All Forum Posts by: Brad S.

Quote from @Amran Musaid:

@Chris Seveney so basically you are saying that even though the property is only 1590sqft and not the 2100sqft as advertised once I convert the attic I can get a new appraisal only this time the square footage will really be 2100 sqft right ?

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Yes, if you "legally" convert the attic into legal living area. Meaning, if permits are required, you would need to obtain permits and convert the attic space per local building requirements and standards. It's not just a matter of "finishing" the area and then calling it living area, you need to do it legally, per local requirements. Otherwise, you just have unpermitted (i.e. illegal) finished attic area, which will NOT be considered part of gla (gross living area) for an appraisal. That doesn't mean it doesn't add value, but typically, less than permitted gla.

A few things here:

* Best not to rely on $/sf for valuing a deal. That's how inexperienced Agents/Brokers/investors value properties, not how experienced investors/flippers or Appraisers do it. It may give you quick insight into general value (or value trends), but can be highly misleading in individual deals. Extreme Example: 1,000sf house on 5ksf lot in original condition, on a main highway, does not have the same $/sf as a brand new, highly upgraded 1,000sf house, on 1 acre of beachfront. 

* You can ask to extend the due diligence period, based on false information provided/advertised and newly discovered facts. If they don't agree to extend, then walk away, it probably isn't a deal.  As someone once said, "The best deal I ever made, was the one I walked away from." And someone else (Dolf de Roos) once said "The deal of a lifetime comes once a week." I have found both sayings to be true.

* Rework your #'s and approach based on the new information, and present the # or terms that work for YOU. If they agree, you may have yourself a deal, if they don't, you may have lucked out and avoided an expensive lesson. Remember, a deal is FIRST, how it works for you and THEN you take into account the Seller's needs. If you do it the other way around, you run a charity. Of course, there's nothing wrong with that, if that's your goal.

I'm not a stock guy, so can't offer much insight there, but I don't you see you taking leverage into account.

You mentioned you put 5% down, since you couldn't afford to pay $145k cash. So, using your #'s provided and not accounting for costs, cashflow, etc, here's how it would've looked:

Stocks
$145k invested to get $500k = 245% gain

Your House
$7,250 invested to get $135k in equity = 1,762% gain

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Now, if you had $145k and split it into 20% or 25% down payments, this is what it would've looked like:

20% down
$29k down, 5 houses, $135k equity each house = $675k gain, 366% gain

25% down
$36,250 down, 4 houses, $135k equity each house = $540k gain, 272% gain

and of course you have costs, maintenance, etc., but you also have depreciation, equity paydown by tenants, tax benefits (1031 deferral), and you own a bundle of commodities as an inflation hedge, cashflow, etc, etc. 

As an Appraiser, I would approach it in numerous ways. I do not look at price/sf to estimate values, unless it is for a larger data sample and a general market overview, or something. That is typically not the most accurate way of estimating value.

So, first, the question you should ask is if your Subject is over built for the market. You say the closest size home you can find is 2,100sf, which may mean it is over built for that market. So, basically, if your Subject has an additional 500sf than what is typical for the market, the additional 500sf will most likely have a lower per sf value, than the first 2,100sf. Example, the first 2,100sf may be at $200/sf and the next 500sf may be $100/sf. In other words, the market may not value the additional gla as much as the typical gla. 

But, in any case, I would look at any relatively similar sales and adjust accordingly, with respect to the Subject. But, as in your case, if there are no recent similar sales, I would look at the available sales and pick those which represent my Subject's important specific characteristic, in order to essentially build a model of the Subject. 

First, I would look back in time (up to multiple years ago) to find any sales with reasonably similar gla size, and then figure out a time trending adjustment, to account for any appreciation, etc. I would also look outside the neighborhood or market area, to find similar sized comps and adjust for location/ neighborhood preference differences and other differences. I would look at the closer recent sales and pick those that best represent the Subject's other characteristics (location, bedroom count, bathroom count, remodeled condition/upgraded, 1 level or multi-level, etc, and they you adjust for any differences (gla size, etc), to come up with an estimated value for each comp. And you should derive those adjustments from the market, by looking at recent sales, that are as similar as possible with a few differences, and see what the sales price differences are. Example: Sale #1 is a 3 bedroom and sold for $200k and sale #2 is a 4 bedroom and recently sold for $210K, therefore, it may point to the market valuing the fourth bedroom at around $10k.

THEN, you can look at the ADJUSTED values of those comps to give you a better idea of ARV. That's how an Appraiser would do it.

