HUD NSP Training - Determining Home Sales Price, 12/13/11

Transcription

1 Kent Buhl: So now, today's event, "Determining Home Sales Price." This webinar will give NSP grantees and their partners guidance on the crucial steps necessary in determining an accurate sales price for NSP properties. Our presenters will review how to set asking sale price, keys to appraisal, how to address sales prices in different neighborhood markets. You'll see examples of how to determine sales price and how some NSP grantees have done this. This webinar is interactive and participants will have an opportunity for questions and answers at one point during the presentation and again following the presentation. And this webinar is for all NSP grantees and their partners. So with us today are Martha Davis and Paul Webster. Martha will be doing the presentation. Paul Webster is available for -- in the Q&A session to add his perspective when appropriate. We also have Jessie Handforth Kome and David Noguera and Hunter Kurtz with us from the NSP office. So welcome to all of you. Glad you're here. And at this point, I will turn it over to Martha. Martha Davis: All right. Good afternoon, again, everyone. Glad we have a nice turnout for this topic. I'm going to try to go through some of the basics about setting sales prices. And I want to try to refer, when I can, to some real world issues that have arisen in some of my consulting work with different grantees over the past year or so in NSP single-family programs. So looking at this agenda, the first section is really on the technical rules that one must follow, and in particular, some exploration of the definition of total development cost as the most key part of that rule. Second, looking at appraisals. We'll just do a little background on the helpfulness and some key elements of property appraisals. And then, we'll really kind of get into some of the meat of how you might design your program and which principles you'll follow in deciding in your locality what ground rules to use in setting your sales prices. And then, look at some special cases when adjustments are needed and some others. So that's kind of the overview of what we'll go through this afternoon. There's a the real simple NSP rules for sales prices and it's the same rule in NSP 1, NSP 2, and NSP 3. And that rule is that the maximum sale price in any single-family home is the total development cost, which we'll get into quite a bit in a minute. There is no minimum price threshold, although we have some advice about that. And there is a recommended practice, and I think it's a pretty widespread best practice, that the sale price be set as the lesser of TDC, total development cost, or the fair market value, which would, typically, be indicated by use of an appraisal. Just to now delve into total development cost, many of you probably are familiar with this, but I want to just review it and talk about a couple of detailed issues. TDC is all of the direct cost of acquiring, constructing, or renovating a property; and that would include both hard costs of construction; soft costs, which, typically, include designs costs; inspections; construction interest if there is a loan; maintenance costs during the construction, etc.

2 And the third category noted here, activity delivery costs on behalf of a grantee, which is providing some direct input, could also be included. And that would be fairly limited, really just something like construction inspection, a very hands-on property-specific activity that a grantee might provide in addition to the development. TDC does not include -- this is by HUD policy -- property maintenance costs outside of the development period. And I think there's some recent discussion and guidance that this development period would reasonably be defined as the time when the developer or grantee acquires the property under this NSP program and stretching up and through the construction period and up until the time, 30 days, after the construction or renovation is complete. So that would be the development period where property maintenance is included in TDC, time before that -- before it's bought -- and time after that would not be included in the definition of TDC. And this is just as a context, the TDC definition for sales price maximum rule. There's a second rule here; disposition costs in their unusual case where there's an NSP home and you end up not doing any real rehabilitation or development, and it's just bought and then resold later. Those costs of sale would not be eligible to be counted as TDC. So again, the significance of TDC here is it's used as a maximum sales price. In many markets, it may not turn out to be the price at all, but it is a maximum. For a little more detail on this precise subject, HUD issued a policy alert updated last September and it's -- there's a link to this full alert at the end of this -- in one of the last slides of this program today. So it's a three-page table within that policy alert, and it goes through a number of types of costs in pre-development, development, post-development, and basically reiterates that TDC costs would be, and this is, quoting from the beginning, those expenses which are integral and allocable to the design, construction, occupancy of a sale of a real estate project. And one of the main lessons is, then, a grantee's administrative overhead, research, planning, expenses, etc. would not be direct costs that would be in TDC. But the direct real estate type costs would be. So this is probably, if you've got questions, a good policy alert just to check out. And as a reminder about recordkeeping, because this TDC limit is one of the clear and paramount rules in NSP, HUD will be looking that you as a grantee to keep records that prove that the sales prices of the properties are below TDC. And so to do that, you have to have a good record of what the TDC is, which would include the component parts of each element of a budget adding up to the TDC, and then also a record with the eventual sales price that would be indicated in a contract or a HUD-1 settlement statement. And the source of the niches of funds is kind of encompassed in those, but when someone buys they might use a variety of different loan and grant sources to make up the total purchase price; that would be in the record. Uses of funds is pretty much the same as the total development cost for that property. And while those records, if they're developers doing the properties, would be initially maintained by the developers; they need to be kept by grantees and grant partners as well since you would be subject to audit on that. 2

