Valuing a condo or small multifamily home

Condo fees, the budget and reserves

Under Massachusetts condominium law, each unit pays common expenses according to its percentage interest, based on an annual budget, and unpaid charges become a lien on the unit. The fee tells you what the association spends; the budget tells you whether it is setting money aside for the roof, elevator, masonry and other large items.

Compare fees only with similar buildings, and look at what each fee includes: heat, hot water, gas, the master insurance policy, parking, amenities. A higher fee that includes heat can cost less in total than a lower fee that does not.

For many conventional loans the lender reviews the project. Under Fannie Mae’s full review, the budget must allocate at least 10% of assessment income to replacement reserves, unless a reserve study supports a different level, and no more than 15% of units may be 60 days or more delinquent on fees. A project that fails these tests limits financing, which narrows the pool of buyers.

Special assessments and major repairs

A special assessment is a charge beyond the regular fee for a specific project. Ask for its purpose, the total, how much each unit still owes and the payoff date, and agree in the contract whether the seller or the buyer pays the remaining balance.

Fannie Mae treats projects that need critical repairs as ineligible, including unfunded repairs costing more than $10,000 per unit that are to be done within 12 months. Lenders look at each special assessment, and one tied to an unremediated critical repair makes the project ineligible. Structural and mechanical inspections from the past three years are also reviewed.

The 6(d) certificate, budget, meeting minutes and master policy are covered in our condo documents guide. Minutes that mention planned work are often the earliest warning.

Parking, floor and exposure

Parking comes with a unit in different ways. It may be conveyed in the unit deed, assigned as an exclusive-use area under the master deed, rented from the association, or not available at all. Each carries a different level of security and resale value, so check the deed and condo documents rather than the listing description.

Within one building, prices differ by floor, light, view, noise and layout. Compare with sales in the same building first, then with similar buildings, and note the floor and exposure of each. A garden-level unit and a top-floor unit of the same size rarely sell for the same price.

For a new or newly converted condo project, Fannie Mae generally expects comparable sales from both inside and outside the project, so the appraisal does not rest only on the developer’s own pricing. There are separate rules for a project’s first sales and for some small projects; the lender confirms which apply.

Two- to four-family: rents and leases

Start with market rent for each unit: bedrooms, condition, parking, laundry, and which utilities the owner pays. In Massachusetts the owner provides electricity or gas unless the unit has its own meter and a written rental agreement makes the tenant pay. Water and sewer can be billed to tenants only through submeters that meet the conditions in the statute. Many older buildings include some utilities in the rent, which lowers net income.

Then look at the leases in place: rent, end date, and the deposits and last month’s rent held. A unit leased well below market until next August cannot be repriced before then. A buyer who plans to live in one unit needs to know when it will be free; our two- and three-family guide covers tenancies that continue after a sale.

Ask the seller early for a rent roll, copies of all leases, deposit records and recent utility bills.

How lenders count rent

For a Fannie Mae purchase, the lender documents gross rent with a comparable rent schedule (Form 1007) or a small residential income property appraisal (Form 1025), plus any leases that transfer to you. If market rents do not support the lease amounts, the lender may use the lesser amount.

The lender then multiplies monthly gross rent by 75% and subtracts the property’s housing payment. How the result is used depends on your experience managing rentals: with less than 12 months, a positive amount can only offset the property’s own payment. Rent from the unit you live in generally cannot be counted. FHA and other programs have their own rules, so ask your loan officer which apply.

The income approach and the gross rent multiplier

Fannie Mae requires the income approach on appraisals of two- to four-unit properties, with comparable rental and sales data and the calculation of the gross rent multiplier (GRM), though the income approach cannot be the only one used. The GRM is a sale price divided by gross rent. Divide recent sale prices of similar buildings by their rents to get a range, then apply that range to the subject’s market rent, using the same basis, monthly or annual, throughout.

The GRM ignores expenses, so check who pays heat and utilities, the tax bill, insurance and the condition of the roof and systems. Two buildings with the same rents can be worth different amounts if one includes heat or needs a new roof.

There are few small multifamily sales in any one neighborhood, so expect a wider search radius and a wider value range than for a condo.