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Buildable Backyards Real Estate Summit 2021
June 22, 2021, Online, USA
Buildable Backyards Real Estate Summit 2021
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Buildable Backyards Real Estate Summit: Concurrent Sess #1 -The Viable Backyard: Lending & Appraisal
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About the talk

June 22, 2021

The popularity of ADUs has risen as communities face housing shortages. Financing and appraising ADUs easily is a crucial component to increasing housing choice. In this session, industry veterans share their experience and information for successful transactions with ADUs.

About speakers

Susan Brown
Consultant at CoreSGB
Sarah Brennan
Senior Vice President at Self-Help Federal Credit Union
Abdur Abdul-Malik
Certified Residential Appraiser at A Quality Appraisal

Seasoned Senior Leader bringing 30 years of mortgage/construction lending and financial industry experience. Success has been built on key fundamental strategies: Create and communicate clear, winning objectives that attract and engage curious, smart, collaborative people. Proficient in adding value to organizations by creating and managing high-performance environments that maximize revenue margins, foster high morale, and engender trust among my colleagues and teams. Strong reputation as a results-driven, reasoned thinker and problem solver with the ability to navigate constant change.

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As Senior Vice President and one of the eight-member executive team of Self-Help FCU, I provide direction for the organization's strategy, growth and impact; share the story of Self-Help with internal and external stakeholders; and lead Self-Help's presence in Southern California, managing teams across 4 locations.

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We are ready to begin. Good afternoon, everyone. My name is our mere kitchen and I am on the board the treasurer for the gym Community Land, Trust these, Welcome to our first, can current session of the afternoon and thank you for attending our session session here is already been some interest in other sections about this topic. Folks are really excited about adus. And now the obvious question is, how do we afford it? I will make it so we can actually buy these things. So how's it going to hit the road? So

we're going to find out today, with our great panel. We have some really good folks here today. I think they may all be here. Abdul Abdul Malik. Who was the accident actually residential appraiser? We got Susan Brown at Sarah Brennan, and Desiree excetera, and I guess he's already been asked a question earlier sessions, and we're going to be on for that kick ass off. And then we going to go through and I'm going to stop you guys about 10 minutes left for Q&A. What along the way, if you have questions and things, you wanted one and say going to shut

them down and chat section. So we don't forget those questions as we go. So having said that, I'm going to let Sarah Brennan, I kick us all. When is the Senior VP, at Selco Credit Union, out in California, a colleague of mine from a while back. And she going to start us off right now, Sarah away, my time here and can book see my screen. Not yet, Sarah. Okay. I just dropped my share. So maybe you can share now. How about now? Are we go? So I'm still going to be with you all. And thank you so much to Durham Community

Land Trustees for organizing this session. Really? Excited to hear from the fellow panelists. So I think it'll be educational for everyone including, including me and I'm excited to share with you a little bit about an agu pilot the self-help launched in Los Angeles here. A couple years ago, my name again, Esther Brennan and I serviced. Spp here. Just a really quick 30 seconds on Whose self-help. Is some of you may be familiar for others. We are a national not-for-profit, community development, financial institutions. We did start, and continue to be headquartered there. In Durham. We

also now have a presence in eight States, including here in California. This week of 20 branches here and thus, treated area is the region that I work in and to get to our our pilot here, so you Maybe thinking. Okay. So self-help. Is this National? Cdfi? Why did you start uradu pilot in Los Angeles? And there's really two reasons. One is structural, and one is serendipitous, on the structural side, both the state of California as well as the city of Los Angeles, have over the past several years rolled out and number of

streamlining responses to make it easier for homeowners to build. An Adu on. This is really in response to the terrible affordable housing crisis that the state continues to face. So the idea is trying to encourage infill development. I'm trying to use all the tools in the toolbox. On the serendipitous side. The reason that self-help got involved with this particular pilot as well is because we connected with some really wonderful Mission. Alliance Partners who were already on the ground into sapiteng as these laws were coming down, how we could better support homeowners. And

so, that's really what I'm going to be talking about. Today is both, I'm who this ecosystem of partners are that we worked with and rolling out the pilot. Because I think that that really helps the homeowners as well as mitigate the rest for the lenders and then I'll be strong. And of course a bit about our product itself and why we designed it, the way that we did. So the ecosystem of mission align partners that I'm going to be describing really comes around almost a one-stop-shop. If you will for homeowners incorporating all of the different elements that a homeowner needs when they're

considering building a Navy, you write. So it's not just financing. It's everything. It's, the design is, how do you get things through the department of building and safety to get your permitting? How do you select a general contractor Etc? And so that's really what that is about and to share with you a little more about who these partners are that we work with and what each one does. L a moth is an urban. Sign and advocacy firm, they both provide. The architectural drawings that we use in the pilot as well as serve as a homeowner Concierge in. This is a rule that we

