A MultiFamily Question on Adjustments

[SANDY]

Denis- If an experienced appraiser perceives that a location adjustment is likely warranted but finds that there appears to be no quantitative evidence for such, then all the more reason to utilize the other non income related methods as part of the sca. There may be perfectly good reasons that your income base data is not indicating a location premium-and how would you verify that suspicion? With sales data not income data.Once again checks and balances and the reason we have different approaches to value and reconciliation. You do not seem to be willing to see that--- data---no matter what type is not perfect--just because income data appears to be fancier, more mystical or better sounding than judgement or sensitivity analysis etc in the sca-- doesn't mean the use of income data does not require judgement also. The adjustment difference between a grm of 115 compared to a grm of 105 or 125 has an approximate 10% margin of error not including possible errors in the market rent estimate. Not to mention that if you normally are able to obtain grms with less of a spread then by definition you have comparables sales data that was used to debvelop the grm--so why not use it in a more traditional csa?

Just to make sure-we are still talking about those instances where we have adequate comarable sales right!!!

Can't allow others to digress and bring in different scenarios or we will be discussing apples and oranges again.

 

[Mztk1]

I've been away from the argument for a while, but it seems still at the same place when I left.

I think PE's approach is not for me for several reasons, mainly:

1. Units of comparison, i.e., the number of adjustments made on the grid, is an indication of the similarity between the sales and the subject. The more adjustments, the less similar and the less weight the sale should be given. When making one lump sum adjustment that part of the analysis is missing.

2. Lumping two or more adjustments into one adjustment can be misleading, in my opinion, making the comparables look more similar to the subject than they really are. Even making a condition adjustment only when a quality and condition adjustment should have been made can be construed as misleading. Whenever it is done it should be because it was not possible to differentiate between the two, and it should be explained. But even then, you can split the differences between the adjustments just to show there are two differences, not one, and explain what you did.

3. It turns the sales comparison approach into a mockery, much like the cost approach on a beat up house with no land sales, where you are just backing into a number.

4. It is akin to having a sale for $200,000 where you have analyzed the contract and find it is at arm's length and fairly negotiated. You look at the comps, all market sales, and you see the first sold for $220,000, the second for $180,000 and the third for $205,000 so you make an appeal adjustment for $20,000 down to comp #1, $20,000 up for comp #2 and $5,000 down for comp #3. Afterall, all differences can boil down to "appeal".

The beauty of both the sales comparison approach and the income approach is that when you have enough data, they can stand on their own. The cost approach doesn't have that ability. Even in a perfect situation for the cost approach you have to do a sales comparison approach for a land value.

Unless you are in a tight spot and cannot extract an adjustment for a specific attribute, like a bedroom let's say, I would prefer not to adjust in the sales comparison approach considering income at all, but base it on either a comparative or paired sales analysis. If the approach is weak because the numbers are not easy to extract, than give more weight to the income approach in the reconciliation. But completing the income approach twice, and calling one the sales comparison approach, is not what I would recommend.

 

[hastalavista]

Denis- If an experienced appraiser perceives that a location adjustment is likely warranted bu finds that there appears to be no quantitative evidence for such, then all the more reason to utilize the other non income related methods as part of the sca. There may be perfectly good reasons that your income base data is not indicating a location premium-and how would you verify that suspicion? With sales data not income data.

Proof that we will not agree on this (at least, not for now).

I made this argument originally back in post #33.
Simply put, I give a specific example where one is looking at a subject property. We have all kinds of sales around. Those sales show superior rents (and value) for superior locations.
Now I compare my subject (which isn't selling, but I'm valuing) to a property that did sell and I'm using as a comp. I think qualitatively that my subject's location is better. Its on a quieter street, the street looks nicer, etc. Qualitatively I think an adjustment is warranted.
However, when I compare my rents, I see there is no difference. I've already confirmed that superior locations generate superior rents. I'm comparing my subject to a property and while I think my property's location is superior, the rents don't support that conclusion.
I decide not to make an adjustment because the subject's location does not support superior location rents. I think this is a fairly well-grounded decision.
You tell me to go back and look some more, because if I think my subject's location is superior, it probably is even though the rents don't support it and (now I'm inferring on what you said) if I search long enough, I'll probably find something which will support my presumption of a superior
location.

Of the two methods, I'll stick with mine. :new_smile-l:

Maybe I'll check back in another 100 posts to see if anything new has been offered here.

 

[Mztk1]

Proof that we will not agree on this (at least, not for now).

I made this argument originally back in post #33.
Simply put, I give a specific example where one is looking at a subject property. We have all kinds of sales around. Those sales show superior rents (and value) for superior locations.
Now I compare my subject (which isn't selling, but I'm valuing) to a property that did sell and I'm using as a comp. I think qualitatively that my subject's location is better. Its on a quieter street, the street looks nicer, etc. Qualitatively I think an adjustment is warranted.
However, when I compare my rents, I see there is no difference. I've already confirmed that superior locations generate superior rents. I'm comparing my subject to a property and while I think my property's location is superior, the rents don't support that conclusion.
I decide not to make an adjustment because the subject's location does not support superior location rents. I think this is a fairly well-grounded decision.
You tell me to go back and look some more, because if I think my subject's location is superior, it probably is even though the rents don't support it and (now I'm inferring on what you said) if I search long enough, I'll probably find something which will support my presumption of a superior
location.

Of the two methods, I'll stick with mine. :new_smile-l:

Maybe I'll check back in another 100 posts to see if anything new has been offered here.

I think Sandy has a point. There is a good chance that the comp you are looking at is rented too high, or the subject is rented too low. For the sale you should be using market rent, not actual rent, in the grid. If you determined market rents are higher for superior locations and the comparable location is inferior but is renting at the same high rate, you have a conflict in your data that you should resolve.

