Seattle Real Estate Appraisal Blog

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Welcome to Lamb Hanson Lamb Appraisals Associates, Inc's Blog! Our blog is a place to share our experience of the appraisal industry, tips and advice around residential, commercial agricultural real estate appraisals, local events and activities as well as Lamb Hanson Lamb Appraisals Associates Inc's press releases. Comments are appreciated but not mandatory and we will do our best to return comments and inquiries in a timely manner. We hope you enjoy your visit and if we can be of any service please do not hesitate to contact us.

How’s My Tax Assessed Value High in THIS Market?

By Edward A. Williamson

How can my property tax assessment be so high in this market?

It’s no secret that the housing sales market in the region is getting tighter. The Northwest Multiple Listing Service (NWMLS) statistics report for July ‘08 shows the YTD average sales price has fallen over $20,000 below the previous year’s average price, with this YTD number of units sold accounting for only 65% of 2007’s YTD totals. It seems that everyday there is a new TV news feature or newspaper article bemoaning the stagnant market.

And yet, when homeowners get their tax bills, their assessed value may have gone up by double digits! What the heck?

Commercial property in King County has been hit even harder. My work partner, Ed Boyle, and I are currently working on an appraisal of current market value for a tax appeal of a long-time local business whose assessed value went up 100%!

Do you think your property value is over-assessed? Don’t know how to appeal your assessment? Fortunately, the problem and a possible solution are linked together. The Assessor’s Office is forbidden by state law to take 2008 market sales into account for this apportionment. But you aren’t!

There are three approaches to successfully appealing your tax assessment:

  1. Can you show that the assessor’s office made a material mistake? If your assessed lot size or evaluation of structural details is significantly different than the actual surveyed size, this would suggest a manifest error. Check your assessment for material accuracy or math mistakes.
  2. Are you being assessed at a different rate than neighboring properties? It is the responsibility of the Board of Equalization to assure that comparable properties are assessed on an equal basis.
  3. Is your home’s assessed value roughly the same as the property’s current market value? As was mentioned earlier, the assessment may very well not reflect today’s fair market value.

You see, this year’s apportionment is based on a three year average value of nearby properties, with values calculated as of January 1, 2008. This three year averaging is intended to mitigate the market flux and capture present fair market value but when the brakes went on, the double-digit appreciation most of the region’s real estate had enjoyed, the market jolted to an abrupt stop, then dropped. And we’ve been sensing market downturn on the commercial side since about July of 2007.

So, how do you appeal? You must file two copies of the appeal petition with the Board of Equalization/Appeals, which must be received by the board on or before July 1st of the assessment year, or within sixty (60) calendar days after the date of the value change notice (or other notice of determination) - whichever is later. The information that the board requires is laid out in the Board of Equalization FAQ page; this site has a good deal of information and is a great place to start. You can begin to compile evidence by contacting the Property Tax Advisor in the assessor’s office for information on how your property was valued. You may need to get information on recent sales at that time, but I would strongly recommend performing your own research. Public records in our area are reasonably easy to come by. One key aspect is to locate comparable properties in your neighborhood that match your property as closely as possible. An identical match is not required, but the fewer the differences, the stronger your argument.

The King County Board of Equalization is made up of seven appointed citizen members. Their decisions are based on the legally-required exercise of “equalizing” the assessed value with the market value standard. That’s today’s market value standard, not the roller coaster of three years past.

And there’s your edge - the comparables you submit in evidence can come from this year’s market and, with good supporting data, you should make your case. Published reports put appeals received from the King County Board of Equalization this year at 1,800 as opposed to 750 by this time last year, with the outcome: Over half the appeals resulted in lowered taxes.

Of course, if your property is complex or commercial, it would pay to get a certified, professional appraiser involved. At Lamb Hanson Lamb Appraisal Associates, we often work on ad valorem appeals for both residential and commercial property assessments. So check out the County Assessor’s resources and start investigating. And don’t forget - the clock is ticking!

More Information: (for local counties)

Assessor’s Office

Board of Equalization/Appeals

Taxpayer Appeal Petitions

Washington State Board of Appeals

Continuing Education: Learning Over a Lifetime

In 2003, I happened to take a continuing education class on a whim at Discover U, a lifelong learning school in Seattle. At that time in my 30s, life was feeling repetitively boring with the same old, daily work grind, week in and week out like a robot. Mostly everything after graduating from college had been about work, career, and making money as well as a living. Personally, I had always enjoyed school and learning new things, but over time in the workplace, I had lost my learning spirit. Weeknights and weekends were about vegetating, recovering from work, and escaping from work.

Taking that initial class at Discover U helped me rediscover a joy for learning. It awoke in me a long, lost hunger to learn new things. It was refreshing being back in the classroom after 10+ years, interacting with other students and meeting new people. I think it is a common experience for many adults in our culture where life after graduating from school becomes all about work, and any desire to learn new things disappears. At Discover U, I enrolled in another class, took another class, and another. I instantly became hooked on taking all kinds of classes from cooking to travel to exercise to career development classes. Rather quickly, I became a volunteer instructor at Discover U teaching my favorite hobby, volleyball, to beginners. I have taught now for the last 4 years, and it has been addictively fun and a wonderful blessing to see students learn how to play volleyball and play it well! Another class I took was an introduction to real estate appraisals, which was an entry point into a new career and preparation to obtain a license with the state of Washington. I definitely plan to take classes and teach classes throughout my life.

