In today’s market we have two types of sellers: proactive and reactive. Or as the results would indicate: successful and unsuccessful. Market dynamics change and as a result what is required of you as a seller will also change. Here are 10 pieces of advice for sellers to set yourself up for a successful transaction.
1. Know your numbers and set goals
You would be shocked how many owners don’t know how much income they earn from their property. Whenever I meet with a client about selling, I ask them: what does the building do for you? I know what you do for the building – you take care of it and give it all your money, but what does it do in return? After a moment of confusion, they compose themselves and the conversation resumes about why they are considering selling. Usually, the properties were purchased with a long term goal of cash flow and upside. But market dynamics have shifted and so must business plans and strategies for future growth. Know your numbers, be humble, and develop a plan with where you want to be three, five and ten years from now.
2. Know what you’re selling
Sounds simple but it’s nuanced. The goal of this is to understand who your buyer pool is. Consider things like granular location (block not submarket), taxes as a percentage of gross income, number of rent stabilized tenants, cleanliness of the building, preferential rents, elevator or walk up etc. etc. All these factors determine who your likely buyer is. Are you targeting first time buyers, users, syndicators, institutions, or family offices? Understanding what you’re selling puts you in a position to know when a good offer comes in from a likely buyer. Alarm bells should be ringing if you get an offer from a family office in a 1031 exchange who owns a building around the corner.
3. Do your diligence ahead of time
Every buyer is going to do a full diligence review after you accept their offer. This is your chance to play offense rather than defense. Hire your own attorney prior to putting the building on the market so you know what to expect during a diligence audit. The ten thousand dollars you spent on your DHCR attorney is a fraction of what it will cost you in overcharge exposure. Know what you have and what you don’t have so we don’t spend 30 days scrambling for paperwork. This puts you at a significant disadvantage and gives the buyer a window to renegotiate at a lower price. A good DHCR attorney will help formulate a credible defense.
4. Price aggressively
Rates are up, prices are down, and buyers can be patient. Treasuries earn you over 5%! In a rising market you can price 15-20% above market value and let the market catch up to you. In a flat market it’s best to price 10% above market value. In today’s market we tell sellers to price super aggressively, (~5% above market price) so buyers know you’re serious and they focus on the deal. It’s better to create a sense of loss than hope to get lucky. So far in 2023 the sellers that haven’t taken this advice have all repriced their buildings at lower values than what we initially suggested during our opinion of value. They chased the market downhill rather than get out in front of it.
5. Know when to take an offer
Living in la-la land is fun but not a good way to make important business decisions. Being educated and grounded in market values and obstacles allows you to know when to accept a good offer. Be aware that if you let one offer go it might be harder to replace than you think. Often it takes another 60 days (if at all) to replace a very attractive offer. In a declining market that offer might not be replaceable. It’s your broker’s job to educate you, and it’s your job to be willing to accept information you might not want to hear. You were given two ears and only one mouth for a reason.
6. Send out multiple contracts
Putting yourself in a position to send out multiple contracts even at different prices and terms puts you in the best position to sign a noncontingent contract and close. The most dangerous point of a transaction for a seller is from the moment they accept an offer until the moment they sign a contract. At this point the buyer has all the leverage. It’s your job to take that leverage back and even the playing field by sending out multiple contracts. The best way to make sure you can do this is by following the other steps mentioned here so you have other ready willing and able buyers at the table willing to participate in the bid process.
7. Listen to and learn from your broker
Despite our incentivized compensation model, we do try to give you the best advise we can. Your loved ones, although well intentioned, don’t know more than your broker. I see way too many sellers insert their kids or family members at different points of the sales process and now we have a new genius in the picture who thinks they can outsmart the market or be the hero. Family members can participate but the decision maker should learn to trust their broker – it’s why you hired us.
8. Hire a speedy attorney
If you have an attorney who cannot send out a first draft of a contract within 72 hours, you need a new attorney. Speed is your ally. I can’t tell you how often a seller’s attorney will sit on contract comments for over a week. This request must come from the client, not the broker. Do not be cheap with your legal fees. Pay your attorney to negotiate as many contracts as needed until you have a signature and deposit. Getting to the 1-yard line doesn’t mean you’re done. Assume you are nowhere until you have a signature and a deposit.
9. Think with the end in mind
What are you looking to accomplish by selling? A seller who tries to sell but doesn’t get the price they want after 90 days starts to question the entire exercise as to why they wanted to sell in the first place. Do not fall for that trap! For long-term owners, selling for 5% less doesn’t change the larger game that they’re playing. Most clients still have substantial equity in their positions and could be earning more and working less on anything they 1031 exchange into.
10. Never forget number one
Don’t lose track of why we started our conversation in the first place. Commercial real estate can be emotional, but the most successful sellers leave those emotions at home. Play a bigger game, be goal oriented, and become the best version of yourself!
The sellers that follow these guidelines are the ones that most often set themselves up for success. Preparing ahead of time with a team of trusted advisors ensures that when you are ready to sell you know what to expect and can react quickly and with confidence so the goal that you set from the onset can be achieved no matter what is thrown at you!
