Multi Family

[Mark Sargent]

I am working on a multifamily where the sales approach with two very close comps indicate value of $408,000; however, utilizing their GRMs I get an indicated income value of $321,000. I think this is a large discrepancy and don't know how to reconcile them or even if it they can be reconciled. Confused appraiser. -

So, what's the thing worth. it's a sale between two realtors.

The two duplex comps are 1 story 3 bed 2 bath, the subject is a 2 story 3 bed 2.1 bath up and down design. No other comps in town and only other similar are 25 miles away which do have a higher grm but they are in a much superior area and new construction.

My brain has done froze.

I think i was working around this thing at so many angles it burned out.

Any suggestions on a path to explore.

 

[The Bob]

Chances are the higher price via the SCA includes the "Blue sky" of anticipated higher rents. Rents almost always lag. In my experience the GRM's are not a reliable way of valuing RE. It's just a derivative of the SCA when you think about it. I've never gotten the same answer twice when I ask an investor how he valued the property he bought.

 

[George Hatch]

I am working on a multifamily where the sales approach with two very close comps indicate value of $408,000; however, utilizing their GRMs I get an indicated income value of $321,000. I think this is a large discrepancy and don't know how to reconcile them or even if it they can be reconciled. Confused appraiser. -

So, what's the thing worth. it's a sale between two realtors.

The two duplex comps are 1 story 3 bed 2 bath, the subject is a 2 story 3 bed 2.1 bath up and down design. No other comps in town and only other similar are 25 miles away which do have a higher grm but they are in a much superior area and new construction.

My brain has done froze.

I think i was working around this thing at so many angles it burned out.

Any suggestions on a path to explore.

If the value indicators from their SCs prompt for $408,000 but their GRMs are pointing to $321,000 then the chances are that you're doing something wrong. Either your adjustments in the SC are out of line for what's actually happening or you're not handling the rents based on the market expectations.

For example, if the rents being reported for the comps are higher than their market rents then it skews the resulting GRM downward. If they are operating off of market rents and you're operating off of contract rents then that's not an equal basis for comparison. On the SC side, the line item adjustments for bedrooms are frequently different than what would apply to an SFR in the same neighborhood. Sometimes they're much different.

 

[CCAAMO]

Could be the rents for the comps or the subject are below or above market

 

[Tom4value]

I am working on a multifamily where the sales approach with two very close comps indicate value of $408,000; however, utilizing their GRMs I get an indicated income value of $321,000. I think this is a large discrepancy and don't know how to reconcile them or even if it they can be reconciled. Confused appraiser. -

So, what's the thing worth. it's a sale between two realtors.

The two duplex comps are 1 story 3 bed 2 bath, the subject is a 2 story 3 bed 2.1 bath up and down design. No other comps in town and only other similar are 25 miles away which do have a higher grm but they are in a much superior area and new construction.

My brain has done froze.

I think i was working around this thing at so many angles it burned out.

Any suggestions on a path to explore.

Reconcile which approach is more reliable. Couple things jump out at me.
1. Only 2 comps in town and need to go 25 miles for third. Sounds like it is not a rental market.
2. Duplex multis are generally owner-occupied, with the other rent as more of a “mortgage helper” as opposed to investment motivation for purchase. If your two comps are owner-occupied and your subject is not, or vice-versa, the GRM will be out of whack.

This leads to two thoughts to consider.
1. If it is not a rental market, the income approach is less reliable since you have little data and the data you have is probably not as important to buyers.
2. If your subject is going to be owner-occupied and use the rent of only the other unit and the other two comps are fully rented, unless you alter the GRM to be based on only one unit occupied, it will lead to a lower value for the IA.

Bottom line, I would go with the SCA value and explain the difference accordingly in the reconciliation.

 

[Tiffany Gibbons]

Could be the rents for the comps or the subject are below or above market

Did they give you the rent rolls and Income Operating statement meant for the Assessor? Don't laugh, happened to me on a hotel. Owner said, Dang, that's the wrong set of books, no wonder.

 

[Elliott]

My short answer is, there's either a problem with the GRM or Rents. On multifamilies I usually have better sales to base a comparison. The form in the SC points to SP/SF, Grid, SP/Rm, and SP/Unit.

But give us some more information and it should be evident:

 

[JeffSH]

The income approach is not applicable to some duplex properties because they have particular appeal to owner-occupants who know their mortgage will be paid off by the other unit. They don't really think about the increased maintenance, and after 20 years they could always sell to an investor who would update and rent both units. It's a very safe bet to the owner-occupant that they won't lose money. 3+ unit residential properties do not have this same appeal. 2-unit properties are semi-detached and usually look pretty nice. They don't stand out as being 'rental housing'

Edit: I've found this to be most true in smaller, single-family communities vs neighborhoods with many rental properties.

 

[ZZGAMAZZ]

If the value indicators from their SCs prompt for $408,000 but their GRMs are pointing to $321,000 then the chances are that you're doing something wrong. Either your adjustments in the SC are out of line for what's actually happening or you're not handling the rents based on the market expectations.

For example, if the rents being reported for the comps are higher than their market rents then it skews the resulting GRM downward. If they are operating off of market rents and you're operating off of contract rents then that's not an equal basis for comparison. On the SC side, the line item adjustments for bedrooms are frequently different than what would apply to an SFR in the same neighborhood. Sometimes they're much different.

Regarding the 1025 Form report: MLS rentals for multi's often describe both the "actual" and the "pro forma" rent schedules. Can the appraiser report actual rents for some of the comps as well as pro forma for other comps, if that protocol is described/disclosesd?

 

[George Hatch]

Never would I ever. Especially now that Calif has statewide rent controls which limit the amounts of the annual increases. Before, a buyer could expect to quickly raise the rents to whatever the market would bear so that the rent losses would be really limited. That's not possible anymore. If your property is fully tenant occupied and is coming up short by 15% or 25% and the market rents are continuing to increase you might not be able to catch up within a reasonable time. At this point the 5+ income properties are selling based on their contract rents. It's also pretty common to see "property will be delivered vacant", which that usually means they can go straight to market rents.

Long story short, if your area has rent controls then the contract rents are the thing, and you can project market rents as the units turn over and get refurbished. If there are no rent controls you should assume the buyer's expectation will be to maximize their rents as soon as they are able.

One more thing to be wary about with contract rents. Borrowers sometimes lie about them and report rents that are much higher than is the case. Which that's one reason we perform rent surveys.