Selling commercial real estate (building, land, apartment, multi-family, auto shop, retail, industrial, etc.) in the Phoenix, Scottsdale, Tempe areas or throughout Arizona is more complex than selling residential real estate, and the buyers of commercial property have a different mentality than those of residential homes. Buyers of residential housing tend to be concerned with the emotions of living in the home, while buyers of commercial property view the property as an investment vehicle designed to generate income or a location that best fits their business needs. If the numbers make sense, a bidding war is likely to occur. If the numbers do not make sense, the sale could take much longer than expected. And in all reality the commercial sales process takes much longer to complete vs a residential sales process.
The sales process for commercial properties is much more business-like, and the buyers tend to be much more sophisticated. They are interested in the numbers, and a detail professional marketing package including professional photos is crucial to present your property in the best light. The sales process looks something like this:
1. Seller’s Goals Analysis. This will be determined at the 1st meet. Most real estate brokerages assume that the sellers want all cash at closing. However, receiving all cash at closing may or may not be in your best interests. The first step I/we (Juan Pesqueira) take in selling a building in Phoenix, Scottsdale, Tempe or throughout Arizona when meeting with the seller or their reps is to determine your goals for selling it.
My most recent commercial sale was 4502 – 4506 S Central Ave, Phoenix, AZ. Known as Larry’s Auto Service, an automotive shop on Central Avenue. The owners were looking to retire, after 40 years in the business, it was time. Our game plan was to price right! We sold it in 220 days.
The challenge we ran into was the south mountain light rail project, Phase 1 and Phase 2 environmental tests, and the shop (although well taken care of) was old.
Juan Pesqueira | Attorneys Realty
Going into a commercial listing consultation I/we ask questions such as: what are you trying to accomplish by selling the building? What are you going to do with the proceeds from the sale? Are you purchasing another building through a 1031 exchange, or are you planning on putting the cash in the bank? Are you more interested in getting a lump sum of cash at closing, or receiving monthly income without the hassles of property management (seller carryback)? Have you taken into consideration the capital gains implications for getting a lump sum of cash at closing? How much do you owe on the property? Is it a bank loan or a private note (seller carryback)? What are the terms? Is there a due on sale clause? All these questions are necessary to structure a customized transaction that will fit your needs.
2. Property Price. There are 5 ways to price a commercial property in Phoenix, Arizona.
- Cost Approach: This valuation method considers the cost to rebuild the structure from scratch, taking into account the current cost of associated land, construction materials, and other costs that would be associated with the replacement of the existing structure. Cost approach is generally applied when appropriate comparable are difficult to locate, such as when the property contains relatively unique or specialized improvements, or when upgraded structures have added substantial value to the underlying land.
- Sales Comparison Approach: Also known as the “market approach,” this method relies heavily upon recent sales data for comparable properties. By seeking recently sold buildings with similar properties from the same market area, a buyer hopes to ascertain a fair market value for the property in question. For example, a 12-unit apartment building might be compared to another that sold in the same neighborhood just a few months earlier. While this valuation method is typically used to value residential real estate, it does have one significant drawback. Depending on general and localized market conditions, it can be difficult to find recent comps that have similar properties.
- Income Capitalization Approach: This valuation method is based primarily on the amount of income an investor can expect to derive from a particular property. That projected income could be derived in part from a comparison of other similar local properties, as well as from an expected decrease in maintenance costs. Say a building is purchased for $1 million, and the expected yield is 5 percent, based on local market research. That $50,000 per year in expected income could be enhanced by tightening inefficiencies, or by passing along other associated costs to the tenant, like electric or water usage. All expected future income is discounted to reflect present value. In addition to the three most commonly used valuation methods discussed above, there are several additional methods that can offer valuable insight for a potential investor.
- Value Per Door: Occasionally used to value apartment buildings, this valuation method breaks down the building’s worth by the number of units. A building with 20 apartments priced at $4 million, for example, would be valued at $200,000 ‘per door’ irrespective of each unit’s size.
- Value Per Gross Rent Multiplier: The Gross Rent Multiplier (GRM) is a back-of-the-envelope calculation used to measure and compare a property’s potential valuation by taking the price of the property and dividing it by its gross income. This method is generally used to identify properties with a low price relative to their market-based potential incomee.
3. Choosing the right commercial real estate agent and brokerage: There is no lack for commercial real estate agents, brokers, companies to choose from in the Phoenix, Arizona area. You have all sorts of choices for agents to brokers and companies (boutique, franchise, attorneys, etc.). Are you looking for a more personal approach or style, do you prefer a more business-like style approach. Once you have decided on the agent or broker you will be asked to sign a listing contract. These contracts vary in length, commission, and terms. Everything is negotiable but the typical is 6 mo. to a year+ and commission range from low 6% up to 10%. The more complex the sale/property the more expensive it will cost you when its all said and done. Also make sure the fee is paid at close of escrow not upfront. That way if your agent/broker or company does not sell the property, you owe nothing. Make sure to read the fine print in the contract.