identified that homeowners really need in order to navigate that permitting process. So la must truly kind of holds the homeowners hand not just in connecting with all of the partners in our pilot. Also, in working with the city rnla is a mission Alliance, not-for-profit general contractor, as folks know, so important to have a general contractor that you can trust and do great work. We along with Genesis la which is another cdfi. Here are the financing partners. And then finally we have La family housing and the housing rights Center and they provide landlord

training to the homeowners, in terms of how to screen tenants and other kind of tips and tricks to make sure that our borrowers are successful in their new role as landlords. So this is a slightly different visual, but same kind of concept about how this ecosystem really works together to keep things simple for the borrower. And to make sure that also we is a lender are reducing our risk and our view through participating in this ecosystem. Right? It's a lot less likelihood that our borrower is going to select the general contractor. That's not bonded or is something

fly by night. And just, you know leaves after a third of the unit is built never to be heard from again. So in our view, this is not only such a huge value-add for borrower it also true. Does mitigate all rest. Just a little bit about the pilot product itself self-help. We do have experience both with mortgage lending as well as commercial lending. We have never actually I use a mortgage product that incorporates Construction Construction financing elements. So that was something a little bit unique about this product. I'm actually really curious to hear from some of the

fellow panelists about how they approach. Or if they already had construction financing within their mortgage loan portfolio for us. The biggest piece really was making sure that we connected with our commercial lending. Holly and have a construction specialist review. All the plans review, the GC beds Etc. And we also needed to establish a new system in place to make sure that we were monitoring and taking care of construction drawers. Again, this is unique for how we're set up as an institution in our mortgage lending and I'm curious to hear other lenders have approached

us. In terms of our underwriting itself. We are refinancing Inspire note and then we're taking the cash that is needed to construct the edu and putting that into an escrow account that we then make payments to against Iran, benchmarks of the GC hippos, benchmarks. We do have a range of terms available. All as always, feel koplo specs and we do not charge private, mortgage insurance. The reason I folded some of these underwriting terms here are these really were very key to getting our borrowers qualified and are not typical.

I'm not to be found in our other mortgage loan. So the big one was definitely being able to project the future rental income. That a homeowner will be receiving as as they actually went out the unit and being able to use that and rdci calculations upfront with out that all of the homeowners that we've been working with who Go to be low and moderate-income would not have qualified with the another really key under reading innovation, in terms of our mortgage loan products for this pilot is that we out of what we're calling Revenue, Gap, financing and this is something

actually that we did not have when we rolled out the product. But our borrowers, aren't, you know, interested parties for made us aware of the need for the quick. And so that's for the period of construction. When a homeowner, you know, they're not get speaking in that income cuz they're not able to rent the unit since it's under construction, but they now have the higher mortgage payment, right? They already took out that funding for the construction and so were actually including that in the overall cost of the loan amount and that way through the construction. Only the borrower is

not responsible for that difference, already included in the total loan cost. And some of the key learning, this is the second to last V. Saucier key learnings as well as some recommendations that that we have from Omar pilot. One is that tree development costs can be romantically change project costs and so on our pilot, one of the things that we did our partners did LA mosca. Architect is they had a limited number of design options and the idea there was to increase efficiency and allow borrowers to choose, you know,

some small customizations, but not too many. How ever do you a lot of sites Pacific modifications that were needed. And this could be anything from Hillside grading to a historical overlay preservation District, you know, it was off brand new car. So just to be mindful of that. Another key learning is that slow, permitting process has really increased cost. So that's get another reason to make. Sure if you're already in touch with your local municipality and they are like La, in LA's case, we

reduce the amount of time that he dies is pledged to get back and review plans to 60 days from 120. That's that's going to be very, very cheap for the cost for the borrower, and for the lender. And then finally, and this is what I'm really interested in hearing from, from one of our panelists who is an appraiser, is that the comprable market is just almost non-existent. And that's, that's complicating calculating be as completed value. I'm very interested in learning about that later in the session. Man, this is last Light recommendations. As I shared Wheatley,

really, really recommend this pre-vetted ecosystem of trusted Partners. We think that adds a lot of value to the borrower and truly reduces risk as a lender. We also really found over and over that that technical support that the homeowner Concierge in the pilot plays is chi in supporting Bowers along good contractors. I've shared is absolutely essential and then finally, don't forget to educate, borrowers up front. I think, the more education we can do. I fry. The more likely it is that expectations are managed and and people come away from the process as

happy borrowers and a Happy New Year. And I'll stop sharing. So that the next Palace the best of Susan. I don't know if you got my message using, are you cute up to go next Susan? I am certainly prepared to do that. Sure. We keep the bank's role in your first pick up from Sarah and if if I could get a nod of head that you're able to see my slides at this point. Thank you so much. Good afternoon. My name is Susan Brown, and I serve as a senior vice president with

