Knowing about comparable assets is important in a competitive environment. Every potential resident and most current residents are shopping your property and those around you. It is imperative that you do the same.
How do you determine if an asset is a comparable? According to the Appraisal Foundation a comparable asset is determined by comparability analysis:
Comparability analysis is a fundamental study in determining property value. This analysis involves a side-by-side examination of physical and transaction characteristics of the identified comparable properties relative to the subject. The reliability of this valuation technique relies heavily on the proper selection of suitable comparable properties.
Appraisal comparability is different from operational comparability. Following are ten points you can use on a spreadsheet to measure operational comparability:
Proximity to the subject asset. The first order of business is determining if selected comparable assets are the right assets to analyze as comparative. Selection of the wrong grouping, or worse- missing real competitors, makes the analysis useless.
Rents - aggregate. There are asking rents and net rents with concessions. What are the variances and why?
Rents - per square foot. When there are significant differences here the amount is often reflected in a varying level of amenities and service levels. A smaller property with no on-site management will have a lower rent-per-square-foot than a full service Class A asset with on-site staff, elevators and underground parking. Simple to understand, but important to note the gap- and track the gap over time. It is often a very consistent number.
Floor plans. In a homogenous submarket when age of construction is similar, floor plans will be similar. Setting that aside, it's important to know layout and square feet for various assets to gain an understanding about pricing.
Some floor plans must be discounted heavily because of a lack of demand (read: Residents avoid them because then just don't like the layout). Others are just stellar and people flock to them. Example: the duel master suite whereas in a two-bedroom apartment each bedroom has a master bath. Perfect for room mates.
Concessions. Concessions cannot be assumed, yet they are always there on a conversational level, albeit not in writing. Once identified at competitive assets, convert the concessions to a dollar amount so that you can more easily compare the value being offered to the new residents.
Parking availability. Sometimes a major issue, other times not at all. Yet important to know for each comparable. Parking is not like pets where management can decide to accept or reject having pets. Parking is a fundamental necessity in many markets so its availability is a determining factor in the rental decision.
On-site Storage availability. Similar to parking, properties either have this or they do not. And, similar to parking, it is very important to some residents and of no concern to others. It's important to know if competitive assets have this capacity. For example, if your competitors offer on-site storage and your asset does not, perhaps you can arrange a discounted rate with a local public storage facility to compete more effectively.
Age of Assets. Redeveloped assets take age out of play- not all assets are redeveloped. Thus, your 1990's product may have to compete head-to-head with a circa 1960's development- but not all 1960's developments. Comparative research will tell you which one's are more directly competitive.
How do you insert this into your spreadsheet? By estimating a number, a dollar amount, from rents and concessions that are reflective of the age quotient. Sometimes this can be as easy as $1 per year (or $2 per year, or $3) based on age of assets. Thus, a 1960 asset is expected to lease for $30 less than a 1990 product everything else being equal. This is an over-simplification, of course, but age must be accounted for competitively.
Utility expense comparisons. Residents are becoming more aware of differences in utility expenses with disparities between properties relatively easy to find. If your assets have an advantage here, point potential residents towards your asset with a utility comparison completed for them if this will assist leasing efforts.
Architecture and Property Presentation. Last but not least is: what does it look like? Each comparable asset has some positive and negative aesthetics. I can think of a few properties with nothing (and I do mean nothing) green on property. Just concrete and asphalt. Others are lush and inviting with regionally appropriate plantings and a small fountain. Are these comparative assets? If they are in the same submarket and serving the same resident base, then yes. Converting this aspect to a dollar amount is part science, part art, and a necessary component of determining rental valuations in comps.
Click here to review a 2-cd, audio course entitled "21-Questions on Comparable Real Estate Answered! presented by John Wilhoit Jr., and Ernest F. Oriente. This audio series will assist you in identifying those assets that are in direct competition with those that you own or manage in your marketplace. One asset standing right next to another does not automatically make it a comparative asset. At the conclusion of this audio course, you will be able to select comparative assets that most closely resemble those that you represent and increase your competitiveness. How? By gaining a professional understanding of what makes them comparative.
During this 2-CD audio course, learn how you can quickly:
What makes a property a comparative asset?
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Mr. Wilhoit is the author of three books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 & 2 - How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets. Multifamily Insight Vol 2 is set for release in 2015.
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About This Blog: Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. See multifamilyinsight.com
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