Tag: Jeremy Cyrier

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Which Sales Approach Gets You the Highest Value - Pricing Low or High?

Could every landlord and seller have it wrong when it comes to making people buy at the highest possible price?  In my experience, commercial real estate investors believe that starting with a high asking price is the best way to achieve maximum value.  It makes sense and here's why.

• It's expected that people make you offers for less than you're asking because it's the American Way.
• When the initial price is set high, potential buyers are likely to think it's worth more.
• You hope that someone will pay you more than you're willing to accept because you asked.

Here's where common sense and science disagree. Science has proven that lower asking prices can lead to a higher final sale price. Gillian Ku, a behavior scientist, and her colleagues studied this question (Read More in "Yes!" by Cialdini, Goldstein, and Martin) and concluded that there are 3 reasons why the lower asking price results in a higher final sale price than the other way around.

1. Higher asking prices act as a barrier to entry. It's true that the larger your buyer pool, the more likely you'll receive the final sale price you desire.  Lower prices encourage participation by as many people as possible.
2. The increase in buyer activity afforded by the lower asking price buyers acts as social proof to other prospective buyers that the opportunity is valuable. Remember, everyone wants what everyone wants.
3. Buyers who spent time with an opportunity early on are likely spend more time and effort trying to buy. They're playing not to lose.  If they've  spent time and energy investigating the opportunity, they're more likely to stay with it and pay more.

There is one caveat, however.  Gillian Ku and her colleagues found that buyers must know that other buyers are interested, otherwise you constrain your traffic and your lower asking price is less effective.  For example, if your retail opportunity is listed under office buildings for sale, you have a problem. Here's how you apply this scientifically proven method to commercial real estate.

• Start with a lower asking price.  Yes, it may feel awkward, but it works.
• Don't participate in a "no asking price" offering. You'll alienate buyers who need guidance in the opportunity and don't have transparency into how much demand exists for the property. Plus, it will upset them and they'll refuse to compete for the opportunity, perceiving it to be a waste of time.
• Make sure your commercial real estate broker provides your buyers and tenants with social proof for the opportunity by sharing metrics about lead flow, tours, proposals, etc.  Again, everyone wants what everyone wants.
• Never limit your offering to a narrow pool of buyers.  Ask your broker if your opportunity is being offer to his "list of buyers" or the entire market.  Many buyers and brokers like the limited pool of buyer approach because the broker doubles his commission and does less work.  The buyers have less competition among each other. Ultimately, you pay more.  Insist that your opportunity be made available to the entire market immediately to generate the highest interest level possible.

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Commercial Real Estate Investing Tip for Working with Brokers

Honestly, I confess that if you've used this expression "I'm just looking for a deal that makes sense," to share what you're looking for, it's not your fault. It's ours--the commercial real estate broker community. Here's a real estate investing tip. In the real estate investing advisory business, we believe that there are no bad prospects, only bad salespeople.  This means that if you've been frustrated with the lack of performance and results you've achieved from your conversations with commercial real estate brokers, then it's our fault for not asking you to be more specific about what you're looking for. Unfortunately, commercial real estate brokers accept that statement because it's easy. They'll add you to their database, possibly send you a list of properties from one of the commercial real estate listing services such as CoStar or Loopnet, and then leave you to fend for yourself.  After a few weeks, you haven't heard anything , so you repeat your investment property search--frustrating. Next time you call our office, we pledge to ask you to be more specific.  If we can help you locate what you're looking for, we will.  If not, we'll tell you and refer you to someone who may be able to satsify your requirement. And the next time you call on a commercial real estate broker, try this experiment.  Don't use the words deal, sense, cash flow, creative, good, add value, or upside.  Instead, describe the property type, location, type of owner, yield requirement and price range you're looking for and see what happens. Your specificity will produce more commercial real estate investing opportunities for you to consider and your commercial real estate investment broker will have a clearer picture of what you're hunting for and who to call first when they see it.

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Costly Mistake To Avoid When Investing in Commercial Real Estate

Many of you would like to close more commercial real estate deals but see your commercial real estate opportunities crushed when the first agreement is circulated. The problem is that too many commercial real estate investors make the mistake of mishandling the transition of the meeting of the minds to the written word. They short circuit their deal by circulating a written agreement that introduces new terms, pricing, and conditions that have not been discussed or agreed upon.

Here are 3 steps to ensure that your deal survives the transition of the meeting of the minds to the written word.

1.  Break down your agreement into business terms and legal terms. Negotiate your business terms in great detail.  Thoroughly. Create a term sheet to document the agreement.   Have all parties sign off on the term sheet. 2.  Prepare each party's expectations for legal term negotiations. Set expectations that the legal terms of the agreement will be revised so that your deal will have a greater likelihood of a successful outcome. 3.  If business terms reemerge, stop negotiating your legal terms and obtain consent from all parties to revisit your initial discussions. Be open and notify all involved that the conversation has changed.   You will build trust and emotional capital in your transaction that you can use to navigate challenges that will arise later in your deal. Once agreed, circulate a final copy of the written agreement for signatures and keep your deal moving.

