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Valuation Analysis for Single Family One- to Four- Unit Dwellings (4150.2) Chapter 1: SELECTION OF APPRAISER
4150.2
1 SELECTION OF APPRAISER
1-0 INTRODUCTION
The success of the FHA insurance program and HUD's ability
to protect its financial interest begins with selecting
qualified and knowledgeable appraisers. This chapter
presents the minimum requirements that appraisers must meet
to be placed on the FHA Register.
1-1 FHA REGISTER
The FHA Register lists appraisers who are eligible to
perform FHA single-family appraisals. To conduct an
appraisal for FHA insurance endorsement, the appraiser must
be on the FHA Register.
Appraiser Appraiser HUD Appraiser
achieves applies reviews placed on
necessary to HUD application FHA Register
credentials
A. APPRAISER CREDENTIALS
To be eligible for placement on the FHA Register, all
appraisers must be state-licensed or state-certified and
must not be listed on any of these:
o GSA's Suspension and Debarment List (the government-
wide list of parties excluded from federal procurement
or non-procurement programs)
o HUD's Limited Denial of Participation List
o HUD's Credit Alert Interactive Voice Response System
(CAIVRS)
To be eligible to perform appraisals for FHA, the appraiser
must also pass a HUD//FHA test on appraisal methods and
reporting, which focuses on applied knowledge of the new
Handbook 4150.2 .
A uniform national examination will be available June 1,
1999. The examination contains fifty questions in a
multiple-choice format. The test will be administered by a
national provider and the cost paid by the appraiser.
Appraisers currently on the FHA Register will be
grandfathered until January 30, 2000.
B. REGISTER APPLICATION PROCESS
The application process is the first screening of the
appraiser's qualifications to perform HUD/FHA appraisals.
To apply, appraisers must submit the following to FHA:
o Updated form HUD-92563 "Register Appraiser Designation
Application"
o A copy of a current valid appraisal license and/or
certification verification that the appraiser has
passed the FHA Examination
HUD will review this information to determine the
appraiser's eligibility for the FHA Register.
C. APPLICANT REVIEW
To verify that the appraiser is eligible to perform HUD/FHA
appraisals, REAC performs a detailed review of the
appraiser's professional qualifications and checks for any
negative information. The review does the following:
o verifies that the appraiser is state-licensed or state-
certified under the Appraisal Qualifications Board
(AQB) criteria
o verifies that the appraiser has passed the FHA
Appraisals Methods and Procedures test
o pre-screens the appraiser's social security number in
the HUD/FHA Credit Alert Interactive Voice Response
System (CAIVRS)
o reviews HUD records to ensure that the appraiser has no
pending suspensions, disqualifications or debarments
o verifies with the appraiser's signature that there are
no actions or pending judgements against the appraiser
for waste, fraud, abuse or breach of professional
ethics or standards
o reviews the previous period's performance, if
applicable.
D. DESIGNATION TO THE FHA REGISTER
When the review of the application is complete, the
appraiser is designated to the FHA Register. New appraisers
recently added to the FHA Register may be monitored and
reviewed more frequently to ensure that their performance is
consistent with HUD/ FHA guidelines and to monitor training
needs.
Because the initial application to the FHA Register will
occur after the appraiser has become state-licensed or
state-certified, the first term will coincide with the
remaining period of state licensing for the home state.
After this initial period, the FHA Register period will be
consistent with the home state license period.
Each period, every appraiser must re-apply to the FHA
Register, concurrent with the appraiser's application for
state licensing and/or re-certification. HUD reviews the
appraiser's performance and compliance with new testing
requirements and verifies that the appraiser is state-
certified or state-licensed.
For more information on the review process, see Chapter 6 of
this Handbook.
1-2 LENDER SELECTION OF THE APPRAISER
Lender Lender Lender Appraiser Lender
selects assigns transmits performs reviews
appraiser appraiser case #, if appraisal appraisal
available
When the lender selects an appraiser from the FHA Register,
the FHA Connection processes a case number for the lender.
