March 17, 2022
To All Members:
In ongoing discussions with Members, Lenders and other stakeholders, requests for Market Rent opinions for Secondary Suites are becoming more prevalent. Some Members are reporting that virtually every file they receive includes a request for Market Rent.
In an attempt to allow our members to meet the needs of their clients, produce assignment results that are not misleading, and complete these assignment requests, we are providing the following guidance.
It appears that we are facing 3 typical situations when Market Rent opinions are being requested:
- The property has a secondary suite, generally a basement living unit, where the owner is renting out the basement unit, or both the main living unit and the basement unit. Zoning permits the use of the suite, and the owner has documentation to show compliance with building codes, etc. indicating that the suite is in compliance. In either case, renting only the suite or the main living unit and the suite, the owner of the property does not enjoy Fee Simple ownership. They have given up the right to occupy the property in part or in whole, and therefore have Leased Fee ownership. If a client requests an appraisal valuing the Fee Simple Interest in the property, Members are able to complete this assignment. They must indicate if the property is currently owner or tenant occupied, or both, and include a statement similar to: “At the request of the Client the property is being valued in Fee Simple, and the Leased Fee Interest is not being addressed.” (See FAQ 240 of the eUSPAP document). In this case, there is neither a Hypothetical Condition nor an Extraordinary Assumption. Members are cautioned, that with all other opinions and conclusions, the source of the rental data used must be cited in the report.
- A second situation may be that the owner of the property states they have undergone the appropriate inspection process by the JHA, the suite complies with the requirements of zoning, building codes, etc. however they are not able to produce the documentation for the appraiser. In this case the appraiser, may use an Extraordinary Assumption, if they believe it is credible, assuming that the proper inspections and approvals have been granted and the suite legally complies. “At the request of the Client, the opinion of Market Rent is based on the Extraordinary Assumption that the income producing portion of the property can be legally occupied by a Tenant, in compliance with all applicable zoning, building code and fire code regulations. Under this Extraordinary Assumption, the opinion of Market Rent is $X, XXX per month.” Again, sources of data must be reported.
- A third situation may be in a case where there is no proof of compliance with zoning, or in a case where the property is wholly owner occupied. The owner does not intend on renting the property; however, the Client is requesting an opinion of Market Rent. These situations create a Hypothetical Condition. If appropriate, the appraiser may complete the assignment under the Hypothetical Condition “At the request of the Client, the opinion of Market Rent is based on the Hypothetical Condition that the property is available to be legally rented. In such a case, Market Rent is estimated to be $X, XXX per month.” As with the other situations listed above, the sources of data used by the appraiser, in the formation of their opinion of Market Rent, must be cited in the report.
Obviously, the variety of situations where you may be asked to provide an opinion of Market Rent are innumerable. It is recommended that using the principles outlined above, along with logic and sound judgement, you will be able to determine if you are able to meet the needs of your clients, comply with the USPAP, and produce credible assignment results.
Should you have any questions contact Rob MacDonald at 888.399.3366 Ext 2 or Kevin Lonsdale at 888.399.3366 Ext 3.