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Rental OIS in an area w/no rental comps

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Urbanz

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Texas
Here's an interesting one...

Im doing an investment property on Bolivar Peninsula, which is only accessable via a ferry from Galveston, TX (near Houston/see attached image). It is a long narrow strip of land with beach houses only. There are no real jobs on Bolivar and one only lives there if they own a home, or rent out a home on a weekend/vacation basis.

Houston and Galveston MLS's have no closed rentals, but plenty of active, withdrawn or terminated listings. Nobody rents there on a yearly basis, and Im very familiar with the market (for you "must be qualified" gurus).

My question is, is there a such thing as:

1. an income approach using vacation rentals if I can get some info? Not sure how "verifiable" this could be. Im not too keen on this one, the GRM would be too variable depending on my guess of the vacancy rate. This is the only source of income for homes there.

2. Can my income approach be $0? I think with the MLS activity and no closed rentals that this clearly shows that homes simply don't rent on Bolivar. I can't go further out to get rental comps because they dont have a 2-3 hour ferry wait at those homes, and there are is a stronger job market there. I like this option much better.

Im sure this is ultimately up the the UW, but wanted to provide a suggestion to them if I can.
 

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hastalavista

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May 16, 2005
Professional Status
Certified General Appraiser
State
California
Here's an interesting one...

Im doing an investment property on Bolivar Peninsula, which is only accessable via a ferry from Galveston, TX (near Houston/see attached image). It is a long narrow strip of land with beach houses only. There are no real jobs on Bolivar and one only lives there if they own a home, or rent out a home on a weekend/vacation basis.

Houston and Galveston MLS's have no closed rentals, but plenty of active, withdrawn or terminated listings. Nobody rents there on a yearly basis, and Im very familiar with the market (for you "must be qualified" gurus).

My question is, is there a such thing as:

1. an income approach using vacation rentals if I can get some info? Not sure how "verifiable" this could be. Im not too keen on this one, the GRM would be too variable depending on my guess of the vacancy rate. This is the only source of income for homes there.

2. Can my income approach be $0? I think with the MLS activity and no closed rentals that this clearly shows that homes simply don't rent on Bolivar. I can't go further out to get rental comps because they dont have a 2-3 hour ferry wait at those homes, and there are is a stronger job market there. I like this option much better.

Im sure this is ultimately up the the UW, but wanted to provide a suggestion to them if I can.

The question (IMO) is this: Can you develop a credible IA?

There are no real jobs on Bolivar and one only lives there if they own a home, or rent out a home on a weekend/vacation basis.

Well, there's income then, no? Your question#1 is how reliably can you verify that income? I would think there are rental agencies that you could get some information from- and,of course, if the subject is rented then perhaps they use a rental agency.
But, if you cannot, then its a development issue and you cannot conclude credible results.

I don't think the value of the subject is $0 via the income approach if there isn't sufficient data to analyze.

My opinion: It would be a hard argument to make that the neighborhood is composed of second homes and rental properties but the income approach may not be applicable. It may be applicable, just difficult to develop. These properties may have a higher value as a second home vs. rentals.

Good luck.
 

Urbanz

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Apr 18, 2006
Professional Status
Certified Residential Appraiser
State
Texas
The subject is new construction and vacant. The builder is an individual doing a cash out refi, then they plan to sell the home or live in it, they havent made up their minds. The bank simply is asking for the OIS because it isn't a primary residence.

So if I can get hard verification of similar homes that are vacation rentals, and get a strong idea for a vacancy rate, then I might get results that are passable to FNMA?

I agree with you that the homes are worth more there, and that income results may not be as worthy, but basically the GRM will be higher, and thats 90% of what UW's seem to care about...

On the other hand, I think I DO have strong information to analyze the rental market. All the active, terminated, and withdrawn rental listings, and no closed deals show me there is no rental market there. All of them had very high DOM.
 