The lender may assign the appraiser before receiving the
case number, but the case may not be submitted for
endorsement without the case number. The case number must
be placed on all copies of the URAR as well as the VC form
and summary. The mortgagee will give the appraiser:
o the property address
o type of construction
o number of units
o other information necessary for the assignment
If the property is a condominium or a Planned Unit
Development (PUD), the lender will verify that it is HUD-
approved before ordering a case number or having an
appraisal performed. The lender will give the appraiser the
project name and ID number and all available property
information. If it is proposed construction for a PUD or
Condominium, it must be FHA-approved before ordering a case
number. The name of the Condominium or PUD must be given.
A. NON-DISCRIMINATION POLICY
The Department's regulations on choosing appraisers
state that there shall be no discrimination on the
basis of race, color, religion, national origin, sex,
age or disability.
HUD expects lenders to comply with anti-discrimination
requirements and affirmatively select female and
minority appraisers for a fair share of appraisals
commensurate with their representation on the FHA
Register. HUD will monitor lenders' choice of
appraisers by their sex and race.
B. CONTRACTUAL RESPONSIBILITY OF APPRAISERS
The appraiser is hired by the lender, and therefore has
a contractual responsibility to the lender. However,
the appraiser provides services for HUD programs, and
therefore, has an obligation to perform these services
commensurate with the standards and requirements of
HUD. This dual responsibility of the appraiser is
recognized in the review and reporting requirements of
HUD. The lender and the appraiser must meet their
respective obligations as prescribed by HUD/FHA.
Therefore, the intended user of the appraisal report is
also HUD. These contractual obligations to the lender
and HUD/FHA are in addition to the appraiser's legal
obligations to his or her credentialing state.
C. COMMUNICATION WITH APPRAISERS
(1-2) HUD/FHA mortgage insurance is initiated when a lender
selects an appraiser from the FHA Register. Once the
appraiser agrees to perform the appraisal, the
appraiser is in a contractual relationship with the
lender. The appraiser will send the completed
appraisal directly to the lender. HUD advises the
appraiser to discuss the appraisal only with the
underwriter. No other individual should contact the
appraiser before the appraisal has been completed.
Real estate brokers and agents should consider the
lender their sole source of information on the
appraisal and all matters related to the appraisal.
D. APPRAISAL FEES
The appraiser and the lender will negotiate the price
and due date. HUD does not establish fees or due
dates. The fee is paid for market value estimate based
on guidelines consistent with HUD policy and procedure
established in this Handbook. The fee is not based on
a requested minimum valuation, a specific valuation or
the approval of a loan. Lenders may charge the
borrower only what is customary and reasonable in the
area to obtain an appraisal.
Appraisal management firms may charge the mortgagor a
fee for the appraisal that may encompass fees for
services performed by the firm as well as fees for the
appraisal itself. However, the total of these fees is
limited to the customary and reasonable fee for an
appraisal in the market area where the appraisal is
performed. Such arrangements must comply with all
aspects of the Real Estate Settlement Procedures Act
(RESPA) and its implementing regulations, including
restrictions against:
o kickbacks and referral fees
o charges for settlement services that were not
actually performed
o payments in affiliated business arrangements other
than return on ownership
Chapter 2: SITE ANALYSIS
2 SITE ANALYSIS
2-0 INTRODUCTION
This Chapter addresses the site requirements for FHA-insured
mortgages. Before the valuation process can begin, subject
properties must meet specific site requirements. The appraisal
process is the lender's tool for determining if a property meets
the minimum requirements and eligibility standards for a FHA-
insured mortgage. In addition, these standards provide a context
for the appraiser in performing the physical inspection of the
property.
2-1 SITE REQUIREMENTS
The purpose of site analysis is to identify the various site
characteristics that affect the marketability and the value of
the subject property. Site analysis requires the following:
o determining the desirability and utility of the site
o determining the degree and extent to which the site, because
of external influences, shares in the market for comparable
and competitive sites in the community
o forecasting the likely changes at the site because of
justifiable future trends
o appraising the current situation and knowledge of the
various trends that could affect the valuation of the real
property
The principal of change is fundamental to appraising real estate
and to properly analyzing a site. Value is created and modified
by economic, social and governmental changes that occur outside
the property. Evaluate the direction of these trends and
determine their effect, if any, on the current value of the
subject property.
A. NEIGHBORHOOD DEFINITION
The appraiser must clearly define the boundaries - north,
south, east and west - of the subject neighborhood. By
defining the neighborhood, the appraiser can extract
pertinent information on which to base valuation
conclusions.
B. COMPETITIVE SITES
Sites are competitive when they are improved with, or
appropriate for, residential properties that are similar in
accommodations and sales price or rental range for similar
residents or prospective occupants. Compare features of the
subject site with the same features of competitive sites
within the community. An acceptable site must be related to
the needs of the prospective occupants and to the
alternatives available to them in other competitive
locations.
C. DEFINITIONS - CONSTRUCTION STATUS
Proposed - No concrete or permanent material has been placed.
Digging of footing and placement of re-bar is not
considered permanent.
Under Construction - From the first placement of concrete
(permanent material) to 100% completion. Finalized and
ready to occupy.
Existing - 100% complete and has occupancy permit.
(2-1) Existing
less than one year - Appraisal performed less than one year
since receipt of final occupancy permit issued. For model
homes, age begins with issuing of permit to use as a model.
For any home less than 2 years old, list month and year
completed in the age box on the URAR.
D. ECONOMIC TRENDS
The appraiser must give consideration to, and include in the
value analysis, the economic trends of a neighborhood and
the general area, including:
o price and wage levels (the purchasing power of
community occupants)
o employment characteristics
o the current supply and demand for residential
dwellings, including projects under construction
o taxation levels
o building costs
o population changes
o activity of real estate sales market and mortgage
interest rates
E. LAND USE RESTRICTIONS
Site analysis determines the effects of actual and potential
neighborhood land use on the subject site. The following
factors form patterns for present and future land uses:
1. Zoning
The appraiser should consider the effect on the value
of appropriate and well-drawn zoning ordinances. Land-
use controls that receive public approval and are
strictly enforced protect residential sites from
adverse influences that diminish the desirability of
sites. This must be noted on the URAR, and its effect
must be quantified in the valuation analysis.
2. Protective Easement/Covenants
Properly drawn protective covenants have proven more
effective than zoning regulations in providing
protection from adverse environmental influences. When
combined with proper zoning ordinances, these covenants
provide the maximum legal protection to ensure that a
developed residential area will maintain desirable
characteristics or that a proposed or partially built-
up neighborhood will develop in a desirable manner.
Protective easements and covenants should be superior
to any mortgage and should be binding to all parties
and all persons claiming under them. These must be
noted on the URAR and its effect must be quantified in
the Valuation Analysis.
3. Inharmonious Land Uses
The appraiser must identify all inharmonious land uses
in a neighborhood that affect value. Clearly define
the current and long-term effect that inharmonious uses
will have on the market value and the economic life of
the subject property. If inharmonious land use
represents a serious detriment to either the health or
safety of the occupants or to the economic security of
the property, clearly note safety of the occupants or
CHG-1
to the economic security of the property, clearly note
this on the VC and URAR. Recommend that the property be
rejected by the Lender.
4. Natural Physical Features
(2-1) The appraiser must consider favorable and underlying
topography and site features, including pleasing views,
wood lots, broad vistas and climatic advantages.
Streets that are laid out with proper regard to
drainage, land contours and traffic flow show good
design and increase the desirability of the
neighborhood. This must be noted on the URAR and its
effect must be quantified in the valuation analysis.
5. Attractiveness of Neighborhood Buildings
The overall appeal of a neighborhood is strengthened if
the buildings in a neighborhood harmonize with each
other and their physical surroundings. A pleasing
variety that results in harmoniously blended properties
is desirable but not mandatory. The age of the
structure is not in itself an important consideration;
however, the maintenance of the structure over time has
an important impact. Consider the amount of
rehabilitation that has taken place or is taking place
in a neighborhood. This must be noted on the URAR and
its effect must be quantified in the valuation
analysis.
6. Neighborhood Character
Mobility and economic growth can alter neighborhood
patterns. Shopping, recreation, places of worship,
schools and places of employment should be easily
accessible. This must be noted on the URAR and its
effect must be quantified in the valuation analysis.
7. Character of Neighborhood Structures
The appraiser must carefully analyze the age, quality,
obsolescence and appropriateness of typical properties
in a neighborhood. Take into account the attitude of
the user group as well as the alternative choices
available to the specific market under consideration.
This must be noted on the URAR and its effect must be
quantified in the valuation analysis.
F. COMMUNITY SERVICES
Community services include commercial, civic and social
centers. For a neighborhood to remain stable and retain a
high degree of desirability, it should be adequately served
by elementary and secondary schools, neighborhood shopping
centers, churches, playgrounds, parks, community halls,
libraries, hospitals and theaters. A lack of services in
the community should be noted and quantified in the
valuation analysis. The appraiser must note a change in
these services and quantify the effect on value.
G. TRANSPORTATION
Ready access to places of employment, shopping, civic
centers, social centers and adjacent neighborhoods is a
requisite of neighborhood stability. The appraiser must
take into consideration the transportation requirements of
the typical family and quantify the effect on value.
H. UTILITIES AND SERVICES
(2-1)
The appraiser must consider these utilities and neighborhood
services: police and fire protection, telephone services,
electricity, natural gas, garbage disposal, street lighting,
water supply, sewage disposal, drainage, street improvements
and maintenance. Public services and utilities can affect
value and must be quantified. A lack of these services
should be noted and quantified in the valuation analysis.
I. NEIGHBORHOOD CHANGE CONSIDERATIONS
As time passes, desirability changes residential areas in
any location. Therefore, give special consideration to the
following:
o infiltration of commercial, industrial or nonconforming
use
o positive and negative effect on value of gentrification
o changes in the mobility of people (employment shifts)
o weakly enforced zoning regulation or covenants
J. MARKETABILITY
The demand for home ownership in a neighborhood is directly
related to the marketability of the homes in the
neighborhood or in competitive neighborhoods. Home
ownership rates, vacancies and the marketing time of
dwellings in a neighborhood help the appraiser determine the
strength of market demand and the extent of supply.
K. SMALL COMMUNITY MARKET PREFERENCES
A small town may have its own set of standards in
architectural design, livability, style of mechanical
equipment, lot size, placement of structures, nature of
street improvements and in all features of the physical
property and environment. Judge each in light of local
standards and preferences.
L. OUTLYING SITES AND ISOLATED SITES
The segment of the market interested in purchasing homes in
these sites compares the advantages and disadvantages of
other outlying or isolated locations.
M. STUDY OF FUTURE UTILITY
The study of future utility is typically covered in the
appraiser's Highest and Best Use Analysis and includes:
o selecting possible uses
o rejecting uses that are obviously lower or higher than
the most probable use
o analyzing differing motives of those buyers
The study of the future uses and utility of a particular
property win lead the appraiser to the property's Highest
and Best Use.
N. CONSIDERATION OF GENERAL TAXES AND SPECIAL ASSESSMENTS
When estimating value, account for general taxes and special
assessments:
CHG-1
o General real estate taxes related to specific sites are
a recurring periodic expense in the ownership of
taxable real property and must be accounted for in the
value estimate.
o Special assessments of various types are frequently an
additional expense of
(2-1) ownership
and must similarly be accounted for in the value estimate.
