Jeff, some of the others here can talk about the RE aspect of it, but the valuation should be done as follows:
1. Figure out what the market rents in that area are,
2. Figure out the average vacancy for your town. Your commercial broker should be able to get that information for you. If it is a big city, this information is available through CoStar. If not, you can always check with the local property management companies, other apartment complexes nearby, etc.
Once you know the rents and number of units, you can get the GSI. Depending on the type of property, common amenities, etc. you can roughly guess the expenses. If you are unsure, you can use Mike Rossi's 50% rule. (If the vacancy in your area is higher than 10%, I would adjust the expenses higher than 50%.)
That will give you the stabilized NOI. Then you use whatever cap rate you are comfortable with to figure out the market value of the property if it were to be stabilized. In the Arcata area of CA, which is not too far from Oregon, it looks like a cap rate of 8% is being used. I personally would not consider anything under 10%.
Since it is a vacant property, you will obviously not pay that amount. But you can't use current values to get it either because without tenants, current rents are zero and it is unlikely that you can get the property for free.
So what you need to do is estimate the amount of time it will take you to stabilize the property. This will require some homework on your part. Once you figure out the market value after stabilization and the time to stabilize the property, you will have to discount that to its present value because a dollar in two years is not worth a dollar today. The discount rate to be used is somewhat subjective because it is the rate of return on your investment that you would want. I would use at least a 20% discount rate because I will not do business at anything less than that return.
Now, after you figure out your present value of the stabilized property, you should subtract from it the losses that you anticipate from operating it until it is stabilized. This will have to be done very carefully by you because small errors in your assumptions can result in large errors in the result. I would do a monthly projection of cash flows for each month until stabilization. When in doubt, assume the worst for each month.
After you have done all this, you have figured out how much the property is worth to you. That's your maximum price. It is not the price that you will try to negotiate, obviously. You will try to get a good discount from this maximum price from a seller who might well bee desperate.
Also, do not do anything until you figure out why the property is totally vacant. If you need help with the financial analysis, please PM me. I will be glad to help you.
(Sorry for the long post. Sitting at the airport while mechanics are checking the engine and have the time to respond in some detail.)
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Nov 04 '09, 01:19 AM
