Appraising Fixer-Uppers

What About Those Fixer-Uppers?

Insights from a Seasoned Appraiser
By Steven Vehmeier
Excerpt: We’re all familiar with the term “fixer-upper.” For many different reasons, properties can come on the market in less-than-par condition. The degree and cost to cure become an issue to buyers and sellers, and a challenge for appraisers. At some point, it’s no longer “normal market value minus cost to cure equals as-is value.”
The terms “entrepreneurial incentidddve” and “entrepreneurial profit” are typically discussed in terms of investment property, but the principles involved can also be applied to the many fixer-uppers—whether the buyer is a “purely investor type” or an “owner-occupied investor type.” Maybe a couple of new terms should be discussed: “sweat equity incentive” and “sweat equity profit.”
To read more, click here
My comments: Most of my appraisals are for estates (date of death). I have never appraised a home that was ready for sale when the person died: staged, new paint and floor coverings, yards cleaned up, etc. I very seldom have any repair estimates or structural pest control or home inspection report.
I always assume the home is empty of furniture and “broom clean,” which I learned doing lots of REOs in the past. If a home is cluttered with personal stuff, the price will be lower. But, it can be fixed easily and inexpensively. If it is a mess, I tell the executor to call me when it is cleaned out so I can see what the walls, floors, kitchen countertops, etc. look like.  If I can’t see, I disclose this in the appraisal and do my best to figure out a condition estimate.
Very few MLS listings here are not fixed up for sale. I look for “fixer”, “contractor”, “as is”, “handyman”, etc. in the description.

Appraisal Business Tips 

Humor for Appraisers

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NOTE: Please scroll down to read the other topics in this long blog post on unusual homes, mortgage origination stats, Fannie and condos, real estate market, fixer uppers, etc

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Glass Pyramid House in Volcano, Hawaii for $120,000

Excerpt: Many of the neighbors are hobby farmers who grow bananas, tea, vegetables, citrus fruits, and bamboo. Tucked into the Royal Hawaiian Estates neighborhood, the area offers a side of Hawaii worlds apart from the tourist-heavy destinations of Waikiki or Lahaina. It is 35 minutes from Hilo.
The listing, outside the pyramid, is a covered dining area and an exterior rock enclosure with a sink, toilet, and bathroom. There’s also a system for off-grid power and dual catchment tanks for water. If you’re wondering about electricity, yes, this pyramid is equipped with LED lighting, so you can see after nightfall.
To read more and see the photos, click here
My comment: I want it! The town’s median price is $75,000. I have always wanted a Hawaiian getaway since I am only 5 miles from the Pacific Ocean ;>
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Direction Sign of Main Street and Wall Street

Tech companies & Wall Street targeting residential real estate

By Ryan Lundquist
Excerpts: Factors:
1) Huge rent growth is propelling big funds: Having lofty rent gains in recent years has caught the attention of big investors and is essentially allowing them to play the market these days. It’s wild to think investors can presumably make the numbers work after ten years of price growth…
3) Profit and Convenience: The iBuyer model is nowhere near a dominant force in the marketplace, but we’ve seen exponential growth over these past three quarters. A dissertation can be written on what these companies are doing, but I want to make a simple point…
To read more, plus a link to Ryan’s previous article and over 40 appraiser comments, click here
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Another Related News Item: Zillow buying homes and flipping. Are they making any money? Some are saying Zillow is paying too much for the homes. To read more, Click here
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How to get more appraisals done without working longer or harder!

