Small Income Residential appraisal

[JamMrC]

I just turned in a triplex appraisal with the Sales Approach showing one value, and the Income Approach showing a second value. The Cost Approach showed even a third value. In my Reconciliation, I stated the Estimated Market Value was based on the Sales and Income Approaches, with the Cost given no consideration. The reviewer just told me that the final value should come from the Sales Approach, and I can't use the Income Approach on residential property.

I stated that it is an income-producing property so why wouldn't I give weight to the Income Approach? I also asked the reviewer if that was in writing somewhere because I found that hard to believe.

I think their system just wants the numbers to match.

Is this true? When valuing residential property, even if it is income-producing, the final estimated market value should come only from the Sales Approach?

Please help! Thanks, MrC

 

[Randolph Kinney]

I just turned in a triplex appraisal with the Sales Approach showing one value, and the Income Approach showing a second value. The Cost Approach showed even a third value. In my Reconciliation, I stated the Estimated Market Value was based on the Sales and Income Approaches, with the Cost given no consideration. The reviewer just told me that the final value should come from the Sales Approach, and I can't use the Income Approach on residential property.

I stated that it is an income-producing property so why wouldn't I give weight to the Income Approach? I also asked the reviewer if that was in writing somewhere because I found that hard to believe.

I think their system just wants the numbers to match.

Is this true? When valuing residential property, even if it is income-producing, the final estimated market value should come only from the Sales Approach?

Please help! Thanks, MrC

GSE lending is done on the SCA value. If the income approach is higher and you reconciled your value conclusion to be above the SCA value, the lender won't lend on that. The same is true for the cost approach.

 

[Randolph Kinney]

Selling Guide: Fannie Mae Single Family
Published March 31, 2011


B4-1.4-20, Appraisal Report Review: Income Approach to Value (04/01/2009)

Introduction

This topic contains information on the income approach to value.

Income Approach to Value

Fannie Mae does not accept appraisals that rely solely on the income approach to value as an indicator of market value.


B4-1.4-21, Appraisal Report Review: Valuation Analysis
and Final Reconciliation (06/30/2010)

Valuation Analysis and Final Reconciliation

In the final reconciliation, appraisers must
• reconcile the reasonableness and reliability of each applicable approach to value
• reconcile the reasonableness and validity of the indicated values
• reconcile the reasonableness of available data, and
• select and report the approach or approaches that were given the most weight.
Note: The final reconciliation must never be an averaging technique.

When the income approach to value is used, the appraisal report must include the supporting comparable rental and sales data, and the calculations used to determine the gross rent multiplier.

 

[George Hatch]

The whole reason we use multiple approaches to value and "reconcile" them for the final value conclusions is because in most assignments one or two of the approaches are going to be weaker than the others.

With that said, your opinion is your opinion until you change that opinion based on someone else's demands. If you really thought your Income and Sales Comparison approaches were worth weighting equally then it is what it is. If a reviewer disagrees the burden is on them to express that (and back it up) in their review report, not tell you what your opinion is.

 

[Michigan CG]

How far apart are your three approaches?

 

[JamMrC]

Randolph:

GSE lending is done on the SCA value. If the income approach is higher and you reconciled your value conclusion to be above the SCA value, the lender won't lend on that.

Fannie Mae does not accept appraisals that rely solely on the income approach to value as an indicator of market value.

I guess I need a refresher on Fannie Mae requirements and allowables.

George: I agree with you. I fully believe though that we appraisers are valued less and less for the analysis and expertise we actually bring, and more and more for our ability to fill out a form with few red flags.

Michigan CG: My 3 approaches were $20k apart, the SCA being the lowest, and the ICA being only 10k above it. I figured a value right between the 2 would be supportable and reasonable. But, like I said above, I guess I need a refresher on Fannie Mae and what they will allow and accept.

Anyway, I appreciate the responses.

Thanks!

 

[Natalie117]

Selling Guide: Fannie Mae Single Family
Published March 31, 2011


B4-1.4-20, Appraisal Report Review: Income Approach to Value (04/01/2009)

Introduction

This topic contains information on the income approach to value.

Income Approach to Value

Fannie Mae does not accept appraisals that rely solely on the income approach to value as an indicator of market value.


