|Mary Cummins, Cummins Real Estate Services
This article is a response to an article in "Valuation Review." The article is titled "Survey: Realtors report contracts still impacted by low appraisals. 'Realtors reported that a percentage of contracts are being canceled, delayed or renegotiated due to low valuations, blaming the process, inappropriate comparables, lender demands and AMC requirements for the issues that still plague the marketplace.'"
Below is a sample of an Appraisal Management Company's (AMC) instructions to real estate appraisers. I took out all identifying information of the AMC and replaced it with “---.” People need to realize that we must follow all of these instructions. In the current market it is sometimes difficult if not impossible to find comparables that are similar to the subject and conform to these guidelines. In the past if we could not find comparables that met the guidelines, we could deviate and use other comparables as long as we explained things in detail. These guidelines are especially difficult with custom or luxury homes which don’t conform to the average home or with comparables that are short sales or foreclosures.
As you can see from these guidelines, appraisers now must do three times as much work than in previous years. Appraisers are now being paid less than half of the appraisal fee. The rest of the fee goes to the AMC. If we don’t follow these guidelines, we don’t get paid anything. If the client cancels the purchase or refinance contract, we also don’t get paid. If we are late, we don’t get paid. On top of this AMCs are making all orders rush orders. We have to complete all of this in two days from when the order was placed online, not from when we see the order or when we inspect the property. It sometimes takes a couple of calls to get an appointment to view, measure, inspect and photograph the subject property. Nowadays every appraisal is like a race. With condos it’s even more difficult as we must get information from the HOA or management company.
I’m writing this just so people understand everything that’s involved in an appraisal for a conventional loan for purchase or refinance with a regular bank.
“By accepting this assignment, the appraiser is acknowledging geographic familiarity and competence to complete and provide a supported opinion of value in compliance with USPAP and adherence to Fannie Mae, Freddie Mac and all other agency guidelines. The appraiser must act and dress professionally while inspecting the subject property. The appraisal will be relied on to make a lending decision, the reader of the report must be able to understand how the appraiser arrived at their conclusion.
DO NOT PROCEED if the following conditions apply...
- IF THE SUBJECT’S PRODUCT TYPE DIFFERS FROM THE ENGAGEMENT LETTER – STOP AND CALL ---
- * If the subject is a refinance but is currently listed or has been listed for sale in the prior 180 days.
- You are not the appraiser specifically named on this order for this property as you may NOT BE PAID for the report.
- * Subject property is a manufactured and or mobile home. Manufactured home is defined as “any dwelling unit built on a permanent chassis, including those attached to a permanent foundation system.”
- * Subject property is under construction or in the process of remodel
- * If the Subject property is rated less than average (C5 or C6) please stop and call ---. At inspection, please take a photo of any/all factors effecting condition. You will be asked to either write a brief addendum about the condition or will be advised to complete the report "subject to repair".
- * If the subject has significant mold issues that need to be remediated.
- * If the subject is an SFR but also is income producing (i.e. working farms, beauty shop, dog kennels, dental or accounting office’s).
If you encounter ANY of the above situations, please contact your --- Order Specialist immediately for further instructions. If appraisal is completed without notifying ---, appraiser may not be paid.
==================== SPECIAL REQUIREMENTS ====================
*** Our client requires that you attempt to contact the borrower/access provider within 24 hours of receiving this order. Please contact us immediately if you have any problems gaining access to the property. ***
- COST APPROACH section must be filled out. The source of the cost figures must be included in the report. In addition, the appraiser must document the depreciation method. The appraiser should not back into the estimated land value. Where possible, vacant land sales should be referenced.
- If the land to value ratio for the subject exceeds 30%, a detailed explanation is required; if the land to value ratio for the subject exceeds 80%, call --- for further direction.
- If your subject is located in a market where marketing times exceed 6 months, then your report must include support and detailed explanation for marketing times exceeding 6 months and its impact on value. Also, the majority of your comps should show "days on market" greater than 180 days.
- If the subject property has security bars, you must mention if the bars have safety release latches, and if they are in compliance with local fire/safety codes.
- If the subject is a purchase transaction, the SALES CONTRACT AND ALL ADDENDA MUST BE REVIEWED AND the impact of financing and sales concessions, if any and their effect on value should be properly analyzed. Note: The sales contract is considered a relevant piece of market data. In cases where the estimate of value falls below the contract, please provide a complete reconciliation providing the reasoning that supports the value conclusion.
