Monday, October 15, 2018

Valuation Guide: Gas and Convenience Store

Valuation Guide: Gas and Convenience Store

|||Valuation Guide: Gas and Convenience Store

Valuation Guide: Gas and Convenience Store

Summary of Valuation Approaches

There are four different types of valuation methods that can be used to value gas and convenience stores, these methods are:
  1. Asset-based valuation
    The basic formula to use for this method is: The fair market value of a company’s assets less the fair market value of its liabilities = the fair market value of a company’s equity. This is approach also sometimes referred to as a cost based approach where the value of the business is equal to the cost of acquiring its assets with the same utility. This approach is seldom used for a gas and convenience store because the value of a convenience store is more closely related to its earnings and cash flow.
  2. Income approach to value (capitalization of earnings)
    This method is most the accurate for gas and convenience stores that have a constant growth of earnings and have a long history of operations. This method is equal to the cash flow projection for one year divided by the capitalization rate.
  3. Income approach to value (discounted cash flow)
    The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established convenience stores with low growth rates as well as newly opened stores with higher rates of growth.
  4. Market approach to value
    This method utilizes market indications of value such as publicly traded comparable company stock as well as acquisitions of privately held gas and convenience stores.

Description of the Industry

According to the National Association of Convenience Stores (“NACS”) the gas and convenience store industry has approximately 145,000 stores in the United States which account for $624 billion in annual sales. It is estimated that 80% of these stores sell gas in addition to food, beverage, and other products. This industry falls into SIC code 5411 and NAICS code of 445120.
A typical convenience store is about 2,800 square feet in size and services about 1,100 customers per day. The gas and convenient store industry is highly fragmented. Seventy percent of stores are owned by companies that have ten or less stores while 62% of convenient stores are owned by someone who has only one store.
The number of stores in the US has grown at a compound annual rate of 1.2% since 2004. However, the total number of gas and convenient stores decreased by 1% in 2008. This decrease was only the third time that the industry experienced a small degree of negative growth over the last 15 years. According to NACS, much of this decrease was experienced by single store owners while larger companies are opportunistically growing market share during the current global recession. 7-Eleven, Inc. one of the nation’s largest convenience store operators announced in May of 2009 that they expect to open 200 more stores by the end of the year. They plan to do this through both organic growth and acquisition.
According to The Convenience Store News, the 2008 top 10 gas and convenience store companies operating in the U.S. are:
  1. 7-Eleven, Inc.
  2. BP North American
  3. Shell Oil Products
  4. Exxon Mobile Corp.
  5. ChevronTexaco Corp.
  6. Alimentation Couche-Tard
  7. Speedway SuperAmerica LLC
  8. CITGO
  9. Sunoco, Inc.
  10. The Pantry, Inc.
Seven of the top ten gas and convenience store companies listed above are owned by large oil companies. Only 7-Eleven, Alimentation (Circle K), and The Pantry, are purely retail companies. The recently oil companies have been shifting from an owner operator model to a franchisor/franchisee model in their gas and convenient store business segment. In addition to increasing the number of franchisees, these oil companies have also been selling off a significant number of stores. Big oil companies are not the only examples of shifting to the franchise model. 7-Eleven has also continued to increase its percentage of franchises over recent years preferring to focus on branding, real estate acquisition, logistics, and systems and leaving the merchandising to franchisees who are more familiar to their customer base. Out of the top 10 companies only The Pantry remains a wholly owned operator of all its stores.