Quote from @Susan Maneck:

Quote from @Abdul Jabar:

@Susan Maneck . True about CA as most counties prop Tax is around 1% of value- however most desirable cities introduced Mello Roos or Community Development Fund tax which makes CA prop Tax around 1.9% to 2% in most desireable cities.

 Yes, but property values can only rise so fast because of Prop 13 until a property changes hands. In any case property taxes in Mississippi are more like 3-4% if not owner-occupied, and that's based on what they think the property is worth. During the Recession their appraisals were higher about 25% higher than I was paying for the properties! 

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Due to Prop 13, CA is by far the best when it comes to property taxes compared to longtime hold property values (appreciation). Property taxes are a flat 1% of assessed value, then there are local voter indebtedness and other local fees, they add to the tax bill, but the actual taxes are only 1%. Typically, the total works out to be around 1.10-1.20%, I have never seen anything close to 2% in CA. And the assessed value can only increase up to 2% per year (per prop 13). So, I know people that have a 3 million dollar house that is assessed at $230k, with a tax bill around $3,200/yr, which equals around 0.11%

But, of course, CA doesn't typically cashflow well for new purchases, and is very tenant friendly.

The term is "seasoning." Seasoning refers to the length of home ownership. Lenders have their own guidelines for the length of seasoning they require prior to utilizing the "new" current value for refinancing. I haven't been in the loan business for a long time, so I can't tell you what the typical amount of time many lenders require, but maybe someone with more current loan experience will chime in. It used to be 12 months and then some would only require 6 months of seasoning. They also would most probably require a new appraisal and not use your existing one.

Quote from @Sam Dorgalli:

@Andrew Freed I totally respect that and I totally understand. I'm sure 95% of the investors here will say the same thing. I can make excuses (I never flipped a property, therefore no investor will work with me, so why try?), I could lie and say I did or believe in myself, gain as much knowledge as possible and work hard and hope someone else will. That's like saying "you never closed a deal, why should I trust you to look for a home with me or list my house for sale with you?" Not all personal trainers are fit, and not every barber has their hair on point, no brand new surgeon opened up a heart before. It does not make them worse than others, their hustle is what matters. Besides, who trusts their agent 100%, I wouldn't say yes to deal before putting the numbers together myself just because my realtor flipped 6 properties this year. But yes, in the meantime I'm working on gaining all the knowledge from books, webinars and other investors and realtors. :)

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I have purchased multiple deals through agents who have never done deals themselves. As a matter of fact, I question a proposed deal more, if an active RE investor or agent/investor, presents me a deal. There is typically a reason why they aren't doing it themselves. It doesn't mean it isn't a deal, but I may feel a need to evaluate it more thoroughly, before taking on the risk. I have bought deals from active investors/rehabbers/Brokers before, and either their reasons for not doing those deals made sense, they are inexperienced as investors/rehabbers, or I saw the potential that they didn't.

Also, as an experienced investor, I don't need to rely on you for deal evaluation. If I need that, I may need to acquire more knowledge prior to taking that risk. As a licensed professional, I think you should be cautious of how much guidance you provide in that capacity, since you are seeing as the authority, or should be. If you provide some "mis-guidance," you may find yourself in an unwanted predicament.

Now, that said, I do want you to "understand" what a deal is. I have spent way too much time over the years, viewing "potential" deals from agents, etc, that were far from deals!  Many agents think that a 15-20% discount on a house is a "good deal!" But, they don't seem to understand the purchase costs, selling costs, holding costs, financing costs, repair costs, potential market changes, and other risks, etc, and that I deserve some entrepreneurial profit at the end of it, for having the knowledge and resources, and for accepting the risks. 

Your job is to vet the potential deals, do some due diligence, gather preliminary information, have or gain the knowledge of why that may be "a deal," and THEN present it to me to evaluate and move forward or not. That's where your value comes in! And your value rises exponentially, if you can present me with "real deals" that are preferably off-market, or where you have some inside knowledge that can benefit toward acquiring the deal.

Example: an mls listed under contract sale, below market value that is "a deal," and you have knowledge that it is going to fall out of escrow and the Seller needs to get back under contract immediately and is highly motivated. 
or
One of your contacts, maybe a fellow Brokerage mate, has a listing coming up, that is still a pocket listing, but you find out the Seller would love to just get it sold and not deal with putting it out on the open market.
...etc

But, if you tell me about a property that happens to be listed on the mls and "it seems interesting," and all you did was search the mls for potential deals, then your "value" as an investor agent gets drastically reduced. Literally, everyone in the world now has access to properties on the mls (at least unless the Sellers opt-out), and many investors will most likely have direct mls access, so you aren't presenting something to them that they can't find themselves. Of course, you may be doing the work to search, but I can hire a VA at $4/hr to do that, if I wanted.

