Guest House

[Peacemaker]

Private appraisal for a homeowner to remove PMI. Custom home, 4 years old, on one acre. His sale from 2 years ago is still the highest yet in the development, it's the largest, probably the nicest home in there. HO recently added pool and spa.

My problem: Since buying two years ago the HO also built an attached guest quarters for his mother-in-law. Nicely done, proper permits. Has a separate entrance, he says that's the only way the town would issue permits. Separate electrical service, separate heat and AC. Since you can't access the addition from the inside of the main house I did not count it in the main GLA, I broke it out on a separate line. Problem is, I only found one closed sale with a "guest house," it is detached, nowhere near as nice, not what I would consider a great comp.

The comp with the "guest house" is the highest sale I have once all other adjustments are made, so there is some support for making an adjustment for the addition. But I can't help but feel there's not a big demand for that, so I am a little uncomfortable jacking up all the comparables except one by 15K. Feels kinda Skippy-ish. The value is above what the HO needs to get rid of his PMI even without the addition, between the pool and appreciating values in the area he's fine. But, saying there's not enough evidence in the market to value the addition seems lazy. It probably does have SOME value, I am just not comfortable saying it's "x" amount. Should I hedge it by saying the value is "at least X amount?" (The amount without the addition?) The lender (big national company) wants a regular 1004, so I am leery of deviating from the standard operating procedure.

Any thoughts would be appreciated. Thank you.

 

[Tater Salad]

Can you find any other function for the guest quarters? Office, maybe even pool house (if close to the newly installed pool)? If so, I bet there are other sales with pools and nice pool houses, no? If not, and there's no other market to extract a % from, I'm at a loss.

I would add the 15k across the board, if you feel that it is warranted. Just not giving it value, when it sounds like you feel that it has value, would be wrong.

 

[Rich Heyn]

Wendy,

My first mentor had an interesting method of dealing with situations like this. He would comp out the main structure independent of the appurtenant structure. Then he would estimate the net income the appurtenant structure would generate if rented, then cap out the net annual income at an appropriate rate to determine contributory value. He would usually make a small downward adjustment to the main structure for privacy loss. Technically, I guess you would call it a hybrid approach that uses the income approach to develop the value of the appurtenance.

This process is based on the rationale that if the property were put on the open market, it may attract buyers who did not have a personal need for the guest house/apartment, but would pay something additional for the property because of the available rental income, less something for loss of privacy.

Rich

 

[CANative]

You have one sale with a guest unit, so the adjustments wouldn't really be across the board. If you want or need more, see if you can find sales which include a nicely finished workshop or other utility building and call that equal. Or maybe a home with a barn or an additional detached garage of similar size.

It doesn't necessarily have to be a granny unit, although that would be the best comparable. Just try to show a demand for some sort of additional structure and what the market reaction to that demand is.

 

[Peacemaker]

I appreciate the suggestions. Rich, your income method is a great idea, I'll tuck that away for future reference. In this case unfortunately there are even fewer rentals than guest houses, due to an almost rural location. But I appreciate all the help, thank you.

 

[Walter Kirk]

Your guest house may well be a super adequacy. Perhaps you should use your comp with the guest house as comp #4 and find a comp similar to it without the guest suite as comp#5, if the difference in sales price is small you have some evidence of super adequacy.

 

[Travis McGee]

I'd look for old sales with guest homes or similar area sales to extract a value.Plus you already have one comp. It does have value-10 or 15 k is not unreasonable Just because we are not skippy, doesn't mean we have to go the other direction either.

The income approach is convulted and not applicable and beside the point. Either you believe in an adjustment or you don't.

 

[Ghost Rider]

Originally posted by Rich Heyn@Jan 24 2004, 05:06 PM
Wendy,

My first mentor had an interesting method of dealing with situations like this. He would comp out the main structure independent of the appurtenant structure. Then he would estimate the net income the appurtenant structure would generate if rented, then cap out the net annual income at an appropriate rate to determine contributory value. He would usually make a small downward adjustment to the main structure for privacy loss. Technically, I guess you would call it a hybrid approach that uses the income approach to develop the value of the appurtenance.

This process is based on the rationale that if the property were put on the open market, it may attract buyers who did not have a personal need for the guest house/apartment, but would pay something additional for the property because of the available rental income, less something for loss of privacy.

