CHAPTER 9. BID FIGURES ON FORECLOSURES, AND DISPOSITION

OF ACQUIRED MULTIFAMILY PROPERTIES

9-1. GENERAL. The instructions which follow shall be complied with

in all cases. The instructions are so worded that they are

applicable both for bid purposes on foreclosure and in making

recommendations for the disposition of properties already owned

by HUD-FHA. The disposition appraisal will not require as

extensive an analysis as the original appraisal for bid

purposes if the original appraisal is prepared in a thorough

manner in accordance with these instructions and the time

interval and economic conditions have not materially changed.

The administratively directed special upset value deduction for

bidding purposes described below will, of course, not be

applicable when the appraisal is for the purpose of disposition

of acquired property.

9-2. OVERHEAD AND ADMINISTRATIVE COSTS. In all cases, pursuant to

an administrative decision to reflect in a special upset value

for bidding purposes at foreclosure the approximate cost to the

Assistant Secretary-Commissioner of carrying the property

during the extra period required for Assistant Secretary-

Commissioner handling and resale, the \"as is\" appraisal will

include a further calculation to disclose the special-purpose

value of the property to the Assistant Secretary-Commissioner.

This will be a deduction from the \"as is\" value in the dollar

amount calculated at 5% of the first \$100,000 of \"as is\" value,

plus 1 1/2% of the \"as is\" value above \$100,000, but in no

event shall such deduction be more than \$25,000. Thus:

Market Value \"As Is\" \$1,000,000

Less estimated overhead and

administrative costs 18,500

Special Upset Value (for bidding

purposes only) \$ 981,500

5% of \$100,000 = \$ 5,000

1 1/2% of \$900,000 = 13,500

Total Deduction = \$18,500

This calculation shall be made in all cases, and recorded in

Section \"O,\" FHA Form 2264 under \"Remarks.\"

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9-3. APPRAISER\'S RECOMMENDATIONS. The appraiser will assist in

recommendations concerning the highest and best use of the

property, the proper repair program, the estimate of value and

the best method of disposal. There is no limit to the nature

and scope of recommendations provided the best interests of the

Assistant Secretary-Commissioner are served. These

recommendations concerning highest and best use will determine

the most logical program to pursue and result in the greatest

recovery by the Assistant Secretary-Commissioner in a most

reasonable length of time.

9-4. SELECTION OF CAPITALIZATION RATES. The freedom of action

permitted in these cases precludes the use of any pre-

determined capitalization rates, estimates of economic life,

occupancy percentages or any other limitations upon the

appraisal process. Directives which are issued by any sources

which differ from these handbook instructions and are intended

to affect underwriting conclusions shall be in writing, signed

by the person issuing the instructions and shall be made a part

of the file. Under such circumstances, the processing in the

Valuation Section shall reflect available data as if no such

instructions existed and the appraisal findings will so

indicate. Modifications of the original valuation conclusions

should be clearly identified and properly documented.

9-5. HIGHEST AND BEST USE DETERMINATION. The determination of the

highest and best use of the property is the first and critical

determination to be made. The detail involved will vary from

case to case and will range from the most simple alternative of

sale \"as is\" to that of dividing the project into parts

suitable for a variety of uses. Any analysis will be complete,

but will stop when the tests applied clearly indicate the

proper use of the property, the proper method of disposal,

the repair (rehabilitation, etc.) involved, and the resulting

indicated values. The appraiser\'s findings regarding highest

and best use is determined as a result of an analysis based on

economics, without regard to current use, or limited uses for

which mortgage insurance may be written.

a\. Consideration should be given to the following:

\(1\) Present use \"as is\", except for cleaning, etc.

(presumably continued as multifamily rental housing

project).

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(9-5) (2) Present use with repair expenditures (\"as repaired\")

repairing deferred maintenance only, or major

repairs, alterations, rehabilitation.

\(3\) Conversion to other use, such as:

\(a\) Furnished apartments;

\(b\) Apartment hotel;

\(c\) Commercial hotel or motel;

\(d\) Office or professional building;

\(e\) Cooperative, condominium or subdivision parcel

for sale to consumers, or sale to promoter, for

subsequent resale to consumers.

\(4\) Conversion of Land to other use, such as:

\(a\) Separate sale of land, and buildings for removal

or re-subdivision of land, as into commercial or

industrial parcels.

\(b\) Sale \"as is,\" with or without requirement for

removal of buildings by purchaser.

\(c\) Other highest and best uses including any

combination of the above.

b\. The decision as to the method used will be the one that

obtains the best recovery most expeditiously in light of

the Assistant Secretary-Commissioner\'s best interest.

c\. If an alternate is required in the Valuation study, it may

be prepared on the basis of material and labor costs

expected to be encountered by the purchaser. An example

would be a major conversion, as to an office building or

motel, in which case the purchaser might well finance and

complete his own plan of conversion or repair, and all

work would be done by or at the expense of a cash

purchaser of the property.

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9-6. APPRAISAL OBJECTIVES. In addition to determining the \"highest

and best\" use, the immediate objective will be to report and

substantiate:

a\. Fair Market Value of Property \"as is.\"

b\. Scope and estimated cost of repairs required and

recommended.

c\. Fair Market Value \"as repaired.\"

d\. Fair Market Value \"as is,\" for conversion to other use

(e.g. commercial).

