Initial Value of Real Estate
January 21, 2019
by a searcher from University of Texas at Austin in Lexington, KY, USA
I have looked at a couple of companies that include real estate. Wondering if anyone has a good resource for a high-level valuation to see if the Buyer's asking price is in the ballpark of market value. I'm having trouble finding comparable information for recent commercial property transactions (warehouse, mfg, etc.). Don't want to incur the cost of an appraiser prior to signing an LOI but know this will be required as part of a loan. Thanks!
from University of Pennsylvania in Chicago, IL, USA
1. Ask the seller what his selling price for the real estate is based on: Appraisal? Broker Opinion of Value (BOV)? Prevailing cap rate? This is also a good way to get an initial read on trustworthiness. Either he/she is direct and tells you that he got a BOV, for example, or you get something not nearly as useful, such as "well, the guy down the street told me that my place is worth X..." If the seller relied on professional assistance for the valuation and told you as much, odds are it is probably within the ballpark. In fact, how the seller answers this question actually tells me a ton about the seller's level of sophistication.
2. Use listings. Listings certainly aren't transactions, but the commercial market is pretty efficient, and brokers push clients to list at market levels. As such, if you know the sq ft and type of space of the property in question, do some searches of the listings. If you can find a comparable listing, it is another data point to check to see if your seller is in the ballpark for pricing. Sure, both could be wrong, but that is usually not the case. .
3. Financial Statements and Cap rates. If the seller has the real estate in a separate entity, the business will be paying rents to that entity. Add up the rents, subtract maintenance, property taxes and insurance (estimate this if necessary) and you have a rough NOI. Take the NOI and divide by list price. That is the cap rate that the building is being offered at. Varies by geography and type of property, but if the cap rate comes out below 5%, then I would be skeptical of the offer price immediately.
from Michigan State University in St. Louis, MO, USA