Fully furnished vs non-furnished for a purchase transaction

[Terraform]

Since I would not be placing value or potential income on personal property, the value by the income approach should be based on a non-furnished unit, correct?

 

[Terraform]

This is probably a newb question, I have not been trained in this, I have always utilized annual lease data (annual contracts non-furnished) to develop a GRM, and MLS has been the source of my findings. In this highly seasonal beach market (Pinellas Barrier Island) a fully furnished unit far outperforms a non-furnished annual income due to short term leases. Which should I be using to reconcile my income approach?

 

[Michigan CG]

Since I would not be placing value or potential income on personal property, the value by the income approach should be based on a non-furnished unit, correct?

This is probably a newb question, I have not been trained in this, I have always utilized annual lease data (annual contracts non-furnished) to develop a GRM, and MLS has been the source of my findings. In this highly seasonal beach market (Pinellas Barrier Island) a fully furnished unit far outperforms a non-furnished annual income due to short term leases. Which should I be using to reconcile my income approach?

So basically you have an AirBnB or similar?

It is hard to answer this type of question because all real estate is local and the various laws, zoning etc., ad infinitum are different but I will let you have my take on it and let you decide if it is helpful.

This type of assignment (if I understand what you have) should take a long time, have a ton of analysis in it and the fee should be significant.

First, you have short-term leases which I am going to assume are a week or less most of the time. In appraisal practice and theory we would want to find the market rent of the property through "rent comparables" and we don't want to have any "business income" in the value of the real estate. That would point you to having leases with no furnishings. In order to find the appropriate GRM you would also find sales to derive those GRMs.

Sales of typical properties with no short-term leases and their resulting GRMs may or may not be a good indicator but they are NOT comparing apples with apples. Your subject has the ability to be a short-term lease property and it is legal to do so and therefore wouldn't you want to find other properties that are leased with furnishings to determine the market rent of the subject?

Then, wouldn't you also want to find sales of similar properties that also have a history of short-term leases? The rental rates of the two different uses are going to be significantly different as would the be the GRMs of the properties.

Another difference in the two property types (furnished/unfurnished) is the expenses (maintenance/cleaning/etc) and the management cost of these is going to be significantly higher than a typical property that is leased for a year.

I have seen the argument that these types of properties should only be valued by CG appraisers and I don't think I agree with that at all but this is a complex assignment unless you live in an area with a lot of sales of these things. I doubt there are a lot of sales of these things anywhere but I could be wrong. ...................

 

[Michigan CG]

To further elaborate on this, let us take an example of a real property where I know the area (I still have my Iowa license). My wife and I go back home every year and last year we did an AirBnB. The cost was $150/night in a 1,200 SF two-bedroom house. The house is probably worth about $150,000 +/-. If the home were to be rented on a yearly lease I am going to say the rent would be about $1,000/month, maybe $1,200/month. Let us go with the higher number.

That would give us a GRM of 125.

The home was dated from the 1960's but very clean (painted cabinets, newer carpet, very dated bathroom but functional). The furnishings were OLD, but clean and functional. We were there five nights and I am a friendly guy and like to talk to people so I got some information from them.

They get $150/night for about four months per year and have the house rented on average six nights per week for those four months. The remainder of the year they have to drop the rents to about $100 and are lucky to get three days of rental a week.

So for four months they are getting $15,300 ($3,825/month) and for the remaining eight months they are getting $10,500 ($875/month) or an average of $2,150/month. The value of the furnishings is then GROSS of $11,400 per year.

BUT........ they have to pay all utilities which a typical tenant would pay. They have to pay someone to clean the house twice a week for four month and one a week for eight months. Cleaning expenses are about $2,200 per year and then let us add on $2,400/year for utilities.

Remember that our gross income with a yearly tenant is $14,400. Let's subtract out 10% for vacancy to figure our management expenses. Around here a management company charges 8% to manage a SFR. What is the management fee for a AirBNB? No management company is going to manage an AirBnB for 8% as there is a lot more work to do it. I am going to take a wild guess of 20% with absolutely no support.

So the management fee is $1,037 for the SFR but for the AirBnB it is $5,160 or $4,123.

Above my estimate (on a Monday night watching TV) for the furnishings value was $11,400/year gross. But our expenses went up and are higher by about $8,723 than renting month to month, so in this completely unsupported discussion those furnishings are worth about $2,500. Using the 125 GRM (from the typical rent and yearly lease) they add ~$26,000 to the value of the home considering all of the additional expenses of the property being a short-term rental.

One more thing to add, the folks said their maintenance expenses were significantly lower with short term tenants as the short term tenants took better care of the property in comparison to the yearly tenants. They have owned this rental (which is next door to their own home) for 25 years and have been doing the AirBNB thing for five years.

I could be all wrong in the above but no one is paying me to comment on AF on a Monday night. I am just thinking out loud.

 

[Michigan CG]

Full disclaimer: I have never appraised an AirBNB. I was asked to once for a house on Lake Erie and I told them $2,000 or something like that and they thought I was being completely unreasonable. They called back a month later after they found someone for the $400 or so they were offering and didn't like the results. I told them I was not interested.

I think the biggest thing missed for these properties, from what I have read on the internet, is the high management costs if they are truly reflected as MARKET management costs and discounted as "there are no management costs, Betty does the management in her spare time". Betty does not work for free in the real world.

 

[Dublin ohio]

I could be all wrong in the above but no one is paying me to comment on AF on a Monday night. I am just thinking out loud

Not that in your scenario I would even consider you being wrong. But from what the op is stating. He has a seasonal rental market. That appears to generate more income on a seasonal basis than if rented annually. I have relatives that manage numerous seasonal units in the outer banks. They shut down many of the units once the season is over. A few are rented off season. But limited demand. They always told me that it was more financially sound to shut down units during the off season. No maintenance except for a bi weekly walk through. Also gave them more time to do any needed repairs to get ready for next season

 

[Dublin ohio]

Since I would not be placing value or potential income on personal property, the value by the income approach should be based on a non-furnished unit, correct?

What does the market show. Are units sold furnished or unfurnished. It would seem to me in a seasonal market. Furnishings would be necessary

 

[Terrel L. Shields]

I believe you can adjust and or find rentals that are unfurnished. May take some serious smiling and dialing. I have a couple of agents who specialize in RE management and they have the best data around. I'd see if I could locate one of them and see what they say. Yes, for a bank loan you would need to treat personal property separately.

 

[Terraform]

Thanks!

 

[Terraform]

This is what prompted the OP, I performed an appraisal for a a triplex in a seasonal beach market for the purpose of a purchase. The City allows for short term rentals and the subject was marketed as fully furnished, the contract indicated that the subject would be fully furnished. This was a bank loan and I utilized unfurnished sales in this market area for comparison, the market rent , GRM, and income approach was based on unfurnished units, I indicated that no personal property was included in the market value estimate. I contacted local real estate professionals specializing in short term seasonal fully furnished rents and developed a average gross monthly rent which was significantly higher than the annual unfurnished rent. The borrower and seller contacted me and expressed that the lender would not loan on the subject property as I utilized an unfurnished monthly rental rate. I didn't respond to the borrower and seller with anything but, I don't how the lender qualifications are calculated. As I included both a supported GMR for both furnished and unfurnished, why can't the lender utilize either or? BTW, the contract price was supported by the market value estimate by sales comparison and income approach.