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Income Approach-Small Residential Income 1025
- Thread starter redfish
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Dublin ohio
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Not necessarily dumb. But incomplete
Dublin ohio
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But I think I now what you are referring to. If you are speaking of developing an income approach to value. Market rents. Unless actual rents are close to market . Using actual can skew your results either high or low. We deal with market reaction.
George Hatch
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The reason you perform a rental survey is to develop an opinion of the market rents. The reason you want to develop that opinion of market rents is to compare it to the subject's contract rents, *if any*. The reason you want to make that comparison is to develop an opinion about how the typical market participants will react to the property's potential income; what their expectations are for operating the property going forward.
Sometimes these properties will sell with vacancies, or with non-market rents which will not fit the typical buyer's expectations and management style. Sometimes a seller or an agent or a borrower will actually lie about the contract rents in order to get a more favorable outcome in the appraisal. This is why the appraiser needs to know where lie the market rents. We are not doing rental surveys for the sole purpose of filling out an appraisal report form.
The main reason you would ignore the market rents in a GRM application would be if there were rent controls which limited a buyer's options for operating that property after the sale. Another reason would be (depending on what your state's laws allowed) if there are long term leases in effect that limited the potential income.
You're trying to figure out what your typical buyer's expectations are for the income going forward.
Sometimes these properties will sell with vacancies, or with non-market rents which will not fit the typical buyer's expectations and management style. Sometimes a seller or an agent or a borrower will actually lie about the contract rents in order to get a more favorable outcome in the appraisal. This is why the appraiser needs to know where lie the market rents. We are not doing rental surveys for the sole purpose of filling out an appraisal report form.
The main reason you would ignore the market rents in a GRM application would be if there were rent controls which limited a buyer's options for operating that property after the sale. Another reason would be (depending on what your state's laws allowed) if there are long term leases in effect that limited the potential income.
You're trying to figure out what your typical buyer's expectations are for the income going forward.
Fernando
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Rent control cities have kept prices for apt buildings from increasing as fast as non rent control cities nearby.
Also, it requires more work in explaining how the ordinances affect subject.
Our CA gov signed a state limit on how high rents can be increased for a limited time.
Also, it requires more work in explaining how the ordinances affect subject.
Our CA gov signed a state limit on how high rents can be increased for a limited time.
Tom4value
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Market rent.
You develop an opinion of market rent regardless of what the actual rent is, just like you develop an opinion of market rent regardless of what the contract price is.
“But Tom, in a truly arms length transaction, the contract price is at least influential in your final reconciliation.” True, and the same with actual rent. If I find that the market rent is generally close to the actual rent, I usually say that the actual rent is the same as the actual rent.
However, there are a couple of caveats
. 1. With units tied to a lease, the rent was determined at the signing, which many times could be almost a year old….could be a lot of changes in that year. Rents could have gone up or down in that time. Your opinion of market rent is based upon the effective date of the appraisal, not at the signing of the lease.
2. With tenant at will, the “textbook theory” is that the rent is always changing according to the market. You find that, right? Neither do I! Landlords find that there no such thing as a “ok” tenant. They are either a tenant from Hell or a fantastic tenant. If you have the latter, you will do anything you can to keep that tenant, even leaving a below market rent alone. That is why I find that tenant at will is generally below market rent.
You develop an opinion of market rent regardless of what the actual rent is, just like you develop an opinion of market rent regardless of what the contract price is.
“But Tom, in a truly arms length transaction, the contract price is at least influential in your final reconciliation.” True, and the same with actual rent. If I find that the market rent is generally close to the actual rent, I usually say that the actual rent is the same as the actual rent.
However, there are a couple of caveats
. 1. With units tied to a lease, the rent was determined at the signing, which many times could be almost a year old….could be a lot of changes in that year. Rents could have gone up or down in that time. Your opinion of market rent is based upon the effective date of the appraisal, not at the signing of the lease.
2. With tenant at will, the “textbook theory” is that the rent is always changing according to the market. You find that, right? Neither do I! Landlords find that there no such thing as a “ok” tenant. They are either a tenant from Hell or a fantastic tenant. If you have the latter, you will do anything you can to keep that tenant, even leaving a below market rent alone. That is why I find that tenant at will is generally below market rent.
Fernando
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The hard part is getting good comps.
My recent 1025 worked out beautifully.
My first two comps were nearby and had very close GRM.
On first try with my estimated GRM, value came same as sales comparison approach. Not often that happens.
My recent 1025 worked out beautifully.
My first two comps were nearby and had very close GRM.
On first try with my estimated GRM, value came same as sales comparison approach. Not often that happens.
sputnam
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If the assignment is to determine market value then, it should be market rent and your GRM should also be based on the market. Many appraisers make the market rent vs actual rent call based on the length of the leases that are in place. Short term... market rent. If the property has long term leases then, you could make a case that the case that the actual rent is going to be more reflective with what the prospective Buyer will actually do.... since the new owner will be stuck those leases until they expire, or the tenants move out.
Fernando
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Or you can argue long term tenants require less maintenance costs and low vacancy adjustment. Final reconciliation, appraiser can rationalize the appraised value.
sputnam
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You can argue that... but that isn't how the Gross Rent Multiplier method works. The differential in maintenance is built in to the multiplier that you are supposed to extract from similar properties. The fact is.. with a long term lease.. the new buyer is stuck with the rents... no matter what happens in the market... until the lease expires, or the tenant vacates.
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