Multi Family used as a rehab center

[Marko11]

Got a call to appraise a 2 family home. Owner informed me of the rents, they are much higher than the market area, I asked for more info and she told me she rents out the rooms to a medical facility for drug and aclohol rehab. Legal use is a 2 family dwelling. I believe they need a commercial appraiser, but I am not sure at this point. any thoughts would be appreciated.

 

[J Grant]

First, inform your client of the tenant situation - they might want to cancel the order. If they proceed and want the medical lease for rehab used imo that would need a commercial appraiserr.
If they proceed and want it appraised as a residential income property of two units, then as the appraiser, we use MARKET RENTS , not the subject contract rents. We use market rents of annual or long-term monthly to month-to-month for two units; we do not use Airbnb, short-term, or rehab rentals. Which means the market rents will be much lower than her contract rents. if the owner cut the units up into smaller rooms or modified the property away from two unit normal layout you might have a cost to cure to put it back to original

 

[Zoe]

Terms and conditions of lease will be huge. Income cap approach almost certain. Almost all weight will go on income cap approach. I am assuming it is a legal use per zoning/etc.

I have no clue on landlord or tenant. I am also assuming Market value definition.

Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale with, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

• buyer and seller are typically motivated;
• both parties are well informed or well advised, and each acting in what they consider to be in their own best interest;
• a reasonable time is allowed for exposure in the open market;
• payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
• the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Inherent is legally permitted.

 

[Zoe]

If MV is value definition, these are the conditions of H&B use. Market value definition requires H&B use analysis.

The highest and best use (HBU) is a fundamental principle in real estate appraisal that determines the most profitable and feasible use of a property. It is based on four criteria:

• Legal Permissibility: The use must comply with local zoning and land use regulations.
• Physical Possibility: The property must be capable of accommodating the proposed use.
• Financial Feasibility: The use must generate sufficient revenue to cover costs and provide a return on investment.
• Maximal Productivity: The use that yields the highest economic return is considered the HBU.
  Understanding HBU is crucial for property owners, investors, and developers to maximize value and ensure compliance with legal requirements. https://www.bing.com/ck/a?!&&p=b54b...XJrZXQtVmFsdWUtRGV0ZXJtaW5hdGlvbi5odG1s&ntb=1

 

[Zoe]

Market value definition as far as I know is only value definition that requires H&B use analysis.

Okay?

 

[Tom D]

Got a call to appraise a 2 family home. Owner informed me of the rents, they are much higher than the market area, I asked for more info and she told me she rents out the rooms to a medical facility for drug and aclohol rehab. Legal use is a 2 family dwelling.

Is it a medical facility with medical equipment, or do they just house their patients there. Yes, these places are higher rents because do you want to be living above/next a facility for drug rehab.
Forget the h&b. Neighbors might not be happy, but if it's zoned residential, it's still legally residential. Unless zoning allows medical office, then it could be commercial. But until then, it's residential. It's functional utility, the current owner gets more rent because of 'drug & alcohol rehab' tenants living there. I would pay less rent to live in the other unit knowing this.

Again, is it a living facility for these people, or has actual medical equipment in it with different patients visiting it every day. The lender might not understand if it's what they call a master residential lease. Facility pays the rent, and gets the rent from a government agency to house their patients while in treatment. Ask if they has a 'master lease', most lenders don't do them. Is it really a residential home for drug and alcohol clients to live in, then get the term 'rehab center' out of you head, or like a doctor's office for visiting patients only, which is a rehab center.

I am big urban easy row home appraiser. However, i live in the highest zip code of drug users in the country. Most here ain't familiar with these facilities and their master lease.

 

[KHS445]

You need to check the definition of “2 family dwelling” in your zoning code. My local code and one from a similar size nearby city define family as being related. I know it is not strictly enforced as many multi-family units are occupied by non-related persons. That said should a complaint be filed, a strict interpretation may limit who can occupy the property.

Now as an alternative you could value the property as a duplex using market based rents and expenses. You could then make mention of the contract with the medical facility and state that the above market rental rate/value is attributed to the contract and not the real estate. If the client wants the property appraised using the medical facility contract as a basis, you now have commercial appraisal, in which both the real estate and the contributory value of the contract will be valued.

 

[Zoe]

You need to check the definition of “2 family dwelling” in your zoning code. My local code and one from a similar size nearby city define family as being related. I know it is not strictly enforced as many multi-family units are occupied by non-related persons. That said should a complaint be filed, a strict interpretation may limit who can occupy the property.

Now as an alternative you could value the property as a duplex using market based rents and expenses. You could then make mention of the contract with the medical facility and state that the above market rental rate/value is attributed to the contract and not the real estate. If the client wants the property appraised using the medical facility contract as a basis, you now have commercial appraisal, in which both the real estate and the contributory value of the contract will be valued.

That is like walgreens stores are valued. They have like 25 year lease and all the appraisal is based on the lease and income cap. If the value of this puppy is over a certain dollar amount, a certified general may be required. If it is just like a daycare below a certain dollar amount the certified residential could do it.

I think.

Some places like the OP mentions are like half way houses. Some of residents may have mental disabilities. Law enforcement could very well be in the mix with this property. I don't know who landlord is.

 

[sputnam]

Got a call to appraise a 2 family home. Owner informed me of the rents, they are much higher than the market area, I asked for more info and she told me she rents out the rooms to a medical facility for drug and aclohol rehab. Legal use is a 2 family dwelling. I believe they need a commercial appraiser, but I am not sure at this point. any thoughts would be appreciated.

Depends. The way an owner is using a property isn't necessarily the Highest and Best Use of that property. If your assignment is market value, then you appraise it at its Highest and Best Use... which may be residential. If that's what your Client wants, that's what you do... or you decline. You definitely should let your Client know what's going on before you invest more time in the assignment.

It's possible that the Client wants you to provide Value in Use or they want it valued as a going concern. In either case, a commercial appraiser is probably a better choice.

Bottom line is.... if you don't feel competent to complete the assignment, decline or withdraw or associate with an appraiser who is competent.

 

[Zoe]

Depends. The way an owner is using a property isn't necessarily the Highest and Best Use of that property. If your assignment is market value, then you appraiser it at its Highest and Best Use... which may be residential. If that's what your Client wants, that's what you do... or you decline. You definitely should let your Client know what's going on before you invest more time in the assignment.

It's possible that the Client wants you to provide Value in Use. In that case, a commercial appraiser probably is more suited to the task.

Either way, if you don't feel competent to complete the assignment, decline or withdraw.

H&B use only applies if MV is the definition of value. Yes, your right if Market value is value definition being appraised.