Freddie Mac · OTC:FMCC
Freddie Mac — 2022 Appraisal Forum
38 slides from Freddie Mac's conference presentation, Feb 24, 2022
Slide 1: 2022 Appraisal Forum
2022 Appraisal Forum February 24, 2022
Slide 2: Key Discussion Topics
Quick philosophy on Freddie Mac appraisals Key Tips and Hints & Dos and Don’ts: Discussion Points of Emphasis for 2022 Topics o Fee Simple versus. Leased Fee: The difference matters o Better support for short-term value increases o The focus of appraisals on As-Is value o Capitalization Rates: Profo
Slide 3: Appraisals for Freddie Mac Multifamily
Appraisals for Freddie Mac Multifamily Prepared by Multifamily © Freddie Mac
Slide 4: The underlying exercise of a Freddie Mac appraisal review
The underlying exercise of a Freddie Mac review of a third-party real estate appraisal review is to determine if the appraiser has adequately supported their opinion of market value. Job aids on the Appraisal tab on the Multifamily website: https://mf.freddiemac.com/lenders/uw/#Appraisals © Freddie
Slide 5: Appraisal Report Content: What We Want To Know
Appraisal What We Want To Know Report Content What the appraiser knows about the subject property and its market How they know it The impact it has on the subject’s market value Not: “…based on my years of experience and knowledge of the area…” © Freddie Mac
Slide 6: Categories We Review
Categories We Review • Issues that might have an impact on Market Value • Issues that might not affect Market Value but have an impact on the validity / credibility / veracity of the appraisal • Issues that do not have an impact on Market Value or validity of the appraisal but are still “things” Job
Slide 7: Best Practices
Best Practices • We actually read your appraisals, and our lending decisions are based on your data, discussions and conclusions. Materiality Matters • The difference between a reasonably well-written appraisal and a sub-par appraisal is the addition of a Transparency Matters short/concise summary a
Slide 8: Leased Fee versus Fee Simple
Leased Fee versus Fee Simple This issue is a “canary in the coal mine” indicator that the rest of the appraisal report might have issues! Many times, an appraiser will state that the appraisal in the valuation is of the “fee simple” interest or that the sales were of the fee simple ownership interes
Slide 9: Large Increase in Value in a Short Time
Large Increase in Value in a Short Time Over the past year, we have seen many appraisals that indicate remarkable value growth in a short period of time, such as 50% over two years or 75% over three years, without adequate support. © Freddie Mac
Slide 10: Example: Appraisal with a poor explanation for a large value increase
Example: Appraisal with a poor explanation for a large value increase Sale Date Value Date Value Change Sale Date: January 28, 2019 February 19, 2021 2 years Sale Price: $62,400,000 $95,900,000 54% Appraiser’s “Since the prior sale, rents have increased, and capitalization Explanation: rates have co
Slide 11: Appraisals with Large Value Increases (cont.)
Appraisals with Large Value Increases (cont.) Note: An “off-market” sale does not necessarily mean that the buyer got a “good deal” and/or that the price is abnormally low. Remember the definition of market value: “Willing buyer/Willing seller, each acting in its own best interest” Why would a prope
Slide 12: Large Increase in Value in a Short Time (cont.)
Large Increase in Value in a Short Time (cont.) Be aware of value growth in a short period of time and of your responsibility to explain and support that growth in terms of: • Rent growth, and/or • NOI growth, and/or • Capitalization rate changes, and/or • Capital improvements and renovation, and/or
Slide 13: Sample: Support for Appraiser's Validation of a Material Value Increase
Sample: Support for Appraiser’s Validation of a Material Value Increase Property name Property location (City, St Zip) Freddie Mac Loan # Appraisal date of value Previous Current % or $ Value Contributory Item (as of: X date) (as of: X date) Change Value and/or Sales Price $ $ Date of previous value
Slide 14: Targeted Affordable Housing
Targeted Affordable Housing As-Is Estimates of Market Value Prepared by Multifamily © Freddie Mac
Slide 15: For Affordable Housing Appraisals
For Affordable Housing Appraisals The appraiser must focus on the As-Is value We underwrite to the As-Is market value, not 100% market rent, so we will: o Review Freddie Mac Multifamily Seller/Servicer Guide requirements o Discuss that Loss-to-Lease is not appropriate Appraisal Forum 2022 Prepared b
Slide 16: For Affordable Housing Appraisals: Guide Section 60.24(5)
For Affordable Housing Appraisals The appraiser must focus on the As-Is value Section 60.24(5) of the Guide “If the Property has restricted units, the appraiser must include an estimate of market value with the restricted units in place and an estimate of hypothetical market value without the restri
Slide 17: As-Is Value versus 100% Market Rent
As-Is Value versus 100% Market Rent For both affordable and conventional properties, if the appraiser develops their income scenario based on 100% market rents, they have incorporated a Hypothetical Condition into their analysis which, by definition, is not an As-Is estimate of market value. And, if
Slide 18: For Affordable Housing Appraisals (cont.)
For Affordable Housing Appraisals (cont.) Guide Section 60.24 (Use of comparable sales) Appraisal Forum 2022 Prepared by Multifamily © Freddie Mac
Slide 19: Comparable Sales for Affordable Valuations
Comparable Sales for Affordable Valuations Real-world example of a poor explanation: Appraisal Forum 2022 Prepared by Multifamily © Freddie Mac
Slide 20: Comparable Sales for Affordable Valuations (cont.)
