The Process of Selling Commercial Real Estate
By: Aziz Khatri
Commercial real estate (CRE) sales transactions are unique and demand specialized knowledge. Few people know the ins and outs of a commercial property sales process. The process is designed to bring maximum return on investment and as a CRE investor, it is vital to understand it.
Commercial real estate sale stages:
2. The Outreach Stage
3. The Sales stage
Commercial real estate relies on the relationships you build. Those relationships will determine the success of your transactions.
This article is for those who own commercial real estate and who want to understand the process better and create important relationships.
Commercial real estate brokers should have experience in:
- interest-based negotiation
- marketplace evaluation
- monetary analysis
- real value-based evaluation
- training other commercial real estate agents???
- property use / zoning
- tax impacts
I can help you with all this and more. Contact me for a consultation now.
There are three main stages of selling commercial real estate:
It’s important that each one of these stages is executed to get you the maximum value for your property. Each stage has specific milestones that maximize the return on your investment:
1. The Preparation Stage:
A: Seller Requirements
The first thing an expert commercial real estate broker analyzes is the seller’s needs. This may include questions such as:
1. Why do you want to sell?
2. Do you have to sell?
3. Is there any time consideration (urgency)?
4. Is realizing capital appreciation the #1 goal of the sale?
5. What are the plans for sale proceeds?
6. Is a lump sum preferable to a monthly income (or vice versa)?
7. Are you purchasing another building via a 1031 exchange?
8. Are you aware of the tax implications and how to mitigate them?
9. Do you need the capital for a specific reason?
10. Is there a “due on sale” clause?
11. Have you thought of other options besides selling?
12. What will happen if you did not sell now?
Your answers to these questions and more will help with structure and timing of the sale to fit your needs.
B. Property Valuation
Most of the Buyers of commercial property are usually interested in the income they can derive from the property. So, the value of your property is directly tied to the Net Operating Income (NOI) of the property. Property value can be influenced by:
1. Comparable sales prices
2. Local commercial real estate leases
3. The terms of the sale
4. Capital terms
6. And more
Capitalization is one of the methods to determine the value of the property: by dividing the net operating income (NOI) with the area’s capitalization rate (Value = NOI/Cap rate). Commercial brokers like myself are experts in helping you determine these factors so you can get the best value for your building.
C. The Marketing Packet Creation
The marketing packet (Offering Memorandum) is one of the important tools that sells prospective buyers on the value of your building. Its goal is to put all the important information about your property in one packet. This makes the buyers decision much easier to make and presents your property in the best light. The elements of a successful marketing packet include:
a. Design. KW Commercial has designers who create marketing packets that are attractive and show your property in the best light.
b. Simplicity. Along with design, making the information easy to find and understand is important to busy professional real estate investors.
c. The Story. Why is this property worth a look? Tell a story with facts that tell an irresistible story with a hook that pulls in the investor. What is its unique value? Weave a story around that and you’ll pull in even the busiest investor.
d. The Photography. Photos also tell a story and are the first thing that grabs attention in any presentation. You should have a variety of high quality photos that give the buyer insight into the value of the property. These photos should include a cover photo, aerial photos, the best exterior angles, etc.
e. The Numbers. The marketing packet is more than just surface level promotion. It should go into detail about the financial considerations of buying the property. Items such as the rent roll, net operating income projections, local market data and more are relevant to investing in commercial real estate.
f. The Sparkle In addition to these critical components your marketing packet should include important sales documentation that increases credibility and usefulness. These include the information disclaimer, the real property highlights, maps, demographics and the contact’s (broker) identification.
2. The Outreach Stage.
One of your broker’s primary responsibilities is to publicize and market your commercial property.
Your commercial real estate broker knows that the key to a successful sale is finding qualified buyers. That’s why online marketing is often not the only key to a successful sale. Relationships with a nationwide network of seasoned commercial property owners and brokers is an invaluable resource for sellers. I will immediately contact my brokerage community, list of qualified buyers and personally show them the value of your property.
C. Indications of Property Interest
Qualified buyers often show interest but need more information to commit. I am an expert in showing buyers all the benefits of your property. There have been many times when a commercial property buyer didn’t see the potential in a building until I educated them to its benefits. This buyer development results in moving purchases forward and higher property prices.
B. Qualify Buyers
Once indications of interest start to arrive, it is important that each potential buyer be interviewed in detail to make sure that your time is not wasted. I am an expert at determining the real interest, experience and buyer qualification.
