Late in 2022, I got a call from a Midtown Sacramento property owner who owned a 3,000 SF duplex located at 2230 K Street. She was looking to sell the building, and she needed an opinion of value. The duplex was 100% occupied, but the business was slated to move out in July of 2023. So, how do you value a Duplex that has been occupied by an office tenant for 20 years that will be vacant soon?
Prior to Covid and the meteoric escalation of interest rates, the valuation would have been pretty easy: regardless of price, someone would buy it – maybe not at the asking price, but there would be a line out the door. Possible buyers included office users, home buyers, investors, developers, exchange buyers, and Unicorns.
Unicorns are extinct and many of them included exchange buyers. Office users have been in a coma (but I have noticed them starting to blink.) Developers are in hiding, and investors are extremely cautious.
So with a limited buyer pool, I determined that the most likely buyer – who could justify paying the highest price – would be someone that wants to live in the building and lease out the extra floor. And that is the buyer we got.
What’s it worth?
The property probably required at least $250,000 in rehab costs. So when we have a situation like this, typical valuation methods don’t fly. I used a modified form of reversion analysis. Basically, with reversion analysis, you calculate what the property will be worth when it is renovated and fully occupied. In this case, the property would be worth about $1.1 MM when stabilized then subtract the cost to get there. So, if you deduct $250,000 – and account for 6 months of vacancy – you can come up with a value. My Valuation was $775,000 to $900,000.
We priced the property at $995,000 to test the waters, but knowing that it would be unlikely to even exceed $900,000. After three months of marketing and 3 open houses, the seller agreed to drop the price to $895,000. Then within 2 months – and a week before the building was going to be vacant – we closed escrow at $800,000. The buyer is living in the property and he will be renting out the floor he does not occupy. The buyer was also an all-cash buyer. So he did not have to deal with getting a loan. Frankly, he was the perfect buyer, and this was the perfect building for him. Check out the video here: https://youtu.be/pcjPICO6tHY
Looking to buy or sell? Curious what how your property is positioned relative to the market? We would love to be of service, even if you don’t intend on doing anything in the near future. Call or email me at (916) 761-1202 / [email protected].