Mixed Use/commercial On 1025

[Gillian Kaiser]

I was approached by another appraiser this morning looking for advice on how to handle a review assignment.

Subject is a mixed use multi-family/commercial use that was written up on the 1025 form. It has two residential units, a deli and a real-estate office.

Original report was completed by a Certified Residential Appraiser here in NY. In my NSHO this should have never been completed by a residential appraiser. Client is stating that we are taking this way too seriously. I do not handle any type of commercial assignment and have no desire to. I advised the review appraiser to pass on the review and send the original report to the state as a misleading/fraudulent report. There is no comment on the original report that this was completed on the 1025 as requested specifically by the lender so I can't figure out why she would have completed it this way in the first place.

What say you so mighty appraisal gurus? Is it misleading to complete a mixed use/commercial property on the 1025? Should I fall off my ever so high horse and concede the client is right that it can be completed and reviewed in this manner?

 

[Pamela Crowley (Florida)]

Florida Board would discipline for that one.

 

[Pat Butler]

I agree that it was a bad choice. However, I'd have to look at what addenda, if any, was added to the 1025. A complex assignment like that would require a lot of explaining.

 

[JSmith43]

May I assume the original purpose of the appraisal was to opine the MV of a duplex with an attached office & Deli? Ordered by a residential lender?

If the nature of the property remained residential & the mixed use was basically insignificant, then, such a report might be possible. When the guy did the inspection maybe he was shocked, yes shocked to find such divergent uses :redface:

So shocked he forgot to stop & tell his client that this was a somewhat complex commercial property, no chance in hell for res. loan (why use 1025?) since there is significant commercial use. CG appraiser required & I guess a 1025 plus a narrative :rofl:

 

[George Hatch]

Is it misleading to complete a mixed use/commercial property on the 1025? Should I fall off my ever so high horse and concede the client is right that it can be completed and reviewed in this manner?

The appraiser makes the appraisal, not the form. I've heard of a few lenders who prefer the use of a 1025 for mixed use properties of up to 4 units, so that isn't really the problem. The times I've seen it have mostly been limited to when the residential uses made up at least 75% of the unit mix and the retail or office use onsite was very incidental. Mostly, the lenders who order these do so as a means of avoiding having to use a commercial appraiser to perform a commercial appraisal. It's almost like when they try to get away with using a BPO for residential properties instead of an appraisal.

What's hard about using a form for a property type other than it was intended is that the appraiser has to work around the defaults. In this case, the unit mix all but guarantees that the Income Approach is going to play a much more important role in the valuation process than it normally would in a residential 2-4s that normally go on the 1025 form. Using that adjustment grid for properties with different uses is going to be a nightmare. The Income/Expense analysis that normally goes with that form is geared to Fannie underwriting guidelines, which are in conflict with the modes normally used for income/expense analyses for non-res properties. For instance, your subject property could have some multi-year leases in effect, in which case the owner's rights are not Fee Simple, but are Leased Fee (or as some people prefer, "Fee Simple subject to the Leases"). Highest/Best Use analyses for these types of properties tend to be much more relevant to the appraisal problem than what that form's defaults would indicate. The form basically ignores attributes that are significant to non-residential uses such as traffic exposure, visibility and access, onsite parking availability, etc..

Where the word "misleading" might come into play is how the appraiser is characterizing the subject property and the valuation analyses. If all the sales and all the rents relate only to the residential component then the appraiser is probably missing the boat with respect to the commercial component. Ideally, they'd be looking for 'similar' mixed use properties with similar unit mixes, but good luck on that; there usually just aren't enough of those around at any given time to make direct comparisons. The next best approach would be to find the contributory values of the components by analyzing multi-tenant commercials and multi-tenant residentials of the same size ranges, and then mix the indictors as appropriate. It's like performing two appraisals in the same assignment.

