Advice for a novice doing Sales Comparable Approach

Hi squad,

I'm a commerce student and one of my electives is a real estate investments course. We have to financially analyze a property in two ways so we decided on DCF and sales comparable method. Does anyone have any ressources or templates for a beginner in RE to do a sales comparable analysis on a multifamily property? I'll be active in the comments if you want any more info!


Fancy Dinners

Comments (2)

Most Helpful
Nov 24, 2019

Sales comparable approaches are most often used in SFR and small multi's (under 5 units). The market /sub market have a bigger influence on value in these cases than the NOI. For buy-side looking to value anything over say 8 units, I prefer using a trailing 12 and the Income approach using actual numbers. The formula is Value= NOI/cap rate.
It's much better to start with how a property is actually performing, and know what your team can do with your capital stack and/or operations. The discussion at the deal table flows well when you use their actual numbers.
On the sell side, brokers typically use pro-forma with some nonsense assumptions. Local market will dictate whether (mostly defunct) assumptions like "raising the rents to market" are going to work. Most of pro forma is BS- except maybe for what the property CAN do (proforma NOI) if the stars align and the creeks don't rise.
To make a comp work, you need recency of trading volume and proximity of similar properties. Ideally, you want to see some volume within a mile of the subject property with the last 1-6 months. Older than that and market conditions need to be verified. Conditions change. Toyota moves in or out, hurricanes hit, leadership announces a jobs program or business incentives, zoning changes... Farther away than a mile or so and you may be looking at a different sub-market, different transportation options... In the case of locations like say Baltimore or Houston, different markets can be directly across the street from one another.
Absolutely not ideal, but if your project is committed to comp method of valuation, get on the phone and start making connections with local brokers. Brokers are not good for much when it comes to valuation as we see it, but they can give you market cap rates and recent sales information for properties in similar situations. Triangulate the answers you get. In other words, start calling and ask who the best is for say class C multi-family greater than 100 units south of route 20 in Dallas. When you hear the same name 3 times, you have a winner. Get a few names. Then get their opinions and market intel.
This means lots of phone work, relationship building, and trust. Brokers deal in this all the time.
You'll also want to look at (or conduct) rent surveys. Many brokers have these too if you ask nicely.
If you find yourself trying to value a property with no recent sales activity (no comps), and (as is often the case, the property may not be performing well enough to produce a bid) then I would consider looking at valuing based on replacement value (price per pound). For this, you need trustworthy contractors (GC's) and/or local property managers. These people can provide you with valuable intel on properties and costs for a given area.
Never assume one-size-fits-all with commercial real estate. Every deal is like an Easter egg hunt and requires a team to sort out.
Once you have your valuations (or at least your variables), then if you're on the buy side, you'll figure out what the property is worth to YOU. Do you have similar properties in the area and umbrella insurance, or is this your first property in a market? Do you have economies of scale on property management? Access to capital at good rates? A different way of managing than the previous owner? A higher use?
Sometimes the question is not: how much is this property worth, but how much is it worth to a given buyer?
Good luck! If you run into trouble, reach out again.

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Dec 2, 2019
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