If you guys thought I wasn’t going to talk about the Cohen testimony, you must not know me that well. There’s way too much to cover, but because we are discussing how to buy in NYC, I will mention the absurdity of Trump inflating the value of his real estate holdings in order to buy the Buffalo Bills. Really, dude? Even the Browns (#believeland) would be a smarter investment than the Bills. But hey, he’d probably inflate their record so much that his base would believe they won the Super Bowl in 2008. - mic drop -
Anyway, I’m going to focus on how you price and evaluate an apartment or building, using a few different methods. This will come into play whether you’re buying to own, buying as an investor, or selling. And even if you’re just renting, you can still use a similar process to figure out whether you have room to negotiate. Which can be helpful when trying to keep your landlord from raising your rent!
What an apartment is worth depends on who is asking. If you ask the owner, it’s worth EVERYTHING. If you ask a buyer, it’s worth 75% of the list price. If you ask an agent, it depends on whom he owes his loyalty. But there are some actual metrics you can use to establish whether the list price is reasonable, low, or high.
The first thing you do before you list an apartment, or if you are evaluating the actual value of something on the market before you put in an offer, is to look at the “comps.” Comps, or comparable apartments, are similar apartments that have recently sold (ideally in the past 3 months, if in the past 6-12 you need to be more aware of market changes). You can also look at average price per square foot (if a condo or standalone property, as co-ops aren’t real property and do not necessarily have this) and apply it to the apartment in question.
Similar apartments that are still on the market should be looked at, but they cannot be used to value an apartment because they aren’t necessarily going to sell for the price at which they are listed. Consider how MANY similar apartments are currently on the market and how many have gone into contract in the past quarter. This will give you an idea of whether the market is stagnant or if it’s moving. As a buyer, the more similar properties available the more negotiating power you have.
A Comp-less Sale:
If there are no comps, you have to look at the market as a whole to arrive at a price. For example, the last two sales I priced both had zero comps. Nothing with the same square footage, style of building, and location had sold in the past 12 months. What I had to do to arrive at a price was look at how property values had changed in the neighborhoods since the last transaction and look at different apartments with SOME similarities.
For the standalone house, it had a more desirable location than another place that sold for nearly $800k, but no driveway or garage. The square footage was similar. But in a neighborhood where you need a car no driveway knocks about $100k off the price. We ended up deciding for the high-$600k’s (but never listed it, for reasons I CANNOT wait to write about!).
For the co-op I will be listing in the next few weeks, everything in equivalent location and style of buildings was significantly bigger and sold for $450-$550k. Then there were slightly larger apartments in a much larger building further away from the park and trains selling for around $300k. These same apartments were selling in the mid-$200’s the last time this apartment changed hands for $300k, so taking this into account and looking at the market trends for studios in the area, we will price in the mid-$300’s.
This may be unnecessarily in-depth, but it goes to show how many things are taken into consideration when pricing an apartment! And we haven’t even gotten into clustering, or different types of pricing strategy, or staging…I’ll save all that for when I spend April talking about my sellers.
If you are purchasing an investment property that generates income (like a rental building), you can use the capitalization rate, or cap rate, to arrive at a price if there are no comps. Even if there are comps, cap rate is used to judge the quality of the investment. You calculate it by dividing the net operating income by the purchase price or value. When looking at a commercial listing, it will generally show you the taxes and other expenses and then the gross income, so you can figure out the net yourself. And if trying to price the building, you would work backwards, trying to get the highest possible cap rate while still maximizing the purchase price.
Other than cap rate you also want to take into consideration age of the building because if it’s generating a lot of income but will need a LOT of work in the near future, it may be a bad investment. Can someone go back in time and tell my prior landlord this? Sigh.
Before an apartment sells there will be an appraisal. If you are the purchaser and are getting a mortgage, the appraisal needs to show the apartment is worth enough to cover the loan amount. Otherwise, if you default, the bank will be left with an asset worth less than the amount it has shelled out to the seller. Agents have a role in this as well, as both the buyer and seller want the place to appraise for the required amount. And how do they ensure that? They make sure the place looks great when the appraiser shows up, and they hand over a comp report that proves their point.
So how and why did Trump inflate his real estate assets? Much like Billy McFarland lying about artist bookings to get money for Fyre Fest or Anna Delvy forging financial documents to keep living her high-society lie, he simply claimed his assets were worth more than they actually were so that Duetsche bank would give him a loan. And he used the methods I discussed above, but in a way that would prove his case rather than be honest and impartial. From the Real Deal:
“Find an asset that is comparable, find the highest price per square foot that’s achieved in the area and apply it to that building,”[Cohen] told members of Congress. “Or, if you’re going by the rent roll, you go by the gross rent roll times a multiple — and you make up the multiple, which is something he had talked about —and it’s based upon what he wanted to value the asset at.”
Basically he found the fanciest comps with the highest price per square foot, then applied it to his buildings. Or he took part of the net operating income and multiplied it by a random number in order to get a good cap rate with a higher “value.” Guys, don’t do this. Don’t willfully mislead yourself into thinking a place is worth more or less by putting on blinders. This is another reason it’s good to work with a professional; you may be a litttttle too close to the issue to be an impartial judge.
At the end of the day, an apartment, house, or investment property is worth whatever someone is willing to pay for it. That person may lose money on resale if they go crazy in a bidding war, but that may be worth it if the home is that special. Or if they truly love and believe in the future of the neighborhood where an investment property is located. A family who falls in love with something and wants to raise children there may not care about “overpaying.” Always remember that real estate is, for some, simply an investment. But, for most of us, it’s much more meaningful.