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“If we don’t learn our history, we are doomed to repeat it.” With that said, let us use the price correction of the residential market as a possible precursor to what may lie ahead for the multifamily market.

Currenty, many residential Realtors are advising clients thinking about selling in the next few years to sell now and list their home for less than what the sales comparables show. This is known as pricing the property ahead of the market.

It has been our experience that Effective Pricing in Multifamily is also beginning to adjust with the changing market. A year and half ago our team would have priced your building as high as 50 basis points higher on the CAP Rate than any sales comparable in the area. Back then, this was the most effective way to price because we were still in a bull market. Inventory was low and demand was extremly high pushing up values accross the charts. Prices would be negotiated between buyers and sellers and the properties would end up selling as high as 25 basis points higher on the CAP Rate than any other recent sales comparables. This meant for multi-family that the sales price would be higher than what most comparables reflected for like properties.

Now, things have changed. Cap Rates have already began to creep back up. Therefore, to Effectively Price and Sell your apartment building you must be sensitive to the changing market and it’s many indicators i.e. Cap Rates discussed in this example.

Today, we advise you to introduce your building to the market no more than 25 basis points higher on the CAP Rate than what the comparables reflect. By the time the negotiation process is over your buildings value should fall right in line with the sales comparables for like properties.

So, if you are on the fence about selling, jump off now and step onto the other side. A common belief we continuously hear is that prices will continue to fall for the next 15 to 18 months. Many believe it will take that long for the price correction to fully adjust. However, this is mere speculation, the down cycle could drag on for much longer, or may pick up mid-year, no one really knows.

Yet, if you are planning on waiting this down cycle out (however long that may be), there is another issue at hand: Taxes.  In 2010, the Tax Reconciliation Act of 2003 will expire. It is expected, that the Federal Capital Gains Tax will adjust from its current 15% to 20% or more. In addition to the Federal Capital Gains Tax increase, there is lots of chatter about tax increases in general and a restructuring of the system. So if prices do begin to rise in the next 15 to 18 months, the tax consequences will be greater and thus eat into profits. -Catch 22 

This entry was posted on Wednesday, January 23rd, 2008 at 6:53 pm and is filed under Commercial Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.