I was recently approached by a client who was planning to sell his vacant commercial/office building. He needed advice on preparing his property for sale in order to generate the greatest level of buyer interest possible – on a limited budget. In this case he was prepared to spend up to $20,000, but he wanted to make sure it would be money well spent and would improve his overall return.
The building was in poor condition inside and out. It had seen multiple additions over the years using different siding materials, trim styles, etc. The walls appeared to have dry rot and the dismal colored exterior paint was badly peeling. The interior contained various old and poorly maintained floor, wall and ceiling materials, miscellaneous shelving, work benches, partial walls and clutter throughout. Fifty thousand dollars could have easily been spent addressing the various issues, but with the limited budget, we needed to concentrate solely on items with the highest return on investment.
At this point it is important to clarify that the recommendations made pertained to a commercial property with an anticipated office or retail use, and not a residential property. I think most of us have seen articles describing how money spent on revamping a home’s kitchen will generate a much greater return on investment than say money spent on a bedroom. However, addressing the sale of an office building requires considerably different thinking from that of a house. Evoking emotions and feelings is very important when preparing a home for sale, while highlighting potential, eliminating buyer uncertainty, and enabling a trouble-free transaction will yield profitable returns on a commercial property.
In preparing a commercial building for sale or lease, it is important to consider the mindset and priorities of the commercial buyer/tenant. A business owner or manager in charge of purchasing or leasing space in which to relocate their company is often in a thankless position. If they don’t get it right, productivity could fall and perhaps even lead to business failure. Timing and coordinating a move are critical so that operations and cash flow will not suffer. Surprises are to be avoided at all costs. Business operators simply cannot afford to make a poor decision relative to their real estate facilities.
My seller client indicated he was thinking of spending his allocated funds on new carpet and paint to really spruce up the interior. In light of our commercial buyer profile, I recommended the money would be better spent on the following: 1) a pest inspection report ($400) to quantify any dry rot or pest damage, with the goal of demonstrating the structural integrity of the building, reducing perceived risk and bolstering buyer confidence; 2) a Phase I Environmental Survey ($1900) to eliminate buyer questions or concerns regarding hazardous materials existing in, on or under the property that could affect its use or require costly remediation. In addition to providing certainty, such a report will also shorten due diligence and escrow time frames; 3) roof, window and door repair ($3,000) with the goal being to demonstrate to prospective buyers that the structure is secure, water tight and ready for interior improvements; 4) siding repair and replacement and a new exterior paint job ($10,000)to improve curb appeal and crucial first impressions; and 5) interior cleanup to remove clutter, open the space up, and facilitate visualization of the appropriate interior layout ($3000).
As you can see, rather than spending $20,000 on carpet and paint for the interior, we ended up spending very little on improvements to the inside of the structure. It is almost impossible to anticipate the use, desired floor plan and design tastes of the commercial property buyer, typically rendering the return on such interior improvements minimal at best.
Upon completing the above work we were able to improve very essential curb appeal, promote the integrity of the structure, and ensure the condition and suitability of the site, thereby eliminating buyer risks and encouraging more attractive offers. In turn this allowed us to bargain from a position of strength rather than uncertainty. What were the end results? We were able to increase the listing price by over double the money spent, generate immediate interest from multiple buyers, and sell the property above list price in only 60 days, thereby further saving the seller significant monthly holding costs.
Every property situation is of course different and should be analyzed relative to the particulars of the property and the seller, as well as the motivations of the target buyer group.
Lock Richards specializes in the leasing and sale of commercial/investment properties and has over 25 years of experience in the field, including over 15 years in the Grass Valley/Nevada City area. His “Commercial Property Review” newsletter, full of current Nevada County market trends and specific property details, is available at highlandcre.com or by calling 530-470-1740.