A MultiFamily Question on Adjustments

[PropertyEconomics]

I am having a discussion with an underwriter as to the appropriate adjustments necessary when appraising a fourplex.
The underwriter is of the opinion that adjustments for baths, square footage, location etc are necessary ....

In my opinion ... these items are considered in an income adjustment. Where comparison of the subject rent is made against that of the comparable and the resulting difference is then multiplied by the comparable GRM in order to arrive at an adjustment for that sale.
One adjustment considering all other differences.

How do the rest of you make adjustments when appraising a four plex within the market grid??

 

[Thomas Fiehler]

When I adjust for these items I analyze the rent and make a single adjustment (usually easyt o calculate the monthly rental per sq. ft. and use the GRM for adjustment). But I usually do not adjust for the differences-it just depends on the market.

 

[PropertyEconomics]

When I adjust for these items I analyze the rent and make a single adjustment (usually easyt o calculate the monthly rental per sq. ft. and use the GRM for adjustment). But I usually do not adjust for the differences-it just depends on the market.

You and I are in complete agreement Mr Fiehler .... the underwriter cant grasp that the rental adjustment makes consideration for the differences .. they MUST SEE adjustments on each line that they think are important.
I think I will tell them the adjustments are as I have shown them .. if you wish to assign them a different way be my guest .. but the analysis is proper. Its nice to hear you also do your adjustments this way.

 

[Ray Miller]

My mentors had me do a single adjustment. They have me analyze the rent and use the GRM for the adjustment. We have completed some 8 and ten units down my Delavan, WI this way. An investor was buy all six buildings.

 

[Mike Boyd]

IMO, you are using two approaches to value, market and income. Therefore, separate adjustments are necessary.

 

[mark jacobs]

I am having a discussion with an underwriter as to the appropriate adjustments necessary when appraising a fourplex.
The underwriter is of the opinion that adjustments for baths, square footage, location etc are necessary.

How do the rest of you make adjustments when appraising a four plex within the market grid??


You have sound reasoning for the Income Approach. But it sound like we are talking about the 1025-72 form.

These are all potentially income affecting amenities. If they affect income, an investor acting in his own self best interest could be motivated to pay a higher price for the item.
If the typical buyer of this type of property would pay more for the item then it should be adjusted in the sales comparison analysis. That is why the adjustment grid was changed for the new 2-4 family form.

As an investor, I would be willing to pay more for a 12 unit building vs a 2 family all other factors the same. Because I can get more rents.
As an investor, I would be willing to pay more for a 4plex with 4 bedroom units vs a 4plex with 1 bedroom units, all other factors the same. Because I typically can get more rents.
As an investor, I would be willing to pay more for a 4plex with 2 bath units vs a 4plex with 1 bath units, all other factors the same. Because I typically can get more rents.
Neighborhood and bedroom/bath ratio are important factors to the amount and validity to the adjustment. Some areas this may not be appropriate.
High end neighborhoods, yes a bath adjustment makes allot of sense.
Investors are motivated similar to home buyers. Increase the income to the investor or increase utility to the owner, given supply/demand factors and they will pay higher prices for added benefit/utility.

 

[PropertyEconomics]

I am having a discussion with an underwriter as to the appropriate adjustments necessary when appraising a fourplex.
The underwriter is of the opinion that adjustments for baths, square footage, location etc are necessary.

How do the rest of you make adjustments when appraising a four plex within the market grid??


You have sound reasoning for the Income Approach. But it sound like we are talking about the 1025-72 form.

These are all potentially income affecting amenities. If they affect income, an investor acting in his own self best interest could be motivated to pay a higher price for the item.
If the typical buyer of this type of property would pay more for the item then it should be adjusted in the sales comparison analysis. That is why the adjustment grid was changed for the new 2-4 family form.

As an investor, I would be willing to pay more for a 12 unit building vs a 2 family all other factors the same. Because I can get more rents.
As an investor, I would be willing to pay more for a 4plex with 4 bedroom units vs a 4plex with 1 bedroom units, all other factors the same. Because I typically can get more rents.
As an investor, I would be willing to pay more for a 4plex with 2 bath units vs a 4plex with 1 bath units, all other factors the same. Because I typically can get more rents.
Neighborhood and bedroom/bath ratio are important factors to the amount and validity to the adjustment. Some areas this may not be appropriate.
High end neighborhoods, yes a bath adjustment makes allot of sense.
Investors are motivated similar to home buyers. Increase the income to the investor or increase utility to the owner, given supply/demand factors and they will pay higher prices for added benefit/utility.

Mr Jacobs .. I would tend to agree with you and the same can be said about a great many different features not just beds/baths ...
My point is that if they are important within the market then the rent will reflect the differences and use of a GRM applied to the rent difference (positive or negative) will result in measurement of the differences which exist but are hidden from casual observation. Since we do not have a rent breakdown showing which feature commands which amount (in some instances for example a fireplace will command $10 - $25 more per month in rent) thus accurate measurement for each feature is not possible. That being the case, it is my contention that use of the income adjustment as described best measures all differences in accordance with market participants preferences.

Mr Mike Boyd ... measurement of specific adjustments within the market approach can be very difficult when you have limited data and particularly if the property is purchased for its ability to produce income. In my opinion measurement of square footage is tied to achievable rent and not some market derived square footage number which is difficult to determine at best. I certainly do see your point though, I just think the income adjustment best reflects the differences.

 

[Michigan CG]

The rent already reflects the size of the units. If they were bigger then the tenant would be willing to pay more. It is double dipping to adjust twice.

 

[Mark to market]

PE your thought that rent reflects market reaction to most adjustment criteria has some merit, however, per Fannie individual adjustments should be considered

XI, 406.03: Adjustments to Comparable Sales (11/01/05)
For two-unit to four-unit properties, the appraiser must report certain unadjusted and adjusted units of comparison for the subject property and the comparable sales. Because purchasers of small residential income properties may rely on these units of comparison, the appraiser should consider them in his or her analysis and reconciliation if they are relevant to the typical purchaser’s motivation in the subject market area

XI, 406.05: Underwriter’s Review of Adjustment Grid (11/01/05)
The underwriter should pay particular attention to the following areas. Because a substantial variance raises questions about the validity of using a specific comparable sale, the appraiser must have addressed the reason for a variance.

Proximity to subject property and location
Sales price
Sales or financing concessions
Date of sale/time adjustment.
Above-grade room count and gross living area
Over-improvements

 

[Mr Rex]

Mr Jacobs .. I would tend to agree with you and the same can be said about a great many different features not just beds/baths ...
My point is that if they are important within the market then the rent will reflect the differences and use of a GRM applied to the rent difference (positive or negative) will result in measurement of the differences which exist but are hidden from casual observation. Since we do not have a rent breakdown showing which feature commands which amount (in some instances for example a fireplace will command $10 - $25 more per month in rent) thus accurate measurement for each feature is not possible. That being the case, it is my contention that use of the income adjustment as described best measures all differences in accordance with market participants preferences.

Mr Mike Boyd ... measurement of specific adjustments within the market approach can be very difficult when you have limited data and particularly if the property is purchased for its ability to produce income. In my opinion measurement of square footage is tied to achievable rent and not some market derived square footage number which is difficult to determine at best. I certainly do see your point though, I just think the income adjustment best reflects the differences.

You might need to do a little regression analysis to pinpoint the market reaction to the various features.