How do I appraise 2 houses on the same property

[John Hassler]

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

With all due respect Mr. Heyn, what you are describing is an individual buyers "go, no go" anaysis to purchase. A market derived cap rate, or even GRM, from the inlaw portion of sales of homes with in-laws, even if over several years if data is lacking, would be a better way to go for an income analysis.


Something else for the OP to considerd is H&BU as a duplex. If duplex is legel you should consider running the numbers and see how they compare to a home with in-law.

 

[daven]

KEN JACKSON:

The land cannot be divided, the city will not allow one house to be sold without the other, both homes are on the same lot and the whole lot sells ONLY, it cannot be divided. If only one of the homes sold the minimum lot size established by the city would be compromised, and the commission will not allow that to happen. The current owner told me the second house was moved in overnight without the knowlede or consent of the city (back in the 40's). Water sewer and electricity are all on seperate meters. I contains its own driveway but shares the yard with the primary residence.

The second house is on a seperate parcel. The primary house has parcel #XXXXX and the second house has the same parcel # with an "A" addded to the end of it (#XXXXXA).

Clarification: The second house IS being sold along with the primary unit. The buyer and seller agreed on a sale price of 161k for the primary house and the second house would be included in the sale for $1.

GREG BOYD WROTE: 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.

You are correct Greg.


One of my idea's was to use the Mother-In-Law unit as cwd suggested. It would be added as a single line item in the sales comparison approach. The problem is, unlike in larger metropolitan city's, South Dakota is not a place where these MIL units are common place, actually they are EXTREMELY RARE accross the state. Yet some do exitst. My problem/question would be how do you adjust for a MIL unit when there is little to no market data. One of you suggested to use duplex's as comparables, not sure if I'm comfortable with that, but I would be willing to further discuss it's pros and cons.

The other idea was to use the income approach, after all it is generating a steady rental fee of $450/Mnth. If a person used the example Rich Heyen posted, the value indicated by this approach would come very close to the county's assesed value of the second house. Obviously, market trends would be different here.

I should also clarify this property is located in the middle of town!

David Wimpleberg, I will take no offense to your judgement of me. Though it was not necessary. I should have explained it a little better, my apologies.

 

[PropertyEconomics]

One of you suggested to use duplex's as comparables, not sure if I'm comfortable with that, but I would be willing to further discuss it's pros and cons.

The other idea was to use the income approach, after all it is generating a steady rental fee of $450/Mnth. If a person used the example Rich Heyen posted, the value indicated by this approach would come very close to the county's assesed value of the second house. Obviously, market trends would be different here.

I made the comment about the duplex .. but I never said to use them as a comparable. My comment was to measure the GRM from a duplex and apply it to your subject additional unit income. Measurement of the GROSS INCOME MULTIPLIER could come from the duplex ... nothing more.

 

[daven]

I understand, and I believe that would be a viable option.

 

[Terrel L. Shields]

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.

In HBU regardless the property, you should determine a dominant estate. The dominant estate is a SFR. The secondary estate is the MIL or rental. If I determined that the MIL would lease for $400 and the Larger home for $1200 a month, then I would allocate 25% of the value to the rental. Your problem with getting your arms around this may lie in the sale for $1 which I precieve to be a gimmick to get it past secondary market financing rules. That puts you in the hot seat for giving the MIL value. But in reality it does (likely) contribute value to the property (I would only see it not if the lot as if vacant was worth net $160,002...i.e.- HBU is commercial or other use.

In the absence of any sales of MIL properties, the only viable way to value it is going to be by income or cost methods. As poor as that may be, I don't think ignoring the rental is a viable option.