Income Approach

[Brian L. Stone]

I am doing my first appraisal where the LO has asked for the income approach on the 1004. In all my previous appraisals it was not necessary to use this approach as it was not needed to provide credible results.
My data sources (MLS, NDC) do not show me which homes in the neighborhood are rentals. My question is, where do I get the information that tells me how many, and which homes are rentals, and how much the rent is? so that I can determine a GRM.

 

[Lee Lansford]

Brian, while I can not provide you with the sources for the data that you request, keep in mind that you can state (if applicable) that the Income Approach is developed and communicated solely at the request of the client.

Further, that the approach is not applicable (note: cite the reasoning) and that absolutely no weighting (fyi: I assume that this might be your thought) is given to it in arriving at the opinion of market value.

Have fun.

Lee

 

[Steve Wyrick]

Brian, first off please update your profile to show where you are at it can help a little in answering this type of question.

Why is the LO asking for the income approach?

Did the LO request the income approach at the time he/she made the order or was this after the fact. If they made the request upfront you should have significantly adjusted your fee upward to include a rental survey form and Income/Expense form typically I charge $75/form over my normal fee of $400 for each of these forms, does not cover the time required to investigate and obtain information but it at least is something. If the request comes in after the fact (the report has benn submitted) then the fee is $150/form.

Typically what the LO's are looking for when they need the income approach, wtih rent survey and income/expense is "Does the market rent less expenses cover the payment". If not then they will loan less or the deal is dead. They are strictly looking at the income generated to be the primary income source of repayment. Whereas in an owner occupied home they look to the income from client work as the source of repayment. Hope I made sense of that for you.

Sounds like you need to do some talking to your LO to find out why they want the income approach.

Now, as to where to find and develope the data, much of that is going to depend on your local. If your local MLS does not have information on rentals then it time for the old fashion way or developing comparables, personal contacts and shoe leather. Check your yellow pages for property managers visit with them to find similar physical homes that they are renting. Check the local for rents in the newspaper. Drive the neighborhood looking for "For Rent" signs and call about them. Talk to other more experienced appraisers in your area they may have some rental comps or tell you who to talk to.

As for the income/expense form, request the past 3 years of tax records from the borrower that shows the income and expense. If they use a property manager then there should be an annual itemized statement from the property manage and of obviously they will be your best source of rental comparables.

Last question, are you a trainee. If so you need to be talking seriously with your mentor, and if they cannot help you find a new mentor. I cannot believe that any appraiser would have gotten through the training with a good mentor where the use, and whys and how to do a rental survey and income/expense form was not completely taught. Typically for my trainees that comes at about 1/2 way through their training cycle.

Good luck hope some of this helps you.


To given you some insight primarily in owner/occupied single family residential the income approach as you state typically is not required to be produce a creditable report since the market

 

[TEL2002]

STeve's shoe leather is where it is at. Also add the newspaper. I have always been able to find ads under houses for rent. Call them up, pretend you want to rent and get the details (address, room count, monthly rent, etc.) Once you have the details, look the addresses up in the MLS, you might an old listing for the property...so now you even have a good idea what the house looks like. I always drive my rental comps & take pictures...I feel safer that way. Get enough of these and you have the data straight from the horse's (landlord) mouth. Also check out the HUD rent schedule for your area, this will give generic info. If it is a high end house and you can not find any rental comps, start calling around to RE Brokers that manage property. I'll bet some of them have rentals they will tell you about.

 

[DTB]

Getting the rental data and rental comparables is the esya, albeit time consuming , part of the equation.

Until you have some SALES that were rented at the time of sale and remained rentals, you've got nothing to establish an income approach on.

Rental data is just rental data until linked with similar sales.

 

[xm72mhd]

Until you have some SALES that were rented at the time of sale and remained rentals, you've got nothing to establish an income approach on.

Right on.

And that may relegate this request to the definite "not applicable" category. Sounds to me like you have client that is not tuned in unless you are completing an appraisal on a house that is or will be rented. Is this house tenant occupied?

Better get some local experienced help.

 

[Ray Miller]

Steve and TE are hitting the nail on the head.

Where to find the information is the question?

I stop by and my staff stops by any store, barber shop, laundrymat that has a board to post things on in a neighborhood, you can always find place for rent. We pull rental papers that a lot of towns have. With this informaiton in hand we call the people who advertise and tell them what we are up to. We also contact rental management services. We update this information every quarter. If it is ag ground we are in contact with the state and federal ag people over cash rents in an area.

Appraisal is more then just filling out a form and going to MLS for informaiton. You need to develop a data base for this kind of inforamtion.

I have two files now that I billed out as incomplete. Simple fact I requested from the borrower the P/L, Cash flow sheets, sinking funds and soforth for his rental income property. They did not produce them. So the lender simply got another appraiser to do a 1004 and not mention they were rental income units for the borrower.

 

[Mike Boyd]

We are lucky in that rental comps can be obtained from a local company that provides rental lists for the general public and for appraisers. They charge $35 for the list which can include 15- to unlimited numbers of comps. I charge $125 for the rental analysis and another $125 for the operating income statement. If you do not have such a company in your area then you can contact real estate brokers and property managers. You can offer to pay them for that data if you wish. Newspaper ads and bulletin boards can also be a source for you.

As far as the operating income statement is concerned: while you should at least ASK for the current owner's tax records (which the lender/client will have in his files) it may or may not be adequate for your purpose. However, it is a simple form with formulae that can be obtained through Marshall Swift or by calling individual retailers, suppliers and tradespeople. Part of the analysis relies on the actual or real, market rents. You take that from your rental analysis.

As far as developing your Gross Rent Multiplier is concerned....that can be kind of speculative if you don't have good comps. What you CAN do is search multifamily sales and dig out the rental information. Compare the rents with the results of your rental analysis. If you have 3 or more sales of multi-family properties, you can determine what those sales demonstrate as a GRM. Use the most similar or bracket the GRMs. That will show what the typical investor is looking for. I always type in that the modified income approach to value has been given little or no weight as single family homes are not typically purchased to generate cash flow.

Lenders that request this data for a SFR do so because the borrower is relying on the generated income to help qualify for the loan. They want YOUR analysis to support what is being claimed for income. Never provide these reports for free.

 

[hastalavista]

Brian-

My experience with LOs when they ask this question is that they do not need the Income Approach completed.

What they usually need is a Rent Survey and Operating Income Statement. Somehow, these two forms get mis-transmitted as "the Income Approach".

Before you start pulling your hair out, I advise that you call and verify with your client what exactly is it that the lender wants.

If I'm wrong, you have the excellent advice from all the previous posts.

Good luck!

 

[DTB]

That would not appear consistent to me. Too many differences in multis and SFR to even be comparable for GRM in my world.