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  #1  
Old 11-01-2009, 09:02 PM
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Green Hornet Green Hornet is offline
 
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Default When Sales Comparison is Worthless

At what point do we stretch the idea of a sales comparison approach so far that it is no longer the most reliable indicator of market value?

I just completed an assignment to appraise a duplex. As with most work I have these days, it is either the biggest, smallest, best, least, weirdest.

I had 2 closed sales within a 10 mile radius or semi similar, almost not comparable properties within 6 months. The best comp was from 7/08. Using all multi-families, the market indicated an 8% decline since the 7/08 sale.

Interestingly enough, when that discount was applied, it brought the sales price inline with the other closed and actives.

14 listings within the subject's price range either cancelled or expired in the last 6 months. Lower price units are still selling.

The borrower bought the duplex 10/08 for $370,000, it was not listed. They already own another duplex in the development. I came in at $345.

As luck would have it, the income and cost approach came in line around the $345,000, not exact, but in support of.

It got me to thinking...with income properties, we have the income approach which I think is a good approach and a good check as most investors weigh that pretty heavily,

If this had been a single family, I am not sure that I could have given the sales comparison approach much validity. Then what...put most weight on the cost approach?

Does there come a point when none of the approaches provide a credible result? Or is it credible, because we have applied all of the approved methodology in the correct fashion.

I remember in one of Hagar's classes, he was talking about a different way to quantify view quality. Not really an accepted methodology, but the only one available.

At the beginning of this downward cycle, I had an elder tell me " If you can make it through a down cycle...then you can call yourself an appraiser."

At the time I did not fully understand what she was talking about...I am begining to!

Anyhow, my weekly rambling. Time for some single malt.

Have a good week all. I am off to Denver on Friday to see my brother. It looks like the weather will improve.
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Old 11-01-2009, 09:34 PM
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Quote:
At what point do we stretch the idea of a sales comparison approach so far that it is no longer the most reliable indicator of market value?
When the income approach is more practical! Even with plenty of sales of multi-family properties, I usually give equal weight to the income approach for multi-family properties. Fourplexes...generally tip the scale and most weight is applied there. It is a Small Residential Income Property. Duplexes can be tough sometimes...so that can be a toss-up depending upon the style of the Duplex. There have been a few times I've been thinking that the income approach would be applicable for SFRs or Condos. But so far, I'm sticking with the SCA to value for those.
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  #3  
Old 11-01-2009, 10:35 PM
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Try doing sales comparison on a qualitative basis instead of quantitative.

You feel whole bunch better about the comparability when free yourself from feeling obligated to make a substantiated dollar value adjustment just to make an obvious comparison.
  #4  
Old 11-01-2009, 11:41 PM
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Multi's are most difficult even in good market times; perhaps extensive history research can help also.

The IA provides support, but you would need to understand the Investors position; some buy for long term and some for short term. There would also be the question for tax purposes and why they created this road as the shelter. Don't think you would ever get the straight input, but if you interviewed 5 such folks at the time they invested, you would get a jist of why they choose the multi property.

Would have to agree (GH) it's not just a simple "Comp Approach" that would satisfy the end result. IMHO, they are completely different from single family Res. and sometimes more complex than Commercial (certain mixed use-small end units), because of the variation of service factors that are applicable to the influence of purchase.

Not your typical classroom model will work, not your typical multi teachings will work most of the time; one can derive the need / return and usefullness, which applies to some of the reasoning for ownership of such properties - then again "it depends".

good luck
  #5  
Old 11-02-2009, 09:10 AM
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It's almost impossible to get conventional financing on multi-family properties and private lenders will scalp the borrower with high interest rates.

The income approach is probably the best way to develop a MV indicator and probably always was for most properties. I've always found that even the simpliest analysis of income potential versus price paid can produce a pretty good indication even in SFRs and while not daring to include this in the appraisal report I have always checked my other conclusions using a rough GRM.

GRMs for all property types have crash dived from previous periods. For SFRs they were probably at 350+ a couple of years ago and now are 135 to 200. 2 units may be 100 to 125, 3 units under 100 and 4 units 75 to 100.

Don't do multi-families for AMC junk fees because they have become extremely complex assignments.
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  #6  
Old 11-02-2009, 10:46 AM
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Do the income approach first. Analyze the properties, then do the market approach. Then make adjustments based on the IA. The income approach is probably the best but a lender will need to see the market approach to make a loan decision.
  #7  
Old 11-02-2009, 11:04 AM
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FYI- In my market 2-4 financing is EZ duty, gets tough to get long term fixed rates for 6+


How are you boys developing a GRM and IA without comparable sales as the OP asked?
  #8  
Old 11-02-2009, 11:09 AM
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Looking at sales from six counties.
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  #9  
Old 11-02-2009, 11:19 AM
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Quote:
Originally Posted by Greg Boyd View Post
Looking at sales from six counties.
Would those be considered comparable sales? Yes, then you have comparable sales. No, then I don't know why the income they generate would be considered comparable.
  #10  
Old 11-02-2009, 11:25 AM
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That's why it's about ALL THE MARKET DATA and not just the closed sales within 6 months. It never was, despite what FannieMae guidelines would have you believe.

When you have better listings that continue to test the market that haven't sold, that generally tells you what these properties still are NOT worth.

So lets change the name to the Market Data Approach. Perhaps that's why so many lenders are now requiring appraisers to do 1004MC and provide the most COMPETIIVE (not highest) priced listings and other pending sales.
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