How do I valuate a commercial building with no good sales comps?
COMMERCIAL REAL ESTATE AGENT DAY: 11

After around 400 calls, I have come across 4 potential buyers and 4 potential off market listings.

Question: I have a potential listing client that wants to sell his building in San Francisco CA 94103. His net annual income or NOI is about 22K. He bought the building in 2021 for approximately 1 million and wants to sell it for 1.6 million. My senior brokers have already said that it is wildly overpriced and that I move on. However, having not closed any deals, I am a bit eager to work on it a little bit because a) the seller seems to have negotiating room on his price b) I want to learn how to valuate his building so as to possibly suggest for him to come down and c) it may not be worth the deal or time but I would like to get a listing period so that I can have something under my belt and some experience closing. 

My question is if the only comp I have is another building far away that sold for 1.5 million (85 Woodward St

San Francisco, CA 94103), how would I give a general valuation without resorting to an official appraisal. I came across a few ways to valuate his building here: 

[https://www.firstrepublic.com/articles-insights/life-money/grow-your-wealth/five-common-methods-to-value-a-commercial-property ](https://www.firstrepublic.com/articles-insights/life-money/grow-your-wealth/five-common-methods-to-value-a-commercial-property )

and the only way I could calculate his cap rate for his price is through the following equation: value = NOI/CAP rate. So his value is 1.6 million = 22,000/x, where x = cap rate, therefore his cap rate comes out to 1.37. From what I have been advised, cap rates of 1-2% are excellent buildings, 3-4% is so-so and 5-6% is down bad and the Multifamily Housing cap rate in this area, according to Costar, is around 3.5%. 

So, how can I come up with a realistic price to value his building?

