All Forum Posts by: Alexander V.

If you use rentometer and various apartment searches and believe that a unit should rent for, say, $650, and your real estate agent estimates that it should rent for $600, that's not a big deal. The different isn't that large. But if you can't find a single unit in the entire area that rents for less than $900, yet the agent still says that the unit won't rent for more than $600, how do you handle such a situation? I'd trust an agent over rentometer, but if I am incapable of finding any property near what the agent claims similar properties are renting for, I don't know how to resolve such a blatant disparity in the numbers.

How can we tell whether 1) the agent is correct and it is somehow a fluke that everything else implies a far higher number or 2) the agent is making an inaccurate estimate and the rent shoulder be much higher.

As far as I see it, if you still want the property, you've got two options. Both assume that the basement unit is livable and there are no legal problems.

First, if the lender won't work with you, switch to a different lender. Let your current lender know that you're switching since they won't work with you. Then buy another appraisal. Eating that cost is going to hurt not because of the expense, but because of the pride. But if you get paid at the end of the day, this may be best.

The second option is to go to war with the appraiser. As I said in my initial response, such people are often unwilling to modify their reports, because that makes them look bad. They don't care whether they were actually correct, they care about maintaining their job security and avoiding headaches. So your strategy should be to threaten his job security and give him the biggest headache possible. Now, a lot of people here are too friendly to get mean with people, and they follow the "it never works" mindset. Twice I have done this, and twice I have won. (*Not with an appraiser, but with similar situations*)

If the appraiser is stubborn and tries to fight back, it probably isn't worth your time. But if you threaten to report him to the Pennsylvania DOS for the reason that he flagrantly disregarded section xyz of whatever code they have to follow, you might get a quick concession. And let him know that you're going to hire a different appraiser anyway if he won't change his report. If he truly just fabricated the whole "basement is illegal" thing, he could start sweating, because now you're going to have him on record making those bogus claims while the municipal code says no such thing and another certified appraiser confirms that there is no such problem.

Sorry to hear that. I hope you find a solution, but I don't have an easy one for you. When you encounter procedures that are both bureaucratic and partially subjective, you will find such individuals as this. Even worse, since their reputation for making good judgments is what keeps them in business, they will never admit to their mistakes and damage their own credentials. If your property is properly zoned and constructed as a triplex with a legal basement apartment, then this appraiser could have simply missed the apartment entirely. When you commented on the mistake, he may have pretended that it was deliberate in order to save face. 

@Danica Estrada, when you get a government loan, whether it be a VA loan or an FHA loan, the appraiser is technically required to address the legal use of the property. The full guidance for FHA loans is a colossal 1000+ page document called HUD 4000.1. That document says under zoning that the "FHA requires the Property to comply with all applicable zoning ordinances." If your property does not comply, then it has a last chance to be what is called "legal non-conforming," but that essentially requires that the property is non-conforming to zoning laws because it was built before the zoning laws took effect. In such a situation, the property is "grandfathered" into legal status even though it violates the zoning. If the owner simply built himself an apartment without getting the correct permit, then it was a violation of the zoning and FHA will not (or at least should not) give you a loan on the property as it stands.

As @Alex Horelick said, you may be able to remove some appliances to make the kitchen not a "kitchen" according to the legal definition--that would render the unit not a "unit." But at that point, you're gambling on the appraiser's willingness to work with you to basically evade municipal codes, and I personally wouldn't take that bet.

Hello,

I hope never to be in this situation, but we've all heard or experienced the story of tenants who are evicted (or just leave on bad terms) and trash their unit before they move out. That's what a security deposit is for, but the security deposit may not cover everything in such a situation. Hotels solved this problem long ago--require a credit card on file. If the guest damages the room, just charge their credit card since they already authorized it when they signed in.

I've never heard of a landlord doing this. Is it illegal? Can you require a credit card on file and include a clause in the lease agreement stipulating that damages beyond the security deposit may be charged to the credit card at the prerogative of the unit owner? Does the legality of this vary by state?

@Greg Dickerson, thanks for your input. I clarified as you were making that post that I'm primarily interested in this for the purposes of cash-out refinancing. If I'm going to buy a run down commercial property and fix it with the intent of getting a cash-out refinance after the project is complete, I would want an accurate estimate of what it should appraise for and therefore how much cash I could pull out. If I were just buying as an investment, appraised value wouldn't be a main concern. But if my end goal is a high appraisal and pulling out some equity that I've created, it is a major concern.

@Steve Morris, good response. Thanks for your input.

I'm mainly interested in this topic in order to try to gauge what a commercial property could appraise for if I wanted to do a cash-out refinance. The idea of buying, rehabbing, and streamlining a commercial property that is run down and poorly managed then moving to a cash-out refinance is appealing to me. But it seems extremely dangerous to pay cash for such a project if you don't have a way of first making a decent estimate of what the property will be appraised for after all repairs and streamlining.

Hello,

This has been asked many times, but after reading multiple other forum posts and articles, I still don't feel that I've found a straight answer. The most common appraisal method for commercial properties that I see tossed around on BP is direct capitalization, which essentially divides the NOI by the cap rate to find the market value. While NOI is straightforward, I can't find how that "cap rate" is actually calculated.

Some people say it is based on "market cap rate." Others, both here on BP and elsewhere, insist that there is no such thing as "market cap rate."

Paul Moore wrote a blog here on BP, saying that the most common formula for cap rate is NOI/(current market value). I note that he used "current market value" instead of "purchase price," implying that there are indeed two different cap rates that are used equivocally--one is the actual cap rate for a specific property based on the actual price the investor paid. The other cap rate is a hypothetical figure that relies on what we estimate the property should sell for at a given time in a given location, the "current market value."

My big confusion is that if the actual cap rate is used, then the appraisal is useless since it totally depends on what the last investor paid. For example, if an investor has a junk property with an NOI of $100 but bought it from a friend for a penny, then its value is 100/0.01 = $10,000. The same property purchased by someone who was tricked into paying $100 is valued at 100/100 = $1. Clearly, appraisers don't do this. But if a hypothetical cap rate based on "current market value" is used as in the above blog post, again, we run into problems. The appraiser is trying to determine the market value of the property, but he needs to already know the market value to make that determination since cap rate is NOI/(current market value). Again, this doesn't make sense.

What I think does make sense is that appraisers know what cap rate other investors are typically willing to accept, and they use that as the cap rate when appraising value. But what main factors do they consider when determining what cap rate investors would reasonably accept for the property? 

Thanks

Let's say I want to purchase a duplex, but there are few on the market. Those that do reach the market don't last long; however, duplexes are not rare in the area. I can find a neighborhood full of duplexes, look up the street at the county assessor's office, and get the contact information for every owner on any one of these streets. Many owners are now elderly and have held the property for decades.

Is there any good reason that I shouldn't just pick up the phone and cold-call every owner on the street with an offer that would be a great deal for me? Most will obviously say no, but targeting these duplex-laden neighborhoods, in many counties we could find the contact information for 50 small multi-family owners in less than 5 minutes and call all 50 in one day. It seems like anyone who does this long enough will eventually strike gold.

Has anyone tried this or a similar approach, and how did it go for you?

I was joking about his accidentally writing "infernal" instead of "internal."

If you "would rather invest in something that has a huge payout in 30 years" then go for it. I have no interest in stopping you, and if that is your goal then more power to you. I just don't support casually dismissing people who have different goals as having "misunderstood" what they should be aiming.