Buyer vs Seller NOI
The number one difference between buyer net income and seller net income are assumptions. Assumptions are what make or break a deal. One of the most challenging parts of my job as a multifamily listing broker is preserving the best performance of my seller in the financials while also balancing what that picture may look like to a new buyer. No seller wants to give up value on the efficiencies they've created in their expenses by holding the asset over time, and no buyer wants to pay for those efficiencies if they'll never experience them after the closing. I work hard to help buyers understand that the asking price not only meets financial metrics and sales comps, but that the seller needs to achieve a certain price in order to make sense of selling. I also have to work with my sellers to help them understand the different line items that that buyer will experience after the closing, not to mention the lender hurdles they have to overcome. Watch the video in the link below to see how I explain this on a simple to use spreadsheet to illustrate the differences in financials between a buyer and a seller. We’ll be looking at a 150-unit apartment complex valued at $18.7 million. We’ll look at the revenue side of the ledger, the gross potential rent, collections, concessions, and other income. We’ll work these numbers at a 3 ½% percent vacancy but understand that many buyers will look at two different things. They'll look at the one-to-three-year actual historical vacancies and two they'll look at the market vacancies or sub-market vacancies. We’ll dive deep into the types of line items that absolutely will vary and can dramatically affect the bottom line.
When you look at the two different net incomes (the buyer vs the seller), you often have a drastically different valuation. The buyer has to sometimes put the seller's hat on, and the seller has to put the buyer's hat on. Meaning they have to be realistic on each other's assumptions in order to bridge the gap. Does the buyer feel like they can add value to the asset by increasing income over time? The power of debt and how debt can drive cash on cash returns is far more important than cap rates. Deals get done despite having differences in seller and buyer net incomes because of one's assumptions on the future value of the sale and the resulting IRRs. With today's technology and access to sales comps, there are plenty of data points and usually, there's no more than a 10% difference between buyer and seller value. And most of the time it's under 5%. You will find that most listing brokers and sellers today are going for an asking price that is above what their historical financials are worth, but not so high that it's at the same value after a full value add. The goal of the buyer, seller, and broker is to determine that number someplace in between that works for all parties.
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