Financing Commercial Property | Buying, selling and operating apartments in Portland

Appraisals – Why, What and How?

26 July 2018
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When we have a well-informed buyer and seller agreed on a price why/when do we need an appraisal and what goes into one?

Why do appraisals exist:

Usually at the request of a 3^rd party like a lender who needs to assure (their shareholders) a property in their portfolio has “true” value.
Part of the sales agreement. Sometimes an appraisal is used to set the price or (like most sales contracts) there is a clause stating a sales price must “meet or beat” appraisal.
Risk-averse buyers – Governmental or non-profits chartered with the stewardship of public funds or donations in a prudently need to ensure they are paying a “fair” price for an asset.

An appraisal is an estimate of value made by an objective disinterested (i.e. neither in favor of the buyer or seller) party and considers multiple market factors.

What does an appraiser look at to establish real-world value? The object is to see if there is an “average” value of a similar property that has been recently purchased. They do this by looking at:

The operating numbers, condition and current use (i.e. can it be repurposed and bring higher value) of the property. This is used to determine a rate of return since commercial property is bought for investment purposes.
Comparable sales of similar properties to normalize/adjust pricing of the appraisal.

What makes a property “comparable” to the appraised property?

Proximity to appraised property (location makes a big difference in value).
Condition of the property (does it need a lot of CapEx just to make it average) will affect sales price.
Age. The average 70s vintage property sells for the min $/unit compared to other decades. [cf. The 5-year Portland sales history (on this WEBsite)]
Size – You have different types of buyers dependent on property size. Smaller buyers may place aesthetics over investment return.
Unit mix – Comparing an apartment with all studios vs. one with all 3 bed units is not representative.

Whether for an appraisal, your investment return or max sales price, you need to keep your property in good shape (for buyer/tenant appeal), stay on top of maintenance and maximize your NOI.

Steve Morris | Vice-President
IMG Northwest
1234 SW 18th, Suite 102
Portland, OR 97205
Phone: 503.970.4593
steve@imgnorthwest.com | www.imgnorthwest.com
OR License # 200202054 | WA License # 24512

For the Oregon Real Estate Agency Pamphlet click here.
For the Washington Real Estate Agency Pamphlet click here.

Posted in Apartment Buying, Apartment Selling, Apartments - Other Topics, Financing Commercial Property
Tags: financials, invest, investment, location, sales

An unsolicited (or any) Offer – How do I rank/evaluate it?

27 July 2017
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Unsolicited offers sometimes work out for a seller. However, what can you ask yourself to rate if it is a GOOD and SOLID offer worth your time to proceed? Here are some questions to ask yourself, in order:

PRICING – A breath-taking price may be not that high if you haven’t done an analysis on your property lately. In 2013, the average sale was $88,934/unit in 2017 YTD = $161,131/unit or a 16% per year increase. While we don’t anticipate this continuing, do a valuation / financial analysis. Actively marketing the property will get you the best price 99% of the time – Unsolicited offers are seeking opportunities.
EARNEST MONEY – CASH OR NOTE? If you accept a note, a buyer may be able to tie your property up until closing with no cash out of their pocket. Worse, they may be able to tie up multiple properties (as in a 1031 search) this way. Without his cash at risk, the buyer loses a lot of motivation to negotiate with a seller.
EXPOSURE/RESUME – Has the buyer seen your property? Does he own property in town? Does he have a financing reference?
WHEREWITHAL – Is the buyer willing to show proof of funds for a down payment? If he is expecting to get a property for less than 25% down (or a LTV > 75%) that is probably unrealistic.
NEGOTIATION – Assume the first number is not the best offer from a buyer on an unsolicited offer. It may be a good test to see how they react to a counter.

We can do a very thorough financial analysis on your property which will point out how to increase your Net Operating Income. We compare your rents and expenses to neighboring properties to address your priorities. In addition, we provide a valuation with comparable sales to correlate value. eMail me if you’d like a sample report to examine.