You’ve seen that same commercial sign on the property for years. It’s been there so long that it’s almost a part of the real estate. Does that help the property owner?
Remember, what is familiar often becomes unseen. Availability of a space or building needs to be seen to be leased or sold. To keep a property in the minds of prospective tenants and buyers, it takes an active marketing approach on the part of the broker/agent. A sign is just a part of that strategy.
What about accountability on performance? If the sign remains, the job is not being completed. There can be many reasons for this, not the least of which is pricing. Pricing is set by the market. When the market essentially “rejects” the property, it is generally due to one of 2 reasons: price or marketing.
If the challenge is price, then it is in the landlord/sellers control. The agent who presents the facts about the market on an ongoing basis to the owner gives that owner the possibility of taking action to get the deal closed. The owner makes the decision to either continue to “list” or to get the property sold/leased.
If the challenge is marketing, that is in the broker/agent’s control. Ask your broker/agent to explain their marketing plan as well as the implementation time. Often a major effort is extended on the part of the broker initially only to fall off significantly after a time. Know your broker/agent’s strategy so you can determine it if meets your needs.
A sign on the property is an ongoing advertisement for the firm on the sign. That’s great for the agent, but may not be in the best interest of the client.
Yesterday, the OFHEO announced the annual appreciation rates for homes across the nation for Q2 of 2007. Sacramento has dropped to -6.07%. Our high was back in Q3 of 2004 at 26.58%. In less than 3 years, that’s a drop in rate of 32.65%!!!!
Ok, what does that mean to you? If you are a seller, you must understand that the value of your home has probably significantly dropped. The annual appreciation rate has dropped 12.58% in just 1 year! The good news is that homes are selling…lots of them. To be among the “solds”, you must price it for today’s market, not yesterdays.
If you are a buyer, it means you are likely to pay less for a home in the Sacramento area than a year ago. Before you dance too high, remember that interest rates are higher than they were a year ago, too. So as usual, it’s a balancing act between interest rates and home prices. If you wait for the market to keep dropping, you may also see the interest rates rising. Where is the balance? Remember, we won’t know where the bottom is until the prices start going back up. So, now is a great time to buy.
Ok, ok, that’s residential real estate, but what is happening with commercial real estate in the Sacramento area? For 1 thing, cap rates are coming up. As cap rates come up, it means prices are decreasing. Additionally, tighter lending guidelines are coming into play. And again, interest rates are going up.
If a property sells at a 6 cap and the rate to borrow money is 6.75%, you have negative leverage, before tax and other considerations. So sellers, if you want to sell and not just list your property, consult a knowledgeable commercial real estate broker who can help you understand the value of your property in today’s market and what it will take to get it sold. After all, once sold, you can move on to your next project.
Buyers, watch those interest rates and be prepared to come in with more money. You may not need it, but it’s best to be prepared. Lenders I’ve spoken with are often talking 65% – 70% LTV, based on actual incomes. That means you are coming in with 30–35% down PLUS closing costs. Again, work with a trustworthy, knowledgeable broker to get a property that meets your objectives. When you find a property that meets your criteria, buy it. And especially in times like this, find a trustworthy lender. Good properties are few and far between. So are good people.
Smith & Associates Real Estate is your Sacramento connection for both commercial and residential real estate.
I just spent a day at a technology seminar. One could get the idea that people are being replaced. After all, with games like War of the Worlds, parents are communicating with their children via text message. Are bedtime stories and helping with homework at a table a thing of the past? Am I being a June Cleaver by not staying up with the times?
Which brings up another point. In the past, the real estate agent’s value was clear. If you wanted to know what properties were available, you needed an agent. That was in the dark ages before computers, of course. Now, you can go to Zillow or Redfin to find out the value of a property…or can you? Is the value of a property as simple as looking at the recording data from each sale? You could have 2 homes in the same area with the same floor plan. One has upgrades galore and one just the builder basics. The one with upgrades is $20,000 more than the “basic” model. How does Zillow and Redfin account for those differences? If it’s an average, that won’t give you a clear picture of your property’s value. A real estate professional is still needed to help with the subtle nuances that make each property unique.
Now let’s look at a piece of commercial investment property. Value can be determined in 1 of 3 ways: income, comparables or replacement cost. Which one do you use to establish value and who do you work with to help you determine what is in your best interest? A big part of that answer depends on if you are buying or selling.
If you are buying, you want a low price. The lowest price is typically yielded by using the income approach. If you are selling, you want a high price, which is typically derived by using replacement cost. A good commercial real estate broker can help you determine how to close the “gap” between those numbers and get to a closed transaction. Sellers who list a property above what the current market will bear have chosen to hold on to the property. After all, they have made the highest bid and no buyer has agreed to match it. Buyers who want a “deal” may pass on a property that meets their objectives because they got stuck on not getting the “deal” they wanted. Five years from now, they may be kicking themselves for the deal they let get away in this “buyer’s market”.
