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Development of GRM

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redfish

Senior Member
Joined
Sep 2, 2007
Professional Status
Certified Residential Appraiser
State
Michigan
In office discussion involves the development of a GRM in a market area that is REO driven. REO sales of competing properties in the last 6 months in the subject market area exceeds 90% of all sales volumes. Current market rent has been established with ease and good data. Historic GRM in the market area is 80-90(2005-2006). Market rent has experinced a slight increase in the last 2 years.

Current market participants are not considering reversion in the buying decision. Flipping of properties is not common. GRM has slipped to 35-40 with no noticable change in market rent. Average sales prices have fallen nearly 65% in the last 2 quarters as compared to the last half of 2007(for competing properties). The income potential has not gone down for these properties and rental demand is increasing.

Participants are paying well below market for the potential income stream due to the significant inventories of REO/short sale listings.

The question is how to reconcile GRM in an REO driven market with no significant decline in market rent (or vacancy/loss rates).

If any of this makes sense, its getting late, please join the discussion.

Oh yeah, this is a SFR analysis.
 

Elliott

Elite Member
Joined
Apr 23, 2002
Professional Status
Certified General Appraiser
State
Oregon
redfish said, The income potential has not gone down for these properties..

Sounds like rent is holding up, cause there is still sufficient demand for rentals.
It all sounds appropriate. I've always thought the GRM/Income Approach was just
chasing the Market Approach. Its always hard to make sense out of it, if that's
all your trying to look at. Who cares about what 'historic grms' use to be, we've just
had a trillion dollar adjustment in the mortgage market and many times that in
many real estate markets?
 

redfish

Senior Member
Joined
Sep 2, 2007
Professional Status
Certified Residential Appraiser
State
Michigan
I know the income approach chases the market approach. The potential income has not changed. Is the investor inelasticity to the anticipated reversion and extended or shortened holding periods really accounting for a 60% decrease in GRM. The two approaches have to be mutually exclusive...right.
 

timd354

Elite Member
Joined
Jan 11, 2008
Professional Status
Certified Residential Appraiser
State
Maryland
I know the income approach chases the market approach. The potential income has not changed. Is the investor inelasticity to the anticipated reversion and extended or shortened holding periods really accounting for a 60% decrease in GRM. The two approaches have to be mutually exclusive...right.

I don't know about your area, but the huge decrease in GRM's in my area is just a reflection that investors are actually starting to care about things like rents, cash flow, GRM, etc. Things in my area got so out of control (I appraise in the Washington, DC area) that investors did not even care about the GRM for a few years....they figured that they would take a rent loss and make up for it with the 25-30% annual price appreciation that was going on here for 3-4 years. In DC during the boom times, I appraised many 1-4 unit rental properties where the typical GRM's were $150-200 in many areas. I went for a period of over 2 years where every Operating Income Statement I did for rental properties showed a significant negative cash flow......the sad part is, nobody even cared, not the buyers, not the lenders who financed 95-100% of the purchase price of the properties....as long as things were increasing 25-30% year.....then, as we all know, the merry-go-round stopped and now people have to actually care about silly things like rents, cash-flow, and GRM's when it comes to rental properties.....what a concept!!!!
 

redfish

Senior Member
Joined
Sep 2, 2007
Professional Status
Certified Residential Appraiser
State
Michigan
Thanks, I was having a hard time explaining this to a lics. appraiser I have been mentoring for the Cert level. Now I have the same explanation from someone else to show him. Butting heads is fun when an outside observer can help settle the agrument with market data from another area that coincides with what he was finding.
 

rcsone

Senior Member
Joined
May 26, 2007
Professional Status
Certified Residential Appraiser
State
Oklahoma
.......financing is the King and Queen of Commerce followed with the eldest heir, Value............always wondered at the difference between "financed" and "cash" worth of almost everything.......but I know it can be of significance.......
best to all....rs
 

Mztk1

Senior Member
Joined
Dec 3, 2006
Professional Status
Certified Residential Appraiser
State
Florida
I don't have enough data in front of me, but if it is anything like my area (which is sounds as though it is) the houses at the market peak were not selling for their income potential so the GRMs at that time had no bearing on market value. In short, you couldn't buy a house with 20% down and have the rent pay the mortgage.

I'd still say that until the investors/buyers are purchasing for the sake of earning rental income, you still have an income approach that has little significance. A GRM that is not being followed in the marketplace is purely acedemic. Perhaps now that rents are being able to pay the mortgage the income stream will be looked at more closely by the typical buyer and GRMs will become more meaningful.

I'd simply keep my nose close to the market and when that happens know I can begin analyzing the data in that way more closing, using the most recently closed sales to develope the GRM. I guess once you know there is a positive cash flow in the market and the market knows it is there, the bottom has been reached or isn't far off.
 

CANative

Elite Member
Joined
Jun 18, 2003
Professional Status
Retired Appraiser
State
California
Money is tighter and harder to get, loan terms kind of suck, risk is up, REO's usually have condition problems the cost of which has to be factored in, rents are up because former homeowners are now, or soon will be, renters.
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
I'd still say that until the investors/buyers are purchasing for the sake of earning rental income, you still have an income approach that has little significance. A GRM that is not being followed in the marketplace is purely acedemic.
Good point. In the early 90's many older houses were being purchased for GRMs of 60 - 100 in my area. That would cash flow. Today, few rentals are expected to cash flow without a revisionary value tacked on the end of a DCF. But these speculators were intent upon flipping homes and not taking the risk of renting. Thus, the GRM became pretty meaningless after 2000 - many vacant homes were never offered for rents and a high percentage of them in my market that were were, lease-purchase. You had 2 years to rent, and if you bought it, they would discount the rents towards payment of the property.
 

PropertyEconomics

Elite Member
Joined
Jun 19, 2007
Professional Status
Certified General Appraiser
State
New Mexico
GRMs are driven by sales price AND rent. If one or both changes significantly there is no way that the GRM wont change significantly. One way to look at it, under current market conditions, the value of an income stream and dropped significantly, ie sales prices have declined while rent has remained steady. Investors are demanding significantly higher returns because of the increased risk associated with the investment. While on the face it may be difficult to explain to someone you are mentoring, it makes perfect sense when put in the light of investments and risk.
 
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