Gross Income Multipliers

[Robert Anderson]

When I first began appraising, it was taught that the gross income multiplier was an application of the sales comparison approach. I believe the argument was that the GIM is a unit of comparison much like price per square foot. I reviewed some older publications in my appraisal library, and they seemed to take this position. However, I also checked the twelfth edition of "The Appraisal of Real Estate," and it discusses GIM's in the chapter dealing with direct capitalization. Is it now accepted that the GIM is an application of the income approach?

As an aside, it has occurred to me that this issue is not of critical importance and that the appraiser can call it whatever he wishes as long as the GIM is correctly employed. I was just curious what the current thinking is on this issue.

As a second aside, this issue came to mind in the appraisal of a small apartment building.

As a third aside, Fannie in the URAR calls the GIM an income approach to value, while Freddie in the 71B includes it under the "market approach." Neither of these fact would appear to be of significance.

Thanks,

Bob Anderson

 

[Randolph Kinney]

I have only done one 71B, a five unit rental. I do residential 1004, 1073 and 1025. My CG has retired so that's it for me too.

However, I would be interested in knowing and following this discussion.

 

[Terrel L. Shields]

I use GIMs in the Income App. I do not make adjustments in the Sales App using same. I do mostly owner occupied retail/office when forced to do commercial. Thus, income app is not particularly meaningful. The best you can do imho in those cases are to deal in generalities so to speak.

I do this comment when dealing with that situation

In many income producing properties, particularly those that are “close-held”, i.e.- owner-operated, parties to a transaction are generally coy or not forthcoming about either expense or income information. Gross Sales often may be estimated in towns with city sales taxes. This is particularly useful in towns with restaurant or hotel taxes. Income information about comparable sales are often unconfirmed, limited, or not reliable. If detailed data requirements cannot be met, but reliable transaction data and gross income data are available from comparable sales, a basic income approach can be performed by use of Gross Income Multipliers. Reliance upon posted rents from MLS listings or other sources of similar properties are the basis for estimating Gross Sales and/or rents for comparables. Due to the lack of available data, little can be expressed about most closed sales regarding rent expenses but taxes and insurance can be estimated

 

[H.B. Userman]

The GIM is part of both appraoches. The GIM is extracted from the sales used in the market approach (ideally). The GIM is then applied in the Income Appch.

I do not do form reports. In my narratives, I first complete the Market Appch, then the Income Appch. In my income approach, I grid out the sales once again showing nothing other than the basic info (address, city, etc.) and the income data (i.e. the extraction ofthe GIM). Then, the GIMs are reconciled and are applied to the subject's GI. In the market approach, I do not grid out the income data, this way the two approaches can be separated. Adjustments for income factors (cap rates, gims) in the market approach are, in my opinion, not necessary because the reason the comparables generate more or less income should be a result of a superior or inferior attribute that can be adjusted for on a line item (location, condition, quality, etc.)

I stay away from the GIMs if at all possible. GIMs are indicative of only the surface of investor thinking. Expenses are not taken into account in the GIM. Therefore, allowing for error if the sales from which the GIMs are derived have significant expense ratio differences that the subject.

Personally, I would use more detailed forms (if fact FNMA or FHLMC produce them) showing the extraction of overall cap rates and then appliing that rate to the subject's NOI after an income statement has been re-structured. Cap rates consider expenses, thus tell the whole story, rather than scratching the surface.

 

[Terrel L. Shields]

GIMs are indicative of only the surface of investor thinking.

Actually a lot of investors do think that way, and we are to replicate the market right? I used to know a landlord who told me he always set the monthly rent at 1% of the price he paid. $30,000 = $300/mo. Worked for him. He assumed that the expenses would be relatively similar.

 

[H.B. Userman]

Yeah, but in my experience when I was appraising residential, GIMs bounced all over the place when cap rates had less variance. I guess it really comes down to how good the comps are.

 

[Robert Anderson]

Thanks for the responses.

Gatlin - I generally agree with you about the use of GIM's and the greater accuracy of direct capitalization utilizing an overall capitalization rate. Right now, I am appraising a couple of 6-unit apartment buildings, and it is my experience that buyers and sellers of this type property are not very sophisticated and often rely on simple tools such as the GIM. So, I thought I would use a GIM in these appraisals.

Thanks again.

Bob Anderson

 

[Phil McDonald]

I also extract the GIM in the Sales Comparison approach and apply it in the Income Approach, just as with Cap Rates that are extracted from comparable sales and applied in the Income Approach. Of course, the GIM and Cap rate indications generated from comparable sales are not always the best comparable sales to be used in the Sales Comparison Approach. I think it is a broader perspective of analyzing all available market data and making appropriate applications to the subject property.

 

[H.B. Userman]

Thats a good point. When I appraised my first few multi-families, I felt the need to use the same sales for each approach. It wasn't until my fourth of fifth one when I realized that the just because properties are similar in physical attributes, doesn't mean they have similar income streams. For instance, there could be five very similar sales on the same block which would make for a great sales comparison, but if the leases are all different from the subjet's, sales that are not so good for direct comparison, but have similar lease structures (with similar reserves needed) may be the best sales to derive the income data from. The problem is the 1-4 family FNMA form doesn't allow appraisers to easily add alternative sales solely for income data extraction. Or maybe it does, once again, its been a while since I've used a form and I know fannie has been updating them. But either way, that should be considered.

[/QUOTE] I think it is a broader perspective of analyzing all available market data and making appropriate applications to the subject property.

Good point Phil

 

[H.B. Userman]

How do I do a quote?