Method for calculating bulk sale discount for 13 residential condos

[herenorthere]

My client is closing their timeshare business and selling their assets. The titles for the 80+ owners are settled, so this is a simple fee appraisal. My market is a small resort community. Bulk sales are very uncommon, but I'm tracking one down that may give me a data point. I'm not aware of investors making bulk purchases. There is an affordable housing problem here, and large employers, the county, the school board, and a funded affordable housing agency are the most likely bulk buyers. I say "likely" because these condos may not fit their criteria or level of funding. It could be that a bulk sale is so risky that the discount has to be huge. I can't mislead my client and say if you discount the property X% you will sell the units quicker because the bulk buyer market is not a given. I had this discussion with a Realtor who thinks -10% would be a starting point to get any sort of reaction, but -20% would be more likely to really stir up interest. I could survey Realtors but I can't disclose too many specifics for confidentiality reasons.

All that said, I'm looking for another way to support a discount, whether from investor publications (which don't really apply in my small market) or a mathematical one such as DCF. DCF could be used, but the 13 units have no rental history, just carrying costs, eventual sale income, commissions to pay, and market appreciation. There is low inventory, so each individual condo would likely sell within ~45 days. But listing all 13 at once would temporarily saturate the market and prolong sales by ~4 or 5 months. I've done DCF for new subdivisions and know how many assumptions are involved. IF DCF seems reasonable, what are my colleague's thoughts? Alternative ideas?

 

[Terrel L. Shields]

Well...bulk discounting is required for commercial lending but not necessarily for anything else I believe.

But the simple way is to analyze some sales of bulk property - like a vacant new subdivision. Array the sales by date, and price

So, say you have a 20-lot subdivision, and 10 lots sell the first year, 4 the second, 3 the third, and 3 the 4th. Discount the bulk price for the time value of money. So, 1st year is zero. Since say, current rates the second were 7% money discount the sale prices 7%, the next 3 at 14%, and the last at 21%. Or, just using a basic DCF spreadsheet you can rate them accordingly. Or, if they all sell in one year....well not much of a discount. Condos OTOH, may be hard to find comparable condo bulk sales. You might try using a small subdivision of new houses or duplexes as a proxy for condos.

 

[herenorthere]

Well...bulk discounting is required for commercial lending but not necessarily for anything else I believe.

But the simple way is to analyze some sales of bulk property - like a vacant new subdivision. Array the sales by date, and price

So, say you have a 20-lot subdivision, and 10 lots sell the first year, 4 the second, 3 the third, and 3 the 4th. Discount the bulk price for the time value of money. So, 1st year is zero. Since say, current rates the second were 7% money discount the sale prices 7%, the next 3 at 14%, and the last at 21%. Or, just using a basic DCF spreadsheet you can rate them accordingly. Or, if they all sell in one year....well not much of a discount. Condos OTOH, may be hard to find comparable condo bulk sales. You might try using a small subdivision of new houses or duplexes as a proxy for condos.

Thank you. I've given it more thought this afternoon and reached some conclusions. Even if condo bulk sales are rare, the concept is on the table for this appraisal. I should have called it what it is.... a "liquidation value." The company owning all the condos has a fiduciary responsibility to the shareholders to sell the assets quickly, reduce their holding costs, and maximize the return. A judge will oversee everything, so they need an expert opinion on a bulk discount or whatever it will take to sell quickly at the highest profit. Due to a lack of proven bulk buyers for this property type and the low inventory, I may advise the client to sell units individually with supply and demand-derived discounts for each type of condo (studios will sell quickest, for example, a 3-bedroom in an old building will take longer and should have a higher discount from MV, etc). All in all, with a bulk discount, it may take longer and be riskier to put all their eggs in one basket than it would to sell the units individually.

 

[George Hatch]

The typical buyer for a group of units will not be an individual owner-user. That's your starting point. If the subject consists of an 80-unit assemblage being operated as a single economic unit then those are the types of borrowers that the appraiser is attempting to emulate; and the modes of analysis they would use in a buy/sell decision are the types of analyses the appraiser would be using. So yes, there probably will be an income approach.

Even if the typical buyer would turn around and resell to individual buyers, they're not going to undertake the risks and illiquidity and carrying costs for free. Flippers don't work for free. They're going to be looking to cover their contingencies and clear a profit. It might take a couple years to sell off 80 units, so that would be property taxes + association dues + financing + costs of sale, etc.

The point being that the MV of the 80 units in a single transaction is not SP x 80.

 

[George Hatch]

Anyways, as a valuation problem what the OP is going to be looking for is other bulk sale transactions which can then be compared to their own individual unit values if sold separately.

As with any other atypical attribute, we're looking for the adjustment factor between the haves vs the have-nots; we're not necessarily looking for direct comps for our subject. So those "bulk-sale-factor" transactions don't need to be all that recent, or proximate or similar in attributes. They just have to involve a single buyer buying multiple units to either continue to operate as a single economic assemblage/plottage or else purchase to resell to multiple owner-users at full retail price with the expectation of a profit margin. Rinse and repeat the process until you can identify the trend. Then import the rate of that discount for usage with your subject's direct comps.

