How do I know what the true value of a commercial piece of property?

Asked by Stevejwebb, Saint Louis, MO Thu Dec 27, 2007

The owner wants $59,000 but the assessed value that he pays his taxes on is only $40,000. How do I negotiate with him to drop his asking price?

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Randy Robins…, , Saint Louis, MO
Wed Jan 2, 2008

I would echo everything that Dale had to say on this subject. Assessed value has virtually nothing to do with actual value. The value of a property is determined by what it would draw on the open market. Keep in mind, pricing a property is an Art not a Science. Depending on the type of property and your proposed use for it this property may be priced high or low.

One of the most important indicators when purchasing commercial property is the Market Capitalization (or market cap) Rate. This is a ratio that is used to estimate the value of income producing properties. By dividing the Net Operating Income (NOI) of the property by the selling price, you derive the Market Capitalization Rate. So what is a good Cap Rate? Well that all depends on your investment portfolio, how you plan to finance the purchase (leverage), and your risk threshold. This is again where Dale's advice of seeking out a professional comes in handy. Keep in mind that cap rate is one of many factors that you can look at in purchasing commercial space. My advice would be to find a professional who understands this arena, how to run the numbers, and most importantly has strong negotiating skills. That will ensure that you get the best possible deal.
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Dale Weir, Agent, Chesterfield, MO
Thu Dec 27, 2007
Assessed value is totally different from what the property is really worth. Every 2 years they reassess the value of property in St Louis County. The ending value is not always based on reality. I spent a couple months this year helping my clients get their property values corrected because the county in it's infinite wisdom 4 years ago did drive bys - your property is in this neighborhood it must be worth this much regardless of condition or other factors. There was a HUGE outcry, so this cycle, they let the computer decide - I had clients with slab homes that were assessed at the same value as homes with basements, I had homes without pools assessed the same as homes with pools, etc. One thing to keep in mind with assessed value, is that if the county hasn't had a reason to re-evaluate the property, the starting point may be low and then the value each reassessment cycle is typically a % increase to that starting point. So if you have someone who starts out low, or who successfully fights and keeps a lower level one year, then the next cycle they are starting out lower than their neighbor is who has an identical building, so they stay lower. I can show you many homes that sit side by side that have widely divergent assessments.

Other factors that you need to consider is that a commercial building may have "other" property as part of the sale (for example a restaurant may have kitchen equipment and table and chairs that area included in the sale. The assessed tax value is for the land and the building, and does not take that into consideration.

If you are buying an established business, you are also buying their reputation, the expectation that the clientele will continue to come to the business and sometimes some trained staff or experience from the seller, all of which are not included in the tax rate.

Now, buying a commercial property is more complicated than buying a residential home. Unless you have a lot of expertise in the real estate field, you should't be doing it without a trained expert to guide you. Your realtor will have a fiduciary responsibility to protect your interests, help you determine a fair value for the property and help you to negotiate a good contract with good terms as well as price (sometimes the terms are as important as the price). The Realtor will also then help guide you to a successful closing, and ensure that all your inspections, title search, survey, etc are done in a timely manner and that any problems are identified and dealt with prior to close. Without a Realtor helping you, you are leaving yourself liable for not having a clear title, for bills that may be due after close and any number of other issues.
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Todd Norsted, Agent, Maple Grove, MN
Thu Dec 27, 2007
The true value of a peice of property is what it will sell for on the open market.

With regard to how to negotiate to get the best price.....get a quaified realtor involved to represent you! They will have the negotiating skills and nowledge of the market to make sure you are well represented and get a great price as it relates to it's true worth. Assessed values are simply that, assessed values, sometimes high, sometimes low, but rarely an exact reflection of the true worth of a property.
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