1007 Rent Survey Subject Not Livable

[Echipman]

I accepted an appraisal assignment for the purchase of a townhome. The client has asked for the subject property to be appraised in it's "As-Is" condition and to also provide the 1007 rent schedule, as it is an investment property. Upon inspection, the townhouse was noted to be in significant disrepair. The carpets were ripped/torn and had very large stains, some of the ceramic tiles for the floor coverings were cracked/broken and the worst part was in the second floor bathroom. Scattered black mold spores were apparent towards the ceiling of the bathroom. The subject was vacant at the time of inspection

When doing the Sales Comparison approach, I actually was able to find 3 recently closed sales in similar C5/C6 condition within the same townhome community. It appears as though businesses or realty companies come in and buy these crappy properties and get them into livable condition and then rent them. I've spoken with my client about the problem I'm running into and advised them to send two separate orders: One order for the 1004 in As-Is condition, and then another separate order for the 1007 rent schedule, which would be done under the hypothetical condition that the subject property was in livable condition. This seemed to be the best solution to the problem since the lender is obviously interested in what the market rent for homes in livable condition is.

Problem : The client also wants the 1007 rent schedule completed to determine the current market rent. The assignment wants the subject valued in it's as-is condition, which was attainable using the sales comparison approach. There are currently 5+ townhomes rented or available for rent in the same subdivision, but all are in C4 or better condition. This is obviously due to the fact that most rental properties are not rented in this bad of condition. I can find rental comparables all day within the subdivision between $1,100/Month - $1,300/Month, but you couldn't pay me $1,300 a month to live in the subject property right now.

How should I approach the 1007 rent survey of the subject property if it is in unlivable condition and potentially has mold issues?

Can this approach even be performed in it's "As-Is" condition if these adverse factors exist?

Isn't the market rent for the subject in it's as-is condition "NULL or $0?"

 

[Lee Lansford]

You have the answer to your question.

If you rightfully conclude that the subject is not habitable--or, at a minimum not rentable--"as is", talk again with your client.

Some folks are just hard-headed and it takes a few knocks to get their attention.

 

[TJSum]

I agree with Lee, what lender makes loans on a home with mold issues? There is a reason the vast majority of these type homes are cash only deals.

 

[Echipman]

So you can't appraise the property as-is via the sales comparison approach, but also employ a hypothetical condition on the 1007?

 

[Scott R Marshall]

Easy. Rent Comparable #1: $1100 monthly rent Condition adjustment: -$1100. Rinse and repeat for the remainder of the comparables.

Market rent for subject in "as is" condition based on the comparable rentals:$0.00

And you can either appraiser the subject "as is" if you have reliable cost to cure info or "subject to" the hypothetical condition it is repaired if you do not.

And I think so long as it is spelled out, you could do the 1007 independent from the conditions of market value utilized on your appraisal form. Meaning either "as is" or "subject to" regardless of what you did on the appraisal form. It is 2 separate values.

 

[CANative]

the worst part was in the second floor bathroom. Scattered black mold spores were apparent towards the ceiling of the bathroom.

Probably just mildew. Easy to clean and easy to deal with.

Just give them an as is value and your opinion of market rent after some basic cleaning and minor repairs. I'm sure they're capable of understanding this. No need to overthink it or stress out.

 

[hastalavista]

Market rent for a property, as-is, that isn't in marketable (ready to rent, meets the market's minimum rental expectations) is a problem.

You've described that these properties are purchased (like your subject) by investors. But you've also described the actions of those buyers: they purchase, rehab, and then rent out. They don't rent them out in the as-is condition.

That's a strong argument to say, as-is, the property is not market-ready, and would not be accepted by the rental market for this type of property.
If you explain that to your client, my bet is that they'll understand, and ask you to provide an appraisal based on a HC (which is the scenario I've run across when facing this type of assignment).

What they should understand is this: If they are requiring rental income as part of the buyer's debt-to-income ratio qualification, they shouldn't until the property is brought-up the rental market's minimum standards.
This is an interesting situation:
As-is, the property is probably the perfect investor-purchase. But investors purchase this type of property with the intent of rehabbing so it could be rented.
Right now, you have the "before". A meaningful rental survey will reflect the "after" which is consistent with what the other buyers of this type of property do.

Good luck!

 

[CANative]

This guy is getting $1,630/mo for this:

 

[The Nightfly]

I've encountered this several times - not necessarily where the unit is uninhabitable, but where the unit is less than average, is being purchased by an investor and will be fixed up. The client has always agreed to allow the rental survey "subject to" certain repairs and cosmetic updates, while having the URAR as-is. This makes sense for what the client really wants to know.

 

[J Grant]

Ridiculous to make $1100 condition adjustments on rental units in good condition.

If client wants an as is income approach, then do it...if you conclude that unit is not rentable in present condition, then there is zero demand and no income approach could be done as there are no comps available rented in such poor condition.


Income approach would be NA, with no value developed, it has no value in present condition as a rental and only sales comparison approach is reliable (or cost approach as well)