Rent Control

[ZZGAMAZZ]

I am still trying to understand the implications of rent control on market rents in the residential income section of a multi unit residential assignment for an estate settlement, in LA City.

The subject has long term tenants that result in the subject's actual rents being approximately 30% less than 90% of the market rents.

It is my understand of rent control that a potential buyer/investor typically is unable to increase rents unless the current tenants leave of their own volition; and this appears to be a critical factor in determining whether to buy--or whether to collaterize if it was a mortgage assignment.

It appears that I will develop the Income Approach and Sales Comparison Approach and weight the Income Approach based upon the subject's actual rents rather than market rents.

Questions:

1) Do my peers think it's necessary to research the extent of the length of the comparables' leases in order to determine whether those rents, also, are "artificially constrained" because of long term tenants? I'm not sure if this info is available, or meaningful, or if the comps' actual rents are what they are and the length of the current rents don't matter.

2) Do I need to develop the SCA if I'm not going to rely upon it? (I've already developed it but just wondering whether it was necessary.)

3) The subject rents include income above-and-beyond the designated amount because the owner is collecting $xxxx from the tenant's girlfriend who recently moved in with him. Would you include that as "additional income" although it's probably illegal. (Of course there is no documentation of this additional income other than the owner's comments.) I'm thinking about describing it as additional income but not using it to describe the true grm based upon the subject's actual rents, although I have never applied this rationale (or lack thereof) before.

4) I recently started to include an additional line item in the R.I. approach for an "estimated GRM." I typically include only active listings in the R.I. approach in order to reflect the most current data, and base the "estimated GRM" on the equation "list price / actual monthly rental income." I describe this rationale in the "Summary of Income Approach" and indicate whether the estimated GRM's do or don't support the GRM derived from the sold comps in the SCA. Just wondering if anybody feels that this is or isn't logical, valuable data.

 

[Doug Wegener]

complex

I am still trying to understand the implications of rent control on market rents in the residential income section of a multi unit residential assignment for an estate settlement, in LA City.

The subject has long term tenants that result in the subject's actual rents being approximately 30% less than 90% of the market rents.

It is my understand of rent control that a potential buyer/investor typically is unable to increase rents unless the current tenants leave of their own volition; and this appears to be a critical factor in determining whether to buy--or whether to collaterize if it was a mortgage assignment.

It appears that I will develop the Income Approach and Sales Comparison Approach and weight the Income Approach based upon the subject's actual rents rather than market rents.

Questions:

1) Do my peers think it's necessary to research the extent of the length of the comparables' leases in order to determine whether those rents, also, are "artificially constrained" because of long term tenants? I'm not sure if this info is available, or meaningful, or if the comps' actual rents are what they are and the length of the current rents don't matter.

2) Do I need to develop the SCA if I'm not going to rely upon it? (I've already developed it but just wondering whether it was necessary.)

3) The subject rents include income above-and-beyond the designated amount because the owner is collecting $xxxx from the tenant's girlfriend who recently moved in with him. Would you include that as "additional income" although it's probably illegal. (Of course there is no documentation of this additional income other than the owner's comments.) I'm thinking about describing it as additional income but not using it to describe the true grm based upon the subject's actual rents, although I have never applied this rationale (or lack thereof) before.

4) I recently started to include an additional line item in the R.I. approach for an "estimated GRM." I typically include only active listings in the R.I. approach in order to reflect the most current data, and base the "estimated GRM" on the equation "list price / actual monthly rental income." I describe this rationale in the "Summary of Income Approach" and indicate whether the estimated GRM's do or don't support the GRM derived from the sold comps in the SCA. Just wondering if anybody feels that this is or isn't logical, valuable data.

Not what you want to hear Im sure, but if this is a property over $250,000 your are dealing with a complex appraisal beyond the scope of your license.

1) If you do a rent analysis in the area you will be able to determine if your comparble rents are "locked low". Also it has to do the with the age of the units. Its been a long time since Ive done one but not all units are subject to rent control, depends on when they were built.
If you havent, you should read the LA housing authority info on rent control, assuming you want to continue with an assignment outside the scope of your license. You could also find someone with a higher level of licensing to sign off which would be the appropriate course of action.

2) I wouldnt do an income property without the sales approach.

3) I wouldnt include the illegal income.

4) Item #4 is extra work but I dont see any problem with it.

What do you do when you find rent control sales that are selling higher than their income and the typical grm in the area justify?

How many units are we talking about here anyway?

 

[Mike Boyd]

I assume you are writing about a 2-4 unit income property. If so, I would give little weight to the income approach found on that form using a GRM. MOST weight should be placed on the market approach as that is a direct indicator of market/sales activity. The lender wants to know what it can SELL the property for if it has to foreclose.....not what it can rent the units for. The rental analysis is needed to determine if the buyer can afford to make the monthly payments and to maintain the property. I would think that the rent control aspect to be very important to the lender as a further means to analyze the borrower's ability to make the payments.

 

[CURT VAN HOOSER]

According to this, the additional rent being charged for the tenant's girlfriend is acceptable (up to 10% of the rent).


http://www.caltenantlaw.com/LARSO.htm

 

[ZZGAMAZZ]

2 units.
estate settlement.
2 assignments, current and retrospective to 08/1999.

included the additional rent as extra subject income and cited the source.

the SCA and the RIA were developed for the current effective date and the RI was heavily weighted, with a large discrepancy, of $240K income and $285K sales.

the absence of any pertinent comparable rental income data for the retrospective assignment resulted in the SCA only being developed, without the RI being developed or a GRM being developed. the opinion of value was based exclusively on the sold comparables. I felt that this was a credible result. I could have developed a GRM based upon the comp's selling prices and the subject's retrospective controlled rent, but that seemed like the kind of circular analysis that was critiqued on a recent thread.

I realize that criticism and head-banging might follow.

 

[Vernon Martin]

If it's just a duplex, I would think that the typical buyer would rely on an SCA. A tenant can be evicted if the new owner will move in to the unit, but has to be paid relocation costs, which range from $3500 to $8500, depending upon the presence of minor children or adults with disabilities.