1. 1 9/15/2015 1 Welcome to {Organization} Appraising 2-4 Family & Multi-Family Properties An Appraisal Continuing Education Course

2. 1 9/15/2015 2 Instructor Name @email.edu Your Instructor Today is Appraising 2-4 Family & Multi-Family Properties

3. 1 9/15/2015 3 Physical and Legal Concepts Chapter 1

4. 1 9/15/2015 4 Chapter Objectives Upon completion of this chapter, the participant will be able to: –Identify key elements of market analysis for a two- to four-unit or multi-family property –Distinguish which features and characteristics of a two- to four-unit or multi-family residence may be significant to the appraiser’s improvement analysis –Recognize legal concepts and terms applicable to an income-producing property

5. 1 9/15/2015 5 Key Terms Fee Simple Estate Gross Lease Lease Leased Fee Estate Leasehold Estate Lessee Lessor Partial Interest

6. 1 9/15/2015 6 Design, Style, Features, and Marketability What is typical/desirable in one market may not be perceived the same in another Unsupported generalization or subjectivity by the appraiser could lead to poor assignment results Appraisers can consult investors, renters in the market, and real estate professionals to determine marketability

7. 1 9/15/2015 7 Older Construction vs. Newer Construction A recently constructed small residential income property will most likely require less maintenance, upkeep, and expense –Translates to a more secure investment Overall marketability of property could be affected if potential renters are not likewise motivated

8. 1 9/15/2015 8 Unit Mix and Location Markets with notable presence of aging participants may be more accepting of ground floor units –Attitudes regarding security/safety in neighborhood can also influence acceptance of a unit based on floor level Acceptance of basement units vary by market Rent may differ depending on whether unit is accessed via stairs or if they are above/below grade

9. 1 9/15/2015 9 Dwellings Designed for Two or More Units vs. Converted Single-Family Preference/acceptance varies by market Appraiser must consider: –Local zoning –Building regulations –Highest and best use

10. 1 9/15/2015 10 Interior Entrance vs. Exterior Entrance Attitudes and actions of market participants must be researched and recognized in order for appraiser to know how to proceed If appraiser recognizes a market reaction to method of access, comparable data should reflect properties with similar access or an adjustment must be applied

11. 1 9/15/2015 11 Source of Utilities and Heat Providing heat/air-conditioning commonly, without individual unit control, can be a downside to both tenant and property owner Including utilities in the rent is a greater risk to the investor Units with separately metered utilities and individual heating/cooling provisions will typically attract more investors and be more marketable

12. 1 9/15/2015 12 Furniture and Appliances Furnished by Landlord Consider market reactions as they pertain to the influence on market rent Comparable data chosen should reflect similar provisions, or an adjustment should be applied When scope of work includes analysis of operating income, estimated replacement reserves should reflect an applicable amount for future replacement of items

13. 1 9/15/2015 13 Property Compliance Issues Each jurisdiction is responsible for establishing and regulating land use/construction standards Scope of work should probably include verification with experts/jurisdictional authorities Use of extraordinary assumptions might be necessary Especially important in areas undergoing revitalization

14. 1 9/15/2015 14 Zoning Zoning may be categorized by property type, while in other locations, residential zoning may be all inclusive Zoning specifications will break down other major land requirements: –Minimum lot width and lot area (often per unit) –Minimum front, rear, and side yard setbacks Maximum lot coverage –Maximum building height An extraordinary assumption may need to be used

15. 1 9/15/2015 15 Building Codes Typically become greater as the number of units in the building increases Expect additional requirements when living units are located on upper levels or below- grade Special building codes for properties with two or more units include: –Doors, fire barriers, handrails, guards, means of escape, and alarms and detectors

16. 1 9/15/2015 16 Building Codes Items helpful to the appraiser include: –Evidence of approval by a building official, permit, occupancy documentation, or building plans –Interviews with other professionals or officials Scope of work may call for review of a professional compliance survey for credible results –Alternatively, an extraordinary assumption may be used continued

