Multi-Family Review Newsletter

property. Those 3 methods are:

Cash flow analysis. The appraiser would determine what the income of the property is and subtract expenses to come up with a net income. Then, by applying a capitalization rate, the rate of return that similar properties have been selling for, they will arrive with a value. As an example; a property that had a net income $10,000 a year in a 7% capitalization market would be valued at $142,857. In simple terms, if you were to purchase the property for $142,857 cash you would be receiving a 7% return on your invested dollars.
Comparable sales. The appraiser in this case would be looking at properties sold that compared to the subject property while taking in variables like gross square footage, location, age and other factors that would affect the value, assign a value to these variables relative to the subject, to come up with a value. Comparable sales will tend to be used more on small properties with less units.
Replacement value. Although not given as much weight as the above methods of valuation this method can be of value if there are not many recent sales. Here, we determine what it would cost to reconstruct the improvements to the property and factor in the useful life remaining.

In valuing properties, it would seem logical that there would be a set amount that a property would be worth. This is not the case. The value for a bank lending money may be less than what a seller would sell for due to market conditions. To further confuse the issue government entities like the County Tax Assessor may have their own formula for valuing a property that in no way follows what the market value is.
One interesting outside variable that can affect market values is available financing. This comes to play in apartment units above 4 units. With 4 units or less the financing options are numerous because they fall under Fannie Mae guidelines like that of a single family residence. With 5 units or more we are now into commercial money, limiting the available sources. Also, with rising interest rates, the net cash an investor receives after debt service is reduced making the investment less attractive.

Pricing a Property for Sale
In pricing a property for sale we would first look at the value of the cash flow and then comparable sales. We would then look at what properties are on the market and how the subject property compares. Next, we would look at market trends. Is the market heating up with more demand or is the market contracting? Is the market flush with cash and 1031 money from sales in the feeder markets? All of these factors must be studied before a sales price is established. Price it too high and the property sits on the market getting shopworn and less valuable to the buyer, priced too low and net proceeds decline. The science in pricing at a cap rate or comparable value must be combined with the art of reading the market to maximize the value of the property.