Estimating market value for a property

5 Replies

Hey guys,

I am still a newbie so I apologize in advance if this isn't a very intelligent question.

I am looking at a potential property with price say $600k (3 plex , 4000 sq ft MF) and asked my realtor for the comps to see if I am buying below or at market fair value (of course I want to buy below). The comps were for 3 different properties that were all 2000 sq ft 3plex mf sold at 500k. so the realtor concluded that I am buying below market price (if they accept my offer) and expects that it actually goes at 675-680k. He did so by using the $/sq ft and using a much lower price per footage doing the comparison.

Is this approach correct? If not, could you please recommend a better approach to get the market value of the property?

thanks

@Georges Arnaout

it's a fine approach though I'd question it's accuracy. Have you run your own set of comps in the area? Realtor.com, Zillow and the local town offices have the information you need. If you are looking in Medford, I'd venture there are at least 10 comps that are almost exactly the same size as your perspective purchase.

@Georges Arnaout the cash flow valuation method is used most often to determine values on multifamily properties.

Here's the simple formula for illustrative purposes:

Gross rents - expenses = Net Operating Income X cap rate = estimated value

If you know what the gross rents are, you can use the 50% rule to estimate the expenses. Add another 10% for PM if you wont' do it and another 10% if you pay for water.

Cap rates are determined by your market and can be used as an investment trigger or cutoff point for your personal objectives. For example, you might say, I'll only invest in properties that offer a 10% or higher cap rate. That doesn't mean that's what it's worth, but that's the price that you would like to buy at. There are a whole lot of factors that determine value and it's an individual judgment call on what's a good deal. Cap rates will be lower for better quality (newer, most desirable, newest amenities) properties.

You really need to have a good grasp of how to come up with valuations and never rely on anyone you don't know and trust from your own experience to give you a property value. You will easily be duped by bad information (intentional or accidental, it's all the same) if you don't know how to independently value properties as an REI. You need an agent to give you MLS comps, that's true, but that agent has to know what they are doing and when they don't, you either have to educate them or find another one. Half sized properties are not good comps for the one you are looking at. If it's not within 10-15% +/- on size, the more of a size difference, the less accurate the comps.

Thanks guys this is really helpful, one more question:

I read at least 10 times in different books that you need to buy the worst property in the best neighborhood - how about buying on the worst street in the best neighborhood. I found a foreclosed property in the Tufts University area in Medford, MA which is considered to be a really good area that fits perfectly for my business model (renting to students by the room).

The only thing that this property is located in front of commercial properties in an isolated street(but still 7 min walk from the university which makes it quite attractive to students).

Originally posted by @Georges Arnaout :
Thanks guys this is really helpful, one more question:

I read at least 10 times in different books that you need to buy the worst property in the best neighborhood - how about buying on the worst street in the best neighborhood. I found a foreclosed property in the Tufts University area in Medford, MA which is considered to be a really good area that fits perfectly for my business model (renting to students by the room).

The only thing that this property is located in front of commercial properties in an isolated street(but still 7 min walk from the university which makes it quite attractive to students).

Just to give my $0.02 on the original question I agree with Aaron that if you are looking in Medford (or most any of the nearby towns/cities) that I'd be surprised not to find a few comps that are more similar in size.

In my opinion I would NOT give a big bump in price for extra square footage without some better support if their are the same number of units of the same BR count. Now if the place you are looking at is all 3BRs while all the comps are 2BRs that makes a big difference in the rents but might not if you will just have bigger 2BR or 3BR units compared to the other places. Even less so if a lot of the extra space is common area.

Anyway to your question about this new property. Students won't give two craps about it being near a commercial building if it is that close to campus. However you should still use that as a point to get a lower price. Non-students and future owner occupants might have bigger issues with that so if you need to sell that has to be factored into your pricing.

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