Duplex vs SFR

[kjk]

I would not get into functional utility adjustments as you will have no data or comps to extract them from.
I would Just make condition adjustments. Or you will lead yourself down a never ending rabbit trail into appraisal purgatory. All they want to know is how much can they sell it for to try and pay off the reveres mortgage loan balance.

Thanks Glenn! One more question as I dig into this- I don't plan on doing the income approach due to a lack of data and it not being applicable in the subject's current condition. Will I raise any flags if I complete a duplex on a GPAR instead of GP 2-4?

 

[George Hatch]

There are no comps for it as a duplex. GLA of 1300 SF- one bed on the main and a studio unit on the upper level. There just isn't a demand for this. As-repaired, I would still say SFR.

"no comps" doesn't mean the same thing as "no 2-units in town". If there are other 2-units in town you can analyze their respective sales histories to see how their pricing has previously stacked up against SFRs of comparable size. If it's less or equal than the SFRs then it might make more sense to rehab back to the original SFR use due to the easier marketability. If the 2-unit properties are obviously selling for more than SFRs of comparable size then it might make more sense to rehab to the current configuration.

If you can do the analysis then there's no reason to skip it and proceed on an assumption or your feelings. And about the only way you can't do the analyses is if there actually are no 2-unit properties in town. Which that is a question that only you can answer.

 

[CGinMN]

In my experience, in these circumstances where a full rehab is needed, and a duplex rehab will be more intensive/expensive than a SFR rehab, there is often no “as is” value premium for the potential duplex use. The HBU can be either/or, and it depends on the investor’s goals, level of sophistication, local permitting/code requirements, and the functional layout of the home. If a hypothetical buyer/investor can make the duplex numbers work, they often won’t pay a dime more for the property because they will want to pocket all the premium for the extra time, money and risk, associated with the duplex project. I think this is especially likely given that your are dealing with a studio/1BR configuration that was originally a SFR.

 

[J Grant]

I have done quite a few FHA and VA reverse defaults. What happens is once the owner has been in a nursing home or assisted care facility for say like 6 months the property has to be purchased by a family member or its sold and liquidated. I did not mean to be rude but not only are these properties usually in real poor condition but most will never be taken to a higher and better use as its not economically feasible. BUT for future H & B Use analysis do not confuse what your assignment conditions are versus a hypothetical future use.

OP - you seem to be following Glenn on this and ignoring other appraiser's advice, including George Hatch and Sputnam, both CG appraisers. Glenn is also a good appraiser and I agree with a number o of his appraisal posts, but not on this topic.

Just because it is a client VA liquidation assignment, does not eliminate a HBU analysis. It is still a market value appraisal, whether market value, or liquidation value ( LV is still a form of MV). If the appraisal form says purpose: market value, then you appraise for MV.

Glenn above invented a "higher and better use". Then he refers to a future HBU. Neither is correct for MV purpose analysis. Assuming a current eff date, dHBU is the current use. ( which can include consideration of future benefits or future zoning changes or plans for the property ). Does the structure , today's current date, add more value to the land then if torn down? Does it cost more to repair the structure than it would to tear down and raze the lot ? The OP never even poses that question. In a poor condition property, that is question number one.

Assuming the structure adds more value to the lot then removing it, even though needs repair,what is the HBU ? It could be SFR or Duplex. Either way, the poor condition would make the typical buyer an investor/flipper who pays less. GH advised how to determine the HBU per what comps are selling for . If no Duplex comps in the area are found going back 3 years, that is the market speaking that though zoning allows both, it was more profitable and on trend for SFR since that is the dominant sales trend.

AS IS condition for VA liquidation of loan use does not mean we skip the HBU of the property. They are two different analysis of the appraisal. HBU is the first fundamental analysis
AFter HBU is determined we go on to appraise what is subject worth in its current poor condition needing repairs.


Here is a sample of possible HBU analysis and commentary :

The subject is a Z sf structure in poor condition but it is salvagable for habitation with repairs . A HBU analysis sees the structure adding more value to the land then removing it, therefor HBU is existing use. The zoning allows either SFR or MF. The subject was at one time configured as a rental property with one unit up and one unit down. After researching past and recent sales, talking to RE agents and reviewing rents of both SFR and MF, the dominant trend shows support for conclusion of SFR as the HBU, though an outlier buyer might purchase it for MF.

The subject in poor condition would appeal to a typically motivated investor flipper buyer who pay in the lower price range due to extensive repair costs and motivation of making a profit above cost when they sell. Therefore, the comps are in poor or fair condition. Two of the comps were REO sales that were sold on MLS and exposed to the open market. They were used not because they were REO , but because they had the most similar poor condition to the subject. "

 

[alebrewer]

There are no comps for it as a duplex. GLA of 1300 SF- one bed on the main and a studio unit on the upper level. There just isn't a demand for this. As-repaired, I would still say SFR.

That seems to be your answer, then. If both uses are physically possible and legally permissible, look to the market to determine which use is the highest and best use...

 

[J Grant]

"no comps" doesn't mean the same thing as "no 2-units in town". If there are other 2-units in town you can analyze their respective sales histories to see how their pricing has previously stacked up against SFRs of comparable size. If it's less or equal than the SFRs then it might make more sense to rehab back to the original SFR use due to the easier marketability. If the 2-unit properties are obviously selling for more than SFRs of comparable size then it might make more sense to rehab to the current configuration.

