| After owning your commercial property for several | | | | As a result, you are less likely to get the maximum |
| years, it's time for you to sell the property. There are a | | | | numbers of offers and consequently not the highest |
| few things you should know and consider before listing | | | | price for your property. |
| your property. | | | | Does it matter which broker should you hire? |
| What Commission You Should Pay? | | | | While any licensed real estate agents can list your |
| It's often a percentage, typically from 3 to 6% of the | | | | commercial property, you don't get any benefits when |
| list price. The commission is negotiable and dependent | | | | you hire a residential specialist to do the job. |
| on various factors | | | | Commercial and residential properties are 2 totally |
| | | | different products which require different marketing |
| 1. Price: in general the higher the price, e.g. $10M, the | | | | plans and selling process. |
| lower the percentage. | | | | |
| 2. How difficult it is to sell it. For example to sell a | | | | 1. The brochure: commercial properties normally have a |
| vacant building in a declining area, you should pay a | | | | brochure instead of a flyer as often used in residential |
| higher commission. | | | | properties. The brochure is given to potential buyers |
| As a seller, it is tempted to think your net proceed is | | | | who may be out of the area, out of state or even out |
| more if you pay low commission. However, when you | | | | of the country. This brochure contains pricing, property |
| take away the commission, you take away a very | | | | pictures, site plan, satellite map, rent roll, income, |
| strong and perhaps the only incentive from people | | | | expenses, demographic, and traffic volume information. |
| who make a living selling your property to their | | | | Investors often look for information that they really |
| investors. They may choose to sell other properties | | | | care about such as Net Operating Income (NOI), cap |
| instead. Less competition may result in lower price for | | | | rate, and lease term (gross or NNN). They often make |
| your property. | | | | offer based on the information in the brochure alone |
| The commission is often split 50/50 among the listing | | | | without even seeing the property personally (they |
| office and the selling office. However, it's not always | | | | inspect the property during due diligence period). Some |
| the case. Some listing office feels it deserves 2/3 of | | | | of the information in the brochure may be confidential, |
| the total commission because it has 2 people working | | | | e.g. rent roll, in which you may want the buyer to sign a |
| as a team. The question to ask is "Does this | | | | confidentiality agreement first. |
| commission split best serve your interest?" As a seller, | | | | 2. Pricing: Most commercial properties are one of a |
| you want to get the biggest bang for your buck. That | | | | kind and very unique in appearance, quality, location, lot |
| means a fair split that will most likely bring the most | | | | size, number parking spaces, tenants list, etc. Many |
| number of offers to the table. So you should consider | | | | have no comparables like residential properties. So |
| asking the listing broker to: | | | | setting the right price is more complex and not as |
| | | | straight forward. Should it be priced based on net |
| 1. Split the commission 50/50 with the selling office. | | | | income, market value or construction cost? The |
| 2. Make the listing available to all brokers inside AND | | | | property would not sell if priced too high. You lose |
| outside of the listing company at the same time. Some | | | | potential profits when priced too low. So you want a |
| companies have the policy of keeping the listings in | | | | commercial specialist to do this. |
| house for the first 30 days. This allows the office to | | | | 3. Documentation: sellers are required per contract to |
| sell the property to just their own clients and keep the | | | | provide various documents, e.g. survey and |
| all the commission. Once they cannot sell the property | | | | environment assessment report, not typical needed in |
| to their own clients, they make the listing available to all | | | | a residential transaction but required by commercial |
| other offices. This action is in conflict with your interest | | | | lenders. Not providing all the required documents to the |
| and may even be unethical because the property | | | | buyer in a timely manner may jeopardize the |
| does not have maximum exposure to all the potential | | | | transaction. |
| buyers. | | | | 4. The offer process: In commercial real estate, the |
| By doing so, you will be likely to get the most number | | | | selling broker often presents a one-page Letter of |
| of offers. As a result you will be likely to get the | | | | Intent or LOI instead of a contract. This LOI states the |
| highest price for your property. | | | | key points: price, earnest money, due diligence period, |
| Some brokers specialize on "no commission to the | | | | financing terms, and closing date. Once the LOI is |
| buyer's broker" listings. Sellers only pay commission to | | | | accepted, both parties will work on the contract. A |
| the listing office and buyers must pay commission to | | | | commercial listing broker will not ask the buyer for a |
| their agents. This may sound fair to you as a seller and | | | | prequalification or pre-approval letter which is typical in |
| you would think your net proceed would be higher | | | | residential transaction but not in commercial transaction. |
| because you don't have to pay a commission to the | | | | This is because the loan approval process for |
| buyer's broker. However, this author is not ware of | | | | commercial property is so different such that lenders |
| any studies showing the seller gets more money with | | | | don't issue a pre-approval letter. |
| this approach. The reality is different because: | | | | 5. Escrow: it normally takes 21-30 days for due |
| | | | diligence or buyer to investigate the property and 60 |
| 1. You take away the most important incentive from | | | | days to close escrow when financing is involved. A |
| the selling brokers: money. They may decide to sell | | | | commercial real estate broker won't demand 30 days |
| other properties to their clients instead. | | | | escrow like in a residential transaction because he |
| 2. Even when sellers pay commission, mentally the | | | | knows it takes a long time for a commercial lender to |
| buyers still think they are really the ones who pay the | | | | approve the loan. |
| commission which is included in the purchase price. | | | | 6. Financing: in commercial real estate a higher |
| This is the reason some buyers prefer to buy "For | | | | percentage of transactions do not close because the |
| Sale By Owner's" or FSBOs. | | | | buyer cannot get the loan. In a transaction that involves |
| 3. Buyers must come up with more money to buy | | | | SFRs, if the buyer has 30% down payment then it's |
| your property. They cannot get financing for the | | | | almost certain that the loan will be approved. However |
| commission since it's not included in the purchase price. | | | | 50% down payment is not even sufficient for many |
| This may discourage buyers from making offers. | | | | properties in California with cap rate of 5% or lower. |
| 4. Buyer's broker may present an offer and state that | | | | Please refer to the article "What Investors Should |
| the real price is the purchase price in the contract | | | | Know about Commercial Loan" written by the same |
| minus his commission. | | | | author. |