Need help on ARV for multifamily

9 Replies

Hello,

As I am researching multifamilies I am finding most sellers seem to understate their expenses in order to elevate their properties value. When determining an accurate ARV do lenders appraise based off the 50% rule or the actual expenses paid in the prior year, IE: tax returns?

Thanks.

Originally posted by @Matthew Lahickey :

Hello,

As I am researching multifamilies I am finding most sellers seem to understate their expenses in order to elevate their properties value. When determining an accurate ARV do lenders appraise based off the 50% rule or the actual expenses paid in the prior year, IE: tax returns?

Thanks.

 The lender will underwrite based on actuals not proformas. So yes, they will look into the owner's tax returns.

Lenders will assume some capex as $/unit (say $250/unit). That amount though is low for smaller buildings (say below 20 units).

When the bank is doing their initial look and underwriting they will normalize the expenses to like properties in the area. I wouldn't rely on the 50% rule as the expense ratio can vary - I've seen anywhere from 30% - 60%+ all depends on the product type, class, age/quality/condition, market, who pays utilities, etc.

Generally speaking for B/C product built in the 60'-70's and 70+ units I've seen expenses range from $3,700-4,500/unit per year. When I worked as an analyst on the CMBS securitization side this was sort of a back stop to cross check when we did our underwriting.

@Matthew Lahickey I believe you are mixing some terms here.

In my mind ARV is a term generally reserved for flippers. I buy, I fix and I intend to sell at an ARV, after repair value. To me if you are figuring an ARV you intend to sell the property, no matter the type, at the end of the repairs. The starting formula that I work from is (cost of acquisition + repairs) < 70% of ARV.

A seller might try to increase the sale price of a property by downplaying the expenses.  Value means the amount that I would pay for the property, no matter the sale price.  To buy the property using credit I'll need an appraisal from a 3rd party appraisal service.  The appraisal is based on the value of the land and the building(s), not on expenses based on running a business through the property.

Now the appraisal could go up depending on what improvements were made to the property.  The cost of these improvements would be an expense that I would actually point out to a perspective seller.  "I put a brand new roof on 3 summers ago.  That is something you aren't going to have to deal with for years!  Here is the paperwork from the really good company that did the work."

If anything is not clear or you don't agree, please let me know.  I'm always up for learning a new way of looking at something :)

@Aaron Montague

Yes, ARV is typically not something used in the commercial space, but there can be a new value based on improvements made to the property and increasing the NOI.

Value for commercial property when done by an appraiser is based on three approaches: income, sales comps, and cost (to construct). Generally, most of the weight is placed on the income and sales comps approaches to determine the value. Cap rates in the local market of similar property and sales comps will drive the value. Improvements made, such as a roof, would be great, but as long as the roof is not leaking or failing in some manner, it should not be looked at as a negative to the value of a commercial asset.


I agree with everything mentioned above. The lender will value the property based on T3 income over normalized expenses. If you are looking to BRRR the property then you will need to create a proforma where you project future income and expenses to determine your future value. A good property manager in the area should be able to assist you with determining expense ratios as well as future rent growth.