"Affordable Housing" hypothetical condition

[Amy Perkins]

It's a cliche for a reason. We do not appraise properties; we appraise property rights. The property rights you're appraising are more limited than a standard Fee Simple bundle that we normally appraise. Your most similar comps will consist of sales of others with similar encumbrances like your subject. If you can find any. One source of comps might be the agency that's running this program - see if they've done any others recently. If not then you'll just have to work with what you've got.

If the program in question is arbitrarily stipulating the sale price via a predetermined formula that operates off of their income or off the income levels that HUD defines for low income or very low income then that pricing will represent the maximum such properties can sell for in the market. Some of those programs might actually refer a re-seller back to the agency that set them up in the first place so they can pick a buyer from their waiting list, in which case your subject might have sold without ever being listed or otherwise exposed to the market. The only people who can buy are those who are income-qualified.

If for some reason your SC was returning sales with lower prices THOSE would indicate to the MV of your subject's property rights even though there's a formula that allows for your subject to sell at a higher price. As a practical matter that outcome is highly unlikely. What's more likely is that your contract price will be lower than the unencumbered fee simple interests and indeed will represent the MV of your subject's property rights.

There are variations of these programs and your valuation will depend on bringing yourself up to speed on the specifics of this program. I just had a conversation about this with another appraiser a few days ago where the program they were working under involved a silent 2nd that was put up by the County, a grant from the state and a rebate from the feds. I had previously appraised a couple projects under that same program while they were under construction so I was already familiar with the details. However, the program you're working with may very well be different.

If it goes into foreclosure do the bundle of rights change? I think not, although I think it did happen in one case I know of in sb. They changed the policy because of it.

 

[George Hatch]

It's been a while since I've done one myself so I don't recall all the details, but these agencies maintain waiting lists of pre-qualified buyers. One of these projects I appraised (I appraised the entire project for the construction loan) was sold by lottery. So if there's a resale or foreclosure clause in their contract the owners can be replaced in no time flat.

 

[Terrel L. Shields]

The rights appraised are not fee simple. They are less than fee simple so you need to discuss that in the report.
Finding comps in other restricted developments may be problematic but that would be the path I would take.

 

[George Hatch]

The contract price is the result of a debt service coverage calculation, not the result of negotiation or comparisons with alternative properties. Unless the fee simple comps are priced lower than this contract price it doesn't matter what they show because the value of the unit is still limited to that DSCR calculation. As far as I can tell they're only getting the appraisal to ensure they haven't overencumbered the property.

 

[SmokeyMax]

I had a very similar assignment a few years back. I used a hypothetical condition and the lender was ok with that. In the addendum I wrote: "The opinion of market value reflected for the subject property in this report is based on the hypothetical condition that the subject property is not encumbered by buyer and value restrictions set forth by the City of XXXXX- Affordable Housing Program (due to existing city 2nd trust deed loan on subject property). Language throughout this report assumes the subject property could be sold at market value as described under "Definition of Market Value" on Page 4 of 6 of the URAR section of report. Sales price of subject is ultimately determined by restrictions set forth by City of XXXXX Affordable Housing Program. "

 

[J Grant]

There is a strong chance this lender has no idea what they are doing wrt telling the appraiser to assume there is no restrictions and appraise with that as a HC, since appraisers are not allowed to add an HC such as this on a URAR form. Even if it can get through ignorant UW or ignorant AMC "review"

Fannie has a formula they use for discounting CRA properties ( community redevelopment agency) properties but that usually involves a land lease, but idk if Fannie also has a formula for a discount for CRA properties without a land lease. The ones I did had a land lease.

The community agency selling this property are usually the ones with a record of prior sales of properties in their own program and normally they would provide it if asked. These sales often have a waiting list of people for them and are not typically found on the MLS

Imo the better solution is the restricted market value to that specific market of lower income approved buyers with the restrictions in place as the primary market value opinion and then provide a second market value with no restriction. (if you want to do that)

These assignments can be very tricky, as some of these programs have language that say the first resale is subject to the restrictions but not the second, or that the agency has its own formula that can change every year and so on. The agency in charge of the program can have language that the restrictions are lifted in case of default/foreclosure as well. They would have that information and or in the deed or contract. Yuck.

 

[Tom D]

when i did plenty of them, it was usually in a lower priced neighborhood where the new, or rehabd, house was built by a non profit cdc, was subsidized by your tax dollars, and sold below cost. sale price was sorta set in that neighborhood value range. ownership was determined by income. the one stip that i saw, which made sense, is that they were not allowed to resell it within a certain number of home ownership years. there was nothing hard about it.

 

[J Grant]

when i did plenty of them, it was usually in a lower priced neighborhood where the new, or rehabd, house was built by a non profit cdc, was subsidized by your tax dollars, and sold below cost. sale price was sorta set in that neighborhood value range. ownership was determined by income. the one stip that i saw, which made sense, is that they were not allowed to resell it within a certain number of home ownership years. there was nothing hard about it.

What you describe is the simplest of these programs and each one is unique and has to be researched locally

I did more complex CRA land lease properties, but we have simple programs here as well, a popular one being a builder gets a zoning variance and in return sets aside a portion of a community, like 20% for workforce housing (homes offered to teachers and police and firefighters ) or a segment set aside for lower-income buyers with a simple set of restrictions such as if the person sells within the initial x years after purchase the buyer can not keep the profit ( to discourage flipping ) and sometimes after a certain # of years of ownership the restrictions lift or are reduced.

 

[Terrel L. Shields]

In short, they are a PITA to value.

 

[DWiley]

How would you guys attack this

I would attack it by clarifying with the lender if they intended to sell the loan to one of the GSEs. If the answer to that question was "yes, we do," I would then look at the GSE Selling Guides for policies related to appraisals on homes with income-based resale restrictions.

B5-5.2-02, Loans with Resale Restrictions: Eligibility, Collateral and Delivery Requirements (05/03/2023)

selling-guide.fanniemae.com

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