Method for calculating bulk sale discount for 13 residential condos

[Terrel L. Shields]

I am referring to packages of improved condos or homes. Yes, I agree that a DCF is important for subdivision appraisals

The same applies to stabilized market of improved properties. from the IAG.

A tract development is defined in the Agencies’ appraisal regulations as a project of five units or more that is constructed or is to be constructed as a single development.​

Regardless of how entrepreneurial profit is handled in the appraisal analysis, an appropriate explanation and discussion should be provided in the appraisal report. The projected sales prices and absorption rate of units should be supported by anticipated demand at the time the units are expected to be exposed for sale.​

 

[Gobears81]

The same applies to stabilized market of improved properties. from the IAG.

A tract development is defined in the Agencies’ appraisal regulations as a project of five units or more that is constructed or is to be constructed as a single development.​

Regardless of how entrepreneurial profit is handled in the appraisal analysis, an appropriate explanation and discussion should be provided in the appraisal report. The projected sales prices and absorption rate of units should be supported by anticipated demand at the time the units are expected to be exposed for sale.​

So would you disregard the market if the consensus is only intend to purchase as a package of MF properties and not sellout? How would you support sellout otherwise? I see why this was created, but it seems to be to enforce the same issues that arise in subdivision appraisals - i.e. summation of retail values. I wonder if a property type can be classified as MF for lending purposes if the market does not support sellout. If not, than this opinion is not MV, and it would require a jurisdictional exception.

Either way, the OP does not appear to be valuing the property for lending purposes, so he can focus on getting it right.

 

[George Hatch]

"An investor" is an individual; it doesn't exactly matter how this owner is acting or what they intend to do. What we want to know is what most buyers of such groups are doing.

 

[Terrel L. Shields]

So would you disregard the market if the consensus is only intend to purchase as a package of MF properties and not sellout?

DCF is 'market' and I cannot imagine an "investor" blindly buying property without gauging the absorption time and price inflation or deflation.

 

[Gobears81]

DCF is 'market' and I cannot imagine an "investor" blindly buying property without gauging the absorption time and price inflation or deflation.

There are plenty of investors that would purchase as a stabilized MF asset, the only difference is that they have to pay multiple RE tax bills, rather than just one.
It seems that the narrative is that if no DCF, the appraiser must have overvalued the property. Actually, if the HBU is for investors to sell the parcels off periodically and the appraiser is not analyzing in this manner, he would undervalue it. Even if we support our discount rate and absorption, if we insist that a DCF is done with a sellout when the market is analyzing as a stabilized MF asset, then there is a greater risk that the train will run off of the track.

 

[George Hatch]

One thing I know about doing income approach on condos vs multi-tenant properties is that the property tax assessments and association dues are higher on a per/sf basis than the equivalent functions in a multi-tenant. And not by a little. On the commercial condos its enough to make purchase-for-rental wholly unfeasible.

2bd condo built in 1981 in 92105 sells for $425,000. Property tax is $425/mo; association dues of $500/mo cover the exterior maintenance and exterior insurance and common area including trash and landscaping. Water, gas and electricity are on the owner. The market rent for such a unit is $2500/mo. 37% of that is consumed by the dues+tax assessment and part of the insurance. Not including the maintenance, property management, repairs and reserves. They're into the low 40+% expenses easily. By contrast there was a 1986yb multi-tenant with 8 units which sold with market rents and a 32% expense ratio.

From what I've seen in this region most of these condo assemblages occur because the developers were partners and were renting the units out after construction instead of selling them during a down market. Or if the property was converted to condos. They don't *buy* the group.

 

[Terrel L. Shields]

If you are using MARKET DATA to estimate the inflation and discount rates, then the numbers should be identical. And a regulated bank wants the numbers from a discount that accounts for the time value of money since such projects sell mostly by individual sales and not in bulk and therefore, the sales are absorbed as the market dictates. A bulk buyer is considering that too in the resales.

 

[Gobears81]

Glad to be educated about my market. I'm obviously a lone wolf on this, so you are all correct

 

[BRCJR]

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.

The issue the Feds have is a regulated lender is not a landlord and needs to know the "as is" value, which is single unit residential properties. They then require, when more than 4 units, to be discounted to a single purchaser.

In your illustration, "most likely purchaser is utilizing the property as an investment portfolio, with no plans to sell the individual units," are they going to pay retail or expect a discounted sale price due to volume purchased?

 

[BRCJR]

So would you disregard the market if the consensus is only intend to purchase as a package of MF properties and not sellout? How would you support sellout otherwise? I see why this was created, but it seems to be to enforce the same issues that arise in subdivision appraisals - i.e. summation of retail values. I wonder if a property type can be classified as MF for lending purposes if the market does not support sellout. If not, than this opinion is not MV, and it would require a jurisdictional exception.

Either way, the OP does not appear to be valuing the property for lending purposes, so he can focus on getting it right.

Present an analysis both ways to support your opinion of H&BU. Retail discounted and as rental units.