Commercial Real Estate Appraiser Michael P. Pugh provides answers to our question.
Last week the MacRo Report Blog posed a question to its readers in A Commercial Real Estate Value Dilemma: Market Demand verses Comparables:
If market comparables are weak, but recent buyer activity is showing signs of a better market value, how does a commercial real estate appraiser weigh the two contradicting forces?
This case study is unique in this commercial real estate market since two offers were put on the table — with a low relative difference in the offering prices.
Recent offers may factor into the development of a value opinion, however the emphasis placed on this information may vary due to several factors.
Each proposal, based on the information outlined in last week’s article, appears to have been independently discussed (“arms-length”) between two knowledgeable and typically motivated buyers and seller. This will carry considerable weight since it appears that two independent entities placed a relatively similar value on the same property — quite different from one sales contract negotiated between a knowledgeable seller and a novice buyer.
For example, I recently interviewed a prospective purchaser regarding a contract of sale that he had executed on a commercial property near Frederick. When asked about how he arrived at the final price in the sales contract, the purchaser stated that there was no price negotiation; he just offered the Seller his asking price. Pressing further I asked if this buyer had ever purchased other types of commercial real estate. He answered that this was the first property that they have ever considered purchasing for his business. As you can imagine, with this information I did not feel that the price in the sales contract carried any weight in my value analysis.
Assuming now that the real estate offers and sales contracts are negotiated between equally motivated buyers and sellers, additional market information needs to be studied to prove that such transactions are reflective of the overall market.
Standing alone, the desirability of one property by two market participants does not define a market. However, as stated considerable weight could be given to offers from knowledgeable real estate buyers.
A commercial real estate appraiser must look closely at several other factors and ask a number of questions before arriving at his/her opinion of market value.
Questions may include, and not limited to the following:
- What comparable properties have sold within the last twelve months within a defined geographic area?
- How many active listings of similar properties are on the market — both for sale or lease?
- Are other brokers/market participants seeing increased interest in those commercial real estate listings?
- In each of those cases what is the time frame from initial listing to first showing?
- Have the number of interested/qualified parties increased with each property listed?
- Are other properties seeing offer prices (for sale) that are similar to the subject property?
- Have other comparable properties been taken off the market during the past several months?
- If so, how long were they on the market and at what pricing levels?
- Are the owners/brokers currently considering placing them back on the market and if so at what price levels?
From all the information gathered, the appraiser will use his judgment to put the proper amount of weight that an offer (or offers) from knowledgeable purchasers will have on the final value. In the end the level of current activity and number of serious offers from knowledgeable buyers can be a key factor in overcoming comparable activity that may show a potentially lower value.
Michael P. Pugh is a Certified General Real Estate Appraiser with the Pugh Real Estate Group, LLC., in Frederick, Maryland. He specializes in the appraisal of improved and unimproved commercial and industrial real estate. He is an Associate Member of the Appraisal Institute. Michael is a member of the Rotary Club of Frederick.