Want a formula to determine a selling price for 31 town home units

In Selling Property - Asked by Terry H. - Dec 23, 2009
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Answer(s)

Jason P.
Broker/Agent
Broomfield, CO

One way to establish a value is through a CAP rate based on the net operating income if these were to be rented at market rates.

Dec 23, 2009
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john s.
Corporate Investor
Lincoln Park, IL

could call an appraiser. Or just ask a realtor to provide recent sales of similar property. However, I agree, cap rate is a good way.

Dec 23, 2009
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David K.
Broker/Agent
Port Coquitlam, BC

If you consult a Realtor, make sure it is a Commercial Realtor with experience in Multi-family product in the subject market. Although Cap Rate is a good thumbnail reference it only takes in to account a cash purchase - does not consider debt/equity, Capital Appreciation/Depreciation, or Time Value of Money - more salient measures of valuing an investment. Find a local CCIM to help you.

Dec 24, 2009
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M M.
Owner/Investor
Newark, NJ

Hi, Jason P.:
Wouldn't it be more accurate for this seller to determine the cap rate based on actual rents received versus market rate rents? In other words, if the owner is renting units below market rate, but the calculation for the cap rate is based on NOI at market rate, the property may end up on the market at a price that is too high.

Dec 24, 2009
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David H.
Broker/Agent
El Segundo, CA

Maria M - I believe Jason P. is assuming all of the units are currently vacant. Thus, an assumption of market rental rates and expenses will need to be considered in order to establish an NOI. The application of a Cap Rate (appropriate for the area and building condition) to the NOI would be a good formula to establish a value.
However, it is hard to give a simple blanket formula to come up with a value. Under the scenario above, you would still need to determine an accurate market rent as well as reliable estimates for expenses. Also, importantly, you need to be able to ascertain a Cap Rate for the specific submarket and product you are evaluating. Not everything is apples to apples when making estimates and assumptions.

Jan 6, 2010
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Chris S.
Broker/Agent
Coeur D'alene, ID

Take what they were worth when you bought them and then deduct 75%. LOL
Seriously selling an assemblage of units is going to be tough. I would determine what a single unit is worth based on comparable sales in the local market (use CURRENT closed sales NOT listings) multiply that by 31 units and then make a substantial deduction for the economies of scale (bulk discount) and a profit margin for a bulk buyer.
I think you'll find the bigger issue is that the only potential buyer in bulk must be all cash. Finding a loan for something like this is impossible. I own 24 and would gladly sell them!
Don't bother with the income approach, unless you really want to sell them as apartments. In most markets the difference in value indication will be substantially lower as apartments. Let's say market rents are $800 per month for the units or you can sell individual units at $110,000. Sell them individually at $110,000. At $800 per month, you'd be lucky to get $50k/unit from an apartment buyer.

Jan 22, 2010
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Gregory G.
Broker/Agent
San Francisco, CA

Cap rate will depend on the location.
Gregory Garver - Commercial Real Estate Broker
Broker License# 01716531
(415)225-9894
gregory.garver@gmail.com

Mar 5, 2010
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