Pricing an Asset in Honolulu

[Christina Dwight]

I was having breakfast with a colleague this morning, and I explained that a seller I was working with had been told that his asset was worth $1-$2 million dollars more than I had calculated. Now, when I'm valuing a property I look at the income, I look at the comps, and I look at the price per door; I look at all that's on the market, in escrow, and sold in the last 6 months to come up with a range of pricing. Then I let the seller decide where he or she wants to start. Hawaii is a "price it right" environment, so pricing too high often results in few to no offers because buyers typically don't want to insult sellers. There are exceptions to this rule, but culturally, if you're not within the range ($1-$2 million dollars over the value, for instance), the listing may sit a LONG time.

My colleague explained, having been approached by agents and brokers, that a lot of realtors will give pie-in-the-sky values just to secure the listing, then explain how "the market isn't bearing those old values" to get the seller to lower the price. Some sellers will be burdened with a time line and face the decision to sell for less, while others will fire that agent and start from scratch.

Now if you ask anyone who knows me (really, anyone), they'll tell you that one of my most beloved/annoying traits is that I am a straight-shooter. I refuse to dash the expectations of a client by giving them false hope. I think that's dishonest, and I think that's unfair. While the seller is making plans for his exit strategy, whether it be exchanging or cashing out, I don't want to be the one with the knowledge that he is dreaming based on something I suggested. I don't want to be the one to have that conversation later about how "the market" isn't performing.

But a lot of sellers like to hear the higher value because they have put their work into the property, they've owned it for a long time, and perhaps they think that it should be worth a lot more than it might be. It is the market and what a ready, willing, and able buyer is willing to pay that really proves the value. And the likelihood of finding that buyer who isn't put off by an exorbitantly high price is slimmer in this cultural environment. Now I'm not saying it's impossible for a cash buyer, desperate for an exchange, to over-pay for an asset, but it is more likely to find one who's wiling to pay a price what pencils.

Right now, this environment proves it's a seller's market. There is abysmally low inventory and properties that are priced right move fast. The cap rate in the metro area averages about 4.5%, making it difficult for buyers and lenders alike. But there's something special in this market that isn't found in such abundance on the mainland: appreciation. Appreciation has historically made multifamily properties (and real estate in general) double in 10-15 year periods. This is especially true for apartment buildings because the existing inventory is static and there isn't a lot of space for more; plus much of the rental pool prefers the metro area, and the cost to build is prohibitive.

Existing demand and supply climates mean that an apartment building that's hollow-tile with a one-to-one parking ratio doesn't have to rely heavily on its income/expenses. It isn't really hindered by original finishes from the 1960's or 70's if it's structurally sound. The price range for a property like this can rely on pro forma (or market) rental rates for its value, pushing the afore-mentioned range up there quite a bit. Of course, the bank likes to see seasoned rents, but even if they are low, fundamentals [hollow tile, 1:1 parking, location] can sway them to overlook the cash flow and will bring cash buyers to the table.

So here's the take-away: real estate investing in Hawaii is historically a sure thing. For those who are interested in up-grading their asset, the prices you can garner in this market are exceptional despite deferred maintenance. But keep in mind that the range of value is your roadmap to finding a performing buyer over one who will waste your time in escrow and ask for monetary concessions in the ninth hour, when it's difficult (and sometimes impossible) to walk away. For those who want to cash out of their asset for long-term care of a parent or to divest the profit before family members multiply due to the death of a principal, understand that a specialist in this sector can best help you determine value--the friend or relative who dabbles in property management and residential sales probably won't be able to best advise you in your next course of action. And what would you rather have--a hurt friend or a burned bridge with tens or hundreds of thousands of dollars lost?