Before You Sell Directly to Your Tenant, Consider This…

Before You Sell Directly to Your Tenant, Consider This…

Introduction: Selling your commercial property to your tenant may initially seem like a logical choice. After all, they’re familiar with the property, and you may think it can save you from paying hefty commissions to a real estate broker. However, there are crucial factors to consider before taking this path. In this blog, we’ll explore why selling directly to your tenant might not always be the best option, if you want to retain your hard-earned equity by netting the highest selling price.

1. Tenant’s Perceived Value May Be Lower Than Fair Market Value

While your tenant may have a specific dollar amount in mind for the property, it’s essential to recognize that their perceived value often falls short of fair market value. Tenants may naturally aim for a lower price, hoping to secure a deal that benefits them financially.

2. Avoiding Commissions vs. Netting More with a Broker

One motivation for selling to your tenant is the desire to avoid paying commissions to a real estate broker. However, working with a broker may, counterintuitively, lead to a more substantial net profit. We’ll take a closer look at this concept in more detail through a real-life example.

3. Retaining Your Equity

When you sell to a tenant below fair market value, you essentially give away your hard-earned equity. Instead of letting your equity slip through your fingers, and into your tenant’s, consider working with a commercial real estate broker that specializes in allowing you to maximize your profits.

4. Marketing the Property to Establish Value

If you have a willing tenant, it’s essential to properly determine the value of your property before entering into a sales contract. A broker can offer a broker opinion of value to make sure the offer is a fair market offer. There are many factors that need to be taken into consideration to get an accurate broker opinion of value, such as supply and demand for certain property types, desirability of location, property condition, upcoming major property expenditures, etc.  

If the offer isn’t fair market, you should consider taking your property to market to attract offers from the broader market. This not only validates the property’s value but also encourages your tenant to make a competitive offer in line with other potential buyers.

5. The Option to Accept Fair Market Offers

By marketing your property with a broker, you maintain the flexibility to consider offers that represent the fair market value. If your tenant doesn’t increase their price to match these offers, you have the opportunity to accept a better deal.

6. Real-Life Example

The property illustrated in this example was a very nice, turnkey property located in a highly desirable area. Properties like this did not become available for sale very often. ProTech Commercial Realty’s broker, Michael Bruni, met with the owner. The owner shared his goals, and provided Michael with the documentation he needed to get the property sold for the highest purchase price possible. Michael was familiar with the property, and had already prepared a broker opinion of value prior to the meeting with the owner, which he shared with the owner at that meeting.

Upon reviewing the lease, Michael noticed the tenant had Right of First Refusal (ROFR), meaning the tenant had the option to buy the building before any other buyers, if the owner and the tenant could come to acceptable terms. The tenant offered a lowball offer, which was $300,000 less than Michael’s broker opinion of value, and refused to negotiate. Michael marketed the property, and had an offer in one week, equaling the valuation produced by his broker opinion of value. The tenant ended up matching the other buyer’s offer, went under contract and closed on the property.

The sale of this property was the owner’s retirement money. If the owner sold directly to the tenant, the difference in purchase prices would have gone into the tenant’s pocket. ProTech Commercial Realty put an additional $260,000 into this seller’s retirement fund, allowing him to live a better retirement.    

Conclusion: Selling your commercial property to a tenant can be an enticing prospect, but it’s crucial to assess whether it aligns with your financial goals. By considering fair market value, exploring all potential offers, and seeking the expertise of a real estate broker, you can make a more informed decision that ultimately benefits your financial future.