Accurate appraisals of single-family short-term rentals (STR) are essential in helping investors make informed decisions about income or potential income and establishing the worth of such investments. While appraisers may use several methods to determine the value of an investment property, one is using appraisal Form 1007.
Form 1007 is used to evaluate one-unit single-family or condominium investment properties. The form is used when rental income is required to qualify for a loan—it is a tool lenders use to determine whether there is sufficient evidence to loan on these types of properties. Lenders make the ultimate decision regarding income from all sources, including STRs.
This article describes what Form 1007 can be used for, how to use it, and when. We’ll also dive into Fannie Mae’s new Reconsideration of Value (ROV) updates and how those apply to short-term rental appraisals.
What is Form 1007?
Form 1007 is used to estimate the monthly market rent of single-family properties or condominium investment properties. Some lenders require this form when rental income is used to qualify for lending. The form can be used alone or with lease agreements when purchasing property. In the case of refinancing, the form is used in combination with lease agreements or tax returns. But ultimately, income falls under the lender’s scope.
Appraisers use Form 1007 to collect data from comparable one-unit rentals to document estimated monthly rental rates. Appraisers collect data and adjust values to comparable properties much like they would for any appraisal but with the addition of verifiable rental information.
Properties are assessed based on the following:
- Location of the property
- Physical condition of the property and year of construction
- Property type (single-family home or condominium)
- Size, including bedrooms and gross living area
- Lease agreements (for subject property)
- Rental amounts for comparable properties
Form 1025 is also used by appraisers to assess income properties. It differs from the 1007 in that it is used to assess duplexes, triplexes, and fourplexes. Form 1025 considers both rental income and fair market value of the comparable properties.
Appraisers use Form 1004 to assess the fair market value of real property. This form is not used to document rental income or potential rental income.
Unique Considerations of Short-Term Rental Properties
STR appraisals present unique challenges, only one of which is that they are typically executed on a nightly basis. STRs are more akin to hotels than homes rented by the month. STRs also include the use of personal property, such as furniture, fixtures, and equipment (FFE), and agreements to rent are made based on terms and conditions.
The biggest challenge with the 1007 is that it is used to document monthly rent for single-family homes, not nightly rent or business income. When appraising STRs, appraisers must only consider the property value not the personal property or income. Income is ultimately decided by the lender. The 1007 is not designed for single-family properties used as STRs.
The form also precludes information about other services related to the property, vacancy rates, and business expenses. Therefore, an appraiser may want to use another tool to determine an estimate for an STR, like AirDNA.
Fannie Mae Policy Updates that Impact Short-Term Rental Appraisals
The Reconsideration of Value (ROV) went into effect on August 29, 2024. Appraisers can use the Selling Guide as a definitive resource. Fannie Mae has also released insights on how to implement the policy—with specific attention to STRs and using Form 1007.
There are two considerations when using this form:
- Form 1007 assesses real property value. Personal property (FFE) must be excluded from the value. Additionally, appraisers cannot include business income (rents) as part of the value of the 1007. A STR property has the same value as a property that is not being used as a STR. The usage does not change the valuation of the property.
- Assessing business income is out of scope when using Form 1007. Appraisers are not required to assess income. According to Fannie Mae, that is the job of the lender. The 1007 documents monthly rent but it’s the lender’s job to make the final determination regarding income. It’s the lender’s job to evaluate the 1007 against tax returns, lease agreements, or nightly contracts to determine business income.
How to Use Form 1007 According to Fannie Mae
Form 1007 is used to compare three properties to the subject property based on monthly rent. Appraisers cannot take the nightly income and multiply that by 30, nor can they multiply the nightly income by 30 and deduct business expenses to come up with a monthly rent amount.
The 1007 must be used as designed—that is, to assess comparable properties based on monthly rents. That being said, there are highest and best-use considerations and appraisers can handle those fundamental questions as they would with any appraisal.
Implications for Appraisers
It’s important to remember that not all loans go through Fannie Mae. It’s OK to use appraisal Form 1007 as it is prescribed. If you are asked to show nightly income for a STR, you cannot use the 1007.
The best resource is to use the search features available to find the relevant sections on the Fannie Mae Selling Guide.
Appraiser Best Practices when Completing Form 1007
When it comes to completing Form 1007, it must be completed as directed. The form is used to determine the fair market value for real property. Lenders make the final determination regarding business income derived from one-unit properties.
Appraisers have other tools they can use, such as the income approach. The income approach uses the income generated by the property to estimate fair market value. This approach works well if the property has been used as a STR long enough to show earnings from short-term guest stays. The income approach also considers operating efficiency and vacancy rates.
Conclusion
Form 1007 is used to document monthly rents of comparable properties when assessing real property value. The same considerations are made to determine the value of the property as in a standard appraisal, including age, condition, and description of the property and location. The form cannot be used to determine or document short-term rental rates. The income approach may be better suited for determining the value of STRs.
Fannie Mae encourages appraisers to understand the use and limitations of Form 1007 and reminds appraisers that income determination is the scope of the lender.
Continuing education is vital for appraisers who want to stay up to date with current regulations and industry trends—it’s also mandatory. McKissock offers a unique approach to CE with its Unlimited Learning Membership. We’re always here to answer any questions you have.
