The methods of sale in commercial property are varied and special. Your choice of the best method of sale needs to be made with clear decisions and strategy in mind. The owner of the property is likely to take the most convenient and cheap method of sale for them. You need to control and re-direct this misplaced focus.
Before the final decision is made regards the marketing campaign for a property, the method of sale will need to be chosen wisely. There are a number of alternatives to be considered and we make the following comments to assist you here.
So what is the ‘best method of sale‘ for commercial property? As the agent, you need to make a clear and solid recommendation to your client.
You may be forgiven for thinking that the ‘sale at a fixed price’ is an effective and trusted method of sale. There are a few problems with that and most new or inexperienced agents will happily take a listing at a price. Consider however the following.
SALE BY PRIVATE TREATY
This is the “Float and Hope” method of sale. The asking price is considered as the top and ambitious price, subject to negotiation downwards. In the listing process, the seller calls the tune. In the negotiation process, the buyer calls the tune. Unless the agent is really strong at negotiating, this can be the most frustrating method of sale. Try to avoid this sale method, and choose a more timely method of getting a negotiation underway.
The private treaty method of sale should only be used in the circumstances of an unusual property in a quiet market. In such cases, you will put the client through a lengthy and protracted promotion of the property with a limited enquiry. The momentum for the sale is just not there.
The longer a property stays on the market the more it depreciates psychologically, in the minds of:
- The Vendor
- The Buyers
- The Agent
- The Neighbours
- The Tenants
- The Competition Agents
In simple terms, the property that sits on the market for a long time becomes a ‘lemon’. No one wants that and the seller needs to avoid such a situation. As an agent to the sale, you can help by fully explaining all potential strategies of sale that the property will match and support.
If a property must go on the market at a price, then make sure that the price is well matched to the value of the property and the market enquiry. Unless you particularly want to (and think you can) condition the seller to a lower price, then you could be wasting your time with the listing and the seller will think you are not much good as an agent in selling the property. Your reputation around town will not be strengthened with lots of unsold listings.
The market for well-located income-producing property is a seller’s market. Any property which has unique characteristics (therefore making it hard to value accurately) that comes up for sale and is bought by private treaty runs the risk of being undersold at a lower price.
To sell a property to the first person who sees it, without a proper marketing promotion and full exposure to ALL genuine and financially able buyers, is unwise and could be a costly mistake.
Even if properly priced, sales by private treaty usually take a long time to achieve a result. They are beset with frustrations of buyers who cannot raise finance or change their minds. A price reduction is followed by another price reduction. This can be a cycle of disappointment to the vendor and the agent. Remember that your agency appointment is finite and will expire, so the clock is ticking for results.
SALE BY TENDER
This is a good method of sale. This method of sale has the advantage of removing the asking price; the onus shifts to potential purchasers to come in with their own estimates of market value.
Although tenders have become a more acceptable method of selling Commercial Real Estate in today’s market, many ‘first time’ purchasers are inexperienced in tendering and are reluctant to become involved. The uncertainty and time delay between submitting the tender and knowing the result also can deter some of these buyers at the lower end of the market.
At the higher end of the property market where you attract larger and more experienced purchasers, you will find that tender is a great method of sale for the promotion of most quality properties.
When you choose a tender method of sale, it is essential to get all your tender documents and draft contracts ready before the promotion of the property starts. Add to this a comprehensive ‘Information Memorandum’ and you can see that you will have a reasonable amount of work to control at the start of the campaign.
With tender situations, it is wise to get the tender documents prepared by the client’s solicitor as the documents are in effect the final documents that will be used when tenders are taken from interested purchasers. The tender documents must be ready to use and sign by all interested parties during the campaign.
The ‘information memorandum’ should be the main focus for the agent or broker in the tender sale. The information in the document will help support and sell the property. Some agents will charge a fee to prepare this document as it is lengthy and comprehensive. Full property detail is included therein to attract and satisfy most of the buyer’s concerns.
It should also be said here that in most situations, the ‘information memorandum’ is not handed to every person that inquires about the property.
Today we would usually get a ‘Privacy and Confidential’ agreement signed first with qualified interested parties. This keeps the financial elements of the sale under some control and out of common knowledge.
SALE BY PUBLIC AUCTION
This is a great method of sale for the right property in the right market. The first period of exposure when a property is new and fresh on the market is the most critical time of any sale and the auction method does this well.
The Vendor, through his agent, is in the box seat and the buyer no longer calls the tune. The Vendor can negotiate from a position of strength, as auction encourages buyers to perform on or before a deadline. This method should always be the first step in determining the value of any property for the following reasons:
- A definite date for the sale of your property. You can make forward plans.
- Intensive advertising for 3 to 5 weeks — locally, nationally and overseas as appropriate.
- Planned inspection times to suit you, which means minimum inconvenience to you or your tenants.
- First impressions count: YOUR PROPERTY IS SEEN BY BUYERS WHEN IT IS LOOKING AT ITS BEST.
- Genuine buyers compete against each other. They are ready, willing and able to buy. The stimulation and excitement of an auction ensure the best price for your property.
- The client’s sale is protected by a confidential reserve price.
- A signed contract, with a 10% deposit, is completed at the auction. The frustrations of losing a sale, associated so often with private treaty sales, are eliminated.
- An auction contract is on your client’s terms; unlike a private treaty, a purchaser cannot dictate special conditions of sale (e.g., timing, finance, inclusions, or part exchange of another property).
- Anyone wishing to buy your property before the auction may do so provided they sign an unconditional contract before the auction. In this case, the client would be refunded any unused advertising expenses. (As the whole point of an auction is to get a higher price for a property we rarely recommend acceptance of pre-auction offers)
SALE BY EXPRESSIONS OF INTEREST
This method of sale entails the preparation of a comprehensive information report on the property and, again, advertising and publicity in accordance with a budget agreed with the vendor. Expressions of interest are used more commonly with the unusual property that could attract limited albeit good enquiry.
Potential purchasers are invited to submit, by a certain date, offers or expressions of interest in the property. This means that no normal contract is required to be completed, although it would be common for the terms and conditions acceptable to the vendor to be made available to interested parties.
On the date given for the close of offers, letters are lodged, by interested parties, setting out the price they are prepared to pay, together with any broad terms and conditions they require. In no case will these letters be binding on either party, and the most desirable offer generally proceeds through final negotiation, much in the manner of a Private Treaty sale, until the exchange of contracts.
This method of sale has one distinct advantage over the formal Tender process, namely, that in order for an organisation to complete a formal Tender, all formalities must be completed by Tender date. That is, approval by the Board of Directors, the obtaining of finance, and all legal and consultants enquiries will have been completed prior to the tender date.
In the case of the seeking of offers, these formalities can be overcome later and, indeed, most letters of offer specify that the offer is subject to final Board approval and other considerations. The advantage of this is that some organisations, who have a more ponderous purchasing process, can take part in the sales of the property since they are not finally bound until after the closing of offers. A greater number of offers will, therefore, in all likelihood, be received.
Where a vendor wishes to consider joint ventures or is flexible on timing, this method has a distinct advantage as each proposal may be different and can be considered by the vendor on individual merits which may result in a greater number of proposals being submitted.