Formula for determining sale price / valuation!

Found myself today in a conversation about how to set the sale price on a property, and I’m not sure I buy into or maybe just don’t understand the equation everyone likes to throw around.

That equation being ( lots x Rent) x12 x .6 = What it’s worth

My question is if .6 is being used as the multiplier then is the assumption that the other 40% is covering all of the expenses.

I’m not sure I believe that.

My actual numbers are close enough to this example that i’ll try and use as close to real life values as possible, but here’s what I have.

50 Lots on 10 acres

Space rent is $200

Utilities are 20K

Taxes are $2,100

Insurance is $2,100

Using the formula 50 * 200 = 10,000 *12 = $120,000 * .6 = $72,000 so the value or sale price would be around. 720,000 at a 10cap

However my real life expenses are as follows

20,000 (for water, trash electric & sewer)

2,100 for property tax

2,100 for insurance

for a total of $24,200 in expenses per year

So I proposed that a valuation along these lines was closer

50*200 = 10,000 * 12= 120,000 * .75 = 90,000

And that’s where we started to argue and get lound. My buddy contests that the .6 is the standard regardless of location or situation, and yet I said why am I being put in the same group of higher expenses when my costs aren’t the same.

For the sake of answering this, I can tell you that the expenses I mentioned are actually on the high side of my actual numbers, but since I’ve been working on the books for Uncle Sam, I can say that everything is within a few hundred dollars of what my real life numbers are.

Bottom line is what am I getting for that missing 40%

You’re both right. 40% is the normal expense ratio if the park pays for the water and sewer, but 30% is the normal expense ratio if the tenant pays for their own water and sewer. As far as getting the expense ratio down to 25%, you are probably not including all the expenses that a bank or appraiser will be including, such as management fee and reserves. From the numbers you submitted, the one that is never going to work is the property tax at $2,100. Any smart buyer is going to use the property tax based on what the purchase price is. If you believe the value is $900,000, then the tax in many states such as Missouri would be $9,000 per year, and in other states like Texas it would be $18,000. So that one item is going to knock you back to 30% or greater, even in your example.

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