  • Top 10 Appraiser Time Wasters And What to do About Them By Doug Smith, SRA
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CFPB settles with nation’s largest reverse mortgage lender over “deceptive” home estimates

In a lawsuit filed October 8 in the U.S. District Court of California’s Central District, the CFPB alleged that Irvine, California-based American Advisors Group (AAG) sent borrowers deceptive consumers to take out a reverse mortgage. The direct mailers advertised a prominent “estimated home value,” per the court filing, which the CFPB claimed was inflated.
The agency does not explain how it determined the values were inflated, nor does it offer documentation to explain how it calculated the difference between the allegedly inflated values and the accurate values. Per the lawsuit, the midpoint of those values were inflated on average by 18%, while at the high end, the values were an average 28% higher.
To read more, click here
My comment: I guess the Primary Appraisal Rule is showing up again: if the appraisal is not the number you want, it is wrong – too high or too low. I just had to include something about high values, since all I hear about are low appraisals.
Their values came from AVMs, maybe with “proprietary” methodology to get higher values? Hmmm…
I did a few reverse mortgage loans for a major lender in low-income neighborhoods many years ago. I quit taking appraisals from them because it included equity splitting. The borrowers I spoke with did not understand what was happening. Reverse mortgages are complicated.
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Round Houses – What and Why

10 amazing round houses from around the world – Amazing!!
Birkedal, Isle of Møn, Denmark (PHOTO ABOVE)
Nine cylinders interlock to make up this retreat on the island of Møn in Demark. A wooden home that goes against the grain, architect Jan Henrick Jansen designed and built the property over the course of five years.
To see more photos and info on other very unique homes,click here
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Why our ancestors built round houses – and why it still makes sense to build round structures today – Fascinating!!
Excerpts: The oldest forms of indigenous shelter were often round in shape. (Think the Southwest USA Hogan, Mongolian Yurt, North American Teepee and the Greek Tenemos, among others.) Why did our ancestors choose to build round? Because the ovid shape — eggs, earth, tree trunks, and stones — is what they saw reflected in the surrounding natural environment. And, as usual, Mother Nature knows best. There is some nifty natural science that makes round buildings more comfortable, more energy-efficient and safer — especially if you combine the ancient shape with modern materials.
Wind and tsunami waves move naturally around a round building rather than getting caught at (and potentially ripping off) corners. A rounded roof avoids ‘air-planing’- a situation where a strong wind lifts the roof structure up and off of the building.
To read more and see lots of photos, click here
My comment: I did not know about the advantages, and history, of round houses. Mostly saw them as houses I would not want to appraise as there are very few here ;>
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Fannie News: Appraising and underwriting condo and co-op projects

Excerpt: Lenders and appraisers have interconnected duties when it comes to condo and co-op projects. For loans sold to us that are secured by units in condo and co-op projects, lenders are responsible for determining that the projects meet all applicable Fannie Mae eligibility requirements. Appraisers must document any special assessments or significant deferred maintenance that may impact the unit’s safety and soundness or marketability, or the financial stability or physical safety of the overall project and its amenities.
My comments: For appraisers, Fannie references special assessments, but also includes: “Significant deferred maintenance may be described as a part of the condition of the individual unit or may be a part of the overall project information (condition section) in the report.”
I was not surprised to hear about the recent collapse of part of a condo project in Florida that revealed significant problems that can occur. Homeowners not wanting to increase dues or do special assessments becomes a larger problem as they get older and need work. Florida does not require a reserve study but requires a reserve schedule for the repair and replacement of major components.
In the mid to late 80s, when I started doing lender and FHA appraisals, I was required to review condo documents, reserves, maintenance expenses, etc. In a nearby city, there were several large older townhome projects with significant problems: few reserves, deferred maintenance, etc. I reviewed all the documents and disclosed any problems in my appraisals.
Since then, I have always reviewed the reserves, expenses, etc. If I can get them, I read newsletters from the HOA. Fortunately, in California, reserve studies have been required for a while, every three years. The HOA is responsible. I always write about the reserves, maintenance issues, etc. in every condo appraisal.
Very similar condo projects can vary widely in dues and special assessments. I have seen significant value differences between the projects with different costs.
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HOW TO USE THE NUMBERS BELOW. Appraisals are ordered after the loan application. These numbers tell you the future for the next few weeks. For more information on how they are compiled, go to www.mbaa.org
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Mortgage applications increased 0.2 percent from one week earlier

