Although it can be said that a house is a house is a house, it's not so easy to find similarities among ICI properties. Just as one of the keys to a successful business is a Unique Selling Proposition, there's a decided emphasis in ICI properties on the "special difference" that each one brings to the table. Finding comparables can prove difficult and value often has to be calculated by rather arbitrary adjustments (plus or minus) to the figures associated with the same kind of property.
Of course, this is a fundamental principle of the appraisal process. However, contention can arise because the results can be based on the cost, income, or comparative market analysis approach, each one them of being likely to suggest a different value. Thus, bringing a seller and buyer together frequently means arriving at some compromise regarding the way each of them determines the true worth, both as it presently exists and as it could become.
On the whole, though, the deciding factors are likely to be answers to the following critical questions:
a) What is the cap rate -- how much money is going to end up in my pocket if I make this investment?
b) What profit potential am I facing if I take this operation over -- how well managed (or not) has it been hitherto and what difference can my experience/expertise/money make to the results?
c) How much of a turnaround am I looking at (assuming one is required) -- how long will it take, how much can things be improved, what degree of effort (and investment) is needed?
d) How much risk can I (afford to) take -- what can I salvage if my expectations aren't (or can't be) realized?
e) What is the total investment -- do I have enough money to take it on, can I raise the shortfall, will the revenue service whatever indebtedness is (going to be) involved?
f) Are the facilities what I need -- enough space, enough room to expand, dependable property management in place (or do I have to provide it?), acceptable lease terms, extent of existing competition (or, it's to be hoped, minimal threats of it), accessibilty (for me, staff, customers, suppliers), location (where I want/need to be), costs and feasibility of making the move?
g) Is this a passive investment or does it call for me to be actively involved -- can I simply sit back and derive an income or do I have (or want) to look after all/some of the day-to-day details?
Needless to say, judgement is called for and subjectivity arises when arriving at the answers. Again, though, they'll come down to two essential points:
What's in for me?
Does it fit in with my objectives?
Searching the Web
This topic is discussed on the web much more than is the case with the others I'm considering here.
For instance, there's a website at http://www.invest-2win.com/IncomeApproach.htm that provides some basic information about the market comparison, cost, and, most particularly, the income approaches to determining value.
In addition, there's a useful discussion "What's a cap rate anyhow?" that you can reach at http://www2.jurock.com/commercial/tips/caprates.asp It elaborates on the general difficulty of determining value but nicely explains the various calculations that are used in the income method to decide what a commercial/investment property is worth. The author is a well respected Canadian columnist.
And, perhaps not the least, there's a quite thoroughgoing consideration of determining value at http://www.zeromillion.com/business/buying/business-valuation.html It includes a specific account of determining the price of a retail clothing store.
Any questions? Something not clear? Need more information?
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Phone: (905) 468-3154 / Cellular: (905) 704-9037
e-mail: ebb@iciniagara.com
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