Friday, January 20, 2017

This a GOOD Offer - But is it the BEST Offer?

Image Attribution: www.naldzgraphics.net
This is seemingly an easy question to answer, right? You should instantly be able to discern an offer's benefits and whether the offer is a good one.

In practice, the determination of the BEST offer is maybe not as simple as one would believe.

Today, I want to explore the characteristics of a good offer for your commercial real estate and what makes it the BEST offer.

Most sellers of commercial real estate gravitate to the price offered vs. the asking price. If the offer is at asking price, cool! Game on. If the offer fails to reach the asking price expectation, it is summarily discarded. Finally, if the offer eclipses the asking price - silence ensues as a quick determination is made - did you ask too little?

However, the offer with the highest price may not in fact be the best offer. Recently, we received an offer for a project we lease and manage. The buyer planned to tear down the existing buildings and construct multi family. The buyer was prepared to pay a huge number for the real estate - and well above market. The problem was he wouldn't close for eighteen months - no deal!

Terms. Terms vary in a commercial real estate deal. Most contain a contingency period which can consume as few as two weeks to as many as 90 days. Buyers use the contingency time to study the physical aspects, complete a title search, obtain financing and vet the occupants, if any. Two offers at the same price but one with a shorter contingency period is generally preferable.

Number of competing offers. If you have the luxury of multiple competing offers, you should create a grid outlining all of the points contained in this post. Rank the offers based upon all of these factors. The best offer will come shining through.

Nature of the buyer. Will the buyer occupy the real estate or rely upon rents from an occupant as his purchase's justification? Typically, an owner occupant will pay more and focus upon the utility of the real estate for his use.

Source of funds. Has the buyer a cache of cash waiting to be deployed to buy your building? Or, will the buyer rely upon other people's money (OPM) to complete the buy? How about financing? A deal that includes a bank's OK is by nature more time consuming and risky. All of the buyer's AND banker's boxes must be checked in order for the sale to progress.

Buyer's motivation. Why does the buyer want to buy your building? You may be thinking, who cares? He just does. Contained within the answer to this question, however, may be a clue as to whether the sale will close at the agreed upon price and terms.

Contingencies. Mentioned above under the terms paragraph, certain items must be satisfied in order for a sale to occur - title, financing, physical inspection. Caution should be given to conditions outside the normal realm such as conditional use permits, construction of improvements, zone changes, or the sale or lease of another property. If a buyer's purchase is contingent upon any of these conditions, you must carefully weigh the likelihood of waiver - otherwise, what appears to be a great offer might in fact become a failed effort.

As advertised, many factors should be considered to convert a good offer into the BEST offer.