WASHINGTON, D.C. (October 13, 2021) – Mortgage applications increased 0.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 8, 2021.
The Market Composite Index, a measure of mortgage loan application volume, increased 0.2 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 0.4 percent compared with the previous week. The Refinance Index decreased 1 percent from the previous week and was 16 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 2 percent from one week earlier. The unadjusted Purchase Index increased 2 percent compared with the previous week and was 10 percent lower than the same week one year ago.
“Mortgage rates reached their highest level since June 2021, but application activity changed little this week. An increase in home purchase applications offset a slight decline in refinances,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The increase in purchase applications was welcome news, but was primarily driven by a 2 percent gain in conventional purchase applications, which kept the average loan size elevated.”
Added Kan, “The 30-year fixed rate reached 3.18 percent last week and has risen 15 basis points over the past month, resulting in an 11 percent drop in refinance applications during this time. Government refinance applications fell over 3 percent last week, driven by a decline in FHA refinances and an 8-basis-point increase in the average FHA mortgage rate. We continue to expect weakening refinance activity as rates move higher and borrowers see less of a rate incentive.”
The refinance share of mortgage activity decreased to 63.9 percent of total applications from 64.5 percent the previous week. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 3.4 percent of total applications.
The FHA share of total applications decreased to 10.2 percent from 10.5 percent the week prior. The VA share of total applications decreased to 10.2 percent from 10.3 percent the week prior. The USDA share of total applications decreased to 0.4 percent from 0.5 percent the week prior.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.18 percent from 3.14 percent, with points increasing to 0.37 from 0.35 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate increased from last week.
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $548,250) increased to 3.22 percent from 3.20 percent, with points increasing to 0.29 from 0.27 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 3.20 percent from 3.12 percent, with points remaining unchanged at (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 15-year fixed-rate mortgages increased to 2.48 percent from 2.45 percent, with points increasing to 0.29 from 0.24 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 5/1 ARMs increased to 3.08 percent from 2.54 percent, with points increasing to 0.26 from 0.16 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The survey covers over 75 percent of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. Base period and value for all indexes is March 16, 1990=100.
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Ann O’Rourke, MAI, SRA, MBA
Appraiser and Publisher Appraisal Today
1826 Clement Ave. Suite 203 Alameda, CA 94501
Phone 510-865-8041

What is Included in Appraisal GLA (sq.ft.)?

Stairway to Confusion – What is Included in GLA?

by C. Brett Bowen
Excerpt: There has been considerable discussion over the years about gross living area (GLA) measurement standards. The ANSI Z765 standard gets the lion’s share of the attention, and is the most widely referenced standard in the industry by far. It can also be the most difficult to interpret, particularly when it comes to stairs. Here’s why.
It is primarily important to recognize two very important facts:
 1) a standard is nothing more than the definition of a unit of comparison
 2) it is the appraiser’s responsibility to be consistent with that definition.
First, what do I mean when I say that a standard is nothing more than the definition of the unit of comparison? The unit of comparison for something is critical to the understanding of that thing.
Second, as an appraiser, consistency with the definition is actually more important than which definition is chosen.
To read more, click here
My comment: Worth reading. I have seldom used ANSI. The standards were developed for new home construction. I have appraised many homes on hillsides, with often only the garage at street level (or just a driveway). Many historic homes, on level streets, have different types of “basements” converted to living area: above grade, partly below grade, etc. If I worked in suburbia, ANSI would work better. I use what the local market tells me.

Appraisal Business Tips 

Humor for Appraisers

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NOTE: Please scroll down to read the other topics in this long blog post on unusual homes, mortgage origination stats, sfr zoning, german appraisers, GLA, etc.

 

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Market Decline Coming for Appraisals?

Is There a Market Correction on Its Way? 

by Steven W. Vehmeier

Excerpt: When will the market correction arrive?

