Form 1025

[hastalavista]

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?

:laugh:
When you say "subject's GRM", how do you get that?
How do you verify (a) the market rents, and then (b) what is the multiplier you use?
What is the $rent you use and how do you get the number used to multiply the rents with?

We seem to be using the same terms but talking about different things?

 

[hastalavista]

I've known some appraisers who did this:

They take the subject's rents, and then divide their opinion of value by the rental amount and use that to conclude the GRM.

Is that what you are referring to?

 

[ZZGAMAZZ]

response

I was referring to the phrase "subject's GRM" from Post9, paragraph6 because I don't know what it means.

I typically determine the market rent from the collective results of the actual rents derived from comparable properties in the SCA and the RIA, prioritizing comparables with physical characteristics most similar to the subject, e.g., # of units, # of bedrooms, condition, etc.

I apply the subject's market rent rather than the actual rent, and the GRM as obtained from the process above, to determine the subject's market value via the rental income approach, although the process seems vaguely "circular" because both of the factors are obtained from the same data/comparbles, but without the dissimilar features, between the subject and each comparable, being calculated because the GRM that automatically calculates in the SCA is based upon the unadjusted sales price although I've always presumed that's how it should be . . . ergo my confusion and the reason I posted this thread.

 

[ZZGAMAZZ]

BTW, I don't use the subject's actual rents for anything. I describe what they are as requested by the form, but consider them to be virtually meaningless unless they happen to correspond to the market rent. An exception exists when the subject property is rent-controlled in a jurisdiction where the sale of the subject does not provide the buyer with the wherewithal to change the rent,

 

[hastalavista]

I was referring to the phrase "subject's GRM" from Post9, paragraph6 because I don't know what it means.

You mean this (bolded):

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.

(my bold)

My subject doesn't have a "GRM" until I reconcile one, right?
I don't typically rely only on the sales that are in the SCA for the GRM because (a) I don't think that is enough data (which is close to your concern; using the same data for two approaches, aka "inbreeding"), and (b) as a rule, it is rare when my closed sale comparables are all "market rent" properties (usually there are some vacancies or a unit was owner-occupied); when I have to estimate market rents for the comparables in the SCA, I'm really making a lot of assumptions that, if any one is incorrect, its going to have a large impact on my analysis.
Therefore, even though I have the GRMs that are derived from the SCA comps, I'll do a separate/independent analysis of a larger data set to conclude my GRM for the Income Approach. As a rule, the GRMs for the comps are consistent with the larger data set (usually, but it doesn't have to be that way... a rent control situation is an excellent example where there could be a big disparity).

There is no rule that says the GRMs have to match the SCA comparable GRMs. There is a rule that says the GRM estimate must be supported. I support my GRM estimate using a larger data set than the 3-4 closed sales I've used in the SCA.

So, if your concern is about using the same data twice; sales comparables to get a sales comparison approach value and a GRM for the income approach (and I think that is a valid concern... I have it too!), then an option is to use a larger data set to calculate the GRM range and reconcile a GRM factor for your income approach analysis. This is what I do.

But my bigger concern (or challenge) occurs when the closed sales in the grid don't have actual market rents when they closed. This was the main reason why I started to gather a larger data set and include it my reports: to support by market evidence my GRM estimate. Now, its become a habit.

:new_smile-l:

 

[sputnam]

You have rental comparables and you have sales comparables. Sometimes, they are the same comparables. When they aren't, the rental comparable section of the 1025 is used to support and report your opinion of the subject's market rental rate. The opinion of the appropriate GRM is extracted by considering sales or properties that were also rented at the time of sale. That's true whether it's the 1025 or the 1004 or any other appraisal form.

As Denis said, there are appraisers who 'create' GRMs by estimating the sales price of rented properties. I have also seen appraisers estimate the rental rate for sold properties. You won't find either 'creation' method in any text about using GRM analysis.

 

[ZZGAMAZZ]

Why does the client use the subject's market rental rate, if as the Forum advised me in the past, that opinion of value established by the GRM can't be prioritized among the 3 approaches?

