DSCR: Appraisal for rent low with bad comps

[Axel Scaggs]

I'm currently under contract for a 2/1 duplex and the appraisal came in earlier today. Unfortunately, it's put me at a razor thin 1.0 DSCR. The average rents in the area are far above the market rent the appraiser assigned. Unfortunately the current tenants of the property pay even less; $300 below the low appraisal and have been in the unit for over a decade. The overall value of the property appraised at $50k over what I am under contract to pay, which is good, but I'm assuming has little impact on the deal going through the DSCR underwriting.

So, the three comps the appraiser provided seem inadequate to me. Two of the three comps are 1/1s, while my target property is a 2/1 on each side. Their comps are also right next to each-other and have the same owner. The 1/1s rent for $995 and the final market rent he assigned for my target 2/1 duplex is $1000 a month, just $5 more. Comp #3 he provided is closer at $1175 a month, but is still drastically less than anything else on the market and isn’t even active. Is it strange that two of the three comps are not even the same number of bedrooms as mine? There is a big difference in market rent for a 1/1 vs a 2/1, unless you take their opinion, which then I guess it’s 5 bucks.

I looked at active listings on Zillow and there were five good, 2/1 duplex comps within 1 mile that rented for $1350-1700. Additionally, there were 5 1 bedroom duplexes that went for $1050-1400. I complied these and wrote a brief summary that my broker suggested we submit Monday. I know they used CoreLogic for their data, not sure how they feel about Zillow rental listings. Has anyone here experienced anything like this and had any luck appealing?

[Brad S.]

Ok, let me give you some insight from the brain of a longtime appraiser (that’s me — also a broker and investor).

For 2–4 unit residential properties, appraisers usually base their value on comparable sales — not the income approach. So estimated rents often play a smaller role than you might expect. In most cases, the appraiser might use the income method (like GRM) just to support the value they've already developed from sales comps — not to drive the value.

Also, rents can vary a ton with 2–4 unit properties, and consistent rental data is hard to come by. The appraiser probably wasn’t thinking about how much those numbers impact your loan.

Here are a few points that might help explain where they’re coming from:

• Rental data is way less available and less standardized than sales data. A lot of rentals are off-MLS, and there's no reliable place to find actual lease amounts. MLS sales, on the other hand, are verifiable and trackable.

•  If your unit had more or fewer bedrooms than the comps they used, they should’ve adjusted for that. If they didn’t, that’s something you can raise.

•  Active rental listings don’t carry much weight. They just show what a landlord hopes to get — not what renters are actually paying.

•  Some appraisers only search for rentals in the exact same property type (like just duplexes), but in reality, most 2–4 unit rentals pull from the same tenant pool. So it’s reasonable to look across all 2–4 unit types for rent data.

• Others may only search for rentals that are labeled as such in the MLS, instead of looking at recent 2–4 unit sales listings that might mention actual or contract rents. Those sales can be goldmines — sometimes one quadraplex listing gives you 4 rent comps.

•  If those listings include real rent amounts (not just projected), you can even call the agents to verify. That adds weight to your case.

If you decide to challenge the appraisal, just think of it as helping the appraiser — not correcting them. Bring new, solid data they might’ve missed. That makes it easier for them to justify a change based on facts they didn’t have before.

Hope this helps. Good luck!