Re-Sale Deed Restriction

[The Warrior Monk]

What I said was, as of the effective date of the appraisal, there was no deed or deed restriction in place from this PA since the deed (with the sale limitation) had not been executed by the seller.

What are the property rights are being appraised? Are you appraising the property with or without the restriction?

Since neither the deed nor the deed restriction legally exit as of the effective date, the agreed upon deed which is not as yet a legal document, has no impact on the opinion of value as defined by the definition of Market Value used.

What if I appraise a supermarket that doesn't have a lease that isn't enforceable as of the date of value, but yet will be effective upon closing. The leasee is the owner's brother and lease stipulates rent at half of market. Do you think the lender would be annoyed if I appraised the property as "fee simple" even though though the property rights being transferred are encumbered by a lease?

A restriction that has no practical effect is like no restriction at all.

That may be true as far as value is concerned, but it is still an issue that needs to be handled. Date of value is still current, property rights being transferred include a restriction, exposure time is based on current date not future date, etc. We can't play moving target with all these SOW issues because the deed restriction won't exist as of a future date. Appraisal development takes place at a point in time, not several points in time (unless you have quite a nifty SOW).

 

[Richard Carlsen]

What are the property rights are being appraised? Are you appraising the property with or without the restriction?

#1 Fee simple estate with no encumbrances. #2 Without because the proposed restriction does not exists. The PA is only a contract to purchase. It has no legal standing vis a vis the subject property except as pertains to the anticipated sale. If the sale does not go through, nothing changes with regards to the restrictions on the property. It is only after the closing when the seller passes the deed to the buyer that any restrictions set forth in the PA go into effect. The agreement itself states that the non-resale price restriction it is not in place as of the effective date of the appraisal. The agreement states that the Buyer may not resell the property for more than $zzz.00 within 3 months of this sale closing. Since the sale closing has not taken place as off the effective date of the closing, this proposed deed restriction is not in place.

 

[Amy Perkins]

What about saying that there is a restriction on it so the value "as is" is X amount, which is only for 3 months otherwise it would appraise at y amount. Seems temporary, at only 3 months, some deed restrictions are for 30+years

 

[Richard Carlsen]

What about saying that there is a restriction on it so the value "as is" is X amount, which is only for 3 months otherwise it would appraise at y amount.

No because that is not what the value is on the effective date of the report.

Would you consider making such a value comment if when you arrived at the subject, you find that the HO is planning in 3 weeks to paint the house fluorescent red and orange with lime green shutters and plowing up the yard? Would you consider those "plans" in the value with a split value "as is" and once the new decor plan is implemented? Of course not. And yet, the PA is only the agreemnet that is in place for the planned closing of the sale.

Read your assignment. It says, use a 1004 to report an appraisal with an opinion of value that is as of the effective date which is the date of the report. Think about it: When you are at the house doing the inspection, the PA is only a contract between the buyer and the seller as the basis of the seller selling the house to the buyer at some date in the future (the closing). Nothing in the PA places any obligations or restriction on the property as of the effective date of the report. So you cannot consider something that might or might not happen in the value opinion.

What you can do is make a comment like this regarding the PA:

"The purchase agreement contains a resale restriction to be placed as a deed restriction that will prohibit the property from being resold for more than the purchase price for a period of 90 following the sale (closing). This only has the effect of limiting the property value for that specific 3 month period of time. Such deed restrictions are not considered common in the market but do not appear to place an unreasonable restriction on the property nor to inhibit normal marketability as the restriction is for a 90 day term only."

 

[The Warrior Monk]

I am concluding from your statement that since the restriction does not exist as of the date of value, it is inappropriate to appraise the property rights being transferred.

I guess I screwed up on an appraisal early this year. The lease that was to go into effect upon transfer. The contract rent only covered 2/3 of the mortgage, with the the term of the lease (w/renewals) up to 20 years. Should I have not appraised the property rights being transfered because the lease was not in effect on the date of value and simply throw a paragraph in the addendum? Do you think the lender would have been annoyed if they took back the property?

Or can we simply play moving target with SOW issues when they don't affect value?

 

[Richard Carlsen]

I am concluding from your statement that since the restriction does not exist as of the date of value, it is inappropriate to appraise the property rights being transferred.

Let's back up a minute and look at this again in hopes of clearing this up before trout season begins in April.


Everybody keeps talking about the deed restriction that prohibits the sale of the property above a preset price for a period of 3 months.

Point in fact: There is no such deed restriction on the property as of the effective date of the report. What everybody is talking about is part of the terms and conditions contained within the PA which is an agreement upon which the two parties (Buyer and Seller) propose to close. If you contend that we as appraisers must consider this particular term and condition in the value opinion, then you must also consider all of the other terms and conditions contained within the PA in the value opinion. This would include but not be limited to the sales price, the type of financing, the possession date, etc. Does anybody consider the sales price when making an adjustment in the grid. Of course not. It is not applicable to the definition of Market Value. Here's the definition of Market Value from FNMA:

DEFINITION OF MARKET VALUE: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.​

Please note the bold section. It says "as of a specified date...". Now if you go to the reconciliation section of the 1004, you will see this:​

Based on a complete visual inspection of the interior and exterior areas of the subject property, defined scope of work, statement of assumptions and limiting conditions, and appraiser’s certification, my (our) opinion of the market value, as defined, of the real property that is the subject of this report is $ (dollar amount ), as of (date), which is the date of inspection and the effective date of this appraisal.​

USPAP Standards Rule 2-2 vi Comments says this:

The effective date of the appraisal establishes the context for the value opinion, while the date of the report indicates whether the perspective of the appraiser on the market or property use conditions as of the effective date of the appraisal was prospective, current, or retrospective.