Industry Trends

The following are some trends within the Gas and Convenience store industry:
  1. The distribution of gas is highly regulated by states and federal agencies. In addition there is a current ongoing lawsuit in a US District court that involves the temperature at which gas is pumped. The people that brought the suit allege that when gas is pumped at temperatures greater than sixty degrees consumers get less gas than they should due to expansion. If successful, the suit would require retrofitting pumps which would be a significant cost for all gasoline retailers
  2. The financial performance of convenience stores that offer gasoline has been negatively impacted during recent periods of high gas prices. Reduced gasoline consumption due to high prices is not only impacting the volume of gas sold at retailers, but is also reducing the amount of customers that come in to buy food and beverages when they fill up their tank. Food and beverage sales offer higher margins than gasoline sales and the loss of these sales has had a negative impact.
  3. Credit card fees continue to be a significant and growing expense for convenience stores. The total industry credit card fees have grown at a rate of 27% over the past 5 years and are the second largest expense at the store level. One way that convenience stores are attempting to combat these fees is by offering incentives to pay with cash when buying gasoline.
  4. Many convenience stores have evolved from gas stations that sell food to restaurants that also sell gas. Food prepared in the store has grown to represent almost 50% of food service sales. Fresh food sales great margins and if done well can actually cause the food to be the product that draws customers in addition to the gas.

Financial Benchmark Statistics

The following benchmarking data is based on a study of over 200 U.S. convenience store companies each with less than $250 million in annual sales.
 
2003
2004
2005
2006
2007
Gross Profit %
23.0
19.8
20.6
22.0
19.2
Operating profit %
2.0
1.0
2.0
2.1
2.0
Owners Compensation/Sales %
2.0
2.2
1.7
2.2
1.7
Sales/Fixed assets
12.2
15.7
13.4
17.9
17.0
Current ratio
1.4
1.7
1.4
1.8
1.4
Inventory Turnover
23.3
18.6
21.8
20.7
27.3

Industry Organizations and Publications

  1. National Association of Convenience Stores
  2. Convenience Store News

Availability of Publicly Traded Guideline Firms

Many of the top convenience store retailers are publicly traded; however, most of these public companies are primarily oil companies and are not good comparisons to a convenience store with or without gas. 7-Eleven, Inc., the largest convenience store operator measured by number of stores, was taken private in 2005. The largest publicly traded pure play convenient store operator in the U.S. is The Pantry, Inc. which operates 1,664 wholly owned gas and convenience stores. The pantry has a price to earnings ratio of 11.1 and a price to cash flow ratio of 1.6 as of the date of this report.

Availability of Purchase Transactions

Since there are relatively few publicly traded comparable convenience store operators in the U.S., a valuation professional would need to place significant reliance on acquisition data for privately held convenience stores when performing an appraisal. One database that tracks acquisitions records 86 purchases convenience store businesses in the U.S. since 2002. The size of these acquired companies range from $150,000 to $4,142,000 in annual sales. From 2002 to the present, the multiple of:
  1. Market value of invested capital to Net Sales (MVIC/Sales)valuation multiples ranged from 0.1 to 1.45 times
  2. MVIC to earnings before interest, taxes and depreciation (MVIC/EBITDA) valuation multiples ranged from 1.5 to 22.0 times.
Stores that sell gasoline typically have a higher multiple than stores that do not. This range of market multiples is too variant to be useful without further analysis. A proper value for the company that is being assessed should be based on the performance of the subject enterprise, compared to the performance of others in the same industry. Industry economic conditions also vary at different times, which obviously affect convenient stores as investment opportunities. Specific factors that are unique for each store or business must be considered. Some of these factors include:
  1. Is the real estate owned or leased
  2. The duration of the lease and landlord/tenant relations
  3. The proximity of the facility to highly populated areas and freeway access
  4. The condition of the store
  5. The history of the operations and financial performance
  6. The competitive environment of the local area
  7. Franchise or Non-franchise
Fulcrum Inquiry performs business appraisals for as and convenience stores, as well as other businesses.
Valuation and Appraisal, Valuation Guides
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The Connection Between Convenience Store Earnings and Property Value


