Small Business Real Estate: 7 Common Saboteurs of CRE Transaction

Many sellers make costly mistakes when it’s time to sell their property. These mistakes can be easily avoided with a little planning and work prior to placing your property on the market.

Mistake #1: Not Physically Preparing the Property to Sell.

In my experience taking a little time upfront to prepare your property for sale improves showings, increases offer, and avoids property inspection issues once under contract.

How to prepare?

Create list of capital improvements for the last 3-5 years. Create list of maintenance records for the last 3-5 years.

:: Roof

:: HVAC

:: Parking Lot

Review & improve exterior condition

:: Grass Landscape Looks Neat & Clean.

:: Parking Lots Free of Litter & Debris.

:: Parking Lot Free of Potholes, Sealcoated If Needed or Topped with Gravel if Needed.

:: May Make Sense to Have Company Powerwash Exterior and Windows.

Review & improve interior condition

:: Remove all unnecessary items & furniture.

:: Patch Repair Any Drywall.

:: Clean any handprints from walls or especially dirty areas.

:: Keep Bathrooms Clean. Especially shop bathrooms.

:: Have carpets cleaned and stains removed.

:: Paint hallways or vestibules that are high traffic/use.

Small Business Real Estate

Commercial Property Sales, Simplified

Mistake #2: Unprepared for buyer’s due diligence process.

Most sales contracts will give a buyer a period of time to complete their due diligence of the property prior to the closing. During this time it’s common for a buyer to have a property inspection, environmental inspection, appraisal completed, and or city inspectors to come out and look at the property.

The inspectors are there to find issues. If you are prepared, there should be minimal issues. Issues will likely cost you money and should be avoided. Having good records can been tremendously helpful.

Suggestions:

:: Repair anything that isn’t working properly.

:: Repair any roof leaks or drainage problems.

:: Gather all your property related paperwork for buyer’s review.

Mistake #3: Unprepared for environmental inspections.

90%+ of the time during the due diligence process, a buyer will have a Phase One environmental assessment completed. This is an inspection to determine if there is any environmental contamination present on the property. To complete this report an inspector will likely tour the property looking for signs of environmental contamination and they will review public records to determine if any of the past uses of the building could be a source of environmental contamination.

Prior to the walk through you will want to you will want to:

:: Remove any chemical barrels.

:: Remove/clean any oil stains or spots.

:: Remove any old vehicles from storage lots that could leak fluids.

:: If you have large amounts of waste oil, prepare summary how that oil is disposed of.

Small Business Real Estate

Sales, Simplified

Mistake #4: Haven’t maximized net income for leased properties?

For leased properties that will be sold as investments, this is a big area for improvement for many sellers. Ideally this would be a process over the last 3-5 year of ownership. It’s a process of maximize the rental income in lease negotiations and minimizing the expenses. This will produce more net cashflow for you during your final years of ownership and make the property more valuable when time to sell.

When leasing, what is valuable?

Generally, you want to produce the greatest amount of income with the least amount of expense and risk. That is why this can’t be done in a 90-day period prior to sale. This needs to be a process over years as leases renew and capital expenses are made. Buyers are buying future cash flow. The better and more reliable the cashflow, the more valuable the property is.

Mistake #5: Discrepancies between lease terms, rent rolls, and expense reports.

In parallel to mistake #4, the documentation of your leases, rent rolls, and expenses is critical. Deals fall apart when there are inconsistencies in the documentation. If the lease says one thing, but it’s not accurately reflected in the rent rolls and expense reports, it’s going to be a problem. Depending on the buyer and how big differences will determine how big the problem is.

Working with your accountant and broker to make sure everything is accurate is time and money well spent prior to a sale. Ideally this level of accuracy builds trust and minimizes perception of risk for the buyer.

Mistake #6: Overpricing your property when first listed.

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. This is because an overpriced property typically is on the market longer and requires several price reductions to sell.

Many buyers are sitting on the sidelines watching, ready to pounce once a new listing comes on the market. If it meets their criteria and is reasonably prices, they will move on it quickly.

Small Business Real Estate

It’s a process of maximize the rental income in lease negotiations and minimizing the expenses.

You need to understand your basis, your depreciation, and your potential tax liability prior to closing.

With the low inventory, current market conditions, they know they need to be first to have a shot a making the purchase and beating competitive buyers out. If it’s overpriced, a seller misses out on that competition. Because of the lack of competition, the buyer is more in control of pricing and it’s typically lower.

Mistake #7: Not understanding the possible tax consequences of the sale prior to closing. I highly suggest having a conversation with your accountant about tax consequences of a sale prior to closing. You need to understand your basis, your depreciation, and your potential tax liability prior to closing. With this information you can decide to pay the tax or to defer into another property. This is information you need to have ahead of time. Because of the IRS rules for deferring taxes, the time frames are tight to find your next property given the current lack of inventory.

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