Don’t sabotage your list price
When it comes to selling multi-family investment properties, it’s easy to formulate pricing strategies that reflect our personal needs and not what the market is willing to support. There’s always a magic number, but how do you get there? A quick calculation might look like this; acquisition price plus a gain to make the sale worthwhile, add the costs of all upgrades and capital improvements and any losses incurred over time, then increase the price by 5% to allow room for the negotiation.
In a seller’s market, this pricing strategy really works. In a flat or worse, declining market, personal pricing strategies will ensure a disappointing result. Regardless of the market, a more objective method of pricing the property should be considered.
So how do you set a realistic market price that will generate enough buyer interest and ultimately lead to a successful sale? Let’s take a look at some objective methods first.
comparable sales
In any market analysis, the greatest weight should be given to comparables sold. In a normal market, comparables from up to six months ago are generally accepted. In a market where values have been rising or falling for an extended period of time, 90 days of recent sales is considered acceptable. Be sure not to compare across asset classes. A million dollar single family home and a 3 unit apartment building on the same block are not comparable properties.
comparable asset
Yes, sold comparables are all that an appraiser and lender will use to determine market value, but active comparables are your competition, so they’re worth investigating. Once you determine an acceptable price range based on recently sold comps, you should search for similar properties currently for sale. Determine if active comps are listed in the same, higher, or lower general price range. If active comps appear higher or lower than recent sales, you need to find out why. The market could be changing.
financial analysis
Start by comparing the gross rent multiple, cap rate, cash-versus-cash yield, internal rate of return, price per unit, and price per square foot. In some markets, these methods may not be ideal for determining market value, especially if you have a building with few units. In Chicago, for example, land values often represent a high percentage of total property value in sought after neighborhoods near the central business district. Other things being equal, the multiple of gross rent and price per square foot are good starting points for comparisons.
Here are two methods that are a bit more subjective:
singularity of the good
Let’s say you have a four-unit investment property. Is there a feature of your building that sets it apart from the other four unit buildings on the market? Perhaps all of your units have large outdoor patios or vintage interior trim, built-ins, and other features that appeal to a larger group of renters willing to pay more to live there. If the units are fully upgraded with modern kitchens and baths and are separately metered, your building will sell for a premium over a building with no upgrades. You need to determine what that premium is.
broad market indices
Take the S&P Case Shiller Indices as an example. The Case Shiller measures the residential housing market, tracking changes in value in 20 metropolitan markets. Yes, this index tracks single-family homes and not multi-family apartment buildings, but it’s also a good indicator of a market’s strength or weakness.
tie it all together
Now you know what the recently sold and active comparables are going for. He has determined that your property has financial proportions in line with the sold comparisons and, generally speaking, your property has some unique aspects that significantly affect the value. How do you set the sale price?
Knowing the average days on market and the relationship between average sale and list price will help. If you know the ratio of the average sales price to the list price is 95% of the asking price and you price your property at a rate of 120% of the market value, you are pricing yourself out of the market.
In a flat or declining market, pricing the property at recent compensation levels will be the best strategy to generate significant interest from buyers. In an appreciating or seller’s market, you will have more opportunities to take advantage of recent market value by adjusting your asking price upwards.
Regardless of the market, the goal is to generate interest in buyers. Don’t worry about low bids in a buyer’s market or leaving money on the table in a seller’s market. When you price it correctly, you’ll access a sufficient pool of buyers who will recognize the opportunity and pay accordingly. Just remember, if you’re going to sell something, you need to sell something people want, at a price you’re willing to pay.
Brent Hall is a real estate sales and marketing consultant at Jameson Real Estate in Chicago. Brent assists buyers and sellers of small to medium market multi-family and mixed-use properties with the implementation and execution of profitable acquisition and disposition strategies.
You can reach Brent at [email protected]. For more information visit http://www.impactpropertylive.com