A MultiFamily Question on Adjustments

[PropertyEconomics]

In that case, there would be no reason to include the market approach.

However, find a lender for a 2, 3 or 4 plex that will allow you to skip that approach. Do you not agree that a 3 bedroom, 2 bath unit will rent for more than a 2 bedroom, 1 bath unit? You are saying that you do not need to adjust for it in the market approach because you are adjusting for it in the income approach. Two separate approaches to value. Each has to stand on its own merits. In your final analysis you can give more weight to whichever approach you deem to be most relevant. BUT, each approach must be completed.

Im not saying to not do the market approach and your post makes my point. A three bedroom unit will rent for more than a two bedroom unit. Why not simply take the monthly rent difference between your subject and your comp (positive or negative) and multiply it by the GRM. Make one line item adjustment in your market grid for income adjustment (call it property differences recognized by income). The adjustment consideres all necessary differences which have income production capabilities.

The only time I have made an additional adjustment is when there is a second lot not earning any income. In that instance there is excess land that must be recognized.

Try it .. it will work.

And to Mr. Klos .... investors in my market are numerous for 2 - 4 family units. Very very few are partially owner occupied and nearly all have investors clamoring for their purchase if they are in a good location and have a good historical income stream. In my market it certainly is the income that drives the market.


And Sandy .... I have never seen anyone capitalize income in a fourplex. While it could be done, it has been my experience that gaining adequate expense statements, historical income statements and vacancy records somewhat preclude use of this method. It is why the GRM method works so much better. Just an aside to a prior post you made.

 

[hastalavista]

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-

First, let me make a distinction between AI, the organization, and AI course material. The AI does not decide what it will teach; the AQB decides what is to be taught and what material must be covered and how it is covered. The AI is just one recognized education provider. I happen to think they are one of the better ones around (full disclosure: I am a member; non-designated). So, what they teach isn't something that they concocted by their lonesome; as one text book author said in a class I took, "it is the recognized method of teaching appraisal practice".

Next, I understand your concern about applying an inappropriate analysis technique. I'm against that too! :new_smile-l: Where we differ is what constitutes inappropriate. Many appraisers (myself included) would have no problem adjusting a unit of comparison (in the SCA) by the cost-difference if that is how the market reacted. I'd cite this as the reason and cost as my basis- that adds credibility to my report as I'm detailing my analysis and rationale. What you and I are discussing is if that same process can be applied to the SCA if it is an income measurement? My answer is yes.

When an appraiser makes an adjustment on the SCA grid, she or he is doing one of two things:
A. Attempting to mimic how the market reacts to those differences.
B. Attempting to predict how the market would react to those differences.

Sometimes, I cannot tell you why the market reacts the way it does; I can just show (based on historical data) that it does. A good example of this would be the appeal of a certain type of house-design; perhaps California Craftsman command a superior price in one of my markets because of the perceived appeal. About as good as I can get with that is to measure how (via paired/matched sales) what the reactions have been in the past. I cannot quantify "appeal" any further than its historical trend (selling at a premium); and, within that premium, there is probably going to be a range. What defines the difference within that range? I simply do not know; there is no credible way for me to figure that out (as a rule). And, I probably don't need to figure it out; it just may be within that buyer pool, individual tastes account for a 5% range of premium to Craftsman homes. So be it. In this case I can only show how the market reacts and I cannot explain it quantitatively other than to say there is a premium awarded to Craftsman, and based on history, it ranges between X and Y.

However, what if I can not only determine how the market reacts but why it reacts? What does that do to my analysis? In my opinion, it improves the credibility and allows the reader the ability to better interpret and judge my results.
We are back to trying to figure out why a fourplex sells for more when it is near the lake. These are non-owner properties (my given), so there is no owner-appeal premium. However, what we do notice is that the rents are higher. When we do a little analysis, we see that their is a correlation between rents, the lake, and higher values. Our matched-pair analysis shows that there is a difference. But it is our income analysis that shows what the difference is based on. We now not only know how the market reacts but why the market reacts as it does. This is powerful information. We can conclude (reasonably so) that for non-owner occupants, the location difference is dependent on rental differences and the value of the location difference can be directly measured by the difference in rents. We can also take this rule and test it against other properties. What we may find is this:
1. A few anomalies.
2. Some locations that we subjectively thought would be better appear to have no rent difference (and consequently no added value).
3. Some locations that we subjectively thought would be better do appear to have rent differences.
With this information, we now have an argument to make or not to make a location adjustment even if it appears subjectively to be superior. In the real world this is a good thing to know; if I get questioned by a UW why I did not make an adjustment for a fourplex on what appears to be a busy street, I can show that there is no market premium or discount for those locations based on the rent. I've supported my non-adjustment in the SCA by means of income analysis!

In summary, I say this: On the basic level, the adjustments in the SCA grid are designed to reflect how the market would or will react to differences in units of comparison. I think we can all agree.
And, paired sales analysis could show the differences without the benefit of anything else. If, however, I cannot only determine how the market reacts but why it reacts, I've just improved my analysis of the subject and my ability to analyze other, similar properties. And if the "why" of how the market reacts happens to be cost or income, I'm going to explain that in my analysis and use cost or income as a basis of my adjustments in the SCA.

But, that's me!! :new_smile-l:
And, Sandy, just because that's what I believe doesn't mean it is right. (and don't worry, if it isn't, I'll be targeted by some of the bigger guns on this forum! :laugh: ).

One last thing: I want to second Greg B's recommendation of accumulating an appraisal library. I've noticed that many of the top-notch appraisers that contribute to this forum reference in their posts the various texts they have read and reviewed. Their level of conversation on these topics is several grades higher than mine because of their professional research. And, yes, I've treated myself to an early Xmas gift and have purchased a number of appraisal books to read. If one is really committed to becoming a professional, then this is a step in that direction.

 

[SANDY]

I don't know Denis-it seems like your working awfull hard at trying to justify what Property did. Appraising is no different from anything else in the sense that knowledge is obtained from a variety of sources. Publications, books etc is but one source and may or may not be the definative source. All of my mentors and supervisors have given me what I believe to be a good mix of book learning combined with practical application of good ole common sense. Perhaps it did not result(as of yet) in me becoming the best appraiser but it sure did help in the net worth department. Professors may not always be the best source of knowledge about any given topic-one would do well to supplement what professors have taught with training by those that are in the trenches.

I really don't think you are going to convince me that what Property has done is advisable. I believe that just because the quality and quantity of the data available is weaker than the available data from another approach does not give a professional a free pass to use the same data for both approaches and disguise it at a different approach. That imho is an example of misleading the client unless of course one fessed up to it in the report. Just because one approach happens to be better than the others in any given circumstance does not absolve them of producing the results of both or all three approaches. Sorry-no free pass!!! Otherwise the reconciliation part of the appraisal process should just be removed because it would basically be a sham!!!
Don't need a library to know that -just some common sense.

At least you didn't stoop to the unprofessional standard comments about trainees like several others here. What they don't know would easily fill craters on the moon. Rather than debate things in a civil and professional manner they hide behind their snide comments that only demean them and the profession.
You should be proud of yourself for not having stooped to that level.

So bring it on you arrow slingers-defend using only the main principle of the income approach in the sales comparison approach and disguising it as a sca. Tell me what reconciliation is for then. Don't even try saying that reconciliation only involves reconciling the quality and quantity of your data within any one approach. Homey don't play game!

Why don't you pull down one of those books in your library Greg and provide some quotes from it for us debate? At least Denis did that and we have proceeded to debate its meaning in a courteous an dprofessional manner.
After discussing this with my first mentor-a certified general appraiser for over 30 years, he only wants to know where and from whom some of you got your training.

Denis-your quote from the AI in my opinion is merely a list of acceptable methods that can be employed as part of the csa and does not include any the use of any or all of those methods in the context of or at the exclusion of another approach. It's merely a list without any context.

 

[hastalavista]

I believe that just because the quality and quantity of the data available is weaker than the available data from another approach does not give a professional a free pass to use the same data for both approaches and disguise it at a different approach.

(my bold)

Ahh... and therein lies the difference.
I don't distinguish how and why the market reacts the way it does by approach. I just try to distinguish how and why it reacts and adjust and support my adjustments based on those findings. :new_smile-l:

One might argue that this doesn't allow the professional a "free pass" to eliminate from consideration data because it doesn't fit a preconceived notion of what type of data can only be used for a particular approach. I think I'd rather make the best adjustment for the right reason then to make a second-best adjustment because the best adjustment's data is off-limits due to a value-approach-adjustment philosophy. :icon_wink:

But we can agree to disagree on this- that's why they make chocolate and vanilla!

 

[SANDY]

Denis-I hear ya.

Just wanted to say that in general-despite the fact that one may possess an extensive book knowledge and understanding of the principles and practices of any profession combined with excellent experience, that does not negate the error of one's mis-application of those principles even if many other mimmick that error!!

 

[CANative]

Sandy,

Sometimes, due to limited availability of sales of directly comparable properties or interests, techniques other than a simple matched pair analysis of sales is necessary. How can it be that a CG with 30 years doesn't understand this simple concept?

