In step one of this seven step process to completing successful commercial real estate transactions, we discussed the importance of deciding what type of property you are focusing on and completing research on those type of property sales in your area. We also discussed networking with the right type of broker to help assist you in the area of real estate you want to invest in.
Step 2 of completing successful commercial real estate transactions is the Evaluation Process. The major part of the evaluation process for completing successful commercial real estate transactions is actually most often done in the “Due Diligence” period, once the property is fully under contract. It can just be too involved and require participation and cooperation of the seller such that doing so before putting the property under contract is sometimes not feasible.
However, there are some “Rule of Thumb” indicators that are used as a down and dirty fast evaluation that you should become familiar with as quick ways to spot potential good deals quickly that you’d like to investigate further.
In the Evaluation process, you are actually verifying that the assumptions you used to make a decision to make an offer at a certain price were in fact valid assumptions.
This is where you now look at the leases and all of the various revenues of the property and verify that they are accurately reflected in the information you were given by the seller. The same process is done with all the expenses.
This is done so you can be comfortable with the NOI (net operating income) figure you used to apply your “Cap Rate” to so you could come up with a value, from which you made your priced offer to purchase.
Since NOI is used as the major factor in determining value, it is important to spend all the time necessary to be comfortable that it has been accurately stated! The “Cap Rate” is a factor applied to the NOI to actually determine the value of a commercial property so it is very important to have a firm grasp on the evaluation process. One must understand how to accurately calculate NOI and Cap Rate when dealing with commercial real estate investments. (We will cover that in another article.)
However, making sure that these numbers are accurately stated is a critical part of the evaluation process. As these numbers determine what type of deal you have, if any at all. Stay tuned for more steps on how to complete successful commercial real estate transactions in upcoming articles.