Definition
Price is the amount of money paid or agreed to be paid for a property in a transaction between a buyer and seller.
In simple terms: it’s what someone actually pays.
Price vs. Value
- Price: The negotiated transaction amount.
- Value: The estimated worth of a property based on income, market comparables, or replacement cost.
Price may be higher or lower than market value depending on negotiation, competition, distress, or strategic motivations.
How Price Is Determined
- Supply and demand conditions
- Income potential (NOI and cap rate)
- Comparable sales
- Financing availability
- Investor expectations
Common Pricing Metrics
- Price Per Unit
- Price Per Square Foot
- Cap Rate Implied Price
- Gross Rent Multiplier (GRM)
Example: Income-Based Pricing
If a property produces $1,000,000 in Net Operating Income (NOI) and the market cap rate is 5%:
Price = NOI ÷ Cap Rate
Price = $1,000,000 ÷ 0.05 = $20,000,000
Price in Negotiation
- May include seller concessions or credits.
- Can reflect off-market premium or discount.
- May be influenced by timing pressure.
- Often tied to due diligence findings.
Contract Price vs. Closing Price
- Contract Price: Amount agreed in purchase agreement.
- Closing Price: Final amount after adjustments, credits, and prorations.
Price and Returns
- Lower purchase price generally increases projected returns.
- Higher price reduces yield unless income grows.
- Price discipline is critical to long-term performance.
Investor Considerations
- Compare price to replacement cost.
- Evaluate price relative to historical sales.
- Stress-test downside value.
- Assess price sensitivity to cap rate shifts.
Common Pitfalls
- Overpaying during peak market cycles.
- Ignoring deferred maintenance when evaluating price.
- Failing to adjust for below-market leases.
- Confusing emotional value with economic value.