High Vacancy on Commercial Appraisal

2 Replies

I'm new to the buy/sell side of real estate. i've been running an apartment complex for the last few years that was inherited. it's around 30 units, and my question is about the commercial appraisal now that i'm at the point of selling. our apartments are at full occupancy and stay that way partly due to below market rents. we had 1 apartment open when it was appraised that's now already rented, a few weeks later. the appraiser listed a 5% vacancy and collections loss across the board and 10% for the 4-plex with the vacancy listed. this takes off tens of thousands to the appraisal price from the 2-3% i'd calculated. i asked him about it and the answer was that it was a forward projection and that was it. the apartments are 1 bedroom which are in short supply in my area. he admitted to not knowing the supply picture for 1 bedrooms here.

there aren't a lot of commercial appraisers where i am. if he's picked by a buyer's bank i'm worried i'll get hit with the same vacancy number. if he's projecting that the buyer will have higher vacancy with higher rents, then i feel i'm getting double-whammied because i'm losing out on the income from higher rents (which i understand) while also paying for it on the expense side. Maybe i'm missing something or not thinking about it correctly. Any thoughts would be appreciated.

Chad.

Isn't 5% vacancy rate pretty normal. I think it makes sense what the appraiser said. 2-3% is a really low vacancy rate. 

Hi Chad,

Wanted to offer a couple thoughts.  Many appraisers take 5%, or whatever "general" vacancy rate they feel comfortable with in the market.  

However, if a property has a multi-year history, with no projected change, I would rely on actual vacancy instead of some "general" number.  For example, if a property has annual PGI of $100,000, and two or more years of EGI averaging $98,000, then I would use a 2% overall vacancy rate (physical vacancy and collection loss).  As long as nothing is changing at the property or the market, this should be a better reflection of market value, because it is how most buyers would value it.

Raising rents is another question.  If they are clearly below market, then the appraiser could do a a fee-simple value (all rents at market rate) and a leased-fee value (using actual rents).  An approach I often use is to value fee simple first, and then take a deduction for the time and hassle of raising rents, yielding the leased-fee value. 

If you are up to it, I would raise rents before selling, deal with the potential increase in vacancy, then start to market it when it fills up again.  The more months at the new, higher EGI the better.

Let me know if you have any other questions!

Dan

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