Sell High: How to Value a Property

Welcome to SellHigh, the ultimate podcast series for landlords looking to maximize their property's potential and achieve top dollar sales.

Hi, I'm James Nelson, your host and I'm here to help you unlock your property's full potential.

And I'm Anlis Callez, your moderator, guiding you through each insightful episode. Get expert insights on market timing, broker selection, property valuation, marketing, negotiation and closing, all in one podcast. Tune in to the Sell High series and unlock the secrets to top dollar sales.

Welcome everyone back to the Sell High series. Here we are, episode three. I'm here with Analise Callez, who is founder of Brandora, and we're going to be talking today about how to value a property correctly.

Thanks for having me, James. So last week we discussed how to find the right broker. We discuss how important it is to find a specialist who will get the most exposure for your property. And think big picture and have your best interest in mind. Today I'm excited to share your insights on property valuation with our audience. We will discuss how you landlords determine the value of your property. James, to put things in context, can you tell us how many properties you have sold in your career?

So I actually don't keep count. I probably should. I could look it up. It's in the hundreds over my career. I've been doing this now for 25 years, so that certainly helps. And I'd also take the eye out of the equation. There is no way that we would do the volume that we do without the team. We're very proud of the way we've built the team. So it's not just one unified sales team here at Avis and Young with a collection of brokers, but it's also the analyst team, the marketing team, everyone that's behind these efforts. That being said, I can tell you the last couple of years because I'm very dialed in on what we were doing relative to the market. So, you know, 22 was a strong year with 50 sales. 23. The market was cut in half here in New York for sales volume. We were still able to maintain 41 sales, which was a 13% market share for Manhattan for properties sold over $5 million. So that that's what we're really tracking is what is our market share as far as how many sales that accounts to. We'd like to believe that we can outperform the market, but, you know, hopefully a little bit of a tailwind or maybe if the market corrects that, that will certainly help.

Well, 30% is really impressive now. People love stories. James and I'd love to share with audience a story about a sale that you're really proud of and one that was really complex.

Yeah. So I think, and I know we're going to get to talk to how you value a property, but sometimes when you're looking to set a record, where you're going and looking to achieve a record, it can be challenging to know what to shoot for. But we were involved and this was kind of a big sale about midway through my career for a collection of six retail stores down on Bleecker street with at the time there was Marc Jacobs and a bunch of other luxury brands including Burberry. And we sold it for over $6,000 a foot, which was a record for the time. And it was also to a new buyer who came to New York. I think that's always a great achievement when you say, okay, we've, we found this outlier who's new to the market. We achieved a record. And so that's, you know, just one example. And I think from, from there we done a lot of work downtown and certainly in the Village and on Bleecker Street. As far as most complex one transaction, this going back to the team effort and what it took. We were involved in a sale that was ultimately won the real Estate board's deal of the year which involved three not for profits. So we had a, we had been retained by a church on the Upper east side that had a substantial amount of development rights. They had outgrown their church. They were looking for a new location. Fortunately, we had also been retained on another church that was only four or five blocks away. They actually didn't need a church anymore. They were more mission driven. They wanted a new location. So the idea was we had one church that wanted to buy the other church. But these churches and many, sometimes we deal with these not for profits who are real estate rich, but they might not have a ton of cash on the balance sheet. So enter the ultimate buyer of the church with the air rights which happened to be another not for profit, a well established hospital. So they did have the money. So they were able to put down the deposit for the first church and allowed them to use that deposit to go put the deposit on the next church. And simultaneously we were able to find that second church a new home and continue to use that deposit to make the acquisition on a third property. And they all happen simultaneously. So we, we called the, I think the, the Trinity sale where all three pieces had to work together. And probably most proud of that ward because that Award is really based on ingenious and doing something that maybe had not been done before. So really proud of that. And in the process establishing permanent homes for three, not for profits, that have been serving New York for, you know, probably close to a century and hopefully many more.

And thank you for sharing. I always love hearing you talk about your real estate stories like that. Now let's dive in. For landlords considering selling their property, one of the first and most crucial step is understanding what their asset is truly worth. How do landlords find out what their property is worth? What are the key methods?

Annalise in our last discussion we talked about working with the right broker and we talked about someone who has experience and knows the market. And I believe today that it's, it's really important than ever that you're working with a broker who is in the marketplace actively transacting because especially when the market's moving, if you're looking at sales comparables that are, you know, a year ago, I mean, things might have changed hopefully in a positive direction at this point. But what you're looking for is that broker's opinion of value. Now these brokers, and for the most part, I mean, some may, may charge for this, but many will do this as a courtesy service for owners who are considering a sale. And so the broker will provide their opinion and we can talk about the different approaches and what goes into that. But and it, it definitely depends on the type of property as well. So let's say if it's an income producing property, it might just be the investment value and then they're going to look at comparable sales as well. We can talk a little bit more later about what comparable sales are all about. But sometimes there are opportunities to reposition the property. Maybe it's a conversion to another use, maybe there's maybe a vacant store at the bottom with apartments above. The highest and best user of that property might be an end user who wants to buy it to put their business there. We actually talk about this in the book the Insider's Edge to Real Estate Investing. Knowing what is highest and best use, I mean that's ultimately what the broker should be solving for is they'll show you different methodologies, but then they're going to reconcile a value based on what they think the most likely and best outcome is. So that that's really what you're looking for in a broker's opinion of value.

