Simply dumping rents into rental grid…
The Fannie Mae Form 1025 is a lame document.
There. I said it. You appraisers out there all know exactly what I’m talking about.
Part of what makes it lame is the goofy layout of the form and what passes for education for appraisers in how to complete it properly.
Too many appraisers haven’t a clue how to compare rents in a two to four unit apartment building. In many cases they simply dump rents into rental grid and magically opine that the subject rents are supported in the market.
What market is that? Actual arm’s length tenants? Section 8 subsidized tenants? Related parties who pay chump change rents? It doesn’t seem to matter.
Is Unit #1 the garden unit or is that Unit #4? What if you can’t legally have a garden unit in the basement? Do I put it on here anyway?
If I have a four-unit building and all of the units are renting for the same amount… what’s the point of repeating this information in four different places?
Why is there one line per comp to put all of the lease expiration dates? Should the net rentable area automatically equal the GBA of each comp?
Besides, GBA (gross building area) and GLA (gross living area) are two different things.
A 2,000 square foot GLA building with a 1,000 square foot basement is actually 3,000 square feet in GBA. GLA is above grade. GBA is above and below grade.
It’s just lame.
But, the form doesn’t seem destined for a much needed makeover anytime soon.
Still, some appraisers seem lost on basic concepts when trying to figure what the market is telling them. Boilerplate becomes a poor substitute for actual analysis. Canned phrases such as: “all rental comps were similar” or “Location, unit sizes, and room counts were all factors in determining rental income” are meaningless filler when the appraiser really doesn’t have anything profound to add about their thought process.
Let’s take a look at some common problems in two to four unit form reports that emerge when complaints come to the Department.
The grids are taken from an actual report. Addresses were removed.
Each rental comp had a full basement just like the subject. It follows that the GBA is short anywhere from 25% to 33%.
Let’s assume that the appraiser meant this to be the same as GLA.
Rental #1 clearly has nothing to do with our subject. It’s half the age, the bath and room counts are outliers, and the building is 40% larger than the subject. The rents per square foot seem like bargains in Rental #1, don’t they? Incidentally, trash collection, or scavenger service isn’t an utility, is it?
Logic problem: Rental #1 was a larger, newer building but is only 2 blocks from the subject.
Unit #2 in Rental #1 has another full bath but is 67 Sq.Ft. smaller than Unit #2 in the subject. Just how small are those rooms?
This appears to be backfilling data in order to make the numbers work. Either the rents are wrong or the unit sizes are wrong.
The other rentals seem to fall within a range of $800 to $950 for a two-bedroom unit. That’s an 18% spread.
Rental #3’s rents don’t even add up. Rentals #2 & #3 are nearly a mile away from the subject in a dense, multi-unit market. Why?
The rents for rental comps #2 & #3 range from $0.73 to $0.80. If we eliminate Rental #1 as an outlier, how come the appraiser concludes a rental rate of $0.82 to $0.89 per square foot for the subject units?
When you examine the forecasted rents below, our subject’s vacant unit mysteriously loses $25 from unfurnished to total rent. Nothing here makes any sense. Especially the word “inspection” in the Comment on lease data, below.
No doubt the 1025 form is poorly cobbled together. Still, forms aren’t built to be USPAP compliant. Only appraisers can be compliant.
Learn your way around the form and figure out how to plug the logic gaps. Don’t rely on canned phrases to save you from actual analysis.
By Lee Lansford – Illinois Appraiser Newsletters – Volume 5, Issue 2