Condo Sell-out Analysis

[Ken B]

Sorry, it is investment value. It is value specific to the financing of the deal, which is all that is really happening here. The developer is getting special financing of the construction from the end unit buyers and transferring substantial risk to the buyers in the process.

Which causes another light to turn on above my head. If we assume that it is market value and not investment value, given the very low risk to an investor who may acquire the property upon completion and who would only be responsible for closing sales, perhaps we should be substantially adjusting the discount rate to reflect that lowered risk of closing the sales. Perhaps we should even be utilizing a safe rate. Again, in the event of buyer default the investor has an opportunity to resell the unit at a price 25% higher than he might have otherwise received, assuming a stable market. Maybe the investor is actually hoping that buyers will default rather than close existing contracts, especially if the market has been appreciating.


Out of curiosity, assuming that the cost approach value indication is consistent with the sell-out analysis value indication utilizing 100% of contract prices for the end units, what adjustment would be made to the cost approach if the sell-out analysis utilizing 80% of contract prices results in a lower value indication? External obsolescence? Can't be. Functional obsolescence? Don't think so. What then?

 

[hastalavista]

Sorry, it is investment value. It is value specific to the financing of the deal, which is all that is really happening here. The developer is getting special financing of the construction from the end unit buyers and transferring substantial risk to the buyers in the process.

Ken, are you saying that because the developer has collected a partial pre-payment for pre-sales, the project, as-complete and with some units in contract but with those units having paid part of their purchase price to the developer, if it sells at that point to a buyer in the market, that the transaction will reflect "investment value" rather than "market value" if the buyer prices the purchase based on their expected cash flows?

In other words, since the developer has received some payments for the pre-sale activity (that it will keep), and the buyer will pay for the project based on what it will receive (which does not include those pre-payments the developer has pocketed), that the value paid is not market value but investment value?

If that is the case, who in the market will pay "market value" (consider cash flows it will not receive) for the subject's project, as-complete, with the pre-sale partial payment to the developer being part of the as-is condition of the sale?

 

[Ken B]

Only someone who can also receive the 20% of the contract price of the end units held by the developer.

 

[hastalavista]

Only someone who can also receive the 20% of the contract price of the end units held by the developer.

So there is no as-is market value for the subject with partial pre-sale monies collected by the developer?

 

[Ken B]

If the revenue received by the investor does not represent the price paid for the end units, that cash flow cannot represent the market value of the project. It can only represent an investment value of that cash flow to the investor who will accept something less than the price paid for the end units as compensation.

 

[Ken B]

Let's test the concept being espoused by those who assert the cash flow received by the investor, when that cash flow does not represent the entire price paid for the end units, could be used to develop a market value for the property.

If the developer required 99% of contract price as deposits prior to completion and end unit buyers would only pay the remaining 1% of the contact price at closing, if, upon completion of the project, an investor acquired the right to receive only that 1% at contract price at closing, would the valuation of that cash flow to that investor represent the market value of the project?

I'm getting behind on other work. Goooood day!

 

[hastalavista]

Let's test the concept being espoused by those who assert the cash flow received by the investor, when that cash flow does not represent the entire price paid for the end units, could be used to develop a market value for the property.

If the developer required 99% of contract price as deposits prior to completion and end unit buyers would only pay the remaining 1% of the contact price at closing, if, upon completion of the project, an investor acquired the right to receive only that 1% at contract price at closing, would the valuation of that cash flow to that investor represent the market value of the project?

Yes.
Get rid of the term "investor" and insert the term "buyer".
What is the market value to the buyer of the project, as-is, when they expect to receive 1% of the gross contract prices?

Again, create a DCF for the project from the beginning to the end.
Identify cash inflows and outflows when they occur or are expected to occur.
Pick a point anywhere along the time-line.
Is there a market value at that time line, and is the market value predicated on the present value of the expected cash flows to be received?

That's all this problem is (as I see it).

I'm getting behind on other work. Goooood day!

Me too!

And, I agree; an excellent discussion!

 

[Ken B]

Yes.

No!

It is only the value of the cash flow that represents a small portion of the revenue received from the sale of the end units. A DCF utilizing only that limited cash flow does not capture the big picture.

If, instead of holding back a percentage of the revenue from the sale of the units, the developer ADDED an extra 20% to the cash flow generated from the closing of the contracts on the units, would THAT cash flow represent the market value of the property upon completion?

 

[hastalavista]

The cash flows that matter are those attributable to the property, no?
The pre-sale payment made by the buyer of the pre-sold unit is attributable to the property.
Adding extra cash that is flowing into the stream by the developer is not attributable to the property.

 

[Gobears81]

Denis-if my posts were any indication, I am a little ambivalent about the entire concept. Here are a couple questions for you-
What does this mean in terms of property rights reduction? Say that you have X number of condos. They have a certain market value if sold on the open market individually and obviously, the deposits doesn't change that. Yes, there is a differential in cash flows, but if the bundle of rights are not altered, wouldn't the value be DCF+current value of deposits? Howard mentioned leased fee/ leasehold as an example. Though the example wasn't 100% synonymous, there is some relevance, based on the partitioning of rents to the whole property based on a ground lease, etc.
On the flip side, adding the current value of deposits opens its own can of worms-do you use the past deposits and bring them to current value by some risk-free interest rate. That would suggest a market value of less than 100% is appropriate.
If there is one thing that I feel strongly about, it is in reference to the effective date and whether the deposits are non-refundable or not. Making a refundable deposit nullifies this concept, as it becomes guaranteed at closing.