Unique Multi-Family Property

[Alexander Zurn]

Hello - I recently have gone under contract with a unique multi family property in Bristol, RI.

It is 3 units. Unit 1 = 3 bed 1 bath ; Unit 2 = 2 bed 1 bath ; Unit 3 = 1 bed 1 bath

Units 1 & 2 are standard MF Up/Down (Unit 2/Unit 1) set up while Unit 3 is a standalone unit with 911 total sq ft of which 448 is livable sq ft.

Few questions:

1. I am putting rents per bedroom in Bristol, RI between $400-$500 based on comps. (1) Can anyone confirm or deny this and either way shed a little more light?

2. Financing this will come down to two things (in my opinion): the self sufficiency calc (3-4 unit FHA requirement - property must be self-sustaining) and finding comps to evaluate it for appraisal. (2)Does anyone know of a property similar to the one I have described? Or how else is could be evaluated?

• The self sufficiency calc will use market rents as the current rents are very low due to tenants being in for a long time. (formula = (Market Rents per appraiser * 85%) > (Principle + Interest + Taxes + Insurance + PMI)
• An appraisal will need comp's similar to a property like this, which I believe will be tough to find and am concerned about not being able to get a loan because of it. (3) Are there ways around this?

Note: I have an inspection tomorrow at 2pm and would hate to spend the money if I can't get the loan due to no comps.

Let me know your thoughts!

Tags: Rhode Island, appraiser, FHA, Underwriting, Boston

[Anthony Thompson]

Alex, I've run across properties like the one you describe a number of times over the years, though I couldn't point to a specific one at the moment.

The first thing that pops into my mind when I see a tiny 3rd floor like that is, make sure it's a legal 3 unit. Very often those kinds of properties are in fact legal 2 units with an illegal 3rd someone put in somewhere along the way. Many a property owner has bought a "3-family" only to find out later that it was actually legally only a 2.

Legal use is determined by the building department, not the tax assessor, so you can't go by the # of units you see on the assessor website. You'll need to contact the building department for the town and specifically say you're trying to confirm the "legal use". This may be something you'll need to do in person, and I find I always get farther when I go in person anyway.

Every town is different, some will want you to fill out a form and pay a small fee (and wait a few days) for a "zoning certificate", while others will just pull the file drawer and give you a copy of the last legal use on file which is still the current legal use as far as they're concerned.

On the rents, I don't usually look at it as $X/bedroom. Usually I find there's a certain base price for a 1BR apartment (e.g., 800) and then a markup for more bedrooms (e.g., 2BR might be 1050, 3BR might be 1200). You kind of have to do rental comps for each BR configuration and you'll have to make adjustments in your mind for the comps of course (like this one was just redone, this one's bigger or smaller, etc.).

If you really can't find good rental comps and are worried about your #s you could walk into a local realty shop somewhere in Bristol that does rentals and have a conversation with one of the newer agents. Basically explain you're buying a property and looking to get a sense of rents in the area, and you may be looking to build a relationship with an agency for filling future vacancies (the carrot that will justify their spending time helping you).

Usually you'll get a newer agent who's on desk duty and who's hungry to build their client base, and they'll be happy to help you. They may be young/newer but they'll still probably have enough market exposure to help you with the rental comps.

The "income approach" is leaned on more heavily for appraising multi-family properties than the sales comparison approach so having good rent #s and expense #s (as best you can estimate) will be important.

I'm guessing some Bristol agents will be on BP and reply with their willingness to help you get recent comparable sales, but if not and all else fails you can send me the property info by PM and I'll see if I can assist with finding some comps. (Remembering, of course, that doing comps is as much of an art as a science and there's always a margin for error - that's why appraisers call it an opinion of value.)