How do YOU measure fair value (using market interpolation)

[Lance Lvovsky]

Just curious, when you examine a mult-family/apartment deal, how do you allocate what the fair value of your purchase should be? In one of my accounting classes in graduate school, we are learning about fair value measurement and how to apply it to real estate transactions. I am wondering if this method (matrix pricing) can be used / or is used by folks here.

I am assuming when evaluating a deal, you look at comps and cap rate. But what if your target deal is say 33,000 square feet and has a cap rate of 8.7% and you return 4 comps of:

• 8% cap rate, 30,000 square feet, price is $1.75M
• 8% cap rate, 40,000 square feet, price is $2.25M
• 9% cap rate, 30,000 square feet, price is $2.0M
• 9% cap rate, 40,000 square feet, price is $2.5M

Using what I learned, I come up with a fair value price of $2.075M. Which makes me wonder if anyone uses this method to negotiate their deals. Here is how I came up with the solution:

• 30,000 sq. ft:
  • 2.0M-1.75M = 225,000... 250,000 * .7 = 175,000 ... 1.75M + 175,000 = $1,925,000 (fair value of 30,000 sq.ft building at 8.7%)
• 40,000 sq. ft:
  • 2.5M-2.25M = 250,000... 250,000 *.7 =  175,000 ... 2.25M + 175,000 = 2,425,000 (fair value of 40,000 sq.ft building at 8.7%)
• Now to find fair value of building w/8.7% Cap rate at 33,000 sq.ft:
  • 2.425M-1.925M = 500,000 ... 500,000 * .3 = 150,000 ... 150,000 + 1.925M = 2.075M

So this makes me wonder, do real estate investors use this when trying to determine fair value for multi-unit deals? I imagine that knowing this number can allow a REI to determine what price one should pay after taking into account vacancies, expenses, fixing up, etc.

Thoughts?