Finishing Line - May 2010

Acquisition — Is it a Good Time
to Buy a Car Wash?
By Robert Roman

People who are bullish on commercial real estate believe the best time to buy property is when property prices have fallen to or below historical lows; there are few buyers on the market; and certain property owners are having difficulty refinancing, selling, or leasing their property.

In this environment, sellers can be-come very motivated and the price for a car wash can fall below its replacement cost resulting in opportunities for people with the cash to take advantage.

If you are a novice and are looking to pick up a car wash at a bargain price before the markets start picking up, what are some of the things you should consider? Astute buyers begin by determining why the owner is selling.

If the property is a mortgagee sale, the owner will have defaulted on the mortgage and the bank taken possession of the property. The bank wants to pay off the loan and will take a price below market value to do that.

Mortgagee sales are awarded to the highest bidder at auction. This means an “as is” sale where your bid must meet the bank’s minimum requirements (no negotiating) and you may or may not have adequate access to inspect the property before sale. Because of these disadvantages, a novice may have more confidence in dealing with distressed properties that are more of a known quantity. This means shopping around.

One sign of a potential bargain is where the asking price of a car wash property has dropped over a period of time. This is also a pretty good sign that the seller may be more willing to negotiate.

Is the car wash property a good investment? After all, buying something cheaply doesn’t guarantee that it will be a good value. This means taking a dispassionate look at a car wash property.

Are nearby tenant buildings full or half empty? Have area traffic counts declined? How many other car washes are for sale in the region? What is the status of the region’s major employers? What is the economic outlook for the area over the next five years? The novice must realize that any investment in real estate should be only for those investors who are prepared to stay for the long term, as property prices are unlikely to move up in a hurry.

Have the building and car wash equipment been well maintained? If not, there may be an opportunity to unlock the potential of the car wash with a makeover. However, fixing up a site will add to the business’s cost and will require marketing to attract customers. This means understanding the development potential of the location and how to renovate the property so the costs are not prohibitive.

In a buyer’s market, it is the buyer that determines the final price not the seller. This means establishing an offering price based on the buyer’s desired return on equity after all operating costs and overhead. Since price is a function of a multiple of net operating income, the lower the net income of the business the lower the price. Upside is highly desirable, but you don’t want to program unrealized benefits or unreported income into the purchase price.

Can I afford the mortgage? Similar to residential property, banks will determine the maximum allowable monthly payment and purchase price based on income less obligations. The maximum payment for commercial real estate is calculated by dividing average monthly net operating income of the business by the lender’s required debt service coverage ratio. The maximum price is derived by working backwards from the maximum payment based on the proposed conditions and terms of the loan (interest rate and period).

If you are interested in buying a car wash property but are uncertain if it is a real bargain, you may want to consider asking for a lease with an option to buy after one or two years. When a property has sat on the market for a good while, sellers are often more willing to consider this option.

In the final analysis, bargain hunters normally find opportunity by sticking with the fundamentals. For a novice, this means getting assistance from an appraiser or car wash consultant who is familiar with determining the value of a car wash property and vendors who know how to renovate car wash facilities. The fundamentals also mean learning when to say “no” if you don’t get the answers you are looking for.

Bob Roman is president of RJR Enterprises — Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at bob@carwashplan.com.

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