appraisal how to

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So Many Appraisal Cost Approach Questions

Cost Approach – When to Use in Appraisals

By Ann O'Rourke on August 26, 2022 / appraisal business, appraisal how to, bias, cost approach, Fannie, george dell, non-lender appraisals / Leave a comment

Tags: appraisal business, appraisal how to, bias, cost approach, Fannie, George Dell

Fannie Mae and the Cost Approach

Excerpt: We often receive questions from appraisers regarding Fannie Mae and the cost approach. For example: “I’m appraising a property and have been instructed to comply with Fannie Mae guidelines. I understand that Fannie Mae requires the sales comparison approach, but what if there aren’t enough good comps? Can I use the cost approach as the primary method of valuation?”

Answer: No!

In order to comply with Fannie Mae guidelines, the sales comparison approach must be the primary method used to determine the value. In fact, Fannie Mae will not purchase a mortgage on a property if the cost approach is the primary or only method of valuation used.

Quite simply, if there isn’t enough data for the appraiser to develop a reliable opinion of value by the sales comparison approach, the mortgage will not be marketable to Fannie Mae.

However…

To read more, click here

My comment: I included this article plus the one below, which both address the Cost Approach’s common appraisal questions.

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The Cost Approach: An Underutilized Approach to Value

Excerpt: In residential appraising, the cost approach and the income approach have in many cases become less utilized in favor of sole reliance on the sales comparison approach.

There are occasions when the income approach can be the primary indicator of value for residential properties, such as developments with a high percentage of homes owned by investors.

The fact that Fannie Mae won’t accept reports that rely solely on the cost approach, with a few rare exceptions, doesn’t mean that approach can’t be the primary indicator of value. It just means Fannie Mae won’t buy that loan.

To read more, click here

My comments: I started with an assessor’s office in the 1970s. At that time, my county was changing from only using the Cost Approach for decades to a sales-based approach. I never liked to use only the Cost Approach when I started doing fee appraisals.

In my area, there are very few land sales. There has not been one for over 20 years in my city. Depreciation is always iffy when appraising Victorian homes built before 1915.

But, I always use the Cost Approach for new construction to determine the financial feasibility of custom homes. I use a few land sales from other cities. If the new proposed home is on a vacant parcel, I go back to when the parcel was purchased, sometimes many years ago, and do a market condition adjustment.

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Subject Property Location in Appraisals

By Ann O'Rourke on July 1, 2022 / appraisal how to, real estate market / 1 Comment

Tags: appraisal how to, real estate market

Subject Property Actual Location

By Dave Towne

Excerpts: Appraisers, this article was prompted by my ‘coming in contact with several appraisal reports where different regional appraisers report the physical location of the subject property “in” a particular City associated with the postal ZIP Code for that City. Actually, the property was not “in” the City at all. It was in the County.

Don’t say that the subject property is ‘within’ a particular City or Town due to the postal ZIP Code that applies to the street address unless that is accurate. The actual location may be miles away from there.

Starting with the ZIP Code: those are merely lines on a map the US Post Office established, used to plan mail routes, and distribute mail more efficiently. ZIP Code boundaries do not always follow City Limit or County (Parish) boundaries, and in some cases, the boundaries are a long way from the City name associated with the ZIP Code. See Map 1. This shows 5 ZIP Codes in a region. The ‘City’ for 98273 and 98274 has two ZIP Codes associated. Note how wide the area coverage boundaries are for those two ZIP Codes. It’s not shown here, but 98284 extends north into the adjoining County!

To read more, click here

My comments: I have seen this locally. For example, the two cities were very different. Having an address in one city was more valuable than in the other city. The cities shared a few zip codes. When using GPS internet searches such as Google maps, the city boundaries don’t show up or are not reliable. I keep printed maps in my car that include city and county boundaries.

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Residential Appraisals and Airbnb Income?

By Ann O'Rourke on June 3, 2022 / appraisal how to, bias, real estate market / Leave a comment

Tags: appraisal how to, bias, real estate market

Residential Appraisals and Airbnb Income?

By Julie Friess, SRA, AI-RRS, MA

Don’t get caught like a deer in the headlights! State appraisal boards ARE disciplining appraisers across the country for improperly using the business income (Short term Rental – STR) from Airbnbs on the residential 1007 Fannie Mae form.

Lenders and AMCs want residential appraisers to value these properties as both the real estate and the business values of these properties – Wrong!!

Some of the topics:

• USPAP issues

• GRM is an Income Approach that applies to homes with long long-term tenants, not homes with many Short Term Rentals.

• Functional Obsolescence

• External Obsolescence

• Covid-19 Pandemic and Airbnb’s

The photo below has an exterior entrance to a bedroom, typical for an Airbnb remodeling.

To read more, click here

My comments: This mainly applies to cities where many homes are being converted to Airbnbs, including exterior doors for bedrooms (see foto below) and expanding the number of bedrooms. In popular vacation areas, such as Sedona, AZ, where Julie lives, investors purchase homes and do extensive remodels to turn them into Airbnbs with Airbnb management companies handling everything for them (clean up, new furnishing, and renting).