3 So let me go into the general section here with a few slides just about appraisals. In many cities and localities, appraisals do play a key role in setting -- after rehab appraisals -- in setting sales prices. So it's not a requirement by HUD rules, but it's a recommended practice here; some of the advantages, both practical, political, operational advantages of using an appraisal. And an appraiser, of course, is a professional who's giving and objective opinion as to the value of a property. So it's a third party giving a professional opinion. It's a standardized means of supporting a fair market value. And so throughout -- in different neighborhoods -- they might be working in one locality throughout the different neighborhoods. The same objective process would be used in each neighborhood and it would lead to -- could support sales at the fair market value. We'll get into that issue later. Of course, an appraisal, when a buyer obtains a private loan form a bank or other source, there will be an appraisal ordered by that lender. And so the locality getting an appraisal up front would have helped align the expectations -- what you expected to sell for and what, in the end, the lender is willing to lend on as a market value. And that's really illustrating the planning. It helps you plan how many units you might be able to sell for what kind of price range and what kind of program income that might therefore generate. And in terms of a political base -- political cover, so to speak, it justifies your decision as a grantee in setting prices or the prices you'll allow developers to set. So it provides a clear objective standard for that. Again, it's a professional doing this. Many grantees don't have the depth of staff expertise inhouse to really be a current appraiser. It's standardized -- I think I really mentioned these before. Buyers and sellers can look at the price as being an objective one, not some kind of -- with any kind of slant from the grantee or the developer. And we'll get into homebuyer assistance and how that would play into covering the full purchase price. So the appraisal will clearly be made for an after rehab value. You would have received an appraisal much earlier in the process when a site is first -- a vacant or a foreclosed site is first acquired, there'd be an appraisal of the as-is value at that time. This is a different appraisal. It's an as-complete appraisal and it's either based on seeing the house completed or, more likely, it's based on seeing the specifications and the contract that -- and plans that are going to be used when construction has started or renovation is started. So the timing of this appraisal could well be ordered well before the construction is complete. And that timing does assist the developer or subgrantee doing the development to begin marketing before the completion. And that's advisable if you want to try to line up a buyer to be available as soon as possible after completion. So just a word on getting a good appraisal. One should use an independent appraiser, not one that's associated with any particular developer or contractor or city councilman or whatever. Generally states would license the appraiser. So a licensed independent appraiser gives you that 3

4 objectivity and competence you're looking for. You may want to give some just advice to the appraiser if your property is located in a very distressed neighborhood where there are very few sales or no sales of good houses in good condition or renovated or newly constructed houses. That appraiser may need to go a little farther a field geographically to find an adjacent neighborhood where there have been physically comparable sales within the past six months. So sometimes, NSP neighborhoods are a challenge to appraise. And you do want to highlight, you or the developer, highlight to the appraiser special features that might be in these homes and, certainly, high energy efficiency is an across-the-board feature of NSP construction and renovation, and something that you'd like to see show up as a little bit of a boost to the appraised value. So that's it on appraisals. I want to get now really to the meat of the policies that you'll consider as a grantee in designing the rules around how you want your developers to set sales price or you yourself set the sales price. But the factors to think about are these NSP rules we've just mentioned. You want something that will result in affordability for your target market, one way or another, and you want to achieve other NSP program goals, primarily neighborhood revitalization. So neighborhood revitalization is a little different than providing affordable housing to your constituent groups. And that's why the sales price level is a key issue; balancing those two. So we're going to look in this presentation at two different options as two approaches to achieving affordability and neighborhood stabilization. In option one, a locality might design a program to price homes to be directly affordable to buyers in the target income group that you're assisting. Option two, you would price at appraised market value, and if that value is not affordable, you would link this pricing with targeted homebuyer assistance. So let's look at option one. You have probably income groups that you're targeting within your locality. They may well be up close to the 120 percent AMI level or they might be more lowincome groups, traditionally might have served. And of course you have your 50 percent AMI set aside group to possibly serve through your program. So you know what target income group you're thinking of. In this option one scenario, you would go ahead and, say, for somebody in that income range, how much can they afford to buy in a home? And that, how much they can afford, is a little calculation here looking at a front-end ratio that is typically used of 30 percent. That's saying that the buyer's monthly housing expenses should be 30 percent of their gross monthly household income. And that housing expense would include mortgage principle, interest, private mortgage insurance if there is that, real estate taxes, and home insurance. And so that calculation can be made, or its arithmetic, depending on the income range you're trying to reach. Here's an example of this option one. There's a home that's developed. Its after rehab appraise value is $160,000 but the locality has decided they're targeting in the income range of $48,000 a year, household income. That's monthly income of $4,000. Using this front-end ratio of 30 percent, that gives you $1,200 a month target housing expense total. 4

