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REO Multi-family

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Beth Ryder

Sophomore Member
Joined
Mar 23, 2004
Professional Status
Certified Residential Appraiser
State
New York
I'm working on a multi-family REO property that has been abandoned for 10 years and is uninhabitable. The lender wants the As-Is value. Since the property is not habitable, it seems the income approach would not be applicable. There are no market rents for uninhabitable properties so how would I even develop the income approach? Market rents are only available for habitable units. Have any of you ever completed a 1025 appraisal without the income approach?
 

Thomas Fiehler

Senior Member
Joined
Jun 2, 2003
Professional Status
Certified General Appraiser
State
Ohio
I have used that form and just noted that the subject is not in habitable condition and unable to support any rental income. Find some sales in similar condition and list them using only that approach. Just be sure to explain what you did.
 

J Grant

Elite Member
Joined
Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
What is overall condition? If it is uninhabitable, would HBU be to tear it down? ( what specifically makes it uninhabitable). That would be first question.

If HBU is existing, imo the income approach can be completed. Use rents from the least updated rentals you can find, and state it income approach is used as a secondary value indicator.

A buyer for multi family would be looking to rent it out, and if well informed, they understand even though subject property is not rentable in current condition after repair it will be. Thus they would pay X$ for the property even in its "as is" crappy state, in consideration of potential, because after repair because it will generate rental income.
 

DWiley

Elite Member
Joined
Apr 4, 2007
Professional Status
Certified Residential Appraiser
State
Tennessee
Theoretically, one could develop an income approach using the income it would generate if made habitable and deduct for the market reaction to the costs in time and money to make it habitable. Having said that, yes, I have completed reports for properties like you describe based solely on the comparison approach.
 

S is for spittman

Senior Member
Joined
Oct 24, 2005
Professional Status
Certified Residential Appraiser
State
Texas
Abandoned for 10 years? Surprised it's still standing.

This may be a little time consuming, but I have had some luck with my MLS by using keyword searches and cross referencing instead of strictly looking in multifamily search. Sometimes agents get desperate when trying to sell these types of properties in the condition you describe and will put, for example, a multifam in the single family section. Other times I have looked in the lots section and found an existing duplex that needed to be torn down so the value was in the land.
 
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exbanker

Freshman Member
Joined
Oct 16, 2016
Professional Status
Certified Residential Appraiser
State
Connecticut
'Rents are estimated based on market rents, as the subject units are not currently rented. The opinion of market rent is based upon a hypothetical condition that the subject units are in move in condition. This is reasonable for the completion of this assignment since they're not inhabitable in their current condition.'
 

J Grant

Elite Member
Joined
Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
Good idea but a hypothetical condition (HC) is not allowed in an AS IS assignment on URAR form- no need for an HC, just state hat the market rents are relied on since subject is uninhabitable. That it would not be credible to adjust market rents down to condition of subject because subject is not habitable and therefore not rent able in current condition.

The market rents indicate what an investor buyer would consider as potential income stream for subject, as an informed buyer they realize the income stream is not possible yet in subject present poor condition.
 

exbanker

Freshman Member
Joined
Oct 16, 2016
Professional Status
Certified Residential Appraiser
State
Connecticut
Good idea but a hypothetical condition (HC) is not allowed in an AS IS assignment on URAR form- no need for an HC, just state hat the market rents are relied on since subject is uninhabitable. That it would not be credible to adjust market rents down to condition of subject because subject is not habitable and therefore not rent able in current condition.

The market rents indicate what an investor buyer would consider as potential income stream for subject, as an informed buyer they realize the income stream is not possible yet in subject present poor condition.

JGrant, thank you for your feedback but that's not an across the board rule. The income approach is different than the sales comp approach and using an EA or HC on one doesn't automatically carry over to the other. It depends on the client's tolerance. I do REO work, many of the multis are uninhabitable, but the client requires the income approach and will accept an HC on the rent schedule while completing the SCA as is. It helps the owner determine whether it's worth fixing the place up prior to sale which occurs in my markets when there are many bank owned units competing in the market.

Beth - in my experience the best thing to do is go back to the client with the information and offer them options,; (option 1. HC rental, as is SCA, option 2. no rent schedule, etc) then let them choose.
 

J Grant

Elite Member
Joined
Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
I understand what you are saying and it is good to know that some clients will accept an HC on one part of report and not other. However, just because a client accepts it, it is still out compliance with the form fwiw.

Outside of compliance issues, I personally do not see why an HC is necessary to develop market rents . Market rents reflect the condition of the rented comps, not the subject. Therefore why does an HC need to be made about the subject condition, in order
to report what the market rents are for the comparable?

The result of market rents/GRM value can either be adjusted down for condition/cost to cure, or left as is in recognition, as we both agree, that an investor buyer would be considering the potential for market rents after subject property is repaired.
 
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