Final Reconciliation - Triplex

[hastalavista]

Lets assume the rents for comps 1-4 are not lagging rents and are at market. The subject is slightly superior to these comps for one reason or another, which may or may not be adjusted for in the Sales Comparison Adjustment grid depending on if the appraiser is a wizard.

The GRM is tight at 200 to 205 for the four comps. 202 is reasonable, which suggests a value of $656,500 for the subject property.

Yes.

I worked the GRM ( based on avg rent of $2900, not subject market rent of $3200), got $584, 600 income approach.Reasonable range...how should I know? I am just the appraiser lol...

Well, I guess if you want to change the subject's market rents to "average rents" (whatever that means), you could come up with that value indication.

I got a 19.6 avg GRM giving me an income approach much higher than the sales...an income approach of $682,000. Can that be right? Did i mess up on developing the GRM...

Yes. 19.6, I think is a GIM, "Gross Income Multiplier. To convert the GIM to GRM, simply multiply by 12. Your GRM based on your GIM of 19.6 is 235. None of the comparables sold with a GIM of 235.

assuming my GRM is correct, or if wrong and I use Nacho's who got $656,000, why would an investor pay $656000 for a property if he could buy one for $600,000?

He'd buy the subject for $656k because he is paying for the subject based on its income. If he pays $600k for the subject, then the GRM would be 185 (I'm rounding). Would the seller want to sell the property at a 185 income multiplier when the market is paying 200? I don't think so.

I mean, how can we answer this without knowing what the listing prices of triplexes are.

That has nothing to do with solving the problem based on the information given.

The comps sold for between $570,000 and $615,000 so no matter what the income approach yields, the actual sale price of the comps is less than income approach. To answer the OMV question, what is the most probable price a buyer would PAY, why would a buyer pay more than similar sale prices indicate? ( unless there is a sudden severe inventory shortage or some other condition not described ).

You clearly do not understand how price is related to income. At least, you haven't demonstrated that understanding in your responses.

Principle of substitution, if there are two listings of triplexes that would command similar market rents , and one is listed at 625k and the other at 610k (for example ), why would my subject be worth 656k? What well informed buyer would pay more for a property than an equivalent substitute when they would yield similar income?

Principle of Solving a Problem: Do not introduce non-existent data in to a problem to try to rationalize the incorrect answer.

 

[J Grant]

i'm rushing as doing this between typing appraisals (not the greatest idea )...but Denis your income approach is based on subject higher rent of $3250 as basis of income decision, i based mine on the average rent of the 4 comps ( market rents). Unless there is a good reason for subject to be commanding higher rents than competing properties, why would I base my OMV on subject rent and not market rents the 4 sold comps show?

In a real appraisal, we do know what listings are going for and what is available in inventory. So despite what an income approach shows, if listings are available as substitutes for a lower price, why would an investor buyer pay a higher price? This is a confusing example because the 4 comps sold for 570k-615k, now we have a subject worth 656 k based on its reported rental being higher as the main driver of income approach value (with no explanation why subject is getting higher rents then the competition) .

Well have to go back to work getting distracted thanks for the example in any case.

(in a real appraisal I might not avg the rents but might weight more the rents of the triplex comps most like the subject but no info to go on here to do that)

 

[NachoPerito]

i'm rushing as doing this between typing appraisals (not the greatest idea )...but Denis your income approach is based on subject higher rent of $3250 as basis of income decision, i based mine on the average rent of the 4 comps ( market rents). Unless there is a good reason for subject to be commanding higher rents than competing properties, why would I base my OMV on subject rent and not market rents the 4 sold comps show?

In a real appraisal, we do know what listings are going for and what is available in inventory. So despite what an income approach shows, if listings are available as substitutes for a lower price, why would an investor buyer pay a higher price? This is a confusing example because the 4 comps sold for 570k-615k, now we have a subject worth 656 k based on its reported rental being higher as the main driver of income approach value (with no explanation why subject is getting higher rents then the competition) .

Well have to go back to work getting distracted thanks for the example in any case.

