Doug Foley, is more than my friend and mentor. He's a CCIM designee, a commercial broker with several decades of experience buying/selling investment properties for himself and others. He's a founding member of the Northwest Real Estate Inverstors Association, and a Past President and current Board Member of The Rental Housing Association of Greater Portland. I am grateful he has given me permission to re-issue the article below. I recommend subscribing to Doug's blog at www.realestateinvestmentspdx.com/
SELLERS, BUYERS & LENDERS - OPPOSING VIEWPOINTS IN TODAY'S APARTMENT MARKET
By Doug Foley, CCIM
Three Points of View:
We have an interesting situation in today's multifamily marketplace. We have three opposing viewpoints in the value of a commercial/apartment property. First, we have the seller's view, which is one looking backward to the past value of their property, or what it might have been worth a year or 2 years ago. They still want to sell for that value now. Unfortunately, just as in the stock market, your property/stock had a paper value - unless you sold at that time, your property only had that value on paper. If you sold when it was valued higher (when you still had a 401k instead of the current half valued "201k"), you could have realized that value, but today, it is not worth that much - the market now sets the price at what a willing buyer will pay a willing seller for the property today.
It has been my experience that it will take the sellers from 6 months to 2 years to adjust their thinking - to be realistic about the true market value of their apartment property. The seller is saying "I'm still keeping my rents up, my occupancy is still high, I've put a lot of money into the property while I've owned it; It is still worth more than the market says it is".
The second opposing value viewpoint is that of the buyer. the buyer looks forward in determining their value opinion. They look forward to the next year or two when the property might even be worth less than the value that is determined today. Forward to possible declining rents, high occupancy rates, and fix-up costs that it will need over the next few years; the market value could be much lower than it is now. Buyers want to deduct the cost of all repairs and rehab the property might need to keep it in top shape, even though the property might be priced lower than other properties to allow for additional fix-up needed. They want to buy it low enough that most of their risk is removed.
The third opposing viewpoint is that of the lender. The lender is looking even farther forward than the buyer. The lender is even more unrealistic than the seller or the buyer. They want to eliminate all risk so they are sure they will not have any foreclosures, short sales. or other problems banks are having today. But wait, it is not commercial/multifamily/investment property that caused the current lender problems - it is the residential market that was given 100% loans with no down payment to buyers who could not afford to make the payments from the start. Commercial loans have always been based on the ability of the property itself to make enough cash-flow to cover the expenses and the payments and to have enough left over that the owner actually has a net profit! So now we have an unrealistic lending attitude that they want more down payment, more cash-flow, more money in reserve so that the owner can pay for any possible change, so that the lenders are risk free.
We have had unrealistic sellers and buyers all along - now we have the lenders to worry about even after we get the seller and buyer to agree... How long are we going to have to wait for them to get realistic and make reasonable loans again?
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