I have no idea, but there will be warning signs, and that’s what this blog article is about. Fluctuations in market activity are common, but unseasonal and ongoing changes of any of the signs listed below can often be red flags. Additional indicators can be some of the factors that led up to the last market bust; there are plenty of articles online with which to familiarize yourself.

What will be the early signs?

Some early warning signs of housing market correction are:

A) Listing inventory in MLS starts to climb steadily. Increasing inventory is generally a sign that buyers have stopped buying (due to prices being too high or a lack of consumer confidence), or there are just fewer ready, willing, and able buyers in the marketplace.

B) Days on Market for listings increase. This event is usually linked to item (A) above.

C) Listing prices begin to stabilize, and reductions in listing prices become more common, which is a sign the market is becoming saturated…

So many appraisers missed the early signs in the last boom’s bust that resulted in claims (valid or not) of over-valuations followed by lawsuits, E&O insurance claims, and regulatory disciplinary actions. Maybe this time, we should pay closer attention to the indicators…

To read lots more tips, click here

My comments: Most Excellent list of what to look for. Very comprehensive. I have been appraising during many up and down cycles in Northern California, starting in the late 1970s at 2%+ per month, followed by a crash in 1980 when interest rates went up to 15%+. Those were the days when lenders told appraisers not to make time adjustments!! Even though we don’t like the 1004mc, it forced lenders and appraisers to look at price changes.

No one knows when the increasing market peaks, but there are signs of a decline, listed in the blog post above. I sold my house in March 2008 and did not anticipate the market crash a few months later. I was very lucky. There had been some modest price declines for about 6 months previously.

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Humor for Appraisers

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NOTE: Please scroll down to read the other topics in this long blog post on liability, Market declining?, Humor, unusual homes, USPAP, mortgage origination stats, etc.

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Location, Location, Location In Appraisals

What’s Location Got to Do with It?

By Steven W. Vehmeier

Excerpts: We’ve all heard the old mantra that real estate is all about “location, location, location.” A perfect example of the importance of location in appraising can be found in The Villages in central Florida.

The development called “The Villages” has seventy-eight communities, each called a “village,” ranging in size from 100 to around 1,500 homes in each. In total, there are somewhere around 140,000 residents, and the home prices in these individual villages range from the low one-hundred thousand up to a couple million. In some cases, villages located near and/or adjacent to each other can vary significantly in price….

An appraiser not familiar with The Villages could easily over-or under-value a property by mixing villages. For example, let’s say the subject is a 3-bedroom, 2-bath, 2,000 square foot home with a two-car garage on a typical sized lot. It would not be hard to find hundreds of homes with similar physical characteristics nearby; however, some might be located in the “wrong” village…

Can we apply this “village” concept to other areas? Are there typically many villages or neighborhoods in and around most major cities? Do the same principles apply in comparable selection and resultant values? Of course, they do!

To read more, click here

My comments: Very interesting “case study.” Tim Andersen soon will have two articles on neighborhoods and what USPAP says in Appraisal Today monthly newsletters.

Appraisal Business Tips 

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NOTE: Please scroll down to read the other topics in this long blog post on bedrooms, bias, time adjustments, unusual homes, mortgage origination stats, etc.

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What is an Appraisal “Inspection”?

Appraisal Inspection Vs. Home Inspection

Excerpts: Why are these roles often confused? What is an Appraisal “Inspection”?

The root of many misconceptions about the appraisal inspection is the word “inspection” itself. It is true that as part of the appraisal process, the appraiser might perform some sort of onsite quality, condition, and functional utility survey of the property to determine its relevant characteristics and if it meets certain standards. For example, to the general public, the FHA requirements that an appraiser must operate certain systems in the home (plumbing, electrical, HVAC) seems similar to what a licensed home inspector does.

