Irrational pricing

[Amy A.]

I have been looking for a strip mall/ shopping center in my area and am not finding any below $3M that are priced based on cap rates or any obvious rational calculation. Also, at their asking prices, they would not have close to the lenders' required DSCR of 1.25 at 80% ltv. Who do they think will purchase these and why are commercial agents taking these listings? I've made two offers and even showed them my calculations (thank you Frank Gallinelli for your book!). Sellers were insulted. Also, it seems the only ones for sale have high vacancy but are pricing as if fully occupied.

As a residential real estate agent I often encounter irrational sellers (which is why I hate it and am going to start turning away clients), but didn't think I'd see it as much in commercial! Am I approaching this the wrong way? I have been looking on Loopnet ( with the free membership - Is it worth the extra $$ to upgrade?) New England Property Exchange (they also have some I can't access) and the MLS. I'm looking to purchase for around $1M, unless I can get better than 80% LTV. Since I'm a licensed broker, I want to represent myself as a buyer and use the commission for necessary upgrades. Thanks!

[Joel Owens]

If you see a commercial loan at 90% LTV then ask if there are ANY fees prior to closing?? Usually that's when all the BS starts.

I haven't seen 90% in years and years. When properties were more depressed and way undervalued some lenders would go 90%. The LTV is just one component and you have to look at interest rate (fixed or floating, term to loan being called, amort. schedule, any recourse or personal guarantee, any cross collateral requested, any pre-pay penalty, can the loan be assumed to qualified purchase down the road, upfront costs to close the loan, qualifying standards for this type of loan, etc.)

Amy the owners you are talking too sound non-motivated. They are doing what we call (testing the market) to see if any over-motivated buyers out there who will pay a premium. The sellers are comfortable with the cash flow and do not NEED to sell.

I don't care what niche of real estate people focus on for investing or as a broker/agent to transact there is always competition. I look through sometimes hundreds of properties a day, makes calls to sellers directly, mail out for off market stuff, call other brokers (sometimes they have been talking off market to an owner for a few months and the owner is finally ready to do something).

For small retail strip centers the newly minted corporate tenant ones I am seeing with strong lease guarantees are going from 6.5% to 7.5% cap rates. As the mix say on a an 8 unit retail strip moves in mix the cap increases. So a 8/8 in the 6 to 7 plus range, 6/8 ( 6 corp,2 mom and pop) it goes up 50 or more basis points etc.

The location plays a factor as well. If you have mainly mom and pop but location is very good with growth happening all around then you will see a lower cap.

When evaluating retail strips for my clients I have to see total sales per store in the complex. If it's a corp guarantee spread out amongst a lot of stores there is less risk. If it's a mom and pop you want the lease no more than ideally 8% of gross sales and 12% is pushing it. So if one tenant had 200,000 in gross sales the lease would be ideal at 16,000 or less a year. Now there are other considerations such as gross profit margins on the concept they have. Some businesses have high sales but low margins so you have to dig down further.

I prefer DESTINATION businesses. Places where consumers HAVE to go for the experience versus things where they can " look and book " and go home and buy online for cheaper. Dry cleaning, restaurants, hair cuts, doctors office, etc. are examples of where people have to go to get something done. The more impulse type tenants the area has to have a lot of high disposable median income.