If you’ve never sold a commercial building before, you need to understand beforehand all of the confusing closing costs associated with the sale, which will help you minimize your losses.
Read our comprehensive and detailed guide to learn what selling costs to expect and how to best manage those expenses in the process of selling your commercial property.
List of the Closing Costs for Selling a Commercial Property
What Are Closing Costs?
By definition, the costs associated with the sale of a building (‘closing on a property’ in the real estate slang) are referred to as ‘closing costs.’ Both the buyer and the seller have such expenses. This guide only addresses the seller’s typical expenses, such as:
- an appraisal
- an inspection
- any repairs
- an agent/broker commission
- marketing expenses
- any outstanding indebtedness against the property
- any title expenses and other selling fees
Please note: These costs are typically associated with a traditional real estate sale. In an off-market sale to a cash buyer such expenses can be significantly reduced or completely eliminated.
Setting the asking price for a commercial property can be a complex calculation. Typically, the seller hires a professional real estate appraiser to help with the process.
The value of a commercial property is generally determined by:
- a direct comparison approach—comparing the building to similar properties
- a cost approach—basing the value on the building’s replacement cost
- an income approach—valuing the building based on its income stream
- any combination of the above
Expect to pay up to $5,000 for an appraisal of an average size commercial property. But a large building can cost $10,000 or more.
In case there are any concerns about the property’s condition, the seller can have the facility inspected by licensed commercial property inspectors to identify any unknown issues that need repair.
It may be beneficial for fixing all important problems in advance, setting a more accurate asking price, and saving time on negotiations with the buyer and their mortgage lender.
However, an interested buyer usually orders their inspection too. In this case it’s normally done at their expense.
A typical inspection will include documenting:
- roof condition
- structural integrity of walls, foundation, and slab
- electrical components
- HVAC equipment
- elevators, stairs, entrances, and exits
- code compliance
- tenant improvements
- driveways, parking lots, and sidewalks
- irrigation system
- site drainage
- and more
A very rough inspection cost estimate is $0.1 per square foot on average. But commercial buildings vary so widely that the complexity of the work an inspector must complete is very different for various room types. Normally, various kinds of rooms have their own rate.
Deciding on what repairs to make to the property’s interior tenant space should be based on the building’s use.
In general, repairing occupied areas should be limited to problems with electrical or mechanical systems. Otherwise, as long as the current tenant is happy, the condition of their space will not usually be a concern to a potential buyer.
The repair of the building’s exterior and common areas is recommended. For example, the roof of any structure should be free of leaks, and the bathrooms should be in good working order.
When getting bids for any necessary repairs, use the inspection report as a reference.
Agent/Broker Commission Rates
The average commission for a commercial real estate agent is between 4% and 8%. All of the agent fees can go to one agent/broker if they both list the property and find the buyer. But often there are two brokers involved: on the buyer’s side and on the seller’s side.
The commission is paid to a seller’s broker and then it is split between the brokers (usually equally but not always. The broker commission is based on the full sales price of a property.
A property sells for $500,000. The commission rate specified on the broker’s contract with the seller is 6%. So the total commission paid is $30,000. If multiple brokers are involved (seller’s and buyer’s broker), this amount is split between them.
#1 Property Staging
At the least, a commercial building should be cleaned up before showing it to a potential buyer. But staging a small office or retail space can cost as little as a few hundred dollars, and it will help you to sell your property quicker and for a higher price.
Staging a high-end urban office, however, can cost several thousand dollars.
#2 Photography and Videography
High-quality photography and videography, delivered in a digital format may cost from a couple hundred to a few thousand dollars depending on your property size and requirements.
Commercial real estate photographers charge differently for their services. Some charge per hour while others per job. Rates for special kinds of photos such as dusk or twilight pictures are higher than for regular photos.
Be aware that some agents charge an additional fee for advertising while others include it into their commission. This could be another few hundred to a few thousands of dollars. Before signing any listing agreement, verify the cost of any advertising markup.
Past Due Utility Bills
In addition to paying utility costs in the common areas of the property, some building owners pay their tenants’ utilities. The owner must pay any unpaid utility bills before trying to sell the building.
When a tenant with unpaid utility bills vacates a lease, the building owner could have other problems. Unless the lease agreement stipulates that the tenant is solely responsible for utility costs, the owner could be on the hook for delinquent payments.
Before the utility company restores services, the building owner might have to pay past due bills. If you are current on utility bills, you should just pay them up to the closing date.
Similarly to utility bills, any property taxes for the period up to the closing day should be paid by the seller before selling the building.