Determine the relative effect of the real estate tax and/or
special assessment's burden on the desirability of the site.
Enter this information on the URAR.
1. Assessment
The real estate tax liability is computed by
multiplying the assessed value by the tax/ millage
rate, which is typically expressed in dollars per
hundred or dollars per thousand of assessed value. In
the addendum to the VC, state the assessment, real
estate tax liability and tax year. State the assessed
market value of the subject property in the addenda.
> If there is no method to relate the assessment to
market value, such as new construction where
reasonable assessment may not exist, mark the
assessed market value response as "N/ A".
2. Special Assessment
A special assessment can be calculated in two ways:
o the same way as real estate taxes, or
o on a pro-rated basis
Determine how the special assessment is calculated and
report the special assessment liability on the URAR.
> If the property does not have special assessment,
mark the URAR "N/A".
For example: An organization that services a community
creates an annual operating budget. Each property
becomes liable for its percentage of that budget based
on the percentage of front feet their property has
compared to the total amount of front feet as a special
assessment in this community.
2-2 SPECIAL NEIGHBORHOOD HAZARDS AND NUISANCES
Physical conditions in some neighborhoods are hazardous to the
personal health and safety of residents and may endanger physical
improvements. These conditions include unusual topography,
subsidence, flood zones, unstable soils, traffic hazards and
various types of grossly offensive nuisances.
When reporting the appraisal, consider site hazards and
nuisances.
> If site hazards exist and cannot be corrected but do not meet
the level of unacceptability, the appraisal must be based upon
the current state.
4150.2, CHG-1
> If the hazard and/or nuisance endangers the health and safety
of the occupants or the marketability of the property, mark
"YES" in VC-1 and return the unfinished appraisal to the
lender.
(2-2) The lender, who is ultimately responsible for rejecting the
site, relies on the appraiser's site analysis to make this
determination. Guidelines for determining site acceptability
follow. The appraiser is required to note only those readily
observable conditions.
A. UNACCEPTABLE SITES
FHA guidelines require that a site be rejected if the
property being appraised is subject to hazards,
environmental contaminants, noxious odors, offensive sights
or excessive noises to the point of endangering the physical
improvements or affecting the livability of the property,
its marketability or the health and safety of its occupants.
Rejection may also be appropriate if the future economic
life of the property is shortened by obvious and compelling
pressure to a higher use, making a long-term mortgage
impractical.
These considerations for rejection apply on a case-by-case
basis, taking into account the needs and desires of the
purchaser. For example, a site should not be considered
unacceptable simply because it abuts a commercial use; some
commercial uses may not appeal to a specific market segment
while other commercial uses may.
If the-condition is clearly a health and safety violation,
reject the appraisal and return it to the lender. If there
is any doubt as to the severity, report the condition and
submit the completed report. The lender must clear the
condition and may require an inspection or reject the
property. For those conditions that cannot be repaired,
such as site factors, the appraised value is based upon the
existing conditions.
B. TOPOGRAPHY
There are special hazards caused by unique topography. For
example, denuded slopes, soil erosion and landslides often
adversely affect the marketability of hillside areas. When
evaluating the site, consider earth and mud slides from
adjoining properties, falling rocks and avalanches. These
occurrences are associated with steep grades and must be
considered in the site analysis.
C. SUBSIDENCE
Danger of subsidence is a special hazard that may be
encountered under a variety of circumstances:
o where buildings are constructed on uncontrolled fill or
unsuitable soil containing foreign matter such as
organic material
o where the subsoil is unstable and subject to slippage
or expansion
In mining areas, consider the depth or extent of mining
operations and the site of operating or abandoned shafts or
tunnels to determine if the danger is imminent, probable or
negligible.
The appraiser must note any readily observable conditions,
which indicate potential problems. Signs include fissure or
cracks in the terrain, damaged foundations, sinkholes or
settlement problems.
