In Real Estate you make money when you buy not when you sell

It seems contrary to common sense  but you make your profit in real estate when you buy it not when you sell.

Let me explain. Normally the selling price on any property will be at whatever the current market is at that time. Usually a buyer will not offer more than the asking price. This might happen in a real active market but currently I don’t believe the market is that strong.Targeting a specific market for commercial real estate

So let’s talk about what I mean when I say that a person makes their profit when they buy property. Sometimes for whatever reason a seller will sell at a lower price. There may be for a number of reasons. The seller may need the cash for family matters or maybe he would like to invest in a property that he perceives as having a greater upside potential. Maybe it is a homeowner that is moving out of the area and needs the cash to buy a home in the new location or doesn’t want to be a landlord or leave the home vacant. I have heard people comment that a person should not take advantage of this kind of seller but don’t forget that they have set the price. They have set the price based on their current need or needs. They want the dollars or debt relief that the sale might generate. In effect a buyer will be helping the seller with his needs whatever that might be at the time.

But the other more important way to make a profit when you buy property is by doing your homework. As a residential agent knowing the market you are working is essential in order to help your client get the best bang for their buck. This can be more of a challenge in the residential market because it is a more emotional transaction. Home buyers are looking at a home as a place to live and raise a family not about a profit at that point. As we all know that changes when they become sellers.

The commercial investment buyer will look at the numbers and analyze the property from all angles. They will look at not just the price but things like location, demographics, market trends and upside potential. The location and condition of the property are important as well. Different types of investors might look at the property form a different perspective than others. Some might like a property in a nice area with good curb appeal and others might look at the upside potential based on price and current market trends. Some investors will like to find a distressed property that they can fix up and flip for a quick profit. Trends not just in the local market but also in the regional and national markets. Evaluating the direction of these trends will help in establishing a price that an investor might be willing to pay. Demographics of an area are always important to examine. What is the overall makeup of the community. If an investor is looking at buying a retirement home he might want to look in an area that has a large population of older people. The type of property, retail-multifamily – office – land, as well as any leases that might be in place are very important.

The point I would like to make is that price alone is not the only way to make money when you buy. All of these items and more need to be evaluated in an effort to establish a price that will make this a good investment currently but also at the time of sale. I believe that whether you are working with residential clients or the commercial investor we need to help them with this process.

 

 

In Real Estate there are always 2 buyers in every transaction

In Real Estate there are always 2 buyers in every transaction.

 

For many years in the real estate business I had never heard of this concept of 2 buyers for every transaction. In most cases the seller does not realize that as soon as he receives an offer,at that point, he also becomes a buyer. When he rejects an offer he is saying ” I am willing to buy the property for that price or even more”. I believe that if every party that is involved in the process of  buying and or selling a property would understand this concept more deals would be completed to everyone’s satisfaction. When representing a potential commercial buyer/investor I learned to always spend time evaluating the property to help in establishing the potential value for that client.clover_4th Always trying to find out just what their objectives are and how the property might meet those objectives. Things like- What kind of return would they like – How much cash do they have – Are they looking to hold the property for a long time or do they want to flip it. This will help to determine a price that they are willing to pay. This process will sometimes help to make an offer that can be justified in the buyers mind and reduce the number of offers and counter offers. It has been my experience that the more counter offer the more frustration for everyone and the less chance of a successful transaction and a win-win for all.

What most sellers/owners fail to understand is that they are in fact the second buyer. We as agents sometimes fail to explain this to them. It is important to list property at as close to market value as we can in order to help the seller/owner achieve their goal of getting the property sold. Ever seller that I have ever worked with would like to get as much for their property as they can. That is only human nature. But it is our job to ask the hard question – How much would you be willing to pay for this property. This conversation needs to happen during the listing process. In most cases this will produce a more realistic listing price and one that will be easier to defend. If a seller understands this concept before an offer has been presented it will speed up the process. If both parties understand this it will reduce the number of counter offers and increase the chance of arriving at a win-win for everyone. It is only right to say that in some cases the needs of both parties will not meet. Generally this will happen earlier in the process and allow all parties to move on to other opportunities.

Whether you are dealing with commercial or residential property this is a technique that will work and provide you with more sales. It will also give you the satisfaction of knowing that you have given your client the best possible representation. Try it. Even if you only get one additional sale this year it will be worth the time and effort.

10 Tips To Help You get Started in Commercial Real Estate

10 Steps to help you get started in commercial real estate

If you are looking to start, or expand your existing residential Real Estate business into the commercial market you may find these 10 steps helpful.Real Estate Agents purple

  1. Identify the market area.   To start, it will be helpful for you to cover an area that you are familiar with and comfortable working (also one where you are known).
  2. Investigate the current market.   Locate every property that is currently listed. Gather listing information on each property, with as much information as you can find about recent commercial sales in your market area.
  3. Identify the type of property you would like to specialize in.   In a small market this may not be prudent but in a larger market it will help you keep focused. Each type of property requires a little different skill set.
  4. Know your market area. Even though you may have lived in an area for a long time you will need to look at it from a different prospective. What are the demographics of the area and traffic patterns? Know about the leakage – money for goods and services that are not being provided currently. Obtain a list of businesses with the names of the owners to begin your prospecting file.
  5. Zoning. Get a copy of both a zoning map and the zoning ordinance for your market area. Make sure that you understand the zoning.  When working with a city the “area of impact” will be helpful information. 
  6. Community involvement: Attend city and county council meetings – Zoning meetings.  Join some civic groups – Local Chamber of Commerce – Rotary – as  examples.
  7. Get an education: I can’t stress the importance of this enough. Knowledge is power. Commercial real estate requires  different skills than residential real estate. Look on line for trade organizations, like CCIM, SIOR, RLI, that offer either classroom or online courses. Education is a continuing process and in most cases the knowledge you learn will make you want to take additional classes.
  8. Know the numbers: Commercial real estate is all about the numbers. Learn how to analyze the performance of property. Learn to prepare cash flow analysis  to help calculate investor returns. This kind of information will help you to better serve both sellers and buyers.
  9. Website: Take the time and spend the money and invest in a good website. It can be the least expensive way to let people know about who you are and what you do. Join social media sites & interact.
  10. Sell yourself: Make personal contact with people. Knock on doors and introduce yourself. Not with just owners of listed properties but of all property owners.

