Purchasing a space we owner operate off market - are we overpaying ?

Question

Our landlords recently had a valuation of their portfolio which includes several units in our building. They are offering it to us at the appraised rate in the valuation and stating they will not pay any realtor fees. Is this type of appraisal generally accurate for the market value? It's my feeling that it might be overvalued 5-10%. My perception is that it's a buyers market where most buyers on the market would at least be getting some concessions (closing costs). BUT, potentially this could be a good move for our business and investment portfolio. We know the landlord well enough to know that there isn't negotiation to be had here. It's a take it or leave it and they'd happily list I think.

The property is in a good part of town and desirable location but I'm not getting a "deal" on the property by any means. Any in the short term our cost for the mortgage might actually be slightly more than renting but a couple hundred dollars.

Help me with pros and cons!

The property is in a good part of town and desirable location but I'm not getting a "deal" on the property by any means. Any in the short term our cost for the mortgage might actually be slightly more than renting but a couple hundred dollars.

Help me with pros and cons!

Benjamin Aaker · Answer

Run the numbers as an investment yourself. Ask what method the appraiser used to calculate the value. Often, sellers want a retail price based on comps but as an investor, you need to use the income method for valuation. If your numbers don't work, either the price will have to come down or it's not as good of a deal as you thought.

Ronald Rohde · Answer

You need to create objective data. Not just feeling 5% off. If it was for my business 5% of Purchase Price is worth it for the control of my site. Is it a single tenant with multiple units, or other tenants paying rent?

Ronald Rohde · Answer

Oh, if its just a condo unit, I'd focus on the lease. get a good long term lease, don't buy a single condo unit.

Laura Casner · Answer

We'd be purchasing our unit, which is one of many in a condo/retail mixed use space. And yes, I am in the process of collecting my own data. There are not many retail buildings for sale in the area and it's been really hard to pull comps on my own. This is one reason I will talk to my agent about adjusting commission.

Henry Clark · Answer

OP. Make sure it’s a good Longterm location for you.   Size, customer base, and neighboring businesses.  Are there any Magnet stores that might leave?  Lease terms for them?

Appraisal-  compare similar property values on Crexi, loopnet and costar.  Just ball park.  Each is different.

Appraisal- commercial is usually based on A. cost to build which they use 25 year average.   With inflation the appraisal may need to be higher.  B. Comparables.  Very hard to do with commercial. C. Revenue stream.  What is the value you would place based on your current lease?  Revenue stream NPV,  Capex repairs, NNN.  Don’t add in your businesses revenue stream.

Deal- if he lists he loses say 7% RE commission.  He should reduce by 1/2 to you.  Owners selling multiple properties hard to do 1031, you might offer deal terms to help him out on 1031 timelines.  But I would lock the property down with a deposit so he doesn’t sale underneath you.

Deal- only do if you’re willing to go thru.  His sales value is based on having a tenant lease in place especially with NNN.  What are your lease terms and length?  I would negotiate downwards before he sales.  Also be prepared to move if terms allow in the short term.  Ask for a lower purchase price.

Deal- Capex, roof, parking if not common area, etc.  reduce price if you buy.

Personal- compare tax impact of owning versus leasing.  Impact to your. Cashflow.

Laura Casner · Answer

Yes I had that thought - having gotten my own appraisals for reasons other than purchase, I know sometimes it's catered towards the goal of the ask.  My only hesitation on my own appraisal was that the bank said it's 6k!

Greg Scott · Answer

If you re interested in buying, just get another appraisal.

The owner may have asked the appraiser to make some assumptions that drove value higher, and if a bank had ordered the appraisal, they would have gotten a different answer.

If a non-biased appraisal is truly 5-10% lower, you can counter at that price.  If he puts it on the market, you can buy it at the 5-10% lower price and he gets to eat the cost of the broker.  It would be worth his while to negotiate with you.