Choosing a Broker

Reinvesting Ranch Sale Proceeds into Commercial Real Estate: 

Choosing the Right Broker/Advisor

Structuring the sale of your family farm or ranch to optimize tax-saving strategies, then using a 1031 exchange to reinvest in commercial real estate, requires specific expertise.  Choosing a broker/advisor to guide you through this process is an important decision -- even more so if your farm or ranch represents a significant portion of your wealth.

Anyone seeking to advise you through this process should be qualified, experienced and trustworthy -- and should act as your advocate.  To evaluate potential candidates, use this guide.

Investment Criteria

Before hiring a broker, ask what investment criteria they use for determining whether a property is suitable for you.  This may help you differentiate the salesmen from the true advisors. 

At Top Hand, we consider the following:

• Quality of the tenant’s credit
• Strength of the lease and its specific terms
• Strength of the local market demographics
• Location within the market
• Suitability of the property, in light of your exchange needs, financial goals and comfort with debt
• Building re-use -- in a worst-case scenario, if the tenant were to move out, what options would you have to re-lease it?

Benefits and Risks

Every investment has benefits and risks.  Commercial real estate is no different.  When you’ve hired a broker to assist you with investing in commercial real estate, they should be looking out for your best interests.  This includes assessing the benefits and risks of the properties you are considering for purchase.  Assessing the benefits is easy.  A broker provides true value by assessing the risks, as well.  If your broker only highlights the benefits of a property and not the risks, they either don’t understand them, or they don’t care.  In either case, you should find a new broker.  Top Hand will always give you our professional assessment of the benefits AND the risks of a property.

Due Diligence

This is the most critical aspect of the process, and frankly, can be very time consuming and tedious for a broker.  Perhaps that is why some brokers take this responsibility less seriously than others.  At Top Hand, this is where we earn our keep.  We come from previous careers where paying attention to detail and critical assessment was part of the job, and we come by it naturally.  Our due diligence process is detailed and comprehensive -- to the point where some sellers and their brokers have complained that we go overboard.  Of course, we’re not trying to serve them -- our only concern is our clients’ best interests.  To that end, we have had several of our client’s attorneys state that our due diligence is the most thorough they have seen in the business.  Bottom line:  We take the due diligence process seriously.  And, if at any time we discover an issue with a property that cannot be satisfactorily resolved, we will recommend that you walk away from the transaction.

References

Ask for references, then call those folks and find out about their experience with the broker.  Some questions to ask include:

• How was your overall experience?
• Did they seek to understand your situation and what you were trying to accomplish?
• Did they explain the risks of the properties, as well as the benefits?
• Did you trust the guidance they gave?  Did you feel they were looking out for your best interests?  How so?   
• How was their communication process?  Did they keep you informed?  Were they available and responsive?  Even during evenings and weekends when necessary?
• Were they willing to work with your other advisors, such as your attorney and CPA?
• Were they responsive to your concerns?
• Would you do business with them again?

Granted, no broker is going to give you references of anyone who may provide a bad reference, but you would be surprised by the information you can acquire simply by asking a few questions.  We will be happy to provide you a long list of folks who you can speak with about their experience with Top Hand.

Specialization

Hire a broker who specializes in the type of real estate you seek.  Be wary of the broker who will find you a house, sell your ranch and represent you in finding commercial real estate.  Those three segments of the real estate market are very different and, typically, a jack-of-all-trades is master of none.  If you’re going to invest seven figures into a commercial property, work with a broker that specializes in the commercial real estate sector. 

At Top Hand, we do one thing:  Assist buyers in purchasing high-quality commercial real estate investments across the country.  More specifically, we specialize in helping folks who are selling farms and ranches complete a 1031 exchange into those properties.

Locating Properties for You

Ask a broker how they will find properties to present to you.  At Top Hand, we have access to commercial listings across the country, and have also developed a network of brokers and developers from whom we can access off-market deals.  For a typical client, we literally review hundreds of properties in order to find a handful we think are best suited to our client’s needs and goals. 

1031 Exchange

If you’re completing a 1031 exchange, you will be best served by a broker who is intimately familiar with the 1031 rules and requirements, which can be complex.  A disqualified exchange can result in significant tax consequences.  Beyond just meeting the rules, you also want someone savvy enough about 1031 exchanges to employ strategies to reduce the inherent risk of an exchange and help ensure that you maintain options and leverage throughout negotiations with sellers. 

First as a CPA and now at Top Hand, Jack Sauther has been advising clients on their 1031 exchanges for over 25 years.  Additionally, he has performed many exchanges through the years for his own investment real estate portfolio.  We are experts in managing our clients’ exchange processes, and will ensure that all required timelines are met and suitable backup properties are identified as necessary.

Fiduciary Responsibility

A broker has a fiduciary responsibility to look out for the best interests of their client at all times.  Some brokers take this duty more seriously than others.

At Top Hand, looking out for our buyer clients is our hallmark.  We are “big picture” people, and operate with full transparency and disclosure.  There is no better way to exemplify this than having you speak with our clients.  They will vouch for our integrity and explain how we served their best interests during their transactions.