The ten steps above will put you well on your way to getting started in commercial real estate. More in-depth information on these topics will be covered in a three part report to follow.

 

Investors say – More is better than Less and Sooner is better than later

While is seems simple to say that more is better than less and sooner is  better than later it goes a little deeper than that. A lot of investors, particularly if they are small investors, agree with this concept but don’t always know what to watch for or how to calculate it. One of the tools an agent can use that will be helpful for an investor/client is a CFA ( cash flow analysis) worksheet that will project the performance of a property out a number of years. The number of years might be determined by the investors requirements. A lot of investors like to project out 10 years even though the further out you project the less reliable the information will be. As an agent this will give you an opportunity to stay in touch with your client over time. By watching the things that are going on in the market you can make suggestions to your client as to the possible best time to sell.  Analysis the performance of the property on a regular basis to determine how it compares with the CFA projections and ascertain if it still meets the investors criteria. By following recent sales in the area, sales CAP rates, the number of like units sold as well as new product coming on line.Commercial Real Estate Success by the NumbersTaking these thing in to consideration will allow you to keep your client informed. Let’s say that the investor was looking at an after tax return of 8%. If a sales price based on the current CAP rates would show an 11% return an investor might want to take advantage of the current market and sell now. He/she might want to reinvest the proceeds into another property which might provide you with an addition sales opportunity. Another benefit to providing information updates is to help  provide you a referral base. Satisfied clients tell other people.
Good follow up with clients will provide you with a steady income. Because of additional sales and referrals you will find that you will spend less time and money trying to attract new customers. Remember that more is better than less and sooner is better than later and always be on top of the market so that you can give good information to your client to help in the decision process.

 

Zoning – Worth Watching

A lot of people that are not directly involved in development do not understand the real importance of zoning. Zoning agencies and the counties or cities they work for can have a big effect on the value of a piece of property regardless of whether it is raw ground or a structure. They have the ability to make some property owners rich and others not. The value of a piece of farm ground zoned agricultural is not worth as much money as a piece of farm ground that is zoned for a commercial or even residential use. Even areas with the same overall type of use may have different amounts of allowable density. Land with allowable density of 4 homes per acre is generally worth more per acre than density of 2 homes per acre. Commercial property may also have some issues that will affect value. Height restrictions may limit a building in one commercial zone to 35 feet and in another allow for a high rise – again density. Parking requirements – setbacks are other issues that can affect the density and thus the value of a piece of property. Depending on the area there may be additional zoning requirements that might affect value. Helping your client/property owner or buyer understand these issues can be a win – win for everyone.

Sometime you may be able to anticipate the direction that a community might be taking and get in front of zoning issues. A city or county Comprehensive Plan is a document that might be helpful in this process. This is a document drafted by the city or county and given to the zoning agency. They use this document as a guide when making zoning decisions. The respective city councils or county commissioners have the final approval of any zoning ordinance but usually give a lot of consideration to the recommendations made by the zoning agency. Time spent understanding and becoming part of this process will pay off for you and your client over time. Attend the meeting of the city or county councils as well as the zoning agency and provide input where appropriate in order to help them with their decisions. Be proactive and this process and help the community become stronger.



Commercial property – Reaching a Go / No Go Decision

In making a decision to either buy or not to buy a piece of property an investor needs to look at four different types of analysis. They are: Market & Competitive Analysis – Location & Site Analysis – Financial Analysis – Political & Legal Analysis. Although all of these overlap to some extent, each needs to be analyzed separately and completely. All four of these areas need to be examined in an effort to determine the potential risk in an investment. Let’s look at some of the items with each one.

Property Analysis- go / no go

Market and Competitive Analysis: This requires a close look at both the supply and demand for the property. What is the current vacancy rate in the area? Is there new construction in the pipeline that will bring additional product on line and when? What are the current rental rates for the area and how do they compare to the subject property? Run comparatives of other properties in the area.

Financial Analysis:  An in-depth look at the income stream as to the current level but also the potential increase. Examine the operating expenses and look for any unusual items. Explore available financing to determine whether to leverage or pay cash. Figure the CAP rate and the IRR (internal rate of return) to determine if the property will meet the requirements of the investor.

Location & Site Analysis:  Location is always important and each type of property will have its own special requirements. With retail it means exposure and or traffic counts – Property access and adequate parking nearby. With industrial access to major highways of major airport or a rail siding might be important. Raw land will want to look at the direction of growth and or the Demographics of the area. These items will be important to all types of property but probably more so with retail or apartments. Proper zoning is always important when doing a site analysis

Political & Legal Analysis:  What is the political view and direction of the city or county officials? Are they proactive and looking to expand and encourage growth? Are there any design restrictions in the area? Are there any other restrictions on the use of the property? What is the tax base and how will it affect the property? Is the property located in any kind of improvement district that might have some tax incentives?

There will be other thing to examine with each one of these analyze depending on the type of property. What is important to understand at this point is the importance of each one of these and how they will overlap. Political issues will directly affect the location. The financial analysis will be directly affected by the market. Do you have a property where this type of information might be helpful? If so please contact Mike Sloan at Group1 Commercial Real Estate Consulting 208 946-5271 or email msloan44@gmail.com