The commercial classroom: There are no "comps"

A year or so ago I wrote a column "pricing challenges" describing various methods for setting the correct price for the sale of a building. We have seen major changes in the economy since then changing the "rules." I read a headline a few days ago that stated that stock prices were at the same value today as in 1997! Another paper proclaimed that house prices today are at the 2001 level. I don't know if I believe everything I read in the papers but I do know commercial building values are down and there have been few sales in the last six to nine months. So, if I wanted to evaluate a building today what do I have to compare it to? Even if I find past sales, they may be "old" and values may have declined since then. If someone wants to sell their building today they need to evaluate their competition; what other properties are on the market in their area, what other choices do the buyers have? In setting the price today we need to consider "comparable methods of valuation." For example, we can compare similar office buildings, that may be of different sizes, by breaking down the asking price to a per square foot cost. (Price divided by the size of the building.) The average cost per square foot value can then be multiplied by the size of the subject property to determine comparable market value. Competition - other properties for sale $1,000,000÷7,800 s/f = $128 PSF $785,999÷6,390 s/f = $123 PSF $625,000÷5,000 SF = $125 PSF Subject Property: Comparable Average PSF $125 Market Value: 7,000 s/f Building 7,000 X $125 = $875,000 On investment property the income approach to valuation is still used. The comparison here is to the CAP Rate (Capitalization Rate) or Rate of Return being offered. Here the potential income of the building is calculated with an adjustment for possible vacancy. The owner's operating expenses are then subtracted, including a contingent fund for possible unexpected repairs and maintenance. Expenses do not include debt service - the buyer could pay all cash. What remains is the net operating income. Based on the asking price a percentage return on the investment may be calculated. This rate of return is now compared to other investment properties. NOI ÷ Asking Price = Rate of Return or CAP Rate being offered The biggest issue today, no matter how the price is established, is can the purchase be financed? As one can imagine the job of the bank appraiser today is difficult. There are many banks that are lending, but down payment and underwriting requirements have increased, putting the all cash buyer in a strong position. Sellers can enhance the possibility of a purchase if they can offer seller financing. Let us hope that all of the things our government is doing will loosen up credit and get business back to normal soon! Announcement: My latest book, "The Commercial Classroom: Lessons in Commercial and Investment Real Estate," is now available through my website: www.CommercialEd.com or on Amazon.com. Edward Smith, RECS, is the Long Island metro regional director of Coldwell Banker Commercial NRT, Eastport, N.Y.