For convenience store real estate, value is related to earnings. Because they are income-producing properties, the market value of c-stores is directly proportional to their capacity to generate sales and profits -- stores that earn more are worth more.
Property prices for c-stores today are down about 20 percent as a result of the Great Recession. Commercial real estate prices across the nation dropped about 40 percent during that recession, which began in 2007, but are now recovering. Based on the past relationship between earnings and real estate prices, we can project real estate price levels at full recovery. To illustrate this relationship, we can use gross profit as a measure of earnings.
The table below shows various levels of gross profit alongside the corresponding current real estate value today and the projected recovery value. It can easily be seen that stores with higher gross profits typically have higher real estate values. For example, a store earning a stabilized gross profit of $400,000 per year would have real estate assets worth about $1,040,000 today, and an expected recovery value of $1,320,000.
The real estate values in this table include the site, store building, canopy, underground storage tanks and dispensers. They do not include food-service equipment, personal property or business value. The reported real estate value assumes typical management and is not based on any specific branding.
Per-store gross profit has been steadily increasing over the last decade, rising by about 4 percent per year, unadjusted for inflation. So, the decline in c-store property prices during the recession most likely reflected general economic conditions outside the convenience industry.
According to CoStar’s latest CCRSI Commercial Property Sale Index, commercial real estate prices are recovering and pricing growth is accelerating across the nation. We expect convenience store real estate prices to follow this trend.
In my next column, I will examine the economic realities of business value -- or the blue sky associated with the business -- and show how it is often overstated by sellers.
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appraisal and valuation of convenience stores and gas stations. 
Find more valuation information at www.cstorevalue.com.
Convenience Store News
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10 Things to Know About Commercial Real Estate Appraisal

A commercial real estate appraisal can be complicated-from knowing what to ask for as well as what to provide to the appraiser-here's what you need to know.
business owners have a lot to digest when it comes to the subject of commercial real estate—especially these days. That goes double for the notion of obtaining an appraisal on a piece of commercial real estate, a process that can differ quite a bit from appraisals done for residential properties. "Commercial is very different from residential in the fact that appraisals are much more subjective in nature," says Scott Everett, founder and president of Supreme Lending, a mortgage lender in Dallas. "Much of the value derived from a commercial building is based on the rental rates received relative to the expenses paid out. The underlying asset is important, but not even close to the same way that a residential properties value assets."

In other words, if you're looking to get an appraisal done on a piece of commercial property—perhaps because you want to buy or sell it or even because you want to establish a value of a lease or lodge a property tax appeal—there could be a bit of a learning curve in knowing what you're about to embark on. Inc. contributor Darren Dahl asked Douglas McKnight, a 22-year veteran commercial real estate appraiser and managing director at CapStruc Valuation in Malvern, Pennsylvania, for some insight into his profession. What follows is a list of the top 10 things McKnight says you need to know about commercial real estate appraisals:

1. The Inspection Is Only a Small Part of the Appraisal Process
Depending on the size and complexity of the property to be appraised, it might take less than an hour to several hours to inspect the property. Some clients perceive this as the entire process but the truth is that it is just the beginning. Appraisers research public ownership and zoning records, investigate demographic and lifestyle information, and compile comparable sales, replacement costs, and rentals. They then analyze this information as it relates to the value of the property. Finally, they write a report on their findings. The inspection is just the beginning of an appraisal process that may take several days or even weeks.

2. Don't Try to Misrepresent the Facts
Appraisers are professional skeptics. They will seek to verify anything that you tell them from other sources. McKnight says he often ask questions that he already knows the answer to just to test the credibility of the people showing him the property. Appraisers are always thinking about how they will defend their opinions if they are ever brought to court, even in assignments in which litigation appears unlikely. If you misrepresent anything, the appraiser will discount the credibility of anything else that you say.

Dig Deeper: How to Pick a Site for Your Business

3. Don't Withhold Information
You will probably be asked if you can provide a property tax bill, a set of drawings of the property, income statements, and other things. You might not know why an appraiser is asking you for something but it is best to provide whatever you can. Appraisers have no interest in unduly expanding their work files but they do need certain information and the more you provide, the more quickly they can complete the assignment. If you subsequently dispute the appraisers value opinions and produce additional information that wasn't provided from the onset, you have wasted valuable time.