Why continuing education? One, for personal growth and enrichment. Learning of any capacity has many health benefits in life such as brain stimulation, stress reduction, alleviated boredom from routine and repetitiveness of everyday life, to counteract business, and to combat aging. Henry Ford, the famous American industrialist (1863-1947), said it best that, “Anyone who keeps learning stays young. A great thing in life is to keep your mind young!” I read an anonymous saying once that if you stop learning, you will stop growing, and if you stop growing, your mind will deteriorate quickly.

Secondly, for career growth and development. I began the process to obtain certification in my appraisal career. I have become an associate member at the Appraisal Institute, the leading membership association for real estate appraisers. AI offers classes nationwide and online for state license, certification, AI designation, and continuing education. These classes are taught by designated members who have years of experience in the appraisal profession. When I took my first AI class, I found it to be very thorough, informative, challenging, and well taught over 4 days in the classroom.

Sadly, Discover U went bankrupt and closed its doors in Belltown. Like the phoenix rising out of ashes, a new school was born offering free classes, on anything and everything, to the greater Seattle community. Seattle Free School is a school where everything is free. It’s free to take and teach classes. No money is exchanged nor are donations accepted. The school was founded by Jessica Dally. Jessica teaches classes herself, which reflects her diverse range of interests: from cheesemaking to soapmaking, to car maintenance and even beekeeping! In only six months, the school had over a thousand people signed up on its mailing list, and growing more by the minute. I taught a beginners’ volleyball class last summer. In the near future, I am teaching a class on investing in stocks for beginners. For classroom space, the school uses community centers and public libraries. Seattle Free School encourages anyone to teach even if one lacks any teaching experience. All that is needed is a volunteer heart to share knowledge and experiences with others! Elie Wiesel, the famous Noble Peace prize winner, said that, “What I receive I must pass on to others. The knowledge that I have acquired must not remain imprisoned in my brain. I owe it to many men and women to do something with it. I feel the need to pay back what was given to me. Call it gratitude.”

Here at Lamb Hanson Lamb Appraisal Associates, this giving spirit is embraced within the company where AI designated and senior appraisers are encouraged to take trainees under their wings to help them grow and advance in their appraisal careers.

Historical Property Preservation

The “Historic Properties” Preservation and the Valuation Process by Judith Reynolds, MAI and published by the American Institute is an absolute masterpiece of American history that follows the preservation movement up to today.

The Historic Preservation Program started in the US with the passage of the National Historic Preservation act of 1966. To date, there are over 79,000 listed properties covered under the Act. The purpose of this Act was to create a means for the documentation, designation, and financial assistance necessary to save landmark properties from total extinction or destruction.

As time went on, the Federal government empowered local municipalities and authorities to create ordinances with standards and guidelines for incentives and the control of historic places and properties.

Thanks to the Advisory Council on Historic Preservation federal support was gained that resulted in the above named Tax Reform Act of 1966. This Act created economic incentives and disincentives, benefits, and penalties that included the beginning of investment tax credits.

Further incentive efforts resulted in the Economic Recovery act of 1981 which accelerated property depreciation and attracted large scale developers.

However, 1982 saw the tax credits base change from a 3 tier savings to only 2 tiers. One, the 25% investment tax credit for historic rehabilitation was reduced to 20% while the 15% and 20% credits for 30 and 40 year old non-historic buildings were combined into a single 10% credit for buildings built before 1936. The one year passive loss rule set at $7,000 to be used up annually now could only be applied against the tax on income generated by the projects themselves. (High-income taxpayers could not use the tax credit at all).

The overall savings and write offs on investment tax credits were forever changing and more and more individual funding again was being relied on.

The 1978 Urban Development Action Grant (UDAGS) allowed grants up to 50% of rehab costs. This changed and ITC’s now were only being applied at the local and state levels and allowed for economically feasible projects only.

The 1995 Historic Home Ownership Assistance act capped the housing tax credits from 20% of costs to $50,000 maximum. These credits however, could be transferred and could reduce interest on mortgages.

Other issues began to rise such as actual uses vs. economic uses, Eminent Domain, and Condemnation Authority conflicts, exemptions and/or tax freeze actions. Also, many properties became subject to the ability to achieve competitive market sales, a reasonable return on investment and a proportion of rent allocation to business income in order to meet eligibility requirements. More and more local, state, and federal authorities are requiring appraisals as the means for establishing eligibility, benefits and analysis of Investment Tax Credits and values for these Historic Properties.

One or all of the common approaches to value are typically used to identify value benefits to individual corporations or agencies who participate in these projects. The appeal, besides third party oversight, is that the appraisal or valuation process is an orderly program by which the problem is defined; the work necessary to solve the problem is planned, and the data involved is acquired, classified, analyzed, interpreted, and translated into an estimate of value.

