No comps for Duplex (Need advice!)

[Curtis M.]

In September I purchased an up/down duplex in Denver. It was built in 1895 as a large single family home, then in the 50's it was converted to a duplex. It is still zoned as a multi-family lot. A multi-family home in Denver means if you want to get a traditional loan you are required to put 25% down. I decided to get an FHA loan at 3.5% down and put my budgeted cash ($45,000 ish) into upgrades with the goal of having the house reappraise for 100k more than when I bought it so I can have 25% equity and then be able to refinance out of the FHA and into a traditional loan (thus eliminating the painful $400/mo PMI fee). And it would be nice to get a home equity line to do some additional work on the house, such as converting the garage into an apartment as well.

When I found the duplex initially, I was able to negotiate a great deal with the previous owner, but when it came time for appraisal, it was impossible to get a good comp. The duplex appraised for 100k less than every other comparable single family home in the neighborhood that had the exact same square footage and footprint! There were no other duplexes in the neighborhood that had sold recently, nor could the appraiser find any comps for a property where both sides were owned by the same owner. Therefore my comps were old beaten-up duplexes that were ultimately bought and then scraped for new townhouse construction…so their purchase price was low. There were many more half-duplexes that were appraised and sold at solid prices he could have used as comps but he didn't/couldn't.

So the question is, in order to get a great appraisal value so that I can refi out of the FHA loan, should I divide the duplex into separate properties and set up a party wall agreement? Can I do that with an up/down duplex rather than a side by side? In a conversation with the zoning department before I purchased, they made it sound like it wouldn't be an issue at all to get the second unit assigned a separate address. I have been told this will increase my annual taxes though? Are there any other downfalls to doing this? Will I then need two mortgages when I refi?

My assumption is that if there are half duplexes that can be used as comps, I will have a lot better appraisal than in it's current scenario. I would love any advice anyone can offer.

Lastly, I'm living in the bottom unit right now, but later this year I will be moving out and renting both units. Right now the upstairs rent payment covers the mortgage. When I rent out the bottom as well I will have great cash flow from the property, nearly double my mortgage payment. Will anyone appraise as an investment property and look at cash flow and not just square footage comps?

Thanks in advance for reading my long story and for offering advice!!

[Bill S.]

@Curtis M. I do not think it's possible to divide a property that is an up/down duplex (I'm 99.9% certain you can't do it in Denver proper - I tried pretty hard). If you are successful at that I would love to know.

I know it's not good news for you but, typically and up/down plexs are not the same animal as side by side nor does the industry place them on equal footing with SFH. Based on what you have said, I would agree with your appraiser on the use of comps.

Perhaps pushing for valuation based on income would help your cause (not sure if this would fly with the lenders). This sort of thing is what makes them difficult and cheap.

Could you make a reasonable case that it's a SFH instead of a duplex? Perhaps some changes (taking doors off and making the smallest kitchen an art studio/workshop) would make it more easier to appraise?