Reconciliation of Approaches

[CANative]

I find lots of SFR rentals that have recently sold as rentals and continue to be NOO. I find them through local rental management companies.

 

[The Warrior Monk]

Don't give me the backed into Brad Ellis numbers of some "construed" GRM. i.e. market value is $100,000 and annual income for similar houses is $12,000 so they sell for 100GRM, when none of the sales were for rental, therefore we do not have an investment value (income approach) any which way it gets massaged.

This is an example of the hypothetical, or "made up," methodologies that I've referred to. We see the same thing with commercial properties in my market area; gross incomes in the five-figure range with sales price in the seven-figure range, several times over. The prior property owners could afford to do so because the owned the property, free and clear, for decades. This income and sales information can be utilized to demonstrate a relationship, yet it does not reflect the manner in which the buyers of this property type purchase properties.

If reversion is important, a cap rate, distinguished from a GRM, might be appropriate. The cap rate can take into consideration the income and expenses over the course of time, as well as the reversion at the end.

 

[Don Clark]

Prove it. Provide any stats you have that support either a unit was rented at the time of sale and remained a rental through at least 1 more lease renewal or provide the stats of sales that were either owner occupied or vacant at the time of sale and were rented for at least 2 years and I'll believe it.

Those stats will not even address their similarity or variance to the subject.

Don't give me the backed into Brad Ellis numbers of some "construed" GRM. i.e. market value is $100,000 and annual income for similar houses is $12,000 so they sell for 100GRM, when none of the sales were for rental, therefore we do not have an investment value (income approach) any which way it gets massaged.

Actually that method was taught in the AI course Residential case study when I took it in 1994. Not sure if it is taught today. Use properties that have sold but not rented. Find a rental that is as similar to the sale as possible(paired sales), the assign the rental to the sale by proxy. When you do that to a set number of sales then you can develop a GRM. That is one way to develop a GRM. Lacking that method it would be almost impossible in my market to do a GRM using sales that are also rentals and have sold. Even the 2-4 family properties are shy on such information being available.

 

[Terrel L. Shields]

Provide any stats you have that support either a unit was rented at the time of sale and remained a rental through at least 1 more lease renewal

And that has what to do with it? Investors are buying them for RENTALS. They know what the MARKET rents are....

The list below is just the pending sales which are available for rent -in one town - Springdale. Pretend there is no relationship between the rents and sale prices if you like..excuse our MLS, it prints "List Price" for "Rent" as a header in the 1004 grid

 

[DTB]

Actually that method was taught in the AI course Residential case study when I took it in 1994. Not sure if it is taught today. Use properties that have sold but not rented. Find a rental that is as similar to the sale as possible(paired sales), the assign the rental to the sale by proxy. When you do that to a set number of sales then you can develop a GRM. That is one way to develop a GRM. Lacking that method it would be almost impossible in my market to do a GRM using sales that are also rentals and have sold. Even the 2-4 family properties are shy on such information being available.

I know they taught it and I'll tell you it's garbage math. Ever wonder why some of the rentals are rentals? Many reasons other than investors buying them for rentals.

 

[DTB]

And that has what to do with it? Investors are buying them for RENTALS. They know what the MARKET rents are....

The list below is just the pending sales which are available for rent -in one town - Springdale. Pretend there is no relationship between the rents and sale prices if you like..excuse our MLS, it prints "List Price" for "Rent" as a header in the 1004 grid

Are these reported as pending sales with the "new" buyer offering them for rent?

Or were they offered for rent and sale simultaneously and they take whatever comes first?

 

[DWiley]

I know they taught it and I'll tell you it's garbage math.

Yes it was taught. I even used it in my demo, and I still have to use today sometimes.

I would not say that it is garbage. I would say that it makes the income approach less of an "income" approach and more a variant of the comparison approach.

One can only use the data that actually exists. If an income approach is required, using substitutes to derive GRMs is one way of doing it. The weaknesses of doing that can be addressed in the reconciliation.

I find that rented homes are a lot like land sales - there are far more of them available in most areas than one would think by just reading most residential appraisal reports.

 

[Michigan CG]

.......I find that rented homes are a lot like land sales - there are far more of them available in most areas than one would think by just reading most residential appraisal reports.

Have to agree. I just read a cost approach where the appraiser stated the land was worth $40,000. Hhhmmm......maybe back in 2006 but now it is worth $15,000 and there are a ton of sales to prove it if the appraiser would do a little homework.

 

[DTB]

Yes it was taught. I even used it in my demo, and I still have to use today sometimes.

I would not say that it is garbage. I would say that it makes the income approach less of an "income" approach and more a variant of the comparison approach.

One can only use the data that actually exists. If an income approach is required, using substitutes to derive GRMs is one way of doing it. The weaknesses of doing that can be addressed in the reconciliation.

I find that rented homes are a lot like land sales - there are far more of them available in most areas than one would think by just reading most residential appraisal reports.

And when it's insufficient, just call it that way w/o dorking up some #s. That's all.

 

[CANative]

I would not say that it is garbage. I would say that it makes the income approach less of an "income" approach and more a variant of the comparison approach.

And once the work is done it is then easy to get a ballpark on any given similarish property by just applying what you think the rent should be to the GRM that's floating around in your head. - IA quick and easy. But not enough to stick in a real appraisal report.

Applicable? Yes. Relevant? Probably not.