GRM Analysis on a Quad

[Steven Brown]

Hello All,

I'm currently analyzing the numbers on a listed Quad. This is my first analyses I'm performing in determining what is the fair market value to place an offer on the property. I've looked at the immediate rents within a mile of this property and the GRM comes out to an average of 8.8 against 4 properties. These are 2/1 units. The listed Quad I'm looking has 2/1 units @ 870 sq. ft per unit renting currently from 800 to 950. Currently way below market rents which are ~1400/mo. The quad listed for 550K but has dropped to 520K. Using the current higher end rents @ 950, that produces a GRM 11.4, which is higher than what the market GRM is at 8.8. Using the market GRM and manipulating the GRM formula (Price = (GRM) x (Gross Annual Rent)), that puts this quad at a market value of ~401K. I want to submit an offer but offering ~120K less than what is listed seems like I may have not considered some additional details. Other than comparing market GRM, what else should I consider? I'm not sure how the listing agent came up with 520K if the current market GRM surrounding this property is @ 8.8. Should I be pulling comps on Single Family homes with similar total sq footage? Are they shooting for the moon and hoping no investor pays attention to the market GRM and listing this quad way above market price?

Any help on this would be much appreciated. If additional info I'm missing is needed I can provide this.

-Steve

[John Gilles]

Hi Steven, as a real estate appraiser, here are my thoughts...As Brandon noted, being a (small income) residential property, sale comps are relied upon more heavily than any particular income approach (GRM, Cap rate, etc). Looking at the total sale price or sale price per unit might give you a better idea of the overall market value. Adjustments for sale price would be reasonable for superior/inferior unit mix (studio v. 1 bed v. 2 bed, etc), building size, condition, and location.

As for your analysis of GRM, you might want to make sure you're comparing apples to apples. For example, are the rental rates for the comps well below market (similar to subject) or much closer to market? You would not use the same GRM for a property that is achieving market rents as a property with in-place rents that are well below market. This is not an equal comparison. If you believe that the market rents for your property at $1,400/mo. per unit. then applying a GRM of 9 would indicate a value of $604,800 ($1,400 x 4 = $5,600/mo. x 12 Mo. = $67,200 annually x 9 (GRM) = $604,800). Similarly, if we apply a lower market rent of $1,200/mo. per unit and the same multiplier of 9, the value is around $518,400 or very close to the asking price.

In an appraisal of a 4-unit building we would calculate the GRM of the comps by using sale price/annual market rents (based on broker estimates or proforma). Then we would calculate the market rent for the subject property and apply a GRM from within the range of the comps. By doing this we are able to produce an apples to apples comparison in which all properties (subject and comps) are being looked at on a market rent basis. FYI, this does get a little more complicated with rent-controlled property.

In some ways a GRM can be applied in the same way as a cap rate, as an assessment of risk. The higher the risk (poor location, near or above market rents, declining market conditions, etc.) the lower the GRM. On the other side, the lower the risk (good location, below market rents, good condition, etc.) the higher the GRM.

Good luck.