The Oxford Online Dictionary defines inspection as: “Careful examination or scrutiny”

Merriam-Webster’s Online Dictionary defines inspection as:

“The act of looking at something closely in order to learn more about it, to find problems, etc.; the act of inspecting something”

It’s somewhat of a benign definition, is it not? There’s nothing really scary there, yet many appraisers attempt to avoid confusion, and (potentially) limit their liability, by avoiding use of the word “inspection” entirely. Many appraisers use euphemisms for this term in their appraisal reports, such as “property visit” or “viewing.”

Even FHA got into the euphemism game with the publication of Handbook 4000.1, which went into effect in 2015. The words “inspect” or “inspection” generally do not appear in reference to an appraiser’s obligations. Instead, the words “observe” and “observation” are used.

To read more, click here

My comments: USPAP has never required an inspection. USPAP defines “Personal Inspection” as the following: a physical observation performed to assist in identifying relevant property characteristics in a valuation service.”

The word “inspection” is used in various locations, such as Advisory opinion A02, including Minimal level of Inspection.

The fourth exposure draft for the 2023 version has Section 1: “Review of Requirements about Disclosing a Personal Inspection.” Final comments deadline is today, July 23, 2021.

Revised FHA Handbook 4000.1 effective 9/14/15. Are you ready for the changes? Get the facts!!

Appraisal Business Tips 

Humor for Appraisers

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NOTE: Please scroll down to read the other topics in this long blog post on bedroom closets, Updated FHA 4000.1, bias, unusual homes, mortgage origination stats, etc

 

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Appraising vs. the Public Good?

Has Appraising Failed the Public Good?

by Steven R. Smith, MSREA, MAI, SRA

Excerpts: The term Public Good is in the opening paragraph of the Uniform Standards of Professional Appraisal Practice (USPAP). An appraiser friend once wrote that our regulations and guidelines are intentionally ambiguous—and that may be. But what is crystal clear to me is that the industry has put the interests of its clients before the public good.

The Public Trust statement and the Ethics Rule have been largely ignored over the years with loan production put first…

What can an individual appraiser do to support the public good, even before they start an assignment? For me, the answer always has been to appraise the client and the appraisal assignment. There are some clients and assignments that simply should be avoided because of the wants, needs and desires of the client, with respect to the assignment results.

To read more, click here

My comments: I have known Steve Smith for a long time. To read more comments from Steve and other savvy appraisers, join the National Appraisers Forum, an email discussion group. I have been a member since it started. It is my “go-to” resource for appraisal topics. Moderated. Very different from Facebook and other appraiser online discussion groups where filling out forms and dealing with AMCs are discussed.

The future of residential appraising

Appraisal Business Tips 

Humor for Appraisers

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NOTE: Please scroll down to read the other topics in this long blog post on unusual homes, appraiser diversity, Cost Approach, liability, mortgage origination stats, etc.

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What Types of Sales For Appraisals

Arm’s Length or Another Type of Sale? The 7 Sale Types Explained

What types of sales for appraisals

Excerpts: As a real estate appraiser, whether you’re considering the current terms of sale or analyzing previous sales of the subject property or comparable sales, it is imperative to know whether a sale is an arms-length transaction or a different type of sale. Sales due to a job relocation, estate settlement, foreclosure, or divorce may sell for less than the property’s market value.

By knowing the type of sale, you are better able to reconcile a current opinion of market value that falls above or below a current or recent transaction for the subject property.

Here are the seven valid sale types, explained in detail below:

  • REO sale
  • Short sale
  • Court ordered sale
  • Estate sale
  • Relocation sale
  • Non-arm’s length sale
  • Arm’s length sale

To read more, click here

My comment: Worth reviewing. Some good tips, especially for today’s crazy sales market!

