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HM Marketing
( 10 posts )

[5 Replies]
A man and his realtor (real estate consultant) walk down the street and the man says “realtor, I want to buy that house,” pointing to a beautiful 5 bedroom 5 bath home, “what should I offer?” the realtor responds, “well, I’ve looked at the comparable sales in the neighborhood and it looks like another 5 bedroom, 5 bathroom home sold for Rs.1,00,00,000 just last month. I would offer them Rs.1,00,00,000. The man agrees and buys the home.

The next week, the same man comes back up to his realtor and says “realtor, i love my new home, but i had a great year at work and also got some of my land sold back in my village so i have some extra money that i want to invest. I heard that the commercial plaza in civic center bahria town is for sale. I saw the one right at the backside to that being sold for 60 million and was identical. Should i offer 60 million? The realtor responds, “let me check the sale price.” the realtor makes a few calls and comes back to tell the man the news. “well,” says the man, “can i buy it?” the realtor then tells the man the news, “that retail center is for sale for 100 million. Maybe we should look at something else?” the man, looking confused, thinks for a minute and then says, “how could that be? They are identical in size, very close to each other in location and have the same size. Why is that one worth twice as much?”
We’ll get back to the realtor’s answer in just a minute.
Before we answer his question, let’s take a quick look at how property values are determined.
Let’s first take a look at residential properties.
We define residential properties as single family homes. Homes are traditionally purchased as a place to live by their owner. They can also be purchased as rental properties. But, because the percentage of homes purchased as rentals is relatively small when compared to the single family home market as a whole, their valuation is based on the same methods.
Home prices are determined by using a few different comparable sale methods. These comparable sale methods are done by using cost per square foot, cost of construction, or floor plans.
For instance, let’s say a home sells in your neighborhood for 10 million. It has 3 bedroom and 3 baths. It is similar in style and size to your home. When you go to sell your home, the realtor will probably tell you that it is worth 10 million after looking at the comparable sale.
Determining residential home value is straightforward and relatively easy to do. You look at similar homes and what they sold for, then adjust for any differences, and you can quickly determine the value.
Commercial real estate is different.
We define commercial real estate as properties that produce income. They consist of apartments, shops, business halls and offices. These buildings are primarily owned by investors. These investors do not live there, but rent them out to tenants who pay rent each month for their space.
Commercial real estate value is determined by the income it generates. Commercial building/property generates income in terms of rent.
Unlike homes, commercial buildings rents vary even two same buildings in same block. One facing boulevard with a bigger parking will attract better tenants (with higher rents) than the one which is not facing main boulevard and has comparatively smaller parking.
Now that you know how values are determined, let’s get back to the realtor’s answer to the investor’s question on how the two property’s values could be so different.
“the reason,” the realtor answered, “is because this property has better tenants and generates more income than the one on back of it.”
What the investor initially failed to see is that he wasn’t just investing in the buildings as you do in residential real estate. The buildings were identical. He was actually investing in the tenants, the leases, and income that is generated by them, not the buildings themselves. Once he realized that, he looked again and it was easy to see why the values were different.
When he looked again, he noticed that the second building had higher quality tenants, a thriving restaurant, a top of the line clothing brand and they were obviously doing more sales. “oh, i see… because that commercial building at main boulevard does more in sales, it can charge more for rent. When it does, it produces more income. Right?”

“yes” said the realtor. Why don’t we go grab some lunch and we can talk about locating the right property for you?

    2281 days ago In Property Evaluation
    Post Answer
    Talib-e-ghil..
    (248 posts)
    Do u have investment property in commercial area inn islamabad worth 2.5 mil rs?
      2280 days ago 

      Real Estate ..
      (1046 posts)
      Hi,

      I appreciate the story you have posted.

      Regards,
      Z@in n@adeem
        2280 days ago 

        HM Marketing
        (10 posts)
        Thank you :). Appreciation is biggest motivation!
          2280 days ago 

          HM Marketing
          (10 posts)
          @ sinful: i have sent you a direct message, please check!
            2280 days ago 

            Adeel
            (54 posts)
            Nice comparisan
              2180 days ago 

              Post Answer (5 Replies)
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