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Updated over 8 years ago on . Most recent reply

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Ryan D.
  • Rental Property Investor
  • San Jose, CA
228
Votes |
188
Posts

how will a bank value an apartment building for financing?

Ryan D.
  • Rental Property Investor
  • San Jose, CA
Posted

I own several residential properties and have used the BRRR strategy successfully there, and am now doing my research to make the move into commercial-multifamily (small-medium apartment complex). I am very familiar with the residential loan process, but have no experience in commercial financing (beyond what I have read) and am uncertain about how a bank will value such a property. Specifically, how do I know what cap rate (or GRM?) a bank will use in valuing a property when I go looking for a loan?

I'm interested in the Portland/Seattle metro areas - is the market relevant to what cap rate a bank will use for valuation?

Thanks in advance!

-Ryan

Most Popular Reply

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2,178
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Albert Bui
  • Lender
  • Bellevue WA & Orange County, CA
1,437
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2,178
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Albert Bui
  • Lender
  • Bellevue WA & Orange County, CA
Replied
Originally posted by @Ryan D.:

I thought sales comps were only used for residential property, and commercial properties were valued by their NOI & cap rate?

 It is based off cap rates but cap rates of comparable recent sold properties (hence comparable sales is still related they are just looking at income of these comparable properties).

They'll adjust cap rate up and down for each comp they use for income approach since your building may be newer or older than the comps. The adjustments based on other sales comps of multi-family buildings in the area so if the appraiser notices that a newer building sells for a lower cap (IE higher price relative to NOI) then they may assume this "difference," is for the perceived lower risk. It may also infer that buyers are willing to pay a higher price for that given income because of the perceived lower risk.

The cap rate a bank uses is different at all banks. There are industry standards you'll see at 5% vacancy, 5% -10% property management, capx reserves, and repairs/maintenance can vary widely at each bank. Sometimes the bank even underwrites with a higher cap rate making your loan amount lower (lower value and lending up to a LTV based off a lower value = lower loan amount) so often times you'll see a bank come back at the 11th hour and say now you need 35% down as an example.

sometimes this happens because the underwriter was able to learn all relevant facts about the property and has downgraded the file due to risk whether property, borrower related, or economy related.

  • Albert Bui
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