Brad Bonkowski and Andie Wilson: Commercial real estate lost: A tragedy

We were recently contacted by a retail property owner with a property totaling about 10,000 square feet with highway frontage. I immediately recognized the address, as the property had been on the market, listed with various brokers, almost continuously over the past 10-plus years. The property was 100 percent full with seven different tenants, but all of the leases had expired and were now month-to-month.

Over the years, the property had been listed as high as $700,000, and we had previously worked with potential investors who briefly considered the property, then quickly dismissed it because after a closer look, it was obviously grossly overpriced due to serious negligence. We’d worked with about 10 different investors who might have been good candidates to purchase the property at its true value, which would’ve been (depending on market conditions at any given time over the decade) between $200,000 and $300,000.

When the property owner called us, she was in a panic because there was now a tax lien on the property, and it was scheduled to be sold by the county at a tax sale in less than 60 days. We scoured our client base to find a cash buyer who could move fast — we work with many buyers like this, but these buyers are looking for deals, and typically won’t pay current market value. We were able to find a buyer and the property ended up selling at about $100,000, just a few days prior to the tax sale. This story offers a good case study and some valuable lessons:

Listing a property at an unrealistic value will discourage offers and serious interest.

Every property should be listed with an appropriate, qualified broker.

Professional property management is one of the most effective ways to increase your property’s value.

Deferred maintenance negatively affects a property’s value.

Let’s examine these four important lessons in order. First of all: list price.

We often go out to analyze a property and end up losing a potential listing to another broker who overstated the property value. If you interview three brokers and are given three different property values, say in this example — $300,000, $400,000, and $700,000 — we would encourage you to fight the urge to go with the broker who threw out the highest number. We call this “buying a listing,” where a broker gives you an unrealistic price knowing you’ll get excited about it, and then he’ll be able to put his sign on your highway frontage, and pick up calls that will lead him to other property sales. This practice is a great disservice to a property owner. It creates unrealistic expectations and doesn’t help the property owner achieve the goal of selling the property. Instead of taking the bait of an unjustified high value, ask each broker to provide actual comparable sales and/or an income and expense analysis to prove to you the current market will bear the value they’re suggesting. If the broker who valued the property at $300,000 has some good comparable sales and financial analysis to back up that number, but the other two brokers don’t, and instead just reassure you “they know the market despite recent sales numbers,” be wary.

Another mistake the property owner made over the decade he had the property on the market was he had it listed with residential agents instead of commercial agents. The property was exposed to residential buyers through MLS (multiple listing service), but was rarely exposed to true commercial buyers or agents through Loopnet, which is a type of commercial MLS system commercial agents use throughout the world. We don’t lease or sell residential property, so when we get calls about residential properties, we refer those calls onto residential specialists who transact those types of properties to be sure those residential transactions are handled properly. If you’re looking to lease or sell a commercial property, are you inquiring with the most qualified broker? Ask the broker how many commercial deals they have transacted in the past 12 months. In Nevada, we’re licensed to sell or lease any type of property, but that doesn’t mean we should. A broker does their client a great disservice when they stray from their area of expertise, to the client’s detriment.

The final and two most important lessons we saw through this transaction are the value of professional property management and the importance of properly maintaining a property. This property owner, based in Sacramento, hadn’t visited the property for more than 10 years. During this time, when a tenant had a plumbing or roof leak, or any other maintenance issue, their only option was to fix it themselves. As a result, the property suffered from serious deterioration. An inspection revealed it needed a new roof, new asphalt, paint and siding in some areas on the exterior, there was a deck that was unsafe, and countless other property maintenance issues. Typically, if there’s a plumbing leak that can be fixed for $100-$200, but instead it’s fixed with duct tape, 10 years later that previously easy fix has turned into a fix costing potentially thousands of dollars. Since the property owner was out of the area and didn’t visit the property, he could’ve prevented the dilapidation of the property by hiring a local commercial property manager to oversee the property’s condition. But the property owner was focused on spending as little as possible on the property, so instead of paying management fees over the past 10 years, he saw the property value decrease by hundreds of thousands of dollars as a result.

The morals of this disturbing story are pretty evident: If you’re going to own real property, it needs to be managed and maintained properly. Saving $100 today may mean giving up $10,000 in the future. We’re reminded of the adage “stepping over dollars to pick up dimes,” and it doesn’t pay in the world of real property ownership. Also, use real estate brokers who are experienced in transactions like the one you’re requiring, so you know you’re working with a true specialist, and not just a Nevada real estate licensee who’s willing to learn how to transact a new property type at your expense.

Brad Bonkowski, CCIM and Andie Wilson, CCIM are owner/brokers of NAI Alliance Carson City, a commercial real estate brokerage. They can be reached at 775-721-2980.