Top FSBO Commercial Real Estate Tips

fsbo commercial real estate

FSBO commercial real estate is commercial real estate being sold by the owner.  It’s not that uncommon in the commercial real estate business.

That’s because – unlike residential real estate – most FSBO commercial real estate is owned by professional business people.  As a result, the investment group holding the real estate includes an attorney, high-net worth individual, or even real estate professionals.

Here are a few tips for buyers thinking about investing in for sale by owner commercial real estate.

Buyer Representation For FSBO Commercial Real Estate

More often that not, with FSBO commercial real estate, or any commercial real estate for that matter, a buyer is buying problems that the seller can’t handle.

That’s not necessarily a bad thing.  Sometimes commercial real estate owners don’t have enough capital to make repairs or upgrades.  Other times they lack the property management resources to find and keep great tenants.

Situations like these can be a good deal for the buyer, if the buyer has what the seller lacks.

But whatever the reason, buying FSBO commercial real estate means that you’re buying someone else’s problems.

That’s why it’s important to hire a buyer broker to represent you in a for sale by owner commercial real estate transaction.

Commercial Real Estate Due Diligence

Commercial real estate investors should always be sure to do their due diligence.  It doesn’t matter if the property is a FSBO or listed on the open market.

There’s a lot more due diligence when buying commercial real estate than when buying a residential property.  Some of the things commercial real estate buyers should always verify include:

  • Tenant leases, tenant quality, and historical rent payments
  • Current zoning and potential business restrictions
  • New competition coming to the market
  • Discover why the owner is really selling

 

Real Estate Loan Scams

real estate loan scams

Whenever a real estate market heats up, real estate loan scams also rise.

Here are three common real estate loan scams to watch out for if you’re buying – or selling – real estate.

Seller Financing

Now, seller financing in and of itself isn’t a real estate loan scam.  But, this method of buying and selling real estate can be, if you’re not careful.

For buyers, seller financing can turn into a real estate loan scam if you pay the seller directly.  To protect yourself, always go through a independent third party such as an escrow company or attorney.  They will track payments received, the loan balance, and money disbursed to the seller.

For sellers, always remember that you are the bank, since you are carrying the note.  Sneaky buyers can turn seller financing into a real estate loan scam by providing you with bad credit information or selling the property to someone else without your knowledge.

Lease Purchase

Lease purchasing – real estate can also turn into a type of loan scam if you’re not careful to have everything in writing.  Also be sure to have written in your lease purchase contract what dollar amount or percentage of payment is applied toward the purchase price of the property.

Remember, a lease purchase agreement is different from a lease purchase option.  With an option, the tenant/buyer has the option to purchase at a predetermined price, but doesn’t have to.

Interest Only Mortgage As Real Estate Loan Scams

Using an interest only mortgage to buy real estate can also end up being a real estate loan scam if you’re not careful.

With an interest only mortgage, payments by the buyer only go toward interest and not principle.

In a real estate market where prices keep rising that’s OK.  But if the market suddenly drops, buyers can quickly find themselves upside down with negative equity on the property.

How To Market A Pocket Listing

pocket listing

A pocket listing is a listing that isn’t on the multiple listing service. Pocket listings are found in both residential and FSBO commercial real estate.

Sellers and real estate agents have pocket listings for a number of reasons.  But regardless of why, pocket real estate listings can be difficult to sell.

Here are three great ways to market a pocket listing.

Get Neighbors To Market Your Pocket Listing

Everybody loves a secret, especially neighbors who know that a place is for sale.

By letting the neighbors know you have a pocket listing, you’re putting word-of-mouth advertising to work for you.  It’s also the ultimate way of putting six degrees of separation to the best possible use.

Internet Real Estate Sites

The internet is the perfect place to market pocket listings that aren’t on the MLS.

Websites like Zillow, Trulia, and even Craigslist are great places to advertise a pocket real estate listing without having to go through the trouble of putting the property on the MLS.

This is also a good technique to use when you really want to zero in on qualified, serious buyers.

Most of the real estate agents on the multiple listing service are weekend warriors.  At most they’ll do one or two transactions a year, which means you’ll quite likely end up dealing with an amateur and their buyer client.