Most buyers aren’t interested in purchasing commercial real estate with tax issues. So all tax issues should be resolved in advance.
Before selling a commercial building, any issues with the title must be cleared up, such as:
- tax liens
- contractor/mechanics liens
- breaks in the chain of title
- incorrect legal description
- reinterpretation of law
The property owner might not be aware of every potential problem with the building’s title. For a fee (typically less than $1000), a title clearing service can be hired to identify any unknown issues.
Once identified, the building’s owner can take care of those issues before the sale.
Title insurance is meant to benefit the buyer of a property. For example, another party could come forward with a legitimate claim to the building at a future date. If so, the title insurance company pays the buyer the face amount of the policy. In the event of a title problem, title insurance could also help prevent a lawsuit against the seller.
Normally, the buyer pays for title insurance (based on the value of the property). But this payment is included in the escrow paid by the buyer before the closing, and then is deducted from the seller’s proceeds.
And, as with many other fees, in various circumstances the buyer may negotiate all or part of the cost to be paid by the seller.
All title costs are typically 1% of the sales price. This includes a document preparation fee, deed recording fee, title insurance, and an escrow fee (escrow fee is essentially what the title company charges). So, if you are closing on a $1,000,000 property, title costs will be roughly $10,000.
A UCC (Uniform Commercial Code) filing refers to a UCC-1 financing statement. A creditor gives legal notice that they have or might have an interest in the business property of a debtor.
UCC search services specialize in searching databases for any UCC filings against a property. Since a title clearing service should also report these same UCC filings, there’s little reason to pay for UCC searches additionally.
An ALTA (American Land Title Association) survey is a comprehensive boundary survey that also includes:
There’s little need for an ALTA survey in newly developed areas. An ALTA survey becomes more important for buildings in highly developed urban areas. In densely populated places, boundary and easement problems can occur when buildings touch each other or share a common wall.
An ALTA survey can protect the seller from a future lawsuit, should a boundary dispute develop between the new owner and the adjacent property owner. The typical cost for an ALTA survey is $2,000 to $3,000.
Most states levy a transfer tax for each real estate transaction. And some counties and cities add their variation to the state transfer tax.
Before selling a commercial property, the seller should check with the state and county for a tax estimate. The tax is usually due at the time of closing.
A commercial real estate sale can be a complicated legal process. It is critical for the seller to enlist the help of a closing attorney throughout the transaction.
The attorney should put in place a legal framework for the entire process, to protect the building owner from a legal action for any past, current or future issues with the property.
The attorney should then serve in a clean-up role—making sure no issues escape legal supervision.
Attorneys charge a flat fee of a few hundred to a couple thousand dollars on average. For a cost estimate, contact recommended commercial real estate lawyers in your area.
Don’t overlook the cost of moving equipment and furniture from the property. Also consider temporary storage expenses, if necessary.
Most moving companies will provide an estimate, but keep in mind these estimates are frequently lower than the actual cost. Typically, a small office or retail space can be relocated for under $10,000.
Removing forklifts and other heavy equipment from an industrial property requires a rigging crew. Be sure to get an estimate because rigging services can be costly.
If you are leaving your equipment behind, this still may incur a cost to dispose of it, if the buyer doesn’t need it. This is negotiated before the closing and may be included in the closing costs.
How to Avoid Costs and Fees for Selling a Commercial Property
Not only are the closing costs associated with a commercial property expensive, but they also take time to complete and supervise. If you don’t have time or money to invest upfront in selling your property with a commercial real estate broker or agent, give us a call.
PropertyCashin is a group of real estate investors who have been buying commercial real estate throughout the US for years. We are ready to buy your property for cash in a matter of weeks and even help you with moving.
You can request a cash offer on your commercial property on our site or over the phone and get it from us within just 24 hours of our visit. Once you accept our offer, start at the top of this guide and cross off every item on the list.
Our all-cash offer is the amount you get at closing and walk away with. And you won’t be waiting for months to close. In only a few days from the signing of the purchase agreement, you may have cash for your commercial property.
As the Lead Commercial Real Estate Analyst at PropertyCashin, Sam McGrath is responsible for the company’s national sales strategy. Prior to his position with the company, Sam served as a Surface Warfare Officer in the United States Navy. Further, Sam was the National Recruitment Manager at Maxim where he expanded the Maxim healthcare brand nationally. He has over 8 years of experience in creative real estate investing. In addition, Sam has bought and sold commercial and residential property in over 42 states. Sam has a bachelor’s degree in business administration and marketing from Texas State University.