9-12. COMPUTING ADJUSTED RENTS FOR COMPARABLE UNITS

This section provides guidance to RCS appraisers for deriving an adjusted rent for each comparable . RCS appraisers must review the instructions provided in this section and the lineby-line instructions provided in Appendix 9-1-1, before preparing the Rent Comparability Grid (Form HUD-92273-S8).

• A. Analyze for differences between subject and comparable. To compute the adjusted rent, the RCS appraiser must:

  1. Compute an effective rent by adjusting the most recently charged rent for factors (e.g., rent concessions) listed in Part A of the Rent Comparability Grid .

  2. Determine which differences between the subject and the comparable unit would affect the amount of rent a typical applicant would be willing to pay in the subject’s market area.

  3. For each difference tenants would value, adjust the comparable’s rent by the amount tenants in the subject’s market area would typically pay for that difference. Adjustments must be displayed in dollar amounts.

• B. Adjust the comparable to the subject. Determine what rent the comparable would obtain if the comparable were nearly identical to the subject. For example, if the comparable is:

  1. Inferior to the subject on a characteristic, the RCS appraiser must adjust the comparable upward. The RCS appraiser must enter the adjustment as a positive value to indicate that residents of the comparable would pay more if the comparable had the subject’s characteristic. For example, if the comparable unit size is 100 square feet smaller than the subject units, and the RCS appraiser estimates the value of incremental square feet to be $0.50 per square foot, $50 would be entered on Line 13 of the Rent Comparability Grid (Form HUD-92273S8).

  2. Superior to the subject on a characteristic, the RCS appraiser must adjust the comparable downward. The RCS appraiser must enter the adjustment as a negative value to indicate that residents of the comparable would pay less if the comparable had the subject’s characteristic. For example, if the comparable units include patios

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or balconies and the subject does not, and the RCS appraiser’s research shows that at a third project in this market that offers units both with and without balconies, units with balconies rent for $15 more, –$15 would be entered on Line 14 of the Rent Comparability Grid (Form HUD-92273-S8).

• C. Provide narrative explanations. RCS appraisers must provide a concise but professionally complete explanation as to why each adjustment was made and how the dollar value was derived. The explanations must be clear and convincing to a person not familiar with the properties and market areas involved.

  1. Every line item adjustment on the Rent Comparability Grid requires two separate and distinct explanations in the narrative.

• a. First, RCS appraisers must explain why the adjustment was made. Specifically, RCS appraisers are required to state the reasons that justify an adjustment and explain whether the adjustment would be on a total dollar amount basis (generally used for qualitative adjustment characteristics such as “neighborhood” or “location”) or on a dollar amount per the comparison unit (generally used for adjusting unit size differences).

Example: “Comparables A and B were each adjusted upward by $20 for not offering units with either a patio or balcony.”

• b. Second, RCS appraisers must explain how the dollar value was derived. Specifically, RCS appraisers are required to explain the rationale for their adjustments. This could be supported through paired comparable analysis, interviews with management agents and leasing agents, or prior experience in the subject market. This second component (“how”) of the narrative is required for all adjustments where the amount of adjustment exceeds a nominal amount (a dollar amount or percent of unadjusted rent of the comparable, as defined in Appendix 9-1-1).

Example: “The subject and comparables C, D, and E offer either a balcony or a patio, while comparables A and B do not offer that feature in any of their units. The RCS appraiser recently appraised a project in this market that offered units both with and without balconies. Units with balconies commanded an average additional rent of approximately $20, which provides the basis for the upward adjustment to comparables A and B”.

2. RCS appraisers shall not just reiterate the entries in the data column. It would be unacceptable for an RCS appraiser to state: “A negative adjustment was made to comparable A for location.” Instead, the RCS appraiser must outline the data and logic used to arrive at the adjustment amount.

Example: “Comparable A was adjusted downward to reflect its location in a more desirable neighborhood that consists primarily of single-family homes, has little crime, and has good access to shopping. The adjustment was estimated by comparing the rents at comparable A with those of comparable D, which is in the subject’s neighborhood but otherwise very similar to comparable A. The average value of the superior location was estimated to be $25.”

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3. For all adjustments exceeding a nominal amount (a dollar amount or percent of unadjusted rent of the comparable, as defined in Appendix 9-1-1), the RCS appraiser must present market data to support each conclusion. Section 9-12.C.1 above shows an example of the two-part explanation needed for adjustments exceeding the nominal amount. For minor adjustments (adjustments not exceeding the nominal amount), the RCS appraiser may provide a subjective evaluation of why the observed differences would affect rent.

, as defined in Appendix 9-1-1), the RCS appraiser must present market data to support each conclusion. Section 9-12.C.1 above shows an example of the two-part explanation needed for adjustments exceeding the nominal amount. For minor adjustments (adjustments not exceeding the nominal amount), the RCS appraiser may provide a subjective evaluation of why the observed differences would affect rent.

• D. Pay attention to Special Issues. The RCS appraiser must pay special attention to the detailed guidance for all line items in the Rent Comparability Grid (Form HUD-92273S8) (see Appendix 9-1-1). In particular, there are a few line items that are discussed under “General Instructions” in Appendix 9-1-1 along with common errors associated with those line items. The RCS appraiser must pay special attention to the guidance before making adjustments for those respective line items.

• E. Follow the Guiding Principles when Quantifying Adjustments.

  1. Not all differences between the subject and the comparable require an adjustment. An RCS appraiser must adjust only for differences that would affect how much rent a tenant is willing to pay. If a difference would appear to affect rental value and no adjustment is made, the RCS appraiser must explain why.

  2. An adjustment must reflect the local market. The RCS appraiser must make an adjustment based on what typical renters in the subject’s particular market area would pay. Additionally, tenants in different markets may value amenities and services differently, so the RCS appraiser must be aware of sometimes subtle differences in the value of some project features even within the same community.

Example: Central air conditioning may be less valued by tenants in a beachfront project, compared to tenants at another project, perhaps not far away, but within a location with much warmer summertime temperatures.

3. Adjustments often vary by unit type. Even in the same market, renters may value the same service differently among unit types.

Example: A second bathroom may be more valuable in a 3-bedroom than in a 2- bedroom unit.

4. An adjustment must reflect rental value, not construction cost or the cost of providing a service.

Example: In adjusting for differences such as an elevator, amortizing the cost of the elevator over its useful life is not what a market renter would do. Any adjustment should reflect only what residents would typically pay for the convenience of using the elevator rather than climbing stairs. It is thus imperative that the value of the adjustment be market-derived, from sources such as pairedcomparable analysis or direct interviews with project management personnel, rather than cost-based.

5. Adjustments, whether positive or negative, must be applied consistently. For a given property feature, RCS appraisers must not make small negative adjustments to a comparable when it is the subject that lacks that respective feature, while

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making large positive adjustments to a comparable when it is the subject, rather than the comparable, that includes that same feature.

6. Do not duplicate adjustments. RCS appraisers must be careful not to adjust for the same element in more than one place.

Example: If adjustments are made for “project appeal” (line 8) and “age” (line 7), the RCS appraiser must take care to ensure that the sum of those lines is not more than the value the tenant would place on all features covered by those line items.