Method for calculating bulk sale discount for 13 residential condos

[Terrel L. Shields]

Pre- say 2005, I had small subdivisions (max 40 lots) which were sold out over a period of 4-8 years typically. But the lots did not sell for exactly the same price. They were priced differently plus as fewer and fewer lots were available, then the price rose over time. From doing 3 or 4 of these similar to the subject lots, I could calculate both appreciation of the price, and the rate of absorption. Run the NPV and apply the same to the subject. If the lots are absorbed 3 per year and you have 12, then you have 4 years where you have to predict the sale price and discount for time both. By 2005 we saw bigger subdivisions near the hot areas around Wally-World and Tysonville where lots were sold by a Dutch Auction method and the whole subdivision was sold with builders buying 10 or more lots at a time. Totally sold out in 60 days, sometimes before the lots were even finished, no streets, etc. and closing only when finished. This implies a time value of money problem waiting for the auctioned property to actually close. And selling finished homes when valuing vacant lots, means you have no other sale price to hang your hat on except the (discounted?) lot sales.

 

[J Grant]

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?

20% 2ould be my guestimate too of what an investor buyer would expect as a discount for buying in bulk-

Is it possible to talk to your client and see if they want one bulk sale value, or would they like two values - one of the units sold individually, the other as a bulk purchase - and what kind of days on the market time frame they might be looking for?

The lower the price, the faster a bulk purchase would sell - so that is a part of the consideration. DCF- go for it, covered in other posts. as a way to develop value. . Additional considerations is how many units are in th rebuilding, and what are their rental rules, reserve funds etc.

REaltor surveys can be done without getting specific about the subject IMO -

 

[BRCJR]

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.

Something that occurs in the lending world:

FRB classifies lenders into several categories. It is based on asset size and "risk" to the local or national economy if the lender were to fail.

Lender A is small and does not receive the same level of scrutiny as a larger lender. They may use a retail value and go undiscovered.
Lender B is a larger lender and has been notified of the deficiency in the formula for their lending decision.

For smaller lenders, a Customer, Loan Officer, Underwriter and/or an Appraiser have never been notified of the improper methodology.

Lender B is now at a disadvantage in a smaller (think more rural) market.

Customer: "Lender A will loan me xx and your bank will only loan me x. I think I will go with the other lender."

That is not the only disadvantage a larger regulated lender has if they "follow the rules".

The issue above is more prevalent with community banks.

Even though a project of more than 4 units may sell out in 12 months, or less, and no discounting is required it should still be considered. There are taxes and holding costs, and maybe seller commissions, etc..

 

[BRCJR]

20% 2ould be my guestimate too of what an investor buyer would expect as a discount for buying in bulk-

Is it possible to talk to your client and see if they want one bulk sale value, or would they like two values - one of the units sold individually, the other as a bulk purchase - and what kind of days on the market time frame they might be looking for?

The lower the price, the faster a bulk purchase would sell - so that is a part of the consideration. DCF- go for it, covered in other posts. as a way to develop value. . Additional considerations is how many units are in th rebuilding, and what are their rental rules, reserve funds etc.

REaltor surveys can be done without getting specific about the subject IMO -

The value of the units sold separately has to be calculated before you can do a bulk sell-out.

 

[Gobears81]

Something that occurs in the lending world:

FRB classifies lenders into several categories. It is based on asset size and "risk" to the local or national economy if the lender were to fail.

Lender A is small and does not receive the same level of scrutiny as a larger lender. They may use a retail value and go undiscovered.
Lender B is a larger lender and has been notified of the deficiency in the formula for their lending decision.

For smaller lenders, a Customer, Loan Officer, Underwriter and/or an Appraiser have never been notified of the improper methodology.

Lender B is now at a disadvantage in a smaller (think more rural) market.

Customer: "Lender A will loan me xx and your bank will only loan me x. I think I will go with the other lender."

That is not the only disadvantage a larger regulated lender has if they "follow the rules".

The issue above is more prevalent with community banks.

Even though a project of more than 4 units may sell out in 12 months, or less, and no discounting is required it should still be considered. There are taxes and holding costs, and maybe seller commissions, etc..

So if I have direct evidence that the most likely purchaser is utilizing the property as an investment portfolio, with no plans to sell the individual units - and that is consistent with market behavior - I should disregard the highest and best use and do a DCF? The resulting value would not be market value.

Your example seems to be akin to an appraiser summing up the retail values of lots in a subdivision and calling it market value. In the first example, I am considering all holding costs, in the second example, the appraiser is overvaluing a property by ignoring them.

 

[J Grant]

The value of the units sold separately has to be calculated before you can do a bulk sell-out.

Agree.

Idk the finances of the subject building or how many units are in it, but the bulk sale of a # of units can (sometimes ) bring down the value of the entire condo and thus the individual units.

 

[Terrel L. Shields]

The issue above is more prevalent with community banks.

