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Income Approach For Single Family Residential

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aaron778

Freshman Member
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Dec 3, 2016
Professional Status
Banking/Mortgage Industry
State
Texas
Wanted to get some appraiser's feedback/opinions on the topic. I work in the banking industry and have been asked by an examiner why we did not place emphasis on the income approach for a single family residence. Appraiser did a sales, cost, and income approach (used GIM) in the appraisal and the income was much less than the sales and cost approaches. A little bit about the property. It is located in a resort beach town where many of the homes are 2nd homes/vacation homes. There are retirees and wealthy individuals that make their primary residence there but the split is about 60/40 maybe 65/35 2nd homes to primary residences. So people do rent them out while they do not occupy them. I guess I can understand the question and in this particular instance the property IS rented at non arms length to a related affiliate of the borrower (oral agreement only, no lease agreement, and no business is being conducted there). My rebuttal was I've seen that these properties seldom generate sufficient rents to pay the mortgage, insurance, taxes, maintenance, etc. The borrowers/owners have to pay out of pocket to support it. Nobody pays $10,000 a month 12 months out of the year to stay there. It's a seasonal rental. Also since this is a single family residence, an owner occupant would pay more to live in it than investor would to just rent it out. Haven't gotten a reply but wanted to see what other professional appraisers would be seeing. Maybe I missed something.
 

Terrel L. Shields

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Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
asked by an examiner why we did not place emphasis on the income approach for a single family residence.
New examiners? Income calculations tend to come in lower (imnsho) because the investor/landlord in SFR tends to be a bottom feeder, buy properties that's either below market or needs repairs, makes repairs then rents out. Either scenario leads to a lower GRM. And the same problem exists as you described. The landlord is not going to purchase a property that won't cash flow. And people aren't going to pay $10/K rents. There are times the IA can be rather misleading and the mere fact a property rents, doesn't make it a candidate for using IA as a given.
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
If it's a seasonal rental, does that also mean that the local jobs are seasonal?

Renters rent near where they work. If there aren't any year round jobs that will support a high rent, there won't be any annual renters, with the exception of HUD subsidized renters, but, HUD does not typically subsidize higher end properties as rentals.

.Seasonal rents may not be sufficient to cover 12 months of mortgage taxes and insurance, and many places are cracking down on short term rentals, like with AirBnB, flipkey and others. So If this is they type of rental that was in the mind of the regulator, the legality of such would have to be researched in each market area. You could however cite the recent lawsuits with New York City, AirBnB and others as an indication that such as practice is not reliable to project value beyond the effective date, as these are fairly new factors waiting on regulations to catch up.

.
 

aaron778

Freshman Member
Joined
Dec 3, 2016
Professional Status
Banking/Mortgage Industry
State
Texas
Jobs in the area are retail/hospitality. Not enough in wages to even think about renting these houses long term. Workers live out of the location and commute. The main reason to rent out these homes is for spring break, summers, maybe holidays. I'm chalking it up to an examiner seeing a commercial borrower and rents being produced and automatically thinking income approach.
 

Meandering

Elite Member
Joined
Feb 26, 2006
Professional Status
Real Estate Agent or Broker
State
Pennsylvania
And there is your answer to the regulator.

Don't fret too much about it. I'm seeing arm's length sales here that were being flipped into rentals within 45 days of purchase. It doesn't happen everywhere.

