Value Add Property - Appraisal?

3 Replies

If I want to purchase a value add 4 unit MF, and want to get an acquisition/construction loan how will the bank appraise the property? Will the bank look at the pro forma rent roll and size the loan from that or the typical appraisal process? If the building is currently vacant will they do a comp appraisal method? Trying to figure out how to get the maximum amount for a loan. 

@Yaya Y. Typically 4 units and under will fall under residential guidelines, and loan decisions will be driven off of your income / credit more so than property performance. This changes once you hit 5+ units and lenders focus more on asset performance. 

If the building is already occupied and you can show leases / rental income, the lender may be able to use that when calculating your dscr. Depending on how much work there needs to be done and what kind of issues are present, you may not qualify for conventional financing and need to go with a local portfolio lender.

A 4-unit MF is valued as residential (via comps) so there is no 'value add' in the sense of increasing value after the purchase. Your value will have to come prior to the purchase by buying it cheap.

@Yaya Y. You can’t base an appraisal on improvements that haven’t been done yet. That makes zero sense. Or, rather, it makes as much sense as you buying a property based on improvements that the current owner hasn’t done. It’s also why you end up with HMLs to loan during that gap period (and fund improvements) until their can be a subsequent refinance of the “improved” value. And that risk is also why HMLs have to charge double (at least) of the bank interest rate, fees, points, etc.

You should also heed the other comments about appraisal methods. If you’re in a quad it’s almost certain you’re trading based on comps, ppsf, etc. So a “new kitchen” will have more value than individually metering utilities. However, utility metering will reducing op-ex and will likely have a much bigger impact on NOI.

Now rents, net income, etc. might be material to you qualifying (if you need the income for the loan) but it usually doesn’t impact the appraisal. Some appraisers May look at it, do some GRM calculations, see that matches up with comps but I’ve never seen a quad appraisal solely based on NOI, cap-rate, etc. like it often is for a commerical property.

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