Let's Talk About Multi-family Properties

[ucbruin]

Not sentiment. Reality.

So I am correct that the sentiment/reality is that investor buyer/investor owner....
Appraisers should typically hang hat on income approach over sales approach???
I'm just checking....
Not trying to create a "perjury" trap....
Basically a yes or no question....

 

[Dublin ohio]

So I am correct that the sentiment/reality is that investor buyer/investor owner....
Appraisers should typically hang hat on income approach over sales approach???
I'm just checking....
Not trying to create a "perjury" trap....
Basically a yes or no question....

I was only addressing the "depends" part of it. The reality I have found. Is that what I "hang my hat on" depends on the neighborhood and market dynamics in that neighborhood. IMHO. I think many residential appraisers approach a 2-4 family property based on the fact that they know fannie will not accept an appraisal based primarily on the income approach. So they approach it the same way as if they are doing a typical SFR appraisal. Were they trained that way. Unfortunately, yes.

 

[Renee Healion]

I am not your hostile witness, UC. You have plenty of answers here to ponder. Go ponder.

 

[glenn walker]

Am I understanding what appears to be a majority opinion....
If appraisal of a 2-4 unit is for: an investor purchased or an investor refi....
Hang hat on income approach???
That's how most have been trained???

I understand most posters include the "depends" caveat....
Overall....
That's the sentiment???

You should develop all approaches needed to make a credible opinion.

As far as Gross Rent Multipliers and cost approach, the FHA-VA-Fannie UW only looks at it as support but the final value is based on the sales comparison approach - So the poor appraiser jerks and jacks playing a game that was never designed for income property .

So I am correct that the sentiment/reality is that investor buyer/investor owner....
Appraisers should typically hang hat on income approach over sales approach???
I'm just checking....
Not trying to create a "perjury" trap....
Basically a yes or no question....

 

[ucbruin]

I was only addressing the "depends" part of it. The reality I have found. Is that what I "hang my hat on" depends on the neighborhood and market dynamics in that neighborhood. IMHO. I think many residential appraisers approach a 2-4 family property based on the fact that they know fannie will not accept an appraisal based primarily on the income approach. So they approach it the same way as if they are doing a typical SFR appraisal. Were they trained that way. Unfortunately, yes.

"IMHO. I think many residential appraisers approach a 2-4 family property based on the fact that they know fannie will not accept an appraisal based primarily on the income approach."

My light blub moment...
I'm so dense....

Because I only complete appraisals for lenders and FNMA guidelines, I get stuck in my own little world....
I couldn't see beyond my blinders and realize that when other members were saying investors they probably meant appraisal for non-fannie private users....
That maybe the reason the bank did not train the appraisers to hang their hats on the income approach....
If that's the case my apologizes for talking past those of you who kept mentioning investor....

 

[Renee Healion]

Glenn
Please fix this response so your responses looks like they came from you and not people quoted.
(I don't know how to reply to multiple posts either without it coming out like this)


That said, I don't disagree about the form. I was just trying to get through one thread without saying how poorly designed it is, except for a couple parts, because I have said it before so often.

 

[Deleted member 130081]

I am an investor in small income producing properties (1-4 family). I know what my motivations are, and I have a decent idea of what the motivations of other investors are not only in my market, but around the country (check out Bigger Pockets sometime). I have found not all investors invest the same way and for the same reasons. I think the Income Approach is a bit basic and considering it assumes the price paid is a function of rent, is basing it's whole thing on that big assumption. Some investors purchase for purposes of appreciation. Some purchase for income. Some purchase so others can pay for a property for them. Some do all of these things at once. Some investors purchase with their own cash. Some investors use others cash. Some investors do both. All of these have an impact on what an investor can and is willing to afford. I don't think the GRM indicator is a "poor" indicator, I just don't think it always tells the whole story, just too many things going on to say what is probable. The direct sales comparison approach however is quite handy. This pretty much cuts the bull and gets down to the bottom line of it all. All investors compete with each other for property at this basic level, no matter their expectations, motivations or strategies.

