Friday, March 11, 2016

Multiple OFFERS...Now What? 5 Ways to Handle

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As I have opined many times recently, Southern California commercial real estate is entrenched in an owner's market. Because almost 98 of every 100 industrial buildings are occupied, an imbalance exists. There are not enough quality buildings to fill the space demand from growing Orange County companies.

When a fairly priced building with the right amenities hits the market, multiple offers can ensue - in some cases prior to the multiple listing service publication.

As an owner's representative, multiple offers can present a conundrum - how to extract the best possible price for the commercial real estate while insuring that the transaction will close.

The downside of multiple offers is a bidding war.  A bidding war too often results in a buyer that will agree to anything, just to get the deal, and then renegotiate the points at the end of due diligence. Your seller is now compromised and may be forced to accept less vs. start over with a new buyer.

What follows are some suggestions that will help you choose the right buyer - best price and best potential to close at that price.

Assemble the due diligence information before taking the property to market. You don't want your buyer to know more about the building than you or the seller knows. In what condition is the roof? Are the air conditioners operational? Does the pavement need a slurry seal to remain impenetrable to water? Have any environmental studies been completed? What about the zoning? Are you familiar with the allowable uses within the zoning? Are building drawings available? Have any improvements been made that require permitting and are the permits available? Too often a building is brought to market with these and other questions a mystery. In my opinion, you should spend some time, assemble the documents a buyer will need, and provide these documents to the buyer. When you provide them is debatable. My rule is typically during the offer/counter offer stage so that the buyer(s) can take any issues into consideration when arriving at a price.

Make sure all of the buyers are operating with the same set of facts. One way to insure all of the buyers are operating with the same fact set is to attend all of the showings. During the building tours you can distribute marketing materials, confirm the pricing, discuss the seller's exit strategy, answer any of the buyer's questions - and maybe most importantly - get a gut feel for the buyer's motivation.

Be transparent when dealing with buyer's brokers. Your interaction with cooperating brokers should be transparent. Be forthright with information. Make yourself available to tour, answer questions, and provide the status of the sale. Certainly, you don't want to share confidential seller information, but you can represent the seller without doing so. You are open for business. Make sure you acknowledge this.

Create a spreadsheet with all of the offers and note the differences. If multiple offers arrive, I create a side by side look at all of the offers and chart things such as touring date, price, financing, due diligence period, closing time, initial deposit, increased deposit, buyer motivation, source of equity, current location and whether leased or owned; if leased, when is the expiration; if owned, will a sale of the existing building be necessary, nature of the use, etc. Sometimes there are too few differences in competing offers. In that case, you must rely on the tours, your interaction with the buyers, and a "gut feel" to form your recommendation.

Choose not one, but two buyers. When multiple offers occur, one buyer gets the nod and one or more do not. Akin to a game of musical chairs, several buyers will be odd man out. Some buyers, not chosen, will be angry. One way to offer a "consolation prize" is to choose a back up buyer. In addition to the second place trophy for buyer number two, your seller is able to keep buyer number one honest, focused, and behaving as a properly motivated buyer should. I encourage my sellers to commit to the second deal in writing so that buyer number two knows he will get the call if buyer number one blinks.

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