Social Media Real Estate Marketing

Marketing your pocket listing on social media is another great way to let people in your sphere of influence know you’ve got a great off market property for sale.

Part of your circle of friends probably includes real estate agents making six figures a year.  These are the types of agents that you want to share your pocket listing with.

They’ve got the experience and the contacts to help get your pocket listing sold to the most qualified buyer.

How To Get Buyers To Pay More

get buyers to pay more

Here are three easy ways to get buyers to pay more for your property.

These tips work in both a hot real estate market and cold real estate market, and for both commercial real estate and residential properties.

First Impressions Count

Experienced negotiators understand that first impressions are lasting impressions.  Once people have made a subliminal decision, it’s very difficult to get them to change their minds.

That’s why making a positive first impression is key to get buyers to pay more for what you’re selling.

In real estate that’s also known as curb appeal.  Well kept landscaping, no litter, and if you’re selling commercial real estate no vagrants hanging around the property.

You’re going for what’s known as the ‘Wow Factor’ when prospective buyers pull up the curb.

No Deferred Maintenance

Deferred maintenance items are things that need to be fixed or repaired but haven’t been.

Items like peeling paint, a loose shingle, or a small graffiti mark on the fence can be innocent enough.

But they can also make a buyer wonder why they haven’t been taken care of – especially if you’re selling your property.  Even worse, deferred maintenance that a buyer can see will also make the buyer think about things that can’t be seen.

Take a loose roof shingle for example.

A loose shingle means that water can get into the inside of the roof, which means dampness and potential mold issues.  Which in turn means potential health issues for the occupant and unknown legal issues for the new property owner.

Get Buyers To Pay More With A Good Story

Another key to getting buyers to pay more is by having a good story to tell.

As a seller you’ll need to be honest with yourself about the problems with your property.  Look at your real estate from a potential buyer’s point of view.

This doesn’t mean you need to apologize.  But it does mean you should foresee as many potential objections or questions as possible, and know ahead of time what your answers are going to be.

A smooth, practiced response goes a long way to convincing a potential buyer that they’re making the right decision to purchase the real estate that you’re selling.

Secrets Of Running A Real Estate Business

running a real estate business

Running a real estate business that’s successful isn’t as easy as it might seem to be at first glance.

Here are a few secrets to running a real estate business.

Have A Real Estate Business Plan

It’s surprising how many businesses – both in and out of the real estate industry – don’t actually have a business plan.  Owners of business start-ups oftentimes take the ‘fly by the seat of your pants’ approach and make things up as they go along.

Running a real estate business without a detailed, long-term plan is a recipe for disaster.

Business planning pros always suggest that after putting together the profit-and-loss statement for your real estate business, you should decrease your projected revenues by 50% and double your expenses.

If you’re still cash-flow positive after this exercise, your real estate business is very likely to succeed.

Strong Administrative Support

Most people that think about running a real estate business do so because they’re good at sales.

And in real estate, the more you sell the more money you make for yourself and your new real estate brokerage.  If you’re the rain maker – the person that’s great at attracting new business and closing deals and working with lenders – that’s fantastic.

But running a real estate business also requires strong back office people and administrative support to assist with your time management.  Tasks such as answering the phone and distributing leads, making sure bills get paid on time, and paying agent sales commissions are just a few of the countless items that fall into this category.

Choose Your Real Estate Niche

Businesses they try to be all things to all people end up failing sooner rather than later.

One of the keys to running a real estate business that’s successful is to pick a niche and stick to it.

Examples of real estate business niches include residential or commercial, buying & selling or leasing, property management, and vacation rentals.

Are Traditional Real Estate Companies Bound To Fail?

traditional real estate companies

To answer this question allow us to change gears for a moment and consider what Steve Jobs had to say about Apple Computer back in 1995.

Specifically, he talked about how Apple will eventually fail.

Granted, this thought is near-blasphemy for a countless number of retail stock market investors, mutual funds, and investment gurus.

After all, the price of Apple stock recently hit an all-time high.  Warren Buffett owns nearly $45 billion of the company, and Apple accounted for an incredible 23% of the entire S&P 500’s gains in May.

