“A condominium is a form of fee ownership or long-term leasehold of separate units or portions of multiunit buildings that provides for formal filing and recording of a divided interest in real property. In contrast to a PUD, a joint share in ownership of the common area is part of the mortgaged property, and therefore, constitutes a measure of the security backing the mortgage loan. FHA’s interest is therefore more immediate and direct with respect to the common areas of condominiums than those of PUDS.” 4150.2 Chapter 9
Condominiums are legal creations of the states in which they are located. They typically start life via the Declaration of Condominium or similar document. There also Covenants, Conditions and Restrictions (CCR’s).
Another source with essentially the same definition as FHA reports there should be a “master deed”, “condominium bylaws,” and “association bylaws”. The thing to understand is that, even though detail wording will vary depending on where you are practicing, the concept is the same. The concept is that there has to be a document which establishes the existence of the condominium, and certain other documentation that provides for the administration of the condominium. The documentation bylaws or CCR’s often have base elements which are set by state law or regulation.
If you are uncertain if your subject is a condominium, ask a title company to check for the Declaration of Condominium, Master Deed or similar document. If you are not familiar with the project, be sure you have reviewed the bylaws or CCR’s.
Summary Codominium Basics
CONDO BASICS
The basics of condominium appraisal for FHA are fairly limited. You must know that manufactured houses that are part of condominium projects or cooperatives are ineligible for FHA insurance. You also must know that FHA approves condominium projects. When you get an assignment to appraise a condominium for use with a loan to be insured by FHA, you should check to be sure the condominium project is approved by FHA. The Website is:
https://entp.hud.gov/idapp/html/condlook.cfm
The use of the Website is self explanatory. When you retrieve the condominium record you are seeking, click on the condominium name highlighted in blue for specific details regarding the project, including its status and year of completion. Hint: You need to know how to use this link to pass your quiz at the end of the assignment.
Also, to be eligible for FHA insured financing, the project must have an owner occupancy rate of 51% or more.
Condo Data
One of the big areas of difference in condominium appraisal as compared to other appraisal assignment types is the gathering of project information for the project analysis.
Depending upon the project, information may be easy or difficult to obtain. Some projects are self managed and some use a management company. As you saw in the video, some appraisers report they are even being charged for certain condominium information. The reality, when you doing a condominium appraisal, is that there is generally a very important person, the owner of the unit, who has a significant financial interest in the outcome of the appraisal. That individual is also, however nominally, the boss of whoever or whatever entity runs the association. If you are having trouble getting the important information you need about the project, you should contact your lender. The lender can often work with the condominium owner to get what you need. It is generally in the self interest of the condominium owners and management to work cooperatively with the appraisal professional.
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Data source for project information
Cite here the sources of the information you used, such as condominium documents, public records, a management company, an association board or committee member. It is best to document with whom you spoke by name and phone number or other contact information. Later on you are requested to provide the name and phone number of the management company anyway.
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Does any single entity own more than 10% of the total units in the project? If a single entity does own more than 10%, you are asked to provide the name of the entity and the number of units owned. You are certain ton find projects where multiple entities own more than 10% of the units. In these cases, you will name each and their concentrations of unit ownership.
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Project analysis – analyze budget. You should explain the results of your analysis, including the adequacy of fees and reserves. Typical elements often included in association fees are:
Legal and accounting
Utilities
Trash removal
Repairs, maintenance, upkeep, landscaping
Taxes and insurance
Reserves
In addition, you are requested to consider if there are any special or unusual characteristics of the project known to the appraiser. You are looking for matters which are out of the ordinary, such as a special assessment for a repair of roof or retaining wall, or rapidly increasing assessments suggesting rapidly increasing maintenance or other expenses. Or you may discover decreasing dues and decreasing reserves, suggesting either that management has over-assessed in the past or the project is currently being poorly managed. In any case, you want to be sure to carefully interview a representative of the association if you have questions or concerns.
GLA
Gross Living Area is calculated differently for condominiums than for other property types. The measurements are interior, not exterior. The owner typically owns from the unpainted interior surface inward. The Handbook suggests you can use a copy of the floor plan from the condominium documents, which also shows the square footage, in lieu of your own sketch.
Using the condominium document’s representation of the subject is good practice. Be sure to check it against your own measurements. It has been known to happen that the representation of the unit in the condominium documents varies significantly from what is really there. Where there are variances, the issue then is how the market treats the units in the project with regard to the square footage. Include either your sketch with calculations of the condominium page with subject’s representation and square footage. If each is necessary to explain how you developed the subject’s gross living area, include both in your appraisal report.
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Physical deficiencies or adverse conditions
Remember: lead based paint requirements are same for a condominium as for any other property type.
Sales Comparables
SALES COMPARISON APPROACH
With regard to the “comparable data pool”, certainly it is best to use sales in the same project if they are available. But we live in a real world, so they are not always available. FHA’s advice is that ,if the sales are limited, you may mix condominium types. That is, you may use a “mid-rise” as a comparable for a “high-rise.” When you open up your search due to a limited amount of data, be sure to use the same criteria for the estimation of the comparable properties available for sale and comparable properties which have sold in the last 12 months.
Again, where resale activity exists, it is best to use sales in same project. It is certainly a big red flag when you do not use sales in the immediate project which indicate a lower value for the subject than the sales you used from outside the subject project which support a higher value. At the very least, there is the appearance of poor appraisal practice. At the worst, the appraiser selected the comparables by price rather than comparability.
For new projects or recent conversions, finding comparable sales can be difficult. FHA guidelines for appraisal assignments within new projects or new conversions call for the use of at least one sale from inside the project to demonstrate the market acceptance of the subject unit’s project.
With new projects or conversions, there is the issue of the builder or developer being a party to the transaction. FHA’s guidance indicates that as long as the builder/developer is not a party to the transactions within the development, sales and resales from within the project are superior to those from outside the condominium project. Be sure to pay particular attention when using sales where the builder or developer is a party to the transaction.
For FHA, only closed transactions can be used as primary sales 1, 2 and 3.
Income Data
INCOME APPROACH
There is a different expectation on the part of FHA for completion of the income approach for a condominium unit, as compared to completion of the income approach in an assignment for the appraisal of a manufactured home or a conventionally built single family residence. FHA advises if “adequate data is available” then the income approach should be completed. You are left with the age-old question of just what is “adequate data”. Certainly, if in the course of your usual due diligence data gathering and analysis for the sales comparison approach, you develop sufficient data to complete a gross rent multiplier (GRM) analysis, then it is pretty clear that adequate data is available. The practical issue then becomes: Does the appraiser face additional due diligence data research and analysis requirements in the completion of an income approach for FHA? What is “adequate data”, and what is the extent of the research expected of the appraiser to develop “adequate data”? This is one area I suspect folks will be thinking about and discussing for some time.
When you do complete the income approach, be sure to provide a proper summary and reconciliation of your analysis. This is not an area for those “canned” comments unless they really apply.
Your subject is in a “high-rise” condominium project. You may: use comparable sales in like “mid-rise” projects and include those in the inventory assessment
