Can I require the lender to add a 1007 Comparable Rent Schedule if the majority of homes in my subject's market area are rentals?

[AppraizerZ]

Hey all, this is my first post, I hope it comes out coherently!​

My assignment: I was engaged to perform an appraisal on a FNMA 1004 form. The subject property is in close proximity to Arizona State University. In the subject's market area, the majority of comparable homes are rented as "shared dormitory housing"(My own term), meaning multiple tenants will rent a house and each tenant has their own lease. Essentially, SFR properties are not being used as SFR's but instead, the owners are leasing out bedrooms to separate tenants and sharing the common area. The highest and best use would be as a rental property for students.
*This transaction is a non-arm's length sale between family members. The three students occupying the home are all grandchildren of the owner and currently not paying any rent.

My issue: After the appraisal inspection and additional neighborhood research, it became apparent that the majority of homes in the area are used as rentals for students and the highest and best use is going to be as an income producing property and not a SFR. I went back to the lender and requested the addition of FNMA 1007 to assist with developing the subject's market rent and ultimately developing the income approach. This was the response I received from the lender (Names and personal information redacted):

"There are three family members living on the property. There is no lease agreement between the ********** Trust (The property is currently owned by a family trust and is being purchased by relatives of the family) nor will there be one. One of the grandkids is leaving to New York in the summer and the other two kids will be going to ASU, but grandpa and grandma ********** will let them live for Free. **** and ****** ********** (The Buyers) will use the property as their 2nd home, and will never lease it out to anyone, including their grandkids. No comparable rent survey needed."

If I, the appraiser, say that I need the comparable rent schedule in order to develop the income approach and avoid creating a misleading report, isn't that my decision to make? The lender should not be trying to dictate which approaches to value I use, right? The sales comparison approach would most likely end up being less than the income approach as there is high rental demand in the subject's market area. That alone makes me feel like the results would be misleading. I mean, that if I only develop the sales comparison approach, the value conclusion would be misleading. Wouldn't this be a USPAP violation?

If the lender offered this assignment saying that they only want me to develop one approach to value(It does not matter which one), I would consider that an unacceptable assignment condition and would not have accepted the assignment. How would you handle this and WHY? The why is what I would like to hear, I am trying to understand how far I can/should take this.

I appreciate any and all advice, but please keep it well thought out and on point. Have a great night!

 

[glenn walker]

You don't need a 1007-just develop a GRM and then complete the approach. if that makes you sleep better at night. The reason the lender is not asking for a 1007 is because it's borrower is doing a owner occupied loan and not doing it as a rental and its all family living there. If the lender orders a 1007 then they would have to be doing the property as a non-owner occupied rental. Also that is an-additional cost to the borrower that is not needed. The appraiser develops the scope of work NOT the lender so if I really believed I had to do a income appraoch on this property I can do it without a 1007- I simply run my rent comparables and determine a GRM then do that portion in your1004. Finally understand that even if you did a 1007 -Fannie-Freddie-FHA-VA do not use that value to determine the borrowers loan amount. The only value used is the Sales comparison approach. The Income or Cost Approach are only a tool for the appraiser to use to support his Sales comparison approach. The single family home is still a single family home and not considered income property for loan purposes. On a Non-Owner occupied single family residence the 1007 and Operating & Income Statement is only required because the Underwriter uses the rental income to determine how much of it covers the borrowers mortgage payment and is it a positive or negative cash flow. Also read your Fannie Certification #4 Which I Printed Below:

Certification 4. I developed my opinion of the market value of the real property that is subject of this report based on the sales comparison appraoch to value. I have adequate comparable market data to develop a reliable sales comparison appraoch for this appraisal assignment . I further certify that I considered the cost and income approaches to value but did not develop them, unless otherwise indicated in this report.

Note: The appraiser can develop a cost and income approach and include it in their report.-you the appraiser are responsible to develop the scope of work not the lender BUT again that value will not be used by Underwriting as the value. Thats also why they require the appraiser to state in their final reconciliation that one to all three of the approaches was developed but the most weight was placed on the sale comparison approach. In the case were the appraiser has no sales comparables its DOA and he is not allowed to just do a report based on the income or cost approaches alone by themselfs.

 

[sputnam]

You can't require the Lender to do anything... except maybe pay you. If you want to include a 1007 in a report... do it. If they insist you take it out... take it out.. and retain it in your workfile. You do have an obligation to consider all approaches to value and to develop those that are applicable and necessary for credible assignment results.... whether the Client wants them or not. If you develop and report an approach, then you must include sufficient comments (depending on the type of appraisal and reporting option) to at least summarize the support and rationale for any opinions and conclusions. Including the 1007 would be one way to report your support and rationale for the subject's market rent.... it's not the only way. You could simply comment that the subject's market rent was derived by analyzing similar rental properties in the market area.

 

[Overimprovement]

I would add if you cannot agree to an appropriate scope of work prior to acceptance of the assignment, you are obligated to decline the assignment.

 

[Overimprovement]

Many clients do NOT want the best possible appraisal and/or reporting thereof. They want something to check a box and move on. I also agree you can develop your value however you wish, the only sticking point may be is the fee commensurate with your time in this one?

 

[lostinthezone]

If this is for a GSE deal, and I assume it is as that's where you're posting it, you'll want to read up on the requirements each GSE has when the income approach is performed in the appraisal. Fannie's guidance is in this section of their Selling Guide;

B4-1.3-10, Cost and Income Approach to Value (04/15/2014)

Here's at least a brief excerpt you'll want to be aware of, but I suggest that you review the whole section;

"When the income approach to value is used, the appraisal report must include the supporting comparable rental and sales data, and the calculations used to determine the gross rent multiplier"

Enjoy.....