Commercial Rental Property Sales Explained

Once you’ve gained some experience buying and selling residential properties, you may want to move into commercial real estate. Buying and selling commercial properties can seem a bit daunting at first, but can be a very lucrative endeavor once executed properly. Some aspects of the buying and selling process are similar to residential properties, while others are much different. Below we explore the ins-and-outs of buying and selling commercial properties.

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How are Commercial Sales Different from Residential Sales?

Buying and selling commercial properties, such as retail, industrial, and office spaces, differs significantly from residential properties, including apartment buildings and single-family rental homes. One of the biggest differences is the focus on cash flow for commercial properties, as these spaces are typically used for business purposes and generate income. In contrast, residential properties can be used for personal use (i.e. single family rentals) or multifamily properties with 4 or lesser units have less strict borrower requirements. Additionally, commercial properties may require more extensive legal and regulatory considerations, such as zoning laws and building codes, compared to residential properties. Ultimately, the buying and selling process for both commercial and residential properties requires careful planning, due diligence, and expertise to ensure a successful transaction.

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3 Important Factors to Consider When Buying or Selling Commercial Properties

When buying or selling a piece of commercial real estate, there are several key factors for consideration to ensure a successful transaction. These factors apply to both buyers and sellers, and each includes a “Pro Tip” based on real world experience.

1. Economic and Industry Trends – Economic and industry trends play a significant role in the buying and selling of commercial real estate. Changes in interest rates, inflation, and economic growth can all impact the demand for commercial properties, rental rates, and overall market conditions. Additionally, unexpected shifts in industry trends, such as technological advances or changes in consumer behavior, can also affect the performance of specific types of commercial properties. Pro Tip: Stay informed of economic and industry trends and how they may directly impact the type of commercial property you are interested in. 
2. Location, Location, Location – Yes, we mentioned location 3 times because it is that important. Location is the most critical factor when buying and selling commercial real estate. The property’s location can impact the demand for the property, the potential for rental income, and the long-term value of the investment. For instance, commercial properties located in high-traffic areas, near public transportation or in thriving business districts, may command higher rental rates and have greater potential for long-term appreciation. Similarly, properties located in areas with high demand for specific types of businesses or services may offer greater potential for rental income and profitability. Pro Tip: Evaluate a property’s location carefully by considering factors such as traffic counts, parking accessibility, street visibility,nearby amenities, and how other nearby commercial properties are performing.
3. Zoning Laws and Land Use – Zoning laws and permissible land uses are important considerations when buying and selling commercial real estate. Zoning laws regulate the type of buildings allowed and business uses within specific areas. This can directly impact the potential uses of a property for better or worse. For example, zoning laws may prohibit certain types of businesses from operating in residential areas or restrict the height and size of buildings in certain zones. Pro Tip: Zoning laws and allowable uses should always be checked before buying, selling, or renting a commercial property to understand the allowable uses by local officials.

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How to Buy a Commercial Property? (17 Steps)

Buying a commercial property is similar to residential properties in some ways, and drastically different in others. Before you make an offer on your dream shopping center, you should be aware of common steps found in the commercial real estate buying process. Below are 17 steps to help potential buyers navigate the process of how to buy a residential rental property:

