Fair Market Rent 3-4 unit FHA Self Sufficiency

[jyoder35]

Hi all!

I'm a mortgage broker and have a client that made an offer on a quadplex with minimum down payment on an FHA loan. I'm concerned we won't pass the FHA's self sufficiency test. We need to have the total PITI payment to be under 75% of the appraiser's estimate of fair market rent for all units. Mortgage payment is going to be around $4100, so we'd need roughly $5500/ month in rental income to qualify.

The property is made up of 3 1BR/1BA unit and one 2BR/1BA units.

I found on Huduser.gov the Fair Market Rent Documentation System linked below, which allows you to see a specific FMR based on zip code.

FY 2023 $fmrtype$ Fair Market Rents Documentation System — Select Geography

www.huduser.gov

If we use this system, we'd have around $1400/ month for each 1 BR and $1700 for the 2BR.

As an appraiser, would/ could you use this number in determining Fair Market Rent? Or would you calculate it? Would existing leases play in?

If we can use HUD's Fair Market Rent number, we are good. If it's based on something else, I'm concerned.

Any guidance is massively appreciated!

 

[TerryRohrer]

Not a chance I would rely on that data. Not terribly familiar with it, but most such data is at such a high level that it can't be viewed as credible regarding an individual property. For example, the data likely includes rents from all spectrums of the market, for the almost uninhabitable to luxury units. Also, it lumps Phoenix, Mesa, and Scottsdale into one lump, as if the whole is homogenous. I have only been there once, but I doubt real estate there does not vary at all by location within that huge area. Depending on the mix, the subject is likely not represented by the average or median for the entire market. If you read the notes at the bottom of the page, you will see all the machinations used to develop their numbers. No appraiser who values their license would even consider these in developing market rents for a particular subject.

 

[J Grant]

Appraisers typically base market rent on what other similar units or properties in the market area are renting for.

 

[jyoder35]

Not a chance I would rely on that data. Not terribly familiar with it, but most such data is at such a high level that it can't be viewed as credible regarding an individual property. For example, the data likely includes rents from all spectrums of the market, for the almost uninhabitable to luxury units. Also, it lumps Phoenix, Mesa, and Scottsdale into one lump, as if the whole is homogenous. I have only been there once, but I doubt real estate there does not vary at all by location within that huge area. Depending on the mix, the subject is likely not represented by the average or median for the entire market. If you read the notes at the bottom of the page, you will see all the machinations used to develop their numbers. No appraiser who values their license would even consider these in developing market rents for a particular subject.

There is some more granular data available (clipped below) that boils it down to zip code that I was using, but it specifies that it is the Maximum FMR. Was just hoping that we had a prayer here since the data is from HUD. Going to have to tell the buyer to cancel their contract. I really appreciate the quick feedback though!

 

[Surf Cat]

Isn't your client being represented by a realtor for the purchase? Your client's realtor should have a good grasp on what 1 & 2 bedrooms of similar properties in the market area are renting for. As well as a GRM.

Never used HUD's fair market rent system. I suspect it to kinda be like Zillow. Will have to check it out.

 

[George Hatch]

That's the purpose of performing rental surveys, to develop an opinion of the market rents. The local averages don't mean anything because they're not specific to the subject's attributes. A 1bd unit in a 100-unit apt project of new construction and located across the street from a university, with pools, tennis courts and a gym has no relevance to a 1bd unit in a 40-yr 4-plex located even 2 miles away. Or even to a guest house behind a single family residence.

"Most similar" is what we look for in a rental survey; and that's frequently the most difficult part of the assignment depending on how common such properties are for the area.

 

[sputnam]

Zip codes do not define neighborhoods.

 

[Dublin ohio]

Isn't your client being represented by a realtor for the purchase? Your client's realtor should have a good grasp on what 1 & 2 bedrooms of similar properties in the market area are renting for. As well as a GRM.

Never used HUD's fair market rent system. I suspect it to kinda be like Zillow. Will have to check it out.

It is the same amount they use for section 8 rents

 

[Dublin ohio]

FWIW. I just ran rents for my neighborhood. Based on the FMR published by HUD. The FMR is anywhere from $500-$1000 lower than what properties are actually renting for. I would definitely be wary of using the FMR. I would suggest doing a rental survey. Otherwise you might be leaving a lot on the table

 

[Tiffany Gibbons]

It is the same amount they use for section 8 rents

Exactly.