4. Appraisers Must Adhere to a Strict Code of Ethics
Appraisers must follow the Uniform Standards of Professional Appraisal Practice, which, among other things, requires them to provide an unbiased opinion. Failure to follow this might result in disciplinary action from the state, including revocation of an appraiser's certification. If an appraiser refuses to do something that you ask for, it is probably because of the obligation to adhere to these ethics.

5. The Client Is the Party That Orders the Appraisal
If the appraisal is for financing, the lender is the client. Appraisers are obligated to maintain client confidentiality, so if you are the borrower or any other party, the appraiser cannot release the appraisal report or any other confidential information to you. If you order an appraisal as part of a property tax appeal and are afraid that the appraised value might be higher than the assessed value, you can rest assured that the appraiser won't release the results to the property tax board without your permission.

6. Identify the Intended Users
Make sure the appraiser knows who you want to use the report. If you are looking to buy a property, that might mean you intend to share the appraisal with the seller, your lender (though they will likely obtain their own appraisal) and possibly your local property tax appeal board. These people or parties will be identified in the appraisal report and are the only ones who are authorized to use the report.
7. There Are Three Types of Preports
A "restricted use report" is the shortest and least expensive type but can only be used by the client. Fees can vary based on the size of the property as well as the scope of the appraisal, but a good starting point for a restricted report might be $2000 to $2,500. A "summary report" summarizes the data and analysis and can be used by any intended user and can cost upwards of $3,000. A "self-contained report" contains all of the details of the data and analysis, but is rarely requested. If you tell the appraiser how you intend to use the report, he or she can guide you as to what type of report you will need. 

8. The Type of Report Is Separate From the Scope of Work
The amount of work involved in reaching conclusions does not depend on the type of appraisal. With a restricted use or summary appraisal, the appraiser will compile large amounts of information that are retained in a work file but are not included in the report. For this reason, the differences in fees between the various types of reports are less than the amount of information contained in the reports might indicate.
Dig Deeper: How to Get a Good Deal on a Lease

9. Consider the Date of Valuation
Several years ago, McKnight appraised a nightclub. The weekend after he inspected the property, someone was shot in the club. This introduced stigma that reduced the value of the property. This indicates the importance of establishing the date of valuation. Appraisers can appraise property as of the date of inspection, as of a past date (a "retrospective appraisal") or as of a future date (a "prospective appraisal"). It is important that you establish the correct date of valuation for your needs.

10. Consider the "Property Interest" Appraised
Last but far from least, it's important to tell the appraiser what your interest in the property is. For example, if you want to know what a property is worth free and clear – such as a warehouse you want to move your business into – you are interested in what's called the "fee simple interest." In other words, you simply want to know the value of the building and its property. On the other hand, if you want to know what a property is worth to a landlord when occupied by a particular tenant or tenants, you want a "leased fee interest." Finally, if you want to know what a lease is worth to a tenant, you want a "leasehold interest." This is a common request when people look to buy businesses, as they need to know what the value of the lease is to that business. "Be sure to identify which property interest you want appraised," says McKnight.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com
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7 Tips for Selling Commercial Real Estate