1. Define Investment Goals: Whether it is buying an industrial warehouse for your growing manufacturing business or exchanging a 20 unit multifamily apartment into a 50 unit multifamily apartment complex, commercial real estate transactions need to be clearly defined with a plan for both your personal objectives and also to provide clarity to your lender on your loan’s purpose.
2. Determine Your Budget: Assess your finances and determine how much you can afford to spend on a property, taking into account the down payment, upgrade or repair budget, and ongoing operating expenses.
3. Get Prequalified: Even if you have the knowledge and experience, you will need to talk to a commercial mortgage broker or direct lender to determine your eligibility for a loan. Commercial lenders will look at your personal collateral, reserves, and ratios such as debt service coverage ratio (DSCR) and loan to value ratio (LTV).
4. (Optional/Recommended) Hire a Real Estate Agent: Most of the time, it is easier to hire a real estate agent to help guide you through the buying process, since they are usually paid for by the seller.
5. (Optional) Hire a Real Estate Attorney: Depending on your locality, state laws and the nature of the transaction, you may need to enlist the services of a real estate attorney. For large and complex commercial real estate transactions, real estate attorneys are very strongly recommended and usually involved.
6. (Optional) Don’t Hire a Real Estate Agent: Alternatively, an advanced technique can be to try and  negotiate directly with a seller (assuming they don’t have a real estate agent either) to mutually save on commissions and in-turn pass those savings onto you. Be prepared to handle all aspects of the transaction if you decide to take this advanced approach.
7. Choose a Location: Location is one of the most important components for commercial real estate. Be sure that the location matches the demand for the type of commercial property. For example, try to avoid mismatches such as an industrial property in a residential neighborhood, or a retail shopping center away from a main street with no visibility.
8. Find a Property: Search online real estate platforms, work with a commercial real estate agent, and even cold-call or write letters to property owners in your target area for properties that meet  your criteria.
9. Assess the Property’s Value: Look at similar properties that have sold, are currently for sale, or consult your real estate agent to determine the target property’s estimated value and identify any issues that may affect its rental potential.
10. Determine Rental Income Potential: If the property is already occupied, find out at what rate on the lease agreements and determine if they are above market, at market, or below market.This is also an important component in securing financing since the lender will perform their own rent analysis and base the loan off of this.
11. Make an Offer: Submit an offer to purchase the property, negotiating terms and price with the seller until you reach an agreement. There may be multiple back-and-forths of counter offers until a final agreement is reached.
12. Secure Financing: Following up on your pre-approval, let your lender know that you have an accepted offer and provide them all relevant details of the property to start the loan process. Note that this process takes some time to finalize.
13. Escrow & Contingencies: Once there is an agreed upon contract, both buyer and seller go into escrow which can usually be 30 days or longer which allows for sufficient time to work  through a series of administrative requirements including satisfying loan approval conditions and completing a title search. During this period, the buyer will usually have to submit deposit monies and there may be contingencies that need to be met in order for the purchase process to continue, such as securing financing or a clean environmental assessment.
14. Environmental Assessment: The buyer usually orders an environmental site assessment that involves a licensed professional to come out to the property to perform a physical inspection of the likelihood for contamination. These can be called a Phase 1, Phase 2 or Phase 3. Note that these are often a requirement to secure a commercial loan.
15. Evaluate the Property’s Condition: The buyer will hire professional inspectors and tradespeople to conduct thorough inspections of the property to assess its condition and identify any necessary repairs or upgrades. Most seller’s typically require an accepted offer before allowing inspections.
16. Close the Deal: Finalize the purchase by completing any necessary paperwork, transferring ownership, and securing the rental property with insurance.
17. Property Management: Determine whether to manage the property yourself or hire a property management company to oversee day-to-day operations and tenant relations.  If you do decide to hire a third party manager, be sure they have experience in commercial property management.

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How to Sell a Commercial Property? (16 Steps)

There can be many reasons to sell a commercial property. Maybe you want to continue building your rental real estate empire with bigger properties, or simply want to cash out the equity for other reasons. Below are 16 steps to help sellers navigate the process of how to sell a commercial rental property:

