What’s the value of my residential assisted living (RAL) or assisted living home? Answer this question first.
The most frequently asked question I’ve heard from owners of assisted living facilities thinking about selling is, ‘What’s my property worth.’ Over a few decades as an advisor and investor, I’ve completed valuations for hundreds of assisted living facilities, and each was different.
They’re different for the obvious reasons. Different sizes, locations, conditions, track records, ownership structures, and more.
One of the most essential distinctions between assisted living communities is the type of property.
Is the property an assisted living facility or an assisted living home?
Here’s what I mean. Is your assisted living:
a) an assisted living facility, defined as a purpose-built facility designed for assisted living,
or is it
b) an assisted living home, defined as a single-family home that was converted to assisted living or could be converted to a single-family residence (commonly called a RAL for residential assisted living).
That distinction is important because one has a limited opportunity for alternate uses, and the other has a clear opportunity for another use that should be considered in the valuation.
Here’s an example.
Many years ago, we were working on some projects in the Phoenix area. The real estate market was hot! We visited the owners of several assisted living homes that wanted to sell and provided some valuations.
As usual, we considered the net operating income that the properties were producing to find how much a buyer could afford to pay. What we found was that the owners could sell their homes for more as single-family homes than any operator of an assisted living home could justify. An assisted living buyer would use nearly all their net income to make their mortgage payments.
That was an extreme example of something that needs to be considered when finding the value of an assisted living home or residential assisted living (RAL).
How much is the property worth as a single-family home?
If you find that the property will sell for more as a single-family home, you may want to consider a few other options.
The first option is shutting down and selling the home as a single-family home.
That means discharging your residents and ending your business. That’s a decision you won’t make lightly. You would be impacting your residents and staff and giving up what may be significant value in the business.
It’s not simple or easy to close an assisted living home because you have obligations to help relocate residents. You will also transition through a period with declining revenue but ongoing expenses. Winding down operations can be expensive.
The second option is transferring operations to a new location – and then selling the first home.
This may result in two sales if you’re exiting the business: the sale of the home and the sale of the business operations to someone who will relocate to another home. The home you’ve occupied may have gone up in value enough during your ownership that the extra effort is worth the two-step exit.
When selling your assisted living home, it’s essential to consider what it may be worth from a few points of view. You may have more value than you realize when it’s time to exit.
In our next article, we’ll look closer at the valuation process for assisted living homes. We will review the income approach to value, the approach most buyers and their lenders will use when deciding their opinion about the market value of your Residential Assisted Living.