If you can do the analysis then there's no reason to skip it and proceed on an assumption or your feelings. And about the only way you can't do the analyses is if there actually are no 2-unit properties in town. Which that is a question that only you can answer.

I agree with your post, but "no comps" also is the market talking. If the relevant market area is searched back 4 years, and no MF sales are found, and no MF listings either, it could indicate no or little demand for MF properties in the area, even though zoning allows either. Search some of the older built sales - maybe they were MF at one time, then converted to SF.

Though searching for MF in a different town/area also has a use as in the analysis well .

 

[CGinMN]

"No comps" doesn't necessarily mean the market is speaking. The small town 2-4 market isn't huge, but that doesn't mean there isn't a market. I have noticed that often times the agents in small towns will put duplexes on the SFR MLS because nobody looks at the MFR MLS. Also, small town investors all know each other and often sell to tenants and exchange these independent of agents.

 

[J Grant]

"No comps" doesn't necessarily mean the market is speaking. The small town 2-4 market isn't huge, but that doesn't mean there isn't a market. I have noticed that often times the agents in small towns will put duplexes on the SFR MLS because nobody looks at the MFR MLS. Also, small town investors all know each other and often sell to tenants and exchange these independent of agents.

That is for appraiser to determine.

However, in your above example, there ARE comps for 2-4 unit MF, they just sold outside the MLS, or were put in the wrong category of MLS as a marketing ployc by realtors. So the market did speak , it is seeing activity and sales/comps of MF which shows demand for this type of property.

Having to search harder for comps is not the same thing as no comps found, as you demonstrated. Which indicates the need for an appraiser to be familiar with an area, such as knowing a tactic of agents to list in wrong MLS category and knowing in that area investors sell to each other outside the MLS.

Now, if you had made the same deep dive search and still found no MF comps, or one lone sale in 4 years, it would be the market speaking, of low demand if both SF and MF zoning is present

 

[kjk]

OP - you seem to be following Glenn on this and ignoring other appraiser's advice, including George Hatch and Sputnam, both CG appraisers. Glenn is also a good appraiser and I agree with a number o of his appraisal posts, but not on this topic.

Just because it is a client VA liquidation assignment, does not eliminate a HBU analysis. It is still a market value appraisal, whether market value, or liquidation value ( LV is still a form of MV). If the appraisal form says purpose: market value, then you appraise for MV.

Glenn above invented a "higher and better use". Then he refers to a future HBU. Neither is correct for MV purpose analysis. Assuming a current eff date, dHBU is the current use. ( which can include consideration of future benefits or future zoning changes or plans for the property ). Does the structure , today's current date, add more value to the land then if torn down? Does it cost more to repair the structure than it would to tear down and raze the lot ? The OP never even poses that question. In a poor condition property, that is question number one.

Assuming the structure adds more value to the lot then removing it, even though needs repair,what is the HBU ? It could be SFR or Duplex. Either way, the poor condition would make the typical buyer an investor/flipper who pays less. GH advised how to determine the HBU per what comps are selling for . If no Duplex comps in the area are found going back 3 years, that is the market speaking that though zoning allows both, it was more profitable and on trend for SFR since that is the dominant sales trend.

AS IS condition for VA liquidation of loan use does not mean we skip the HBU of the property. They are two different analysis of the appraisal. HBU is the first fundamental analysis
AFter HBU is determined we go on to appraise what is subject worth in its current poor condition needing repairs.


Here is a sample of possible HBU analysis and commentary :

The subject is a Z sf structure in poor condition but it is salvagable for habitation with repairs . A HBU analysis sees the structure adding more value to the land then removing it, therefor HBU is existing use. The zoning allows either SFR or MF. The subject was at one time configured as a rental property with one unit up and one unit down. After researching past and recent sales, talking to RE agents and reviewing rents of both SFR and MF, the dominant trend shows support for conclusion of SFR as the HBU, though an outlier buyer might purchase it for MF.

The subject in poor condition would appeal to a typically motivated investor flipper buyer who pay in the lower price range due to extensive repair costs and motivation of making a profit above cost when they sell. Therefore, the comps are in poor or fair condition. Two of the comps were REO sales that were sold on MLS and exposed to the open market. They were used not because they were REO , but because they had the most similar poor condition to the subject. "

Thank you for your thoughtful reply. I know we are all very busy, so I appreciate everyone taking the time to help me out! Though the subject is not currently used as a duplex, it is configured as one so I will appraise it as a duplex. I will also add my H&BU analysis. The last issue I am running into is the form. Due to the poor condition, I believe using rental comps and the income approach would be misleading. Is using a standard GPAR an acceptable form for this use?

Again, thank you EVERYONE for your replies. I have found the appraiser world to be more of an island- so I am very thankful for the help here!

 

[alebrewer]

"No comps" doesn't necessarily mean the market is speaking. The small town 2-4 market isn't huge, but that doesn't mean there isn't a market. I have noticed that often times the agents in small towns will put duplexes on the SFR MLS because nobody looks at the MFR MLS. Also, small town investors all know each other and often sell to tenants and exchange these independent of agents.

One of the reasons we're still in demand. The appraiser's job is to determine (from the market) which use is the H&B use...