Determining Value Of A Vaccant Multi Family Unit
How would one determine the value of a vaccant multi family building thats being renovated. The seller wants to renovate and flip the property. What factors should be considered in determining the value?
Do the following methods work in this case:
- consider the market rents in the area, add 10% vaccancy, subtract expenses(~45%) & calculate the value of the building based on 10% CAP rate
- get the cost for the built up area and arrive at the value (making sure its less then the replacement cost)
Any other methods? Please advise.
Thanks, in advance.
Aaron
"Do the following methods work in this case:
- consider the market rents in the area, add 10% vaccancy, subtract expenses(~45%) & calculate the value of the building based on 10% CAP rate"
This is probably your best option other than creating a DCF for the property. While a 10% cap rate may be acceptable, you should consider recent sales in the area to determine at what cap they are selling. If they are selling at an 8, or 9% cap, it would be a gift to the new buyer if sold at a 10%.
Make sure the rental rate comps you use to determine value are accurate.
Determining the value of a vacant building is probably the single most complicated thing in the commercial business.
First question: why is it vacant? Is there a market for the kind of space the building contains? Is the vacancy the result of some need to renovate or otherwise change the nature of the building?
Second Question: If the building is not currently rentable what will it cost to bring it to market? Will there have to be extensive renovation? Will there need to be major lease-up periods.
Third: Once the building is rentable (either in its current condition or after a renovation) how much would it rent for? On what basis have you reached this number (comparable units, some "feel" for the market)?
Fourth: How long will it take to get there? How much demand for these units is there? What on-going turn-over and absorption rates are likely.
Fifth: Once occupied what will it cost to operate the building? Maintenance and Repairs, taxes, etc.
Sixth: On the basis of these income and expense numbers what with the annual NOI be? On the basis of that NOI and some reasonable capitilization rate you should be able to calculate an after-renovation value.
Seventh. What is the total renovation and marketing subtacted from the Capitalized after renovation value? This would give you a maximum value for the vacant building. But you really cannot afford to pay anywhere near this maximum because all of the calculations so far are estimates, i.e. they are your "best guess". Now you need to sit back and think about how comfortable you are with the nature of your guesses.
Eighth: What margin of safety do you want to allow for one or more of the prior estimates to be in error? Subtract that from the Maximum price you have calculated so far.
Ninth: Now comes the real fun. How much money do you want to make for all the effort and risk of doing all this? Subtract that from the result of step eight. The result is the maximum you really want to pay for the building.
There you have it. Nine simple steps.
Good luck
HATS OFF TO YOU COMMERTIAL KING
I just couldnt wait to thank you for your post ... am not suppose to be doing this at work .
Thanks for educating us on this topic. Following your nine simple steps can result in big $$ savings.
Aaron