Let's Talk About Multi-family Properties

[SillyMe]

Bedrooms are what drive the rental rate in my market area as well and it just baffles me that the reports that I reviewed seemed to give this no consideration thus this post and discussion.
The flawed methodology leads to a materially deficient report. I understand that bedroom count may not drive the market in all market areas but if an appraiser is giving more value to a fireplace than a bedroom we have a problem!

As I said, we have not had any new multi-family development in my market area for 5+/- years. I was in Columbus OH this weekend and their downtown area is booming with new multi-family development (and Bird scooters).

 

[Terrel L. Shields]

Find a large development and see what they are charging for units with additional bedrooms

Well yes, but quantity has a quality of its own...SF generally relates to bedroom capacities. So I can say as a local example, the income relates to # of bedrooms but a 3 bed apartment that is too small will rent per SF for about the same as a properly sized 2 bed. Also, as singles are significant market here, a college town, a lot of them would just as soon have a cheaper, smaller apartment. We also see a lot of rebuilt downtown apartments over stores. In my career we've went from basically no urban apartment downtown to dozens of them . And a carport adds some to income, a garage more, 2 car garage even more.

 

[Terrel L. Shields]

Rightly or wrongly the bank that trained me was of the opinion that the typical buyers of a 2-4 unit did so for a place to live and future appreciation rather than for the potential income stream.....

My first mentor built 4 plexes, leased three, lived in one unit, and held long enough to get cap gains reduction and then sold it to build another. Worked well in the middle of Wallyworld where Bentonville population went from 13,800 to 45,000 or so now.

 

[Michigan CG]

The flawed methodology leads to a materially deficient report. I understand that bedroom count may not drive the market in all market areas but if an appraiser is giving more value to a fireplace than a bedroom we have a problem!

Of course there is a problem. How many appraisers have taken an income approach class? How many appraisers are hired by AMCs based only on fee? How many AMC reviewers have any real experience in the real world appraising income properties?

The fireplace thing is a perfect example. Very few appraisers can justify the fireplace adjustment in their single-family reports. Justifying one in a mult-family report would be absurd in 99.9% of reports but they have that list of adjustments and apply it across the board.

Anyone not analyzing bedroom counts in any market would most likely be an idiot.

 

[Dublin ohio]

I was in Columbus OH this weekend and their downtown area is booming with new multi-family development

You are absolutely correct. Numerous apartments and condos. But also quite a large amount of tax abatement. Majority of newer condos and apts. are tax abated. Just north of downtown (short north area) is doing the same. One somewhat unusual trend we are seeing is bedrooms with no windows on many of the apartments. Does not seem to impact marketability to the rental market. They are using creative methods to pass fire code for egress. Additional door to living area or door between adjacent bedrooms creating 2 methods of egress.

 

[Deleted member 152047]

A couple of thoughts....

Rightly or wrongly the bank that trained me was of the opinion that the typical buyers of a 2-4 unit did so for a place to live and future appreciation rather than for the potential income stream.....

And there are times the income stream doesn't cover the mortgage....

How can there be future appreciation if the income doesn't increase, and subsequently drive up the value? Intelligent participants look at what the revenue stream is (or could be) and make their purchase decisions.

 

[J Grant]

I recently reviewed several multi-family properties and was kind of shocked at some of the things that I came across.

All of the files that I reviewed were completed by CR appraisers (1-4 units). All but one did not appear to consider the additional income produced from additional bedrooms. I had appraiser's adjusting $1,500 for a fireplace which can be a liability but $0 for a 3br vs. a 2 br. As a landlord, I will tell you that HUD pays about $150 more a month for a 2 vs. a 3 br (in my market area) and investors are making their buying decisions on the income potential of the property.

Some of the adjustments or lack of were indicative of the appraiser not being competent to appraise a multi-family property. The adjustments and methodology used were more consistent with a SFR appraisal than that of an income producing property.
It was concerning.
Sorry, I can't edit the spelling error in the title

As a Cert Res, I do roughly 12-15 MF a year...not easy assignments more tedious than anything gathering information. Adjusting for a fireplace is petty, but as a reviewer, if it does not impact results much, I let it go., But if an extra bedroom does not get adjusted for and market shows rent per $ bedroom in income, then as a reviewer you need to note that, and if the lack of adjustments means a different value then ...if it's part of assignment you'd develop your own value opinion if it differs from OA- did that happen or not in these reviews?

It really depends on the comps and what is happening in the market...I can find searching for comps so difficult that I might have to compare a duplex and a triplex ...I'd rather compare the same to same but that's not always possible. In my area , most small income property is for investment , not to live in , and as prices rise the income and expense statement can show it barely breaking even. Rents keep rising here though which i'm at a loss to understand how working people who live in the small income properties manage to pay it, since I don't see any commensurate rise in wages .

 

[Carnivore]

(my bold)
Sounds like they were using a book of "adjustments"

I hear ya! LOL

I suspect from our conversations that you probably are already taking on this kind of work. You might want to really focus on 2-4 work in your market area in Florida because of the high competition for SFR appraisal work. I say this because Property Management companies are the best source of rental rate data and rental sale data. I have two in particular that serve as my primary source of data because they have so many. They do charge me for the data but its worth every penny. Side benefit from them is I also get sale and refinance work for their SFR and multi's.

 

[ucbruin]

How can there be future appreciation if the income doesn't increase, and subsequently drive up the value? Intelligent participants look at what the revenue stream is (or could be) and make their purchase decisions.

I will concede that everyone who has posted a comment on this thread has more experience/knowledge/etc than me so I'm not responding believing I know more than I do....

Regarding 2-4 properties, I'll assume appreciation factors are the same as those that affect SFRs and condos.....

And not income streams....
But I'm not sure...

 

[ucbruin]

As a Cert Res, I do roughly 12-15 MF a year...not easy assignments more tedious than anything gathering information. Adjusting for a fireplace is petty, but as a reviewer, if it does not impact results much, I let it go., But if an extra bedroom does not get adjusted for and market shows rent per $ bedroom in income, then as a reviewer you need to note that, and if the lack of adjustments means a different value then ...if it's part of assignment you'd develop your own value opinion if it differs from OA- did that happen or not in these reviews?

It really depends on the comps and what is happening in the market...I can find searching for comps so difficult that I might have to compare a duplex and a triplex ...I'd rather compare the same to same but that's not always possible. In my area , most small income property is for investment , not to live in , and as prices rise the income and expense statement can show it barely breaking even. Rents keep rising here though which i'm at a loss to understand how working people who live in the small income properties manage to pay it, since I don't see any commensurate rise in wages .

I'm asking you because of the limited number of 2-4 you appraise per year....

How do you adjustment different number of units????

I avoid it like the plague....