Appraisal question on a multi/single family house?

Question

Hey there! so I’ve got a bit of a struggle going on in my head right now, and was looking to see if any one, specifically appraisers had any advice out there. The triplex were living in right now we bought as a Duplex 2 months ago because the bottom two units are currently connected (and only one of those two units have a kitchen) and the top unit you have to go outside and up the stairs to get to. Also, the bottom two units share an electrical meter where as the top has its own meter. Water is all shared on the same meter. Because we bought the house as a duplex the value came in very low, somewhere around $70/sqft (because there is no multifamily within 10-15 miles of here) when houses all around us are easily going $150/ sqft. So my thought was if we built stairs connecting the bottom to the top ( so you didn’t have to go outside to get up there.) and converted the full kitchen upstairs to a kitchenette, hopefully when we refinance it will refinance as a single family home (like the previous owners bought it as 3 years ago.) and our value will skyrocket. My only concern is that because it has 2 meters and the house flows more like multi family than single family I might just be wasting a-lot of money. Tax records say that its zoned R3 and from my understanding that means single family or multifamily residential.

Our end goal is to get refinanced as a SFH giving us a boat load of equity we can then use on a HELOC to go do more deals with and convert the house back into a triplex to house hack. if you took the time to read all this thanks so much!

Phillip McDonald · Answer

Based on your description of the market conditions single family may be the highest and best use of the property. Multi-Family is never automatically the highest and best use. Highest and Best Use is determined by applying a test of four criteria in order. 1. Legally Permissible, which both single family and multi family pass, based on your description. 2. Physically possible, both pass based on your description. Financially Feasible, now this is where the analysis described in the previous response comes in. If this is the only duplex in 15 miles is there sufficient demand for this property type, can the units be rented, what is market rent, vacancy etc. for multi family and single family. If there is no demand for rental units then it is possible that a duplex is not financially feasible. The final test is maximally productive. Which type of improvement contributes more to the land. Based on your figures, this is single family. Therefore, if single family contributes a value of $150 PSF and a duplex contributes a value of $70 PSF then single family is the highest and best use. The conversion back to single family will require that you install the stairs and that all areas are connected. You may need to modify the flow as well if the property is not functional as a single family home due to the problem with flow you refer to. Definitely, have only one kitchen The second meter is a factor if you are attempting to represent a portion of the property as an ADU. Separate meters and separate addresses are a guideline in the determination of an ADU or duplex classification. If you are not representing the property as having an ADU and you really do have the property configured as a single family home then the second meter should not be a determining factor regarding classification. Do not keep it as a duplex and then when it is appraised try to play make believe with the appraiser that it is a single family home. We are not easily fooled, we see hundreds of properties each year and we know what we are looking at when we see it. Do present the appraiser with the history of the property being a single family home three years ago, being converted to a duplex and then converted back to single family. This explains the second meter. Don't show them the second meter or bring it up, let them ask about it. Show the appraiser your building permits for any work completed for the conversation. Make sure you are being honest with yourself regarding the value figures you are using. If you paid $70 PSF and conversation to single family doubles the value why don't you just convert it, sell it, take your money and do next? Doubling your money for installing a staircase and making some small floor plan modifications is an investors dream. If your answer is that it may not actually sell for $15O PSF due to functional utility issues then don't expect it to appraise for that. I hope this was helpful. Phil McDonald

Sebastian Marroquin · Answer

A lot of great comments and advice on here. A lot of or most appraisers i work with that also work for the banks with purchases or refinances do “table top appraisals” I would pay one of them in your town: see any good realtor that is in escrow in your town for their listing or buyers and they likely had an appraiser come out recently (call them and ask them for that phone number). Pay them about $300 to $400 to do a table top app. For either a 3plex or a single family home. They will give you a good indication of what each scenario would be worth and if it would be a good ROI for you to do anything. Here in CA we do have several cities where I have seen a duplex with 1600 sq ft sell for about $1.2 and a SFR with also 1600 sq ft sell for $1.5 (trends right now show that buyers would rather have a home that is 1600 sq ft with a detached garage they can convert into the second unit for rental purposes or for family to move into). So, i get your point. I think you have to know your area and the comps for each one of those options. Lastly, do not compare a single fam. Home that is renovated and looks great at $150 per Sq foot to a fixer duplex or triplex. Not the same. Good luck

Zachary Aldridge · Answer

@Phillip McDonald @Kerry Baird Thanks so much! My only concern is that we put the stairs in ourselves and they're to code and look great but we didn't pull permits because we live In the house. Im not trying to present an ADU when I go to refinance. Id like to just present it as a single family house because in that case we would have a 10 bed 5 bath single family house with 4000 sqft. Around here, 7 bedroom 4 bath houses with 3000sqft are going for in and around $475000 (Hiram, GA). We bought this place as a duplex for $302500. It did need a considerable amount of work though, so we are doing that now.

Kerry Baird · Answer

You might be mistaken by thinking this is an equity type of deal. It isn't. You don't need the value to rise. In my opinion, and at this stage of your investing, you need the cash flow to increase. I think you need to determine what the return on investment would be for every action you take. -Will putting in a kitchenette increase your ROI? Two meters = value that you didn't have to pay for. My additional thoughts:-If you rent out one unit, what does the house produce? If you rent out two smaller units, what does the house produce? If you rent out three itty bitty units, and you move into the next deal, what does that property produce? -How many months of renting out units will it take you to have enough down payment to move yourself to the next property?-The house rises to its highest use for the zoning as a multi-unit property. I am of the opinion that spending money to add and remove kitchens is a fools' errand. If it were my property, I would do what I could to have 2 good sized units with 2 bedrooms each. I'd screen very well for solid tenants, with good stable jobs. I'd move them in and move me out. I'd be looking for my next property to owner occupy. I particularly like probate deals, or tired landlords who offer seller financing. Rinse and repeat a few times, aiming for increased cash flow.