The Perfect Time to Sell CRE
There are many factors to consider when deciding when to sell your commercial real estate (CRE) property. Let us start off by saying that it should not be an impulsive or overnight decision, unless extremely necessary. It takes time, research, discussion, and reflection in order to come up with a decision that can generate profit to you as a CRE property owner.
The good thing is there are ways to assess whether it is time to let go of your property. This article will discuss the ways of determining a great time to sell your CRE property, and tip the odds in your favor.
When Property Income exceeds Sales Price
There are two significant values you need to determine when deciding when to sell your CRE property: the projected income your property can generate and your sales price. In order to identify whether your CRE property is viable for a potential sale, the projected property income must be able to exceed your sales price.
This is to ensure your potential buyers that your property generates a substantial amount of income more than the offered sales price. This is definitely a standard deal-breaker among investors whether to buy your property or not.
For instance, if a CRE property is projected to earn a property income of $6,000,000.00 while being sold for $5,000,000.00 based on market value, then this makes the property viable for sale since it estimates an immediate $1,000,000.00 advantage to the buyer.
On the other hand, if the property is projected to earn $5,000,000.00 but is being marketed for a $6,000,000.00 price as per the market value, then it is better for you, as the property owner, to hold the property for a little while until the numbers turn to your favor.
In identifying these metrics, you need to prepare the proforma of financial statements presenting the following values:
- financial projection of a commercial real estate property’s income
- operating expenses
- net operating income (NOI)
- cash flow
- capitalization rate (Cap Rate)
- internal rate of return (IRR)
- equity multiple
- cash on cash return
When market conditions reduce potential continued returns
Immediate sale profit vs. continued income
As a CRE owner eyeing to sell your property, it is crucial to study your current market, which includes the demographics of your competitors and potential buyers, the standard vacancy and interest rates in the general market and within your area, and the population of occupancy of your property’s market. Remember that market trends fluctuate through time and when research tells you that now is not the right time to put your property for sale, then you better trust the numbers.
With this data at your disposal, it will be easier for you to calculate another two important values to help you determine whether it is the right time to sell your property: its potential return upon selling and the projected property income when you keep the property.
Comparing these two, while analyzing it with your current market trends, will help you answer the question, “Is it more profitable to sell this asset now or will it generate a more steady income if I keep this for now?”
With that, you can determine when it’s high time, or not, to sell your property.
Decrease in annual return vs. total operating costs
Another thing to do is to calculate the total annual operating costs versus the annual property income. When the required percentage to efficiently sustain property operations is not met, consider selling the property before its value continuously drops.
For instance, if a CRE property requires a steady 20% annual return to maintain the facility and provide ample income to the owner but a study of the finances reveals that the facility only generates 10% annual return, then selling the property is a better option, considering a bigger chance of lower profit in the future.
Whereas, if the CRE property owner projects potential rent increase in the near future as per market standards as a result of varied factors and believes that people are more likely to continue leasing, then keeping the property can generate bigger continued profit as compared to the possible immediate sales profit.
When identified prospect buyers become competitive
Different buyers, different needs and motivations. That is what you need to remember when putting your CRE property in the market for sale. With this being said, there are particular buyers who are eager to pay more for your property based on their immediate needs, so knowing them puts you in an advantaged position.
Bigger companies with expanded spans of coverage can willingly pay more for your property as compared to local business owners, if they identify your property as the one they want. Furthermore, a business owner with an urgent demand for a space can shed more money to secure the spot as compared to a regular business owner settling for your sales price.
Therefore, knowing your potential buyers and creating competition among them is a huge advantage that can help you leverage your sales price, consequently increasing your profit.
From the three points mentioned, finding the perfect time to sell your CRE property all boils down to market research. Knowing the current market trends allows you, as a CRE property owner, to make data-based projections and calculated decisions. Knowing your competitors and your prospect buyers gives you knowledge on how and where you can better position your marketing, sales price, and identifying your eventual buyer. Take note that if you want bigger profit and better deals, you need to track, analyze, and trust the numbers. It is your responsibility to monitor the market since numbers are going up and down constantly.
Finally, you don’t have to work on it by yourself. There is a reason why commercial real estate brokers are in existence, and you must hire one to have access to expert opinions on real-estate matters and in securing better deals for your property.
Even after outlining all the information above, determining when to sell your commercial real estate (CRE) can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at email@example.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE