Refinance multiplex (4 units)

[John Yoo]

I purchased 4 unit property in 2022. Purchase price was 250K and rent was $2225. Now all the rents are near the market rent (i.e., $4041). I didn't do any rehab but replace the flat roof.

So here is my question. If I select the same zip code multiplex properties, the sales comps (approximately $290K) are not as great as my expectation. However, if I choose 1-2 miles radius (approximately $365K) , it's much better. I understand that it really depends on an appraiser but is there any chance that I could use 1-2 miles radius approach and present it to the appraiser?

Any thoughts?

[Brian Fung]

Quote from @John Yoo:

I purchased 4 unit property in 2022. Purchase price was 250K and rent was $2225. Now all the rents are near the market rent (i.e., $4041). I didn't do any rehab but replace the flat roof.

So here is my question. If I select the same zip code multiplex properties, the sales comps (approximately $290K) are not as great as my expectation. However, if I choose 1-2 miles radius (approximately $365K) , it's much better. I understand that it really depends on an appraiser but is there any chance that I could use 1-2 miles radius approach and present it to the appraiser?

Any thoughts?

 You're going to want to follow the following general rule of thumb:

- 0.5 mile radius
- same zip code
- Sold in last 3 months
- Same unit count
- Same bed/bath count
- Same square footage

(this is not fully exhaustive but they're the big ticket items)

If the appraiser selects comps that are closer matches to the above than the comps you want to use, you're going to have a tough chance arguing for the usage of your comps over theirs. 

Best of luck. Aloha. 

[Greg Kasmer]

John - I believe the appraiser will typically defer to "closer" properties relative to others as along as the sales are within 6-12 months. If that is not the case, they would go further out and perhaps closer to your 1-2 mile radius. I have put together a "packet" for the appraisers before when they come on-site that shares details about the property (rents, square footage, etc..) and I also share a few "target properties" (aka comps) that I modeled after as a "suggestion" to them. I found that most appreciate/like it. Good Luck!

[Brian Fung]

Quote from @John Yoo:

I purchased 4 unit property in 2022. Purchase price was 250K and rent was $2225. Now all the rents are near the market rent (i.e., $4041). I didn't do any rehab but replace the flat roof.

So here is my question. If I select the same zip code multiplex properties, the sales comps (approximately $290K) are not as great as my expectation. However, if I choose 1-2 miles radius (approximately $365K) , it's much better. I understand that it really depends on an appraiser but is there any chance that I could use 1-2 miles radius approach and present it to the appraiser?

Any thoughts?

 You're going to want to follow the following general rule of thumb:

- 0.5 mile radius
- same zip code
- Sold in last 3 months
- Same unit count
- Same bed/bath count
- Same square footage

(this is not fully exhaustive but they're the big ticket items)

If the appraiser selects comps that are closer matches to the above than the comps you want to use, you're going to have a tough chance arguing for the usage of your comps over theirs. 

Best of luck. Aloha. 

[John Yoo]

@Greg Kasmer@Brian Fung Thank you both. If my property has 4 units (2x2bed/1bath and 2x1bed/1bath), I need to look for the similar quadplex within 1-2 miles radius to compare. Should I also look at 4x1bed/1bath properties?

[Brian Fung]

Quote from @John Yoo:

@Greg Kasmer@Brian Fung Thank you both. If my property has 4 units (2x2bed/1bath and 2x1bed/1bath), I need to look for the similar quadplex within 1-2 miles radius to compare. Should I also look at 4x1bed/1bath properties?

 Aloha John, 

If the ONLY comps available are (4) 1/1 quadplexes, then the appraiser will likely have to use that. Assuming all other things are equal, the quadplex of 1/1s is going to set the floor value and the appraiser will make line item adjustments on value to back into their opinion of the value of your property. It's also important to note that the industry standard is always going to be to take comps closest to the subject property first. 1+ miles away is considered to be far from the subject property in normal metros. So if you're going 1-2 miles away, make sure you don't have any comps that are closer to your property that could hurt your value. 

If you have a real estate agent that is helping you to find properties, they can help you to pull a CMA which may have comps that normal aggregators like zillow and redfin may not have. You can also call your property manager if you use a professional management company to see if their portfolio has anyone that recently purchased or currently owns properties in the area that are thinking about selling (just to help you rationalize your value better). If you DM me with the address, I can have my team do some basic due diligence for you to see if we can point you in a better direction. It's hard to give the best response without seeing the data and the market you're in for ourselves.

Good luck either way. Aloha. 

