Method for calculating bulk sale discount for 13 residential condos

[J Grant]

The appraisal question is not what the buyer will do after they buy the units ( we can't know that ) but rather what price a bulk buyer would pay for the units as a package.

Of course, knowing the typical options of what they will do after purchase can inform us of what they might pay - it also depends on the condition of the units, are they ready to rent tomorrow or do they need work - in my are, it trends as investors that own a group of units tend to rent them out and also sell might individual units over some time, often to a tenant.

 

[George Hatch]

If there's one assemblage in a condo project the chances are pretty high that there are or were others. If so then you can identify that in the sales histories and see how the previous "assemblage" buyers acted after their acquisition. And you can compare the bulk-transactions against their individual unit values to see if there was a discount for the conditions of sale, and if so by how much.

Of course, all RE is local and this situation isn't any different. YMMV. These are questions to be asked, not assumptions to make. I apologize if anyone read my prior comment to imply one size fits all.

A couple months back I appraised an assemblage of industrial condos (partners developed and later split the project between them). I was doing it for a date-of-death. One partner (my subject) retained their portion and has been renting them out for the last 30 years; the other sold his off individually over a period of several years. Some of my comps were resales from the resale of the prior assemblage, that's how I came to understand what happened to the assemblage of which they were a part. I've appraised the before/after of apt properties that were converted to condo ownership and which were subsequently flipped to individual owner-users. I've seen a TON of these situations over the years via checking sales histories. But that's in this region, not nationwide.

 

[Terrel L. Shields]

are they ready to rent tomorrow or do they need work

The way a discounted cash flow should work is to account for both the time it will take to absorb the properties individually and any future change in prices. The only way I know to do that with support is to analyze other subdivisions (0r built houses) of similar size to determine how long did it take to sell out, and that pretty much is a measure of how many houses that market will absorb over time. And the change in prices is a predictor of what is the rate of change in prices. Here, prices usually increase as available units decrease - scarcity at work.

 

[Gobears81]

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?

Rather than speaking in generalities, I'll give a more specific example. There was a development of common-lot line dwellings that were cheaply built, have minimum amenities, and were packed in like sardines. They were hit hard when the 2008 downturn hit, and are predominantly occupied by tenants. Though that sounds like a failed development, there have been additional homes constructed here in the past few years, and they are also now rented. If they sell, it is priced based on their investment-potential, as owner-occupancy demand is poor, whereas investor demand is high. From that perspective, they aren't selling for a discount vs the "retail" price, but they are also not priced with upside to reflect potentially selling to an owner in the future. No one is attempting to sell off the individual units.
A property where there is a more balanced split between owners and tenants would, in theory, be more likely to be priced based on sellout and reflect a discount to the retail price. But, Illinois is in a strange place right now, as the outmigration from the past decade+ discouraged investment in that time, but losses seem to have stabilized or even reversed in some locations, so there is a shortage of rental units in many areas. As you know from the credit side, it is harder to get a mortgage now, due to the higher interest rates coupled with the higher home prices, so that has pushed many potential purchasers into rentals. The lower-priced units have experienced the largest increases, as an $800/ month unit would have been decent a couple of years ago, but now, that is often a Class C 1 BR unit. Many investors now come in from out of the area for even the small properties, so between the higher rents, lower vacancies, and higher investor demand that keeps multipliers high/ cap rates low, owner-occupants are not always keeping pace with the prices paid by investors.
IRT to GH's post (#66), I am admittedly referring more to common-lot line and even detached SF residential vs condos, so the condo fees aren't an issue. As the owner-occupants aren't "beating out" investors, the assessed values are (at least in theory) based on its investment potential, so the RE taxes aren't necessarily higher than what it would be for a similar apartment property on a unit basis.

 

[J Grant]

Not all condos allow renting, and the ones that do can have restrictions, such as can only rent for X times a year or only for two years, or no pets, or no kids etc. Renters usually have to get approved by a condo board. a condo can also vote to change the rental policy if enough owners agree.

I imagine an investor of a bulk purchase is aware of those aspects - it might make owning a condo less attractive for rental in some cases vs a SFR where the owner is free to rent to whomever for however long they want to .

 

[BRCJR]

Rather than speaking in generalities, I'll give a more specific example. There was a development of common-lot line dwellings that were cheaply built, have minimum amenities, and were packed in like sardines. They were hit hard when the 2008 downturn hit, and are predominantly occupied by tenants. Though that sounds like a failed development, there have been additional homes constructed here in the past few years, and they are also now rented. If they sell, it is priced based on their investment-potential, as owner-occupancy demand is poor, whereas investor demand is high. From that perspective, they aren't selling for a discount vs the "retail" price, but they are also not priced with upside to reflect potentially selling to an owner in the future. No one is attempting to sell off the individual units.
A property where there is a more balanced split between owners and tenants would, in theory, be more likely to be priced based on sellout and reflect a discount to the retail price. But, Illinois is in a strange place right now, as the outmigration from the past decade+ discouraged investment in that time, but losses seem to have stabilized or even reversed in some locations, so there is a shortage of rental units in many areas. As you know from the credit side, it is harder to get a mortgage now, due to the higher interest rates coupled with the higher home prices, so that has pushed many potential purchasers into rentals. The lower-priced units have experienced the largest increases, as an $800/ month unit would have been decent a couple of years ago, but now, that is often a Class C 1 BR unit. Many investors now come in from out of the area for even the small properties, so between the higher rents, lower vacancies, and higher investor demand that keeps multipliers high/ cap rates low, owner-occupants are not always keeping pace with the prices paid by investors.
IRT to GH's post (#66), I am admittedly referring more to common-lot line and even detached SF residential vs condos, so the condo fees aren't an issue. As the owner-occupants aren't "beating out" investors, the assessed values are (at least in theory) based on its investment potential, so the RE taxes aren't necessarily higher than what it would be for a similar apartment property on a unit basis.

I think it would be rather easy to support H&BU as rental, based upon the above. The Feds would expect to see the support in the Appraisal Report. You may have a very long absorption period beyond anything considered typical. That in itself would provide evidence that rental as an "apartment complex" would be H&BU.