How to value Apartment building - Posted by Troy


#1

Posted by Ray(OH) on November 19, 1998 at 08:24:50:

Hi Troy,
I am just a newbie myself, however, My brother and I are currently involved in buying a 24 unit building. In the beginning we had no idea of the value, but the seller was willing to carry a 100K 2nd, so we had to investigate. We studied up on the different methods and did an income approach as you did, but were not comfortable trusting our numbers. We then took what seemed to us to be the next logical step, we picked up the phone book! In the Cleveland area there are probably a couple hundred appraisers(or more), but few are commercial. So I started calling. Some were no help at all, most were willing to answer a question or two and there were a few who were willing to spend some time helping a poor ignorant rookie investor to understand commercial appraisals.
Here’s what I learned:
Depending on the area, apartment comps can be difficult to find and require more research and effort to make the adjustments so that you can compare apples to apples.
The “Income Stream” is the biggest factor.
The property value can be “Penalized” for various aspects of the property, such as;
-Age and condition of the building itself.
-Age and condition of the heating/cooling system, plumbing system, electrical system. (how much life is left in these items? how much will it cost to replace)
-Rental history
-The Neighborhood and the location of the property in that neighborhood.
-Are the utilities seperated? (seperate being more valuable)
-Planned improvements(updating the mechanical systems, installing a new roof, etc.)
-How well the appraiser knows the area.
***In our situation this may be the biggest factor of all. The appraiser we decided to use has been in the business for 40 years and works for several different community organizations (he’s on salary for $1.00 a year with these organizations). He knows that our world famous hospitals in the area are expanding and will need housing for their staff. Therefore, our proposed improvements will be that much more valuable in the near future. He knows that this part of the city is being revitalized.
If you go forward with this property, take some time to find a good appraiser. I learned enough by talking to appraisers on the phone to feel comfortable with proceeding with the deal.
Hope this helps


#2

How to value Apartment building - Posted by Troy

Posted by Troy on November 18, 1998 at 23:05:54:

What is the best way to determine market value on an apartment building? I have done my own using the income aproach, but my agent claims there are no recent comps. What is the bank going to look at?
Thanks for all the help, past and present,
Troy


#3

Re: How to value Apartment building - Posted by Paul

Posted by Paul on November 19, 1998 at 14:53:50:

First, how many units are you talking about? Up to four units, appraisals done for banks generally weigh heavilt upon comp. sales with a brief income analysis. For more than four units, the income approach is the best means of estimating value. An appraiser will estimate market rent and stabilize operating expenses based on the property’s actual history. Financial and business-related expenses (depreciation, interest, travel, entertainment, etc.) as well as non-recurring expenses (large capital improvements) are excluded from expenses. The appraiser may also include a management fee if one is not listed as part of the actual expenses, and may also include a reserve for replacement of items such as carpeting, appliances, roof, HVAC, etc. Then you may ask some local appraisers what typical cap rates they are using for similar apartments. Good luck.