12 Unit Multi-Family Property Valuation

[Ben Matityahu]

Can a 12 Unit Multi-Family property be offered for sale according to residential property rates and not NOI ?

On projected current rates and Expenses based on NOI I got a valuation that is 50 - 55 % lower than the asking price which is based on comparable residential units in the area I was looking at ... in simple terms the price is more or less justified if you sold each unit individually but if you evaluate it as a multifamily property its 50-55% less than the current suggested price .... number example 4 mil asking price valuation (Residential calculation) vs 2 mil valuation (Based on NOI Multi-Family calculation)

The property in question is a "text book" built and zoned as multi-family property no doubt... 

Which Valuation is correct for the property ? it is located in the Miami Area.... Thank you   

[Melanie P.]

Small multifamily trades closer to comps than a strict NOI/Cap Rate calculation. That is why you must take with a grain of salt investors here who claim that they "forced appreciation" and their property is now worth "double." That's great on paper and makes you happy with yourself, but when it comes time to sell small multifamily you're not going to force a double in sales price by doubling the NOI.

[Alecia Loveless]

@Ben Matityahu I'm not sure. I think it should be based on the commercial version with the NOI and the Cap Rate since it's a 12 unit.

I’m having the same problem. I just had my 8 unit appraised and it came in about 50% lower than I thought it should have. The comps were from 2021, nothing recent now that prices have risen exceedingly higher and they got my rental income too low based on rents that were 1/4 of what they are currently.

The valuation comes out just barely to cover what I’m trying to accomplish but doesn’t help me out any further down the road with my equity levels which I definitely needed.

[George Voutsinos]

The seller can ask whatever sale price they'd like but it's up to you to determine the value. Are you sure they're not condos? I'm not sure how a building of condos would be evaluated but if it's 12-unit apartment building it should definitely be evaluated off NOI. Compare CAP rates from comps that recently sold.

[Robert Rixer]

The correct valuation is what the market is willing to pay for it.

You didn't provide any information on what cap rate you applied to your calculation or how you derived your NOI, all of which could play significant factors in the discrepancy.

[Joshua Christensen]

Quote from @Ben Matityahu:

Can a 12 Unit Multi-Family property be offered for sale according to residential property rates and not NOI ?

On projected current rates and Expenses based on NOI I got a valuation that is 50 - 55 % lower than the asking price which is based on comparable residential units in the area I was looking at ... in simple terms the price is more or less justified if you sold each unit individually but if you evaluate it as a multifamily property its 50-55% less than the current suggested price .... number example 4 mil asking price valuation (Residential calculation) vs 2 mil valuation (Based on NOI Multi-Family calculation)

The property in question is a "text book" built and zoned as multi-family property no doubt... 

Which Valuation is correct for the property ? it is located in the Miami Area.... Thank you   

 Hey Ben, you're in that grey area on this one.  

Yes, in a perfect world, NOI is the correct measurement of value. Unfortunately, on smaller MF like this, the listing are usually taken by residential brokers who don't know how to use NOI to value a property. Additionally, these attract a lot of inexperienced buyers who started in the single family or four plex space who are trying to go bigger. They are used to using a sales comp approach to valuation. It's a messy space.

My recommnedation:

1. Look at the sales comps price per unit. (usually the mid)

2. Look at the price per sq foot (usually the highest)

3. Look at the NOI (usually lowest)

Average these out.

Second:  Questions for you

1. What is your exit plan?  long term hold, value add flip in 3-5 years?

2. To get better terms, can you draft off the underlying low rate mortgage with a wrap/sub2 offering?  

3. Will the building cover your expenses in year 1 so you can build revenue over time for cash flow in 1-2 years?

4. What are your goals?  Yield, Capital Gains, Cash flow, Forced Appreciation?

Third:

1. Sellers and Brokers want to get their highest sales price

2. Most listings are based on Proforma numbers, not existing (conflict with buyers that look at existing)

3. Your valuation is what you feel comfortable putting the deal together at.

Ultimately the buyer determines the sales price, not the seller.  Seller's determine the marketing price.  The two of you have to come together in negotiations that work for each side.  That's the real value.  Then the banks and appraisers need to support that value for financing.

Hope that helps.

[Melanie P.]

Small multifamily trades closer to comps than a strict NOI/Cap Rate calculation. That is why you must take with a grain of salt investors here who claim that they "forced appreciation" and their property is now worth "double." That's great on paper and makes you happy with yourself, but when it comes time to sell small multifamily you're not going to force a double in sales price by doubling the NOI.