Julie does not include short-term rental income (STR) in her appraisals of homes with Airbnbs. I posted her article on my website so that everyone can read it. I have a few of my comments, of course!! I’m a commercial appraiser and know how hotels and Bed and Breakfasts are appraised. The appraisals include separate values for real estate, fixtures, and Going Concern (business income and expenses).

Julie speaks about this topic regularly on our weekly Clubhouse meetup, Real Estate Appraisal Questions, every Thursday at 2 PM Pacific Time (audio-only social media). All the sessions are recorded. The May 12, 2022 session was “Residential 1004/1007 Form Appraising & AirBnB Income”.

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Tips on appraising new construction homes

By Ann O'Rourke on May 27, 2022 / appraisal business, appraisal how to, Fannie, liability, va / Leave a comment

Tags: appraisal business, appraisal how to, Fannie, liability, va

6 Tips for Appraising New Construction Homes

Excerpts: New construction is treated a little differently by lenders, FHA, and the GSEs. When appraising new construction homes, you must take into consideration certain features and attributes that don’t necessarily apply to re-sales. It requires more work, so you want to be sure that you are charging for your effort. However, perhaps more than that, you want to be sure you’re following the proper protocol. Stick to these best practices to ensure you cover all your bases.

3. Talk to multiple local builders You can gain valuable information from builders—as long as you talk to them now to evaluate current costs and value. Some of the best construction cost data is compiled by you as you complete new construction appraisal assignments. When appraising new proposed construction, the prior data can be reviewed for those construction projects that are most similar to the subject property in quality, size, and features and be used as cost data to support cost estimates for the current appraisal. As the cost of construction materials generally continue to spiral upwards, it may be necessary to adjust for time, depending on how old the cost data is.

To read more tips, click here

My comments: Well written and worth reading. New home construction appraisals can be tricky. I quit doing them a while ago – too many various hassles, but many appraisers like doing them. There are few new homes built in my area, except stacked condos. Land is too expensive.

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Borrower Keeps Calling Appraiser

By Ann O'Rourke on May 13, 2022 / appraisal how to, bad appraisers, bias, Freddie, hybrid appraisals / Leave a comment

Tags: appraisal how to, Bad appraiser, bias, Hybrid appraisals

Borrower Keeps Calling Appraiser

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The future of residential appraising(Opens in a new browser tab)

Appraisers – The Past and The Future

By Ann O'Rourke on April 8, 2022 / appraisal, appraisal how to, bias, Clubhouse, real estate market / Leave a comment

Tags: adjustments, appraisal, appraisal how to, bias, CLUBHOUSE, real estate market

Appraisers – The Past and The Future

The Path that Brought Us Here

by Richard Hagar, SRA

Excerpts: A wise man by the name of Jim Irish, former chief appraiser for the Federal Reserve Bank out of Topeka, Kansas, once told me something very profound: “The government is rarely proactive but always reactive.” Translation: laws, rules, and guidelines are usually developed after a problem smacks us upside the head. Since hearing this, I have found that it also applies to large enterprises.

Appraisers continued to tell lenders that they drove by each of the comparables used in the report. Years later, when lenders, Fannie Mae, Freddie Mac, FHA, and the VA spot-checked reports, they found out that the condition or location of many comparables didn’t match what was reported. So, the reactive response was to require the appraiser to affirm, under penalty of perjury (which stands to this day), and provide original photographs of each comparable.

Failure to inspect triggered client engagement letters stating the absolute requirement to personally inspect each of the comparables, provide original photographs, and create a system that inspects the photographs and can tell when a photograph is used twice or sourced from the MLS or county—clients know who’s lying to them and fees are lower because of it.

To read more, click here

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Prepare for Change

by Richard Hagar, SRA

Excerpts: In my career, I’ve been through four major changes in the market and our business, so what’s about to happen isn’t my first rodeo. I’m going to point out some things that will make a few people angry. However, I’m trying to help by pointing out how you can become better and profit from the change.

Waivers

Both Fannie Mae and Freddie Mac allow “appraisal waivers” (loans where no appraisal is required), and in the past, waivers were limited to fewer than 5% of the loans they purchased from lenders. However, their waivers have increased to 48% of their loan purchases over the past year. Imagine that 48% of the loans no longer require an inspection or appraisal.

Prior to 2022, Fannie Mae’s UAD system reviewed approximately 20,000 appraisals a day produced by approximately 40,000 appraisers. This indicates that appraisers were providing one appraisal every other day. Now, consider that waivers reduce the rate to an appraisal once every 4 days. Ouch.

To read more, click here

My comments: I have known Richard Hagar for a long time. He can sometimes be negative or even harsh but has good ideas

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Fannie’s New Desktop Appraisal FAQs

By Ann O'Rourke on March 11, 2022 / ANSI, appraisal how to, bias, Clubhouse, desktop appraisals, Fannie / Leave a comment

Tags: ANSI, appraisal how to, bias, desktop appraisals, Fannie

Fannie’s New Desktop FAQs

Timeline and 19 FAQs From an email received 3-8-22

“Desktop appraisals will be offered in Desktop Underwriter® (DU®) for eligible transactions starting March 19. Are you ready?