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Mountain Man

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Jan 15, 2002
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Certified General Appraiser
State
Georgia
In my area, we have a lot of vacation homes on rental programs. Usually, the rental income is enough to cover most of the expenses and house payments, but they are not great "rental investments". That's not why the owners are buying them, they buy them for a vacation house. The OI may show a marginal profit, but the highest and best use is not as an income property.
 

CANative

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Jun 18, 2003
Professional Status
Retired Appraiser
State
California
Agree with Mel.

Vacation rental market. High dollar houses that are not used year 'round. They put them on the vacation rental program to defray some of the costs of ownership. Not to get an income stream. And coming up with a consistent and supportable rental rate is next to impossible. They rent them by the day, by the week, by the weekend. By the person, by the group. Different rates for weekdays, weekends, holiday weeks and weekends and spcific holidays. Some owners use them more some owners use them less.
 

hastalavista

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Professional Status
Certified General Appraiser
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California
In my area, we have a lot of vacation homes on rental programs. Usually, the rental income is enough to cover most of the expenses and house payments, but they are not great "rental investments". That's not why the owners are buying them, they buy them for a vacation house. The OI may show a marginal profit, but the highest and best use is not as an income property.

My thoughts exactly.
Rental income may be a secondary consideration with the primary motivation of buyers for these homes being their own personal use (first), rental income (second, if at all).

If these homes' value is based on owner-user (second home) vs. income, then the income approach isn't the best (or reliable) indicator of value.
An investor's primary motivation for purchasing an income property is...income. So, if you have a GRM of 400 for these properties on the ferry-access island, but a GRM of 200 for properties on the mainland side, which property is the typical investor going to purchase?
Your GRMs may support your value if you are using all owner-user/second-homes with secondary rental income from the subject's island, but they will not be supported in the greater investor market.
That's a long way of saying if income is not the primary motivation for purchasing the homes (which it wouldn't be in my scenario) then the Income Approach does not provide a credible indication of market value.
 
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Mike Boyd

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Jan 18, 2002
Professional Status
Retired Appraiser
State
California
Agree with Mel.

Vacation rental market. High dollar houses that are not used year 'round. They put them on the vacation rental program to defray some of the costs of ownership. Not to get an income stream. And coming up with a consistent and supportable rental rate is next to impossible. They rent them by the day, by the week, by the weekend. By the person, by the group. Different rates for weekdays, weekends, holiday weeks and weekends and spcific holidays. Some owners use them more some owners use them less.

Use the ANNUAL rent and divide by 12. However, there are extra expenses such as all utilities are typically included. The homes are always completely furnished including dishes and flat ware, bedding and even nic knacks. Landscaping maintenance is always included. House cleaning, once the periodic renters leave is included. Management fees are also considerably higher. All this would have a significant impact on your OI statement (form 216). Has your client asked for a rental analysis as well as the OIS? If so, you would need similar periodic rental data and that is where you estimate income by taking the annual and dividing it by 12. Lots of work. Make sure you set your fee high enough to account for it.
By the way, never use 0 as the value from the IA. If you are not going to use the income approach, type in N/A.
 
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CANative

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Retired Appraiser
State
California
Use the ANNUAL rent and divide by 12.

Rots of ruck getting a straight answer out of a vacation rental manager.

I've done it that way once or twice and it wasn't worth the effort and it amounted to guesswork in the end.
 

Urbanz

Thread Starter
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Apr 18, 2006
Professional Status
Certified Residential Appraiser
State
Texas
Rots of ruck getting a straight answer out of a vacation rental manager.

I've done it that way once or twice and it wasn't worth the effort and it amounted to guesswork in the end.

Well, I agree, and not only that, but the information would be almost impossible to verify. Im not sure anyone would let me pour over their books and bank accounts. I think that N/A is the answer...
 

Mike Boyd

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Retired Appraiser
State
California
Well, I agree, and not only that, but the information would be almost impossible to verify. Im not sure anyone would let me pour over their books and bank accounts. I think that N/A is the answer...

You QUALIFY the rental data by showing the REPORTED income. I don't think anyone would expect you to verify it.
 
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