5 And when you do the math at calculating what kind of mortgage that would lead to, with a small down payment, that would lead you, depending on the interest rate assumption, but something like $148,000 sales price. That's the mortgage someone would afford; let's say $147,000 with $1,000 down payment. Oh, sorry. So in this case you are pricing the home at $148,000; you're pricing the home below the appraised value. And I'm going to talk about the implications of that in a minute. So this is option one where you really have a straightforward, affordable sales price. In option two, it's really relying on homeownership assistance to be an additional tool. And the reason option two is looked at here, it mentions neighborhood housing values, the second bullet. Neighborhood housing values may be undermined if you have a program where your -- have widespread sales at rates below the fair market value for the neighborhood. That leads -- for the future or for private or publicly assisted sales -- leads to total values as well as become comparable in future appraisals. So the aim here is if you have a soft market neighborhood, you want to try to use your NSP pricing as a tool to bolster appraised values across the board, the bolster that becomes a new market value in the neighborhood. You're producing houses that are probably in better condition than the average for the neighborhood. You want these to be high value -- as high value as they can according to a competent appraisal. But the issue is, how does your target homebuyer afford this market value? And so here in option two, we have an example of how homeownership assistance would be used to achieve both the affordability and the bolstering neighborhood market values. So in this example, the same house is appraised at $160,000. That same buyer can afford a first mortgage of $147,000 and a down payment of $1,000. And rather than selling the house for $148,000, you're selling the house for $160,000 and you're offering $12,000 in a non-payable second mortgage to that homebuyer. And each time you have an applicant, it is sized correctly for that particular applicant. People are not oversubsidized or undersubsidized; they just get what they need to afford that market value of $160,000. Using an example from Cleveland, Ohio, they've got a successful program that's been operating for some months. They use this option two. They set their prices at the appraised value, they underwrite each buyer to see how much that individual household can afford in a first mortgage. And so their values are a little bit lower; typically let's say $150,000 in their program, they've defined a minimum down payment, cash required, of just $500, and they have a maximum in their program, homebuyer assistance maximum, of 20 percent of the price. So in this example, that would be $30,000. They don't necessarily go up to that maximum. In this case, somebody would have to at least be able to qualify for a first mortgage of $119,500; maybe they'd qualify for $125,000, in which case they'd receive the difference in the form of a soft second mortgage from the grantee, Cleveland. There is another advantage, I guess I'll say administratively, to this option two, that is that second mortgage is termed "homebuyer assistance" in the NSP lingo. And that means that when you're looking at long term affordability requirements, recapture, resale choices, you're able to use recapture rather than resale restrictions. If your locality would prefer the probably simpler route of having recapture, it means that if you have that second mortgage subject to recapture if the 5

6 affordability period is violated by a premature sale or lease of the house, you as a grantee can recapture the funds. You've met your HUD required affordability requires through that. The different detail mechanisms of how that second mortgage would be captured, how much of it would be repaid. But whichever mechanism is used it means that there's a fairly administratively simple way to meet your affordability requirements. That owner needs to be a principal owner occupant for the period of time, then the recapture mechanism goes away. If the person violates it, you have a one-time recapture event, and you're not tracking that house any further as grantee. Okay. Let me pause here. This is kind of the basic core of this program. And I've got some special case issues I want to go into in the last slide, but I want to see what questions there are so far. Kent Buhl: Good. We do have some questions. Jody [ph] asked, "How does one convince an appraiser not to use distressed sales? That seems to be the only comps our local appraiser will use." Martha Davis: Wow. Well, an appraiser is supposed to try to find houses that are geographically proximate, but they're also supposed to try to use physically comparable houses. And so I'm assuming if those distressed sales are homes in need of repair or maybe drastically in need of repair, I would make the argument to that appraiser that they need to go further a field and find houses that are in good condition, number one. And second, a distress sale implies that there's sort of -- some -- the seller is under pressure to perhaps take whatever they can get for the sale and you're presenting a normal transaction in your NSP sale until that appraiser -- they really should try to find -- a non-distressed sale really is more comparable in the sense that there's not a pressure on the seller -- the desperation on a seller's part to have to sell in a certain timeframe. So I guess those are the two arguments I would try to make and maybe you could do some research yourself, if possible, to see how far you might need to go -- how far the appraiser might need to go in order to find a more typical and good condition sort of sale transaction. Let me know if there's any follow-up questions on that. Kent Buhl: Okay. Thanks for that question, Jody. And going to go to Samuel. Hi, Samuel. You've got a question about undue enrichment. And perhaps the option two that Martha presented answered your question, but let's hear it from you. Q: Well, let's assume an agency doesn't have access to down payment assistance funds, which, presumably, would close the affordability gap. Are they still allowed to unload that property for an amount less than full market value? Martha Davis: Well, here's my two-part answer, and others may want to add. You are -- there's nothing in the rules of NSP to prevent you from selling at a below market price. It's -- I think -- it's not the best thing for the neighborhood value, but it does not violate rules. 6