4. brochure. The next step is for your agent/broker to create a professional marketing packet that shines and showcases the property right. Rather than giving the buyers information piece by piece, it makes the buyer’s purchase decision much easier by giving them all the information at once. Sometimes, the buyers need to be shown why your building is worth this much, and the marketing packet is the tool that sells your building to potential buyers.
5. Contact Qualified Buyers. Once the preparation is done, I/we begin to contact our database of qualified buyers. We also market your property across the nation through various means. Marketing commercial real estate is not like residential, there are only a few avenues online. It is not unusual for a buyer from out of State or out of country to purchase your building. Because financing is more complex with commercial property many of the buyers pay cash or would like some sort of carry back terms. Be open to creative financing but make sure the paperwork is handled correctly.
6. Interview Buyers. All buyers are interviewed to ensure that they have the proper background, resources, and interest to acquire and manage your building successfully. Many deals fall apart at the end because the buyers were not properly interviewed at the beginning. Juan Pesqueira and his team conduct an extensive interview on the qualifications of each buyer, so your time is not wasted by unqualified buyers.
7. Educate Buyers. Many buyers believe the 3 most important words in real estate are “location, location, location”. While the location is important, it is not the only factor buyers should be interested in. I/we believe the 3 most important words in real estate are “location, terms, and expandability”. It is sometimes necessary for us to educate the buyers and expand their vision, so they see the possibilities of your building. All it takes is a little education, and buyers can go from saying no to saying yes.
8. Sign Confidentiality Agreement. There are times when the owner wishes to keep the transaction confidential. If this is the case, the buyers must sign a Confidentiality Agreement, commonly known as a Non-Disclosure Agreement (NDA). This agreement protects the seller in the event of litigation.
9. Seller and Buyer Meeting. If the buyer is interested after reading the marketing packet, the next step is for the seller and buyer to meet in person. The broker will be present at this meeting, coach the seller on what to say, and steer the conversation in the right path.
10. Offer and counteroffer. The agent/broker will help the buyer draft up an offer, which can include the following: price, terms, earnest money, bank financing, seller financing, assignment, due diligence period, closing date, utility charges, seller’s disclosure, promissory note, deed of trust etc. The agent/broker will present all offers to the seller and facilitate the negotiation process to ensure that both parties get what they want.
11. Acceptance and open escrow.
- Due diligence. Once the offer is accepted, the buyer will begin the due diligence process. The broker will facilitate the process to provide the buyer with the information he or she needs, while ensuring that the tenants do not know the building is for sale until the deal is closed.
- Building inspection. Chances are the building needs to be inspected by an inspector, engineer, appraiser, general contractor, and various sub-contractors. Juan Pesqueira can be a great resource for the buyer in this process, which increases the likelihood of the deal going to closing.
- Negotiation with Bankers. The professional marketing package on the building is not only a tool to show buyers, but also an important tool to convince bankers to finance the deal. Bankers like it when they have all the information they need presented in an orderly manner. Juan Pesqueira assist the buyers in getting financed so the deal is more likely to close.
- Waiver of Contingencies. Once the due diligence period is over, the buyer cannot back out from the deal without forfeiting the earnest money.
- Closing at escrow. Having a good escrow agent is important because it will make closing a smooth, pleasant, and organized process. Having a good broker at closing is also important, because the broker can smooth out the process should emotions ever run high at the closing table.
Finding buyers for commercial property
There are numerous means of finding a buyer for your commercial property in Phoenix, Scottsdale, Tempe, or throughout Arizona. It all starts with showcasing/highlighting the property in the best light. Professional photography, brochure (tell a story or give its history is helpful), and attention to detail is half the battle. LoopNet.com and CoStar.com are the #1 online listing platforms, commercial broker meetings are a must, networking, social media, blogs, etc. Because a buyer might not be local or even outside the U.S, you should try to advertise the property in different languages and different countries.
The most recent commercial deal we did, our buyer only spoke Spanish, paid cash, and was coming from Mexico City. I/We are bilingual in English and Spanish – Juan Pesqueira | Attorneys Realty
Most of your agents/brokers work will be done outside the property. Broker to broker networking and presentations. Taking calls from other agents, brokers, and potential buyers. As the seller you should also prepare your property to be shown, keep it clean, and answer questions. Don’t try to hide anything, disclose, and work with your agent/broker not against. I/We keep our sellers in the loop, we send out a weekly update email, and every month meet face to face or speak over the phone for a more personalized update.
How a Commercial Agents Are Paid
Juan Pesqueira is success commission-based agent. What this means is that if the building is not sold, I do not get paid. This encourages me to work harder to get your property sold.
Your next step is to decide if you want to sell your property. We invite you to do one of two things:
- Free Property Price and consultation. Have a confidential meeting with me to find out the price of your property in today’s market. There is no charge for this service, and you are not obligated in any way to use our services.
- You can reach Juan Pesqueira – Attorneys Realty at 480.458.8007 (This cell does not have a voice message so if I dont pick up leave a detailed message), call my office 480.767.6900, of shoot me an email: Pesqueira2@cox.net.