I am looking at a group of properties, but I am not certain whether they should be considered residential properties or commercial. The seller says all but one unit is on one lot, and the other property is on an adjacent lot. There are 12 units, total, and it is a mix of single-families, duplexes, and quad. Even though they are "on the same lot," each building has a separate street number. So, the seller is valuing the properties based on NOI and CAP. However, I suspect this is more of a collection of residential properties and not a true commercial property.
How do I go about determining the proper way to value this property? If it matters, this is in TN.
Interesting. I don't know that there is going to be an "official" way of valuing these properties but my thought would be to value them both as residential and commercial properties and see what the numbers look like compared to each other.
The good thing about valuing them as the seller is (commercial) is that you are at least valuing based on black and white numbers. If you're goal is cash flow then you would want to base your decision to purchase or not on the actual numbers anyway and not just comps from other properties.
If you fast forward to when you want to sell, I would suspect that a buyer would (I would) also want to evaluate the purchase on the numbers. Might be pretty difficult to come up with comps that replicate the situation you are describing.
@Jeff Owen I would value using comparables. You should also talk to your lender.
Often times in these situations, brokers/sellers value on income because there is a lot of fuzzy math involved and they can play with #s. This allows them to come up with a higher valuation than would be otherwise justified.
You should value based on #s because the marker will value each of your units using comparables. At the end of the day, it doesn't matter what you and I feel is the right approach, what matters is what the market considers the right approach. Why fight it?
For instance, a few years down the line, you can decide to sell 2 units (2 SFRs or 1 duplex). Regardless of what the broker is saying right now, nobody will pay you a price based off the income approach! In the case of multifamily (4+ units under 1 building), you value off income because upon sale you can not partially sell the building (say, 1 out of 20).
Howdy @Jeff Owen
You can check with the county on zoning and tax office on how they are assessing the properties. Just to give you extra information to use in your evaluation.
I analyze it both ways to get a ruff idea on the individual structure values and the income value.
Be sure to have a through inspection. CapEx and Maintenance can eat you alive with these type of properties. That will give you a good bargaining chip in the negotiations.
If they are selling based on income approach then that’s the way you will have to go. Make sure you stock up on plenty of ammunition to be able to shoot holes thru their analysis.
If they Are all on one parcel, there is no question......you can’t comp/classify them as single units because they are not.
@Jeff Owen : Look them up on the county tax collectors website, and see how many "parcels" are associated with the property addresses. Each parcel has a unique parcel number.
I'm willing to bet that they each have their own parcel number, in which case it's definitely a portfolio of residential units. You should also be able to see the zoning for each parcel, which should tell you if it's a SFR, small MFR, or larger MFR.
As you probably already know, residential units are primarily valued by comps with some consideration given to NOI (for 2-4 plexes.)
By the way, you should be doing this for all properties that you are purchasing during the due-diligence phase anyways.
Hope that helps!
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