4265.1

CHAPTER 10. VALUATION PROCESSING

10-1. APPLICABILITY. This Chapter describes valuation processing to

be accomplished by personnel of the Single Family Mortgage

Insurance Branch (in an Area Office) for appraisals of the

following kinds of condominium properties:

a\. Units In An Operating Condominium (11 or Less Units) Not

Previously Insured Under Any Section Of The Housing Act. An

operating condominium project is defined as one which has been

substantially filled with occupants who have had title to the

units they occupy, for sufficient time to demonstrate the

common expense experience in the last accounting year. (A

project with 11 or less units which is not an operating

condominium must be processed by the Assistant Director

Technical Services Branch (ADTSB) under multifamily

instructions.)

b\. Reappraisal For Sale Of An Individual Unit In A Condominium

Project Previously Approved by HUD/FHA For Insured Condominium

Mortgages. Since the owner of a condominium unit has a mortgage

separate from mortgages on other units, resale of a unit

to a subsequent purchaser may be financed by a new insured

mortgage.

c\. Simplified Procedures For Insurance Upon Completion Cases

With A Presale Condition (No Unit Extending Over or Under

Another.) When the sponsor has requested the use of simplified

administrative procedures (described in paragraphs 7-1. and

10-4.) and when the project is composed of detached,

semi-detached, row (townhouse), or walk-up apartment structures

in which no part of a living unit extends over or under

another living unit, the project may be processed by Section

203 underwriting procedures.

10-2. VALUATION ANALYSIS FOR OPERATING CONDOMINIUMS (11 OR LESS UNITS

NOT PREVIOUSLY INSURED . When a request is received to insure a

mortgage on a unit located in an operating condominium of 11 or

less units, which was not constructed with a HUD-FHA insured

project mortgage, application for appraisal will be made on FHA

Form 2800. Legal documents organizing the condominium (e.g.

Enabling Declaration, By-Laws, Regulatory Agreement, etc.) are

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4265.1

(10-2) to be reviewed and a determination of acceptability made before

processing is begun. Amendments thereof may be necessary for

these operating condominiums to be eligible. If it is found that

condominium owners are unwilling to be subjected to a Regulatory

Agreement or required amendments cannot be made, for instance,

because of the inability to obtain approval of the present unit

owners, further processing of the case will not be made.

a\. Data Needed From Project. For processing purposes, the

valuator must be familiar with certain essential data which

should be retained in data files after processing:

\(1\) A plan of the entire project which shows the relationship

of the subject unit to the project as a whole and

a precise delineation of all the commonly owned property

and facilities.

\(2\) The legal and property description of the fee interest

in the subject unit.

\(3\) A copy of the Articles of Incorporation, By-Laws, etc.,

or other documents of the Owners\' Association or other

identity which controls the common facilities.

\(a\) From these, he determines all the rights and benefits

accruing from ownership of a unit and all the

obligations incurred therewith for the maintenance

of the common property and facilities.

\(b\) The expenses involved and the liability for

assessment must be ascertained.

\(4\) A statement of common expense experienced in the last

accounting year, and a budget of common expense for the

current year.

\(5\) Unit ratios in the legal documents for subject and other

units.

\(6\) The condition of the subject unit and of common areas in

the entire property since the association of owners is

responsible for maintaining all common elements such as

plumbing, electrical wiring, roofs, halls, stairways,

structural elements, etc.

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4265\. 1

(10-2) (a) The association must assess each member for the cost

of this maintenance in proportion to the unit ratio

contained in the legal documents.

\(b\) An appraiser who is doubtful of the condition of the

property, or who wishes assistance in determining

the extent of repairs necessary to place the property

in an acceptable condition without deferred

maintenance may request the assistance of the

Architectural Section.

\(c\) Required repairs shall be made a condition of the

commitment.

