What should I share with prospective purchasers?
What documentation will help maximize the market price?
Whether you are selling multifamily, office or other investment property consider what documentation is helpful in maximizing your price in the marketplace.
To begin – answer this question: What is a Buyer looking for in a purchase? The Buyer is going through the following thought process:
- Are the rents at the maximum levels according to the market?
- What are the stabilized past three years of income and vacancy loss?
- What are the stabilized past three years of expenses?
- Is there any deferred maintenance? A third party property inspection is usually ordered for this.
- What capital improvements or replacements have recently been done?
A coherent story, backed up with reasonable numbers, goes a long way to reeling the highest offer in.
It is vital to have capital improvements “washed” out of the expenses because if one time major cash items are mixed in with expenses it will ultimately understate your net operating income. After all, that is what a Buyer is really purchasing from you. A coherent story backed up with reasonable numbers goes a long way to reeling the highest offer in.
How does the buyer regard the annual stabilized income and expense information?
A simple way to remember the income approach to valuation is by the simple formula for determining the rate of capitalization often called “cap rate.” Income= (Rate) X (Value).
A buyer is looking for a desired rate of return.
A Buyer (and an appraiser hired by a lender) is looking for a desired rate of return. Typical cap rates are 5.5% – 8% or more depending on many different market circumstances. To solve for rate, divide the net operating income by the value offered. It is important that the net operating income does not include mortgage interest or principal or depreciation which is purely a tax number. It is obvious that the higher the net operating income (NOI) the higher the price. The sales process involves communicating what the present net income scenario is as well as conveying what the potential for the property is. Clear information upfront will go a long way to getting the highest possible offer.
Clear information upfront helps get the highest possible offer.
Dan Roseliep, CPM
Vice President, ALTUS Commercial Real Estate