Things You Should Consider Before Listing Your Commercial Property

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Things You Should Consider Before Listing Your Commercial Property By Expert Author: David V. Tran
View Summary \| Submitted: 2007-04-16 \| Word Count: 1235 words

After owning your commercial property for several years, it's time for you to sell the property. There are a few things you should know and consider before listing your property.

What Commission You Should Pay?

It's often a percentage, typically from 3 to 6% of the list price. The commission is negotiable and dependent on various factors

Price: in general the higher the price, e.g. $10M, the lower the percentage.
How difficult it is to sell it. For example to sell a vacant building in a declining area, you should pay a higher commission.

As a seller, it is tempted to think your net proceed is more if you pay low commission. However, when you take away the commission, you take away a very strong and perhaps the only incentive from people who make a living selling your property to their investors. They may choose to sell other properties instead. Less competition may result in lower price for your property.

The commission is often split 50/50 among the listing office and the selling office. However, it's not always the case. Some listing office feels it deserves 2/3 of the total commission because it has 2 people working as a team. The question to ask is "Does this commission split best serve your interest?" As a seller, you want to get the biggest bang for your buck. That means a fair split that will most likely bring the most number of offers to the table. So you should consider asking the listing broker to:

Split the commission 50/50 with the selling office.
Make the listing available to all brokers inside AND outside of the listing company at the same time. Some companies have the policy of keeping the listings in house for the first 30 days. This allows the office to sell the property to just their own clients and keep the all the commission. Once they cannot sell the property to their own clients, they make the listing available to all other offices. This action is in conflict with your interest and may even be unethical because the property does not have maximum exposure to all the potential buyers.

By doing so, you will be likely to get the most number of offers. As a result you will be likely to get the highest price for your property.

Some brokers specialize on "no commission to the buyer's broker" listings. Sellers only pay commission to the listing office and buyers must pay commission to their agents. This may sound fair to you as a seller and you would think your net proceed would be higher because you don't have to pay a commission to the buyer's broker. However, this author is not ware of any studies showing the seller gets more money with this approach. The reality is different because:

You take away the most important incentive from the selling brokers: money. They may decide to sell other properties to their clients instead.
Even when sellers pay commission, mentally the buyers still think they are really the ones who pay the commission which is included in the purchase price. This is the reason some buyers prefer to buy "For Sale By Owner's" or FSBOs.
Buyers must come up with more money to buy your property. They cannot get financing for the commission since it's not included in the purchase price. This may discourage buyers from making offers.
Buyer's broker may present an offer and state that the real price is the purchase price in the contract minus his commission.

As a result, you are less likely to get the maximum numbers of offers and consequently not the highest price for your property.

Does it matter which broker should you hire?
While any licensed real estate agents can list your commercial property, you don't get any benefits when you hire a residential specialist to do the job. Commercial and residential properties are 2 totally different products which require different marketing plans and selling process.

The brochure: commercial properties normally have a brochure instead of a flyer as often used in residential properties. The brochure is given to potential buyers who may be out of the area, out of state or even out of the country. This brochure contains pricing, property pictures, site plan, satellite map, rent roll, income, expenses, demographic, and traffic volume information. Investors often look for information that they really care about such as Net Operating Income (NOI), cap rate, and lease term (gross or NNN). They often make offer based on the information in the brochure alone without even seeing the property personally (they inspect the property during due diligence period). Some of the information in the brochure may be confidential, e.g. rent roll, in which you may want the buyer to sign a confidentiality agreement first.

Pricing: Most commercial properties are one of a kind and very unique in appearance, quality, location, lot size, number parking spaces, tenants list, etc. Many have no comparables like residential properties. So setting the right price is more complex and not as straight forward. Should it be priced based on net income, market value or construction cost? The property would not sell if priced too high. You lose potential profits when priced too low. So you want a commercial specialist to do this.

Documentation: sellers are required per contract to provide various documents, e.g. survey and environment assessment report, not typical needed in a residential transaction but required by commercial lenders. Not providing all the required documents to the buyer in a timely manner may jeopardize the transaction.

The offer process: In commercial real estate, the selling broker often presents a one-page Letter of Intent or LOI instead of a contract. This LOI states the key points: price, earnest money, due diligence period, financing terms, and closing date. Once the LOI is accepted, both parties will work on the contract. A commercial listing broker will not ask the buyer for a prequalification or pre-approval letter which is typical in residential transaction but not in commercial transaction. This is because the loan approval process for commercial property is so different such that lenders don't issue a pre-approval letter.

Escrow: it normally takes 21-30 days for due diligence or buyer to investigate the property and 60 days to close escrow when financing is involved. A commercial real estate broker won't demand 30 days escrow like in a residential transaction because he knows it takes a long time for a commercial lender to approve the loan.

Financing: in commercial real estate a higher percentage of transactions do not close because the buyer cannot get the loan. In a transaction that involves SFRs, if the buyer has 30% down payment then it's almost certain that the loan will be approved. However 50% down payment is not even sufficient for many properties in California with cap rate of 5% or lower. Please refer to the article "What Investors Should Know about Commercial Loan" written by the same author. So a listing broker with experience about commercial financing will be able to advise the seller not to accept an offer with a remote chance of getting the loan approved

You are welcome to share this article, unedited and in its entirety, with anyone you like. You may not remove this text. Â© 2007 eFunding, Inc.

About the Author/Author Bio

David V. Tran is the CEO eFunding Inc., a commercial real estate brokerage, commercial loan broker, property management, self-directed IRA investment, TIC and syndication company in San Jose, CA. His website is www.efundingcom.com. He may be contacted at (408) 288-5500. eFunding does business in all 50 states. He is selected as Pensco Trust's (a major self-directed IRA custodian) Preferred Professional. David is well-known for his 3 FREE real estate investment seminars.

Article Source: http://www.articlesphere.com/Article/Things-You-Should-Consider-Before-Listing-Your-Commercial-Property/84866

Article Tags: real estate, commercial real estate, commercial property listing

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