Form 1025, Income Approach: Actual vs Market Rents

[John Hassler]

On the SCA grid both the actual and projected rents and GRM of the comps can be reported using your red/black method (I like “A” and “P”) provided it’s clear to the reader what you’re doing. If your SCA comps will be the source of the GRM used in the IA you can reconcile your reliance on the strength of rents of the comp sales there (ie, “low actual rents due to long term tenants per discussion with agent”).

Also consider using sales other than those in the SCA to develop a GRM. There no rule that you are limited to the sales used in your SCA. If all of your SCA comps were fully or partially vacant you may want to seek a sale or two that were fully rented At the time of sale. Or it may just strengthen your analysis to have additional GRM indicators.

 

[Dublin ohio]

The comparable rental grid in the 1025 is populated with rental comps that support you opinion of market rent for subject. It is that simple. No reason to use "market" rents in the comparable rental grid. Those rental comps may or may not be the same as your sales comps. The GRMs in the sales grid are usually all over the place in my market. As many sales have rents that haven't been raised to market or are sold with vacant units. My GRM analysis goes way beyond the sales I use in the grid.

 

[George Hatch]

(California specific) Statewide rent control limitations (AB1482) limit the amount of rent increase a landlord can charge to 10% a year for units which are older than 15yrs. So unless the contract rents are within 10% of the market rate you basically CAN'T compare them on the equivalent basis without using contract rents for the units which are tenant occupied and market rents for the units that are vacant or owner-occupied.

Example: 3-unit property where 1 unit is owner occupied, 1 unit is vacant, 1 unit is tenant occupied at 1/2 the market rent. You could project market rents for the vacant and owner's unit but you'd have to use the contract rent for the below market unit. That's all a prospective buyer could reasonably expect to get.

You would also want to extract your GRMs from properties with a similar mix of rents. If a comp has all-market level rents (or is vacant and can be filled with such tenants) then the GRM for that will be lower than the GRM that goes with a property where all the rents are low and for which it will take years of increased before they match the then-current market rate.

Apples to apples. Really, you want to go for red apples to red apples.
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Prior to AB1482, I used to use market rents for my subject and comps because a new buyer coming in could (and mostly did) expect to get them within the first year of ownership. That's not the case anymore.

 

[ZZGAMAZZ]

On the SCA grid both the actual and projected rents and GRM of the comps can be reported using your red/black method (I like “A” and “P”) provided it’s clear to the reader what you’re doing. If your SCA comps will be the source of the GRM used in the IA you can reconcile your reliance on the strength of rents of the comp sales there (ie, “low actual rents due to long term tenants per discussion with agent”).

Also consider using sales other than those in the SCA to develop a GRM. There no rule that you are limited to the sales used in your SCA. If all of your SCA comps were fully or partially vacant you may want to seek a sale or two that were fully rented At the time of sale. Or it may just strengthen your analysis to have additional GRM indicators.

JG recently mentioned that she uses different comps for the SCA and Rental grids. I always prefer to use more rather than fewer comps in general although multi's that sold recently often are most similar to the subject's physical improvements, and consequently the rental income.

 

[George Hatch]

There's no point in using the rents from a sales comp in a rental survey if they're not in line with the market rents. With that said, it's also not uncommon for a sale that had low rents at the time of sale to be showing a "for rent" sign when you drive the comp - so you can make a call and figure out what the landlord is asking for right now.

 

[ZZGAMAZZ]

There's no point in using the rents from a sales comp in a rental survey if they're not in line with the market rents. With that said, it's also not uncommon for a sale that had low rents at the time of sale to be showing a "for rent" sign when you drive the comp - so you can make a call and figure out what the landlord is asking for right now.

Would an appraiser with a market-based notion of market rent tend to report comps with vacant units so he/she can determine market rents in order to obtain the desired result?

 

[ZZGAMAZZ]

There's no point in using the rents from a sales comp in a rental survey if they're not in line with the market rents. With that said, it's also not uncommon for a sale that had low rents at the time of sale to be showing a "for rent" sign when you drive the comp - so you can make a call and figure out what the landlord is asking for right now.

Yea but.....

1) Why would we have that discussion if the appraiser must report actual rather than market rents?

2) Regarding the scenario of a potential comp with actual rents reported in the MLS property profile but a "For Rent" sign....the appraier would presume that the propery is vacant, reporting market rent?

3) I ask because the listing agent told me that two of three units were vacant because the previous, recent tenants would not given an opportunity to extend their leases that recently expired, so the buyer/investor would be able to set a fee as high and possible? That makes sense to me.

 

[George Hatch]

Yea but.....

1) Why would we have that discussion if the appraiser must report actual rather than market rents?

2) Regarding the scenario of a potential comp with actual rents reported in the MLS property profile but a "For Rent" sign....the appraier would presume that the propery is vacant, reporting market rent?

3) I ask because the listing agent told me that two of three units were vacant because the previous, recent tenants would not given an opportunity to extend their leases that recently expired, so the buyer/investor would be able to set a fee as high and possible? That makes sense to me.

These issues are specific to situations (like multi-family in California) where there are rent controls or other means by which rent increases are constrained. A few cities in the state have had their own rent controls for many years.

1 - Just because the rent increases are legally constrained doesn't render rent surveys irrelevant. Buyers are still going to work toward getting as much income as they can. Some properties will get sold with current market level rents or as vacant so they can get to market rents. Besides, we still need to understand how the subject's current rents relate to the market level rents.

2 - WRT comps, you would report the potential rents in effect as of the date of sale, not later on when considering their use as a comparable. The income at the date of sale was in the past. A current "for rent" sign when you drive it after the sale is the present.

3 - That's a common scenario, too. Again, the buyer's expectation will be that they'll be able to get the market level rent.

4a - Even when the rents are low, rent increases of 10% (or 5%+CPI) as proscribed by law can still usually be worked up to market rents during an investor's holding period. So don't be surprised if the 2-4s still all sell based on the sales comparison and not the income approach. That happens in some of the high demand areas.

 

[jay trotta]

Assignment is a conventional purchase of a 3-unit residential income property.

I populated the Income Approach grid with several comps, using actual rents if they are reported in MLS and if they appear to me to be current/appropriate; and I used market rent when the CRMLS listings reported both actual and market, with the numbers in black font [actual] and red font [red], describing that rationale in the IA addendum, as based upon the embedded Form instructions to:

" . . . support the opinion of the market rent for the subject properties."

Client condition is for me to change all market rents to actual rents (including some that are vacant).

I will do what I think is correct regardless of the client condition, but I am not sure that my interpretation of the instructions is accurate.

Peers, please advise.

From what you describe, it would appear you did not use/add the OIS to the report? Why Not ?

IMO-supporting the "Estimated Market Rents" via MLS or other sources, are "subject to" verification if possible. I doubt, any Owner is going to provide you with supportive documentation for their actual rental data. The OIS requires the; Owner/ UW/Lender to provide, add an opinion/estimated or factual data of Rental information.

 

[sputnam]

I assume that your assignment is to develop an opinion of market value. A potential buyer will be stuck with any existing leases and rents that are in place at the time of purchase. If you are dealing with a long term lease, and actual rents are below market then, consider using actual rents. If the remaining term of the lease is short... say 6 months or less... then go ahead and use market rents. Be sure to comment that actual rents for the subject are below (or above) market rents. You could, if you want to get into it, capitalize the rent loss between actual and market rents for the remaining period of the lease and apply that in your valuation.