D. The Confidentiality Agreement
If the buyer or seller wants the sale to be confidential the timing of the Non-Disclosure Agreement (NDA) will protect both parties. It is important for your commercial real estate broker to know how and when to get this signed. Before the marketing packet is sent is the best time, since the marketing packet may contain sensitive information.
E. Share the Marketing Packet with the Buyer
Once the preliminaries have been confirmed the buyer will have the opportunity to view the full marketing packet. The marketing packet contains high-value information and should not be distributed to everyone. That’s why it’s critical for a broker like me to help create the packet and position it correctly for the buyer.
3. The Sales stage
Now we enter into the next stage of the transaction. With transactions as important as yours, it is vital for all the previous stages to go smoothly. Now is the time for negotiation and for your broker to prove his/her worth.
A. The Letter of Intent (LOI)
The LOI is a way of making an offer that gets the basic terms out on the table.
It puts the deal into easily understandable terms so both parties can come to a preliminary agreement.
The LOI is not a sales contract or legally binding, it is a negotiation tool. It allows offers to be quickly entertained without either party having to spend a lot of time or money.
The basic elements of a LOI are:
1. Identification of buyer and representative broker
2. Identification of seller representative broker
3. Identification of buyer and representative broker
4. The offer amount (Purchase Price)
5. The deposit amounts
6. Due diligence period
7. Close of escrow terms
8. Expenses and commission amounts
9. Proration of expenses
10. Any special conditions or clauses
Once the LOI terms are negotiated escrow is opened we can move on to the contract.
B. The Contract
1. The Offer and Counter-offer
Once all the terms and conditions of the contracts are agreed by both parties through LOI, The buyer’s broker will draft an offer for the commercial property based on terms agreed in the LOI.
Once presented to the seller, Seller can accept, reject or counter the offer. The commercial real estate broker (Aziz Khatri) will review all the formation at each stage of offer/counteroffer and make sure that all the sellers’ concerns are accounted for.
C. Open Escrow
Once the LOI, due diligence and inspections are completed you’ll want to open escrow. Important parts of opening escrow include:
1. Earnest Money & The Waiver of Contingencies
The contract is executed when an offer is accepted. At this stage/time, escrow is opened with Earnest Money Deposit by Buyer. Once escrow is opened the waiver of contingencies becomes an important step to make sure the seller is protected from aborted sales and wasted opportunities. Your broker will negotiate the earnest money and the waiver and make sure that it is signed so the buyer cannot back out without losing his earnest money.
2. Due Diligence
The buyer will complete due diligence to confirm the property meets all his/her needs. Your broker will manage the process of providing the buyer any information he needs. Ensuring that the current tenants’ use of the property is as uninterrupted as possible is also part of the broker’s job.
Due diligence contingencies are automatically removed on the date agreed in the contract. The seller can grant an extension to remove Due diligence contingencies upon the buyer's request.
3. The Inspection
As part of the due diligence, a full inspection is expected by the buyer. The inspection is also important for any banks, investors, or partners. The Inspection usually includes environmental surveys, structural engineering, appraisal, building condition contracting, etc.
There are “gotchas” that can derail a sale in this stage and your broker, I will help navigate you through this step.
D. Close Escrow
Shortly after the contingencies are waived, both parties will want to close escrow. Important parts of this step are escrow agents, title company, waiver of contingencies, and any lender or investor documentation. This can be the least stressful part of the sales process if the brokers are experienced and organized. Both parties are ready to complete the deal and your broker will help with the closing details.
KW Commercial and Aziz Khatri find you premium buyers.
KW Commercial is the premier commercial real estate brokerage in California. I, Aziz Khatri specialize in getting maximum value for your property. He understands that each commercial property is a business with revenue, income, and real value beyond the building materials.
I have ready buyers for multiple types of property. I am an expert in 1031 exchanges and knows how to create financial leverage for his sellers. He will create the largest pool of qualified bidders for your property by reaching out to:
1. Known buyers
2. My network of professional real estate purchasers.
3. KW nationwide network of qualified buyers
4. Professional resources including CCIM, ACP, Provisors, BNI, and HAAS Alumni
Connect with my team now at azizkhatri.com, LinkedIn, Facebook
For your confidential consultation to discover the value of your commercial real estate and the temperature of today’s market in your location. Receive your free valuation estimate with no obligation. There is no cost to talk to me about your plans and your property. Call now!