You make your money when you buy. You maximize your profits when you sell. The time to start thinking about selling your syndicate's property is when you are buying it. Part of analyzing your purchase was planning what you intended to do to improve the property, estimating what the property would be worth when you sold it and estimating a holding period. Once you determine it is time to sell you have to set the asking price.
The price you can get when it is time to sell is influenced by inflation, the availability of financing, economic conditions, rates of returns from competing investment choices, scarcity of similar offerings, the property conditions and so on.
Setting the selling price is complicated by the fact that a fair price is what ever the buyer and seller agree that it is. Having said that there are some generally excepted guidelines used to value income properties that will aid you in setting the price.
An appraisal.
Capitalization rates.
Comparison of prices.
Rules of thumb.
Analysis.
An appraisal.
An appraisal is most often required by a lender before they make a loan. The appraisal for income property compares recent sales or listings of similar sized income properties and their rent schedules to
determine a fair price of your property. The appraiser could and should also compare the property against replacement cost. This value determination is helpful in setting the price and for insurance purposes.
This method of determining value is subject to a high degree of the appraisers opinion as to value. Often complete information about the comparable property not available.
Capitalization rates.
The capitalization of net income is the most common and accepted way to set prices for income producing properties.
An investor will expect a certain rate of return on the money invested. This rate varies depending on the rates of returns being paid on other investment options and the buyers idea of where he thinks the future rates will go as well as what effect inflation and taxes has on those rates. Buyers expect a higher return from real estate to compensate for the lack of liquidity and the issues of owning property.
Currently an 8% capitalization rate is considered low and a 12% cap rate is considered high. You determine the capitalization rate by taking the properties net income and divide it by the asking price. Example; assuming your properties asking price is $380,000 and the net income is $38,000 the cap rate is 10% ($380,000 divided by $38,000 = 10%)
To set the asking price based on a given cap rate you take the properties net income and divided by the required cap rate then multiply by 100 the answer equals the sales price needed to produce that cap rate. Example; assuming your properties net income is $38,000 a year and buyers expect a 12% cap rate. You set the asking price by taking the net income $38,000 divided by the desired cap rate 12% times 100 to get the sales price needed to give the buyers that 12% expected return ($38,000 divided by 12% x 100 = $316,666)
I determine the cap rate I want to promote when I am selling by taking the expected finance rate the buyer have to pay to get a loan and add 3% to that number. Currently most commercial loans are at 7% so a 10% cap rate would be in order. Ask your real estate agent what cap rates deals are getting done at and start 1 or 2 points lower then that.
Comparison of prices.
Comparison of prices works best for vacant land and non standard properties. There are too many differences of even like kind properties to make effective use of price comparisons. Let your real estate agent do the comparisons for you but only as an aid to the other valuation methods.
For valuation of vacant land I have found that looking up the property owners at the court house and calling all of them around your property got better comparisons then letting the real estate agents use comparable sales or listings. Even then considerable adjustments are needed to account for variables such as zoning, egress, ease of permitting, drainage, grade, traffic counts, etc.
Rules of thumb.
Rules of thumb is often used to eliminate a property from consideration. A person might take the annual or monthly rental income and multiply by a set factor to see if a property is in their ball park. This works fairly well for single family homes and duplexes but not much beyond that.
For single family homes you might take the monthly rent times 100 to get a starting point of value. For example a house renting at $1,100 a month would have a value of $110,000 That number tells you that a house selling close to that is likely a profitable venture worthy of further analysis.
Another example is for a builders lot for a home or office. For homes the rule is 20% is lot value. For offices check the tax office for the percentage they assign to land value. If the houses in the area are selling for $250,000 the cost of a lot to build on should not be higher then 20% of that number. A builder who pays more then that has a competitive disadvantage and a builder who pays less has a competitive advantage.
Analysis.
Analyzing everything and every valuation method available to you is best. You not only get a good feel for the value, but you will have a through understanding of the market. You an make helpful suggestions to the your real estate agent on marketing and talk with confidence with any potential buyers about future prospects for the property.
This same information will help you prepare a white paper on your property that can aid the buyer in making a decision and convince them to pay top dollar buy eliminating the negatives and accentuating the positive attributes of the property.
The real estate agent will use it as a tool as will the appraisers and bankers. Prepare the information white paper with that in mind. A password protected web site makes a good white paper and can be changed at will.