LIHTC: Verifying Fair Market Value of Applicant/Tenant Real Estate (Part 1)
The LIHTC program requires us to count the value of an asset that the tenant has access to. We call this the Cash Value. To determine the Cash Value, we must know the Fair Market Value (FMV) which is the amount for which something can be sold in a given market given current circumstances. For Real Estate, the cash value would be the Fair Market value minus any costs to convert the asset into Cash.
There are several ways to verify the FMV of Real Estate:
1. Verification from a RE Agent
2. RE Tax Records
3. Market Analysis
4. Appraisal
Verification from a RE agent
The preferred option would be a 3rd party verification form completed by a Real Estate agent who has access to current listings. They would best be able to give a Fair Market Value based on current conditions. The agent, if currently the listing agent, would also have access to other variables that would be needed to convert the asset to cash such as commissions, broker fees, etc.
RE Tax Records
If 3rd party verification from a RE agent is not available, using the Current assessed value, usually found on a most recent tax bill, would be the next best option. In addition to the most recent tax bill, searching the municipality website where the property is located can also be used to find the assessed value of a home. Once assessed value is obtained, the next step in determining Market Value is to collect the Common Level Ratio (CLR) amounts also called the tax equalization ratio amounts for the municipality. A municipality uses the CLR amounts to assess property values within its jurisdiction. As many of our clients are based in Pennsylvania, current and historical values for Pennsylvania can be found at the PA Dept of Revenue – Common Level Ratios. If you are unable to locate the rates online, try calling the tax assessor’s office in the municipality where the property is located. Ask “I have an assessed value for a property in your county and I am trying to find out the estimated Market Rate. Do you assess at Market Rate or is there a calculation that you use on the assessed value such as a ratio amount to determine the Market Value?” Some municipalities assessments are already at Market Rate. If in the end the call does not provide the information needed, you’ll have to continue to the market analysis below.
EXAMPLE: The assessed value of your home in Beaver County Pennsylvania is $175,000. The current CLR in Beaver County is 6.76. To calculate the Market Value, take the assessed value x the Common Level Ratio.
Assessed Value of $175,000 x CLR 6.76% = $118,300.00
Assessed Value $175,000 + $11,830 = $186,830 Market Value
Market Analysis
A real estate market analysis – or a comparative market analysis – is a study of the current market values of properties, comparable to yours, which serves as a tool for determining the market value of your own property. To determine if a home is comparable to yours, look for the following characteristics: Lot size, square footage, home style or similar architecture, age, and location. While you may not find a home with the same exact characteristics as yours, you’ll likely find a few that are close.
You can find comparable home sales in a variety of places:
• Your local assessor’s office can provide a list of recent sales you can browse and compare or a sales history of a particular house, home style or neighborhood
• Many cities keep local sales information in their offices or post it online
• Online databases, such as a real estate database, Zillow or Trulia which show homes sold
Once you’ve obtained several comparable properties to your subject property, use the sales prices to calculate the market value of your subject property.
Examples: Homes are all in same town as subject with same Bed and Bath sizes and comparable sq. ft.
| COMP Home A $125,000 123 State St. |
COMP Home B $132,000 6 State St. |
COMP Home C $95,000 98 West St. |
COMP Home D $117,000 30 Central St. |
Comparative Market Value of Subject Home = $117,250
Appraisal
The appraised value is what a professional appraiser believes a property is worth (a professional opinion) vs. the market value, which is what the buying public is willing to pay for the property instead. If a property is appraised at $250,000 but buyers are willing to pay $275,000, the Market Value would be more than the appraised value. Therefore, using an appraised value is not often recommended in determining the cash value of real estate for LIHTC due to potential undervaluation.
Stay tuned for part 2: LIHTC: Costs to Convert to Cash Value & Other Scenarios for Applicant/Tenant Real Estate
“Creating and maintaining affordable housing communities is a complex task. Numerous state and federal requirements must be followed – both during development and for years thereafter. We clarify LIHTC, Federal HOME, HUD, and certification requirements you must follow to remain compliant. For more information on these services be sure to visit our Property Compliance page and don’t hesitate to contact us. The information presented in this post is intended solely for informational purposes and should not be construed as consulting advice from M&L Compliance or McKonly & Asbury, LLP.”
About the Author
Jennifer joined MLCM, McKonly & Asbury’s affiliate property compliance company, in March 2022. Before joining our team, she was with Roizman & Associates for 13 years overseeing the Compliance Department.
