Valuing Vacant Properties

[Edgar Martinez]

Just out of curiosity, how would you value a vacant or nearly vacant property?

Drove by a large property today that was for sale but it looked like it could possible be vacant or nearly vacant.

Would you still use the NOI x Cap Rate approach?

Assuming it's either vacant or nearly vacant the NOI is likely in the negatives (assuming taxes, lawn maintenance/snow removal, and probably at least minimal heating costs during the winter).

[Greg Dickerson]

@Edgar Martinez Depends on the property. For smaller properties you can use comps and work backwards from there based on those values. Take the ARV and subtract repair costs, closing costs, stabilization and lease up costs to get fair market value. You then need to determine how much spread you want and back that out to get an offer price.

For larger properties you determine values primarily on CAP rate so you have to work it backwards like a new development by first estimating the gross rents and operating costs to determine the NOI. Calculate the value based on the market CAP in the area to get the true stabilized market value (SMV). You can also look at comps and replacement value to validate this number. Take the SMV and subtract the costs to get the property to stabilization which could be renovations, marketing, leasing commissions, concessions, management costs, etc. Subtract those costs from the SMV to get a base value. I like to have at least 25%-30% margin for profit on a deal like this so take the SMV x 30% and subtract that from the base value to get an offer price.

If the property is partially vacant you can adjust the formula above for vacant and occupied units and calculate values by the unit.