Wednesday, May 2, 2012

Building Valuations - "Lack of Comparable Sales"

Where do you go, when there are not sufficient comparables to compare the building/property to? How do you arrive at price per ft., where legitimate sales data does not exist or is not readily available?

Typically this topic can be based on any one of the following conditions:
i) A market with a historically low turnover of buildings
ii) Market substantially down from recent year highs
iii) Small market location (ie. rural, isolated town/district)
iv) Lack of institutional financing available
v) Poor economy & market dominated by distress sales only

Any of the above conditions, can be a major challenge in trying to peg a building value. But alternatively, there are certain things you can do to help you in your valuation process. Specifically, consider the following:
i) Look at the property’s assessed value (for tax purposes)
ii) Review all ‘active’ listings (not sold) on the market
iii) Order a “Fee Appraisal” from an Appraiser
iv) Review mortgaging options/ceilings with area lenders
v) Consider greater time adjustments (ie. going back 2-3-4 years)
vi) Expand your locational/area search for comparable sales

In the case of the last 2 points, these should be as a last resort and certainly it needs to include some sort of ‘discounting mechanism’ in applying them. For instance, if there are good comparable sales going back 3 years, you need to apply the changes in the overall market during that period (either +/-). Just a further comment on the ‘Fee Appraisal’ - it will most likely include a list of comparable sales which the Appraiser feels are appropriate for valuation purposes. Since an appraisal is most often required in order to arrange financing, it’s generally an investment that has to be made in any event.

One final thought on being challenged on arriving at a fair value. If it’s that difficult, perhaps its not a good investment and you should continue to look at other options. At the end of the day, if you can’t value it properly today, you could have the same problem as the Seller down the road!

Again, tap the expertise of an experienced commercial broker in your market, to help you with your valuation challenges. To watch our YouTube video tours, click here.

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