Guest House

[Fred]

Rich
To your question about alligators.
It’s from a category of expressions about negative cash flow ventures.
A big alligator will eat you. A small alligator will eat you too, but it takes longer.

MH,
I don’t follow where you are getting the “adjustment” idea out of what Rich proposed and I seconded. I (we) used the term hybrid property (or maybe compound property is better) and I mentioned the similarity to an appraisal with excess land. In such an appraisal, you have the market value of the primary property plus the contributory value of the secondary (perhaps, excess) property. What is “adjusted?”

Applying substitution, the buyer faces a choice:
Alternative 1: buy a house in this market area
Alternative 2: buy a similar house (subject) and an apartment and go into the apartment rental business at the same time
Why would we assume that a prudent buyer would treat going into the apartment rental business any differently in this instance? Why would I approach this any differently than other income producing properties?
Alternative 3: buy a similar house (subject) and covert the apartment to something else

99% of every appraisal I have seen doesn't even develop the income approach,

Is that for income-producing property?

 

[Ghost Rider]

Steven, I am referring back to the original question posed within this thread. The basic question was in order to determine the contributory value for the guest house. I.E. determining the adjustment that would be made to a sale which lacked the guest house amenity.....

I was referring back to the idea that Rich had proposed to utilize the possible income produced by this unit would be an acceptable adjustment....

The orignal thread was discussing single family residences which are not typicall utilized as an income producing property.....I think a lot of the confusion has come from the fact that this thread has shifted far from the original question. If this were to be appraised as an income producing property, I would appraise it as a 2 unit, do it on the 1025, and develop the income approach fully. In the case of the original example, I assume the H&BU of the subject is as a single family dwelling with a guest house, nto as an income producing property......My comment of "99% of the appraisals I have seen don't develop the income approach" was referring to single family residences, NOT income producing properties.....

 

[Fred]

Posted by MH

I think a lot of the confusion has come from the fact that this thread has shifted far from the original question. If this were to be appraised as an income producing property, I would appraise it as a 2 unit

If you read carefully - I don’t think it has shifted at all.
No one said appraise “this” as an income producing property. The suggestion is to appraise only the income-producing portion of the property as income-producing property.

That was the approach Rich said he got from his first mentor

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

Posted by MH

basic question was in order to determine the contributory value for the guest house. I.E. determining the adjustment

Some of this may not translate because we are not all accustomed to the same terms and expressing ideas the same way - because it seems very clear to me. Using the approach originally suggested by Rich does not detemine an “adjustment” for contributory value, we find the contributory directly, by capitalization – not by “adjusting” (non-apartment space into apartment space).

Your original evaluation of this method,

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

is truly picturesque, but misses the point.

If practical examples help, suppose that subject is 2,600 SF of house and 400 SF of rental unit (for a total of 3,000 SF).
One idea would be to find the value of 3,000 SF house and “adjust” 400 SF of non-apartment space into apartment space.
The suggested alternative is find the value of 2,600 SF house, find the contributory value of the 400 SF apartment - and add - not "adjust."

The only adjusting Rich suggested is

make a small downward adjustment to the main structure for privacy loss.

I hope this helps.

 

[Travis McGee]

MH- I concur with your thought- many times guest houses are not rental properties but are multi use buildings used sometimes for family members, sometimes for home offices/art studios/storage rooms/workshops, and, sometimes, as rentals. I am not against the idea of this income calculation to get an adjsutment- I just think it might become artifically overly precise- mechanical and not refelctive of the market no matter how much math was done.

Certain adjustments such as guest house rarely can be narrowed to a precise range. I personally usually give a conservative adjustment for them unless I see otherwise in the market- most times, enough market data exists to develop the a reasonable range of contributory value from paired and/or slightly older sales.

 

[Farm Gal]

Originally posted by MHMerriman@Jan 28 2004, 02:41 PM
Then let me ask you this quesion back LeeAnn {snip}...

If this type of adjustment works so well, why don't we use the income approach as a stronger indicator to value when determining the market value of a home.....99% of every appraisal I have seen doesn't even develop the income approach, as it is not applicable for the majority of homes out there. But if the income approach is so reliable, why not develop it more??

MH:

My final reconciliation for a typical SFD usually reads: The subject style/location does not lend to investor purchase motivation, the income approach was considered but not developed.

~~~~~~

SO what if 99% or better of all SFD homes one looks at are not investor properties? Some are, some aren't and some are hybrids!

The described property (subject of this post and THAT appraisal) has an amenity that at least in the back of MANY buyers minds could be let out for rent to decrease their holding costs should they desire to do so... either at the onset of the mortgage payment period OR if their income stream is in any way disturbed from their comfort level.

I am not guessing, I know this through interviews. People done gone and told me so. :twisted:

So it is reasonable based on my knowlege of MY market to pursue the estimation of value based on what I have discovered about folk's motivation in considering that amenity. Doesn't matter if they chose never to rent it, the buyers regularly CONSIDERED IT IN THIER ESTIMATE OF VALUE OF THE HOME!! Furthermore they CONSIDERED IT THE WAY I and Rich mentioned!

We are charged with reporting the market, not developing it the way the user or we ourselves WANT to see it B)

Why paint the world black and white, when there are so many shades of grey? Zone system, figure out how to block and frame and then techncially set up the picture so others see it clearly! Don't slap the glass over it til you got it in focus...

izzat clear enough?

 

[Phil Rice]

MH says:

These types of adjustments MUST be extracted from the market.

when I read this, I wonder what you are thinking? Where does it say that any adjusment MUST be extracted from the market?

Any appraiser that makes a good faith effort to get the "right" amount for an adjustment is going to base the decision on how they perceive the market would react to the item in question. Could be a specific and well documented matched pair analysis, and it could be general knowledge that comes from the market. Assuming that the appraiser makes an effort to simulate the market (as opposed to the number needed to make the deal work), there is no such thing as "pulled from air", it is always going to be derived (extracted) from the market.

MH, you can do it any way you want. If you have the idea that you are making the rules for everyone, or that your way is the only "right" way, I disagree.

You explain how you usually have good comps, and if not, you can find historical data to make a good estimate.

IMHO, the appraiser should do the best they can with what they have to work with. If good comps are available, by all means use them. When good comps are not available, judgment comes into play.

IMHO, matched pair analysis to extract the market premium for a mountain view is going to be an in-exact science at best, and wild patootie guess at worst. It does not mean that the matched pair analysis is a waste of time or the wrong thing to do, but in some cases, an appraiser will do better to make an adjustment based on general experience. Doing a specific matched pair analysis will not always be better, and it is not required for mountain view, busy road, pool, GLA, or any adjustment.

 

[Jungle Boy]

Originally posted by Phil Rice@Feb 1 2004, 11:32 PM
IMHO, the appraiser should do the best they can with what they have to work with. If good comps are available, by all means use them. When good comps are not available, judgment comes into play.

It's a judgement call ... work with what you have.

If butter is not available, use margarine. If margarine is not available, use jam.

Use avocado and salt if necessary.

If no spread is found, eat the toast plain.

It may not taste as good, but it'll satisfy the hunger !

 

[Peacemaker]

This has been a very interesting and enlightening debate and I appreciate all the analysis and feedback. Even though not everyone agreed with the suggestion of capitalizing the mother-in-law unit to get an adjustment, I appreciated it because it was something I had not thought of and there may be times that would work. I pulled an adjustment out of the market of $15,000 but I wasn't entirely comfortable with it, based on my experience in the area. BUT if there had been good rental data, perhaps this would have supported the market reaction and been a usable method. (There are no rentals in this area it is rural horse properties)

Market-derived adjustments are the most desirable scenario but this was a very unsual case. I think it's better to have SOME support for it if it ever comes back to haunt you, than to just say you based it on your experience.

 

[Richard Carlsen]

You have one sales with a guest house but examination of the market might indicate that there are more out there then you think. In that case, I would not call it superadequate.

We have a fair number of these in our area. Often they are only an old garage that is converted to a 1 bdrm, 1 bath, kitchenette guest house. Most often on a lake or acreage parcel. I tend to downplay the value, usually giving a small amount, say $4k to $8k for the unit since we do not have sufficient direct market data to pin down the value. It is one of those things that does not turn the market off but you are not exactly sure how much the market is turned on by their existence. In most cases, they cannot be used as rental properties so the income approach is N/A. It usually boils down to a SWAAG with explanation.

 

[Phil Rice]

Unlike MH, I am not going to say that anyone MUST do something. I do have an opinion about what has been said here.

I think that Richard, Wendy, and many others are dancing around an important issue. For discussion purposes, here is an example: the subject has some unusuall amenity. It prolly adds value to the property, but good market data is hard to come by. The appraiser thinks the adjustment should be $25K-$30K, but this is a SWAGG. Much effort is expended in a search for market data, and the end result is a simple and straighforward conclusion that the market data does not really say anything about the value of the subject.

Richard says:

I tend to downplay the value, usually giving a small amount, say $4k to $8k for the unit since we do not have sufficient direct market data to pin down the value

Wendy says:

I pulled an adjustment out of the market of $15,000 but I wasn't entirely comfortable with it, based on my experience in the area. ....Market-derived adjustments are the most desirable scenario but this was a very unsual case. I think it's better to have SOME support for it if it ever comes back to haunt you, than to just say you based it on your experience.

IMHO it is just as wrong to undervalue a house as to overvalue. We call the appriaser Skippy when the appriasal is high. What should we call the appraiser who is low becuase they emphasize CYA and are timid about trusting their knowledge and experience?

The appraiser has an obligation to value the property at the "right" amount (for defination of "right", see market value). When good market data is available, by all means, let that drive your opinion. When good market data is not available, IMHO, the appraiser is obligated to make the adjustment based on what they think best reflects the market reaction. To say: I think it is worth $30 but I only adjusted $15 because of limited market data (read none), is just plain wrong.

Now I know that noone has said: I think it is worth $30 but I only adjusted $15. I do not like it when others try to put words in my mouth, things I have not said. However, I think that some appraisers take this approach, and those who have posted here have danced around this issue (see quotes above, not trying to pick on these 2, I think they have expressed the majority opinion).

Don't let the MH's of the world intimiate you. Make up your own mind. Do not underestimate your experience, and even if you have no experience, do not underestimate your knowledge and your judgment. Cover your butt is fine, but (IMHO) not at the expense of an accurate value. Your opinion does matter.

As a balance to the above paragraph, please do not think that I advocate the idea that you can ignore market data. Always make a good faith effort to find the best available market data, and use it according to the quality of the data. Then do the best you can with what you have to work with. If the data is not very good, or no good at all, your analysis should reflect that.