Perception vs Reality – Commercial Purchase
harkins / September 26, 2012
It’s amazing to see how the media can blow things out of proportion without having the benefit of direct knowledge in an industry. This holds true throughout many facets of business that our media covers; However, the real estate markets have been a huge source of articles for the past few years, and to some degree, rightfully so.
The truth of the matter is that, yes, there are some bank-owned locations or short sales that can provide some initial equity to your bottom line; However, there are numerous potential pitfalls to these locations that will require a professional to do some serious due diligence work. These pitfalls could include: extensive remodel work, outdated facilities that need to be brought up to current code, impact fees, shell space build-outs, turn-over time, existing liens, and more.
The perceived value is there from a pricing perspective but the hidden costs could be a huge liability. In addition, many of the banks that may have control of these locations have already written down the loans to a current market value meaning that they may not have a sense of urgency to release the property. The misconception is that if it’s bank owned, let’s “low ball” an offer for the location.
Having worked with numerous regional and community banks this theory doesn’t always work. Banks also understand value and what a location could demand now and in the future, and may not be willing to sell the location at the number offered. In fact, there have been numerous circumstances where the bank simply doesn’t respond based on the understanding of the value the location commands. Keep in mind, they may have a current appraisal in hand.
In today’s world the best bet is to discover internally what budget numbers fit for your practice now and into the future. If your current rent payment is $2,500 per month, with today’s flat out amazing financing rates, your practice could afford a mortgage of close to $400,000 (Prin + Int only/ 20 year amortization) with a good credit profile. The fact is banks have money to lend, and medical practitioners are highly sought after.
The goal for purchasers should be to work within their practice parameters and take a global look at the market. With a narrow focus one may miss out on additional locations that provide significant value. Ask yourself, would you be willing to pay a little more for a location now knowing you could close in 45 days, rather than pay a little less on a distressed asset only to hope that you may take possession at some time in the future and have additional pitfalls.
The truth is, today’s markets can provide practices a significant amount of value. Pricing for commercial locations are at historic lows, interest rates are at historic lows, construction costs are lower than ever and governmental entities are willing to work with new businesses to create capital infusions. These items provide significant advantages to moving businesses off the sidelines and into the marketplace. Contrary to what the media may portray, this is the reality in today’s world.
« Previous Next »