\(7\) Information from the sponsor sufficient to complete

parts A, B and D of FHA Form 2264-B, and also evidence

of adequate working capital.

b\. Approach to Value. The approach to value of a single unit in

a condominium project is similar to that for other home

mortgage programs. As in other home mortgage appraisals, the

estimates of replacement cost and market price will both

establish upper limits of value and the estimate of capitalized

income will serve as a guide or indicator, but not as an upper

limit. Closing costs are added to the value estimate to arrive

at the total on which the mortgage is based as in other HUD-FHA

home mortgage appraisals. Special considerations which must

be taken into account are outlined below under the three

approaches to value:

\(1\) Estimate of Market Price by Comparison. Data on the

sales of any other units in the subject projects should

be obtained; and sales in other competitive condominium

projects must also be obtained, and given consideration

in the comparative analysis.

\(a\) Condominiums have an attraction to many purchasers

by reason of freedom from some of the

responsibilities of maintenance coupled with the

advantages of semi-private use of community

recreational facilities. Off-setting these

advantages are usually some loss of privacy and the

cooperative aspects of ownership of the commonly

owned land and facilities.

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4265.1

(10-2) (b) The market price of individual units having the

same utility in the same project may vary considerably

due to their location within the project. In

apartments or row dwellings of the townhouse type,

relative desirability is greatly affected by

differences in views, proximity to the swimming pool

and recreational areas with their attendant noise;

proximity to the odors and nuisance of incinerators,

garbage chutes or refuse areas; proximity to noisy

pumps or boiler rooms; etc. Adjustments must be

made in sales prices for all of these differences

as well as adjustments to reflect preferences of

purchasers between upper floors and lower floors,

and other locational factors. Adjustments must

also be made for differences in physical improvements

within the dwelling unit which have been

made by the owner-occupant.

\(c\) When the comparison is made with a similar unit in

another condominium project, adjustments are required

to reflect the differences between the projects.

\(d\) If there are no similar condominiums, comparisons

can be made with similar units in planned-unit

developments that may be of the same general

structural type as the subject. Market comparisons

with units in cooperatives should be made only when

the terms for financing are fully known and the

differences in sales prices can be adjusted. Common

expenses, however, in a cooperative unit may be

used to establish the monthly cost of ownership.

\(e\) In the comparative analysis, consideration will be

given to the relative cost of ownership in other

projects of various types, and the cost of renting

or buying similar units. Market comparisons with

the comparables may be shown on FHA Form 2800 or on

FHA Form 2019, as desired.

\(2\) Estimates of Replacement Cost. Although an application

will be received on a FHA Form 2800 and a conditional

commitment will be issued on a FHA Form 2800-5, the

appraiser will process on FHA Form 2264-B. This form is

used as a worksheet so that the appraiser has a means of

recording necessary costs and expenses. Estimated

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4265.1

(10-2) Replacement Cost will be computed to the extent that is

necessary to establish an upper limit of value. Detailed

cost estimates should be made in a project where

replacement cost will have a direct effect on value.

Carrying Charges, Financing and other costs would reflect

those amounts which would be used if the project were being

built as a condominium under a commitment for insurance

upon completion. (In cases where replacement cost has

little relationship to value, a lump sum square foot cost

estimate may be used.) Cost estimates of improvements

will be furnished by the cost analyst.

\(a\) The present market price of the project site is then

found by the usual appraisal method and this amount

is added to the current project replacement cost to

arrive at Total Replacement Cost of the project

including the land.

\(b\) Next, the proration factor applicable to the unit

under appraisal is obtained from the legal documents

of the project and is applied to the current

replacement cost of the project to obtain the current

replacement cost of the unit under appraisal.

\(3\) Estimate of Capitalized Income. An indicated value by

capitalization will be found as in Section 203(b) by

application of a gross rent multiplier to the estimated

gross monthly rental value of the unit. If any of the

units are rented on an unfurnished basis, they would

provide excellent comparisons. Otherwise, rentals in

other projects, either condominium or rental projects,

may be used and adjustments made to reflect the

difference in benefits.

\(4\) Personal Benefit Expense. Estimate and record personal

benefit expense on FHA Form 2264-B.

