Rooming House...Any experience out there?

[Charlotte Dixon]

An assignment was just dropped in my lap that may be a little complicated since it's a rooming house (zoned residential). I've done plenty of 2-4/multi family units, but have not done "rooms for rent by the week or day" jobs. Since rooming house comps are not lined up and down the street, even after looking 3 years back, I'm not sure how to attack this. I have comps within a year which have 3 to 6 units containing 1-3 bedrooms, kitchen and bath(s). But I'm not sure how to compare these to the subject, which has 3 floors. The second floor and finished attic have been condemned by the city because they have no fire escapes and smoke detectors. On the first floor, there are 6 sleeping rooms, 1 shared kitchen and 2 shared baths. County records indicate it contains about 2700 sq.ft. for the 1st and 2nd floor. I've inspected the interior of the property, but the temps were 101 degrees here that day and I couldn't bring myself to measure the exterior first floor (which is not the same as the 2nd flr. and attic). And, I wasn't quite sure I would take the job. So, I'll have to measure the interior of those floors when and if I go back! Needless to say, the accommodations were not pretty... One person sitting on each bed in each room, if you get the picture. The purpose of this appraisal is to arrive at an opinion of value because the manager wants to make an offer on the property. And, of course, if there is an executed contract of sale, the prospective buyer will need a loan and I'll probably be contacted again. So, any ideas out there as to how to approach this? And, don't say "with Lysol"....... :roll:

 

[Farm Gal]

Charlotte:

Been there and done that. Wanted bleach to walk through before entering my car, settled for scuffing along in the gutter for half a block. ick.

In my case, I was fortunate enough to have a (that is ONE sale), of reasonably similar nature, despite very different size and location. I had a few multifamily (quasi-triplex, 4plex) converted homes, in fairly similar but not quite as bad a physical shape. Despite the differences there was something of a logic in the market approach, as the house was mostly 'habitable' by the standards of the single male occupants, or mixed sex tenants of Slumloards Aanonymous.

Due to the very weak market approach, I worked the thing from the cost approach(as is) discounting heavily for accrued depreciation, and weighted the income approach heaviest in my conclusion, remembering to include the additional overhead costs in working the income approach. (Found two other 'boarding house' managers and interviewed heavily). The primary issues are vacancy, collections, and unbeleiveable repairs - the managers expect 25% vacancy, headaches galore in rent collection, regular repairs of doors, locksets, interior and exterior walls, window glass, mediating fights between the tenants, etc.

I used what I had to work with, and carefully explained what I had done - then took a step back and figured the cost to reconvert back to a SFD. Surprisingly the cost and market, and 'reconversion-extra' approach came out fairly tight.

The thing STILL cash flowed like a spigot, after expenses, IF you don't count the headaches as collateral loss :roll: . The value in use as boarding house/income approach was significantly higher. After conversation with the lender Income was accepted as a valid approach, they got two values: value in use, and "if the current owner dies or blows up, what you can unload this turkey for".

I got paid (extra), the loan closed and it has never come back to haunt me. That last surprises me somewhat.

Good luck!

 

[Anonymous]

A rooming house, like a hotel is a business and must be valued as a business. Don't try to compare it to multi family housing.

 

[xmrdfghap]

With a little research you might find comparable sales data in a university town.

Check with the school's housing department, they will have referrals to room to rent landlords.

Otherwise look strongly at the income approach as this is going to be what the buyer and seller and lender will be most interested in. The Cost approach would be secondary, and market data third......using it to show that there really is a demand for that type of housing.

 

[Farm Gal]

Walt:
I respectfully disagree: many of these 'converted houses' particularly if gone to rack and ruin, would not be sold as a viable business if the bank needs to foreclose: they would be viewed as 'distressed house in need of serious repair'. Few of the tenants in such places have more than a month to month tenancy agreements, some are even weekly. the business exists exactly as long as an indivdual is willing to deal with the headaches assciated with running it. No reputable management company in this are will touch such a problem.

The bank needed both values, one to assist them in recognising the cash flow (business) and the second as the real estate.

I got help on the first to make sure I knew what I was doing, and the second did what could be done with the limited approaches available... I don't think I violated any ethics or standards in so producing the reort, and the client got what they wanted.

 

[Restrain]

I would confirm how the property is rented. I've seen them rented by the person, not the room. It's amazing how many illegals can be crammed into one unit. Yes, they violate zoning. Yes, they violate occupancy requirements. No, the laws are not enforced. So, treat it as a business, not an apartment.

 

[Ross (CO)]

Charlotte, .... Having just taken a CE course in town last week on appraising complex and non-conforming properties, and remembering one key point made by the instructor, you might just give the client a call and request to speak DIRECTLY with the U/W who will handle your report ! ( Perhaps I may have missed in your post where you say that you have done this already.) Have your pertinent data and fact discoveries ready to share and have them guide you in proceeding and therefore do what is needed, provided you feel it can be brought together sufficiently, rather than fielding all kinds of questions and possible needs for new or different comp data afterwards. Measure twice--cut once, a rule I might follow if dealing with an out-of-the-ordinary property as this one is.

 

[Anonymous]

Lee Ann:
I agree with you however my point was that a rooming house is not directly comparable to a two or three family house even though they may be physically similar. Just as a hotel and an apartment building may be physically similar but economically different.

 

[Charlotte Dixon]

Thank you for all your help! The end of this thread is....I didn't take the job. 1) Absolutely no comps, not even one. If I had one good one, I may have attempted this 2) I never thought of this property as a "small hotel" rooms by the night or week, thus it is a going concern, even tho zoned residential 3) they couldn't pay me enough. Thanks again!

Charlotte