4-Unit Property: Appraising The Tough Ones

A new appraisal order comes in, and you discover it’s a 4-unit property… and the groaning begins. You don’t have time for this – the phone calls to verify rents, the lack of comps, and more.

What is it that makes these appraisals so challenging?

• At least two approaches will be in the scope of work. Beyond the sales comparison approach, the income approach will be developed. Acquiring the information to develop this approach can be challenging, as often the usual data sources don’t have all the data you’ll need.
• The volume of information that is required. Getting all the data together can be quite a task, as the 2-4 family form has over 100 data points to fill in!

Look from the mindset of the owner/investor

Let’s look from an owner’s point of view. For a single-family home purchase, you most likely have a scenario where the owner will live in the property. It’s likely that the sales comparison approach is most relevant because that’s how the owner valued the 4-unit property as they did their home search by comparing it to other similar homes in the area. The parameters that drove their decision might have been wanting a certain school district, larger square footage or a bigger yard.

Conversely, the investor looks at the 4-unit property for income generation. They’re more likely to consider the total rent it can bring based on its attributes or location. And they’ll carefully look at any dollars they’ll need to spend to repair or remodel in relation to one thing… their return on their investment.

Making this assignment less intimidating is as simple as getting an appraisal plan together.

As we look over the 2-4 family appraisal form, it can be intimidating with all the pages of data needed, from rents to sales and more. So here are some tips to make this job easier!

Gather the information first.

Get the hard part over first, collect all the data and fill in those blanks. Often, the rental information is best gathered by doing data collection the old-fashioned way – by picking up the phone and cold calling agents or landlords. You’ll be surprised how having the data at your fingertips makes the rest of this assignment easier!

Keep a list of investors to help you with the data.

Gathering rental information is made easier if you maintain a database of investors who own properties in certain locations, as you learn those names over time. Chances are you’ve done appraisals for them or their loans before – hang onto that information to use when you need it. Investors are used to these types of questions and are likely to share the information with you.

Develop a solid Gross Rent Multiplier.

Don’t let the GRM intimidate you! It’s a handy tool and not hard to develop as long as you can find the data you need. Start out by searching for sales of similar properties that were leased at the time of sale. Taking the sale price, divided by their rent, will render the GRM for that 4-unit property. With data on several of these rented sales, the GRM will easily be developed. Note that these sales may not be the same sales on your sales grid. If so, just add their info to an addendum instead. Many times, the most similar sales weren’t necessarily leased at the time of sale, as investors leave them vacant for easier showing capability.

Develop a solid opinion of market rent.

Current rent of the subject unit may not be market rent! It’s surprising how often properties are over – or – under rented, for a wide variety of reasons. A long-term tenant may enjoy a rent that hasn’t been increased in years. Or a tenant desperate for a home due to pressure to move may over-pay. It’s up to the appraiser to gather enough data to clearly demonstrate the market rent. Having a well-supported opinion of market rent should lead the appraiser to a well-supported opinion of value by the income approach.

Don’t be intimidated by the bottom of the sales grid.

You know the section – where you’re asked to select indicators including “value per room”, “value per unit”, or “value per bedroom”. Chances are, the value per bedroom or per unit may be your best indicators as they are factors that drive investment value. Look at the ranges of these indicators on your sales grid and let them lead you to a logical value opinion.

Having a good working knowledge of how to appraise 2-4 unit properties can be a benefit to your appraisal career. You can become known as the expert in your area, with the benefits of increased workload as a result.