We’ve updated the About desktop appraisals fact sheet with an expanded frequently asked questions section.

Thanks to all the appraisers, AMCs, and lenders who submitted questions, and please continue to Contact us with your appraisal related comments and questions.”

To read the FAQs, click here

My comment: Reading the original Fannie document is good, such as a timeline list, additional verifications, inspections, CU, etc.

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McKissock has an excellent blog post answering many practical questions, including some in the Fannie FAQs and many other questions.

Topics include:

What data sources are used for identifying the subject’s relevant characteristics?
Are there any state restrictions?
Must I be competent in the subject’s market area?
Are extraordinary assumptions allowed?
Does the limited scope of work mitigate my liability?
What is the difference between a sketch and a floor plan?
How do I get a floor plan?
Does the floor plan need to be verified?
Does the property need to be measured per ANSI measurement standards per Fannie Mae’s requirements?

To read more, click here

My comment: Read both the Fannie FAQs and McKissock blog post. How often will desktops be used? It will take a while before they may be widely adopted. See last week’s newsletter. When are we going to get some ANSI FAQs????

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Neighborhood Boundaries for Appraisals

By Ann O'Rourke on January 28, 2022 / adjustments, ANSI, appraisal classes, appraisal how to, bias / Leave a comment

Tags: adjustments, ANSI, appraisal how to, bias, Fannie, mortgage lending

Gentrification, neighborhood boundaries, and bias

By Ryan Lundquist

Excerpts: Photo used with permission (thanks, Vicky).

Sometimes, crossing the street can make all the difference for value. In short, if we don’t understand where a neighborhood starts and ends, we might choose the wrong comps.

Q&A #3 How do we know neighborhood boundaries?

Okay, this is a big question, and it could easily be a dissertation. For starters, let’s consider what Fannie Mae says about neighborhoods:

Fannie Mae: “The appraiser should provide an outline of the neighborhood boundaries, which should be clearly delineated using ‘North,’ ‘South’, ‘East,’ and ‘West’. These boundaries may include but are not limited to streets, legally recognized neighborhood boundaries, waterways, or other natural boundaries that define the separation of one neighborhood from another. Appraisers should not reference a map or other addendum as the only example of the neighborhood boundaries.”

Other thoughts (mine): I think sometimes we focus only on major streets, but let’s also consider school boundaries and even how neighborhood associations or city websites define areas. But also, where would residents themselves draw the lines? And where would buyers be hunting for a home before shopping somewhere else? All these things could be clues.

To read more and see lots of maps and graphs, click here

My comments: Excellent analysis of specific neighborhood boundaries with maps and graphs, of course. Worth reading. The Jan. and Feb issues of the monthly Appraisal Today has this article: Does my neighborhood really need to be analyzed? Parts I II By Tim Andersen, MAI. The best neighborhood explanations I have ever read!!

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Appraisal Completion Certifications – be careful

Desktop appraisals okay for some Fannie Loans March 2022

By Ann O'Rourke on January 21, 2022 / ANSI, appraisal business, appraisal forms, appraisal how to, bias, desktop appraisals, Fannie, liability, square footage / Leave a comment

Tags: ANSI, appraisal business, appraisal how to, bias, desktop appraisals, Fannie, square footage

Desktop appraisals okay for some Fannie Loans March 2022

Fannie announcement – About Desktop Appraisals

Beginning in March 2022, desktop appraisals will be an option for some loan transactions. This fact sheet provides high-level information on Fannie Mae’s requirements for desktop appraisals and answers some frequently asked questions. We’ll be adding information to the fact sheet, such as additional FAQs as needed.

Excerpts:

Use Form 1004 Desktop
Must include floor plan with interior walls.
The appraiser must have sufficient information to develop a credible report.

To read the fact sheet, click here

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Desktop Appraisal to Become the New Norm

by Isaac Peck, Editor, WorkingRe

Note: This article was written before the Fannie announcement above.

Excerpts: A number of questions remain regarding how the GSEs will establish the eligibility criteria for what types of loans, transactions, and loan-to-value (LTV) ratios will qualify for these desktop valuations. For example, Thompson’s comments that such a move will provide relief on rural appraisals runs contrary to most conventional appraisal experience in the industry where appraisal waivers, hybrid appraisals, and other “alternative” valuation products have primarily been used in cookie-cutter, tract home neighborhoods where model-match comps are more readily available.

In fact, over the years many senior executives at the GSEs and at major lending institutions have acknowledged the need for traditional appraisals on rural properties—which are much more likely to have unique features and require more complex analysis.

There is also the question of whether the introduction of desktop appraisals will potentially lead to a broader range of alternative appraisal products into the mix. Given that some senior executives at Fannie Mae were predicting that hybrid appraisals would become mainstream by 2022, it is actually a little surprising that desktop appraisal assignments are the first alternative product to get a permanent place on the GSE’s valuation roster. Appraisers will just have to wait to see what the future holds!

To read more, click here

My comment: Interesting and worth reading about the background of Fannie’s change

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