Real Estate Investor Financing 101: 1007 Form

[Robin Simon]

From a twitter series:

Why is  this boring innocuous sounding form is so crucial to financing your real estate investment properties?

What is the 1007 Form?

Standardized Fnnie Mae "Single-Family Comparable Rent Schedule"

It is added to certain appraisals to determine the market rent of the property by comparing nearby rented SFRs

1007 Rent = what you'd reasonably rent the SFR at if put on the market today

Typically, the appraiser will take three nearby rented properties, look at their in-place rent, and then adjust as necessary (i.e. if the property has 3 bathrooms vs. 2 bathrooms, adjust accordingly). 

Nature of the market will determine adjustments and rents.

Suburban PUD - driven mostly by property quality and beds/baths
Condo Tower - views and floors can be huge?
Beach Town - nearby properties, one walkable to beach, one not, can make a huge $ difference

So why is the 1007 so important for financing SFRs?

Typically a lender will give you credit for the LOWER of the 1007 market rent and in-place rent. Or if Vacant, will use the 1007 market rent.

Even if you rent it above market, lender assumes it will eventually converge.

Additionally, as more investors shift towards short term rentals and medium term rentals, some appraisers will have trouble accurately determining rents in markets that cater to these tenancies

i.e.
STRs in beach or ski towns
MTRs near hospitals that hire a lot of travel nurses

1007 Market Rents are crucial for qualification on investment property loans, esp. "DSCR" loans. Deals can be tripped up near the finish line if rents come in low or if the appraiser can't do a 1007 form based on specific market characteristics (i.e. STR/MTR idiosyncrasies)

Bottom Line?  Make sure when financing an investment property that you have a good grasp on the importance of a 1007 form and insist that the appraiser has a rock-solid understanding of the nuances of the local market, especially if its a MTR/STR area