Help! SFR - Leased Fee

[Pamela Crowley (Florida)]

Subject estimated market rent from a pretty good SFR Comparable Rent Schedule comes to $890/mo. Owner has a 1 yr lease, started 5/8/03 for $975. Either got real lucky or the tenant is a credit nightmare that couldn't rent anything else. (betting on the second)

GRM from investor purchases of new houses that are leased (since those are the only ones I could find that were purchased to rent them out outside of a couple of REOs at nice discounted prices): 110

Listings that are leased fee do not sell, the listings expire or they sell after the lease is expired.

Investors and rental agents I've talked to say at least 10% discount would be expected to purchase a leased fee SFR.

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Estimated market rent of 890 x GRM of 100 = $97,900
Actual market rent of 975 x 100 = $107,250

Cost Approach with typical depreciation and no consideration of the Leased Fee Estate = $115,500

Sales Comparison Comps with no adjustment for Leased Fee Estate adjusted come to
114,200
115,700
113,700

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Please bear with me here as it's been a long time since I've done one of these.

Am I looking at a $17,100+/- adjustment for the Leased Fee Estate? Is this what this information is telling me?

If so, how/where do you adjust for it in the Cost Approach? This is Functional Curable, isn't it?

This could have been close to a cookie cutter if it wasn't a leased fee!!! :twisted:

 

[Willie]

Got to run. Are you absolutely sure your subject rent is above market? Are you absolutely sure your one rent comp is at market?

 

[Pamela Crowley (Florida)]

Actually, I have about 12 rent comps. I haven't gridded them all, just the 3 best ones, but do believe they would all end up close to the $875 - 925 area.

There are a few other things in this one that makes me believe it's even possible that this owner gave me a made up lease. Little red flags popping up that I can't prove but make me suspicious.

I'm pretty well decided on using $12,000 for the Leased Fee adjustment and think that's probably low. I really, really want some additional opinions on this, please.

 

[JSmith43]

Pamela,

If I understand the situation, you have a rented SF home tied up at a slightly above market rent ( a plus) for about 9 more months. The marketability problem of a remaining 9 month leasehold (a minus) depends primarily upon the cooperation of the current tenant in showings, etc. A reasonable analysis, IMHO, would consider the following:

My guess, is that a typical tenant would also agree to be outtaaaa there if the seller offered him a $1,000 bill to break that lease. Maybe $500 would do the trick. Isn't that (the guy's price) the lowest cost to cure? Wouldn't that low cost option lower any objections of buyers wishing to occupy? I think I would bring that up as a reasonable & probable option. I think you need to explore the probability of that option coming forth prior to plunking down a huge adjustment. I agree, the assignment bites, if for a regular res. fee.

Am I missing some parts to the puzzle? Or, does this make sense?

 

[Pamela Crowley (Florida)]

Hi Roger,

Thank you very much for your opinion on this. I agree that a little 'moving' money would end that lease making it easier to sell and glad you brought that up. Something I hadn't thought of lately and obviously the Realtors listing these properties haven't either. I've very rarely ever found any SFR here that was listed and sold prior to the lease expiring and almost all I've ever found in MLS expired or closed at the end of the lease. Add on that I don't have enough experience with the income approach and every one turns into a monster for me. Another class I would like to take, but they are so rare here in residential work.

Had a Cert Gen email me and is going to send me a spread sheet he did using the figures posted here and looking forward to seeing that.

How do the rest of you handle the difference/lower value of the Cost Approach in these cases?

 

[Pamela Crowley (Florida)]

OK - CORRECTION HERE:

Typo!

My GRM should have been 110 instead of 100. Sorry!!!!

 

[Willie]

Pamela, I know you have reviewed your MLS system closely.

Is the market for such a home an investor? Are you sure investors(not realtors) are telling you right about there being a big discount for leased property? They are in the rental business. I'm not, but if I were, I think a good lease would not bother me in my purchase price of the home. I mean, that is what they(investors) do. That is what they are going to do. If it had been leased for 6 months are a year, or two, or three to the same tenant, all the better, as far as I would be concerned, as an income property investor. It would be seasoned. Again, I invest in raw land, so I'm not personally sure how I would look at income as an investor.

 

[Willie]

Cost approach, just back off a little on your per square foot cost. Just kidding Steven Santora

Anyway, what is the difference, assuming all else is correct? Wouldn't it have to be a functional loss because it is tied up(being used) as income property, rather than just a good old single family home(use). Right?

It is a functional loss if you buy it as a SFR and have to wait 6 months or a year for the lease to expire in order to gain access permanently.

 

[JSmith43]

Cost Approach:

Well, if you need to show depreciation, I see an argument for showing it under external factors. That little piece of paper the lease is written on. And, it is apparently self curing, nine short months to cure! Have fun explaining this one. I'd be tempted to just tag it as market resistance to rented property & be done with it.

Does a home that is or has been rented in your area also suffer from stigma? I can see the buyer reading the seller's disclosure. Does a little cartoon bubble forms over the buyer's head? "If this place wasn't good enough for the prior owner to live in it, why should it be good enough for me?" I say this only partly in jest as it just might be the case.

What I am wondering is why the rented homes seem to sell for less. Do the renters on average leave out more dirty laundry & dishes (a staging issue), is it primarily due to the delayed availability of occupancy by a prospective buyer, stigmma of a rented property, or a combination of these & other ingredients. The data seems to favor the staging argument (average marketability & appeal reappear upon expiration of the lease).

A $12,000 adjustment doesn't sit well with me for the reasons described in my prior post. I suspect some sort of natural selection process (in reverse) makes the available rental comps look like they sell for less with no physical reason, when really, there likely are physical reasons or staging reasons.

I remind you of the standard contingent & limiting conditions of a URAR report: "The property is appraised on the basis of it being under responsible ownership." That would include a leasehold owner doing dishes & picking up a bit for showings. I content this doesn't happen often enough & is the probable cause of the lower selling prices of many similar leased homes. Responsible ownership includes responsible marketing. Don't neglect to bribe...er compensate renters for the inconvenience of multiple showings. Shouldn't the amount of the required bribe be the adjustment?

I tried to be more constructive this time. :yellowblack: I don't think you need a fancy table to put this assignment to rest. Perhaps a short story & the right assumptions will do!

 

[Steve Gish]

Pam, new as I am, please bear with me. In reading this this whole thread, I found myself looking for the answers to the following questions:

1) Scope of work, is the buyer looking for a home or is it an investor.
...then...
2) If it's profitably legal, physically permitted and in it's present state provides the highest income, does that equate to Highest and Best Use as an investment property?
3) What's the going CAP rate for comparable properties in this price range? How does it compare?

Years ago when I was looking for investment property, only condo's were in my price range. I bought a owner occupied unit and turning it into investment property, the numbers just worked. Highest and Best Use for ME was as an investment.

I guess I'm having a hard time understanding why a $115,000 investment property, would be adjusted to 103,000. It has a $975/month cash flow, installed tenant, historical rent and a CAP rate of 10%, even at market rent with the adjusted value. Seems like a pretty good investment for that "market value" price, even with 100% financing.

..... on the other hand, as a SFR, and a Cost to Cure, how about $975 x 9 = 8,775, the cost of a rental home for 9 months (on the high side even)?

4) A copy of the lease should be attatched to the sales contract, I'd sure want a copy of that for my work file to justify my adjustment.

Without seeing the market and comps I can't say wheather $12,000 is the right adjustment, if the market justifies it, then that's what it is. Just boggles my mind