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Understanding Appraisals: Top 10 Questions from Lenders, Banks, and Credit Unions W: www.nationwide-appraisal.com T: 888.760.8899 (Toll Free)
Understanding Appraisals: Top 10 Questions
from Lenders, Banks, and Credit Unions
W: www.nationwide-appraisal.com
T: 888.760.8899 (Toll Free)
2 3tABle oF contents
About the authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
#10 What is the appraiser actually considering when talking about “Gross Living Area”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
#9 The Cost approach. What is it? . . . . . . . . . . . . . . . . . . . . . . . . . 6
#8 Why are adjustments made when comparing similar sales? . . . . . . 8
#7 A property is Rural and/or Unique, how will its appraisal be affected? . . 9
#6 How is the value of a property determined? . . . . . . . . . . . . . . . 10
#5 Why do appraisers use short sales and foreclosures as comparisons if there are arm’s length comps available? . . . . . . . . . . . . . . . . 11
#4 What determines the quality and condition of a property? . . . . . . 12
#3 Valuing square footage: above grade vs. below grade . . . . . . . . . . . 13
#2 Changing the name of the lender on an appraisal . . . . . . . . . . . . . . 14
#1 Reporting errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
introduction
How to understand Appraisals
Appraisals are constantly changing and are fi lled with terminology many of us may not be familiar with. This white paper aims to help you to understand the Appraisal Process as a whole, while informing you of the most recent changes. We’ve put together a list of the of the most frequently asked questions that we get from lenders, banks and credit unions and answered them in a way that we hope helps to promote a better understanding of appraisals.
The Appraisal process in today’s world
As we all know, there have been signifi cant changes to the appraisal process in recent years. Aside from the Dodd-Frank Act eliminating certain communication with the appraiser, there have been many updates from Fannie Mae, FHA, USPAP and UWs.
With all of these updates comes a whole new world of appraising and requirements that appraisers must learn and meet.
ABout tHe AutHors
Joni Pilgrim
Joni Pilgrim is one of the founding partners of Nationwide Appraisal Network. She has served many roles in the company since the doors opened, including Director of Operations. In 2011, she took on the role of managing sales and marketing. “Our brand is dynamic, young, and smart. We want people to be excited to work with NAN. We are a company built upon the people that work here, and I want to let the industry know that this is what makes us diff erent.” Business development and brand awareness is the main focus of her daily life at NAN.
Cristy Conolly
Cristy started in the appraisal industry in 2003 managing a busy appraisal fi rm in Philadelphia while completing her apprenticeship and becoming a certifi ed residential appraiser. After several years of appraisal fi eld work and eventually relocating to Florida, Cristy decided to lend her expertise to Nationwide Appraisal Network. She started with NAN as a staff appraiser and quickly moved into her current position as Director of Quality Assurance and Compliance. In this role, she oversees the direction of our elite compliance task force and works with our legal team to eff ectively manage our policies and procedures.
Kevin Johnson
Kevin Johnson, came to us from the West Coast with more than 24 years of experience in the mortgage industry, including a diverse background in wholesale and correspondent lending, as well as, underwriting and operations. Kevin’s role at NAN is vital in developing sales and client relations. He leads the on-boarding process as well as on-going training and support for our new and existing lender clients.
Shortly after Dodd Frank, we had the 1004MC, which was added as a required addendum to most residential appraisal reports. Next, Fannie Mae implemented UAD and with that came a brand new way of reporting for appraisers and reviewing for UWs. FHA soon followed suit and required UAD formatting as well.
The Disclosure & Delivery Requirement was implemented in January of 2014, and now creditors must provide a copy of ALL appraisals and other written valuations to the consumer. With this new regulation came the responsibility of lenders, banks and credit unions to be able to provide an explanation of the appraisal and other valuations to the consumer.
April 2009
JAnuArY 2014
Then came submission to the UCDP and navigating through
the new world of warnings, soft stops and hard stops.
The most recent change is Fannie Mae’s Collateral Underwriter which was implemented on
January 26, 2015.
MArcH 2012
JAnuArY 2015
4 5introduction (contd.)
What is the purpose of all of these changes?
The main purpose is to enable UWs to make better informed lending decisions. Lenders rely on appraisals to analyze the risk in lending their money to a borrower using their property as collateral.
