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For Duplex Comps Is Grm Based On Contract Or Market Rents

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NachoPerito

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Washington
Wondering the opinion out there.

Often the duplex sales comps have rents that are 20% under market.

Say you determine the subject market rents are $1200 per unit, but the contract rents on your comps are at $1000 per month.

Do you make sure the GRM for each comp is based on market rent to compare apples to apples?
 

gregb

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Wondering the opinion out there.

Often the duplex sales comps have rents that are 20% under market.

Say you determine the subject market rents are $1200 per unit, but the contract rents on your comps are at $1000 per month.

Do you make sure the GRM for each comp is based on market rent to compare apples to apples?

If I am using market rent for the subject, then it's wise to use market or proforma rent for the comparables.
 

Michael S

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New Mexico
I'd try to determine it both ways and see which one the market is using. If most of the comparables are similarly below market then you should see some consistency either way. Like extracting cap rates though, the most important thing is an apples to apples comparison with your subject. If you're using contract rent that's below market but extracting a GRM or cap rate from market rents you will obviously be way off.
 

Michigan CG

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I am of the opinion that many buyers of duplex properties are not as educated (or is sophisticated the right word) as others involved in real estate. The actual rent GRM tells us the motivation of the buyer.
 

reviewbe

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What they said.

There's all kinds of ways to do this stuff. Really just have to be clear on what you are doing and explain adjustments and that kind of thing. What you shouldn't do is use actual rents for your subject GRM (if actual rents aren't at market), while estimating that GRM based on market rents.

Think of this; what if the tenant was the sister of the owners sons wife, and was living there rent-free due to family connections? Would you use actual rent ($0) or market rent? Would a buyer continue the same below-market rent to the sellers sons wifes sister? What if the comp you use to generate a GRM had the owners sons wifes sister?

You are supposed to reconcile actual rents to market rents, and explain any differences. If not at market rent, there pretty much has to be a reason why not. You have to figure out why not and what the resulting influence on value is.

Most often, 1-4 units are rented monthly, so easy for the buyer to raise rents to market or kick out the old tenant and get one that pays market rent. So in terms of value, actual rents may not matter, if they can be brought to market rents within a short time. Report actual, say why they are low, and why market rents are better for estimating value. Turn it in and get paid. Move on to the next one.

BUT, what if the unit is leased and the new owner is stuck with low rent for another couple of years? Or if you have rent control so the below market rent can't be increased to market until that tenant moves out? In these cases, and others like them, you have some explaining to do, because a buyer will likely discount the price paid for the property to reflect the lower rental income until rents can be increased. Your GRM ought to be based on similar rent-controlled properties too. Lots of work here, make sure to charge accordingly.

And, in your example, if all duplexes are 20% below market rent, isn't that the market rent for duplexes?

I'm talking about appraising here, not filling out the form. Conceptually similar, though.

On a semi-related matter, one common mistake residential appraisers make with 1-4 unit appraisals is filling in the value from the sales approach, and then using the GRM that the form spits out at you as your GRM. In other words, the form calculates the GRM from your opined value in the sales approach. Not surprisingly, you get very consistent results from both the GRM and the sales approach. But you'll regret it when you make an error in the sales approach and can't see that it is a error since the GRM gives you the same value.

More than what you wanted, sorry, I'm at work.
 

NachoPerito

Senior Member
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Jul 25, 2012
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Certified General Appraiser
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Washington
What they said.

And, in your example, if all duplexes are 20% below market rent, isn't that the market rent for duplexes?
.

I was simplifying for the example, but it is common here for owners to lag behind market rent by 10% to 30% and only get back to market upon vacancy. We have had increases of 8% per year in rents so too hard to stay up.
 

Howard Klahr

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Oct 4, 2004
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Certified General Appraiser
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Florida
Do you make sure the GRM for each comp is based on market rent to compare apples to apples?
What are the buyers doing in their evaluation for purchasing the units. Appraisals are supposed to "mirror" the actions of the market participants. All part of the conformation process.
 

J Grant

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Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
Wondering the opinion out there.

Often the duplex sales comps have rents that are 20% under market.

Say you determine the subject market rents are $1200 per unit, but the contract rents on your comps are at $1000 per month.

Do you make sure the GRM for each comp is based on market rent to compare apples to apples?

How do you determine market rents are $1200 per unit , if the duplex comps pay $1000 per unit? What duplex units are the market rents based on?

Perhaps it is a question of what kind of tenants rent duplexes in an area, resulting in why a number of owners are keeping rents lower , to hold on to better tenants rather than raise rents and risk getting less stable tenants. Some renters who sign up for a higher dollar lease may stop paying, then owner eats the loss. Is it a question of many area duplex owners not raising rents in order to keep long term tenants in place, or just this particular set of comps.
 
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NachoPerito

Senior Member
Joined
Jul 25, 2012
Professional Status
Certified General Appraiser
State
Washington
How do you determine market rents are $1200 per unit , if the duplex comps pay $1000 per unit? What duplex units are the market rents based on?

Perhaps it is a question of what kind of tenants rent duplexes in an area, resulting in why a number of owners are keeping rents lower , to hold on to better tenants rather than raise rents and risk getting less stable tenants. Some renters who sign up for a higher dollar lease may stop paying, then owner eats the loss. Is it a question of many area duplex owners not raising rents in order to keep long term tenants in place, or just this particular set of comps.

New signed leases from craigslist and our MLS site show $1200.
 

gregb

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Sep 3, 2011
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California
The reason to use market rents for the comps is to reflect any change in market conditions (vacancy and rental rates) with a decline in rental rates as important to recognize as an increase in rents. While we have not seen large local company layoffs recently, they have been known to occur.
 
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