But, if you find a listing on the mls that fits my criteria, and then you jump on the phone and get some pertinent info from the agent and see potential "deal value," etc, then that might be more interesting.

I think you understand what I'm saying.

And of course, you will gain direct investing knowledge on the way, as well.

With all that said, I am happy to discuss any of this with you, in more detail, if you like. I am a longtime local investor/flipper/Broker/Appraiser as well as OOS rental owner, etc. I am relatively active - just finishing up selling a flip in the Valley, not too far from you. And that deal was an off market deal that came directly from a Broker contact of mine. Feel free to reach out if interested. 

And I would take what @James Hamling said to heart and reread all that he wrote. I feel a lot wisdom oozing out from him.  :)

Quote from @Scott Mac:

Quote from @Brad S.:

Appraiser here
I would use the income approach in the report, but rely mostly on the sales comparison. Income/GRMs tends to vary widely in 2-4 unit properties and is not very consistent in my markets and therefore, typically doesn't seem too meaningful in my 2-4 unit reports.

Won't the lender make the choice to lend on Comps or Income (???)

If most are going for Comps in the last X months, and a few are going for Income (but Income produces a lower value than comps = distressed or etc...) It seems logical the bank would go for Comps (???)

I would think the only way they would go for income is if Income is below Comps for some observable reason, such as obsolescence of units.

But if income was higher than Comps, I would think they would lend on the Comps, because if income is so good, the comps income should soon shoot up--making them true Comps.

Or is there some other logic to the 2,3,4 plex lending I'm missing (???)

Such as owner occupied vs all units rented, or etc....(???)

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A conventional lender is going to base their decision on the appraised value. A HML or private lender may have different criteria and specific guidelines, but most will also go by the final appraised value. The appraiser is going to take all 3 approaches to value (cost, sales comparison, & income) into consideration and develop an opinion based in the relevant approaches and then reconcile those opinions into a value or value range. The final value is not necessarily based on just 1 approach to value, but the reconciling of all relevant approaches, depending on market forces.

So, if a local market appears to put more value on the income a 4-plex produces, then the income approach may be relied on more, but that should also show up in the sales prices, since Buyers are more likely to pay more for the higher income properties, thereby causing higher priced comps. 

But, in my experience and markets, the issue typically is the wide range or unit condition, sizes, characteristics, landlord motivation, etc, which cause a wide range of rents and therefore income, in 2-4 unit properties. And as you pointed out, some of the variance is due to some units being owner occupied. It could also be due to rent controls or other motivation for what owners charge for rent. It isn't as consistent as say, a 20 unit apartment complex. This tends to create a wide range of GRM's (gross rent multipliers) which skew the income approach results. An example is a recent triplex I appraised. My grm range was $235-$387, this translates to a value range for this property between $3,525,000 to $5,805,000. A very wide value range! Even after reconciling the grm's the value range would be significantly wider then looking at the sales comps. My sales comps ranged between 3m and 3.8m. Looking at the data for this specific market, it appears that Buyers are not buying based on similar income requirements/expectations.

Quote from @Katie Landis:

 Under contract at $165K :-)

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CONGRATULATIONS on the Contract!

Now comes the "fun" part ...everything else!  LOL

1) I agree on your decision to go with the conventional loan, if you can afford it. It is not fun getting to the end of a HML term and then scrambling trying to find a replacement! So, at least now, you have some breathing room. I just had a 6 mth rehab project turn into a year, so you never know what's going to happen.

#2) Have you gone to the city to verify the zoning and permits? If not, I definitely would verify the status of the Subject property during your due diligence period. If nothing else, so you can get ahead of your planning. You mentioned it is zoned for a duplex, but is it permitted as one? And if not, what would be required to do so? Those answers might help direct you to your decision of sfr vs duplex.

But, also very important are the #'s. How much income are you projecting as an sfr, and how much as a duplex? What is the ARV as sfr vs duplex?

It sounds like you plan on holding this as an income producing property for longterm, and usually a duplex would bring in more income. You can also do the rehab keeping in mind the possibility of converting back to an sfr, if you decide to sell in the future and that would maximize the value.

Appraiser here
I would use the income approach in the report, but rely mostly on the sales comparison. Income/GRMs tends to vary widely in 2-4 unit properties and is not very consistent in my markets and therefore, typically doesn't seem too meaningful in my 2-4 unit reports.