Can you explain the difference between an appraisal and a bov?

Sure. So an appraisal comes from a Licensed appraiser, Most brokers are not. And there are certainly appraisal standards in how they go about the methodology that's used. Brokers, I don't want to say can take more, more liberty. But when you're using say maybe a deal that's in contract or you're using a high bid, that might be your opinion, right. Of what the property is worth based on maybe a transaction that hasn't happened yet. So we've done that before again, in a, in a market that's moving, we might say, well, look, this is, has sold, but this is what's in contract. This is what, where we're getting high bids on an offer, whereas an appraisal, we'll really look at what the actual facts are with the asset. There's definitely standards and how they go about it. Lenders certainly rely on appraisals when they go to make loans. Estates will generally look for an appraisal, so they know that they have that certain methodology. And again, brokers can, can take more liberties. We talked about that user premium. That can be a very subjective premium on what you think that's ultimately worth. The last thing I would add is I don't think as an owner, if you want to sell your property, that you necessarily have to get an appraisal. In fact, I don't think that's necessary. I think that the broker's opinion should suffice. But for certain situations, as I mentioned before, an appraisal could be needed.

Interesting. So can you share with our audience what goes into a good bov?

I think the first thing is that you want to have a BOV that's realistic. A broker who is overly optimistic is not doing anyone any favors. For one, if you're the owner and you're looking to decide which broker to work with, you don't want to just work with the broker who tells you your property's worth the most money. Right. You want to see how they substantiate it. So, and by the way, if you're a seller, the impetus is also on you to provide the accurate information. So sometimes we just get a rent roll. You know, here's a 20 unit apartment building, five of the units are vacant. You tell us what you think the market's worth and you tell us what you think the expenses are. Some expenses are public records here in New York. We know what the real estate taxes are, we know what water and sewer. But some of these things we make projections unless it's provided for. The important thing is that you want to Be realistic with your projections. So if there's vacancy, you want to make sure that the rents, the projections are, are justified. Right. So are there not just sales comparables but is your broker showing you leasing comps to justify what that projection is? And then on the expenses you want to make sure that they're realistic and that you've accounted for things such as a management fee. In some cases owners will say well I self manage the property, but the way an investor might look at it is to, to put in a line item for that. So I think you need to value it as if an investor is going to buy it. Now brokers are going to look for probably the most aggressive investment analysis. Who do we think the most aggressive buyers. What are they paying? A lot of times it boils down to that cap rate. So how do you define a cap rate? Written a white paper on this that's on Forbes about all the different considerations that go into this capitalization rate. That's the rate of return that an investor is going to look for before debt service. So a lot goes into that. Part of that is really looking at the comparable sales to understand what's trading in the market and knowing the story behind the trade. You know, just the price, the square footage, price per foot, that might only tell you part of the story. What was the return? Where were the rents? What type of upside potential might have existed? Or maybe there's downside that that existed. So I think really being realistic and making sure that you have the backup is important. I mean sometimes we'll go and we'll meet with an owner and they'll say okay, well we met with this other broker and you know, they just gave me a number, they gave me a one pager, right? I mean we, we do a substantial analysis with many different vantage points. Sometimes a snapshot of what is today. Sometimes we're looking at if it's an office deal that has leases that roll over the next several years, it might be a 10 year cash flow analysis. We might even do an Argus run a very detailed analysis with assumptions of what happens in the, in the future. So you do want a detailed analysis, you want to make sure that it's substantiated and you want to make sure it's accurate. Because again I think, and we can maybe talk about this at a future time, but going out with the value that's way above and beyond market and not defendable just ends up wasting a lot of time and actually ends up hurting the value of the property in the long term.

And so speaking about being accurate, would you say that the cap rates that are usually provided by brokers are realistic?

It's a great question because first of all, if you ask a seller when they sold a property what the cap rate is and what the buyer is, they might tell you two entirely different things. So a lot of that depends on what assumptions that you used. Now this is also one of the things that makes real estate investing really interesting. It's not an efficient marketplace. When you buy a stock and you see, you can, you can know how many times earnings that you're, you're paying for that. Whereas with the exception of properties that have CMBS loans that are public, you might not know what the income and expenses are. And are the expenses accurate? Are they reported properly? Brokers should try to make sure that when they're getting cap rates that they're getting it from a reliable source and that they're also being consistent with the methodology and how they get to those cap rates. It's not the end all and be all. I mean, I would say the value of the price per foot is, you know, as long as, and here's another caveat, how you measure the building, because sometimes public sources have the measurement off as well. But if you actually know what is the price per square foot and you can substantiate that, that's a way to make an apples to apples comparison because that you would hope at least the square footage is something that you could get an accurate count on the income. And the expenses that leads to the cap rate can sometimes be more challenging.

Interesting. And James, I've been thinking realistically, no property is alike. Would you agree or disagree that evaluating a property is almost like art, more than science?

