Form 1025, Income Approach: Actual vs Market Rents

[ZZGAMAZZ]

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.

Two of 3 units are being transferred vacant, with 1 unit leased.

 

[George Hatch]

Two of 3 units are being transferred vacant, with 1 unit leased.

2 @ market rents, 1@ contract rents. Simple.

Try to reconcile your GRMs to the mixed rent. Not that it matters in this assignment. In this region the SC is the dominant approach for 3un properties. Not the IA.

 

[sputnam]

Two of 3 units are being transferred vacant, with 1 unit leased.

In that case, I'd use market rent.

 

[ZZGAMAZZ]

In that case, I'd use market rent.

Wait: for the subject or for the comps? BTW I never thought much previously about the income potential inherent in selling units vacant. Woudn't that be a powerful factor that affecs the selling price?

 

[ZZGAMAZZ]

2 @ market rents, 1@ contract rents. Simple.

Try to reconcile your GRMs to the mixed rent. Not that it matters in this assignment. In this region the SC is the dominant approach for 3un properties. Not the IA.

Probably correct but rental rates are the primary factor affecting supply and also demand.

 

[ZZGAMAZZ]

2 @ market rents, 1@ contract rents. Simple.

Try to reconcile your GRMs to the mixed rent. Not that it matters in this assignment. In this region the SC is the dominant approach for 3un properties. Not the IA.

I apologize in advance but please explain your first sentence.

 

[sputnam]

Wait: for the subject or for the comps? BTW I never thought much previously about the income potential inherent in selling units vacant. Woudn't that be a powerful factor that affecs the selling price?

You are trying to determine market value. In your Income Approach (whatever method you use) you capitalize the subject's market rent. Your opinion of the subject's market rent is developed by analyzing the actual rents of comparable properties within the subject's market.

 

[ZZGAMAZZ]

You are trying to determine market value. In your Income Approach (whatever method you use) you capitalize the subject's market rent. Your opinion of the subject's market rent is developed by analyzing the actual rents of comparable properties within the subject's market.

Great explanation appreciated. If enough comps arent available (like in the majority of regional markets), the IA Includes some with either vacant units or units with longer term tenants that pay below market (any existing lease more than half way through the 1 year term), reflected by MLS rents that describe actual and also market values, to report and to use actual as basis of subjects market rents would appear to lower/decrease it artificially. (Or not???)

 

[alebrewer]

Agreed. Aside from your specific situation with your client, it's the reconciliation section that should help your reader understand how you analyzed the comparable rents (whether actual, market, or a mix of both) in reconciling an estimate of market rent for the subject property.

 

[J Grant]

MLS reports the actual rents of units (if they don't, it sis misleading) Atents might comment on the listing that it is rented for below market, or the rent should be $X, but they list the actual rents. Actual rents for the comps ARE market rents.

An opinion of the estimate of market rent is derived from analyzing actual rents at prevailing terms and reconciling them or averaging them (however one arrives at it )

The actual rent of a subject unit or units are called contract rents. We report contract rents, whether above or below market ( and explain reasons ) and also, if the unit is vacant, obviously there is no rent being collected. UW and reviewers want to see market rents used for the subject regardless of what the contract rents are. If the contract rents are the same as/equivalent to market rents, then the market rent is still used, but explain it is found to be the same as or equivalent to the actual contract rents of the subject.

Special case scenarios can differ of course. If an entire area or region is affected by rent control or other rent stabilizing/similar programs,, then explain that is part of the actual /market rents.