When you have a professional that understands your objectives and takes their fiduciary responsibility seriously, you have someone worth their weight in gold. They are not the transactional broker who just wants to close the deal and collect a check. Rather, they want a relationship with you for this transaction and the next and the next. To do that, they may not get what they want today. However, they are willing to trade truth today for your business tomorrow.
For commercial and residential brokerage services in the Sacramento area, get to know us as Smith & Associates Real Estate.
You have listings and they just are not selling. Translation: You aren’t making any money. Relief is here!
There are a couple of tools that can be used to find ready and willing buyers for your listings. The first is called Real Buyer Direct. This service is a place where buyers can register the particular type of property they are looking to buy. You go to Real Buyer Direct and put in your parameters and Shazam! you have a list of potential buyers for your property.
The second is called a listserv. This is similar to the program referenced above except you send a broadcast email to people looking for your property type. First you register for the service. Next you pick the groups of buyers who you want to send your message to. There are thousands of listserv’s out there but many of them have only a few registrants. I am about the share with you how you can do one “post” and reach 10’s of 1,000’s of people looking for what you have! How cool is that?!!!
This is great stuff, but as is true in life, “there ain’t no free lunch”. These are just 2 tools of the Top 25 Top Real Estate Cyber Tools that are available at NO CHARGE to Real Estate Cyber Society members. Yes, you must join the Society. That cost is about $13.00 per month, paid as an annual fee. Let’s see…$13.00 to bring buyers to your door…is that a fair trade? With commissions on just 1 closed deal well above $10,000 in most cases, that’s a great trade!
I share these tips that have changed the course of my business as a fellow commercial real estate professional. As a member of Smith Real Estate Services , a “niche” real estate firm with licensees in California and Idaho, we continue to provide “value” to the real estate community. We do that with educational tips like this or as brokers on your next real estate transaction. Call us…we are always working for you!
A couple a months ago, I posted Will You Make Money on This Deal? This article created a good deal of interest because it is common knowledge that the value of a commercial investment property is generally in the leases. This new post gives a little more detail on the answers from my previous post. Test your lease knowledge.
1. A triple net lease is most commonly associated with what property type(s)? A. office; B. retail; C. industrial or D. all of the above
2. Operating Expenses include: A. property taxes, insurance, advertising; B. capital reserves, property taxes, insurance; C. property taxes, utilities, leasing commissions; or D. all of the above
3. Cash flow before taxes includes: A. property taxes & insurance; B. advertising & capital reserves; C. property management fees; or D. all of the above
4. Which property type is closest to a true triple net lease? A. strip center; B. office building; C. ground lease; or D. industrial building
5. Which property type has the lowest average cap rate in the Sacramento MSA? A. office; B. industrial; C. retail; or D. multi-family
Answers: 1B, 2A, 3D, 4C and 5D
How did you do? If you got 100%, great. Of course, if you did, you probably know this is a very simple quiz. To really understand how to come up with a value on a commercial investment property, take my Deal Analysis Basics course where we go into detail on each of these topics. Knowing the facts about a piece of commercial investment property just makes good sense to your bottom line.
Buy-Hold-Sell: Let Smith Real Estate Services help you create wealth every step of the way!
It’s that time of year again…taxes! As we compile our information, the similarities between the different methods of filing tax returns is strikingly similar to the commercial real estate business. What do I mean?
With our taxes, we can file by TurboTax (or some other software program), we can go to H&R Block, an accountant or a CPA. Each of these methods costs a different amount and as a result, we expect more out of one than the other.
Likewise with commercial real estate. You can do it on your own, seek out a residential agent, seek out a commercial broker or seek out a commercial professional with a designation that proves their level of expertise in a certain area. Let me explain.
Finding a piece of commercial real estate on your own is like using TurboTax. You may end up with a “return” but was it the best “return” you could get?
The H&R Block method I equate to using a residential agent. They know their business and can do the leg work for you. However, they don’t have the depth of knowledge that an accountant or commercial broker does and you may leave “something on the table” by using this method.
The accountant is a seasoned veteran and is similar to a commercial real estate broker. They have experience and depth in their industry. They would generally be more equipped to provide a higher level of expertise than the other 2 methods, thus yielding you a “higher return”.
Finally, the CPA is like a CCIM (Certified Commercial Investment Member) or SIOR(Society Industrial Office Realtors). In order to hold the designation, they had extensive educations requirements, a proven track record in their field and had to take and pass an extensive exam on their subject.
