Is "comparable sales" a good approach for setting list price?

Question

I'm working on listing a commercial property for sale. One of the brokers I'm talking to prepared a doc showing a comparison between a comparable sales approach, and an income (cap rate) approach, to estimate value per square foot.

The two values are fairly different, with the income based one being the lower of the two, so they're recommending going forward with the comparable sales approach and listing at that price.

My concern is, what if those other sales that we're comparing to were sales to investors shopping on an income basis, which means it's really not an apples-to-apples comparison? How does one determine if it makes sense to go with that higher "comparable sales" value, or if the lower value is more realistic?

I'm leaning towards going forward with it. Worst case, we pivot and lower the price if needed. I just want to make sure they're not deliberately over-estimating, in an attempt to lure me into choosing them over other options. WWYD?

Henry Clark · Answer

Which pasta is better.  They have the same Gorgonzola sauce.   The Gnocchi is fluffier than we have had which is nice. Versus doughy and heavy like most. The Ravioli was stuffed with pumpkin.  Tasted sweet.  A light thin dough versus thick.  Can’t really compare the two.

1.  Age of roofs.  Flat Membrane and rock versus metal with slow pitch.     One needs to be replaced in 2 years.2.  Hvac.  One has splits.  The other has central with ducts.  Utility is a lot higher on one due to one is spray foamed versus blown.     3.  One has 12 parking spots which is fine and the other has 20 which is not enough.

4.   Access.  One had VPD of 15,000 and the other has VPD of 70,000.  The 15,000 is on a two lane road at 35 mph.   The 70,000 is 4 lane highway on the backside with turn around 1/2 mile down at 65 mph.

5.  Road access.  One has turn thru lane from the opposite side. One there is a boulevard in the middle and no turn around lane for 2 blocks. 6.  One has permitted billboard road sign.   The other one can’t be permitted. 7.  One has complimentary kid businesses and the other is a restaurant with hardware stores next to it. 8.  One is contractor buildings where customers never come and the other is retail.

Need more detail.

Valuation methodology for commercial is not normally comparables.   That is for housing.

1.   Cost basis, income basis, and yea sales comparison.  But more weight is placed in commercial in the income basis.

2.  Who did the income approach?  Based on history?  The year before I paid the full year property taxes and insurance early. This year none.  No management costs in the prior owners model versus yours.  Will property taxes go up after the acquisition? Is this a leased property?  How long and what are the terms of the lease?  Great lessee USDA regional office for 7 years remaining.  One month cancellation notification clause.  .    Get a new realtor.

Plus we really can’t help you.

Bowling alley, restaurant, doctors offices, paint store, etc. They all have different considerations.

Patricia Steiner · Answer

Comparable Sales in itself is meaningless...no two properties are exactly alike so those sales need to be adjusted to make them 'comparable' to your property - aka Adjusted Comparable Sales is the method that appraisers and brokers utilize to establish valuation using this method.  The Income Approach is used by appraisers and commercial real estate brokers; 'It is based on the expectation of future benefits. This method of valuation relates value to the market rent that a property can be expected to earn and to the resale value.' (End).  There is a formal process that is completed to determine valuation based on both methods. Ask to see the calculations used (actual document) - the adjustments made, the current to future rent forecasts.  If you're using a residential realtor, the transaction will be a challenge from start to finish...it's a different skill set altogether.  Ask for documentation on how the list price/valuation was determined.

Evan Polaski · Answer

@David Kim, to echo a bit of Cason's comment: there are a lot of people on these forums that come to the Commercial Real Estate page and then are posting about a 5-unit multifamily, hence Cason's comment: what kind of property is this: retail strip center, mixed-use property, 5 unit apartment, warehouse, etc.

Additionally, what kind of broker is this?  Is this a residential broker that you know, so you asked them to list your 20,000 sq ft warehouse?

At the end of the day, I would get multiple broker opinions, not only on the listed price, but how they plan to market the property, their fees and why they recommend the list price.  And make them all defend their pricing strategy: "I also spoke with this other broker, who recommended that I go with a sales comparable price, because it is higher.  Why are you not suggesting that?"  Use some tact here, so as not to annoy all of them and cause no one to get your listing, but to understand each person's reasoning.

Cason Acor · Answer

@David Kim I’ll need a little more info. What specifically is the commercial property you’re wanting to sell? Is your property fully occupied? Will you be marketing it as an investment sale? If it’s fully occupied, how does the current rate fair in comparison to market rates?

I’m a commercial agent that specializes in investment sales. If what you’re selling is an investment property, than the income based approach is what should matter most to you, because that’s exactly how a buyer is going to put a value on the property as well. When an income based approach yields a value lower than comparable sales, that usually means your rents are under market. Without knowing anything else about your property, that would be my first assumption. If that’s the case, you’ll have a hard time getting any interest at the higher sales comparable number. Why would someone pay a higher price when the income doesn’t justify the cost? Gone are the days of being able to sell properties on pro forma.

Allan Smith · Answer

Setting aside the fact that a listing agent should know how to price properties that they list, I would suggest talking to the broker at your firm. Ask them for their recommendations on pricing properties like this. Or perhaps there's other Brokers that are mentors to you that you can ask. I've not dealt much with commercial property, but comparable sales do not tell the whole story. Did you would want to find out what the business model was on those other sales and see how it compares to this one. If it's a similar business model then perhaps this one is worth more. It does seem like in this market sometimes the fundamental financials don't matter anymore and people will just pay anything for investments. So if that's the case, someone very well may pay the higher price for your asset but the market is softening so I would be wary.