Do you want me to lie to you and make you feel good about the value of the property you’re calling me about or do you want to get it sold? I haven’t been asking this question at the beginning of my conversations with potential sellers, but I think I should start. If I did I could probably have significantly easier (or shorter) conversations.

If you’re calling me today to have a real estate auction I am probably not going to tell you anything you want to hear about the value of your property. Values have not recovered and we are not yet headed in the right direction in any kind of meaningful way (yes I know some states have seen some forward movement in residential property over the last few months).

Today I got a call from a broker representing a seller of a commercial property that is listed right now for $1.2MM. The seller wanted to know if his property was right for an auction and what did I think it would bring at auction. The fact is we’re going to get pretty close to market price at our sales (IMO), but then what the hell is market price anyway? Well these are the questions I ask to get down to it (yes in this order).

ME. What is it?
Broker. A mixed office and retail property.
ME. How big?
Broker. About 10,000 square feet
ME. What is the debt on it?
Broker. Nothing it’s free and clear.
ME. Hhhmmm (I like that) What’s the income?
Broker. About $1500 a month.
ME. Huh?!
Broker. Oh it’s mostly vacant, the market is real tough, there’s negative absorption in office and retail, yadda yadda yadda
ME. Ok so you’re 80% vacant.
Broker. Well yeah he’d probably keep it if he could fill it.
ME. What was your last asking price?
Broker. It’s on the market at $1.2MM, we have an appraisal at $2MM.
ME. Wait, what? So how’s that work out per foot on the rents what are you getting?
Broker. $11 per foot.
ME. Gross?
Broker. Yeah.
ME. So $8.
Broker. Yeah.
ME. Ok what are you figuring for a Cap Rate? What’s the math on this?
Broker. What’s a cap rate?
ME. Mmmm well, let’s do some math….

Sometime later I’ve explained the income approach to valuing this property.

ME. It’s worth $480,000 max on the best day, with tenants.
Broker. Well the guy says he’s not going to take something as low as like $600k.
ME. Yeah, I would take this with a reserve of maybe a couple hundred thousand. That’s all there is.
Broker. Ok, thanks, bye.

So here’s the problem. Now this broker, a nice guy, a good kid, has to go back to his seller and decide what to say. Or otherwise I guess he can take down his signs not answer his phone for a while and try to digest the fact that he just wasted a whole bunch of time and money marketing a property at roughly 3X it’s value.

It really doesn’t matter what you want a property to be worth today. We’re back to fundamentals. Where’s the money? Show me how this makes sense? What would you pay for this property? These are the conversations we need to be having with sellers today. There’s too much at stake for the seller and the investment in time and marketing is too great to be spent chasing unicorns. Let’s all agree to just be honest with one another and with ourselves about where we’re at and what we have before that slips away too.

Or I could just lie to you.

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