SFR - Affordable Housing Deed Restriction

[Doug DeMars]

I'm working an appraisal that has a deed restriction with the city related to affordable housing.

For the specific property I'm appraising, the restriction places limitations upon refinance and resale. Any new buyer must fall within the "Moderate Income Household" definition. This deed restriction expires in about 36 years on Sept 28, 2050.

I've been in the process with the city to determine the max amount the dwelling can be sold under the restriction. However, this may be purely academic from an appraisal perspective. The FNMA 1004 form (which is the requested form per the lender/client) clearly states a market value definition with "...normal consideration for the property sold unaffected by special or creative financing or sale concessions granted by anyone associated with the sale."

As such, I could simply ignore the deed restriction because the market value definition expresses this hypothetical scenario. This is not unlike a "Short Sale" scenario where lien-holder approval is not blended into the final opinion of value. I don't think that Cert 14 is implying lien-holder approval...or deed restrictions as a legitimate factor related to the market value definition.

And yet...I think its prudent to report the deed restriction. (See Cert 15) I'm leaning toward providing an opinion of market value (sans Deed Restriction) and make appropriate commentary in the Final Reconciliation regarding the restriction and note the max sale price allowable per the city...but only in the addendum. If the lender doesn't properly underwrite the loan with knowledge of the deed restriction upon resale...they could effectively loan more to the borrower than could be repaid upon resale. But that's not my responsibility...right?

Am I missing something here? What do you do in these scenarios?

 

[Tim The Enchanter]

Is this in Ventura? I just had one there that was also restricted to first time buyers, in addition to income caps. I thought it best to use all comps that were also deed restricted, and was glad to have some. As for the price cap, it didn't matter, they are selling way below that figure.

All the info was readily available online from the city.

 

[J Grant]

It seems from what I understand at least, the deed restriction restricts the buyer pool...not anybody can buy there, only folks who earn less than $X income, is that correct? In that sense it has more in common with an over 55 age restricted community where certain buyers are excluded.

Is there a max amount property can be sold for? Does the deed restriction say that over a $ amount the overage goes to city, or seller gets to keep whatever amount they can sell the property for?

Are there enough comps from within the subject deed restricted or similar affordable housing deed restricted communities? That way the deed restriction impact on marketability or value is already baked into the comp's prices ( and marketing times, which will translate to market exposure, does it take longer to sell a property with a deed restriction and limited buyer pool?)

You can not ignore the deed restriction and have to analyze any impact on marketability and value.

It is different than a short sale. A short sale is a one time sale type, with (typically) no attached restrictions on who the new owner can resell too in future or for what amount. o. Whereas this deed restriction travels with the property for 36 years and restricts future sales transactions the new buyer can make should they to sell later .

The financing may be conventional, imo this is not about financing, it is about a deed restriction and impact on value of such.

 

[Doug DeMars]

J-
Well yes...the buyer pool is restricted...but that's true for most sub-markets (expressed or implied). I checked with the city, and there's a waiting list. So...a restricted buyer pool is not a marketability issue. There's plenty of demand for this specific property with the restriction.

There is a max amount the property can be sold for and it is based upon the median household income (I wasn't provided what index the city uses).

Hi Lee-
No...this is up in Nor Cal. This specific deed restriction doesn't say anything regarding 1st time buyers...just income qualifications (and requiring owner occupancy).

All this may be moot. I finally got the resale price ceiling from the city and it is about 5% to 10% above market value.

My question would be what to do if the price cap was below market value. I'd think it best to appraise based upon the MV definition and make comments in the addendum regarding the price cap due to the deed restriction...but only make note of that in the addendum.

 

[J Grant]

Your plan is mostly good, however, there is a difference between a buyer pool restricted by deed vs the naturally self limiting pool of buyers in a market for a given property type ,so I would address that.

 

[Tim The Enchanter]

Guess I didn't look at your location close enough, Doug.
It sounds very much like Venturas law, and I'm not aware of other cities with such a program in LA or Ventura Counties where I work.

I felt it was one of the defining features of the property. Sort of like property in a 55 and over community. Different feature, but...

 

[hastalavista]

Doug:

I've done maybe 10 of these.
In addition to the restrictions of who can buy the property and what is the maximum they'll pay, there is sometimes restrictions on how the property can be mortgaged. When I get these assignments, I find out the answer to both so I can disclose it in my report (some may argue that the mortgage amounts are not my problem; I do it to protect myself).

In one case I specifically recall the client wanted market value as-if there were no max price restriction. I did it under a hypothetical condition.
In all the other cases (IIRC), they wanted the value with consideration to the price-restriction. If the price-ceiling was higher than market (like in your case), no problem. If it was lower than market, then the value was pretty straight-forward (it was at the max). Most clients want at least one if not more similar BMR (Below Market Rate) properties as comparables; even though they may not be similar, I they like to have them to show marketability.

However the client wants it valued, I get (either directly from them or I email them and have them respond back to me) exactly what they ask and I include their instructions in my report.

I may be overly cautious, but so be it! :new_smile-l:

 

[Tim The Enchanter]

I specifically recall the client wanted market value as-if there were no max price restriction. I did it under a hypothetical condition.

Good thought to see what the client needs. In my case they wanted market value with no hypothetical as ifs.

 

[residentialguy]

I've done these and I disagree with your alignment to a short sale. This is something that hangs with the house and needs to be consider. The bank wants to know market value because it's going to basically own it and needs to know the market value due to risk of it going south down the road. A short sale doesn't affect that, but that deed restriction will still be there affecting that future sale. You give them market value, but your market value needs to take that into consideration. A restriction to sell is not creative financing or concessions...it's like a house near an airport that doesn't allow any building variances. That's going to affect all future sales.

 

[Doug DeMars]

Thx Denis...I like your approach.
In the current scenario...MV is below the current cap for resale. So the issue is moot. If and when I run across this situation again, I'll clarify what the client wants when MV is above the cap for resale. Unfortunately, the limited data for BMR (below market rate) dwellings provided by the city is not of much use. There's a pending BMR...but it's a Short Sale and an active BMR that is also a Short Sale.

Beyond that...there's only one relatively recent BMR comparable that is "OK" as market evidence. It took a bit longer to sell and fell at the low end of the price range in comparison to its non-BMR counter-parts. It would be nice if I had more than one BMR sale (not also a Short Sale) that would clarify if a market discount is appropriate due to the deed restriction. But my instincts tell me that the discount is not significant with a pool of buyers on a waiting list ready to purchase these type of dwellings.

ResGuy-

A restriction to sell is not creative financing or concessions...it's like a house near an airport that doesn't allow any building variances. That's going to affect all future sales.

And here is my issue...if MV would be found above the cap for resale.

I agree the deed restriction is not a concession...but...but...but how can a BMR property sell under the premise of "normal consideration". What else could you possibly call an affordable housing program anything other than "creative financing" that is assisted by the city? Capping the sale price certainly assists the buyer with their required financing...no? :icon_idea:

If the most probable sale price is above the sale price cap...I'm not sure I can personally pound that "price capped value" square peg into the MV definition.