Determining FMV?

Question

My deal analysis process continues. Having great fun and learning a lot along the way.

With that said:

Investment property in the area that I am focusing on is overvalued.

Because of this I would like to be able to approach sellers in a professional manner to state my case for reducing the sales price.

I called my local county tax assessors office today and verified that they are mandated by the state to assess taxes based on 100% of the true FMV. However, then the representative told me that their valuations are approximately two years behind

What are some effective tools for determining the FMV for a particular piece of property?

Anything besides comparables?

Websites?

Rough equations?

Public/government information?

I would like to be able to plug in something to an Excel spreadsheet and go...

Thanks, Chris

PS. if you have any overall suggestions are how you go about deal analysis, your insight is appreciated and will be passed on to those that come after us,

Mike Nuss · Answer

@Jason Quick gave you the quick rundown on valuation. Market Approach or Sales comparison approach, income approach and cost approach. Honestly, as an appraiser, valuation is not a science. You don't gather data, throw it into a computer or formula and it spits out a value. Valuation is an art based on principles. Valuation comes down to interpretation, comp selection (even the income approach to value uses market data from "comps") and validity of the techniques and data used.

Valuation is more important for short term flip style deals when the exit strategy will take place in a short period of time. Market conditions change, and so valuation becomes less important on hold properties. Honestly, FMV is an over rated piece of investing for hold properties. The income stream and the financing are the important factors.

Our Portland market is crazy with "investors" paying cap rates in the 4-5% range (or less). Or Gross Rent Multiplies of nearly 200 or above (yes, $3,000 in gross monthly rate equates to $600,000 in value for some neighborhoods). Why compete with that? Run numbers that make you comfortable. Negotiate with a seller based on what they need, not want. Structure the deal to meet what they need, while meeting your goals as an investor at the same time. Some of our best deals are when we paid at or above "market value" for the property. These scenarios worked well because of the way we structured the financing.

Financing and Real Estate are typically combined, but should be looked at and analyzed independently. A "great buy" can be ruined by bad financing. A "bad deal" can be saved with the right financing. Don't beat your head against a wall battling a seller looking to get offers you are not willing to make. Instead, respectfully decline, let them know why the deal does not meet your goals and leave on good terms.

Listening to and understanding the seller's needs are much more important than what the property is worth (in a hold property anyway). If the seller is fixed on price, work with them instead on creating a finance structure that allows to meet price and still create cash flow.

A mentor of mine put it very simply today. "As investors we are looking for a receptive audience in the right location. An audience that happens to own RE in a well located part of town". Let your ears, knowledge of tools and the market do the rest.

If valuation is a big concern (which it should be in the right scenario) I suggest getting intimate with your investment area. Know the players in the market, know the comps, know the cap rates, know the GRMs, know when a property hits the market, goes pending and closes. Keep an eye on outliers, talk to sellers on a consistent basis and become your own valuation machine. You'll learn more from looking at 50 homes in a certain price range than any appraiser can tell you about a specific market or property. Spend time getting to know your arena and you'll become a better "appraiser" than the licensed "appraisers".

Susan Gillespie · Answer

Hi @Chris Stromdahl I'm in a similar market situation (many of us are) where prices are bid up by investors who have the cash or financial wherewithal to pay more to get the property.

If you were the seller, would you sell to the logical person making the case for a price reduction, or to the cash/motivated buyer who will pay top dollar?

I would consider market dynamics in your equation, along with motivation of the seller. Don't try so hard to get a property that you get a bad deal.

Have you considered single family properties? My best deals by far have been ugly but minimally distressed properties that no one else wants. The ick factor translates to a lower sales price. These are also harder to find now, but there are more opportunities overall.

My investing partner/husband is also a Navy vet. Our specialty is evaluation. If we can help, let me know. My advice is to network with credible investors, learn as much as you can and be ready for the right deal when it comes. Good luck.

Jason Quick · Answer

There really are three "professional" ways to value a property. The sales comparison method (which you already mentioned), the income method, and the replacement cost method. For single family homes, the sales comparison method is the primary approach. The others don't usually translate well. This is how appraisers value homes. A tax assessment is rarely relevant to anything.

One approach that we use when marketing investment grade multifamily properties is replacement cost. Contact some builders or investors in your area to see what it costs to build a new home on a per square foot basis. Include hard costs, soft costs, and land costs. When the market is overvalued, home prices will often be higher than the replacement cost to build a new home. If you can show the sellers they are charging double what it cost to build the house new, that gives you a logical argument.

Another tactic is to use the prior sales of that property and leverage them against the seller if they are much lower than the current asking price. You could also try to explain to them carrying costs as many single family home sellers probably aren't really considering the full amount of them.

You could look at some income valuation techniques if this is a multifamily building. For those, the income method is typically used. There are a lot of spreadsheets and resources available on BP for calculating things like cap rates, IRR, unlevered IRR, cash on cash return, and other metrics used in the income method. Good luck!

Chris Stromdahl · Answer

@Mike Nuss

Wow, great insight.

"Valuation is more important for short term flip style deals when the exit strategy will take place in a short period of time. Market conditions change, and so valuation becomes less important on hold properties. Honestly, FMV is an over rated piece of investing for hold properties. The income stream and the financing are the important factors."

While I understand your point, I do think that having a strong hold on what the most current FMV is for and B/H property is important for three reasons:

• Metrics, negotiating, making money when I buy

But, I agree 100% about becoming my own appraiser, and had not thought of using the closing sales data as a proxy for comps. Will definitely explore that more.

I viewed your profile and will be in touch.

Chris Stromdahl · Answer

@Jason Quick

Thank you for the income valuation perspective. I will research/implement the tools I find.

@Susan  Gillespie

Thank you for pointing the sellers perspective, very good point.

I would like to make money when I buy. In my market, this is not possible. There is a perfect example in my neighborhood. The buyers paid too much for the property, are asking too much for the rent and it has been vacant since they completed the renovation.

I do think that there is opportunity to negotiate with sellers who's properties have been on the market longer than most and are in need of some repair. I think this is part of the point you were making.

The good news is that we have found a couple properties that are local where the numbers work out. The process continues.

Thanks for your input.

Determining FMV?

Most Popular Reply