Comparable Sales for Affordable Valuations (cont.) All multifamily sales (conventional, affordable, student housing, seniors, etc.) have varying motivations and intricacies, and very, very few sales of any type are immediately/directly “well suited for direct comparison” unless the appraiser does so
Slide 21: Capitalization Rates
Capitalization Rates Proforma vs. T-12 Prepared by Multifamily © Freddie Mac
Slide 22: Development of Capitalization Rates: Proforma NOI versus T-12 NOI
Development of Capitalization Rates: Proforma NOI versus T-12 NOI First, let’s start with Industry Best Practices (quoted from The Appraisal of Real Estate (15th edition), pages 460 and 462): • “…appraisers must make certain that the net operating income of each comparable property is calculated and
Slide 23: Development of Capitalization Rates: Proforma NOI versus T-12 NOI (cont.)
Development of Capitalization Rates: Proforma NOI versus. T-12 NOI (cont.) • For the development of the capitalization rate, industry best practices require an apples-to-apples comparison of the comparable sales’ NOI to the subject property’s NOI. • The estimate of the subject property NOI should be
Slide 24: Development of Capitalization Rates: Proforma NOI versus T-12 NOI (cont.)
Development of Capitalization Rates: Proforma NOI versus. T-12 NOI (cont.) Some examples: The potential overvaluation from erroneous development of the capitalization rate is indicative of a higher valuation risk from Freddie Mac’s use of that appraisal report. Appraisal Forum 2022 Prepared by Multi
Slide 25: Geographic Competency
Geographic Competency Prepared by Multifamily © Freddie Mac
Slide 26: Demonstration of Geographic Competency
Demonstration of Geographic Competency This is a USPAP compliance issue • We have found a high correlation with out-of-the-area and sub-par review scores. • Just because an appraiser is Certified in a state, does not mean that they have Geographic Competency o Out-of-state office/location for the ap
Slide 27: Appraisal Resources
Appraisal Resources Prepared by Multifamily © Freddie Mac
Slide 28: Appraisal Resources
Appraisal Resources The Appraisal tab on the Multifamily website: https://mf.freddiemac.com/lenders/uw/#Appraisals Appraisal Forum 2022 Prepared by Multifamily © Freddie Mac
Slide 29: Appraisal Resources: Apartment Investment Market Index (AIMI)
Appraisal Resources Freddie Mac’s Apartment Investment Market Index® (AIMI®): https://mf.freddiemac.com/aimi The Freddie Mac Multifamily Apartment Investment Market Index (AIMI) can help you determine how the relative value of investing in multifamily properties in select major metros, and nationall
Slide 30: Panel Discussion: Perspectives from Freddie Mac Underwriting
Panel Discussion Perspectives from Freddie Mac Underwriting Prepared by Multifamily © Freddie Mac
Slide 31: Insights and Perspectives from Freddie Mac Underwriting
Insights and Perspectives from Freddie Mac Underwriting Benjamin Barash Deona Epps Galina Ivanova-Tozeva Rick Farmer Karen Clark Manager, Manager, Manager, Director, Manager, Underwriting & Credit, Underwriting & Credit, Underwriting & Credit, Underwriting & Credit, Underwriting & Credit, Seniors Ho
Slide 32: Takeaways: Underwriting Panel
Takeaways: Underwriting Panel A peek behind the curtain at Freddie Mac Underwriting to see how their work product fits into the larger picture. General takeaways from our panel of underwriters: • We want transparent discussions and analyses. • We need an adequately supported opinion of market value.
Slide 33: Takeaways: Underwriting Panel - Seniors Housing
Takeaways: Underwriting Panel Seniors Housing (Ben Barash) • The COVID-19 pandemic has had a material impact on seniors housing in terms of: o Occupancy declines o Rental rate declines or increased use of concessions o Expenses, particularly those related to staffing and wage levels o NOI/Valuation
Slide 34: Takeaways: Underwriting Panel - Targeted Affordable Housing
Takeaways: Underwriting Panel Targeted Affordable Housing (Deona Epps) • For our affordable housing underwriting, we underwrite to the appraiser’s As-Is estimate of market value: o As-Is means that the appraiser must consider rent restrictions o Depending on the loan product (i.e., forwards, rehabil
Slide 35: Takeaways: Underwriting Panel - Conventional Underwriting
Takeaways: Underwriting Panel Conventional Underwriting (Galina Ivanova-Tozeva) • Unsupported value growth could be a material valuation and underwriting risk o Appraisers are typically doing a sub-par job of supporting significant growth over a short (two or three year) time period o Just saying “T
Slide 36: Takeaways: Underwriting Panel - Small Balance Loans
Takeaways: Underwriting Panel Small Balance Loans (Rick Farmer) • These smaller properties pose different underwriting challenges than conventional properties due to: o Fewer instances of professional property management o More instances of less sophisticated financial records and rent rolls o Less
Slide 37: Takeaways: Underwriting Panel - Risk Distribution and Credit
Takeaways: Underwriting Panel Risk Distribution and Credit (Karen Clark) • Risk Distribution & Credit (RDC) acts as a liaison between our underwriting teams and the capital markets investment community. o RDC becomes involved with all the Freddie Mac property types o 95% ± of Freddie Mac loans get b
Slide 38: Contact Us
Contact Us Alex Chang Marty Skolnik alex_chang@freddiemac.com martin_skolnik@freddiemac.com Appraisal Forum 2022 Prepared by Multifamily © Freddie Mac