B4-1.4-21, Appraisal Report Review: Valuation Analysis
and Final Reconciliation (06/30/2010)

Valuation Analysis and Final Reconciliation

In the final reconciliation, appraisers must
• reconcile the reasonableness and reliability of each applicable approach to value
• reconcile the reasonableness and validity of the indicated values
• reconcile the reasonableness of available data, and
• select and report the approach or approaches that were given the most weight.
Note: The final reconciliation must never be an averaging technique.

When the income approach to value is used, the appraisal report must include the supporting comparable rental and sales data, and the calculations used to determine the gross rent multiplier.

Since these are the rules regarding Single Family properties....how is this applicable to the OP's triplex?

 

[Randolph Kinney]

Since these are the rules regarding Single Family properties....how is this applicable to the OP's triplex?

If you read through the selling guide, although it is titled single family, it also covers Small Residential Income Property Appraisals (Form 1025), aka 2 - 4 unit single family properties.

It also covers Uniform Residential Appraisal Report (Form 1004), Manufactured Home Appraisal Report (Form 1004C), Individual Condo Unit Appraisal Report (Form 1073), as well as other property type appraisals.

Multifamily is like apartments units, 5+ or more.

From:

2007 Selling Guide
Part XI: Property and Appraisal Guidelines
XI, Chapter 4: Reviewing the Appraisal Report (11/01/05)
XI, 408: Income Approach to Value (11/01/05)
Title: XI, 408: Income Approach to Value (11/01/05)


The income approach to value is based on the assumption that market value is related to the market rent or income that a property can be expected to earn. Its use generally is appropriate in neighborhoods that consist of one-unit properties when there is a substantial rental market, and it can be an important approach in the valuation of two-unit to four-unit properties. However, it generally is not appropriate in areas that consist mostly of owner-occupied properties since adequate rental data generally does not exist for those areas. We will not accept an appraisal if the appraiser relies solely on the income approach to value as an indicator of market value.

To arrive at the indicated value by the income approach to value, the appraiser multiplies the total gross estimated monthly market rent for the subject property by a reconciled gross monthly rent multiplier. (Because of the way the appraiser’s opinion of value is derived under this approach, the income approach to value provides a reliable indication of value only when the comparable sales are truly comparable.)

• Estimated market rent is based on an analysis of comparable rentals in the neighborhood. After appropriate adjustments are made to the comparable properties, their adjusted (or indicated) values are reconciled to develop an estimated monthly market rent for the subject property.

• The gross rent multiplier is determined by dividing the sales prices of comparable properties that were rented at the time of sale by their monthly market rent, which is then reconciled to create a single gross rent multiplier (or a range of multipliers) for the subject property.


The appraiser must use his or her best judgment regarding the applicability of the income approach to value. An instance in which the income approach may not be an appropriate indicator of value involves the appraisal of a two-unit rental property in a neighborhood that is dominated by two-unit properties that are owner-occupied. In such cases, the appraiser does not need to develop a gross monthly rent multiplier, but must report the estimated market rent for the subject property. In such cases, the appraiser should provide an appropriate explanation of why he or she chose to report in this manner.

When the property being appraised is a one-unit property that will be used as an investment property, the appraiser must prepare a Single-Family Comparable Rent Schedule (Form 1007) in addition to the appropriate appraisal report form. [This form is not required for a two-unit to four-unit property because the Small Residential Income Property Appraisal Report (Form 1025) provides substantially the same information, nor is it required for a Community Living group home mortgage.] When the appraiser is relying on the income approach to value, he or she should include the supporting comparable rental and sales data, and the calculations used to determine the gross rent multiplier in the appraisal report.

 

[Randolph Kinney]

Since these are the rules regarding Single Family properties....how is this applicable to the OP's triplex?

Here is what the GSEs call multifamily:
Freddie Mac's Multifamily products support the acquisition, refinance, rehabilitation and construction of apartment buildings. Here are some recent examples of how Freddie Mac has provided funding solutions for our Seller/Servicers.

http://www.freddiemac.com/multifamily/multifamily_financing.html

 

[realbiz]

I agree with Mr. Kinney. Also most people look at two to four unit properties to be occupied by a owner, or a owner and family members. I know some people buy these properties as investments, but they still fall under typical FNMA, FHA and VA financing with most weight given to the market approach.