Small Business Real Estate: Guide to Effective Seller Pricing

Small

Estate Guide to Effective Seller Pricing by Chris Condon, Vice President, john greene

Objectives: Clients/Customers-

:: Maximize Net Sales Price

:: Maximize the Probability of Completed Sale.

:: Minimize Time on Market.

:: Minimize Costly Mistakes

For many this is their biggest concern. These are relationships you have had for a long time. They likely depend on your business, and you feel an obligation to do right by them. To effectively sell any property one of the most important considerations is establishing an asking price. Many people falsely believe that a higher asking price is better and will ultimately lead to a higher net sales price. Much of the time, this is incorrect and ends up netting a seller less.

What determines pricing? Ultimately it comes down to supply and demand. As the number of properties on the market increases, prices decrease. As the number of properties on the market decreases, prices increase.

From the buyer’s perspective, ultimately, they are buying to meet a need and it represents a good value relative to all the other options in the marketplace. The property is only worth what a buyer is willing to pay for it. The buyer doesn’t care what it was appraised for or what the seller thinks it’s worth. The buyer is only interested in meeting their needs and can they get it at a fair price.

From a seller’s perspective, you want to sell for the most the can, in the least amount of time possible. Most sellers have a price in mind they would like to get for their property. Typically, this is 10%-20% higher than what the market is willing to pay.

Why do seller’s typically think their property is worth so much more than the market? The Endowment Effect. The endowment effect refers to an emotional bias that causes individuals to value an owned object higher, often irrationally, than its market value. This is what causes a seller to price a property higher or significantly higher than what an appraiser or a broker may suggest.

From both the buyer’s perspective and the seller’s perspective this is what creates the spread between the bid and the ask. When the spread is too wide, it’s very difficult to receive offers and complete a transaction. When it’s narrow, often this creates a competitive situation with buyers and because of scarcity, can cause the price to be bid up.

When pricing a property, ultimately the seller needs to determine an effective asking price. This is the pricing that can attract the greatest number of buyers while allowing the seller to net the greatest amount of money. Ideally, setting up a situation where within the first 2-3 weeks there is a flurry of showings and multiple offers. A seller should avoid a property sitting on the market for an extended period ultimately selling for less because of a lack of buyer competition.

How does the market work? The best analogy of how the market works is “Like A Pond”. In a pond there are different layers of water with different flows through the pond as new water comes in and water goes out. In this description, buyer sit on the banks, waiting for the right opportunity to come in the pond. The best of the new opportunities are gobbled up and quickly move out of the pond. The not-so-great opportunities seem to fester and, in some instances, sink to the bottom of the pond and end up not selling, or selling for far less than they could have.

These properties that end up towards the bottom are the sellers that feel like they are “Giving Away Their Property”. Unfortunately, this is a bit of a myth that is brought on by the endowment effect. The truth is their expectations where considerably higher than what the market would provide. Basically, this created too wide of a gap between the ask and bid.

The only reason a property will not sell is that it’s overpriced. If the market doesn’t see it as a “fair value” or “good value” compared to the asking price and what other properties are available in the market.

In my experience, most buyers won’t look at properties where there is too wide of a gap between the ask and bid. Their perception is that it’s a waste of time right now and they know that over time the sellers typically become more reasonable in their pricing expectations.

When pricing a property, ultimately the seller needs to determine an effective asking price.

Pricing Strategies:

Set The High Bar - This is the strategy where the price is set above or significantly above the market price with the hope that someone will pay it. This approach typically results in the property sitting on the market for an extended period. Often the property doesn’t sell. Many times, sellers will have a change of heart and reduce the price to something more reasonable. If the seller is serious about selling, they will need to be more aggressive in their price drops to attract a buyer. Often, this property will sell for less than it could have because of lack of interest.

At the Market - This can be a highly effective strategy if truly at the market. It’s easy to tell if the price hits the mark because activity in the first 2-4 weeks is good. Often, inquiries will come in within the first couple days, with showings in the first couple weeks, followed quickly by reasonable offers.

Slightly Below Market to Create Bidding War - This is a very effective strategy especially if there is a tight time frame for a sale to take place. For example, let’s say the market price is $100/sf, you would price the property at $95 or $97/sf. This property would represent a good value and likely attract a significant amount of buyer almost immediately to the property. Because of the competition this could potentially set up a bidding war situation where the price could be driven up above the market price, netting the seller a higher that market price.

Increasing Property Value - From my perspective increasing property value comes from improving the condition and minimizing risk to the buyer.

Take a moment to look around your property from a buyer’s perspective. Think like a buyer.

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?

Take a moment to look around your property from a buyer’s perspective. Think like a buyer.

:: 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?

Take a moment to look around your property from a buyer’s perspective. Think like a buyer.

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 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.

:: 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 Phase One Environmental Reports.

:: NFR Letter from past environmental cleanup.

:: 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.

If your property is leased and you plan on selling as an investment, for the prior 3-5 years, you should be doing what you can to maximize the net income, maximizing the length of the leases, and minimizing the risk to a potential buyer. This ultimately will put more cash in your pocket during your last few years of ownership and will put a multiple of cash in your pocket when you sell the property.

Preparation To Sell:

I always advise clients to think with the end in mind. At some point you will sell. Maximizing value along the way should be a continual process as you own the property. This allows for maximum return on your investment.

Process:

:: Complete Improving Property Value

:: Remove All Unnecessary Items from Property

:: Prepare Property To Show to Potential Buyers

:: Create Moving Plan

:: Discuss Pricing and Marketing with Broker

:: When Ready, Sign Listing Agreement & Move Forward.

Common Fears/Hesitations:

As discussed before, contrary to popular dogma, it’s not possible to “give a property away”. Fortunately, or unfortunately, the market is what it is. You want to do everything you can to position the property in its best light. To remove as much perceived risk as possible. At the end of the day, the property is only worth what a ready willing and able buyer is willing to give. To a certain extent, the only vote that count’s is the buyers, and they vote with their checkbook.

Maximizing value along the way should be a continual process as you own the property.

What if my property doesn’t sell? In my experience, the only reason a property will not sell is because of price. They market is perceiving the asking price to be significantly higher that what the market believes the property to be worth.

Once the asking price is closer to the market price, showings will take place and offers will be made.

What if the buyer backs out? Unfortunately, this is a possibility of a real estate transaction. There are several reasons this can happen. It’s the broker’s job to minimize that risk. Most of the time a contract will fall apart because of financing or because of zoning. Prior to signing a contract, the listing broker should ask for as much information from the buyer as possible to have a good understanding of the likelihood of the buyer getting financing and of the likelihood of the buyers intended use being allowed in the current zoning or if needed likelihood of the zoning change.

Ultimately this approach will net more and guarantee your property will sell in your timeframe.

Once the asking price is closer to the market price, showings will take place and offers will be made.