Appraising a co-op

[Jonathan Kim]

This is regards to a co-op appraisal coming up.

1. In a couple of threads on co-op appraisals, it appeared that without a good number of comps, a co-op appraisal would be tough to do. However, with enough comps in the area to form an active market, would a co-op appraisal follow the same theories for SFRs/Condos?

2. Some threads mentioned using all comps from the same building. If all comps come from the subject's building, there would be no sales comparison with other co-ops, correct? If that was true, what relationship are we basing the value on? Wouldn't this be similar to using all condo comps within the same complex without comparing to ones outside of it?

3. This co-op is in San Francisco. Some units face the bay, some face the city. Others are located on the 2nd floor, some are on the top. How do we accurately adjust for amenities without using comps outside the subject's building?

4. There are a fair number of co-ops in this area. Is it safe to assume that there wouldn't be much variation between co-ops in the area b/c an active market exists? Or would we have to actively research each building's data?

My theory is that in an active market of co-op buildings, if you examined the data over time, sales would follow approximately the same patterns as condos/sfrs. Any thoughts? It seems that the toughest part abt. co-op appraisals may be getting the data from the co-op board.

Any input is greatly appreciated.

Thanks!

 

[xm39hnu]

Hello, Jonathan, and welcome to the forum. You haven't listed your licensure level, so I have to guess at your experience. I estimate from the text of this post that you're fairly new to the profession.

Generally speaking, you can use resale comps from the same building with impunity; they're usually the best ones. Using new sales from the same building, all from the same seller, would be a bad idea. You'd need to verify condition at time of sale in either case. You'd need to go outside the complex for additional comps if you had mostly new sales from the developer. This would prove that the seller isn't "making his own market," and that your value opinion represents the whole market. As with most real estate, location matters a great deal. Be sure to compare your subject against properties with similar locational amenities.

3. This co-op is in San Francisco. Some units face the bay, some face the city. Others are located on the 2nd floor, some are on the top. How do we accurately adjust for amenities without using comps outside the subject's building?

You don't, necessarily. If you can get enough comps inside the building, you'll have the most accurate market extraction. But if you have to go outside to find paired sales, then adjust for everything else, then extract your elevation/view adjustment.

4. There are a fair number of co-ops in this area. Is it safe to assume that there wouldn't be much variation between co-ops in the area b/c an active market exists? Or would we have to actively research each building's data?

It is never safe to assume. Whatever you put into an appraisal report needs to be supportable. This is why I suggest that you partner with an appraiser who is experienced in this type of property. S/he will already have this research performed; all that will be needed is to update and confirm its findings. OTOH, if you have never appraised this type of property, you'll have to do all the original research. Because whatever you say about the subject and the comps, you need to be able to back it up with data.

My theory is that in an active market of co-op buildings, if you examined the data over time, sales would follow approximately the same patterns as condos/sfrs. Any thoughts?

Yeah. Prove your theory with hard data, then you won't have to "theorize" about it.

Market analysis is the cornerstone of an appraisal, and Highest and Best Use is its foundation. Do these well, and these two analyses will answer most if not all of your questions.

 

[Walter Kirk]

Jim,
Among the major problems with appraising co-ops are individual rules and underlying mortgages. Some co-ops limit resales, others reserve rights of first refusal or limit sales prices. Underlying mortgages are debt owed by the co-op on the whole project and are paid by members as assessments or as higher common area charges. It is therefore logical to use comps within the same project.

Adjustments for view, floor level etc should be made the same way you would make the adjustment in any other property type. If, for example, you can prove that buyers will pay X% more for a bay view than a city view in other neighboring buildings you will have a basis for a X% adjustment. It's not more difficult to value a co-op but it does require attention to detail.

 

[xm39hnu]

Walter,
It was Jonathan who was asking, but you've enlightened both of us. I don't have any co-ops in my area (that I've discovered yet), but it's nice to know where the bodies get buried if I run across one. Sounds like they would be an entertaining assignment. Thanks.

 

[Jonathan Kim]

Thanks for the input.

Let me see if I can sum up my understanding of co-ops and their valuation:

1. The value of a unit in a co-op depends on both the market for its share of the co-op and the financial health of the project.

2. It's best to compare co-ops within the same projects as this allows you to focus solely on the market value of each share.

3. It's okay to compare different co-ops as long as you can establish similar financial health of all the co-ops.

Sound about right? Now, how exactly you compare financial health of different co-ops is another question...

As for adjustments, will they follow similar adjustments for normal condo/SFR units? Is it even possible to find out accurate adjustment percentages by looking at historical sales prices within the same co-op since the financial health of the project may fluctuate at different points in time?

Realistically, I bet that adjustments of co-ops and adjustments for sfrs/condos would be similar over a long period of time.

Once again, thanks for all the help!

 

[xm39hnu]

Now, how exactly you compare financial health of different co-ops is another question...

Answer this question: Is the income of the co-op adequate to meet its contractural expenses?

As I said, I've never done a co-op, so I'd be likely to over-analyze one. That question above is loaded. To answer it, you'd have to look at sources of income and the stability of those sources. You'd need accurate expense statements as well as the co-op contracts. I think I'd approach it like a complex lease analysis: What does it cost to lease (own) this property? Can the owner be relied upon to be able to meet the terms of the contract (lease)? Can the landlord live up to his obligations? Are the terms of the lease above market, at market, or below market? Kinda like an income property, but with adjustments for residential considerations.