A forced-sale discount is four separate things: a higher yield, a price chip, the costs of the process and the months it takes. Price each one.
Calculate forced sale value by building it up from market value: reprice the income at the yield a buyer demands for a quick sale with limited information, deduct the price chip and the costs of the enforcement process, then discount the net proceeds and the income collected meanwhile back to today. On an illustrative office worth 40,000,000, a receiver's sale nets 33,138,021 today, 82.8 per cent of market value, a forced-sale discount of 17.2 per cent, of which 11.1 points are the yield premium.
Worked in full in The Real Estate Workout by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Credit papers often carry a single line: "forced sale value, market value less 20 per cent". The number is unexplained, so it cannot be challenged, and it hides four things that behave differently. A thinner buyer pool raises the yield. Missing warranties and data rooms cost a price chip. The receiver, agents and lawyers are paid out of the proceeds. And the process takes months, during which the income may or may not reach the lender. Each one is a line you can test.
A multi-let office with secure income. Every figure is illustrative.
| Input | Value |
|---|---|
| Net operating income | 2,400,000 |
| Market yield, normal marketing | 6.00% |
| Yield premium for a forced sale | 75 bp |
| Price chip for no warranties and limited information | 2% |
| Receiver's fees, share of price | 1.5% |
| Agent and legal costs, share of price | 2.0% |
| Months from appointment to completion | 9 |
| Share of income collected during the process | 80% |
| Lender's discount rate | 8% |
1. Market value. 2,400,000 ÷ 6.00% = 40,000,000
2. Forced-sale price. 2,400,000 ÷ 6.75% = 35,555,556, which is 88.9 per cent of market value
3. Price chip. 35,555,556 × 2% = 711,111, leaving 34,844,444
4. Costs. 34,844,444 × 3.5% = 1,219,556, leaving net proceeds of 33,624,889
5. Time. Proceeds in 9 months: 33,624,889 ÷ 1.080.75 = 31,738,986
6. Income meanwhile. 2,400,000 × 80% × 0.75 = 1,440,000, worth 1,399,035 today
Net forced sale value today = 31,738,986 + 1,399,035 = 33,138,021
Excel: =NOI/(Yield+Premium)*(1-Chip)*(1-Costs)/(1+r)^(Months/12)+NOI*Collected*Months/12/(1+r)^(Months/24)
| Step | Amount | Share of market value |
|---|---|---|
| Market value | 40,000,000 | 100.0% |
| Yield premium of 75 bp | −4,444,444 | 11.1% |
| Information chip | −711,111 | 1.8% |
| Receiver and sale costs | −1,219,556 | 3.0% |
| Nine months of time value | −1,885,903 | 4.7% |
| Income collected meanwhile | +1,399,035 | 3.5% |
| Forced sale value today | 33,138,021 | 82.8% |
The yield premium is the largest single item, and it is a judgement about the buyer pool: who has the money and the appetite to close in three months on this kind of building with no vendor warranties. The time value is the second largest, but the income collected recovers most of it, which is why the timetable hurts least when the building is let and paying.
| Yield premium | Forced-sale yield | Price discount alone | 6 months | 9 months | 15 months |
|---|---|---|---|---|---|
| 50 bp | 6.50% | 7.7% | 86.4% | 85.9% | 85.0% |
| 75 bp | 6.75% | 11.1% | 83.2% | 82.8% | 82.1% |
| 100 bp | 7.00% | 14.3% | 80.4% | 80.0% | 79.3% |
| 150 bp | 7.50% | 20.0% | 75.2% | 74.9% | 74.4% |
Each 25 basis points of premium moves the answer by about three points; six extra months move it by less than one, as long as 80 per cent of the rent is collected. If none of it is, because tenants withhold rent or the borrower diverts it before the receiver takes control, the same sale is worth 80.9 per cent of market value at 6 months, 79.3 at 9 and 76.4 at 15. That is the case in which a delay is expensive, and it is set out month by month in what a month of delay costs in an enforcement.
Valuation standards treat a forced sale as a circumstance rather than a basis of value. Ask the valuer for market value on a special assumption of a shortened marketing period, which gives you step 2, and build the rest yourself: the costs and the timetable belong to the lender's process, not to the property.
Double counting. Take a quoted forced-sale discount that already allows for costs and delay, 17.2 per cent here, and then deduct costs and discount for nine months again: the office drops to 30,184,644, 75.5 per cent of market value, and the lender accepts a discounted payoff it should have refused, because enforcement looks worse than it is. The opposite error is just as common: comparing an ordinary sale net of 1.5 per cent costs, 39,400,000, with the loan, as though a receiver could sell like a willing owner, which leads the lender to refuse an offer it should take. The route also matters, since a share pledge sells a going concern faster than a receiver sells a building; see share pledge vs mortgage enforcement.
The book prices the four ways out of one broken loan against enforcement, and the free workbooks for this case rank the four things that destroy value in an enforcement, in euros and in cents on the loan.
There is no reliable single figure; it depends on the buyer pool, the information available and the time allowed. Build it up instead. On the illustrative office a 75 basis point yield premium alone takes 11.1 per cent off; with costs, a price chip and nine months of delay, net of income collected, the total is 17.2 per cent. At a 150 basis point premium the property nets 74.9 per cent of market value.
No. Market value assumes a proper marketing period and a willing seller. Valuation standards treat a forced sale as a circumstance rather than a basis of value, so a valuer will usually report market value on a special assumption, such as a shortened marketing period. The lender then has to add the costs and timing of its own process: on the illustrative office, 40,000,000 becomes 33,138,021.
Less than expected while the rent keeps coming. On the illustrative office, collecting 80 per cent of income, the net value today is 83.2 per cent of market value at 6 months and 82.1 at 15. If no income is collected it falls to 80.9 and 76.4 per cent: delay is expensive mainly when the building is not paying.
This article is one calculation from The Real Estate Workout. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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