Great price differnce

10 Replies

Hi BPs,

Found this commercial building, great location, but  having hard time placing a dollar value on the building, since its not going to have tenants in on sale and the difference from what the owner wants and the value of the title company market comps, (and Tax assesor) is about $300,00 (30% of purchase).  the owner argument is, that's prime location, however, the building will need work, and the layout is not 100% functional (25% is a second floor unit, no a real separate entrance.

Any suggestions? 

Hello Sharon,

To me it sounds like your on the right track and the seller is not that motivated.   I believe he is trying to get you to pay him for work you have to do.    This may be a case where  you will have to either just punt this one or just keep hammering on it over time when the market has educated the seller on what is the truth.

Like a Few Good Men....He can't handle the truth.  

Is this a standalone commercial building?  Are you planning to owner occupy it or try to find a tenant for it?

My suggestion would be to find out what the market rents should be on this type of building and work your way back to what you're willing to pay for it.  A property is only worth as much as somebody is willing to pay for it.  What the owner says it's worth and what it's actually worth don't have anything to do with each other.  If the seller doesn't want to sell for what you want to pay then let it sit on the market and go look at other properties.  It sounds like it's an empty property that would be losing money each month, so you as the buyer should be in the driver's seat.  Doesn't sound like something worth paying a premium for to me.

Seller might be valuing the dirt. Some people look at junky buildings or structures in good locations and think of making  a low offer.

What they do not realize is the seller is selling the dirt and the buyer will tear down and put a national tenant there for a premium.

When I did land development people would call on the land and see an old house on it with the main road. They were thinking of it as a cheap rental. I explained we were selling the land for 800,000 and the house would be torn down.    

Thanks everybody for your input. it's a free standing building, but not the whole building is his. his broker (of course) told him that you don't set value by the tilte company comps.

The rent idea is a good one- thank you Michael.

He is actually off market, and I got him with a direct mail campaign, looking for this tpe of location...for the rght price.

@Sharon Gold

Both advice from @Joel Owens & @Michael Siekerka are excellent.

Commercial building value comes from the land & the best & highest use. 

1)If you can use the buildings & make the best use for yourself, then it is worth a premium to you.

2) if you can tear down the building as Joel is saying & put up a national NNN tenant there, there, then it is worth a premium.

3) in most other cases, it is based upon the income approach, how much rent as Michael is saying; will this place generate & multiply that by the market cap, you shall have a fair market value.

4) if this location is at the dead end & needs work, stay away or offer whatever you think is worth, never mind about the asking price. In most cases like this, the seller is more anxious to sell than you to buy.

Hi Tom, Thanks for the replay. I feel that the location (dirt- like what Joel said) is the key aspect here. However, how do you value that? w re not going to demo the building, it is dated, but overall a nice building.

He would like to sell , but is in no hurry to. he did mention to us, that he was not successful selling it before, from what I gathered , for two reasons:

1) Doesn't have  tenant in place (he's an owner occupant, want to retire)

2) 25% of the square feet is not that usable.

I am using these as negotiation points, but trying to figure out the real market value, to justify my offer price and avoid overpaying big times

Hi Sharon,

It is fairly apparent that the seller is not motivated currently.  So this exercise may be futile.

First approach would be to multiply the rentable square footage by the market rent for it's existing use. (retail, industrial, office etc.) Then apply a cap rate range to the NOI to determine a range of Market Values. Adjust for, carrying costs & capital expenditures required for build out & any repairs to bring it to the required quality to receive the estimated rent per sqft. Then factor in your required profit margin.

Second approach: Determine highest & best use of the land. Calculate the NOI based on the maximum buildable sqft you are allowed on the parcel. Apply the market cap rate to comparable buildings to the projected NOI to determine approximate market value. You can now subtract all the development, permits, entitlement, construction , cost of capital, & required profit from that number to determine what you could pay for the dirt.

Isolating land value is a process of reverse engineering all the expenses required for the development, building & improvements from the value of a completed building.

Just remember when you are essentially buying dirt, you are buying negative cash flow until you can cross the river from idea to income producing.  The time & risk from point A to point B should not be taken lightly.  

If you can create a compelling case to the seller, you could have a strong argument to have the seller finance your purchase with realistic terms that could make the deal work.  The tax assessed value has absolutely nothing to do with market value in California.  

You can always hire an MAI or commercial appraiser to give you a detailed report on determining value.  

Best of luck

@Ellis San Jose  thank you for elaborating and expanding in your answer. 

As local investor, what would you feel an average retail cap rate is?

Another question, what terms do you find realistic for seller financing in our market?

Thanks

Sharon

Local cap rate for retail varies with location as well as other factors.  Westlake Village vs. Thousand Oaks vs. Oxnard vs. Ventura. Single tenant vs. stripmall etc.

The cap rates in Ventura County are pretty low 4%-6% ballpark.

Realistic seller financing is what ever the seller will agree with to get the deal done & make sense for you as an investment.

Best of luck,

Ellis

@Ellis San Jose Thanks, that is exactly the range I took, since the asking price is well over a Million, the reassurance is important to me. The building is a free standing, high traffic area in Camarillo.

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