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Welcome to{Organization}

Appraising 2-4 Family &

Multi-Family Properties

An Appraisal Continuing Education Course

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Instructor Name@email.edu

Your Instructor Today is

Appraising 2-4 Family & Multi-Family Properties

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Physical and Legal Concepts

Chapter 1

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Chapter Objectives

• Upon completion of this chapter, the participant will be able to:– Identify key elements of market analysis for a

two- to four-unit or multi-family property– Distinguish which features and characteristics of

a two- to four-unit or multi-family residence may be significant to the appraiser’s improvement analysis

– Recognize legal concepts and terms applicable to an income-producing property

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Key Terms

•Fee Simple Estate

•Gross Lease

•Lease

•Leased Fee Estate

•Leasehold Estate

•Lessee

•Lessor

•Partial Interest

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Design, Style, Features, and Marketability

• What is typical/desirable in one market may not be perceived the same in another

• Unsupported generalization or subjectivity by the appraiser could lead to poor assignment results

• Appraisers can consult investors, renters in the market, and real estate professionals to determine marketability

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Older Construction vs. Newer Construction

• A recently constructed small residential income property will most likely require less maintenance, upkeep, and expense– Translates to a more secure investment

• Overall marketability of property could be affected if potential renters are not likewise motivated

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Unit Mix and Location

• Markets with notable presence of aging participants may be more accepting of ground floor units– Attitudes regarding security/safety in neighborhood

can also influence acceptance of a unit based on floor level

• Acceptance of basement units vary by market• Rent may differ depending on whether unit is

accessed via stairs or if they are above/below grade

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Dwellings Designed for Two or More Units vs. Converted Single-Family

• Preference/acceptance varies by market

• Appraiser must consider:– Local zoning– Building regulations– Highest and best use

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Interior Entrance vs. Exterior Entrance

• Attitudes and actions of market participants must be researched and recognized in order for appraiser to know how to proceed

• If appraiser recognizes a market reaction to method of access, comparable data should reflect properties with similar access or an adjustment must be applied

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Source of Utilities and Heat

• Providing heat/air-conditioning commonly, without individual unit control, can be a downside to both tenant and property owner

• Including utilities in the rent is a greater risk to the investor

• Units with separately metered utilities and individual heating/cooling provisions will typically attract more investors and be more marketable

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Furniture and Appliances Furnished by Landlord

• Consider market reactions as they pertain to the influence on market rent

• Comparable data chosen should reflect similar provisions, or an adjustment should be applied

• When scope of work includes analysis of operating income, estimated replacement reserves should reflect an applicable amount for future replacement of items

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Property Compliance Issues

• Each jurisdiction is responsible for establishing and regulating land use/construction standards

• Scope of work should probably include verification with experts/jurisdictional authorities

• Use of extraordinary assumptions might be necessary

• Especially important in areas undergoing revitalization

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Zoning

• Zoning may be categorized by property type, while in other locations, residential zoning may be all inclusive

• Zoning specifications will break down other major land requirements:– Minimum lot width and lot area (often per unit)– Minimum front, rear, and side yard setbacks

Maximum lot coverage – Maximum building height

• An extraordinary assumption may need to be used

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Building Codes

• Typically become greater as the number of units in the building increases

• Expect additional requirements when living units are located on upper levels or below-grade

• Special building codes for properties with two or more units include:– Doors, fire barriers, handrails, guards, means of

escape, and alarms and detectors

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Building Codes

• Items helpful to the appraiser include:– Evidence of approval by a building official,

permit, occupancy documentation, or building plans

– Interviews with other professionals or officials

• Scope of work may call for review of a professional compliance survey for credible results– Alternatively, an extraordinary assumption may

be used

continued

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Leases

• Lease: Legal contract between 2 parties that conveys possession of property in exchange for rent– Lessor is the landlord

– Lessee is the tenant

• Gross Lease: Landlord pays for all expenses related to ownership of property

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Leases

• Majority of lease agreements seen in residential appraisal assignments will be:– Flat leases

– Variable

– Annual Increase

– Step-up

continued

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Flat Lease

• An arrangement where the rent payments to the lessor are consistent throughout the duration of the lease term

• Most common type of lease used in residential situations

• May also be referred to as a level lease or a level payment lease

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Variable Leases

• A lease with rental payments made at regular intervals, but payment amounts may change– Sometimes known as an index lease

• The longer the lease term, the more likely it is to have some sort of adjustment mechanism written into it, especially net leases

• Common mechanisms that trigger a change in lease rate or rent:– Consumer Price Index

– Variations in the owner’s expenses

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Step-up Leases

• Provides for the rent amount to change over time, usually a predetermined percentage at a predetermined interval– Any interval can be specified, but annual increases

are the most common

• May also be called a graduated rental lease• Appraisers might encounter residential property

that is the subject of such a lease scenario– Usually leases of longer terms.

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Annual Increase Leases

• Operates very similarly to a step-up lease with one major exception:– Rather than a percentage increase, the

periodic increase specified in the lease is a specific dollar amount

• Could be found with any type of property

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Property Rights

• Fee simple estates– Greatest ownership one can have in real

property; it is freely transferable and inheritable, and of indefinite duration, with no conditions on title

• Leased fee estates– Landlord’s ownership interest in the property

• Leasehold estates– An estate that gives the tenant a temporary right

to possession without title

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Property Rights

• Appraisers must recognize what interest is being appraised in the assignment– Takes place during problem identification when

determining relevant property characteristics

• It is the appraiser’s duty to factually disclose and describe terms of any existing lease arrangement related to subject

continued

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Partial Interest

• Any interest in real estate that one may have, other than the full bundle of rights– Applicable when the subject of an

assignment is leased fee or leasehold estate

• Such assignments can often be complex

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Chapter 1 Quiz

1. _____________ conclusions regarding the marketability of a property containing two or more living units could lead to poor assignment results

Unsupported

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Chapter 1 Quiz

2. Verification of a property’s compliance with zoning and building code requirements should probably be included as part of the appraiser’s ______ __ ______ in an assignment involving a property with two or more living units.

Scope of work

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Chapter 1 Quiz

3. The parties to a lease agreement are known as the ________ and the ________.

lessorlessee

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Chapter 1 Quiz

4. The estate that provides the tenant a temporary right of possession without title is known as a ________ estate. leasehold

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Chapter 1 Quiz

5. A ________ interest is any interest in real estate that one may have other than the full bundle of rights.

partial

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Chapter 1 Quiz

6. Dwellings that were designed as two or more living units are consistently more desirable than dwellings that have been converted.

TRUE FALSE

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Chapter 1 Quiz

7. When a property is leased to a tenant, the property owner no longer holds a fee simple estate.

TRUE FALSE

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Chapter 1 Quiz

8. A leased fee estate represents the lessor’s ownership interest in the property minus the right of possession.

TRUE FALSE

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Chapter 1 Quiz

9. An appraiser determines the property interest being appraised in an assignment during market analysis.

TRUE FALSE

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Chapter 1 Quiz

10. The marketability of a property with two or more units is greatly affected by the perception of potential renters in the market.

TRUE FALSE