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FHA
Home Loan Appraisals - Income Approach
The
income approach is rarely used to determine the value of a home
that will be financed by an FHA insured loan unless it is an
income producing property (such as a triplex or four-plex).
The income approach is an analysis based on the relationship of
value as related to the market rent that a property can be
expected to earn.
Market
rent is the rental income that a property would most likely
receive on the open market as indicated by current rentals paid
for comparable space. In addition, the appraiser will
analyze the sales prices of comparable properties in order to
determine the gross rent multiplier (GRM) that represents
the relationship between market rent and market value. This
ratio is calculated by:
Sales
Price divided by Gross Rent = GRM
The
following illustrates how to calculate a monthly gross rent
multiplier:
| Comparable |
Sales
Price |
Monthly
Rent |
Gross
Rent Multiplier |
| 1 |
$90,000 |
$750 |
120.00 |
| 2 |
85,000 |
690 |
123.19 |
| 3 |
87,000 |
715 |
121.68 |
| 4 |
95,000 |
800 |
118.75 |
| 5 |
89,000 |
730 |
121.92 |
| Average: |
121.11 |
Based
upon this analysis, the appraiser can used this estimated GRM and
apply it to the projected gross rents of the subject
property. For example, if the appraiser had determined that
the market rent for the subject property is $700 per month, the
estimated value of the subject property would be:
Gross
Rent x GRM = Market Value
$700
x 121.11 = $84,777
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