Value / Apraisal of a Self Serve Wash

[Patrick H. Crowe]

Dear Ms.Dover:

Thank you for posting the information about the loans you and a friend recently obtained.

It seems to me clarification is needed.

1. The definition of a "fixed" rate loan is that the lender is unable to change the rate for the enitre TERM of the loan, right? Let me be very clear. If the rate is not fixed for the enire term of the loan then it is an adjustable rate loan and not FIXED.

2. All variable or adjustable rate loans have the rate "fixed" for some period of time but not for the entire term of the loan. Example: My most recent adjustable rate loan was at 3.375%. It was not on a car wash. It was "fixed for three years, then the lender could adjust it.

3. Were the lonas to which you refer commercial loans on car washes?

4. Were the loans to which you refer based on down payments of 20% or less?

5. Were the loans to which you refer based only on the car was to secure them? I'm wondering if other collateral ws involved.

6. What were the up front fees? In many cases a borrower can negotiate a lower rate and a longer term before adjustment by paying fees up front. Did either loan do that?

In my many years of getting commercial loans and speaking with other car wash owners about their loan I find their minimum initial statement to be somewhat misleading. Wer yours?

I intend no offense. I simply need musch more information.

Patrick H. Crowe

 

[Patrick H. Crowe]

Dear Sequoia:

I never "dismiss" the land value. I only wish you had read my book so you would know how important I consider it to be. In the first of the three approaches to any car wash appraisal problem, the "Cost Approach", the value of the land is dealt with at length.

I repeat my notion that the appraisal of a car wash is a complex problem. Folks who claim I "dismiss" land value are being completely silly. I tried to explain the difference between a car wash appraisal problem and a land appraisal problem. I admit the notion merits much more space than I have here.

Still, you accusation (and others) that land value plays noe role in value only shows an almost complete ignorance of the process of determining FAIR MARKET VAKUE.

Moreover, whether the value of the land is sure to go up (or down) is at the very most a minor consideration in determinations of FAIR NARKET VAKUE. As anyone who has read my book knows predictions of what the land value will be years from now are speculative at best.

How many such predictions about real estate values have been proven to be dead wrong in the last three years? Only a complete fool assumes he/she can predict the future values. Fair market value, by definition, avoids this falsity.

Send me your snail mail address and I'll send you a copy of my book or google "carwash appraisal".

Respectfully,

Patrick H. Crowe

 

[Bubbles Galore]

I see what you mean about a fixed rate. I have a 5 year note that is ammortized over 25 years, but after five years I have to refinance and that most surely means my rate will change. Understood.

One of the main reasons I was interested in the car wash I ended up purchasing was because my appraiser basically said that I was buying a successful operational business for what the land alone was worth. I don't think that one can 'simplify' appraisals into this times this and get the FMV of their wash. I do think that with a little common sense and being aware of your competition and the surrounding market you could make a fairly educated guess and go from there. Just my .02

 

[Rudy]

Having a note that HAS to be refinanced after only 5 years is (in my humble opinion) extremely hazardous. If credit is tight, or the revenue numbers slip (perhaps due to something as simple as the weather), you may find it impossible to refinance.

I'd never do it.....never.

This exact situation happened to a friend of mine. It almost bankrupted him.

Balloon notes are a ticking time bomb, unless you have other sources of capital as a backup.

 

[Bubbles Galore]

I have already crossed that bridge, so there isn't much to do about it now. Our loan was SBA backed and those were the terms we had work with.

 

[Sequoia]

land value

Patrick,

Thank you for the offer on the handbook. I'll take you up on it and will be interested to see what is included. I always enjoy exposure to new material and new thoughts and ideas.

I think the difference in your outlook and mine has to do with the respective markets that we have experience in. If you evaluate as "silly" any car wash that is priced at 5x GIM or higher, I view this as obviously divorced from the land value. But it's a difficult "divorce" as the business and the land most often go together.

The characteristics in my market is that there is *nothing* below 5x, and earlier in the thread I posted examples of washes at 8x, 10x, and 13x. Granted, at those multiples it makes paying a note difficult if you must finance your wash purchase; the land value does not generate revenue but it inflates the cost of the note.

Sales at multiples above 5x GIM makes for some interesting deals. Obviously, cash buyers have an advantage, as do those with a large down. And, if there is substantial land value it's key to have your exit planned before you enter.

 

[washregal]

ok Now all of you guys are scaring the hell out of me...

Here is my deal.. I have Two Properties that I am looking to finance.. Both wash's are grossing around $230k annually.

I am looking at settleing on a note of 1.4 m for both properties.

The Financing would be a 20 yr term at prime +1 so at 6% in today's numbers. The bank would finance 75% of the deal.

The seller will hold a 2nd on the remaining 25% at a rate of 6 % fixed with a 25 yr amort. 10 yr Baloon.

I have been running these wash's for the past two and a half years and have spent a ton of time with them.... In your honest opinion where do you see things?

Patrick scares me if I look back on the last 15 yr. Lending rates.