Umpqua Bank. And I run the construction loan division that are home. Lending division. We are a very long-term construction lenders for about the last 20 years. We've been involved in providing loans to help build or renovate customers properties. And some time ago. We gained of a high Comfort level with Adu financing even before it became so popular, like it is today. So for us, this involvement, on a local level, as well as nationally to try to help people understand our perspective, on what we're doing is we're

honored to be here to share what we know. I would put Umpqua Bank into the conventional lending category, my colleagues, on the panel. Bring some very unique and much-needed, financing options that can fill the Gap that we can't fill. I'm, we're able to do more conventional type products, but all of us together offer a broad Suite of available options for your clients. I'm at Umpqua. We work with owner-occupied properties, which helps to mitigate a little bit of risk associated with multifamily properties. That also have 80, use just a smaller University of properties

that were able to finance. We are able to work with internal 80 years and I'm, I'm sure many of you from the prior session's, understand those differences in turn was simply within the existing footprint of the house. And we also, are we able to help with external adus, which are attached to the existing building? And then the separate adus, which are often called backyard Cottages Casitas. A variety of different names, but their detached from the main unit. A growing Trend across the country.

Specifically in California. We're seeing options available for multiple adus. On a single property. Our program allows for just a single Adu that stretch to find financing for multiple adus. As one of those things with a great ideas to coming ahead of available financing options. So that's a little bit tougher,. But there are some organizations. I believe that have that available at this time. We just were not able to offer that. We have a suite of products available for

customers who want to build an Adu for folks who have an adequate amount of equity in their existing property, a home equity line of credit might be a really good choice. That's just simply a line of credit works. A lot like a credit card, but it's attached to the lien against the house. It's established for a particular credit limit and then you can borrow up to them that amount and pay back over time. One of the costumes that I offer when people are considering the home equity line of credit is to make sure that it has sufficient

funds available to get your entire project. Completed are one of the dilemmas that some homeowners run into as they get partially complete with our construction project. And then seek financing when a lot of work has already taken place, and there are very very few lenders, who will lend on a project that's already started. So it just be a caution to make sure that there's plenty of funds to complete the project without line of credit. We're also, I fortunate to offer the Homestyle renovation loan. That's a Fannie Mae product, that allows

for the renovation of an existing property and allows for all types of 80 years. Like, we talked about, just a moment ago. There are some accommodations in the Homestyle product that will allow the use of rental income from that, 80 you to propose a to you. Those circumstances are really limited. So I would encourage you to talk with your lender who offers the Homestyle renovation product, so that they can tell you what those choices are for availability to use the rental income to qualify. We also have access to the full

Suite of FHA, 203k products. We have the limited and that in some small instances, could be used for an Adu, but there can't be any structural work. Associated with a limited alone. But with a standard 203k project, it allows for structural changes generally working within the existing footprint, but there are some accommodations for additions to the footprint as well. But the the modifications to the property can be quite broad, including things like repairing, foundations, and repairing Wells also, so it's a way that they can do some major upgrades to their property while they're

adding an Adu. Finally our all-in-one Custom Construction product is the product we use most often offer our construction and renovation project that can accommodate all of the types of adu's that we talked about. It gives us a little more flexibility to do some kind of unique things, but still not as ingenuitive and Innovative. As the other two speakers who are talking today. They've got some accommodations that. I I certainly wish we had to With the construction program and Sarah reflected in her comments earlier.

There's a bar or review process just like every other loan that customers do. So, there's the whole credit package. That's typical for any loan transaction. We also conduct a builder review on again, to Sarah's comments, making sure that you have a tried-and-true and vetted Builder to be a partner with your customer, is a central to make sure that that project is going to be able to come to fruition. And finally, we do a project review where we look at all of the exhibits up front. And in fact, we passed those exhibits off to our

partners after happens to be in my community in Portland. So, we had occasion to be in touch in the past and we would send all of these exhibits to the appraiser to have them. Take a look at the comparable sales and let us know the value for that property. With all of our construction loans, the customer will make some type of a payment during the construction. Some of the products. We have our full principal interest taxes, and insurance payment during construction. Other products are an interest-only payment and then all of

our loans have a permanent feature. That once the construction is complete, they will continue on as a permanent loan. The customer doesn't have to refinance unless they wish to and that's called rolling to permanent status. I want to finalize my comments by offering some learnings about challenges and I don't mean for this to wrap up on a, on a disappointing note, but just facing some of their realities that we have when it comes to construction, lending, broadly. And then in particular related, to 80 use on the first I mentioned before

that, we are able for our program. We're able to do a single 80 you and not multiple adus. So as lenders out there are considering their options for developing a program or or trying to use us at Umpqua Bank. I'm just about to the realization that we just can entertain one. There's been a lot of conversation about condominium. Icing, adus where they will ultimately split the lot and create a condominium that would Encompass both the main home and the new Adu structure. So we're beginning to have

conversations about how financing would work in that scenario, and it's becoming very popular in the Seattle market. So I imagine people will be looking to that market for some learning as we go forward. Probably one of the biggest hurdles that we have is in most instances. We're not able to include future rental income to qualify a borrower for the Adu development. That's a roadblock for a lot of customers and one that we continue to explore different methods that in the future. Maybe we will

be able to include that rental income. The appraisal which actor will talk about in a couple of minutes, is a challenge, not insurmountable. And with a very highly-skilled appraiser. I'm not quite the roadblock that some people might anticipate for Umpqua Bank. We do owner-occupied properties. Only when we're building out a new 80. You, so we have yet in the future to add the investment properties which possibility that we could do that someday in the future with the Fannie and Freddie affordable programs that I mentioned

in conjunction with Homestyle. I'm there are some limitations on the income but the good news is that they did have some accommodations for low and moderate-income borrowers that we can include some of that rental income. So that opens up a little bit of a window for a select group of customers that we might be able to serve. That is the end of my comments. So I will stop sharing my screen and we can have the next speaker. Go forward. Thank you very much. I want to make a change but I think a

