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Portfolio Value

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Stephen J. Vertin MAI

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified General Appraiser
State
Illinois
I need help. In the late 1980s I did a number of portfolio properties. At that time there were a number of studies indicating buyers were willing to pay premiums for near-by properties, within portfolio, due to reduced closing cost, search time, economies of scale in operations, etc.

I have a client who purchased eight near by (to one another) apartment buildings. They were willing to pay a premium for the same reasons provided. Furthermore, I have a group of portfolio apartment facilities that recently sold at a premium in the market due to the same reasons provided.

Here is where I need help. Is there a good definition of "portfolio value" and does anyone know of any recent studies, articles or information supporting premiums paid? It would add a lot to my report.

Steve Vertin
 
A

Anonymous

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I have a question which should further complicate matters. Is a buyer who buys properties which are near his existing properties typically motivated? Can we say that the market value of a subject property is higher because some adjacent property owner might pay a premium for it?
 

Stephen J. Vertin MAI

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified General Appraiser
State
Illinois
Walt

I have already provided the market value for the individual buildings. So that is not at issue. However, it is my contention, for which I have market support, the individual value of the units within the portfolio are not as valuable as the total portfolio. In other words the sum of the parts does not equal the value of the whole. Your adjacent owner example is kind of, sort of, a driving force in portfolio value, but it is more akin to assemblage. A buyer maybe willing to pay more to assemble land for a lager highest and best use. Of course this analogy only kind of, sort of, covers it also.

It is simply a matter of economics. The closer the buildings the lower management cost. This is simply the cost of time elements. Chicago is a large City and it takes time to get from one area to another. Management can be reduced up to 3 percent of gross. Maintenance and janitorial cost are also reduced for the same reasons. Furthermore, owners can receive bulk rates on services such as trash removal, lawn service and pest control. Not to mention, evictions serving cost, removal and legal cost. Furthermore, a smaller number of employees can handle a greater number of nearby units. Total cost can easily be reduced 10 percent per building. That is substantial increase to net operating income and in return value. Furthermore, the above says nothing about closing cost. My appraisal fee alone was reduced a couple thousand due to the buildings all being close by. The same holds true for many professional service cost including title work, attorney fees, etc.....

Steve Vertin
 

Terry Russell

Senior Member
Joined
Feb 24, 2002
Professional Status
Appraiser Trainee
State
Montana
Steve,

Here is some more links.

The first two are glossarys and terms.

The third is the one you warned about a few months ago concerning Federal Accounting Standards Board.

The fourth and last are the Feds PolicyWorks, if you are looking for supportive data these two may help.

I am posting a topic on the General forum about finding info an appraiser might find useful.

Thanks for the compliment. Happy Hunting.

Terry


http/www.ventureline.com/glossary.htm

http/www.econterms.com/econtent.html


http/www.fasb.org/draft/ed_amend_st133.pdf


http://policyworks.gov/org/main/mp/library...winter98-99.pdf

http://policyworks.gov/realproperty
 

Paul Ness MAI

Member
Joined
Jan 14, 2002
Professional Status
Certified General Appraiser
State
Pennsylvania
Steve, I've never seen or heard of "portfolio value" as an alternative to market value. The closest thing that came to mind which I believe applies for the reasons you mentioned is "investment value" which is defined in the Dictionary of Real Estate Appraisal as "The specific value of an investment to a particular investor or class of investors based on individual investment requirements; as distinguished from market value, which is impersonal and detached."

I have run into this many times, when appraising the market value of such a property and the client will come back and say their management fees are much lower because they own three properties in the same area and will share a manager, or they resell gas in the MHP and since they own multiple MHP's in the area they can buy the gas in bulk at a lower cost, or they get cheaper insurance rates because they have a blanket policy that covers multiple properties in the area, or they can get special below market financing since they have large deposits with one bank and have all their loans there and are married to the president's daughter, etc, all falls under investment value.
 

Stephen J. Vertin MAI

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified General Appraiser
State
Illinois
Thank you Terry and Paul you got me thinking this morning.

Steve Vertin
 

Terry Russell

Senior Member
Joined
Feb 24, 2002
Professional Status
Appraiser Trainee
State
Montana
The following is from an AI pub. 2001 called

Scope of Work and Range of Services.


Here is the link: www.appraisalinstitute.org/resources/scopeofwork.asp




A “portfolio valuation” assignment involves the development of opinions of value for any number of properties held in a single investment portfolio.

Unlike a mass appraisal assignment (5) ,
this type of assignment involves properties which *MAY* have little to nothing in common in terms of location or type of use, and which require separate analyses of distinct data sets.

(((*I should hve emphasized the MAY word. It also means 'may not' could or could not' 'should or should not' and a plethora of other possibilities. The author was comparing portfolio valuation to mass appraisal.)))


A common characteristic of such assignments is the limited amount of time available to the client to make a decision concerning the portfolio. Thus, invariably the client must either bear the risk inherent in making decisions under extreme time pressure or forego whatever opportunity may be presented.

Should the client decide to pursue the opportunity, the client will have to accept that the best information obtainable about the properties’ values will be from appraisals in which the scope of work is extremely narrow. And the inherent risk in such appraisals is that they are imprecise (i.e., subject to a higher margin of error.)

Can the appraiser provide a service in such situations in accordance with USPAP?

Yes. In accordance with S.R. 2-2(a), (b), or ©(vii), the appraisal report must be very clear about what the appraiser did, and did not do, to complete the assignment.

The properties might not be inspected at all. Collection of data will likely be limited to certain data sources, perhaps within stated time frames. Verification of data will be limited. The analysis will be minimal, most
likely relying on one appraisal approach. The valuations will need to be based on a number of extraordinary assumptions, all of which must be detailed in the report.

That the scope of work is extremely narrow cannot be overemphasized in the report in an assignment like this; a full discussion is warranted, however brief the remainder of the report.

The results of such an assignment, while appropriate for the intended use, would be entirely inappropriate for a different intended use. An intended user making a single decision about a transaction involving a single property in the portfolio would not likely find the wide margin of
error acceptable.

Thus, while identification of the intended use and intended users is mandatory for any appraisal assignment, it is critical for an assignment such as this in which the scope of work is extremely narrow.



5 “Mass appraisal” is defined in USPAP as “the process of valuing a universe of properties as of a given date using standard methodology, employing common data, and allowing for statistical testing.” Mass appraisal is covered by Standard 6.


That's all.
 

Stephen J. Vertin MAI

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified General Appraiser
State
Illinois
I have searched a number of articles on this subject. You would be surprised how little is written. After reading what is available and the USPAP, I have come to the determination, that the value of the whole is market value to an individual buyer from an individual seller. The USPAP states in the AO section that this should be clearly stated throughout the report. Therefore, I have included a very in-depth scope and purpose. Thanks again for all of the information and input.
 
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