1025 Rent Survey With Rent Control

[Smokey Bear]

I'm appraising a duplex in an area with rent and eviction control. Rents are all over the market due to the rent control, and subject units are also controlled by leases. In this case do you use actual rent for estimated rent, since she can't raise the rent? Also, the downstairs unit only rented 2-3 months ago, so I'm assuming that's a good indicator that actual rent IS the market rent???

 

[Kate]

I don't know?? How does that work exactly? I don't deal with rent control because I live in the "live free or die" state. Does the town or state tell you what you can charge? Does it go by the dwelling or is it an overal cap on what rent can be in the town for different type rentals? I would assume there would be a government person you could talk to to find out. Would the assessors office know? Actually I would hit the building and zoning department first and start asking questions. They will know and if they don't they will know who to direct you to.

But if you have rent control on the subject property and the property is an income producing property, I would want to see a lot of discussion in that appraisal on all the rules. Not just what the estimated rent should be. That has got to effect marketability IMO and possibly destroy the income approach. Do some digging. Then I think your answer will pop out at you.

 

[Smokey Bear]

The rent control ordinance caps the amount the rent can be increased each year based on the CPI, and allows for rent banking.

I just spoke with the owner - one tenant has given notice that she's moving and the lower tenant is new (no rent banking) and on a 1 year lease, and owner researched rents and rented at market value so that solves the problem - I'm using actual rents as market rents, since she can't really raise the rent for a year, and is limited on what she can raise it to.

 

[Kate]

I see. So if you have a vacant apartment you can charge what ever the market will except but then once you have it rented there is a percentage that you can raise the rent to per year? Interesting. Then I would agree with you. The newly rented apartments would be a good indicator of market rent.

 

[Otis Key]

Cynthia, the way I see the report, requested information and intended use of the form, and I'm sure I'll be corrected if wrong, is that you should indicate that there are rent controls on the appraisal and then you should use market rents and indicate CLEARLY that's what you've done. Now, if the owner can research what rents are, then I guess you can do the same as well. I'd call property managers, real estate agents, bang doors, and so on.

But what ever you do, disclose that there are rent controls!

 

[hastalavista]

Cynthia-

I’m in your neck of the woods and have wondered about the same issue. If you are appraising in SF, Oakland, Berkeley, etc., how should rent control be factored into the income approach?

What Otis suggested is the way I do it (which means you should really double-check it out with someone else!!! :rofl: ). I try to determine what the appropriate market rents are, and then if the subject OR COMP rents are not to market, I will adjust them to reflect the market rents.
(I actually do an Excel spreadsheet that I attach to the report. Even if my approach is wrong, it seems to impress the UW/Reviewer, because no one ever questions me….yet!)

If the Income Approach is based on the buyer’s motivation to maximize the income stream, then a “rational” buyer would make a purchase decision based on what the units could rent for if they were vacant. This should be based on the market rents.

The problem we face are two-fold: Getting good “current” rental data, and the fact that 2-4’s are “hybrids”, where some buyers are looking for owner-occupied properties, and the income stream is not the only consideration.

My experience is that in our area, so many duplexes are owner-occupied, that it makes sense to give the Sales Comparison Approach equal consideration with the Income Approach. But as a rule, I’ll give the income approach most weight for triplex/fourplex properties.

 

[Smokey Bear]

In this case, the buyer was going to owner occupy one unit, and the other was under a lease. They lender was using the "market rent" to qualify the buyer for the loan, i.e. the lower unit's rent would be considered part of her income. since the lower unit was leased, and the lease wouldn't expire until next year, and there's eviction control anyway, I used actual rents, especially since the rent couldn't be raised much due to rent control once the lease expired.

Market rent in this case is only applicable if you rent to a new tenant, since there is eviction control and rent control (tenant can't be evicted without just cause). It seems that to use "market rent" in this case would be misleading since the landlord was so limited in the ability to charge market rent, unless the tenant voluntarily vacated.

 

[hastalavista]

Originally posted by Cynthia Hamilton@Sep 10 2005, 04:34 PM

Market rent in this case is only applicable if you rent to a new tenant, since there is eviction control and rent control (tenant can't be evicted without just cause).  It seems that to use "market rent" in this case would be misleading since the landlord was so limited in the ability to charge market rent, unless the tenant voluntarily vacated.

Cynthia-

I’m not so sure I’d agree that by using market rents, it would be misleading. My understanding is the lender is only going to consider the actual rental receipts, or the estimated market rents if the unit is vacant (or owner occupied) in their calculations. If the market rents are higher than the actual rents, the lender is not going to use the estimated market rents. Also, in the report, it is stated if actual or estimated (market) rents are being used.

One of our state’s (Ca) last publications (Winter, 2002) clearly states that market rents should be uses for the subject and comps when appraising 2-4’s. It also says that the influence of rent control must be analyzed-but I don’t see a conflict between the two. There might be a market premium for those properties that are sold “vacant” so they can actually be rented “at market”, but this premium would be observable if estimated market rents were being used (it would sell at a higher multiple).

But, let's look at a theoretical example:
Let’s say there are two similar properties. Both are triplex, 2br/1ba (all units) configuration buildings. One with rent control (our comp), one without (our subject). Assume market rents for triplex is $1.50/sqft, and that the buildings are 2,100 sqft (700sf/unit).
Rent control building rents for $700, $650, and one unit is vacant: total rent $2,400.
No Rent control rents at market: $3,150.

Rent Control building sales for $700k. GRM is 290+/-.
Is Non-Rent Control building worth $915k?
(Yes, only one example, but I use it just to make a point)

I’ve seen non-rent control properties sell at a premium, but everything else being equal, I’ve never seen them sell at a 30% premium. Chances are good that our Non-Rent Control building is worth something close to $700k. By using market rents for all the comps, the measuring stick is standardized. If there is a premium for the vacant properties, it will be reflected in the higher GRM. And if the subject is vacant, it makes sense to use the GRM at the higher end of the range.

Not trying to argue, because this situation has confused me for a long time. But for me, by using Market Rents for the subject and comps in all markets including rent control affected areas, the GRMs are much more consistent and in a narrow range, and this narrower range results in Income Approach values that are more consistent with the sales comparable range.

 

[Ted Wegener]

"One of our state’s (Ca) last publications (Winter, 2002) clearly states that market rents should be uses for the subject and comps when appraising 2-4’s"


I wouldnt think that would apply to rent control properties. Rent control destroys the value of a property. An investor is buying an income stream in 4 unit properties and cannot evict tenants in some jurisdictions. He is buying a property with locked low rents so there is no justification for using market rents to determine value.

So many landlords were evicting tenants in Los Angles under the pretext of major remodeling that they cannot do it and there are restriction on the amount of rent they can raise after remodeling.

In some areas tenant have been there so long and have such low rents you cant get them out with dynamite.

I was taught to use actual rents in rent control areas to determine an income approach.

Why use a market rent when you cant get it?

 

[jonathan asbury]

They lender was using the "market rent" to qualify the buyer for the loan, i.e. the lower unit's rent would be considered part of her income. since the lower unit was leased, and the lease wouldn't expire until next year,

definately use the actual rents. And be sure to disclose the rent control issue.

jonathan

ps- heres a laugh, I had a broker tell me they needed a rental survey that said $4000 month for a 4 bd, 2, ba raised ranch right on cesar cheves in SF 2 blocks from us101.

:blink:

ya right! :rainfro: