How to Comp a quadplex in San Diego?

Question

I've been looking at a quadplex in San Diego area for sale that I'll call Property A.  Property A is built in 1940, 2400 sqft building on a 6700 sqft lot, 4 car garage There are no interior pictures, but if the inside follows the outside of the properties, I'm guessing it hasn't been maintained or remodeled recently.

I went on Redfin to find multi-family properties in the same zip code that sold in the last 3 months. The closest i found  was a 7 unit (Property B), built in 1985, 5693 sqft building on 7,000 sqft lot, 7 car garage just 2 blocks up from property A.  It sold for $574/sqft.

I asked my agent what he thought we should offer on Property A, so he tried to pull up only quadplexes that sold in the last 6 months. He found one that sold back in June 2022,  was a couple miles away in a nicer neighborhood.  I told him that wasn't a good comp because the neighborhood is quite a bit nicer.

He said my comp wasn't accurate because it was a 7-unit.  Yet he also sent me a triplex as another comp, but still a couple miles away from Property A.  This is in an area where neighborhoods can change pretty quickly street to street.

I know valuing a multi-family property is different than single family, since you need to account for the income and expenses, but my thought process was to take the $574/sqft sell price of property B, and discount it lower to ~$550/sqft given that Property A is much older building and likely would need a lot of rehab. And the street is a tad bit less desirable than property B.

To me, property B was more accurate based on the location.

Thoughts on how to best go about valuing Property A?

Brad S. · Answer

@Mike Hsiao

1-4 unit is a residential property, 5+ are commercial properties. It’s best not to use the 7 unit to comp out the 4 unit.

In appraisal speak, this is a complex assignment, due to lack of relevant data. We (Appraisers) would approach it multiple ways, but first off, I would and do not use $/sf for a residential valuation, especially not for multi unit properties. That doesn’t take into account all the other differences between properties. Would a 2k sf, 4plex, with four 2 bedrooms units, built in 2022, located 1 block from the beach, have the same value as a 2k sf 4plex with all studio units, located on a main street, 1/2 mile from the beach. They would have drastically different $/sf, which wouldn’t help the evaluation much.

So, a few different ways to approach it would be:

1) go back in time. -  go back multiple years in the market area/neighborhood and find any 4-unit sales you can, then determine a reasonable “time adjustment” to use on each comp, based on when they sold and the changing market conditions since the. (I.e. appreciation, etc)

2) find any recent 2-4 unit sales in the neighborhood and determine a reasonable adjustment for unit # differences. So, if you estimate a triplex would sell for $50k less then a quad, then you adjust the triplex up 50k, etc.

3) find recent quad sales in neighboring market areas and determine a reasonable adjustment for location appeal. So, if the comp is located in an area that may have a 10% greater appeal, you’d adjust its sale price down 10%, to account for the Subject’s inferior location.

4) Determine a reasonable GRM (gross rent multiplier) and apply that to any missing units of your comps. So, if you determine a reasonable grm for 2-4 unit properties in the area is 100, and you have a triplex comp in the neighborhood, which is missing a 4th 2 bed/2 bath unit (as compared to the Subject), and typical rent for that 2 bed unit would be $1,500, then you could multiply $1,500 x 100 (grm), to get $150k estimate for that missing 4th unit. Add that to you triplex comps, and Abracadabra, it’s magic!

Now, I don’t really expect you to do all or even many of these things, but those are some proper ways of valuing your Subject. Sometimes those situations can be better, since the valuation is not clear and may present opportunities others don’t see.

Dan H. · Answer

Up to 4 units are valued based on comps if conventionally financed. Over 4 units are valued on NOI and cap rate. An over 4 unit is not a comp with a under 5 unit. However, duplexes and triplexes can be comps for the quad.

The appraiser should look for similar recent sold properties in the same vicinity and make adjustments as needed.  These price adjustments can be for anything including condition, footage, unit count, bathrooms, garages, time sold (values have fallen ~10% in many San Diego markets since May), etc.

your realtor should know this and should be able to provide comps and an estimated value. They may have access to a tool that does an attempt at this automatically (I do and I am not a realtor). If they cannot do this, I question their experience and value.

Good luck

Nathan A. · Answer

If repair costs are involved, I don't think you want to determine what to offer quite this way with discounting price per square foot. I think you want to use comps to determine after repair value but then try to estimate the actual repair costs you'd likely be talking about.

David M. · Answer

@Mike Hsiao

I agree with the prior comment that commercial properties (5 units and over) are evaluated with NOI and cap rate..  But, I don't always find it to be realistic.

Lets face it, anybody who purchases a multifamily property is automatically a landlord/investor unless they have a large enough family/friends to occupy all the units.  So, I'd also take a look at how much could be afforded/financed if 3 or 4 of the units were rented.

Too many times I've run into multi's that are priced way too high because that is the "appropriate" comp (given its size really and features) except even in this high rental market it far exceeds the necessary amount of rent to make the deal work.  Maybe its just my market...

Sounds like you have little comps to work with, so it will be very difficult to determine.  But, look back as far as a year.

Since you are buying, its really what number works for YOU --- unless for some strange reason your number somehow is over market price...

I hope that makes sense and helps.

Mike Hsiao · Answer

Thanks everyone, all very good inputs! I did find a comp of a quadplex that sold about 1 year ago.  It's a little bit nicer street, and it was decently renovated, so I can take these things into account.

How to Comp a quadplex in San Diego?

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