\(5\) Common Expense. Estimate and record common expense on

FHA Form 2264-B.

c\. Estimate of Value. The final valuation estimate must be ii,

appropriate relationship to:

\(1\) The cost of acquiring a similar unit with similar

maintenance costs in a substitute condominium or

planned-unit development of similar characteristics.

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4265.1

\(2\) The cost of renting a substitute dwelling unit offering

similar benefits and utility.

\(3\) The rental value of the subject unit.

\(4\) The cost of acquiring and maintaining a dwelling unit

offering similar benefits and utility in any other type

of amenity income dwelling.

\(5\) The replacement cost of the subject unit.

d\. Commitment. The valuator\'s estimates will be entered on FHA

Forms 180 and 2800-3 and the Conditional Commitment completed

by the Authorized Agent in the usual manner. Mortgage amount,

loan to value ratios and term are the same as those prescribed

for Section 203(b) existing properties more than one year

old. However, Section of the Act must be shown as 234(c).

e\. Pre-Sale Requirement. In an existing condominium of 11 units

or less, care should be exercised to prevent accepting a unit

in a building that is not fully sold out. If sell out is

imminent, a pre-sale requirement may be used as a commitment

requirement on the unit under consideration.

f\. Data Files. When the first unit is processed in a condominium

project, a valuation project data file will be set up and

maintained so that future applications can be processed based

on the information found in the initial file. FHA Form 180,

Condominium Analysis and Appraisal Form, will be used to

record the final results of the analysis prepared on FHA Form

2264-B. All columns of FHA form 180 will be completely filled

out for subject units. For other units, only certain columns

are required: 1, 2, 3, 4, 5, 8, 13, 16, 17, 18 and 19. Any

sale data received should be entered in Column 25. If

subsequent cases are received, they may be processed on FHA Form

2800 only with the aid of the data recorded in the data file.

10-3. REAPPRAISAL OF A UNIT IN A PROJECT PREVIOUSLY APPROVED BY HUD/FHA

FOR CONDOMINIUM MORTGAGE INSURANCE. With the aid of the data file

on this condominium project, including a copy of FHA Form 180 as

originally processed, the appraiser accomplishes all processing

on FHA Form 2800-3, as follows:

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4265.1

(10-3) a. Market Comparison. Section 34 is completed in accord with

basic instructions using sales in the subject-and other

condominium projects, PUDs, and cooperative units, if possible.

b\. Estimated Replacement Cost. This estimate is made in the

remarks section as follows: \"Original R.C. \$18,284 (Form 180)

x 1.11 cost adj. factor = \$20,295.\" The cost adjusting factor

adjusts for cost changes from the date of original processing

to the present and is obtained from the cost analyst. The

total, \$20,295, includes land and is entered on the bottom

line of box 32.

c\. Common Expense. From the common expense data in the project

data file, and from the annual budget of the association of

owners, the appraiser estimates (in whole dollars) the monthly

amount which the association will charge the owner of subject

unit for common expense and,fixed charges. In Item 7 of FHA

Form 2800, \"Maintenance and Repairs\" is lined out, and the

entry made as follows:

\"Common Expense \... \$ 45 \"

d\. Personal Benefit Expense. Those expense items to be paid

directly by an owner (rather than passing through the

association) other than real estate taxes, insurance, and

mortgage payments, are called personal benefit expense. From

personal benefit expense data in the project data file (FHA

Forms 2264-B and 180) and from more recent data from project

occupants and from the data bank, the appraiser estimates the

nearest monthly whole dollar amount for personal benefit

expense. After lining out \"Heat and Utilities in Item 7 of FHA

Form 2800, he enters the monthly personal benefit expense

estimate, as follows:

\"Pers. Ben. Exp. \$ 28 \"

e\. Completing Appraisal. The remainder of the FHA Form 2800 is

completed as in Section 203(b).

f\. Commitment. FHA Form 2800-5 is used for commitment as in

Section 203(b), but Section 234(c) is entered. Firm commitment

at a later time, uses FHA Form 3275.