7 But back to your assumption, in a number of localities that I know about, their second mortgage money really is NSP money so that if the NSP program is providing a subsidy to the developer during the development period to pay for part of the rehab cost, and you might be providing $100,000 for that developer, part of that money really can be recycled to become homebuyer assistance in this option two scenario. Q: I see. But absent that -- Martha Davis: Well -- [talking over each other] Martha Davis: -- are you providing NSP money in the development phase? Q: I'm sorry? Martha Davis: If your locality is providing NSP subsidy in the development phase, is that entire subsidy kind of eaten up by -- how do we say? If you provide subsidy for a house that costs $200,000 to build -- renovate -- acquire and renovate, and then the market value turns out to be only $100,000, I guess your subsidy could all go into just that difference. Maybe that's your situation? Q: Oh, actually you hit the nail on the head. That happens more times than not. But I guess the issue isn't so much the subsidy as it is the fair market challenge or issue. And I thought the properties had to be sold at the lesser of fair market value or total development cost. Total development costs usually about always exceed value, but it sounds as though in your hypothetical you just mentioned, if that property -- if we want to see it at -- if it appraises at $100,000, but we want to sell it at $80,000 without providing a second trustee, we could do that. Martha Davis: Well, that is definitely my understanding of the rules. The rule you quoted is often quoted as being the rule, the lesser of TDC or appraised value. But my understanding is it's not -- it's the best practice but it's not a requirement. And you could sell that house for $80,000. David Noguera: Remember, Martha -- this is David Noguera. I'll just say, yes. That's certainly acceptable if you can justify that to be a reasonable cost or a reasonable price based on the needs of the buyer, then it's appropriate to reduce the price. Q: Okay. May I ask Dave; is there actually a HUD bulletin that further discusses this that we can put in the file when we have this occurrence? David Noguera: Well, it wouldn't be as explicit as what I just said. It would be -- a lot of our guidance speaks more on the general sense of how you go about using our homeownership assistance rules to make a property affordable; right? You have a variety of options available to you to make the property affordable. In terms of if you'd like to submit a question using the FAQs, we could probably get something back to you in writing that way. 7

8 Q: Okay. That's fine. Do that. David Noguera: Okay. Kent Buhl: Thank you, Samuel. And I think we've answered Michael's question, which was, "If a post-rehab fair market appraisal is not required to establish sales price, how else can we establish it?" And our direction is to set the maximum price at the lesser of TDC and appraised price. Martha Davis: Well, I would say an appraisal is recommended; it is not required. And so your direction that you mentioned is a good one, that -- of using the lesser of TDC or appraised value. So I think -- assuming your buyer was going to get a bank loan, there's going to be an appraisal coming down the road with a fair market value. So you are using an appraisal to set your price up front is just a good practice to help -- have a good expectation for what that lender and buyer will be wanting to pay. Kent Buhl: And finally, let's go to -- Q: Could I just interrupt for a moment? Kent Buhl: Sure. Paul Webster: This is Paul Webster. It's not a requirement that you have an appraisal. And the property can be sold at less than fair market value if the difference can be justified. But the key when you're trying to establish what fair market value is, the appraisal is probably the best and most conductive provenance for documentation of fair market value. But it's not the only one. So there are other means -- approaches that might be used to estimate the fair market value. I think the crucial point is that the -- before the property is sold, that the price, it should be -- some documentation of the other fair market value -- an attempt to document it, and I think that if the grantee does that, then it is going a long way towards protecting itself against audit findings or monitoring findings later on because at least you would have tried to establish. And the fair market value of an appraiser's appraisal is just nothing more than an estimate itself. So a key is, I think, that you try to establish fair market value looking at the various approaches that might be used. The appraisal is obviously the one that would be most recognized as the best approach in most cases, but it's not the only one. Martha Davis: And that -- if I could piggyback on that, this is Martha -- I think that it's possible in a market which may be declining even since you began the NSP program, the market may have softened locally. You may be surprised at low an appraisal may even come in. So it could turn out to be what you thought perhaps was unaffordable turns out to be naturally affordable because values have declined. 8

