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REO appraisal an other fun things

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Carnivore

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Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
North Carolina
OK everyone, in another thread that apparently died for lack of interest a poster stated that he does not do an income approach for a 2+ family property. He stated that the lenders donot want this , they just want to know what its worth not how much it will make.

Heres my question.

Can you do a report on a REO 2+ family property, by invoking departure on the income approach? If so, how do you do it? Also, can you do this by invoking departure on the cost approach also?

All answers are welcome.
 

Bobby Bucks

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Jan 27, 2002
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Real Estate Agent or Broker
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North Dakota
Andrew is the Nature Boy still in the Queen City? I sure miss seeing him on TV.
This is what I do on all multi-family REOs. Of course when they get bigger than Quads I refer them out to
my G-Man buddy who has more education and E & O coverage. I include the income approach
and when I get into the high brow part of the “splaining” I comment that the most emphasis has
been given to the sales comparison approach and that the income approach was given minimal
weight, little weight or no weight (depending on the number of cockroaches) since the property was not considered to be habitable at the
time of the inspection. Indicated value in the report for the income approach and estimated rent in
the income approach is subject to the property being in average condition. Ooops did I forget the
cost approach? The cost approach was not considered, but was included to satisfy the
requirements of the old blue haired lady underwriter who will call me, hassle me and make my life miserable if I don’t fill in all those blanks.

Where is Brad Ellis? I'll bet he has a complete answer to this question.
 

Carnivore

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Professional Status
Certified Residential Appraiser
State
North Carolina
Bobby Bucks, thanks for your time I hope things are jumpin OK at the ranch. I have lived in the queen city since 1986, been comin around this place since the early 70's. You got me on Who the Nature Boy is.

on to business, If I understand you correctly, you have sales that are in similar condition, lets say uninhabitable. My problem I am having is this dang "highest and Best use" thing. It appears to me that the potential of the income stream is most important and condition is such a tempoary thing. The cost approach seem like it would take second fiddle to determine if fixin the dump is cost effective to ensure a market rate of return over trearing it down and starting over.

I also have a problem with this dang USPAP thing. I can not see how its OK to invoke departure even with instructions from the client. That is not on a 2+ family subject. SFR yes, duplex or above NO.

Who is Nature Boy.
 

Farm Gal

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Jan 14, 2002
Professional Status
Licensed Appraiser
State
Nebraska
Andrew:

Would the market for the subject property in it's 'as is' condition include investors?

Or is it more likely to be purchased by Hairy Homeowner and his cousins...

We have some multi-families that are being bought up by a particular ethnic group and the investor market in that immediate area is thin on the ground as this other buyer set is paying more than the investors would want to pay for the POS houses!

I have no problem indicating that the Income approach in the above situation is not the best approach, and exclude it from the report, and sometimes even serious consideration!

~~~~~

You can also say you considered it, its in the workfile and the report being a Restricted Use for eyes and use of that client only does not contain the analysis!
As long as it wasn't the approach you would have otherwise selected as the most appropriate 8O
 
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Montana
Andrew:

One exercise helpful to appraising REO multi-family dwellings is to test whether a two tier market exists. There might be more than two tiers but for the sake of argument, let's confine the exercise to two tiers. When REO multi-family properties come on the market investors seek them out but have much lower expectations than those for properties that are in good condition. The properties are generally repaired to be rentable but they do not usually command rents that are as high as those in good condition. If you array a set of properties and the GRM of each property you will be able to tell if there are two distinct sets. If you find two tiers, confine your analysis to the one tier more similar to the subject.

I am guessing your reservation about using the income approach is the result does not seem related to the market value of your subject. If you confine your market data to properties more similar to your subject you are likely to get better and more credible results.

In my market there are two distinct tiers, each with their own investment potential. The problem I run into if there is any uncertainty as to the condition of the heating sytem or plumbing, investors expect and get steep discounts. This creates a sub-tier that has to be taken into account when applying the income approach. I am certain in your nice warm weather climate this is not a factor but you might want to talk to enough investors to make sure you are taking into account all the features and expetations about a property that are considered when they purchase a property.

I am doing a lot of REO properties and there seems to be one factor that it difficult to pin down and I can only describe it as REO stigma. If two properties are identical in all ways and one is a REO property, the shark instincts seem to come out and investors just expect a discount.

As to skipping the approach altogether, I doubt if you would be on solid ground. Everyone would have to skip it in your market and it's absence would have to lend it self to making your appraisal more credible. I recommend a closer and more detailed analysis of the market. The other major problem of leaving out the income approach is a multi-family dwelling implies that it is investment property. Therefore, as an appraiser you have to reflect the market value in terms on it's investment potential. The lender most certainly should want to know if this property stacks up as an investment. Since the likely pool of buyers are mostly investors, you somehow have to interpret their behavior and one effective way is the income approach. Just keep digging. Interpret market behavior.
 
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Florida
Doug,

REO Stigma. Not sure whether it's a stigma, or just what to call it, but there's something there that depresses the price.


In neglected or trashed homes, no matter what the listing agent has done to it , it still looks like a foreclosure. Those tell-tale signs fade away only the home has been ilived in for several years..

BTW, what do you call the discount that operates in Estate Sales?

Regards,

Tom
 

Pam Wyant

Senior Member
Joined
Feb 12, 2003
Professional Status
Certified Residential Appraiser
State
West Virginia
Another thing to consider - Is there sufficient data to develop an income approach? If there is insufficient data for some reason (few sales, lack of reliable rental and expense figures) it would be perfectly acceptable to say the income approach was considered, but due to a lack of reliable data could not be completed.
 

bradellis

Member
Joined
Jan 16, 2002
Andrew,

It all depends. If the subject REO is not inhabitable and one is doing the appraisal "as is", then not doing an income approach is appropriate AND is not departure. If it cannot be rented in its current condition, how can one forecast the income There can be no income. So there is nothing to capitalize.

If, on the other hand, you are doing it "subject to", it is a different story.

When I used to manage appraisals for a HUD contractor, I tried to get this thru HUD's heads, but to no avail.

Omitting this income approach may or may not produce credible results- it depends upon your market. If it is necessary and applicable then departure is required.

Brad Ellis, IFA,RAA
 

EDWARD BERRY

Senior Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
Arkansas
Thomas,

Someone in a class called that Discount "the Puke Factor".

Gross but accurate. ed who has been there.
 
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