17. 1 9/15/2015 17 Leases Lease: Legal contract between 2 parties that conveys possession of property in exchange for rent –Lessor is the landlord –Lessee is the tenant Gross Lease: Landlord pays for all expenses related to ownership of property

18. 1 9/15/2015 18 Leases Majority of lease agreements seen in residential appraisal assignments will be: –Flat leases –Variable –Annual Increase –Step-up continued

19. 1 9/15/2015 19 Flat Lease An arrangement where the rent payments to the lessor are consistent throughout the duration of the lease term Most common type of lease used in residential situations May also be referred to as a level lease or a level payment lease

20. 1 9/15/2015 20 Variable Leases A lease with rental payments made at regular intervals, but payment amounts may change –Sometimes known as an index lease The longer the lease term, the more likely it is to have some sort of adjustment mechanism written into it, especially net leases Common mechanisms that trigger a change in lease rate or rent: –Consumer Price Index –Variations in the owner’s expenses

21. 1 9/15/2015 21 Step-up Leases Provides for the rent amount to change over time, usually a predetermined percentage at a predetermined interval –Any interval can be specified, but annual increases are the most common May also be called a graduated rental lease Appraisers might encounter residential property that is the subject of such a lease scenario –Usually leases of longer terms.

22. 1 9/15/2015 22 Annual Increase Leases Operates very similarly to a step-up lease with one major exception: –Rather than a percentage increase, the periodic increase specified in the lease is a specific dollar amount Could be found with any type of property

23. 1 9/15/2015 23 Property Rights Fee simple estates –Greatest ownership one can have in real property; it is freely transferable and inheritable, and of indefinite duration, with no conditions on title Leased fee estates –Landlord’s ownership interest in the property Leasehold estates –An estate that gives the tenant a temporary right to possession without title

24. 1 9/15/2015 24 Property Rights Appraisers must recognize what interest is being appraised in the assignment –Takes place during problem identification when determining relevant property characteristics It is the appraiser’s duty to factually disclose and describe terms of any existing lease arrangement related to subject continued

25. 1 9/15/2015 25 Partial Interest Any interest in real estate that one may have, other than the full bundle of rights –Applicable when the subject of an assignment is leased fee or leasehold estate Such assignments can often be complex

26. 1 9/15/2015 26 Chapter 1 Quiz 1. _____________ conclusions regarding the marketability of a property containing two or more living units could lead to poor assignment results Unsupported

27. 1 9/15/2015 27 Chapter 1 Quiz 2. Verification of a property’s compliance with zoning and building code requirements should probably be included as part of the appraiser’s ______ __ ______ in an assignment involving a property with two or more living units. Scope of work

28. 1 9/15/2015 28 Chapter 1 Quiz 3. The parties to a lease agreement are known as the ________ and the ________. lessor lessee

29. 1 9/15/2015 29 Chapter 1 Quiz 4. The estate that provides the tenant a temporary right of possession without title is known as a ________ estate. leasehold

30. 1 9/15/2015 30 Chapter 1 Quiz 5. A ________ interest is any interest in real estate that one may have other than the full bundle of rights. partial

31. 1 9/15/2015 31 Chapter 1 Quiz 6.Dwellings that were designed as two or more living units are consistently more desirable than dwellings that have been converted. TRUEFALSE

32. 1 9/15/2015 32 Chapter 1 Quiz 7. When a property is leased to a tenant, the property owner no longer holds a fee simple estate. TRUEFALSE

33. 1 9/15/2015 33 Chapter 1 Quiz 8. A leased fee estate represents the lessor’s ownership interest in the property minus the right of possession. TRUEFALSE

34. 1 9/15/2015 34 Chapter 1 Quiz 9. An appraiser determines the property interest being appraised in an assignment during market analysis. TRUEFALSE

35. 1 9/15/2015 35 Chapter 1 Quiz 10. The marketability of a property with two or more units is greatly affected by the perception of potential renters in the market. TRUEFALSE