Comparable sale has rental cottage

Discussion in 'Urgent - Help Needed' started by WindyJRTX, Oct 21, 2011.

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  1. WindyJRTX

    WindyJRTX New Member

    0
    Oct 31, 2008
    Professional Status:
    Appraiser Trainee
    State:
    Virginia
    I am appraising a single-family home with square footage that is somewhat higher than the average for the neighborhood. One of the few comparable homes I can find with similar GLA is a pending sale, but it also has a cottage on site that rents for $575/month. Should I include this sale, and if so, how do I adjust for the cottage? Will this sale raise to many red flags with underwriters to bother with? Thanks to anyone with advice to offer!

    By the way, I am NOT a trainee, I am licensed since '08 with 5 years prior trainee experience; I'm not sure why my professional status says "Appraiser Trainee". I have appraised using comps with rental accessory units in the past, but cannot remember how I approached it as I have lost access to my old appraisal files. I was let go from my prior appraisal company due to slow business and am now on my own with fewer reference files, and therefore reaching out to fellow appraisers! Thanks!
     
    Last edited: Oct 21, 2011
  2. VolcanoLvr

    VolcanoLvr Senior Member

    1
    Oct 30, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    Washington
    You can 'adjust out' the Guest House using a depreciated cost to build, as a line item adjustment at the bottom of the grid. Hopefully your assessor data will show the size of that structure.

    On my forms I have the line below Garage/Carport as "Outbuilding/Other" ... that's where I make these kind of adjustments. U/W's don't challenge this.

    Don't sweat the rental income.

    --
    As far as your status.....send a note to Wayne via PM and ask him to change it.
     
  3. leelansford

    leelansford Elite Member

    11
    Mar 29, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Illinois

    1st, what is your analysis of the other market data indicating to you as to the affect of this accessory unit specific to the price paid for this property?

    2nd, you may want to talk to both the selling and buying agents regarding the affect of the accessory unit as to the price paid for the property.
     
  4. NorthTexValuation

    NorthTexValuation Senior Member

    0
    Sep 17, 2011
    Professional Status:
    Certified Residential Appraiser
    State:
    Texas
    If it was one of the three best comparable sales I might use it, but since it's just a pending I would not bother with it. Also, if the subject is significantly larger than al other hosues in the neighborhood, that pending's listed GLA might include the cottage. Just check it out if you end up using it. Talk with both brokers and ask their opinion on how much a typical buyer would pay for a cottage with that rental income.
     
  5. Ed Falkowski

    Ed Falkowski Senior Member

    0
    Jun 25, 2007
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    Aside from contacting Wayne (he resides as "Head Surfer"), I don't know if I 100% agree with anything else on this post. If all else fails, I would look at the depreciated cost... but not after exploring other options. For instance, some adjustments in the SCA for income-producing property are based on just that... income. Take a hypothetical scenario for the property in question:

    Sale Price: $100,000 (house + cottage)
    Monthly rental income of cottage: $575
    Yearly NOI (assuming 40% opex ratio): $4,140 annual rental income
    Cap rate for small rental property product: 9%
    Value added (and associated negative adjustment) as a result of the cottage: $46,000 (or 46% of the sale price)

    Now, consider this...

    A 30 year loan at 4.5% with an 80% LTV equates to a monthly payment of $405/month. Your monthly NOI is $345. Therefore, you could almost live in your house free and clear and just sit back and collect a rent check every month. Not a bad deal, if you ask me and something that would heavily affect a sale price for a property in this price range.

    Of course, these numbers could be changed based on sale price. Let's ramp it up to a $500,000 property... the same calculations would be in effect for the total adjustment but the percentage adjustment would then be 9.2%. Obviously, the NOI of $345/month would not cover an 80% debt service on this property... which would then put further credence that the overall percentage adjustment would be lower as well (it would still eat up some of your monthly mortgage payment, though!).

    Since the cottage is an income-producing element on the property then I would always try and extract the value on an income-producing basis. As follow up support, I would try the depreciated cost technique and see how that lines up with your income adjustment. If the cost to build the cottage outpaces the value added by its income-producing capability, then this would be a good proof for whatever form of obsolescence is attributable to the higher building cost (usually either functional or economic obsolescence... but in more extreme cases it might be physical).

    Just my $0.02.
     
  6. CANative

    CANative Elite Member

    25
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    I assumed:

    $575 x 12 = $6,900 with 25% expenses (NOI $5,175) and a 12 cap ($43,125.)
     
  7. Ariba

    Ariba Senior Member

    0
    Feb 8, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    m2: OMG. Need I say more?
     
  8. Zero

    Zero Member

    4
    Jun 7, 2006
    Professional Status:
    Certified Residential Appraiser
    State:
    Virginia
    Agree. Unless you absolutely can't live without this comp, you might set it aside. Verification and analysis of an income producing, residential property, which may or may not be subdividable, with recorded GLA that may or may not include the cottage, which may or may not be legally rented....
     
  9. Joyce Potts

    Joyce Potts Elite Member

    3
    Feb 6, 2005
    Professional Status:
    Certified Residential Appraiser
    State:
    Florida
    Pollyanna says who cares about what red flags underwriters. Be concerned about USPAP. I did a 1600+- sf Florida Cracker home on three acres just this week-- with not one but TWO, I said 2 detached cottages, 2 barns, lakefront in west Orange County/Orlando. Not pretty, but it is what it is. No way will it ever come close to appraisal guideline compliance. There is no right or wrong answer. It's about approaching the assignment pursuant to USPOOP guidelines with sound, established appraisal methodology and standards and make your best, compelling argument as to the approach you took and why. Make a diligent attempt at supporting your land value--In my case, I tried, but came up with vastly erratic and inconsistent conclusions. But my workfile and appraisal estabishes and discloses that I tried. As long as you're disclosing the problem, the options to the problem, the road you took, etc., you hedge your bet against civil or regulatory liability. Or do it like the lender suggested as a tri-plex, small income producing property even though none of the accessory cottages were rented and even if they were, that market is NOT driven my income or investor activity based on my research.

    My theory, that no one agrees with, is that I write my reports as if I were writing to a reviewer, a lawyer looking to sue or a potential regulatory complaint. Underwriters are the least of my concern because whatever you submit it's never what they think they're looking for anyway.
     
  10. PropertyEconomics

    PropertyEconomics Elite Member

    0
    Jun 19, 2007
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico

    Does the market use cap rates on individual units???? Is there support for the "expenses"? How about a GRM measured from the market against the income???????????????
     
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