If the opinion of value based on the rental rate is used to support the opinion established by the SCA, would it be concluded that--if the value from the rental rate differs substantially, say 20% or more from the SCA value--the appraiser's methodology is flawed in one or both of the approaches? I just completed a 1025 for the first time in quite awhile, and the SCA value of $245K is relative to the value based on the GRM, of $290K, which was based on actual rents of about 15 recently sold and currently listed and/or pending sale. That was the basis of one of my original questions, whether this property might be considered as a plum because the rental income potential exceeds the market value--from the prospective of a potential buyer as well as the perspective of the client/lender...

 

[hastalavista]

Why does the client use the subject's market rental rate, if as the Forum advised me in the past, that opinion of value established by the GRM can't be prioritized among the 3 approaches?

If the opinion of value based on the rental rate is used to support the opinion established by the SCA, would it be concluded that--if the value from the rental rate differs substantially, say 20% or more from the SCA value--the appraiser's methodology is flawed in one or both of the approaches? I just completed a 1025 for the first time in quite awhile, and the SCA value of $245K is relative to the value based on the GRM, of $290K, which was based on actual rents of about 15 recently sold and currently listed and/or pending sale. That was the basis of one of my original questions, whether this property might be considered as a plum because the rental income potential exceeds the market value--from the prospective of a potential buyer as well as the perspective of the client/lender ...

The procedure the appraiser used may be flawed.
Or, the data may be low quality.

In the ideal world, the best way analyze GRMs is not to just match the same "type" of property, but to match the same risk-type of property. Older properties with deferred maintenance will sell for less than old properties with no deferred maintenance.
Many times, pest reports for older 2-4s reveal necessary and needed Section I repairs: the renters may not care that the foundation is being eaten away, but knowledgeable investor will: As a consequence, the reported sale price is $40k less than what the investor actually pays (the sale price + an expenditure immediately after the purchase to cure the problem); a sale price that is $40k less than what was actually paid is going to have its GRM skewed to the upside.

In a rational market, where the investor is the primary buyer, they will evaluate the property based on its income potential (Principle of Anticipation) and what they think it will earn them in terms of rent. If all other things are equal, in this market, the indicated value in the SCA (Principle of Substitution) should be close to the indicated value of the IA (Principle of Anticipation).
If there is a significant disparity, then one, or a combination, of several things are likely:
A. There is a significant difference in the quality of data used for one approach vs. the other.
B. One (or both) of the approaches is flawed in its application (not identifying the correct elements of comparison and/or not adjusting based on a market-supported unit of comparison).
C. The comparable data doesn't match the subject (using the wrong GRMs, from dissimilar properties, or using the wrong comparables in the sales grid).

Or, as you ask (my bold):

That was the basis of one of my original questions, whether this property might be considered as a plum because the rental income potential exceeds the market value--from the prospective of a potential buyer as well as the perspective of the client/lender

this is a possibility, but an unlikely one for the reasons I've already stated: the SCA should closely match the IA, if this is an investor-driven buyer pool.

So, that is a question I didn't ask: Is the market you're analyzing predominantly an investor market, or are there owner-users also purchasing these properties?
If owner-users pay a premium over investors for one of these properties, then that price will be higher. If rents that were reported are used, then the GRM is going to be higher (but remember: the owner-user is going to evict one of the tenants and live in a unit him/herself. The IA is not the driving factor behind their purchase... use-utility is. This would not be a good comp, using the last reported market rents, to extract a GRM from because the sale price is skewed upward due to the buyer-type).

:new_smile-l:

 

[J Grant]

An investor, most likely buyer for these types of properties, is going to look at both. They want to know the rental income, to see if property makes sense to hold as investment income..As appraisers we can get our rental information from a number of sources...there are often a lack of closed recent sales with similar rental units as subject, so old sales are okay as long as rental info is relatively current (can look up rentals on MLS or signs in area), or current listings or expired/cancelled sold with tenant leases in place/rented.

That information goes into deriving the GRM. The lender wants to see sale prices of comparable unit properties, as well as the results of the income approach to see if the GRM income approach is close in range to the SCA.

The income and expense statement imo is a better indicator if this property is viable as an investment than the GRM. You can question development of a GRM a lot more than a negative or positive cash flow after expenses.

 

[J Grant]

Expired/cancelled listings are a good source of rentals as is the rental property section of MLS.