Let's face it. Not every property's listed asking price is really what the property is worth. In fact, the asking price for a property can be dependent upon multiple issues, none of which are truly related to current market value.
Evaluating an owner's asking price is crucial to your investment.
There are many investment strategies in commercial real estate, and different players in the industry look for different characteristics of a property, including asking price.
For the majority of people in commercial real estate, they are looking for a fair, good deal with a property that is marketed at retail or just below retail. They are not usually willing to purchase a property for more than it is worth (of course, there are exceptions).
I understand there are people who will purchase a property because they are so in love with it, that it does not matter what it is really worth. They will pay whatever they need to in order to get the property they have their heart and mind set on.
There are other people in commercial real estate who look for properties that are far below retail value. Whatever the investment strategy, you must be able to evaluate a seller's asking price and find out how it relates to the property's true market value. This is the only way a commercial real estate player can decide if the property is worth paying a certain amount, dependent upon their investment strategy and goals.
The seller can set the asking price at whatever he or she wants. There are no laws or rules that must be followed when setting an asking price for a property. In fact, there are numerous strategies for pricing a property that can be related to motivation, negotiation, emotional investment in a property, and so many others; the list is infinite.
Let's first look at some possible seller strategies for pricing a property so we understand how pricing can be dependent upon so many issues.
The seller could have an idea in his or her head as to what the property is worth, and, without any consultation, pick a price out of thin air. Or they could look at comps (comparable sales) of properties that have sold near the property to determine a fair market value. They can then price the property higher or lower, depending on how motivated the seller really is.
If there are no comps to compare properties, the seller may have to judge a property's worth based on a different type of property, property that sold a long time ago, and adjust for appreciation, or even look at neighboring, comparable cities that could indicate what the property is actually worth.
A truly fair seller could get appraisals done by a few different people, and take the average of the values.
Keep in mind, however, appraisals can be very expensive and are at best a guesstimate as to what a property is worth.
Unfortunately, appraisers can be swayed to appraise higher or lower if there is any sort of personal interest of the appraiser, or possibly a relationship between the seller and appraiser. Of course, this is ill-advised, but justifying an appraised value to a certain dictated number is easier than one thinks.
A seller could price a property much higher than the current market value in hopes that someone will actually pay that much, or leave a lot of wiggle room for negotiations. Other sellers may simply price a property so low they literally just want the property off their hands.
As you can see, the asking price for a property can be a conundrum. Now that we understand just a few of the many possible pricing strategies, let's look at how you can evaluate the seller's asking price, so you can purchase properties in alignment with your own investment strategies and goals.
The best way to evaluate a seller's asking price is to blatantly ask the broker, agent, or seller, how the price was determined, and to give supporting evidence.
You may find yourself in a situation where the broker has a pile of comps, perhaps an appraisal, and supporting documentation as to why the property is priced at what it is. If you find yourself in this situation, beyond validating and verifying the supporting documents, you will very easily be able to evaluate if the asking price is above, at, or below market value. This is the easiest situation in which to find yourself.
Unfortunately, although this previous example is how every property should be presented to a buyer, it is not always realistic. You may have to ask the broker for comps and do the research yourself in order to evaluate the seller's asking price.
You will need to determine motivation by asking the broker why the owner is selling. You will need to compare land values similar to and close to the subject property. You may even need to speak to the city, engineers, and other builders, developers or investors in the area who know the land value better than you do.
If the property is in your own community, then, as a real estate insider, you should know your commercial real estate market inside and out. However, if you are searching in an unfamiliar area, you will need to request the services of other commercial real estate players.
If you do decide that the seller's asking price is in alignment with your investment strategy and goals, and you put the property under contract, the next step would be to get an appraisal done by an independent party that has no interest in the subject property whatsoever, in order to validate your assumptions.
This appraisal, after all, will be similar to a bank's appraisal and help to determine how much money can be loaned on the project. The closer you are to the bank's appraisal, the better shape you will be in to meet project costs, debt service and make your desired profit.
Knowing what a property is really worth and evaluating the seller's asking price are two major ways that you can approach making a sound and final decision regarding an investment. Always have supporting and verified documentation for the subject property so you know exactly what you are getting and for what price.
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