office condo on a pre-construction basis

housebuilding, construction site, construction work-3370969.jpg

Posted by: newbie Jul 16 2004, 01:17 PM
I’ve got an opportunity to buy a office condo on a pre-construction basis. The developer is a friend. I am very new to real estate investing and have reveiwed several of your articles. I really appreciate your help thus far. Is there any advice you could offer in evaluating pre-construction opportunities? I can’t calculate a cap rate as I don’t know what the operating costs will be. Is there a rule of thumb per sq ft? Is there any advice you can offer on finding out about market demand? I know what avg rents are like but do not know things like vacancy rates.

Any info you could offer would be appreciated.
Posted by: loanuniverse Jul 16 2004, 02:43 PM
The most important aspects to evaluate this opportunity are:

1- Price that you pay as compared to that of the market

Essentially, you want to see the difference between the “deal” from your friend to the price that someone else would have to pay in the open market. If the difference is substantial, you might even want to “flip” it and not have to worry about being a landlord. On the other hand, there is a reason why there is a discount for “pre-construction”. You are taking on the risk that the developer will not perform.

2- Average rents for comparable properties as well as vacancy rates

As a lender’s credit analyst, I have access to professional reports from commercial appraisers plus I get to rely on the experience of our commercial real estate lenders. This kind of information is going to be hard to get for a “civilian” specially one with no experience. The one source that comes to mind is speaking to real estate brokers. You will also be making a decision based on information that might be outdated by the time you close on the unit. {I would imagine that this would be at least 12 months away}.

3- Operating expenses including debt service

I disagree with your statement that you can’t figure out how much the operating expenses are going to be. Sure, you won’t get them to the penny, but you can start adding up the following.

a- You have an idea of how much the debt service will be.
b- You can get tax information on comparables from your county appraiser’s office. If you are lucky you might even be able to get that from its website.
c- You should have an idea of how much maintenance will be. I mean this would be one of the first questions someone would ask that wants to buy a condo.
d- Maintenance should be really low being that the building is new.

You should also now that most of these units are leased on a triple net basis, which means that most expenses will be the responsibility of the tenant.

Good luck

Author: Commercial Loan Underwriter