When It Comes To Commercial Real Estate, Experience Matters—Here’s Why
I was out golfing with a colleague of mine the other day who was in the midst of hiring a new financial planner. His previous planner had recently retired and recommended his young apprentice who, while new to the profession, came with a host of academic qualifications including a PhD in economic theory—talk about a numbers guy! His other choice was a recommendation from a neighbour (a neighbour with a slightly nicer pool) whose planner couldn’t quite match the academic achievements of the other candidate but had 20 years of experience and, according to his neighbour, had consistently delivered positive results.
He’d received thorough proposals from each and had been mulling over the decision for weeks. Lightheartedly, I teased, “Jeez Bill, make a call already!”
He laughed. “You’re right, I need to make a decision, but this is my life savings, you know? I want to make sure I do my due diligence.”
Setting up for my shot, this statement made me miss the ball completely. I turned to him and exclaimed, “But Bill, you let your son-in-law sell your commercial property, and that’s worth three times your savings!”
He laughed again. “No offence, Steve. I know this is your business and all, but real estate isn’t like investment, it doesn’t require the same level of expertise. If it did, why would people only need a license to practice?”
I can’t tell you how often I hear this refrain in my business. The second part I covered in a recent blog post, but the first part is often not something people realize until after a deal has gone wrong. And when I say “a deal goes wrong” that often involves the loss of tens of thousands of dollars, sometimes millions.
The truth is experience counts—especially in real estate, doubly so in commercial real estate.
If you’re on the fence about whether or not experience counts in commercial real estate, consider the story of Sandra (not her real name) who entrusted one of the most important financial decisions of her life—opening her own business—to not only an inexperienced agent but also an inexperienced residential agent.
Why Experience Counts
There’s little that compares to the thrill of opening your own business. The excitement, the freedom...the responsibilities. It’s not an easy path and certainly not for everyone, but those who can make a go of it are often well rewarded for their efforts.
Such was the case for Sandra.
Sandra has a unique skillset delivering therapy to children that are hard of hearing or even completely deaf. A noble cause, to be sure, but also a limited target market and little room to scale growth as Sandra's expertise is what customers sought.
To help her prepare to leave the 9-5 grind and launch her own business, Sandra sought the help of several mentors and professionals who helped her develop a business plan and sound strategy for success. However, when it came time to find a commercial space for her business, Sandra enlisted the help of her old co-worker’s boyfriend who had recently received his real estate license and had completed a couple of residential deals.
He was able to find an incredible spot for her. It was much bigger than she had wanted, but her agent encouraged her that it just meant she had room to grow her business (given that Sandra’s business model has a limited capacity as she is the sole provider and cannot create more time out of thin air, this was bad advice). Agents with experience in commercial deals know there is a process to leasing commercial office space. The process is critical to ensure the client does not end up owing more than they can afford and helps to cover any tenant improvements that might be required. Failing to understand this process can potentially lead to the tenant struggling to make their business profitable. Remember, the two major expenses to every business are wages and rent.
The larger space, while in a perfect location with many of the must-have amenities Sandra was looking for, cost $88,000 per year to lease. After reading Sandra’s business plan, we realized that her best-case scenario for income the first year was $90,000—that’s if everything went right! Nevermind the fact the inexperienced agent did not allow for the cost of the tenant improvements into the yearly rent, which in this example would have been material. There was no way Sandra would be able to lease this space unless she was able to increase her business. The question then arises: Can she ever increase her billings enough to make the business profitable?
Bad Planning or Bad Advice?
Sandra did end up opening her business; however, eight months later, the doors were shuttered. I don’t know for sure what caused the closure of the business, but if I was told it was due to financial difficulties, I wouldn’t be surprised.
The worst part for Sandra is that her business didn’t fail. She simply took bad advice. Her agent wasn’t intentionally trying to mislead her, he probably believed he was giving her genuinely good advice but lacked the experience needed to understand that his attempts to get her a “better deal” were actually sabotaging her long-term prospects.
This is why experience counts. Any agent can make sure the right signatures are on the right pages, but it takes an experienced agent to find the right space for your business.
For your next commercial real estate deal, reach out to the professionals at MCRE to ensure you receive the best advice experience can deliver!