Let's Talk About Multi-family Properties

[Tim The Enchanter]

We are only talking 2-4 right?
Not larger properties that are province of the AG folks.

 

[SillyMe]

Correct

 

[Dublin ohio]

My experience with multi family properties has always shown a premium for additional bedrooms. Just finished one near a major university. Bedroom count is typically the biggest factor. Rental rates were based on a $300-$450 per bedroom price. Closer to campus could bring up to $600+ per bedroom. Condition was also a important factor. All of my adjustments were income based and well supported. GBA for the most part was a minimal factor. Site size was only a factor if it provided off street parking. I have seen numerous other 2-4 family appraisals done by other appraisers in this neighborhood. Almost all pay little if any attention to income. Try to appraise like it was a typical SFR property. Adjusted values were all wacked out and made no sense. Now in some neighborhoods. I have found that income is less of a factor since the typical buyer is looking at long term investment strategies and prefer a more stable predominantly owner occupied neighborhood

 

[ucbruin]

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....

 

[Gobears81]

Was the garage conversion legal?

Again, as an investor, if I am buying a property for the sole purpose of earning money, I don't care if the garage is not usable because I would be making more money with it converted to a bedroom. To investors, a bedroom is worth more than a garage (at least in my market area).

It almost sounds like you are combining the sales comparison approach and the income approach. They are 2 separate approaches to value.

I am not trying to be critical and thank you for having this conversation with me. I started this thread to have this exact type of discussion. Most residential appraiser's don't look at an income producing property the same way an investor would.

I get the feeling that Section 8/ HUD is a real component of your market (a slight hint by your mention of HUD rents ) and that investors purchase based on continued Section 8 rentals. In many markets, if you take a new 4 or 6-unit with an average unit size of 3 BR/ 2 Bath and turn the 1 car garage into an additional bedroom, that's an awful decision as Section 8 isn't really a consideration of said market, either on the current rent side or the investor's future projection side. What you would be left with is a new property which has a layout designed for 3 BR, but now accommodating 4 BR and with a garage that the tenants can't park in. That is a prime example of functional obsolescence, and even if an investor is able to obtain a higher rent, there may be a higher vacancy loss. Further, functional obsolescence would theoretically impact your GRM. For that reason, isolating the income approach entirely from the sales comparison approach is not always a positive and could be a negative.
I just completed an apartment appraisal where there was predominantly 1 BR units with an average size of 390 SF. Of course I adjusted for the properties with a mix of 1 and 2 BR units, but I also adjusted for the 1 BR units which are larger as they support higher rents. But I also typically use the sale price per unit in those types of appraisals, not the sale price per bedroom, which would be more relevant in say campus rentals.

 

[Dublin ohio]

I get the feeling that Section 8/ HUD is a real component of your market (a slight hint by your mention of HUD rents ) and that investors purchase based on continued Section 8 rentals

Got the same impression. Neighborhoods with a high level of section 8 rentals are typically a different animal. Typical tenant is not too picky about amenities such as garages. Just looking for a place to live that has enough bedrooms for the family. Since section 8 rates are basically based on bedroom count. The investors in these neighborhoods are looking to maximize income.

 

[SillyMe]

@GoBears
HUD isn't a significant part of my market, I was just using that as an example for differences in rental rates based upon bedroom count alone.

The analysis that you and @Dublin ohio discuss is what most 1-4 unit appraisals lack. The reports that I reviewed were more indicative of a SFR appraisal as the appraiser did not
seem to acknowledge or consider most things that the typical investor would consider. It is my opinion that this is indicative of not being competent to appraiser income properties.

We have had no new multi-family development in this market area for 5 years +/- so the analysis that you provide is interesting.

 

[Michigan CG]

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.....

That may be the case in your area, who am I to judge? In the midwest (flyover states) the vast majority of 2-4 unit properties are bought by investors who would NEVER live in them.

 

[Michigan CG]

The reports that I reviewed were more indicative of a SFR appraisal ............. It is my opinion that this is indicative of not being competent to appraiser income properties.

I have found that the vast majority of 2-4 unit appraisals are written by people who have absolutely no clue. Most appraisers do very few of these types of properties, maybe one or two a year and they are picked by the AMC by who will do them the cheapest. No AMC will take my fee of $700 but are happy to give these out all day long at $400 to people who have no clue on how to complete them.

 

[Renee Healion]

The unit of comparison that matters most in my area is number of bedrooms. Tenants need X number of BR, the properties are advertised by #BR, the rental varies by BR count. And, in a different segment, the investors who rent to students literally rent by bedroom.

So if the reports were on fannie forms, they would show the units of comparison. The appraiser should comment on which ones matter and how they contributed to the appraiser's opinion of value. Here, if they are adjusting for FP (that so bugs me) in rambling old houses converted to apts then they are just going through the motions of form filling. Here, when I see that, I think no tenant rents by # of fireplaces. Did the appraiser even consider whether they are functional--after all, most serve as a knickknack shelf--and if you used them you'd burn the whole place down. So, are the fireplaces even fireplaces? (If they are, it is another question whether they are permitted to use them, or care to do so.)

FP from The List: It is a tell, here, that not too many brain cells were sacrificed to the appraisal gods.

This should be the topic of discussion in their reconciliation of SCA. Oh, that.