Seller valuation based on GPR?

Question

Hi all..question about valuation.  In a smaller property with high economic vacancy, is it reasonable for a seller to use market rents to value the property?  Specifically, if the property could be rented today, without any renovations, at a higher rate but the seller up til now has chosen not to, should they expect to be able to base the sale price on gross potential rents?

Reed Rickenbach · Answer

They will always try. However, if your plan is to purchase and increase rents, YOU are the one taking the risk. I usually land somewhere in the middle in this situation. You should get a discount based on vacancy. You should not be paying a premium before the work is even done.

Justin Moy · Answer

It's definitely common, especially in a market where they're getting that optimistic pricing and not having to do the work to still get the value (offers) for proforma pricing.

At the end of the day time is a factor of money, if it will take you 2 years to get to proforma, that's 2 years of smaller returns and that should reflect the price as opposed to you purchasing at proforma day 1.

There is additional risk involved and you always have to ask yourself if it's as simple as raising the rents with no additional effort, why hasn't it been done already? Maybe there's a great answer to that or maybe there's something you need to dig a bit deeper on.

Carolyn Yates · Answer

From an appraisal standpoint, the appraiser should value the property as if it were stabilized or at market occupancy/rent.  Then they would deduct the lease-up costs to get to that point.  The lease-up costs would include loss rent, rent commissions, and profit for leasing up the building.  This could be a nominal amount depending on how many units are vacant or below market rent.  If this is for below-market rents and the tenants are under a lease then you would have to deduct the rent loss from their below-market rents for the remainder of the lease term.  I hope that helps!

Rob Bird · Answer

Of course I expect sellers and their agent to try to get top dollar.  That is no surprise.  I'm simply wondering how much bargaining power I have.  I know that I have my own metrics for what works for me and if it doesn't work, then it doesn't work.  However, it always helps when one knows the strength of their own position before proceeding into an offer.  My inclination was that it's somewhat bogus to expect a buyer to pay as if the building is already performing at a certain level, but for all I know, in instances such as this one, maybe it's not that far-fetched.

Bjorn Ahlblad · Answer

Sellers will always want top dollar, I mean wouldn’t you. As a buyer worry more about what to base your offer on.

Olivia Grabka · Answer

@Rob Bird. Yes, and in fact most Lenders will agree to evaluate the property based on fair market rents as long as there is supporting evidence and the 3rd party appraiser agrees.

Seller valuation based on GPR?

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