If there is a danger of subsidence, the specific site will
be deemed ineligible unless complete and satisfactory
evidence can be secured to establish that the probability of
any threat is negligible.
> If there is evidence of subsidence, the property is
ineligible. Mark the "YES" column in VC-1 under
subsidence.
D. OPERATING AND ABANDONED OIL OR GAS WELLS
Operating and abandoned oil and gas wells pose potential
hazards to housing, including potential fire, explosion,
spray and other pollution.
1. Existing Construction
No existing dwelling may be located closer than 300
feet from an active or planned drilling site. Note
that this applies to the site boundary, not to the
actual well site.
2. New or Proposed Construction
If an operating well is located in a single-family
subdivision, no new or proposed construction may be
built within 75 feet of the operating well unless
mitigation measures are taken. This measure is
designed to:
o avoid nuisance during maintenance
o diminish noise levels caused by pumping
o reduce the likelihood of contamination by
potential spills
The appraiser must examine the site for the existence
of or any readily observable evidence of a well.
3. Abandoned Well
A letter may be obtained from the responsible authority
in the state government stating that the subject well
was safely and permanently abandoned.
o When such a letter is provided, a dwelling may be
located no closer than 10 feet from the abandoned
well.
o When a letter is not provided, the dwelling must
be located at least 300 feet from the abandoned
well.
The lender is responsible for obtaining the letter; the
appraiser must note the location of the well and verify
the existence of the letter.
4. Special Case - Proposed, Existing or Abandoned
Wells
(2-2) Hydrogen sulfide gas emitted from petroleum
product wells is toxic and extremely hazardous.
Minimum clearance from sour gas wells may be
established only after a petroleum engineer has
assessed the risk and state authorities have
concurred on clearance recommendations for
petroleum industry regulation and for public
health and safety.
> If there is readily observable evidence that
the conditions exist, mark the "YES" column in
VC-1 under operating and abandoned wells.
> If an inspection by a qualified person verifies
that the condition exists and is acceptable
based on the standards defined above, account
for the presence of wells in the valuation of
the property.
E. SLUSH PITS
A slush pit is a basin in which drilling "mud" is mixed and
circulated during drilling to lubricate and cool the drill
bit and to flush away rock cuttings. Drilling mud normally
contains large quantities of bentonite - a very expansive
soil material. This results in a site with the potential
for great soil volume change and, therefore, damage to
structures.
To be eligible for FHA mortgage insurance, all unstable and
toxic materials must be removed and the pit must be filled
with compacted selected materials.
> If a property is proposed near an active or abandoned
well, call for a survey to locate the pits and their
impact on the subject property.
> If there is any readily observable evidence of slush
pits, mark the "YES" column in VC-1.
F. HEAVY TRAFFIC
Close proximity to heavily traveled roadways can have a
negative effect on the marketability and value of sites
because of excess noise and danger. Properties backing to
freeways or other thoroughfares that are heavily screened or
where traffic is well below grade and at a sufficient
distance from the property may not affect value. For
detailed noise acceptance levels, reference 24 CFR 51.103.
> If there is significant noise or unsafe traffic
conditions that endanger the occupants or affect the
marketability of the property, mark "YES" in VC-1.
Typically, traffic hazards cannot be corrected. Therefore,
the appraiser must quantify the effect on value if the
property is marketable. This adjustment should be supported
by comparable transactions. This condition could be the
reason that a lender ultimately rejects the property. Do
not reject existing properties only because of heavy traffic
if there is evidence of acceptance within the market and if
use of the dwelling is expected to continue.
G. AIRPORT NOISE AND HAZARDS
(2-2) Sites near, an airport may be subjected to the noise
and hazards of low-flying aircraft. Appraisers must
identify affected properties, review airport contour maps
and condition the appraisal accordingly.
Do not reject existing properties only because of airport
influences if there is evidence of acceptance within the
market and if use of the dwelling is expected to continue.
