9-10. SELECTING COMPARABLE UNITS

This section provides guidance on the items an RCS appraiser must take into account to ensure that units and properties selected as comparables accurately represent the rental market for the subject project:

• A. Six Point Criteria. For each primary unit type identified pursuant to paragraph 9-9.A.2 above, the RCS appraiser must exert a good-faith effort to identify comparable units from 5 properties that meet all 6 of the criteria listed below and compete with the subject for tenants. Specifically, the comparable properties must:

  1. Be in the same market area as the subject project, considering rent levels, housing prices, job opportunities, and other relevant economic indicators.

  2. Be occupied by tenants without tenant-based assistance, residing in unassisted units as defined in paragraph 9-6.A.

  3. Have locations and neighborhood conditions (including crime rates and accessibility to services, employment, transportation, etc.) that are similar to those of the subject project.

  4. Be similar to the subject project in terms of project structure and layout, design, street appeal, age, unit size and mix, project amenities, and utilities.

  5. Have amenities and provide non-shelter services similar to those available at the subject project and do not have significant amenities or non-shelter services beyond those available at the property, taking into account if those services are included in the rent or incidental.

  6. Not be rent-restricted or rent-controlled by a federal, state, local, or other public program. This category includes Low Income Housing Tax Credit (LIHTC), HOME, HOPE VI, state/local rent controlled and rent stabilization units, and all unassisted units in 236, BMIR, 202/811, and Section 515 Rural Development projects.

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If the RCS appraiser cannot find 5 properties that meet these 6 criteria, then the RCS appraiser may use the methods discussed in paragraph B, below.

• B. Insufficient Comparables Meeting the Criteria. HUD recognizes that finding 5 comparables meeting all 6 criteria in paragraph 9-10.A above will be difficult in some markets. When the RCS appraiser makes a good-faith effort to identify 5 comparables that meet all 6 criteria in paragraph 9-10.A but fails to do so, the RCS appraiser may adopt one or more of the following strategies. The RCS appraiser must use professional judgment to decide the pairing and ordering of the alternate strategies listed below, except that using rent-restricted units must be done only as a last resort.

  1. Units with No Restrictions. If a project contains rent-restricted units or units with tenant subsidies but also has other units with no restrictions or subsidies, then the RCS appraiser may use as a comparable a unit that is both unrestricted and unassisted. Such mixes will often exist in LIHTC, tax-exempt, state-financed, HOPE VI, or Section 221(d)(3)/(d)(4) FHA-insured projects.

2. Identity-of-Interest Properties. The RCS appraiser may select a comparable that has the same Ownership/management as the subject project, or is owned or managed by a company/individual having an identity-of-interest (as defined in Chapter 2, paragraph 3 of Handbook 4381.5) with the Owner or Management Agent of the subject project. In such a situation, the RCS appraiser must disclose the nature of the “identity-of-interest” under the section titled “Selection of Comparables” in the RCS report. The RCS appraiser must also take special care to verify the rent at which a unit in the comparable property is leased, preferably through an unrelated party. For example, the RCS appraiser might ask on-site management to provide a copy of a redacted, recently executed lease.

   3. Comparables from Outside the Market Area. If necessary to identify a comparable in a market area that is similar to the market area in which the subject project is located, the RCS appraiser may select a comparable that is in an alternate market area. If equally good comparables are available in more than one alternate market area, then the RCS appraiser must consider using the alternate market area that is nearest the subject project. For Section 8 projects in rural areas, HUD recognizes that it will often be necessary to go to distant, alternate market areas that are sometimes of a different character.

   4. Dissimilar Comparables. If similar comparables are unavailable in the subject’s neighborhood, the RCS appraiser may use comparables that differ from the subject in terms of vintage, construction type, layout, design, and/or services and amenities, but are in the same market. Alternatively, the RCS appraiser may use similar comparables from outside the subject’s market area when comparables in the same category are not available in the subject’s neighborhood. The RCS appraiser must provide market support for the comparable selection process.

   5. Fewer Than Five Comparables. If the above strategies do not produce 5 comparables for each unit type, then the RCS appraiser may use fewer than 5 comparables, provided no unit type has fewer than 3 comparables. Before proceeding with fewer than 5 comparables, the RCS appraiser may ask the Regional Center if it is aware of any comparables not identified by the RCS

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appraiser. As described in 9-10.C.2, below, the RCS appraiser must discuss why fewer than 5 comparables were used.

