Functional Obsolescence in Appraisals

Functional Obsolescence Can Be Challenging

By McKissock

Excerpts: For appraisers, functional obsolescence can be a challenging concept because the elements that influence property values may not be obvious or immediately apparent. To help you better understand what it means and how to pinpoint it, we’re exploring some examples, the different types of functional obsolescence, and how it can influence property values.

Additionally, we’re sharing insights from appraisers who answered our survey question, “When dealing with functional obsolescence in real property appraisal, what aspect do you find most challenging?”

Topics include:

  • Types of functional obsolescence
  • Curable obsolescence
  • Incurable obsolescence
  • Superadequacy

What aspects of functional obsolescence do appraisers find most challenging? We asked our appraisal community, “When dealing with functional obsolescence in real property appraisal, what aspect do you find most challenging?”

The top two answers were “supporting adjustments for it” and “finding comparable properties with similar obsolescence.” Here are the full survey results, followed by comments from appraisers who shared further insights into these two common challenges related to functional obsolescence:

Supporting adjustments: 46%

Finding comps: 33%

Sample appraiser comments:

“Functional obsolescence is not a searchable criterion in any MLS database I’ve found. The ability to find a credible impact on other homes repeatedly is an anomaly. So, I may be able to generate a factor or dollar difference but having only one comp to determine with leaves you deciding on credibility or making no deduction if you don’t feel it’s a credible adjustment.”

To read more, Click Here

My comments: We all encounter Functional Obsolescence when appraising. The blog post is well-written and understandable. It is worth reading the full blog post and the appraisers’ comments. Plus, the explanations about functional obsolescence are good reminders.

Functional Obsolescence for Appraisers

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Freddie Advice: How to Avoid Using “Bad” Words

More Objective Appraisals: A Practical Guide for Appraisers

By Scott Reuter Single-Family Chief Appraisal Officer, Freddie Mac

Excerpts: Changing the Mindset – Facts First

What’s the number one thing appraisers should be doing when they develop an appraisal? Stick to the facts. Here are a few more best practices that can help appraisers achieve more objective appraisals.

  • Don’t think like a salesperson – avoid words that may be common in Multiple Listing Service (MLS) and used to help sell a home.
  • Don’t use shorthand – both ‘123 Church Street’ and ‘123 Church’ could refer to an address but might come across differently in an appraisal.
  • Don’t copy and paste – avoid copying from Wikipedia or old appraisal reports or commonly used templates when providing neighborhood descriptions for similar communities.
  • Use pre-screening practices – while you can implement your own pre-screening process, some appraisal companies can implement them too.

To read more, click here 

My comments: Read this article! Not just a list of words and phrases. Excellent examples and analysis. The author started as a second-generation practicing residential appraiser. He knows what you want.

 

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Appraisers: Watch for Concessions and Kickbacks

Concessions, Kickbacks, and the Appraiser’s Nightmare

by Richard Hagar, SRA

Excerpts: What Appraisers Must Do

There are many steps appraisers must follow, more than I can list here. However, you should start off by listing and describing the concessions. Learn how to provide an accurate value conclusion that protects the appraiser from the potential ramifications of their bad acts.

On the first page of FNMA’s form, they ask this question:

“Is there any financial assistance [loan charges, sales concessions, gift or down payment assistance, etc.] to be paid by any party on behalf of the borrower?”

The appraiser has no choice when faced with this question, they must answer and if they get it wrong…then the appraiser is in trouble. After disclosing the information, the appraiser’s next task is to determine how the concessions have impacted the sales price. Federal law, FNMA/FHLMC guidelines and USPAP all point to a solution.

Solutions to Keep You Safe

  • Make sure you have a complete signed purchase contract.
  • In the appraisal, list how many pages of the contract you have in your possession (In case someone is hiding pages from you).
  • List the concessions on page 1 and in the final reconciliation.
  • In the sales grid, list any known concessions that were involved with the purchase of a comparable….

