How to Review an Appraisal
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Legal Disclaimer
The information presented in these training materials is based on guidelines and practices accepted within the mortgage finance industry generally and is not intended to be all-inclusive. All examples are hypothetical and are for illustrative purposes only. Investor requirements change from time to time and their application is subject to interpretation. Therefore, we cannot and do not guarantee how any specific investor guidelines will be applied to individual circumstances. Our training is not intended and should not be interpreted or relied upon as legal advice. We encourage you to seek legal and compliance advice from a qualified professional.
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Agenda 1. Purpose of Appraisal 2. Responsibilities: Underwriter, Lender, Appraiser 3. Collateral Underwriter “CU” 4. Appraisal Checklist 5. Key Forms and Sections 6. Rural, Unique & Atypical Properties 7. Red Flags 3
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Purpose of Appraisal
To provide an accurate portrayal of the subject property, neighborhood, and current market conditions To provide an accurate and supportable opinion of market value using sound methods and recognized appraisal techniques 4
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U/W’s Responsibilities:
Determine property’s acceptability as security − − − −
Value Condition Marketability Eligibility
Obtain complete appraisal
Obtain sufficient documentation
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Lender’s Responsibilities:
Appraiser License and Certification, Knowledge and Experience: −
Selection of appraisers
−
Verifying state-licensed or state-certified
−
Ensuring state license or certification is active as of appraisal date
−
Ensuring appraiser has knowledge required to perform a professional quality appraisal for the specific geographic location & property type
−
Confident appraiser has knowledge & access to appropriate data sources for the appraisal assignment
−
Appraiser has demonstrated the ability to perform high quality work 6
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Appraiser’s Responsibilities:
Follow professional guidelines known as USPAP
Focus solely on the property valuation
Provide an opinion of market value based on market data, logical analysis & judgment
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Collateral Underwriter “CU”
We discussed the responsibilities of the: −
Underwriter
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Lender
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Appraiser
How are their roles affected by the recent unveiling of CU?
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Collateral Underwriter “CU”
Introduced by FNMA −
Effective 1/26/15
Robust property valuation database −
Several years of UAD collection − −
Over 12 million appraisals logged Which includes 20 million comparable sales
Was developed to identify appraisals with: − − − −
Heightened risk of property eligibility Policy compliance violations Overvaluation Appraisal quality issues 9
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Collateral Underwriter “CU”
Initially, CU scores will be reported on Submission Summary Reports (SSRs) −
Scores range between 1 - 5 − −
Q2-15, CU will be integrated with DU 1.2 = low 4.9 = high
CU risk scores will not determine loan eligibility −
They’re meant to assist lenders with appraisal review
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Collateral Underwriter “CU”
Hard stop messaging will require lender action to enable successful appraisal submission: −
21 proprietary messages will halt delivery: − − − −
Sales contract was not analyzed Appraiser license state doesn’t match subject property state Present use is indicated as not highest and best use Fannie Mae will not accept appraisals from this appraiser
Lender options include: − −
Manually override the message(s) Obtain & upload new/correct appraisal
CU is intended to supplement, not substitute, lender’s appraisal review process 11
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An Appraisal Report must… 1. Be completed by a licensed, certified appraiser 2. Provide a factual & specific description of neighborhood & property conditions 3. Be unbiased & describe favorable or unfavorable factors 4. Have an effective date w/in 120 days of note date 5. Provide an opinion of market value based on market data, logical analysis & judgment
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Definition of Market Value Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus.
Source – Appraisal Institute 13
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Complete Appraisal
Page 1 −
Page 2 − −
Comparing subject to comparables Sales history and final value
Page 3 − −
All about the subject property
Commentary/explanations from appraiser Cost approach
Pages 4-6 − −
Official disclosures/disclaimers Appraisal signature/licensure info
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Appraisal Attachments
Photos of subject, Front / Rear / Street / Interior Photos of comparable(s) Location map Exterior building sketch
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Checklist – Page 1
Subject Contract
Neighborhood
HUD Data Plate Site
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Checklist – Page 2 Improvements Sales Comparison Approach
Additional Comments Reconciliation Cost Approach PUD Info
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Checklist – Page 3 Addenda Appraiser’s Cert 1004MC
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Appraisal Forms PROPERTY TYPE
(FANNIE MAE/FREDDIE MAC)
FORM #
TYPE OF INSPECTION
1-Unit (includes PUD)
1004/70 URAR
Interior/Exterior
2055
Exterior-Only
1004C/70B
Interior/Exterior
1073/465
Interior/Exterior
1075/466
Exterior-Only
2090/N/A
Interior/Exterior
2095/N/A
Exterior-Only
2- to 4-Unit
1025/72
Interior/Exterior
1- to 4-Unit
1004MC/71
Addendum
Manufactured Home Condominium Cooperative
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Form 1004 – Page 1 Subject Contract
Neighborhood
Site
Improvements
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Subject Section The purpose of this summary appraisal…
Is the subject property currently offered…
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Contract Section
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Neighborhood Section Neighborhood Characteristics
One--Unit Housing Trends One
One-Unit Present Land OneHousing Use %
Description of: Boundaries, neighborhood & market conditions
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Market Conditions Addendum 1.
