How will a bank appraise my rooming house?

5 Replies

I am looking to (finally) make my first deal on a 3-bedroom single-family home in a college town for about $80,000. But I have a big question.

My intent is to:

1. Purchase with $80,000 cash
2. Some light rehab to create 2 more bedrooms, and fully furnish ($15,000)
3. Turn into a 5-bedroom rooming house for college students
4. Get appraised based on income it generates ($500/bedroom), aiming for at least $130,000 ARV

5. Refinance and take $80,000 out

I am hung up on Step #4. I've read that multi-family properties are appraised based on the income they generate, and single-family homes are appraised based on comps. Do I have any chance of getting a bank to appraise this single-family home based on income and NOT comps, once I've fully converted it into a rooming house, fully rented it, and secured all the necessary city hall approvals?

Thanks for reading!

          @Matthew Becker The appraisal for SFH is based on comps. The idea is that it is the value the bank needs to rely upon should they need to take the collateral back and resell the property. So, the fact that you are renting it out by room doesn't really matter for the bank. If they had to resell the property the only thing that would matter is how much someone else would pay.

          Multi family is different since the buyers would all use the property for income production. That’s why the rental income matters for multi family appraisals.

          Unless the property is a commercial property (5 or more, self-contained rental units), the bank can not focus on the income. They need to foreclose in a default so they will want to liquidate as soon as possible. The SFR pool of buyers is much more likely to be where this will be sold so that is the value the bank will use.

          Like others have said, the bank will appraise the home as a single family based on other comparable sales from similar single families that have sold. No income approach for a single family. 

          Something else you may want to consider is not filling the rooms until after your refinance is done. Not sure about where your house is located, but in my market if you have a home with 5 bedrooms and essentially 4 different tenants with 4 different leases that is considered a boarding house and your house needs to be specifically zoned for that. Your market and/or lender may be different with how they look at that, but it is worth looking into.

          Tenants living in a single family all under 1 lease is OK. 

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