Commercial Offers
Quick Question.
I've continuously studied residential properties, never really paying much attention to commercial properties thinking that they were for the big fish.
Can anyone tell me an example of what is a good discount when it comes to commercial. Getting the seller to agree to $30k less than appraised in residential is pretty good but how about in the commercial investing market?
Any tips or advice are greatly appreciated. 8-)
In general, commercial is much less liquid and difficult to compare/value as opposed to residential.
What I have been tought and do, is figure out what I can do with the property, and then back into the purchase number.
For example, the building is crap, and he wants 100K. (only land value). If I know people or a group of investors that want to build or operate a fast food store in
that area, I "know" the demand.
From each market segment there are canned rates that area used. With all that I come up with my selling price,.
Backing out what my costs are and profit margin I know if a selling price of 100K is right of is 66K more like it.
I'm not sure that I would agree that commercial is harder to value than residential. That is true only in the sense that commercial property has fewer comparable sales and so the value of property tends to be determined more by cap rates or income multipliers and less by the "market' approach.
That said the other major difference between commercial investing and residential investing is that residential investing tends to be about finding bargains. Commercial investing tends to be about adding value. So one worries less about how much discount from some "market" value and more about what you are going to do to make this property worth more.
As to your $30K question it doesn't make much sense in commercial because the size of the deal is different. A $30K discount on a $800k deal is not that much money. If you were talking about a 30% discount that would be more universal. It is possible to buy at that much discount to "retail" but more likely is figuring out some way to add 30 or 40% to the value either before or soon after closing.
For example I've got a flip deal under contract now where I paid $260K and am selling for $400K. What did I do to add all that value? I found a tenant and rented the space. A building with income is worth more than a vacant one in the commercial world. I'm currently negotiating closing this in simultaneous closes so I did it with almost none of my money.
Hope that is helpful/