Multi-use Lease Conundrum

[ZZGAMAZZ]

Subject is a 2-unit residential income property in an urban environment in downtown LA. Lots of appropriate comps.

Lender provides 4 leases for the 2-unit duplex based upon its contention that each of the units is leased to two different individuals/parties/entities/etc. That's cool cool because the lease documentation was provided--although the subject lease schedule is about double the typical market rent for the neighborhood.

HOWEVER, I refuse to budge on my Opinion of Market Rent that is the basis of the GRM and the corresponding Opinion of Value via the Income Approach. There is no data to support that factor as being typical for fhe local market...although I probably could find data for similar multiple-individual leases if I looked hard and long enough--but it wouldn't reflect what IMO is the typical, market rent.

Does peer opinion that that an appraiser needs to report similar [atypical] leases in his or her Opinion of Market Rent? [This is a first-time client that is a major nationwide mortgage company, although I got no qualms in losing a potentia client by "doing the right thing," if I am indeed doing the right thing.

Please advise of your perspective, Kindest regards.

 

[George Hatch]

We perform rent surveys in order to form an opinion of the market rents under typical management, not to support or not support what this particular property manager is doing with this property. We're looking for the typical expectations of the typical buyer/seller.

Bogus rent agreements are not uncommon among multi-family appraisal assignments. It's not 50%, but it still happens on occasion. Don't let it get to you.

Besides, rent control is a thing in Calif. and tenants have no incentive to pay more than the prevailing market rents.

 

[ZZGAMAZZ]

We perform rent surveys in order to form an opinion of the market rents under typical management, not to support or not support what this particular property manager is doing with this property. We're looking for the typical expectations of the typical buyer/seller.

Bogus rent agreements are not uncommon among multi-family appraisal assignments. It's not 50%, but it still happens on occasion. Don't let it get to you.

Besides, rent control is a thing in Calif. and tenants have no incentive to pay more than the prevailing market rents.

Thanks very much for your support. Somebody in the foodchain provided a prior, relatively recent appraisal when the appraiser reported all of the comp market rents at I think $5,000 per month total, but his Opinion of Market of $7500 just happened to be identical to the subject's so-called dual-rents, of $7500. Never understand how appraisers can report really stupid, non-credible info and analysis, although anything I ever do even a tiny bit askansce seems to get conditioned--although despite the extent to which Nephew Glenn used to criticize me, I've never had an Opinon of Value shot down, duting more than 2,500 assignments, from perhaps 150 different clients. [But I'm trying to be a successful realtor now, and the work requirements as well as the SoCal grind make me weary quite often, possibly age-related.) LOL

 

[George Hatch]

I can't tell you how many times I've been handed a stack of rental agreements where the same pen and the same handwriting was used but only the spelling on the tenant names was changed. And the rents are almost always obscenely high relative to the unit attributes.

I never allowed that to get to me because as I said, I'm aiming at what the typical buyer can expect to do under conventional management. not what some superspecial kissed-by-god landlord has "allegedly" managed to do for themselves.

"The actual rents above are as reported by the property owner, however those rates are not supported by the results of the rental survey. For the purposes of analysis and comparison the subject's income is projected at the market rate and are subject to the state rent control laws which limit the rates of annual increases". ​

I didn't call them a liar but I also didn't forecast rents in my GRM/GIM analysis that aren't supported in the market.

 

[ZZGAMAZZ]

I can't tell you how many times I've been handed a stack of rental agreements where the same pen and the same handwriting was used but only the spelling on the tenant names was changed. And the rents are almost always obscenely high relative to the unit attributes.

I never allowed that to get to me because as I said, I'm aiming at what the typical buyer can expect to do under conventional management. not what some superspecial kissed-by-god landlord has "allegedly" managed to do for themselves.

"The actual rents above are as reported by the property owner, however those rates are not supported by the results of the rental survey. For the purposes of analysis and comparison the subject's income is projected at the market rate and are subject to the state rent control laws which limit the rates of annual increases". ​

I didn't call them a liar but I also didn't forecast rents in my GRM/GIM analysis that aren't supported in the market.

How do you address the Opinion of Value obtained from the GRM that when derived from the market but multipled by the subejct's "actual rents" can reveal a value 2x or 3x of the Opinion of Value derived from the Sales Comparison approach? Of couse the OV of the assignment can logically be based upon results of the SCA, do you simply explain that the OV based upon the Rental Analysis is convoluted because of the subject's multi-tenant rent schedule--that is the truth.

 

[George Hatch]

I never use grossly overstated rents. The borrower thinks you're dumb enough or lazy/cooperative enough to just take their word for it.

At this moment its far more common for my multi-family comps to have below market rents at the time of sale so I'm having the opposite problem of the occupied units being rented below market in a rent controlled liitations. They can't adjust to market rents all at once. Some of those properties will take at least 3 years or more to get in line with the current rents.

If my subject's contract rents are below market then I have to go with the contract rents. They're not free to adjust to the market rate.
If someone lies to me about their rents and I can't verify the real rents then the most I will forecast is the market rate ( vacant unit can be re-rented at market). And then I'll comment to that effect and recommend the lender verify the rents with the proviso that if my assumption is incorrect it would have an effect on my opinions.

Whatever you do, don't apply the market-based GRM to grossly overstated rents. Not that the IA makes any difference in a 2-4 unit appraisal anyway.

 

[ZZGAMAZZ]

I'm totally unaware of lending protocal, although it seems "logical" that unscrupulous lenders would encourage potential borrowers to create bogus leases in order to enhance a client's financial status. Is that true? If so is it a typical activity? Does a borrower's rental income affect their ability to get a loan? [BTW I was recently advised by a bank that I cant get any $$$$ out of a property I fully own bc it is tenant occupied...]

 

[George Hatch]

The borrowers sometimes lie in order to get their deal. The underwriters will usually catch a bogus income/expense statement but this is the kind of thing the appraiser will want to get in front on, not wait for the underwriter to come back for a revision because the rents were overstated.

To repeat, examples like this are exactly why we do rent surveys. We aren't doing it just to fill the form out.

 

[sputnam]

1- You should report the leases provided.
2- If the aprpaisal request was to provide the market value of the property then, the Income Approach should be based on what the market indicates the subject should rent for.
3- Your Client can make the loan... or not. None of your business.