Income Approach?

[Addie]

The real question is; who is your buyer? It sounds like you will be pulling sales of owner purchased properties. The market for owner occupants could be significantly different from the investor market for the property. How many owner occupants are going to be able to obtain financing, or have the willingness, to hold onto a property for 21 months before they occupy the property? IMO, I don't think the question is whether to include the income approach, it is whether to make a property rights adjustment to the SCA.

All they have to do is ask the client. Do you want the fee simple interest valued? OK, then I am going to make it hypothetical (FYI this hypothetical condition must be stated on every single tenant occupied house even if month to month aka as-is owner has leased fee, HC they have fee simple)

Or do they want leased fee interest that reverts to fee simple in 21 months? Then do as-is and good luck finding investment SFR.

 

[Deleted member 152047]

All they have to do is ask the client. Do you want the fee simple interest valued? OK, then I am going to make it hypothetical (FYI this hypothetical condition must be done on every single tenant occupied house even if month to month aka as-is owner has leased fee, HC they have fee simple)

Or do they want leased fee interest that reverts to fee simple in 21 months? Then do as-is and good luck finding investment SFR.

Admittedly, I am a commercial guy and don't know much about residential lending. But on the commercial side, lenders will not accept, nor lend, on an "as is" market value that is subject to a significant hypothetical condition. Maybe someone more informed in that arena can provide some insight?

 

[J Grant]

It's a fee simple interest , the house they are buying just happens to be tenant occupied. Same as buying a Multi family that has leases to tenants in place, this is just more unusual since it is a single family

 

[Addie]

It's a fee simple interest , the house they are buying just happens to be tenant occupied

as of the effective date no one has fee simple interest. The bundle of rights are leased fee and leashold. You must use a HC that the rights are fee simple. Say a month to month. You do as-is check box, but you say there is a HC attached. Hey, owner has leased fee interest. I'm doing this as fee simple. (makes no value difference but makes a huge difference in telling the truth vs not.)

Now a 21 month lease is a whole new ballgame. That's going to affect value. Client can ask to as-is checkbox on that, but good luck backing that value up. The easy way out would be no check box in the reconcile and explain why no box checked and manually tell the the circumstances of the value, but that's a client decision, not an appraisers. (Due to form limitations, no box appropriate, xxxx)

 

[J Grant]

Since OP referenced FNMA...the FNMA 1004 form on grid has 2 choices, leasehold estate/fee simple .

It does not present a third choice ( leased fee estate). Perhaps because a leased fee period has a temporary (even in a several year lease ) when it encumbers the property? That's my understanding of how it would apply in this case, since with an AS IS appraisal for FNMA on a 1004 form it can not be made subject to an HC or have an EA added to the form.

 

[Terrel L. Shields]

as of the effective date no one has fee simple interest.

Most mortgages will require a fee simple value, and here the renter may have to sign a waiver in lieu of foreclosure. But federal law proves some protection to renters being evicted in foreclosure. Outside that the renter may have no more than 90 days so long as they pay rents. The bank is patient.

 

[Addie]

Since OP referenced FNMA...the FNMA 1004 form on grid has 2 choices, leasehold estate/fee simple .

It does not present a third choice ( leased fee estate). Perhaps because a leased fee period has a temporary (even in a several year lease ) when it encumbers the property? That's my understanding of how it would apply in this case, since with an AS IS appraisal for FNMA on a 1004 form it can not be made subject to an HC or have an EA added to the form.

Well, there's also top of page 1 with "rights appraised" and has "other", but OK.

So when you have a month to month tenant w/ a refi. and effective date is 08/17/18, you say you are appraising the fee simple rights. This is fine.

My question to you as the client and the state board, "as of the effective date, who had this fee simple bundle of rights you said you did the appraisal under?"

Answer, no one, you lied. You did a hypothetical appraisal but forgot to tell someone. I spoke with an investigator at BREA on this very topic. The investigator said "you are correct." I wanted to hear it from 1 of the horses mouths.

Just because 100% of appraisers are doing it wrong, doesn't make it right. And BREA (particular investigator) did say, they don't call it out formally. Probably because 100% would get citations and it wouldn't look good.

On a short term lease on a 1004. They correct way to go is; as-is checked, and a comment letting the reader know a HC is attached to that as-is value. You then explain, as-is leased fee interest, did as fee simple. This HC has no affect on value if it was not in place. It was used to let the reader/client know as of the effective date what bundle of rights the subject was under.

 

[J Grant]

From article: The leased fee interest, which is typically used in the industry, is equivalent to the feesimple interest of a property that is leased to others. ... A lease contract does not remove any rights from the bundle of rights of the fee simple estate, but rather it is an addition to the fee simple estate.Mar 9, 2018

http://nerej.com/fee-simple-vs-leased-fee-in-valuation-by-steve-hurlbut

 

[J Grant]

In regards to the above post 18, he is correct in that fee simple is the ownership bundle of rights ( the alternatives are leasehold, or life estate ...) , but leased fee is not a bundle of rights form of ownership it is an ADDITION ( an additional term ) to the fee simple ownership.

In an income property appraisal when we develop the income approach we are doing an appraisal of the leased fee interest as well as the fee simple interest. If purpose is owner occupancy we do not do the income approach/appraise the leased fee interest, only the fee simple interest ( which answers the OP question whether to develop the income approach )

In OP particular case, we asked who the likely buyer is ....if it is owner occupant , then no income approach developed, just add rent survey and 2016 if applicable since it is rented.

For the particular subject , if for owner occupant use it has a 21 month lease that other properties sold don't, so that could be on a line item of its own and impact on marketability /value addressed there ( imo, others may have a different way to report it) BUT ( I am confused myself on this point )...when we appraise a property we normally appraise it as if vacant, aka as if ready to be rented at market rates if an income property and as if ready for occupancy by new owner if owner occupant property.

So , in that sense, would it matter that the subject has a lease in place ? Should it be appraised as if vacant and the lease has no bearing ? Or maybe two values, one as vacant one with the affect of having the 21 month lease in place ?

Because every appraisal is as we know in essence a HC model , therefore we don't make a HC that it is so....if we appraise a house for a refinance, for example, it is not "for sale" and clearly the fact it would be vacant as of eff date is a HC because in fact there is an owner livign there who in reality is not selling his property...but in appraisal there is a presumed, or HC "sale" (what property should bring as of eff date passing of title/consummation of sale )

 

[Dublin ohio]

I spoke with an investigator at BREA on this very topic. The investigator said "you are correct." I wanted to hear it from 1 of the horses mouths.

Just because 100% of appraisers are doing it wrong, doesn't make it right. And BREA (particular investigator) did say, they don't call it out formally. Probably because 100% would get citations and it wouldn't look good

So you are telling us that the CA BREA does selective enforcement. I call BS. But than again it is California.