[Erik Estrada]

Quote from @John Yoo:

I purchased 4 unit property in 2022. Purchase price was 250K and rent was $2225. Now all the rents are near the market rent (i.e., $4041). I didn't do any rehab but replace the flat roof.

So here is my question. If I select the same zip code multiplex properties, the sales comps (approximately $290K) are not as great as my expectation. However, if I choose 1-2 miles radius (approximately $365K) , it's much better. I understand that it really depends on an appraiser but is there any chance that I could use 1-2 miles radius approach and present it to the appraiser?

Any thoughts?

The main issue is getting the appraiser to consider your comps over theirs. In this market, many appraisers are reluctant to reconsider values. 

You also have to factor in lender appraisal reviews. If this is a refinance, a lot of lenders are looking at values more closely and will either agree with the appraised value, require a secondary report, or just cut the value all together. 

If I were in your shoes, I would change my mentality to how can I convince an appraiser to give me more value to what is the worst case scenario, if the value comes in lower. 

[Gregory Schwartz]

Call your friendly local appraiser. I've had great conversations based on similar concerns with my local appraiser. Usually, they are happy to talk to someone who's not angry with them due to a low appraisal value haha. 

[Katherine Blazer]

You can always leave a packet and highlight your property details and the comps you believe are stronger than others. Check your state's guidelines.. though. 

[Brad S.]

Longtime appraiser here.  

* 2-4 unit properties are residential and mainly valued based on sales-comparison, not income. Income approach should play some role, but not major. The fact that you increased the income from $2,225 to $4,041 is great and I would think should contribute to a higher valuation, but that depends on many other factors.

* Since you didn't significantly change the condition or quality of the property, any increase in value would be due to either you paying under market value originally, or appreciation due to buyers paying more for similar properties in the area. That would be for you to research and decide.

* The value of your property is based on SIMILAR recent sales. SIMILAR means unit configuration, # of units, bed/bath count, relative unit size, garage/s, etc. It also, and VERY IMPORTANTLY means SIMILAR LOCATION/AREA. What you are describing (i.e. expanding search area to 1-2 mile radius) sounds like "shopping for higher priced sales" as opposed to looking for recent similar sales in a similar market area. In other words, it sounds like you are saying, "I want to use these sales over here, because they appear to give my property a higher value." But, that's not how values or markets work and any reasonable appraiser will not widen their search criteria just because values aren't at a certain level. Although, they may widen their search if there are a lack of similar sales in the Subject's market area.

Based on what you are saying, the properties located beyond your property's zip code and within the 1-2 miles radius, are in a higher demand market area, with greater market appeal and therefore higher values - for some reason. And, if I (an appraiser) decide I need to use comps in a different area, I should analyze the area and see if any location adjustments are necessary (i.e. are those comps in a more desirable area/location, etc,). And if those comps are determined to be in a higher demand/desirable area they would be adjusted downward for superior location and the Subject value would end up in the vicinity of the closer comps anyway.

If there are "good" comps within close proximity and within the same market area as the Subject, an appraiser is not justified to look beyond that for higher valued sales comps. But, I have also seen many "questionable" appraisals/appraisers, so it is possible that you get someone who doesn't know any better.  :)

[John Yoo]

Quote from @Brad S.:

Longtime appraiser here.  

* 2-4 unit properties are residential and mainly valued based on sales-comparison, not income. Income approach should play some role, but not major. The fact that you increased the income from $2,225 to $4,041 is great and I would think should contribute to a higher valuation, but that depends on many other factors.

* Since you didn't significantly change the condition or quality of the property, any increase in value would be due to either you paying under market value originally, or appreciation due to buyers paying more for similar properties in the area. That would be for you to research and decide.

* The value of your property is based on SIMILAR recent sales. SIMILAR means unit configuration, # of units, bed/bath count, relative unit size, garage/s, etc. It also, and VERY IMPORTANTLY means SIMILAR LOCATION/AREA. What you are describing (i.e. expanding search area to 1-2 mile radius) sounds like "shopping for higher priced sales" as opposed to looking for recent similar sales in a similar market area. In other words, it sounds like you are saying, "I want to use these sales over here, because they appear to give my property a higher value." But, that's not how values or markets work and any reasonable appraiser will not widen their search criteria just because values aren't at a certain level. Although, they may widen their search if there are a lack of similar sales in the Subject's market area.

