Income Approach vs Past Sales

[Isaac Fridmann]

Hey BP Community,

First off, I just want to say how grateful I am to this platform. While I haven't yet acquired my first property, I'm way more knowledgeable thanks to the Bigger Pockets community and hope to also be able to provide value to others. 

I'm working hard to acquire my first BRRRR property. While I'm looking at SFH, I'm also focusing on duplexes, triplexes and quadplexes. I had 2 questions i was hoping to run by the community;

1) With duplexes, triplexes and quadplexes, do you calculate the ARV with the income approach or past sales?

2) When looking at comps for a triplex for example, if there aren't any that sold in the area, can you use a 3 bedroom SFH as a comp?

Thanks in advance!

[Sergey A. Petrov]

One to four residential is almost always based on comps not income although appraisers will consider fair rental value. A triplex and a SFH aren't really comparable

[Isaac Fridmann]

Quote from @Sergey A. Petrov:

One to four residential is almost always based on comps not income although appraisers will consider fair rental value. A triplex and a SFH aren't really comparable

 Thank you.

[Robin Simon]

Your valuation approach should be more towards income approach for the multi-unit properties because thats who the potential buyer pool is (by definition, investors only since they are multi-unit properties). Ideally, you make the income approach the dominant value indicator and use sales comps as a secondary/confirmatory value approach. 3-BR SFH is definitely not a good comp for a triplex, as the buyer pool for 3BR houses are primarily familys looking for a place to live, and not concerned about rents by the room

[Alex Bekeza]

@Isaac Fridmann

1) With duplexes, triplexes and quadplexes, do you calculate the ARV with the income approach or past sales?

The appraiser is always going to value 1-4 unit properties primarily based on the sales comps approach.  He will give a sales comps approach, cost to rebuild approach, and income approach to value but his final appraised value conclusion will match the sales comps approach which is what lenders will use.  The income approach to value becomes influential only on 5 + units.  There is a common misconception that DSCR lenders value properties based on income.  COMPLETELY FALSE.  They underwrite your loan based on income/DSCR but the APPRAISED value is always derived from the sales comps approach. 

2) When looking at comps for a triplex for example, if there aren't any that sold in the area, can you use a 3 bedroom SFH as a comp?

I wouldn't rely on this.  This property may be very difficult to appraise and when in doubt you should definitely lean conservative in your expectations.  He will not use the SFR so he will likely find another duplex or 4plex and adjust upward or downward accordingly.  When the appraiser has to go out on a limb due to a lack of comparable property types it's a safe bet that he's going to sway conservative.  

I have 1 fourplex and 6 duplexes but both property types are prevalent in the area so comps were easy to find.  I've also originated over 300 BRRRR refinances so I've seen just about every combination of the situation you're describing.