How are small multifamily's appraised

Question

I have been here for a while mostly just reading and learning. One thing I haven't read a definitive answer on is how 2-4 family's are appraised. I know 5+ are typically appraised based on the Cap rate and SFR are appraised based on CMA's.

I plan to purchase a small 2-4 family and would like to know what needs to be done to increase the value in order to refi and get my down payment out for another and so on. So are small multi's based on the Cap rate or GRM when compared to the local market or something else?

Gino Barbaro · Answer

Nicholas W.Hi Nicholas,I am trying to refinance 4 family property. The bank is taking into consideration the income on the property, but it also appears that they weight the comps when coming up with a figure. The bank is looking at all sales in the last 6 months that are comparable to mine.If you want to get the value up, increase the income, lower the expenses, or do both to increase the NOI.Gino

Austin Hajjar · Answer

like mentioned by @Greg Scott above any 2-4 multi unit will be appraised based on comps because 99% of banks will go the Fannie/ Freddie route (even portfolio lenders). I have 3 duplexes in the same city 3 blocks from each other in a C+ / B neighborhood. Our first appraisal as expected and we were able to pull out our down payment. Our second property (similar sq ft and bed/bath) was appraised $50k below our first duplex. All because the appraiser can't find comps (but my cash flow is 2.5x debt) so be prepared for that and run numbers accordingly

Mark Vejnar · Answer

Nicholas W. says, increase NOI. Cap Rate and GRM are utilized to reconcile value, but a strong NOI directly impacts decision making. Most buyers are utilizing 2-4 unit MF as investments so income typically carries the most wight in the final determination of value. However, because the subject is appraised as residential vs. commercial underwriters also care about sales comps. If you are able to buy a significantly deteriorated property and force appreciation through rehab, it seems to me you have a better case for refi and more equity to pull and reinvest in the next project. Does that help?For your reading pleasure:https://www.fanniemae.com/content/guide_form/1025....

Account Closed · Answer

Ding! Ding! Ding!

Nicholas W. · Answer

Mark, that was very helpful, Thanks a ton! I will review the link now to get a better understanding.

Greg Scott · Answer

The properties you mentioned 2-4 units are technically considered "single family" for financing purposes. As a result, they rely on comps. Of course, if you are in an area where there are no good comps, it may cause challenges getting refinanced later. The valuation won't be driven by income, like it would with larger multifamily.

Jason D. · Answer

Nicholas White you would have to buy an undervalued poorly kept multi that requires work so that sweat equity would help you refi. You're looking for multi renting lower than market value and check for comps of recently sold multis in the area. Adding value is limited since it's not a commercial property with various streams of income and routes for decreasing costs. However depending on your location you could rent by the room or use VRBO or something. Both of which would bet you more than renting out a whole unit. It would help with cash flow but would require more work. This is where building systems will help. I'm sure you'll get a lot more responses soon. This site is a community of knowledge. Just listen to the experienced guys/gals.

Nicholas W. · Answer

Well that's not what I wanted to hear. So in your experience the Cap rate and other supporting factors have no bearing on an appraisal?

Nicholas W. · Answer

Gino,Thanks that's very helpful, sounds like in your case they use kind of a mix between the NOI and a CMA.I was afraid of that as I'd rather them base it strictly on the numbers as I have more control over those.

Nicholas W. · Answer

Jason, that would be ideal, I am self employed in a seasonal industry so I have the time to fix up and add value to a property. My goal would be find a property with low rents due to some deferred maintenance/Capex put in the sweat equity and raise rents a bit while also managing myself/maintaining myself to increase the cap rate as much as possible. I realize that I have to put a value on the time that I spend on the property, but in my position and in the industry I'm in, I often have more time than money.I'd also like to add that I am in no way intending on buy a D class property. Looking in B class neighborhoods, just with deferred maintenance and poor management.