Comparable Rent Schedule / Operating Income

[NC Values]

I completed a 1004 appraisal on a SFR a few months ago and now the lender wants a Comparable Rent Schedule (FMNA 1007) and Operating Income Statement (FMNA 216).

The lender needs these forms to meet underwriting guidelines, but does not care about what the Net Cash Flow is for the property, because the owner qualifies for financing with $0 rental income. Property is occupied by owners son and friends who pay nominal rent (below market rent).
The lender wants a minimum scope of work effort to complete these forms. Lender does not have any data on income or expenses.

The original appraisal report did not include the Income Approach because highest and best use is owner occupancy, despite the fact the property is currently used for rental.

I would like to get feedback if the following is OK?

Also, Where should I document the Scope of Work in the deliverables to client? Is there a separate form I should use for SOW?

1) Rent Schedule will based solely on MLS rental data (appears to be adequate data for credible result).
2) Expenses are based on assumption that tenants pay all utilities (owner utility expenses are $0)
3) Am I correct that lender must, at a minimum, supply me with the PITI for calcuating Net Cash Flow?

 

[Mike Boyd]

I completed a 1004 appraisal on a SFR a few months ago and now the lender wants a Comparable Rent Schedule (FMNA 1007) and Operating Income Statement (FMNA 216).

The lender needs these forms to meet underwriting guidelines, but does not care about what the Net Cash Flow is for the property, because the owner qualifies for financing with $0 rental income. Property is occupied by owners son and friends who pay nominal rent (below market rent).
The lender wants a minimum scope of work effort to complete these forms. Lender does not have any data on income or expenses.

The original appraisal report did not include the Income Approach because highest and best use is owner occupancy, despite the fact the property is currently used for rental.

I would like to get feedback if the following is OK?

Also, Where should I document the Scope of Work in the deliverables to client? Is there a separate form I should use for SOW?

1) Rent Schedule will based solely on MLS rental data (appears to be adequate data for credible result).
2) Expenses are based on assumption that tenants pay all utilities (owner utility expenses are $0)
3) Am I correct that lender must, at a minimum, supply me with the PITI for calcuating Net Cash Flow?

I would charge them $125 for each report. $250, total.

Everything else OK. I leave the net cash flow line blanck and comment that lender is to calculate that amount.

 

[Calvin the Airedale]

I completed a 1004 appraisal on a SFR a few months ago and now the lender wants a Comparable Rent Schedule (FMNA 1007) and Operating Income Statement (FMNA 216).

The lender needs these forms to meet underwriting guidelines, but does not care about what the Net Cash Flow is for the property, because the owner qualifies for financing with $0 rental income. Property is occupied by owners son and friends who pay nominal rent (below market rent).
The lender wants a minimum scope of work effort to complete these forms. Lender does not have any data on income or expenses.

The original appraisal report did not include the Income Approach because highest and best use is owner occupancy, despite the fact the property is currently used for rental.

I would like to get feedback if the following is OK?

Also, Where should I document the Scope of Work in the deliverables to client? Is there a separate form I should use for SOW?

1) Rent Schedule will based solely on MLS rental data (appears to be adequate data for credible result).
2) Expenses are based on assumption that tenants pay all utilities (owner utility expenses are $0)
3) Am I correct that lender must, at a minimum, supply me with the PITI for calcuating Net Cash Flow?

There may be good reasons for omitting an Income Approach but HBU isn't one of them. And if that truly were the case, how did your report reconcile the fact that despite an owner occupied HBU, the property was actually tenant occupied?

Fact is the HBU was residential. Whether owner or tenant occupied will not make a difference.

 

[Randolph Kinney]

I completed a 1004 appraisal on a SFR a few months ago and now the lender wants a Comparable Rent Schedule (FMNA 1007) and Operating Income Statement (FMNA 216).

The lender needs these forms to meet underwriting guidelines, but does not care about what the Net Cash Flow is for the property, because the owner qualifies for financing with $0 rental income. Property is occupied by owners son and friends who pay nominal rent (below market rent).
The lender wants a minimum scope of work effort to complete these forms. Lender does not have any data on income or expenses.

The original appraisal report did not include the Income Approach because highest and best use is owner occupancy, despite the fact the property is currently used for rental.

I would like to get feedback if the following is OK?

Also, Where should I document the Scope of Work in the deliverables to client? Is there a separate form I should use for SOW?

1) Rent Schedule will based solely on MLS rental data (appears to be adequate data for credible result).
2) Expenses are based on assumption that tenants pay all utilities (owner utility expenses are $0)
3) Am I correct that lender must, at a minimum, supply me with the PITI for calcuating Net Cash Flow?

You can treat this as a new assignment. The lender is asking for an appraisal: a market rent is an appraisal. The SOW of whatever you deem to be credible to produce an appraisal.