How in the world could Apple possibly fail?

According to Steve Jobs, companies with a monopoly market share forget about what it means to build a great product.  There’s no difference between a good and a bad product, and no feeling in the hearts of the people who run the company about wanting to help their customers.

Other than perhaps the size of the display screen, what’s the big difference between the last several generations of iPhones . . . except for a rising price?

Eventually companies decline because of the lack of quality products and failure to adapt to the new realities of the marketplace.  Steve Job’s belief that companies must adapt or eventually die is also applicable to the real estate industry today.

Traditional real estate companies

Media as diverse as the Pew Research Center and USA Today claim that the decline in home ownership and the rise of the ‘renter class’ is due to rapidly growing home prices and an inventory shortage.  Would-be homeowners are forced to rent because they can’t find anything to buy.

But perhaps a more likely explanation for more people renting homes than buying is that consumer demand is simply changing.

As more Baby Boomers retire and sell their family homes, they are intentionally choosing to rent, or moving into assisted living or senior housing.

At the same time, the younger generation prefers to rent a home rather than own.  Factors such as the growing gig economy and 1099 employment, the lack of mobility that home ownership brings, and the rapidly growing ways to invest in real estate other than owning a home, all make home ownership much less attractive than it once was.

The traditional real estate industry still operates under a business model of new home construction and a resale market that focuses primarily on home buyers that are owner occupants.

This is in stark contrast to the changing wants and desires of the real estate consumer, and a perfect example of Steve Job’s warning to companies who focus on their own needs rather than wanting to help their customers.

Three First-Time Home Buying Tips

first time home buying tips

Here are three first-time home buying tips that will go a long way toward enjoying your new home.

These three first-time home buying tips all focus around saving money.  That’s because buying your first home will always, always, always, take more money that you might think!

Down Payment Assistance

Many first-time home buyers think that asking the seller for down payment assistance is an embarrassment.  But smart home buyers think of this as a way of using OPM or other peoples’ money.

This first-time home buying tip works especially well with sellers who have a lot of equity in their home, and with buyers who have few contingencies in their purchase contract.

Closing Cost Credits

This is similar to asking for assistance with the down payment.  It works well with sellers who don’t even have that much equity in their home.

The fees when buying a new home can really add up.  In addition to the normal buyer costs such as doing inspections, there will be fees from the home owner association, title and escrow company, attorneys, and lenders.

Individually these can be small dollar amounts compared to the purchase price of a new home.  Most sellers are quite willing to negotiate a closing cost credit with a qualified home buyer of the house for sale.

Home Updating Escrow Reserve

First-time home buyers can also ask the title company to hold money in reserve for needed repairs.

The funds come from the seller, but are held by an independent third-party – such as the escrow, title company, or an attorney – to directly pay contractor bills.

Any left over money gets returned to the seller.

Other First-Time Home Buying Tips

In addition to getting as much money back from the seller as possible – even in a seller’s market!  First-time home buyers should also:

  • Try not to underestimate the cost of repairing & rehabbing
  • Visit the neighborhood during different times of the day and week
  • Don’t be afraid to renegotiate the purchase contract if any red flags appear during the inspection period

How To Buy A Rental Property Investment

rental property investment

Owning a real estate rental property investment is one of the most time-tested ways to build wealth and generate income.

Here are three things to consider when buying a rental property investment.

A Rental Property Investment Isn’t Your Home

Many beginning real estate investors make the mistake of buying a rental property investment the same way they would buy a home to live in themselves.

They focus more on the amenities-  lush backyard, high-end fixtures & appliances, and a swimming pool – than looking at the property as a business.    True, items like these will attract tenants.  But they will also be more expensive to maintain, repair, and replace when damaged beyond repair.

Experienced rental property real estate investors prefer to buy a basic home with minimal upgrades and amenities.  Doing this allows for a quicker turn between tenants and less expensive repairs when needed.

Go Where The Renters Are

An easy way to determine where to buy a rental property investment is to buy in areas where there are already apartments or smaller multi family dwellings.

While doing this might sound like common sense, it’s surprising how many beginning investors in real estate don’t do this.

