Differences in Sales and Income Approaches

[Steve Owen]

The reason for the divergence is that buyers of certain properties have way too much money!

If that is true, then they are the ones setting the prices and it follows that they are the ones setting market value. I would have no problem with doing what you propose... the speculators are part of the market and may be driving prices in this segment of the market.

However, some caution is in order. First, as mentioned previously, you should not try to "force" other approaches. Secondly, if your client is a lender, then they are going to want to be more cautious than the typical speculator (if they are smart). So, spell out what you have talked about here when you write your report... set your opinion of market value as you believe it is correct, if most weight is on Sales Comparison, so be it. The client will then have the option of lowering what they will do based on other information in the report.

BTW, David... what is "commercial boot camp?"

 

[The Warrior Monk]

BTW, David... what is "commercial boot camp?"

That's my way of saying that I'm going gung ho to get my commercial experience credits. It's eating up a tremendous amount of my time because of the learning curve...but it's still worth it.

 

[Steve Owen]

Cool

 

[KenRossman]

Just saw this...

My take - I do a fair amount of small potatos commercial and industrial on Long Island: owner occupants who buy primarily for location, utility and amenities are not particularly concerned with potential income capability. Many if not most potential owner occupants of such properties do not adequately consider future maintenance, reserve, management, vacancy-credit loss and often under state other operating expenses in their pro-formas, etc. It is not unusual in these primarily owner occupied small commercial or industrial properties for the value found by the income approach to fall well short of the value found by direct sales comparison. More often than not the income approach is an exercise in futility.

my 2 cts...

 

[C. Kevin Bokoske MAI]

A few years back I analyzed all warehouse sales in the Memphis, TN market over a 2-year period. There were 100s of sales, ranging from 10,000 s/f to over 1,000,000 s/f, as this is a major distribution center. I found patterns where a newer, 200,000 s/f, tilt-up, 30 ft high, 2-4% office build-out, warehouse would have the indicated values from the 3 approaches in an extremely tight range. More often that not, these were owned by REITs or 3rd part logistical companies.

Now, move to the 10,000 s/f, prefab metal warehouse, 20 years old. These were typically owner-occupied, and the value indicated via the sales comparison approach was invariablely 25% to 35% higher than the value indicated by the income cap approach. It was not a matter of tenant FF&E, as one of the other posters said. It was simply that the buyers wanted their businesses located in this area, the occupancy cost was a relatively small part of their overall business costs, and it was not a bad investment vehicle at the same time.

I think the original poster was correct in saying that we just have to recognize these events; we, as appraisers, do not have to struggle with them. In my study, these properties, although you could find some rentals, were not usually purchased by income-seeking individuals; they were purchased by users.