For me personally, I purchase per unit. I have a certain amount per unit I will pay and yes, the ability to command rent is a factor in that (money in/money out). Also a factor in that are capital improvements, both what needs to be done immediately and what the property is expected to need along the way. As far as bedrooms yes, there is a bit of a premium that can be commanded going from a 1 bedroom to 2, and again from a 2 to 3. However, I don't really like 1 bedrooms because they are harder to rent at a higher price and attract single people who have a harder time paying and I don't like 3 bedrooms because the small amount of extra rent goes out the door with the extra wear and tear from larger families. I don't really care about the total number of rooms, so long as a unit has an acceptable amount of space for tenants to do their thing. Larger properties are actually a turn-off, as it's just more sf to maintain and repair. The best deals are often the little ones. But all that's me.

Some folks accept rent assistance and in that game the difference in bedrooms, paid by the government, not the market, can be substantial. It might make the difference between purchasing a property at a certain price point at all.

I buy in the city, but live in the suburbs. I would never invest where I live, there is just no money in it. The people who invest out here pretty much are all banking on either appreciation or getting someone to purchase a property for them, not about cash-flowing. Many of these out here have owner-occupants, as again, there is no money in them so they have to pay for them partially by themselves anyways, and it is cheaper to be an on-site landlord.

It really is a matter of different strokes for different folks.

 

[Renee Healion]

Good post, FC. And different strokes are we should be looking at and reporting, the way I see it. All the things you have said would inform an appraiser. I can just hear an old friend who was not an appraiser talking about what to pay for a unit and laughing at someone who paid more. Depends on where you are. And when.

Not crazy about the GRM but it is a good example of the approaches being very interdependent. When I took Income Cap Case Studies the second instructor was quite a character from NYC who talked about the rent rolls, the trials and tricks and arm-twisting of getting the rent rolls. (Maybe some people would know who I mean, sorry forgot his name. Bradley was the other instructor, nice man.) I got the impression that many investors in his market would use a quick reference like a GRM, but where I am from they sound more like you do, conditioning their comments on various factors, some of which apply in one case and not in the other. I discuss the rental situation in mine in depth because I do not like the form but then I do not do them for regular lenders.

Doing all the approaches needed for a credible result does not mean doing all the approaches every time. But it would mean thinking about it all. Cost here would just get you quizzical looks from investors.

 

[Dublin ohio]

It really is a matter of different strokes for different folks.

Yep. It depends.

 

[Deleted member 152047]

Fcrecords, I think that you make some good points. I would add that if the appraiser has good market data for the sales approach, it is highly likely that the income approach data will be current and relevant. You will then see the income fall right on top of the sca mv indication. The sca comps will allow the appraiser to derive cap rates and potentially act as expense comps (at least op ex ratio indications).

That said, the market value is not driven by an individual investors model for a given property (appreciation, zero money down, rent growth, etc.). The market dictates what the value is, and if you really dig into it (I have to in nearly every appraisal) you will find that the price paid for a property is nearly the same for levered and unlevered buyers and is irrespective of the investors personal model. Simply, the market value of the property is not less because an investor is funding the deal as opposed to levering the deal. The ROE expectation is higher for levered investors, but that doesn't mean an equity investor won't accept a lower ROE on the same asset at the same price. In fact, if you look at most of the largest unlevered deals that have occurred over the past few years in the US, they set record highs for sale prices.

Okay, so that said. You all touched on the form reports. I am a commercial guy and have never completed a form report. If the income is more relevant, why would you not allow that to drive your sales comp selection, and ultimately your conclusion? Ucbruin has tried to pigeon hole everyone on this forum into definitive answers when there aren't any. YOU have to do the work. If you aren't getting paid enough fee to do it properly, then don't accept the assignment. Simply relying on the sca because the government told you to is not acceptable in my mind.....but again I'm a commercial guy.