Selling Commercial Real Estate

Let's dive into the nuts and bolts of listing, marketing, and selling an apartment complex.

For real estate investors, an investment’s conclusion is most often the most profitable stage, when patience, planning, and operations are rewarded. In our value-add business model, selling a property that we’ve repositioned in the market proves the biggest driver of investment returns. We aim to return investor capital early on to decrease risk, but the actual gains typically come at the exit. We’ve discussed the more global decision-making process for deciding when to sell a property, but, since it is at the point of sale that our investors make the most money, I want to detail the actual process we conduct to exit an investment and sell a property.

Relationships Matter

Once we decide to sell, we reach out to our appropriate broker networks to get some expert feedback on how they would value, structure, and market our property. Broker teams put together what’s called a “Broker’s Opinion of Value,” in which they consider all aspects of the deal and the market. Using this information, they propose a price point and prime positioning for the property to secure a successful exit. We are always building our network of brokers, but we do have a core team of trusted agents whose opinions we highly value. We gather BOVs from this team and move forward with the best plan.

It’s important to note that we’re not necessarily looking for whoever gave us the highest valuation of our property, but who had the most realistic valuation that aligns and builds on our assessment, and who we’d trust most to execute the connected sales plan.

After we make our choice, the broker team puts together an “Offering Memorandum” (OM). An informational packet on the property, the brokers send the OM to any prospective investors/buyers. The OM contains property details, pictures, financials, market analysis, and the broker’s track record. This is a deliberate process, and we repeatedly review draft OMs with the brokers to ensure we accurately and optimally capture the property’s story. First impressions play a huge role in convincing prospective buyers to view our property, so we want to maximize that opportunity through the OM.

The Marketing Process

Once the OM is ready, the brokers will release it to their investor lists. These are often expansive lists with contacts the brokers have developed over years. They can range up to tens of thousands of investors of all types. Additionally, the brokers will curate a specific list for our property, focusing on buyers who are active in our specific market and in our property type. They’ll reach out directly to those investors to gauge interest and get feedback on our OM and property.

This process usually takes several weeks, as commercial buyers and investors often need time to evaluate deals. Often buyers like to get a story and description of the property from the brokers and then dig into their own underwriting and financial processes, which can take days or weeks. It’s quite different from the home-buying process that most people go through, so it’s important not to get too anxious during this process.

In the meantime, the brokers also push out the listing and OM to all the major commercial real estate websites, like CoStar, Crexi, LoopNet, and others. This is another deviation from home-buying, in that most commercial buyers don’t find acquisition targets by surfing websites like home buyers do on, say, Zillow or Redfin; but it does occasionally happen, so we make sure to get our property on the sites available.

We Get an Offer

Once investors and buyers have had a chance to review our property, work out a financial analysis, and decide that they’re interested, they submit what’s called a Letter of Intent, or LOI. The LOI is a short document that expresses their interest in purchasing the property and briefly describes the general terms to be expected in a contract. Brokers receive the LOIs and discuss them with the potential buyers, looking for more context and background on the potential buyers. After that, they’ll send the info on to us, with a recommendation for how to proceed. They evaluate the terms and pricing for fairness and the buyer’s potential and ability to close the purchase.

As sellers, we ultimately decide whether or not to move forward and/or negotiate with any potential buyers, but we always carefully consider the broker team’s feedback. We understand that they’re incentivized to secure a transaction, because that’s how they get paid, but they are seasoned negotiators who excel at finding common ground between parties.

The next step is to negotiate the details and terms: we must settle on a price, timelines for due diligence and closing, and any necessary contingencies. There’s a lot of flexibility in commercial contracts; all the terms are negotiable, and we do our best to ensure that our investors are protected from unserious buyers that might take us off the market and keep us from getting the best value for our property.

Under Contract

Once we’ve agreed on terms with a buyer, a contract is drafted and all parties sign. This process is also different from an individual home buyer because investors usually have their own contracts that can contain a wide variety of terms and conditions. Both parties might take days or weeks to review and revise the contract with their respective legal teams to keep their interests protected.

(To see it from the other side, it’s during this phase that we would be raising money from investors like you if we were the buyers.)

Once the contract is signed, the due diligence period begins for the buyer. We discussed this process both in this newsletter and on the podcast. The buyers conduct inspections, reviews, and appraisals and engage lenders to close on the property. Due diligence is usually 14 to 30 days, after which any earnest money deposited by the buyer becomes “hard” and is forfeited if the buyer backs out.

After due diligence, the focus shifts towards closing: read, getting the paperwork in order. As sellers, we aim to stay as proactive as possible, ensuring there are no delays on our side to keep the property from closing on schedule. Commercial lenders often need lots of paperwork, some of which is completed by the seller, and we work to promptly return any forms or documents when asked.

Closing

Once we get to closing, we’re almost there. We don’t usually communicate much with our investors during this process; we wait until we’re sure of the closing because we want to avoid getting investor hopes up prematurely. However, we do engage with our tax and accounting team during the sales process to ensure we can rapidly report to investors the tax implications of our sale. We must have accurate info to report once we finally close, especially if we’re selling towards the end of a calendar year and close to tax time.

After a successful closing, we settle up all accounts with vendors, lenders, insurers, and any other parties that were involved in the property. This process can take a few weeks, so investors should not be alarmed if they don’t receive a check immediately following a closing announcement. Once all the accounting has been completed, then finally comes the best day ever, when we get to wire funds or send checks to investors and thank them for trusting us for years to operate the investment. It’s the culmination of years of hard work and planning, and it doesn’t get any better.

After distributing funds, we have a little celebration and high-five each other more than is probably necessary, I admit. Then we get back to work finding more investments!

-Matthias