Appraisers' Free Forum

I've got a request for proposal on a commercial property. It's giving me fits.

It's an old house that's been rezoned commercial, and encompasses about 3700 sf. It's one block off the main drag, across the street from a church, has another church across the back yard. House was built over 100 years ago. Good quality for the time. Since the death of the last resident, it has been a restaurant, which failed twice. Now it's been bought by a local insurance agent who's converted it to his insurance office, and he plans to offer two other sections to other tenants. The new owner has extensively renovated the place, and has put way more money into it than the market will pay for it around here. But it is finished really elegantly.

This job has been offered to a CG about a hundred miles from here; he promptly demanded construction contracts, materials receipts, and all other supporting data for a cost approach. The client called me right after that. I took a look at the property today (not a formal inspection, just nosing around to see what I've got.) I called two CG's in Jackson. One said he didn't have a clue how to appraise an old house converted to office space, but knew they were tough to do. He referred me to the other CG, who is experienced in these types of property. He, too, said it would more likely be a function of the cost approach and the sales comparison approach.

Now, I'm not a CG; won't be until January. But I will be dipped in kim-chee before I'll base a market value opinion on a confounded cost approach on a 100-year-old house that's been renovated and remodeled three times (that I know of). That insurance agent can figure out his own coverage needs, probably better than I can.

I can develop a credible sales comparison approach; even got some likely sales locally. But my problem is going to be developing an income approach, and how much emphasis to place on it. The property, like many others, was purchased primarily for owner occupancy. The owner plans to defray the cost of ownership by renting the unneeded space. This house has a very large lot with a nicely-developed and well-landscaped garden in the back. The whole thing is fenced with an attractive wood and vinyl fence for privacy. It has a gazebo. The owner plans to rent the back yard for wedding photos and possibly for outdoor receptions as well.

This place is as close as they come to unique. My daughter's wedding reception was held there when it was still a restaurant, and many of her wedding photos were taken in that garden. Adjustments will be my very best wild-ass guess, supported by whatever meager data exists.

I've scared off two experienced CG's with this thing. Anything you folks can do to help me figure this out will be appreciated. Am I overthinking this?

Thanks for the replies, folks.
Edd, thank you in particular for pointing out the applicability of the cost approach. Now I won't look like such a s*ithead. This thing's been renovated to new condition. All the problem wood has been replaced, floor leveled, and the roof is in good shape. I'm estimating effective age at 5 years, TEL 65. Got new plumbing, wiring, appliances, fixtures, floors, HVAC, and everything else. The cost approach won't dominate the appraisal, but it'll serve as a sanity check.

Deriving cap rates from the market may be a problem, but not insurmountable. Comparable rents are available. There are even a couple of local sales, one of a similarly large house converted to commercial, but superior. The other's smaller, and in lesser condition. So I've got a bracket to work in, and there are other non-local sales to use for fill-in.

Thanks a bunch, folks.
What's got me skittish is although I've done a number of commercial properties, I've never done one with multiple tenants. Wife has, a few years ago (in fact, for a different insurance agent.) But I believe in getting as much diverse opinion as possible. Since the effective age of this prop is so low, I'm going to do a replacement cost on it. (It'll take an FO/superadequacy hit, though). That won't get relied on.

The cap rate will HAVE to be band of investments, because that's all I've got. If I get one single good market extraction to support it with, I'll be tickled.

Since its owner-occupied, I think most weight goes to the SCA, with whatever support is available from the IA.

Think I'll get permission from the client to have this peer-reviewed, and then post it in the APO section so you guys can rip it a new one.

(Remember, you never learn a damn thing when everybody agrees with you.)