Are comps relevant for commercial residential?

Question

In email conversation with an agent about an 8 unit property, I questioned how she arrived at the ask price considering the income, expense and cap rate figures she sent me.  The figures and the list price didn't align at all.  She answered, not well I think, but also sent a comp to try to help justify.  Are comps even relevant for this type of property?  From my understanding it is strictly an NOI and cap rate to arrive at a valuation.

Michael Marston · Answer

I personally use the projected NOI based on where I think it could be to help calculate what I feel it is worth.

I use the projected NOI based on current operations to help calculate what I would pay for it.

Michael Marston · Answer

Yes that would be the point - hopefully to buy the investment property with some immediate upside available (increased rents) . I would not buy it based on the future rents... I would buy it based on its current rental rates and then increase the rates to market when leases expire.

Dan O'Neill · Answer

@Michael Marston, what do you mean by projected NOI?  Projected based on current operations?  Projected based on where you think it could and should be, or somewhere between the two?  The comp provided was essentially useless, containing no income or expense figures.  All I can see from it is that someone indeed paid a higher price for a 3 quad property than the 2 quad property is asking for.  For all I know the buyer overpaid, or maybe the rents are at market and therefore the higher valuation per unit is justified.  Like McElroy says, buyers want wholesale and seller want retail.  In this case it seems the sellers want retail without having to go through the process of positioning the property for sale, bringing rents to market, lowering expenses, etc.  I am new to this and I am just curious how people view this situation.  If both parties indeed recognize that rents are below market, do you typically meet somewhere in the middle?  Or as a buyer, would you insist on only offering what is justified by current operations?

Account Closed · Answer

Comps, direct sales comparison, is the BEST way to value any property.

The reason direct capitalization is used for commercial properties is because its NOI consists of long term leases at above and below market rates.

Anyone trying to sell you a multi-residential property based on cap rates should be challenged to provide cap rate comps.  They will not be able to and that is where their analysis crumbles.

Dan O'Neill · Answer

The rents on this particular property are probably somewhat low.  But isn't that the point, to buy what it is now because of what you think it could be?  In other words, today is what you're buying and tomorrow is why you're buying.

Michael Marston · Answer

Dan, when I analyze multi-unit deals, I strictly go by projected NOI and cap rate. Although the comp may indicate that current rents at the property you are looking at are off.