Form 1025, Income Approach: Actual vs Market Rents

[ZZGAMAZZ]

Assignment is a conventional purchase of a 3-unit residential income property.

I populated the Income Approach grid with several comps, using actual rents if they are reported in MLS and if they appear to me to be current/appropriate; and I used market rent when the CRMLS listings reported both actual and market, with the numbers in black font [actual] and red font [red], describing that rationale in the IA addendum, as based upon the embedded Form instructions to:

" . . . support the opinion of the market rent for the subject properties."

Client condition is for me to change all market rents to actual rents (including some that are vacant).

I will do what I think is correct regardless of the client condition, but I am not sure that my interpretation of the instructions is accurate.

Peers, please advise.

 

[glenn walker]

How can vacant Units have actual rents ?

 

[ZZGAMAZZ]

That will be noted in my response to the conditions.

 

[Charles West]

Sounds like the client may be concerned about the quality of cash flow going forward. Are these units in fair or worse condition?

 

[John Hassler]

It’s not clear from your post but I’ll assume that you are filling out the comparable rental analysis section of the form. If that’s the case then, yes, those should be actual contract rents.

If one of your comps has vacant units then don’t include those units in your analysis, even if the agent provided a projected rent. For instance, say a comp is a triplex with a 3-1-1, a 4-2-1, and a 4-2-2. If the 4-2-1 is vacant, just report the other two units on the grid.

 

[ZZGAMAZZ]

It’s not clear from your post but I’ll assume that you are filling out the comparable rental analysis section of the form. If that’s the case then, yes, those should be actual contract rents.

If one of your comps has vacant units then don’t include those units in your analysis. For instance, say a comp is a triplex with a 3-1-1, a 4-2-1, and a 4-2-2. If the 4-2-1 is vacant, just report the other two units on the grid.

As noted, I literally don't know the answer; however, following your advice:

1) with two of three subject units vacant, and reporting the actual rent of the 3rd unit that is rented, the subject's actual rent will reflect the Effective Date but it won't come close to the Total Market Rents reported near the bottom of page 2.

The prelude to the rental income says that "This analysis ia intended to support the opinion of the market rent fo the subject property," which won't be accurately reported in acdtual rather than market rents are reported, in this dynamic residential rental market.

The prelude to the secxtion I mentioned above near the bottom of the page is to ". . . peocisw rhw opinion oF market rent for each unit of the subject property" which means IMO that in a week or two when the two vacant subject units are rented, results of the appraisal will be meaningless.

2) The Gross Rent Multplier probably will be significantly different than if market rents are reported for the subject as well as the comps. And if so, the Opinion of Market Rent will vary dramaically from results of the SCA. (right?)

3) Transition to the 216 instructions that " where there are no current rents...including currently vacant units, market rents should be used" Won't any report that includes a 1025 and a 216 be reporting apples/oranges?

I truely want to understand all of this but I don't undestand the rationale that underlies what is and what isn't. If you hae time please discuss as much as possible Thanks.

 

[ZZGAMAZZ]

Sounds like the client may be concerned about the quality of cash flow going forward. Are these units in fair or worse condition?

Well, the front building is a 2-story duplex built circa 1918 with a recent ostensibly-comprehensive interior renovation; and the back unit is a studio that was a detached 1-car garage until it was converted with building permits [provided and reported] to become an ADU in 2022. [Course I am being conditioned to find a duplex with an ADU apparently because studio comps reported in the grid aren't ADU''s--good luck that although the neighborhood market in downtown Riverside city (CA) is improved with a surprsing quantity of residential multi's based almost exclusively on older homes chopped up into units over the past seven - 10 decade.

 

[John Hassler]

As noted, I literally don't know the answer; however, following your advice:

1) with two of three subject units vacant, and reporting the actual rent of the 3rd unit that is rented, the subject's actual rent will reflect the Effective Date but it won't come close to the Total Market Rents reported near the bottom of page 2.

The prelude to the rental income says that "This analysis ia intended to support the opinion of the market rent fo the subject property," which won't be accurately reported in acdtual rather than market rents are reported, in this dynamic residential rental market.

The prelude to the secxtion I mentioned above near the bottom of the page is to ". . . peocisw rhw opinion oF market rent for each unit of the subject property" which means IMO that in a week or two when the two vacant subject units are rented, results of the appraisal will be meaningless.

2) The Gross Rent Multplier probably will be significantly different than if market rents are reported for the subject as well as the comps. And if so, the Opinion of Market Rent will vary dramaically from results of the SCA. (right?)

3) Transition to the 216 instructions that " where there are no current rents...including currently vacant units, market rents should be used" Won't any report that includes a 1025 and a 216 be reporting apples/oranges?

I truely want to understand all of this but I don't undestand the rationale that underlies what is and what isn't. If you hae time please discuss as much as possible Thanks.

If I’m understanding you correctly, and I’m not sure that I am, the left side of the rental grid will have your actual subject rents and the right side your projected rents. Your projected market rents are based solely on the actual market rents of your comps (not their projected rents).

 

[Charles West]

As noted, I literally don't know the answer; however, following your advice:

1) with two of three subject units vacant, and reporting the actual rent of the 3rd unit that is rented, the subject's actual rent will reflect the Effective Date but it won't come close to the Total Market Rents reported near the bottom of page 2.

The prelude to the rental income says that "This analysis ia intended to support the opinion of the market rent fo the subject property," which won't be accurately reported in acdtual rather than market rents are reported, in this dynamic residential rental market.

The prelude to the secxtion I mentioned above near the bottom of the page is to ". . . peocisw rhw opinion oF market rent for each unit of the subject property" which means IMO that in a week or two when the two vacant subject units are rented, results of the appraisal will be meaningless.

2) The Gross Rent Multplier probably will be significantly different than if market rents are reported for the subject as well as the comps. And if so, the Opinion of Market Rent will vary dramaically from results of the SCA. (right?)

3) Transition to the 216 instructions that " where there are no current rents...including currently vacant units, market rents should be used" Won't any report that includes a 1025 and a 216 be reporting apples/oranges?

I truely want to understand all of this but I don't undestand the rationale that underlies what is and what isn't. If you hae time please discuss as much as possible Thanks.

I think I misunderstood what you were asking, and I wish I had access to the form but if I remember correctly, John is correct, you do initially report what are actual rents on the day of inspection then you present your rental survey information of actual market rents or close proximity to when developing the estimate of the subject property's market rents used in the market approach section. Your GRM is derived from existing sales data that presumably represents market rents but reported rents in MLS aren't always market so care needs to be taken when developing your GRM.

 

[Terrel L. Shields]

If you use economic rents it tends to increase the GRM and therefore, skews the value since the average buyer is looking at this as an opportunity to arbitrage the difference between economic and market rents. I did a series of apartments where the rents were anomalously low - after running a quickee rent survey, realized the owners hadn't raised the rent in like 4 years. They sold cheap, the renters got the boot, the new buyers then did some light touch up and leased at $200 a month more. The GRM fell by 20% overnight.