Tri-plex too cheap?

[PropertyEconomics]

Question for the crowd .... WHY would multi family prices be in decline and vacancies increasing when foreclosures are high, mortgage financing is difficult, and more families are seeking places to live?

 

[ZZGAMAZZ]

It's possible that the overbuilt apartment segment has yet to absorb the increasing number of renters?

 

[PropertyEconomics]

I think the analysis should be done carefully. Total units for lease, total units absorbed prior year, etc.. It has been my experience that SFR markets and MFR markets work in reverse. As money supply tightens, foreclosures increase the demand for multifamily increases as do rents and vacancies decline.
Not knowing the market my point is that this would require careful analysis. Lack of sales does not always mean a decline ... I would guess investors are much more cautious in this market but not that values will decline exponentially .... I would really not see that .. but again I dont know the market.

 

[hastalavista]

It has been my experience that SFR markets and MFR markets work in reverse. As money supply tightens, foreclosures increase the demand for multifamily increases as do rents and vacancies decline.

Mine too... except now I'm beginning to question (but haven't been able to observationally confirm) if that same relationship will hold true in many of my markets due to the number of homes coming onto the market (REOs) and being sold at low prices.

I have a client for whom I completed two purchase appraisals for in the Tracy, CA area; he's a mortgage broker (one of the most ethical I've met) and he was purchasing these homes out of foreclosure auction (not from the courthouse, but one of those liquidation auctions). I did a rent survey and he said the rent (if obtainable) that I surveyed would put him into a positive cash-flow situation from the start.
Therefore, I wonder in some markets if the conversion of bank-owned properties to rentals will have a downward pressure on some multi-family rents (or if not downward, perhaps a stabilizing effect)?

 

[PropertyEconomics]

Mine too... except now I'm beginning to question (but haven't been able to observationally confirm) if that same relationship will hold true in many of my markets due to the number of homes coming onto the market (REOs) and being sold at low prices.

I have a client for whom I completed two purchase appraisals for in the Tracy, CA area; he's a mortgage broker (one of the most ethical I've met) and he was purchasing these homes out of foreclosure auction (not from the courthouse, but one of those liquidation auctions). I did a rent survey and he said the rent (if obtainable) that I surveyed would put him into a positive cash-flow situation from the start.
Therefore, I wonder in some markets if the conversion of bank-owned properties to rentals will have a downward pressure on some multi-family rents (or if not downward, perhaps a stabilizing effect)?

Denis I have the same thoughts as you .. the only real issue in this market is lack of available financing. It could be that strong investors pick up these homes and either lease them or sell them on contracts. That is the thing yet unseen .. but we certainly know those that have lost their homes will not be able to purchase again anytime soon .. particularly given the tightening of the credit market. From an appraisal standpoint, this has to be one of the more interesting things that is happening and will require considerable thought when appraising multifamily properties. Good post.

 

[Webbed Feet]

To All,

Sorry O.P. But I predict that with a gap that big, your analysis is faulty AND the little old lady is selling below market, both.

Get away from price or cost per unit using data that does not properly reflect economy of scale regarding other ownership costs. Get away from faulty reported rents. Get out of your car, go door knocking, and start speaking personally to renters of similar properties and find out the real market rents, length of tenancies, and vacancy rates currently are. Take the data and use it to estimate what the MARKET RENTs for your comps should be and stop using the probably false reported actual rents. You'll find your GRM will begin to make sense and you can then repair your income approach. Which, by the way, you cannot use an indicated GRM generated by your software from a four-plex against a tri-plex, or a duplex to a tri-plex. A tri-plex is about the toughest of subjects in the 2-4 arena due to this fact when you have no tri-plex comps. Such a GRM is skewed and will give you bad results due to the number of units being off.

And yes, I'd be terrified to send out a report with a gap that big between a contract price, and my opinion, without being able to explain it during the current state of lending. I would not sign and send until I had the explanation. Otherwise, you can plan on getting nailed for not "analyzing" the sales contract versus your opinion of value. Not that I agree with that concept, because I don't.

Webbed.

 

[The Bob]

Question for the crowd .... WHY would multi family prices be in decline and vacancies increasing when foreclosures are high, mortgage financing is difficult, and more families are seeking places to live?

There was an article about this in the WSJ recently. Last year everyone was saying rents were going up because more people would be renting since they can no longer qualify for a loan. Well, they forgot to take into account that all those houses in the market that weren't selling, were turned into rentals. This is especially true in the markets that saw a lot of investor activity.

In short, there is an over supply of houses for rent in some markets.