10 Tips for Compliant Rent Comparability Studies
If you ever need a rent comparability study (RCS)—for a Section 8 contract renewal, for example, or to help substantiate an annual rent increase request—you don't want to simply take what the appraiser gives you and hand it off to your contract administrator or local HUD office.
You should first review it carefully, even though it will be reviewed again at the regional and national levels. You'll want to examine it because your sign-off indicates that you did, and because appraisers sometimes make mistakes.
“The appraiser is key,” says Cindy Ross, operations manager for Contract Management Services in Bremerton, Wash. Ross conducts training for site owners and managers about the fine points of contract renewal and rent adjustments. “Ideally, you want an appraiser who is familiar with Section 8 and HUD rent studies.”
The appraiser's RCS determines the rents you could charge if your site wasn't HUD supported. In most cases, to get your contract renewed or your rents increased, your RCS must show that your site's rents are below comparable market rents. HUD sets specific rules for how RCSs should be prepared in the Section 8 Renewal Policy Guide, Chapter 9.
To determine the comparable market rent, the appraiser reviews rents of similar, but unassisted, units in your area. First, though, the appraiser must determine the most common types of units at your site, based on size and number of bedrooms. The appraiser will use these units, called the “primary unit types,” for making comparisons. For each primary unit type, the appraiser must identify five similar units in five different market-rate sites. These five units are called “comparable units,” or “comps.”
What qualifies as a comp? HUD requires that comps resemble your site's units in a number of ways, including:
The market area where the site is located, meaning the geographic area from which the site would draw most of its applicants;
The site's age, physical condition, and overall appeal;
The type of structure (for example, an elevator building versus a garden apartment);
The unit size;
The amenities (such as floor coverings, washer-dryer, or microwave);
The number of bedrooms and bathrooms;
Utilities (the type and whether they're paid by the owner or resident);
Site equipment (such as a club room, parking, or a pool);
Access to schools, employment, medical centers, transportation, and shopping; and
Crime rates and street noise.
Using these and other factors, the appraiser decides how the comps measure up against your site and what your rent should be.
No comparable unit will be identical to your site's units, so the appraiser must decide whether the differences are worth more or less to a potential resident and adjust the rent of each comp accordingly. After determining the adjusted rent for all five comps, the appraiser uses these adjusted rents to determine the estimated market rent for your site's units. The appraiser should explain clearly why he chose the comps and how he accounted for differences in rent adjustments. HUD needs to see and understand how the appraiser reached his conclusions about the estimated market rent for your site's units.
Details of the Decisions
The appraiser has some latitude in selecting the comps and even the submarket, but all choices must be explained and documented. These 10 tips will help you assure your RCS is done right:
Tip #1: Check that comps are in same neighborhood (submarket) as your site. The rent that a resident is willing to pay can vary greatly based on the perceived desirability of the neighborhood. As a result, using a comp located in a different neighborhood isn't always helpful in determining the correct market rent for your site's units.
In some instances, your appraiser may decide that using a comp in a different neighborhood is appropriate. For example, say your site is 20 years old and in good condition. All other sites in your neighborhood are much older and in inferior condition. Your appraiser might correctly conclude that sites in an adjacent neighborhood, similar in age and condition to your site, are better comparables than the older, run-down sites in your neighborhood. This is fine as long as the appraiser discloses in the RCS that he chose a comp in a different neighborhood, justifies his selection, and explains any adjustments made to the rent.
Tip #2: Match building types. If your site is a garden property and garden comps are available, it's not reasonable to select a comp unit located in a four-story walk-up or an elevator property. Similarly, if your appraiser properly selects a unit of a different building type as a comp, he must see whether the available market data suggest that the rent should be adjusted. For example, in some markets, residents may prefer elevator buildings to other types of buildings and so may be willing to pay a higher rent for them. The appraiser must adjust the rent to account for this preference.
Tip #3: Look for similarities in age, condition, and quality. The appraiser can't select a unit in a luxury apartment complex or new construction site as a comp for a 20-year-old assisted site when comps similar in quality are available. Building quality is important in evaluating rent. If the site of one comp has been renovated recently or has more street appeal, the appraiser must determine whether these qualities are worth more to residents and so require a rent adjustment.
Tip #4: Match number of bedrooms. Ideally, comparable units should have the same number of bedrooms as the primary unit type in your building. If your appraiser uses comps with a different number of bedrooms from the primary unit type at your site—for example, because there were no comps in your submarket with the same number of bedrooms—make sure he justifies his choice in the RCS and explains any rent adjustments made.
Tip #5: Remind appraiser: the more similarities, the better. Your appraiser shouldn't select comparable units that are so different from your site's units that they require many adjustments to the rent if better comparable units requiring fewer adjustments are available.
Tip #6: Describe in detail. In the RCS, the appraiser must discuss in detail how he selected the comparable units and why he rejected other units as comps.
Tip #7: Double-check utility adjustments. Be sure adjustments for resident-paid vs. owner-paid utilities are clearly documented. If one rent includes the cost of utilities and the other rent doesn't, the appraiser must estimate the value of including that utility in the rent and then adjust the comp's rent accordingly.
Tip #8: Stick to the facts for your site's region. The appraiser shouldn't base the adjustments he makes on data from other regions. For example, residents in warmer climates may be more willing to pay for access to a swimming pool than residents who live in colder climates. So the appraiser can't make the same adjustment for the presence of a pool for units at a California site as he would make for units at a New York site.
Tip #9: Check for consistency in adjustments and complete documentation. Appraisers must be consistent in how they derive and apply adjustments. For example, if two of the comps have balconies and your site's units don't, the appraiser should make rent adjustments for both comps—not for only one comp—because they both differ from your site's units. And the appraiser must give a detailed explanation of why each adjustment was made and how he arrived at the dollar amount of the adjustment. This information lets the HUD reviewer determine whether the adjustments are reasonable and valid.
Tip #10: Make sure the final recommendation makes sense. Reconciliation is the process by which the appraiser takes the adjusted rents for each of the five comps and arrives at the estimated market rent for your site's units. In most cases, the appraiser can't just take the average of the five adjusted rents, because some of the comps are more like the subject and so should be given more weight. The appraiser must decide how to weight the comps and then explain how he arrived at his decision. Also, the appraiser can't simply state what the estimated market rent is without discussing how the five comparable rents were reconciled to arrive at the recommended figure.
Ross works with owners and their management agents on contract renewals and rental adjustments to help them comply with HUD regulations. Her goal is to help make sure all documentation is current and complete so that funding is not delayed in any way. Owners or their agents have a responsibility for accuracy with the RCS, she explains.
“The owner is supposed to review the study for completeness,” she says. “Once the owner has reviewed the study for accuracy, the study is forwarded to the contract administrator who also must check the study in the same manner. After the study meets the initial criteria as set forth in the Section 8 Renewal Policy Guide, the contract administrator forwards the study to the administrative review appraiser for a substantive review.”
To help your site owner in the initial review of the appraiser's work, you can use our Model RCS Checklist. It's based on one Ross developed incorporating requirements addressed in Chapter 9 of the Section 8 Renewal Policy Guide.
Cindy Ross: Operations Manager, Contract Management Services, Norm Dicks Government Ctr., 345 6th St., Ste. 200, Bremerton, WA 98337; (360) 373-0420; firstname.lastname@example.org.
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