How are buildings with airbnbs appraised?

Question

I'm looking at a building that is zoned B-1 business and plan to convert it to 3 airbnb units. Once the build out is complete, how would an appraiser value the building given that use? Would they use comps for other B-1 buildings of similar age and Sqft or consider its use? I'm concerned that appraisers aren't familiar with this type of use and will opt for a generic business use. Any insight from those who are appraisers or have airbnbs?

any posts are a few years old at this point.
Thanks!

any posts are a few years old at this point.Thanks!

Joshua Strickland · Answer

Triple check with the local planning and zoning department that you can run STRs in a business zoning district. Most will give you a zoning confirmation letter. STRs are a business but typically considered residential in my experience.

Steven Goldman · Answer

Many of our clients focus on AIRBNB opportunities. The appraiser will value the building based on the lenders request. First they will look at the sold comps. in the immediate vicinity of the property. Than they will, if asked, give a fair rental appraisal based on the average annual rents for each unit. I think you are asking this question: How will a lender determine debt service coverage for a proposed Airbnb?  This would determine the maximum loan to value that the property would support. Only a very few lenders will use AIRDNA average rent to determine debt service coverage ratio. (D.S.C.R.) Forget the banks and also, forget about 3.8 or 4.2 percent interest, If you need the D.S.C.R. to be determined by AIRDNA than you will be working with a specialty funding company. Rates between 5.5-6.5 but thirty year fixed available. Good luck!

Joshua Strickland · Answer

@Dave Carpenter I’m not sure how an entire building would appraise, but in the single family house str space the income has not been taken into consideration typically. What a house is appraising for is the same as if you were buying it as a primary residence from what I’ve seen.

Scott Kelley · Answer

@Steven Goldman are there other airbnb close? What in the appraisers opinion is the highest and best use for the property? If it hasnt been a airbnb but is in a area that is primary med or office space the appraiser will more than likely compare it to those. The airbnb model is so new to appraiser community.  Especially if there arent any past rents from the property ir similar properties that have sold as airbnbs.

Patrick Britton · Answer

@Dave Carpenter

In short, it depends on the lender.  Keep in mind that it is the lender who is the client of the appraiser.  Yes, 99% of the time it is the borrower who pays for the appraisal but guess what, it is the lender’s report and the lender decides the purpose of the appraisal.  I know what you're thinking and I agree:  That doesn't seem right.

The overwhelming percentage of appraisals are done using the sales comparison approach.  I would be hard pressed to find any lender or appraiser who regularly uses the income approach to valuing any property with fewer than five units.  in fact, an appraiser might even lose their license if they did that.

Lastly, appraisers have not been provided guidance on airbnb by the uniform standards of professional appraisal practice.  to date, the argument is that the income generated from short term rentals is so highly variable no lender can bank on an amount provided by the borrower, even if the borrower provides a plethora of documentation another supporting evidence.

The only possible wiggle room would be if a certified general appraiser uses other similarly zoned motels, hotels or the sort.

But please, if you're looking at the massive amount of income generated through short term rentals and believe that an appraiser is going to use those numbers to determine value, I'm sorry to inform you that this is not going to happen.  However, check and recheck and then check again with your loan officer or commercial banker.

Steven Goldman · Answer

After reading some of the other worthy contributors I add this: If the property was already operating as an Airbnb than the lender may use the income for debt service coverage purposes. The appraiser is going to use the comparative long term rental income approach, as is the bank. (I know of no bank that will use comparative income approach based on Airbnb income. So do not pay Airbnb prices for a property, pay its actual current value. You are value adding with the Airbnb.

The lenders are most comfortable with long term leases. Only a few funding companies will consider Airbnb income when calculating D.S.C.R.

William Beck · Answer

If you are using appraisal with plan for commercial use they may be able to factor historical information, but I would doubt they'd have the experience or speculation to factor what potential short term rental income could be. This is definitely an industry challenge as revenue can have a wide range.

Caleb Brown · Answer

@William Beck

Will Gaston · Answer

@Dave Carpenter assuming my market and lenders, it would be based on sales comps/square footage it were 1-4 units. The rents would have little or no impact, unfortunately.

I think this would change with 5+ units and a true commercial appraisal that was done with an income approach.

I hate that this is the case but from a lender standpoint that can't assume it's highest/best use.

How are buildings with airbnbs appraised?

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