Market rents for comparable sales - GRM, FHA 1025?

[SteveSpy]

Hello Appraisers!

I may be having a memory lapse here and could use some help...

I have a revision request for a 1025-FHA-203K file. UW is requiring the use of market rents for comparable sales to arrive at a GRM. Most 2-4 unit properties in this market are at least partially owner occupied. Most of the comps are not fully rented.

I provided a market survey for the subject area of all closed, fully rented 2-4 unit buildings, from which I derived a GRM. The survey included 10 sales from the past 12 months. The results were in-line with the fully rented comps in he SC grid.

I thought I remembered that it was not an accepted practice to utilize Estimated or Market Rents in the SC grid. I thought it was somewhere in the Selling Guide, but I can seem to find it... It seems like a great way to over-inflate the Income Approach and that it could be misleading.

Or I need more coffee and am imagining this

Any constructive advice is welcome. Thanks in advance!!!

 

[TerryRohrer]

I provided a market survey for the subject area of all closed, fully rented 2-4 unit buildings, from which I derived a GRM. The survey included 10 sales from the past 12 months. The results were in-line with the fully rented comps in he SC grid.

The above should be more than adequate, assuming that those sales were generally at or near market rents. The lender has no authority to dictate how an appraiser develops their opinion, particularly when they don’t understand the task. If you have sufficient data involving fully rented sales, imputing rents to partially rented sales should never trump results from fully rented sales. There is no sound rational anywhere that limits an appraiser to data in a grid, and particularly not in the weak mind of an UW.

I would suggest, though, that GRMs developed from on fully rented sales may not accurately reflect market conditions. Say that only 30% of sales are fully rented and the rest (and the general market) have a 25% vacancy. Is the GRM for that market truly represented by 30 % of the data? The problem with keying on one variable in a 50 variable problem is that it is never just one variable involved…despite that being the maximum capacity of a weak UW mind.

 

[SteveSpy]

Thanks for the respons.

I agree... That is part of my weighting statement for the reconciliation. Elevated vacancies and/or owner occupied properties makes the IA less reliable and therefore given less weight.

But I could have sworn there was a statement on using market rents for comps issued by the GSEs at some point. Maybe I imagined it???? I've always felt it a best practice to report the acta rents in the grid and supplement with data or a survey in the addendum.

 

[sputnam]

Hello Appraisers!

I may be having a memory lapse here and could use some help...

I have a revision request for a 1025-FHA-203K file. UW is requiring the use of market rents for comparable sales to arrive at a GRM. Most 2-4 unit properties in this market are at least partially owner occupied. Most of the comps are not fully rented.

I provided a market survey for the subject area of all closed, fully rented 2-4 unit buildings, from which I derived a GRM. The survey included 10 sales from the past 12 months. The results were in-line with the fully rented comps in he SC grid.

I thought I remembered that it was not an accepted practice to utilize Estimated or Market Rents in the SC grid. I thought it was somewhere in the Selling Guide, but I can seem to find it... It seems like a great way to over-inflate the Income Approach and that it could be misleading.

Or I need more coffee and am imagining this

Any constructive advice is welcome. Thanks in advance!!!

By definition, the GRM is the mathematic relationship between the sales price and the rent of a property that was rented at the time it sold. If there are no current sales that let you do that, then you analyze older or distant sales to extract the GRM. Ideally, those are the same sales you used as comparables in Sales Comparison Analysis. Sometimes that isn't possible. When it's not, you use other methods and you explain, explain, explain.

 

[Tom4value]

If your market has multi-family properties with one unit owner-occupied, you can do both ways. 1. Use the income from all but one unit to derive the GRM. 2. Use estimated market rents for the owner-occupied unit for the total income. This is reliable as most multifamily properties have the o.o. unit that is similar to the other rented units so the estimate is easy to determine. Then explain what you did. Chances are you will find that the two different GRMs will support similar estimates of market value.

 

[Fernando]

I always felt the 1025 did an inadequate job in estimating market rent. The format is insufficient to provide a detail analysis in estimating market rent.
It allowed Fernando to do what he wanted.

 

[ZZGAMAZZ]

By definition, the GRM is the mathematic relationship between the sales price and the rent of a property that was rented at the time it sold. If there are no current sales that let you do that, then you analyze older or distant sales to extract the GRM. Ideally, those are the same sales you used as comparables in Sales Comparison Analysis. Sometimes that isn't possible. When it's not, you use other methods and you explain, explain, explain.

AF advised me never to use multi units in the 1025 income approach that also are reported in the SCA. I remember who said so but not why

 

[sputnam]

AF advised me never to use multi units in the 1025 income approach that also are reported in the SCA. I remember who said so but not why

Whoever advised you of that is simply wrong.

 

[ZZGAMAZZ]

The above should be more than adequate, assuming that those sales were generally at or near market rents. The lender has no authority to dictate how an appraiser develops their opinion, particularly when they don’t understand the task. If you have sufficient data involving fully rented sales, imputing rents to partially rented sales should never trump results from fully rented sales. There is no sound rational anywhere that limits an appraiser to data in a grid, and particularly not in the weak mind of an UW.

I would suggest, though, that GRMs developed from on fully rented sales may not accurately reflect market conditions. Say that only 30% of sales are fully rented and the rest (and the general market) have a 25% vacancy. Is the GRM for that market truly represented by 30 % of the data? The problem with keying on one variable in a 50 variable problem is that it is never just one variable involved…despite that being the maximum capacity of a weak UW mind.

If using comparables that are described as being occupied with long-term tenants in an increasing market, do you report the actual rents that are far below current market rent, and explain/explain, or report pro forma, current rent, and explain/explain?

 

[TerryRohrer]

If using comparables that are described as being occupied with long-term tenants in an increasing market, do you report the actual rents that are far below current market rent, and explain/explain, or report pro forma, current rent, and explain/explain?

I try to verify when rents were raised last. For calculating GRMs or cap rates, current rents best reflect current market conditions, but I have always been reluctant to create those rates...not my job. NOI depends on rental rates, vacancy rates, expenses (and who pays them), and sale prices. Simply applying current rents from comps and ignoring the rest will likely lead to results that are not supported.