9-7. SUBDIVIDED PARCELS. If sale in subdivided parcels is

recommended, the value of each such parcel shall be estimated

and recorded in a tabulation attached to the FHA Form 2264.

The tabulation will identify each proposed sales parcel, which

may be a row house unit, a four family building, or a group of

buildings. The value ascribed the project shall be the sum

total of all the values of the individual sales parcels.

9-8. CONDOMINIUM OR COOPERATIVE CONVERSION. Sale to tenants

organized for condominium or cooperative ownership of a

project, or sub-divided portions thereof, will be considered as

a variation of the original use for multifamily housing.

Valuation will be of the entity (or the total of the values of

the individual units). The market comparison approach will be

used as the principal approach if condominium ownership is

recommended.

9-9. UNUSUAL CASES. Unusual cases may include those whose

conversion to hotel or transient use may be profitable, but not

contemplated in the National Housing Act, especially if a

purchase money mortgage is anticipated. Such cases shall be

referred to the Office of Technical and Credit Standards. The

appraiser shall include a valuation analysis based upon the

recommended use.

9-10. MARKET CONSIDERATIONS. The appraiser must always consider the

market for the property appraised. The project or property \`

will be offered widely, by means of circularizing an extensive

list of prospective purchasers, and by use of local advertising

media and newspapers in financial centers. Therefore, the

valuator should recognize the broad coverage rather than

consider only the potential interest in the immediate vicinity.

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9-11. AVAILABLE FINANCING. The valuator should consider the

financing available to the prospective purchaser. Generally,

the project sold \"as repaired,\" or in reasonably good

condition, for continued use as a multifamily housing project

will be eligible for a liberal HUD-FHA purchase money mortgage,

or for a HUD-FHA insured mortgage. This will apply whether the

sale is for investment purposes or as a cooperative or

condominium. It will also apply if the project is to be

subdivided into reasonable, smaller real estate entities, e.g.,

as single buildings or individual row house dwellings.

a\. Therefore, while appraisals of market value are

theoretically made as if for all cash sales, this premise

must assume and give effect to the going market mortgage

financing. If the property is to be offered for sale on

the basis of a high ratio purchase money mortgage or HUD-

FHA mortgage insurance, this will be a favorable factor

affecting its market value. The availability of

conventional financing at reasonable rates will also be

favorable.

b\. Note that HUD-FHA may consider taking back a purchase

money mortgage or trust note, on the entirety or on

separate parcels, and if on the entirety, with release

clauses. In the income approach to value, when liberal

HUD-FHA mortgage terms will be offered, capitalization by

an overall capitalization rate derived by the cash flow

method will be used. (See paragraph 7-5.)

9-12. USE OF NARRATIVE REPORTS. In reporting his appraisal for other

than rental housing use, FHA Form 2264 may not be useable. In

such instances, the appraiser will make his report showing the

necessary calculations. For example, land, the best use of

which is commercial, will be reported at its value per unit of

land and total, less cost to clear the land, with the resultant

value opinion supported by a recording of comparisons.

Conversion of a high rise apartment to an office building may

also be reported by a narrative appraisal, with capitalization

and proper comparative support.

9-13. USE OF FHA FORM 2264. Appraisal processing will generally

follow Section 207 procedure, with exceptions recited herein.

The Project Income Analysis and Appraisal, FHA Form 2264, when

used in proposed construction, discloses fair market value and

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feasibility with respect to production cost. In treating

acquired properties, the analysis will develop the most

practical method of disposal, bringing the greatest net

recovery obtainable within a reasonable time.

9-14. INSPECTIONS OF THE PROPERTY. Joint inspection of the property

by the Valuation Section with the Architectural Section is a

most important phase of examination. The Field Office project

Master File may contain FHA Form 2475, Property Report - Rental

Project. It may be used for data purposes. However, for the

purpose of this analysis, a new form shall be prepared jointly

by the Valuator and the Architectural processor. This form

will supply most of the information usually available in FHA

Form 2013. A FHA Form 2475 will be prepared for the project or

for each building as necessary, except that repetitive

recording is unnecessary and that Item #10 - Repairs,

Replacement and Improvements - need not be completed if it will

duplicate data recorded and recommendations made previously.

9-15. RECOMMENDED REPAIRS. HUD Form 2060a, Report of Physical

Condition and Repair Recommendations, will be used as a

worksheet during the inspection of living units and public

spaces. Repairs essential to arrest accelerated deterioration

will be given first consideration.

a\. Recommended repair beyond those essential will be based on

the objective of placing the property in a competitively

marketable condition consistent with obtainable rentals

and other Valuation assumptions and conclusions. A clear

understanding of this objective by both the Architectural

and the Valuator processors is essential.

b\. A list shall be prepared setting forth in specific detail

any deficiency and the manner of correction. Each item

shall be preceded or followed by the specific locations

where such work is to be performed, such as number of

building, apartment, room or other identification, which

would not permit misunderstanding or oversight. The total

estimated cost of each item described shall be stated.

