How to come up with current property value to Sell to Partner.

Question

Hey BP community,

I am currently in the process of selling my portion of our rental property to my partner for him to own 100%. I am trying to figure out what is the best way for us to deicide the value of our property. It is 3bed 2bed 1300sq home in Rocklin CA. I hear people tell me to get an appraiser, but I feel like an appraiser may not price the home at market value or as high if we were to put it on the market, which in Sacramento is very hot. It is a tricky situation and I am looking for just an honest solution for the both of us.

What would you guys do or go off of to find the right value if you were in my shoes? Any advice would help thanks!

Gordon Cuffe · Answer

You can ask a realtor in rocklin what they think the house will sell for. A realtor can look at pending sales to come up with a little higher value than appraised value. Appraisers have to use closed sales. If your partner has to do a cash out refinance to pay you out then an appraisal is needed anyway.

Rick Albert · Answer

I get the concern with the appraisal. I've had homes sell above and below appraised values. However you don't ultimately know unless you put the properties on the market.

You could do three appraisals and pick the middle one. If you have Realtors in your network then you could ask for their opinion as well. Some Realtors you can actually pay to do it.

Eduardo Aguilar · Answer

@Wasam Hawari- definitely a tricky balance to maximize the price short of going to market. With that being the case however, you can run a pretty quick and dirty Comparative Market Analysis (CMA) using any of the consumer friendly real estate apps like Zillow/Redfin/etc. Here's a step by step process that will get you a confident range that you guys can base a decision off of that's built on fairly standard appraisal practices.

Step 1) Set the minimum maximum square feet of comps within a 20% up and down range of your home. At 1,300 sq ft, twenty percent equals 260sq ft so set your square foot range to 1,140-1,560.

Step 2) Activate the ability to view closed sales and see if you can limit the closing period to a timeframe of the last 3-6 months.

Step 3) Activate the ability to see Pending listings to give you an idea of what price homes are currently going into contract on. Though you won't know what they will close at (unless you contact the agent and they disclose) it nevertheless provides for one way to try to account for present day market value.

Step 3A) You can further adjust for this by looking at what the list to closing price ratio for the homes that have closed to arrive at a comparable ratio for the Pending listings.

Step 4) Average out the square footage of the Closed and Pending homes and then divide your home's square footage into the average sq ft of the Closed/Pendings. Write this number down.

Step 5) Calculate, if not given, the average per square foot price for both the Closed and Pending properties.

Step 6) Multiply the averaged Closed/Pending square foot price (Step 5) by the square foot ratio that you got in Step 4 to calculate an estimated per square foot price for your home.

Step 7) Multiply the estimated per square foot price for your home by the actual sqft of your home to arrive at a base value. If you completed Step 3A you can apply the ratio to your base value to arrive at a fairly confident (85-95% confident) market price for your home.

Remember however that if the plan is for your partner to either do a cash out refi or a HELOC, they will only have access to a certain amount (75%-85%) of the value of the home depending on the refi/HELOC option. For example, most lenders typically will only provide up to 80% loan to value meaning that for a refi, you can only access up to 80% of the current value of the home minus what you currently owe.

For a home purchased at $500K with a 5% ($25K) conventional loan (loan amount $475K) that is now worth $600K, the numbers would look like this.

-80% of $600K= $480,000

-$480,000-$475,000 (current loan balance)= $5K that you could pull out in equity. I'm sure you're not looking to cash out for $5K.

I say all this as buying you out may require for you and your partner to explore a longer term equity option for you. This could mean you maintaining ownership of a percentage of the rents and equity for a designated period (5-10 years). This option does not provide for you to have access to an immediate return but at least gives you the ability to recoup a more equitable pay out based on the income and equity that is generated by the home if a delayed pay out works for you.

I know that this is a lot of information to digest and so am happy to dive in if you want to send me a direct message. Either way, wish you the best and hope that this info was helpful.

Bill B. · Answer

It’s nice you’re looking out for your partner. You could ask a realtor (or two but one feels more fair so you could give them business in the future) check Zillow/Redfin/whoever for an estimate. As mentioned if your partner is getting a loan to pay you off they’ll need an appraisal anyway.

If you have any desire to own 100% instead of them feel free to name a price you would be happy to buy or sell at. You could also get a 3-5% discount on purchase price as there won’t be a realtor involved.

Nate Monson · Answer

The best way to value a single family property is through a comparative market analysis. Pulling records of similar sales in the last 6-12 months, but also analyzing where the market is going in your area. If you only pull comparative sales you may miss the mark on what it's actually worth in a market that is appreciating rapidly. You could also use the income approach with a cap rate to give you an idea of what it would be worth to an investor if he's looking to rent it, but the market analysis approach will likely give you the best results, whether you use a realtor or a 3rd party source to pull them.

Barry Ruby · Answer

@Wasam Hawari an alternative to consider is “your appraiser my appraiser their appraiser”.

In this approach, one partner picks an appraiser and if the other partner doesn’t accept the valuation, he/she picks their appraiser. If that valuation, is unacceptable to the parties, the two previous appraisers pick the third appraiser whose valuation is final.

Lori Williams · Answer

You guys can find the comps on your own if you feel you're qualified to do that and make it fair for both of you.You could pay 3 realtors to do reports using comps and average them out.You could do both and come to some price based on combination of the two.

How to come up with current property value to Sell to Partner.

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