It has been my experience that the vast majority of residential appraisers do not have sufficient experience with non-residential uses to successfully pull off an appraisal on a mixed use property. Of course, we could say the same for some of the "commercial appraisers" out there, too; it's just not as common. It's also been my experience that a client who will engage a residential appraiser to perform such an appraisal using the 1025 form doesn't really care about appraiser competency issues and is not really going to be that interested in any dissenting opinions from a reviewer. If your friend accepts that assignment, they should keep that in mind.

 

[Gillian Kaiser]

Thank you all for your comments. Nothing like learning something new and commercial stuff is all new to me! :blink:

The competency issue is how the review appraiser arrived at my desk. She had no idea what to do with the poor animal. It came across to me as the appraiser was trying to fit a square peg in a round hole. I understand the 1025 form is just a reporting method but it just doesn't work in this scenario for those same reasons you stated, George.

The first building is Deli/Office space that comprises 1420 sqft on the first floor and a 2br apt 1104 sqft that is located partially on the first and fully on the second floors. There is also a detached 384 sqft cottage with no bedroom count listed but is considered "an apartment" as noted in the condition of improvements.

Original appraiser addresses the mixed use in the Other adjustment line in the sales comparison approach as:
Subject: 2 Resid/2 Comm
Comp 1: 1 Resid/1Comm
Comp 2: 4 Comm
Comp 3: 2 Resid/1 Comm
with no value adjustments.

For functional utility appraiser makes a $5,000 adjustment per "unit" (i.e. subject listed with 4 units, comp 1 has 2 units with a $10,000 adjustment). The report is actually quite hard to follow as the subject information changes on each page for room count and bath count. The addendum page has 7 paragraphs on it with 5 of them being canned comments. The 216 is completed as though it had 3 residential units with operating reserves for 3 refrig/stove/dishwashers each with the same replacement cost of $600.

Doing a mixed property is strictly for the Certified General here in NY. A Certified Residential appraiser is not licensed to do the mixed use routine.

Thanks for letting me vent!

 

[George Hatch]

The unit mix you describe does not seem to portray a primarily residential property, so the appraiser's choice of the 1025 form was poorly made, IMO.

The "no-adjustment" routine on the grid isn't a big deal IMO as long as the appraiser - a) is consistent, and B) explains how they reconcile the data. Most of the Fannie Sales Comparison grids are designed to be used for quantitative analysis, which means that the differences are accounted for on a quantitative basis with adjustments. If an appraiser skips the quantitative method and uses a "qualitative analysis" wherein the subject is ranked among the range, that is sometimes a lot easier to explain, support and justify, especially for square peg properties like this. However, this does illustrate (again) how the misuse of a form usually creates more problems than it solves.

From your description it looks like the comp selection might be about as good as can be expected for a mixed use property, and that's a big relief. Huge, really. You might consider breaking down the sale prices on a price/SqFt basis and see what the unadjusted range of indicators looks like. If the income potential for the residential and non-residential units are similar on a rent/SqFt basis, the price/SqFt indicators might also present a reasonable range. If there are significant differences in the rent potential for the two components this approach won't work very well.

You didn't mention any leases, and that could possibly be a problem. Leases can have a big impact on values for these types of properties, and there would be no good reason to outright ignore an existing lease if there is one or more in effect. Failure to report or analyze leases is one of the most common deficiencies out there for properties like this, and it's real common for residential-oriented appraisers to skip this aspect. Especially when using a 1025. Non-market rental rates can work either to the landlord's benefit or to their detriment, depending on whether the rents are supported in the market. Borrowers have also been known to dummy up leases for appraisers, so that would fall under the "Trust, but Verify" category. When it comes to recognizing funky leases it really helps to have either a suspicious mind and/or significant market competency. Preferrably both.

Putting all of that aside, licensing may be an issue on this appraisal, depending on the intended use/intended user for this assigment and how that relates to your state licensing requirements. If the appraiser is working beyond the scope of their license as defined in the state rules and regs there is no point in your client attempting to use the workproduct.