I worked during the crash with 2 banks. One 'did it right' because I was the appraiser. Even with the appraisal in hand, they would lend more than the appraised value. The other bank had their own in-house appraiser. She was actually removed from the job after the bank examiners took a hard look at some bad loans. They demanded the bank revalue all their commercial properties using a certified general appraiser - me. One loan was 42 lots where they had a CR value a single lot and then they multiplied it by 42 - "they", being the bank, not the appraiser. He did nothing wrong I suppose although I suspect he knew they would simply use that one appraisal for every lot. They cried like big babies over the fee...but look, the guy got maybe 3 lots started and none completed before folding up. They got less than $10k per lot but the buyer of the lots had paid over $30k each. In the end, both banks were forced to sell out and are now owned by larger regional banks.

I never got a single comment about my reports from the examiners brought back to me and they used me for about three years after the bust very routinely. Then the latter bank sold, and I have done only one (a couple years ago because it was in OK and they couldn't find an OK appraiser.) The other bank struggled having borrowed money from another bank in the state who wasn't in much better shape, and in fact, had some nasty letters from the examiners themselves. That bank then hired 2 loan officers from their ranks - one to act as an LO and the other was to oversee the disposal of their ORE (REO to you.) The FDIC instructed them to hire some "expert" bankers to oversee getting the bank back on its feet. These were to basically work with the FDIC, not the two guys the second bank sent (getting complicated right?)

I was shocked when I realized who they had hired. The two guys were former clients (one the VP of lending, the other President) with a start-up bank who pressured me to value their own new bank building with inadequate plans and specs. Since I knew this would get the full monty of over-sight from the FDIC, I insisted on a semi-complete set of plans and talked to the architects who said the clients had not even selected the floor material, nor approved the room layout. They via their investors (themselves??) had given $1,000,000 for the lot. When I demurred on the deal, they fired me after working for them in rented quarters for 3 years. The week before the new building was to be occupied both men resigned the bank, and it was under scrutiny for the next few years. Anyway, the troubled bank lasted until 2015 when investors bought out the bank and its financial backer (the other bank.) What a mess. At that point, the new owners hired an oversight company that was former bank examiners out of Tulsa and they also provided the ordering of evaluators from their own staff and only if a borrower insisted upon an appraisal did they order one. They basically dumped me just because I wasn't on their list and my past association with the bank was something they didn't want apparently. At least that was a hint I got from 2 of the loan officers who are friends of mine- both of whom were shifted to new positions away from the lending desk. But again, I never heard a peep from anyone about the reports I prepared in all those 2008-2015 years.

That other bank - the 3rd one? Pinnacle by name - sold to Central after several years of Pinnacle trying to buy Central. WTF??? The building was owned by the investors and still is as far as I know- the bank being financed by a bank across the state - and that one bank sold to another and the building is now occupied by yet another bank - ironically, the very bank that was tied to the failure of the smaller bank in 2015. It's been musical bank chairs in NW Arkansas.

The resulting value would not be market value.

I really have to disagree with that. I'd think what an 'investor' would speculate on is not necessarily "market value" any more or less than that indicated by the DCF because the DCF is based upon market evidence.

 

[Gobears81]

I really have to disagree with that. I'd think what an 'investor' would speculate on is not necessarily "market value" any more or less than that indicated by the DCF because the DCF is based upon market evidence.

What I mean is that an investor may have zero focus on sellout of the individual units during the holding period. Our job is to emulate the market, and if we explain to market participants that we are determining sellout periods for the individual homes, they would probably think that this is why appraisers get such a bad rap sometimes.
Again, that is just for my market. Also, there are of course sectors which are more likely to be more desirable for owners/ sellout, such as the higher priced homes. But if market participants more frequently approach a property valuation in a certain manner, then we are walking a precarious path if valuing in an entirely different manner.

 

[Terrel L. Shields]

What I mean is that an investor may have zero focus on sellout of the individual units during the holding period. Our job is to emulate the market, and if we explain to market participants that we are determining sellout periods for the individual homes, they will probably think that this is why appraisers get such a bad rap sometimes.

Well, if I am using comparable subdivisions to estimate the lot sale prices, the appreciation rate for those lot prices, the absorption rate, then I have a way to estimate the absorption rate and price of lot sales in a DCF to arrive at a discounted value. Surely the investor is weighing how lot it will take to sell out and at what price. The longer the period to sell the riskier it gets because market conditions could change. One of my old mentors bemoaned a small subdivision he had developed because after about half the lots sold, sales slowed and he had to sit on the lots for 2 years - claimed it lost him a lot of his investment because he had anticipated selling out in less than 2 years. And it had taken 4 years instead.

 

[Gobears81]

Well, if I am using comparable subdivisions to estimate the lot sale prices, the appreciation rate for those lot prices, the absorption rate, then I have a way to estimate the absorption rate and price of lot sales in a DCF to arrive at a discounted value. Surely the investor is weighing how lot it will take to sell out and at what price. The longer the period to sell the riskier it gets because market conditions could change. One of my old mentors bemoaned a small subdivision he had developed because after about half the lots sold, sales slowed and he had to sit on the lots for 2 years - claimed it lost him a lot of his investment because he had anticipated selling out in less than 2 years. And it had taken 4 years instead.

I think we are talking about two different property types. I am referring to packages of improved condos or homes. Yes, I agree that a DCF is important for subdivision appraisals