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4265.1 CHG 3

\*

10-4. SIMPLIFIED PROCEDURES FOR INSURANCE UPON COMPLETION OF CASES WITH
A

PRESALE CONDITION. This procedure may be used where the sponsor is

able to complete construction of a condominium project composed of

detached, semi-detached, row or walk-up apartment structures without

the need for HUD/FHA insured construction advances on the project

and without need for a dual commitment. Individual units may be of

the horizontal town-house or vertical configuration in which all or

part of a living unit extends over another unit. No structure shall

be over three stories in height, excluding garages. A three story

structure will only be acceptable if there are no more than two

flights of stairs from grade and there is no elevator. The units

involved are essentially single family dwelling units.

a\. Simplified Procedures

Step 1: Developer submits the following with related exhibits to

the Field Office.

1\. Application for Environmental Review Form HUD 92250.

2\. Location map.

3\. Preliminary condominium sketch plan.

4\. Equal Employment Opportunity Certification Form HUD

92010\.

5\. Affirmative Marketing Plan.

6\. Evidence that A-95 Clearinghouse(s) have been

contacted.

7\. Form FHA 2530, Previous Participation

Certification (2 copies)

Step 2: Single Family Valuation Branch sets up card file, assigns

control number and acknowledges receipt of preliminary

exhibits on Form HUD 92251. Forwards Form FHA 2530,

Previous Participation Certification to Participation

Control Officer, c/o Assistant Secretary for Housing in

Washington, DC (For details see 24 CFR 200.210 et seq.)

Step 3: Subdivision Appraiser conducts environmental review (ECO

2/3) and notifies VA of results.

Step 4: Subdivision Appraiser notifies the developer that the

proposal is:

1\. Not Acceptable. Use Form HUD 92253, Final Report on

Application. Notify A-95 clearinghouse of

determination.

2\. Environmentally acceptable or conditionally

acceptable. The Subdivision Appraiser notifies the

developer that the proposal is acceptable or

conditionally acceptable in the Environmental Review

Letter (see Handbook 4135.1 Appendix 7) and requests

the developer to submit certified plans and

specifications on the land improvements together with

whatever requirements are necessary to mitigate any \*

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4265.1 CHG 3

\*

environmental problems. Form HUD 92256, Exhibits Required

for Certification, is sent with the Environmental Review

Letter to guide the developer in preparing exhibits.

Plans and specifications for single family units and the

legal documents are not required at this stage. The

developer must be notified of the 70% presale requirement

and of the Davis-Bacon Act on prevailing wage rates.

NOTE A requirement of this procedure is that

configuration of the condominium must be similar to

single family detached, semi-detached, row or

walk-up apartment units. Simplified procedure is not

to continue if the proposal is not of this type.

Step 5: Developer submits all required exhibits as requested on Form

HUD 92256. Subdivision Appraiser reviews submission to assure

that all required exhibits and proper certifications have been

submitted. The Subdivision Appraiser issues Form HUD 92257,

Acknowledgment of Receipt of Certified Exhibits to notify the

developer that submission is incomplete or that the submission

is acceptable and processing has begun.

Step 6: Subdivision Appraiser prepares Form HUD 92258 (Letter of

Acceptance) and delivers it to the developer. This form shall

be modified as necessary to include solicitation for application

for project mortgage insurance. At this time the Service

Office Supervisor/Director notifies the Wage Requirement

Officer to conduct a preconstruction conference for determining

the developer\'s compliance with Davis-Bacon Act.

Step 7: The developer is requested to sign the concurrence on the Form

HUD 92258 and submit request for project mortgage insurance

from his/her mortgagee by returning the signed Form HUD 92258

and submitting the application fee. The submission will

include:

1\. Schedule of Units (Form FHA 3280-A)(2 copies)

2\. Application for Project Mortgage Insurance (Form FHA 3201)

(2 copies) modified as follows:

a\. Items in Sec. L need not be submitted except for Form

HUD 93240, Budget.

b\. Section F, H, J, K need not be completed.

c\. Section E, Estimate of Annual Common Expenses, will

include only the items that would be chargeable to the

unit owners by the condominium associations.

