Income Approach for FHA on Duplex

6 Replies

I recently received an offer to purchase a duplex I own. The appraisal came back at roughly 65K less than asking. When I look at the appraisal, I see that he struggled to find comparable properties in the area and ended up using duplex properties 12 and 13 miles away... OK I get it. However, on his income approach, he decided to use only rents for 1/2 (1 unit) of the duplex (stating that with FHA owner-occupied loans, he can only use the income from the half the owner will not live in). There is no way this can be correct! Is he right?

Originally posted by @Phil Bullock :

I recently received an offer to purchase a duplex I own. The appraisal came back at roughly 65K less than asking. When I look at the appraisal, I see that he struggled to find comparable properties in the area and ended up using duplex properties 12 and 13 miles away... OK I get it. However, on his income approach, he decided to use only rents for 1/2 (1 unit) of the duplex (stating that with FHA owner-occupied loans, he can only use the income from the half the owner will not live in). There is no way this can be correct! Is he right?

Yes, absolutely he's right. As the appraiser mentioned, FHA loans are designed/intended for owner-occupied primary residence; it is assumed you will be living in one of the units. As such, no rent will be eligible for the unit in which you occupy.

Thanks Michael for the response.  I'll accept this to be correct then.  With that said, it still seems wacky considering the appraisal should tell me the value of the property.  The income approach, in this case, does not tell me the value of my property from an income perspective.  It seems highly misleading to call this an "income approach."  I'm not getting a fair assessment from that perspective. Thanks again!

Originally posted by @Phil Bullock :

Thanks Michael for the response.  I'll accept this to be correct then.  With that said, it still seems wacky considering the appraisal should tell me the value of the property.  The income approach, in this case, does not tell me the value of my property from an income perspective.  It seems highly misleading to call this an "income approach."  I'm not getting a fair assessment from that perspective. Thanks again!

I'm sorry; I'm not clear what you're looking for. The appraisal DID give you the value of the property. The value of the property is what the appraiser determined.

FHA, and other government loans, do not use income approach. The income approach is for commercial (5+ units) only.

@Phil Bullock It sounds like the appraisal needed a "1007" supplemental report which gives market value for rental income. The income plays no part in the value of the property for an FHA loan but the buyer might have needed it to qualify for the loan itself. Hope this helps.

Andrew Postell, Lender in Texas (#392627)
817-873-0621
Originally posted by @Phil Bullock :

Thanks Michael for the response.  I'll accept this to be correct then.  With that said, it still seems wacky considering the appraisal should tell me the value of the property.  The income approach, in this case, does not tell me the value of my property from an income perspective.  It seems highly misleading to call this an "income approach."  I'm not getting a fair assessment from that perspective. Thanks again!

A Buyer is entitled to get their own Appraisal, and I guess they can ask the Appraiser to use an income approach, even if that's not how the market determines value. (Comps from "12 and 13 miles away"? That's laughable!)

On the other hand, you are entitled to not accept their lowball Offer! Welcome to BP. All the best...

Welcome to BP @Phil Bullock

Have you run your own numbers?, as if you where looking to buy? Get comps?

See if you are being low-balled.

By the way, you did not mention if you even wanted to sell.  Was the cash needed elsewhere?  Is it time to get out?

Curious.

Kirk

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