Investor · Clarksville, TN · Member since 2008 · 122 posts · 53 votes
My cousin and I are in the process of putting a 12,000 sq/ft warehouse under contract... My question is... If we went the route to get an ARV loan, Who would say what the ARV would be? now I know the answer is probably going to be the bank's appraiser, BUT, a warehouse is not something our local banks are appraising very often, As a matter of fact.... the selling agent had NO Comps within 5 miles sold within 5 YEARS! Its a steel building with block walls and the cost to build the building today is 500K+... would that be something the bank would go off of? The man that's selling the building was the original owner/builder in the early 90s. Selling @ 185K.
Commercial buildings are typically valued by the income method, not the comp method. Find out the "cap rate" on similar buildings in the area, figure out the expenses and projected income, and calculate the value.
Whether that's what its really worth to buy and be profitable is another question. The values computed by that method are often too high to really be profitable.
thanks jon, I see your point. we shouldnt really have to worry about losing on this one. we already have 2 separate people wanting to lease portions of the space and our cost is well more than covered. One of the people said they didn't know the building was for sale OR lease... said he would love to buy it if we ever go to selling.
I assume you have it under contract, then. Ask that guy what he would pay for it. Lot to be said for taking a quick profit and going on to the next deal. I think in another thread you mentioned $3000/month in rent. Expenses should be minimal compared to residential, though you still have quite a few. I don't have a good feel for expenses on this sort of building. But, looks like an OK deal.
Banks are still going to want a down payment, most likely.
Commercial buildings are absolutely valued by the income approach and not comps. You can look at what similar buildings went for via the price per square, but it's true valuation stems from the NOI (Net operating income).
If the gross rents are $3k monthly and the lease is a NNN, then your only expenses are accounting, legal, administartive, entity formation, and PM if you choose to use one.
Assuming the total operating expenses come to 20%, your NOI= $28,800
If the going cap rate in that area is 10%, then the value is $288,000
If the going cap rate is 12%, then the value is $240,000.
$3 per square NNN for industrial is pretty cheap, although I am not familiar with your area rates.