To read more click here 

My comments: Some good tips on how real estate agents try to deal with this. I have known Richard for many years. He is an expert and is a most excellent instructor. I have taken many of his seminars over the years.

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FHA: Cosmetic vs. MPR Repairs

Cosmetic vs. MPR Repairs: Guidance for FHA Appraisers

By: McKissock

Excerpts: If you are appraising a property that needs some cosmetic repairs but meets FHA minimum property requirements (MPR) in its current condition, you should make the appraisal “as-is.” Here is some guidance on cosmetic repairs vs. MPR repairs.

Topics include:

  • When can an FHA appraisal be completed “as-is” vs. “subject to”?
  • Cosmetic repairs Examples
  • MPR repairs Examples
  • Conditions that require inspection Examples

To read more, click here

My comments: If you do FHA appraisals, read this blog post. Photos and lots of examples. I quit doing FHA appraisals in the mid-1980s because of the inspection requirements compared to conventional appraisals, that did not have the requirement.

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FHA Handbook 4000.1 Appraisal Changes

FHA Handbook 4000.1 Appraisal Changes

By Dan Bradley

Excerpts: On January 18, 2023, HUD issued an announcement regarding revisions made to Handbook 4000.1. According to the announcement, the revisions included “enhancements and revisions to existing guidelines and various technical edits.”

The most significant of these revisions was the elimination of the requirement to include the 1004MC form as an attachment to the appraisal report.

Changes to the Handbook also include several other minor, but nevertheless meaningful, edits and clarifications to FHA appraisal requirements, including:

Under “Attic Observation Requirements,” a clarification was made regarding the appraiser’s obligation to “safely” access the attic. The language requiring a minimum “head and shoulders” access into the attic was deleted.

Under “Crawl Space Observation Requirements,” significant revisions were made, including removal of a bullet point list of MPR/MPS criteria for the crawl space. Also, language requiring a minimum “head and shoulders” access into the crawl space was deleted.

The changes outlined in the Handbook may be implemented immediately but must be implemented for FHA cases assigned on or after April 18, 2023.

To read more, click here

My comments: Many thanks to McKissock for telling us what we need to know. Includes a link to the “redline” version of 4000.1 so you can skip over most of it. Scroll down to “Updates, Revisions, Notifications” to get the redline versions.

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

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Appraising Short-Term Rentals/Airbnb

Debate on Appraising Short-Term Rentals

By Julie Friess, SRA, AI-RRS, MA

Video 22 minutes. Worth Watching!

Excerpt: What can appraisers learn when it comes to short-term and long-term rentals? What role does an appraiser take when sorting between the two? What can appraisers learn when it comes to short-term and long-term rentals? What role does an appraiser take when sorting between the two? These questions and much more will be answered.

My comments: Julie is not referring to an owner-occupant renting out a spare room in their house for a short term. She is talking about an investor buying and renting many rooms in a house, sometimes changing the floor plan. The photo above is a good example: an exterior door for access to a bedroom. This is not typical for a single family home

In the video, Joan Trice and Julie disagreed on how to appraise Short Term Rentals. I have been a commercial appraiser for over 40 years. It is obvious to me that you need experience and knowledge of what to do when appraising them as commercial properties.

If the GSEs are unclear on this, that is their problem, not yours. Just Say No! Don’t Risk Your License! 

Julie has lived for decades in Sedona, a popular vacation location. Many homes were changed to investor-purchased Airbnbs with few home rentals available for local residents. Julie and a group of other concerned residents are now preparing for August 5, 2022, when there is an election for new city council members.

Julie and I are co-hosts every Thursday at 2 PM Pacific Time in our Clubhouse group (Real Estate Appraisal Questions). To attend, download the Clubhouse app on your smartphone. All sessions are recorded and available. Recent topics include Water rights, views, location, and more. Short-term Rentals. Zoning, Highest, and Best Use. Past, Present, and Future of Residential Appraising.

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Two articles by Julie on my website:

Residential Appraisals and Airbnb Income?

Click here to read

Excerpts from the article: 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!!

