Real Estate Valuation & Underwriting

2 Replies

I am looking to get started investing in Real Estate in Grand Rapids, Mi. I am currently looking at a deal that multiple buildings (a combination of multiunit and single family homes) and a total of 11 units. The asking price is absolutely astronomical when I crunch the numbers. The listing agent is stating that they are valuing the property based on the market value approach instead of based on the Cap Rate or GRM. My question is whether or not this is a standard approach for this type of investment?

As a buyer or seller, you can valuate it however you want, and it'll work if buyer/seller meet in the middle. Wherever a buyer and seller meet in the middle, using whatever methods they used, that's market value. Period, end of story, that's the definition. :)

However, you posted this in the mortgage subforum...

- For residential appraisals to make residential lenders happy, it's based on comps. 

- For commercial appraisals to make commercial lenders happy, it's generally based on income.

There are some properties where that difference is important. 

- Let's say I'm a residential lender and can go to 75% LTV on a property/scenario, and per the comp approach it's an $800k property. That means I can lend $600k on the property.

- Let's say a commercial lender can go to 80% LTV on a property/scenario, and per the income approach it's a $725k property. That means they can lend $580k on the property.

Note that the higher LTV lender can actually lend less on the exact same property in that scenario, just because of the different approach used.

Here in the Bay Area this generally favors the residential lender over the commercial lender for properties that can be financed either way (2-4 unit generally). In a scenario where there's literally no comps, like if it's the only duplex in town, a commercial lender might be the way to go.

In the exact scenario you described, where it's a portfolio of a dozen properties, that's a commercial loan so the income approach will apply and it'll be a commercial appraisal. 

But, by all means, use comps to negotiate price down if you can. :)