Duplex Appraisal

Appraisers typically use two approaches to estimate the market value of a duplex: the sales comparison approach and the income approach. Unless the property is a newer construction, the cost approach, which determines market value by estimating the construction costs new less any depreciation, is typically not as reliable as the sales and income approaches and is usually omitted.

Much like a single-family home appraisal, the sales comparison approach compares the subject duplex to other similar duplex properties that have recently sold, with adjustments made for significant differences. For example, if the subject has two-bedroom units and it is being compared to a duplex with one two-bedroom unit and one three-bedroom unit, an adjustment for this difference is generally necessary. This is because duplex properties are most often purchased by investors for their cash-flow potential and, all other factors being similar, three-bedroom units produce more income than two-bedroom units. 

Let’s say for example that the subject duplex has 2 two-bedroom units, and it is being compared to a duplex with 1 two-bedroom unit and 1 three-bedroom unit. Let’s also say that two bedroom units rent for $1,000, and three bedroom units rent for $1,200.

 Duplex Appraisal

As you can see, the comparable sales’s annual gross rents are $2,400 more than the subject’s gross market rents. How much does this difference in cash flow impact the property value? One way to determine this is by developing an appropriate, market extracted Gross Rent Multiplier (GRM). (More on GRMs upcoming.) 

Let’s say that the appraiser has determined that the appropriate GRM is 8.1. The adjustment to account for the comparable sale having a 3-bedroom unit is made as follows:

 How to Appraise a Duplex

In this situation, the adjustment necessary to account for the comparable sale having a three-bedroom unit compared to the subject’s two-bedroom unit is $21,060. It is important to note that the adjustment does not always equal the rent difference times the GRM due to economies of scale.  Also, differences in rents and GRMs will vary greatly depending on the location and condition of the property.

Developing an appropriate, market-extracted gross rent multiplier is absolutely essential to appraising a duplex. It is not only used to determine adjustments in the sales comparison approach (as shown above), but it is one of the two most important steps to develop the income approach (the other being determining the subject’s market rent).

The first step in the Income Approach is to determine the subject’s market rent, which may differ from the subject’s current rent. There are several methods that appraisers use to determine market rents including:

• Analyzing Rental Comparables (properties similar to the subject that have rented.)
• Analyzing Advertised Rents (useful in markets where actual rents are hard to come by.)
• Analyzing the Subject’s Current Rents 
• Interviewing Real Estate Agents and Investors Familiar With the Market
• Preparing and/or Reviewing Published Studies

Once the appraiser has reconciled an opinion of the subject’s market rents, its Annual Gross Rent is calculated. Taking the example from above, let’s say the subject duplex has 2 two-bedroom units that rent for $1,000 each. This equates to a total Annual Gross Rent of $24,000.

The last step of the Income Approach is to develop an appropriate the Gross Rent Multiplier (GRM) to be applied to the subject’s Annual Gross Rent. The same methods used to determine the subject’s market rents can be used to develop the GRM. The best method is to find and analyze Gross Rent Multiplier Comparables. This involves looking at sold properties, and dividing the Sale Price by Annual Gross Rents.

 How to determine Gross Rent Multiplier (GRM)

At this point, the appraiser will analyze and compare the  GRM  Comparables to the subject. Factors not built into the rent are considered, including the age and condition of capital improvements (roof, mechanicals, etc.), other expenses not paid by the tenant (taxes, special assessments), vacancy rates, leased fee interest, and investment risk. Generally, the lower the GRM, the more expensive and/or risky the investment. After weighing the similarities and differences of the GRM comparables to the subject, the appraiser reconciles a GRM to be applied to the subject’s gross market rents. 

Let’s say in this situation that we have reconciled a GRM for the subject of 8.1. When applied to the appraiser’s estimate of the property’s annual gross market rent of $24,000, the indicated market value for the property is $194,400.

The last step in the appraisal process is the reconciliation, which considers the strengths and weaknesses of the value indicated by the Sales Comparison Approach and the value indicated by the Income Approach. Once these factors are considered, the appraiser will reconcile a final opinion of the duplex’s market value.

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Top Reasons to Work with Orion Appraisals

By selecting Orion Appraisals for your valuation needs you’ll receive a highly-informative and easy to read appraisal product.

Our appraisers are experts at appraising duplex properties. We are often retained by homeowners, investors, and real estate agents to perform these valuations.

Our team consists of experienced Certified and Licensed Appraisers as well as talented support staff.  Our President, Joe Sullivan, has also obtained his MAI designation.  The MAI designation is a prestigious designation awarded by the Appraisal Institute to those appraisers that have shown a high level of appraisal expertise through a series of coursework, exams, demonstrations, and experience hours. 

We specialize in preparing appraisal reports for non-financing purposes. Most home appraisers work almost exclusively for financial institutions, which have different reporting requirements than property owners, the IRS, and the courts.

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