Quadplex being developed to be rented solely as short-term rental units. Residential or Commercial?

[CGinMN]

I would argue most CRs are competent to perform at least the first 2 HBU tests, and some can probably perform 3 and 4 as well if they have the data. Just because something is legally permissible or physically possible doesn’t mean much. Financial feasibility and maximal productivity are often the most difficult to determine and may require some data analysis. But this was my state’s interpretation so I thought I would share.

 

[Dublin ohio]

I have done a few commercial zoned properties with residential use improvements. Understanding of zoning regs is probably the most important in my situations. Pretty simple actually. A small 40x120 urban site. No recent, current or proposed assemblage in the foreseeable future. After considering required setbacks , minimum building size, parking requirements. Easy to determine that current residential use is HBU. Since the site itself cannot support any permitted commercial use.

 

[Terrel L. Shields]

Financial feasibility and maximal productivity are often the most difficult

That even isn't always much of a "thinking thing"...

 

[bnmappraisal]

Our office just got handed an assignment to perform a residential appraisal on a new development quadplex. So far so good. We do plenty of those, and know the market for long-term tenant rentals well in the subject's market area.

The problem is, the developer is adamant that the units are going to be rented on a per-day/week/month basis, ala AirBnB, and as a result, any appraisal performed must approach appraising said property based on per-day/week/month rental prices, market cap rates, etc. rather than as long-term rentals.

Both our team and the underwriting team for the loan are uncertain if this property therefore requires a commercial appraisal, rather than a residential appraisal, given this information and the significant difference in utilization and expected rental income compared to a standard long-term lease. It seems to me as though the property should fall under a commercial appraisal rather than a residential appraisal, as its highest and best use per projected income rates would be as a short-term rental, thus putting it in direct competition with other commercial hospitality services. If it is commercial, then we need to pass on the order as we only handle residential orders.

We are hoping someone here has dealt with this issue previously and might be able to shed some light on how to proceed. Has anyone dealt with this? Would this fall under a commercial appraisal umbrella rather than a residential one?

To your question, I, personally, would have a CG either work with you or pass it on to a CG
As @Michigan CG states

Short-term rental properties involve a business aspect and I think a CG should do the report. This CG would turn it down as it sounds like it is a pain in the rear.

The management expenses, cleaning expenses, advertising, etc. are all things to consider and the research would be very time-consuming. Add in the developer is insisting on the short-term rental valuation it sounds like more of a pain in the rear.

(my bold)

 

[Ken B]

Unless I missed it, I didn't see anyone mention the vacancy rate and average daily rate for a short-term rental, so I'm throwing that wrench into the works also. What is the demand for a short-term rental outside of a tourist area. If there is reasonable demand, there will be different, perhaps much different, occupancy levels and rates between season and out of season periods. A short-term rental is management intensive. If an owner doesn't pay for someone else to manage it, they will have to do it themselves.

There is a reason uninformed buyers of hotel condo units can't cover the mortgage with the rental income and often lose their shirts on resale.

 

[Elliott]

I use to get operating statements and they pretty much went, $30,000 gross, 40% occupancy, 50% expenses. So when all an owner had was a gross, I'd estimate the net rental equivalent at average daily rate x 365 x 20% of their gross and compare it with standard rentals, or something like that. (Do not use this information for your appraisals, its proprietary).

 

[George Hatch]

I would argue most CRs are competent to perform at least the first 2 HBU tests, and some can probably perform 3 and 4 as well if they have the data. Just because something is legally permissible or physically possible doesn’t mean much. Financial feasibility and maximal productivity are often the most difficult to determine and may require some data analysis. But this was my state’s interpretation so I thought I would share.

I completely agree that it doesn't (and indeed, shouldn't) take a CG ticket to become competent at HBU analyses. BUT, if the state appraisal board has decided to operate off a fixed assumption to the contrary then that is good information for licensees to be aware of. Now the next logical step for the board to take is to publish that policy and disseminate among their licensees so that nobody accidentally crosses that line.

Good fences make for good neighbors.

 

[CGinMN]

I completely agree that it doesn't (and indeed, shouldn't) take a CG ticket to become competent at HBU analyses. BUT, if the state appraisal board has decided to operate off a fixed assumption to the contrary then that is good information for licensees to be aware of. Now the next logical step for the board to take is to publish that policy and disseminate among their licensees so that nobody accidentally crosses that line.

Good fences make for good neighbors.

Here’s your answer to that.

Me: “If it’s DOCs stance that licensed and CR appraisers can only complete work in R1-R2 zones, I’m willing to bet most appraisers won’t understand this.”

Response: “I give the appraisers the benefit of the doubt on understanding this once it is brought to their attention.”

I’m not sure who is going to bring it to their attention until after it’s already too late.

 

[Cob]

I would put the ball in the lenders court on this, it doesn't really matter what or how the owner "wants" the appraisal to be completed as it's not really his say because he is getting a loan on the property from a lender. In a normal residential 2-4 unit property there is a reason lenders want to see a lease and terms of a lease, most leases are anywhere from 6 months to 24 months, this is actual contract between the renter and the home owner. Most lenders are leery of these kind of income properties as all it takes is something like COVID, then there goes almost any income for SEVERAL months that would normally be coming in.

In Austin, they do not allow properties to be short term rentals 100% of the time as it is basically a hotel, I have a property behind my house and over one that is being used almost exclusively as a short term rental, in March they added a pool and now it's a non stop party almost every day, the City of Austin and the zoning of the property does not allow this, I would be checking the zoning of this property to see if 100% short term rental is even allowed.

 

[nachocheesefries]

Our office just got handed an assignment to perform a residential appraisal on a new development quadplex. So far so good. We do plenty of those, and know the market for long-term tenant rentals well in the subject's market area.

The problem is, the developer is adamant that the units are going to be rented on a per-day/week/month basis, ala AirBnB, and as a result, any appraisal performed must approach appraising said property based on per-day/week/month rental prices, market cap rates, etc. rather than as long-term rentals.

Both our team and the underwriting team for the loan are uncertain if this property therefore requires a commercial appraisal, rather than a residential appraisal, given this information and the significant difference in utilization and expected rental income compared to a standard long-term lease. It seems to me as though the property should fall under a commercial appraisal rather than a residential appraisal, as its highest and best use per projected income rates would be as a short-term rental, thus putting it in direct competition with other commercial hospitality services. If it is commercial, then we need to pass on the order as we only handle residential orders.

We are hoping someone here has dealt with this issue previously and might be able to shed some light on how to proceed. Has anyone dealt with this? Would this fall under a commercial appraisal umbrella rather than a residential one?

Perhaps not as technical as some here would get...but, we have a lot of nightly rentals in our area and these clowns all want them appraised based on their nightly rental income (which is impossible to do and the numbers vary wildly depending on owner motivations/skill sets/ management expenses, etc.).

My response is always a hard no and I just tell them I am required to appraise with the assumption of a TYPICAL buyer, not a specific buyer looking for an air BNB...which is almost a business enterprise. If the property goes back to the bank, the air BNB listing an all its 5 star reviews is irrelevant. Its almost always SFR's in our area.

I know there is more to it than that, but they rarely understand all the other components as to why I am not touching it. I decline them now just so I don't have to explain why they are dumb.

Foreclosures lookin for loan!!!! Just wait and see!