Introduction

The aim of this eBook is to assist buyers, sellers and realtors in the process of making a transaction for a small apartment building or any other small investment property. It examines an investor's needs and motivations so that a good listing brochure can be prepared that will facilitate a sale. It also provides an explanation of current terminology in this sector of the real estate industry and discusses how a property’s value can be determined and how it can be improved.

The examples and situations provided are for illustration purposes only and do not represent any actual property or person. Any similarities are entirely coincidental. To some people the figures used here may be unrealistically low or high but values are primarily determined by location and it would be impossible to provide any accurate values for every area. The reader is, however, not left dangling as directions are given on how to obtain values for their own locality.

To many people, commercial real estate is a mystery. What is it? Who owns it? How is it valued? How are rents calculated? How do you measure it? How can a person invest in it? What are typical real estate brokerage fees? What is R.O.I.? What is a cap. rate? What is capitalization? What do all these strange terms mean?

All these questions will be answered here but it cannot make anyone an expert in marketing investment properties overnight. Residential realtors are skilled in selling homes or land and possibly a small set of flats but few of them get the experience needed to properly market an apartment building, a warehouse, a store or an office building. This book will teach the basics of marketing apartment buildings and it will allow realtors to build on this knowledge to successfully and professionally market any kind of commercial property.

Caution

There is a pressing need to caution anyone who provides an opinion of value for real estate to clients. In some jurisdictions it may even be unlawful for anyone other than a professional appraiser to provide this service with or without charging a fee but in any case there is the problem of ‘professional liability’.

To illustrate the importance of care and duties owed to a client, imagine a realtor is asked to list a group of properties that might include a six-unit apartment building, a corner store with an apartment on the second floor, a gas station, a warehouse, and an adjoining piece of land that is zoned for industrial use, the realtor is sure to be asked the age old question, “So what do you think I can get for it?”

Without experience in the commercial sector of the market, the realtor may be tempted to take an ‘uneducated guess’ or just go along with the seller's suggested value of, let's say, 2.5 million dollars. The ‘lucky’ realtor may then list it at 2.75 million dollars in expectation of a an offer below asking price and eventually sells it for the owner’s original figure. So, what could possibly be wrong with that?

Well . . . if the buyer ‘flips’ it for 5 million dollars, do you think the original seller would have any grounds for complaint against the realtor? Do you think the seller’s lawyer might look for some compensation for underselling it? You might say that the realtor achieved exactly what the client wanted and should be grateful……but that is no defence if it can be shown that the seller was unaware of its value and relied on the realtor to provide marketing advice. At the very least, the seller may feel cheated and the realtor could be open to a discipline action. At the worst, the seller could sue the realtor and the broker and the brokerage for the ‘loss’ sustained. The legal fees would be enough to bankrupt most people and then there is the public humiliation and loss of business.

Finally, organized real estate, governing bodies for the industry, courts and legislation have determined standards of business practice. Perhaps the most important rule is the realtors’ primary duty which is to protect the interests of the client while acting fairly and honestly with everyone else involved.

Other typical standards imposed by real estate bodies include:

You shall discover and verify the pertinent facts relating to a property …. that a reasonably prudent Member would discover.

Do not rely solely on information provided by the seller if it can be independently verified.

All financial information must be disclosed to the buyer.

Do not provide an opinion of value unless you have the knowledge, skill and training and have completed the necessary research.

If you can’t provide competent service either alone or with another qualified person, decline to act.

It follows that the duty of advising clients and customers professionally and competently cannot be taken lightly.

Professional Advice

Buyers and sellers of investment properties should seek competent, professional advice before any contract for real estate is made. The author and publishers of this eBook believe this is a realistic illustration of market practices at the time of publication but do not guarantee its accuracy or accept any responsibility. These are general practices that are almost universal but many localities may have their own practices. It does not purport to offer legal, financial or appraisal advice.

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Chapter One: Commercial Real Estate

"Commercial real estate" is any land and buildings that produce or could produce an economic rent. An ‘economic rent’ is sometimes called the ‘market rent’ and should provide an owner with a return on the investment after all costs are paid.

Typical examples of commercial real estate are apartment buildings, flats, warehouses, factories, offices, stores, and retail centres. Vacant land may also be considered as commercial real estate because it may produce an income from parking fees or because of its development potential. Single family homes such as houses, condominiums and mobile homes are generally considered as residential real estate and their value is in providing living space rather than rental income.

Other properties such as schools, hospitals, universities, libraries, farms and hotels are not considered as commercial real estate in this context as they are either institutional buildings or specialized business enterprises. Another term for commercial real estate is "I.C.&I." - Investment, Commercial, and Industrial. Another is "Investment Property". These terms are used interchangeably throughout the industry.

Real Estate Categories

Residential - condominium apartments, town houses, flats, houses, and mobile homes that are occupied as single family homes.

Industrial/Warehouse - light, medium and heavy manufacturing and processing buildings,

freestanding warehouses with offices, strip plaza warehouses with office/retail component.

Retail - small, medium, and large single-user stores, ‘Big-box’ stores, strip plazas, and

enclosed shopping malls. Also mixed-use shopping/office/residential complexes.

Offices - small, medium, and large single-user office buildings and multi-tenant office.

Investment - any category of real estate that offers investment opportunities and includes all the above plus apartment buildings - Small (2- 24 units), medium (25-99 units), and large (100 and more units).

There are many examples of hybrid properties where there is either a mix of uses or the line between warehouse, office, and retail is not clearly drawn. As an example, when warehouse properties were first developed they comprised a large open storage space with a small office area. This has changed to a larger office component with an even larger showroom and sales area. So the warehouse has declined from its original storage use into a marketing centre.

How Do Investors Make Their Money?

In order to successfully market investment property, it is important to understand how investors view potential real estate opportunities - what makes them excited about a particular property? Generally, they have a preference for a category but their attitudes might change over time with the state of the economy. In a recession, for example, industrial buildings are not popular due to reduced consumer spending and the consequent reduced need for consumer products such as furniture manufacturing. However, apartment buildings are more popular in uncertain times because people prefer to rent rather than buy their homes.

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TABLE OF CONTENTS

Introduction

Chapter One: Commercial Real Estate