Using home’s previous sales in appraisals

Appraisal Business Tips 

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What are Pass through Bedrooms for Appraisals

Pass-through Bedrooms

Excerpts: This may not be a major problem if the house has sufficient bedrooms to match what is typical and expected in the neighborhood. It can have a negative impact on the marketability of the home if this arrangement reduces the number of usable bedrooms from what is typical.
The floor plan layout of a home can have an impact on its market value: The impact on value is determined from market data and how buyers perceive it. Did the home sell for less because it has a different floor plan than what is typical and expected?
The cost to fix can vary: Depending on the current floor plan configuration and the location of the bedroom in relation to other rooms the cost can vary widely and this should be taken into consideration when comparing it to the value added by fixing the problem.
Written for home owners with a good discussion of cost to cure vs. value added.
To read more, click here
For more analysis by Ryan Lundquist (from 2016) of what I often see, click here The image above is from Ryan’s article.
My comments: I have had many discussions with real estate agents and home owners about this issue. The number of bedrooms in a house can be a significant factor in many markets. In my market most homes were built prior to 1940 and have modifications, such as additions, over time. The pass through bedrooms can seldom be fixed. I usually call them “dens”.

Read more!!

Fannie says appraisal “forms” are going away

Fannie Mae is Not Developing New Appraisal Forms

By Dustin Harris 

Excerpt: Some of my colleagues have asked me, “What will the new forms look like?” Again, and I know it is a bit nit-picky, but there are no new forms. Rather, the GSEs are developing a cloud-based electronic container that will be used to report our findings rather than filling out a form and sending it in. Weird, I know, but it has its positives.

Currently, an appraiser needs to determine the proper scope of work to know which form is best for the situation. If it is a condo, it is likely a 1073. Single family residence, a 1004 or 2055.

To read more, click here

My comments: Nothing much new, of course. I have been writing about Fannie Modernization in the monthly newsletter and this newsletter for a while. Last week’s weekly newsletter had a brief Fannie Update – mostly the new timeline to 2024.

I also hear that Fannie will require a lot more data with more time required to fill out the online “form.” I can’t wait until we don’t have to decide which form to use! Especially since some “reviewers” and AMCs don’t really understand this.

A good example is how Turbo Tax software works. Instead of looking at every part of your printed tax return, it only shows what is relevant. For example, if you are filing as a single person or married. A single person would not have to look at the single vs. married part of the return.

Appraisal Business Tips 

Humor for Appraisers

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To read more of this long blog post with many topics, click Read More Below!!

NOTE: Please scroll down to read the other topics in this long blog post on unusual homes, crazy market now, adjustments, what fannie wants, mortgage origination stats, etc.

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Complex Residential Properties for Appraisers

How to Identify a Residential Complex Property

Excerpts: A complex one-to-four family residential property is defined as a property that meets at least one of the following criteria:

  • The property to be appraised is atypical
  • The form of ownership is atypical
  • The market conditions are atypical

“Below we dig a little deeper into each type of complex property outlined above, providing detailed descriptions and examples of properties that would fall under each of the three categories.”

To read more, click here

My comments: This is the best explanation I have read about this issue. All appraisers encounter complex properties. You may or may not decide to accept the assignment. Always check the info you have on the property before accepting the assignment. Or, you find out after starting on the appraisal that it is more complex than you thought. I regularly turn down assignments because it will require more time, or I don’t want to “reinvent the wheel,” as I may never do another like it, etc.

Mortgage lending appraisals are very, very cyclical. When you are very busy, I recommend turning down these assignments to make more money. You will have lots of time during the slow period to accept these assignments.

In ancient history, before AMCs, I often did the tough ones for loyal clients as a favor. AMCs will go down the list, sometimes for days, trying to find an appraiser. One called me yesterday about a mixed-use property that their lender client said was residential. From online information, it looked like commercial on first floor. The issue was highest and best use, of course. I told them I did not know any commercial appraisers who work for AMCs, plus the fee would be over $2,000. You have to know that city’s local zoning regulations, requiring local expertise to determine the highest and best use.

The Bottom Line: Don’t Risk Your Appraisal License if it is too complicated for you!! I get many calls from appraisers having problems. This is always my answer. I have returned fees up to $2,000 after spending lots of hours on the assignment.

Appraisal Business Tips 

Humor for Appraisers

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