Saturday, 20 August 2022 | The Latest Buzz for the Appraisal Industry

Valuing Short-Term Rentals

Today’s Buzzcast interview is with Julie Friess, Lead Appraiser of Sedona Appraisal Research Associates LLC. We sat down with Julie and Joan Trice, Founder of Allterra Group, LLC, to discuss her Appraiser Trainee Camp and the short-term rentals impacting the market.

What is Appraisal Camp-Sedona? What can appraisers learn when it comes to short-term and long-term rentals? What role does an appraiser take when sorting between the two? These questions and much more will be answered between Julie and Joan as they dive into this subject.

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  1. The blind leading the blind – and to think this person is responsible for trainees from other fields with no knowledge of appraising. If it is legal, feasible, etc. – there is and will be market data reflecting values associated with residential uses taking advantage of Air B&B opportunities. Joan is correct. Costs associated with legal Air B&B uses may still result in a net income which exceeds long term rent.

  2. Well IN resort areas the income approach is important, however, once the subject is in a primary SF residential (not mostly rented) and the subject is a STR.. The HBU may be for a long term rental. I think owners in these areas (not resorts) are going to unload those properties n the 3 yrs. So this might be a transitory use, as Covid impacted rental markets everywhere.

  3. This is an interesting topic but the discussion didn’t really answer any questions. So the question remains… why should a short term rental be a commercial assignment? I think I could probably write a dissertation on this subject.

    A short term property is a specialized commercial property that looks like a single family residence. Don’t be fooled just because it looks like a duck and walks like a duck… it ain’t a duck I assure you. Residential appraisers are trained in the description and analysis of single family residential and small multi-unit properties. They typically have good skills with respect to a comparative analysis, and, to a slightly lesser extent, skills for analyzing costs and land values for a cost approach. However, the training for income analysis for residential appraisers is typically limited and generally doesn’t include determining leased fee values and values for properties that may or may not include business value.

    The fact of the matter here is that short term nightly rental property transactions have some basis in the property’s ability to generate a return to the buyer. In an income analysis, the appraiser needs to determine which portion of the revenue should be allocated to the real property, the personal property and the going concern or operating business. Since the net revenue cannot be generated without all three components (real property, personal property and going concern), any value generated by an income approach will inherently generate the value of all three (some of which may be zero but that’s a discussion for another day). Thus if value is determined using a gross rent multiplier or other capitalization technique, the value returned includes the personal property, real property and going concern that needs to be divided to determine the value contribution of the real property. The only appraiser’s I have seen with this level of knowledge are SRA’s and they us it so infrequently there may be some question about competency.

    That’s why it’s a commercial assignment.

  4. I would prefer answers to arguments. It is an interesting topic that has not been addressed in this podcast. I would like to get someone on who actually knows what they are talking about. I can find an argument anywhere. ?

  5. After my yard sale (earned $500), does that increase the value of my residence $500? Does that make my residence “commercial”? Is that “commercial activity”? By the way, there is plenty of market data available here (CA) for short term rentals…all we’ve done is use the Fannie Mae 1007 form and revise accordingly for short term data (such as no GRM, etc.). Another “comments page” is added as a next page to the 1007 with specific discussion/instructions that this is no longer a “long term” form. So far lenders have accepted my concocted “short term 1007” form, no questions asked. Maybe someday the “powers that be” will come up with a reasonable “short term 1007” form. Until then…

    1. Thomas, I was wondering if you make any attempt to separate out the real property, personal property and going concern in your reports? We do the same type of report on the appraisal institute form but the length of the addenda typically exceeds the length of the report itself. Depending on the property type we find that the going concern is sometimes nothing and sometimes a significant amount of the sale price. Lately we have been seeing buyers ignore income because of the imbalance of supply and demand but I suspect that is going to change in the very near future.

    2. Are you properly calculating the average daily rate, occupancy rates, expense rates, etc.? These are not typically dealt with in residential appraisals and in every review I have done with an income approach on short term rentals none of those items were addressed correctly.

  6. There is no debate. If Short Term Rental is determined the H&B Use, then this is a commercial appraisal.

    To value a 1-4 unit residential property as a short term rental requires that it is fully furnished including utensils, bedding, etc. That is personal property…. and then those pieces of the valuation puzzle need to be included in the valuation. This includes a determination of the level of physical depreciation and remaining physical or economic life of the Personal property.