Let's say we have 50 units, each worth $200k when sold individually. 50 x $200k = $5M when sold off in 50 different transactions to 50 different buyers; and it'll probably take 1-2 year to sell them all off. By the time we add up $2000/yr in HOA dues and another $2400/yr in property taxes and whatever the carrying costs for the mortgages - multiplied by 50 for the first year and by 25 in the 2nd year and hopefully the values don't enter into decline and hopefully it doesn't take longer than 2 years to sell off 50 units. Not counting whatever contingency and profit margins the investor is going to need. You can see the discount factor for a bulk sale just about can't be less than 15% of the aggregate of the individual resale prices. 20% might even be cutting it close under certain circumstances. 20% of a $200k resale value = $40k.

Usually when we run the flip/resale model we set up our cash flows on a quarterly basis, project the rate of sales per quarter so we can reduce number of units (and their costs) by quarter. We start with all 50 units and run it for however long we think it will get to zero.

These considerations are not a trivial thing insofar as a lender making a mortgage decision. Every assumption we're using in that model should be both reasonable and supportable, otherwise we're just guessing at it. What's the absorption rate, what are the projected changes to the resale values as we are going 2 or more years into the future, what are the costs of the financing (rate, term, payment), how is the financing being paid off, what the costs of sale are, what are the rents if renting some of them to offset the carrying costs. Just as when people use overall capitalization rates or rent multipliers, those aggregate rates and factors are packed full of assumptions in lieu of individual considerations.

 

[Terrel L. Shields]

The typical buyer for a group of units will not be an individual owner-user.

The typical seller of such units will be selling individual units as fast as the market will absorb them. Using discounting is to calculate the as is current value...not to determine the value of all sold as one.

 

[Gobears81]

I have seen (and appraised) similar packages of homes sold. I did the DCF model on a similar appraisal about 15-years ago, but the market was completely different then, and I would not go that route now. Though you are not aware of investors making bulk purchases of homes, it *sounds like* the lack of affordable housing in your area would make it a desirable asset to investors. The increase in home prices coupled with higher interest rates have created fewer sellers (around here), which has caused rents to jump in a hurry. Depending on the size of the market or the specs of your properties, there are REIT focusing on SF residential that may be interested. It would be worthwhile to determine the market rent and going through the income capitalization approach as a "rental community". Depending on occupancy, a discount for lease-up may be necessary. If you cannot find similar packages of homes, what are cap rates from comparable size/ class MF assets? If for nothing else, that will help you firm up the highest and best use conclusions.

 

[George Hatch]

TBH, I don't see how we can get to a value of the whole without starting with the values of the individual units. So in my mind it isn't an either-or choice. It's both.

 

[Gobears81]

TBH, I don't see how we can get to a value of the whole without starting with the values of the individual units. So in my mind it isn't an either-or choice. It's both.

I agree that it is a necessary consideration, at least for the HBU analysis. I certainly don't have any thoughts about the ID market, but there are some centralized benefits of owning an entire cluster of units that are reduced when the individual units are sold off. It reminds me of a former apartment that was purchased by an out-of-area "investor" and he converted it to condos. Some of the units sold for a decent amount initially, but then the housing market declined, and the condition of the property declined more so. A few years after conversion, some of the units were selling for 1/3 of their original prices. Someone purchased the unsold units out of foreclosure and bought out the condos that were sold, then reassembled/ de-converted back to an apartment property. Lots of trouble and money spent for this idea that subdividing into smaller pieces creates more wealth - that is more of a pre-2008 concept in my area. Maybe not in others.

 

[zaclan]

Here is what I did for a smaller new construction condo complex.

-Establish unit values via sales comparison approach.
-Estimate absorption period (this may require client input)
-Estimate appreciation/depreciation depending on absorption period
-Estimate holding costs based on absorption period including taxes, sales commissions, closing costs, maintenance etc. Also include entrepreneurial incentive.
-Estimate a discount rate, usually based on publications
-Develop a DCS analysis based on the preceding factors.

The implied discount rate will be difference between the aggregate value of the individual units vs. the net present value from the DCS. The benefit here, is that your bulk discount is mathematically derived based on reasonable assumptions based on market conditions, or at the preference of the client ie. we NEED to sell these units in X amount of time.

'Due to a lack of proven bulk buyers for this property type and the low inventory, I may advise the client to sell units individually with supply and demand-derived discounts for each type of condo (studios will sell quickest, for example, a 3-bedroom in an old building will take longer and should have a higher discount from MV, etc).'

Given that you said this may end up in court, I think this may be a mistake as you are crossing from an appraisers expertise, into a brokers expertise. Broker interviews would be a good way to further support the conclusions of the DCS analysis and implied bulk discount.