How do you run comps on a multifamily home

Question

I have a client, like most, valuing their multifamily home very high. It is a section 8 rental property. How do I run comps for a multifamily home and what other methods would you use to convince the client that the property is not worth as much as they think.

William Whitley · Answer

When you ask how do you run comps for a multi family home, I’m not sure if you are asking for data sources or about methodology. If you have a reliable data source, then you are simply looking for similar sales that sold recently. Preferably you want a similar number of units in the sales as your client’s property, and you want those units to be similar in number of bedrooms per unit and unit size. You also want the properties to be located in the same market area as your client’s property. You can also look for active listings that are currently offered for sale. If you can find comps, you can determine the price per unit, price per bedroom, and price per SF of these sales, and see which one seems to be the most reliable indicator. Then apply that to your client’s property.

There are factors like Gross Rent Multipliers, which can be extracted out of the market from recently sold comparable properties by dividing the sale price by monthly gross rent. For example, a property sells for $1,000,000 and the gross monthly rent is $10,000. In that situation, the GRM is 100. Assuming your client’s property is similar in that example, you could take their gross monthly rent and multiply it by 100. Let’s say your client’s property gas gross monthly rent of $9,700. The indicated value in that example would be $970,000. Of course you would want more that one sale that you could extract GRMs from. That’s one example.

A more complex method is using cap rates to apply to net income, but that’s more involved, because you need P&Ls from the sales and the property rents and expenses need to be relatively similar to extract reliable cap rates.

I hope this helps.