1007 form

[Scuttlebutt]

I have a client that has ordered a 1007 and is asking me to use short term rental income as the basis of value. The form refers to "Market Rent", "Monthly Rent" and lease term information. None of this exists when considering short term rental. Can I project monthly income based on short term rental information and use this approach? It doesn't seem like the intended purpose of the 1007 form. On the other hand, the subject is not rented out as a long term rental, so it would not be a direct comparison to use monthly market rent amounts. Any thoughts?

 

[glenn walker]

I have a client that has ordered a 1007 and is asking me to use short term rental income as the basis of value. The form refers to "Market Rent", "Monthly Rent" and lease term information. None of this exists when considering short term rental. Can I project monthly income based on short term rental information and use this approach? It doesn't seem like the intended purpose of the 1007 form. On the other hand, the subject is not rented out as a long term rental, so it would not be a direct comparison to use monthly market rent amounts. Any thoughts?

I would say No- It would produce an-unreliable and rental survey and if you include the #216 Income & Operating Form your property will show a large negative cash flow. Typically the reason why the Underwriter wants or needs a 2007 and 216 is so She knows if the actual or if market rents in that area will cover the mortgage, taxes, insurance and repairs and maintenance. rental income . ON Say a Airbnb-Vacation rental etc, there is no way for the appraiser to estimate a reasonable rental rate. Also Covid-19 has shut down many Airbnb and vacation rentals , so depending on where you are there may be no market for a short term rental. Also short term rental income as a basis of value ? What does that mean you are going to develop a GRM and value the property on an-income approach ?

 

[mike32716]

I have a client that has ordered a 1007 and is asking me to use short term rental income as the basis of value. The form refers to "Market Rent", "Monthly Rent" and lease term information. None of this exists when considering short term rental. Can I project monthly income based on short term rental information and use this approach? It doesn't seem like the intended purpose of the 1007 form. On the other hand, the subject is not rented out as a long term rental, so it would not be a direct comparison to use monthly market rent amounts. Any thoughts?

Search the forum threads. This issue has been beaten to death. Short term rentals are a business. Maybe with several years of verifiable data one could develop an ROI. Need to consider utilities, furnishings (depreciation for reserves), management expenses, cleaning, higher insurance rates, higher maintenance costs, etc. Several state boards have warned residential appraisers to be careful if/when doing these. One can easily swerve into commercial territory when analyzing bookings.

 

[CANative]

If you're talking about vacation rentals such as airbnb and such, I've done a few out of necessity with lots of negotiation with the client before accepting the assignment and lots of narrative in the report. I don't like them, but in many areas I work there is no opportunity to get regular rental comps and there is/was a good market with demonstrable data for rates in context with location, views, GLA's and bedrooms. I would convert the yearly income history from a vacation rental comp (provided in MLS or data sheets from several vacation rental offices/brokerages) into inferred monthly rent for the subject.

If I was going to stay in this business I wouldn't touch them with a 10' tape measure due to the COVID thing and it's impact at this time and uncertainty going forward.

 

[CANative]

Search the forum threads. This issue has been beaten to death. Short term rentals are a business. Maybe with several years of verifiable data one could develop an ROI. Need to consider utilities, furnishings (depreciation for reserves), management expenses, cleaning, higher insurance rates, higher maintenance costs, etc. Several state boards have warned residential appraisers to be careful if/when doing these. One can easily swerve into commercial territory when analyzing bookings.

I think the 1007 is designed for gross rent, not ROI or net income, etc. Lot's of 1007 assignments but there is not always a requirement for the 216. Depends on the type of loan and type of property.

 

[J Grant]

I have a client that has ordered a 1007 and is asking me to use short term rental income as the basis of value. The form refers to "Market Rent", "Monthly Rent" and lease term information. None of this exists when considering short term rental. Can I project monthly income based on short term rental information and use this approach? It doesn't seem like the intended purpose of the 1007 form. On the other hand, the subject is not rented out as a long term rental, so it would not be a direct comparison to use monthly market rent amounts. Any thoughts?

The dictating to you which rentals( short term ) to use to derive income , thus impacting appraisal/value result. You don't see the problem with that ? That makes it an unacceptable assignment condition. Might as well have them tell you which sales comps to use too. Short term rentals are usually a higher rate...now why would they want them ... ( sarcasm ) . Unless the only rentals taking place are short term, usually market rate rentals esp for residential properties is based on annual /longer term.

Short term rentals turn a property into a hotel type use and if a residential loan usually UW has a problem with that. A very odd scenario for a client to be telling an appraiser to do that on a residential property.

 

[CANative]

Short term rentals turn a property into a hotel type use

I disagree with this. SFR's on a vacation rental program are still SFR's and owned in Fee Simple. The owner can turn off the rental on a whim in an instant.

A 1007 is an appraisal, but it is not an approach to value.

 

[gregb]

I disagree with this. SFR's on a vacation rental program are still SFR's and owned in Fee Simple. The owner can turn off the rental on a whim in an instant.

A 1007 is an appraisal, but it is not an approach to value.

Isn't market rent estimated by the SCApproach in the 1007?

 

[CANative]

No. I don't think so. Maybe I don't understand the question the way it was written.

The rent survey would be part of an income approach if one were completing an income approach. The 1007 does not produce GRMs, Cap rates, or income multipliers.

 

[Howard Klahr]

Can I project monthly income based on short term rental information and use this approach?

No

It doesn't seem like the intended purpose of the 1007 form

You are correct

On the other hand, the subject is not rented out as a long term rental, so it would not be a direct comparison to use monthly market rent amounts. Any thoughts?

Without getting too deep in the weeds here, many areas require a license or permit to legally operate as a vacation/short-term rental. If this jurisdiction has those type of requirements then the answer is an easy no.

Some other considerations as to why no, short-term rentals are not only furnished but often include everything such as dishes, towels, linen etc. as well as all utilities. To use these rents is not comparing apples to apples.

Suggest that your client stick to what they know and leave appraising to the professionals