Cohousing-L Mailing List: Land Costs to Total Costs

[Munn Heydorn (munn]

On Fri, April 14, 1995, Bill Paiss said:

-----snip-----

>One issue I have not yet heard is the dreaded effect that banks
>and the appraiser have on all development regardless of the 
>approach.  Again, here in colorado, lending regulations say that
>the cost of the "lot" must only 25% of the cost of the home.

-----snip-----

I would bet that there is no "regulation" (either state or federal) in a 
legal sense that says the above per se; no reflection on Bill, I don't doubt 
that someone has said that to him.  It is, or rather was, a common real 
estate guideline to have a land (finished lot) cost to overall cost at the 
25% level, more or less, for single family homes.  In the last 10-15 years 
around here (a reasonably affluent area west of Chicago) that ratio has been 
creeping up somewhat.

There are related problems in a practical sense in two areas of which I am 
aware:

(1) Fannie Mae (FNMA) and Freddie Mac (FHLMC) will generally not buy loans 
with high ratios of land to overall cost.  Since they are the largest buyers 
of single family loans, they have a lot to say about what home loans are 
made in the market place.  A ratio of 25 to 30% is common around here and 
that, as long as good **lot** comparables exist, exceptions might be made by 
underwriters on the upside even above that relationship.  I'm sure that the 
situation will be muddier if the "land" value covered common areas and 
common buildings as well, however, although I don't see much underwriting 
difference between cohousing here and a condo project with common amenities 
such as a pool or clubhouse except that cohousing is less well known.  

If the land value is artificially apportioned among the houses, creating 
higher lot costs for X houses for the more affluent and lower lot costs for 
the Y houses for the less affluent when the real market place values might 
be the same for both would be a problem for those with the higher priced 
units since that would not represent "market" and would present an appraisal 
problem.

If I was involved around here-where there are no cohousing projects to my 
knowledge-in starting a cohousing project, I would be tempted to try to talk 
to the people that do underwriting at FNMA and FHLMC locally (that might not 
be easily done) and try to "sell" the situation, if possible.  Both entities 
have been under some political (Is that changing now? I don't know.) 
pressure as to affordable housing loans and, I believe, have an 
ombudsman/affordable housing sales person type in each local office that 
might be willing to at least listen to your story and connect you to the 
right underwriting people if your story involved some affordable housing for 
lower income persons.  Your local housing authority or low income housing 
advocacy/development organizations should have the name of that person at 
FNMA or FHLMC.  

(2) FDICIA (for banks and S & Ls) governs how much can be loaned on specific 
property types and land is at a lower ratio than land improved with 
buildings.  That might be a complicating factor, perhaps, in extreme cases 
where there is a very high land to overall value ratio with an excessive 
amount of land in some appraiser's eyes.

Best,
Munn (Hi, Bill)
I should add that I'm in commercial real estate, 
not home lending; take with two grains of salt.

Munn Heydorn (The words and ideas are 
mine, not necessarily First Chicago's)          
The First National Bank of Chicago
Voice: 1-708-221-4452    Fax: 1-708-260-4683
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