Determining valuation and how to properly use commercial broker
 

Hi all, I'm interested in purchasing this office commercial real estate in Western Washington. There's a small medical/dental business on the lower floor (\~2k sq ft) and an upper floor (1k sq ft) that sits empty. Its asking price is 800k.

I understand there's some ways to come with a valuation 1) cap rate 2) comps 3) build. The selling broker seems to be valuing it high since the building next door is larger by 2k, larger lot and sold for $1 million. I hired a local broker and he pulled some comps and agreed that it was a good offer. But if we're looking at the cap rate/income that changes since the top floor is not leased, and the building has not been updated for a long time.

1) How do you take into account the building being old (1990) and hasn't been updated?

2) I understand that having it leased is an important factor. The comps could have had long leases that I don't know about. How does the top floor not being leased for a long time affect the valuation?

3) The lease for the business below ends next year. The current rate is possibly a little higher than comps, especially since it's a medical/dental business, so in the future to lease it out, the new tenant would likely want lower $/sq ft for longer term.

4) How do I make sure my broker is representing my best interest?  


I'm sure commercial real estate is pretty localized and my broker knows the selling broker and are currently working on a different deal (not together).  My broker walked through the building with the selling broker and talking to me afterwards he mentioned the "potential" $/sq ft the units could rent for, which were the exact same numbers the selling broker had for his cap rate valuation (which I didn't share with my broker). Thanks for any insight.
[{"id": "i1zqmyl", "text": "This sounds like your broker found it on loopnet\u2026\n\nWestern WA so I\u2019ll assume a medium sized market at least. Your broker should have lease comps to verify the going $/sf for medical office around the property. \n\nIf a tenant is paying at the top of market with less than a year left, I count that unit as vacant when I underwrite. So there goes all your income valuation. Built in 90 with no capex? RUN is my initial opinion.", "replies": [{"id": "i1zrbv5", "text": "It's an off market deal, I contacted my broker by seeing who had listings in the area. I'm looking to get the operating statements but I can't imagine it being accurate/upkept. I know for sure the roof needs to be redone. The building next door was definitely not upkept but was sold by the same selling broker to the tenant/new owner who feels like he overspent on it.", "replies": [{"id": "i1zsbqb", "text": "Seems like you\u2019re answering your own question here\u2026 what\u2019s the motivation to keep considering this deal? Does it have some intangible quality that makes it attractive?", "replies": [{"id": "i1ztb0p", "text": "I would possibly take over the business on the lower floor, and the current tenant wants a smooth transition and is opting to replace the roof on his dime. As a future small business owner if it's a good valuation, then to own the real estate rather than having to lease would be ideal.  \nI want to make sure the valuation makes sense, how much I need to spend to make it attractive to lease in case I plan to move my business to a more visible location in the future.", "replies": [{"id": "i1zv4s8", "text": "That\u2019s some context worth consideration. If you are going to occupy, and can get the seller to cover some deferred capex, then yes, when compared to your leasing costs as a business over 5 years, much more attractive. (You probably mentioned something about owner-occupy but I thought you were talking about the seller, not you)", "replies": [], "depth": 5}, {"id": "i23du9o", "text": "This changes the *entire* math of the deal.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "i1zt9vw", "text": "I'm not sure I'd agree with running just yet but, I'd certainly use that information as a negotiating tool.\n\nYou have several issues to consider:\n\n1990 construction, ergo, ADA compliance issues at some point.  They'll likely be nominal but, quite real.\n\nYou have a \"medical / dental\" business on one floor.  If your tenant sells supplies to that industry, they can move in 3 seconds.  If it's a dentist....that's an expensive move, on top of relocating all their patients.\n\nYou have a piece of dirt that apparently can support more structures (or, more sf'g).  That's intriguing (particularly in \"*western Washington*\"), but it's not enough to move the dial, just enough to pique my interest as a potential buyer.\n\n$800,000.00 is not a significant outlay, nor is it a significant price per sf.  What bothers me more (considering you have provided nearly zero useful information) is: Why the heck is that 1,000 sf empty?\n\nBeing more than familiar with assets in western Wa., I'm clear there are some markets (Seattle, Vancouver) markets that are on fire and worth diving in to with both feet and several others if you could find them, whereas there are other markets (such as Everett, or Centralia)...literally just around the corner from the hot ones, that I wouldn't touch if you gave me interest free loans and no payments for 20 years.\n\nThere's a million other considerations, like what condition is the building in...the parking lot, the neighborhood....and more.\n\nThere's a lot of negatives to this asset, possibly enough to make it unpalatable.  Some will see that as a reason to run, still others will see it as reason to negotiate harder.\n\nI can't help you with that aspect.\n\nThe commenter above me is absolutely correct in that, I would count that currently occupied space as vacant for valuations.", "replies": [], "depth": 2}], "depth": 1}]