Follow 10 Rules for Preparing Rent Comparability Study
At some point in time, you’re likely to need a rent comparability study (RCS) that looks at rents charged at comparable market-rate sites in your area. For example, as a requirement for renewal, most owners with expiring Section 8 project-based contracts must submit a RCS at initial renewal to demonstrate that current rents are at or below comparable “market” rents. Beginning with the date of the initial renewal of the expiring Section 8 project-based contract, the RCS starts a maximum five-year “life cycle,” after which a new RCS is required.
For these purposes, you must get an appraiser to prepare and submit an RCS to your contract administrator or local HUD office. The appraiser’s RCS determines the rents you could charge if your site wasn’t supported by Section 8 assistance. 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. But appraisers can make mistakes. That’s why owners should review the RCS. Also, your signature on the cover letter attached to the RCS indicates, among other things, that you’ve reviewed the appraiser’s work and concluded that it’s complete and accurate. Before reviewing the RCS, it’s a good idea for owners and managers to go over Chapter 9 of HUD’s Section 8 Renewal Policy Guide.
First, we’ll review some basics about RCSs. Then, we’ll cover 10 rules your appraiser should follow, and tell you what to look for in the completed rent comparability study to make sure the appraiser has followed these rules.
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 (such as townhouses, elevator building, or walk-up apartment);
- The unit size;
- The amenities (such as floor coverings, washer-dryer, or microwave);
- The number of bedrooms and bathrooms;
- Utilities (type and whether 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. For example, a unit with two bathrooms would very likely command a higher rent than a unit with only one bathroom. To accurately compare your unit (the “subject” unit) to the comparable unit, your appraiser must adjust the rent of the comparable unit to account for this difference. The appraiser also must account for any other differences between the two units that would affect value in the eyes of a prospective resident.
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.
If your appraiser makes mistakes in the RCS, his conclusions could be wrong. This, in turn, could lead to a time-consuming HUD or contract administrator review of your rent increase request. And HUD could decide to commission its own RCS instead. Also, HUD and the contract administrator may be suspicious of future RCSs you submit.
Here are 10 rules your appraiser should follow in comparing units, and the types of explanations you should look for in the RCS.
Rule #1: Select Comps Located in Same Submarket
In general, the comps your appraiser selects should be located in the same neighborhood as your site. But appraisers sometimes mistakenly select a comp that’s located in a different neighborhood when there are suitable comps available in your neighborhood. 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.
If your appraiser uses comps outside your neighborhood, make sure he describes his research showing that no similar units in the neighborhood were appropriate to use. In addition, make sure the appraiser supports any adjustments made in the rent to reflect the difference in neighborhood. For example, market data showing that rents are higher in your site’s neighborhood than in the comps’ neighborhood.
Rule #2: Choose Comps in Same Building Type
Appraisers shouldn’t select comps in a different building type from your site when suitable comps of the same building type are available. For example, if your site is a garden apartment 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, she 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.
Rule #3: Select Comps of Comparable Quality
In selecting comparable units, the appraiser should select units located in buildings that are similar to your site 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.
Make sure the appraiser discloses the difference in building quality and makes an adjustment to the rent where appropriate. Square footage differences between units present a comparable quality issue, too. If the square footage varies a lot between the subject and comp, this may indicate that the units simply aren’t comparable and better comps should be found.
Rule #4: Select Comps with Same Number of Bedrooms
Ideally, comparable units should have the same number of bedrooms as the primary unit type in your building. Usually, it’s inappropriate to use a three-bedroom unit as a comp for a four-bedroom unit if other four-bedroom comps are available. But your appraiser could choose a three-bedroom comp unit when your site has four-bedroom units because there are no other four-bedroom units in your market.
If your appraiser uses comps with a different number of bedrooms from the primary unit type at your site, make sure he justifies his choice in the RCS and explains any rent adjustments made.
Rule #5: Reject Comps that Require Many Adjustments
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.
When an appraiser makes many significant adjustments, the comparison probably won’t yield an accurate rent for your site’s units. Comps that are more similar to your site’s units require fewer adjustments and are a better indicator of the market rent for your units. Check the RCS to see how many adjustments your appraiser has made to the comps’ rents. If some comps require multiple adjustments, check to see that the appraiser showed that no better comps were available.
Rule #6: Ensure Adjustments Reflect Local Markets
The adjustments your appraiser makes must be based on the facts in your site’s region. The appraiser shouldn’t base the adjustments he makes on data from other regions. Tenants in different markets may value amenities and services differently, so the RCS appraiser must be aware of sometimes subtle differences in the value of some project features even within the same community.
For example, central air conditioning may be less valued by tenants in a beachfront project, compared to tenants at another project, perhaps not far away, but within a location with much warmer summertime temperatures.
Rule #7: Make Sure Adjustments Are Consistent
Above all, appraisers must be consistent in how they derive and apply adjustments. HUD’s Section 8 Renewal Policy Guide warns about consistency in making negative and positive adjustments.
For example, it says that an appraiser shouldn’t make small negative adjustments when a comp’s amenity is superior to the subject while making a large positive adjustment when the same feature is inferior. The adjustments, up or down, should be similar when comparing the same feature.
Be sure to check that your appraiser makes similar adjustments for specific differences identified in the RCS—for example, she made similar adjustments for the comps that don’t include cable and Internet access. The best way to do this is to review the HUD Form 92273 “rent comp grids.” Don’t be afraid to ask your appraiser if you think there may be an inconsistency in her comparisons.
Rule #8: Adequately Document Adjustments
HUD’s Section 8 Renewal Policy Guide states that RCS appraisers must provide concise, but professionally complete explanations as to why the adjustments were made and how the dollar values were derived. The explanations must be clear and convincing to a person not familiar with the properties and market areas involved. This information lets the HUD reviewer determine whether the adjustments are reasonable and valid.
Make sure the RCS describes in detail each adjustment: the amount of the adjustment, the market data she considered, and mathematically how she determined the amount. If the appraiser makes no adjustments for seemingly important differences between the subject site and the comps, she must give a detailed explanation of why she didn’t make any adjustments.
Rule #9: Make Sure Comps Are Properly Weighted
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 much weight to give to the different comps and explain how she reached that decision.
Make sure the appraiser explains how she weighted the comps. For example, she might explain in the RCS that Comp #1 and Comp #2 were very similar to your site in location, building type, and physical condition, so she weighted those more heavily than the others. And because Comps #3 and #4 were located outside the market area, they were assigned less weight.
Rule #10: Explain Reconciliation
The RCS appraiser must explain how the market rent was derived and why it was derived that way. In other words, 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.
Make sure the reconciliation includes an acceptable explanation. For example, one of the following might be an acceptable explanation:
- “I determined that all five comps were roughly equal in quality because they were located in the same submarket, had similar amenities, and had equal access to shopping and public transportation. Accordingly, I derived the estimated market rent of $434 by using the average of the five comps”; or
- “I determined that Comps #2 and #4 were the most comparable because of building, size, and location, and accordingly, I gave them extra weight. Similarly, I determined that Comp #5 was less comparable because of its location outside of the subject’s market, and accordingly, I gave it less weight than Comps #1 and #3. I arrived at the Estimated Market Rent of $440 by the mathematical process I describe below.”