How to determine value of a commercial property w/ no list price?

Question

I have found several commercial property websites. Many of the properties have no list price. They are relying on me to make the first offer. How do I determine how much I can offer?

I can assume that I should estimate how much rent I should receive, but how do I know that? Are there companies that perform this kind of analysis? From my job as a property manager, I know that maintenance costs can be highly unpredictable. Aside from that, other costs like debt and property tax should be easy to estimate.

Should I take future expected rents into consideration? How would I know this?

Ronald Rohde · Answer

You should probably not be buying a commercial property. Please find a commercial broker you trust, they will help you "invest" your money.

Ronald Rohde · Answer

I've seen a lot of inexperienced investors get in over their head on commercial deals. if you don't have a beginning basis to even estimate market rents, how are you confident that you can manage the property? Deal with a bank? Decide when to hire professionals and when to begin somewhere a bit friendlier. Just from my experience, you may be an investing genius, but the types of questions seems pretty Google friendly to me.

Good luck!

Brent Coombs · Answer

I reckon that if you want to be a commercial player, you need to go outdoors, to meet and greet commercial people!

Joel Owens · Answer

You do not even mention what type of commercial asset you are buying. I would start there. Even in the same local market various types of commercial properties can be at different points in the recovery cycle and are underwritten differently.

Brent Coombs · Answer

@Patrick Philip, commercial market value is largely decided by the Cap Rate for that area. Any decent Realtor should be able to give you recent sold comp figures, divided by their revenue, to show how they arrived at the "local Cap Rate".

Ask around. Don't just rely on one Realtors verdict.

And don't ask leading questions like "I've been told that the Cap Rate around here is 7.5% - is that right?"

Your job of course, is to offer LESS, which would give YOU a higher Cap Rate for the property in question.

But then, when you sell, ALWAYS try for as LOW a Cap Rate as the market will sustain! My 2c...

Lucas Machado · Answer

I was in a similar situation regarding a commercial property, and I wasn't sure how to value it (by this I mean, I understood conceptually, but the baseline data was hard to come by). I can run a cap rate just fine, easy it's just numbers, but getting those number i.e. the rent and re-sale values was tricky.

I ended up reaching out to 5 commercial listing agents - I explained I had a deal I was considering purchasing, but it was mixed-use and I couldn't figure out how much the office space would rent for. One of the better ones immediately gave me a price/sf number. You can find some names of local commercial agents on LoopNet (you want someone active). Some people won't give you the time of day, but others will.

Of course, I wouldn't rely on just one opinion.

Regarding the re-sales, if you find good & tech savy realtor - there is a local system (at least in Florida) where you can draw a custom map and select essentially any piece of information in that map. So for example, commercial property use, last sale date 1/1/2015, lot size, building area - and you have a comp base to work from. Of course, it's not as simple as SFH because there is not exactly "direct" comps.

Antoine Martel · Answer

You can do this by the same method of checking comps or reaching out to local commercial agents.

Jeff Kehl · Answer

@Patrick Philip Ignore them, if you're fairly experienced with residential investing and have the skills you can easily make the jump into commercial investing. I am doing the same thing and I have also started with office and a bit of retail and special purpose.

Office and retail feels the same to me as residential did 5 years ago. No one is building it in my area, the demand is increasing and there are still good deals to be found.

There's a few good books and podcasts you can read/listen to to get some background. But the market is definitely more fractured than residential so it is more work. You need to set a target market and find out who the brokers are in that area and get to know them. Loopnet is a good place to start just like with residential apartments.

How to know what to pay? Same as residential, look at the income it produces and what it is worth, look at comparable sales and look at what it would cost to rebuild it.

How to find out what it would rent for? Same as residential, pretend you're starting a business or shop and need some space. Drive around and talk to people and you will get an idea.

One thing that messes with me is in commercial they will always quote rents in $/sq foot/year so instead of $1000/month for a 1000 square foot apartment rent they will say $12/square foot for a 1000 square foot office. Exactly the same price just people messing with you on terminology :)

One last thing, commercial is for sure a business and there are lots of big companies involved in it. Get to know the big players because they will help educate you for free. Go to their websites and conferences if you can. Marcus & Millichap, CBRE, Colliers.

Patrick Philip · Answer

Yea I could have Googled this one. Just like any investment, compare it to the risk-free return on a 10-year treasury note. Even if I beat that (might have to wait 10 years), it's better than leaving it in cash. I don't know how to invest in the stock market other than just guessing. I understand the principles of value investing, but no idea how to accurately value a company. I'm sure I could Google that, too.

Patrick Philip · Answer

And why's that?

How to determine value of a commercial property w/ no list price?

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