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For Sale by Owner Commercial Property: How It Works

Published: 08-06-24 Category: Selling

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You've probably seen a residential house with a yard sign proclaiming it's For Sale By Owner. This means that the homeowner has decided not to work with a real estate agent for one reason or another.

While most commercial real estate (CRE) is sold through an agent or broker, you may encounter a building that's being offered for sale by its owner. This is the exception rather than the rule for a variety of reasons.

In addition, buying a commercial building with tenants in place will be more complex if and when it's put on the market as a For Sale By Owner (commonly shortened to FSBO). But even if the building is empty, there are more hoops to jump through than for other types of purchases.

Let's take a minute to look at commercial FSBO sellers' possible reasons for going it alone.

Why Sell Commercial FSBO?

The primary reason is simple: the seller won't be paying a commission to an agent or broker.

Most owners are glad to pay a commission to a broker or agent because of the various tasks they do to earn it. However, the seller may have a real estate license or specialized knowledge of commercial real estate (CRE) transactions.

Other possible reasons why a building's owner has decided to sell without the help of a broker include:

The seller wants full control over the process.
There's no need to sell the building quickly.
The seller is convinced that it's a seller's market.

Next, we'll examine the main topic of this article: how the FSBO process in commercial real estate works.

FSBO in Commercial Real Estate: The Basics

An FSBO transaction requires the property owner to do much more than prepare a sales agreement. They'll also need to list the property for sale in places where potential buyers will learn about it.

This approach differs from the conventional method of selling properties through commercial real estate brokers. The broker finds potential buyers, markets the property if necessary, and negotiates the finer points of a sale.

There are several other major differentiators to consider, such as the following.

FSBO Sales vs. Brokered Sales

In FSBO transactions, buyers communicate directly with property owners. Ideally, this will simplify negotiations and help buyers get faster answers to questions. Buyers will hear straight from the source instead of waiting for a broker to investigate and return their call.

As mentioned before, one of the primary motivations for sellers to opt for an FSBO transaction is to avoid paying broker commissions, which typically range from 4% to 8% of the sale price.

An FSBO transaction may result in a lower purchase price for a buyer, as the seller may be willing to share the savings gained from not paying a broker commission.

With no broker on hand to assist, buyers must be prepared to research and complete due diligence on their own. If they aren't able to do this, the buyer may need to pay a CPA, accountant or attorney to assist with this step.

Due diligence for this type of transaction will include property inspections, title searches, financial analysis, and research of the property's desirability to future tenants.

Any type of business transaction may need to have some points discussed. Negotiations during an FSBO transaction can be more personal, especially if the owner/seller has no prior experience selling a property.

The owner may also have an emotional attachment to a property, especially if it housed a family-run business, something a buyer should keep in mind if this becomes evident.

FSBO properties can be difficult to find, as they are generally less widely marketed than those listed with brokers. Buyers might need to be more proactive in their property search.

For example, an FSBO buyer may see no difference in putting out a For Sale By Owner sign in front of a commercial property that resembles what you'd usually see in front of residential properties. The seller may also stick to advertising on Craig's List and other free venues.

While buyers can usually handle these situations, financing the purchase may present challenges if the buyer doesn't plan to pay cash.

Financing an FSBO Transaction

There are several ways a buyer can finance a commercial FSBO property. Here are some of the most popular ones.

Seller financing is not uncommon with FSBOs. This may benefit buyers who may not qualify for a traditional mortgage. Seller financing can take various forms, such as a mortgage held by the seller or a lease-to-own agreement.

Traditional financing can be confusing, since there is no CRE broker involved to provide details of qualifying guidelines. Generally, buyers should have a good-to-excellent credit rating and a substantial down payment to qualify for a commercial mortgage, no matter who is selling.

Alternative financing is sometimes possible. Buyers and sellers might agree on arrangements such as graduated payment plans that align with the buyer's projected income from the property.

Now that you have a better picture of a typical commercial FSBO transaction, here are some areas where buyers may need to find solutions for the potential risks involved when working without a broker's advice.

Common FSBO Speed Bumps

Here are details of some reasons why some buyers, especially those with little or no previous CRE experience, will run into problems when settling an FSBO purchase.

Property valuations are more complex than for most residential properties, as market analysis of the property's future profitability is a factor.

Due diligence can be complex, even for smaller buildings. Some FSBO buyers may end up spending a considerable sum to guarantee that a purchase doesn't include problems.

Other concerns covered by due diligence may include environmental regulations, city and county codes, and estimates of future traffic/tenants.

Existing tenants may require extensive paperwork, as a buyer may need to re-negotiate the details of every tenant's lease after studying their existing contracts.