Valuing Real Estate

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by a searcher from Princeton University
in Livingston, NJ 07039, USA

1yr ago

Valuing Real Estate

Does anyone have any good tips on how to value real estate? Sellers do not always have an appraisal and I am not sure how much I would trust it anyway. Also I do not want to get a commercial broker all spun up when I am still pre-LOI. I have been going to the town tax records for the assessment but would love other ideas. Or is there language in an LOI like with working capital where we will just deal with this in due diligence?

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reply by a lender 1yr ago
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

There are lots of challenges in valuing real estate for these acquisitions. Short of having a current or past appraisal, you may need to go with the estimate being provided by the broker or engage a real estate broker to provide you an assessment. I have been in commercial lending for over 30 years now, and I have been repeatedly shocked at where appraisals have come back on properties versus what all of my experience and analysis tells me. Without a market area expert involved, it is hard to know the nuisances of a particular sub-market. You need to know vacancy rates, age factors, conditions, rent rates, demand, competition, location benefits, etc. There is a lot involved in assessing real estate value.

An income approach can work (as suggested below) but you must know not only market rental rates but also the property expenses. You also need to account for things like vacancy, management fees, repair reserves, etc. that appraisers factor into their income approach. And often times the rent being paid by an owner on an owner-occupied property will either be below market or above market, making it hard. This also means you need to adjust the business cash flow to take into account what the market rent would be for the property.

We usually recommend putting together offers that have language in them if the real estate is involved where the price paid for the real estate will not exceed that of a third party appraisal received from the lender. There are some strategic benefits to pushing more of the debt to the real estate, the largest one of which is you can typically get better terms and a longer amortization on real estate secured loans. However, if you use SBA financing there are also some other benefits. If you would like to discuss options from an SBA perspective, you can reach me here or directly at redacted

reply by a searcher 1yr ago
from New York University in New York, NY, USA

Agreed with above suggestions on coming up with a proforma income based on FMV rental and using a cap rate approach. As alternative, you can go on Loopnet.com and see asking price/sqf on comparable properties in the area. That should give you a good base-line starting point.