The exit is still the part I can't underwrite after nine years of room rents

The part that decides this for me is what the buyer's appraiser is allowed to do. On a one unit residential property the sales comparison approach usually carries the report and the income approach is a supporting line at best, and five separate room leases don't turn a house into a two-to-four unit property. So the appraised number tends to come back as a house.

What you can influence is the paperwork the buyer inherits. Five leases with staggered ends, a written house agreement, a rent roll with payment history, permits for any bathroom you added. An operator buyer reading that is buying twelve months of avoided setup. That's real to them and it doesn't have to show up in the appraisal to show up in the price, as long as the buyer isn't financing to the appraised value with a thin down payment.

One thing I'd check before you build the exit story: whether the leases are assignable and whether your state requires anything specific on transfer of security deposits held on individual room leases. That varies by state and it's the kind of thing that shows up as a closing problem, not a marketing problem. Worth an hour with a local attorney rather than a forum.

Financing is the choke point on your buyer pool, orchard.

An owner-occupant buying a five bedroom house is shopping a conventional product and they price it as a house. An operator buying it as an income property is either paying cash or going to a lender who has to get comfortable with a rent roll made of individual room leases. Some lenders will count that income, some will haircut it hard, some will ask why the occupancy classification on the appraisal says one thing and the insurance binder says another. I wouldn't state any of that as a fixed rule, terms move and every shop writes its own overlays. Anyone building an exit on it should get the lender's treatment of room income in writing before they plan around it.

So the practical question is how many cash operators are active in your submarket. If the answer is two, you don't have a market, you have a phone call. If it's twenty, the premium is real and it's still smaller than the income multiple would suggest, because their financing is more expensive than the owner-occupant's.

tender's number is the one I'd chase first. How many operator buyers, and have any of them actually closed at a premium in the last two years, or are they just the ones who post listings.

orchard, do you know what happened to the last few room-rented houses that traded near you? Not what they listed at.

I sold one. Four bed, three rooms rented plus a converted den I shouldn't have counted. Listed it with the rent roll in the remarks, got two operator showings and nine families. Sold to a family at the comp number, roughly $8k over the last three bed sale on the street, and I'm fairly sure that $8k was the newer HVAC and not the room roll.

The operator offers came in under comp, both of them. They wanted the income at their cap rate and their cap rate was ugly. That's the part people miss. An operator paying you room-income value at a 9 is offering you less than a family paying comp value at whatever a family pays.

quarry's last line is the whole thread honestly.

orchard, before you model any of this, pull the permit history on the house yourself. Nine years of room use with an added bath and any bedroom that used to be a den means the county record and the physical house may not match, and that gap shows up at exit as a repair addendum or a re-appraisal. What has to be disclosed about prior use and unpermitted work differs by state, so get that answered locally rather than from a thread.

The other paperwork item: check whether the room leases have any holdover language that survives a sale. I've read house agreements that gave residents a right to stay through the end of a term the owner couldn't cancel. Great for the residents. It means your buyer inherits five tenancies whether they want a co-living house or not, and an owner-occupant buyer will walk from that instantly.

I want to make sure I have this straight. "Comp value" means what similar houses nearby sold for, and "income value" means the rent divided by a cap rate, is that right? And the argument is that houses get priced the first way even when they earn like the second way?

juniper, that's it. A one unit house gets valued against other one unit houses because that's who buys them.

orchard, the reason I'd land on comps is the floor underneath. Your lot and structure hold value whether or not anyone ever rents a room in it again. The room roll is an operating result, and operating results generally don't survive the sale of the operator. I think of the income density as something you harvest during the hold, and the exit is just the house.

Question before I vote. orchard, if the answer turns out to be comps only, does that actually change what you'd do? You've held nine years and collected the spread. Nothing about a comp-based exit makes those nine years worse. It only matters if you were counting on the exit to fund the land purchase at a number the exit can't reach.

So what's the land number you need.

