What’s all the fuss about in appraising new condominium developments? What are Fannie Mae’s specific rules regarding condominium developments? Do appraisers need to be proactive when they are tasked with appraising a new condominium?
In recent years, many condominium developments have come on to the market only to encounter seemingly insurmountable obstacles during the underwriting and loan process. Unfortunately, some of these obstacles arise out of the appraisals written for these new condominium developments.
New condominium developments can be newly constructed, or newly renovated and offered developments. Any newly offered collection of shared and/or partial interest homes which have a condominium form of ownership fall under the Fannie Mae guidelines for new condominium developments.
The Fannie Mae/Freddie Mac Condominium Form Appraisal Report (Fannie Mae Form No. 1073, effective March 2005) requires the appraiser to provide details not only about the subject unit but the condominium development as a whole. The real property defined as the subject unit is an inseparable part of that development. The analysis of the development is as important as the analysis of the individual unit.
Often, the residential appraiser is unaware of the importance of accuracy in their development and reporting of that data, and its impact on the overall valuation process.
Why does it matter how many units are built? How many are offered for sale? Who owns how many of the units? Whether or not the budget was provided and reviewed? In any condominium development, these details are an integral part of the valuation analysis.
When tasked with appraising a single unit in a new condominium development, appraisers must understand the crucial importance of their analysis of the project as a whole in order to arrive at a reasonable and supported opinion of market value.
The appraiser must fully research and report accurately the details of the subject development, including the number of phases; the status of those phases, the total number of units, the number of parking spaces, the site size, and any restrictions regarding tenancy which are mandated by the city or municipality. The Declaration of Condominium must be reviewed and referenced, along with the site plans on file with the city or municipality.
The adequacy of the amenities, and the budgeting for their completion and maintenance should be analyzed.
Fannie Mae recognizes the importance of this information, and maintains a website identifying “approved” developments. If a property does not appear on the Fannie Mae website, it will be necessary for the lender to obtain a “spot” approval for a particular development.
Although the appraiser is not responsible for the approval process, the appraiser does bear responsibility for determining and reporting whether or not the particular development has been approved.
Since it is the appraiser’s role to define whether the current use is the highest and best use of a property, the appraiser bears responsibility for determining whether the subject unit’s use a single family home in the condominium form of ownership defines the greatest return or the highest possible value—to the property owner. The data gathered by appraisers regarding the development as a whole should enable them to satisfy that professional responsibility.
The appraiser needs to determine what the market response is—in their particular market—to the subject unit’s specific style, amenities, location and development type. They need to define all the aspects of the subject’s development by carefully gathering the data for the subject development and reporting it to their client.
Attention to things like phases of development, number of units currently offered for sale and sold, and percentage of owner occupied units vs. tenant occupied units is critical in performing an adequate comparative analysis. The appraiser needs to know how many units are sold in the development, how many are currently on offer and how many have been offered in the past.
Buyers weigh their decision to purchase based on many factors, and it is the appraiser’s responsibility to determine and to report which of these factors are value-influencing and which are not.
Perhaps the single most important area for consideration is the one most often overlooked by residential appraisers.
Does the subject development meet the expectations of the market? Will those units be perceived as desirable? Are they located appropriately? Are they reasonably priced? Are they similar in amenities and room counts to units which are accepted in the market?
The market responds to location, site amenities, room counts, styles and fees.
The location of a unit matters to the purchaser. The subject market may define a unit’s value by phase, floor level or position. Or, it may use some combination of all of those factors to define the value. It is the appraiser’s responsibility to identify and assess such market responses, and to communicate them to his or her client.
The appraiser must address the market response to the cost to own the condominium, as represented by the monthly homeowner’s association fees. The prudent buyer must be able to afford these monthly fees. The market will demonstrate a response to fees which are too high or too low. In addition, the appraiser must provide enough analysis for his or her client—the lender—to be satisfied that the aggregate fees are adequate for the maintenance of the condominium development.
The buyer cares about numbers of bedrooms and baths. A buyer for a one-bedroom unit may consider a two-bedroom unit. However, a buyer who needs two bedrooms will not consider a one-bedroom unit as competing. The market responds to types of shared amenities. A unit with onsite amenities like pools and parking garages will sometimes sell for more than one without them. It is the appraiser’s responsibility to demonstrate the market response to the particular amenities offered by the subject’s development.
The style of the development matters, too. If all of the units are townhouse style, then the market response to them may be similar. However, if the typical condominium development in a market is a townhouse style, but the subject is a high rise, then appraisers bear the responsibility to measure the market’s acceptance of the different style and to report that to their client.
Appraising a new condominium without a historic track record of market acceptance is a multilayered analysis, which requires the appraiser to take into account and to respond to many differing elements of data.
Lenders often have condominium-specific requirements for their loan products. These requirements are designed to ensure a level of certainty for the lender as regards both the development and the appraiser’s analysis.
A new condominium development does not have to be an insurmountable underwriting challenge for the client and the borrower.
By partnering with the lender, appraisers can ensure that they present a reasonable and supported market value opinion to their client which takes into account all areas of contributory value, and which will allow their client to make a loan with confidence.
Jennifer Schnell is the senior quality review appraiser for Lincoln Appraisal and Settlement Services, Providence, R.I.