HUD's position is that because the properties are in use and
are expected to be in use into the near future, their
marketability should be the strongest indicator of their
acceptability. Marketability should account for the
following considerations:
o plans for future expansion of airport facilities
o prospective increases in the number of planes or
flights using the field or specific runways
o the timing and frequency of the volume of flights
o any other factors that may increase the annoyance of
having the airport nearby excessive noise
If changes are likely, the appraiser must anticipate any
adverse effect that these changes are likely to have on the
marketability of the property. The appraiser should judge
each situation on its merits. Compare the effect of
aircraft activity on the desirability of a particular site
with other sites that are:
o improved with similar structures
o considered competitive with those located in the
subject neighborhood
H. SPECIAL AIRPORT HAZARDS
HUD requires that the buyer of a property located in a
Runway Clear Zone/Clear Zone is advised that the property is
located in such a zone and of the implications associated
with that site. This includes the possibility that the
airport operator could acquire the property in the future.
1. New and Proposed Construction
New and proposed construction within Runway Clear Zones
(also known as Runway Protection Zones) at civil
airports or within Clear Zones at military airfields
are ineligible for home mortgage insurance.
Properties located in Accident Potential Zone I at
military airfields may be eligible for FHA insurance
provided that the property is compatible with
Department of Defense guidelines. For more
information, see 24 CFR 51.303(b).
If new or proposed construction lies within these
zones, mark "YES" in VC-1.
2. Existing Construction
Existing dwellings more than one year old are eligible
for FHA mortgage insurance if the prospective purchaser
acknowledges awareness that the property is located in
a Runway Clear Zone/Clear Zone. The lender will
furnish this disclosure form to the buyer. For a sample of the
buyer's acknowledgment certification, see HUD Handbook
4150.1, REV-1, Chapters 4-26 (a) and (b).
(2-2)
> Note whether the property is in a Clear Zone and
condition the appraisal on the buyer's
acknowledgment.
I. PROXIMITY TO HIGH PRESSURE GAS
A dwelling or related property improvement near high-
pressure gas, liquid petroleum pipelines or other volatile
and explosive products - both above ground and subsurface
must be located outside of the outer boundary of the
pipeline easement.
> If the property is less than ten feet away, mark "YES"
in VC-1.
J. OVERHEAD HIGH-VOLTAGE TRANSMISSION LINES
No dwelling or related property improvement may be located
within the engineering (designed) fall distance of any pole,
tower or support structure of a high-voltage transmission
line, radio/TV transmission tower, microwave relay dish or
tower or satellite dish (radio, TV cable, etc.). For field
analysis, the appraiser may use tower height as the fall
distance.
For the purpose of this Handbook, a High-Voltage Electric
Transmission Line is a power line that carries high voltage
between a generating plant and a substation. These lines
are usually 60 Kilovolts (kV) and greater, and are
considered hazardous. Lines with capacity of 12-60 kV and
above are considered high voltage for the purpose of this Handbook.
High voltage lines do not include local
distribution and service lines.
Low voltage power lines are distribution lines that commonly
supply power to housing developments and similar facilities.
These lines are usually 12 kV or less and are considered to
be a minimum hazard. These lines may not pass directly over
any structure, including pools, on the property being
insured by HUD.
> If the property is within the unacceptable distance,
mark "YES" in VC-1.
K. SMOKE, FUMES, OFFENSIVE NOISES AND ODORS
Excessive smoke, fog, chemical fumes, noxious odors,
stagnant ponds or marshes, poor surface drainage and
excessive dampness are hazardous to the health of
neighborhood occupants and adversely affect the market value
of the subject property.
> If these conditions threaten the health and safety of
the occupants or the marketability of the property, mark
"YES" in VC-1. If, however, the extent of the hazard is
not dangerous, account for its effect in the valuation
of the property.
> Include other factors that may affect valuation such as
offensive odors and unsightly neighborhood features such
as stables or kennels.
