Form 1025

[ZZGAMAZZ]

I was baffled by the form when I entered the industry; and now that I can provide the data that is required, I'm somewhat more confused/concerned.

If the GRM is derived from actual rents (that reflect market rent), properties that are actively listed, pending sale, or closed sale can be used as the basis of a collective GRM, from which the appraiser refines the range into a single GRM.

If so, why is the form comprised of a rental income section as well as a sales comparison analysis?

For a long time I developed a GRM from closed sales and added an entire section that I entitled "Tentative GRM" based on active listings and pending sales, but now I realize that the rental income from listings is as real as it is for properties recently sold, so I'm even more confused about the need for two distinct sections of the report.

I've taken classroom courses and on-line courses but nothing ever seems to actually address the form, per se, at least not in a context that I can translate into a functional approach to appraising multiple-unit residential income properties.

Granted, the Forum might opine that I totally misunderstand the essence of a multi assignment. If so, bring it on so I can improve...

 

[sputnam]

The rental income section is used to support the opinion of the subject's market rent that will subsequently be used in the GRM approach.

 

[Randolph Kinney]

Suppose you have a sale that was not rented at the time it sold. You can use the market rent section to assign what the rent would have been. You would disclose what you did and why.

 

[Peter LeQuire]

Suppose you have a sale that was not rented at the time it sold. You can use the market rent section to assign what the rent would have been. You would disclose what you did and why.

Absent an adequate number of sales that were rented at the time of sale, you may have to do this. But, the sale of a house that is rented implies a different set of buyer motivations that does the sale of a house that is not rented, particularly if it is to be occupied by the purchaser. One is buying its rental income stream or rental income potential: the other is acting on all those other mushy motivations about home, place to raise the kids, etc.

 

[ZZGAMAZZ]

Why does the GRM automatically calculate in the SCA but not the RIA?

Would the GRM be more meaningful if calculated from the adjusted sales price of comparable sales rather than the unadjusted, selling price?

Would an investor typically be interested in a property with a value from the income approach that significantly exceeds the value from the SCA?

Would a lender typically be interested to extend a loan to a property with a value from the income approach that significantly exceeds the value from the SCA, based upon the enhanced likelihood that the income stream will support the borrower's ability to repay the loan?

 

[hastalavista]

Why does the GRM automatically calculate in the SCA but not the RIA?

What is "RIA"?
Is it "Rental Income Analysis"?

 

[ZZGAMAZZ]

Yes I coined the phrase.

 

[CANative]

Rent multipliers, like capitalization rates, are just mathematical representations of what a buyer will pay for an ANTICIPATED revenue, not necessarily what the property was producing at the time of sale.

You're not going to get credible results from the mini-workup on the 1025 form. You need a lot more data and a lot more thought. The 1025 is just what you write your findings on when you're finished with the appraisal.

 

[hastalavista]

I guess one could break-down the IA in the 1025 to two parts:

The first part is developing an estimate of market rents for the subject. This is what I think you mean as the "RIA" (Rental Income Analysis).
For this, you can used closed sales, actives, pending comps. I will use asking prices from other sources as well (Craigslist, for example): depending on the rental market, some are more efficient than others; in San Francisco, for example, I find the rental market very efficient; when I say that, I mean that asking rent is pretty close to contract rent once the deal is signed.
So, the rental survey is designed to develop an opinion of market rents for the subject. This is used (typically) as the basis for the GRM calculation (GRM x Market Rents).

The GRM analysis may have little (if anything) to do with the same comparables used to develop the opinion of market rent.
In the ideal world, the sold comparables used in the SCA would all be rented at or near market, and one could use the reported rents from these sales to develop a market-based GRM.
In my "real" world, I find that many times this isn't the case (for various reasons... rental control, some units are vacant, etc., etc.). For vacant or owner-occupied units of the sales comparables, the argument is one can use market rents to get an "estimated" monthly rent and then use that to calculate a GRM for that comp.
Yeah, one can do that, but there is a lot of assumptions-on-assumptions using that method.

I prefer to supplement the SCA comparables by going to the market and finding similar-type 2-4's that have sold relatively recently with reported rents that are close to market and use those sales to analyze a GRM that I haven't used in the SCA. If I'm lucky, I may capture 8-20 sales (20 would be very lucky). I try to match "like for like"; in other words, I'd compare 2-units to 2-units, and 3- and 4-units collectively. In my market, comparing a 2-unit to a 3- or 4-unit for GRM analysis is not a good idea.

The long and the short of it is I'll have a GRM range using verified, closed sales; my sales comparables may or may not have actual rents; if so, they'll be in my larger data group of GRMs; if not, they won't be.
I'll reconcile my subject's GRM based on the indicated range of the data; it typically is consistent with the actual and actual + estimated rents I've had to use for the comparables in the SCA.

Voilà!

(I'll include the GRM survey in the addendum; I use an excel sheet to do this analysis, so I'll insert the tables into a word doc, PDFs that, and insert that into an addendum page in the report).

I may calculate the GRMs of pendings and actives, but depending on the market, that may or may not be a good indicator (in many of my markets, sale prices are in excess of list prices, so using the list price distorts the GRM indication).

Anyway, that's how I do it.

 

[ZZGAMAZZ]

You mentioned reconciliation between the subject's GRM with the market GRM; but I don't understand why you would do that.

Do you calculate the "subject's GRM" from the subject's actual rental income, or are you referring to the market-extracted GRM?

That issue notwithstanding, are the actual subject rents or any consequence relative to the GRM extracted from the market?