Residential 2-4 family, Band of Investment

[CSP 49]

Just wrapped up a 2-4 family continuing education (Bert Rodgers) and had to learn the Band of Investment formula.

Has anyone actually used Band of Investment in a residential 2-4 family appraisal? Truthfully, I drew a blank when this was suggested as an alternative to direct income capitalization. Seemed over the top for a 7 hour continuing education class.

 

[Ken B]

I don't think appraisers should try to be smarter than the market. Most 2-4 family investors are not that sophisticated. I would think that a direct cap approach would be overkill. The GRM method would be more appropriate.

But think of the stimulating conversation you can have at a cocktail party with this new found knowledge!

 

[Terrel L. Shields]

Gee, just do a Hoskold's or Inwood formula and really dazzle 'em...

 

[Michael S]

Band of investment is simply another way to derive a cap rate. While market extraction from comparable sales is the best method, a band of investment analysis can provide a good check of reasonableness. However given the lack of reliable expense data for 2-4 unit residential properties I would imagine most buyers are simply looking at GRM or a price per unit basis. Even with smaller apartment properties (20 units or less) it's rare to find reliable operating expense information, making market extraction of cap rates rather difficult.

 

[AnonApprsr]

I talk to investors and most rely on some form of a gross rent multiplyer, and they are also conscious of the units being in rentable condition which varies by market. A unit in Brockton can be rented at a different condition level than one in Cambridge. So if units in the property aren't up to their desired condition, based on the rent they are going to be asking in that area for that type of unit, they consider the costs and time that any work would take carefully. That's the investor that is buying the property to rent. I also have spoken with those who buy a 3 or 4 family that is in horrible condition and fix it up than sell it 3 or less months later. But they usually do single family homes as well so there you go.