How to value 12 unit building?

Question

My brother and I own 25% each of a 12 unit building in SF.  Our sister runs the building and owns 50% and she wants to buy us out - she wants to keep the building, and I want to buy a house.

She got an appraisal report for 6.0m

GRM on the report is 19.0

Indicated Overall Capitalization Rate of 3.1%

There was another appraisal done a year ago from a different firm at 5.4m with a 18 GRM.

I know there are more factors in pricing a building...

I don't really know if I should take the buyout? Or ask for a second or third appraisal?  I want to be fair, and I think she does as well. We won't be paying a commission for the internal transaction.

David Fernandez · Answer

Hi @AS Chow,

I won’t complicate things much. You already have two appraisals, one from last year and one recently completed. The difference between the two is 10%. If you are all in good terms, you can negotiate something that works for all of you between the two values you got from the appraisals

Now, there are many ways to determine the value of a 12 unit building, none of them is perfect, but you should be getting a similar value of your asset from each of them. Here are the two most common methods (I’m sure you can find this in the appraisal report):

1. Comps: is there any similar building in the area? It doesn’t need to be exactly 12 units, but somewhere between 6 and 20-25 units should work. How much did it sold for? What was it’s confition? Are the locations similar?

2. Income approach / CAP rate: since you own part of the building, I’m sure you know quite well the real NOI of the property. Dive the NOI by your market’s cap rate and you will obtain the value of the asset. The harder part for you may be yo find out what is the cap rate that these types of buildings are sold in your area. You can a) ask a commercial broker, b) look at a general cap rate for your market available in some of the national commercial brokerage companies, and/or c) look online for commercial properties for sale in your area. If they have the financials, you can get the cap rate dividing the NOI by the asking price.

There are other methods/metrics (GRM, cost approach, etc) to determine the value of your asset, but comps and income approach are the ones most people use.

Pat G. · Answer

The building can appraise for whatever. In the end the building has to cash flow for your sister for the deal to work. I would start with a price that gives your sister close to what she is getting in cash flow currently and see what that price is. And then raise or lower the price as needed.

Try maybe a Re-finance and take a portion out to buy your house. Or better yet hold on the house and buy another cash flowing asset with Re-finance money and stay where your at?  Now you have 2 cash flowing assets paying for your new house, in time. ???