Income vs Sales approach

[joe lee]

I have a two unit that has burned down to appraise. It is located in the worst part of town. The median sales price for 2 units in this market is only $9,000. Owner states property is worth at least $60,000 based on the income it generates alone. Market data indicates if the owner was to put a sign up in the front yard a buyer would be willing to pay around $10,000. I have to appraise for the day prior to the fire and assume the property was in average condition. I told client that income doesnt necessarly equal value and the market indicates far less than the the owner thinks the property is worth. I need some help.... 1. income does not necessarly equal value right? and 2. How to explain this to the client.

Thanks!

 

[DTB]

In this case the income generated does provide an indication of the subject's value. Apparently, based on your information posted, for the income stream generated by similar properties, buyers are willing to pay in the range of 9-10K.

Other properties in other areas generating the same income may be worth more or less. Depends on the quality of the income stream and that is usually location dependent.

If they don't get this...oh well.

 

[hastalavista]

It sounds to me like there is a problem with your data?

Rarely is it the case where the income approach is more than the sales comparison approach. If that were the case, then investors should be snatching up these properties instantly.

However, the reverse can be true (sales comparison is higher than the income); that occurs when owner-occupants are willing to pay a premium to own/occupy one of the units and that premium cannot be recaptured in rent by the investors. In other words, the owner-users crowd out the investors.

The question with the income approach is this: How likely is the income stream projected to continue and at what rate?
If the neighborhood is experiencing high vacancies or is experiencing an outflow of renters (which would presumably increase the vacancy rate), then the income would be very uncertain; ergo, the values would be affected.

You say the property is located in the worst part of town. Not knowing how bad "worst" is, it could be the case where vacancy rates and vandalism (repair/maintenance costs) result in little if any net operating profit.

Edit to add: When I say "problem with your data", I mean that your sales are not market sales, your income is not actual income, or your multiplier is not the market rate. My guess is that your sales are probably correct (as this should be the easiest to verify); so the problem may be with the income data.

 

[Scott R Marshall]

Joe,


I have actually found the opposite to be true. While the sales comparison approach can be utilized, your typical buyer, at least in my market, is interested in the potential income. Now certain factors can affect the data. What are vacancy rates likes? Are typical leases long term (12 month+) or month to month? The tenants that were in place before the fire were there how long? Were the paying market rent or a higher amount? Although a duplex, was there something unique about the units (larger than normal, more bedrooms than normal)? What does rent per square foot show? Based on the represented rental amounts and the market derived GRM, what does your income approach show?

I assume you have done all of this but your reliance on the sales comparison approach, as opposed to the income approach, has me a little concerned.

 

[Mark K]

You can do the income approach with the GRM derived from the market. It will likely support the sales comparison approach if it is developed accurately. The extraordinary neighborhood risk is typiclly reflected in the sales prices and hence, the GRM.

I just finished some appraisals for a road project, total takes, where the GRMs for the comps on the SFRs were in the 20-40 range and the 4-8 unit buildings' comps had GRMs of 18-25. Duplexes that rented for $375 - $425/side sold for $15-$25K. In a good part of town they'd sell for $75K - $90K with GRMs of 90-110.

There are certainly more rental properties that have sold in your area. Analyze the GRMs and use them against your subject's rent.

If it is an income property you need to develop the income approach. It might only be used to support the sales comparison approach but you should include it.

Suggestion: keep in mind this is not Freddie/Fannie and put their guidelines out of your mind.

 

[The Warrior Monk]

It sounds to me like there is a problem with your data?

I'll agree with that, or something is missing in information we're being provided. It simply makes no sense that properties are selling for $10,000 and the income approach concludes $60,000, if the rate/multiplier used in the analysis is derived from sales data. I'm making the assumption that the subject and the comparables are similar, of course.

 

[Lee Lansford]

... Owner states property is worth at least $60,000 based on the income it generates alone.
...

What does the market rent say vs. what the owner says?

 

[Michigan CG]

The first thing to do is to determine market rent and in the case of a two-unit property you will develop a GRM.

You then compare the Market Rents to the subject property rents to see if they are reasonable. WHY? Because you are valuing the property's MARKET VALUE. If rents are above or below the market the subject rents are not MARKET.

There are many indicators of value in a two-unit property including Market Rent, rent per bedroom, rent per SF, GRM, PGIM, EGIM............

There is something wrong with the data you have accumulated or you are interpreting that data wrong.

As a commercial appraiser this is an easy assignment but I have seen many struggle with this type of property which is understandable considering the rare assignments of this property type.

I suggest getting a little local help and feedback from someone you respect. I performed a review and appraisal for a small income property a few weeks ago for a property owner on a similar property and the original appraiser will be getting her local help from the state board.