Office Seller Secrets
How to Net More When It’s Time to Sell
by Chris Condon, Vice President, john greene Commercial
Chris Condon Vice President john greene Commercial 1311 S. Rt 59 Naperville, IL 60564 chriscondon@johngreenecommercial.com 815-693-3005 mobile
For nearly 20 years, I have been helping local business owners and commercial property owners to maximize value, effectively market, and sell their property. Along the way, I have been documenting best practices. Constantly refining what I have learned into a highly effective approach that delivers great results.
Selling office real estate can be a complex and overwhelming process
In this guide, I share my insights and experience with you so you can realize your best return on investment. I want to deliver massive value to you, regardless if you choose to work with me or not. Selling commercial real estate can be a complex and overwhelming process, that few people do more than once or twice in their lifetime. I want to demystify and simplify this process, breaking it down step by step, sharing best practices along the way. If can help you in any way, please let me know.
Sincerely,
Chris Condon Vice President john greene Commercial
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Section1
Deciding To Sell & The Path Forward
Is now the right time to sell? Has your situation changed? Do you no longer need or want your office property? Many factors that go into a decision like this. The best advice I have is to decide, commit, and move forward. Once the decision is made, everything will begin to align around making it happen. Selling a commercial property is a process. To complete all the steps, could take from 3 to 12 months, depending on a number of different factors. I have been fortunate and closed new listings in as little as 45 days, and others have taken 5 years + to complete. By following the steps outlined in this report, I will help you be closer to the former, not the latter. The process moving forward: :: Destination. What’s your outcome? :: Preparation. :: Effective Pricing :: Marketing Plan :: Preparing for Showings :: Negotiating Offers :: From Contract to Close :: Bottom Line
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Section 2
The Destination
What’s your outcome? What are you after? Thinking this through is a critical first step as you begin this process. Clarity is power. Why is this so important to you? What will you do with the proceeds of this sale? How will it improve your business? How will this improve your life? I always want to know, what is my client’s outcome? I see it as my responsibility to help guide and facilitate them getting that outcome. I love the Steven Covey quote of “Begin with the end in mind.” All the strategic decisions moving forward will be based on this outcome. What impact will this sale(s) have on your business and family? Working primarily with small business owners, I know business results are family results. Big financial decisions have great impact on the business owner’s quality of life. Take some “Think Time” and really explore this in detail. Some helpful questions to consider: :: What is the result or outcome you are after? :: Are you looking to get your price, no matter how long it takes? :: Are you looking to sell in a particular time frame? :: Do you want somewhere in between? Reasonable price in reasonable timeframe? :: Why is this so important to you? What benefits will this sale bring to you? :: What are the positive consequences when it sells? :: What are the negative consequences when it sells? What are the tax consequences when it sells? WARNING: Many sellers don’t consult with their banker, attorney, and accountant before listing their property for sale. Depending on your financial situation and tax basis, this can have significant tax consequences. Please consult with your professional advisors BEFORE you list to best understand your potential liabilities and discuss the various strategies to minimize the tax consequences. Having this deep understanding of desired outcomes is very important as you set the asking price and marketing strategy. Ultimately, helping you achieve your outcome is the sole focus of this process. .
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Section 3
Preparation
When working with buyers, I always advise them to “think with the end in mind”. Meaning, as you own and manage the property, always be thinking in terms of making decisions that increase value. Especially when it comes to income producing properties, the decisions you make today with tenants and leases have long term impact on your property value.
Take a moment to look around your property from a buyer’s perspective. Think like a buyer.
When you consider this possible sale, have you done what you can to maximize value? If you are considering a sale in the next 3-6 months, there is probably not much you can do to increase the net income of your property. If you are not considering a sale for the next 18-36 months, start thinking with the eventual sale in mind. What can you do to, :: Secure great tenants with long term leases? :: Maximized the gross income? :: Minimized the expenses? :: Maximized the net income to drive up the sales price? When a buyer drives onto your property for their tour, what do you want their first impression to be? Do you want them to see a first-class, well-maintained property that represents a great value and a great opportunity for them? Or do you want them to see a property that is rough, poorly maintained, and overpriced for what it is? In selling commercial property, the appearance isn’t as big of a consideration as when selling a home, but certainly is a major factor. Functionality is usually more important than appearance, but first impressions do matter. Take a moment to look around your property from a buyer’s perspective. Think like a buyer.