Based on what you are saying, the properties located beyond your property's zip code and within the 1-2 miles radius, are in a higher demand market area, with greater market appeal and therefore higher values - for some reason. And, if I (an appraiser) decide I need to use comps in a different area, I should analyze the area and see if any location adjustments are necessary (i.e. are those comps in a more desirable area/location, etc,). And if those comps are determined to be in a higher demand/desirable area they would be adjusted downward for superior location and the Subject value would end up in the vicinity of the closer comps anyway.

If there are "good" comps within close proximity and within the same market area as the Subject, an appraiser is not justified to look beyond that for higher valued sales comps. But, I have also seen many "questionable" appraisals/appraisers, so it is possible that you get someone who doesn't know any better.  :)

Thanks Brad for the detailed explanation. 

I looked at the properties (similar properties - same number of units with same bed/bath) within 90 days recent sold. If I filter this within the same zip code, I could find one property (sold last Dec at $269K) and this property is about 1.3 miles from the subject property. However, if I use the similar approach not within the same zip code but same mile radius (1.3), I could find two properties at $410K and 390K. Both sold in April 2024. In this case, can I assume that these two properties which sold recently are more accurate values?

[Brad S.]

Quote from @John Yoo:

I looked at the properties (similar properties - same number of units with same bed/bath) within 90 days recent sold. If I filter this within the same zip code, I could find one property (sold last Dec at $269K) and this property is about 1.3 miles from the subject property. However, if I use the similar approach not within the same zip code but same mile radius (1.3), I could find two properties at $410K and 390K. Both sold in April 2024. In this case, can I assume that these two properties which sold recently are more accurate values?

Got it. That additional detail helps.
So, assuming those more recent sales are considered to be in the same or similar "market area" and have similar locational appeal, than it would make sense that those would be more representative of the current Subject value, then the Dec 2023 sale.

It may be market dependent, but there are very few areas where zip code would be the defining factor in location or market area. But, some areas the zip code makes a big difference, like 90210 in Beverly Hills and other Bev Hills location with different zips.
As long as the locational characteristics, including zoning, appeal, school districts, etc, are similar.

So, yes, you're argument may be reasonable.

[John Yoo]

Quote from @Brad S.:

Quote from @John Yoo:

I looked at the properties (similar properties - same number of units with same bed/bath) within 90 days recent sold. If I filter this within the same zip code, I could find one property (sold last Dec at $269K) and this property is about 1.3 miles from the subject property. However, if I use the similar approach not within the same zip code but same mile radius (1.3), I could find two properties at $410K and 390K. Both sold in April 2024. In this case, can I assume that these two properties which sold recently are more accurate values?

Got it. That additional detail helps.
So, assuming those more recent sales are considered to be in the same or similar "market area" and have similar locational appeal, than it would make sense that those would be more representative of the current Subject value, then the Dec 2023 sale.

It may be market dependent, but there are very few areas where zip code would be the defining factor in location or market area. But, some areas the zip code makes a big difference, like 90210 in Beverly Hills.
As long as the locational characteristics, including zoning, appeal, school districts, etc, are similar.

So, yes, you're argument may be reasonable.

My property is between a good and bad neighborhood. Literally in the middle area lol. So east side sales comp is much better than the west side (because of crime rates). I feel now confident to proceed with this refinance. Thanks again Brad!

[Brad S.]

Quote from @John Yoo:

Got it. Hopefully it works out for the better for you. I'm happy to help and even may have a lender referral if you need it. Also, remember, I obviously know nothing about your property or area, so I could be wrong and please don't rely on what I say.  :)  Ok, I just have to put out my disclosure.  :)

Feel free to reach out if you need any help.

[Jake Baker]

@John Yoo

In some markets, appraiser will value price per square foot heavily. Meaning if a comp sold at $200 per sf, they will apply that to your property. With this being 4 units or less, there may be less comps in the area so it okay to assume they may look in a wider radius to back into their value. It's and art not a science.

[Alex Hunt]

Quote from @John Yoo:

I purchased 4 unit property in 2022. Purchase price was 250K and rent was $2225. Now all the rents are near the market rent (i.e., $4041). I didn't do any rehab but replace the flat roof.

So here is my question. If I select the same zip code multiplex properties, the sales comps (approximately $290K) are not as great as my expectation. However, if I choose 1-2 miles radius (approximately $365K) , it's much better. I understand that it really depends on an appraiser but is there any chance that I could use 1-2 miles radius approach and present it to the appraiser?

Any thoughts?

Hey John, very in depth question I love it! 
Yes 1-2 miles is useable for comps for sure. 

Happy to answer any refinance questions!