1. Define Goal of Sale: If you have been fortunate enough to own commercial real estate, selling the property will require a plan on what to do with the proceeds. Consulting with related professionals such as a commercial real estate agent and tax professional, can sometimes help with guidance in the right direction.
2. (Optional/Recommended) Hire a Real Estate Agent: A good real estate agent associated with a reputable brokerage can net you far more than their commission when selling a property. Their market knowledge and negotiating skills to help overcome any inevitable challenges that arise in the selling process.
3. (Optional) Don’t Hire a Real Estate Agent: Alternatively, you can try to go the for sale by owner (FSBO) route by trying to sell yourself or instant cash offer service. These alternative approaches either require additional effort on your part, or the acceptance of potentially selling the property at a discount in exchange for a faster and hassle-free experience.
4. Determine the Property’s Value: Determine a fair asking price based on the property’s value and comparable sales in the area. A real estate agent can usually help determine this through other comparable sales data, or you can consider hiring an appraiser for an additional fee.
5. Consider Tax Implications: Consult with a tax professional to determine any tax liabilities associated with the sale of the rental property and to explore potential tax benefits.
6. Check Local Tenant Laws: New buyers may want the property vacant or a particular tenant out. Be sure to check local landlord-tenant laws to understand what is allowed, not allowed, and may be required to relocate tenants.
7. Decide on a Selling Strategy: Determine whether to sell the property as-is or make any necessary repairs or upgrades before listing.
8. Prepare the Property For Sale: Gather all lease agreements, make any necessary repairs and give the property some curb appeal to attract potential buyers. Commercial lenders usually want to see historical financial statements for the property, so be prepared to provide them when asked.
9. List the Property: Your real estate agent should advertise the property through multiple channels, such as online real estate websites, social media, colleagues, neighboring property owners, and investor networks.
10. Show the Property: Commercial real estate showings are a little different than residential. Your real estate agent will schedule private showings as requested from credible buyers who are typically also represented by a real estate agent.
11. Receive and Review Offers: Review offers and negotiate terms with potential buyers until you reach a mutually agreeable price. There may be multiple back-and-forths of counter offers until a final agreement is reached.
12. Enter Into a Contract: Once you have accepted an offer, enter into a legally binding contract with the buyer.
13. Escrow & Contingencies: Once there is an agreed upon contract, both buyer and seller go into escrow which can usually be 30 days or longer which allows for sufficient time to order an appraisal, complete a title search, and work through a series of administrative requirements including satisfying loan approval conditions. During this period, the buyer will usually have to submit deposit monies and there may be contingencies that need to be met in order for the sale process to continue, such as buyer to secure property financing or a clean environmental assessment.
14. Environmental Assessment: The buyer usually orders an environmental site assessment that involves a licensed professional to come out to the property to perform a physical inspection of the likelihood for contamination. These can be called a Phase 1, Phase 2 or Phase 3. Note that these are often a requirement to secure a commercial loan.
15. Close the Sale: Complete any final repairs or preparations, transfer ownership to the buyer, and receive payment for the property.
16. Use of Sale Proceeds: Selling a property can net you a large amount of capital if there is equity in the property. It is best to have a plan ahead of time of what you plan to do with the money, before  it hits your bank account. Maybe consider a 1031 exchange if you still plan to keep growing your rental property portfolio.

Selling a Commercial Rental Property For Sale by Owner (FSBO)

Deciding whether or not to sell a commercial rental property as For Sale by Owner (FSBO) is a personal decision that depends on several factors. While selling a property without an agent can save on commission fees, it also requires more time and effort on the part of the owner. Owners must be willing to handle the sales process themselves, including pricing the property, marketing it effectively, and negotiating with potential buyers. Additionally, owners must have a strong understanding of the local real estate market laws and be able to accurately assess the value of the property. For those with experience in real estate sales or who have successfully sold properties FSBO in the past, it may be a viable option. However, for those who are new to real estate sales or are unfamiliar with the process, working with a real estate agent is usually the safer and more effective choice.

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Buying and Selling Commercial Properties Off Market

Buying and selling commercial real estate “off market” refers to the process of buying or selling a property without listing it publicly on real estate platforms or without a real estate agent. Instead, the transaction is usually handled privately between the buyer and seller or their respective representatives. This approach can provide several advantages, such as greater control over the transaction, confidentiality, and potentially more favorable terms. However, it also requires a network of connections and resources to identify and access off-market properties. Investors and brokers with strong industry relationships and experience in off-market transactions may be better equipped to navigate this market and identify profitable opportunities. Additionally, buyers and sellers should exercise caution and carefully evaluate the risks and benefits of off-market transactions before proceeding.

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Commercial Sales Companies

When buying or selling a residential rental property, the real estate agents that facilitate the process are usually associated with a particular larger company called a brokerage. Real estate brokerages hold individual real estate agent’s licenses and provide their agents with access to helpful resources through shared networks. Brokerages can range from local small multi-person companies, to multinational brands with thousands of agents. There are also specialized brokerages who focus solely on commercial properties such as industrial warehouses or retail shopping centers.  Much like choosing a brand of car or associating with a favorite sports team, real estate agents carefully select their brokerage to help maximize their growth and sales potential.

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Commercial Real Estate Agents

Choosing a real estate agent to sell a rental property is an important decision that can impact the success of the sale. When selling a piece of commercial real estate such as vacant land for development or a self storage facility, it’s important to find an agent with experience in commercial investment property sales and a strong understanding of the local real estate market. A good agent should be able to provide guidance on pricing the property, marketing it effectively, and favorably negotiating the terms of the sale with potential buyers to your benefit. Additionally, they should be able to work with existing tenants and address any concerns they may have throughout the sales process. By choosing the right real estate agent, owners can maximize their investment profits and ensure a successful sale.

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Where to Buy or Sell a Commercial Rental Property Online?

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