Fannie Mae 1004MC / Freddie Mac 71
2.
Structured format
3.
Easily IDs current market trends & conditions
4.
Conclusions in “Neighborhood” section
5.
Required for 1- to 4-family properties
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Form 1004MC/71
Market Research & Analysis − − − − − −
Inventory Analysis Median Sale & List Price DOM, Sale/List % Overall Trend Seller Concessions Foreclosure Sales Summary/Analysis Data Condo/Co-op Projects
Appraiser
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Inventory Analysis
− − − −
Total # of Comparable Sales (Settled) Absorption Rate (Total Sales/Months) Total # of Comparable Active Listings Months of Housing Supply (Total Listings/Absorption Rate)
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Median Sale & List Price, DOM, Sales/List %
− − − − −
Median Comparable Sale Price Median Comparable Sales Days on Market Median Comparable List Price Median Comparable Listings Days on Market Median Sales Price as % of List Price
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Overall Trend
− − − − −
Appraiser’s opinion of trend Designed to be reviewed quickly Left column - increasing prices and demand Right column - falling prices or oversupply Middle column - market in balance
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Seller Concessions
Motivated seller Incentive to purchase Must detail type and % of concession
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Foreclosure Sales
Foreclosure impact Trend explanation
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Data Source & Summary
Importance of summary to overall market conditions
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Condo/Co-op Projects
Complete in addition to Market Research & Analysis section Describes market in the subject project Addresses projects slow to complete construction or sell units 32
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Market Conditions Summary Increasing
Stable
Declining
Foreclosures
None
One
More than one
Seller Concessions
Rare
Standard 3 – 6%
Prevalent
Days on Market
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Supply/Demand
Inventory Shortage
In Balance
Oversupply
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Site Section
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UAD – Condition Ratings C1
C2
C3
Improvements very recently constructed. Not previously occupied
Improvements feature no deferred maintenance.
Improvements are well maintained & feature limited physical dep.
C4
C5
C6
Improvements feature some deferred maintenancefunctionally adequate
Improvements have obvious deferred maintenance in need of significant repair
Improvements need substantial repairs & rehab incl. most components
Almost new/renovated
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Kitchen & Bathroom Standardization
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Kitchen & Bathroom Standardization
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Kitchen & Bathroom Standardization
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Improvements General Description
Foundation
Exterior Description
Interior Description
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Form 1004 – Page 2
Sales Comparison Approach
Reconciliation
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UAD Ratings Q1
Q2
Q3
unique, architect designed structures
Often custom designed or upgraded plans
Above-standard with upgraded finishes
Q4
Q5
Q6
Meet acceptable building codes; builder grade finishes
Meet minimum building codes; stock materials
Basic quality; may not be suitable for year-round occupancy
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Sales Comparison Approach
Evaluates similar neighborhood properties
+/- adjustments based on differences − −
+ if inferior to subject - if superior to subject
Value based on: − −
Reliable sales data Probable price in competitive fair sale
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Soft Line Adjustments
Appraiser to address large line adjustments in the following: − − − − − − −
Location Site View Design/Style Quality of Construction Actual Age Condition
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Comparable sales in the subject neighborhood within the past 12 months…
Comparable properties currently offered for sale in the subject neighborhood ranging in price from…
S a l e s C o m p a r i s o n
+/+ -
A p p r o a c h
Net Adjustment Total Adjusted Sales Price of Comparables
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Supplemental Sales 4 5 6 Addendum
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Sales Comparison Approach Research Data: •Prior sale or transfer of subject property for 3 yrs. prior •Prior sale or transfer of the comps for 12 mos. prior to date of comp sale
Summary of Sales Comparison Approach
Indicated value by Sales Comparison Approach 46
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Reconciliation
“as is”
“….opinion of the market value, as defined, of the real property that is the subject of this report is”
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Form 1004D - Appraisal Update/Completion Report
Used to complete an Appraisal Update, A Completion Report or both −
“Appraisal Update” includes the complete appraisal report, front view photo of subject − −
−
Used to update effective date of the appraisal Report is considered a new assignment “Completion Report” includes completed appraisal report and photos of the subject
Used for appraisals completed, “subject to” −
Report verifies conditions have been met
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Form 1004 – Page 3 Additional Comments
Cost Approach
Income PUD Information
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Additional Comments
Supports report conclusion Explains inconsistencies
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Cost Approach
Purchase estimate based on cost to produce like property + + =
Opinion of Site value Total estimate of cost-new Estimated accrued depreciation (Physical, Functional & External) “As Is” value of site improvements Indicated Value by Cost Approach
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Physical Depreciation
Loss in Value due to: − − −
Wear and tear Disintegration Action of the elements
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Functional Depreciation
Loss in Value due to: − −
Design defects Change in market preference
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External Depreciation
Loss in Value due to: − −
Economic factors Environmental factors
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Cost Approach, Income Approach
OPINION OF SITE VALUE
DEPRECIATION
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Income Approach
Typically income properties
Value based on rental income
Rarely used for single-family due to: − −
Generally, not purchased for income purposes Limited market / rental information
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Form 1007- Single Family Comparable Rent Schedule
Typically income properties
Provide an estimated market rent for the subject
Rarely used for single-family due to: − −
Generally, not purchased for income purposes Limited market / rental information
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Planned Unit Development (PUD)
Owner has: − −
Title to lot & dwelling Right to use common areas
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Appraiser’s Certification
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Uniform Appraisal Dataset Definitions
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Rural, Unique & Atypical Properties
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What is a Rural Property?
