Determining Value Of Commercial Property

JohnCl profile photo

How does one determine the value of a office condo?

Rents for $1500/month. Does that mean it is worth $180,000. (plus or minus location, condition, and the like)?

JohnCl

Comments(14)

  • roboxking12th October, 2004

    Depends on the norm capitalization rate and the comps in your area.

  • DaShow12th October, 2004

    I'd contact commercialking for that question, he'll know the answer.

  • JohnCl12th October, 2004

    Looks like an identical unit sold in May 2003 for 209K.

    Tax Record has it valued at $81,400.00 (2003). Is this sort of discrepancy normal for office space?

    JohnCl

  • JohnCl12th October, 2004

    CAP should be around 14% unless there are some other association fees I am missing.

    JohnCl
    [ Edited by JohnCl on Date 10/12/2004 ]

  • roboxking12th October, 2004

    When I appraise commercial property, I usually go with the HIGHEST AND BEST USE. Are you sure that the cap rate is that high? If so then use this formular to figure out what it is worth :

    ((Potential Gross Income - (Vacancy+Other Expenses)) = Net Operating Income

    Then take the NOI and divide it by 0.14 and that will tell you what the building is truly worth.

  • roboxking12th October, 2004

    $81,400.00 (2003).

    When in 2003?

    You may want to adjust for time and see what the value is by the sales comparison approach.

  • jripeastwest13th October, 2004

    Hey

    There is no way the cap rate is 14% I'd buy 10 of them

  • JohnCl13th October, 2004

    Ok. This is how I got that number. Tell me what else you think I am missing:

    Purchase price:
    $95,000

    Monthly Gross Income:
    (this is once occupied. The unit needs no work and is in a great area. I could not see any vacancies in the complex.)
    $1,500

    Monthly payment (interest only 6.5%): $525.42 (since this is debt service it is not used in the calculation for CAP, right?)

    Monthly Taxes
    $87.00

    Monthly Insurance:
    $30.00 (could be less)

    Condo Association Fee:
    $185

    Total Monthly Expenses :
    $302

    GOI: $18,000
    Expenses: $3624.00
    NOI: $14376
    Investment:$95,000
    NOI/Investment: .1513 CAP Rate

    What am I missing?

    JohnCl

    [ Edited by JohnCl on Date 10/13/2004 ]

  • NewKidinTown213th October, 2004

    If you think the seller will accept $95K, go for it. Buy as many as you can afford as long as they command the market rent you cite. Even better if the tenant is responsible for all maintenance and repair.

    What you are missing in this discussion is the seller's asking price. With sales comps at or near $200K, I would expect a reasonable seller will want something a lot closer to that number.

    Not sure that the CapRate calculations are very meaningful for single unit condos (even though they have a commercial use). More likely, there are comparable sales numbers that the seller will use to establish market value.

  • JohnCl13th October, 2004

    Looks like the 208K sale was for a unit with all of the apparatus for a Dentist office installed. That would explain the huge discrepancy. This makes it very hard for me to determine what value an appraiser would place on the unit.

    All I have to go by is income potential, I guess.

    JohnCl

  • NewKidinTown214th October, 2004

    What value is the seller placing on the unit? In other words, what is the asking price?

  • commercialking15th October, 2004

    Sorry to be a little late weighing in here. SBC (aka the Axis of Evil) has had my DSL down for two weeks and I only just got back on line.

    The whole joy of cap rates it that it makes it possible to value a property knowing only "internal" information. Comps are less important although you will note that in this sitution, as is frequently the case in owner-occupied units (houses, commercial condos) the Comparable Sales prices are such that the property is selling for a lot more than you can justify using a cap rate.

    Yes, with a NOI (before debt) of $14,300 the property is "worth" about $143,000. Obviously if you can buy it for $95,000 that represents about a one-third discount to "value". Anytime the discount is more than 20% you've got a good deal.

    If on the other hand you paid the $200K that the comparable sales suggest you would be buying on a 7% cap rate-- not a particularly good deal.

    Under the circumstances if I could really buy at $95 and sell at $200 I would flip the property. You'd have to manage the thing for 7 years to make as much money as you could in a flip in 90 or 120 days. Take the money and run.

  • JohnCl15th October, 2004

    commercialking,

    Thanks for your input on this. It looks like the 208K figure included a bunch of pre-installed dental hardware. There was actually another sale for about 350K. Same thing, lots of pre-installed dental equipment made the difference.

    I called every "for lease" sign in the area. The actual complex does not have many vacancies, but the surrounding area does. Looks like $12-$13 per sq/ ft is more reasonable to rent it in our slow market. Based on that, I get a rent rate of, say, $1200/month rather than the $1500/month quoted by the seller.

    The problem is, I need to be able to make an accurate determination of value without paying 1-2K for a commercial appraisal. My bank will take my word, so I want to make sure it is good.

    Based on this, I get an internal NOI (before debt) of $10,776.00. So this would mean the base value of the property is actually about 107K (+/- condition, location in area, etc)?

    JohnCl[ Edited by JohnCl on Date 10/15/2004 ]

  • commercialking15th October, 2004

    Yeah,

    I would then want to discount that $107,000 number by something for the fact that it is vacant and you should probably figure some reasonable lease-up time. On top of that you want to buy at at least a 20% discount to "retail".

    Hope that helps.

    Mark

Add Comment

Login To Comment