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Freddie Mac — Freddie Mac Multifamily Appraisal Forum 2021
44 slides from Freddie Mac's conference presentation, Feb 17, 2021
Slide 1: Appraisal Forum February 17, 2021
Appraisal FreddieMac MULTIFAMILY Forum2_21 February 17, 2021
Slide 2: A Better Freddie Mac
For families ...innovating to improve the liquidity, stability and affordability of mortgage markets For customers ...competing to earn their business For taxpayers ...reducing their exposure to mortgage risks A Better Freddie Mac …and a better housing finance system
Slide 3: Appraisal Review at Freddie Mac
Appraisal Review at Freddie Mac Alex Chang Martin A. Skolnik, MAI (Marty) Michael Donovan Vice President Chief Appraiser Senior Analyst Risk Distribution & Credit Appraisal Team Appraisal Team [email protected] [email protected] [email protected]
Slide 4: Discussion Topics
Topics • Quick philosophy on Freddie Mac appraisals Key • Results from 2020 appraisal reviews Discussion • Tips and Hints; Do’s and Don’ts for 2021, including: Topics ‒ Sales adjustments ‒ Capitalization rate development ‒ COVID-19 considerations ‒ Property taxes
Slide 5: Appraisals at Freddie Mac
Appraisals at Freddie Mac Many of you have heard this material before, but we have the advantage today of reaching out to a large percentage of the multifamily appraisal community, so it’s worth talking about these topics again… 1
Slide 6: Purpose of a Freddie Mac review of a third-party appraisal
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 his/her opinion of market value.
Slide 7: Appraisal Report Content
Appraisal Report Content We want to know: • 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…”
Slide 8: 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”
Slide 9: Process Overview – Optigo Lenders
Process Overview – Optigo® Lenders Optigo lenders (formerly known as Seller/Servicers) Third-party appraisals come to Freddie Mac through the Optigo lender network for a loan acquisition: Freddie Mac does not originate loans … but, we purchase loans from our Optigo lender network Freddie Mac does no
Slide 10: Appraisals for Freddie Mac
Appraisals for Freddie Mac We are very interested in what you are saying about the local market and the subject property. We actually read your appraisals, and our lending decisions are based on your data, discussions and conclusions. Part of the underwriting process is to understand the valuation r
Slide 11: Best Practices
Saves everyone time and money…and frees up more time for everyone in the lending chain to do additional quality Best Practices transactions! • Difference between a reasonably well-written appraisal and a below- Materiality Matters average appraisal is the addition of a short/concise summary at the T
Slide 12: Items to Call Out
Items to Call Out Call out/note/discuss the report’s deficiencies so we can evaluate the valuation risk • Sales ‒ Older or a wide geographic area ‒ Poor or missing financial data ‒ Poor comparability or quantity • Income ‒ Poor rent roll from the property manager ‒ Not a substantial operating histor
Slide 13: Results of Appraisal Reviews
Results of Appraisal Reviews 2
Slide 14: Appraisal Review Process
Transparency is key Appraisal Review Process • Annually, we sample 5-10 appraisals from each Optigo lender • The focus of our review: ‒ Did the appraiser adequately support their opinion of market value? ‒ Are there issues that might affect the validity of the appraiser’s data, analyses and conclusi
Slide 15: 2020 Results
2020 Results 2015 - 2020 Appraisal Reviews Total Optigo Lender Population 67% 98%67% 57% 55% 27477 te, 21% 18% 694 18% 13% 11% 11% 12% 11% 6% iy) 9% fa: Hl | Hai: Ps | Wh Poor Below Meets Exceeds BAI Optigo Lenders (2015) MAIl Optigo Lenders (2015) WAIl Optigo Lenders (2017) WAIl Optigo Lenders (201
Slide 16: 2020 Results (SBL)
2020 Results 2015 - 2020 Appraisal Reviews SBL Population 73% 9% 64% 61% 7%: 9 3593626, 5 o/ Y 21%| y 15% 13% | 10% 3% i 5% y 3% 4% 0% gm ox BZ 0% Yj, 0% ov Ml 25 poze Poor Below Meets Exceeds A KDW 0 v6 CSBL(2015) MSBL(2016) MSBL(2017) MSBL(2018) MSBL(2019) %SBL(2020) Appraisal Forum2 21
Slide 17: 2020 Results – Most Frequent Issues
2020 Results – Most Frequent Issues Most Frequent Appraisal Issues Without Adequate Support (2020) % of reports in Rank Appraisal Review Item compliance 1 The appraiser considered “unit mix” as a comparative adjustment. 19% Are the capitalization rates developed for the comparable sales calculated s
Slide 18: The Good, the Bad and the Ugly
The Good, the Bad and the Ugly Suggestions for Improvements in 2021 3
Slide 19: Leased Fee vs. Fee Simple
Leased Fee vs. 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, and this is not correct! • The Appraisal of Real Estate (14t
Slide 20: Customer Service
Customer Service • If Freddie Mac or Optigo lenders have questions, take them seriously – we wouldn’t be taking the time to ask if it wasn’t something that matters to us. Don’t blow it off. • If Freddie Mac raises a question, it is an issue with underwriting, the valuation risk, consistency with oth
Slide 21: Appraiser's Mythical Assumptions
Appraiser’s Mythical Assumptions Sales Comparison Approach: Economies of Scale • Is/are Economies of Scale a thing? • What factors are affected as property size changes, say from a 50-unit property to a 200-unit property? To a 300-unit property? ‒ The number of assistant managers ‒ The number of mai
Slide 22: Appraiser's Mythical Assumptions (cont'd)
Appraiser’s Mythical Assumptions (cont’d) Sales Comparison Approach: Unit Size Is unit size a factor in sales pricing or is unit mix a determinant of price? • Most appraisers imply the sales’ rents/income generation is based on their units’ raw square footage, but is there something else? • Even wit
Slide 23: Valuations of Property with Recent Sale