    Name one state where a licensed or certified RESIDENTIAL appraiser has the legal right under that state’s law to perform personal property appraisals?

    The AQB differentiates Personal Property Appraisal from Real Property Appraisal and rigorous requirements.

    USPAP states that you must disclose if you are experienced and knowledgeable regarding all aspects of appraising a property. If you have not taken all the courses and experience time necessary per the AQB for personal property appraisal, can you meet the USPAP requirement for appraising a short term rental property with personal property inside of it? If it does not have personal property, then how can it be used as a short term rental?

    Personal property valuation is not part of the Real Property Appraisal that is the 1004 form or any residential form for that matter.

    As part of the H&B use study, if a home’s H&B use is short term rental, it must include a determination of whether or not the personal property and short-lived finishes are adequate for the “market” within which the short-term rental is competing for market share of the population of short-term rentals, which includes local hotels as well as B&Bs.

    Is the H&B use Short-term rental with updated interior finishes? What is the life expectancy of a couch based on a market with predominantly 1-2 night occupants, versus one say in an area where 1-2 weeks is more prevalent? How often does the hotel down the way replace their furnishings? Linens? Cookware or table settings? What type of reserves need to be withheld in order to adequately address these ON-Going costs, hence these are going concern types of analysis, not long term residential rental income which absolutely need to have reserves, but the typical long term rental does not supply furniture, forks, spoons, etc.

    H&B use study also goes beyond just what the income is, it requires a study of the business itself.
    Is the house more profitable renting out individual bedrooms with a community kitchen?
    Does a 2-bedroom home have a better ROI than a 3 bedroom home? What level of deposit is required for short term rentals to cover possible loss or damage?
    These are all forms of analyzing a business.

    I am sorry to say that Joan is 100% wrong. Short term rentals are not the same as long term rentals. They both generate income, but they are different types of income, one is a commercial business, the other is not.

    Just my $0.02, please feel free to correct me where I am wrong.
    Todd Redington, SRA AI-RRS AGA

    1. To shorten up my response….. Valuation of a property is predominantly at its H&B use.
      A short term rental (STR) is only a viable STR if it is furnished.
      If STR is the H&B Use, then the H&B use analysis would HAVE TO include the analysis and valuation of its furnishings/personal property.
      If the H&B Use requires the valuation of PP, then the appraiser must be qualified to value PP because USPAP requires we disclose if we do not have competency in a part of the valuation process….. Please see the AQB requirements for someone to be qualified to perform personal property valuations and then tell me the # of residential appraisers that meet that requirement….. go ahead, I will let you use your toes as well as your fingers if you think there are that many.
      H&B use as short term rentals must analyze what the competing properties are…. Like Hotels, B&Bs, motels. How can a residential H&B use be determined when the H&B use competes with commercially zoned and improved properties?
      Nothing about a STR is SFR or even 2-4 unit.

      If I were on a state review board and a complaint came in about a licensed or certified RESIDENTIAL appraiser were to come in for review I would ask 2 questions with a possible 3rd follow up
      1) What training/experience do you the appraiser have in valuation of personal property?
      If there is an answer in the affirmative I would follow up with…. Does it meet the AQB requirements?
      2) Did you disclose to the client that you did not have the adequate or requisite training/experience to perform personal property appraisals as required by USPAP?

      oh, and the 3rd question….
      Would you like to voluntarily give up your license or do wish to proceed with trying to defend the indefensible.

      Todd Redington, SRA AI-RRS AGA

  7. I have listen to this about four times. What am I am missing? Is the area Julie is talking about only rental single family residences and when these detached single family residences sell or are listed for sale and is the multiple listing information or sources available stating each of the residence’s gross income? Then maybe there is some logic to this. Otherwise I am lost. “Highest and Best Use” is not empty or vacant for an improved residence nor is “short term income” a “Highest and Best Use” as the moderator, Joan stated. There are a number of things Julie stated that make no sense. A residence if it is detached, attached or a condominium unit is not a hotel. What is scary a person without an appraisal background or for that matter a real estate background listens to this and thinks this is logical. I will give the benefit of doubt to Julie and maybe as I stated the area she was describing are short term rentals or vacation residences. Otherwise God have mercy. But again some of things that were discussed were disturbing if both of these ladies are licensed and experienced real estate appraisers.

  8. I’m kind of new here, but I love the serious back and forth. Often times a host is unwilling to say something like, “You still haven’t answered my question.”


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