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Section 3
Have you been deferring maintenance? :: Is there a roof leak that you haven’t dealt with? :: Or, have you dealt with the roof leak, but still have stained ceiling tiles? :: Have you been maintaining the HVAC systems? When was the last time they were serviced? :: Does your parking lot need to be seal coated or repaired? :: Does the lobby or hallways need paint? :: Do the carpets need to be cleaned? :: Does the landscape need some attention? :: Do all the lights work? Most buyers are busy business owners who spend their days running their businesses. Time is a precious commodity and making repairs or improvements to a property they just purchased is likely not a project they are looking to add to their list. Spending a few dollars to have the carpets cleaned, the stained ceiling tiles replaced, and high traffic areas painted can pay off big when making a first impression. Ultimately, this should result in more buyer interest, higher initial offers, and give you greater return on investment. Once we find a buyer and go to contract, most buyers will request a period of time before closing so they can do their due diligence. During this time, they will likely request additional information on the property. Below is a list of common due diligence documents to collect and have ready.
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Section 3 :: :: :: :: :: :: :: ::
The more unknowns, the more perceived risk, and a lower the sales price
Copies of all leases. Copies of all service contracts. Utility Bills Taxes Capital Improvements for the last 3-5 years. Maintenance Records for the last 3-5 years. Past Survey Past Title Policy
Ideally, you want to be able to present the property so that is in the best condition possible. You want to have the documentation to be able to remove as much perceived risk as possible so buyers will pay more. The more unknowns, the more perceived risk, and a lower the sales price. We want to put their fears to rest. What fears? 1. 2. 3. 4.
What am I missing? What’s wrong with it? Am I paying too much? Am I going to miss out?
By doing the work of collecting all the data above we are eliminating many of the fears that will keep buyers from making an offer.
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Section 4
Pricing Strategy
One of the most important steps in the whole process is the pricing strategy. An effective pricing strategy will create strong demand and ideally multiple offers, driving up the price. An ineffective pricing strategy will keep the property on the market for an extended period of time, negatively affecting your net proceeds. Have you ever heard of the endowment effect? In behavioral finance, the endowment effect describes a circumstance in which an individual places a higher value on an object that they already own than the value they would place on that same object if they did not own it. The Endowment effect is often heightened with items that have an emotional or symbolic significance to the individual. Because of this, many sellers believe their property to be worth far more than what the market would suggest. So how do we overcome this? See the property through “buyer’s eyes”. Because of the volume of information that is available today, buyers are very savvy in how they perceive value. Buyers know when a property is overpriced, or at least, doesn’t represent a good value in the marketplace. The evidence for this shows up in a lack of inquiries, a lack of showings, and a lack of offers. Market data suggests, that to complete a sale in 3-6 months, a listing needs to receive 1-2 inquiries per week, 1 showing per week, and an offer per month. If it’s more than a few weeks between showings or offers, the property is likely overpriced, and downward price adjustments need to be made. The only reason a property will not sell is that it’s overpriced. Contrary to popular dogma, it’s not possible to “give a property away”.
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Section 5
Preparing To List
We know our outcome. We have a pricing strategy. What’s next? Finding the right broker to make it happen! Not all brokers are equal. Not all marketing plans are equal. How tell a highperforming broker from just a mediocre one? Here are three categories where you can draw a contrast between a mediocre and high-performing broker and the questions you can ask a broker that will you to that high-performing broker that will net you better results. 1. :: :: :: :: :: ::
Demonstrated results How many properties have they sold year to date? How many properties did they sell last year? How many properties have they sold like yours? Who is the likely buyer for your property? How do they attract that type of buyer? What percentage of your business are transactions like this?
2. :: :: :: :: ::
Experience How many years have they been in the business? How many properties like yours have they sold in the last 3 years? What are the likely scenarios that could derail our sale? How can you mitigate the downside in those scenarios? How do you qualify a potential buyer for my property?
3. Marketing Plan :: What’s your marketing plan? :: How will you best position my property to be highly attractive in the marketplace? :: If your plan doesn’t work, what adjustments will you make to get back on track? :: How often do you provide updates?
