Vaughan - Posted by ECB

Posted by ECB on July 20, 2003 at 18:14:48:

Thanks for the follow-up. I disagree with a bit – cash flow can be standardized fairly easily. What is difficult is the underlying assumptions although I would note that gross receipts is fairly easy to come up with. What is difficult to project is operating expenses.

Again – I view any asset’s value as what cash flow it produces (projected or otherwise). Obviously, the value of an asset can, and does change, based on existing cash flow or projected.

Just my thoughts. Continued discussion is welcome.


Vaughan - Posted by ECB

Posted by ECB on July 20, 2003 at 14:19:45:

Here is one for us to think about —

J.P. Vaughan notes that there is only ONE (her emphasis) way to determine the market value for a single family home is comps.


Well, I suppose if you were planning to LIVE in it, yes.

On the other hand, if it is an investment, then I would argue that the amount of cash flow that the property generates would be a more valuable method. This gets back to a fundamental finance class fact-- the value of any asset is the cash that it produces. Using J.P.'s strategy, a home that comps out, yet produces not cash (say it’s not rented), could, in theory, be valued at the same amount as a similar home that is rented out and is generating a positive monthly cash flow. Which would we rather have?

I understand what J.P is saying and would argue that comps do play a role in determining market value. However, to say that there is only ONE (again, her emphasis) way to value property is, in my opinion, erroneous.

Other thoughts on this?


Re: Vaughan - Posted by JohnBoy

Posted by JohnBoy on July 22, 2003 at 10:48:00:

So if I had a house that justified a sale price of 150% of FMV, based on “cash flow”, even though comparable comps support less, you would gladly pay me 150% of FMV because the “cash flow” supports paying it???

I don’t know about you, but regardless of how much the property cash flows, I would never pay more than FMV based on comparable sales. If a house is only worth $100k I’m not going to pay $150k for it just because they may have a renter paying higher rent that could justify a higher than market value for the property. I would just buy another house and get my own renter and end up with a better deal.

The article is about SFH’s, not multi-units. Naturally, if the SFH has a FMV that won’t support the rent for the area, I’m not going to buy it for a rental. But regardless of how much rent it generates, I’m also not going to pay a higher than FMV price based on comparable sales. I don’t care how much it cash flows, if it’s only worth $100k based on comparable sales, it’s only worth $100k.

Like Bronchick pointed out. There are investors buying rentals that generate $400 rents they are paying $15k for the property. $400 rent would support a much higher price than $15k. So are you saying you would gladly pay a lot more than the $15k just because the rent supports it, regardless of the fact the property is only worth $15k???

Re: Vaughan - Posted by Rob FL

Posted by Rob FL on July 21, 2003 at 09:27:15:

Except that in real world 101, that an appraiser is only going to use the comparable sales method to determine the value.

Re: Vaughan - Posted by Joe C. (AR)

Posted by Joe C. (AR) on July 20, 2003 at 22:59:50:

Just my .02 because I can’t stay out of this. “Comp” value is what you could buy a comparable property for. Cashflow potential shouldn’t raise the value because because a truely “comparable” property should offer the same cashflow opportunity. If you are looking for a minimum cashflow requirement this should only lower the value in your eyes, never enhance it. Why pay more than the “going rate”, which is what comps give you?
Joe C. (AR)

Context is relevant - Posted by William Bronchick

Posted by William Bronchick on July 20, 2003 at 21:10:26:

You have to consider the context of the article. She was comparing the “comparable sales” method vs. assessed value, income approach, listed price, etc. The amount of cash flow the property will produce is relevant in your decision to buy or not buy the property as a rental. However, the “income approach” method of appraisal is not really relevant in determining the market value of a single family home (as thus what you should offer). The major reason is that most single family homes should be valued at what they can be sold for as a residence, not a rental, even if you keep it as a rental. I say in most cases - ghetto properties are generally bought for rental value, since nobody but another ghetto landlord would buy it from you (e.g., I know landlords in Philadelphia and Baltimore who buy houses for $15,000 cash and rent them for $400 per month).

If you finance properties, appraisers will look at comps, not the income approach. Some lenders will look at a “rent survey” to make sure the rents vs. debt will not leave the borrower in a negative cash flow situation he cannot handle. I’ve never seen a lender look at the income approach to appraising a single family home.

Re: Vaughan - Posted by dell-ohio

Posted by dell-ohio on July 20, 2003 at 16:53:40:

I also read the article. I found it well written with valuable information to help people determing retail value of SINGLE FAMILY houses.

However if you are purchasing duplexes, larger multi-units or if you are buying and holding for cash flow and assett creation, then you better know something about the “ONLY” way to value a property, the income approach.

We have purchased twelve properties since we began in Janurary, and I must say that comps played very little, if any, role in ten of them.

In two single family homes that we purchased COMPS did play a larger role, however the determining factor was still, can we rent these two properties and have at least $150 per month cash flow. In case the Realtor cant sell them at FMV in 90 days after completion of rehab.

Real Estate appraisors would also disagree with Vaughn, they use the three commmonly accepted methods of appraising real estate. The MARKET APPROACH, INCOME APPROACH and REPLACEMENT COST APPROACH. Depending on the type of property you get different weighting for each method to determine actual value. The value to the buyer is determined by what he intends to do with the property.

My viewpoints


Re: Vaughan - Posted by Kristine-CA

Posted by Kristine-CA on July 20, 2003 at 16:23:44:

My understanding is that FMV and “value” are two different things. Rented or no,cash flow or no, you are comparing recent sales of properties without these considerations to make them equal. Every investor is different about what consitutes “cash-flow” and how it is calculated. I would not be interested in any FMV comps for SFHs that included “cash-flow” numbers. Too subjective for me.

In fact, most investors that call me to sell me something tell me that his or her property is worth more than the “comps” because of the money it makes, the money it could make.

I suppose if cash-flow could be systematically calculated and standardized, cash-flow could be useful in determining comps for SFHs. But we’re not there yet.

Sincerely, Kristine

Re: Vaughan - Posted by dell-ohio

Posted by dell-ohio on July 21, 2003 at 22:13:39:

True on single family properties. Not true on multi units or commercial properties.

All my real world apprasials from certified commercial appraisers use some weighted average of the three approaches with INCOME APPROACH carrying the most weight.