All Forum Posts by: Brad S.

All of what you propose to do sounds good. Typically, you would want to see at least the past 2 years of financials (income/expenses, repairs, etc). Ask your family member for those, usually their accountant may have that. If they don't keep good track of those #'s, that may actually present a good opportunity for you to add value to the deal, due to their potential mis-management. They may have higher than normal expenses and/or repair costs, may be below market rents, etc. You may see a way of lowering expenses (separating utilities, adding solar or increasing other efficiencies, etc).

If you don't feel confident enough underwriting the value yourself, then an appraisal may be a good idea. But, I would do research on current market rents in the area, to see where the Subject stands - to see if there is any upside potential there. 

Obviously, a professional physical inspection also, to verify condition. 

Also, are you looking to get a good deal (below market or with some value-add potential) on it, or just good terms (low-down, seller carry, etc)?

Sounds like you are on the right track though. Good luck!

You're on the right track and let me give you some more insight. I am a longtime appraiser, so I have a wee-bit of knowledge and experience regarding this.

Here's where you may want to focus on:

First Sale -
*All cash - this may've caused the seller to accept a lower sale price, knowing that an appraisal and loan contingency may not have been involved, therefore, reducing the uncertainty of the deal falling apart. You may ask the seller if there were any concessions offered to the Buyer (i.e. repair credits, etc). Ask them if there was an appraisal contingency, just to verify if that may have contributed to the seller's motivation to sell for less. Actually, ask them if there were ANY contingencies.

* Low marketing time - less than 1 day - this could be evidence of a few factors: the offer price being below market value, the seller being atypically motivated to sell, buyer/s being atypically motivated to buy, and/or the unit was not given enough time on the "open market" for the market (buyers/sellers) to determine fair market value, thereby, contributing to a below market price sale. 

* Condition/Repair Issues - point out the inferior condition and "deferred maintenance" of the unit, to assist in the explanation of why it sold below market and why yours is worth more, since it is in superior condition. Paint the picture of the unit being in very poor condition, etc, and of course, photos, etc, would help. I would maybe do both a video and photos - you want to given them actual evidence they can either put in their workfile or their report to justify their opinion (i.e. inferior appeal of the comp unit), and a video is probably not the best for that. But, it may be good to show the appraiser (if they are interested), to prove you are not making this up. But, I would be an succinct as possible, just provide the important info, otherwise it may be overwhelming -there's a lot of other info for us to review and go over than just those comps. 

Second Sale - NO marketing time

The same as above except you can explain how this one was NEVER marketed to the open market, never made it on the mls, etc. A good appraiser should see that unit has sold, even if it wasn't on the mls, but I would not be surprised if they do miss it.

Also, interview the agent for those sales and ask if there was any atypical motivation from either buyer or seller, and see if they will offer any info on specific repair issues, etc, many times they will have some insight which can be very beneficial.

FOCUS ON 
1) Buyer/Seller motivation
2) Limited Market Exposure
3) Inferior condition and/or quality

You want to provide as much FACTUAL EVIDENCE to help the Appraiser justify their opinion, that those sales are below market. And if you waiting a year, they may still use 1 or both of those sales, since they are in the Subject project, but they may have an easier time with a higher value, since they may be able to rely on newer sales, but that is no guarantee. 

******************
Here is part of the definition of Market Value that will be used. 

• *buyer and seller are typically motivated;
• *both parties are well informed or well advised, and each acting in what they consider to be in their own best interest;
• *a reasonable time is allowed for exposure in the open market;
• payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
• *the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Here's a good resource for free CA specific Real Estate forms

https://journal.firsttuesday.u...

Exactly, most people equate "value" directly with price/cost or dollar amount or market value, but they miss a main point. There are multiple types of value and we learn this, or should've learned this, in the appraisal world. One such concept is called "value-in-use" which may or may not be equal to the highest and best use of a property. Examples are: a Buyer paying a premium to live across the street from their parents. They would now have close "built-in" babysitters at anytime, etc. Or, Disney purchasing property adjacent to it's current park, so they can expand. That land has more value, beyond market value, to them, since it is contiguous to their current properties and would allow for seamless expansion. ...Or, when celebrities purchase multiple properties around their personal residence, to house their employees or just have additional security and privacy. ...there are many more examples.

https://archive.is/2023.05.23-...

Full text sans paywall...

@Wade Barnett

Hey Wade, not sure if you saw my response to another thread a few days ago, but, essentially, it's not totally that the ADU's are not being valued correctly (which is sometimes the case), but, it's more of not enough data reflecting the market value of those ADU's. We, as Appraisers, reflect what the market values, not the other way around. So, when there are sales comps with similar ADU's then the appraiser has evidence telling them how the market values them.

Generally speaking, we, the Appraisers, do not set values, we report them. We look for market data that reflects how much the market (i.e. Buyers/Sellers) "values" certain property characteristics, and then we use different techniques to form an educated opinion, based on that market evidence. So, essentially, the willing Buyer and Seller are telling us where the value is. The challenges are when there is not enough straight forward evidence of that. Like when there are not enough sales with ADUs, in an area, to reflect how much the market is valuing them. 

But, what you are talking about is a residential neighborhood, where most properties are typically used and bought for residential/owner-occupied purposes. So, generally, they are not being purchased for their income potential, even their ADU income potential. Therefore, the income approach is not a good indicative approach to value. So, that ADU income has a specific value to YOU, but not to the typical buyer in your market, at least not until there is enough data to prove otherwise. When more ADU's are built and properties with them are sold, the ADU values (to the market-"Buyers") will show up in their sales prices, which , in turn will be reflected in the Appraisals, etc. But, even then, those sale prices are most likely not going to be based solely on income, since most buyers are not purchasing them for their investment returns.

