Yet Another Valuation Question

[Dave1972]

Hello again...my previous thread asked took a few different turns and I thought I would start a new one on strictly one topic: Valuation.

3SS+2IBA (one IBA Inoperable at the moment)

Public tax information has the place assessed as:
Land Value: $180,000
Improved Value: $241,900
Total Value: $421,900

An estimated appraisal ("3rd Party") example could look like:
Land Value: $123,500
Improved Value: $326,500
Total Value $450,000

The appraisal also looked at market approach valuation based on comparable sales (no idea as to what properties were compared)--I do have access to the full appraisal.
Sale 1 $431,335
Sale 2 $418,500
Sale 3 $432,109
Sale 4 $410,683

Market Approach Valuation $435,000 (is not the averaged amount of the 4 comparables)

On the previous thread, many have mentioned offering to pay only land value. So even if the assessed value for tax purposes is $421,900 you would only offer the $180,000? I know that is too low and the owner would never sell for that or even close to that amount. This is where my biggest dilemma is--besides the reality of time and money used to get it up and running in the shape I would want to maintain. Don't want to pay too much for this thing and lose my a$$! HELP?

 

[robert roman]

I find one of the hardest things for small business owners is accepting an answer or advice that is contrary to their intuition.

“…..besides the reality of time and money used to get it up and running in the shape I would want to maintain.”

So you do not want to make a mistake and bad investment but you also have a strong interest in this property, perhaps too strong.

Fundamental to value of an income producing property is income.

If there is no income, you don’t have an income producing property but rather real estate and single purpose building with equipment that may be worth $0.10 to $0.15 on the dollar.

“Public tax information has the place assessed as: Land Value: $180,000”

At best, this “assessment” may be 20 percent less than current land asking/selling prices.

“Improved Value: $241,900”

Again, improvements (site work, building, equipment) are incidental to market value of income producing property if there is no income.

“Total Value: $421,900”

As an expert, I believe my counterparts would also take issue with this value.

For example, are comps income producing, bank-owned, etc.?

If you have no carwash experience, at price of $400K the bank would probably need to see volume levels (gross sales) of between $150K and $200K for loan payoff and recovery of investor’s equity.

You can’t squeeze blood from a rock. If you patch it up and run it, you will end up with patched up revenue.

So, most people would try to identify if there was higher and better use for the property as a carwash site.

For example, express, quick-serve, flex-serve, etc.

 

[Dave1972]

But Robert...at the end of the day even you have not offered an "expert" opinion--at least nothing that is of value to help me form some sort of opinion with regard to an actual dollar figure. Perhaps I haven't included gross sales information and that is what is needed? I can't share that .

While I understand that you would never put any sort of emotion into a transaction like this, as a small rural-town--emotion does still play a factor in business. I still expect to see a farmer drive his tractor to the wash and spray off the cow-$h*t. I know tractors and farmers and rural areas are still businesses--don't get me wrong, I do feel that some level of involvement or emotion would play a part regardless of whether we're talking car washes, consultant work, CPA firm, or any other business. If your heart isn't in it, why do you do it type of mindset.

Of course the income component does have a huge impact into cash flows, which is where value comes in--I just wanted to get a better feeling regarding tax assessed value and/or 3rd party appraisal value. Any thoughts on the "value" that the real estate tax assessment provides? Or the 3rd party appraisal? Neither of them know gross income/cash flow information--so wanted to hear everyone's thoughts on whether this information is completely useless or if it provides any sort of place to start?

Thanks so far for your input on this--saw that the thread has been viewed over 60 times with no responses...

 

[robert roman]

“But Robert...at the end of the day even you have not offered an "expert" opinion--at least nothing that is of value to help me form some sort of opinion with regard to an actual dollar figure.”

“Perhaps I haven't included gross sales information and that is what is needed? I can't share that”

No buts about it. Secrets that surround an income producing property are like clouds that obscure the sun.

Experts rely on income verification among other things not fairy tales with rainbows and pixie dust.

No income verification, opinion of value is real estate only otherwise pro forma projections must be considered.

Pro forma projections, like financial history and IRS, must come from the seller.

In the final analysis, a summary property appraisal and opinion of value come from the proper application of the cost, market (sales) and income approaches to value.

In a paper presented to the appraisal institute, researchers (property appraisers) found car counts and financials are generally not available or meaningful for self-serve properties. So, sales approach is often applied resulting in physical “price per unit analysis.”

However, when counts and income is available, the inclusion of capitalization techniques (income approach) is recommended/require to reach an indication of value.

How can I or anyone else judge 3rd party appraisals without reading them?

Likewise, I would not recommend hanging a hat just on sales approach. Meaning I would also do cost approach in arriving at indication of value.

 

[Dave1972]

Robert-understood-without income info you are in the dark around the most important component.

I've signed a non-disclosure agreement so information I can put in a public forum is limited. I do have taxes for the past 4 years as well as utility costs for the past 3 years. I don't have count information available but I'd guess the IBA has car counts since new that can be averaged over the past 2 years (since new).

So-where do I go from here if assessments and 3rd party appraisal bottom line amounts don't tell enough of the story? I do have the full appraisal available as well.

 

[JMMUSTANG]

Without knowing the income and not knowing what shape the equipment, building, driveways, etc. are in this is a how I would look at the wash.