Valuations of Property with Recent Sale 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 • NOI growth • Capitalization rate changes • Capital improvements / renovation • Examples of value growth with period-ov
Slide 24: Property Taxes
Property Taxes What we want to know: 1. Description of the local assessment process and the next date of revaluation ‒ Property tax assessment values may or may not be static – it depends on the laws of the local jurisdiction ‒ Even with static assessment values, property taxes might be materially v
Slide 25: Incorporating Risk of Assessment
Incorporating Risk of Assessment One way to estimate property taxes in a jurisdiction where a reassessment is likely in the near future: 1. Select several sales within the same or similar taxing jurisdiction that have been reassessed after the sale 2. A comparability chart can be constructed to comp
Slide 26: Incorporating Risk of Assessment
Incorporating Risk of Assessment
Slide 27: Incorporating Risk of Assessment
Incorporating Risk of Assessment At this link: https://cbreemai l.com/rv/ff011ee 33dd2b5986eb0 349dd24583d84 26e749c
Slide 28: Incorporating Risk of Assessment
Incorporating Risk of Assessment A closer look: This type of information helps us answer the questions: • What is the re-assessment methodology of the local assessor? • If the property is due for re-assessment in the near future, what is the risk that the assessor will be similar to the property’s m
Slide 29: Ground Leases
Ground Leases Freddie Mac purchases loans on the leasehold interest in a subject property; i.e., the ownership interest receiving the monthly rent from the property’s tenants The appraiser should: • Model the financial impact of the ground lease payments on the multifamily operations component • Con
Slide 30: Ground Leases (cont'd)
Ground Leases (cont’d) We have been seeing a difference in the way an appraiser considers an existing ground lease with a prospective ground lease. We need the appraiser to consider and discuss: • Would that prospective ground survive a transfer/sale of the subject property? Is it between related en
Slide 31: Other Reminders
Other Reminders • Three years and year-to-date of financial data are required in the report • Call out rent roll issues within the report (date, content, format, etc.)
Slide 32: Quality of appraisal data and rent roll requirements
The validity, quality, dependability and risk of an appraisal is directly related to the quality of data the appraiser receives. Please review Chapter 60.6 of the Freddie Mac Guide for current rent roll requirements!
Slide 33: Capitalization Rate Development
Capitalization Rate Development • Inconsistent capitalization rate calculations from the sales ‒ A capitalization rate calculated using T-12 or in-place net operating income (NOI) typically is 25-75 bps more aggressive than one based on pro forma NOI ‒ This could have a material affect and an overva
Slide 34: Capitalization Rate Development (cont'd)
Capitalization Rate Development (cont’d) Supplemental sales • It is not acceptable for the appraiser to include supplemental sales without providing full outlines – i.e., similar to the primary sales discussed in the Sales Comparison Approach ‒ Without full sales outlines, the reader cannot validate
Slide 35: COVID-19
Transparency is key COVID-19 • The inspection protocols we put in place in April 2020 can be found here: https://mf.freddiemac.com/lenders/uw/#Appraisals • We are seeing more sales transactions as market participants are getting their arms around the issues of investing during these unusual times. ‒
Slide 36: State Certification
State Certification All the appraisers signing the appraisal must be certified in the state in which the property is located. • You cannot use a New York certification to appraise or co-sign an appraisal on a property in New Jersey – we just saw one of these. • Also, recently we had a New York appra
Slide 37: Recap: Appraisals for SBL
Recap Appraisals for SBL Small Balance Loans 50 Pages or Less 4
Slide 38: Areas for More Efficiency
Areas for More Efficiency • Letter of Transmittal • Executive Summary • Regional Description • Property Tax • Zoning • Less boiler plate and repetition: ‒ Sales Comparison Approach ‒ Income Approach Do not just dump all the regular report stuff in the Addenda, like a 20-page Market Area Analysis or
Slide 39: Summarize Shorten Focus
Summarize Shorten Focus Appraisal Forum2_21
Slide 40: Appraisal Resources
Appraisal Resources New link for the Appraisal tab on the Multifamily website: https://mf.freddiemac.com/lenders/uw/#Appraisals
Slide 41: Data Standardization for Third-Party Reports
Data Standardization for Third-Party Reports Technology Update – Appraisal coming soon! September 2020: Freddie Mac announced new structured data supplement requirements for Property Condition Assessment reports. October 2020: Freddie Mac enhanced the myOptigo application with an integrated workflow
Slide 42: Benefits
Benefits For Third-Party Consultants • Greater transparency into each report’s compliance with Guide requirements • Report data is more accessible to clients, elevating the utility of third- party report data for each transaction For Lenders • Greater transparency into each report’s compliance with
Slide 43: PCA Data Standardization in Practice Today
PCA Data Standardization in Practice Today 1 3 2 Report Excel Template (provided by Freddie) w/ seamless data file generation feature OR Report Data Supplement File Full PDF Report Report Webform in myOptigo Proprietary Report Writing System Visualizes data supplement w/ w/ seamless data file genera
Slide 44: Appraisal Data Standardization: Next Steps
Appraisal Data Standardization: Next Steps • Give us your thoughts! Take the post-event survey to help shape the direction of Freddie Mac’s appraisal data requirements. • Stay tuned! Freddie Mac plans to announce new appraisal data standardization requirements in early summer 2021.
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