Any suggestions/insight would be greatly appreciated!
[{"id": "i4pawk7", "text": "I'd highly suggest you not post confidential information on reddit with the property address", "replies": [{"id": "i4pp5q9", "text": "edited, thanks, one of my initial posts.", "replies": [{"id": "i4ppy2c", "text": "Np.  Lots of folks google addresses before submitting offers or even potential renters to read reviews etc.  Owners google to see the same reviews, make sure pm and brokers are marketing correctly etc.\n\nLots of ways for this post to come up to someone real close to the situation", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i4pb8r1", "text": "Oh no definitely not. Treasuries are yielding more. For a good part of SF I would use 4.25% at minimum.", "replies": [], "depth": 1}, {"id": "i4pbgvk", "text": "I wouldn\u2019t rely on cap rate for valuation. I would do a DCF Analysis to calculate the going in &amp; exit price based on your tolerance for risk. You\u2019ll want to consider any future disruptions to income, capital improvements etc in your analysis so that you come up with a realistic #. Good luck! \ud83d\ude0a", "replies": [], "depth": 1}, {"id": "i4pbl4p", "text": "Unfortunately I think you\u2019re dealing with an unreasonable seller who\u2019s trying to cash in. The CAP rate is a good quick metric, but only a snap shot in time to compare against other investment alternatives. It\u2019s also a very fallible number as it\u2019s extremely easy to manipulate.\n\nIf you have the ability to run a DCF on it based on the lease terms, that\u2019d be a better way to get to a number that\u2019s more attractive. Also I would add some sensitivity analysis to show the seller what happens to his price at certain cap rates and peg his building against a comparable cap rate.\n\nFor potential purchasers if there\u2019s value add potential, show the value add math and place a valuation based on that potential. You\u2019ll catch some rubes that way but the more sophisticated investors may not care.\n\nAlso just pulling that address up and understanding the San Fran market only tangentially, that NOI seems really low. On a building like that in downtown I would have thought his annual NOI would be somewhere around $50-$100k (just a guess).", "replies": [{"id": "i4ppdp4", "text": "Thank you so much! DCF I will definitely look into and this is the answer I was looking for!", "replies": [], "depth": 2}], "depth": 1}, {"id": "i4pgkn5", "text": "Why are you posting the property address?  If you're attempting to gain interest via this board it's in bad taste.", "replies": [{"id": "i4pp8ym", "text": "Thank you, I went and edited.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i4pprui", "text": "My first two years as a broker I would list anything in hopes to get a sale.  It didn't matter if the listing price was insanely higher than market comps,  I was desperate and took listings hoping I would get lucky.  Every deal that I listed that was overpriced was a huge waste of time.  My sellers were mad at me because I wasn't getting it done,  I was frustrated because I had no movement, and it was embarrassing trying to pitch a property that was way overpriced.\n\nNow I move on and list things I can move.  Brokerage is so much easier when you can do that. \n\n&amp;#x200B;\n\nOn a side note,  remember that everyone is a seller is they get a deal that is magically double market rate.  The sellers you want are sellers that are reasonable.", "replies": [], "depth": 1}, {"id": "i4q0zzg", "text": "That location is dangerously close to a building that I hoped I never see in real life", "replies": [], "depth": 1}, {"id": "i4ql22a", "text": "In short, who would be the likely buyer and how would they evaluate it. If you have steady income, then you're probably an investor, not owner-user. (Obvious, I know, but baby steps.) If it's investor, what sort of investor? Is it highly-sophisticated REIT or slumlord? How does that type of investor typically evaluate properties? It often comes to the marketing class (A, B, C, other) that you're dealing with. Class A probably more detailed - maybe multi-year discounted cash flows (DCF) with some sensitivity analysis. if it's fully stabilized, might use capitalization rates too. Class B probably more focused on the capitalization rates. Lower-tier properties might have rent or income multipliers. So for apartments, a simplified picture is:\n\n* 500-unit is DCF\n* 60-unit is cap rate\n* 2-8 units is rent multiplier\n\nCost Approach is meaningless unless the land provides most of the value. A lot of people will say use the Cost Approach for new buildings or special-use, but they ignore the notion that depreciation comes from more than just physical wear, and that special-use properties may not have a market. Sales Approach is okay as a check of reasonableness. If everything sells $200/sf, and you're coming out to $500/sf, check things over. If there are no sales comps, then skip that. I did a net lease dollar store and skipped the sales - there are sales, but the lease is the only thing that matters.\n\nIf seller wants $1,600,000 and that provides cap rate 1.4%, look at how that compares to other investments in the area. Would a buyer rather get this building at a 1.4% or a 10-year net lease to CVS or Walgreens at over 5%?\n\nThe cap rate thing depends largely on the location of the property, the market scale (city, regional, or national), upside potential, and general safety of the investment. I won't say there are no sales at 1.4%, but I bet there are plenty of other more appealing places that offer higher returns.\n\nHopefully, one of the senior brokers would take 2 minutes to explain to you ***why*** they think it's so over-priced.", "replies": [], "depth": 1}, {"id": "i4rjm6k", "text": "You can\u2019t determine quality of a building by cap rate based on a sellers desired price. If I want 2 million bucks for my property with 1k NOI that\u2019s not a great property I am just dumb.\n\nWhat type of property is it? Retail? Apartments? Office? That\u2019s going to determine what an appropriate cap rate is to value the property.\n\nAs another person said a full DCF is an option but not really necessary for a property this small. Most buyers are going to look at it on a direct capitalization basis.\n\nRealistically, if your seller paid $1M for an asset with $22k/year in cash flow he already fucked up. That\u2019s a 2.2% cap rate. Even multifamily and industrial which are the hottest asset classes out are trading at 3%+ at best.\n\nYour seller would be lucky to get his money back.\n\nAlso based on your post I can easily recognize you don\u2019t have a great grasp of the numbers. I\u2019d highly recommend doing CCIM or buying a real estate finance textbook at the least.", "replies": [{"id": "i4tdeu1", "text": "I purchased Mcgraw Hill Real Estate Finance textbook, they did not cover any of this during real estate exam licensure course.", "replies": [{"id": "i4vy7t2", "text": "The Brueggeman textbook you\u2019re referencing from McGraw Hill is probably the best one on the market for someone with little to no formal finance knowledge/experience. I highly recommend reading it cover to cover and completing the questions at the end of each chapter.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i4rpzas", "text": "What company are you with??", "replies": [{"id": "i4tdg5c", "text": "I'm with a regional company in San Francisco, sorry can't disclose company name.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i4rzkn3", "text": "Value.\n\nEvaluate.", "replies": [], "depth": 1}]