How Much is Your Hotel Worth? Price?

(6-minute read)

Author: James Cornell

A real estate appraisal is defined as the “act or process of forming an opinion of value for a specific property.” Brokers provide market-based opinions of value, often called Broker Price Opinions (BPOs). A BPO is the estimated price at which a real estate asset will sell between willing and capable parties.

All appraisals are estimates of market value. According to the Appraisal Institute, an appraisal is defined as “the act or process of developing an opinion of value.”

The word “opinion” is essential for understanding the purpose of an appraisal. In other words: “An appraisal is a professional ‘estimate‘ of a property’s value.” No one knows the exact market value of any real estate property until a sale is finalized.

Competitive Market Analysis (“Sales Comps” versus “Income Approach”)

In the residential market, the BPO is often referred to as a Competitive Market Analysis (CMA), also known as “sales comps.” There is a distinction between Broker Price Opinion (BPO) for commercial and residential properties. The CMA valuation technique is best applied to residential and vacant land, which are more homogeneous. Residential comparable properties are readily available, and market data readily support price comparisons between properties with similar characteristics.

On the other hand, hotel properties are not as homogeneous as vacant land and residential properties. Furniture, Fixtures, and Equipment (FF&E) and depreciation adjustment calculations are largely subjective.1,

Professional hotel consultants (brokers) and hotel appraisers generally do not rely solely on the CMA approach. The consensus among expert hotel appraisers is that hotels often lack good comparable properties with similar features in the same market. As a result, calculating an accurate price valuation using the CMA technique (sales comps) is often difficult or impossible to do with certainty. In contrast, the Income Approach to hotel valuations is regarded as the most objective and data-supported method.

Mortgage-Equity Valuation Method

Various valuation techniques are based on the Income Approach. One such technique is the Mortgage-Equity Method.

For commercial income-producing real estate (hotels), valuations are determined using three approaches: the Income Approach, Competitive Market Analysis (sales comps), and the Cost Approach. The Competitive Market Analysis and Cost Approach verify the price valuation calculated using the Income Approach.2

Most experienced investors, hotel appraisers, and valuation consultants (brokers) mainly rely on the Income Approach for valuation.1 The Income Approach forms the foundation for the mortgage-equity valuation method. Valuation experts worldwide prefer the accuracy of valuations calculated using the mortgage-equity method. The mortgage-equity valuation method includes the required returns of both the lender and investor. 2

Read Library Article:  “Three Approaches to Appraising Hotels”

This article explains why the CMA method (sales comps) is unreliable for most hotel appraisals.

Over-valuations Cause Problems for Investors and Sellers

Many factors can cause hotels not to sell. Have you ever wondered why some hotel properties remain unsold? Incorrect pricing can hinder a hotel from being sold. Negative first impressions from when a hotel first hits the market can be hard to change. Serious buyers may hesitate to make offers even after the property is correctly re-priced. Price valuations should be based on market-supported data from the start of the sale process.

Accurate and Honest Hotel Valuations Are Needed Before the Sale Process Begins

Some brokers mark up a hotel’s price above what the market will pay to secure the listing. This strategy might succeed with a seller who doesn’t trust appraisers and brokers to be honest about a hotel’s true value. Eventually, the seller will see that the hotel was overpriced, and a more realistic market value will be established to facilitate the sale. A more thorough price valuation analysis at the outset might convince the seller of the hotel’s true value.

Read Library Articles:

    • “The Sales Process from Start to Finish – What to Expect”
    • “Hotel Price Appraisals – Selecting Your Broker”

Correct Cap Rates Are Crucial When Selling a Hotel

Algebraic regression analysis produces current, credible Cap Rates, which are necessary for valid price valuations.

Read Library Article: “Calculate Cap Rates Using Regression Analysis”

Overpricing a Hotel by Using Incorrect Cap Rates

Appraisers who rely on overall-property-yield Cap Rates published by hotel trade journals may overvalue a hotel. When lender yield requirements are not included in the valuation calculation, overvaluations are likely to occur as net income increases over the investment period.2 This calculation error could discourage potential investors from buying an overvalued hotel. The hotel will probably stay on the market until accurate valuations are done and a market-supported price is established.

Modern Computerized Appraisal Software

As mentioned earlier, some brokers overvalue hotels for various reasons. A broker who provides the highest valuation to the seller may win the listing, but the seller’s hotel could remain unsold. Eventually, the listing broker will need to recommend price adjustments. Selling hotels in a timely manner requires accurate fair market value valuations. Computer valuation software helps produce accurate market-based price valuations.

Cornell Hotel Brokers utilizes modern hotel valuation software to support accurate market-based Cap Rates.

NOTE: James Cornell is a Certified Hotel Valuation Software Consultant (CHVSC). The software is used to calculate Hotel Market Analysis, Financial Projections & Price Valuations.

Read Library Article: “Hotel Market Analysis & Price Valuation Software”

Few hotel buyers are willing to overpay for a hotel. Price comparisons are easily accessible in many hotel publications and online sources. While overpricing a hotel might help brokers secure listings by inflating property values, it ultimately does a disservice to the seller. Overpriced hotels tend to remain unsold.

Band Of Investment

The “Band Of Investment” is a good method for calculating hotel value. It works well when the local hotel market is not expected to see major changes in supply and demand. When supply and demand stay relatively stable, net income is assumed to remain relatively unchanged. The stable net income after reserves is then capitalized to estimate the hotel’s value.1

Broker Price Opinion

As mentioned in other articles on this website, all appraisals are educated estimates of fair market value. Broker Price Opinions (BPOs) are valuation estimates that determine the price knowledgeable investors are willing to pay for a property.

Cornell uses the most current market data and the calculation techniques preferred by the most experienced and knowledgeable hotel appraisers.

 Read Library Articles:

    • “About James Cornell”
    • “How to Choose the Right Broker”
    • “Our Offer to You”
    • “Occupancies are Rising. Why sell now?”
    • “Suggestions on How to Make Your Hotel Sale Go Easier”

* More interesting articles are available on this website. Visit Library Articles.

Attributions and Endnotes

  1. Jan deRoos, Ph.D., and Stephen Rushmore, CHA, MAI, “Hotel Valuation Techniques,” https://hvs.com/content/Bookstore/HotelValuationTechniques.pdf

  2. Stephen Rushmore, How to Value a Hotel, A Complete Guide to the Hotel Valuation Methodology by Steve Rushmore, MAI, CHA.