I have a motivated seller looking to sell his duplex, but I can find no comps for the area. There are maybe 3 other duplexes within a mile, but no one has sold in years. Could someone please share with me the basics of determining fair market value based on the financial model?
Side A has 2 bedrooms and rents for $695. Side B has 3 bedrooms and rents for $850. Both are occupied by long term tennants, and lease comps support a $25 increase on both sides. The tax bill was $3,061 last year.
The property had been listed at 133k with one offer at 128k. The offer maker got tangled up with his bank and had to withdraw, but their was an inspection showing about 13k in repairs needed. I've worked with this seller before, and he was so happy with the last deal, he brought me 3 more properties. I want my offer to be right and maintain the relationship.
Any advise? Pointers? Can I hear 2 cents from the likes of Jon Holdman ??
Is this for a quick sale, for cash? Might prime your seller for what lies ahed with no comps....financing may be harder to do.
If the are no duplexes within a mile, move further out to three miles.
If nothing, you'll need to find comprable SFDs and make adjustments to the lot size, sq ft and amenities, with the subject being less desirable than a SFD. On the income approach, the same will then apply, less desirable for a duplex. The cap rate should be used that is common for your area in that market for investors. The cost approach with depreciation is not effected. Good luck!
If you want to know what the property is worth to an investor from an income perspective, read this:
Then use the formula:
Value = NOI / Cap Rate
If you don't know what the cap rate is in your area, I would use 10% to get a reasonable estimate. If the property is in a very desirable area or is in great shape, perhaps drop the cap rate to 7-8%. And if the property is in a more rural area or is in rough shape, perhaps raise the cap rate to 12-13%.
But, that should give you a rough idea of the value from an income perspective...
Duplexes are more commonly valued by the comp method rather than the income method. If there are no comparable sales then its difficult to establish a value. I walked away from a deal last year for just this reason. This may have been why the deal fell through with the potential buyer.
Do you have an appraiser you've worked with in the past? If so, give him or her a call and see how they would approach this.
The rents are $1545. Less 50% then times 12 for a year gives you NOI of $9270. With a 10% cap rate, that makes it worth $92,700. Less $15K in repairs is $77,700. That would be a great deal, IMHO, for that amount of rent.
Trouble is going to be that it will be difficult to get a loan if you can't establish a value.
Thanks fellas, I really appreciate the help.
@Financexaminer; yes, this will be a quick sale for cash. I have worked with this seller before and he already knows my offer will be 70% less repairs. His property manager has been busy correcting some of the issues from inspection, so I'll need to note that.
@J Scott; wow, I can't believe I missed that article! Beautifully written. I guess I should have searched before posting :oops: I spent about an hour and a half going through the numbers with formula, and I came to a number in the low 80's.
@Jon; so the 50% rule came within 5k of my number crunching, and I bet you spent all of ten seconds on it :roll: I still am not completely comfortable having no comps, but not uncomfortable enough to walk away either.
All; would it be a complete mistake to run numbers based on the rent potential rather than the actual?
Ed, do you want to speculate or invest?