Valuing a real estate brokerage
Thursday, February 2, 2012
By Charles S. Bonamer
ORRA class instructor, Brokerage Management
There is no single method best applicable to valuing a real estate brokerage. A number of methods may be considered when the buyer and seller are striving for agreement.
I - The value of owned, or leased, real property is frequently the largest component of value. Traditional methods should be used to determine the value of the real property
- Financial records, including balance sheets and income statements, should be reliably prepared and easily interpreted.
- A schedule should be drafted identifying pending income, commissions payable, number of listings, market share, and other competitive market data.
- Personal property, including the value of any franchise, must be valued separately from the value of the business. Market and liquidation value should both be calculated.
- The listing inventory is not included in the sale if the seller is a sole proprietor or general partnership. Listings will survive the sale of corporate stock.
II - The National Association of REALTORS® suggests three primary methods of valuing a real estate brokerage
A. Current net worth of tangible assets method
- Net worth of the firm should be calculated using an adjusted balance sheet.
- This total should be multiplied by a rate of return acceptable to the investor (generally between 15-35 percent).
- This yield discloses the minimum annual profit necessary to justify tangible asset value.
B. The liquidation value approach, which compensates for a company with a very low, or negative, net worth
- It places a liquidation value on all tangible and intangible assets. For example, what is the value of the used office furnishings and equipment?
- Liquidation value is lower than any other. It is also be referred to as salvage value.
C. Excess value of intangible assets approach
- Value of tangible assets is determined. A rate of return, based on their remaining useful life, is selected.
- An annuity capitalization rate should be derived. The point at which intangible assets generate income occurs when the profits exceed the return of, and on, the investment.
III - A combination of methods
An existing real estate brokerage is difficult to sell for more than the value of the tangible assets unless the brokerage controls the market area, or shows a strong second or third position.
The principle of substitution applies: A purchaser will not purchase an existing real estate brokerage if the cost to create a new entity is less.
Charles S. Bonamer is the instructor of ORRA’s Brokerage Management course, which is offered monthly and worth three continuing education credits. Class dates, more information, and registration are available via the online ORRA Calendar.
Reprinted from the Florida Real Estate Brokerage Management manual, by Charles S. Bonamer. Copyright ©1987-2012 by TRANS-EQUITY, Inc.