- If the subject is a refinance and vacant, please check to see that utilities are working. Please add this information to the report.
---------------------- LICENSING REQUIREMENTS ----------------------
- Only a State Certified or State Licensed appraiser may complete the assignment.
- If the subject property is valued over $1 million, a Certified Residential Appraiser or higher is required to complete the report.
------------------- REPORT REQUIREMENTS -------------------
For Single Family Residence and Site Condo in condo projects that consist solely of detached dwellings use form 1004.
- Itemized Cost to Cure is required ONLY when repairs are needed. (List cost for each individual repair item and a total cost to cure). All repair items require a photograph. If Health and safety issues are noted, please complete the report "Subject to" Health and safety items only. All other repair items should be considered in a cost to cure. Photographs are required.
- ACREAGE – Client requires the total site area to be included in the appraisal value (i.e. if the public record indicated a site of 64 acres, then all 64 acres are to be valued in the report.)
- WELL/SEPTIC - If the subject is on well and/or Septic, you must comment if this is typical for the area and if there is any impact on value.
- Sales and/or Listings should bracket the subject's gross living area (GLA). If this is not possible, please provide a detailed explanation.
- If the subject's final value conclusion is above the predominate value for the area, a detailed explanation is required to explain why it is.
- You must have two data sources for all sales in your report. One can be public records or a public records data provider but the other data source should be MLS, or builder, or broker, or agent or seller or buyer etc. It is not acceptable for the second data source to be "exterior inspection".
- Comment on any external factors stating what type of structures or land uses are present, if they affect marketability (positive or negative) or are considered an external obsolescence (in which the box on page 1 of the URAR should be marked YES for site conditions/external factors). Address whether or not the comparables shares similar influences.
- For RURAL: If dated or distant comps are used in your report it is mandatory that a complete and detailed discussion be made in the report about what lengths you went to find more recent and closer comps and a detailed reconciliation on which comp(s) get most weight in your appraisal.
----------------------- COMPARABLE REQUIREMENTS -----------------------
- 3 Closed Comparable Sales. All comparables must be within 1 mile from subject and sold within the last 6 months. NOTE: If comparable sales exceed proximity/sale criteria, detailed explanation is required.
- Provide 1 Comparable listing, if available. (TWO listings are required in a "declining" market.) Listings must support the value estimate.
- Please provide days on market (DOM) for each listing or pending comparable property used in the report. This would include total days on market not just the days on market since the last price reduction.
- If the subject property is valued over $1 million, a total of five comparables are required, the required 3 sales above, and any two additional comparables, either active pending or sold. Any other sales considered relevant, however not comparable, should be narrated within the supplemental addendum.
- You must make list price to sales price ratio adjustments to any listing or pending comps used in your report, or provide commentary to explain that no list price to sales price adjustment is warranted when not made.
- The appraiser must provide a reconciliation of the sales comparison approach. Specifically, why each of the comps used in the report were chosen and which comp(s) are given most weight in the appraisal and why. This is in addition to the reconciliation of the 3 approaches to value.
- Market and Time Adjustments – Time adjustments must be explained and supported with market data.
- Across the grid adjustments – All positive or negative adjustments made to all comparables require explanation and market support. These are specific adjustments for condition, construction quality, view and location. (Example: If first 3 comparable sales are in inferior condition, it is necessary to provide a 4th comparable sale in similar condition even if it is dated or a distant sale.)
- A wide unadjusted range with only less conforming comparables available (causing line, net, and gross adjustments to exceed typical guidelines) requires detailed support for individual adjustments and adequate commentary is critical for underwriting purposes. Lastly, with the challenging comp data resulting in a report with higher adjustments or a wider adjusted range, the reconciliation commentary on the report needs to be very specific as to the weighting of the comparables and why as to arriving at the final estimate of value.
- An explanation is required on the adjustments to the comparable sales whenever the gross adjustment exceed 25% and net adjustments exceed 15%. Please be certain that the gross living area adjustments per square foot for the comparables are consistent. *An explanation is required when using comparables with a GLA variance greater than 20% * When use of dated or distant comps is necessary, justification for their use must be included. A thorough explanation of the available market data and the expanded search parameters utilized is expected.
------------------ PHOTO REQUIREMENTS ------------------
- Front, rear and street scene of the subject property.
