My 3 Best Tips for Finding Commercial Real Estate Comparables

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Originally Posted On: https://www.dohardmoney.com/my-3-best-tips-for-finding-commercial-real-estate-comparables/

No matter if you’re a business owner looking for a new flagship spot, or a real estate investor who wants to avoid the competitiveness of the residential market, commercial real estate can be a great asset to have. The problem, though, is knowing whether you’re getting a fair deal for your new space. Normally when buying residential property, there are usually ways to find comparable sold listings, or “comps,” but commercial real estate is a completely different topic. If you’re looking for tips for finding commercial real estate comparables, read on to find out more.

When looking for comparables in commercial real estate, you can look at sites like Loopnet, or try to find tax records from past sales. Neither of these are a perfect solution, though, so it’s usually best to leave this to the professionals. Hiring a commercial real estate agent who specializes in your industry is the most reliable way to finding the fair market value for a commercial property.

So let’s break down what commercial real estate actually is and a deeper dive into the options you have to find comps. Plus I’ll give you a few things to consider that make finding comparables of commercial real estate much harder than residential. Let’s dive in.

First, I want to clear up what exactly commercial real estate is and isn’t as it can get into a few gray areas. 

Commercial real estate includes warehouses, office spaces, retail stores, some industrial properties, and any other space where a business would be located. That said, your home office is not considered commercial as it’s part of your residential home. There’s also mixed-use zoning, but that’s another topic for another day.

Single family homes, duplexes, and triplexes are not considered commercial, they’re instead zoned as residential. Where it gets into the gray area is anything that can house more than three families. Once you get past a triplex, your property is now considered commercial.

The Multiple Listing Service, or MLS, is the hub where the homes in your area are listed for sale. There’s no one MLS; many cities will have multiple MLS’. The MLS was previously unavailable to potential homeowners as it was a complicated system that needed to be kept small due to the amount of paperwork, updates, and communications agents required to make to keep it up-to-date. Now, thanks to the Internet and sites like Zillow and Redfin, anyone can tap into current listings on the MLS whenever they like. 

Unfortunately, commercial property isn’t included in the MLS. There are a variety of reasons – the way commercial properties feature amenities, pricing structures, length of time they’re listed – but suffice to say it’s just too different an animal than residential, so agents don’t bother.

Since commercial properties don’t live on the MLS, commercial real estate agents become essential tools for finding properties. Consequently, they keep this data pretty close to the chest so they’ll have a competitive advantage. 

Whether you’re looking to buy or sell a commercial property, you must know what’s considered a fair purchase price for a property like yours (or the one you’re looking at). So how do you get that sort of info? There are three ways I’ve found to be helpful:

1. Loopnet. Loopnet is sort of like the MLS but is exclusively for commercial real estate. It shows current listings of available properties but doesn’t have a lot of information on recent sales. So while you won’t be able to find much in the way of historical data, it can give you an overview of what current properties are being listed for.
2. Tax records. Tax records are often public records, but even this isn’t a perfect solution. Two significant factors can affect the accuracy of the info you’ll get from tax records. The first is whether or not you live in a state which requires disclosure or not. Some states will have non-disclosure laws for commercial real estate, making it difficult to find comparables. The second is trust deeds and mortgages. These are often required to be public information so that creditors can access them. The problem is that this information is only for the amount mortgaged, not the total value of the property. So if a business owner buys a property for $1 million but puts down $500,000 and gets financing for the rest, then the tax records will only show a mortgage of $500,000. In that scenario, you’re only getting half of the story, which can leave you at a big disadvantage when looking for comps.
   
3. Working with a commercial real estate agent. Niche commercial agents are worth their weight in gold. Commercial agents will specialize in different niches like warehouses, offices, alternative investments (like mobile home parks), etc. Not only will they understand how commercial real estate works, but they’ll also be keyed into what the going rate is in your area. 

Some investors don’t like to work with agents, but I find that they’re essential for something as specialized as commercial real estate. While none of these is a perfect solution, especially when comparing them to the ease of finding residential comps, I still believe that working with an agent will net you better results than the first two options. 

Trying to find a 1:1 comparable in commercial real estate can be particularly difficult. There are some rules you’ll use in residential that simply don’t work with commercial, so I want to clarify a few things you’ll notice when trying to find comps.

How long they’ve been listed doesn’t matter. Commercial real estate isn’t bought the same way a single-family home is. Each property needs just the right buyer looking for the size, amenities, location, etc. Consider the immense amount of work it takes to move a business with employees, offices, furniture, clients, and so on. Thinking about it gives me a headache, and I’m not even looking for a place! There’s got to be a “Goldilocks” fit that compels a business owner to make the leap, and that just doesn’t happen as often as it does in residential zones. Expect to see properties that have been listed for sale for years without decreasing their price. 

How close are they really to the property you’re looking to buy or sell? In residential properties, you have a little wiggle room when it comes to comps. If there’s a home with different square footage than your own, you can usually do a little napkin math to accommodate that. Commercial real estate is a whole other thing due to the way each space is used. One less bathroom could mean health code or OSHA violations for a business, or too much square footage could mean exorbitant HVAC costs for a small business. When trying to find comparables in commercial real estate, you have to be precise in a way that’s not required in residential.

What is the foot traffic or commute time, and does it matter? I know it’s a trope, but location, location, location. The wrong location for a business can mean failure and potential bankruptcy for the owner, so you have to consider how a possible comp was being used and by what sort of business. A property owner may make concessions on the price to help entice business owners to compromise, and that can affect your ability to find accurate data. When looking for comps, try to see how the space was previously used and how successful that business was while there.

Whether you’re looking for a space for your business or are considering becoming a commercial real estate investor, there’s extra care that needs to be given when looking at properties. Try to work with an experienced commercial agent who can help you navigate the process to find comps for your property to save you a ton of hassle. Give a few of the considerations above some thought, and let us know in the comments if you have any extra tips I missed.