Desiree made a great Point. Have all endings, go first, and then we'll have the appraiser go last. So you can hold out for me to do my answer in which case, we'll let Desiree at the correct pronunciation. Take us away. If you don't mind, please mail. Okay, let's see if my screen share can work. All right. I see it. Do you all see my screen? Not yet, not yet. And why she's queuing it up. Okay. She got it at Susan you going to share your your slide deck as well. Outstanding information. Thank you so much for

sharing that with us. All right. Can you see my screen? Great, and then I wanted to say a quick note of gratitude to my other panelists. This is a small community of folks that have been trying to figure out how to deliver these a to use for a while and we've all been relying on each other over the past couple years. It feels to learn some of these lessons and share, what's been working and not working and what each of our lending, institutions are allowed and not allowed to do. And so I look forward to ongoing collaboration, but thanks also

for everybody's good work. Thus far, I will talk a little. I'll talk about a little bit about who cracked. And then how we design our a deal on product. And some lessons learned. We are a nonprofit community development financial institution. We are not a depository Bank. We are just a lender, which means that We have a mission. We serve, Pacific Northwest, Oregon and Washington. And we do that through a variety of business, business loans, and Consumer loans and Loans, nonprofits, and a wide array of loans, but our Capital we don't have deposits as our capitalsource. We

bringing capital from a range of other sources, whether it's from private-sector, public sector, Grand loans, it cetera. And so when we are thinking about serving, a community need, or meeting a need with our loans, the question about, what capital sources, we could use and what pricing that we can offer. The homeowners is always another factor that we have to consider and that's been an interesting challenge with 80 years because of the economics of them. How do we keep the rates low, and not to make everything pencil for all the parties involved

is one of our ongoing challenges? I'll just get through a couple of these background Factory slides. So, we for many years have an offering and a small Consumer loans for septic system repair and replacement for home energy. Upgrades more recently to help people repair place manufactured homes, and in this context. And in all the work that we've been doing and communities need for support and financing for adus has been folks, have been asking us for a long time. Can you help with this? Because other financing products haven't

been quite working. And so a couple of years ago. We set out to figure out a loan product, that would work to meet the gaps in the market and be able to deliver financing affordably enough to support that homeowner to rent to a low income household or for a low income household to be able to take out, maybe you and generate some income. So we, when we went to design our product, we investigated all the different options and where the needs were that we saw out in the world and we have been

trying to avoid a standard construction loan as much as possible because they're expensive to deliver. I think Suzanne talk through all the different reasons why they're good loans, but they're also expensive and we're trying to see how can we streamline our costs as much as possible. So we offer a home loan secured by a deed of trust that can Finance the design Development and Construction of an Adu. We've had to be pretty creative because people really do need construction loans and we've been trying to kind of work around and find a way to

deliver a construction is product without it being a frontal construct. We have two different tracks right now that we offer, although, that could change in the future. We designed our Loan in context of a lot of programs that were trying to get it up and running both in Oregon and Washington, not all the programs have come together as quickly as it was two for us to internally design. One product because long product design is easier and faster than bringing a million Partners together to do all the wonderful coordination that we've been

hearing from all the other panelists. And so we launch. We've been calling or Standalone loan, which is just our own loan using Kraft Reese capital. And then we also have partnered with back home that you've heard in the previous. Fashion. And they were able to take some of their funding and invested in Crash 3, in order to draw down the interest rate and the tenants required from that progress. The program are required to be lower income. So up to 80% of the area median income and back home is a full-service. One of the full service program, that

helps the homeowner from Soup To Nuts, navigate finding a new unit going through the construction process. And then there's Property Management Services to that are part of that work. And that is a nice package to Brad's house. And then in exchange, for all the services in the reduced rates that tenants, whether it's friends and family, or unknown, third party tenant, they all have to qualify as learning under 80% of the area median income in the rental restricted. We've all been talking about the various Mission impact said that Adu loans can bring two

communities and we are interested in all of them cuz they all serve the communities that we've been working with and I think as time goes on, we will learn more about which which of these Mission impacts are coming up more frequently than others, but our goals. We want to build housing have more units of Housing and have, as many of them be as affordable as possible support this, or reduced displacement risk and support homeowner stabilization. We're also seeing a lot of Need for multi-generational housing and assisting whether it's seniors or kids that