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Section 5
A great marketing plan contains the following elements: – Visually Appealing Flyer that contains enough information to attract interest, but not too much where all a buyer’s questions are answered or disqualified. – Broad Online Marketing Reach. All avenues utilized including Loopnet, Costar, Crexi, MLS, email blast campaign to likely buyers, and a company website. – Personal Network/Outreach. Relationships are an important criteria. Every broker has access to online tools, it the personal connections and the ability to connect the dots between buyers and sellers that usually makes the most difference. Look for a broker that has a strong network of buyers and investors and is committed to proactively prospecting that database.
A visually appealing sign will attract attention and many times the right buyer.
– Signage. Even in the age of the internet, I am constantly amazed at how many sign calls I still receive. A visually appealing sign will attract attention and many times the right buyer. I would say that 1/3 of the listing property inquiries I receive in any given year are from sign calls. 4. :: :: ::
Understanding of the marketplace. What is going on in the market right now? What trends are emerging that will affect the sale of my property? How will those trends likely affect the sale of my property?
Existing buyers How many buyers are you currently working with? How do you typically attract buyers? Based on your experience with buyers in the marketplace, how will my property be viewed? :: Are you currently working with any buyers that would be interested in my property? 5. :: :: ::
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Section 6
Creating Demand
If I am being honest, brokers can’t create demand. What they can do is price a property so that it represents a good value relative to everything currently available in the marketplace. They can create effective marketing that is targeted at the most likely buyers. They can adjust to the feedback the market gives them. Said differently, a great broker can’t create a market. What they can do is create great marketing that helps you stand out in the market and adjust their strategy depending on the feedback they received. Ultimately, it’s the buyer’s decision if they are interested enough to inquire, tour, and/or make an offer. They have to see the property as a viable opportunity to help move them towards their outcome. It must represent a good value relative to everything else in the marketplace to get them to make an offer. If the marketing is effective and the property is priced properly, inquiries, showings and offers will happen. Buyers are ALWAYS in the market looking for properties to purchase. Many brokers and buyers have automatic search tools set up so as soon as a property comes on the market that matches their criteria, they are notified. If it meets their needs and represents a good value, they will be interested and take the next step. If it doesn’t, they will not. Inquiries, showings, and offers happen if the property meets their physical space needs and represents a good value. If it does, it will sell. If it doesn’t, it will sit. If a proven marketing strategy is being executed, but inquiries, showings and offers are not happening, the problem may be the pricing. If your broker is seeing large amount of online traffic, both views and clicks, but it’s not translating into inquiries, showings, and offers, a review of the pricing strategy is likely needed.
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Section 7
Preparing for Showings
The marketing plan is working. We have attracted a potential buyer and they have asked to tour the property. Now what? 1. Make the property easy to show. I realize that some business owners are sensitive about a potential sale and are trying to keep the sale confidential. If possible, make the property available to show at just about any time. For commercial real estate, most showings will take place during normal business hours. It’s not uncommon to have buyers request early morning or evening showings. Occasionally, showings will take place on the weekend. Most buyers will not make an offer until they have toured the property.
The first offer, many times, is the best offer.
2. Keep the property in great condition. Do your best to keep offices clutter-free. Do your best to keep warehouses organized and looking good. 3. Keep the landscaping and exterior maintenance up. Keep parking lots clean free of debris.
