In this article, “real estate transaction” refers to any action related to the purchase or sale of a property / real estate. This includes, for example, preparing the sale of a property, making and receiving offers, valuing and inspecting the property, and drawing up and signing the sales agreement.
In most transactions, advisors are used by both sellers and buyers. Today, a significant proportion of real estate transactions also take the form of indirect acquisitions, where a single property is sold either as part of a larger portfolio or as part of a company being acquired.
However, real estate transactions that take the form of a corporate transaction, such as the sale of real estate companies or real estate development projects, are not discussed in detail in this article.
Preparation of the transaction
The transaction process always starts with the seller’s decision to initiate the sale of a property, usually followed by offering the property for sale and marketing the property. This can take place in several different ways. In most cases, before marketing the property, the seller:
- determines whether the property is fully developed and marketable from the seller’s standpoint.
- creates a sales strategy together with the advisors.
- obtains or prepares an appraisal of the property to be sold.
- creates any preliminary surveys and sales materials deemed necessary.
Determining the value of the property and the target purchase price is an important step in the transaction. In addition to validating the price request, it helps the parties assess the justifiable value of the property to be sold. A wide range of factors, including the location, condition, size, yield, and amenities of the property, influence the determination of its value. At the latest, once the value has been determined, it is recommended that the seller assesses the need for a broker. It is advisable to have a property valuation carried out by an externally authorised valuer.
Potential buyers and contacting them
Generally, potential buyers are contacted in person, so expression of potential interest is immediate. This expression will be used to decide whether the potential buyer is willing to receive more detailed material on the property. However, contacting buyers can also be done through an intermediary.
As a rule, it is advisable to draw up a non-disclosure agreement (NDA) with prospective buyers before any material is provided to them. It is also possible that an interested buyer makes a preliminary offer for the property before the seller has even considered selling it. If the seller is interested in selling the property for the amount proposed by the buyer, it is common practise in these types of transactions to draw up a letter of intent rather than an NDA. The purpose of the letter of intent, in addition to the confidentiality provisions, is to grant the buyer a time-limited exclusive right to the transaction process.
Preliminary purchase offer
Making and receiving initial purchase offers is the next step in the transaction. At this stage, interested buyers make offers for the property and the initial price, subject to various conditions and reservations. If there are several interested buyers, a second round of offers can be organised, if necessary, in which the seller offers, for example, more detailed material for a limited number of the most potential buyers to familiarise them with the property and the possibility to increase the offer which has already been made. This may be done to reduce the risks that may arise during the due diligence phase by offering the buyer more information on the target already at the offer stage. After the bid round(s), the seller decides whether to accept the offer. If the seller accepts the offer, the transaction proceeds to the due diligence stage, where the final purchase price and other terms of the transaction are determined.
Due diligence process, final negotiations of the purchase price, and risk assessment
The due diligence process ensures that the buyer’s assumptions underlying the initial purchase offer are correct. In addition, the buyer assesses the suitability of the transaction for its own use, its investment strategy, and its future. The buyer’s goal is to assess and ensure that the target has realistic expectations. The outcome of the due diligence process will usually have an impact on, among other things, the structure of the transaction, the determination of the purchase price, and the seller’s potential liabilities towards the buyer. In principle, it enables both parties to avoid unexpected consequences and to agree on the terms of the transaction with sufficient precision.
Due diligence is not only about assessing the risks; it is also about identifying the positive aspects and opportunities of the transaction. The due diligence process also provides an opportunity to correct any shortcomings, ambiguities or uncertainties in the target before the transaction is concluded or to negotiate their impact on the purchase price.
During the due diligence process, the seller often has a good opportunity to present the property and its features and potential to the buyer in more detail. In other words, the due diligence process is an opportunity for both parties to justify their views on the purchase price, the condition of the property, its features, and the expected returns.
Final negotiations and sales agreement
The negotiations can be divided into two parts: the commercial negotiations on the value of the object of the transaction and the legal negotiations on how to agree on the issues, responsibilities, and obligations.
The sales agreement is, in principle, the most important document in a real estate transaction, as it serves as proof that the transaction has been carried out under certain conditions and that both parties have accepted its terms. In addition to due diligence, the form and content of the final sales agreement will of course be influenced by the competitive situation on the market, the location of the property, its condition, and many other factors.
It is advisable to make the sales agreement as precise as possible so that all parties to the transaction know what is expected from them and what they will receive in the transaction. A properly drafted sales agreement will also help to avoid any potential conflicts or ambiguities after the sale.