM) divides the property price by the gross income and is expressed as a ratio.
- Value per door is typically used to buy an apartment complex and is calculated by dividing the property price by the number of units.
- Cost per rentable square foot measures the amount of rental revenue generated by the total amount of leasable square footage to make a fair evaluation of a building’s value.
Remember that real estate sales comps may not give you the information you want. But knowing what to expect ahead of time, you and your commercial broker can make informed decisions throughout the entire process of selling commercial real estate.
3. Find the Right Representation for Your Property
Hiring a great commercial realtor can make the difference between selling your property fast at the best possible price or having it sit on the market month after month, with no buyers in sight.
Some of the most significant advantages of having a broker represent your property for sale include:
- Determining a fair and realistic asking price based on current market conditions, helping to ensure a favorable return on your investment
- Exposing your property to an established network of contacts who may be interested in buying your property right away
- Handling the back-and-forth negotiations through closing, including managing the necessary paperwork. The broker only gets paid when the sale is complete
4. Use Online Marketing for the Best Results
Even before COVID-19 struck, the rise in CRE tech and online marketing tools were revolutionizing commercial real estate marketing and significantly expanding the pool of qualified buyers:
- Virtual tours, online Zoom calls, drone aerial videos, and AI in real estate are now the rule rather than the exception.
- CRE tech tools such as Crexi can put your property in front of qualified buyers, helping you understand what future buyers look like.
Marketing and selling commercial real estate online makes it easy to gather contact information for prospective buyers and build a database with names, phone numbers, and emails.
5. Do Your Due Diligence and Prepare Your Property for Sale
Most qualified buyers won’t waste time waiting for a seller to gather information and put documents together. To keep your prospective buyers interested, plan ahead by doing your own due diligence and preparing your commercial buildings for sale:
- Order a preliminary title report and look for issues such as monetary liens and overdue taxes
- Update lease files to include all leases, amendments, and modifications, along with copies of all material tenant correspondence, then put together a historical and year-to-date rent roll
- Service contracts for existing vendors, including maintenance, landscape, and property management
- Collect copies of all maintenance records and capital expenditures, including mechanical systems such as HVAC and electrical, structural and safety systems such as roof and fire suppression systems, and common areas such as parking lots and elevators
- Compile historical and year-to-date profit and loss statements that accurately report the annual operating revenue of the property, using your tenant lease details and maintenance records as backup
- Assemble physical due diligence material, including an updated Phase 1 and 2 environmental assessment report, ALTA survey, zoning reports, and insurance studies
6. Set Realistic Expectations for the Sales Process
Selling commercial real estate sometimes takes longer than many owners realize. Market conditions can change after escrow is opened. Sales costs such as cleaning and staging the property for virtual showing, inspections and repairs, and legal fees can quickly add up.
There are four basic steps in the sales process for commercial real estate:
Escrow paperwork is more extensive than buying residential property. Less regulation of CRE transactions requires escrow officers to have expertise in conducting commercial real estate closings.
CRE deals often involve two or more legal entities, such as an LLC or LLP, to protect buyers and sellers from personal liability. Properly structuring entities can create an extra layer of paperwork and potential delays in the closing process.
Although lack of RESPA can lead to creative deal structuring, closings may also be delayed due to lease verification and review of seller’s books and records.
Title and closing documents
Commercial real estate titles are often more complicated due to the liens, encumbrances, and easements included. Reports must be thoroughly reviewed, with objections filed within the deadline or a contingency extension negotiated.
Commercial real estate transactions can take as little as one month to complete or as long as a year or more, depending on the deal’s documentation and complexity. In-depth market research, efficient CRE tech, and advice from your real estate broker can prepare you for the realities of the marketplace and set the right expectations for how much profit to expect when your transaction closes escrow.