Barndominium receiving above market rent from VRBO

[Xavier Hargrove]

Hey everyone,

Happy Monday, I have a new problem I am interested in hearing thoughts on. I recently accepted an appraisal order for a refinance on a new construction Barndominium. The subject is located in a part of the county with no zoning, you can virtually build anything you want. A builder (the borrower) decided to build a Barndominum that is 5,111 sqft. This is higher than most homes in the area. Now on the inside the structure is laid out like a hotel. There are a total of 4 bedrooms each with their own bathroom located on the bottom floor and the same layout, 4 bedrooms each with their own bathroom located on the top floor. There is a shared kitchen and living room in the middle of the rectangle-style building. The borrower currently rents out the building on VRBO with the stipulation that the renter has to rent the whole building at $1,000 per night. He has gotten many organizations and companies to rent it as it appeals to them but in doing so created his own market in a way. Would the average buyer look at it like that I am not sure, odds are this would appeal to investors only.

My thought process is to appraise it utilizing all three approaches, the cost as a plug and play, the income approach, using VRBO listings to support, then sales comparing to larger residential homes making necessary adjustments. Any thoughts? Does anyone have any experience doing these?

 

[J Grant]

Hey everyone,

Happy Monday, I have a new problem I am interested in hearing thoughts on. I recently accepted an appraisal order for a refinance on a new construction Barndominium. The subject is located in a part of the county with no zoning, you can virtually build anything you want. A builder (the borrower) decided to build a Barndominum that is 5,111 sqft. This is higher than most homes in the area. Now on the inside the structure is laid out like a hotel. There are a total of 4 bedrooms each with their own bathroom located on the bottom floor and the same layout, 4 bedrooms each with their own bathroom located on the top floor. There is a shared kitchen and living room in the middle of the rectangle-style building. The borrower currently rents out the building on VRBO with the stipulation that the renter has to rent the whole building at $1,000 per night. He has gotten many organizations and companies to rent it as it appeals to them but in doing so created his own market in a way. Would the average buyer look at it like that I am not sure, odds are this would appeal to investors only.

My thought process is to appraise it utilizing all three approaches, the cost as a plug and play, the income approach, using VRBO listings to support, then sales comparing to larger residential homes making necessary adjustments. Any thoughts? Does anyone have any experience doing these?

Idk if the avg buyer would - who is the avg buyer ? Buyers are particular to a property type. If you want to appraise it as a going concern, a business investment motel, then the investor is the average buyer, and it won't qualify for a residential loan.

If the owner is trying to get a residential mortgage, we are not allowed to use VBRO/Airbnb income, so it won't count -the theoretically typically motivated buyer for res would be renting it out on an annual or monthly basis or living in it to occupy.

 

[Elliott]

No onsite management? What is net income? Seems similar to a Ma&Pa 8-unit roadside motel. I recommend watching 'Bad Times at the El Royale.'

​

 

[alebrewer]

Not sure from your post if this is F/F/F or not, but if so: remember that the 1007 was developed to report 'monthly' rent. As such, using STR may inflate the property's rental income by failing to account for FFE, vacancy, and expenses.

From Fannie:

Appraiser Update | Fannie Mae

Welcome to the Q4 2024 Fannie Mae Appraiser Update.

singlefamily.fanniemae.com

 

[Xavier Hargrove]

Idk if the avg buyer would - who is the avg buyer ? Buyers are particular to a property type. If you want to appraise it as a going concern, a business investment motel, then the investor is the average buyer, and it won't qualify for a residential loan.

If the owner is trying to get a residential mortgage, we are not allowed to use VBRO/Airbnb income, so it won't count -the theoretically typically motivated buyer for res would be renting it out on an annual or monthly basis or living in it to occupy.

Good point, this would be for a residential mortgage. I'm sure they'll ask for an explanation of the discrepancy between actual and market rents. I bet there's some business out there for lenders and appraisers with all the short-term rental trends.

 

[J Grant]

Good point, this would be for a residential mortgage. I'm sure they'll ask for an explanation of the discrepancy between actual and market rents. I bet there's some business out there for lenders and appraisers with all the short-term rental trends.

Read the Fannie letter on it - short-term/daily rental rates are not allowed in the appraisal for residential use. That is your explanation right there.

 

[alebrewer]

If the owner is trying to get a residential mortgage, we are not allowed to use VBRO/Airbnb income, so it won't count -the theoretically typically motivated buyer for res would be renting it out on an annual or monthly basis or living in it to occupy.

This is mostly correct. The reason they don't like counting STR for income stream is that STR's are more like a going concern than a rental. Doesn't really have anything to do with typical motivation of the buyer.

 

[J Grant]

This is mostly correct. The reason they don't like counting STR for income stream is that STR's are more like a going concern than a rental. Doesn't really have anything to do with typical motivation of the buyer.

Agree. That is why in my first response, I told the OP that if they are appraising it as a going concern, the typically motivated buyer is an investor/absentee owner running it as an air bnb

For res purpose loans, the STR income is not allowed, thus the model for the typical buyer changes - for valuation purposes.

I have appraised a number of properties where the proud owner tells me how much they get per night or week from airnb and I tell them right there we an not use those figures and have to use annual ormonth to month long term leases - so there wont' be a nasty surprise later.

 

[alebrewer]

Agree. That is why in my first response, I told the OP that if they are appraising it as a going concern, the typically motivated buyer is an investor/absentee owner running it as an air bnb

For res purpose loans, the STR income is not allowed, thus the model for the typical buyer changes - for valuation purposes.

I have appraised a number of properties where the proud owner tells me how much they get per night or week from airnb and I tell them right there we an not use those figures and have to use annual ormonth to month long term leases - so there wont' be a nasty surprise later.

Fully agreed. Which is why the typically motivated buyer may be looking at LTR as the most profitable model, or LTR - all depending on the market.

 

[Xavier Hargrove]

Not sure from your post if this is F/F/F or not, but if so: remember that the 1007 was developed to report 'monthly' rent. As such, using STR may inflate the property's rental income by failing to account for FFE, vacancy, and expenses.

From Fannie:

Appraiser Update | Fannie Mae

Welcome to the Q4 2024 Fannie Mae Appraiser Update.

singlefamily.fanniemae.com

Thanks for the read, the lender can decide on whether or not to use the income as business or rental, but the 1007 has to reflect monthly market rents. If the lender wants an operating income form would you advise using current or market rents then?