Below Market Rate (BMR) housing appraisal

[688Cool]

I am working an an appraisal for a BMR house. It is selling for about half market value. It has a deed restriction and must remain an "affordable house" for 20 years. Basically, the owner will not benefit from any appreciation, as the restriction limits resale based on a formula using average income in the area.

The lender wants a market value appraisal. I am looking for suggestions on how to disclose the restrictions sufficiently in the appraisal. Do you think this is an extraordinary condition?

I feel weird providing a market value knowing that it absolutely cannot be sold for that price.

All comments/suggestions welcome!!

 

[KenRossman]

Market value would be subject to the deed restrictions, etc. unless apraised subject to a hypothetical condition.

In an extraordinary assumption you believe the premise to be true, but if found not to be true could cause you to change your value opinion.

In a hypothetical condition the premise is known to be false... but assumed true for the purpose of the appraisal.

 

[688Cool]

Hi Ken

So - what would you actually say in your appraisal? I am looking for really clear disclosure/reporting so that the report is clear that the deed restriction prohibits the property from being sold at MV.

Thanks.

 

[George Hatch]

We do not appraise properties as such. We appraise property rights.

The property rights you're appraising include the deed restrictions, so the market value of those property rights will be influenced by the effects of those deed restrictions.

Remember highest and best use? The 4-step analysis for HBU? Legal, physical, feasible and "most profitable? Well, "legally permissible" is not just limited to the zoning requirements or the general plan. It also includes other legal restrictions such as leases, encumbrances, easements, and others. Deed restrictions are one of these "others".

There basically is no such thing as the market value of the property without the deed restrictions unless there's some reasonable indication those restrictions can be eliminated.

You can't even justify basing an appraisal on a Hypothetical Condition (deed restriction doesn't exist) unless you can articulate why such an assumption is "clearly necessary for legal purposes, for purposes of reasonable analysis, or purposes of comparison" (Lines 586/587 of SR1-2.g). Your client wanting to do a higher loan doesn't meet any of those criteria.

You have good reason to feel funny about this request and consider declining it. You should follow your instincts.

 

[George Hatch]

So - what would you actually say in your appraisal? I am looking for really clear disclosure/reporting so that the report is clear that the deed restriction prohibits the property from being sold at MV.

Just state that the property rights appraised include a deed restriction, the effects of which are of effect on both the marketability and the value of those property rights.

 

[KenRossman]

Here is a statement I put in an appraisal several years ago checking the box for subject to conditions on the old URAR form...

[ Subject was purchased (199X) through a subsidized Town of xxxxxx "Affordable Housing Program". If sold before 200X a % of profit (less the cost of improvements made subsequent to the purchase) must be returned to the Town. See attached program requirements. ] (I included a copy of the complete program requirements with the appraisal).

 

[KenRossman]

George -

Did one of these about six or seven years ago - court ordered with a hypothetical condition that the deed restrictions didn't exist in a matrimonial...

 

[George Hatch]

That would fall under the category of "for legal purposes".

 

[Fred]

I feel weird providing a market value knowing that it absolutely cannot be sold for that price.

I thought market value was it would sell for.

 

[Howard Klahr]

George,

The following link is to a fannie mae announcement issued in March 2006. If the subject is located within aan affordable housing project developed through a community land trust, the appraisal may be performed based upon market value without considertion to the deed restriction. This is not to say the deed restriction is not disclosed and that the appraisal is not based upon a hypothetical condition.

Ann. 06-03: Properties Subject to Resale Restrictions or Located on Land Owned by Community Land Trusts (03/22/06)

Here is another thread in the forum on this same topic:

valuation-house-cannot-sold.html

Hope this helps