How do I appraise 2 houses on the same property

[daven]

I have only been appraising for about 6 months and ran into what I think is a unique situation. My supervisor is a very good and well renowned appraiser in our area. I do not doubt his opinion I'm just curious how others may approach this appraisal, here are the major details:

Two houses located on a corner lot, primary house is 2 story built late 1800's with 2100+ Sq Ft. Second house is just over 600 sq ft located right behind the primary house built in the 1940's. City has a parcel number for each house, but will not allow the sale of one without the other. The address is the exact same for both houses. The smaller house is being rented for $zzz.xx per month. Lender is not attributing any value to the smaller house, yet comparables will likely not support the sale price of the property & improvements alone. Smaller house is not listed anywhere in the purchase agreement. County assessor is attributing two seperate land values, and significant value to the smaller house. This is in a community in South Dakota with a population of around 3000. There are NO comparable properties. Again, no properties with this unique combination of improvements. How does one approach the valuation of such a situation.

With your suggestions I will respond with my scope of work conclusions/thoughts. Thanks

 

[aussie ken]

I have only been appraising for about 6 months and ran into what I think is a unique situation. My supervisor is a very good and well renowned appraiser in our area. I do not doubt his opinion I'm just curious how others may approach this appraisal, here are the major details:

Two houses located on a corner lot, primary house is 2 story built late 1800's with 2100+ Sq Ft. Second house is just over 600 sq ft located right behind the primary house built in the 1940's. City has a parcel number for each house, but will not allow the sale of one without the other. The address is the exact same for both houses. The smaller house is being rented for $zzz.xx per month. Lender is not attributing any value to the smaller house, yet comparables will likely not support the sale price of the property & improvements alone. Smaller house is not listed anywhere in the purchase agreement. County assessor is attributing two seperate land values, and significant value to the smaller house. This is in a community in South Dakota with a population of around 3000. There are NO comparable properties. Again, no properties with this unique combination of improvements. How does one approach the valuation of such a situation.

With your suggestions I will respond with my scope of work conclusions/thoughts. Thanks

Hi Daven.........on behalf of my colleages in the US hope you dont mind me asking just a couple of extra questions in response ..........the 2nd cottage is it legal? Can the portion of land on which the houses are on be sub-divided under your City planning scheme? Are its services of water, sewer and electricity on separate meters? Does the 2nd cottage have its own driveway and seperate yard area and fencing?

 

[c w d]

I think we can assume the property is legal since the second dwelling was built in the 40's and has a parcel number. City Hall is slow, but not that slow. The property may be legal non-conforming presently.

If the second home is not part of the purchase transaction then I would have to ask:
Is the second dwelling on a separate parcel? If not, then how can the sale not include the second dwelling? Is this just a matter of a poorly written contract?

If the second dwelling is to be part of the sale then adjust it as an apartment or mother-in-law suite or exactly as it is based on the availability of data. Considering the limited size of the subject's area you may need to develop an adjustment using sales from a different area, where ever you can find the needed data.

If the second dwelling is not part of the sale but is on the same lot as the primary dwelling then I would require a survey in case the parcel is to be split to know exactly what it is I'm appraising.

If the property is legal non-conforming then chances are the two properties may not be able to be separated without negating any grandfather status they have.

 

[CANative]

The second house was probably built or converted from some other building before zoning came to town. They may have "split" the lot for tax purposes for a number of reasons and it may have been legal to sell the two lots separately at one time but zoning now days might not allow for the creation of a sub-standard lot (a lot smaller than minimum lot size or a lot with a house or improvement outside of any set backs, etc) The reason the other "house" is not on the contract is because the contract is for the property as a whole including whatever is on it.

If the second residence can legally be allowed to remain and continue it's current use as a second residential dwelling unit it probably has some contributory value. You say you don't have any comps but that is probably because you haven't looked long enough, hard enough, far enough or you may be structuring your search with too much detail and the listing return will come back with no matches. If you're using MLS don't refine the search parameter. Look at EVERY sale and read agent comments or other "between the lines" clues. It might not say specifically what you're looking for.

You can use the cost approach if you need to but that requires some other research if you want a market value indicator. You can use the income approach to an extent. You might not be able to get direct information from available sales in the immediate area but you develop inferred data by analyzing what this type of extra unit will bring to a sale by observing sales in competing communities.

