Clasisfication of class A, B, C, D ... MFH and apartments?
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Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
12y
Originally posted by @Jerry N.:
I think I use to know what the classification of class A, B and C apartments meant but recently that knowledge has been challenged so here is my question. Could this very from market to market or even investor to investor? From what I have seen these terms have not been used uniformly by everyone. As an example all my MFH are in the cities not towns. Up to now I have classified these as B and C class. My C class is right in the city clean older building, safe street but areas around are mixed, there are some streets or buildings that I would rather not touch. My B class is still in city but more like a townhouse between 2 family and single family homes very quiet and safe neighborhood. Recently I was investigating potential purchase that was presented to me as C class, however I was shocked with the condition or even amenities of that property. In my judgment this would have been E or F class property Is there some sort of generic rule to classified property by location, price, condition or any other qualities?
Thank you.
Thank you.
Great question. Here is my newbie take on the subject.
A= you and you family would live in it.
B= you and you family could live in it.
C= you and your family could live in it if it was emergency.
D= YOU WOULD RATHER BE CAMPING.
21 Replies
- 14yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
Unfortunately, the definition for A,B,C,D classifications are somewhat elastic and always subject to interpretation. The Appraisal Institute does attempt to define what the characteristics are for each classification of each type of property. Note that these are not absolute definitions, they are merely a list of type of characteristics. So again we come to a judgement decision.
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes12y
Originally posted by @Jerry N.:
I think I use to know what the classification of class A, B and C apartments meant but recently that knowledge has been challenged so here is my question. Could this very from market to market or even investor to investor? From what I have seen these terms have not been used uniformly by everyone. As an example all my MFH are in the cities not towns. Up to now I have classified these as B and C class. My C class is right in the city clean older building, safe street but areas around are mixed, there are some streets or buildings that I would rather not touch. My B class is still in city but more like a townhouse between 2 family and single family homes very quiet and safe neighborhood. Recently I was investigating potential purchase that was presented to me as C class, however I was shocked with the condition or even amenities of that property. In my judgment this would have been E or F class property Is there some sort of generic rule to classified property by location, price, condition or any other qualities?
Thank you.Great question. Here is my newbie take on the subject.
A= you and you family would live in it.
B= you and you family could live in it.
C= you and your family could live in it if it was emergency.
D= YOU WOULD RATHER BE CAMPING.
- Specialist · Rockland, MA · Member since 2010 · 7k+ posts · 2k+ votes12y
My 2 cents
Classification of Properties
A Properties-Cream of the Crop
·Built within last 10 years
·Rented by younger professions
·Command Highest rents
·Amenities Pool, Workout Room, Tennis Clubhouse etc.
·High Speed internet, Alarm systems etc.
·Properties lower maintenance low-risk tenants
·Tenants maybe relocating, looking for a home, Dual Income couples no kids
·Turnover higher than a C Property
·Consider Highest and Best use maybe a special population.
B Properties Still High End
·Built in last 20 years
·Rents quite high not as high as A property
·Tenants white collar workers and higher paid blue collar
C Properties Gold that looks like lead
·Built within the last 30 years.
·Tenants blue collar some government sponsored
·Vehicles in lot >10 years old and > number of pickup trucks
·Most vehicles gone during the day—working
·Some deferred maintenance.
·In rentals forever
D Properties-Worst Area of town
·Built 40 years or more
·Good Cashflow
·Management Intensive
·Not a good starting out property
·Assisted housing, out of prison, hard luck etc.
Grading Areas of the City
A Areas
·Upper level society reside
·High end Properties
·Path of Progress
·Construction tear down old build new
B Areas
·Blue collar workers live
·Business in area serve needs, bowling alleys, Nail salons, pizza movie rentals etc.
·Comb subsidized housing and others
·If you allow subsidized make sure they have a job.
C Areas
·Filled with restaurants and business that support c-type tenants
·Old strip malls in need of repair. Small % vacant
·Area neglected because path of progress went the other way
D Areas
·The area of the city with the most repairs needed.
·Business with bars on the windows
·Gas station attendants stay behind bullet proof windows.
