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Common Ploys Commercial Real Estate Agents Use When Selling Properties
| | Thursday, January 04, 2007 @ 12:24 PM EST
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Contributed by: Monica Villasenor
Monica Villasenor Properties
Read more archived articles about Selling
I hope everyone can enjoy this excerpt from my book that I'm writing about commercial real estate investing.
1. They try to create a sense of urgency
I can almost guarantee that with each telephone call you place to a listing agent of a commercial property, he will say something along these lines.... “You better hurry. There’s been a lot of interest on this property”. They all say that. Interest doesn’t mean anything. A letter of interest doesn’t mean anything. Only a contract means something and even then it may not. It’s all a game, sometimes all of the interest is
legitimate, most of the time it’s not. Even if it is true and you miss out on a great deal, there’s another one just down the road. There are literally thousands of commercial properties to choose from.
When I bought my condo conversion property, it had gone into contract three previous times and none of the purchaser’s had closed. In fact, I don’t think the seller truly thought we were going to close on the deal because he had been disappointed three previous times before. Even if the property is in contract you may want to give the agent your contact information so he has it just in case it doesn’t close
2. Using proforma numbers instead of the “real” numbers.
There’s usually a reason for real estate agents to do this. Either the “real” numbers are so bad that the selling price is way out of line or the agent is hoping that the purchaser is ignorant about commercial real estate investing and doesn’t know any better. The only legitimate time proforma numbers should be used are when the property is new and there are no prior numbers to use.
3. Manipulating numbers to look like the property generates more money than it does.
I really can’t blame them for doing this. I know that when the time comes to sell my properties I might suddenly develop a tad of Alzheimer’s regarding some of the property’s expenses. Trim a little expenses off here and there. Make the numbers believable of course. With just a few changes, the property is magically worth hundreds of thousands of dollars more. DON’T EVER TRUST THE SELLER’S NUMBERS TO BE ACCURATE.
4. Doing the math wrong.
Unfortunately, this is common. I see cap rates and cash on cash returns listed as the same percentage. I’m thinking “Okay, either this agent doesn’t know how to calculate the numbers or he truly thinks that they are the same thing”. Either way is pretty scary. You must know how to calculate returns to make sure that the numbers presented are accurate.
5. Adding in projected income from a percentage rent clause to justify the selling price.
I struggle with this one. On one hand it is a valid point that the income did come in and therefore the NOI is higher, which would increase the property’s value. On the other hand, it is not guaranteed income. A breakpoint has to be met to get that bonus income. While the breakpoint may have been achieved previously, there is no guarantee that it will continue to do so. If there is adequate history that the breakpoint is consistently met to justify calculating the income, fine. However, you do not want to add that extra income if the breakpoint has not been achieved and the agent is merely guessing that it will happen in the future. If you do decide to calculate in this bonus income into the NOI, I wouldn’t add in the full value. Unless the income can be guaranteed, it doesn’t have the same value as other income that is.
6. Using unrealistic proposed financing to create a pretty picture
As of today you will find that the Wall Street Journal Prime rate is 8.25%. However, you will see commercial property listings with proposed financing at 6.50%. When you are talking about commercial real estate prices that 1.75% difference is a huge amount of money. Yet, commercial agents will use a fantasy financing percentage in the proposed financing section.
Commercial agents may also put into the proposed financing terms that are unrealistic as well. For instance, they may put in a 30 year amortization schedule or interest only payments for a retail strip property. Interest only commercial loan, when those types of loans are generally only available on apartments and not other commercial real estate like retail and office buildings. I really think this is stupid on the agents part. Let me tell you why. What will happen is that an unsuspecting investor will come in, tie up the property, and then fail to close because when they tried to get financing they were unable to get terms or interest rates that enables the deal to make financial sense. Why, as an agent or seller, would you waste your time? Seems silly to me.
7. Putting up a picture that is not the actual property
What if you put a picture up on a dating site that had the little disclaimer “Photo is not the actual person”. It would make you wonder what that person has to hide. It’s the same in real estate. Why would an agent use a photo of a different property unless there is something to hide? Unless, the project is under construction, there should be a picture of the actual property. That’s just the way I view it though.
8. “Principals Only”
Be aware of listings that state “Principals Only”. Essentially, what the listing agent is saying here is “If I have to split my commission with another agent, I don’t even want to look at your offer.” Do you know what this says about the agent? This says “I can care less about you, Mr. Seller. All I care about is getting my commission. I want it ALL!” It kind of reminds me of behavior that I sometimes see with my four year old son. I think this is a bunch of crap and borders on being illegal. An agent, by law, must present ALL offers to the sellers no matter who it comes from. The only thing this does is benefit the listing agent. Most sellers don’t know about this common practice and so it continues. Watch for this when you decide to sell your first commercial property.
9. Wanting a cut of the deal in addition to their commission
I’ve never had this happen to me, but I just read online a comment from an investor whose commercial agent was insisting on a percentage of the development’s sales (see equity participation in the financing section) in addition to his normal commission. I find that completely out of line.
Note: Monica Villasenor is a real estate investor and developer. She is currently converting a 24 unit apartment building to condos in Redding, CA. See the website for more information at www.aboutmonacocondos.com
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