Valuing a mid-sized condo development per door or based on NOI?
I’m looking at a property (mid-size condo complex 30-50 units) where the seller owns all but one unit. We are negotiating on price, but are far apart depending on methodology. 

Seller is looking for 10x annual gross rent per door, which is not atypical for the area for individual condos. However, the NOI of the property as a whole is very low (&lt;25% of gross rent).

Applying a cap rate of 5-6% yields a price that is less than half based on the 10x metric. Any suggestions on how to approach negotiations? Any thoughts on a fair middle ground?
[{"id": "h99fuxx", "text": "Pay for a commercial valuation.  They'll usually give you appraisals in multiple methods and come up with the most reliable one to use based on the context.", "replies": [], "depth": 1}, {"id": "h9a9b2j", "text": "If you think you can lower expenses, then 10x gross is good. If expenses will always be high because of association fees or poor energy efficiency or any other factor, then I\u2019d put more weight on a cap rate than a gross rent multiplier. \n\nUse comps - either GRM comps or cap comps. You argue cap comps based on in-place NOI and the seller will say look at the GRM comps. Then negotiate or walk away. \n\nOn another note, any chance of getting the last hold out to sell? Even if not, you can deconvert the project into apartments to get rid of association fees to cut expenses. This will shift some expenses to ownership but there might be some savings there.", "replies": [{"id": "h9afxxn", "text": "That\u2019s a good point - will look into GRM.\n\nNo chance. They just bought it in Jan. 2021 where the previous owners deliberately sold for below market to a specific individual.", "replies": [{"id": "h9ak0im", "text": "The seller wants to use GRM, that's gross rent multiplier. You were saying that that gives a higher value than applying a cap rate to the net operating income. From your standpoint, you'd like to use capitalization of the NOI as that would be a lower value than a 10x multiplier on gross. Check comps in the market for what GRMs are. If you get substantially different values from market GRM comps and cap comps, then there's a problem with the subject's expenses, they're too high. If you think you can fix that, then offering more $ and basing the price on a GRM is acceptable. If there's a deficiency with the property that gives higher expenses that can't be corrected, that's functional obsolescence and would cause a buyer to pay less for the property, so base a purchase price on NOI and cap rate, not gross income and multiplier.\n\nYou can still deconvert even if that owner objects. In most states it requires approval of 75% of unit owners, and if you own all but one unit, you will own more than 75% of the units. Just in case you want to go that route.", "replies": [{"id": "h9awhdc", "text": "Thanks for the clarification - I meant that I would look into whether the 10x is actually market like you outlined. \n\nI\u2019ve read a lot online but have not been able to speak to anyone who has done a condo to apartment conversion. What are the advantages when you already control almost al the units and therefore how the HOA funds are allocated anyway - common area etc? Property management is centralized. I suppose you could force a below market sale when prices are low but probably not the case here.", "replies": [{"id": "h9by1b9", "text": "I'm not a developer who has done a project like this, I'm an appraiser so I'm not the best source of information on de-conversions. I'm not sure what advantages there actually are since you'll own most of the units anyway.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "h9aesk9", "text": "Are you buying from the original developers? Conventional primary residence financing for condos in associations with that much ownership concentration can be an issue. You usually need to get close to or past 50% non-developer owned units before the financing for individual unit sales loosens up.\n\nLong &amp; short; seller wants you to pay a price based on what an individual would pay in the market but 90% of individuals can't pay that for *this* property since they can't finance it.", "replies": [{"id": "h9afq73", "text": "Agreed, I believe the condos are unwarrantable.", "replies": [], "depth": 2}], "depth": 1}, {"id": "h9dbnnk", "text": "Your value will be determined on the highest and best use.  Someone paid a lot to get each unit as a condo.  But if there is no market for condos then the money was spent in vain.  So if the best use is apartments then a GRM is a good way to value.  If the comps are a 10 GRM then pay 10 times gross rents.  If the comps are 7 then seven it is.  But your comps will be apartment buildings not a group of condos.\n\nIf condos are the best use then you would use sales comparison to get the value but then subtract the cost of selling and the holding costs.  Every condo development starts with the developer holding most of the units.  Financing should not be a problem if you show that you are actively selling the units and have a plan.", "replies": [{"id": "h9dcvjj", "text": "Thanks that\u2019s helpful", "replies": [], "depth": 2}], "depth": 1}, {"id": "h9e69li", "text": "I thinks it\u2019s crazy to use GRM. If 10x rents equals a .025-.03% cap rate, don\u2019t buy it. When interest rates increase, cap rates will too. You\u2019ll be bag holding this property if the market moves  at such a ridiculously low cap rate. Also, I would never touch a property that you don\u2019t own the entire project. Unless you are convinced that the market is going to go up \u201cforever\u201d, I\u2019d find another project that is more value oriented.", "replies": [], "depth": 1}]