·Higher vacancy rates
·Lots of cars in the street and lots waiting to be worked on.
- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes12y
This is definitely very subjective, and varies greatly by region and property type. There are quite a few threads here dealing with the different "classes", but here is a little multi family example to demonstrate the difference .
Here in San Diego where I live an A class multi family property would likely be a new construction apartment. It would have the best amenities; granite, layout, central A/C ect. It could also be an older area in the downtown or a very desirable beach area like La Jolla that was recently renovated, or was a scrape and rebuild. So the age of the property may have significant bearing on its classification.
Now in an area like @Roy N. lives in Canada, there may be no new construction going on and all of the properties could easily be a minimum of 70-100+ years old. In that case A class could be that it is recently upgraded or is in whatever region is desired by professional(Dr., Lawyer, Acct's) type tenants. And because those property types are common it may even be that an A class property is one that has the "charm" of the old construction even at the sacrifice of some of the modern day efficiency. (Not saying that is the case there but it could be depending on the market)
Where I invest in FL my most run down areas are nothing like what you could find in say Detroit or Chicago or even Miami for that matter. So does that mean there's no D class properties there? No it means my classification of D class for that area will be greatly different than what D class means for those areas.
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes12y
While I agree that age has some effect on the classifaction, but an old property that was was primped up in a high end area could still be an A. I look at was kind of tenant would be attracted to a property. This would include the property and unit condition and the neighborhood and location. 30 year old properties kept up and shined can still bring A clients. The opposite is also true that a run down property can also down quickly.
I was looking at an 170 unit property that had 50 vacancies. Walking through the property you saw men in tank tops smoking and seniors that seemed to be short of a few teeth. I felt that this was a C, C- or even a D property. The saving grace was the neighborhood was at least a B and was a block away from a major hospital. This property was the pimple of the neighborhood. At first I thought if I could get it at the right price, I could bring it up to a B property. A closer look at the units size and layouts had me leaning more toward a C+ clientele. This still would be a vast improvement to this property and the neighborhood. Unfortunately the seller and I could not come to terms that would justify the rehab costs and risk.
My point is that the tenants that your building attracts effects the classification of the building IMHO.
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes12y
Some related links so you can see varied opinions on this:
http://www.biggerpockets.com/forums/12/topics/105631-how-do-class-your-property-?page=1#p680131
- Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes12y
@Paul Timmins , you nailed it in the head.
@Matt R. , good answer also - you're funny.
- Scottsdale, AZ · Member since 2014 · 48 posts · 12 votes12y
So, I'm curious... Let's say you've decided to focus on Class A properties and in your area that means they were built > 4 years ago. Do you sell the building when it gets old enough to be Class B and use the proceeds to buy another, newer, Class A building? Or do you keep renovating every few years to keep it up to Class A status? Or none of the above?
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes12y
You would want to keep it up to the highest level you can to bring in the best price at sale. The caveat to that is, what is it going to cost you. Trying to bring a B up to an A may or may not make financial sense.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes12y
Another factor that is often overlooked is average occupancy levels. While each area will have its own averages, it is clear that in each area, the average occupancy is highest in class A, drops slightly in class B and so forth.
Secondly, amenities are also missed at times. Class A will have many amenities like pool, spa, laundry services and dry cleaning, play areas for children, and possibly gym, etc. As the amenities drop, so does the class of the building.
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes12y
@Will Barnard while I agree with you on the amenities, I have seen many c properties at 100% (due to below market rents) while the A's and B's had many vacancies. Real estate as we know is different Market to market.
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes12y
I disagree with the classification of class A, B, C and D based on the age of the building. A tear down building in a class A neighborhood is still a class A. A brand new building in a crap hole is still a class C or D building. You can change everything about a building including tearing it down and rebuilding it, but you cannot change its location.
- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes12y
Originally posted by @Kirsten Walstedt:
So, I'm curious... Let's say you've decided to focus on Class A properties and in your area that means they were built > 4 years ago. Do you sell the building when it gets old enough to be Class B and use the proceeds to buy another, newer, Class A building? Or do you keep renovating every few years to keep it up to Class A status? Or none of the above?The building demographic isn't going to change nearly quickly enough for this to happen as quickly as that. Your personal evaluation in any property should probably look at whether you need to sell or not every 3-5 years or so anyway. That is simply a factor of you not being able to completely control any area you invest in, and as you change investment goals you really need to see if you're better served moving that capital elsewhere. So yes at year 4/5 you should probably evaluate if that property is still considered an A or not and meets your financial goals. If it is then no problem hold on for a few more years, if not then dump it.
Think of the new up and coming area from 15 years ago wherever you lived then, it's likely still fairly desirable even though it's not even close to new anymore. Unless there's a major event causing a sudden shift, it usually would take awhile for everything to age into that B status as either the buildings begin to rundown or another area becomes more trendy.
For an area to go from A to B would probably take at minimum 15 years or so, probably longer the A to B transition usually takes longer than the B to C or C to D. The less desirable an area is initially the more work and less reward there is going to be to maintain it usually, leading to the slide going quicker than it did initially.Think about it like this, in a less desirable C area you only need some criminal activity to take hold and within a year or two it will easily be solidly into the D territory. And those people living in C often are less able or willing to root out the criminal activity to keep their area from sliding. On the other hand bringing an area up is much more difficult usually.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes12y
Originally posted by @Jeff Greenberg:
@Will Barnard while I agree with you on the amenities, I have seen many c properties at 100% (due to below market rents) while the A's and B's had many vacancies. Real estate as we know is different Market to market.Of course any property or number of properties can have higher than "average" occupancy levels, most specifically when they have under priced rents. I was referring to "on average" based on each local area studies.
Saturation is another factor that can change this. Any one area may have a higher demand for lower to middle class than white collar in one area may have too many of one type units over another causing that area to have higher occupancy in a C class over an A class.
All in all, we are on the same page.
Ps. Great meet up today, had a good time.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes12y
Originally posted by @Account Closed:
I disagree with the classification of class A, B, C and D based on the age of the building. A tear down building in a class A neighborhood is still a class A. A brand new building in a crap hole is still a class C or D building. You can change everything about a building including tearing it down and rebuilding it, but you cannot change its location.Minh, I can't speak for everybody, but when I state "age" it is not simply year built, but also "effective year built" thus a building originally built in 1980 but fully remodeled in and out in 2010 would be an A class as far as age, of course area is the most important aspect to class. So even a new build in a C class area is still a C class building but having an A class age.
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes12y
@Will Barnard @Account Closed I prefer to separate the neighborhood classification from the property. An A property in a B neighborhood may have a tough time getting A tenants, none the less it may be an A property. If the neighborhood is upgraded by new construction and becomes an A neighborhood, does the property now become an A?
Location is absolutely important, but classification of a property should be based on effective age, amenities, quality of the units, and the class of tenant that they will attract. The negative neighborhood can reduce the ability for a property to live up to its class, but should not change the classification of the property.
Just as an Olympic caliper athlete on a second rate high school team may not reach his potential. None the less he his an Olympic caliper athlete.
PS. It was a good meeting. Thank you for your help and participation. I look forward to next month in Agoura.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes12y
I do too Jeff, doing so allows you to properly analyze the deal, there is a distinct difference between the class of the property and the class of the location.
- Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes12y
Originally posted by @Account Closed:
A tear down building in a class A neighborhood is still a class A. A brand new building in a crap hole is still a class C or D building. You can change everything about a building including tearing it down and rebuilding it, but you cannot change its location.I have to completely disagree with you here. As I said in an earlier post, an A property in a C or D area will never rent up to its potential, but could still have A amenities and features. If your scenario was true then we should separate the property and the location. D location, must be a D property we are done. Tear down in an A neighborhood being an A property no way.
I know of a 170 unit junker (c-) in a solid B neighborhood, I would love to wholesale at a B price. Do I have any takers.
- Investor · Syracuse, NY · Member since 2014 · 37 posts · 12 votes11y
@Paul Timmins haha wonderful take on the subject : )
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