No Recent Comps for a Small Multifamily (2-4). How to offer?

12 Replies

So there's a small multifamily house (2 units) for sale in my area that I am interested in. However, I feel like the list price is inflated quite a bit for the area. The MFH is listed for $265,000 and when I run comps for SFH the average sale price is about $160,000. How would you go about making a competitive offer if there aren't any recent comps for a MFH? Do you use the average price per square foot for the zip code? Do you look at SFH comps in the area? Any input would be very helpful.

P.S.- I do not have access to the MLS.

I would take the lowest 3 to 5 sold comps and total the sale prices then average them to get a total. Then take the sq ft of those and average them. Then divide to get average per sq ft price. Then multiply into the sq ft of the property you want to buy. That will give you a fair market value and then back out your repairs and your profit margins and any other expenses to arrive at your MAO.

You should never pay based on comps. Offer what it's worth. Take current income from rents, if occupied, or market rents. Then all expenses. Work with the numbers until you get a return on investment or cash on cash return of whatever percentage you are seeking. I personally look for  8-10% at least. BP has an analyzer you can use for free or there are spreadsheets online that can be used for your due diligence.

@Beth L.

I agree with you but normally, any 1 - 4 unit is base off of comp's by the majority of folks. Also, you would be hard pressed to change the sellers mind when their realtor is telling them it is based off comps. If there is a 40% gap between you and the seller and the seller has enlisted the help of a realtor then I would find another property.

I agree with @Beth L. . Don't even take the list price into consideration. Run the numbers (all income-all expenses) to get the annual cash flow of the property. 

Are you buying all cash or 20% down? I look at cap rate and cash-on-cash. I want to see a specific cash-on-cash return so using a % return and cash flow, you can calculate your max offer. You could also call around to find out what the going cap rate is in your area and use that to make an offer (cap rate excludes mortgage payment).

It seems like a lot of the duplexes are listed at higher prices because they are trying to attract owner-occupancy, targeted towards people that aren't looking to make money but to decrease the cost of ownership 

I completely agree that you should offer what its worth but clearly the "what its worth approach" is a little skewed.  To the seller its worth $265,000 but to me its not.  What I realized and think the key point to this conversation is to offer what will work for you to get the numbers you want and not to worry about what the seller wants. Thanks for all the insight guys!

Residential multi-family (2-4 units) can be hard to value. Lenders will look at appraisals and appraisers will look at comp.'s. Their criteria for valid comp.'s may differ from yours.

If you're a good negotiator, you can work up the value based on income and make an argument for that with the seller. Their motivation will play strongly in that scenario.

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."
- DJ Benedict

I would take the lowest 3 to 5 sold comps and total the sale prices then average them to get a total. Then take the sq ft of those and average them. Then divide to get average per sq ft price. Then multiply into the sq ft of the property you want to buy. That will give you a fair market value and then back out your repairs and your profit margins and any other expenses to arrive at your MAO.
Just remember when your dealing with small units like this if its a 2 unit that your vacancy rate goes to 50% if you lose one tenant. 25% if it's a 4 unit. So running your numbers by the income can be a little tricky.

Originally posted by @Beth L. :

You should never pay based on comps. Offer what it's worth. Take current income from rents, if occupied, or market rents. Then all expenses. Work with the numbers until you get a return on investment or cash on cash return of whatever percentage you are seeking. I personally look for  8-10% at least. BP has an analyzer you can use for free or there are spreadsheets online that can be used for your due diligence.

The comps tell you what it is worth.

Thanks for all the insight! After hours of researching (I don't have access to the MLS) I found a comp that closed earlier in the month for a "similar" duplex about a mile away. From pictures online it looks like that duplex that just sold only needed a little cosmetic rehab (just paint.) That sold for $187,000. So either the duplex I'm looking at is priced too high or the pictures are deceiving for the one that just sold (prob the case). I'm going to drive by the duplex that just sold to do some investigation, i.e. is there a dumpster out front for a rehab

@Bob Bowling the comps tell you what another person was willing to pay for a similar property, not what you should pay. Only the buyer knows what numbers will work for them. If the numbers only work at a much lower purchase price, then that is what should be offered. Convincing the seller of that price may be difficult or impossible, but it worked for me on a number of occasions. This is especially true if the property or seller is distressed and just wants out. 

@Christopher Giannino Comps may be good to look at initially, but there are so many variables that can change that price drastically. In my town, even going over the railroad tracks put you into an undesirable neighborhood and the prices drop. Something you can try, if you want to find properties that have sold, is using Zillow, type in your target area under the "Buy" section. Then under the "listing type" tab, select only "Recently Sold". You can also ask your agent to run some comps for you.