Appraising a multi-family property is usually more complicated than appraising a single-family home. Two-, three-, or four-unit buildings are sometimes subject to confusion when it comes to arranging a loan for purchase or refinancing. Generally, appraisers use the ‘market value’ approach when appraising these properties, but also must consider the ‘income’ approach.
The purpose of an appraisal is to estimate the current market value of the subject property. The definition of ‘market value’ is the most probable price in terms of money or a comparable consideration which a property will bring in an open competitive market under all conditions requisite to a fair sale, where the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue circumstances.
The appraiser’s valuation is his or her opinion of what the property is worth. It doesn’t matter what the buyer is willing to pay or what the seller is willing to accept. At the end of the day, the valuation report must be backed by real data that support the appraiser’s opinion and would stand up in court.
Appraisals done on single-family homes are different than appraisals done on multi-unit properties. The primary difference between the two involves income. Professional appraisers normally employ the Sales Comparison Approach for both property types, but multi-family properties also require the appraiser to develop a value based on the Income Capitalization Approach or Income Approach. The appraiser then reconciles these two results to determine the final market value of your home. Of course, this can also apply to a rented single family home. An owner-occupied property would likely not require this depth of analysis.
Generally, there are (3) methods used to evaluate a property in an appraisal: the ‘market approach’, the ‘cost approach’, and the ‘income approach’.
The appraisal of a multi-unit property is based partly on the “income approach” to reach the value of the subject property. When a property generates income for it’s owner, that income, or potential for income, helps to substantiate the market value of the property.
With this approach, the appraiser determines the fair market rent of each unit based on comparable rents obtained from other similar properties. The market rent can be adjusted based on concessions typical to the market. The appraiser will then multiply the sum of the rents by the weighted Gross Rent Multiplier (GRM) to arrive at the fair market value of the property.
Single family home appraisals are almost always based on the “market approach.” The value of the property is based on the sales of comparable properties within the previous 12 months and usually within a one mile radius of the subject property. The sales of the comparable properties are then adjusted up or down based on how they compare to the features found in the subject property to generate the actual value of the property.
The cost approach is a real estate valuation method that surmises that the price a buyer should pay for a piece of property should equal the cost to build an equivalent building. In the cost approach, the market price for the property is equal to the cost of land plus cost of construction of all improvements, less depreciation. The cost approach is most reliable when used on newer construction. The methods and results of the cost approach are considered to be less reliable in direct relation to the age of a home.
Every time someone purchases a property that involves bank financing, the bank will require an appraisal to be performed. The appraisal will verify that the purchase price does not exceed the fair market value for the property. The appraisal attempts to protect the bank from the overexposure that would result from funding more than the true value of the property.
Apartment buildings and duplexes are examples of income-producing properties. Appraisers use the income derived from the property as part of the assessment of the market value of the property.
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