I'm looking at a 5 unit building and at first glance the property looks like it has good potential. It's in need of updating and all the units are under rented. I want to run preliminary numbers in its current state, and the rehabbed / higher rent state, so I contacted the commercial department of my local credit union. When I asked them how they determine the value of commercial property, the response I received was as follows:
"Typically will do an income approach off of rents and expenses and also a market approach, based on what similar properties are selling for. The final value is typically somewhere between those two values."
My concern is it will be much more difficult to assume the forced appreciation value with their approach. Has anyone else run into this? I plan on contacting other banks / credit unions until I find one that will value the property based on income / expense approach, but wanted to see if anyone else has purchased commercial property with this appraisal method. If so, any tips / advice?
@Greg Neuman Yes all commercial properties are appraised using the 3 approaches. Cost , income and comps. This is how an MAI appraisers value commercial.
Usually they lean towards income unless the property is in a highly deisirable area. In that case it’s comps and cost to build new.
@Greg Dickerson This is good to know. Up until now I had assumed value was typically based strictly on the income approach. I'll have to research comps in the area as well as using the income method to determine if the property I'm looking at is worth pursuing and has enough value add. The market I'm looking in is not a super hot market at this time, but will still run the details past the lender I'm going to go with knowing this is a typical approach. Thanks again!
This is typical, but not necessarily a problem. Commercial lenders have more freedom than residential lenders and are usually willing to listen to your income/expense based approach. For you, it's all about NOI. If you're able to get financing that you can afford before the rehab, then you'll have a ton of cash flow after the rehab. FWIW, take your time with the rehab and do it with cash flow from the property if possible.
Hope this helps,
Thanks @Bob Langworthy . This is helpful advice. One option we are going to look at is acquiring the property and fixing up one or two of the worst units, get them rented, repeat with the other units, while raising the rents on the newly rehabbed units.
@Greg Neuman , that's a great plan.