Help quick! How do I find ARV on a 4-plex with no comps?!

4 Replies

Hey fellow BP users, 

I need help. I have a potential deal on a 4 plex with a very motivated seller. The problem is there are no other 4 unit apts nearby, so no comps. How should I go about figuring out the value of these apts?

Unfortunately, that can make it very tough. Comps with multi-family is always tougher. Are there nearby duplexes that have sold? Are there fourplexes a little further away? Even the average prices of houses in the neighborhood can be helpful. More importantly, have you been able to work out what the cap rate will be on this fourplex? That should give you an idea of where you want to be. The quality of the neighborhood should give you an idea about what the cap rate should be, although I would aim for over 10 either way. And remember, multi-family is about cashflow. Do you plan to hold this property? If so, the key is that the property will cash flow really well.

You can also use the lack of comparables as a negotiating tactic, saying you have to be extra cautious because of that. Unfortunately in real estate, there is no perfect way to value a property, and often, there isn't even a very good way. 

If you have a trusted agent that you know won't try to get the guy to list it, getting a BPO may help too. Don't take it as Gospel, but it's nice to have a second opinion and they're usually pretty cheap.

Finding ARV on multi-family can be very hard. Even if you had other four-unit building sales to compare to, they might not be high quality comps. When buying and selling MFH (in particular anything 5+ units), you are really buying and selling a business. Yes, there is value in the land and the structure, but the primary value is in the business.

I, personally, like to use discounted cash flow models to help me determine these values. You can use a few rules of thumb, though, to get a quick estimate. Let's say you can get this 4-plex for $100k today and it is generating gross rents of $1,200 per month. Let's take that 1.2% as fixed for simplicity. After rehab, you can generate gross rents of $1,700. This means that the ARV would be around $142k. Again, this is just a quick and dirty, but it should at least start pointing you in the right direction.

Some of it is gut and experience.

There is no true valuation, an appraisal is just an opinion of value, the real value is what a willing buyer and wiling seller agree to.

Saying that, I'd use an income approach and compare it to other rental property in the area.  Most appraisals will list income approach and cost to build approach, but rely on comparables.

If it were me, I'd take a look at the average $/sq/ft on sold property in the area and use that as my benchmark.  

More risk, but also more opportunity when its not so cut and dry...

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