Max. Value
Bay cost $30,000 per bay x 5 bays = $150,000
1 operable IBA = $30,000
3 bays self serv. eqp.,vacs $10,00 per bay = $30,000
Land (Value) = $180,000

Total Max. Paid = $390,000 (not saying I would pay this much)

Min. Value
Bay Cost @$25,000 per bay = $125,000
1 IBA (Used) = $ 25,000
3 Self Serv., vacs @ $8,000 per = $ 24,000
Land Value minus 20% = $135,000

Total Estimated Min. Value = $309,000

Without knowing what amount of money you're putting down, your bank terms, length and limits you have to decide if you can carry your note payments, operating cost, etc. and still make a profit based on the 3 yrs. of income statements you have but cannot disclose.
Also your ability to be able to fix your equipment since it's used. Jack of all trades master of none.
It's been viewed over 60 times without many comments because we do not have a full picture.
Many people have dreams of owning a car wash but do not have the balls or guts to pull the trigger.
Many of us that have wished we hadn't.
Good luck

 

[JGinther]

On the financial part of the decision to purchase, I would not purchase below a 12% cap rate based on last years numbers. I would really analize the chance of someone else coming in and chopping your numbers in half... But if the risk of that is low, and there is lots of upside by improving the operation, and you have decided a neverending janitor job is what intrigues you, you could make the property a good investment. Say you buy at a 12% cap, inject 75,000.00 and lost of sweat, improve sales by 30%, then sell at a 15% cap... would you have made a good investment? You would have to fill in the blanks because I don't know the income.

 

[Washmee]

As a conveyor wash operator I wonder why anyone would want to own a business that is open 365/24 that would only return a profit of less than 50k. You're not buying a business, you are buying a lifestyle. My wash is open 66 hours a week which is quite enough. But at least when I close the doors at the end of the day(6pm) I know I have some time for myself and my family. Unless there is some future possibility of selling the land that the wash sits on for a future enterprise I would never get into the selfservice wash business.

 

[Dave1972]

JMMUSTANG--Awesome response and thank you! As I've read here one of the better things to do is to finance for shorter terms--maybe take a 20 year note but pay off in 15 as things hum along. Based on your math from the above post--that is EXACTLY what I was thinking for valuation. A few things that are not making me happy are that basically NONE of the lights work--no parking lot and I think only one light in one of the SS bays works--no exterior lighting either. The 2nd IBA is inoperable and needs an unknown amount of work. The building itself and the parking lot seems to be in pretty good shape. I did post a few pictures on the other thread about valuation located here http://www.autocareforum.com/showthread.php?11374-Another-Newbie-1st-Post-Value-of-Existing-Wash

Let's assume that income and expenses were as described somewhere else--let's say 90k income and 50k expenses--these are theoretical numbers of course.

 

[rph9168]

As several have already said without financials it is impossible to answer your question on whether to purchase or not and at what price. I know you have signed a confidentiality agreement but without financials any recommendation is a crap shoot based on a wild guess. It sounds like you have pretty much made up your mind anyway so if that is the case negotiate a price you think you can live with and be prepared to work your a$$ off to make it work. good luck.

 

[Dave1972]

Washmee-very interesting frame of mind. Your points are well-noted. The other thing to think about is equity once the property and equipment is paid off. That counts for something also right? I mean--what mindset do most of you have with this business? Is it strictly a profit scenario where you continue monthly payments for eternity in order to scrape as much off the top as you can and still keep the place in existence? Then the exit strategy is to sell for what is owed on it?

 

[robert roman]

Where do you go from here should be based on where you have been and where you are now.

You have not been in the carwash business. Now, you can’t share income, so I can only ponder real estate or cost.

Someone provided a cost approach but it doesn’t consider market-derived value of real estate or source (i.e. Marshall, RSMeans, etc.) as well as depreciation or marketing period.

However, I echo the qualitative remarks about nerve and pulling trigger. As long as you don’t have a gun to your head, there is no need to commit suicide.

My take is you do not have sufficient information to make an informed decision on moving forward.

 

[Waxman]

Do what I did to see if you even like this business: go and get a part time job at a carwash.

I worked at Golden Nozzle (FL Roberts) here in MA before building on land i had owned for years (in a town i lived very close to for over 30 years). I worked at 2 locations, each with 2 Laserwash brand machines.

What an education I got!!!!! My main point is this; you should feel passionate about whatever business you choose, because even the passionate among us are tested by a carwash. The hours, hard physical work, equipment maintenance, building maintenance, lot maintenance, customer relations, ordering of goods, contracting of outside services, employees. This is just a quick list!

I always wanted a carwash and now I have one. Many days are just like I dreamed they would be. The other days? Those are the test.

Good luck with your decision!

 

[robert roman]

Waxman made excellent points.

“what mindset do most of you have with this business?”

A rational person would want to maximize profits.

“Is it strictly a profit scenario where you continue monthly payments for eternity in order to scrape as much off the top as you can and still keep the place in existence?”

No, it’s to satisfy public demand. By doing so, one would expect to make normal profit in the long run.

“Then the exit strategy is to sell for what is owed on it?”

No, it’s to sell at a price that would pay off the loan, return all the investor’s equity and the desired return on investment equity.

 

[Waxman]

Yes a carwash is like any other business in that a person enters into it expecting to somehow maximize profit. That is a broad statement which, in the context of a carwash boils down to several questions:
1. what do i charge?
2. what will customer pay?
3. what does ciustomer expect?
4. where do i buy goods?
5. where do i buy services?
6. what payment do i accept at the wash?
7. what kind of ads do i run?
8. how many hours do i need to work per week?
9. hire employees?
10. employees pay scale?

Again, this is a quick list.