3\. Three sets of unit plans and specifications on each type of

property. Also three sets of plans and specifications of

any planned community facilities. \*

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4265.1 CHG 3

\*

4\. Two copies of all legal documents. The developer\'s or

mortgagee\'s attorney must certify that the legal documents

follow HUD policy guidelines (Appendix 24). In some states,

the Area Counsel may determine that the state laws and

requirements for legal documents equal or exceed HUD\'s. In

these cases, the developer need only certify that the

documents were accepted by the state. Field Offices are

not required to review these documents for acceptability.

Step 8: 1. The Subdivision Appraiser forwards plans and specifications

of units and community facilities to the Architectural

staff to review for compliance with HUD\'s Minimum Property

Standards (MPS).

2\. Legal documents are forwarded to Area Counsel for review,

if documents were not certified by mortgagee\'s attorney.

3\. Operating budget and the management plan, if any, are

forwarded to Property Management section for review.

Step 9: The Architectural Staff reviews the plans and specifications

for compliance with the MPS. The plans and specifications are

then forwarded to the designated fee appraiser along with

pertinent project information. HUD notifies the mortgagee of

the identity of the appraiser.

1\. The fee appraiser appraises the unit.

a\. The fee appraiser makes appraisal of land per

instructions for Planned Unit Developments

(See Chapter 7 of Reference 9) The appraiser shall

document the approach used to arrive at land value.

b\. Replacement Cost. Appraiser makes cost estimate of

building improvements for each basic case on

HUD 92800, adds land value and completes replacement

cost estimate which is entered on HUD 92800. The

appraiser shall use the Marshall and Swift Residential

Cost System to arrive at the replacement cost of

building improvements.

c\. Market Price. Appraiser uses Form FHA 2019 to arrive

at estimated market price. Form FHA 2019 may be

amended to reflect adjustments for condominium fees

and other condominium features not listed. \*

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4265.1 CHG 3

\* d. Monthly Estimates. The monthly estimate must include

a common expense estimate. To arrive at this estimate,

the appraiser must include both replacement reserve

and operating reserves. The sum of the estimated

replacement cost of improvements is derived by

dividing the life expectancy of an item into its total

cost to arrive at an annual replacement reserve. The

sum of all common expenses exclusive of the operating

reserve, multiplied by .03 is the annual operating

reserve. Complete Item 18 of FHA Form 180.

Step 10: The fee appraiser completes Form FHA 180 and Schedule of Units,

Form FHA 3280-A. Do not make an entry for Column 5.

Step 11: The fee appraiser returns the appraisal package to HUD for

review and sends an invoice for payment to mortgagee. HUD

prepares and issues Form FHA 3284-A\* Commitment to Insure Upon

Completion when the following documents are on hand:

1\. Application fee deposited and recorded.

2\. Previous Participation Certificates (Form FHA 2530).

3\. Legal documents accepted.

4\. Operating budget accepted.

5\. Management plan accepted.

6\. Agreement and Certification Form FHA 3305 A is properly

executed.

7\. Contractor\'s Certification concerning Labor Standards and

Prevailing Wage Requirements properly executed (Form FHA

2482).

8\. Subcontractor\'s certification concerning labor Standards

and Prevailing Wage Requirements (2482-A).

9\. Forms FHA 180 and 3280A.

\* The commitment will contain as an additional condition, the

requirement for replacement reserves and operating reserves

prescribed by HUD.

\* The mortgage amount shall not be less than, and need not

exceed the amounts arrived at by multiplying the number of

units by \$50 and dividing the total by .008; i.e., 75 units

x \$50.00 = 3,750 divided by .008 = \$468,750 mortgage amount.

Step 12: Copies of Forms FHA 180, 3284-A and 3280-A are sent to VA.

Step 13: With delivery of the commitment to the lender and approval of

Form FHA 3305-A, Agreement to Cost Certify, construction may

begin. Assignment is made to a fee inspector. \*

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4265.1 CHG 3

\*

Step 14: Staff/Fee inspector conducts the wage surveys and inspects

subdivision improvements. Fee inspectors will inspect

construction of dwellings and community facilities, if any.

