Use Actual Rents, Not Market Rents

[gregb]

Anyone run across this where the client insists that on a 50 unit apartment property that the actual rents are used instead of the market rents in the analysis?

 

[KHS445]

I have not. That said, I would include both a market rent and actual rent valuation in the report and explain the differences and why you have selected one valuation over the other. Which one provides a higher valuation? Is the difference significant? Is the difference explainable and is it realistic considering the current market and marketing area?

 

[J Grant]

Anyone run across this where the client insists that on a 50 unit apartment property that the actual rents are used instead of the market rents in the analysis?

Not on that scale but similar for small income property, I ignore that directive it is an unacceptable assignment condition. If the appraiser decides actual rents are equivalent to market rents that is one thing, but to use actual rents simply because client dictated it, and especially if they do not reflect market rents, I think you already know the answer.

 

[Mr Rex]

Is it some form of subsidized housing?

 

[Michael P Jacobs MAI]

Well, an adjustment for below market stabilization would technically "use" actual rents and still reflect market as well if that's what they are asking for.

 

[Overimprovement]

Could there be a reason they are garnering above market rents in general? Perhaps the maintenance staff is exceptional. Perhaps they have higher quality/condition units that other appraisers have not found sufficient comparables for in the past. Maybe there is some solid locational advantage to the units, again that just has not been realized in the past by other appraisers.

Wouldn't hurt to ask why--maybe one of these will come out as the reason, and you can focus an extra bit of time attempting to verify their assertions. If they are a good client, they would appreciate the effort, if nothing else. Maybe they are just wrong in their assumptions too, and the market truly just doesn't care about granite countertops and three parking spaces per unit.

All that said, could just be smoke too--wanting a higher value. Or even fraud--with fake leases.

 

[George Hatch]

Rent control is a thing with multi-family properties in certain jurisdictions in this region. Sometimes you have to use contract rents, at least for any occupied units.

 

[J Grant]

No more details from the OP meaning everyone is answering in a void.

 

[NachoPerito]

I have used market rents and contract rents independently as different analysis (always did both in the same report), but a banker said that using contract rents wasn't valid. So now I use market rents in the income approach and I capitalize the contract rents as a "test or reasonableness" only.