Posted on July 2, 2012
The world of commercial real estate is a vast place with a load of information that you will need wade through. You may wonder what exactly qualifies a property to be a commercial property. Also, how are the rules and legalities different from private property to commercial property?
If you are at the negotiating table for a commercial property sale, be sure to keep the fact that you would like to get the sale completed quickly under wraps. If it is known that you are in a hurry to get the property, you will find that you will lose a great deal of leverage to get a better deal.
You need to hire a real estate agent that has experience with commercial real estate if you are attempting to sell your commercial property. There are some agents who may be trying to get into the commercial real estate game, but really have no experience at selling commercial real estate. That means that they may not be able to give you the help that a more experienced real estate agent would be able to.
When you are looking for a broker, one of the things that you will have to focus on is whether they are a generalist or a specialist. A specialist will have more skills in the field that you are looking at, which will allow you to get the best possible deal.
Even if you have already purchased a commercial real estate property, it is important to keep in mind that it is a long process. Some commercial property owners grow impatient with the process and want to give up on it. Just remember, everything has to be made official, documents need to be signed and possibly, repairs need to be made.
Have several different individuals evaluate the value of the commercial property you are considering buying. Fresh perspectives will be able to give you a clear view of how much others believe this property is worth. You may find that you are paying too much, or that your real estate agent is overvaluing the property for your offer.
Research and follow up is always the key. Remember, talk to your financial advisers and a title or deed officer. Since you will be purchasing a property for commercial uses it is always a good idea to have your legal representative be advised of each step or your process.
Posted on June 24, 2012
Over the years, my clients have understandably wanted me to pursue every avenue to sell their property. To do so, they often request that I list their property as an investment in addition to listing it under a particular commercial real estate category. While this may seem like a good idea, in my opinion, unless you really have a property that can be considered an investment property, it is not particularly helpful.
Recently, one client asked to have their office building listed as an investment property. Office properties can be an investment but in my opinion, this property did not qualify. It was about 50% vacant and all of the leases in place were short term leases.
Similarly, I have had clients ask to have land listed as investment property. Certainly, there are people who will buy and hold land for a potential windfall down the road but unless the land has a lease or some sort of on-going income potential, I do not think that it is appropriate to consider it an investment property.
For a true investor, neither of these cases would get you past first glance. For something to be an ideal Investment property, it should have the following -
- Ongoing income streams - Usually this would be rent. In the past, some people have assumed an appreciation of the property over time in their decision process. In my opinion and in light of the tremendous devaluation of real estate over the last few years, that is a mistake. When making an investment decision, the best practice is to consider the actual income streams themselves in valuing the asset.
- Long terms on the income streams - Ideally lease terms remaining should be 10 to 20 years. When buying an income property, a new owner does not want to pay for a property that may be vacant in 1 or 2 years.
- Single tenant users - This is not to say that people will not consider multiple tenant properties however, as you increase the number of tenants, you also increase the number of potential headaches associated with the property.
- Credit Tenants - Whether you have a single tenant or multiple tenants, the leases associated with the property are only as strong as the tenants.
- Triple Net Leases - Ideally, an investor will simply want to collect rent and deposit a check. For them the best leases have the tenant responsible for the property taxes, insurance, utilities and maintenance of the building.
- Full or nearly full occupancy - Some properties are advertised as income properties which have significant vacancy. These properties often advertise a cap rate for the property that assumes the vacant area will be leased at the asking lease rate and the asking price for the property. In my opinion, this is misleading. If a property is not fully leased, quoting a cap rate in this way makes no sense. An investor making an intelligent decision would be best served selecting a property which is fully occupied.
For Investors to compare apples to apples, they need an investment alternative that is basically as simple as any other investment option. With stocks, bonds, or interest bearing accounts, you simply invest the money and do not have to take on property maintenance, leasing and other chores and expenses. Of course, these criteria significantly reduce the number of properties which you might consider and I realize that not every property will have all of these features. But I will also tell you that properties like this do exist and can be found.
There are definitely properties which will sell that do not have all of these features and expectations of these features differ somewhat with the type of property (i.e. retail vs. office). However, if you are marketing the property as an Investment option, the successful seller will try to match these criteria as closely as possible.
Posted on June 17, 2012
In order to understand commercial real estate values, you must understand how an appraiser professionally appraises a property. An appraiser is tasked with the responsibility of estimating or giving an opinion of the value of a commercial property. You can apply his or her techniques to estimate the value.
Comparable Sales Approach
The first and probably the easiest method in valuing commercial real estate is called the comparable sales approach. If you recall when you bought your first house, the bank had an appraiser come out and give the property a value that you hoped would at least equal your purchase price. The same applies to commercial property. The commercial appraiser goes out and compares prices of recently sold local properties that are similar in form and function to the property they are appraising. The analysis will produce an average price and that price is what your property will be valued at. In commercial properties, they not only look at the price, but they also look at the sales price per square foot of the building.
Although the comparable sales approach is the easiest method for figuring out a value for commercial property, there are a couple of problems when using this approach.
• When values go up and down or aren't stabilized, this can nullify the use of the comparable sale approach
• In some small markets, there are no or only a few comparable sales due to the lack of overall sales
The Income Approach
In determining commercial real estate values, this is the most important one that you should learn.
You will find that commercial properties are chiefly valued by the amount of income they bring in. To be more precise, it is actually the net operating income that is the most important factor. When you have accurate operating and financial information on the property, the income approach can be utilized.
This approach is based on the capitalization rate being calculated for a property. In order to calculate the cap rate, you must first know the property's sale price and its net operating income.
After you calculate the cap rate of the property, you then compare the cap rate to similar property's cap rates that were sold in the area. The appraiser goes out and finds the cap rates of the other properties and averages them. He then utilizes that average cap rate to calculate the property's value knowing the net operating income.
The Cost Approach
The final approach to figuring out a property's value is the cost approach. This approach is the least often used as you are trying to figure out the value of the property based on what it might cost to construct in today's market, plus adding in the value of the land. The cost approach is most accurate for newer buildings because in determining the value of older buildings, you must account for the depreciation which can be hard to determine.