An Appraisal Continuing Education Course
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Welcome to
{Organization}
Appraising 2-4
Family &
Multi-Family
Properties
3/19/2016
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Appraising 2-4 Family & Multi-Family Properties
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Your Instructor Today is
Instructor Name
@email.edu
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Chapter 1
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Physical and
Legal Concepts
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Chapter Objectives
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• 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
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Key Terms
•Fee Simple Estate
•Gross Lease
•Lease
•Leased Fee Estate
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•Leasehold Estate
•Lessee
•Lessor
•Partial Interest
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Design, Style, Features,
and Marketability
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• 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
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Older Construction
vs. Newer Construction
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• 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
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Unit Mix and Location
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• 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
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Dwellings Designed for Two or More
Units vs. Converted Single-Family
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• Preference/acceptance varies by market
• Appraiser must consider:
– Local zoning
– Building regulations
– Highest and best use
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Interior Entrance vs.
Exterior Entrance
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• 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
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Source of Utilities and Heat
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• 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
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Furniture and Appliances
Furnished by Landlord
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• 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
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Property Compliance Issues
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• 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
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Zoning
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• 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
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Building Codes
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• Typically become greater as the number of
units in the building increases
• Expect additional requirements when living
units are located on upper levels or belowgrade
• Special building codes for properties with
two or more units include:
– Doors, fire barriers, handrails, guards, means of
escape, and alarms and detectors
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Building Codes
continued
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• 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
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Leases
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• 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
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Leases
continued
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• Majority of lease agreements seen in
residential appraisal assignments will be:
– Flat leases
– Variable
– Annual Increase
– Step-up
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Flat Lease
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• 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
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Variable Leases
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• 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
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Step-up Leases
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• 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.
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Annual Increase Leases
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• 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
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Property Rights
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• 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
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Property Rightscontinued
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• 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
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Partial Interest
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• 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
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Chapter 1 Quiz
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1. _____________
Unsupported conclusions
regarding the marketability of a
property containing two or more
living units could lead to poor
assignment results
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Chapter 1 Quiz
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2. Verification of a property’s
compliance with zoning and
building code requirements should
probably be included as part of the
appraiser’s ______
Scope __
of ______
work in an
assignment involving a property
with two or more living units.
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Chapter 1 Quiz
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3. The parties to a lease agreement
lessor and
are known as the ________
the ________.
lessee
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Chapter 1 Quiz
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4. The estate that provides the
tenant a temporary right of
possession without title is known
leasehold estate.
as a ________
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Chapter 1 Quiz
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partial interest is any
5. A ________
interest in real estate that one
may have other than the full
bundle of rights.
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Chapter 1 Quiz
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6. Dwellings that were designed as
two or more living units are
consistently more desirable than
dwellings that have been
converted.
TRUE
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FALSE
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Chapter 1 Quiz
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7. When a property is leased to a
tenant, the property owner no
longer holds a fee simple estate.
TRUE
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FALSE
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Chapter 1 Quiz
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8. A leased fee estate represents the
lessor’s ownership interest in the
property minus the right of
possession.
TRUE
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FALSE
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Chapter 1 Quiz
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9. An appraiser determines the
property interest being appraised in
an assignment during market
analysis.
TRUE
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FALSE
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Chapter 1 Quiz
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10. The marketability of a property
with two or more units is greatly
affected by the perception of
potential renters in the market.
TRUE
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FALSE
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