have graduated college and moved home and whole variety of ways at folks, need to house their friends and family. Particularly in that last last year. Are so I talked a little bit about our planet to go through the other features. We also are only supporting owner-occupied single family, residence. We will make an adjustment. If there's a direct family member living in the primary residence, that's not the owner then and they want to rent out the 80. We are willing to work with that. Right now. We serve Multnomah, Washington, Clackamas County is,

which is the Portland metro area. And with additional capital and partners. We will expand throughout the Pacific. Northwest. Our loan will offer up to $250,000 for a standalone. Craft 3, back homes are limited to $150,000 in order to keep that monthly payment fordable. Some exceptions may be approved. We don't have an exact opinion on A1 versus A2, a to use in the backyard. But the likelihood that the kind of bar or applicant, I will come to us to be able to put 280 use in their backyard, given the overall state of their finances is is not highly likely at this

time. We had one one applicant that their home was valued at $300,000 and they wanted to put $400,000 worth of 80 years in the backyard. And for us, that's more of a commercial loan than that is really a home loan. Our rates are fixed. We offer reduced rates for lower-income applicants, and also reduced rates for back home. Participants that are going to rent to rent out their units of affordable housing. We increase our term up to 20 years, to keep those payments low and we have a very generous forbearance

for the first payment to accommodate long and construction timeline. When we first started offering Adu loans, the time lines were looking for to 6 months, but now because in Oregon, there's been fires and covid has exacerbated peoples, want a desire to be home, improvement projects that timeline has expanded a lot. And so we've had to go back and make some adjustments there. I have another side to go into more details about underwriting, but we will accommodate more risk than traditional lender. Higher loan-to-value is higher debt to income and will tolerate subordinated,

Lane positions. Even third position, if it's behind a small HELOC, We also don't increase our rates for lower credit score. So if you're approved and a rate, that's your approval rate, regardless of as long as you're approved. That's what you got. We also don't we don't Outsource to third-party servers. We serviced everything in house. So we don't have third-party debt collectors and we don't report. We don't report to credit agencies. So that's another way to try to reduce the risk and bolster that homeowners Financial stability. And

contractor Lies. We also do have a vetting process for contractors and we need the contractors selected to prove that they've done projects within the budget that the our borrowers are looking at. There's a lot of 400080 used in the Pacific Northwest and we don't want someone who's accustomed to that promise. They're going to deliver one at $80,000 and then leave our bar or an alert. And then this lie goes through, some of the ways, in which we can be flexible in our underwriting. These are some examples and for us, really, it's about not too much

layered risk, so we can accommodate a lot of these things. Just not all of them all together. So higher loan-to-value and hired at the income. Ratios, we will either go by the appraised value or the origin of simple desktop appraisal depending on the overall picture of the project. We don't require an appraisal and last the homeowner needs that appraisal in order to get that right amount of money approved. We are okay managing some past derogatory issues. We generally be emphasized credit scores because of their history of

an equity and because of the Equitable and then we're trying to do. So, we can accommodate low scores and things like income distractions, particularly nowadays, and then we do consider the intended, 80 you use in the underwriting, but depending on that homeowners play, we may, or may not consider that rental income. We have to determine that on a case-by-case basis based on that homeowners plan. And then here's an example of one of our earlier borrowers who have completed their Adu. This is a unit from Wolfe Industries, which is

our partner on the back program. They used to be able to generate an 80 you in about three or four months from design from deposit to installation and their timeline has extended now, but they're highly affordable. Pretty high-quality unit. And then like a number of our are approved. Applicants. They were able to get some money from an equity loan or some money from Alana, but just not enough to cover the full cost of their Adu. We also see folks either have new homeowners that don't have equity in their property, or they

have lower incomes in a, quite a lot of equity in their property. And so, those are kind of examples of books that we could really work with. And then my tips and Lessons Learned are pretty much the same as everybody else's. That financing is important. You can't have a program without financing, but there's so many other factors to helping something to be successful. And financing is one piece and it takes a lot of time and flexibility and creativity to pull all the partners together and have a comprehensive program works. And then for the cities and counties and potential funders out

there. That is a great way to support ATU growth. In your region is too to help all these entities, have the time and money to be able to come together and come to some, bring something out there and then learning the needs of the homeowners. And Builders is really important. We seen a lot of programs that I didn't know enough about what the hell miners need and just a design. Something that wasn't quite the right fit and I had to go back in the past. I think my final biggest takeaway here is that the economics can be pretty tight. Either you've got high

rental potential rental income but then your construction costs are high and then in the places where the construction costs are lower, the rental potential is lower. And so if you want to achieve support lower-income households and Building Wealth, and rent to lower-income households, those are really great goals to have, but they require a bit of subsidy to have enough cushion for everybody for two pencil for everybody and pencil comfort. And so are really thinking through that homeowner performa, and that renter performa is important in designing the

program, and the financing needs. And finally, we just need more examples and more storytelling to convey those benefits and to help other lenders, figure out how to join the market and help cities and counties, and other nonprofits determine how to jump in and add this to their tools to create an enhanced fordable housing, whether formal affordable housing or naturally occurring throughout all of our regions. And I said, thank you. We've got some real good examples of lenders who have the flexibility to do Adu Financial sandwiches outstanding. I never going to hear from an appraiser

because we know that's one of the key pieces to getting all this done. I'm still do Malik will walk us through his approach in terms of how this can work with appraisals made to use. Certain floor is yours. And before you start any, had your hands raised a question that, but we're going to get to all the questions out in about 15 minutes or so Patty. Okay, so my name is Abdul Abdul Malik. I am a certified residential appraiser that's based in the Oregon and Washington area. Are you able to see my screen? Can I get a not?