 

[hastalavista]

Denis-I hear ya.

Just wanted to say that in general-despite the fact that one may possess an extensive book knowledge and understanding of the principles and practices of any profession combined with excellent experience, that does not negate the error of one's mis-application of those principles even if many other mimmick that error!!

If you are saying that despite training and experience, one can incorrectly apply appraisal methodology, I won't argue with that.
And, even if many advocate a method, does that majority advocacy make the method correct? No, not by itself.

When it is all said and done, each individual appraiser needs to make their individual decision. Those decisions, if they are to be judged, however, will typically be judged based on some collective wisdom of their peers. So while I don't automatically march to the collective drumbeat, I certainly consider the collective wisdom of my peers (of which, I exclude myself as one of the wise! :laugh: ).

 

[SANDY]

Greg:
Thank you for your change in tone-now we can talk and I can learn. I can certainly understand and have experienced circumstances where the sca data is so limited that one cannot use it to produce a credible approach. But that is extremely rare and may actually be non-existant I'm not sure. The vast majority of the time though, such data is just somewhat limited and can only result in what one would call an inferior result compared to the data used in another approach. In my opinion, this does not absolve us from producing the results of that approach and that approach should preferably be developed utilizing different techniques than used in another approach. One of the main reasons for requiring these different approaches is that if done correctly and one of them yields a significantly different result, then it's a clue that something is likely wrong and should trigger re-analysis of the available data or at least another search to determine if something was missed in the initial effort. There is a specific reason that we are not allowed to casually dismiss any of the approaches to value. Check and balance. If one chooses to utilize the same technique for two or more approaches then its "danger Will Robinson"!!

 

[CANative]

Say your subject is a 4 unit property with two 2-bedroom units and two 1-bedroom units. But the only 4-unit comps you have are two with all 2 bedroom units and one with 1 2-bedroom unit and and three 1-bedroom units.

There's probably not enough information there to make supportable adjustments for the unit mix. What to do?

You could peform a rental survey to find out that 2 bedroom units rent for 700 and one bedroom units rent for 600. The incremental rent attributable to a 2nd bedroom is $100.

Rent per month $100
Gross income per year $1,200
5% vacancy -$60
Subtotal $1,140.
Less operating expenses and collection loss at 35% - $399 ($400)
Annual income for second bedroom $740
Capitalize at 8% = $9,250.

or say the GRM is 100. Then the indicator is $10,000 for the bedroom.

What's wrong or misleading with that?

(These are just made up numbers to illustrate the point.)

 

[SANDY]

Assuming your rental data is so good that it does not require adjustments for such things as long time renter currently at below market rent for one example and assuming that the comparables available are actually that limited, and assuming that you actually can find comparable rental data with no other value contributing differences that would account for differences in rent, then, no problem. But if your going to say that there are times when csa data is limited then you would have to also recognize that it is indeed rare when income related data is ever perfect either. Alternative may be to use adjusted older sales for matched pairs or adjusted sales in different locations.
I believe that Property was attemting to distribute the overall cummulative difference in his income approach value throughout the various line items in the sca. I don't really see how that could be done without making some assumptions albeit maybe they would informed assumptions but without the application of some other acceptable methods as part of the sca, they would be more like what Austin loves to call "voodoo" adjustments. One would likely arrive at or be able to back into a credible value in the sca but the methodology would not hold up. The only way out in the case where data was actually that scarce, would be regression analysis a-la Austin whereby the contributory value of individual components could be determined. Not convinced of that method completely either. One other way would be to fess up to the truth and state that the sca was developed due to a lack of reliable data, but I don't think that USPAP allows for us to take that road.

At the very least, in your example ,it would advisable to summarize the methodology used in the csa and make it clear that this method does not allow for determination of an individual component's value contribution unless market rent data was not available in such a form as to allow for individual component adjustments.
It's a little different when one throws out a scenario that is not real and that appears on its face to box one in. As I said before, it is highly unlikely to have such limited choices-there is nearly always an alternative, although in those cases the alternative may result in a weaker result.
To me it is similar to when some people say that there are some properties that just cannot be appraised-hogwash!!!

Bottom line-I can see that if your example were ever to be the case that your method would be acceptable as long as it was disclosed adequately to the client. No-one would want to get caught trying to convince anyone that a duck was actually a robin in disguise.

There are typically at least some flaws in rental and income data just like there is in the csa. The $100 difference in rent in your example may actually be better explained by the fact that the tenant was willing to pay $50 or even the full $100 more because it happens to be located closer to his job. Much like people pay more for a regular home because they like the kitchen wallpaper etc...Of course quantity of that data could overcome that one anamoly but we don't know that in your example.