And, unless I'm missing anything I don't see how using SB9 would change that, for 2 units. You still end up with the same result and use.  

Now, with that said, I did find a few recent sales with ADU's in your area, between 1.1m-1.6m. So, it looks like there is pretty good data for you to have a general idea of value with the ADU.

Feel free to contact me directly, I'm happy to discuss it further offline.

@Tammy Helble

First off, what county are the duplexes located in?  Depending on where, I may be able to help. 

TX is a non-disclosure state, meaning the sales data are not disclosed publicly. The only was to get the data is directly from the MLS. Easiest way to do that is through a realtor contact. You can get a good idea of the sales price by looking at the listing price prior to it selling and assuming the sales price is close to the list price. You can see listing history on zillow and other similar sites. I am not sure if you can find the listing agents info, but if you can, just call them up and ask them what the final sale price was.

I believe the county needs to provide their data of what comps they used to value your properties. In the counties where my rentals are, they provide that directly through their website. Then, I can use that info and review it and form arguments of why they do not adequately represent my property's value, etc.  I would find out how to get that info first. 

When you mention there "aren't any good comps in the area," what exactly do you mean?
There aren't any recent sales of new duplexes? There aren't any recent sales of duplexes at all? or?
If there aren't any good comps in the area, why are you thinking it is being overvalued by the Assessor? What are you basing that on?

From an Appraiser's viewpoint, if comps are lacking, we would approach it in multiple ways. 
* Look back in time to older comps of similar properties and estimate today's value, based on where the market trended (appreciation, etc).
* Look at recent sales of ANY duplexes in the area and adjust for differences (older built, inferior quality/condition/location, gla, bedroom/bathroom, etc)
* Look at recent sales in other neighborhoods and adjust for differences, including neighborhood differences (Yours might be in a better Nhbd or worse, etc)

We would also to a cost approach. Estimating the cost to build and adding the land value and possibly some expected "entrepreneurial profit."

So, did you build these duplexes, or buy them from a builder or investment company? And either, how much did they cost to build + land cost, or how much did you pay for the completed or proposed new builds? And could the market have increased since you went under contract with them?

So, it's hard to help without more context, like, why do you think their proposed values are too high?

Hey @Wade Barnett

That's the million dollar question. :P
I have a couple of things to say about that:
First off, as a licensed Appraiser, I am legally bound by certain standards and can't openly share specific professional opinions (even ranges), etc, especially on a worldwide public open web platform.  :)

Now, that said, I am happy to discuss generalities offline. Feel free to DM me with your contact info, and we can talk further. I actually have a good client in your area right now, where we are working on a couple of potential prospects. 

I'll address the second part of your post.
As an Appraiser, we are looking to the market (buyers/sellers, sales data, etc) to "tell us" what the value is in a market. And since residential properties are mainly bought as personal residences, they are "valued" by buyers as such and not solely investments (ie. the returns they produce). This is glaringly evident by the lack of significant returns available in our areas. Example being, a $1m house does not pencil out too well with a $3,500/mth rental potential, even if you add a $2,500/mth ADU

Sorry, that's a long of way of saying NO, how you use that residential property (owner occupy or rent both units) wouldn't affect the main valuation methods, which would be the sales-comparison approach. And unfortunately, IMO, many appraisers would probably under value the ADU these days, either due to their lack of knowledge/experience, or due to their lack of willingness to put in the extra work which may be required to research the contributory value of the ADU.

Sorry to contradict @Dominick Johnson, But, in my experience, as an Appraiser, it will most likely always affect appraisal value, or the appraiser is not doing their job. Appraisal value is just a reflection of market value and if the demand is less for those properties on a busy street, then those properties will sell for less. I personally have never had a situation where it did not affect the value, but I suppose there may be areas where it won't. Remember the old adage, "Location, location, location." That is a popular saying for a reason.

As a Broker, I have had clients that would not even consider buying a property on a busy street. I had showed them perfect houses for them, but they were adamant about not be interested, and I don't blame them. I have also had clients that found a house that was great for them, and they were willing to put in an offer, but only for a significantly lower price than other properties they had seen away from the busy street. So, YES, it does affect value, demand, appeal, and may definitely affect how long it takes to sell.

That said, depending on the market conditions, it may not be a significant difference. I have seen markets where inventory was low, the market was hot, lots of demand, etc, and those houses still seemed to do ok, but generally, they are affected somewhat.

You get more noise nuisances, pollution, crime potential, possibly less street parking availability, etc, and many buyers steer clear for those reasons.

In the OP's case, -$50/mth x 12 = $600/yr
If property is held 10+ years with same negative cashflow, that is theoretically only an additional $6k to make up for. And, from my experience, even an average appreciating market can more than make up for that. Look at my real #'s from my previous post, the potential gains were in the multiple 6 figures on some properties, more than being worth a small negative to start with. I don't condone starting at a negative with 1 individual property, but in an aggregate portfolio, it is fine for the right reasons. I don't remember, but I may have been slightly negative for a while on a couple of the properties I listed above, and am very happy with the ones I kept, and regret the ones I didn't.

It's similar to putting a monthly deposit into an IRA or other retirement vehicle, with better potential and inflation hedge IMO.