1 9/15/2015 1 welcome to {organization} appraising 2-4 family & multi-family properties an...
TRANSCRIPT
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Welcome to{Organization}
Appraising 2-4 Family &
Multi-Family Properties
An Appraisal Continuing Education Course
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Instructor [email protected]
Your Instructor Today is
Appraising 2-4 Family & Multi-Family Properties
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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