Commercial real estate presents unique challenges. If you plan ahead, do your market research, and apprise yourself of the latest trends, you’ll be able to break into the market and hit the ground running. To help ease the transition, here are 7 Tips for Selling Commercial Real Estate.
1. Talk to other commercial real estate agents. Ask if they have any tips for making the transition, or if they have particular expertise in your local market. You might even ask if they’ll help you gain experience by co-listing a property to start, allowing you to shadow them through the process.
2. Prepare yourself for a slow start. Don’t resign yourself to a slow start, but have your ducks in a row, just in case. When making a professional or personal transition in life, a safety net is always helpful — big moves can take time. No matter how much you know about commercial real estate, it’s important to remember that it can take longer to move commercial listings than it generally takes to move residential listings. Be prepared to weather that storm.
3. Learn the commercial real estate appraisal process. Appraisals in commercial real estate can be much more complicated than appraisals on residential properties. It’s essential that you know what to ask for and also what to provide the appraiser. Here are “10 Things to Know About Commercial Real Estate Appraisal,” from Inc.
4. Remember that commercial real estate is still about relationships. Remember, commercial real estate is not THAT much different than residential. The relationships you build with your clients and customers will ultimately determine your success — prospect, cold call, and build momentum.
5. Be on top of your training. Look for training opportunities that go beyond what you learned earning your real estate license. NAR offers the CCIM designation (Certified Commercial Investment Member) to train commercial real estate owners, investors and users in interest-based negotiation, ethics, market analysis, financial analysis and more. REALTORS® earning CCIM are recognized experts in commercial real estate.
6. Know your zoning. Commercial real estate comes with a lot of nuance when it comes to commercial use and zoning. In order to effectively serve your clients you’ll need to be up to date. Talk to your local zoning officer about individual properties and any upcoming changes.
7. Embrace commercial real estate marketing technologies. Listen or download podcasts about the latest in what’s happening in the commercial real estate market at REALTOR.org/commercial or find helpful marketing tips, articles and resources on NAR’s Commercial Blog, blog.commercialsource.com. Looking for where to post listings? Many commercial real estate listings don’t use MLS. NAR recently announced a new partnership with Xceligent, Inc. that will provide a suite of commercial real estate information services and preferred pricing exclusively for members through NAR’s REALTOR Benefits® Program. To learn more about this exciting new member benefit, please visit www.commercialsearch.com
Have you made the transition from selling residential homes to selling commercial real estate? Leave your tips in the comments.
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Getting Started in Commercial Real Estate


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Getting Started in Commercial Real Estate

Thinking of branching out into the commercial sector? Learn what it takes to get started and what kind of income potential awaits you.

January 1, 2007

by Cindy S. Chandler
Excerpted from The Insider's Guide to Commercial Real Estate (Dearborn Real Estate Education). This excerpt is taken from Chapter 1, "Getting Started." 
“Why do you want to be in commercial real estate?” That’s the first question I ask of those who come to me for advice. The advice I give them is directly related to their answer to my “why” question.
But let’s start with the one thing everyone has in mind: the money. Do you make more money on commercial real estate than on residential? Let’s try some math, as seen in the following example:
A Sample Residential Transaction:
Agent sells $275,000 home.
Agent co-brokers it with another firm. (The other firm is the listing firm.)
Agent’s firm gets 3%.
Agent gets 65% of his or her firm’s share.
Agent’s commission = $5,362.50.
A Sample Commercial Transaction:
Agent leases 7,500 square feet of space with a 3-year lease at $12 per square foot.
Agent co-brokers it with another firm.
Agent’s firm gets 3%.
Agent gets 65%.
Agent’s commission = $5,265.00.
What about selling a $50,000,000 mall? Likely, you won’t be doing any of those types of transactions right away, if ever! In any case, even though you can make a lot of money on big deals, they take much longer to put together.
While most residential transactions usually close within one or two months of signing the contract, commercial deals do not. Even the 7,500-square-foot lease in the example above could have taken as long as six months or more to get done and paid. Then again, it may have closed in a few weeks.
The shopping center example above illustrates that while it can be frustrating and somewhat risky, commercial real estate can also be very satisfying when a deal finally goes right. Another advantage to the commercial field is its variety.

Career Options

For many years, I taught the real estate courses needed to obtain a state real estate license. While most who enrolled thought they would sell homes — either new construction or general brokerage — many were encouraged to try commercial real estate when they saw all of the career opportunities in it. Let’s look at some of those opportunities.
General Brokerage. Commercial agents can represent buyers or sellers, assisting with the sale of a commercial property. These agents are typically independent contractors, not employees of a company, and work on commission. Depending upon the size and depth of the market, an agent may specialize in a certain product type (retail, office, industrial, investment — such as apartment complex brokerage) or a certain geographical market.
Development. An agent can work in several areas, such as actual development, project management, and leasing. The development staff purchases land and builds something on it — a shopping center or office building. The developer arranges financing, negotiates the “anchor” tenant leases, hires the architects, contractors, etc., and supervises the process until it is completed and the tenants move in.
Property Management. Once a property is purchased or developed, it needs to be managed. The property manager handles the day-to-day operations of a property — staffing, contracting for services, repairs, maintenance, etc. Individuals employed by property management firms are usually paid a salary.