Okay. So me to have begin the presentation here and let me switch that around. So I a whole two major appraiser designations b s r a n d, a s a designation. I'm a blogger, a variety of platforms. I've been studying the contributory value of a to use and a couple years working for Nationwide appraisal management company which gave me a wide angle lens for the lending environment throughout the country and I'm going to Vance Excel user and I am studying data science techniques. What are the most important things to do is to go to

definitions. We've probably been exposed to these definitions before, but it doesn't hurt to review briefly. So this is from the Fannie Mae selling guy. And this is how they Define an Adu which is very important for the appraiser. They say that it's an additional living area, independent of the primary dwelling unit. It includes a fully functioning kitchen and bathroom some examples, include a living area over garage basement units. Now whether a properties of fine as a one-unit property with an accessory unit or a 2-unit property will be based on the characteristics of the property

which made But are not limited to the existence of separate utilities are unique postal address, and whether the unit is rented. So here's the key. The appraiser is required to provide a description of the accessory unit and analyze any effect. It has on the value or marketability of the subject property. A lot of this comes down to, what's known as highest and best use a highest and best use is something that an appraiser does to determine what is the most profitable use for property. When you factor in legalities owning, and various other characteristics, sometimes people just say to

the appraiser, just call this property and duplexes or Triplex and just be done with it. Well, there's a problem with just painting with everything. With the same brush, Richard haigler. He's a nationwide, a teacher of a appraisal Theory. He's an SRA as well. And he likes to say that appraises need to do a righteous highest and best use analysis, which means you really have to dig in deep and you have to do due diligence. Now here in Portland, permit, Oregon, Portland, Oregon permit, the person to rent not only the 80 you but also the name of a property but it's some municipalities that may

not be the case. But the key is that sometimes if an appraiser were to look at a d property and a single family property and just say, oh well, it's a Let's let's call it a duplex. It could result in a diminution of value of the property. So an appraiser has to be very sensitive to look at the property from all the important angles. And sometimes it's extremely easy to characterize. What are properties of duplex. I hear the top. We have a symmetric property, very easy to call that a duplex. Certainly, I would agree with that. But here below, we have a major dominant unit and then

a truly accessory unit. So that's pretty clear. But in some cases, it's very ambiguous. And that's when the appraiser has to really dig into the data to see which way the market will reward the property and its interpretation. Now, I know that appraisers can be the fly in the ointment, with many of these programs. And so I have given presentations to fellow appraisers about, appraising accessory, dwelling unit and I always tell them please, please, please don't be the $10,000 guy. There's some appraisers who just found it in. I'm not throwing my profession under the bus, but I am

acknowledging that there are some problems in valuation, and you can get a great appraiser and the transactions go through smoothly. No problem, but then you might get an appraiser who is maybe a little bit outside their death. They kind of just throw up their hands and they say well I'm just going to say this baby you is worth $10,000. Now, I know that this has some very important real-world consequences that could derail a loan. So I again lead with my fellow appraisers, please don't be the $10,000 guy. It can't help to keep costs in

mind. Now here in Portland. We actually have a very favorable of regime for building adus. And in fact, we have a national aux out who puts on tours periodically for homes that he helped and they do you get constructed for I'm back in 2019, before covid actually participated in one of those a detour. So I drove around all of Portland, looking at these various home, but I just want to draw your attention to the cost line. This 157,000, this 126,000 this one 203,000. This one right here,

$380,000 is what they have to pay to get that a to you. And the second page of some of the other properties that were on the tour. They're mostly ranging between about 175 to $230,000. In fact, the cheapest one on this entire list cost. The bar were $70,000 to construct and that was a relatively simple one. So we appraisers, we do stress and we do caution that cost is not necessarily equal value. A cost can be a reasonable test for the upper limits of what that 80, you should be contributing to the overall property.

And I have said this to praise as before, if you were writing a report and you are giving only a measly $10,000, a bump up in value to the to the property for that Adu. It better be the most awesome report ever written the history of a crazy. And it should be a report that can be archived in the Library of Congress for future generations to study. So what are some valuation tips? You know what I was told people there's no magical way to appraising a. Do you appraisers have a multiplicity of tools with which they can approach valuation? The three major approaches, but

there's a lot of sub approaches within them. Now, you can actually consider the income approach which is an approach to value that says, I'm getting this much money. I can apply a standard formula. So this is what the property is worth. Now, almost 10 years ago. Now, there was an income approach that he done in the city of Portland and that's that he was very interesting. There's a hyperlink there. You can screenshot and take a look at that paper. The authors of that paper concluded that the income approach often times, overstates the value of the contributory value of an Adu.