Apartment building developers & property managers have already done the heavy lifting.  They’ve figured out where the renters are and what the market rents are for the area.  Rather than reinventing the wheel, savvy smaller rental real estate investors simply adapt to what the big players have already done.

Treat Your Rental Property Investment Like A Business

As a small real estate investor it’s very easy to get caught up in tenant drama.

Remember, the tenant is your customer and not your friend.  You’re providing a nice place for them to live.  In exchange you expect the monthly rent to be paid in full and on time, each and every month, and the property to be well kept.

Experienced real estate investors know that once they allow a tenant to pay the rent late it will quickly become the norm and not the exception.

How To Buy A Multifamily Property

buy a multifamily property

Many real estate investors decide to buy a multifamily property after owning one or two single family rental houses.

While the asset classes are similar, there are some distinct differences between owning single family rentals and buying a multifamily property.

Before You Buy A Multifamily Property

Here are some general things to consider before you buy a multifamily property.

These are general comments.  They will vary depending on what market and what country your real estate investments are:

Exit StrategyBefore you buy, think about selling

When you invest in a single family home as a rental, selling it is easy.

That’s because you have a bigger buyer pool.  You can sell a rental house to another real estate investor, to the tenant, or to an owner-occupier who is buying the house to live in.

Selling a multifamily property is different.  Yes, you could ‘go condo’ by turning each rental unit into a property for sale.  But often times that’s easier said than done.

When the time comes to sell your multifamily real estate investment, your pool of prospective buyers is going to be other income property investors.

Unit TurnsHow quickly can a vacant unit be made rental ready?

We all know that time is money.  This is especially true when it comes to property managing and leasing multifamily property.

The term ‘unit turn’ refers to how quickly any needed repairs and updating can be done when an old tenant moves out and a new one moves in.

Some of the keys to turning a unit quickly include having the same fixtures, appliances, paint and flooring in each unit of your multifamily property.

Tenant TypesUnderstand who you are renting to and why

Knowing the type of tenant you will be renting to is key to successfully investing in multifamily property.

You will also want to have a firm understanding of the unique characteristics of your specific tenants.

For example, young professionals in an urban area will expect more amenities and stylish decor.  Other renters are just looking for a simple place to live.

How To Calculate A CAP Rate

calculate a cap rate

There are two pieces of information that real estate investors need in order to calculate  a CAP rate or Capitalization Rate:

  1. NOI or net operating income of the asset
  2. Sales price or current market value of the asset

CAP rates are useful for comparing the performance of a real estate investment to similar properties in the market, to calculate what a sales price should be based on the property’s NOI, and determining what the net operating income should be based on the CAP rate of a property that’s for sale.

The CAP rate calculation can be used for residential and multifamily property, commercial investments, and even land.

Formula To Calculate A CAP Rate

The formula used in a CAP rate calculation is pretty straightforward:

CAP Rate = NOI / Sales Price

Let’s say we have a small multi family rental property investment that is generating $100,000 in net operating income each year.  The owner decides to sell and lists the apartment building for sale for $2 million.

The CAP rate is: $100,000 NOI / $2,000,000 Sales price = 5% CAP rate

Why Is A CAP Rate Used?

In addition to comparing alternative real estate investments in the same market, the CAP rate formula can also be used for calculating what a sales price should be and in determining what a property’s net operating income should be based on CAP rates for similar properties.

For example, if our apartment building above is listed for sale with an asking price of $2.5 million and market CAP rates for similar properties are 5%, then the property’s NOI should be:

$2.5 million x 5% = $125,000 per year

Based on the capitalization rate calculation the property is over priced compared to its peers.  Now, maybe there’s a good reason for this or maybe not.  That’s up to the buyer and seller to determine.

What Is A Good CAP Rate?

CAP rates for specific asset classes vary from market to market and sometimes even from neighborhood to neighborhood.

A good CAP rate for one investor will be a not so good CAP rate for another investor.  That’s one reason why it’s dangerous to call a CAP rate good or bad in and of itself.

But capitalization rates are useful for quickly comparing one real estate investment to another, and also return on investment for specific asset classes from one market to another.