Sales Comparison Approach vs. Income Approach

[Scott R Marshall]

As this is the second time I've run into this scenario recently I'm posting as I wonder if this is a new trend within the market, an anomaly, of if I am missing something.

Subject is represented as a potential rental. Both my sales comparison and income approach data is sufficient and credible enough that I'm confident with the result, similar to the last time I ran into this scenario a couple months ago. Value by sales comparison approach, in my opinion, is $85K to $90K with a current purchase price of $86K. CONSERVATIVE GRM is 160 and market rent is nailed at $750 per month, so my income approach indicates a value of $120K. This was the same scenario I ran into a few months ago as well, where my sales comparision approach value was significantly lower than my income approach.

I guess I could reconcile toward the value indicated by the income approach but my adjusted values of the 4 sold comparables are $85,945, $90,629, $91,500 and $99,415. The 2 active comparable listings I have in the subdivision have current list prices of $89,900 and $100,000.

What am I missing here and/or how would you explain this market dynamic within your report if you ran into a similar situation?

 

[Mr Rex]

How did you come up with your GRM?

 

[Michigan CG]

Where did you get a GRM of 160?

 

[residentialguy]

How did you come up with your GRM?

Skippys keep plugging in the number until it's just a little over SCA value

 

[Scott R Marshall]

How did you come up with your GRM?

Ran the entire market area of sales over the last 2 years that were represented as rentals with represented rental amounts contained within the MLS database. That's pretty much the only way in my market to determine GRM's. Plenty are represented as rentals but no rental amounts provided. I could spend the next few days trying to get that additional info as well to see if the data skews lower but I've got enough rental amount data that I'm comfortable with the results I've got.

 

[Mr Rex]

What you are missing is the operating expenses and vacancy loss etc. That is evident in your SCA.

 

[Scott R Marshall]

Skippys keep plugging in the number until it's just a little over SCA value

You may not believe it but my mentor, who is no longer licensed, believed that the best way to determine GRM was to divide your opinion of value by whatever market rent was. No further analysis of the market data was necessary in his opinion.

 

[Scott R Marshall]

What you are missing is the operating expenses and vacancy loss etc. That is evident in your SCA.

I guess vacancy loss could account for some of it as well as operating expenses, which is why I'm opting toward the very low range of market GRM's but even if a 160 GRM didn't account for any of that and needed to be lowered to account for these items, it still would not, at least in my opinion, account for the large discrepancy.

But I do like your explantion as to why the income approach was not given much weight in determining an opinion of market value for the subject.

 

[Mr Rex]

Investors aren't dumbarses, or they would be buying at your 160 GRM. The market is speaking to you, loudly.

 

[residentialguy]

What you are missing is the operating expenses and vacancy loss etc. That is evident in your SCA.

You can run PGIM as long as you are consistant when applying it to the subject