Well, it depends. No property is alike. And that does make it interesting again from an investing standpoint. So you could have. I've seen in my career where there's two buildings on the same block that seem the same, but one sells for double. You know, why is that? And that might be because one has double the income, or maybe the other building is encumbered with long leases with below market rents. But it could also be ultimately how the property was sold. Right? So we talk before about maximizing the exposure. And you know, I, I learned very early on in my career and I think we, we talked about that sale on 10th street down in the, in the Village where one of the first investments I made with, with our friend Matt Blesso, he had bought a property off market. And within a couple weeks I made a couple calls to see if we could resell it, it was clear that that seller had left 5, $600,000 on the table because they just didn't market the property. So that's the other thing that plays into it. It could be the property itself, it could be the way the property was marketed that led to a lower price or a premium.

And can you elaborate on the factors that affect property value?

There's a lot of factors that go into the valuation. So clearly, where's that income coming from? Is it from a credit tenant, A national tenant? Is it a mom and pop? Is it asset class? So, you know, multifamily is a much more conservative investment because I would say most places, if you have 100 a unit apartment building and one tenant leaves, there's probably, you know, it's only a matter of time before you can get someone else to take it. In some places, you know, sometimes you see these triple net single tenant assets that are somewhere in upstate and maybe there's not credit. And if that tenant leaves, you may never be able to replace that tenant. Right. And so there's different risk premiums to define what kind of cap rate, the safer the investment. Investors should be willing to accept a lower return, whereas with a riskier investment, you're going to look for a higher return. So yes, the credit of the tenant, the type of asset, the old adage, location, location, location, the geography, a lot of that also plays into supply and demand. So if there's more buyers who want to buy in New York City, that competition is going to drive down the returns. Right. Whereas if you're buying in a tertiary market, you might not have as much competition. Right. So you might be able to gain a higher return. But just remember the mark, the same market and property that you're buying into, you're going to have to sell on the way out, if that's your plan. So those are definitely some of the, I would say, the major considerations. I mean, I think when we look at what cap rate to use, we're also looking at where that rent is in relationship to market. So if we know the rents are below market and we know there's future upside potential, we know that an investor will accept a lower return today for that future potential.

And that makes sense. Can you share any tips for landlords on how to ensure they can get an accurate and reliable valuation?

Well, I think it starts again with working with that broker who has that track record and someone that you believe is not going to over promise and under deliver. We take great pride in our valuations. We actually track the last hundred properties that we've sold and we looked at where we reconciled the value in that broker's opinion of value relative to where we sold it and was within 5%. And we, and we tell owners that when we meet with them because, you know, let's, let's face it, it is if we do 10, if we meet with 10, owners do 10, broker opinion of values, probably seven or eight of them are going to say that they wish the value was a little higher. You know, maybe one or two of them will say that about what they expected. It is very rare that an owner will say, I think you really overvalued the property. So. But the key again is that you want to work with a broker who really tells you that honest opinion of what it is. And they're not trying to sugarcoat it. They're not trying to tell you the number that you want to hear. Because again, you go at a too high a price, especially in this market, you're not going to have buyers who take a serious look at it. And then the property sits. And if the property's been out there for six months and then you start up to going through price reductions and then that property gets a stigma, what's wrong with it? It's been sitting around forever. Right. It's much better to price a property on the nose or even a little bit below. That's going to drive a lot more activity and that demand is what can lead to a bidding ward and ultimately the highest price.

And do you think landlords should ask as many questions and also like, challenge any assumptions or methodologies that seem questionable?

I think it is a discussion and you want to understand how the broker came to their valuation and be able to support it. So again, if there's projections, where did you get those from? And I think also their knowledge of the comparables are going to be very telling. If you ask questions about the comparables. Okay, why did this property sell for twice per foot that this property sold for? What was the tenancy, what was the condition? And clearly the broker who can really explain the comparable sales has an understanding of what's taking place in the market.

Excellent advice. Thank you so much for sharing your expertise. James. For our listeners, understanding your property's value is crucial when selling at as it will inform your pricing strategy and help you maximize your returns. To wrap up this episode, James, in your own words, what are the three takeaways to share with landlords listening on how to find out what their property is worth?

So I think the first thing is making sure that you're dealing with a credible broker who has knowledge in that market. Right? So that's certainly number one. I think number two, they need to have a real understanding to be able to support their projections and a knowledge in the comparable sales to make sure that they're looking at this in the right way. I think also having a knowledge of what's going on in the marketplace, knowing what's actually trading, and also looking at what what are the the future potential of the property. Has that broker identified the highest and best use?

Thank you so much for sharing your wisdom with our audience today. In our next episode, we'll dive deeper into the marketing and selling process. So stay tuned. And remember, the key to selling high is working with the right team of professionals who have your best interest in mind. Thank you, James. And thank you all for listening to the Insider's Edge and the Sell High series. Until next time, maximize your property's potential and sell High.

And as always, you can go to jamesnelson.com, that's where you can find our show notes for this episode as well as all of our other podcasts, our video series, our white papers that we have posted that help you gain the insider's edge to real estate investing. Thank you again.

Maximize your property's potential, Sell High.