The appraiser is their “boots on the ground”, their eyes and ear to report every aspect of the property that impacts not only value, but also marketability.
Part of the appraiser’s job is to provide all of this information within the appraisal report so the UW can make a sound lending decision.
An opinion of value
There is a common misconception that appraisals are an exact science, which is not the case. The appraised value and information contained in any report are the opinions and conclusions of the appraiser signing the report. In fact if two appraisers complete an appraisal on the same property on the same day, the values will likely not be exactly the same.
In order to understand the appraisal report, it’s essential to be well versed on the industry standards and requirements.
Your UW, Fannie/Freddie, VA, and FHA all have their own specifi c requirements that the appraiser must meet and take into consideration when completing the report. Then of course there is USPAP, the authority on appraising, which refl ects the standards appraisers must follow in order to maintain public trust in appraisal practice.
#10 Question: What is the appraiser actually considering when reporting “Gross Living Area”?
Sometimes upper levels will be measured from the interior if the appraiser isn’t able to access them from outside.
The “Above grade area” refers to that fi nished part of the
dwelling that is above the ground line, or grade of the earth.
Think of the fi rst fl oor and any fl oors above.
Above-grade and Below-grade are reported as distinct areas in the appraisal and the appraiser will value them separately in the sales comparison grid. Only fi nished above-grade areas can be used in calculating and reporting above-grade room count and GLA.
“Below grade area” is usually defi ned as the area that is ALL
or PARTLY below that ground line. Think basement space.
Even if that space has windows it is considered below-grade.
Fannie Mae considers a level to be below-grade if any portion of it is below-grade, regardless of the quality of its fi nish or the window area of any room. Therefore, a “walk-out basement” with fi nished rooms would not be included in the above-grade room count. This would be given value as a fi nished basement.
Enclosed porches or fi nished spaces above grade can be included in GLA if they meet certain requirements; such as:
• having a permanent heat source,
• being fi nished to the same quality as the main dwelling, and
• obtaining the proper permits.
Without these items, the impact on value will be considered and noted, however the area may not be included in the GLA
GLA is measured by the Appraiser during their inspection using the exterior building dimensions per fl oor.
If the borrower defaults on their loan, will the equity be there?
Will you be able to sell the property and recoup what you’ve invested?
Of course, there are exceptions to the rules. There are times when an appraiser will deviate, and this largely depends on the geographic area and specifi c property type. If it’s typical in a market to consider a daylight basement as above grade GLA, you will see this refl ected in the appraisal. As long as the appraiser is consistent when reporting the Subject property and the Comps, and also explains what was done, this is acceptable and will be a good indicator of value.
6 7#9 Question: The Cost approach. What is it?
This is another method an appraiser may use to develop an opinion of value.
In a nutshell, it’s a breakdown of what the cost would be to rebuild the property
today if it were destroyed.
The appraiser has two options to select from:
You will almost always see appraisers select Replacement Cost New. But it’s not that cut and dried, the appraiser also takes in to account the land value and any deduction or additional value for depreciation or appreciation.
The cost approach is a valuable method to use when appraising newer homes that might have little or no depreciation; however for homes older than a few years, it is not generally considered very reliable. Some underwriters still want these completed regardless of the age of the home, and that’s when we start running into
confusion from borrowers. There is a big diff erence between the cost of building a
home today versus 30 or 40 years ago.
Let’s break it down:
First, we have the site value. This is the value of the land minus any improvements and is typically determined by vacant land sales in the market area.
Next, there is the cost to construct the dwelling which may confuse borrowers who often assume that this cost per square foot should equal what their home’s value is per square foot. This is not the case – it is actually showing what it would cost per square foot to build this home today as new construction, using today’s materials. The age of the home has not yet been taken into account.
Following the construction cost of the dwelling, the appraiser will add value for any additional improvements such as an in-ground pool, or a porch at what their cost new would be at today’s prices.
Next, the appraiser has to consider depreciation – which takes into account the age and condition of the property, as well as any functional or external obsolescence (for example, railroad tracks, commercial infl uence, only having access to the bath through a bedroom).
Finally, in order to arrive at an estimated value of the property the appraiser has to consider the “as is” value of site improvements, which could include driveways, private wells, sewer systems, etc.
Together all of these items described provide the appraiser with an estimated value of the cost to reconstruct the same property.