9 Kent Buhl: That's a good point. And let's go now to -- who's next? Let's go to Matt. Hi, Matt. Matt Constantine? Q: Hi. Yes. Kent Buhl: Hello? Q: Hello? Kent Buhl: Go ahead. Q: I had a question. Appraisals are being mentioned with fair market values and, just curious, with the affordability restrictions that are required with NSP 2, how are grantees communicating that to appraisers and shouldn't these appraisals be coming back below the fair market values due to those affordability restrictions? Martha Davis: That's a good question and this is my take on it. It depends, I think, partly which of two mechanisms for affordability the locality is using. And yes, it should be communicating to the appraiser. If you're using a recapture mechanism, I don't really -- in my opinion, I'm not sure that would really depress the market value of that home. That's just requiring that first buyer to live there. It's not constraining the future resale of that property whereas if the locality is using resale restrictions and for 20 years it needs to be sold for -- to people of the same low-mod income range, I would agree. Yes, that could depress the value in the appraiser's mind. So I think the two are different. Q: Okay. Thank you. Kent Buhl: Thanks, Matt. And what -- who's next? Looks like Elizabeth, who asks, "When determining the sales price, should we take into account all sources of funding in establishing the total development cost? This pertains to leveraging of funds where NSP and private dollars are being used to complete the overall project." Martha Davis: So yeah. The short answer is yes. Regardless of the funding source, you want to look at the spending -- the cost of doing the acquisition and construction, and all the associated soft cost. So definitely the total development cost is cost-based, regardless of whether private or public funds are used, or the source. And the policy advisory that's referenced at the end of this presentation kind of reiterates that in detail. So you might look at that, too. Kent Buhl: Let's go now to Jennifer Elliot. Hi, Jennifer. Jennifer? Hello, Jennifer? Sounds like you're almost there, but -- Q: Hi. I'm sorry. Kent Buhl: There you are. 9

10 Q: My mute was on and I -- anyway. We have a property on the market and it's been there for six months. And we have some adjacent properties that they're lowering the sales prices. They're not ours, but other properties lowering their prices. How do I document lowering a sales price when we've set it at a price based on the after rehab value? Martha Davis: We're actually going to get to that topic in the next couple of slides. Q: Okay. Sounds good. Martha Davis: So I can defer that and call back if that's not clear enough from -- Q: Sounds great. Thank you. Martha Davis: Okay. Kent Buhl: Thanks, Jennifer. And Leon -- where is Leon? Hi. There you go. Hi, Leon. Leon Romanosi [ph]? May have stepped away. And let's go then to Kim's question. Kim asks -- or says that, "We built two duplexes with two units each, costing $550,000 each. Appraisal came in at $160,000, much to our surprise." Martha Davis: Wow. Kent Buhl: "What should the selling price be?" Martha Davis: Well, it's a shock sometimes, the degrade at which value is less than the development cost. But that's pretty common, maybe not that -- quite that degree, but it's common across the country. And so I certainly think if you're going to attract the buyer, you've got to use that appraised value as your selling price. Nobody is going to come and pay $550,000 for it. Kent Buhl: Very good. Thank you, Kim. And let's go to Jeff Holmes [ph]. Hi, Jeff. Q: Oh, sorry. My mute was on. Are you there? Kent Buhl: Yeah. We can hear you. Q: My question was -- I sent it in, but that's all right. You guys can ask me. Can you use a real estate broker to determine a value as an option? Martha Davis: Yes. I think the short answer is yes. Q: Okay. Martha Davis: That's -- Paul Webster mentioned a few minutes ago that appraisal is not the only way to go. And so a broker opinion, if it's something that you trust, is acceptable. 10

11 Q: Okay. Thank you. Paul Webster: Yeah. That's -- unless it's otherwise required, like for the -- I think the statute explicitly states that for foreclosed homes, that the appraisal is required to determine current market value. But you have a little more flexibility with the vacant and abandoned properties. Martha Davis: My understanding is that -- this is Martha -- that that appraisal requirement for foreclosed homes pertains to the initial acquisition before the development. Paul Webster: No. You're right. Yeah. And I think -- [talking over each other] Martha Davis: I was going to mention, that's a confusing -- Paul Webster: Pull it back. Martha Davis: -- because that appraisal is often discussed in NSP rules. But -- Paul Webster: Right. Martha Davis: So just to be clear, it's, I think, a -- it's sort of a case that an appraisal is not, by rule, not required for this second transaction, the resale after renovation or construction. Kent Buhl: Good. Okay. Let's see. We've got -- a couple of questions, I think, have been clarified. And John Yell [ph] would like, again, if you could go over suggestions on how to set a price below the fair market value, total development, to make a home affordable for the homebuyer without causing a decline in value for the neighborhood, which was your [inaudible]. Martha Davis: Well, so again, I think, without causing a decline for the neighborhood, or in fact, hopefully creating a little boost for the neighborhood, again, that's in the slides, option two, where the price is not necessarily directly affordable to that buyer without some second mortgage assistance. I'm not certain if this is what you meant, just to reiterate that. Option two, again, is -- in order to protect neighborhood values, you have perhaps a higher sales price and you need to offer second mortgage to that buyer. Option one, you have direct affordability to that buyer, but in reality you do sacrifice the neighborhood value trend by establishing a below-market comparable. Let me know if I didn't respond fully. Kent Buhl: And Kim asks what if the broker is higher than the appraised value, which do you use? Martha Davis: I think, partly, that might be a timing issue, and we're actually going to get into timing questions in the slide, but let me just say if perhaps some significant time elapsed in between, and it seems like, in fact, the market strengthened, you could potentially use that broker opinion. If, from your general information, your market is not strengthening and it's sort of more 11

