Reasons for not including income apprach

[Tim Schneider]

When working on a SFR, in an area where SFR are not commonly purchased as an investment, and you do not include the income approach, what verbage do you use to explain yourself? Thanks!

 

[Joyce Potts]

When working on a SFR, in an area where SFR are not commonly purchased as an investment, and you do not include the income approach, what verbage do you use to explain yourself? Thanks!

Due to the predominant owner-occupancy of the subject's market area and the extreme lack of available rental data, the Income Approach is not considered applicable.

 

[Mike Kennedy]

Three Approaches to Value, Replacement Cost, Income, and Sales Comparison, were considered pursuant to the Scope of Work for this Appraisal Assignment. Analysis of local MLS, Assessor, and other automated data base records on Actively Listed, Contracted, and Closed Sale Properties in the Subject's immediate local market, retroactively through 2007, 2006, and 2005, was performed by the Appraiser. This research clearly indicated truly similar quality single family properties are characteristically Owner-Occupied. Typically this results in a scarcity of active single family rentals which would be considered competitive with the Subject. Review of currently available, and recently rented, Tenant-Occupied Properties, demonstrated them to be clearly inferior in age, location, quality, utility and general appeal and not comparable to the Subject Property.

In the Appraisers' opinion, the local Market indicates the Highest and Best Use of the Subject Site is as an Owner-Occupied Residential Property. Therefore, the Income Approach to Value is not a reliable indicator of Value for the Subject, is not applicable pursuant to the Scope of Work for this Assignment, and is not utilized herein.

 

[Terrel L. Shields]

When working on a SFR, in an area where SFR are not commonly purchased as an investment,

Just nitpicking but in the failing market we are in, a lot of "investors" were buying but not making any effort to rent, in fact did not want to rent but to flip the property...So you can still be in an area where the investor is the predominate owner and there be no rental data.

I use the old standard. "This is an area of predominately owner occupied property and market rents are uncommon. Therefore, the Income Approach is meaningless and is not used."

My narrative is more like,

The current use is residential and such properties can rarely be reliably appraised by the Income Approach unless they are typical rental properties in a typical rental neighborhood. The subject does not appear to be a typical rental property and the area is predominately owner - occupied for single family occupancy or as a long term investment

 

[The Warrior Monk]

I think in terms of how the market participant would value the property, which determines which method(s) will be used. If the typical purchaser would not purchase the property for its rental income, then that method is not necessary in the valuation of that property.

The lack of data is not an excuse for not using a method if that is the method that the market participant would use to value the property, because in that case it is necessary.

 

[Lloyd Bonafide]

Even for a non-owner occupied SFRs, I do not fully complete the income approach anymore. I do include a 1007 and 216, when requested.

On the Fannie Mae form, if you do complete the income approach, you are supposed to support both the market rent, (no problem), and the GRM, (big problem). Unless you are in an area that is primarily tenant-occupied, how are you going to support the GRM? You can't just back into it anymore.

For non-owner SFRs and condos, I write: "There was insufficient information to fully develop the income approach with a market-extracted GRM, although a rental survey and Form 216 are included in the appraisal."

Don't tell me to develop a GRM from rented homes that sold recently, because they are almost always rented below market when they have been listed for sale.

 

[Charles Knutson]

My standard comment for the three approach (owner occupied SFR) final reconciliation of value:

Most weight is given to the sales comparison approach. The income approach is not considered appropriate for single family owner occupied residences. For properties of this age and condition, the cost approach is considered an unreliable indicator of value, and was given little weight in the final reconciliation of value.

For the tenant occupied SFR with income approach developed:

Most weight is given to the sales comparison approach. The income approach generally supports the sales comparison approach. For properties of this age and condition, the cost approach is considered an unreliable indicator of value, and was given little weight in the final reconciliation of value.

Why does the tenant occupied SFR income approach generally support the sales comparison approach?

Because the sales comparison approach is the best indicator of value, even for SFR income properties. The GRM is derived by dividing the sales price of tenant occupied SFRs by their monthly rent.

Most GRMs in high demand areas will not support a positive cash flow with a high LTV mortgage -- that is a fact of life in SFR investment properties.

 

[Mztk1]

My comments is similar to, though not verbatim to:

In this market, the typical buyer and seller do not consider a property's rental income when negociating a sale price, and, therefore, the income approach is not completed as its results would be meaningless.

 

[Jerry Bone Jr]

"The Income Approach is not typical practice in such an assignment, therefore is not applicable."

 

[Fred]

The lack of data is not an excuse for not using a method if that is the method that the market participant would use to value the property,

Except that if the market participants were using the method, wouldn't there be "data?"

Reasons for not using income cap for SFRs?
- Developing the preferable sales comparison approach makes the Inc app unecessary.
- If developed, you would not givt the approach weight of reliance.
- It is not typical practice.