Negotiating Offers & Picking A Buyer
The showing went well. The buyer had a few questions we were able to answer or provide them with the documentation they requested. They are serious about buying the property and have made an offer. Common Offer Formats: Letter of Intent (LOI) The letter of intent or LOI for short, is typically a 2-4 page document that details the proposed terms of a potential sales agreement. This will typically have the address, price, earnest money, contingencies, requests for
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Section 8 improvements, and timelines for a possible sale. This is typically a non-binding document that is useful for clarifying terms before a formal contract. Once the terms are negotiated and agreed to, a formal binding purchase sale agreement can be drafted, and the fine line details of the agreement are negotiated and agreed to. Once all terms are agreed to, the contract is signed. Draft Purchase Sale Agreement/Contract. Some buyers will prefer to send their offer in a draft contract format. I typically prefer this format because it brings a level of seriousness to offer that an LOI does not. Like the LOI, the contract format addresses all the terms of the potential transaction including the fine line details. Many times, an offer like this will have an “Attorney Review Provision” allowing the buyer and seller to sign the agreement, and then have their attorney review it after signatures. It allows the attorney to make any modifications or add riders in case a specific situational detail is not adequately addressed in the body of the contract. A few things to consider during negotiations: The first offer, many times, is the best offer. As a property sits on the market, buyers realize there must not be much demand for the property and offer lower and lower as time goes on. The highest price may not be the best offer. Negotiating commercial sales is different than buying and selling homes. Typically, in a home sale, we see two types of contingencies. The first is for financing and the second is for the sale of their existing home. On the commercial side, we have finance contingencies and some additional contingencies. As we consider contingencies, we must ask a few questions for clarification. Financing Contingencies: How likely is this buyer able to get financing? On the commercial side, for the most part, there isn’t a pre-approval letter like on the residential side. You can ask to see some sort of a pre-qualification letter. This will basically say we have reviewed the buyer’s financials and the proposed purchase. Conceptually, we are willing to loan them the money. However, they will still have to go through the bank’s formal process. A few questions to help clarify their likelihood financing:
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Section 8 :: Do they have their business banking at this same bank? :: Have they borrowed money from this bank before? :: Does this bank typically lend money for this type of property and borrower? Can we talk to the lender to discuss the likelihood of loan approval?
Sometimes a buyer of a property will need to change the zoning to be able to use the property in their desired manner.
Other Contingencies: Zoning Changes or Project Approvals Sometimes a buyer of a property will need to change the zoning to be able to use the property in their desired manner. Depending on the municipality, this can take between 60-120 days, depending on their process. To better understand this, a few questions need to be asked to determine the likelihood of approvals: :: :: :: ::
Has the buyer met with the municipality? How supportive of the change were they? How long did the municipality say the process would take? How supportive of the change would the neighboring property owners be? :: Has this buyer completed a project like this before? :: Are they working with an attorney who has a good working relationship with this municipality? Project Approvals In addition to or instead of a zoning change, a buyer may need municipal approvals for property modifications for building additions. Like zoning changes, each municipality is a little different in its process. Sometimes it can be handled at the staff level, sometimes it will need board or council approval. The questions that need to be asked are basically the same. :: :: :: ::
Has the buyer met with the municipality? How supportive of the change were they? How long did the municipality say the process would take? Has this buyer completed a project like this before?
This is where transaction experience is important. Ultimately, you are trying to determine how likely it is that his buyer will be able to receive the necessary approvals and move forward with the purchase. The certainty of being able to
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Section 9 close should be an important consideration when choosing a buyer. When you go under contract, you are essentially taking the property off the market. Most buyers will stop looking at your property as a viable solution to their problem. The longer a property sits on the market, the less the seller will likely net. Also, time kills all deals. Transactions have a momentum to them. The longer they take, the less likely they are to close. Having competent and experienced professionals helping to guide you is critical as you decide the best buyer to work with.
The transaction process: Contract to Closing
Now all the terms are agreed to, you have either a handshake agreement, a signed LOI, or a signed contract. If the original offer was a letter of intent, the next step to prepare or have prepared a formalized contract. Many brokers use a standard contract. Or, you can have your attorney prepare the contract. If the offer was in contract form, sign the contract, collect the earnest money, and begin the process. Due Diligence: This is the equivalent of the inspection period on a residential transaction. The buyer has the ability to inspect the property, review all the relevant documents, and determine if they would like to move forward with the purchase. Many attorneys or brokers have a due diligence checklist of information they would like the seller to provide as part of their due diligence process. I will typically have sellers gather this information in advance of a listing, so it’s easily accessible and ready to give to the buyer once due diligence begins. Typical Info Requested: :: Property Inspection :: Leases :: Phase One Environmental :: Survey :: Title Report :: Maintenance Records
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Section 10
Inspection Issues: The inspection provides a point of reassurance to the buyer that they haven’t missed anything. The building inspector’s job is to be extremely comprehensive. The result is oftentimes a list of inspection items that a buyer will want to be fixed or be compensated for. The inspection can become a chance for the buyer to renegotiate.
The certainty of being able to close should be an important consideration when choosing a buyer.
