How do you determine the value on a Duplex with no Comps???

15 Replies

I have a duplex in arguably the hottest area of Nashville, TN for the last 3-4 years. Not completely sure how to determine the value of duplexes.............Help me... please!

Jim, The most common way is with sales comps, the way an appraiser would determine value. Based on the law of substitution. If it truly is a hot market than you can get a real estate agent to pull comps for you, or even do a BPO for you. Another way although not usually used on small residential properties is income approach. Hot markets might have higher rents, some investors are buying cashflow and will pay 1 to 12 times the annual rent. Sometimes in a hot market, it's a good idea to check the value of SFR's, I'm working a deal where duplexes are 219000 to 310000, and SFR's of similar SF are 500000. Worth converting the second kitchen into a killer walk in closet and master bath. HABU

Yes it is in East Nashville. Inglewood (Riverwood) area to be exact @SethMosley

Thanks a lot! That was a major help! @MikeMoran

@Jim Adams  

I personally look at square footage. In California there are all pretty much cookie cutter houses but have different "per square footage prices". Therefore I come up with a price I want to pay per square foot, say 1.10 and than times that by the size of the house X and that give you the price. This is a great way to compare the cost of a single family to a multiplex, etc. It brings it down to more apples to apples. That being said I specialize in single family homes, in very "hot" neighborhoods. I like to buy the "crappiest" ones so this lets me "sort" better.

Most of Inglewood is RS zoning but if your utilities are grandfathered and you can get HPR approval your land may be worth more than your building.

You've got a comp on Eastdale at 141k.  If you have a post WWII Tudor style conversion it may be worth more.  If it's a little shotgun off of Riverside it's worth less.  I can pretty much dial it in with an address.

@ElizabethColgrove

Thanks so much for the advice!

Everyone is mad helpful here!

Most duplexes in East Nashville are going to have the exact same age and floorplan nearby. Find a few that've sold recently and you have bang on comps. 

Hey @Jim Adams. That is such a good question and a tough one. We own two duplexes in a city where multi-family rarely turns over. Years can go without a decent comp. This is a A- / B+ class area (sounds like your town too) and there is substancial competition any time a property goes to market. We were able to get this one before it went on the MLS as it is 3 doors down from our 1st rental. The price was basically the most I could pay with the current loan environment and rents (the rents were far under market).

The purchase price was 635k in Feb 2013. Taking a look at the appraisal, they used three different approaches:

Sales Comparison Approach: $ 654,000 

He picked comps. Looking at them, it was a stretch. He has a 4plex in there, a triplex and a duplex from 2 years before with an additional 1,000 sq ft. He then did his best to adjust for the difference. Kind of B.S. honestly, but that is how it was done. They factored in number of bedrooms, square footage, garage / parking, quality of property, heating / cooling and other large ticket factors.

Cost Approach (if developed): $ 651,160

He took the square footage and multiplied it time a cost of construction per square foot. It so happens that price points at the moment have come back into alignment with building costs, so for the short term, depending on your burgh, this could be an option. He assigned a value to the land based upon comps / local knowledge, then multiplied by a $191/sq foot build cost, then factored in depreciation and some of the site improvements (built in shed etc).

Income Approach: $ 699,300 

The appraiser put together an operating statement + a capex statement. They used a GRM of 189. I was expecting to see a cap rate but it seems GRM is the magic ratio.

What is your exit strategy on the deal?  That will play a role in how you evaluate the value.  

For example, you might be able to get it for $100K below market, but if your plan is to hold as a rental and it doesn't cashflow at that price, then the discount won't help you much.

I love you @J Scott ...almost as much as @Brandon Turner  !

Brandon pay attention. All of these posts suggesting everything from square footage to CAP Rates. All valid, but potentially pointless without the exit as the starting point.

@jim 

@Jim Adams  undefined

 Figure out the following - if you were the owner and had to get rid of the thing in 30 days, at what price would this work.  That's your strike all in.

Now - how you figure this out and what metrics you apply is a function of what - how your buyers will underwrite this!!!

Do you know how your buyers will underwrite this?  Obviously NO.  Stay out!

In some cases, the behavior of the marketplace dictates that the risk s so high that the value to you is zero or negative - stay out!

Buttom line - study your marketplace.  Understand their thinking.  This dictates your exit.  Then work the numbers backwards.  And if you don't yet have tools in the back to do this - stay out.  Do what you know, and educate yourself :)

@Jim Adams Hey Jim, you've already been given some great advice above, but I wanted to send my two cents. I just closed on a duplex in Arlington, TX (different market, I recognize) which lies in a duplex community, but was built later than the others and has varying criteria as well, therefore the traditional sales comps method was difficult to determine the ARV. Once the appraisal came back, it was confirmed that the appraiser used the cost per square footage method, as @Elizabeth Colegrove  mentioned earlier. Fortunately, I estimated the ARV on the cost per square footage method and so did the appraiser, so my estimated numbers were right on, but I was holding my breath for a few days because it could have easily swung the other way. Anyways, all that to say, if you're having difficulty, I would second the suggestion by @Elizabeth Colegrove to estimate your ARV on the cost per square footage method, but plan for the worst case scenario, and if you hit those numbers, everything additional is gravy. Good luck!

For an investment property, it's best to calculate through average rent in the area.  The value of that property is 

(100 x monthly income of full occupancy) = max price

Or it's the same as the annual gross income is 12%

Originally posted by @Udayabagya Halim :

The value of that property is 

(100 x monthly income of full occupancy) = max price

Only if you're buying strictly based on the income stream and only if comparable properties in the area are selling at a 6% cap rate...

Generally, duplexes shouldn't be purchased strictly based on their income stream -- if you overpay and have to sell in a short time period, the new buyer will likely consider comps as well.  For that reason, so should you.

As for the 100 x Monthly rent, that's 8.33 x Annual Rent. Assuming the 50% Rule, that's an NOI of .5 x Annual Rent, so you'd be saying that the cap rate is supposed to be:

.5 / 8.33 = .06 = 6%

Why do you think every property should be valued based on a 6% cap rate?  That makes no sense to me.

Jim, Although I know nothing about the location of your property, the most important thing for most typical real estate investors is the bottom line. Will it, or will it not, prove to be a profitable investment? Set a price and think about this way: Would you (as a real estate investor) pay the price that you're asking? If so, than go for it, otherwise consider modifying the price.

After listening to 40+ podcasts the past week I would say offer something you consider ridiculously low and go from there. I noticed this was posted months ago so I'd be curious how it turned out. 

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