Appraisal for a 1-4 Unit Residential property, comps include a Commercial apartment building

[nybuyer]

Hi all,

Firstly, full disclosure, this is for an appraisal I received as a potential buyer. I am researching a couple of issues (in my mind) with the report and I'm hoping for some independent input.

The property I am purchasing is a 3 Family Residential house in a residential zone. I am purchasing it as an owner occupant. The bank is using the Sales Comp method of appraisal versus income based. I don't know if that is relevant.

Issue 1: the appraiser chose a comp that is an apartment building (411 type in NY) in a commercial zone. There are 4 units in the building and it is located 1.8 miles from the subject property. I don't know how common this is. I mention the distance because I was able to find several 3 unit residential properties within a mile of the house. I guess my question is, is it acceptable to mix multi-family property types (Residential/Commercial) in this manner?

Issue 2: Second possible issue is that another comp was a cash sale which was done shortly after the last owner passed away. I found the obituary and some other info during my internet sleuthing. The property appears in below average condition and was sold for about 30 % less than other similar properties. Now, my immediate conjecture is that it was an estate sale and the family was trying to get rid of it fast. But maybe that is an acceptable comp? I don't know.

What are your thoughts on this? Am I wrong about my concerns?

 

[Meandering]

If yours is a 4 unit, the lender will want at least one other 4 unit as a comp. As they are not prevalent, the one chosen might have been the only one available at the time for the appraiser. Estate sales can be used, as long as they are similar in size, location, blah, blah to the subject. If it is in lesser condition then yours, it will be used to "bracket" the condition of the one you want to buy, but most likely would not be attributed the greatest weight in the analysis. There should be comments within the report about the comps available, those chosen and why, and how all that market data was reconciled into the opinion of value.

.

 

[Mike Kennedy]

Opinions:

Re: relevance of the Income Approach - absolutely. relevance of the Sales Comparison Approach - Yes, highly relevant.

Re: Commercial zone sale as comp for residential - hell no unless NO other relevant closed Residential only sales are reported within 6mos-1 year (maybe 2 yrs depending on market conditions).

Re: estate sale/discounted due to motivation of owners and condition - relevant likely provided the inferior conditions of sale and inferior condition are adjusted for (upward).

 

[George Hatch]

Issue 1: the appraiser chose a comp that is an apartment building (411 type in NY) in a commercial zone. There are 4 units in the building and it is located 1.8 miles from the subject property.​

This sale could be a problem, but then again it might not be a problem. There are a couple potential issues:

- In general, if that property was purchased for continued use as 4 residential units then the zoning will not be of effect on the value to that buyer or that seller; this will most commonly be the case for such properties. The zoning only becomes the thing if that property is worth more as land value than as 4 units, which usually won't be the case.

- You're correct that it's generally better to use 3-unit comparables for a 3-unit subject. There are a couple reasons for this but that's geek stuff that you don't really need to wade through.

HOWEVER, what types of units the subject has may possibly figure into this decision as well. If the other 3-unit properties are way different in age or configuration or room count then they might not be as comparable overall as this 4-unit. For example, if your subject was built in 1930 and consists of a detached cottage in front and a 1-story duplex to the rear, then the most similar sales will also include older construction of comparable age and with comparable room counts. We don't know because we can't see, but if those other 3 unit properties are way different in age or have way different room counts (1bd vs 3bd, for example) then those 3-unit properties could possibly be not as directly comparable as the 4-unit property even though the latter has an additional unit.

- distance isn't usually an issue with appraisals involving 2-4 unit properties because their respective geographic ranges are commonly different than would apply in a 1-unit residential appraisal. Remember, the appraiser is attempting to emulate the reasoning and the available comparable data that a buyer or seller would consider comparable, based on the criteria that applies to 2-4 units properties, not necessarily the criteria that applies to a 1-unit property. What will be more important in a 2-4 unit appraisal are the rental characteristics of the locations involved; not because the properties are valued strictly by the rents, but because the rents indicate to the tenant appeal for these locations which will parallel the buyer reactions.
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Issue 2: Second possible issue is that another comp was a cash sale which was done shortly after the last owner passed away.​

That sale could be ill suited for comparison, but then again maybe not. If the market demand for such properties is low and it normally takes a long time (lets say, 6-9 months) to sell one then selling it in significantly less time (like 2-3 months) could require a discount in order to make that happen within that time frame. On the other hand, if that sale sold in the same amount of time as the others than the seller motivations probably aren't a factor.

