I don't want to look like a fool. Second opinion, please?

Question

The seller is asking $250k on a 2,500ft commercial building built in the '40s and renovated in the '90s. It needs renovating again.

Good location in a downtown area of a 60,000 pop. city an hour outside of Atlanta.

Based on the renovation bid and expense estimates, I would only offer $85,000.

Will someone take a look at my numbers and see if I'm off somewhere? THANKS!

https://docs.google.com/spreadsheets/d/1mu_rX1lMehzn8qtaYejx-0vU7etn7GyfzzsgIet8pcU/edit?usp=sharing

Tom V. · Answer

@John S.  I would encourage you to do some more research.  Try to hook up with an experienced real estate broker in your area.   If you have the financial resources to do a deal like this, then someone will take you seriously and will spend some time walking you through the market.

The age of the building is not relevant per se - ideally the comparable sales you look at would be of buildings of a similar age.  Again, you may have to do more homework.

Last, don't be afraid to look like a fool in the negotiation phase.  By the time you close and put your money in escrow, you need to be darned sure you are not making a foolish move, but low bidding without shame is something you should be good at if you plan to make real estate pay for you.

What's the worst that could happen, they say no?   Pretty limited downside.

Tom V. · Answer

What are cap rates for similar properties in the same market?

Are they trading at 4%?

8%?

12%

In isolation, creating an implied value for a listing based on your target cap rate says little about the value of the property.  In some markets a high quality asset might trade for a 3 cap.  You could buy a wreck in Detroit and convince yourself it's a 20 cap.   If the price is too high, you should be able to demonstrate that to the seller based on sales of similar properties in your market.

John S. · Answer

Good point. Being a newbie it is tough to say, but from looking at other listings around town, 8% is the upper end.  I'll ask an agent.  Why I would offer at closer to a 10% is because of the age and condition of the building, which increases the risk overall.

John S. · Answer

Thanks, Brian. The seller is a broker herself, so hopefully she understands it's just math--nothing personal.

Bryan H. · Answer

Your numbers are probably fine, but I wouldn't waste my time on this one. Especially if it's listed. The seller has hopes and dreams, as many do these days. Hoping for suckers and dreams of cashing in.

I don't want to look like a fool. Second opinion, please?

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