Income Approach-Small Residential Income 1025

[Fernando]

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.

Each property is unique with its own GRM. Some comps have vacant units. Some have market rents. Some have below market rents. Some are relative owned.
It's difficult to find most similar 2-4 unit building in same situation.
When I did recent 1025, the most difficult part was finding the best available limited comps sold recently. Appraiser has to look overall situation and do the best he/she can. Takes good knowledge of area and experience.

 

[sputnam]

Fernando... Please cite for us the part of USPAP that says... 'Appraisers don't have to do it correctly if it's difficult'.

 

[ZZGAMAZZ]

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.

F & Peers:

Do you advise the client in the report that the SCA and the IA are based upon market rents rather than actual rents (because the grids don't allow for both values).

How do you explain the two different values (SCA & IA) in the 1025 if the two are different?

Do you note that the value was based upon results of the SCA because lending standards require that protocol.

Because the appraisal isn't conducted under the units are under contract, how do results of the IA even come into play unless the contract includes an appraisal contingency?

Sooooo much about the 1025 that remain a mystery to me...

Thanks;

 

[ZZGAMAZZ]

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.

Doesn't a purchase allow the buyer to revise the leases however they wish to do so?

 

[Terrel L. Shields]

Doesn't a purchase allow the buyer to revise the leases however they wish to do so?

Except where rent controls are in place. The trade off is that raising rents will cause some to leave so you have the issue of updating and cleaning and the vacancy issue. I appraised an estate where the owners policy was not to ever raise you rents unless you got behind on paying them. She had some occupants that had been there 10 years or longer. But some buyers now are investors and will give the renters notice, update the apartments, then raise the rents. Last year most of the raised rents I saw were on the order of 15-20% increase.

 

[sputnam]

Doesn't a purchase allow the buyer to revise the leases however they wish to do so?

Usually not. The leases that are in place transfer and are binding on the new owner. Certainly, when the lease expires, the new owner can renegotiate the lease with the tenant or, find a new tenant.

 

[Terrel L. Shields]

The leases that are in place transfer

I can't think of a lease here over six months, so it is short term and most renters in below market properties are already on a month by month basis, so 60 days notice and out they go.

 

[sputnam]

I see longer leases regularly. Obviously, if it's a short term lease, then there is less impact.