Tough assignment the first 100 times you do them.

 

[Rich Heyn]

Not everyone will agree with this, but here's a method that might work for you. The rationale is that the income stream is worth something and that a typical buyer will pay more for the property because of it. The actual amounts and rates in the example below are for illustrative purposes only. The taxes and insurance are pro-rated from the respective totals. Privacy loss is simply an estimate of how a purchaser might react to having another party living closer than otherwise might be typical. Cap rate is difficult to establish; might have to interview some Realtors who have sold similar properties to find our what went on in the head of the purchaser.

All this, of course, assumes you were not fortunate enough to have located several matched pairs.

Sorry about the poor alignment of the numbers below. Too much trouble to fix.

$500/month rent x 12 = $6,000

Insurance 200
Taxes 800
5% Vacancy 300
Repairs 500
=====
Total expenses 1800
10% Privacy loss 600
=====
Total $2,400

Net $3,600

Desired return 12%

Contributory value
$3,600 / .12 = $30,000

 

[Tawfik Ahdab]

You need help with this assignment, which is often a challenge enough for seasoned appraisers.

I have done many of these sub-types of residential property appraisals, almost exclusively in a rural setting, where acreage is an additional dimension of the appraisal prroblem.

Here's what I wrote in one appraisal. I hope you can adapt it to your subject property.

"The subject site contains two residences: a primary dwelling, and a secondary residence. As stated in the site description, this is a legal non-conforming (grandfathered) use, with both buildings having full replacement rights. This is one of the few instances in rural Lane County where two homes are allowed on the same parcel. This does not imply that the parcel can be subdivided or partitioned. Instead, it means that both homes must be sold with the land as one parcel. According to the owner's daughter, the secondary albeit newer home was last rented for $850 per month on a month-to-month basis before being kept vacant and available for visiting family members. The owner provided water and sewage disposal. Electricity and garbage collection were the responsibility of the tenant.

The typical purchaser of this type of property would not be the same as the purchaser who buys a duplex for passive income production. The primary residence is larger than typical for a duplex unit, and thus constitutes the bulk of the improvement value on the site. The presence of the additional living unit may in fact be incidental, as it could quite possibly be used as a caretaker's home, mother in law unit, or a detached living area for dependent family members. The prior use as a rental is also fully allowable and could be resumed. This rental usage does not figure prominently into the overall appeal for the property. The primary appeal of this property would be to a family wanting an older home with
acreage and seclusion.

This appraisal will be conducted on a single family residential basis and the value of the second living unit will be estimated and added as a single line item in the sales comparison approach if required for a comparison with a strictly single family residential comparable sale. The possibility of producing a duplex report was extensively investigated. The database required for such a report is not sufficient to produce a credible result. In addition, such a report would not accurately reflect market worth of the subject property, or the intentions of the typical purchaser of this property.

The income approach is applicable in the case of the subject, but applies more specifically to the additional living unit than to the property as a whole. Following an investigation of the West Lane County residential rental market, the subject's prior contract rent at $850/month is judged to hold at current economic levels. Analysis of area sales of single family residences with compatible site values revealed typical land-to-value ratios ranging between a low of 36% and a high of 43%, with 40% predominating. Investigation of a duplex sale and a recent two-dwelling sale within the defined neighborhood (nearby Mapleton to be precise) obtained gross rent multipliers (GRM) ranging from 101.5 (MLS # 15280) to 137.14, with the higher multiplier associated with the two detached dwelling property (MLS # 16177).

The valuation of the second, newer home, separately from the land, site improvements, and primary residential improvements is obtained thus:

Rent (at economic level) attributable to both land and the accessory living unit is $850/month. The typical contribution of the site to total value within the neighborhood is 40%. Thus the contribution of the improvements to total value is typically 60% (.60). Rent attributable to the second home alone is thus $850 X .60 = $510. Given the most applicable GRM of 137.14, then $510 X 137.14 yields a contributory value for the second home of $69,9410, say $69,400,via the income approach."

Rich Heyn has a completely different method above, but its also makes sense...for an investor.