6. Rent-Restricted Units. If the RCS appraiser cannot find comparables other than rent-restricted units that meet conditions 1 through 5 under paragraph 9-10.A, above, then the RCS appraiser may use the rent-restricted units. Adjustments that would need to be made in the Rent Comparability Grid for such comparables are inherently subjective. Rent-restricted units may be used as comparables only when they reasonably represent the market. The following guidelines apply:

r than rent-restricted units that meet conditions 1 through 5 under paragraph 9-10.A, above, then the RCS appraiser may use the rent-restricted units. Adjustments that would need to be made in the Rent Comparability Grid for such comparables are inherently subjective. Rent-restricted units may be used as comparables only when they reasonably represent the market. The following guidelines apply:

  - a. If the RCS appraiser cannot find 5 unrestricted, similar units in the same market area as the subject project, the RCS appraiser may supplement the rental analysis with rent-restricted units that are available in a nearby, similar market area and meet the requirements of conditions 2 through 5 under paragraph 9-10.A. 

  - b. The RCS appraiser must clearly disclose the use of rent-restricted comparables and the nature of the rent restriction in the part of the RCS where the appraiser provides a narrative description of the selection of comparables and on the _Rent Comparability Grid_ . (Note: The RCS appraiser must not adjust rents simply to account for the fact that the comparable unit is rent restricted.) 

  - c. While rent-restricted units may in some cases reflect market rent (e.g., when LIHTC units make up a large percent of the multifamily units in a neighborhood or nearly all units are rent-controlled), rent-restricted units can also be below market rent. Therefore, the RCS appraiser may want to discuss the use of rent-restricted units with the Owner and HUD appraisal staff before finalizing the selection of comparables. RCS appraisers hired by HUD/CAs to prepare studies pursuant to Section 9-14 must be especially careful to avoid selecting rent-restricted units that would artificially depress the RCS’s rent conclusions. 

  - d. An appraiser may select units within properties subject to rent control ordinances if they were rented recently (within 6 months of the date of the study) and are therefore representative of market rents. 

7. Special Project Types. Appendix 9-6 provides guidance on using comparables drawn from project categories that would not typically be suitable for use as comparables for multifamily rental housing. Project types discussed include cooperative housing, certain elderly/disabled project types, student housing, and congregate-care projects. Newly renovated/recently constructed housing is also cited in Appendix 9-6, because properties from that category are suitable comparables for the subject project only after the impact of any proposed rehabilitation to the subject project is considered.

• C. Comparables Search Procedure. The RCS appraiser must include a narrative in the RCS to describe the process used to identify the set of comparable properties for the subject project.

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1. Document the Search Process. The RCS appraiser must note the means used for comparables selection, whether driving the market area, interviewing the AEs and Owner, consulting subscription databases, or a combination of these approaches.

2. Selected Comparables. For each selected comparable, considered separately, the RCS appraiser must describe the specific characteristics that the respective comparable shares with the subject project (e.g., same market area, similar design and layout) that justify the inclusion of the project in the RCS. The narrative must provide an overall assessment of the availability of comparables, describe the quality of the comparables selected, and state why they were selected.

3. Excluded Comparables. For potential comparables that were excluded, the RCS appraiser must document the reasons for such exclusion. If the unassisted units in the subject project have the same number of bedrooms and were not used as comparables, the RCS appraiser must explain why. If there are unassisted properties near the subject project that share the subject project’s basic characteristics (e.g., number of bedrooms) but were not used as comparables, the RCS appraiser must explain why.

Example: The nearest 1-bedroom units to the subject are clustered just 1 mile away, along Oceanview Boulevard. However, these are mostly large, luxury units, with many amenities and ocean views. Rather than make numerous large adjustments to most of the property comparison features at those buildings, the RCS appraiser instead selected comparables more similar to the subject and located further away, but still within the geographic radius shopped by renters considering living in the subject neighborhood.

4. Insufficient Comparables. If fewer than 5 comparables were provided for any primary unit type, the RCS appraiser must explain why. If the RCS appraiser chooses to use comparables that are significantly different from the subject, the RCS appraiser must describe the research that was performed to determine that more similar comparables were not available. When comparables are outside the subject’s market area, the RCS appraiser must discuss in the RCS what research was done that indicated that better comparables were not available in the subject’s market area. In such instances, the RCS appraiser must also compare economic indicators in the alternate market area with those in the subject’s market area. When using rent-restricted units, the RCS appraiser must discuss in the RCS what research was done that indicated that no other similar, non–rent restricted units were available for use as comparables. The RCS appraiser must also explain the type of restriction (e.g., LIHTC, local rent control, etc.) when using rent-restricted units as comparables.

5. Variety of Comparables. In identifying the 3 to 5 comparables, the RCS appraiser must try to select some comparables that are superior and some that are inferior to the subject project so that the subject is within the range of indicators.