OARs and Reserves for replacement

[Caligirl]

I have always done my best to reflect what actual market participants in my market were doing and as such reserves typically are not an expense item.

PE brings up a very important point. Also, I think property type figures importantly here, since for example you will rarely see an operating statement for large apartment complexes without reserves.

 

[Louis Pompeo]

Your Income Approach could use both rates to reflect a range of value - then reconcile the two - or report both and explain what each value represents.

Then maybe in your sales comparison analysis - do a GIM analysis, which keeps you away from the RR issue.

Your final reconciliation should more convincing - after having provided all of this analysis.

 

[MNRural]

Most of the investors in my small market dont use reserves, they pay capital expenditures out of their pocket.

Most of the clients in my market want to see reserves....therefore, I use them.

You can consider and account for this in the reconciliation.

 

[Calvin the Airedale]

Your Income Approach could use both rates to reflect a range of value - then reconcile the two - or report both and explain what each value represents.

Or, at the least, Tim's report should provide sufficient narrative to explain how he has reconciled this dilemma.

Then maybe in your sales comparison analysis - do a GIM analysis, which keeps you away from the RR issue.

Your final reconciliation should more convincing - after having provided all of this analysis.

One of the reasons I find this thread important is the alarming frequency with which this situation is glossed over or never addressed in so many reports.

The GIM approach is an excellent suggestion but it keeps you from this problem on only a tangential basis. You'd still be wise to explain the efficiency of the GIs as they relate the GIMs in their range. At that point it would be helpful to discuss either the level of reserves or actual capital expenditures in the expenses of each comp.

 

[Louis Pompeo]

Calvin is right - on both counts....

First, this issue is glossed over in so many reports, and when questioned, appraisers either get VERY scientific, to the point of being unintelligable, or stutter and stammer through a weak explanation.

Reviewers are usually appraisers, who have been in the field and faced the same dilemma. I would guess that on any particular day, in no particular assignment, they they have (or could have) fallen down on either side of the fence on this issue.

The reviewer wants to be convinced. That is our job as appraisers - to provide CREDIBLE conclusions. (Credible = Worthy of Belief)

Secondly, yes - the GIM is a tangential support for what may be happening elswhere in the report. Its better than nothing, but still not conclusive.

Thanks for your comments Calvin

 

[Calvin the Airedale]

Calvin is right - on both counts....

First, this issue is glossed over in so many reports, and when questioned, appraisers either get VERY scientific, to the point of being unintelligable, or stutter and stammer through a weak explanation.

Reviewers are usually appraisers, who have been in the field and faced the same dilemma. I would guess that on any particular day, in no particular assignment, they they have (or could have) fallen down on either side of the fence on this issue.

The reviewer wants to be convinced. That is our job as appraisers - to provide CREDIBLE conclusions. (Credible = Worthy of Belief)

Secondly, yes - the GIM is a tangential support for what may be happening elswhere in the report. Its better than nothing, but still not conclusive.

Thanks for your comments Calvin

Thank you Mr. Murphy, I appreciate the kind words.

To return the compliment, you're one of the forum members whose activities I birddog, and whose posts I enjoy.

I too am a big fan of the all subsuming GIM. Unfortunately it seems much out of favor nowadays. Many analysts consider it too unsophisticated to include in their report.

 

[Y-TOWN]

Unfortunately it seems much out of favor nowadays. Many analysts consider it too unsophisticated to include in their report.

My take on this is as an appraiser we are paid to mirror the market.

If your particular market participants utilize that method of valuation in the buy/sell decision, that approach should/must be included in the appraisal.

Developing approaches to market value by methods not utilized by active market participants in your marketplace is an academician exercise.

 

[Calvin the Airedale]

My take on this is as an appraiser we are paid to mirror the market.

If your particular market participants utilize that method of valuation in the buy/sell decision, that approach should/must be included in the appraisal.

Developing approaches to market value by methods not utilized by active market participants in your marketplace is an academician exercise.

I understand what you're saying but disagree. GIM (or GRM) analysis is simply another tool in your toolbox to help you produce a credible valuation. Given the type of sale data you have, some tools are better than others.

Except for institutional investors, few participants use DCF analysis, yet I see that all the time!

And do you see many buyers gridding out sale comparisons and making adjustments for gross building area, financing concessions and the like?

Aside from brand new buildings, who uses the Cost Approach?

I know some investors that make the buy and sell decisions on nothing more than gut feelings. In fact I've seen it often enough, that I begin to question the usefulness of thoughtful analysis to these participants.

But how would it look if, in an attempt to mirror the market, I used this approach in a report?

The thing about markets, many of them anyhow, is that they are not monolithic. Healthy markets have buyers, sellers, investors with a broad range of motivations and inputs.

Thank God, too! If markets were monolithic, AMCs could simply run algorithms to solve for value. Where would that leave us?

 

[Y-TOWN]

I understand what you're saying but disagree. GIM (or GRM) analysis is simply another tool in your toolbox to help you produce a credible valuation. Thank God, too! If markets were monolithic, AMCs could simply run algorithms to solve for value. Where would that leave us?

If you understand what I'm saying why would you disagree -

The GIM or GRM is another valuation tool, but if not used by active market participants in your specific marketplace the development of it is an academic exercise.

In my market it is not typically utilized by active market participates. It is too broad of a measure of value, the appraiser usually reconciling the value indication VERY subjectively where it fits within the range.

Again, we mirror the market, if the active participates are not using that method of valuation the appraiser should not, it has no impact on market participants decisions if not utilized by them.

Depends on your specific market - if that is how they do it in your market - go for it - if that is not how your market values an income property the development of a GIM/GRM approach is purely an academician exercise

I do agree with your statement about algorithms -

 

[Calvin the Airedale]

If you understand what I'm saying why would you disagree -

Understanding your argument is not the same thing as agreeing with it, how is that difficult to comprehend?

Our job is not to mirror the market. It's convenient if your methods of analysis do, but the methods you select for use in any given valuation will be dependent upon the data (and skills) you have to work with.

The GIM or GRM is another valuation tool, but if not used by active market participants in your specific marketplace the development of it is an academic exercise. (Unless it happens to be an accurate indicator of value. Then you're foolish if you don't use it.)

You can believe that if you like, but most appraisal academics I've met make more money than I do so I can live with giving off that type of vibe.

In my market it is not typically utilized by active market participates. It is too broad of a measure of value, the appraiser usually reconciling the value indication VERY subjectively where it fits within the range.

Your description above suggests a somewhat narrow view of how GIMs in any given range are differentiated. In other words, why a range even exists. This may, in fact, be the reason you're not comfortable using GIM analysis. If what I have just said isn't making any sense, please let me know, I would be happy to expand my explanation.

Again, we mirror the market, if the active participates are not using that method of valuation the appraiser should not, it has no impact on market participants decisions if not utilized by them.

And all those other examples I given of tried and true analytic methods that also aren't used by buyers and sellers didn't dissaude of this notion? Go figure!

Depends on your specific market - if that is how they do it in your market - go for it - if that is not how your market values an income property the development of a GIM/GRM approach is purely an academician exercise

I do agree with your statement about algorithms -

In ancient Roman days, learned men, would examine the entrails of animals to augur the future. I suppose by your logic, if this method was still practiced (and it is in some parts of Borneo) you might feel obliged to duplicate the method in your report?