A MultiFamily Question on Adjustments

[CANative]

You don't have to do what is applicable. You only have to do what is necessary.

An "approach" can use many methods and techniques.

 

[Pat Butler]

Lots of ways to report your analysis on this. However, if you agreed to report in on a particular form that requires individual adjustments, then I'd say you're obligated to do so. Pretty simple.

 

[hastalavista]

Two different approached required-that's why there is a reconcialtion line on the form-Also why all tree approaches if applicable are required-what is being done is the income approach twice and its being thinly veiled in the guise of a sales comparison approach.

Gotta be careful of what you post!!!

From the AI's course: General Appraiser Sales Comparison Approach-
Techniques for Estimating Adjustments

Quantitative Adjustment- In the sales comparison approach, the process of making numerical adjustments to the sale prices of comparable properties, including data analysis techniques (paired data analysis, grouped data analysis, and secondary data analysis), statistical analysis, graphic analysis, trend analysis, cost analysis (cost to cure, depreciated cost), and capitalization of rent differences; usually precedes qualitative analysis.

.(my bold)

I think there is confusion here that one approach automatically excludes another. That isn't the case since each approach is based on how the market reacts.
If I have a 4-plex that gets 10% higher rent because I'm next to a lake, and consequently that 10% is reflected in my GRM x income, what is the appropriate adjustment for the location difference? Is it not the GRM x 10% rental difference? Not hard to calculate a location adjustment if the market values it as a rent (income) difference, is it?
Now, what if we have the same situation but there is no rent difference? An appraiser may assume that being by the lake is a superior location... but it isn't recognized as such by renters (users) of the property. Will buyer of these properties pay a superior location premium when the market doesn't recognize any additional income for the location? Again, this is a sales comparison approach problem that uses income analysis to determine the appropriate adjustment for units of comparison.

Now, what about the situation where I need to replace my roof? Do renters pay more if the roof is new or not new? My experience says no; roof age is not a rental influence (positive or negative) but is a purchase-price influence; if I need to replace the roof, I'm going to consider that cost in my pricing of the property. That would be an example of a non-income component that has an influence on the sales comparison approach... but wait! It also has an influence on the Income Analysis too!

So, I wouldn't get too hung-up on trying to create an artificial division between approaches when the actual market does not make that distinction. More important is to recognize how and why the market is reacting to differences and then making the adjustments based on those reasons; without doing this, it is difficult to support the rationale for the adjustments, no? (Or worse, the appraiser is making adjustments for differences without understanding why it is so) :new_smile-l:

 

[SANDY]

Can't argue with the assumption that most if not all buyers would view differences in comparables strictly on the basis of whether and how much those differences would mean in terms of rental income. Why would there be a sales comparison approach for 2-4 units then? Essentially the income approach is being done twice-capitalization of rent differences is the income approach-is it not? The reason all three approaches are required if applicable is to theoretically arrive at different value indicators which then are reconciled on the basis of the quality and quantity of the data. There is little use in reconciling the same data used in any or all approaches.

 

[hastalavista]

Can't argue with the assumption that most if not all buyers would view differences in comparables strictly on the basis of whether and how much those differences would mean in terms of rental income. Why would there be a sales comparison approach for 2-4 units then? Essentially the income approach is being done twice-capitalization of rent differences is the income approach-is it not? The reason all three approaches are required if applicable is to theoretically arrive at different value indicators which then are reconciled on the basis of the quality and quantity of the data. There is little use in reconciling the same data used in any or all approaches.

The three approaches value a property based on three different perspectives: Utility (SCA), Income (IA) and (IMO) special use (CA). However, because there are three different approaches doesn't mean that they cannot share similar units of comparison and, indeed, may have the same type of measurement (support for the market adjustments) for those units.
Just because a unit of comparison's value is based on its income, does that mean it shouldn't be considered and adjusted for in the SCA? What about cost? What if the market recognizes the value of a new roof at the cost of a new roof- must the appraiser reject that finding because "cost cannot be mixed with SCA?" Of course not.
If the market reacts to differences in income for a particular amenity (say location, as I suggested before) what is the reason not to adjust it as such in the SCA?

There is no double-dipping. An adjustment in the SCA, if warranted, is warranted regardless if it is income derived or based on some other market analysis. I am of the opinion (better articulated by others on this forum) that there is no such thing as "three independent approaches" and that they all are entangled and blend into one another.
However, whether you agree with that or not, I'd like to hear the convincing argument that one shouldn't base an adjustment for a unit of comparison in the SCA on income differences if that's how the market values the difference? :new_smile-l:

 

[Laughing Heir]

Sandy,

Why can't you use a well-supported GRM to make adjustments in the SCA?

Almost every one of my qualifying classes (taken through the AI and taught by Mark Smeltzer(GREAT instructor) has referenced the ability to take what was determined through the income approach and apply it to the sales comparison.

Additionally, my last class on the cost approach we learned how to take elements from that and apply it to the sales comparison.

I wish wish wish I had a CG instructor so that I had someone more comfortable with advanced techniques and could get me acclimated with what the method PE uses.

 

[CANative]

Laughing...

Start building your appraisal library and read appraisal books at night and for some light reading on the weekend. Take some of the more advanced AI courses if you can afford them (always take a live course if you can). You can start applying what you learn in almost any assignment right away.

It won't take too long to realize what you're missing. You'll also realize how much time and work it will take to catch up with the PE's, Santora's and Hatch's in our profession.

 

[SANDY]

Ok here we go ahead Greg- instead of discussing the issue intelligently you prefer to slig arrows and braod based generalizations. So grab another arrpw and fire away-meanwhile I will discuss the issue with Denis and maybe both of us will learn some. In Denis" case he may only learn how dumb us trainees are!

So Denis-My point is that while the AI recognizes that the SCA approach may include some of the same techniques as the income approach, if one were to use the same analytical technique in both approaches, then can one really ethically hold out that appraisal report as utilizing both the income and SCA approaches? To me that might be mis-leading to a client. Just because the other more traditional anlalytical methods recognized by the AI may be weaker in terms of the credibility of the results doesn't mean that it should habe been abandoned- does it? Isn't that the primary reason for having a reconciliation?
Look, we all know that there are things we do because it is practical and makes the most sense-but when that practicality moves us closer to the ethical/un-ethical line I would prefer to be very very careful to state exactly what I did and why I did it. To me that would mean that I would state in the report that although the SCA was provided, it relied primarily upon the capitalized income method which is most commonly used in the income approach. IF it walks like a duck and quacks like a duch-it's rprobably a duck!

By the way Denis-thanks for your patience with me on this issue.

 

[SANDY]

I also do not see or have never seen anything in AI materials or any other professional publications where it indicates what is acceptable practice in terms of how to appropraitely utilize both the income and CSA approaches as they may apply to any one particular subject property. In other words just because the AI says that using the C.I. method as part of the SCA is perfectly acceptable-it says nothing about whether that is advisable to use as the only alternative method to be applied as part of one's CSA.

 

[CANative]

I don't see where I sligged any arrows. I was trying to encourage another fellow appraiser.

I also do not see or have never seen anything in AI materials or any other professional publications

You have to actually read the material. Not just see it.