 

[PropertyEconomics]

Not everyone will agree with this, but here's a method that might work for you. The rationale is that the income stream is worth something and that a typical buyer will pay more for the property because of it. The actual amounts and rates in the example below are for illustrative purposes only. The taxes and insurance are pro-rated from the respective totals. Privacy loss is simply an estimate of how a purchaser might react to having another party living closer than otherwise might be typical. Cap rate is difficult to establish; might have to interview some Realtors who have sold similar properties to find our what went on in the head of the purchaser.

All this, of course, assumes you were not fortunate enough to have located several matched pairs.

Sorry about the poor alignment of the numbers below. Too much trouble to fix.

$500/month rent x 12 = $6,000

Insurance 200
Taxes 800
5% Vacancy 300
Repairs 500
=====
Total expenses 1800
10% Privacy loss 600
=====
Total $2,400

Net $3,600

Desired return 12%

Contributory value
$3,600 / .12 = $30,000

Rich .. I think your method may very well be a viable option. I would also look at perhaps GRMs from say duplexes as a test of reasonableness. I would use duplexes that are rented because often times they cant be sold one without the other, much the same as the subject according to the poster. I would make sure not to double dip on any land adjustments that may be made, and may in fact contemplate an adjustment to the rent for the underlying land, however, Id have to think about that a bit more before I would make that conclusion.
I do think use of the income as an indicator of contributory value a reasonable method in this assignment.
Finally, I am a bit perplexed why the lender said they didnt give any value to the second dwelling. I would absolutely verify the second dwelling is being conveyed in the sale of the second. An appraiser should certainly not take the same stance that there is no contributory value if it is indeed being transferred as part of the sale.

 

[The Warrior Monk]

In addition to what others have said:

Two houses located on a corner lot, primary house is 2 story built late 1800's with 2100+ Sq Ft. Second house is just over 600 sq ft located right behind the primary house built in the 1940's. City has a parcel number for each house, but will not allow the sale of one without the other. The address is the exact same for both houses.

Separate tax parcels does not mean separate building parcels. There are numerous reasons for this. Sometimes different parts of the property are located in different tax districts. We have an example of such right around the corner of our office. There is a rectangular building lot that is bisected by a village and school district line, so this one building parcel is described by three tax lots. Other times, which may be what you are dealing with, is that there were two single-and-separate building parcels at one time but have be merged for the sake of building. You have to know something about zoning in your are to determine HBU of the property.

The smaller house is being rented for $zzz.xx per month. Lender is not attributing any value to the smaller house, yet comparables will likely not support the sale price of the property & improvements alone.

The person that made that comment does not know what they are talking about. Whether they want to imagine that something is on the property or not, the mortgage is on the entire property, including what they want to ignore. Fact is, lenders don't lend on hypothetical properties.

Smaller house is not listed anywhere in the purchase agreement.

Purchase agreements, at least the ones I've seen here in NY (which is a great many), do not list the structures on the property. There is usually some type of blanket statement that covers all structures.

 

[Mike Boyd]

.

Here's what I wrote in one appraisal. I hope you can adapt it to your subject property.

.

Very good, Tawfix, now Summarize it onto 3 or 4 lines.

"Highest and best use of the subject is as a primary residence with a 600 SF guest or granny unit. No sales of homes with such an auxillary unit were found in the same market area, therefore, only nominal value was given. 1 sale was found in the neighboring community and this nominal value is based on that sale."

Include that sale as an extra comp.

 

[aussie ken]

I have only been appraising for about 6 months and ran into what I think is a unique situation. My supervisor is a very good and well renowned appraiser in our area. I do not doubt his opinion I'm just curious how others may approach this appraisal, here are the major details:

Two houses located on a corner lot, primary house is 2 story built late 1800's with 2100+ Sq Ft. Second house is just over 600 sq ft located right behind the primary house built in the 1940's. City has a parcel number for each house, but will not allow the sale of one without the other. The address is the exact same for both houses. The smaller house is being rented for $zzz.xx per month. Lender is not attributing any value to the smaller house, yet comparables will likely not support the sale price of the property & improvements alone. Smaller house is not listed anywhere in the purchase agreement. County assessor is attributing two seperate land values, and significant value to the smaller house. This is in a community in South Dakota with a population of around 3000. There are NO comparable properties. Again, no properties with this unique combination of improvements. How does one approach the valuation of such a situation.

With your suggestions I will respond with my scope of work conclusions/thoughts. Thanks

So Daven........hope these reponses helped. How do they compare to your adopted methodology?