One of the best things about commercial real estate is the promise of steady and long-term cash flow. It came as no surprise when CNBC reported that nearly 90% of high net worth individuals made and maintained their wealth through real estate.
But, circumstances might change (crashing markets, someone making you an offer you can’t refuse, or the smart money has moved elsewhere) that make selling a commercial property sensible.
And what a market! Statista estimates North American commercial real estate at $1.3 trillion. But that is not to say there aren’t some downsides. Read on for the advantages and disadvantages of selling commercial property.
Advantages of Selling Your Commercial Property
Some of the general advantages of selling your commercial property include:
- Freedom from rates and taxes
- You don’t have to worry about the hustle of managing a property
- After the sale, you get a nice lumpsum instead of waiting for ages to recover the same amount
- Potential growth in investment, so you are likely to get more from the sale than what you invested initially
- It frees up a lot of your capital
- You don’t have to worry about market trends eating into the value of your investment
- No more responsibility for building safety or ongoing costs
That said, there are two distinct ways of selling a commercial property; on-market and off-market, each with its own advantages and disadvantages.
If you opt for an on-market property sale, it means you are using conventional means of selling the property by placing it on multiple listing services (MLS) using real estate agents or brokers.
On the other hand, off-market refers to selling your commercial property without using the agents, brokers, or public listings. It is harder for potential buyers to find the property as it is not in the general public knowledge.
Here are advantages to selling your commercial property on-market (through brokers) and off-market (without real estate agents):
On Market
- The broker understands the market better than you and knows where to source buyers.
- Selling through brokers increases the competition among prospective buyers, potentially leading to an increase in the selling price, netting you higher returns.
- Since the property is on MLS, it is more visible to a broader audience of potential qualified buyers. Anyone can go on the internet and search for a property anywhere in the country.
- A real estate agent knows they get a sales commission, so they will do their best to get you a great deal.
- Brokers have a game plan to sell a property, such as market intelligence, competitive analysis, and property marketing plan, to ensure they milk the best price from the sale in the quickest time possible.
- Real estate agents have advanced algorithms so they can tell you should expect before any potential buyer makes an offer to buy the commercial property.
Off-Market
Selling property off-market is the opposite of on-market–you don’t list on the MLS, and you don’t market it to the general public. While you can sell the property yourself, you may involve a broker, typically a single real estate agent tasked with keeping the potential sale low-key.
An off-market property is a private sale, with only a few people made aware that the property is on sale. Here are the advantages of selling your commercial property off-market:
- There will be little disruption to tenants because the sale of your property has not been made public. Interest in your commercial property will be from potential buyers you have identified.
- You can maintain the confidentiality of buyers’ profits, costs, and identity.
- No broker fees or commissions.
- You can test the waters to see if a potential sale can fetch you a reasonable price.
- Since the property is not on MLS, it is an exclusive deal, a bargaining chip you can use to raise the price.
- If you involve a broker, they know where to source ready clients, even without marketing.
Disadvantages of Selling a Commercial Property
These are some of the disadvantages of selling a commercial property:
- Since they are costly, commercial property is not in the fast-moving-product category. Finding a buyer can take anywhere from 2 weeks to more than a year to find a buyer.
- If promoted poorly, sold during a dip in the market, or if you sell the property yourself without proper market research, you stand to make a loss from your initial investment.
- The commercial property selling process is quite lengthy, especially if the buyer uses a loan. The paperwork involves completing appraisals, paperwork, and loan committee reviews, which might take up to 60 days to complete. The fastest way to complete a real estate deal is through a cash deal, but since commercial properties are expensive, that is a tough ask.
- You lose out on the long and stable income that comes with owning a commercial property.
- As most real estate tends to appreciate with time, you miss out on potential income if you had held on to the property in the long run.
Ways to Make Your Commercial Property Valuable
You can start by raising the commercial property value. A commercial property management enterprise will upgrade the face of your commercial property, saving it from deterioration and increasing its market value.
Another way to increase the value of your property is by changing the purpose of the building. For instance, office spaces bore the brunt of the pandemic, registering low occupancy rates.
Consequently, they fetch lower prices in the current market. To offset that, you could transform the building into a multipurpose facility, which milks its maximum potential and fetches a higher price.
Reasons Why People Sell Commercial Property
You might not want to sell your commercial property, but circumstances may compel you to do so, such as:
1. Maximum Earning Capability
The commercial property hit its potential earning ceiling, and you don’t see any other way to improve it. You’ve tried every trick in the book, such as increasing rent, upgrading the facility, and changing its use, but it still doesn’t fetch as much money as you would like.
In such cases, the best option is to sell before incurring further depreciation or piling on taxes and mortgage payments.
2. Too Little Returns on Work
While the property may not be turning in losses, it takes too much effort than you are willing to put in. For instance, it could be an aging building, and you don’t have the resources to conduct facelifts or repairs, or there are too many lease turn-overs that need plenty of marketing funds. In short, managing the asset is too hectic for you to keep up with.
3. Favorable Market Conditions
Sometimes the stars align favorably, and the market is just right. Then someone makes you a once-in-a-lifetime offer that you can’t resist. High demand and financing options ensure short sale completion rates and low cap rates. It makes sense to cash in on the healthy profit then and invest elsewhere.
4. Major Tenant’s Lengthy Lease Ends
The end of a long-term lease on your commercial property exposes you to the risk of holding a vacant property. Selling your property saves you from the dangers of retaining an inactive property.
Final Word
In conclusion, you may have various objectives for selling your property. The advantages and disadvantages of selling your commercial property on-market and off-market should direct you on which path to take.
Selling a property offers an escape from hectic property management, mortgage, rates, and taxes and provides a chance to recoup invested capital while earning a healthy profit to boot.
On the other hand, you miss out on steady monthly income and a chance for future profits if you sell a commercial property. Similarly, you could lose a chunk of your initial investment if marketed poorly or if sold during an unfavorable market period.