Site Value
+ Cost to construct the dwelling
+ Additional improvements
- Depreciation
++ ‘As is’ value of improvements
= VALUE!! ✓
Reproduction Cost is used if an exact replica of the original property is produced.
1reproduction
cost
Replacement Cost New is used if a property is rebuilt with comparable utility, but using current design and construction methods and materials.
2replAceMent
cost new
8 9#7 Question: A property is Rural and/or Unique, how will its
appraisal be affected?
Appraisers face particular challenges when appraising properties located in small towns and rural areas or structures that are unique in design.
The availability of suitable sales for comparison can be challenging due to limited market activity and possible scarcity of sales. An appraiser can only use what is available to them, which sometimes means the comparable properties will be dated, distant, and have adjustments that exceed industry guidelines. It’s common to see comparable properties as far as 20 miles away, greater than one year old and with over 50% gross adjustments. Rural areas or unique designs are also challenging for the underwriter, since they don’t fit into the idealistic appraisal box where every comparable property is within 1 mile, sold in the last 6 months and has minimal adjustments.
In these cases, it’s important for the appraiser to locate comparable properties that demonstrate the as many of the same dominant features as the property being appraised. For example, if the property is on 25 acres, the comparable properties need to be on similar acreage to support value and demonstrate marketability. If the property is a geodesic dome, it needs to be compared to properties of similar design. The underwriter needs to see that the property value is supported by the comparables used.
Rural/unique property
“ How much is my 50 acre Ostrich farm worth?”
“How much is my geodesic dome worth?”
#8 Question: Why are adjustments made when comparing similar sales?
In developing an opinion of value, the appraiser considers recent sales of similar properties called Comparables. Rarely are two properties exactly the same, therefore the appraiser must account for differences between the properties that sold and the property being appraised. These differences are called “adjustments.”
Adjustments are added or subtracted from the sales prices of the comparable to indicate adjusted sales prices. The adjusted sales prices of the comparables will reflect the probable range of value for the subject.
Some adjustments you’ll see are GLA (gross living area) differences greater than 100 SF (square foot), 1 car garage vs. 2 car garage, varying bathroom counts, quality or condition.
It’s important to note the cost to complete an upgrade or improvement does not
always equal added value to the home.
The adjustments are derived from market data that supports what the typical buyer is willing to pay for these differences. A great example of this is an in-ground pool. A typical buyer will rarely pay what it cost to put in, especially in the northern part of the country where they can’t be utilized most of the year.
Two very confusing adjustments since implementation of the UAD are those for quality and condition. The UAD requires the appraiser to utilize 1 of 6 options for these two items. Properties must be reported with the most accurate overall
rating. This means that the property being appraised and a comparable may both be in overall C3 condition, however the comparable might have some inferior or superior upgrades.
Although the overall condition rating is the same, there will be an adjustment to account for the differences in upgrades.
In these cases, the appraiser needs to include comments clearly explaining this in the report. Ideally all features and amenities the subject has will be bracketed by the comparables selected. While this is not an appraisal requirement – USPAP, FHA, Fannie and Freddie do NOT require bracketing – it is typically an underwriting requirement for the lender. If bracketing is not possible, the appraiser should explain why in the report.
10 11#5 Question: Why do appraisers use short sales and foreclosures as comparisons if there are arm’s length comps available?
When the housing market crashed, it created a lot of distressed sales and bank repossessions that are still impacting markets today. An appraiser is typically appraising a property for current market value. If the current market has a signifi cant percentage of distressed sales, they will be a factor when determining market value. If 50% of sales are distressed, that’s representing half the market. It would be misleading for an appraiser to ignore that and only use arms-length sales.be misleading for an appraiser to ignore that and only use arms-length sales.
#6 Question:
How is the value of a property determined?
1. Research Market Area – the appraiser will research the market area to determine if property values are increasing, decreasing, or remaining stable. They need to know neighborhood trends and what the current inventory of available housing is. They research public records to obtain information on the property and to ensure it complies with local zoning, among other things.
3. Search for Comparable Sales – once the appraiser has inspected the property, they will search for comparable properties through the MLS and other local data sources. The properties sought will be as similar as possible in regards to design, GLA, room count, condition and amenities. They may also talk to local real estate professionals active in the market. Once the overall most similar comparables have been selected, the appraiser must drive by each of them to observe any external infl uences that will impact value.
