Determining Sales Price

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

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