Field Offices will refer to appropriate fee schedules for

determining allowable inspection fees.

Step 15: File containing Form FHA 180 is sent to Mortgage Credit with

necessary processing binders each containing a copy of the

Schedule of Units (Form FHA 3280-A) and Underwriting Report

Form HUD 92800-3).

Step 16: Mortgage Credit maintains a record of presale approvals and

enters actual sale price (excluding closing costs) in column

25 of Form FHA 180.

Step 17: When project is 100 percent complete, the staff inspector

completes final Project Inspection Report, (HUD Representative\'s

Trip Report, Form HUD 5379) and Permission to Occupy (Form FHA

2485).

Step 18: Upon completion of the project and the submission of acceptable

evidence of firm sales to bonafide purchasers, the mortgagee

may request insurance endorsement of project mortgage. The

evidence of firm sales shall be entered on the Schedule of

Family Unit Sales, Form FHA 3282 and contain sales of not less

than 70 percent of value of the units. Simultaneously, the

mortgagee must submit a request for termination of project

mortgage insurance. \*

10-5. VA GUARANTEE OF LOANS ON HUD-FHA CONDOMINIUM UNITS.

a\. Purpose. This section describes ways in which HUD-FHA Field

Offices will cooperate with the Veterans Administration so

that VA offices may guarantee loans on condominium units which

have been processed for commitment by HUD-FHA Field Offices.

b\. General Information. The Veterans Housing Act of 1970 permits

the VA to guarantee \"a loan to an eligible veteran to purchase

a one-family residential unit to be owned and occupied by him

as a home in a condominium housing development or project as

to which the Secretary of Housing and Urban Development has

issued, under Section 234 of the National Housing Act, as

amended, evidence of insurance on at least one loan for the

purchase of a one family unit.\"

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4265.1 CHG 3

(10-5) (1) Under this limitation, the VA may guarantee a condominium

loan only after the determination has been made that HUD

has in fact insured a mortgage under Section 234 for the

purchaser of a condominium unit.

\(2\) The fact that HUD-FHA may have insured a mortgage on the

project under Section 234 is not sufficient to qualify

unit loans in a project for VA guarantee or insurance.

\(3\) Certificates of Reasonable Value in connection with the

original sale of a condominium unit will be based on

Form FHA 180, Condominium Analysis and Appraisal.

c\. Documents for The Veterans Administration. When the firm

commitment for project mortgage is issued, copies of the

commitment forms, FHA 3280-A and FHA 180, will be sent to

the Veterans Administration office which guarantees loans

in that area.

\(1\) Copies from feasibility or conditional commitment stage

processing should not be sent to VA as it is desired to

send only valuations which are not likely to be changed.

\(2\) When the condominium unit sales program begins, VA

purchasers may be issued CRVs based on FHA Value, but

each CRV will contain a requirement for evidence that

at least one mortgage on a condominium unit has been

insured by the Secretary for Housing and Urban

Development.

d\. Resale of Condominium Units. In projects where HUD-FHA has

in the past, insured a mortgage on at least one condominium

unit, the VA will appraise for reasonable value and issue

CRVs for resale purposes.

\(1\) The VA valuation procedures involve estimation of the

current unit share of condominium unit replacement cost

by multiplying the Unit Share of Condominium Replacement

Cost for that unit in Column 8 (as shown in the original

Form FHA 180) by the cost index factor necessary to

adjust costs from that date to the present.

\(2\) For that reason, Field Offices will supply copies of

Forms FHA 180 concerning previously processed condominium

projects whenever the VA office requests it in

order to appraise condominium units for resale.

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4265.1 CHG 3

(10-5) e. Notice of First Insurance. When the first condominium unit

mortgage is insured by HUD-FHA in a project, the Chief

Appraiser will prepare a memorandum to be signed by the

Director, informing the VA that an identified unit mortgage

in that project was endorsed for mortgage insurance on a

particular date.

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