5. Deliver Final Opinion of Value – once all of their research is concluded, the appraiser will complete the appraisal report and develop their opinion of value.
2. Inspect and physically measure the property – during the visit to the property when the appraiser completes their inspection, they will physically measure the property. This is where the GLA is obtained – NOT from public records or the tax assessor. The appraiser must measure the property themselves and report their measurements in an interior appraisal. During the inspection, the appraiser will note materials in each room, condition of everything, any amenities, or external items that impact value (i.e., railroad tracks behind the house, a gas station across the street).
4. Make Adjustments – two properties are rarely exact matches and the appraiser is typically limited to what has sold within the last year, so the appraiser must adjust for any diff erences that the market shows to impact value. Adjustments come up a lot in conversations as well and we will talk about how they are made later on.
You’ll be surprised to learn that more of the appraisers work is completed through research than in the fi eld!
It’s the appraiser’s job to do their due diligence and select the most appropriate sales as comparables. If the appraiser feels an REO or Short Sale is the most appropriate, they will use it and should support the use within the appraisal with data regarding the prevalence of these sales and the impact on the market they’re having.
Foreclosure
12 13
Some repairs will require a professional, such as a plumber or roofer. Sometimes a survey is needed to determine distances between a well and septic.
There are some other items a borrower can complete themselves if they’re capable, like putting a railing on a porch, or scraping and re-painting areas with chipping paint.
#3 Question: What are the most common reasons an appraisal would be completed “subject to”?
#4 Question: How are upgrades and improvements valued in an appraisal?
The most common reasons to complete an appraisal “subject to” are when there are existing conditions that affect the safety, soundness or structural integrity of the property.
Examples of items that would require repair are:
• cracks in the foundation
• an active leaking roof
• exposed electric wires
• peeling or chipping paint on properties built prior to 1978
Minor conditions or deferred maintenance, cosmetic items…won’t require the appraisal to be “subject to”. FHA has stricter requirements than Fannie Mae, so when ordering FHA appraisals, be prepared.
The appraiser will almost always have to go back out to complete a final inspection once the repairs have been completed. There are some items the UW can approve without a final inspection, like reviewing a roof certification.
Examples of home improvements that will have a
major impact on the appraisal:
• additions including baths and bedrooms,
• major structural upgrades such as replacement of a worn roof,
• stabilization of a crumbling foundation.
1
3
Cosmetic upgrades to a home may or may not
impact the value:
• Replacing hard wood flooring with tile will likely not impact the value, as this is a personal preference.
• Replacing worn out 20 year old carpets with top of the line hard wood will likely impact the overall condition of the property.
• A brand new kitchen will have an impact on the value, but it might not be dollar for dollar.
• Most times, cosmetic upgrades are a matter of personal preference and not necessarily recognized by the market.
Some improvements that might hurt the value:
• removing a bedroom to expand a closet
• combining two smaller bathrooms into one large one.2
How do we value non-permanent improvements?
Improvements that are not permanent are considered personal property, and therefore not usually valued in the appraisal. E.g. an above-ground pool, a shed that is not on a permanent foundation or a hot tub.
5
4What is an over-improvement?
An over-improvement is created when the expense of improving the property is excessive in comparison to other properties in the market.
14 15
A Real World Example from an Appraiser
Let’s say I recently appraised a home in Philadelphia. I’ve selected 4 comps that have sold in the last 3 months. They have a sale price range from $200-225K. The fi nal value I’ve determined to be is $215K. I submit my report.
Then, I get a call from the lender explaining that the borrower had an appraisal completed a year ago with a value of $230K. They send me the report to review. I see there were 4 Comps used, all sold 12-18 months ago. The sale price ranged from $215-240K. The sales were current at the time of that appraisal, however they are not today.
If I used those sales, the UW would reject them immediately and ask why I didn’t use the more recent sales that are available. The current comps that were not available 1 year ago, but are today, have a slightly lower sale price range -- current market value for the Subject will refl ect that. However, this does not indicate a declining market.
If the most recent comps sold for lower than the Comps available a year ago, it’s going to impact the value for the Subject specifi cally. The market may still be stable overall. Often times when we see this, the decrease is less than 10%. That’s not really showing a declining market, rather a minor variance in the most recent sale prices for properties similar to the Subject.