.
 

jay trotta

Elite Member
Joined
Feb 8, 2004
Professional Status
Certified Residential Appraiser
State
Connecticut
Wanted to get some appraiser's feedback/opinions on the topic. I work in the banking industry and have been asked by an examiner why we did not place emphasis on the income approach for a single family residence. Appraiser did a sales, cost, and income approach (used GIM) in the appraisal and the income was much less than the sales and cost approaches. A little bit about the property. It is located in a resort beach town where many of the homes are 2nd homes/vacation homes. There are retirees and wealthy individuals that make their primary residence there but the split is about 60/40 maybe 65/35 2nd homes to primary residences. So people do rent them out while they do not occupy them. I guess I can understand the question and in this particular instance the property IS rented at non arms length to a related affiliate of the borrower (oral agreement only, no lease agreement, and no business is being conducted there). My rebuttal was I've seen that these properties seldom generate sufficient rents to pay the mortgage, insurance, taxes, maintenance, etc. The borrowers/owners have to pay out of pocket to support it. Nobody pays $10,000 a month 12 months out of the year to stay there. It's a seasonal rental. Also since this is a single family residence, an owner occupant would pay more to live in it than investor would to just rent it out. Haven't gotten a reply but wanted to see what other professional appraisers would be seeing. Maybe I missed something.

It would appear the examiner, perhaps did not read your entire report or information; What kind of Income would be required @ $10,000/Mo ?
A "Seasonal Rental" is not a Rental Property, it is an offset vehicle for Taxes / Upkeep & Insurance, IMO

Lastly, does the "examiner" have or will he/she provide sound reasoning for placing "emphasis" on the income approach ??
 

KHS445

Member
Joined
Aug 20, 2011
Professional Status
Appraiser Trainee
State
Michigan
Having experienced somewhere north of 50 state and federal bank examinations in my previous life I have to wonder in part if the examiner is testing you and/or your bank policy. He/she may be seeing what sort of internal analyst your bank completes for each appraisal. For about my last 10 years in banking we would add a brief cover memo to each appraisal outlining our thoughts of the appraisal, the conclusions and why if there were some variations from our written policy we decided to make an exception.

Obviously I have not seen the appraisal in questions but I could imagine an attached memo stating that all three approaches to value were provided with the sales approach being selected as the primary support to value. The cost approach provides an estimate of value which in our opinion is not relevant in the current market. The income approach was completed based on seasonal rental income, which is limited to approximately 12 weeks per year with occasional off season weekend rental mixed in. Off season rentals are virtually non-existence within the subject market, especially at the seasonal rental rates. Thus, while the rental of the subject provides some seasonal income after deducting all legal expenses the income approach indicates a value significantly less than that developed by the cost and sales approach.

The Highest and Best Use analysis indicates that single family primary/secondary housing maximizes value and therefore the sales approach has been given primary weight in estimating the subject's current market value. Generally dwellings similar to the subject within this market area are purchased for use rather than income.
 

BRCJR

Elite Member
Gold Supporting Member
Joined
Sep 20, 2005
Professional Status
Licensed Appraiser
State
Virginia
The Appraiser, most likely, included an approach that was not necessary for credible results.
We, a lender, do not consider/weight the Income Approach to Value for SUR rental properties, unless they set the market.
We, virtually, stand in the street and ask, "why would someone purchase that property if we had to take it back?"
If for rental income we consider the Income Approach relevant. If owner occupancy we do not consider the Income Approach relevant.

Simply, what is the H&BU?
 

norapp

Member
Joined
Jul 11, 2016
Professional Status
Certified Residential Appraiser
State
New York
I live/work in an area where there is a large seasonal/summer rental community. I've been asked after appraising properties to do an operating income statement and rental analysis. I refuse and tell them had they disclosed this was needed at time of order I would have told them no. These homes are rented for only for a few weeks during the summer months. In winter everything is shut down. Lender/clients don't seem to understand that seasonal income properties do not fall under the same umbrella that a year round rental property does.
 

aaron778

Freshman Member
Joined
Dec 3, 2016
Professional Status
Banking/Mortgage Industry
State
Texas
Thanks all, appreciate the insight. We'll see how it turns, haven't heard back on it yet and the exit is coming up. Like you stated khs, I figured it was more to test our knowledge of appraisals but what was being asked for appeared irrelevant to ridiculous. It seemed they were really pressing towards the NOI route as if it were a commercial property. Also peeved they came up with a value all on their own as if they're licensed to do that.
 
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