What to Expect

What can a person expect as far as compensation, hours, and so on, as a commercial real estate broker? It depends. The 2006 NATIONAL ASSOCIATION OF REALTORS® Commercial Member Profile had the following findings based upon its 2005 random sampling of 25,000 REALTORS® with an interest in commercial real estate:
  • Slightly more than half of the respondents had an annual gross income of $75,000 to $249,000 in 2004, while 5 percent had an annual gross income of $500,000 or more.
  • Selling commercial property generated more income than leasing. More than half reported a volume of over $2 million.
  • Half have been involved only in commercial real estate for 16 years or more, whereas 42 percent of all REALTORS® have fewer than 5 years of experience.
  • A little over half work for a firm that is exclusively commercial oriented. About 25 percent work in an office with a mix of residential and commercial.

Taking the First Steps

Let’s say that you are a successful residential real estate agent looking to change careers. You are not sure in which area of commercial real estate you’d do best. You have business experience and you know people. (We’ll call these folks your “sphere of influence.”) What should you do?
Step 1. List everyone you know in commercial real estate.
Step 2. Call all of your relatives and closest friends and list everyone they know in commercial real estate.
Step 3. Start calling. Call first those from your list you feel will give you some time. Ask for only 15 minutes of their time. Explain that you are gathering information only, not seeking a position at this time.
Step 4. Conduct the interview. During the interview, ask the real estate professional how he or she got started and what advice they would give a newcomer. Ask for a brief overview of their business and their industry, and ask if you can borrow or have some industry publications, usually found in their reception area or office library. Before you leave, ask for two or three names of other commercial real estate people you should talk to.
Step 5. Narrow your search and research further. When you think you have narrowed your search, go to the industry-specific Web sites and do some research. Read their publications and get to know the jargon, types of projects, and key players. Also, attend as many commercial real estate classes as you can. Not only will you learn, you will probably make your best contacts there.
Step 6. Know the details about employment. Get an idea of compensation structure. Some positions are commission only; some may be draw against commission; some may be salary. Decide what you can live with and what you can’t.
Step 7. Begin the interview process. You are now ready for serious interviewing. Narrow your final choices down to no more than five. Just as with commercial properties, commercial professionals don’t like to have our candidates “shopped.”
Step 8. Get the job. Call back your contact person for another meeting. Explain that you have talked with many professionals, have narrowed it down to XYZ field (retail, office, etc.), have visited some of their deals or listings, and have some specific questions. When you meet, ask your questions, share what you have learned, and ask what opportunities his or her company has. Keep in mind that most commercial firms don’t have “openings” but create slots depending upon need or opportunity. Explain what you can bring to the table. Remember that the company is interested only in what it will be gaining, not what you will. Don’t spend too much time talking about your wants, needs, and desires unless specifically asked, and then keep your reply brief.

Cindy S. Chandler

Cindy S. Chandler, CCIM, CRE is the author of The Insider's Guide to Commercial Real Estate (Dearborn Real Estate Education) in which she demystifies the language, culture, and math of commercial real estate.
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COMPARING COMMERCIAL AND RESIDENTIAL REAL ESTATE

  • Commercial real estate is business-focused. It involves property that is sold, leased, or used to achieve a predetermined business objective. It’s used as an investment to achieve an anticipated rate of return on the funds invested.
  • Residential real estate revolves around the wants and needs of a homeowner and his family. It involves property purchased for individual use, most often to provide housing for families.
The selling process for commercial real estate hinges on numbers and return-on-investment calculations. Residential real estate is nowhere near so cut-and-dried because it’s more of an emotional purchase. Many buyers make decisions based on the fact that the house just feels right to them. The key factor is the return on investment.