Another reason for this, and you’re not going to like it, is that appraisals are opinions. Most likely if there are 2 appraisals within 1 year of each other that diff er signifi cantly in value, chances are, they were done by two diff erent Appraisers. It’s possible their opinions of what sales were most appropriate to indicate value were diff erent. It’s also possible one Appraiser made a mistake and missed market data, or mis-measured the property.
When we come across that scenario at NAN, we review the reports against each other for discrepancies, errors, and diff erences. If both reports appear accurate and supported, with the only diff erence being their comp selection, we suggest ordering reviews for each appraisal to determine if one is not credible. The appraisal with the higher value is not always the supported one.
CURRENT
Subject property in Philadelphia:
4 comps sold in last 3 months
Sale price range = $200k-225k
Final value = $215k
PREVIOUS
Same subject property in Philadelphia:
Final value = $230k
4 comps used sold 12-18 months ago
Sale price range = $215k-240k
Would be rejected if used in current appraisal report.
Remember…we are reporting CURRENT market value.
#2 Question: Why would the value of a property decline in comparison to an appraisal done a year ago that showed overall sales prices were increasing?
This is a tough one that is diffi cult to explain to a borrower. The section of the appraisal that reports information on the neighborhood is referring to the entire market area, not the Subject specifi cally.
Whether the market is stable, increasing, or declining, the appraiser must use the most recent and similar sales to determine the current market value of the Subject, not the entire market area.
The purpose of this is to provide the lender with a clear and accurate understanding of the market trends and conditions prevalent in the subject Neighborhood.
16 17 Once you hit “submit”, the file will be passed along to one of our staff appraisers who will review the request, contact the appraiser, and work towards resolving the discrepancies and communicating with you along the way all in a timely manner.
If you go through the dispute process and you or your borrower are still unhappy with the appraisal, there are a few options:
An important thing to remember if you choose to order a 2nd appraisal is Appraiser Independence Requirements or AIR. AIR only permits a 2nd appraisal to be ordered once one of the following has been met:
The 1st appraisal is flawed and reasons why are clearly documented in your file
It’s part of your pre-established appraisal review or QC process
It’s required due to loan product
A 2nd appraisal is required by law
Make sure you have these bases covered if you choose to order a 2nd appraisal.
You could also order a full 2nd appraisal, which is completely separate from the 1st appraisal. This would give you a fresh report from another local appraiser to determine their opinion of value. Generally speaking, if appraisals are completed around the same time, the values should be within 10% of each other. Remember, appraisals are opinions, so the values will not match exactly.
2second
ApprAisAl
First, you could order an appraisal review - this is when another local appraiser reviews the report to verify data and provides their opinion on the comps selected and value.
1ApprAisAl
review
#1 Question: What is the best practice for Disputing an Appraisal?
It is usually worth it to go through the dispute process if you have reason to believe it’s flawed. We see and work on disputes here at NAN often, and we receive positive feedback from our clients - they appreciate our knowledge and ability to work with the appraiser to resolve any concerns and answer questions. If additional sales are provided, appraisers will review them to see if they may have initially overlooked them and determine if they’re comparable properties. They’ll respond to questions and provide additional data to support items as well. In the end, the ultimate goal is to either provide a revised report if information was missed or errors were made, OR to provide an explanation to the lender addressing the concerns at hand.
If you decide to dispute an appraisal we have a few pointers:
At NAN – Our appraisal dispute process is simple. We track all requests within our portal for each file individually. All you have to do is log in to the portal, find your file, click on the appraisal dispute form and follow the instructions.
As you can see on the form, we have included instructions and examples of best practices for using the form properly. You have plenty of room to provide details and to supply additional sales and/or insufficiencies found in the appraisal. Feel free to attach information in the ‘file upload’ section as well.
3
2
4
1 Gather data including errors found and any factual support for your dispute.
If you believe the appraiser selected comparables that were not the most similar, submit a list of closed sales to be considered. They should be as or more similar than the Comps the appraiser selected.
Don’t submit active or pending listings – a common misconception is these represent current market value, when in fact, they only represent what the owner decided to list it for.
Remember - if you see a house across the street from the Subject that is listed right now for $30K higher than the appraised value, that does not indicate market value. Until it’s sold, the market has not accepted that price. Nobody knows if it will sell at all, or if it does, at what price.
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