Lets pretend you are the buyer for this exercise Mr. Grant. You see four properties with rents at $2950 per month .Then you see another for $3250 per month. You wouldn't pay any more for an extra $300 in cash every month?

 

[CANative]

 

[J Grant]

Lets pretend you are the buyer for this exercise Mr. Grant. You see four properties with rents at $2950 per month .Then you see another for $3250 per month. You wouldn't pay any more for an extra $300 in cash every month?

I might...if I could be convinced that the subject could sustain that $3250 a month and there was a reason the tenants are paying more. If I find out it is BS and there is no reason this property would normally rent for more than the competition, I'd pass. There is no reason in this example the subject is rented for $300 a month more than the other triplexes. So as a well informed buyer, I'd want a good reason for it. I want to know that if these tenants move out, I could get that higher rent from new tenants.

Appraisers should approach a higher than typical rent for a subject property the same way.

Then an investor would consider if they pay more in purchase price, how long does it take to recoup that with the $300 a month extra in rent.

I know I tend to be verbose but there are many questions to consider in answering if a typically motivated buyer would pay more. It is not based on what one buyer would do, it;s based on what the likely pool of typically motivated buyers would do (composite which makes up the "typically motivated buyer". Besides needing to know what listings are available at what prices, would investors base their calculations of income on market rents of other properties, or on a subject higher than typical rent with no particular reason for it (unless there was a reason for it and they were confident they could get similar rents on open market when current tenants leave. )

Investors tend to be a pretty shrewd bunch and would do some digging one presumes.

 

[Michigan CG]

.............. i based mine on the average rent of the 4 comps ( market rents). ............

When did averaging become acceptable appraisal practice?

 

[J Grant]

See my post # 32...I would likely not average the rents in a real appraisal but did it here since no reason any triplex was different than another per information given.

Averaging can be an acceptable practice if it is the best answer to a question though it is is typically frowned on ( and not something I tend to do unless there is good reason for it, rarely do it in fact )

 

[Terrel L. Shields]

Fannie & Freddie and major banks consider 1-4 units as residential and not true income property.

That's why so many of them went belly up circa 2009... They are still pariahs to people. In fact, they are "true" income properties, even when owner occupied and their value lies in the ability to generate income.

clients can determine assignment condition. With res lending, when the certs say most reliance on sales comparison approach, that is an assignment condition, appraiser is free to reject assignment if they disagree and feel they can't derive an opinion of market value based on the assignment condition.

That is so wrong on so many levels

A client telling me how much weight to give a certain approach in going too far.

You da man...exactly

When did averaging become acceptable appraisal practice?

When there is insufficient evidence to not weight all the items equally.

In our market, we are seeing GRMs of 88 - 95. That's a very nice rate. And the ones that are the most successful investors are pros at managing their properties. The individual buyers have basically been wiped out. That suggests the investor is the wiser one and not necessarily the one who pays the most. I was just in 4 duplexes that were rented and were not trashed. They were top shelf and they paid a premium deposit. I bet they leave them in very good condition compared to far too many such properties.

 

[glenn walker]

1 unit in many 2-4 units are occupied by the owner *** and often the owner pays more than 25% to 40% of the income stream. Example My wife and I lived in one of my 4 unit properties in California, we figured even if we paid 40% of the mortgage etc and the rest was paid by the tenants we are in good shape after principle loan reduction etc. That's why Fannie & Freddie Mac established favorable financing for 2-4 units. These are not true income properties unless the buyer pays cash. In the last 30 years my family has owned many 2-4 and some 10-40 unit properties. The cash flow for a small 2-4 unit after PITI and maintenance rarely has been a large positive and often a negative if a major repair was required. The true income property 25 units has the benefit of being able to have a on site manager and being able to have maintenance cost spread over the 25 units. The only money with 2-4 units is when the market appreciates dramatically or you own them free and clear with no mortgage.

 

[Tim The Enchanter]

I can't do the most meaningful income approach when few or none of the comps have rental data.