Rich

Perhaps I'm confused, but how would the income approach lead to an adjustment?? With the amount of "estimating of income" it sounds a lot more like an extraction method (read, extracting an adjustment out of your butt) of determining value.....And of course it assumes the accessory dwelling could legally be utilized as a rental unit, which would be questionable in many cases.....

The only way to properly make the adjustment is via matched pair analysis. From what Wendy said, there is a good comparable with a guest house. Perfect, there is the stongest indicator. From that, an idea of the contributory value of the guest house can be extracted. If there is a need for more data, then I'd start looking at historic sales data of homes with guest quarters, and see what kind of affect it had on those sales then. You can probably get a prety good feel for what the market is willing to pay for the amenity.

One other thing:

The comp with the "guest house" is the highest sale I have once all other adjustments are made, so there is some support for making an adjustment for the addition. But I can't help but feel there's not a big demand for that, so I am a little uncomfortable jacking up all the comparables except one by 15K. Feels kinda Skippy-ish. The value is above what the HO needs to get rid of his PMI even without the addition, between the pool and appreciating values in the area he's fine. But, saying there's not enough evidence in the market to value the addition seems lazy. It probably does have SOME value, I am just not comfortable saying it's "x" amount. Should I hedge it by saying the value is "at least X amount?" (The amount without the addition?) The lender (big national company) wants a regular 1004, so I am leery of deviating from the standard operating procedure.

As much as I am a proponent of trusting your gut, and using your experience when it comes to value, you can't fight the market. If the market says a pool or a guest house or whatever is worth X amount, adjust for it. Make sure you have data to support it (which it sounds like you do) and make the adjustment.

 

[Peacemaker]

Thanks for all the replies. I went ahead and made the adjustment, after searching back 2 years, 10 miles in all directions, both MLS and tax records, and "reading between the lines" on a lot of realtor comments looking for an attached anything. Slept on it, still think the adjustment is okay so I'm gonna go with it. I do appreciate all the comments.

 

[Rich Heyn]

Jo Anne and MH,

I'll try to answer you both in a single post.

The income approach is convulted and not applicable and beside the point. Either you believe in an adjustment or you don't.

What I proposed was an alternate method of developing an adjustment. When all you can find is one comp with a guest house, it may not be all that reliable in and of itself. Sometimes it’s easier to find some rental data for nearby apartments or small houses and use the income data to develop the contributory value of the guest house.

What’s convoluted about developing NOI and applying a reasonable cap rate? Or, if you really want to keep it simple, develop a GRM and apply it to the estimated rental income to determine contributory value.

Now, I’ll admit that it may not as precise as we would all like. However, in the absence of good comparable data, what is wrong with using another approach to fortify our opinion of value?

Perhaps I'm confused, but how would the income approach lead to an adjustment??

Sorry, perhaps I didn’t do a very good job of explaining it.

The rationale and procedure to something like this:

Joe and Sally are in the market for a house. They find just what they want; only it happens to have a guest house out back. They have no personal use for the guest house, but figure they can rent it out. The rental income is worth something to them and adds value to the house.

Joe and Sally do some research of nearby apartments and small rental houses and figure they can rent out the guest house for $300 per month, or $3,600 per year. After allowing for some vacancy, additional cost of insurance, taxes, repairs, etc. they calculate that they can reasonably expect to net $2,400 per year. They feel that over time, they can invest in stocks, bonds, whatever and obtain an average annual yield of 8%. To compensate for the risk involved in owning a rental house, putting up with calls in the middle of the night to fix a water heater and the attendant loss in privacy, they feel that if they get anything less than a 12% return is not worth the hassle and 15% would be even better. So, they say, they will pay an additional $16,000 to $20,000 for the property because it has the rental house. In effect, they put a net present value on the income stream.

With the amount of "estimating of income" it sounds a lot more like an extraction method (read, extracting an adjustment out of your butt) of determining value..

I’m not sure what you mean by your colorful metaphor. Forgive me if I’m taking this the wrong way, but it almost sounds as if you are suggesting that I’m advocating something akin to pulling figures out of the air. As I said above, sometimes it’s easier to find rental data for a small house or apartment than to find comps with guest houses or attached apartments.

The only way to properly make the adjustment is via matched pair analysis.

Are you referring to this specific situation or do you mean that you can’t use cost or income approach principles and procedures to develop adjustments used in the sales comparison approach? That seems to be the crux of the matter.

MH, perhaps this method just strikes you and Jo Anne as odd because you have never encountered it before. Think about it. What here is unreasonable or not market based?

Rich