Either method can get you a “return”. The question is are you looking for just any return or the best return? Your choice in a service provider can make the difference.
You get a new listing on a piece of commercial real estate and you are so happy! You’ve heard about the large commissions for commercial real estate so you want to handle this listing right.
You put in on the MLS, post a sign, add it to the Realtor caravan, and send out just listed postcards. 30 days pass and you have very little activity. You decide to have an open house. A few of the neighbors trickle in but no serious interest. You even get the client to agree to a price reduction. You get a couple of more showings but that’s it.
Your long term client with whom you’ve sold many homes is very disappointed in you and cancels the listing. They list it with a commercial broker and the property closes about 90 days later.
What went wrong for you? If you read my Ten Things You Need to Know About Commercial Real Estate, you would know that commercial brokers are generally not members of the local Realtor board. Consequently, they do not use the MLS. Since a buyer of commercial real estate will often use a commercial broker, leaving the property out of view from commercial brokers is a huge oversight.
Now, let’s say that you do get an offer in from a commercial brokerage firm. Because they are not members of the Realtor board, they typically do not use CAR (this refers to the state of California) forms. The CAR forms you know contain all of the customary legal protections. They also prompt you to provide certain disclosures and time lines. You know where to look for things on these forms.
The large brokerage firms often paid their attorneys a lot of money to draft their own contracts. Each firm often has a different contract. Additionally, the offer may come in on an AIR form (American Industrial Association). You’ve never seen these before. Are they legal contracts? How do you counter since you don’t have the same contract?
The basic answer is yes, they are legal contracts. They are simply different from what you are accustomed to. As for the counter, you would need to check with your broker to see how they would like you to handle this. I’ve seen different firms handle it differently.
However, what’s important about this in not the answers to the questions I posed, but rather to realize that this is just the tip of the ice burg when it comes to differences between commercial and residential real estate transactions. When you are selling your expertise and your time, you want to be relatively certain that you will get to a closed transaction. With that in mind, sticking with your area of expertise is in the best interest of both you and your client.
The S.I.R.E. Report
February 2007
Provided by Sheryl A. Smith, CCIM, CEO of Smith Real Estate Services
The national view tells us that real estate remains a “darling” of investors. However, since real estate is a local business, here is a look at Sacramento specifically.
Sacramento Retail
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Street Retail had the highest average asking rent of $2.17psf/mo.
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Average Asking Sales Prices are flat as compared to Aug 2006, across all retail property types.
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About 51% of the listed retail properties are between 5,000-24,999 sf.
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14th lowest retail vacancy market (6.2%) in the USA in 2006.
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5th highest average retail rent ($2.13 psf/mo) in USA, across all property types.
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Net absorption in 2006 14,000sf
Average Asking Price by retail building size
5,000-9,999sf $265 psf (28.7% of available property listed)
10,000-24,999sf $222 psf (22% of available property listed)
25,000-49,999sf $199 psf (6.1% of available property listed)
Snapshot: Compared to last month, average rents are slightly up and asking prices are ever so slightly down. Even though there is about 5% more product listed, there is still only about 1.3msf listed. Now would be a great time to sell! Call me today for a free investment analysis of your property.
Sacramento Industrial
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Flex/R&D had the highest average asking rent of $0.93psf/mo.
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Average Asking Sales Prices have gone up about 4.6% since Aug 2006, across all industrial property types.
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About 60.5% of the listed industrial properties are between 5,000-24,999 sf.
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Net absorption in 2006 1,001,000sf
Average Asking Price by industrial building size
5,000-9,999sf $144 psf (26% of available property listed)
10,000-24,999sf $128 psf (34.5% of available property listed)
25,000-49,999sf $ 97 psf (9.4% of available property listed)
Snapshot: Compared to last month, average rents are down, asking prices up. There is about 5.8 msf of inventory listed, which is about 5% less than last month.
Sacramento Office
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Office buildings had the highest average asking rent of $1.82psf/mo.
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Average Asking Sales Prices have gone up about 1.5% since Aug 2006, across all office property types.
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About 70% of the listed office properties are between 0-9,999sf.
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Net absorption in 2006 804,000sf
Average Asking Price by office building size
0-5,000sf $356 psf (45.7% of available property listed)
5,000-9,999sf $287 psf (24.2% of available property listed)
10,000-24,999sf $247 psf (20.1% of available property listed)
Snapshot: Compared to last month, average rents and asking prices are flat. There is about 4.6msf of inventory listed, which is down about 4.7%.
Sacramento Multi-Family
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Du/Tri/Fourplexes had the highest average asking sales price of $188,238 per unit.
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Average Asking Sales Prices are flat as compared to Aug 2006 prices, across all multi-family property types.
