Doing multifamily property appraisals can be very challenging because they aren’t done the same way as either single-family home or apartment building appraisals. In fact, a multifamily property appraisal is quite different from either. In part, this is because a multifamily property is most often used to produce income rather than as a place for the owner to live.
There are three required approaches appraisers need to examine in calculating the value of a multifamily property: the sales comparison approach, the income approach, and the cost approach. Let’s look at each of these approaches you can use when evaluating a multifamily property.
1. Sales Comparison Approach to Multifamily Property Appraisals
The sales comparison approach compares the subject property to other recently sold properties with similar characteristics in a similar area. Typically, the appraiser compares properties sold in a 12-month period within a one-mile radius (unless there are extenuating circumstances for a more unusual property).
The individual features of the property influence the total value of the subject property. Common characteristics that appraisers evaluate include location, recently sold listings, age, condition, features, and the average price per square foot. This approach is the backbone of a competitive market analysis, because the value is based on the features of the property. However, not all areas have enough multifamily homes to make this approach viable.
2. Income Approach to Multifamily Property Appraisals
This appraisal approach estimates the fair market value of a multifamily property based on the income of that property. The property’s value is based on the current cash flow the owner can receive from rental income.
Market data is examined to determine the typical rent expectation for the subject property. There are several approaches to this method, with the most common being to use a single year’s income to estimate the property’s value.
The appraiser needs to consider how efficiently the property is operating and how many units may be empty at a given time, especially if repairs are needed. This approach can also consider market concessions, making it more adjustable than the other appraisal methods.
3. Cost Approach to Multifamily Property Appraisals
The cost approach is a real estate valuation method that estimates the price a buyer would pay to build the building again. That number is equal to the cost of land and construction, minus depreciation. In other words, what would be needed to replace this building from start to finish?
There are two ways to use the cost approach. One is reproduction: What would it cost to build the property using similar materials? The other is replacement: How much would it cost to build the structure using contemporary methods and materials?
The cost approach is most often used when the property is new because it’s the most accurate. However, it can be less reliable than the income and sales approaches. It requires certain assumptions, such as that the buyer could purchase land to build an identical property.
Other Hurdles to Consider for Multifamily Property Appraisals
There are some other hurdles the appraiser must consider when it comes to multifamily property appraisals.
First, how will the property be used? The appraiser may need to use a different approach if the owner will be living in one of the units and using rent from the other units to get a loan for the building.
The appraiser also always needs to look at the market and what demand for rental units is like (and what demand is likely to be in the foreseeable future).
Appraisers need to think through the best approach for multifamily property appraisals on a case-by-case basis, selecting the one that’s best for that situation.
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