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!

 

[Amy Perkins]

There was a place like this called IV, Isla Vista near UCSB. In order to figure the rents you had to count beds, but fyi, it was illegal to rent by the bed or charge by the person. This was the best way to determine the value was to develop the rental approach and convert to value. Then there was the issue of the beach, which is not your problem... So, since they aren't using the rents to qualify for the loan; you will need to understand the market in this way to figure out the value. Since they aren't owner occupied, this is the best approach for value. You should be charging for complexity and do your rental approach, you can include it or not in your report, but it's going to be your guide for a property like this. You can try comparing price per sf, price per bed and I would put this in the bottom portion you can write in. Organize them in a spread sheet and sort by how nice it is, by date, price per SF, or whatever makes sense.

Duplex, one side is 3 Brs with two beds, and one with three beds, so 5 beds, at $500 each, 2500 net lease...etc 200 GRM X 2500 =$500,000 value
Duplex , one side is 3 Brs with two beds, say 6 beds at $600 each, say 3600 X 200GRM say $750,000 because it's closer to school, the beach, or whatever attraction the kids love.

Because now you have two properties with a 250K gap it makes sense but the sales comparison approach is going to be hit and miss, find the pattern of value and make sure you charge for it.

 

[CGinMN]

If you think the income approach is necessary for credible assignment results, you need to include it. It doesn’t sound like the lender is going to stop you.

However, you don’t need a 1007 to develop and report an income approach. To my knowledge the 1007 is a form lenders require when an non-owner occupant is getting financing and they’re relying on the income to pay the mortgage. So, from their perspective they don’t want it because it doesn’t apply.

 

[CGinMN]

You should have quoted the assignment knowing that the income approach was needed. You can tell them you need to expand the scope and that the fee will increase, but they might not be willing pay it. If you need the 1007 in order to assist in estimating market rent, fill it out and keep it in the file. Or include it and they probably won’t care, it sounds they just don’t want to pay for it.

 

[Terrel L. Shields]

Doing a simple GRM is no biggie. I always assume all three approaches will be necessary. But the chances are the income approach will not be the dominant way a house is valued. Further, you appear to be creating a scenario that does not exist in your subject - namely this shared living arrangement of students. Don't go there. Creating this unicorn will invite stips or worse, a trip to the state board. Simply note the demographic, estimate the rent "AS IS" (not your scenario) and using similar sales with rentals, calculate the GRM...quickie Income Approach and go on. Weight the sales approach. Investors are not the likely buyers. This is usually just a small time landlord renting out housing to students. And it does not sound like your subject is that and another question is "is it even zoned to allow for it?"

Looking at the ASU area and Tempe zoning map, it is pretty complex. I'd really vet the zoning closely.

Family means:​

​

1.​

One (1) or more persons related by the 3 rd degree of consanguinity, adoption, marriage or as domestic partners as defined in Section 7-105, and not more than two (2) additional persons living together in a dwelling unit; or​

​

2.​

Not more than three (3) persons who are not related by the 3 rd degree of consanguinity, adoption, marriage or as domestic partners, living together in a dwelling unit.​

​

PS - you cannot require a lender to "do" anything.​

 

[George Hatch]

The occupancy doesn't change what type of property this is. It's still a 1-unit residential and the comps will consist of other 1-unit residential regardless of their occupancy.

If you think an income approach is relevant in this market segment then you can expand your own scope of work on that basis whether the client requests it or not. If these homes are being purchased as rentals then it wouldn't matter if your subject was tenant occupied, the IA would still be applicable.

Just describing this neighborhood as being heavily tenant occupied and your subject as being tenant occupied may end up being of effect on your client's decision making process. Independent of your value conclusion. If your subject has lease agreements in effect that could affect marketability and/or exposure times.

 

[AppraizerZ]

Doing a simple GRM is no biggie. I always assume all three approaches will be necessary. But the chances are the income approach will not be the dominant way a house is valued. Further, you appear to be creating a scenario that does not exist in your subject - namely this shared living arrangement of students. Don't go there. Creating this unicorn will invite stips or worse, a trip to the state board. Simply note the demographic, estimate the rent "AS IS" (not your scenario) and using similar sales with rentals, calculate the GRM...quickie Income Approach and go on. Weight the sales approach. Investors are not the likely buyers. This is usually just a small time landlord renting out housing to students. And it does not sound like your subject is that and another question is "is it even zoned to allow for it?"

Looking at the ASU area and Tempe zoning map, it is pretty complex. I'd really vet the zoning closely.

​

Family means:​

​

1.​

One (1) or more persons related by the 3 rd degree of consanguinity, adoption, marriage or as domestic partners as defined in Section 7-105, and not more than two (2) additional persons living together in a dwelling unit; or​

​

2.​

Not more than three (3) persons who are not related by the 3 rd degree of consanguinity, adoption, marriage or as domestic partners, living together in a dwelling unit.​

​

PS - you cannot require a lender to "do" anything.​

Thank you for the note that I cannot require a lender to do anything. Made me smile, but I get it.

 

[Lee Lansford]

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!

The appraiser decides which of the 3 approaches of value are necessary to communicate a credible appraisal. Within this past week I completed an appraisal where although the client did not require the Income Approach, I knew that the approach was necessary...and I did it. E-Z, P-Z. And, no, I did not include the form 1007, I merely communicated what was necessary in narrative.

 

[Russ Kitzberger]

You should have quoted the assignment knowing that the income approach was needed. You can tell them you need to expand the scope and that the fee will increase, but they might not be willing pay it. If you need the 1007 in order to assist in estimating market rent, fill it out and keep it in the file. Or include it and they probably won’t care, it sounds they just don’t want to pay for it.

Concur, if it is a lease area, income is possibly more significant than sales data.

I owned student housing, SFR and 2-4 unit MF. Any appraisal that didn't include the income approach at least acknowledging the ability to lease by room (now allowed by federal court case despite SFR zoning), was completely malpractice. The players in that area were investors and groups of college rental companies and houses would trade needing rehab after they were depreciated. We had virtually no market participants for owner occupancy. Going outside the immediate neighborhood was what most incompetent appraisers would do in lending appraisal. I exited this market after a decade recently, 100% of my properties sold to investors.

If you don't do the income approach and it is shown to have a disparate impact on the borrower in a protected classs or if they are shown in aggregate to be disparate on a protected class, you have an Equal Credit opportunity issue possible. I think this is going to be the next frontier for lawsuits against big lenders. When rents are increasing in these areas and equity is stagnant, credit access is a major issue that will come to the forefront when the loans and appraisal are able to be analyzed using big data.

 

[Dublin ohio]

I have done a number of properties in similar neighborhoods. None for gse. Sales are usually rare. Since these properties are cash cows and seldom sell. Like Russ said. Most sales take place between investors. Have seen property "swaps". Small bulk purchases etc. When I do have sales. They are all over the place and very seldom truly "compare" to subject. Sca becomes little more than an attachment. It is all about the income.