  • Working exclusively for a builder of new homes, usually by serving as the on-site salesperson for a new home community. In this role, the agent sells only the builder’s homes. If buyers need to sell an existing home outside of that community, usually another agent handles that sale.
  • Representing residential real estate investors who are looking to increase wealth through the ownership of homes, duplexes, triplexes, and fourplexes. Small-scale multiplexes are handled by residential rather than commercial agents for the following two reasons:
• Often the purchaser lives in one segment of the multiplex, creating a residence as well as an investment property.
• Usually a purchaser can buy up to a fourplex with a conventional mortgage.
    Residential agents rarely represent buyers or sellers of multiplexes with more than four dwelling units. Purchasers of larger complexes must qualify for and secure commercial real estate loans — which involve a more restrictive set of conditions, including higher interest rates, shorter amortization schedules, and considerably higher initial equity positions or down payments.

WHAT IS COMMERCIAL REAL ESTATE?

Commercial real estate centers on business or investment use of real estate.
In commercial real estate, you can buy, sell, lease as a lessor (the person who owns the property for lease), lease as a lessee (the person who’s trying to lease the property for their use), syndicate, joint venture, develop, option, and invest in a wide range of commercial real estate categories, including retail, office, industrial, apartments, investments, and raw-land leasing.
Commercial real estate agents are usually familiar with many of the commercial real estate areas, but they generally specialize in one of the following areas or disciplines:
  • Representing tenants or lessees by finding, selecting, and negotiating new space for client businesses.
  • Representing building owners or lessors by working to lease out building space for the highest possible price and with the most favorable terms. Frequently a commercial agent represents one owner or even one building exclusively in order to ensure the building is leased to capacity.
  • Representing investors who want to buy and sell commercial property by finding opportunities that offer the lowest risk to the client, the best return on investment, and the best capitalization rate, which is the net operating income of the property divided by the sales price or value of the property.
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What Is The Difference Between Residential And Commercial Real Estate Agents?


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What is the difference between residential and commercial, you ask? The answer is simple: the difference lies with the property-type, the typical commission amount earned upon closing a transaction, the education required to understand and succeed in that particular field, and the work culture of the overall environment. A typical commercial real estate career will consist of negotiating properties such as office buildings, hospitals, entire apartment complexes, and malls. Whereas, an agent that is involved in a residential real estate career will focus on residential real estate such as houses and condominiums- property used for residential use, whether it be a single family type or multi family type such as a duplex or triplex.

Commercial real estate is focused in return on investment, therefore it is a lot less emotional and relies more on hard numbers. Some of the important questions in commercial real estate are “what the cap rate?”, “what is the monthly ROI (return-on-investment)?”, and “what is the payoff schedule?” There’s a much greater risk but often a greater possibility of a larger financial reward. You must be more adept at calculations and realize that customers are not looking for “their dream home” but more at a good investment vs. a bad one. There is typically less of a turnover rate on a commercial sale since investors tend to hold on to their buildings for many times longer than people usually stay in their homes. Your commissions may be ten times as large, but they definitely don’t come as frequently. For this reason, it’s important to save lots of money for living expenses — even more so than a residential agent — and be able to weather the storm if nothing sells within a year or more.
Being in commercial real estate is a much more corporate and data-driven environment than residential. While residential agents might reach out to buyers through a cute social media post, commercial agents are much more likely to formally present data and numbers to their clients, rather than show them pictures of rooms or backyards. Commercial clients expect agents to be ready with cap rates, gross rent multipliers, and more – all things that a residential agent would never really deal with.
Residential sales can be a much “softer” market in the sense that people purchase with emotions in mind, and people need homes to live in by a certain time frame. A commercial investor is not as concerned with moving in by the end of summer, or falling in love with a dream kitchen – they are thinking in terms of numbers and rent schedules and insurance rates more than anything else!
To sum it up, commercial agents need to have all the data, and must be patient, confident, and persistent to succeed in the competitive field that is commercial real estate.


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