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Retrospective Appraisal Of Small Apartment Building – Below Market Rents

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PS111222333444

Sophomore Member
Joined
Sep 2, 2010
Professional Status
Certified General Appraiser
State
Washington
Appraising a 15-unit apartment building for estate settlement. Date of death is very recent. Some of the contract rents are 20-30% below market (long term tenants). How to deal with this? Use market rent or adjust the cap rate for the upside potential income?

Appreciate the input.
 

hastalavista

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Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
Either way is fine (IMO). I think you'd have to provide some basis for making an adjustment to the cap rate if all your other properties were stabilized.
Personally, I'd conclude a stabilized value and then adjust for the stabilization costs.
 

Scott Cole

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Sep 26, 2016
Professional Status
Certified General Appraiser
State
Maryland
Agree with Denis...either way will work.
 

George Hatch

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Personally, I'd conclude a stabilized value and then adjust for the stabilization costs.

That's how I do it. That's how I think most investors do it.
 

PS111222333444

Sophomore Member
Joined
Sep 2, 2010
Professional Status
Certified General Appraiser
State
Washington
Either way is fine (IMO). I think you'd have to provide some basis for making an adjustment to the cap rate if all your other properties were stabilized.
Personally, I'd conclude a stabilized value and then adjust for the stabilization costs.
So deduct for rent loss, redecoration and leasing fees? Any other stabilization costs that should be included?
 

gregb

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Certified General Appraiser
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Are the majority of your comparables selling with below market rents?
 

Terrel L. Shields

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May 2, 2002
Professional Status
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State
Arkansas
Some of the contract rents are 20-30% below market (long term tenants).
Typically I see long term rents offered to those who stay. Raise the rent and they move. So using the contract rents and zero vacancy may come out about the same as raising to market rents and expecting some significant increase in vacancy. Just did one where the landlord does not raise rents. But he has went two years since anyone has moved out - He raises the rate when someone moves out but has such low turnover, and they also keep the units in good repair...net income is higher. The more frequent you have to reload with a new renter, the sooner you run into trashed properties.
 

Howard Klahr

Senior Member
Joined
Oct 4, 2004
Professional Status
Certified General Appraiser
State
Florida
The more frequent you have to reload with a new renter, the sooner you run into trashed properties.
I'm sure the institutional investors will be glad to start implementing this particular strategy for their investments.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
So deduct for rent loss, redecoration and leasing fees? Any other stabilization costs that should be included?

An investor may require some additional inventive (EI, entrepreneurial incentive) for taking on the stabilization process itself, so that would be factored as an add-on to the expense.
If it is going to take more than a year, most would apply discounting to a multiyear stabilization analysis.
 
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