Friday, April 17, 2015

As a Commercial Real Estate Owner, DON'T Fall Victim to Mayor PufNStuf!

Image Attribution: www.misfittoys.com
When I was a young man growing up in the 1960s...yes, I am that old...one of the cool shows on TV was HR PufNStuf.

I didn't realize it at the time...because I was a sheltered youth growing up in Texarkana, Arkansas, where the Four States Fair and Rodeo was a BIG deal...that the show was linked to the cannabis culture of the 1960s and early 1970s.

I just thought that the Krofft's large NCAA mascot typed characters were neat and their genre became the KoolAid Pitcher, Mayor McCheese, and the Hamburglar.

What does any of this have to do with commercial real estate, you may ask...and you would be well advised to do so.

In commercial real estate we have a version of PufNStuf. This post is designed to explain the concept and provide some counsel on how to avoid it.

Just what is PufNStuf. PufNStuf is a method of inflating the recommended purchase price of a prospective listing in order to secure an exclusive engagement to sell or lease the piece of commercial real estate, the "puff". Once the engagement is secured, at the above market price, the activity in the market "stuffs" the true price down the unsuspecting owner's gullet. The broker blames the market for the variance in "ask" vs "reality" and the owner of the commercial real estate falls victim to a legalized "bait and switch".

Now, with full disclosure, sometimes a broker's intentions are not malicious. There are cases when a broker may recommend "pushing" the market to achieve a price in excess of the recent comparable sales. I have done this many times when I believed there was something unique in the offering OR if the market availabilities were scarce. In my opinion, that is what a skilled broker should do...recommend a course of action as dictated by the market trends.

How to avoid PufNStuff. We all believe that our children are the cutest and that our commercial real estate is somehow more valuable than other comparable buildings. PufNStuff plays to this emotion. My children ARE the cutest, by the way!

Consider these four things to avoid getting Puffed and Stuffed:

Be realistic. Your commercial real estate has an emotional appeal to you because you have owned it and may have operated a business from it. Understand that the market may not share your emotional attachment and will compare your offering to others in the market. Understand the trends. How many buildings, just like yours, have sold and are available? What were the salient reasons? Understand how the market may receive your building if your were to sell or lease it.

Ask your broker to justify his recommendations. If the comparable sales tell one story and your broker is recommending a price that is substantially higher than the market, ask him why. Listen to his response. The correct response would be that your building has unique amenities that buyers will value and that there is a shortage of buildings like yours on the market for sale. If he cannot justify his recommendations, you may be getting puffed!

Pay close attention to the activity you receive. Generally, you will receive a flurry of activity immediately after the building hits the market and the pent-up demand of the market reacts to the new listing. Chances are this activity will generate some tours. If lots of tours occur and there are no offers, chances are you are priced too high. Ask your broker to track down every single prospect that tours your building to discover what they liked and disliked about your building. You can learn loads from this type of feedback.

Rinse and repeat: Use the feedback in the market and your time horizon to adjust to the market conditions. Be swift to react as the commercial real estate market can move quickly.