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How to Price a Risky Tenant When Investing in Commercial Real Estate

When successful commercial real estate investors lease their commercial real estate to a tenant of varying creditworthiness, they adjust for risk by altering rental rates, security deposits, guarantees, and improvement allowances, not the fees they pay commercial real estate brokers. Often, commercial real estate investors confuse the tenant's risk associated with the commercial real estate broker’s fee.  Andy Zezas, SIOR, a well-respected tenant rep broker, explains that if the landlord perceives the tenant's to be high risk, he tries to withhold or reduce payout, and if he perceives the tenant to be low to moderate risk, he may pay a market rate. Andy describes this practice as asking the broker to guarantee the tenant's creditworthiness below:

As for brokers acting as guarantor of the tenant’s creditworthiness and performance of lease obligations, that’s about as absurd as brokers guaranteeing landlord credit and performance. Brokers are fee-for-service professionals, not credit analysts, nor guarantors.

Andy's right and here's why. Imagine that you are a bank. Let's call your bank LBCCIM Washington Bank.  You lend money to generate fees for profit, which keeps your investors happy and continually making deposits with you. Your secret is that you are a savvy commercial real estate banker and lend intelligently to 3 types of borrowers:

1. AAA credit company.  You like the certainty of knowing that this borrower pays the loan on time and satisfies the covenants agreed to in the mortgage and promissory note. Because of the certainty of getting paid, you offer this borrower a low interest rate.

2. BBB credit company. They pay their bills. Sometimes they're late and they've renegotiated loans in the past.  You're aware that you carry some risk with this borrower and you offer them a higher interest rate.

3. CCC credit company. They are high risk, yet fit your lending profile and you're eager to get some money on the street.  You make the deal.  What interest rate will they pay?

It’s simple. The higher the risk the borrower poses, the higher the interest rate offered.  Higher risk = higher reward. Here’s one consideration for you. Nothing above has changed, except that borrowers AAA, BBB, and CCC have been introduced to you by an intermediary (let's call him your mortgage broker).  He is aware of the risks associated with each borrower, yet he knows that they all meet your lending criteria. You and your mortgage broker have agreed to a fee, equal to a percentage of whatever loan amount you lend. Who, then, should you be spending your time negotiating with when you are reviewing the AAA, BBB, and CCC borrowers, your borrower or your broker? Commercial real estate landlords face the same dilemma with tenants for their vacant space and the brokers who represent them. The next time you're concerned about your tenant's risk profile, ask your real estate advisor to analyze their financial statements and guide you to accurately price the tenant's risk into your commercial real estate investment plan.

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How to Tenant Your Commercial Property at Closing

Ever dream of buying a commercial property for sale that's vacant and then tenant it the day you close? It's the best of both worlds.  You get the forced appreciation that the tenant creates and you buy at a value based on zero income. We've worked with investors who've structured such deals. Here are 4 tips on how they've done it: 1.  Find a broker selling an empty building and ask them about tenants interested in the property. Work the tenant relationships through the broker to purchase and tenant at closing.  Remember, most owners selling vacant buildings don't want to reinvest in the property, so they won't have interest in tenants wanting their space.  They want to sell. 2.  Find a broker with a tenant or two in his pocket in the market for space.  Offer to buy them a building when they find what they want.  When you're in the right place at the right time, you can hit a double, triple, or even a home run. 3.  Prospect tenants directly.  Call on your relationships with companies looking to relocate and offer to assist them as an owner-partner. You'll handle the acquisition and build out of what they need if they'll agree to commit to a long-term leasing relationship.  Retail developers who work with CVS, Walgreens, Walmart, etc. know what they're seeking. They find it, obtain commitment, then build it. 4.  Call local and regional contractors who contacted by companies pricing build-to-suit projects.  Offer to acquire the site and finance the construction. They earn fees. You keep the building and tenant. Our most successful transactions have involved repositioning empty buildings by obtaining letters of intent from tenants and then sourcing investors to purchase the property.  Our seller clients are happy to sell and our investor clients are thrilled at obtaining a building at a discount with immediate upside built into the acquisition because of the new leases we put in place.

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Cyrier Named to Banker and Tradesman's "New Leaders" 2009

Jeremy Cyrier, CCIM is 1 of 29 named to Banker & Tradesman's New Leaders in 2009.  The Banker & Tradesman Publication set out to find leaders at the forefront of cutting edge companies, who are their firm's top performers, and are entrepreneurs with a bent for innovation.  Their work is at the center of their organization's growth. The award was also given to those who have found ways to give back to their larger communities, participating in extracurricular activities and charities. Jeremy Cyrier, CCIM is the principal of MANSARD Commercial Properties, is a member of the CCIM Institute faculty where he teaches Financial Analysis for Commercial Real Estate, acts as Vice President on the New England CCIM Chapter Board of Directors, is a member of the Middlessex Reserve Deputy Sheriff Association, and is a member of the Jay W Levine 2010 Leadership Academy. Get free weekly email updates of this blog.