Georgia Real Estate Commission GREC RENEWS Volume 2, Issue 3 March 2006 2006 Dates to Note March 8, 2006 Trust Account Class Greater Rome Board of Realtors 706-295-1727 March 30-31, 2006 Georgia Instructor Training (GIT) Georgia Institute of Real Estate Duluth, GA 404-250-0051 or 1-800-633-3583 April 25, 2006 Trust Account Class Statesboro Board of Realtors 912-489-7355 GREC Disciplinary Sanctions INSIDE THIS ISSUE: Listing Income Property 1 Listing a Business 1 Business Brokerage 2 A description of the assets Listing & Selling Income Properties included in the sale, such as the Real estate licensees often choose to specialize in a specific area of real estate. One such specialty is income- generating properties. property description, building drawing(s), and equipment used in the management of the property should be available for interested prospects. Any outstanding management Income properties are the very core of real contracts and other service estate investment. They include contracts must be available. apartments, office buildings, shopping Other issues to consider: centers, duplexes, warehouses, and The landlord/owner may require virtually any type of property that that a confidentiality agreement generates income from tenant rentals. be signed before he/she will The investor is buying the future stream of release specific financial reports income to be generated from the property. to interested prospects. When taking a listing on an income The owner's CPA may prepare property, the licensee must address appropriate financial information. certain issues that are not relevant in basic sale transactions where no tenants are involved. Data collection is a critical part of the listing process, and the ultimate marketing success of the property. Basic information such as rent rolls, lease expirations, and amount of space occupied by each tenant must be collected. Usually it is better to have this information prepared by the landlord so that the information is as accurate as possible. Many investors want to know the "cap rate" (capitalization rate) of the property before determining a further Disclaimers are often included in any marketing piece for the owner and the licensee. Listing forms and agency disclosures are required as in any real estate transaction. An investment property must be marketed differently. Quite often the licensee cannot use the same marketing sources or methods as for other listings because the owner/landlord may not want the tenants to be aware that the property is being offered for sale. interest. (The "cap rate" is described in the Focus on Terminology Section of this Issue of the GREC RENEWS.)The "cap rate" is based upon net operating income and the sales price ("value"). When listing and selling an income property, begin by learning about the property itself and think like an investor would think to determine what information is needed. Focus on Terminology: "Cap Rate" Georgia Real Estate Commission Suite 1000, International Tower 229 Peachtree Street N.E. Atlanta, GA 30303-1605 Listing & Selling an On-Going Business A real estate license is required to receive a commission JJ's Shop on the sale of a business that includes some transfer of any type of real estate. Valuing a business is quite different than determining a listing price for a piece of real estate. Be careful that you consider the business as well as the real estate value when taking a listing on a business. The core value is based upon the projected future profits from the business itself. The listing agent should work in conjunction with the owner's CPA or other professional who is familiar with that type of business and the tax and legal implications of selling an on-going concern. 1 Volume 2, Issue 3 March 2006 Georgia Real Estate Commission Suite 1000, International Tower 229 Peachtree Street N.E. Atlanta, GA 30303-1605 You can sign up to receive the GREC RENEWS electronic newsletter each month by visiting the GREC website or CLICK HERE TO SIGN UP Focus on Terminology: "Cap Rate" The "Cap Rate" or Capitalization Rate is a very basic measure of performance for quickly evaluating income properties. The Basic Cap Rate Formula gives an estimate of return: Cap Rate = Net Operating Income Value 1. If an investor requires a certain minimum "cap rate," the licensee can quickly determine if a potential income property is in the client's acceptable range to merit his/her interest. Usually owners of income properties will provide basic net operating income (NOI) numbers to assist in the marketing of the property. NOI is the income generated after expenses are covered. The seller of the property may require a confidentiality agreement be signed before detailed information is released. The value should be comparable to other similar properties recently sold. 2. Knowing the required "cap rate" or the "cap rates" of similar properties can provide a quick estimate of value. Value = Net Operating Income Cap Rate 3. The "cap rate" theory can also be used to estimate the net operating income a property should generate based upon a certain "cap rate" and properties of comparable value and type. Net Operating Income = Cap Rate X Value Remember that the "cap rate" is merely a snapshot in time and only reflects the value based upon the numbers provided for one period of time. Investors often perform more detailed performance analysis to determine if they are interested in purchasing a certain income property. RENews Newsletter Comments or Suggestions Click Here GREC Reminders: If the sale of a business includes real estate, the recipient of the sales commission must have an active real estate license. If the real estate licensee has a listing and sells a business involving real estate, the licensee cannot split the commission with a business broker unless that business broker also holds an active real estate license. Paying an unlicensed individual compensation for performing the acts of a broker is a violation of the license law. Business Brokerage: Licensure & Brokerage 520-1.12 520-1-.12 Business Brokerage Unless otherwise excepted from licensure requirements by O.C.G.A. Section 4340-29, a person who brokers the sale of a business must hold an appropriate license issued by the Commission if the sale of the business involves the transfer of any interest (including, but not limited to, leasehold or ownership interest) in real property. A business broker and any of the business broker's associates who do not hold licenses issued by the Commission may not negotiate or attempt to negotiate or assist in procuring prospects for the sale of a business where: (a) that sale involves the transfer of any interest in real property, or (b) where the payment of all or part of a commission or fee to the business broker or any of the business broker's associates in the sale of a business is contingent upon the transfer of an interest in real estate. An unlicensed broker may not perform or attempt to perform the acts in the preceding sentence and then secure a person licensed by the Commission to approve that transaction. see also O.C.G.A. 43-40-1; 43-40-2; 43-40-29; and 43-40-30 2