When such list is completed and signed by the

Architectural processor, it is also signed by the

Valuator, indicating his concurrence as to the nature of

the work required.

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c\. In the event of a disagreement between the Architectural

and Valuation processors as to the repairs to be called

for which cannot be resolved, the Architectural processor

will affix his signature to his recommendations and the

Valuation processor will do the same and submit them to

the ADTSB/CU for resolution.

9-16. INCOME AND EXPENSE DATA. Accurate projections of income and

expense may be made by utilizing data accumulated in the data

bank. (See Chapters 5 and 6.) Actual project income and

expense data, for the most part, may be unreliable to use.

a\. Causes of failure will very often indicate whether any of

the income and expense data can be used.

b\. Actual income and expense during HUD-FHA ownership is

usually untypical since expenses during this period are

higher than competitive projects, and income may be less

than competing projects.

9-17. RESERVE FOR REPLACEMENT. Reserve for Replacements will

be computed utilizing the factor shown on the FHA Form 2264.

The computation will be based on the cost of \"Total Structures\"

provided by the cost analyst. Major items requiring

replacement within two years will be shown separately as an

additional cash requirement to the reserve fund.

9-18. \"AS IS\" AND \"AS REPAIRED\" VALUE. A typical case will require

the preparation of two copies of FHA Form 2264; one will be

completed on an \"as is\" basis and clearly labeled \"as is\"; the

other on the assumption that all repairs are completed pursuant

to recommendation, and labeled \"as repaired.\" The annual

income-expense estimates and remaining economic life will be

recorded specifically for each assumption (\"as is\" and \"as

repaired\") to reflect the differences that will exist. The

scope and cost of repairs recommended as necessary to attain

the value indicated in the \"as repaired\" appraisal will be

entered under \"Remarks,\" Section \"O,\" FHA Form 2264.

a\. The differences between the \"as is\" and \"as repaired\" will

normally be at least equal to the cost of repairs or

remodeling estimated as required herein, including a

reasonable margin for risk and temporary financing

charges.

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b\. In some instances this may not be true, inasmuch as the

typical potential purchaser may be able to accomplish the

work at less cost than would be incurred by the

government. In this event, it may be proper to recommend

an \"as is\" sale and to report an \"as is\" value that would

reflect, to some degree, the more favorable repair

position of the purchaser.

9-19. CHATTELS. In most instances, items of personal property

included in the project being acquired will not be covered in

the real estate mortgage. A notation shall be added in the

\"Remarks\" portion of the FHA Form 2264 which will indicate the

value of such chattel property. The chattels should be

itemized and valued in a separate attachment to the FHA Form

2264\.

9-20. LEGAL CONSIDERATIONS. When requesting the appraisal, the

Office of General Counsel will furnish any necessary special

information and instructions with respect to redemption rights

and other legal considerations affecting value, including

information as to applicable laws and court decisions giving

the foreclosed mortgagor the right to collect and retain

project income during the redemption period. If an unusually

difficult appraisal problem is presented by such redemption

rights, special advice or assistance may be sought of the

Central Office Appraisal and Mortgage Risk Division.

9-21. COMPARISON APPROACH. Estimated Fair Market Value of

Property by Comparison, Item L-8, FHA Form 2264, will be

completed using the most closely similar investment properties

(not necessarily identical) preferably within the housing

market area, recently exchanged in the market. If comparisons

are made other than on an \"as repaired\" basis, special comment

should be made. Since similar investment property is normally

sold for the income it will produce, value estimates by

comparison will typically approximate the value by

capitalization. However, in the \"as is\" valuation, it must be

recognized that the property, especially if in need of major

repairs or rehabilitation, may produce a relatively low net

income as compared with potential income and the capitalization

rate will usually reflect this fact. In the extreme case, a

property may not be rentable in \"as is\" condition, and yet will

have value in consideration of the potential as repaired, or

for other use.

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9-22. APPRAISAL SUMMARY. In the Appraisal Summary, L-9, FHA Form

2264, value by capitalization should represent a reasonable

estimate of the price that may be recovered after suitable

exposure in the market if the best use is as a rental housing

project.

If the project is to be sold \"as is,\" and the income does not

reflect the full potential earning capacity of the land,

capitalization at investment property income rates will, of

course, not be indicative of market value, and the comparative

value, or the value as repaired less cost of estimated repairs,

or the value for other use of project structures or land may

control.

9-23. NARRATIVE SUMMARY AND CONCLUSIONS. A comprehensive statement

shall be attached disclosing in narrative form, with

recapitulation of repair costs and resultant values, the

recommendation of the Valuator as to disposition of the

property and the justification therefore. Recapture of

repairs, rate of marketability, availability of conventional or

HUD-FHA insured financing, the activity and extent (local or

otherwise) of the market, and the probable time required for

disposal should be discussed.

The summary should also discuss the reasons the project failed.

Specific causes of failure should be stated and

recommendations, if any, for preventing repetitions.

9-24. ROUTING OF COMPLETED APPRAISAL. The Valuation processing of

the case having been completed the case is then routed to the

Office of the ADTSB/CU.

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