Selling commercial real estate differs greatly from selling a residential property in that commercial buildings are usually purchased as an income property and involve revenue, expenses and net operating income. Your agent should be able to put a pro forma together for you which shows the buyer, the company’s financial activities while excluding “unusual and nonrecurring transactions” when stating how much money the company or said property actually made.
It’s important to make sure you are working with a correct fair market value and capitalization rate so you can come up with a marketing strategy to make your property really pop when it hits the open market.
If you’re trying to keep the purchase confidential, signage does not have to be placed unless you allow it. Your commercial Realtor will field the inquiries and financially qualify the potential candidates prior to introducing them to you. Information about the property will be provided to all qualified candidates and a showing of the property will follow.
When a prospective buyer decides to make an offer, your commercial Realtor will assist with this process and a Letter of Intent or Contract will be completed. Once the offer has been mutually accepted, the due-diligence period will begin, which allows the purchaser to check the property and verify all seller representations.
Once the purchaser completes the lending process and the closing takes place, your property will be sold! While it seems simple enough, there are many challenges along the way. By working together with your commercial Realtor, you can meet these challenges head-on and close the sale of your property.
Here are some ways that commercial agents will calculate value on your behalf.
NOI
The NOI of a commercial real estate property is calculated by valuating the property’s first year gross operating income and then subtracting the operating expenses for the first year. You want to have positive NOI.
Cap Rate
A real estate property’s “cap” – or capitalization – rate, is used to calculate the value of income producing properties. Cap rates are used to estimate the net present value of future profits or cash flow; the process is also called capitalization of earnings.
Cash on Cash
Commercial real estate investors who rely on financing to purchase their properties often adhere to the cash-on-cash formula to compare first-year performance of competing properties. Cash-on-cash takes the fact that the investor in question doesn’t require 100% cash to buy the property into account, but also accounts for the fact that the investor will not keep all of the NOI because he or she must use some of it to make mortgage payments. To uncover cash on cash, real estate investors must determine the amount required to invest to purchase the property, or their initial
