The Income Approach/Rental Analysis
If the income approach had been a required technique in all Real Estate Appraisals over the past 50 years, I am certain that we would have avoided the boom and bust in the Real Estate Market.
Why have appraisers always been taught that the income approach is not applicable in almost all single family appraisals? I believe that it is because the rule makers (Banks and GSEs) know that the Income Approach must be ignored in order to support the market value estimates needed to keep the money flowing.
I don't have a great deal of confidence that the Income Approach will ever make it into the owner occupied single family appraisal process. However, I believe that an estimate of Potential Rents and something like the Debt Coverage Ratios could and should be made part of the appraisal and underwriting processes. This is especially important now that there is a history showing how readily borrowers will walk away from their mortgages.
The addition of a rental analysis and debt coverage ratio will add a layer of protection for those who invest in mortgages and mortgage backed securities. I believe the time has come to rethink how we value owner occupied single family properties.
Lawton Grantham, Jr., SRA