Commercial Classroom, back to basics: Overcoming objections, part 1 - by Ed Smith

This column is offered to help educate agents new to commercial and investment brokerage and serve as a review of basics for existing practitioners.

Objections are often statements not questions. A statement does not require an answer. Agents often over-react to a statement by a buyer or tenant. They may just be thinking out loud or considering qualifying issues. Showing them a building, the buyer may say “not sure this is big enough,” or “that’s a lot of money for this space.” Neither is a question– they will sort it out for themselves.

“With some work-at-home rotations we can fit here.” “This location should be worth the price.” With these types of objections, it is best to ignore their comments, but not them, acknowledge the comment, “I heard you” but do not respond to the statement. 80% of these objections will be solved by the client and go away. Caution: Answering an objection may create a defensive or confrontational reaction.

A true objection is something that is preventing a listing from being signed or a sale/lease from happening. In the later context it is a buying sign; there would be no objection if there was no interest.

Real Objections

There are two common objections we get every time we try to list a property:

1. Price: Owners think their property is worth more than market value.
2. Commissions: They think we get paid too much!

Value Objections

When the owner says, “Are you kidding, my property is worth $1,000,000,000,000.95!” Is that a perception issue? Is it really priced too high?

This objection to value is overcome by education and facts and should be handled in the listing presentation itself. To prepare, you need to update your “comparables” daily. Because there are fewer commercial transactions than residential, we need to look to both closed sales and leases and also what is currently on the market (competition) for our “comparables.” Create your own comparable files by checking the commercial listing services for new listings, reading the news and trade papers for news of closings. When you read of done deals call the agent and congratulate them and ask for the final closing prices.

Prepare to justify your suggestion of market value in your listing presentation. Find three or four similar type properties in your comparables–different size buildings are okay. Divide the building price by the square footage to determine the price per square foot. Show the client the math for each building and what the average sales price per square foot is for your area. Multiply the average price per square foot by the square footage of their building as the basis for your value assessment.

When the owner says, “My building is worth $_________.” Challenge them by questioning, “The comparables I just showed you don’t seem to justify your asking price. Perhaps I don’t understand something. Why are our numbers so far apart?”

Sometimes owners say, “Another broker told me my building was worth $________.” Answer with, “Why do you think an agent would tell you your building is worth more than these comparables show?”

“Maybe they are trying to get me to give them the listing.” “What’s your opinion of an agent who would inflate your buildings value just to get the listing?”

Properties that are priced right sells or leases. Overpriced properties waste your time, and you make no money. Are you prepared to walk away? Do I want you as a client? If the owners asking price is up to 15% or 20% over market, I may take the listing with a “hook,” but any higher over market I walk.

“I am certainly willing to try to sell/lease your building/space at that price. But I want you to agree that you will be willing to reconsider the price if the property/rental unit doesn’t sell/lease in 30 days.”

Better, “Frankly, I have to make a decision, if I want to invest my time and resources into marketing your property. Would you consider reducing your price to $_____ if we do not get any activity within the  first 30 days at your price?” Then write in your listing agreement, on __date__, listing price is reduced to $_________. Have owner sign so the reduction becomes automatic.

You can use these same techniques for leasing, be sure when comparing numbers you have the total cost per foot including base rent and all additional rent pass throughs.

Investment properties are compared using the capitalization rate (Cap Rate) of the properties. A Cap Rate is determined by the formula: Net Operating Income (NOI) divided by the value (price) equals the CAP Rate which equates to the Return on Investment (ROI). Prepare by finding and determining the CAP/ROI on three, four or more of your investment comparables. Remember as the price goes up the return goes down.

Ask the owner, “If you were buying investment property today what would be the minimum acceptable ROI to you?” They may say, “6.5% - 7%.” Then do the math using the NOI and their asking price to see what return they are offering to a buyer. “At the price you are asking your only offering a 3% return!” Educate – show them the math.

Also explain, “A lower return on the invest will require a higher down payment to finance. The higher the down payment required the fewer potential buyers.”

Next month in Part 2 we will look at overcoming commission objections.

Edward Smith. Jr. CREI, ITI, CIC, GREEN, MICP, CNE, e-PRO and CIREC program developer, is a commercial and investment real estate instructor, author, broker, speaker and a consultant to the trade.