 

[NC Values]

There may be good reasons for omitting an Income Approach but HBU isn't one of them. And if that truly were the case, how did your report reconcile the fact that despite an owner occupied HBU, the property was actually tenant occupied?

Fact is the HBU was residential. Whether owner or tenant occupied will not make a difference.

Does not occupancy largerly determine value? Investors looking for rental properties have different motivations from owner occupancy. Market value for the subject property is around $540,000, but I doubt this home would rent for more than $2500/month. As far as occupancy of subject goes, it is occuppied by owner's son and some of his buddies that attend a nearby colllege. Owner lives next door and bought the property primarily to recombine lots so that he could build a new addition to his $1M+ home.

 

[Lee Lansford]

Does not occupancy largerly determine value? Investors looking for rental properties have different motivations from owner occupancy. Market value for the subject property is around $540,000, but I doubt this home would rent for more than $2500/month.

Bear in mind that if you rightfully originally concluded that the income approach was not applicable...the Income Approach remains not applicable (and, hence, of course, "not necessary").

You're not being asked to develop and communicate the IA.

 

[CANative]

It's not an income approach. If the lender wants the appraiser to complete the 216 (it's supposed to be filled out by the lender and borrower) then they must supply you with appropriate information. BTW… For Fannie Mae purposes the 216 is not required for SFR's.

Fannie Mae 2009 Selling Guide B4-1.2-06, Appraisal Forms and Report Exhibits (04/01/2009)

• Operating Income Statement (Form 216) or a similar cash flow and operating income statement — Required for investment property, including a two- to four-unit property in which the applicant will occupy one unit as a principal residence.
Note: The form may be prepared by the applicant or the appraiser.
o When the applicant prepares Form 216, the appraiser’s comments on the reasonableness of the projected operating income must be included on the form.
o When the appraiser prepares Form 216, the lender must ensure that the appraiser has operating statements; expense statements related to mortgage insurance premiums, homeowners’ association dues, leasehold payments, or subordinate financing payments; and any other pertinent information related to the property.• Single-Family Comparable Rent Schedule (Form 1007), if the property is a one-unit investment property.
• Any other data—as an attachment or addendum to the appraisal report form—that are necessary to provide an adequately supported opinion of market value.

 

[Calvin the Airedale]

Does not occupancy largerly determine value? (1) Investors looking for rental properties have different motivations from owner occupancy. (2) Market value for the subject property is around $540,000, but I doubt this home would rent for more than $2500/month. (3) As far as occupancy of subject goes, it is occuppied by owner's son and some of his buddies that attend a nearby colllege. (4) Owner lives next door and bought the property primarily to recombine lots so that he could build a new addition to his $1M+ home.

Perhaps its time to revisit our definition of HBU:

highest and best use
The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity. (Dictionary of Real Estate Appraisal, 4th Edition, Appraisal Institute)

Or the defintion provided from this source for an improved property:

highest and best use of property as improved
The use that should be made of a property as it exists. An existing improvement should be renovated or retained as is so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one.

1. As far as HBU goes, USE, not occupancy determine value.

2. Don't confuse rental or investment motive with how much rent can be expected or what type of return is anticipated.

3. See, you're already part way done toward completing and Income Approach (GRM analysis for SFR) and the HBU wasn't what was holding you back! You only need to support a rental amount and a GRM to indicate a value.

4. What is the name for someone that occuppies a property but does not own it?

I'm not giving you a hard time for omitting the Income Approach. As I said, there are a lot of good reasons for leaving it out. It's just that your particular reason is bogus. Maybe the falacious nature of your explanation didn't resonate with your client, but I suggest you pick another reason next time that will be more convincing to your peers.

 

[NC Values]

Perhaps its time to revisit our definition of HBU:

2. Don't confuse rental or investment motive with how much rent can be expected or what type of return is anticipated.


I suggest you pick another reason next time that will be more convincing to your peers.

Thanks for the time and effort of your response. I think what has me confused on owner versus tenant occupancy and HBU is that the definition of HBU refers to use of a property that will maiximize value and that in higher end neighborhoods, it would take an extremely high GRM of 250+ to reconcile market rents with market values.

Could you please explain what you mean by "dont confuse investment motive with what type of return can be expected".?m2:

Video, audio, disco... I hear, I see, I learn.

 

[mike32716]

Something to keep in mind: The results of the OIS and rent schedule should be consistent with your assertion that the income approach was either not neccessary or unreliable. It is also likely that the lender has a new investor which requires this information. The new investor is likely using the net rent in calculating potential loss ratios in the event of default. In fact, most of the oddball requests that appraisers have been receiving over the past couple of years are not required by the GSEs, but are (constantly changing) overlays from investors.