Final Reconciliation - Triplex

[J Grant]

The sales prices are the best indicator of MV for these properties, since the MV definition references the most probable price a buyer would pay. The fact is, no matter how much a buyer cares about income, what they are willing to pay to get that income is seen in the sales price of the properties.

 

[NachoPerito]

The problem is in your reconciliation section. "Because it's an income property" is not an adequate explanation. Talk about the quality and quantity of the data analyzed.

This is true. You have to have good quality data. In my experience, if buyer's are looking at income and you are able to track down this information then the vast majority of the time there will be better conformity in your conclusions via the income approach.

 

[NachoPerito]

J Grant said: ↑
The sales prices are the best indicator of MV for these properties, since the MV definition references the most probable price a buyer would pay. The fact is, no matter how much a buyer cares about income, what they are willing to pay to get that income is seen in the sales price of the properties.

I disagree with this.

edit: changed content

 

[Mike Kennedy]

Was the Income based on estimated market rents or confirmed truly competitive/comparable rentals?

 

[glenn walker]

That's all great until Big Bank gets a loan buy back from Fannie or Freddie and guess who they come after **the appraiser. First of all in California many 2-4 units rents don't cover costs and many new owners have no idea of how hard the tenants are on these properties. I know first hand we manage quite a few of these properties. The other issue is in California it's very hard to evict tenants and 1 vacancy can kill your yearly cash flow. Like I stated the reason the 1-4 get favorable financing is because they are considered residential and can be purchased with 20% down versus 30% or more on 5 or more units. I have no disagreement with anyone except it's the basic rule of reconciliation on 1-4 units at least for the last 30 years I have been doing this and I have done a lot of reviews for Fannie and major banks. The underwriting guidelines clearly state the 1-4 reconciliation have the most weight placed on the sales comparison approach with support from the income approach. If the appraiser wants to fight with the reviewer he can but the lender will probably have to order another appraisal from another appraiser so they can have a marketable loan.

 

[NachoPerito]

Yes for the most part investors are buying duplex/triplex/fourplex properties for income. However, what they are willing to pay is seen in the PRICES of these properties, no matter if income approach supports a higher or lower figure. Whether we agree or not, res lending , (of which financing 1-4 units is part of, ) wants to see SALES prices more than income . This is because their interest is in the property as collateral they may have to sell one day rather than how much it generates from rents, since lenders are not in the property rental business.

A lender is our client, not the investor buyer. To an investor buyer, the income might be more important. To a lender, the sales prices are more important. The lender may have to sell the property one day in case of a default and they won't be renting out as an owner. That is why they want more reliance on the sales comparison approach.

The client wants market value. Market value doesn't depend on the client. The client is irrelevant.

 

[Michigan CG]

I have my eye on a couple houses in a certain neighborhood that are getting $750/month rent. The homes in the neighborhood are selling for $25,000-$30,000 (that is not a typo). If I go to a different neighborhood I can get the same rent but the houses are in the $80,000 range. I would be more than willing to pay $40,000 for those two houses in the inferior neighborhood and make the same income.

 

[J Grant]

Client meaningful intended use, and clients can determine assignment condition. With res lending, when the certs say most reliance on sales comparison approach, that is an assignment condition, appraiser is free to reject assignment if they disagree and feel they can't derive an opinion of market value based on the assignment condition.

 

[J Grant]

I have my eye on a couple houses in a certain neighborhood that are getting $750/month rent. The homes in the neighborhood are selling for $25,000-$30,000 (that is not a typo). If I go to a different neighborhood I can get the same rent but the houses are in the $80,000 range. I would be more than willing to pay $40,000 for those two houses in the inferior neighborhood and make the same income.

Then you would be a typical buyer for the inf neighborhood house cheaper price , since income is driving your decision. The buyer for higher sale price neighborhood would be a different typically motivated buyer...other factors besides income is driving their decision. Perhaps they are an owner occupant , and even if they are an investor, perhaps experience has shown them that owning a rental property in an inferior neighborhood has accompanying problems. Or they believe the higher price neighborhood is a better choice for appreciation and resale one day.

An appraiser has to be able to identify the typically motivated buyer for a property type and area.

 

[NachoPerito]

Client meaningful intended use, and clients can determine assignment condition. With res lending, when the certs say most reliance on sales comparison approach, that is an assignment condition, appraiser is free to reject assignment if they disagree and feel they can't derive an opinion of market value based on the assignment condition.

A client telling me how much weight to give a certain approach in going too far.