Tales of a Trainee at Appraisal Camp Sedona

Click here to read

Residential Appraisals and AirBnb Income?

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NOTE: Please scroll down to read the other topics in this long blog post on Cubicasa, Desktops, FHA, unusual homes, mortgage origination stats, etc.

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Desktop appraisals – Lots of Info Available!

Desktop appraisals – Lots of Info Available
Fannie and Freddie started using Desktops on March 19, 2022

Both a floor plan and a building sketch with dimensions and GLA calculations are required. ANSI is not required.

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March 2022 Fannie Mae Appraiser Update: 

Link to March Appraiser Update, click here:

Link to “About Desktop Appraisals” PDF with 5 pages of information, click here Watch the Noble Appraiser explore the benefits of performing desktop appraisals:
The Desktop Appraisal Discovery Link to Noble Appraiser on desktops video, click here 

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McKissock: Fannie Mae and Freddie Mac Desktop Appraisals: Your Questions Answered

Excerpts: In January 2022, Fannie Mae and Freddie Mac announced a desktop appraisal option that goes live in mid-March 2022. In various articles and opinion pieces, some claim that desktop appraisals will solve the appraiser shortage and modernize the appraisal process, while others claim that they will cause the demise of the appraisal profession.

Here are a few of the 16 questions answered

  • What is a desktop appraisal?
  • Does USPAP require me to complete an inspection?
  • 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?
  • Won’t these types of valuations be risky for the lender

To read more, click here

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Bradford Software Webinar Floor Plans for Desktops – Discover Your Options with 7 Floor Plan Providers March 24, 2022 (1 hour, 34 minutes), with comments from Scott Reuter of Freddie Mac.

It was recorded and is available at https://vimeo.com/692030955

I did not have time to watch it yesterday.

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My comments on the above resources: What’s the best resource(s) for you?

Noble appraiser video is short (3 min. 34 seconds) understandable and very informative. Fannie Mae is “the source” for desktops. McKissock’s Q and A post is well written, understandable with short answers.

Bradford’s video has demos of 7 app providers for floor plans and sketches.

If lenders will use them much is very uncertain. The Covid desktops were never widely adopted. No one knows now which cell phone apps will be used, who will use them, and their accuracy (tested by an independent company). Minimum of an IPhone 12 Pro, with LIDAR camera. Appraisers who have tested them say the floor plans are good, but sketches with dimensions and floor plans may not be accurate on complicated home designs.

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Appraisals Obsolete Now or Later?

Is Appraisal Obsolete?

By George Dell SRA, MAI, ASA, CRE
Excerpt: Obsolete! Such a harsh word. Can it be?
Is the problem convolution?
Does it mean I will soon be obsolete? Not needed? Not loved? Terrible. What can be done?
Yet all the little signs are pointing that way. “Automated” valuation models have much of the market, and continue to gain. Other valuation methods and appraisal exempted transactions continue to grow. Evaluations, desktops, hybrids, auto-measurements, non-appraiser inspections, broker opinions.
To read more, click here
My comment: Another different perspective from George Dell! Check out “Appraisal startup Aloft closes $20M Series A” above! Not the first, and not the last, appraisal-related company to get millions in funding. Who needs experienced field appraisers when we have AVMs, hybrids, etc.?

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Haunted House Appraisal Adjustments

Inspired by Italy, a Conical Home in Indiana

Excerpt: On the market for $424,900, the home consists of two main silolike buildings with shake conical roofs. Inside the round compound is a total of 3,111 square feet of living space.

The design was inspired by the trulli homes of the Itria Valley in Puglia, Italy. They were typically built from limestone and had conical roofs. The structures were chiefly designed as temporary shelters or storage areas in the 19th century. Today, they endure as charming residences in southern Italy. Back in Indiana, this home’s architect, Evans Woollen, combined details from trulli homes into his design.

“The house is a midcentury version of a 200-year-old village in Italy,” Landrigan says.

To read more and see lots of photos, click here

 

Top Ten Reasons Why It Is Great to be an Appraiser Humor

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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!!

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