12 of a fluke, I would say it's probably not advisable to use a higher price if you're -- if it's not clear that it's better -- more accurate. In the end, the lender will end up getting an appraisal right at the time that that buyer is -- after the buyer has signed a contract. So that will be really kind of a third opinion that would come in at that time. But I would hesitate to raise the price unless I felt confident that that broker had better information, newer information, than the appraiser had had. I don't know; others have an opinion about that. Paul Webster: This is Paul Webster again. Again, sure, the owner of the property, if you're going to -- if the broker is, again, is a higher value, you can market it at that, and if it doesn't sell, then you can reduce the price. But the -- it's totally up to the grantee to make an informed judgment. Again, all of the -- these days in particular -- everything you're getting in the way of estimates are just that. And in the end, you have to have a willing buyer as well as a willing seller, and it depends on what the buyer is willing to pay for it. If they're willing to pay higher than the appraiser's estimate, then that's fine. But you're really not constrained to use the appraiser -- the appraised value for what is done. You just have to exercise good judgment and you probably also know your market and make a judgment between the two of them. You can try to do that. But you have the flexibility to use either -- the main thing is, again, that you've got something that provides with a -- an estimate of value. Someone who would want to second guess you later on, such as auditors or even staff who get HUD's cap, if you have used the broker's estimate, at least you've -- you're using the higher value. And if you could sell it to that, then so much the better. So I think you have the option to use either. Kent Buhl: Okay. Jessie, I see your hand up, but I cannot unmute you. So you can submit your question in writing or you can go to the event info tab and call in using all of that information. And let's go to Cardigan [ph]. Hi, Cardigan. Q: Hi, there. Hi, Cardigan in Chicago. We actually do use broker CMAs. We've got, I guess, a group of about 10 procured agents that actually provide us pricing prior to properties going out to market. The problem, obviously, is -- right now -- is construction and the timeline it takes to get through construction. Appraisers are going to these 90-day appraisal windows now, that the appraisals are expiring. So we're having properties that once were under contract for a price that maybe we're using three months ago, by the time that appraisal comes back out, it's much lower or the appraisal that they did three months, if we didn't close in time, a new appraisal has to be ordered and that appraisal may be lower. So I guess, my question is, how low can you go at some point in time when it gets to the point where you're -- you haven't sold a property and it's taking a much longer time period from what your initial assessment of that value was? 12

13 Martha Davis: I'll take a crack at that. If I understand exactly, I think you have to go as low as the final appraisal that's going to be in effect at the time of closing. And so I'm assuming you're talking about lender-ordered appraisals here -- towards the end, which -- Q: Correct. Martha Davis: -- would expire. And so timing-wise, you have to try to wait long enough to order it that it will still be good by the time you close. That's one side issue, but if it's got to be redone or if it's a new appraisal after a previous opinion you got way before construction started and it's declining, I think you have to keep going as low as the last bank-sanctioned appraisal. I would think the bank is not willing to close on a, let's say, a second mortgage, that's going to exceed 100 percent on the value when added to the first. So I think you were stuck -- Q: Right. Martha Davis: -- reducing your sales price so that your loan amounts stay aligned with the loan devalue using the last value in effect. Q: Okay. I think that answers it. It's really looking at that last appraisal of that and then looking at that appraisal. If that property doesn't close, is that our new price? I mean, that's what we probably should use, I'm guessing. Martha Davis: Or if it doesn't close and you have to then go find a new buyer -- Q: Correct. Martha Davis: -- I -- Q: But not get a new price because we've got an appraisal that was set at -- basically, this new appraisal that's now in the system for, no, three months or six months, whatever -- Martha Davis: Well, I suppose when you read the appraisal, you could decide if you feel it's a fair appraisal. If for some reason it seems too conservative, I think you'd be free to have a slightly different price for marketing purposes. The new buyer, again, would get a lender appraiser or that new buyer moves towards closing. Q: Okay. Thank you. Kent Buhl: Thanks, Cardigan. And if you'd lower your hand, I'd appreciate it. Next up, let's try Jennifer again. Jennifer E., are you there? Q: Yes, Sir. Kent Buhl: Hi. Go ahead. What's your question? 13

14 Q: I didn't think I raised my hand. I had already asked my question and the host said that she would be -- Martha Davis: Oh, right. Getting to it in the last slide. Q: That's okay. I keep hearing everything around it, and we'll get there. I think a few of us might be having that issue. Kent Buhl: Got you. Yeah. My fault. There we go. Q: No. That's okay. Kent Buhl: Thank you. And who else here? So we've got some information back from Joe Neal [ph] about an example what would happen in scenario two, which we can go into if you care to, Martha. So think about that. And in the meantime, Kim asks, "How do we justify to the public the significantly reduced price of the new construction?" Martha Davis: So how do we justify to the public the -- Kent Buhl: The significantly reduced price in something that's -- Martha Davis: Oh, yeah. I see. [talking over each other] Kent Buhl: -- total -- Martha Davis: The reduced sale price compared to the construction cost? Kent Buhl: Yes. Martha Davis: Well, that's a good question. I don't have the magic bullet on that. The fact is that, I guess, you need to demonstrate that you're trying to keep actual costs as low as reasonable. On the other hand, you're paying for probably full renovation or construction in adding energy efficiency elements that cost something extra. So I don't know. If that would be convincing, but the fact is I think the public can't expect you to try to sell a house for more than the market value. And so that's the only way it works if you sell the house at the market value. And I think you just have to try to indicate your keeping costs as low as possible and so long as you're -- if your costs are lining up with any other private sector costs you might document that might help. But this is not a foolproof response, but -- 14

