Adam Stern discusses how to price a portfolio of single family rental properties in today’s REI Classroom lesson.
Learn more about how the pricing is calculated and considerations to look for. Adam Stern explains what’s deducted from the fair market value to come up with the final price.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Adam: Hi, my name’s Adam Stern. I’m President of OwnAmerica. I’ll be your host of the REI Classroom for the next few minutes. OwnAmerica, my company, is the premier single-family rental property portfolio trading platform operating in the United States right now. And I am the number one single-family rental property portfolio salesperson. As such, since we’re single-family rental property portfolio experts, try to say that three times fast, we’ll be talking about a subject that’s near and dear in my heart and near and dear to all my client’s hearts, which is pricing a portfolio of single-family rentals.
Mike: This show was sponsored by passiverental.com.
Adam: There seem to be lots of different opinions on this because the commercial brokers who treat a portfolio of single-family rentals as more like a commercial property, they have a different opinion on how to price this versus OwnAmerica’s opinion, which is indicative of our background. We have a background that’s deep in the residential real estate industry, the traditional brokerage industry.
And the dichotomy I see between commercial and the way they price portfolios and the way we price portfolios is a lot of times, you’ll talk to investors and commercial guys and they’ll want to price your portfolio based on cap rates. They’ll look at the income the property portfolio provides and they’ll figure out what a prevailing cap rate is in the marketplace. For those of you who don’t know, cap rate is pretty much your yield after expenses. And they’ll price based upon coming to that level.
Being in the residential brokerage industry, OwnAmerica has come to understand that residential real estate is priced on comparable values. So the way we go about pricing portfolios is a really simple formula. It’s fair market value, or comparable value, minus capex, or capital expenditure. So let’s me just take you through it for a second.
Comparable value is how every home that gets sold on the MLS is priced. Your realtor goes out or some kind of valuation company goes out. They look at comps that have been sold in the neighborhood or the market that most closely resemble the properties that they are being compared against. You take some kind of average of all of those properties and then you assign a value based upon the conditions of property, essentially.
So what we do on OwnAmerica is we do this in every single property in every single portfolio that we come into contact with. The way we do it is through our website, ownamerica.com, people upload their portfolios and we don’t have a human do a comparable property values but we get our values from a computer, from an AVM, an automated valuation model that sifts out a number that’s very much like what an agent or valuation company would price it that.
Once we figure that out, we have a really honest, no BS, conversation with the sellers about what condition is, and we figure out what likely price per square foot the properties will require to get up to market value, and we could track that capex number out, really simple, $3 per square foot times 2000 square feet, that’s your capex number. Fair market value, or comparable market value, minus capex, equals what the property is worth. You add all those up and you have your portfolio price.
All the rest of it’s figured out, due diligence between buyer and seller coming to a price or the pricing, the ultimate pricing which it sells is figured out between a buyer and seller coming to a price, and then figure out during due diligence if that price holds true to the current condition of the property. It’s that simple. I appreciate you guys listening. See you later.
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