July 2, 2021
How To Make A Strong Purchase offer
You’ve identified real estate that you would like to own. Now you have to control it. The only problem is that even though the seller of the property would like to sell and you would like to buy, both are incentivized by opposites, buyers want low deposits, low prices, and long due diligence periods, while sellers want high deposits, high prices, and short due diligence periods. You want to carefully craft your offer in a way that the seller will, obviously, want to do business with you. Here is what you need to know in order to craft the most compelling offer: 1) The process of buying commercial real estate from start to finish, 2) What makes a strong offer, 3) Questions to ask to read the seller, and 4) Common mistakes in writing offers.
The Process of Buying Real Estate.
There are five phases to going from looking a property to closing: negotiating offer, negotiating purchase and sale agreement, due diligence period, permitting period, closing. Each phase will take a different amount of time depending on the type of property and the market, ask your real estate agent what is reasonable in your situation. Many buyers write offers to be non-binding, but a binding offer may be more advantageous in some cases. Depending on the complexity of the Purchase and Sale Agreement, sometimes called the P and S or the PSA, it may take anywhere from a couple weeks to many months to get it wrapped up. The due diligence period is a specific amount of time a buyer is able to look do an environmental, septic, or roof report to be what they are buying. Most Purchase and Sale Agreements are written in a way that gives the buyer the unilateral opportunity to walk away and get the initial deposit refunded if something in Due Diligence is unsatisfactory. The permitting period is applicable to buyers who have a use that demand a longer period of time than the Due Diligence period. Perhaps they are developers that intend to repurpose the property for something other than what it has historically used for. If a buyer has a use for a site that will keep the seller from closing as quickly as they would like, buyers will oftentimes pay a monthly premium for keeping the property off the market that is not applicable to the purchase price. After all due diligence has been completed and permits have been granted, a closing can happen. Commercial real estate can sell as fast as a week or as long as numerous years.
What Makes a Strong Offer.
Making a strong offer does not simply mean a high price, buyers will often need to sell themselves and the strength of their company in order to stand out to the seller. The elements to a strong offer are usually a combination of high price, no contingencies, fast closing, ready to go financing, and a use that is allowed by right. Remember that if a seller is responding to your offer, they are interested in continuing the dialogue. Your initial offer may not be accepted as-is, but as long as you are getting a response, the deal is moving forward.
Tactics to Find Out the Real Sale Price.
Good seller’s agents will not disclose their client’s interests, and most seller’s will not give their bottom line price or terms up front. A few questions to get a read on what the seller is really thinking are 1) what offers have you turned down? 2) Would we get a response as “x” price? Or, after finding out what the seller paid for the property, 3) ask what they invested in the property since purchasing it in order to find out what they may want to recuperate. 4) Check if there is an outstanding mortgage on the property, because the seller may have recently refinanced which would give the buyer an idea about what they will do.
Many buyers make these mistakes:
- Approaching a commercial transaction like a residential one by using residential terms, offer sheets or templates, or even using a residential agent. The unfortunate reality is if a seasoned commercial listing agent takes a call on a property by a residential agent, they will often assume, many times rightfully so, that the residential agent is not experienced in the commercial business and will be able to negotiate a far better deal for their client than if negotiating with a fellow commercial agent
- Talking about how coming up with a down payment will be a struggle does not instill confidence in the seller that the buyer will get a deal done
- Writing offers that delineate all of the contingencies for the transaction. This is typically seen in residential offers and ultimately weakens an offer by highlighting the possible problems for the seller. Remember, purchase and sale agreements give a buyer a defined Due Diligence period which allows a buyer to investigate financing, environmental status, or any other possible issue