It is important to be proactive and have proper expectations as a seller headed into an inspection. The more diligence that is taken to take care of items up front will keep the transaction heading smoothly towards a closing. As far as expectations go, having a game plan headed into the inspection will be helpful. :: Are you prepared to repair, replace, or offer compensation for items that warrant immediate attention? :: Are you not willing to offer any additional investment or compensation to the buyer? Having these questions answered will allow you to be proactive and set expectations through the course of negotiation and due diligence with the buyer. Financing: From the seller’s perspective, it’s the buyer’s responsibility to get the financing. The seller only needs to provide: :: Access for Appraisal :: Access for Environmental Inspection Clear To Close: Once the due diligence is complete and the borrower has full financing approval, the closing can be set, and final preparations made.
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Section 10 Estoppel Letters: With income producing properties, where leases will be transferred with the sale, it’s very common that estoppel letters are prepared. An estoppel letter is a document that tenants sign off on that confirms the agreed to lease terms. This gives the buyer confidence that there is no side agreement that in place other than the provided lease.
Net Sheet: Closing Costs & Bottom Line
If you have sold commercial property in the past, you probably have seen the closing statement. If you have not sold a commercial property before, below is a sample from a closing I recently attended. That closing statement is a balance sheet of how all the monies were handled for the entire transaction. Understanding Seller Closing Costs: 1. Tax Prorations. This is often the largest cost. In IL taxes are paid in arrears. This means that the taxes you paid on your property this year were for last year and the first tax bill your buyer received will be for the time you owned the home. You will be crediting the buyer for taxes for the time you owned the property at closing. 2. Transfer stamps. Each municipality has its own rates in transfer stamps, but they must be paid before closing. 3. Title Insurance. This is insurance you are providing to a buyer to ensure that you are conveying title to the property that is clear of any defects. If defects do exist, it becomes the responsibility of the title company to cure or resolve those defects. The fee for this varies depending on the property type and contract value. 4. ALTA Survey. Most contracts and title companies will require that an ALTA survey be provided before closing. This is a much more thorough survey than on a residential transaction is and much more costly as well.
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Section 10 5. Attorney fees. For commercial transactions, most attorneys charge on an hourly basis. Consult with your attorney about their fees and how they prefer to be compensated. 6. Broker’s Commission. This is typically a percentage of the contract price. If another broker represents the buying side, that total fee is split between the two brokers. The net effect on your proceeds is the same either way. 7. Security Deposits. With income producing property, when leases are transferred with the property, any security deposits that were collected will be transferred to the buyer as well as per the lease. Just before closing: Gather all the keys, door openers, and security system information to provide to the buyer at closing. :: :: :: ::
Call utility companies and order final meter readings. Call service providers and disconnect or terminate services. Contact Post Office and set up mail forwarding. Schedule final walk-thru with the buyer.
If you would prefer not to attend the closing, schedule to pre-sign the documents or give your attorney power of attorney to handle them for you.
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Section 10
Thank you for taking the time to read this report. I sincerely hope you found it informative and helpful. For nearly 20 years, I have been helping owners to maximize the value of their commercial properties as they sell and move on to their next venture. I have consistently learned from each experience, constantly improving my ability to deliver outstanding results for my clients. If you are looking to for someone to deliver great results and help you to meet your goals, I would be honored to help you. Let me know what I can do to help you. Lastly, I want to offer you two additional resources as you consider selling your property. :: FREE Broker Price Opinion Report (BPO, a $500 value). This a report that will give you an accurate property value based on the current market conditions. My fee for this is usually $500. I am happy to provide this as my gift to you. Please call me at 815-693-3005 to order this report. :: Market Update Report. At the beginning of each quarter, I review trends and activity to better understand the direction of the market. I prepare this report to help clients better understand the market and make better decisions regarding their real estate holdings. This an excellent way to stay informed and prepare for an eventual sale. Please call me at 815-693-3005 so I can add you to our email list. If there is anything else, I can do for you, or if you have any questions, I am happy to help however I can. Please don’t hesitate to call me at 815-693-3005 Chris Condon Vice President john greene Commercial 1311 S. Rt 59 Naperville, IL 60564 chriscondon@johngreenecommercial.com 815-693-3005 mobile
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