Valuation of Adult Family Homes

I recently attended the Wisconsin Assisted Living Association’s Spring Conference and a person asked me – how do you determine the value of a 4 bed adult family home?  I began my answer as usual, describing the income approach to value and how to capitalize the net operating income to determine value.  But it quickly became apparent that this facility was different from most, and that the method of finding value would be different, too.

Adult family home

Assisted living facilities come in all shapes and sizes.  While the majority of facilities are purpose-built structures with 20, 50, 100 or even more units, there are many that are converted single family homes for up to four residents.  In many states, this type of living arrangement is known as an adult family home.

The value of larger, purpose-built facilities is almost alway done as I began to answer the man at the conference (and how I’ve commented in many other posts).  But adult family homes often need another approach that considers another key factor – that is, what would the property sell for if it were vacant and offered as a single family home or other use?

With few residents and limited income potential, the income approach doesn’t always reflect the full value of the property.  For example, we recently completed a valuation for an adult family home that was situated on a large, rural parcel that adjoined a state park.  This setting would be attractive to many people ready to move out of the city for a quieter style of living.  It’s also a beautiful setting for the disabled residents served at this location today.  But what’s the property worth?

In the case of this property, and many adult family homes, our valuation starts by finding the value of the property vacant and used as a single family residence.  Next, we find how much net income is derived from the business after subtracting all operating expenses and the holding costs of the real estate.  This adjusted net income represents the amount generated from the business only and not the amount attributable to the real estate.  The adjusted net income is multiplied by a business value multiple normally in the range of 3 – 4.  This business value is then added to the value of the real property from the first step.

For many properties, this approach to valuation will result in about the same value as the standard income approach.  But for properties that have extra value associated with the real estate or a limited value attributable to their income, this approach can result in a more accurate valuation and often a better price for the seller.

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