Multi-Family Appraisal questions - two unique situations

[Nicholas B.]

I have an 18 unit multi-family property that has rents that are roughly two to three times higher than the neighborhood comps. My 300 sq ft studios rent for $600 and the property across the street gets $700 for 1000 sq ft 2 bedrooms. I can show a rental history on my property going back two years with those rents.

How does an appraiser view my rental prices for the purposes of a loan? 

Lets say I build 75 units on this site that get those rent amounts, does that change anything? 

And here's another more interesting question. This multi-family is on two acres of land zoned for 75 units. The land currently is worth roughly 1 million. The rental income currently is 150k gross and 120k after expenses. 

Highest and best use I'm assuming is the current use. at a 6% cap rate it's worth 2 million. However that doesn't give any value to the land value. 

If you appraise it purely for the value of the current income you're completely discounting the land that's included in the sale. If you appraise it for the land you're ignoring the value of the rental income. 

I also can't think of a way to combine both of these. As an investor I'd pay 2 million plus an additional amount for the potential of development. Does an appraiser look at it this way too? Or simply value it at 2 million?

[Brian Burke]

@Nicholas B. most likely an appraiser will end up placing a value related to the property's current income stream.  Using the income approach the appraiser will estimate the income (using area rental comps and also weighing in the rents you are getting) and use a cap rate to establish value.  They might also use a technique called "Band of Investment" which is similar to a direct capitalization approach but it considers the cost of mortgage debt and first-year return on equity.

They'll also do an analysis of comparable sales and arrive at a value, and then they'll do a replacement cost analysis where they take the value of the land and the cost to construct the structures to arrive at a value.  Finally, they do a reconciliation where they compare these values and give weight to the one that is most significant.  In the case of multifamily property, in almost all cases the income approach is most significant.  Thus, the property's value is most likely to be reflective of the current income stream.

If the buildings were in very poor condition and the most likely strategy by a buyer would be to tear them down and rebuild, then the replacement approach might work, or perhaps the comparable sale approach by comparing land sales and deducting the cost of demolition.

The property you are describing sounds like what's known as a "covered land play".  This is when a buyer purchases a property that has potential for a higher use (in your case, 75 units versus the existing 18) with the intent of eventually redeveloping the property when the economics make sense.  In the mean time, they get a nice return on investment from the in-place income.  In the future, once land values exceed the value of the existing units, they can either tear them down and redevelop, or sell the site to a developer for them to do it.  At that point, the appraisal of the sale would most likely lean more toward the vacant land comps.  It doesn't sound like you're at that point as of yet.