I've been asking this question of clients and prospects lately and here are some of the answers I've gotten.
1. "about ½ of what I paid for it."
2. "less than I owe."
3. "Well, I paid $1.5 million for it so I have to get at least that much."
4. "At a 6% cap rate it's worth $2 million."
The first 2 are probably pretty accurate in our market, and suggest a sense of helplessness and resignation. The third response is almost certainly rooted in denial, and the 4th may or may not be anywhere close to accurate.
It is my observation that the valuation methods of replacement cost and comparable sales have become less relevant and far more difficult to quantify over the past 2 years. Replacement cost becomes totally irrelevant when there is an adequate supply of listings well below replacement cost. (I remember thinking it was pretty obvious advice when a legendary local investor admonished a room full of investors and brokers in 2006, ..."never pay more than replacement cost"... but that's another story.)
In the case of comp sales, there is little opportunity for fair market sales when the inventory of distressed properties is sufficient to satisfy buyers. We have market segments with 30 to 40% vacancy where most if not all the sales in the past 6 months have been distressed, short sale, and foreclosure sales. Many owners hope or even believe that there is one market value for distressed sales, and another for stable property. That is only true if your definition of stable property includes an in-place income stream, AND the income is from a financially healthy tenant. Otherwise, it may as well be vacant. I say this because there are really only 3 buyers out there.
Buyers of Credit Tenant investments
Owner/User Buyers of heavily discounted distressed property
Investors in vacant, heavily discounted distressed property
The investment buyer and the owner/user buyer are straight-forward and expected. It is the investor in vacant distressed properties who take advantage of the discounted purchase price, captures the scarce tenants with market-leading rents, and essentially resets Lease rates across that micro market. Buying at a discount provides them with an acceptable profit, even at the new reduced rate. The real upside for these investors will be realized when vacancy decreases and rents increase with demand. When that happens, their Cap rates will be 10 - 20%
Sellers in today's market have few options and tepid prospects for near-term improvement. The individuals and small businesses that invested their own ‘real' capital to buy and operate property between 2002 and 2008 stand to suffer the most severe ‘real' losses as a result of value declines. This is especially significant as 5, 7, and 10 year loan maturities approach. It's not a promising prospect for some of our most entrepreneurial and hard working property owners. It's an even bigger shame that so many of these people who DIDN'T game the mortgage system are taking far more than their share of the consequences.
...I think my next topic should be, "Where did all the money go?"