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Market Volatility Boosts Valuation Activity

Aug 5, 2020 8:48:10 AM

The latest on brokerage firm values and valuation activity.

The volume of brokerage valuations we perform at REAL Trends ebbs and flows based on a variety of factors. One factor that we can consistently count on to boost our pipeline is market volatility. Since residential real estate is inherently volatile, I’m referring to larger, more unpredictable structural occurrences—events that jolt us to the core.

The COVID-19 global pandemic is such an event, and it has definitely jolted broker-owners to the core. In the early stages of the pandemic, firms were in survival mode. With commerce ground to a halt amidst the shelter-in-place orders, valuations were the last thing on anyone’s mind. Rallying the troops and adjusting to the new reality took precedent.

Slowdown in March Through May

As a result, March, April and May were relatively slow on the valuations front. Now that restrictions have been lifted and business regained some sense of normalcy, we’ve experienced a large influx of requests for valuations. Interestingly, we’re finding that this influx is more than just pent-up demand, it’s a result of an awakening of sorts for many broker-owners.

The reasons for a valuation remain diverse. Succession/estate planning, business planning, divorce, partnership disputes and consideration of sale are among the more common reasons. It’s the latter where we’re seeing this awakening.

With acquisitions a completely normal facet of the real estate brokerage circle of life, valuations for the purpose of a sale have always been the most common reason. Nothing exposes the need for or brings out the urgency of selling than a market event like what we’re experiencing now.

Financially Distressed Sellers in the Minority

You may think this refers to the financially distressed seller in dire straits. In some cases, this type of market occurrence exposes firms that may not have been performing well pre-pandemic, with the current state of affairs forcing a quick sale as their only way of survival. Yes, we’re seeing these types of sellers. Interestingly, this seller is the minority.

Most sellers we’re currently dealing with are struggling psychologically more so than financially. The economic concerns and uncertainties spawned by the pandemic have stoked memories of the not-too-far-removed Great Recession, and they want out.

Fortunately for most sellers, buyers abound. For nearly every new seller awoken by this pandemic are buyers who are embracing this environment as an opportunity to grow via acquisition. The good news for sellers is that valuation multiples have not fallen off a cliff.

We continue to keep a close eye on the factors that affect marketability, and, to this point, there’s only been a modest softening of multiples. The biggest pandemic-related changes we’re seeing to valuations and acquisitions are the terms. Terms shifted and are now a little more favorable to the buyer in order to allow for flexibility should there be extreme volatility in the housing market. As long as sellers are amenable to earn-out flexibility, deals are to be had. 

Scott Wright is vice president of REAL Trends and handles valuations, mergers and acquisitions.

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