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Rural Property
For residential use only Accessible from public highways or private roads with recorded easements & shared maintenance agreements Out-buildings must be of minimal value in relation to total property value Sufficient distance from undesirable influences Generally less than 10 acres - GSE has no acreage requirement Slightly dated comps can be used, with explanation that’s supportive of market value 63
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Rural Property
5 ways rural neighborhoods differ from urban/suburban neighborhoods: − − − − −
Generally have larger geographic boundaries Common to have less than a 25% built-up rate Not unusual to have slower growth rates Generally acceptable to have marketing times greater than 6 months Common for mixed uses (agricultural) to be present in rural neighborhoods
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Rural
Drivers − −
Value of Outbuildings Could the contributory value be different depending on the site size and utility? 65
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What is a Unique Property?
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Unique Property
What constitutes a unique property? − −
Unique properties may be acceptable − −
Log homes may be common in some parts of the country High rise condos may be unique in rural areas If they have been properly appraised Market acceptance has been demonstrated
Value of a unique property may be higher, lower, or equal to more typical homes in the area −
The appraiser needs to fully analyze potential differences 67
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Unique Property
At least three settled or closed sales in sales comparison approach
Appraisal must include market data and comparable sales of similar unique properties
Comparable sales that have settled or closed within the last 12 months should be used in appraisal
Lenders & Underwriters must determine whether there is sufficient information to develop a reliable opinion of market value
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Unique Property
If recent sales in the immediate area are not available: −
− − −
Similar properties that sold more than 12 months earlier with supporting commentary explaining their use Listings of similar properties Information and analysis about the neighborhood and similar properties located within it Sales of similar unique properties from competing areas with similar market conditions
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What is an Atypical Property?
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Atypical Property
What determines if a property feature is atypical? −
Dwellings with unusual layouts, peculiar floor plans, inadequate equipment or amenities generally have limited market appeal − −
The marketplace
Bedrooms on a level with no bath Kitchen on a different level from the dining room
The appraisal must include appropriate adjustments based on how the subject compares to the comparable sales
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Atypical Property
Some signs that an atypical feature may be inadequately addressed in the appraisal report − − −
−
Comparable sales do not include the atypical feature or anything similar Feature is not addressed in the comments sections Appraisal reports states “the subject (or feature) is uncommon for the area” but has no further explanation Despite differences appraiser states “no adjustment” required or no contributory value is applied without adequate commentary
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Atypical Property
Appraiser’s responsibility - assess the impact and scale − −
Does the appraiser’s analysis make sense given the context? Is the unusual aspect easily curable or a major feature of the property? − −
Exterior “pink” paint may be unusual in some areas but may not have a large impact on value if it is easily curable A property accessible only by steep steps may not be accepted by buyers in some areas and may have limited market limited
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Valuation of Red Flags 1.
Property listed as vacant
2.
Comps not similar in market appeal
3.
Inconsistent sq. footage adjustments for each comp
4.
Comps distant from subject location
5.
Higher value comps outside neighborhood
6.
Favoring comp in superior location
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Valuation of Red Flags continued 7.
One directional adjustments
8.
Lot size/acreage
9.
Pool/amenities
10.
Older comps due to area decline in value
11.
Unwarranted time adjustments
12.
Photos inconsistent w/ sales comparison grid
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Did the appraiser:
Complete all required sections of the appraisal?
Provide appropriate narrative to those sections that required an explanation?
Use sales comparables within a reasonable distance and appropriate adjustments?
Include all supporting documentation (photos, location map, building sketch)?
And, in the end… 76
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Did the appraiser provide an opinion of market value based on market data, logical analysis & judgment?
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