Why is your fee so high? It’s just a little pizza parlor. On a corner. In the middle of a residential neighborhood. It is only assessed for $125,000. Because it is very difficult to appraise. Often the small and the cheap are the hard and expensive.
So let’s compare the pizza parlor to a 100,000 square foot office building with 12 long-term tenants that is assessed for $14,000,000. Something that big would be difficult to appraise, no?
Actually, no. It is much, much easier, and more economical, to appraise.
Why is this? Well, first there is the economy of scale. Let’s say a simple appraisal report would justify a minimum fee of $2,000. That would represent almost 2% of the value of the $125,000 pizza parlor – a bit on the pricey side. But $2,000 would be about 0.01% of the value (or a couple of hours of net income) of the office building. Much more reasonable.
Then there is a question of market. There are probably not a lot of potential users for the pizza parlor, and one would be hard pressed to find a real estate broker who specializes in leasing obscure-site pizzerias.
But there is a small army of real estate brokers and agents who specialize in leasing large office buildings. The market is active and there are lots of landlord and tenant participants. Most of these people could rattle off the last 10 deals in the market – whether they were directly involved or not.
Here’s the real beauty: get one of the brokers on the telephone and they can quickly head you in the right direction. “Your building is in good shape, but it would lease for less than the building next door, which is newer and has a larger atrium lobby. Your space should lease for between $22.00 and $24.00 plus utilities for the initial five-year term with a $25 tenant improvement work letter. The expenses in your subject building are about $9.00 per square foot.”
As an appraiser, once you have this insight, you are halfway home.
Going back to the pizza joint. Could the potential users be considered a “market?” No, the users are small entrepreneurs who can be best described as “winging it” in the pizza business. The scant data available, which is obtained by a combination of page-by-page review of Multiple Listing data and shoe leather, is often conflicting, showing a wide array of rents and terms. Picking a number in this scattered dataset is sometimes just educated guesswork. There, I said it.
And that’s only the rent. Expense data? Good luck with that. Either the property has been vacant and there is none, or you get a back-of-the-napkin (literally) analysis from Mr. Freddie of Freddie’s Famous Pies.
But I get it. It’s just a little pizza parlor.