 

[Patrick H. Crowe]

Dear Wash Regal:

Here's the good news first: Because you have been the hands on manager for more than two years you no doubt know these washes extremely well. That's a definite plus.

Now the bad news: If I read you correctly you need a first and second mortgage to get
the deal to work and the term is TWNERY FIVE YEARS, RIGHT?

That's crazy. Go look at 25 year old washes. How do they compare to today's express tunnels?

The most damaging part is the cost. These fail to even come close to sane GIM's. I hear the enthusiasm you have. Of all the washes I looked at in over 40 years most, nearly all, were priced like yours - - way, way tpp high.

Do the numbers on a ten year loan. Keep telling yourself this is not a residential real estate sale where a 25 year loan is common. Once you see the numbers will not begin to work, then walk away. If you must, do the numbers on a 15 year loan but be sure you note an expected rate of return, of course in addition to your management salarry, of 20% or more. Please.

The current fair market value of any property has almost notheing to do with the potential buyer's prediction about what it will be worth some time in the distant future. That's the sad fact few buyers will admit. Over the long run some go up, some down. OBVIOUSLY! What happens if a competitor opens up way too close?

Bwat of luck but .Get real. Walk.

No offense intended but this deal is a walk away.

Patrick H. Crowe

 

[Patrick H. Crowe]

Dear Wash regal;

Either send me your snail mail address or google car wash appraisal. Either way I'll get you a copy of my book: The 2009 Car Wash Appraisal Handbook. It gives this topic the space it merits and needs. Read and study it, please. Ypu'll see why your deal in close to preposterous.
Patrick H. Crowe

 

[Jim Caudill]

Things can change very rapidly. When I started out, I had the only wash within 5 miles. My business grew steadily until late 2001. 2001 was my best year. I think I grossed about 1/4 of that in 2007! A number of things changed: Another SS wash opened up about 1/2 mile north and a convience store with a tunnel opened up about 1 mile south. Numerous job losses from the auto industry, the dotcom bust, 9-11, and everything else that we all have come to know. If you just saw my gross numbers for 1999, 2000, & 2001; there is no way that you would think that my business could collapse the way it did. I'm glad I didn't invest my money in a wash (I just lease mine). I know of others that are working to support their wash instead of the other way around.

Regarding the whole appraisal thing, are you a land speculator or are you looking to buy a business that can stand on its own two feet? I am asking myself these very questions as I am considering purchasing residential real estate. As rental properties, the deal doesn't look so good (rental income minus expenses, taxes, etc); but, if I am betting on a housing "bounceback", then now is the time to buy. They really are two different things.

 

[washregal]

Patrick,

My e-mail is hcminter@gmail.com

Thank you in advance.

 

[Jim L.]

Here is my deal.. I have Two Properties that I am looking to finance.. Both wash's are grossing around $230k annually.

Does this mean $230K EACH or $230K TOGETHER?

 

[Sequoia]

Deal

20 yr term at prime +1 so at 6%. The bank would finance 75% of the deal. The seller will hold a 2nd on the remaining 25% at a rate of 6 % fixed with a 25 yr amort. 10 yr Baloon.

Check my math, but the 1st note will be $7,120/mo and the 2nd at $2,100. Call is $9,200/mo or $110,000 per year in payments.

It's unclear to me if the two washes combined gross $230k or if they each gross that. If you get TWO washes each grossing $230k ($460k total) with 50% net then you have $110k in mortgage against $230k gross net profit. I'm guessing at the 50% figure so you will need to adjust for that. In this case, I think there is a lot of room to look at this deal and then factor in such future risks as rising interest rates and other horror scenarios, just as with any biz deal.

If both washes combined gross $230k and you net 50%, you only have $115k gross net with a $110k mortgage cost against it. Yikes. Considering interest rates and other risks, there just isn't any money left in this deal for you with those numbers. Not to mention the balloon in 10 years.

So the question becomes .. do they gross $230k each, or combined?

 

[dustpan]

Now Jim, do you want to be a car wash hero, or a cheapo residential landlord. Don't real men fix cat pumps and hydrominders instead of toilet floats?

 

[Patrick H. Crowe]

Jim L.

Had the quote said: "Each was is grossing around 230K . . " The quote said both, not each.

Of course an error in reporting the gross of 100% makes a whole new problem.

Patrick H. Crowe

 

[washregal]

They gross 230k Combined.. I know Yikes...

Shopping rates now.. anyone have solid commercial lenders with great rates?

 

[Jim L.]

Yikes is right! Finding a bank to go with you on this deal will be like pulling a rabbit out of a hat. The only way I could see this happening is that the land alone is worth more than the total purchase price of the 2 washes.

 

[dustpan]

It would need to be oceanfront on that one to be worth hocking the homefront for. I think the lenders going to want you to throw your house in.

 

[Patrick H. Crowe]

When a comprtitor opens a half mile away, and an express tunnel down the street,then what? Get reeeeeeeel!

Patrick H. Crowe