Review of Legal Documents

Your broker should be reading all applicable legal documents that are relevant to your commercial property transaction.  While we assume all brokers certainly read the purchase and sale agreement (PSA), not all of them review the lease, governing documents and title commitments, etc.  Some prefer to leave this responsibility to the attorney.   At Top Hand, we always review all relevant legal documents because these can, in large part, determine the value and suitability of an investment.  That said, we are not attorneys -- so we insist that our clients be represented by a competent commercial real estate attorney who performs a legal review of these same documents.  We then review our findings with the attorney as part of our due diligence process.

Experience

Your broker should have sufficient experience in order to represent you well.  They should have the connections within the industry to find the best available properties to present to you.  Experienced brokers will be skilled negotiators and will quickly be able to assess the pros and cons of a particular property.  They will have connections with third-party professionals such as lenders, appraisers, attorneys, building inspectors, etc.  They will be skilled at reviewing legal documents and be able to anticipate potential problems before they arise.  Beware of the brokers who talk a good game, but in reality fall short.  At Top Hand, we have been assisting agricultural families completing 1031 exchanges and investing in commercial real estate since 2004.  Additionally, we have been active real estate investors since 1991.

Communication

Communication is one of the most important aspects of the broker’s work.  Timely and consistent communication is especially important with folks who are completing 1031 exchanges due to the deadlines required.  At Top Hand, we communicate through a combination of telephone calls and emails throughout the 60 to 120-day transaction cycle, which is the time we begin searching for our client’s investment properties to the closing dates of those properties.  During this period, you will hear from us nearly every business day, and sometimes on weekends, and will always know the status at every step of your transaction.

Client Familiarity

It’s critical for the broker and client to “be on the same page”.  The broker should have a deep understanding of your situation and what you are trying to accomplish.  Our first step is always to meet with you to make sure we gain a full understanding of your needs, goals, fears, investment return expectations, risk tolerance, and much more.

Legal Representation

Beware of the broker who tells you that you don’t need legal representation.  Some brokers apparently feel that they can expertly negotiate the purchase and sale contract, and competently review the lease, governing documents, survey and the title commitment, with all of its related documents.  Either that, or they simply want to control the process to ensure that no attorney mucks up their deal -- and their commission.

At Top Hand, we believe it’s important to know your strengths, as well as your limitations.  While we review all of the above documents, and while we are skilled in understanding them, we are not attorneys.  Thus, we insist that our clients be represented by attorneys who have significant expertise in commercial real estate.  When you’re spending seven figures on a property, it simply makes no sense not to.

Client’s Professional Advisors

A broker should offer to keep your professional advisors (e.g., CPA and/or attorney) in the loop through the commercial property investment process.  If your broker balks at this, or tries to talk you out of keeping your advisors informed, find a new broker.  Our viewpoint is the more eyes and ears the better, and we always offer to keep our client’s other personal advisors informed throughout the process.

Representation – Dual Agency

Dual agency occurs when the broker represents both the Buyer and Seller in a transaction.  This can arise when the broker goes direct to the Seller and there is no listing agent involved.  Inherently, there is a conflict of interest.  It is not possible to truly represent both the Buyer’s and Seller’s best interests.  Some brokers see no problem with dual agency.  At Top Hand, we will never act in a dual agent capacity.  We will always act as advocates for you, our Buyer client.

Investment Experience

While it may not be critical for a broker to have significant real estate investment experience to properly represent a Buyer of commercial real estate, it can be an advantage.  At Top Hand, Jack Sauther has been an active real estate investor since 1991, and either owns or has owned investment properties representing the following sectors:  farm and ranch, multi-family, retail, office and residential lots.  When we’re analyzing investment properties, we step into the shoes of our Buyer clients and ask ourselves whether we would buy these same properties.

Added Value

Another important consideration when deciding on a broker is identifying what “added value” they are able to contribute to the process.  In other words, beyond the normal transaction responsibilities, can a broker contribute anything substantive that sets them apart?  At Top Hand, in large part due to our backgrounds, we are able to add value in many ways -- beyond what has been discussed previously:

• We approach our job more from an advisory standpoint than a transactional standpoint.  We believe in looking at the big picture and assessing your overall situation.  In our opinion, the decisions you make related to your ranch sale and commercial property reinvestment should be made relative to your cash flow, liquidity and diversification needs, current debt status, other assets/investments, etc.  We will address this with you and talk through the different scenarios.
• Propose and discuss tax-saving strategies related to your property sale and reinvestment, as applicable.  We always do this in conjunction with your CPA and insist that they are part of this process.
• Prepare tax and cash flow projections based on various “what if” scenarios.  This is particularly valuable to our clients when deciding how much to exchange and how much cash, if any, they should take out of their sale for liquidity and diversification needs.  Again, we insist this information be shared with your CPA, as they know your tax situation better than anyone.
• For those clients who are seeking financing, we are able to leverage our close relationships with various commercial lenders to shop the best loan terms for our clients.
• Our relationship with you won’t stop once your transaction has closed.  We will continue to call you periodically throughout your property ownership to check in and answer any questions you have.  And if you need assistance with selling the property, finding a tenant, financing, etc., we’ll be happy to introduce you to folks we know who can provide those services.  Bottom line:  We are here as a resource for you, long after your transaction has closed.

We’ve provided the information in this Straight Talk guide for general educational purposes.  It is not intended as specific tax or legal advice.  Please consult a professional for specific advice regarding your particular situation.

© 2016 Jack Sauther & Diana Sauther