What usually will be a factor is the physical condition - a property that requires a lot of work will often get hit hard in the value to account for those costs. However, adjusting for physical condition is usually pretty simple for an appraiser because we do that a lot.
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The thing to remember about appraising 2-4s is that, unlike the 1-unit properties, the total number of these properties is often just a fraction of the number of 1-unit properties in the same geographic area. That leads to a much smaller selection of comparable properties for an appraisal and sometimes the selection is so inadequate that the appraiser will have to go much further and consider much less similar properties than they normally would in a 1-unit appraisal assignment. Depending on the composition of a neighborhood or a community we sometimes struggle just to come up with any comparable sales, let alone the types of properties that we consider to be really comparable to our subject. We often end up working with what we can get as opposed to working with what we want.

Long story short, what's typical for 1-unit appraisal assignments will usually be highly atypical for all other property types. Not always because there are exceptions to the rule; but usually.

 

[sputnam]

Re choosing comparables.... the appraisers job is to select the 'best' comparables available. In some markets, those might not be 'good' at all. Individual appraisers will have somewhat different ideas about which subset of reasonably similar sales are the best. The appraiser doesn't get to make the comparables, he/she just selects which are most appropriate for the subject. In some cases, that will mean that very dissimilar comparables are used.

 

[spittman]

You make some valid points. Without knowing much about the area, it's hard for us here to know the appraiser's reasoning as to why he chose specific comps over others. You seem like a smart person and one that knows the basic principles of real estate evaluation. Let me ask you something. Does it seem like the appraiser's value is on the high end? Do you get the feeling that the appraiser chose the commercial property and made high adjustments for the estate sale just to "make value"???

 

[BRCJR]

Issue 1: the appraiser chose a comp that is an apartment building (411 type in NY) in a commercial zone. There are 4 units in the building and it is located 1.8 miles from the subject property.​

This sale could be a problem, but then again it might not be a problem. There are a couple potential issues:

- In general, if that property was purchased for continued use as 4 residential units then the zoning will not be of effect on the value to that buyer or that seller; this will most commonly be the case for such properties. The zoning only becomes the thing if that property is worth more as land value than as 4 units, which usually won't be the case.

- You're correct that it's generally better to use 3-unit comparables for a 3-unit subject. There are a couple reasons for this but that's geek stuff that you don't really need to wade through.

HOWEVER, what types of units the subject has may possibly figure into this decision as well. If the other 3-unit properties are way different in age or configuration or room count then they might not be as comparable overall as this 4-unit. For example, if your subject was built in 1930 and consists of a detached cottage in front and a 1-story duplex to the rear, then the most similar sales will also include older construction of comparable age and with comparable room counts. We don't know because we can't see, but if those other 3 unit properties are way different in age or have way different room counts (1bd vs 3bd, for example) then those 3-unit properties could possibly be not as directly comparable as the 4-unit property even though the latter has an additional unit.

- distance isn't usually an issue with appraisals involving 2-4 unit properties because their respective geographic ranges are commonly different than would apply in a 1-unit residential appraisal. Remember, the appraiser is attempting to emulate the reasoning and the available comparable data that a buyer or seller would consider comparable, based on the criteria that applies to 2-4 units properties, not necessarily the criteria that applies to a 1-unit property. What will be more important in a 2-4 unit appraisal are the rental characteristics of the locations involved; not because the properties are valued strictly by the rents, but because the rents indicate to the tenant appeal for these locations which will parallel the buyer reactions.
-----------------

Issue 2: Second possible issue is that another comp was a cash sale which was done shortly after the last owner passed away.​

That sale could be ill suited for comparison, but then again maybe not. If the market demand for such properties is low and it normally takes a long time (lets say, 6-9 months) to sell one then selling it in significantly less time (like 2-3 months) could require a discount in order to make that happen within that time frame. On the other hand, if that sale sold in the same amount of time as the others than the seller motivations probably aren't a factor.

What usually will be a factor is the physical condition - a property that requires a lot of work will often get hit hard in the value to account for those costs. However, adjusting for physical condition is usually pretty simple for an appraiser because we do that a lot.
-----------------------

The thing to remember about appraising 2-4s is that, unlike the 1-unit properties, the total number of these properties is often just a fraction of the number of 1-unit properties in the same geographic area. That leads to a much smaller selection of comparable properties for an appraisal and sometimes the selection is so inadequate that the appraiser will have to go much further and consider much less similar properties than they normally would in a 1-unit appraisal assignment. Depending on the composition of a neighborhood or a community we sometimes struggle just to come up with any comparable sales, let alone the types of properties that we consider to be really comparable to our subject. We often end up working with what we can get as opposed to working with what we want.

Long story short, what's typical for 1-unit appraisal assignments will usually be highly atypical for all other property types. Not always because there are exceptions to the rule; but usually.

Your professional well thought out replies are duly noted. A compliment to the profession, you are.

 

[nybuyer]

I just wanted to say that I appreciate everyone's replies, I read all of them. I ended up submitting an appraisal dispute, we shall see.

Much appreciated!