How to Evaluate the Market Value of a Commercial Property

4 Replies

Hello BP.

My father and I are interested in purchasing a little car wash that has been vacant for years and is now in the foreclosure process and will be up for auction here soon by the county. I know that commercial real estate is valued based on the cap rate and I want to create a pro-forma to evaluate this but I'm not sure how to start. I was wondering how I would go about valuing this property so that I don't overbid at the auction, and the only thing that comes to my mind is to contact other car washes in the area to see their operating performances. I'd like to hear if anyone has  bought a property like this before and how they ended up valuing the property's worth.

The current county appraised value is $156,000

Thanks,

Stephen Brown

If theres no cash flow, you probably can do replacement cost. Otherwise it sounds like you're going to be in a pretty low market (not a lot of variance).

Not a ton of car wash comps that's for sure! I would look into the business and see what the numbers are currently and base my offer off of what its pulling in monthly vs how much the mortgage taxes and insurance would be. If its not operating like you said see if another owner would be able to help you out and look at their performance over the last few years.

@Stephen Brown

For starters, find local chemical distributors and call a few of them. They know the market and might have insight on volume the wash had done and the condition of the building and equipment.

I’d look into traffic count and speed of road. Is there a stoplight that keeps eyes on your location a bit longer or so people fly by at 55mph?

What is the population within 3 or 5 miles? Thats where your customer base is.

A good chemical rep should be able to offer you insight on traffic and population.

This data will give you a sense of volume.

A working wash that’s operating regularly should be valued loosely at 3-5x yearly gross sales. In this case, I’d anticipate discounting with that as a sterling point.

Also consider what the costs will be to get it up and running.

On the back side, know you are building a business not a passive investment. It may not be a full time job, but someone will need to be there at minimum most days of the week.

Good luck!

Define what is highest and best use? is it the land, existing building, new building?

What does current and future zoning allow for? You might have an awesome tenant wanting to go on the site but the city or county says no way to a variance and you spend lots of time and money for nothing.

Any deed restrictions?

Does the site have a clean phase one? Often when put up for sale a phase one will be ordered to know the current condition of the property and disclose that in the DD file for the auction.

Just remember the cheaper you can buy the more tenant options you likely have and still make money. If I buy a site and pay so much that it only pencils with the national credit tenant on there then I do not want to own it until there is an executed lease with non-refundable hard money from the tenant.

If the land is so cheap that national tenant passes, regional tenant passes on the site but mom and pop wants it then I can still make money for the low price paid so do not mind owning it and land banking it for awhile.