Pricing Residential Multifamily Assets

Don't Sabotage Your List Price

When it comes to selling multifamily investment property, it's easy to formulate pricing strategies that reflect our personal needs and not what the market is willing to bear. There is always a magic number but how does one come to it. A quick calculation might look something like this; acquisition price plus a profit to make a sale worthwhile, add in the costs for all the upgrades and capital improvements and any losses that may have been incurred over time, then mark the price up 5% to make room for negotiation.

In a sellers market, this pricing strategy actually works. In a flat or worse, a declining market, personal pricing strategies will ensure a disappointing outcome. Regardless of the market, a more objective method for pricing property should be considered.

So, how does one establish a realistic market price that will generate sufficient buyer interest and eventually lead to a successful sale? Let's take a look at a few objective methods first.

Sold comparables

In any market analysis, sold comparables should be given the most weight. In a normal market, comparables from up to six months back are generally accepted. In a market where values have been increasing or decreasing for a prolonged period of time, 90 days of recent sales is considered acceptable. Be sure not to compare across asset classes. A million dollar single family home and a 3 unit apartment building on the same block are not comparable properties.  

Active comparables

Yes, sold comparables are all an appraiser and lender will use to determine market value but active comparable are your competition, so they're worth researching. Once you determine an acceptable price range based on the recently sold comps you should look at similar properties currently for sale. Determine if the active comps are listed in the same general price range, higher or lower. If active comps are listed higher or lower than recent sales you need to find out why. The market could be shifting.

Financial analysis

Start with comparing the gross rent multiple, cap rate, cash on cash return, internal rate of return, price per unit and price per square foot. In some markets, these methods may not be ideal for determining market value, especially if you have a building with just a few units. In Chicago for example, the value of the land often times accounts for a high percentage of the overall property value in sought after neighborhoods near the central business district. All things being equal, the gross rent multiple and price per square foot are good starting points for making comparisons.  Simple Property Analysis: 1 to 6 units (excel file)

Here are two methods that are slightly more subjective:

Uniqueness of the asset

Let's assume you have a four unit investment property. Are there any characteristics of your building that differentiate it from the other four unit buildings on the market? Maybe all of your units have large outdoor patios or vintage interior moldings, built-ins and other features that attract a larger pool of renters willing to pay more to live there. If the units are fully updated with modern kitchens and baths and separately metered, your building will sell for a premium over a building without any improvements. You need to determine what that premium is.

Broad market indices

Take the S&P Case Shiller Indices for example. The Case Shiller measures the residential housing market, tracking the changes in value in 20 metropolitan markets. Yes, this index tracks single family housing and not multifamily apartment buildings, but it is also a good indicator of the strength or weakness of a market.

Tying it all together

Now you know what the recently sold and active comparables are going for. You've determined that your property has financial ratios in-line with sold comps and generally speaking your property has some unique aspects that significantly impact the value. How do you set the asking price?

Knowing the average days on the market and average sale to list price ratio will help. If you know the average sale to list price ratio is 95% of ask and you price your property at a rate of 120% of the market value, you are pricing yourself out of the market.

In a flat to declining market, pricing the property at recent comp levels will be the best strategy for generating significant buyer interest. In an appreciating or sellers market, you will have more opportunity to build on recent market value by adjusting your asking price upward.

Regardless of the market, the objective is to generate buyer interest. Don't worry about low ball offers in a buyers market or leaving money on the table in a sellers market. When priced correctly, you will tap into a sufficient pool of buyers who will recognize the opportunity and pay accordingly. Just remember, if you are going to sell something, you need to sell something people want, at a price they are willing to pay.