Rent Split Property

[Andee]

Have a property that has a "Rent Split/Rental Share". Was given the original lease which has only one signatory, and states the property is a 4 bedroom 2.1 bathroom dwelling. During the inspection I saw that some of the living areas have been enclosed to make bedrooms, and the main bedroom has been split into 2 bedrooms, still only 2.1 bathrooms, the garage was converted prior to the current owner purchasing it, so they basically now have 7 bedrooms if you count the enclosed garage.

I'm not sure if the owner created the extra bedrooms or if it was created by the tenant who signed the lease. I have a call into the management company to find out any information I can. I need to complete a 1007 with the report. There are other single room rentals in the area but not a lot. How would you write this?

1. As it is with 7 bedrooms, which will never bracket because its only 2600 sf, and 7 bedrooms isnt common in this size, nor do I have lease amounts for each room?

2. Make a hypothetical condition and base it on the way the lease is written?

 

[Surf Cat]

Yikes...

First off, I would inform the client of what you have before doing any more work on the report to see if they even want you to proceed.

For the appraisal part, the client may want a cost to cure to remove the partition walls to bring it back to its original configuration. I mean, is this next to a college where there may be sales that have been reconfigured? Otherwise, you're not going to find any comps.

The 1007 is intended for a rental property as a whole.... not a converted SFR with an unusual bedroom count, a bunch of partition walls and separate leases flophouse. You're not going to find any comparables to support a credible analysis. Plus, you only have one lease.

Do all the bedrooms have doors and windows? I don't know what the laws are there in Texas, but I would think you would have health and safety issues in regards to a couple of the bedrooms having Ingress and egress, for emergency access. Here in CA, I can typically find converted garages. But again, it's probably not permitted.

Lastly, a hypothetical condition is only appropriate when you are analyzing something contrary to what is known to exist.

Every time I've had something like this with the exception of a hard money lender, these are canceled. Be sure to point out if a couple of those mock bedrooms don't have Windows.... that's a Fool's errand to do that report. Be sure to calculate your trip fee and research time.

Edit: the only way I could see you doing that report is a cost to cure to reconfigure the dwelling back to its original 4 / 2.1 configuration. Plus, the 1007 the same way, finding 4 / 2.1 rental comps.

Good luck!

 

[Andee]

Do all the bedrooms have doors and windows?

Yes, all the bedrooms have windows for egress and the garage conversion has an exterior door. The lease is in 1 persons name for the entire property, which is why I'm not sure who put the walls up.

 

[Surf Cat]

Yes, all the bedrooms have windows for egress and the garage conversion has an exterior door. The lease is in 1 persons name for the entire property, which is why I'm not sure who put the walls up.

Well, see what the client says. I don't think it would be too bad if just the main bedroom was split with a window on each side. But you state this....

During the inspection I saw that some of the living areas have been enclosed to make bedrooms

unless you're near a college and other homeowners are doing this, you're not going to find any comps for a market reaction.

Also, if the garage conversion has been done without permits, I wouldn't include that as living area or try to stuff that into the 1007..... it's just a converted garage.

Let us know what the client says!

 

[Zoe]

I definitely would want a rent roll and 2 years income/expense statements from owner. If they could not give me that, I would probably back out.

 

[Tom D]

Yea, sounds like university off campus housing. One name on the lease, tenants pay per bedroom. Is this a university area.
This type of lease is sometimes called a master lease, which lenders don't understand. An organization rents the whole property, then rents individual parts.
Why is the garage a bedroom, couldn't be a den. You are over thinking bedrooms for everything.

 

[Zoe]

If MV is your value definition, the H&B use of the subject is income producing property depending on rent roll and income/expense statements.

Some areas locally have strict code. If code told me it was not legal and they were going to visit the owner, I would be out too.

It depends on your client if you can back out and at least get inspection fee. Hope you have a good client.

 

[sputnam]

Maybe think about your analysis and opinon of HABU. Most appraisers will report the HABU as something like 'single family dwelling'. Instead, what if you actually did a thorough HABU analysis and found that the HABU for the subject property is a 4 bedroom, three bath, single family dwelling? I know of at least one appraiser who does that. If you did, and your assignment is market value, then the extra bedrooms are functional obsolesence.

 

[J Grant]

Yes, all the bedrooms have windows for egress and the garage conversion has an exterior door. The lease is in 1 persons name for the entire property, which is why I'm not sure who put the walls up.

It does not matter who put the walls up. WRT whether the owner or the tenant did it. Or if the owner either did it themselves or hired someone.

The point is the house's functional utility has been affected, and the large # of bedrooms indicates illegal use as a rooming house - and they garage was converted. First, call the client and describe it and see if they want to proceed. They might put it on hold , or cancel it, or make it subject to removing the walls.

If it proceeds, find whatever comps you can that are SFR.
Get the owner to state how much rent they collect total from leasing all the rooms out. That is the contract rent ( subject rent.) the market rent comes from other SFR rented properties. The market rent might be lower than your subject contract rent, which, if illegal, is more of a value in use than market value.

 

[Zoe]

It does not matter who put the walls up. The owner either did it themselves or hired someone, and they are likely illegally using it as a rooming house - they made a 4-bedroom or whatever it was into a 7-bedroom and converted the garage. First, call the client and describe it and see if they want to proceed.

If they do, you do not need to find 7-bedroom rental comps. Find whatever comps you have that have the most similar number of bedrooms yet are still SFR.
Get the owner to state how much rent they collect total from leasing all the rooms out. No matter what they tell you, it is put down as contract rent ( subject rent.) the market rent comes from similar SFR rented properties. The market rent might be lower than your subject contract rent.

I am worse than you J Grant. Yes, I would call the client first. But that would be the starting point with me. I am either all in or all out.