Discount for high vacancy in apartment appraisal?

[kbkil]

I seem to recall something in a class an appraiser acquaintance took several years ago, discussing how a deduction for higher than usual vacancies is not appropriate in the valuation of an apartment property. Is this true? Something that in the past required two values (as-is, stabilized), but now is just an as-is value with stabilized income/expenses?

 

[glenn walker]

I seem to recall something in a class an appraiser acquaintance took several years ago, discussing how a deduction for higher than usual vacancies is not appropriate in the valuation of an apartment property. Is this true? Something that in the past required two values (as-is, stabilized), but now is just an as-is value with stabilized income/expenses?

Because poor property management can be changed and vacancies be brought up to what other similar buildings are renting for.

 

[George Hatch]

I seem to recall something in a class an appraiser acquaintance took several years ago, discussing how a deduction for higher than usual vacancies is not appropriate in the valuation of an apartment property. Is this true? Something that in the past required two values (as-is, stabilized), but now is just an as-is value with stabilized income/expenses?

As far as I know, over the last 30 years the appraisals for FRTs have required consideration of existing income, vacancies and discounts for rent losses. "As Stabilized" being an additional requirement if/when there are problems.

 

[kbkil]

True. It was just a few years ago I was told this discount for lease-up was no longer applicable, or reasonable, because buyers of a property with higher than typical vacancies were weighing that factor into their investment decision. End result it would be a double-penalty to the property.

 

[TerryRohrer]

True. It was just a few years ago I was told this discount for lease-up was no longer applicable, or reasonable, because buyers of a property with higher than typical vacancies were weighing that factor into their investment decision. End result it would be a double-penalty to the property.

If your saying the comps have the same circumstances as the subject, that could be. But if all aren't the same, the difference needs accounted for.

 

[Terrel L. Shields]

The high vacancy rate reflects in the NOI statement as rent loss and therefore, using comps with similar rent loss to calculate the cap rate should be reflected in the sales approach. The prudent buyer is buying upon current performance, not what they anticipate the future performance under their brilliant management might do. Those who are confident they can improve the occupancy rate generally will do so by updating the property. I recently did a motel that was converted to rentals. The new owners are updating them to make fewer but larger apartments and will have new roof, new interior, and an unused separate 2 bed apartment will likewise be remodeled. But they still didn't pay a premium for the property.

 

[George Hatch]

Stabilized would be in reference to other such properties in the area. If none of them are getting past 80% then that's the rate, right?

 

[Terrel L. Shields]

Stabilized would be in reference to other such properties

My interpretation was it referred to new or remodeled construction which isn't filled yet and yes, stabilized meant the going rate of occupancy in the market.

 

[Gobears81]

True. It was just a few years ago I was told this discount for lease-up was no longer applicable, or reasonable, because buyers of a property with higher than typical vacancies were weighing that factor into their investment decision. End result it would be a double-penalty to the property.

How is it penalized twice?

We always look forward, but if there is a lag between stabilization and current levels, that should be accounted for in some context. But for apartments, stabilized occupancy can usually be reached quickly, whereas multi-tenant commercial can take years to fill. So the discount isn't usually going to be significant, especially in this market.

 

[Tom D]

i do only residential, but what do you do here?
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