So there is correlation between income in value, but was adus, it's not exactly the causation. And this actually goes with with Desiree. Wide-eyed. There's a multiplicity of reasons why someone may do many of you and maybe for income generation, but it could be for Aging in place for multi-generational living at. She mention the cost approach as we previously mentioned. Absolutely. Can be considered it may not give a dollar for dollar increase in value and fat. In most cases an amenity, an improvement improvement.

Usually doesn't give you a dollar for dollar increase in property value right away. There are some rare occasions were, sometimes you pay for something and you get an even greater value out, but in most cases, it's going to be a fraction of that dollar you put in one of the bigger challenges that I found with, by the cost approach, is that you have to account for depreciation. Many, how much is the property worn down? And sometimes the 80 you is so much nicer than house. I said, you're buying a two-year. You're getting a house thrown in and so, the depreciation can be very different

between the main house and that beautiful to $3,000 + 80 you. So what is the best approach in my opinion? It's the sales comparison approach. That's where the rubber meets the road. You're saying. If I put this on the open market, how much could I reasonably expect to get back from a, from a typical buyer. Now, appraisers typically are going to be appraising, an Adu for a bank, and they often will go by the standards of the gses like, Fannie, Mae, and Freddie Mac. But I like to point out that, even though they have these guidelines, that

they want appraisers to follow. That's all they are just guidelines. An appraiser can modify if the valuation warrants? So, what's one technique now in an Ideal World and appraisal would have, at least three similar cells that have closed within the last 90 days. But it seldom that I deal with her. Maybe you and Alice has a lot of times and maybe this is for the underwriters, that might be listening. You may have to relax those guys. Signs and be willing to see an appraiser gray to call that sold. Maybe twenty-four months ago, 36 months ago and an appraiser who is burst an evaluation

techniques, should be able to do what's known as price index in he can say. Or she can say, it's sold during this timeframe, but I know the market is now here, let me go ahead and apply time adjustment to this folder sale so that I can make sure I'm properly accounted for returning my analysis. Now, another technique could be resale. Announces. I've had some appraisals where the subject was a very odd ball property, but sometimes I'll notice that the property sold a few times on the open market. So what I can do is say, hey, every time this thing sold on the open market, the market

seems to have given this percentage of an increase for this feature or tour. Demolition. Of course, we'll pay to use, usually, it's going to be an increase. Another technique could be location. There is no rule that says your comps. All have to be within a mile of the subject. That's a made-up standard that sometimes lenders will apply. When the Praises are praising a typical properties. It's Not Unusual to go miles out at Sac. If an appraiser is appraising something like a geodesic. Dome. They may have to go 25 30. 50 miles out. Now, you're usually not going to have to go that far

out with an Adu, but if you see a report where the ATU comprable is 3 miles out, you really shouldn't bat an eye. If that's the best dated that's available. Now, you just can't find a comp that really is comparable to the subject. So what you have to do is accept, what's known as property bearings, you're going to find a property. That's not comprable to subdue, really not comfortable, but it hasn't made you. So then what you're going to do is you're going to study that property. They had to say to you and you can say, okay, it actually contributed expert. In value. So

now you have a market proven percentage adjustment that you can apply to other comprable in your report. And I like to point out that you're so many valuation techniques. The Praises have these are the names of a few. I use all of these from time to time in my valuation report. A lot of times. I'm leaning on regression, aggregate difference is a group of parrot, sales analysis. Hear some of the, the grass that might show up occasionally in my report. If it warrants inclusion in the report till my point is the date is out there. We have to dig the techniques are certainly

there. You just may need to get an appraiser who kinda is comfortable with all this. And you may also have to realize that expertise may not come as cheap as some of the more normal appraisal. So you may have to open up that pocketbook to get the right appraisal. So I think that will do it for my presentation. If you have any questions than happy to answer any Wow, thank you so much. You know, I came to the session with high expectations, but you four have exceeded those greatly. Thanks to you all. We got some great questions already in the chat in the Q&A section. I'm going to start with

Sarah. Thank you. Offered this answer the first question. How does it spell permitting process? Add a lot to the cost? So there you can take that way if you don't mind. Yeah, and thanks for the question. I mean, it is 10 affects the cost. I suppose, the cost could also go down. But for example, I need time. You're adding an additional element of time. You're adding the rest of a number of factors changing. So for example, interest rates can rise or fall or in particular, over the last year, with newly risen is the cost of construction due to increasing cost

of lumber. So that's why I included it as an element that is undesirable when the permanent gets extend. I suppose it's technically true, but it you might end up with your costs reduced. But at least in our experience over the last year with scented up happening is that the costs are going up. Straight answer. I'm Mark. That satisfy you. Do you want any more detail with that answer? I think we'll take that. Mark has another question for you. Susan why we try to get asked for that one. So Susan, never get a question about the one-time close

Heather. You mentioned, I'm Susan. Yes, I always assumed looking for a little more of a definition. I'm construction loans, true construction loans can be offered in two forms. One is called a one-time close. One is a two-time close with a one-time close. The loan documents are written in such a way that they incorporate both the construction. And then the permanent financing. The bill own rules over to that permanent phase without having to modify or refinance.

