Wants me to switch to 2-4 family form

[Neil Melby]

I completed a 1004 appraisal on a 2 story home, approx 3500 sf above grade, very updated, very nice, very hard to find a home of this size in this university town. The problem is that the basement is a full basement with two apartments of fair quality finishing, rented for $350 each, with each apartment having an outside entrance.

In my highest and best use analysis, I analyzed and opined that the property would most likely be purchased as a single family home, I am of the opinion that numerous buyers would be drawn to the large size and updating and may even give up the rental registration on the lower level units as they park in the rear of the home and many would not like having permanent guests. I also explained in the report that the 30 day oral leases on the basement apartments may not significantly affect the fee simple status of the property.

The underwriter is insisting that the property be appraised on a 2-4 family form. I have informed the broker that my opinion is that the property may sell for substantially less as a 2-4 family property, and the income approach as well as multi family sales will be significantly lower than single family property sales, though I do know that for sure until I complete the analysis.

I have also told the broker that I need to state in the report that the highest and best use is as a single family home, not as a 2-4 family home. Should I complete a 2-4 even if the property would very likely not be sold as a 2-4 to realize the highest sale price?

 

[TEL2002]

Does zoning permit the house plus 2 apartments?

What do the two apartments consist of...Kitchen, bedroom, bathroom ...what?

Are college rentals common in the area?

 

[Bama Bayou]

Tell them that the 2-4 means a duplex, triplex, or fourplex. A basement apartment or two does not maket it a duplex or triplex.

If you rent your upstairs bedroom does that make it a duplex? I don't think so.

 

[Couch Potato]

So you stated the highest and best use is not the current use. If it is not the highest and best use, what was your rational for it not currently being used in that manner? What was initially ordered? If not what you delivered, did you discuss it with your client? If not what was found to exist, did you discuss it with your client?

 

[Neil Melby]

The zoning permits the house plus two apartments as it exists today without agrandfather clause.

The property is registered with the city rental inspection office as a three unit property by grandfather clause. If the registration were cancelled by the city or lapsed, it could not come back into the rental program without major changes including separate heating systems for each apartment, separate electrical and water meters, separate gas meter, etc.
The apartments each have a very small kitchen, bath, one bedroom, very small living room, legal egress windows.

College rentals are common in the area, as the city is 10000 people, the university is 7500, the local economy revolves around the university.

The presence of the apartments in the basement is a negative factor in the property as a single family home, as the property is an otherwise renovated large 1906 home with considerable appeal to buyers, most buyers would prefer that the basement be unfinished or not split into apartments.

 

[PropertyEconomics]

I completed a 1004 appraisal on a 2 story home, approx 3500 sf above grade, very updated, very nice, very hard to find a home of this size in this university town. The problem is that the basement is a full basement with two apartments of fair quality finishing, rented for $350 each, with each apartment having an outside entrance.

In my highest and best use analysis, I analyzed and opined that the property would most likely be purchased as a single family home, I am of the opinion that numerous buyers would be drawn to the large size and updating and may even give up the rental registration on the lower level units as they park in the rear of the home and many would not like having permanent guests. I also explained in the report that the 30 day oral leases on the basement apartments may not significantly affect the fee simple status of the property.

The underwriter is insisting that the property be appraised on a 2-4 family form. I have informed the broker that my opinion is that the property may sell for substantially less as a 2-4 family property, and the income approach as well as multi family sales will be significantly lower than single family property sales, though I do know that for sure until I complete the analysis.

I have also told the broker that I need to state in the report that the highest and best use is as a single family home, not as a 2-4 family home. Should I complete a 2-4 even if the property would very likely not be sold as a 2-4 to realize the highest sale price?

(my bold)

Unfortunately this was required as part of your ORIGINAL highest and best use anlaysis. Without having done it there is no way you can tell what the highest and best use of the property is. As Is .. you have two rental units and the H&BU Analysis would have had to have accounted for these.
Did you appraise the subject under the hypothetical condition the rental units were not leased? That their configuration was changed so as to not be rentals? Current zoning appears to have been ignored.
All important questions that must or should have been addressed prior to your determination of value for the property.
What it is ... is what it is.

 

[Mike Boyd]

The borrower probably needs to use the income generated by the apartments to qualify for the loan. Therefore, the lender needs it appraised as a 3 unit property (and on the 2-4 form).

Certainly, I do not know your market but it is hard to believe that a victorian era home with apartments in the basement would dimish in value simply because of those units. Methinks it is simply easier for you to do as a SFR as there are no sales of similar property.

Maybe ask your client if you could consider the basement units as a granny and guest unit and you will provide a rental analysis and operating income statement.

 

[leelansford]

If either use (small residential income property OR SFR) is legal, it does come down to a matter of determining which use yields the highest MV.

If your conclusion is well-supported and obvious (not a dollar or two here or there type of situation), "it is what it is".

 

[Neil Melby]

Will try to answer the multiple questions:'

1. Re: the apartments: I researched and found that the apartments were on an oral lease, which can be terminated in 30 days in South Dakota, so I opined that the oral leases would not greatly affect the fee simple status.

2. a 1004 was ordered with an income operating statement.

3. Discussed the lower level apartments and the lack of long term written leases with the client on the lower level apartments, also discussed that their quality and age of improvements did not contribute greatly to the property.

4. There is no doubt in my mind that the property will sell best as single family, and I did do a highest and best use analysis in the original appraisal. What I mean is that I surmise that a comparison to multiple family properties will indicate a lower opinion of value, I just do not know what that opinion of value will be, in my original analysis I did note that multi family properties of 3 & 4 units (not necessarily that looked like the subject, did not find any that resembled the subject) were selling for considerably less than subject, at that point I considered that the property would sell best as a SFH and appraised as such.

5. Current zoning ignored? Current zoning states that single family, two family, and multiple family are allowed, so either use is permissible and in compliance with zoning.

6. Dimunition of value because of apartments? This property would finance much more readily without the apartments, the additional income is offset by the mortgage markets reluctance to finance a property with these lower level apartments.

7. I am quite sure that you are correct that the income stream is most likely needed for the owner to qualify for refinancing.

 

[TJSum]

I don't know your market, but can only speak in general terms. I would think most University towns put high value on rental units like you describe. What is the total value of the home? If it is over $500,000, the rental income might not mean much to the typical owner in that price range, but lets say the home is worth around $200,000, that $700 per month income could pay half of the owners mortgage each month. Most college town neighborhoods have basement rental units in this part of the country, it is rather routine.

What kind of data does the neighborhood show, other "single family homes" with basement rental units, or 2-4 unit homes? What price ranges are we looking at here to see how important that rental income is to the typical owner?