How do you determine for price for 4unit

Question

I am aware 5units is commercials and 4 and below is residential. I am confused on how are comps determined (I'm looking to submit an offer)? If all units are leased would you just run the numbers as if it is commercial (debt service/cap rate,etc)?

Thanks in advance for your help....

Bryan O. · Answer

If it is a 4-unit then cap rate, NOI, etc. will not matter for the purchase. They are going to look at comps in the area. You should have your own concept of what you want, but that isn't how residential purchases are valued. Residential is 1-4 units and is based on comps.

Anthony Chara · Answer

The value of 4 Unit properties and less are determined by Comps. You'll need to get an appraisal. You can also speak to several local Brokers to see if they can run some preliminary comps for you. Some people might refer to them as BPO's. Broker's Price Opinion. Do you have a relationship with a RE Broker in your area?

In most cases, the value of 4 or less units has little to nothing to do with income or expenses in a Lender's eyes. They look at Comps and the condition of the property. Some may ask their appraiser to run some rental comps to help determine value and viability with the property in that area, though.

I don't know any lender that uses Cap Rate or GRM on 4 or less SFH units.

Thomas S. · Answer

You decide what you are willing to pay based on the NOI. It is irrelevant what type of property you are buying as a income investor. Allowing the market to set your price is the biggest mistake a investor will make and why some have very poor cash flow. Poor investment practices.  Comps, asking price etc. have nothing to do with what a investors is willing to offer for a property. Allowing the market to drive your business is not financially advisable. If the numbers do not fit your business plan then you keep looking.

John Casmon · Answer

@CJ B. I would evaluate it as I would a commercial, but understand the lender will use comps for financing purposes. The NOI is a key number, but cash flow is ultimately what you need to determine.

CJ B. · Answer

@Anthony Chara I thought the same thing. I don't have a broker, but a real estate agent. Should I asked to speak with my agents broker? My agent told me to run the numbers and she goes off an 8% cap rate. This property is unique as it is 4 separate houses on one lot.

@Bruce Ellerd thank you. That is really helpful!

@Josh Caldwell yes that is what my agent had said. That a seasoned investor would only be concerned with that not the other stuff.

Whew this can get very confusing. If only Maryland had more properties with 4 separate house on one lot to compare.

CJ B. · Answer

@Andrew Michael it is 4 houses on one lot. Mixture of both well/septic. Do you have experience with well water? Any guidance for what to expect for that? Right now I wouldn't be ready to do the separate deeding however. I am trying to consider this for future as an exit strategy down the road. Do you have any multi units similar to this?

@Anthony Chara thanks, but my agent said there are no comps to only look at the CAP rate.

@John Casmon I think the numbers are adding up for the commercial side, but of course that is if I'm doing my numbers correctly on the calculator. For expenditures should I just do 10% or is that to high? How much do you use for NOI?

@Bryan Otteson that's what I had thought when I read before. My issue is that would I just look at it as 4 homes similar to it separately and add it up to verify the value. I'm not sure how to look at the comps to decide my purchase price.

Thomas S.   How do you decide what to pay based on your NOI?

This is a first time purchase. I believe its a great deal, but I want to make sure that I'm not over looking anything (well as much as I can at least).  I really appreciate everyone's feedback and guidance.

Ron Walton · Answer

Hi;

I am analysis comps for a 4 unit dwelling in DC not far from you.  The only real concern for my investor clients are comps in the areas, fortunately I have a number of similar dwelling rentals to compare.

The bottom line is NOI and cash flow. Let me know if you need assistance,

Ron

John Casmon · Answer

@CJ B. Not sure if you mean expenses when you say expenditures, but most investors will tell you to use somewhere between 40-60% for expenses, inclusive of taxes, insurance, management fees and vacancy. Whatever you do, don't rely on the seller's pro forma! Since this is 4 houses on 1 lot and NOT a 4-unit, you may be better off understanding what the comps would be for each house. Can you split the lot or do they have to be purchased/sold as one package?

William Hochstedler · Answer

It sounds like you've located a pretty unconventional property which can be a very good thing but may be difficult to wrap one's head around.

What are you planning on doing with the property?  Appraisers have a term "highest and best use" when valuing certain types of properties and it may apply here.  Is this property most valuable as four single family homes?  If so, what would it take to get there?

If the cash flow is great, it might make the most sense to leave it as a multi-unit property.  But the well and septic tank(s)(?) might require additional maintenance and need to be adjusted for.

Also, you should be talking with a lender to see how they would view this property and how they would lend on it.  I've seen non-conforming properties sell for quite a bit less than their comps if lending is not straightforward.

If it were me, I'd do a cash-flow analysis based on market rents and high maintenance costs, a comparative analysis as SFR's less the cost of getting it there, and a comparative analysis as a 4-plex and see if the numbers converge.

If you do make an offer, give yourself plenty of time to do due diligence to figure out what you've got.

Good luck and keep us posted.

Bryan O. · Answer

@Greg S. is right. If you are talking about how much you are willing to offer, you need to understand what you are trying to make on the deal. Those numbers are decided by you and based on the performance of the property.

If you are using leverage, the bank will value it based on comps. If you don't understand comps talk to your agent or network with an appraiser and they can tell you about how they go about that process. If they are local to you, they may be able to give you a quick guestimate.

How do you determine for price for 4unit

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