 

[SANDY]

Denis- Do you really believe that there is always a perfect relationship between income and location for example? Why do you constantly point out the so-called flaws in sales data but never recognize the potential flaws in income data? I definately see some bias much like the others that have tried to profile trainees. Not you so much but the others a lot.
All trees do not have leaves and leaves are not only on trees!!

 

[SANDY]

I think Sandy has a point. There is a good chance that the comp you are looking at is rented too high, or the subject is rented too low. For the sale you should be using market rent, not actual rent, in the grid. If you determined market rents are higher for superior locations and the comparable location is inferior but is renting at the same high rate, you have a conflict in your data that you should resolve.

Oh my God-a non-profiler!!! data sources and the data itself may have some flaws or anomolies in them-that's why you cross check your results in one approach with the results in another approach---and you don't use the same methods in both approaches.

Has this profession really come to this where the people in it don't understand the reason for the different methods?

 

[hastalavista]

Denis- Do you really believe that there is always a perfect relationship between income and location for example?

No, of course not. I used it as an easy example and said as such 100 posts ago.

Why do you constantly point out the so-called flaws in sales data but never recognize the potential flaws in income data?

What flaws am I omitting from either? I said that it appeared the subject's location was superior and that the appraiser thinks its better. I also said there was a correlation between superior locations and superior rents which equates to superior values. Then I said there is no rental premium paid for the subject despite what appears to be a superior location (and by the way, Jim, if you read my next to last post, you'll see I said "market rents"). Finally I said given this, I'd not make an adjustment with that data.

The market is imperfect. But I have a much higher confidnece level in making an adjustment when I can correlate it to the market vs. when I can't.
And doesn't the same argument work the other way? So what if I think it is a better location; if I can't find that support in the market should I make the adjustment anyway?
(Maybe I do; an appraiser can and should use her or his judgment. But in this specific, I give the example of where the market shows contrary data and the response is to ignore it and go back and look for confirming data?!?)

I definately see some bias much like the others that have tried to profile trainees. Not you so much but the others a lot.

I don't know what my comments on units of comparisons/adjustment analysis and trainees have in common?
The only bias I try to have is in understanding how the market works. Perhaps your vision of what I try to do is clearer than my own and you can see things I cannot.

All trees do not have leaves and leaves are not only on trees!!

Good advice to preach... and follow.

 

[Mztk1]

(and by the way, Jim, if you read my next to last post, you'll see I said "market rents").

Here is what you said:

Our subject's location appears superior to Comparable A. However, we can determine that superior locations command higher rents. We compare our subject's market rent to that of Comparable A and find no rental difference.

What you are saying is ambiguous in whether you are using "actual" or "market" rent for comparable "A". Either way, based on what you are saying, something is wrong and there are several things to look at:

1. Let's say comparable "A" is rented for $1200 per month (actual rent), which happens to be the same as the market rent of the subject, but comparable "A" has an inferior location. Let's say the location adjustment is $100 per month based on your market data. Comp A and the subject being otherwise 100% equal, despite comparable "A" being rented at $1200 per month, its market rent is $1100 per month.

Or, #2: comparable "A" has a market rent of $1200 per month and the subject location, which is superior to comparable "A", is extracted to have a $100 positive effect on rent. In such a case, where comp A and the subject are otherwise 100% equal, the subject market rent is $1300 not $1200.

Or, #3: The location was mistakenly attributed a $100 effect in the market via your rental analysis and it actually has a $0 effect.

Or #4: The subject location is not superior to the location of the comparable as either the subject location is inferior to what you thought, or the comparable location superior.

But either way, what you are saying suggests there is something off with your data and Sandy is right, you have to try to figure out what that "something" is.

 

[hastalavista]

I thought I provided a simple and clear example. Boy was I wrong!

Let's say comparable "A" is rented for $1200 per month (actual rent), which happens to be the same as the market rent of the subject, but comparable "A" has an inferior location. Let's say the location adjustment is $100 per month based on your market data. Comp A and the subject being otherwise 100% equal, despite comparable "A" being rented at $1200 per month, its market rent is $1100 per month

I'm not sure what you are trying to say, so I'll paraphrase what I think it is:
"A" is rented for $1200 which is at market and the same as the subject.
"A" has an inferior location; everything else being equal to the subject.
Location adjustment for rent difference is $100; so since its location is inferior, it really should be rented for $1,100.
(I think the rest of your points are variations of this, so I'll spare us both and not paraphrase those too)

Is that what you are saying? If it is, at least you and I disagree over the same things that Sandy and I disagree over. And, your example changes my givens! So let me add my given back to your question:

Suppose, given your example, that you have correlated rents and locations and, all other things being equal, superior locations rent at a premium to inferior locations.
The subject and "A" are renting at market and are renting for the same amount- $1,200/month. They are similar in all other respects.
The appraiser thinks that "A" is in an inferior location but the rents would argue against that.
Does the appraiser ignore what the market data indicates (no difference in rents means no difference in location) and make a location adjustment anyway?
If asked why was an adjustment made in lieu of the contrary data, how should the appraiser respond?

 

[Jonsey]

How about we get back to the actual circumstances at hand- Property says that he had adequate comarable sales. He chose to use his grm based data to make one lump sum adjustment in the sca. Underwriter wanted lne item adjustments.
So if he had adequate comparables then why not use them to make the line item adjustments based upon paired sales or some other acceptable sca method? Maybe his sales did not allow for specific line item paired sales info?

Sandy, This thread has been thus far......absolutely priceless. Thank you. Welcome to the Forum. Don't stray too far now, ya hear..... I've got a duplex this weekend. Your peers need to be kept on their toes.