Gross vs. Net Sellout

Although investors consider real estate investment with an eye toward a property’s bottom-line market value, those who intend to develop or serve as long-term landlords for a property must have a tool to assess a property’s value when parceled into individual units and sold piecemeal. Sellout values provide a means in which a developer or investor may determine the total revenue potential of a building or development, although projecting earnings through net sellout values may be difficult because of the many variables involved.

In the broadest sense, the sellout value of a property is the amount of revenue the developer could receive if each unit in the valued property was vacant and was able to be sold at its valued asking price. This value reflects an ideal investment return and is usually not achievable because of existing tenants who lower the number of units that may be sold, vacancy rates that keep units unsold and market forces that may force units to sell below their listed value.

Gross sellout value is a measure that investors may calculate extremely accurately and without speculation. Investors may calculate a property’s gross sellout value by referencing each individual unit’s gross sales price as defined by the Dictionary of Real Estate Appraisal -- not current market trends or speculative appraisal methods -- and totaling each value. This figure represents the total income an investor or developer may expect to receive if he sells each unit in a property but doesn’t include deductions made for the sales process.

After an investor determines a reasonable and accurate gross sellout value of a property, she can use that figure to determine its net sellout value. Net sellout value is calculated by reducing the property’s gross sellout value by all miscellaneous costs associated with doing business -- listing fees, professional costs, advertising and marketing costs, repairs and renovations -- as well as reducing any existing income and reserves for the property. Costs for marketing and other factors can be difficult to forecast, particularly if the property must be marketed for an extended time.

Gross and net sellout analysis methods rely on an ideal situation where each unit in the property is vacant and may be sold or leased immediately after its purchase. Unless the property is freshly developed, this situation is unlikely to be present in the real world. Investors who use gross and net sellout methods to determine potential cash flow from an investment property should consider the number of vacant units versus the number of leased units in the building at the time of analysis. For valuation purposes, vacant units are more valuable than those with tenants, as they may be immediately sold or leased following a sale.