Two years ago, multiple bidders for commercial property in Northeast Ohio would have been unheard of. Now, market power has shifted from the buyer/tenant to owner/landlord. Vacancy rates have dipped and the quality of the product on the market has significantly decreased, says George J. Pofok, CCIM, SIOR, senior vice president at CRESCO.
“As the market and the economy continue to improve, with the lack of quality product out in the market, I think we’re going to see more multiple-bid situations,” Pofok says.
Smart Business spoke with Pofok about what to do when you’re competing for commercial property.
What determines if a property might have multiple bidders? Is it the type of building or location?
Right now, multiple offers are happening more with industrial properties as opposed to office — and a lot of that has to do with the quality of the building. Class A Industrial buildings are in limited supply. So, a property’s cleanliness, building amenities and ceiling height make it more desirable and thus more likely to be competitive.
Location is important, including freeway accessibility, being near public transportation and your labor force, but amenities to a building sometimes outweigh location. If you were to build a new industrial building today versus purchasing another facility already equipped, there are cost savings in addition to being able to get widgets to the market quicker.
How does the bidding process typically work with more than one bidder?
Everything ends up being a one or two-step process, usually. The seller might give you a revised counter or just send you a letter saying, ‘We have multiple bids. Give us your highest and best offer.’ Then, you’ll have a couple of days to a week to respond. Obviously, getting your response in by the timeline the seller dictates is critical, but the terms of the offer are what drives everything.
There can be a lot of back and forth or the seller may end up picking a lead horse, and then try to fine-tune the economics with that bidder. They may like your offer but have one objection. They’ll come back to you about that objection.
So, how can you make your offer the most attractive one?
You’ll need to consult with your broker and your lawyer, and most importantly not play games. If you’re going to play games, you’re going to lose. Many buyers or tenants still think, ‘I’m going to get this great deal on this building.’ When in fact, the market has shifted in favor of an owner/landlord.
You want to be as highly competitive and flexible as possible. In addition to increasing your offer, some advantages a buyer or tenant can use are to pay cash or increase the amount of earnest money. Earnest money is put toward the down payment when the transaction is finalized but may be kept by the seller if the buyer defaults on the purchase.
It helps if you’re able to shorten the amount of days you have requested for due diligence or financing contingency, where you apply for lending. For example, 90 days may be too long under these circumstances; something in the 45-day range is better.
Also be flexible when negotiating reps and warranties. Buyers sometimes ask for the owner to warranty and represent various issues regarding the title or environmental concerns for an extended period of time. However, owners just want to sell, cut the cord and be done. Consult with your attorney when discussing these issues. Money talks. So, increasing your offer from a purchase price perspective is critical, but it’s not the ultimate factor. If an owner has two offers and one is for $50,000 less, but the terms in the lower offer are much more palatable with less due diligence and more earnest money, he or she may be willing to take the lower offer. Sellers and landlords are going to look at everything.
Are buyers assuming more risk under these circumstances?
At times, yes, it’s riskier. You may take a little more risk than you’d prefer. If the terms of the deal get too onerous, walk away. There will be other opportunities, but it needs to make sense. That’s why you definitely want to leave the emotional part out of it. Look at it from a business perspective, and put together the best offer you can. ●
George J. Pofok, CCIM, SIOR, is a senior vice president at CRESCO. Reach him at (216) 525-1469 or [email protected].
Insights Real Estate is brought to you by CRESCO
