Method for calculating bulk sale discount for 13 residential condos

[BRCJR]

These are somewhat conflicting posts - the consensus in this thread seems to be to do a DCF, which is certainly an option if the individual values are sufficiently higher to support sales expenses, but this would not emulate market behavior if the most likely purchaser would have no plans to sell individually. I'm kind of surprised that so few appraisers in other markets haven't seen this type of behavior, as it has been plenty of times for me and I don't recall many times where they actually ended up trying to sell off the units individually.

Regulators require the NPV of more than 4 units if not sold (absorbed) within one year of loan execution.
Market analysis must support no discount.

 

[Gobears81]

Regulators require the NPV of more than 4 units if not sold (absorbed) within one year of loan execution.
Market analysis must support no discount.

When you say NPV, do you mean that has to be done via yield cap. when the market is doing direct cap./ not planning to sell off?

The vast majority of the time, I have seen very little discount vs the individual values if sold separately, if any. But it is certainly covered in the HBU analysis. When I did a DCF on a similar case about 15-years ago, the bulk discount was 13% - 15% IIRC, so not very large at that point, as they can earn interim rental income until they sell. Since that time, cap rates have gone down and investors are much more national, so you are almost just as likely to have an out-of-area buyer on a small MF project than a local one. Also, the Midwest hasn't dealt with the supply glut on MF that some other areas have, but rents have gone surprisingly high, so it often wouldn't take a very low cap rate to match what the value is if selling individually.

 

[George Hatch]

By the time we get to interim holding strategies like renting to offset holding costs or building/selling in phases, the more detailed DCF analysis is just about the only way to account for all those variables over all those time periods. Nobody WANTS to get involved with trying to forecast a 2yr absorption but it would be foolish to ignore all the other elements which also go with that strategy.

With that said, an assemblage or plottage of 13 residential units might be doable with a straight percentage discount if one can be identified via other bulk sale transactions. It might depend on how much demand for those units there are, what the exposure times are for individual units, current supply, etc .

These are opinions to be developed, not assumptions for an appraiser to simply pull out of thin air.

 

[Gobears81]

we get to interim holding strategies like renting to offset holding costs or building/selling in phases

I would agree with you, if that is what is happening. But that addresses my entire point - I have seen VERY few investors, maybe none in recent years, who buy these properties with the intention to sell any of the units individually. I know that YMMV disclaimer needs to be added, but since MF investing is more global than it used to be, I can't help but have suspicions that it isn't only some odd quirk from my market.

 

[Zoe]

I agree, but that does not bind us to valuing the property in a manner that may be contrary to how the most likely purchaser would.

The OP mentioned affordable housing - that is a clue to me that renters would be a very likely portion of the mix, though I don't know all of the facts. What is really different between 13-units that have separate parcels and 13-units with a single parcel? The right to sell the individual units separately...but if the units aren't so much lower in value (or any lower) as a group, it doesn't make much sense to put up the individual units for sale, especially when you have to pay 6% or so for a commission.

The vacancy component would require a discount for lease-up, perhaps in either type of valuation.

I agree with your synopsis, but you have many inherent assumptions in your preliminary analysis.

All I am trying to tell you is the information I would want or I would not do it.

I would get engagement fee before I even started.

I may be need more but all condo association records would be required. I would know how many units were rented and owned.

I would know how many were vacant.

I would know who pays for what in condo development.

If I got engineer's report too, I would know about repairs needed.

The list goes on.

My minimum fee would be like $5K with half up front.

Do you understand?

 

[Zoe]

It would probably take me 2 weeks to complete it. I would have to depend on other experts. May take longer.

 

[Zoe]

Probably a $7k assignment. Take it or leave it.

My time is valuable. I know I have to depend on other experts in this assignment. That can really slow the assignment down.

 

[Zoe]

I think I could do it for $5. Not sure.

If I had to travel and get license in another state, the fee would include all expenses paid.

Client would have to agree to pay all my expenses.

 

[BRCJR]

When you say NPV, do you mean that has to be done via yield cap. when the market is doing direct cap./ not planning to sell off?

The vast majority of the time, I have seen very little discount vs the individual values if sold separately, if any. But it is certainly covered in the HBU analysis. When I did a DCF on a similar case about 15-years ago, the bulk discount was 13% - 15% IIRC, so not very large at that point, as they can earn interim rental income until they sell. Since that time, cap rates have gone down and investors are much more national, so you are almost just as likely to have an out-of-area buyer on a small MF project than a local one. Also, the Midwest hasn't dealt with the supply glut on MF that some other areas have, but rents have gone surprisingly high, so it often wouldn't take a very low cap rate to match what the value is if selling individually.

The regulated lender is required to know the value for a bulk sell to one purchaser when more than four units are involved in the same development. Only way I know to do so is DCF is it will take longer than 12 months to sell out.

 

[Gobears81]

The regulated lender is required to know the value for a bulk sell to one purchaser when more than four units are involved in the same development. Only way I know to do so is DCF is it will take longer than 12 months to sell out.

One market value opinion of several units is inherently a bulk sell to one purchaser. On the interagency guidelines, that read very similar to subdivisions - I remember testifying on a subdivision where the atty that I was working for was wanting me to speak for the prior appraiser, who added up all of the retail lot values. Not doing that! I am, of course, uneducated on the banking side, but it read like they were wanting to avoid that same problem - i.e. making sure that they weren't loaning on a figure derived from the summation of individual retail values of the homes or units didn't account for all of the appropriate discounts. I've worked with several different banks on similar types of cases in the past, and none have ever had a problem with the way that we approached these assignments. The direct cap model inherently considers the holding costs. The MF market is something else now - I could see REITs/ Blackstone-type companies owning massive swaths of houses in some communities in the future.