Estate Planning Made Easy
If you’re interested in buying or selling commercial property , you need to get an accurate property valuation. But how do you go about doing it?
SHOULD YOU USE A PROFESSIONAL VALUATION SERVICE?
It can be daunting to value commercial property and get an accurate figure. This is particularly the case for commercial properties that are not standard or are in certain parts of a town that don’t have similar developments.
One way to solve this is to search for professional appraisal services. If you’re planning on investing in a commercial property or want to get a fair price when selling a property, it’s important to get an accurate valuation.
When you use a valuation service, there will be fees to pay. These can vary considerably, but you can expect to pay anywhere up
to Euro 5,000.
COST APPROACH
This is the simplest and most readily-available way to estimate a commercial property’s value . The estimation is a bit rough because you only need to add together the land and construction costs to get an approximate valuation.
INCOME CAPITALISATION APPROACH
Another way to value a property is by looking at its potential income.
This begins by looking at the capitalisation or ‘cap’ rate of the commercial property. This is the net annual rental income divided by your estimate of the current value of the commercial property. You can get this value by looking at sales of similar properties in the area.
Once you have the cap rate, or the rate of return, you can divide the net operating by this figure to get a value.
SALES COMPARISON APPROACH
This approach relies on the value of other similar properties going in the local area. It is possible to match your property to one with a similar square footage and facilities nearby. This will give you an estimation on how much your property could possibly sell for. It’s not the most accurate value, but it is a quick way to come up with a valuation figure.
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COMMERCIAL BRIDGING LOAN
How much money needed? What is the purpose?
Be it in a bank or with a commercial mortgage lender, expect this as the first question when you apply for a loan. The loan amount you request to plays a key role.
Commercial mortgage lenders, especially the private ones, very well know that most cases of borrowers who reach out to them are the ones who were rejected by banks. It’s important they build the right relationship with the borrower and answer for this question will set them up for the rest.
Next important point to consider is the purpose of the loan. For a business, it could be for different reasons like invest in the property improvements, purchases equipment for the business, or to pay off existing debt, and so on. It’s important for the lender to know where the money will be spent by the borrower.
What is your credit history (credit score)?
This is one of the most important factors that the lender would want to understand from the borrower.
Answering this question will help the lender in deciding if to offer the loan. It’s important that you maintain a minimum credit score of 680, no personal bankruptcy, foreclosures and tax liens in the previous 5-7 years.
Tip: Different lenders have different terms and conditions for credit history.
Some may require only the business credit history while others have to pull out both personal and business credit reports. Make sure you have both handy when you apply for a commercial mortgage loan. Lenders can let borrowers get their credit scores from reputed sites (Annual credit report, and so on).
Will you be able to repay the amount? What will be your repayment schedule?
Primarily, every lender, not just a commercial mortgage lender, would like to know if the borrower can repay the money. This is their main concern factor and they would require anything to give them the confidence you will repay their money.
The money lenders demand an assurance that you either have the savings or the will power to repay them back. Be ready with answers for any outstanding debts or loans that you may have.
It’s crucial that the lender and borrower discuss the loan repayment structure in detail when applying for the loan. With a commercial mortgage, the repayment structures are different.
There are two types of repayment schedules—Immediate and Long Term. Immediate loans have to be paid in 2 years or fewer, while long-term loans can extend to a period of up to 20 years.
Repayment structure could be similar to bank loans (amortizing) where the amount is settled across multiple instalments along with an interest. On the other hand, repayment can be in the form of a balloon loan – one payment to pay the loan principal amount.
What is the property?
Lenders first try to understand the property, its use and how the borrower will use the property. They also inquire about the value of the property, when the borrower purchased it, what amount they paid, the current worth of the property, and the present condition.
Most lenders prefer the property to be in suburbs or across metropolitan areas. They will perform an assessment with the help of reputed organizations to know the actual property value.
Tip: Be sure to provide the right information to the lender for a hassle-free process. If you have existing mortgages on the property, make sure you let the lender know about it and provide details to support the claim.
The more you pay, you will need a lesser loan from the lender, and you can maintain a lesser LTV ratio. This becomes easy and less risky for the lender.
Tip: Have a higher limit of what you can repay the lender every month. This will help you to put in the right upfront down payment and maintain a lower LTV ratio.
Details of a company’s financial performance over the years
Some lenders will demand information and proof about performing your business over the past few years. Few of the key documentation required are –
· Audit reports verified by the company auditor for the previous two years
· Bank statements (minimum of previous six months)
· Profit and loss statement for the financial year
· Business plan and growth projections for the future
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