Some of the available benefits and incentives are as follows:

  1. Subsidized interest loans
  2. Tax exempt bond financing
  3. Mortgage guarantees
  4. Relief from local sales tax, tax moratoriums, freezes and abatements
  5. Assessment tax relief
  6. Zoning and building code relief
  7. Public purchase and private resale at low prices
  8. Public/private joint ventures
  9. Sale of Development Rights (Transferable Tax Credits)
  10. Accelerated depreciation
  11. Charitable Donations and Grants

Appraisers must thoroughly document what they are appraising and sometimes must be creative in their approaches. Incentives are created to benefit participants and can create added value. A $50,000 rehab grant in the Cost Approach may create additional return in the Income Approach. Restricting the building height of a historic property may mean analyzing land value by dividing the floor area by the existing building and comparing it to the potential floor area to find the difference in lost density dollars per square foot of land area. Relief from real estate taxes may well mean lower expenses and a higher NOI (net operating income) and a higher market value. Many times historic properties are tourist attractions and create substantial income advantages; all must be measured properly.

Of the 37 listed historic places in Seattle including properties in the Ballard District, Georgetown, Columbia City, Harvard-Belmont Capital Hill, Pike Place Market, the Stimson-Green house, the Arctic, Lyon and Hoge Buildings, Pioneer Square, The International District, and so on, listing them all, Lamb Hanson Lamb has appraised 14 properties.

Those who would like additional information on Historic Properties in Seattle may view the Preservation Advocate website at www.historicseattle.org, or call Christine Palmer at 206-622-5444 ext.226.

Another Reason for Rising Housing Prices

Why House Prices Rise – another example:

Biological Opinion Under ESA May Spell End of Floodplain Development in Washington State

In response to a 2004 federal court order,[1] NOAA Fisheries (the “Service”) recently released a biological opinion (“BiOp”) addressing the effects of the Federal Emergency Management Agency’s (“FEMA”) continued administration of the National Flood Insurance Program (“NFIP”) throughout the Puget Sound region (the “FEMA BiOp”).[2] In the FEMA BiOp, the Service determined that the NFIP jeopardizes several marine species listed under the Endangered Species Act (the “ESA”) and adversely affects or destroys their critical habitat. As a result, over 270 Puget Sound communities will soon receive guidance from FEMA explaining what they must do to avoid violating the ESA when authorizing floodplain development.[3] One way for local governments to comply with forthcoming directives would be a blanket building moratorium across 100-year floodplains. Such a prohibition would fundamentally alter the manner in which Washington cities and counties have managed floodplain development for the past half century.[4]
– (Jessica Ferrell, Martin Law Group)

The above is a direct quote from Ms. Jessica Ferrell (of Martin Law Group) as the lead paragraph from an article she wrote. I understand that she specializes in environmental law.

Regardless of your opinion as to how severely the Endangered Species Act (ESA) should be administered and applied, it is clear that this ruling will once again provide impetus for higher lot prices for new homes. Higher lot prices results directly in higher new home prices. Without going into the detail and proof of why, economic forces dictate that any increase in lot prices will result in an increase in a finished new home prices of about 3 times the lot value increase.

Why will this increase lot prices? Lots of reasons!

  • There is a substantial amount of land in the region that lies in 100-year flood plains, including much of the land that is currently undeveloped.
  • It will require developers to do more pre-approval studies, increasing production costs.
  • It will reduce the inventory of available development (or re-development) land, as some of what would have otherwise been usable will be excluded from being used. This will increase raw or vacant land prices. Remember that our cities, towns, and counties have already limited the amount of development land by the dictates of the Growth Management Act (GMA) which requires that development be constrained to be within the politically drawn lines of Urban Growth Boundaries (UGB) in what is then designated as Urban Growth Areas (UGA). While planners made conscientious efforts to identify usable land inventory when establishing their UGAs, removing some of this land will cause many of the comprehensive plans to need reworked earlier than expected.
  • It will require increases in infrastructure costs, particularly in storm water management infrastructure. More of the developable land will be dedicated to non-development use to accommodate stormwater management. This will decrease yield on the usable land, further reducing potential lot inventory.
  • No doubt “mitigation” requirements will increase beyond stormwater management – which often means the paying of fees to various governments so that they can “provide remedies”. Unfortunately, this remedy is really nothing more than a tax, in effect, as the money goes into general funds and gets otherwise expended.
  • It will lengthen the already time-consuming and costly entitlement process, adding to holding costs, thereby adding to production costs.

This is not a complete list, and may be just the start. What is important to understand (regardless of how strongly you embrace such regulations) is that it will increase the cost of production of new housing for everyone. But it won’t make the houses bigger or better. It may not even provide much benefit to the species that are endangered. Governmental agencies (regardless of lip service on the topic of “affordable housing”) rarely contain any kind of cost/benefit analysis.

One of the problems with taking things to extremes is that costs go up dramatically while the increment of benefit gets smaller and smaller. Just like auto pollution – the first 80% of improvement cost automakers and the car-buying public less than raising the degree of improvement from 80% to 90%. And 100% can never be achieved, regardless of cost. Just how far should we go, and at what cost?

Ian M. Lamb Awarded SRA Designation

CITY– Seattle, Real Estate Appraiser, Ian M. Lamb, Lamb Hanson Lamb Appraisal Associates, Inc, Seattle has been awarded the SRA designation for appraisers involved in the valuation and analysis of residential real estate by the Appraisal Institute. The designation was granted June 25th 2008, and the new member was honored during the Appraisal Institute meeting in Seattle, Washington. SRA appraisers have an advanced level of expertise and experience in the valuation of single-family homes, townhouses and residential income properties of up to and including four units.

The SRA designation is earned upon the successful completion of a graduate-level curriculum, which includes a written demonstration appraisal report or alternative and attaining 3,000 hours of qualifying experience requirements. Also, designees must abide by both the appraisal profession’s Uniform Standards of Professional Appraisal Practice (USPAP) and the Appraisal Institute’s Standards of Professional Practice and Code of Ethics.

Click here to read the full article…

Lawsuits and Privacy

When banks foreclose on real estate, they look for someone to cover their losses. In some recent lawsuits against appraisers in other areas of the country, appraisers have been found to be incompetent whether or not they had appropriately valued the property. Residential appraisers are most at risk, but some of the following applies to anyone doing appraisals for lending purposes.

Privacy Policy. Every report done for a lender must have a reference to the company’s privacy policy in compliance with the Gramm-Leach-Bliley (GLB) Act. Our corporate policy is included in the company policy manual and also on our site, under Privacy Policy. The corporate policy, which is also mailed to our regular clients on an annual basis, shows the connection between the GLB Act requirements and USPAP confidentiality requirements and can be added to a report, or the more generic GLB compliance statement that was previously distributed can be used.

Exposure Time. With the current edition of USPAP, we are no longer required to comment on Marketing Time (prior to the Date of Value), but we still need to discuss appropriate Exposure Time in every appraisal report. Appraiser competency has been questioned and is found wanting when the Exposure Time comment is not specific to the assignment. Simply stating that “exposure time of 60-90 days is appropriate” is NOT adequate. The exposure time must be specific to the type of property (i.e. single family homes of 1,800 to 2,200 square feet or single family homes in the $XXX,000 to $XXX,000 price range) and the market area.

In Fannie Mae form reports, Fannie Mae guidelines require the “Date of Sale/Time” to show both the contract date AND the closing date for the sales comparables. However they will accept just the closing date but you must state in the comments which date you used and the source, e.g. “The date of sale shown in the comparison grid is the closing date as recorded by the county recorder.”

Also, in the Fannie Mae form reports, the Cost Approach, if developed, must include the ‘entrepreneurial profit’ as a line entry; Marshall & Swift does not include that in the Residential Cost Handbook.

Appraisers should also be aware that the Marshall & Swift cost factors are based on subdivision construction, where material can be staged and crafts-people can be easily shifted. The replacement cost for a single home in a developed plat requires “just-in-time” material delivery, because there is no space to store it for a week or two until it is needed, and coordination of workers’ schedules, so the builder does not have a $60/hr employee standing around waiting for someone else to finish their work. One insurance company has estimated that such timing adds at least 10% to the replacement costs for fire damaged properties.

Per the instructor of a recent continuing education class, the above are just some of the deficiencies in residential appraisal reports where appraisers are being shown to be incompetent before the court even considers the accuracy of the valuation. When the appraiser deviates from regulations (USPAP), policy statements (Fannie Mae guidelines) or textbooks (The Appraisal of Real Estate, 13th Edition), it does not matter to a court what “is typical in this market.”

RMA Young Professionals Summer Social - August 20

The Young Professionals’ Risk Management Association (YPRMA) is holding the 3rd of its Summer Socials!

Joey’s Restaurant
800 Bellevue Way Northeast
Bellevue, WA 98004-4229
Tele: (425) 637-1177

Wednesday, August 20th, 2008

Social begins at 5:30pm. $15 Registration Fee.

Please check out the flyer here: RMA Young Professionals August Flyer

To Register: Registration Form

If you have any questions, please contact Patrick Lamb at (206) 838-1216.

Other RMA Events:

  • Branching Out Social (Everett) - July
  • Argosy Cruise with CPA Group - August 6
  • Branching Out Social (Bellevue) - August 20
  • Business and Dining Etiquette - September 17
  • Horrors in Lending - October 22
  • Personal Finance Investing Tips - November 19
  • Bowling Social - December (TBD)
  • Operational Risk/Fraud - January 21
  • Understanding the Secondary Market - February 18
  • Spring Social (Meet & Greet for Business Schools) - March 18
  • Understanding Title Policies - April 22
  • Golf Tournament - May 20

Appraisers and Condominium Reserve Studies

By Michael N. Read, Certified General Appraiser (WA & OR)
& Barry Wilson, Certified Residential Appraiser (WA)

Changes and new provisions to the Washington State Condominium Law, which took effect June 12, 2008, may impact valuations and appraiser liability. These need to be understood by appraisers (and by owners, purchasers, and real estate agents) when becoming involved with a condominium, whether it is newly declared or has been in existence for many years.

For a quick overview of this topic, refer to an excellent article by Elizabeth Rhodes of the Seattle Times.

For a complete and detailed look at the law itself, please see the Condominium Act and scroll down to Section 64.34.380 through 64.34.390. The history of the new legislation is available at http://www.leg.wa.gov/legislature. You can view the Original Bill or the Bill as Passed in Legislature.

The goal of the new law, sponsored by Senators Rodney Tom, Jim Honeyford, and Bob McCaslin, is to enhance consumer protection in the purchase and ownership of a condominium.

In addition, new rules adopted by Fannie Mae and Freddie Mac, the two secondary mortgage market enterprises that purchase most residential loans, now require that lenders verify that the community association has a line item in its budget requiring annual reserve contributions equal to 10 percent of revenues. An article in the Community Associations Institute New England Chapter newsletter on July 25, 2008 discusses the responsibilities of and potential liabilities for condominium home owners associations.

RCW 64.34.380 ‘encourages’ every Washington Home Owners Association (HOA) to establish a Reserve Account to fund major maintenance, repair and replacement of common elements, including limited (long term up to 30 years) common elements. The Reserve Account is to be established in the name of the Association and the board of directors of the HOA is responsible for administering the Reserve Account. The Reserve Account is to be separate from the HOA’s normal operating and maintenance budget.

‘Unless doing so would impose an unreasonable hardship’, the HOA must prepare and update a Reserve Study in accordance with the HOA’s governing documents and RCW 64.34.224 (1), which requires each unit to have a proportional undivided interest in the common elements.

The Reserve Study must be based on a ‘visual site inspection’ conducted by a ‘reserve study professional’. The Reserve Study must be updated annually and at least every 3 years be based on a ‘visual site inspection’ conducted by a ‘reserve study professional’.

This requirement does not apply to condominiums consisting solely of units that are restricted in the declaration to non-residential use.

In its definition of a Reserve Study, RCW 64.34.382 uses terminology that appraisers will immediately recognize from the Cost Approach. A Reserve Study must include:

  1. A reserve component list including quantities and estimates for useful life, remaining useful life, and current repair and replacement cost for each reserve component.
  2. The date of the Reserve Study and a statement that the study meets the requirement of this section.
  3. The level of Reserve Study performed.
    • Level I: Full Reserve Study, funding analysis and plan.
    • Level II: Update with visual site inspection.
    • Level III: Update with no visual site inspection.
  4. The association’s reserve account balance.
  5. The percentage of the fully funded balance that the reserve account contains.
  6. The special assessments already implemented or planned.
  7. Interest and inflation assumptions.
  8. Current Reserve Account contribution rate.
  9. Recommended Reserve Account contribution rate.
  10. Projected Reserve Account balance for thirty years and a funding plan to pay for projected costs from those reserves without reliance on future unplanned special assessments; and
  11. Whether the Reserve Study was prepared by a ‘reserve study professional’.

The Reserve Study must also include a disclosure that warns about the failure to include a particular component or provide contributions to the Reserve Account for that component may result in the unit owner having to pay on demand a special assessment for that component.

RCW 64.34.384 allows the HOA to withdraw funds from the Reserve Account for unforeseen and unbudgeted items providing they notify the unit owners and repay the amount within 24 months, unless the 24 months would impose an ‘unreasonable burden’ on the unit owners.

RCW 64.34.386 gives unit owners legal recourse to demand of the HOA a Reserve Study if none has been completed within the past three years. The unit owner’s duty to pay for common expenses cannot be excused because of the HOA’s failure to comply.

RCW 64.34.388 relates to the preparation and updating of a Reserve Study at the discretion of the Board of Directors.

RCW 64.34.390 may be of particular interest and concern to appraisers (and real estate agents) as it states that monetary damages or any other liability MAY NOT BE AWARDED against or imposed upon the association, the officers or board of directors of the association, or those persons who may have provided advice or assistance to the association or its officers or directors, for failure to: Establish a Reserve Account; have a current Reserve Study prepared or updated in accordance with the RCW 64.34.380 through 64.34.388, or make the reserve disclosures in accordance with RCW 64.34.382 and other referenced RCWs.

The legislation as written idemnifies all parties involved in the production, management and maintenance of a condominium but leaves the unit owners, purchasers, and their advocates (the very parties who the legislative author’s goal was to protect) with little legal recourse.

A Reserve Study Professional is defined as ‘an independent person suitably qualified by knowledge, skill, experience, training or education to prepare a Reserve Study in accordance with Sections 1 and 2 of this act.’

This definition is not very definitive and could easily result in poorly prepared and ineffective Reserve Studies where the preparer is protected from any liability!

Because of the dearth of professionals currently providing Reserve Studies, community managers, CPAs, contractors and other related professionals are rushing in to fill the void. Appraisers and home inspectors may look upon this as an opportunity to provide a new fee service. Be careful!

Mike Read, the primary author of this article, states:

“I have personally assisted in the preparation of these studies in Oregon under the tutelage of a licensed architect and even though I am a degreed engineer (Mechanical, UK) and a Certified General Appraiser licensed in Washington and Oregon, I do not feel qualified to complete a Reserve Study without additional training and experience. At present I am not aware of any education available in this field, but a background in Building Sciences would be relevant. There is an organization, the Community Association Institute (CAI), which has some certifications, but I do not know the details of their educational path.”

Nena Groskind, the author of the article in the CAI New England Chapter newsletter referenced above, recommends that the Reserve Study be performed by an engineering firm “with expertise in this area.”

There are two main parts to a Reserve Study. The first requires the completion of a ‘Property Condition Assessment’ which is a detailed site inspection of the property and all its common areas and systems. This report identifies the immediate repairs and replacements required plus short and long term replacements required of all common area components. The second part is the number crunching, which places the work items in an orderly time and dollar budget (RCW 64.34.380 recommends a 30-year projection for major maintenance and replacement), to be presented to the HOA and its owners. In her article, Ms. Groskind also noted that IRS regulations require separation between operating funds for maintenance and reserve accounts for replacement and strongly cautioned against commingling funds.

If an appraiser (or real estate agent) is involved in the transfer of a condominium (in Washington State) where there is an action brought by a unit owner or purchaser for nondisclosure of a pending assessment or large unfunded or undisclosed liability contained in a Reserve Study, they could be the only entity in the chain of responsibility that could be held liable. Likewise an appraisal that does not include in its value conclusion the amount and effect of such an assessment or unfunded liability could become the focus for recourse of action by an owner or purchaser.

In preparing a condominium appraisal report on the Fannie Mae form 1073, the appraiser must answer four questions in the “Project Analysis” section on page 2; two of those questions may now have more significance. The appraiser is expected to comment on the project budget for the current year and the adequacy of fees, reserves, etc. and to opine how the unit charge compares to competitive projects of similar quality and design.

Just stating that the budget was not analyzed because the documents were not provided and checking the “Average” box may not be an adequate defense.

Henceforth, when appraising a condominium, in addition to the other documents typically required (minutes of annual membership or monthly board meetings, resale certificate, etc.), it is incumbent upon the appraiser to obtain a copy of the current Reserve Study. If none is available, the appraiser should clearly state in the report that:

  1. A copy of the Reserve Study described under the provisions of RCW 64.34.380 was not provided to the appraiser (and describe the efforts made to obtain same);
  2. Inadequate reserves for replacement of critical components of the building could result in special assessments that would financially impact the borrower;
  3. The opinion of value is based on the Extraordinary Assumption that the HOA has adequate reserves and/or plans to address such expenses; and
  4. If this assumption proves to be in error, the value of the property could be affected.

The authors of this article are both experienced appraisers and are aware of appraisers being sued for failure to disclose critical financial information or information on property conditions that impact value. With the changes to both Washington law and the lending requirements of Fannie Mae, more responsibilities are being placed on the appraiser.


About the Authors:

Michael N. Read has been appraising residential and commercial property in Washington, Oregon and Mexico since 1986.

Barry C. Wilson has been appraising residential property in Washington since 1986.

Additional expertise concerning the items discussed above was provided by:
Carson M. Horton, RS of HOA Services Group, LLC in Beaverton, Oregon.
carson@hoaservicesgroup.com
www.hoaservicesgroup.com

FHA Appraisals - What’s the Big Difference?

A residential real estate appraiser produces a variety of appraisal reports that are specific to the property type, the value definition applied, and the client’s needs. For residential financing purposes, conventional or FHA, the appraisal of typically written on a standard 1004 Form report, also known as a Uniform Residential Appraisal Report (URAR).

Fundamentally, there is no difference between an appraisal report written for a conventional loan and one that is written for an FHA insured loan. Both display an “opinion of value” that represents Market Value. Starting in 2006, the FHA appraisal became the same URAR appraisal report used for conventional loans with the exception of a statement regarding the Intended User that reads, “to support the underwriting requirements for an FHA insured mortgage”.

So why do we perceive a difference between an FHA and a conventional appraisal report?

To know that, you need some knowledge of FHA history. Prior to 2006, an FHA report required two HUD forms to be included in all appraisal reports.

The first was HUD Form 92564-VC, which was a “Notice to the Lender” form also referred to as the “Valuation Conditions” or “VC” form. This form, with 14 sections, broke down the property into sub-categories including: site, soil, topography, site improvements (well and sewage), pests, access, structure, foundation, roofing, mechanical systems, health and safety, lead-based paint and specific requirements for condominiums and manufactured homes. In this form, the appraiser would check off the presence or absence of the various elements within each section. It was a tedious, but thorough analysis of a property that required the appraiser to scrutinize the property and report the findings on the VC Form.

The second was HUD Form 92564-HS, which was a “Notice to the Homebuyer” form. This form summarized the findings on the VC form into a palpable format. If there was a problem identified on the VC form, it was noted and explained on the “Notice to Homebuyer” form. Fortunately or unfortunately, depending on which appraiser you ask, these HUD forms were retired.

Also changed was the FHA requirement of reporting separate “As-Is” and “As-Repaired” values for properties that had observable defects, whether they were major defects, e.g. cracked or sinking foundation, roof leads, health and safety issues; or minor defects, e.g. missing handrails, cracked windows, worn out flooring. This “As-Is” and “As-Repaired” requirement created problems for everyone. It necessitated the appraiser to act as a contractor and determine a repair cost that was, for the most part, unsubstantiated. This requirement also caused significant delays in the delivery of the reports as well as an administrative nightmare.

Still confused as to what differentiates an FHA appraisal?

It all boils down to the underwriting requirements of FHA insured mortgage. The FHA requirements are different from those used for a conventional mortgage. These FHA requirements are stricter and may disqualify a home from the FHA program altogether. An example of a condition that would disqualify a home from the FHA program would be environmental contaminants, noxious odors, proximate location near an oil well, high-powered transmission lines, or anything that is clearly a health and safety violation.

Many requirements extend to a property’s eligibility for an FHA insured mortgage if not corrected or repaired. One example is the roof. A home may have a maximum of three layers of roofing. However, if more than two layers exist and repair is necessary or there is less than two years of remaining physical life, all of the old roofing must be removed as part of the re-roofing. Also, a home with a flat roof must be inspected by a qualified roofing inspector.

Another example are the private water and septic systems. They are allowable as long as they are functioning; meet the required setbacks and the requirements of the local health department. However, connection to public water and sewer must be made if the total cost to connect is 3% or less than the estimated value of the property. Furthermore, FHA requires that shared wells service no more than four properties and a shared well must have a shared well agreement in title and that agreement shall also be recorded in a deed or public records.

One more difference between the FHA and conventional appraisal are the reporting of the physical improvements, i.e. home or condominium. The most confusing of the guidelines is how the FHA considers gross living area (GLA). The GLA is the total area of above-grade residential space. Above-grade living space is the area above a crawl space or a basement. Finished basements or attics are not included in the GLA, however their existence, size, quality, and functionality are valued.

According to FHA requirements, basement space does not count as habitable space unless certain criteria are met. For example, basement bedrooms must have a window, the windowsill must be no higher than 44 inches from the floor, the window must have a clear opening of at least 24 inches wide and 36 inches in height and the window must be at ground level or higher or have appropriate window wells.

The above examples are just a few of the FHA requirements pertaining to single-family housing. There are many more FHA requirements and issues regarding eligibility. A copy of the FHA Handbook (4150.2), in Word or PDF format, is available on the HUD website.

Thanks for reading.

Use of Transferable Development Rights (TDRs) by Local Municipalities and Private Parties

Observations: There appears to be three general categories of TDRs: first, there are rights transferred within a municipality. For example, the Seattle, Redmond, and Black Diamond programs transfer rights between certain specific areas within their city. The second broad category involves inter-local agreements between cities and their county planning divisions. King County has an inter-local agreement with Issaquah; Thurston County has one with Lacy, Olympia, and Tumwater (at present, there exists no similar agreement regarding TDRs between those cities). Generally, the county will designate a region or class of property as the sending site and the city will designate an area for its receiving site. The third broad category involves private sites as both the sending and receiving sites. One example of this had a developer “sending” 4-units of density from a site near Auburn to a site near Redmond/Kirkland. Both sites were county jurisdiction.

Beyond these general categories, TDR practices can differ greatly. King and Pierce Counties and Seattle operate TDR banks in addition to private credit transactions. Many municipalities, however, require private transactions while maintaining approval rights. The pilot program in Snohomish County sends credits from farmland along the Stillaguamish River to a master planned neighborhood. Landowners seeking approval for new development projects in the Arlington Receiving Area must purchase and use transferred development rights for at least 25% of the proposed single family residential dwellings. And in Redmond, the sending sites include urban recreation sites and critical natural growth areas to receive in a commercial building area. In almost all cases, some level of participation is required for development in the receiving areas; in some cases, participation is only necessary to achieve maximum density. It remains to be seen if the forced acquisition of credits will have an impact on private developer’s attitudes and participation.

The issues associated with allocation rates and exchange rates are likewise varied. For example, in King County 1 urban TDR credit equals additional urban unit for private purchase, while 1 rural TDR equals 2 additional urban units. The unit of exchange in the City of Seattle is the square foot, and the city acknowledges that there is often not a one-to-one correlation. The variety of variables suggests a negotiation process.

Transfer price information is hard to come by and somewhat open to interpretation. During the approximately 12 years that Redmond has offered a TDR program, some 560 TDRs have been transacted generating an estimated $16.5 million. (The number of sending and receiving sites involved is unknown by us.) This averages $29,464 per TDR credit. But the actual purchase price will reflect prevailing market conditions of the time and the needs of the principals. And these are all private transactions as Redmond does not maintain a TDR credit bank.

Of course, the most informative sales data may come from public-to-private transactions. The City of Seattle estimates that their bank of 1.3 million square feet sold in a range from $15-$20 per square foot (it is notable that this figure usually applies to up zoning in a small downtown area and not raw land outside of the urban core). King County ranges private urban prices from $10,000 to $15,000 per credit, and rural to urban prices average $15,000 to $25,000.

Great care must be taken in valuing the allocation and exchange rates to provide the financial incentives necessary to interest buyers and sellers. In 2006, Snohomish County, while never intending to act the role of a TDR credit bank, felt pressured enough to commit $2.1 million for one-to-one exchange to the receiving area, this rate may divert potential development interest elsewhere and serve as a challenge to the program’s success. The county acknowledges its flawed valuation and plans to recover, the but the message is clear: market-based transactions are risky, particularly if the asset may be held for a period of time. Expert impartial guidance helps mitigate the risk.

When all is said, it appears that the range of values demonstrated for TDRs falls into the rather broad range of $10,000 to $42,857 per credit. For the most part, the market appears to be under the control of various governmental jurisdictions, either directly or via their police powers. The sales data is quite thin, given that it has occurred during a time span that has seen the Puget Sound Region going through a record setting period of development.

The market for TDR credits also does not seem to be in any way organized. We cannot find that the values of reported sales were established by any means other than negotiations between the principals to the transactions, be they public or private.

Given these conditions, it is quite speculative to assign a value to a potential transferable development credit. The client who commissioned our study had facilitated the sale of only 2 credits, and these fo an amount of $40,000 each. This may or may not have been a market value, but was the result of negotiations between the city and the buyer/user of the credits. Since the study was caused by the client looking at acquiring land from which more TDR credits could be harvested, and since the client already has some unsold TDR credits banked, does it follow that their modest success at selling already banked credits really define a market? We would caution that the answer is “probably not”. Would it be highly speculative of them to acquire additional TDR credits to add to their bank based on the expectation of selling them at $40,000 each? We would say, “Absolutely.”

Another consideration that must be taken under advisement is that it appears that the prospective inventory of Sending sites is much larger than the inventory of Receiving sites. This raises the question as to whether TDR programs may cause the harvesting of credits to create substantial banks of usable TDRs. If this happens, will supply and demand act as it does in a typical market by driving the price down? Perhaps it will, as one of the underlying precepts of market value tells us that if all other things are equal, the lowest price will sell first. Competition may therefore act to drive prices down.

This is of particular interest if both public entities and private parties are holders of TDRs. It seems reasonable to expect that the private parties would react quicker to fulfill the conversion of TDRs to cash, and would therefore lower prices to the point that the governmental jurisdictions would be non-competitive if their price levels were not similarly adjusted. Government jurisdictions would still hold the trump card, though, as they wold have to approve the greater density proposed for the receiving sites.

In those circumstances where the governmental jurisdictions hold a monopoly on TDRs, it still remains that prospective users would buy or not buy based upon the economics of any given transactions. It should be financially feasible before a private party buys TDRs so government’s various asking prices may not find a ready market. Could this lead to developers being forced to add density (which could mean buying TDRs at “asking” prices) in order to attain project approval?

It is tempting to offer an opinion that the value of TDRs would be tied to some degree to the cost of land in any given location. For example, an acre parcel of land in Jollytown, zoned for 6 units/acre, could sell in the market at, say, $240,000, or $40,000 per unit. Would it follow then that if a developer would pay $40,000 per unit for land, he would also pay $40,000 per TDR to expand the density by say, 2 units/acre, to a total of 8. Maybe, but maybe not. Clearly, an acre parcel (assuming no wetland, steep slopes, setbacks from critical areas, or other limitations to cause a loss of effective usable land) would typically yield lots somewhere in the range of 6,000 SF each, on average, after the removal of land for streets, sidewalks, stormwater facilities, utilities and other such uses required to provide infrastructure to the site.

If 2 TDRs were acquired to enhance the yield to 8 units on this acre, the probability is that the lot sizes would then fall to something a bit below 4,500 per SF each. Is it probable that a lot of 4,500 would have a lower market value than a lot of 6,000 SF? Yes.

Would the aggregate of values for the 8 lots, despite a lower per lot value, be greater than the aggregated value of the 6 larger lots? Probably so.

Would development costs rise due to having to accommodate 8 lots with infrastructure as opposed to 6 lots? Yes, but likely at a less than pro-rata basis.

Would development costs on a per lot basis rise, stay the same, or reduce somewhat? Probably reduce somewhat.

There are other similar questions that would need to be asked in doing a pro forma development costing sheet for such a project. Moreover, it is reasonable to expect that such costs will change from one specific site to another in response to the differences in the features of the sites.

When such questions are answered specific to a prospective receiving site, it should then be possible to make a reasonable effort at evaluating TDRs on a comparative basis based upon market values for the land. The value for the TDR should always be less than the unit value for the land for a like use, however, due to the influences addressed above.

Another aspect that is worth being addressed is the condition of supply and demand. There appears to be no way to measure how much demand there is in the actual marketplace. Further, it also is not really ascertainable whether the demand is higher than demonstrated by sales - but sales are curtailed by the price at which TDRs are available.

To further the difficulty of analyzing TDR values, they are personal property - not real estate. There is no device that causes sales of TDRs to become recorded and therefore public information. It may be possible to track every project that is approved for development and/or construction to see if there is a TDR component present, but this would be quite labor intensive and would likely yield relatively little data for the effort. Who wants to become an “expert” in such a limited arena, and therefore spend the necessary time - without any certain compensation for having done so?

Another difficulty derives from the fact that TDRs can be harvested from sending sites by private parties - at least in some jurisdictions. As the governing rules appear from our survey, it would be possible for the governing agencies to track how many of these are currently available, but a constant surveying of those records would be required to maintain an accurate accounting of the inventory.

With all of this being addressed, it becomes obvious that establishing a price for TDRs without specific knowledge of the details for each potential transaction appears to not be feasible at present. On the other hand, given the details of a specific transaction, it should be possible to reasonably establish a value for TDRs associated with that specific transaction by measuring the economic impact for both the sending and receiving sites.

That being said, the data appears to show for residential units can be shown to have enjoyed some market acceptance in the range of $15,000 to $40,000 per TDR unit.

Perhaps more order to the market could occur if the various jurisdictions that are currently utilizing TDRs or considering incorporating them into their land use planning were to establish more uniform methods. This would potentially benefit the understanding of the market and market values. It could also facilitate the development of Interlocal Agreements so that TDRs could be harvested from a sending site in one jurisdiction and transferred to a receiving site in another jurisdiction, which is now possible in only a very limited way.

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