Freddie Mac Guidelines: Appraisal Requirements for Restricted Properties

What Are Resale Restrictions and Why Do They Matter

Resale restrictions are legal limitations on who can buy a property or under what conditions it can be sold. These restrictions appear most commonly in affordable housing programs, age-restricted communities, and certain planned developments.

A typical example is a first-time homebuyer program where the city retains the right to buy back the property at below-market rates if you sell within 10 years. Another common restriction appears in 55+ communities where buyers must meet age requirements.

These restrictions create appraisal challenges because they limit the pool of potential buyers, which can affect both value and how quickly a property might sell. Fannie Mae requires appraisers to account for these impacts when determining what the property is worth.

How Appraisers Handle Properties with Resale Restrictions

Every appraisal on a restricted property must identify the specific restrictions and analyze how they affect value and marketability. The appraiser cannot simply ignore these limitations or treat the property as if it were unrestricted.

The analysis must go beyond just noting that restrictions exist. The appraiser needs to explain whether the restrictions make the property harder to sell, limit its value, or create other market impacts.

For age-restricted properties, Fannie Mae offers some relief through automated collateral evaluation (ACE) or ACE+ PDR programs. These automated systems can sometimes replace full appraisals in 55+ communities where restrictions are well-understood and market data is robust.

When Restrictions Survive Foreclosure

Some resale restrictions remain in place even if the lender forecloses on the property. This happens frequently with affordable housing programs where the restriction runs with the land regardless of ownership changes.

In these cases, the appraisal must reflect the restricted value because that's what the lender would actually recover in foreclosure. The appraiser should use comparable sales of similarly restricted properties whenever possible.

Say you're buying a home through a county affordable housing program that caps resale prices at 80% of area median income levels. If this restriction survives foreclosure, your appraiser needs to find other homes sold under similar price restrictions to determine value.

Finding Comparable Sales for Restricted Properties

The best comparable sales are recent transactions of properties with identical or very similar restrictions in the same market area. But appraisers often struggle to find enough recent restricted sales to support their analysis.

When recent restricted comparables aren't available locally, the appraiser can use older restricted sales from the same area. They might also look at recent restricted sales from competing markets that have similar demographics and housing characteristics.

If no restricted comparables exist, the appraiser may use properties with different restrictions or even unrestricted properties. However, they must explain and justify these choices in detail, showing how they adjusted for the differences in restrictions.

When Restrictions Terminate Upon Foreclosure

Many resale restrictions automatically disappear if the lender forecloses or accepts a deed in lieu of foreclosure. This commonly occurs with employer-assisted housing programs or certain community land trust arrangements.

When restrictions terminate upon foreclosure, the appraisal reflects the unrestricted market value because that's what the lender could actually recover. The appraiser uses comparable sales of unrestricted properties in this scenario.

The appraisal must include a specific hypothetical condition statement: "This appraisal is made on the basis of a hypothetical condition that the property rights being appraised are without resale and other restrictions that are terminated automatically upon the latter of foreclosure or the expiration of any applicable redemption period, or upon recordation of a deed-in-lieu of foreclosure."

Required Documentation and Disclosure

The lender or authorized third party must ensure both you and the appraiser understand the exact nature of any resale restrictions. This isn't optional - it's a requirement that protects all parties involved.

You should receive clear documentation explaining what restrictions apply to your property, how long they last, and what happens to them in various scenarios including foreclosure. The appraiser needs this same information to complete their analysis properly.

Common restriction documents include deed restrictions, homeowners association covenants, affordable housing program agreements, and age-restriction declarations. Make sure your loan officer has copies of all relevant restriction documents early in the process.

Why These Rules Exist

Fannie Mae created these requirements because resale restrictions create real risks that affect both property values and loan performance. A property that can only be sold to buyers meeting specific criteria or at restricted prices represents different collateral than an unrestricted property.

The rules ensure appraisers provide accurate valuations that reflect actual market conditions. This protects both lenders and borrowers from overvaluing restricted properties or underestimating the challenges of selling them.

The distinction between restrictions that survive versus terminate upon foreclosure matters because it affects the lender's recovery prospects. If restrictions survive foreclosure, the lender inherits those limitations when they take title to the property.

Common Problems and Complications

Appraisers sometimes struggle to find adequate comparable sales for restricted properties, especially in smaller markets or with unusual restriction types. This can lead to delays while they expand their search area or seek additional guidance.

Mixed restriction types create complexity. A property might have both age restrictions and resale price caps, requiring the appraiser to analyze multiple impacts simultaneously.

Documentation problems frequently arise when restriction details are unclear or when different parties provide conflicting information about what restrictions apply. Always verify restriction details with the original source documents rather than relying on verbal descriptions.

Some restrictions have sunset dates or modification triggers that could affect the appraisal approach. The appraiser needs to understand not just current restrictions but also how they might change over time.

References

For the official guidelines, see 4406.4: Appraisal requirements for Mortgages secured by properties subject to resale restrictions in the Fannie Mae Selling Guide.