You do the report with an opinion of value as of the effective date of the report which is the inspection date. As of the inspection date, the pending sales agreement with all of it's terms and conditions has not closed. Therefore, nothing that is contained in the terms and conditions of the PA has any legal effect on the subject property and therefore cannot have any effect on the market value as of the date of the report.

 

[Webbed Feet]

Ms. Perkins,

What about saying that there is a restriction on it so the value "as is" is X amount, which is only for 3 months otherwise it would appraise at y amount. Seems temporary, at only 3 months, some deed restrictions are for 30+years

I agree with Mr. Carlsen. Your wording is off. Any “as is” value as of the effective date that is prior to closing cannot consider a deed restriction that does not exist. Not unless the client wants and agrees to a hypothetical condition that is. So your “X” would be per the definition of market value, not considering the nonexistent deed restriction. Anything regarding the following three month period with an expression of market value would have to be a “Subject To” appraisal based on a HC the deed restriction was currently in place.

Webbed.


Mr. Carlsen,

I see we agree for a change! ......

Webbed.

 

[Webbed Feet]

Mr. Wimpelberg,

I think we are clouding the waters getting into your lease situation. And I would hate to see this thread go off on a tangent. I may leave out a pertinent part, but I want to highlight a few things.

You post about your lease going into “effect upon transfer.” I ask you, transfer of what? Your transfer taking place is of possession. Not ownership. The lease is personal property that may be legally binding the moment both parties, lessor and lessee, sign the contract. If your SOW was the value of the property rights being transferred, then the “transfered” rights went to the Lessee, correct? So you are saying you valued the tenants personal property under the lease when the tenant had not yet taken possession? So the present value of the tenants' future rights? Allowing for no escape clause in the lease, and therefore in the consideration, I would say the tenant would indeed have a present value of future rights. With an escape clause I would have to read it to determine if I would need to use a HC or an EA in order to opine a present value for future rights that may, or may not, occur.

On the other hand, while sales contracts for real estate may also be legally binding once signed, the contract may not be fully ratified until all elements of the contract are satisfied. Therefore, any contingency such as the sale being contingent on the buyer being able to obtain financing would kill the sale if the buyer cannot. The sale is not closed, the intended deed restriction is not recorded and does not exist. Therefore, if the client desires a SOW that considers a nonexistent deed restriction, the client is asking for a “Subject To” analysis that employs a Hypothetical Condition that the proposed deed restriction is in existence as of the effective date of the analysis. Any other type of request that forces a consideration of something that does not yet exist expressed “as is” would have to be some other type of value definition that does not appear on the standard forms currently used in residential appraising. And at the moment don't ask me what that definition would say. At least I believe that things that are "proposed," and "subject to," are all words that link up with hypothetical conditions and all go together with each other in our work.

So I could see a request from a client, regarding our original post, that essentially is asking for two real estate appraisals. One “as is,” the deed restriction does not exist.... and one “subject to,” with a HC the deed restriction has been created by ratification of the contract and recording.

Webbed.

 

[The Warrior Monk]

I just keep it short.

Does the property have an enforceable deed restriction as of the current date of value? No.

Is the property without the deed restriction being transferred? No.

Is the property without the deed restriction being mortgaged? No.

Is the property with a deed restriction being transferred? Yes.

Is the property with a deed restriction being mortgaged? Yes.

Is is appropriate to the intended use to appraise a property without a deed restriction for mortgage collateral when the property being mortgaged will have a deed restriction? My answer is no.


Richard:
Why is okay to appriase "house and 5," which doesn't exist and is not being transferred, but not okay to appraise a property with a deed restriction that will exist and is being transferred?

 

[Webbed Feet]

<snip>...........

Is is appropriate to the intended use to appraise a property without a deed restriction for mortgage collateral when the property being mortgaged will have a deed restriction? My answer is no.

Mr. Wimpelberg,

Wonderful!.... Then you are in total agreement that because of the above the appraisal would have to go out "Subject To" a HC that "The deed restriction exists on the effective date." And that then the affect of the restriction, if any, would have to be considered.

Ok, now what do you do if the client is insisting on a CB1 only appraisal?

Webbed.

Richard:
Why is okay to appriase "house and 5," which doesn't exist and is not being transferred, but not okay to appraise a property with a deed restriction that will exist and is being transferred?

I'll take a whack at this for Mr. Carlsen..... You don't suppose the answer is that the classic five acre appraisal is based on a hypothetical condition do you?



Webbed.