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About 66% of the listed multi-family properties are between 1-9 units.
Average Asking Price by unit mix
>5 units $189,061 per unit (51.6% of available property listed)
5-9 units $113,434 per unit (14.4% of available property listed)
10-19 units $104,240 per unit (9.2% of available property listed)
Snapshot: Compared to last month, average asking prices and inventories are both significantly down. Lots of inventory on the market…about 4.3msf.
Western Region Average Cap Rate
Office 6.9%
Industrial 7.3%
Retail 6.4%
Multi Family 5.4%
The S.I.R.E. Report is published monthly with results from the previous month. Stay current on property in Sacramento. Sign up to receive my posts by automatic email each month.
Sources: Loopnet Local Insights & the NAR Commercial Real Estate Outlook Reports
The goal of making an investment is to make money. Often, the amount one makes comes from taking a hit or miss approach. If that doesn’t work for you, consider these 6 steps to getting a higher return on your real estate investment.
1. 1. Know your holding period
Knowing the amount of time you plan to hold an investment property is an important consideration in determining what you will pay for a property. You make your money going into an investment.
Changes in the market and/or area could dramatically affect the value of your property. For example, if you buy in a redevelopment area, you may plan to buy the property at a low price, renovate it an then lease it out for significant cash flow. If you are among the first to renovate in the area, it may take you awhile to lease out the space.
If your goal is to hold this property for 2 years and you are the only one in the block renovating, you may not realize a very dramatic return, even after you renovate. However, if your holding period is 5 years and others are making significant improvements in the area, you would most likely see a dramatic increase in your property value.
2. Choose the right agent/broker
There are four key factors to consider when making your selection:
- Specialty (retail, office, industrial, land, apartment);
- Leasing agent/broker vs. Investment agent/broker;
- Time to dedicate to your property;
- Ongoing communication with you about your property.
3. Set the right price
Performance measures are ratios (ie. cap rate, cash on cash, etc). Working with performance measures can often lead to opinions, causing you to either leave money on the table or price your property out of the market.
Measures of value allow you to make comparisons between investments and and take into account the time value of money. When you can reduce numbers to a comparable measure that takes into account the most relevant factors of property ownership, then you have numbers you can use for sound decision making in pricing.
4.
Cast a broad net. You and/ or your agent/broker may have knowledge of certain buyers. Those buyers may not be buying your specific property at this time. For this reason, it is important to get the message out to as many people as possible. After all, you do not know where your next buyer is!
5. Negotiate skillfully
Time and Money are what most deal points break down to. Because your agent/broker works for you, when they understand your objectives, they can make sure you keep the deal in play while protecting your interests. If the deal dies, you want it dead because you were unable to reach an agreement on your terms.
6. Post Contract details
A time line with accountability is key. It is not just the job of the escrow officer to make sure all of your details are handled on time. A detail-oriented professional should be a part of your team. This can help you avoid those last minute details that can kill your deal.
Keeping these six factors at top of mind can help you get to the finish line on your transaction and for you to be happy with the result when you get there.
Go to Smith Real Estate Services to find tools to help you get on the right path to maximizing the return on your real estate investment, including training, financial analysis and brokerage services .
In its most basic form, cash flow is cash coming into your pocket. Negative cash flow is cash going out of your pocket. But, let’s be real. The real question is, how do you determine the true cash flow of a property? The right answer can make you money by helping you see if this investment is right for you. An incorrect calculation can cost you big money. Here is a quick example to test your current investment analysis skills:
You bought a piece of commercial real estate as an investment for $900,000 last month. You put 30% down. Because this was a former gas station site, you had to do some studies totaling $8,000. Your loan had 1 point. You collect $5,400 per month in base rent. It’s a triple net lease. Taxes are $9,100 a year, insurance $2,000 per year and CAM’s $2,400 per year. Your additional operating expenses on the property are $300 per month. You set aside 5% for future capital improvements. Your loan payment is $4,622 (PI) per month.
What is your initial investment?
What is the cash flow before taxes on this investment property?
What is the cash on cash return for this investment property?
What was your cap rate on this purchase?
What price should you pay to get a 7% cap rate?
The answers respectively are $284,300; -$582; 0; 6.4%; $828,000.
How did you do? If you got something different, you need our Deal Analysis Basics course. This course lays out how items are categorized when analyzing a piece of real estate for the benefit of the investor. This course covers investment analysis for both a single family home investment property and a commercial property.
If terms like triple nets, base rent and CAM’s are foreign to you and/or you wonder what difference does the former use make, our Intro to Commercial Real Estate course is ideal for you. Check out our entire group of teleseminars at Smith Real Estate Services and sign up for a course or package today. An investment in you is an investment in building your wealth.