Those loan terms. A two-time close. Is one alone is specifically and only for the construction phase and the customer needs to find a permanent financing with a different loan. So they're generally refinancing it with the same lender or a different lender to get that final construction loan. Okay. Excellent. Thank you so much for that. Susan, and I know we will have more questions. You guys have to be available for other folks with questions cuz this has been so great and we only have so much time left. But I want to continue this discussion, Mark has one more

question about. This is a great question. I don't know against this. When what he says this is these many programs is so exciting. Any tips on how to find equally friendly loans, local to the Raleigh-Durham area. This is the million-dollar question. You guys doing great things out on the west coast and other places, but what about right here where we live on any any responses to questions about about? I know you soak help is actually National Linda. I don't know if that this program is available all over. But I maybe you can tell us

about whether there's any chance that we can share some of that West Coast love over here in RDU area. I think that's certainly possible. I cannot commit anything on behalf of my colleagues, but I'm certainly, we have you, no experience to learn from that, were more than happy to share. And, of course, our uh, North Carolina colleagues are aware of this pilot. She also mentioned something. I didn't mention of the presentation which is that this La pilot is now kind of in a runoff mode. So it's close to New applicants. And in the meantime, we're launching an

expanded version of it up in Oakland in partnership with a funder of there. So the announcements not yet public, but they'll be out of that soon. So I got to say that Self-help continues to explore this. I think what makes it easier to attract a lender, whether its elf helper another one. And it really depends on what the target population of homeowners you're working with is for us as some of the other panelists of alluded to when we're working with low and moderate-income homeowners in particular and element of subsidy is really crucial. So, for us,

that's why the next phase of our pilot is going to be in Oakland because we have connected with a philanthropist. That's really interested in supporting that work. So I would say for grammar, anywhere that are that are listening, try to connect some of these. For some of these pieces in advance, either for the finder. If you find a friend who's interested in this kind of work, then, finding some of those other partners, because that's what has pulled together now. Both the durations of the stuff out pilot. And I, I think that it makes it easier to make that case, whether it's

to A lender to, Keep grouper whomever when you already have some other high-quality Partners on board. I would love to spread from LA to Oakland and we'll have to wait and see if how far it goes any any other. I thought to my parents about how we can find these kinds of options close to the home. Yeah, I'm here. This is Susan, again. I think it's not every lender. And then again, I'm speaking from the conventional perspective. I'm not every lender offers construction lending. But if they do offer construction,

lending, the chances are good that they would entertain an Adu project. So I would check with local credit unions, some of the larger Regional banks have also been engaged in construction financing. It is harder to find that are not everywhere, but those would be the ones that I would check out for some kind of those Regional Banks and then also local credit. Unions have had some, some experience in those areas. Text Greg, answer my two cents that I will add to. That is two in

that work. Understand from the barriers, that your local lenders, are wolf face and where they identify the risks, because there are ways that either the public sector or the private. Nonprofit sector could help offset some of those risks and make it possible for some of the more conventional. Our credit union lenders to be able to fit to fill that Niche. If they just have, you know, whether it's a long guarantee or something else. There might be some ways to move forward even in a conventional lending environment. Excellent point that we can take. Mr. Abdul Malik

what this we can go and fight with these these Linens about the appraisals to get that was some great information. There, one more question for I believe it's for IU. Desiree is about class B. And whether you guys have a product or pickled, Target demographics. For homeowners, that's for you. I'm Desiree. Do not have restrictions this, that loan product has a higher price point on the interest rate. And so we reduced interest for Laura. If the applicant for the loan is under 100% of the area median income, they qualify for a reduced rate.

And so how we are our philosophy is that there is a wide variety of people that lack access to financing. And we don't want to limit that pool but we want to create greater incentives for folks that might have a harder time to afford. That financing will have different ways that we can incentivize or support a lower income household, but we make that loan available. Universally. We don't have necessarily a restriction on the use of the property either. Although there are programs in the city that make it such that, those those restrictions come from other

places. Because there's a Waiver of different charges if you don't offer it as a single, if you don't rent it out like on Airbnb, so we don't have to be The Regulators of those things, but there are other controls out there, that help us avoid. I'm some of those other situations. I hope you can share the information with this and encourage all of us to continue to reach out to the Palace into each other and network use the app. This is been great. A great way to end this session. So, thank you guys for great demonstrations. Thank you. And I believe we're coming up here.

So I'm next station, would 10 minutes of networking, you all. Thank you. Thank you for your body.

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