Valuation - what tools do you use to move beyond just cap rate for more detail
I am preparing to sell commercial property that I inherited a couple years ago that is located out of state.  It has really become too time consuming.  I'm hoping to use the proceeds to fund the purchase of something closer to home.  The way the leases are setup as a non triple net situation in a multi-tenant commercial building means that I field a ton of calls and things that I consider routine, but they fall to me.  If I continue to pay someone to do light maintenance, or hire a property management group, it doesn't make financial sense to hold as there are too many other opportunities.  

I can take the cap rate of a few different percentages and get an idea of what the building is worth based on cash flow.   It seems like this is most important to an investor since the place would immediately be profitable.  If I tweak that number based on location, future potential, lease quality and price, etc... which all lead to relatively minor changes, is there anything else that I should be thinking of?

I will ultimately sit down with a commercial broker to hash out an agreement, but I'd like to do some research about pricing and have an idea of pricing worked out so it isn't a complete guess when meeting the broker?

I appreciate any tips from the experienced crowd!

Thanks!
[{"id": "gknsuyv", "text": "I\u2019d recommend you get an appraisal, or, at a minimum, a broker for a price opinion.", "replies": [], "depth": 1}, {"id": "gkntio5", "text": "Sales comparison and cost approach, but what the other guy said you should probably get an appraisal", "replies": [], "depth": 1}, {"id": "gknuhxf", "text": "Meet with at least 2 brokers who specialize in the product type you are selling. Make sure the net operating income that have each arrived at by analyzing your rent roll and income/expenses statements is substantially similar (they can vary based upon assumptions about property taxes, vacancy, expenses included/excluded, etc.). Then ask them what they recommend as an asking cap rate and where they think the property will actually sell. Ask them why they think the way they do and what factors they are considering. The cap rate is determined by the net operating income but then comparing it to comparable properties that have sold and that are on the market adjusting for the factors you mentioned (location, age, quality of leases, tenants, etc.). Then ask about their marketing plan and how well they will expose the property. In my opinion, all properties should be widely exposed. If they imply otherwise, move on. Also, they should not need more then a 90 day initial listing. They may not sell it in 90 days and you may very well stick with them after 90 days, but it puts pressure on them to perform and communicate. A good broker will not mind this. A bad broker who intends to not widely expose a property will object. If a property is properly priced and properly marketed, it should generate offers within 90 days. Good luck.", "replies": [{"id": "gvfhf7v", "text": "Taking notes, thanks.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gknwgqs", "text": "Reach out to a few brokers for a BOV (broker option of value). They are free, as they want your business, and will give you a strong idea of current market value.\n\nIn my option, an appraisal is a waste of time and money for your situation. First, it\u2019s money out of your pocket and they don\u2019t know the market as well as brokers (who they rely on for sale and rent comps). Second, they are looking in the rear view mirror versus investors who are forward looking. \n\nDifferent asset types weight the importance of metrics differently. You don\u2019t need tools, just calculations but comparing a few BOVs will give you what you\u2019re looking for.", "replies": [{"id": "gkp1rpk", "text": "I agree with this.  Without a price target to hit (like when a sale is occurring) appraisers can be painfully inaccurate.  Their first calls are going to be to brokers in the area to confirm comps anyways, so might as well save the money.  \n\nIf possible, I\u2019d also recommend talking to multiple brokers.  I\u2019m a big fan of loyalty but it sounds like you\u2019re not certain exactly what you\u2019re looking for and different brokerage shops will offer you different services (for example, maybe one is a national company and can help you find your next property, maybe one is a local boutique but knows the sub market better than anyone else, etc).  Good luck", "replies": [{"id": "gvfheq0", "text": "Taking notes, thanks.", "replies": [], "depth": 3}], "depth": 2}, {"id": "gvfhe7y", "text": "Taking notes, thanks.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gknxhog", "text": "Technically, a cap rate can\u2019t be tweaked for things such as location, condition, etc. considering it is a mathematical approach to valuation. As you mentioned you can tweak future cash flow, but also consider looking at expenses as you might be too low or high in some categories which needs to be standardized to market expenses. This leads to your bottom line to which a cap rate can be applied. You\u2019d need to do a sales comparison approach to consider and tweak for external characteristics such as location, tenant quality, property conditions and the like. That \u201ctweaking\u201d would lead to an adjusted sales price for the comparables and using a metric such as square feet of GBA or GLA, you\u2019d find a value for your property.", "replies": [{"id": "gko3eel", "text": "You can tweak the cap rate as a measure of risk. Hard corner is going to be a lower cap than the mid-block property next door, all else equal.\n\nDefinitely should hit up a broker for a BOV.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gko1d13", "text": "hi, i specialize in property tax assessment appeals. basically, valuing commercial property but for tax purposes, and the lower i get it, the more i earn. if hiring an appraiser was necessary on each assignment, it would not be a profitable business. when you do enough cases, you find that the way you come up with a cap rate is one of the things you get grilled on the most. when you interview commercial brokers (makes sure its a few) grill them on how they come up with a cap rate. if they are using reports, how are they making the adjustments for your cap rate. if they are building from recent sales they were party to, how are they adjusting to your cash flow/risk profile? sounds like you know enough of the lingo, you just need access to data. \n\nbut to answer your question more directly, find data. i like [realtyrates.com](https://realtyrates.com) because they have data for my metro that other providers dont (or just have regional numbers, which dont help me)", "replies": [], "depth": 1}, {"id": "gko4r9x", "text": "BOV, appraisal, etc. But you should have a discounted cash flow model to substantiate your value thesis under certain assumptions.", "replies": [{"id": "gvfi1u9", "text": "Had to look up what BOV meant. Taking notes, thanks.", "replies": [{"id": "gvfonrb", "text": "Ha. Too many acronyms in the industry. I think people just make them up.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gko4wvw", "text": "DCF. Discount Cash Flow. This is arguably the gold standard for commercial valuations. In reality cap rate is far too simplistic. Use DCF to model out 10 or more years worth of cash flows, taking all income (growth included) and expenses (including capex, vacancy, and lease-up assumptions) into account.", "replies": [], "depth": 1}, {"id": "gkocxil", "text": "Chat with a broker or two - get some comps.", "replies": [], "depth": 1}, {"id": "gkoebs5", "text": "Generally, theoretical valuation is going to triangulate between direct capping a stabilized NOI, looking at sales of comparable properties (both psf and cap rate), and a DCF. I\u2019d argue DCF is most heavily weighed for buyers / lenders. The discussion then becomes what assumptions do you use for projecting forward, and that depends heavily on the market you are in and the property type.\n\nIf you\u2019re not familiar with a DCF, then just focus on the other two for now and have a discussion with the broker. They\u2019ll have their analysts do it all too and then present you with a BOV and hopefully a nice book that they plan to use for marketing.", "replies": [], "depth": 1}]