Great price differnce

[Dr. sharon Gold]

Hi BPs,

Found this commercial building, great location, but  having hard time placing a dollar value on the building, since its not going to have tenants in on sale and the difference from what the owner wants and the value of the title company market comps, (and Tax assesor) is about $300,00 (30% of purchase).  the owner argument is, that's prime location, however, the building will need work, and the layout is not 100% functional (25% is a second floor unit, no a real separate entrance.

Any suggestions? 

[Ellis San Jose]

Hi Sharon,

It is fairly apparent that the seller is not motivated currently.  So this exercise may be futile.

First approach would be to multiply the rentable square footage by the market rent for it's existing use. (retail, industrial, office etc.) Then apply a cap rate range to the NOI to determine a range of Market Values. Adjust for, carrying costs & capital expenditures required for build out & any repairs to bring it to the required quality to receive the estimated rent per sqft. Then factor in your required profit margin.

Second approach: Determine highest & best use of the land. Calculate the NOI based on the maximum buildable sqft you are allowed on the parcel. Apply the market cap rate to comparable buildings to the projected NOI to determine approximate market value. You can now subtract all the development, permits, entitlement, construction , cost of capital, & required profit from that number to determine what you could pay for the dirt.

Isolating land value is a process of reverse engineering all the expenses required for the development, building & improvements from the value of a completed building.

Just remember when you are essentially buying dirt, you are buying negative cash flow until you can cross the river from idea to income producing.  The time & risk from point A to point B should not be taken lightly.  

If you can create a compelling case to the seller, you could have a strong argument to have the seller finance your purchase with realistic terms that could make the deal work.  The tax assessed value has absolutely nothing to do with market value in California.  

You can always hire an MAI or commercial appraiser to give you a detailed report on determining value.  

Best of luck