Valued twice, then reconciled
A two-to-four family gets two analyses, not one.
The first treats it as a building and compares it with sales of similar buildings. The second treats it as an investment and looks at what it earns — the rents in place, the leases, the operating position, the vacancy. Both are developed, and then the report has to say which one carried the conclusion and why, rather than splitting the difference and hoping nobody asks.
Those two figures disagreeing on the first pass is normal. It is usually the most informative thing in the file: it tells you whether the building is priced by investors or by owner-occupiers, and in this part of New Jersey the answer varies street by street.
The form matters, and it is worth settling early
Lending on a two-to-four family uses the small residential income property report, not the single-family form. It has room for a rent schedule and an operating statement, which the single-family form does not.
If you own a three-family and somebody has ordered a 1004, one of you has the wrong form. That is a five-minute fix before the inspection and an expensive one after the report.
What legal status does to the number
This is the finding that causes the most trouble, so here it is in advance.
A great deal of this stock across Hudson, Essex, Passaic and Union predates the zoning that now governs the block. Legally non-conforming use is ordinary and does not, by itself, hurt value much — but it has to be identified, because it bears on what could be rebuilt after a fire.
The harder case is the unit that is not on the certificate of occupancy. An informal fourth apartment inside a legal three-family generally earns no income credit, because that income is not lawfully collectable. The building is appraised as what it legally is, not as what it currently contains. Where the seller’s asking price assumed four rents, the supportable value can land a long way below it, and no appraisal fixes that.
Check the certificate before you commission anything. That advice costs you nothing and it has saved several people a fee.
Rent control, where it applies
There is no statewide rent control in New Jersey. There are local ordinances in a substantial number of municipalities, and they differ from town to town.
Where one applies, it operates as a ceiling on income rather than as a discount to be added back later. An owner who cannot legally charge market rent does not have market rent, and a report that treats the gap as recoverable is describing a building that does not exist.
Access is the thing that decides the schedule
Not the analysis, and not the fee. Access.
Every unit needs to be seen, including the vacant one and the one with the tenant who does not want an appraiser in the apartment. Where I cannot get in, the report describes what was observed elsewhere in the building and states plainly that the remaining unit was estimated from it — which is a weaker report, honestly labelled.
If you know one unit is going to be a problem, tell me when we book rather than on the morning. With notice it is usually solvable. Without it, it is the reason the job takes twelve days instead of seven.
New Jersey specifics
- Most of this stock sits in Hudson, Essex, Passaic and Union, and a great deal of it predates the zoning now governing the block. Legally non-conforming use is common, has to be identified, and bears on what an owner could rebuild after a fire.
- Many towns here require a continued certificate of occupancy when a property sells or a tenant changes. An unregistered unit is a valuation problem rather than a paperwork one — an informal fourth unit inside a legal three-family earns no income credit at all.
- Rent control here is municipal and there is no statewide scheme, so the ordinance and its reach change at every town line. Under an ordinance the contract rent can sit far below market, and that difference is not money an owner can reach.
What you receive
- A report carrying both a sales comparison and an income analysis, with a reconciliation stating which carried the conclusion and why
- Actual rents tested against market rents for that municipality
- A unit-by-unit description where access allowed, and open disclosure where it did not
- Signed USPAP certification
What I need from you
- A rent roll, and the leases where they exist
- Recent operating costs — taxes, insurance, owner-paid utilities, maintenance
- Which units are owner-occupied and which are tenanted
- Early warning about any unit you cannot get me into
- The certificate of occupancy, or continued-occupancy paperwork where the town issues one