Quote from @Dalton Dillon:
I'm looking to purchase a duplex using the BRRR method. I'm concerned about the ARV due to there not being any comps in the area. Even as far out as 1 year. My question is - How will an appraiser appraise the property without there being any duplex/triplex's sold within the last year? My agent even went as far as going over to the next city/town which is pretty far out and still nothing. Will the appraiser use singe family comps since a duplex is still residential?
Dalton, I have written about this in length in previous responses on BP, but I will try and be relatively brief here. First, my background is a ~27yr certified appraiser, RE Broker, investor, etc., so I have a very good perspective on this subject. This response is predicated on the experience, skill and knowledge of the appraiser assigned, but an experienced, knowledgeable and skilled appraiser "should" do the following.
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Ok, here are my typical approaches to a complex assignment.
1) determine the most important value characteristics within my subject market (location, school district, # of units, size, lot size, bedroom/bath count, remodeled, new build, specific style, other amenities, etc.)
2) research available comparable sales (with those important characteristics found above) within the designated market area
3) in the absence of recent good comparable sales, I will expand my search back in time, even 5 years (or more) if need be. I will choose the best comparables to use and then do a market analysis to determine any time adjustments required. Example, if my data suggests the market appreciated 10% since a comp sold, I will then adjust that comp up 10% for differing market conditions. I am not limited by when a comp sold, if it makes sense.
4) I will also look beyond the Subject's market area and find any reasonable comps. Then i would determine if there is a market difference in market areas. So, if I found properties sold for an average of 10% more in the comp area, I would adjust that comp down 10% to compare it to the Subject's area. I have gone 10+ miles for certain complex properties (and I am in a pretty densely populated area).
5) I may also use a a triplex and try to determine an adjustment for the 3rd unit, to deduct that from the comp. But, similar to an sfr adjusted up for a 2nd unit, this is typically not the most reliable method. I have used this only for additional support, but not relied upon for final value.
6) And then adjusting any found comps for all the typical characteristics (age, size, location, etc).
Those are the basics.
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Here's some additional appraiser brain droppings, not included in the "brief response".
Assess the important characteristics of the Subject property, in relation to the market. In other words, what are the Subject's characteristics which the market seems to place value on (i.e., specific location, gla size, lot size, specific amenities, remodeled, etc, etc, etc). The appraiser should generally try and rate those important characteristics in order. Example, if the Subject is located in a highly desirable school district where buyers pay more to be in, then that would probably be a very high desirable characteristic on a buyer's wish list. Therefore, comps (comparable sales) should be researched with that in mind.
Basically, as an appraiser, I am not limited to any specific rules or regulations when it comes to picking my comps, deriving my value opinion, etc, as long as my method/s or reasonable, credible, and supportable. So, yes, I can use an sfr sale and adjust it to the Subject, if I absolutely feel a need to. But, that is isn't typically reliable or advisable. And the income approach is not typically reliable, since 2-4 unit property rents typically vary widely, depending on many factors, and the grm's (gross rent multipliers) will reflect that, therefore, causing a wide range in values. Generally, many 2-4 unit properties are not purchased for their income producing abilities alone, as much as larger multi-unit properties are. This fact creates a more wide range of conclusions. But, yes, there are times when those methods do help to support the valuation of a complex assignment.
And a VERY IMPORTANT CONCEPT I learned very early on in my training, I (an appraiser) don't tell you what the value is, the Buyer/s (market data) tell me what the value most reasonably should be. An experienced active investor (or realtor) in a specific area, will typically know more about what their customers (buyers) want, then many appraisers. Appraisers should reflect values, not determine them.
