Not enough rental info

[AlwaysLearning]

The income approach is optional in a Fannie/Freddie/FHA appraisal.

The above is misleading.

According to Fannie:
“The appraiser must use his or her best judgment regarding the applicability of the income approach to value”.

Fannie considers the use of Income Approach as appropriate in any neighborhood when there is adequate rental data.

 

[J Grant]

In a small income property, 2-4 family, the income approach is often the most reliable approach to value.

Any verifiable rents are good, and if they are on an active listing, so be it, it is allowable to use them and they are often good sources of data...knocking on a door of a commercial property where the strores or building or offices spaces are occupied by professionals is one thing, walking around knocking on doors in duplex neighborhoods (or just about any neighborhood ) is a good way to endanger yourself.

 

[CANative]

The above is misleading.

According to Fannie:
“The appraiser must use his or her best judgment regarding the applicability of the income approach to value”.

Fannie considers the use of Income Approach as appropriate in any neighborhood when there is adequate rental data.

If an approach to value is necessary for credibility then employing that approach is not optional, no matter the client, intended user or intended use. If it is not necessary then it's an optional part of the scope of work.

I don't see anything in your quotation that suggests anything misleading about what I posted.

 

[DMZwerg]

In addition to MLS, I've used the internet (Craig's List, for example), classified ads in the local paper (Saturday and Sunday editions are generally the issues with the most RE ads), open eyes as I drive around ("For Rent"), etc.

That was one of the things my mentor's mentor taught him. The guy was old school and did not realize you could use MLS internet searches to find rental data until my mentor showed him.

Bottom line: there are multiple sources for information, not just sold properties in MLS.

 

[DMZwerg]

I would re-phrase the question as "Why WOULDN"T the appraiser 'use an active or sales comp for rental information'?"

Exactly. Rental comps are used to determine exactly one thing - rent. For this reason the most recent and accurate info is the most important, and a property that sold 6+ months ago would tend to have less up to date information then a property that was just listed last week.
Sold comps are used to determine GRM.

In a small income property, 2-4 family, the income approach is often the most reliable approach to value.

In my CR class the instructor point blank informed us that the income approach is rarely (if ever) the most reliable approach for SFR but for multi-unit apartment complexes (5+ units) it is almost always the most reliable (rarely are others used for the largest apartment complexes), and that for 2-4 units the income approach slowly becomes more reliable and dominant as the number of units goes up. The reason is that (at the time) most duplexes were purchased by owner-occupants but few if any 4-units were, thus the typical buyer motivation and intent shifted.

Since then at least one local market (Kenosha) has shown a major shift where even duplexes are (apparently) being purchased primarily by investors and thus income approach has become dominant for many duplexes as well.

I thought I would add that as the motivation of the typical buyer can shift (as can who the typical buyer is and in what ratio) and thus can affect which approach is likely the most reliable based on the current typical buyers for that property (in Kenosha there are different buyers (strata) from gutted REOs, barely uninhabitable REOs, barely uninhabitable non-REOs, barely habitable REO, REOs in average condition, barely habitable non-REOs, REOs in good condition, avg condition non-REOs, and good condition non-REOs (usually in the superior areas but not always) in the duplex and separate 3-4 unit sub-markets. OK, Kenosha is a strange market with all those different strata and buyers from rehabbers to landlords to (very few) owner-occupiers all still active in the market (with investors being the most active, esp. both rehabbers & landlords).

Good luck &

 

[David Mescon]

Fannie considers the use of Income Approach as appropriate in any neighborhood when there is adequate rental data.

In my neck of the woods, the relationship between income potential and value is non-linear. A typical "cheap" home in my town might rent for between $1,200 and $1,500. This type of home would likely cost anywhere from the lower 200s to the lower 300s. A typical "average" home might rent for between $1,500 and $1,800. Such a home would typically cost anywhere from the mid 300s to the upper 500s. A typical "good" home might rent for between $1,800 and $2,500. Such a home would typically cost anywhere from around the lower 600s to around 1.3M.

Basically, if it's a house, and habitable, it will usually rent for at least $1,200. If it's a really nice and large home, with a great view, it will usually rent for no more than $2,500, and many can be rented for around $2,000. Few rentals here can command over $2,500. The difference in what you get for $1,500 and $2,000 is usually enormous, and bears little relation to the difference in the value of the homes, which is usually fifty percent,or more.

 

[David Mescon]

I have a duplex in an area where there are VERY few sales, and most sales do not list the rental information on MLS. One of the five comps has rental info and both active listings have rental info. I was able to find one other one (searched the extended neighborhood for 24 months for active, pending, sold, expired and withdrawn) and only came up with one other property remotely similar with rental info. Not a lot of info on Craigslist, and if there were it would only be for one of the units and this is a cape COD style property.

In cases like this what is your opinion on using an active and a sold on the rental page. BTW, it is an FHA

Thanks

I'm a strong advocate of calling landlords and knocking on the doors of, and interviewing, tenants. Most of the time, people are pretty easy to deal with once I explain why I need their help. I like people and I really enjoy meeting and talking with them, which helps greatly. I understand this can be uncomfortable for many.

 

[Terrel L. Shields]

"Why WOULDN"T the appraiser 'use an active or sales comp for rental information'?"

You've obviously never used MLXChange in NW Arkansas have you?...but i digress and don't get me started. I can call a local property manager and get more info in 5 minutes than I can from the MLX searching it all day... It stinks for rental comps or adequate info on it...Realtors won't fill in the right fields, but state the rents in the remarks section.

 

[CANative]

Small residential income properties usually fail one or more of the assumptions necessary for the development of an income approach. One of the components that makes the income approach particularly problematical with two unit properties is that they are not always developed and purchased to provide just monetary benefits. They are often purchased for a combination of amenity benefits as well as monetary benefits.

If the income approach is used to value property that provides both monetary and amenity benefits, care should be exercised in converting amenity benefits into value. If the capitalization rate reflects the amenity benefit, a question arises whether the amount of the amenity benefit reflected in the rate equals the amenity benefit in the subject property.

This is the underlying princicple that David and DMZ are discussing. It's why, IMO, the income approach is not the best approach for two unit properties. Although in some areas there is so much investor activity that there is little or no amenity benefit to worry about and it's a good approach.

 

[DMZwerg]

You've obviously never used MLXChange in NW Arkansas have you?

and I doubt you have tried to so a 3- or 4-family in Kenosha where they classify anything beyond a 2-family as "commercial" and the data available on MLS drops like a rock ... but I digress

I can call a local property manager and get more info in 5 minutes than I can from the MLX searching it all day... It stinks for rental comps or adequate info on it...Realtors won't fill in the right fields, but state the rents in the remarks section.

Different areas are different. In Kenosha upwards of 5% of the properties are indicated in the wrong location by a significant factor. Makes radius searches "interesting" when properties are indicated as being miles from their actual location (for those that are off, most are over 5 miles off), and especially when some properties show up as being located about a mile or more out in Lake Michigan. :new_smile-l:

Milwaukee data tended to be much more accurate therefore it took a bit of time for me to adjust to the Kenosha eccentricities especially since the same MLS system covers both.

So mileage may very in ANY location and some areas you may have to use other sources of information.