216 For Single Family New Construction?

[MrSpokaneValue]

I'm doing a proposed construction of a new single family residence to be used as a rental income property near campus of the local University. Obviously the Income Approach to value is a necessary approach due to the high ratio of rentals in the area, but would you complete a 216 Operating Income Statement on this property? Mind you, it's new construction in an area of homes that were built predominantly in the 1890's - 1930's, there is no history of utilities expenses, and the annual taxes are unknown. Due to the age differences between the subject and any of the surrounding homes, I wouldn't even be able to estimate what the expenses might be based on similar homes in the area. So in the end, there's no way of effectively estimating the subject's Total Operating Expenses, the Operating Income, the Monthly Housing Expense, or the Net Cash Flow.

I explained this to my client and they haven't yet gotten back to me as to whether they want it or not, but I just thought I'd get some other opinions on it. Let me know what you think.

 

[Terrel L. Shields]

Are new homes being rented out to students? If not, then the market is not a rental market and the income approach would be marginal. A simple GRM would eliminate the need for utility and taxes info. But the question should be do I have any new houses that are rented...and I bet the answer is no. I would look for new construction comps first and foremost.

 

[MrSpokaneValue]

Are new homes being rented out to students? If not, then the market is not a rental market and the income approach would be marginal. A simple GRM would eliminate the need for utility and taxes info. But the question should be do I have any new houses that are rented...and I bet the answer is no. I would look for new construction comps first and foremost.

I understand your reasoning, but this particular home is being built specifically to be used as a rental in the area. It's not a new home in a tract development or anything and there are no other new homes in the area for comparison. The prior home was demolished to make room for the proposed improvements. The subject is a 2 Story with 6 bedrooms and 3 bathrooms within walking distance to the University campus. A LARGE number of homes in the area are configured and used as off-campus student housing, and rent per bedroom on 9-month leases (typically between $350 and $550 depending on condition, BR to BA ratio, parking, etc). With recent expansion of the University and high demand for student housing along with a steadily increasing student population, location and utility are paramount for comparison. There have been no sales of new construction in the subject neighborhood or within a 3 mile radius of the subject home during the past 10 years. New construction comps from a different area would not provide a reliable indicator of value. Cost Approach and Income Approach are both meaningful in this particular case.

 

[hastalavista]

The 216 is a lender/UW form. It's completion isn't necessary ito extract and apply a GRM. It is more of a test to determine if the property's income can support the debt service.
The form itself states that the lender is to provide the information (provided by the borrower) to the appraiser and the appraiser then evaluates it and makes any adjustments the appraiser deems necessary. Further, there is space in that form for the UW to make his/her adjustments; so just because the appraiser says "$X" doesn't mean the UW won't change the expense estimate to "$Y".

If your client is insistent on the form being completed, then ask the client for the information (as per the form's outline). Compare those figures as best you can to the data you do have, and make a conclusion. Qualify your conclusion based on the quality of the data you have.

I wouldn't make this a hill to die on. I think if you communicate reasonably to your client, they'll understand what the limitations are in having you complete this form. If you are dealing with an AMC, you may have to kick-it up a notch in the pecking order to speak with someone who understands the issue; or, if you are lucky, your primary contact will "get it" and try to get the lender to accept the report without the 216.

Good luck!

 

[Dublin ohio]

What is the ratio of rental to owner occupied. If very high then I do not think being a new build would have much bearing on the income side unless there is data that says newer homes rent higher. I have run into this same problem in a similar neighborhood adjacent to a 60,000 student campus which is 90-95% rentals. Newer units seldom rent for much of a premium compared to older well maintained and updated units and the rental rates are usually determined per bedroom even though the house will be rented as a whole. AS far as the 216. Use estimates based on local rates for the various factors such as carpet, painting, maintenance etc. Maintenance costs on mechanicals should be minimal for the near future since mechanicals will be new. I am not sure in you market. But taxes here can be estimated based on appraiser value and using taxation rates. Our auditor even has a tax estimate calculator on line. Your replacement reserves should be pretty easy. New construction. Typical shingle roof has estimated life of 20-30 years depending on quality of shingle. Furnaces typically have a 30 year warranty on heat exchanger. In my experience with student rentals. You have to be a little aggressive with your costs and expenses since students are typically a little hard on properties. My biggest problem in neighborhoods such as this is finding legitimate sales. Most investors hold on to these rental properties for extended periods of time due to high rental rates. When they do sell they are very seldom placed on open market and often sell in package type deals to another local investor or even some type of tax exchange sale. Most of the time. The sales comparison is just an attachment to a narrative based report since available sales are minimal and are seldom similar to subject. Most of my adjustments in the sales comparison are based on income approach factors since too little reliable sales data available. Never had a problem from client but of course not for fannie or freddy. A few times I have even been able to develop a reliable cap rate since I do have access to the necessary data from reliable sources. Good luck