15 Kent Buhl: Maybe showing too that there's not going to be development -- undue enrichment to the -- Martha Davis: Okay. Yeah. [talking over each other] Kent Buhl: -- desire -- Martha Davis: Maybe part of the -- [talking over each other] David Noguera: Martha, one thing I just want to reiterate is that while we understand the level of investments that are being made into these properties to upbuild them, grantees have to be reminded that this was a grant that was given to the cities to uplift these depressed communities. So in many cases, we're pushing green principles or we're pushing energy efficient appliances and practices to make the standard of house in these neighborhoods more marketable, more sustainable so that -- to ultimately attract folks. Now, if this means that the grantees aren't going to be able to get their full investment out of the property, that's okay. We didn't go into this NSP thing to make a profit here. It's intended to serve those families that meet the income qualifications and to address the housing crisis that we've been having. So if -- again, if a development subsidy's needed, that's fine. I just wanted to add that point. Martha Davis: Yeah. Just to add one other thing. I mean, the discrepancy between the cost and the sales value partly just reflects the state of the local market and that's not -- if that local market is depressed and that sales price is low, that's just a fact of life. That's the hand that you all were dealt as well as the public. So I mean, elaborating on that about his main point, you're trying to create some new housing stock or revitalized housing stock despite the fact the market is low and this is the only way to do that. Kent Buhl: Good. So Martha, I suggest you proceed with your presentation and we can come back to Joe Neal's example of your option two later if there's time. Martha Davis: Okay. Great. Let me try to advance this here. Okay. So there's -- one problem we're just -- kind of a special case, which has not come up yet in the questions, but on occasion and probably most often through the Habitat for Humanity model, total development cost might actually be lower than market value and lower than -- if market value is the desired sales price, the discrepancy kind of goes in the other direction. This is a case where you have significant donations of supplies, appliances, etc. and perhaps significant donations of labor as well. And there are cases, then, when TDC is actually fairly low because of those donations. In that kind of case, the HUD rule -- the quirk of the HUD rule is that you're stuck selling the house for no more than that TDC. So your market values in the 15

16 neighborhood might be $120,000 but the cost to actually do the property was $100,000, then that $100,000 is the price. And the only comment here is to point out that dilemma. You're forced to have a low price, but to make extra efforts to make sure that all of the costs, even more hidden costs perhaps, are included in TDC. And if you have such a thing as like volunteer administration to recruit and organize volunteers or other things directly, you -- required for that house rehab on construction to make sure TDC is accurately reflecting all of the costs. And another comment just would be if the TDC is below market, and that's a negative for future sales prices, don't concentrate many of those -- such houses in one spot. You don't want a whole block of houses that are all logging in at $100,000 sales prices and that just brings the values in the neighborhood down. Try to do what you can to spread out that negative market effect. So this is kind of an outlier but just something we want to mention in this presentation. And the last topic is to this kind of, I guess, declining market situation. So let's say at the beginning of a year, the renovation begins. An appraisal is obtained and the appraisal says the house is worth $120, the projection is that it'll be worth $120,000, and things change during the course of that renovation period and the market might change. What we're suggesting is that, in fact, the grantee and the developer need to keep an eye on that market. As the questioner mentioned, maybe you'll see that other houses in the vicinity are reducing their prices to try to sell. I mean, unfortunately, you're possibly -- will need to follow suit. The one caveat I want to mention is especially in a really slow market where the sales process may drag out over some period of time, you want to, as a grantee, you want to try to ensure that your developers and the real estate agents are still actively marketing the property or maintaining it in good physical condition, keeping the yard up as the months pass, keeping everything in working order, making it look nice; hopefully having the realtor host open houses, continuing to do outreach so that the property is known about. So I think in certain localities, when the time -- when time has passed, this kind of semiabandonment of the marketing of a property and it's really never going to get sold, I think that, as a minimum, the grantee needs to require a certain amount of monthly attention, activity, open houses, maybe check on the conditions of those houses yourself to make sure the curb appeal is kept up by the developer. But that's one issue, is just making sure that the attention is paid to marketing. The other circumstance is the market is actually dropping and in that case, I think, as the Chicago call indicated, you're really forced to meet the market as it declines. There's a suggestion in the standard single-family tool kit that's found on the HUD NSP website. This is kind of some generic language, not necessarily for a falling market, but it could fit into that category. It suggests that, with a robust marketing effort, if not-qualified offers are received in the first 60 days of robust marketing, the developer might be allowed to reduce the asking price by five 16

17 percent. If a not-qualified offer is received in the following 60 days, another 5 percent adjustment might be made. This is kind of generic advice, but it's introducing the concept that there has to be some flexibility retained by the grantee and the developer. And if the market is falling as you operate your program, you're, unfortunately, forced to drop your values with that. I guess I would suggest that if you've got a reasonable offer that's pursued, maybe a little bit below list price, and in the end the lender will be ordering an appraisal to correspond to that contract, and that appraisal in the end will really be governing if it's lower so that the lender appraiser kind of trumps any of your prior -- the contract price or the asking price before that. So I don't have, in the case that the question -- or I think it was Jennifer, posed, I don't really have a solution, to some extent, matching the declines in the offering price if you have a product -- if your house is really substantially similar. I mean, the other thing is to try to market the fact that it's energy efficient as much as possible, the lower operating cost that brings. You know, maybe your product is a little bit superior to some of the surrounding houses; that would justify a little bit higher asking price. David Noguera: And Martha? Martha Davis: Yes? David Noguera: One thing I just wanted to add is that in some cases where grantees find that the markets are continuing to plummet in value and it's just really not feasible for them to sell it, they can always switch gears and rent it. We have some cases where grantees have had houses on the market for an extended period of time and rather than keeping it vacant and hoping that it will sell, they revert to a short-term rental. In some cases, it may be two to five years or something like that. But it's another way to sort of take the property off the market while it's benefiting an income-eligible household, and then revisiting the for-sale market at a later date. Martha Davis: I would agree with that if every marketing efforts have been consistent and really haven't yielded anything. Then, I guess that's a very last-ditch effort. It's not probably what most of the neighborhoods where single-family homes predominant are -- of course, prefer to get owner-occupants in there and your program design presumably was around an ownership program. And so if you did resort to this rental backup option, then you need, as I understand it, you need to setup the rental conformance with the NSP rental program so that you'd need to have some guidelines over property management and marketing and income certifications, etc. But it's good to hear this. It's allowable fallback, but not one that you should take lightly, I'd say. Just to sort of just show her at the end of the slides here that we've got some references here in the slides and these slides will be on the website And so you can use these links to find this standard template for a single-family program manual, a guide to marketing, a prior webinar that the TDC guidance that I mentioned earlier on. So there're good resources there. 17

18 I do want to add just one other marketing -- and we can come back to the falling market issue, but one other marketing detail that's another little quandary is let's say if a TDC of -- sorry. The appraised value of a home is $150,000 in a certain market, but you're really -- you're expecting your target market would need some assistance, soft second mortgage, so they might only be able to afford $130,000, your MRIS at the listing, iif you're using that tool, would be showing the full sales price of the $150,000. And so it's important to work with your agents and developers to try to make sure that information gets out that there is some special financing available to try to attract the potentials buyers who can't afford the $150,000. At least in the comment section of the MRIS listing in any flyers and other kinds of outreach you do, you need to communicate to the public that this $150,000 price is not going to be what you have to -- that the buyers won't have to qualify for a first mortgage in that amount, that there is special financing that will make it more affordable. So it's a little quirk of advertising at fair market value, you need to make sure you don't pre-empt any of your affordable market who can't afford fair market value. So with that, I think we can go back to more questions. Kent Buhl: More questions. Okay. So time to think of other questions you've got. And let me start back with Jennifer to see if we answered her question. I know she was specifically interested in documentation of needing to lower a sales price. So Jennifer, are you there now? Q: Yes. I think -- I like that language in there that's suggesting about the five percent and whatnot. And because you are right in comparing the actual -- the other properties that lower by, like, $10,000, we obviously have some additional bonuses in our home that those homes don't. I appreciate it. Martha Davis: Okay. And in terms of documentation, if you do feel like the market is dropping and your original appraisal may not be fully current, then you can, and should, get some kind of update if you want some documentation to guide your marketing efforts. And that could be a broker's opinion letter was mentioned earlier or you could go back to the same appraiser for a smaller fee, probably they could issue an update to you. So if it's been six months or nine months or 12 months since that appraisal, it may be the actual market has changed. But as you say, don't sell yourself short. Maybe your property is, in fact, worth more than some of the neighboring -- just owners selling properties that have not been renovated recently should certainly not be as attractive or valuable as your NSP property. Kent Buhl: And let's go back to Samuel. Hi, Samuel. Q: Oh, hi, guys. I didn't know if you really need to take my call on that query. But I think David suggested the possibility of rental when there is a property that for whatever reason isn't moving. And my question was whether or not there needs to be an amendment, etc., to the agreement with HUD or not because it is temporary and it's that temporary period, two or three years, that's fine, 18