Estimating market value for a property

[Georges A.]

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

[Robert Leonard]

@Georges A. 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.