The thing I'd have been embarrassed to ask: does a five bedroom two bath house even comp well as a house? Around me the four and five bedroom stock is thin and the ones that sell take longer. Feels like the room-rent version of the house might be the easier sale, not the harder one, if the family buyer pool for a big old house is small to begin with.

compass, that's real and it cuts the other way too. Big house, two baths, five people worth of wear on those two baths for nine years. The condition discount at exit on a room-rented house rarely shows up in anyone's model. My three room house needed $4,100 of paint, doors and floor patching before I'd have shown it to an owner-occupant, and that's a smaller house than yours.

orchard, whatever you decide about the terminal value, put a line in for restoration to family-buyer condition. Mine ran about 1.3% of the eventual sale price and I got off light.

Out where I look there's no operator bid at all. None. A house is a house, a buyer is a family or a flipper, and the room roll is a curiosity that makes the listing agent nervous.

So my vote is comps, but I'll say plainly that's a market fact about small towns and not a law of nature. In a metro with a hospital campus and five active operators I'd probably answer differently.

Six months of pulling listings and I've seen maybe eleven houses marketed as co-living ready in two metros. Three of them are still sitting. I can't see the closing prices in my state at all (one of the ones that doesn't publish them), which is its own problem for anyone trying to answer this with data.

Something from the screening side that connects to the exit. Five sitting tenants at closing means five sets of deposits, five ledgers, and five people who have to be told something. If any of them are month to month you have flexibility, if they're all mid-term you don't. I'd stagger toward a delivery-vacant option a year before any sale, even if it costs some occupancy.

Comps. I want the version I can defend to myself in a bad month, and "an operator will pay me for my rent roll" isn't that.

verity, same, though I'd add one wrinkle to my earlier post. If the house sits on a lot that could take a second unit under current rules, that's a separate value that has nothing to do with rooms or comps and it can be larger than either. orchard, do you know what your lot allows? That would change what I'd hold for.

I'm going to be the disagreement here. I sold a four room house to another operator eighteen months ago at about 6% over the best comp on the street, cash, twelve day close, furniture and leases in place. He didn't pay me an income multiple. He paid me for not spending five months and $22k building the same thing, and he told me so.

That's not room-income value. It's comp plus a setup premium, and it only existed because he was already running four houses within two miles and wanted a fifth. quarry's ugly-cap operators were the wrong operators. The bid comes from someone with a machine already running who wants another unit for it.

orchard, if I were you I'd find out who the three biggest room operators in your submarket are and just ask them what they'd pay. Costs you nothing and it answers the poll better than we can.

flint's premium is the one I see from the service side. When an operator adds a house, the setup line is furniture, a lockbox and access system, listing photos, and the first eight weeks of paid vacancy while rooms fill. On a five room house that's real money and real calendar. A buyer who can skip it will pay part of what they skipped.

orchard, keep the furniture inventory and the actual filled-by dates for each room. That's the evidence that shortens their fill assumption, and it's the difference between a premium and a shrug.

flint and thatch have moved me. I came in on comps and I'm voting comps plus a modest premium, with the emphasis on modest. 6% over comp on one deal from a buyer already operating nearby is a real thing that happened and it's also not a number I'd underwrite nine years out.

orchard, if you build the terminal value at comps and get the premium, fine. Building it at the premium and getting comps is how the land purchase falls apart.

anchor said it. Model the floor, hope for the ceiling.

For what it's worth, orchard, run the whole-house lease number as a sanity check on the hold too. If your 3,650 gross drops to a 2,250 lease and the house still carries itself with a margin, you've got a house that works both ways and a much wider buyer pool at exit. If it only works at 3,650, you're tied to the room model and to whatever the occupancy rules in that zone do over the next five years.

Voted comps plus a modest premium. flint, when you get a minute, was your buyer financed on that one or genuinely all cash? I'm trying to work out whether that premium survives contact with an appraisal or only exists on cash deals, because if it's cash only the pool is even thinner than the eleven listings I found.