Valuation of a house that cannot be sold

[xm39hnu]

The complete details of the restrictions need to be fully understood prior to being able to do this appraisal, IF those restriction leave enough variables for a potential sale.

That's what both of my references say: Research everything. Then verify it. Followed by "Y'all be careful, now, y'hear?"

 

[Jan Roseberry]

After defining all aspects of how and when you can get to cash equivalency, I would sure take a good look at value in use. Certain life estates might be helpful.

 

[Fred]

I think. Cash equivalency is the problem

Cash equivalency is part of the solution when the seller accepts debt securities (IOU’s) instead of cash. That is why you have to estimate the cash equivalent of the IOU’s. I don’t see how that relates to this question at all.
I don’t think there is enough information here to define the problem, but Ken’s point that the seller’s residual could be the basis of the value of something is sound.

 

[KenRossman]

What a sweet deal for the builder.

Typically, the builder must competitively bid the project, and will make an adequate profit, but nothing spectacular. The subsidy usually comes from (and will be repaid to) a community development agency or housing authority, etc. and more often than not is based upon either bonds that must be repaid and/or a pass-thru of far below typical land acquisition costs. The only one getting a "sweet deal" is the purchaser.

 

[hastalavista]

I think there is an important piece of the puzzle missing here too: If the seller decided to sell, who would he have to sell it to and at what mandated price?

There are a number of programs in my area, usually run by some local agency or city, that offer what is termed "Below Market Rate" housing to certain qualified buyers. The qualifications restrict the buyer usually to:
1. Some maximum annual income.
2. An employment criteria (firefighters, police officers, teachers, etc.)
3. Existing residents in the agency/city's jurisdiction, or, those who work in those jurisdictions usually get priority.

The "Below Market Rate" may be somewhat of a misnomer; as a rule, its not the "rate" (i.e. interest rate) that is below market, but the price itself, but could be a combination of both.

A person can purchase the property and get conventional financing. The restrictions put on the property if sold before a certain time-period are that the selling price is based on some type of formula + the cost of verified improvements (the improvements have a criteria of their own, and do not include regular maintenance or repair work). Also, the next buyer usually has to meet similar qualifications as the original buyer.

If the person holds the property for the full period, all restrictions are removed. If the person sell's the property before the restriction expiration date, than the price and usually the buyer's qualifications fall under the mandated restriction.
In all the cases I've dealt with, there is a further restriction that mortgage financing is limited to a percentage of the restricted sale price. One recent property was restricted to a 90% LTV of restricted sale price; other programs may use other LTVs, etc.

So, my question is what restrictions are on the property if the owner tried to sell right now?

 

[hastalavista]

Typically, the builder must competitively bid the project, and will make an adequate profit, but nothing spectacular. The subsidy usually comes from (and will be repaid to) a community development agency or housing authority, etc. and more often than not is based upon either bonds that must be repaid and/or a pass-thru of far below typical land acquisition costs. The only one getting a "sweet deal" is the purchaser.

There can be tax incentives to the developer as well.

 

[CANative]

The reason I asked about leasehold interests is that this property may be similar to what is described in Fannie's affordable housing stuff. If so, Fannie Mae would buy the loan with the restrictions described in this thread. But the appraisal might be very complicated the fist time out.

XI, 312: Leaseholds Held by Community Land Trusts (06/30/02)

Community land trusts are typically nonprofit organizations that acquire land for a variety of reasons—such as to facilitate homeownership among lower-income individuals and families or to maintain a permanently affordable housing stock in a given community. To reduce development costs to an affordable level, a community land trust uses grants, gifts, and subsidy dollars to acquire land (and then retains ownership of that land). The sales price for the improvements situated on the land does not include the subsidy amount used to acquire the land, which means that a borrower will pay a lower purchase price for his or her home (often less than the leasehold interest in the property). The trust offers the borrower a long-term (typically 99 years), renewable ground lease. Because of the affordable terms that it offers, a community land trust usually includes in its ground lease restrictions on borrower eligibility, as well as on the resale of the property improvements.

In selecting an appraiser to provide an opinion of value for a leasehold held by a community land trust, the lender must make sure that the appraiser is knowledgeable and experienced in the appraisal techniques—direct capitalization and market derivation of capitalization rates—that are necessary to appraise this type of property.

When a leasehold interest is held by a community land trust, the appraiser must analyze the property subject to the ground lease. Since the community land trust typically subsidizes the sales price to the borrower, that price may be significantly less than the market value of the leasehold interest in the property. The resale restrictions (as well as other restrictions) that may be included in the ground lease also can affect the value of the property. However, we have developed a ground lease rider that the lender and the borrower must execute to remove such restrictions from the community land trust's ground lease (see Part VIII, Section 302). The land records for the subject property must include adoption of the terms and conditions that are incorporated in this ground lease rider. In view of these concerns, it is important that the appraised value of the leasehold interest in the property be well supported and correctly developed.

The appraiser must use a three-step process to develop his or her opinion of value: (1) determine the fee simple value of the property by using the sales comparison analysis approach to value, (2) determine the applicable capitalization rate (and convert the income from the ground lease into a leased fee value by using the market-derived capitalization rate), and (3) determine the leasehold value by reducing the fee simple value by the leased fee value. When this appraisal technique is used, there is no need to document the actual land value of the security property. The appraiser must develop the opinion of value for the leasehold interest under the hypothetical condition that "the property rights being appraised are the leasehold interest without the resale and other restrictions that our ground lease rider removes when we have to dispose of a property acquired through foreclosure." The lender should advise the appraiser that he or she must include the following statement in the appraisal report:

This appraisal is made on the basis of a hypothetical condition that the property rights being appraised are the leasehold interest without resale and other restrictions that are removed by the Uniform Community Land Trust Ground Lease rider.

 

[KenRossman]

The attached link is a program synopsis of one of these scenarios...

http://hot-links.ws/toh-syn.pdf

 

[Ben Vukicevich SRA]

You guys are thinking too hard. LOL. If you're doing it on a Fannie form and to Fannie guidelines, you appraise to market value and you ignore the deed restriction.



.

 

[xm72mhd]

You guys are thinking too hard. LOL. If you're doing it on a Fannie form and to Fannie guidelines, you appraise to market value and you ignore the deed restriction.

Won't you run slam dab into an H&BU problem if you do that and then also you are not appraising "as is", but under some kind of hypothetical, which I understand meets with resistance somewhere in the maze that leads death in the Fannie dungeon.