How Are Small Multi-Family Properties Appraised?

Question

Guy's I'm looking to get some more information on how 1-4 unit multi-family properties are appraised. The primary reason I'm asking is because for my buy and hold strategy I'd like use hard money loans to buy distressed properties, rehab them, and refinance based on the ARV to a conventional mortgage. Based on all the information I've pulled appraisers will typically use a sales comparison or an income approach.

For the 1-4 unit non commercial properties will appraisers typically use the income approach?

Is there a finite amount of time that the units must be rented for before an appraiser can use an income approach based on the net operating income of my property? Example: If I rehab a property and have it filled with tenants in 6 months and go to refinance my loan in month 7 will an appraiser still use the income approach even though my property has been rented for such a short period of time?

Thanks for any information you guy's can offer!

Steve Wilcox · Answer

Almost all the time the comparable sales approach will be used. However some lenders may use an income approach/ commercial appraisal if you are getting a commercial loan even on a small 2-4 family property, especially if you are refinancing a couple of buildings into one larger loan.

Typically on an investment property I have been asked to show proof of security deposit, leases for tenants and some lenders have asked for 3 months verification that the tenant has been paying (i.e. on the property bank statement).

I have been asked for this on both income and comparable sales refinances, however on comparable sales it has been a criteria of the lender not a portion of the appraisal.

You also will need to consider seasoning requirements a lender will have to allow you to use the new appraised value to refinance against. Most lenders will require you own the property for 12 months before they will allow you to use the new value to pull out cash, before that most will only recognize your purchase price even if you have done major renovations. Some lenders might recognize some level of loan to cost(+/- 80%), but you will have to verify your expenses and they will make sure you are bellow 65% of the new value by appraising.

I recommend that if you are serious you write a 1-2 page plan, put in a pro forma deal of an actual property you would buy, along with a breakdown of the rehab portion, how you plan to manage the tenants (or if you a have a professional manager), ect. Go in to a few local banks in a suit and share your plan and see what they say. Be prepared to hear alot of no's but if you have a great credit score, personally qualify for a loan with verifiable income and tax returns, you should have no problem getting a loan (it just depends what terms they will offer). I also recommend calling some of the national companies like B2R finance, First Key, ect and hear what they can offer. Odds are the rates are higher form national groups compared to local but they do offer 30 year fixed terms which many local do not on these loans. (PM me If you dont find local terms you like, I use first key and have a good contact I can put you in touch with.)

The questions you need are

1. Seasoning, 2. LTV (based on seasoning) 3. Verification of renters 4. Appraisal methods 5. terms of the loans 6. requirements from you (tax returns, verification of income, capital reserves, credit score, ect)

Jeff B. · Answer

"For the 1-4 unit non commercial properties will appraisers typically use the income approach?"  For commercial property (5+) the income approach is used, but 1-4 can go either way.  One could argue that ALL rentals are commercial, but dicker that one with the bank.  IMO, the income approach is far less subjective and sensitive to community / neighborhood issues as the rents substantiate the value.

Jon Holdman · Answer

Comparables is the most common method.  Usually when someone is wanting to use the income method they're trying to get a higher value than the comps justify.

Jennifer T. · Answer

I've purchased two duplexes in my city.  Plus I've had an appraisal ordered for twice for two HELOCs I did.  In all four of those situations, the houses were appraised with a comparative sales approach; however, the appraiser was usually able to find at least 1-2 nearby properties that were also duplexes.

Rental amounts were included in the data for the appraisals, but I don't think they were used at all for determining the appraisal value.  The value was based strictly on a determination of the square footage value multiplied by the sq. ft. of my house.  With a few limited add-ins/subtractions for additional features like garage/deck...though, added nothing for my solar panels (whatever!).

Jon Holdman · Answer

Agree with @Colleen F.   When doing commercial loans on 5+ unit properties the income approach will be more common.

Any situation where comps are hard to find will be problematic.  I was burned on a deal like this - a busy street in this case.  Its a guess as to what an appraiser might find and that makes estimating a value a guessing game, too.

Colleen F. · Answer

I can speak to going through this with a two family and it is comparable property they look at and they will usually go further away and use less comparable properties.  In my experience they would not use an income approach and that is likely common based on what the appraiser said.  It is tough because even in the populated area of NJ this house was in there were not a lot of recent 2 family sales and the appraisal was impacted.

The income model is generally used at 5 units as it is a commercial loan.

Alex Grier · Answer

Gotcha, as a new investor I don't entirely understand the mechanics. However, would you say that appraisers primarily use the comparison model for residential and only tend to gravitate towards the income model for commercial?

Jon Holdman · Answer

That only makes matters worse. The appraiser will try to find something to compare it to.  They may have to go further back in time or further away.  But they're unlikely to switch to the income method because that often gives very different answers.  May depend somewhat on the lender, too.

Alex Grier · Answer

What if there are truly no recent comps though? Multi-family properties that actually have separate units with living areas, kitchens, etc. surely can't be compared to other sf or town homes just because they have the same number of rooms? I don't currently have access to the MLS as I'm not yet a licensed realtor. However, if I search a listing site for recently sold homes in the area that I'm looking at a potential multi-family property I typically can't find any comps.

How Are Small Multi-Family Properties Appraised?

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