- Interior photographs, which must, at a minimum, include: – the kitchen; – all bathrooms; – main living area; – examples of physical deterioration, if present; and – examples of recent updates, such as restoration, remodeling, and renovation, if present.
- Photos of pools, outbuildings, views (if applicable).
- Photos of any deferred maintenance that would affect property value.
- Original front photos of each comparables used. If MLS photos are used, a current photo taken by the appraiser is still required. Clients will only accept MLS photo if comp is in an inaccessible community. Appraiser then must provide photo of obstacle as well and a detailed explanation.
NOTE: Please DO NOT include pictures of people on any of the images in the report.
---------------- REQUIRED EXHIBITS ----------------
- Location map with subject and comparables used.
- Subject building sketch – Sketches must include all outside dimensions, calculations, labels for all rooms and out buildings.
- 1004MC form
- A copy of the appraiser's license is required in the report.
--- and --- requirements and advisements Advisement on Private Streets
Private Street properties only
- Report to provide details on whether a written private street agreement exists.
- Identification of the comparables being located on private or public streets is required.
- Commentary on market reaction to private versus public street location is to be included.
Advisement on Adverse or Functional issues
- Make sure the appraiser has fully described the functional issue.
- Make sure the appraiser has fully analyzed the functional issue.
- Provide photographs
- Make sure the appraiser has fully assessed and proven the impact on value and marketability on any adverse condition.
- Atypical Properties
- Common mistake: insufficient information; make sure there is detail about what makes the subject atypical and unique.
- Please make sure the appraiser discusses if the subject would compete with other homes in the market
- Describe the type of buyer that would be interested in this kind of home in this market and discuss if it is a limited buyer pool.
- When possible, provide homes with similar impairment or similar functional issues
Requirement on Non Permitted Additions: This is a condition of assignment
Non-permitted or non-verifiable as permitted living areas should be analyzed for their potential impact on value and adjusted. This could result in either positive or negative adjustments. Simply ignoring non-permitted areas is not acceptable. You must provide your source used to determine the additions were not permitted.
Non-permitted additions may be common and typical in some areas, having both market acceptance and a positive market reaction related to their perceived value.
In situations of non-permitted additions, please answer the list of questions below and complete the report being sure to address each issue within the addendum. The report addendum should summarize the itemized points listed below and should contain at least 1 comparable with a similar unpermitted feature to demonstrate it as being common and typical for the area and to support market acceptance.
- Completed in a workmanlike manner?
- Common and typical for the area?
- Provides contributory value?
- Are comparables with similar non-permitted improvements available and can be utilized in the report?
- Affect on marketability is positive?
- Conforms to zoning?
- Property could transfer without obtaining the lacking permits?
- Property could transfer without demolition of the addition?
- If destroyed, could all of the existing improvements be rebuilt?
If the quality of the added improvement is consistent with the existing dwelling, market acceptance and positive reaction exists, and there can be a reasonable expectation of its permanency, the client will recognize the non-permitted area as acceptable collateral for loan purposes. In most cases the additional living area will be reflected in the GLA; however an acceptable alternative is to account for it as a separate line item adjustment. The later may be more appropriate if the justifiable rate of adjustment for the non-permitted area is different than the GLA rate, and necessary if the non-permitted area is detached from the main dwelling as would be the case in the examples of a pool house or an in-law cottage.
If the non-permitted addition or modification has resulted in creating any health & safety issues that must be remedied, then the report needs to be made SUBJECT TO only the necessary repairs or alterations to remedy the H&S concerns.
**In California - --- does not require the appraiser to determine if Co2 detectors are present and the report should not be made "subject to" simply based on the lack of the co2 detectors.
All appraisal reports are subject to appraisal review. You may be contacted to provide responses to questions resulting from a review of the appraisal report. Additional research, analysis/and or supplemental appraisal information may be requested.
SUBMITTING THE REPORT
For *** **
*** DO NOT submit invoice with completed report. Invoices are paid 30 days upon completion of the order. Please be reminded that the order will ONLY be considered complete once our client accepted the appraisal report. In the meantime, you must
be available to make ANY corrections/revisions, if necessary.
It is important that all instructions and requirements mentioned above have been fulfilled before submitting the report to prevent any delays. Failure to comply with all the requirements will result in non-payment of the order.
Mary Cummins of Animal Advocates is a wildlife rehabilitator licensed by the California Department of Fish and Game and the USDA. Mary Cummins is also a licensed real estate appraiser in Los Angeles, California.
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