Listing A Property - Do I use Pro Forma or Actual assumptions???

[Ken Martin]

Hi All, I purchased a 5 unit property in SW Michigan about a year ago. I bought the property from the bank for very cheap, but now that I've done renovations, raised rents, billed back utilities, and have the property filled out, the cashflow is great, and the property is worth materially more than when I bought it. My question is this... when i'm listing the property to sell (I want to sell this property, and buyer a larger one), do I use my current tax rate and insurance costs? OR do I use estimated pro forma insurance and tax costs on the potential sale price that will be materially higher than what I bought the property for? The difference in those two inputs in my expenses materially impacts the NOI, and therefore the amount I can justify listing the property for.

For example, if I bought the property for $80k, but now it's doing $28k in NOI, and I want to list it at a 10cap , the difference in tax and insurance between a $80k property and a $280k property is pretty material. If I plug in the higher tax and insurance rates based on a $280k value, it really eats into the NOI and cuts the value of the property by about $70k. 

How do I account for this when determining how much to list the building for? 

[Brian Ploszay]

Often firms market properties showing both actual and proforma numbers. They just need to be labeled. On most MLS systems, they want you to input actual. So in the comments, you can describe how one achieves pro-forma.

[Bjorn Ahlblad]

@Ken Martin That's the problem when you believe you know too much-Right? If you are using an agent let him/her come up with the numbers. If I were you I would use the current (lower) number and feel perfectly at ease. In fact you have no way of knowing the new taxes and insurance anyway since the final sales price is unknown. It may go higher than asking, at asking, or lower-nobody knows for sure.

[Wayne Brooks]

It’s the buyer’s responsibility to figure out what Their taxes and insurance might be.  As a buyer you can ignore the seller’s insurance as you don’t know what bare bones policy they may have and depending how tax assessments are done in that area it’s fairly easy to determine buyer’s taxes.

[Josh J.]

List the property based on 12 month forward NOI and don't readjust taxes or insurance. That's not your responsibility.

Not to sound like an unscrupulous jerk, but you're trying to sell this at the max value so you can 1031 into the next deal. 

Don't miss out on the chance to have someone overpay for your property because they're underwriting the deal assuming NOI is X when Y1 NOI will turn out to be .8X when it's all said and done.

[Mary M.]

I would be sure to list with a RE agent so you can get as much as possible. Find one that is familiar with MF 

[Joe Norman]

I would market the property based on whatever is going to maximize your return.  It’s the buy’ers responsibility to do their own due diligence and confirm your numbers.  Obviously don’t be unscrupulous or unethical, but if your actual numbers make the property look more favorable on paper then use them.

[Theo Hicks]

I would just provide the T-12 and current rent roll and let your r agent market the property however they like since that is their expertise.

[Seth Ferguson]

Hi @Ken Martin,

Everyone's on point. Your broker will know more about where the market's at and will be able to massage a pro forma to suit market expectations.