Property Valuation - Income Approach
I recently found a property in Philly that I am interested in purchasing (Fishtown area). I live out of state and therefore at a handicap.
However, I got a local newspaper and called a few re agents to get a feel for property costs. I also looked at comps for the neighborhood. I checked taxes etc.
The owner is asking for 135K. She indicated that the income approach was used as the valuation method. The area is emerging (it is west of Center City). Once rehabbed, the property would make a nice rental or 2. One apartment is an efficiency that could rent for $500/mnth. The other is a 2 bedroom that could rent for $1050 (utilities included in both rents).Since both apartments are currently vacant, I am verifiying that these rents are in line with the area.
Based on my research, property purchased on this street over the last 2 years fell in the 60K - 65K range. It looks like the place needs about 15 -20K of rehab and new applicances.
Can someone explain how the "income approach" is used to derive a property value. Why it would be used? Is the current owner asking too much for the property?
Thanks for your help.
As far as I understand it, the income approach is used on apartment buildings (anything from 4 units up), primarily because you would only buy those for their income potential.
On a duplex or 2-unit, which it sounds like this is, you're still in a residential class of property. Therefore, the rules of residential valuation apply, which is basically that it is worth whatever somebody will pay for it, based on current market value.
The best way to determine this is either get a property appraiser to check it out, or check comparable sales of similar properties (the closer in location and property type the better).
This is definately residential not commercial. Unless Philly is different than everyother State, which is not. Way too much. Call local appraisal and see if they are willing to pull recent comps for a nominal fee. In addition, even if they used the income approach for this property, the numbers would not warrant a sale price of $135K.
The way she got the figure was by adding the rents together and multiplying by 7 yrs. From my limited understanding, that is how you do an income valuation. Adding $1050+500 *84 mos. = $130,200. She's probably padding it a little so she can be 'talked down' on the price. Still, I agree with the others that this is too much for this particular piece of real estate, especially considering that you have to do repairs that you cannot be there to supervise. She should come down significantly or more likely, you should walk away. If you really want a property in that area, buy one of the 50-60k homes instead. Build a couple of walls, add a kitchen to make one of the larger rooms into an efficiency and you've got the same property for 60k less. Just my opinion.
The income approach can be completed on any income producing properties. This value is derived from the market in an standard appraisal report through the use of GRM'S (gross rent multipliers) and cap rates for certain market areas. The income approach is not determined by adding the rents together and multiplied by 7 years. A good reference book would be the " The fundementals of Appraising" From the Appraisal Institute.
Quote:
On 2003-08-20 13:47, kellygreen wrote:
A good reference book would be the " The fundementals of Appraising" From the Appraisal Institute.
Kelly,
Thanks for the tip on the book I will check into it.
Your are welcome and good luck. There is a lot of interesting theory in there.