L. FLOOD HAZARD AREAS
Designation of Special Flood Hazard Areas
(2-2) The
Federal Emergency Management Agency (FEMA) determines
Special Flood Hazard Areas nationwide, (SFHA). FEMA issues
Flood Hazard Boundary Maps to designate these areas in a
community. A special flood hazard may be designated as Zone
A, AO, AH, Al-30, AE, A99, VO or Vl-30, VE or V.
o Only those properties within zones 'A' and 'V' require
flood insurance.
o Zones 'B' or 'C' do not require flood insurance because
FEMA designates only zones 'A' and 'V as "Special Flood
Hazard Areas."
An appraisal report with a positive indication in a Special
Flood Hazard Area (SFHA) activates a commitment requirement
for flood insurance coverage. The appraiser must quantify
the effect on value, if any, for properties within a
designated flood map.
A lender shall reject a property in any of these
circumstances: o if the property is subject to frequently recurring
flooding
o if there is any potential hazard to life or safety
o if escape to higher ground would not be feasible during
severe flooding conditions
FEMA Maps
For copies of FEMA's Flood Hazard Boundary Maps and Flood
Insurance Rate Maps, contact:
Federal Emergency Management Agency (FEMA)
FEMA Map Service Center
P.O. Box 1038
Jessup, MD 20794-1038
Phone: 1-800-358-9616
Fax: 1-800-358-9620
Eligibility of Properties for FHA Insurance
The lender is responsible for determining the eligibility of
properties in Flood Zones, and relies on the appraiser's
notation on the URAR.
1. New and Proposed Construction
If any part of the property improvements essential to
the property value and subject to flood damage are
located within the 100-year floodplain, then the entire
property, improved and otherwise, is ineligible for FHA
mortgage insurance unless a Letter of Map Amendment
(LOMA) or a Letter of Map Revision (LOMR) is submitted
with the case for endorsement. Proposed construction
where improvements are located, or to be located,
within a designated Special Flood Hazard Area (SFHA) is
ineligible for FHA insurance. This is true regardless
of whether the property is covered or will be covered
by flood insurance unless the lender can furnish
evidence of a LOMA, a LOMR or evidence that the
property is not in a SFHA.
(2-2) For existing properties located in a SFHA, make the
appropriate notation in the URAR.
> If the proposed improvements are located in a SFHA
and there is no LOMA or LOMR mark "YES" in VC-1 and
return the unfinished appraisal to the lender until
these documents are retrieved.
2. Existing Construction
Market attitude and acceptance determine the
eligibility of existing properties located in a
designated SFHA. Flood insurance is required for
properties accepted for mortgage insurance in a FEMA-
designated SFHA. 3. Condominium
The Homeowners Association is responsible for
maintaining flood insurance on the project as a whole,
not each individual unit. The appraiser must verify
the location of a condominium in the floodplain and
make the correct notation in the URAR.
M. STATIONARY STORAGE TANKS
Stationary Storage tanks containing flammable or explosive
material pose potential hazards to housing, including
hazards from fire and explosions.
> If the property is within 300 feet of a stationary,
storage tank containing more than 1000 gallons of
flammable or explosive material, the site is ineligible.
Mark "YES" in VC-1 and return the unfinished appraisal
to the lender.
Chapter 3: PROPERTY ANALYSIS
4150.2
3 PROPERTY ANALYSIS
3-0 INTRODUCTION
The FHA guidelines for property analysis include specific
requirements to which appraisers must adhere for the appraisal to
reflect an accurate valuation that win:
o denote any deficiencies in the subject property
o protect HUD's interest in that property
The property analysis includes General Acceptability Criteria for
conducting the appraisal to address FHA minimum property
requirements.
3-1 APPRAISAL REQUIREMENTS
o The appraiser must make a complete visual inspection of the
subject property - interior and exterior - and complete the
VC form.
o The appraiser must take photographs that show the sides,
front and rear of the subject property and all improvements
on the subject property with any contributory value. A
photograph of the street frontage is also required.
o The appraiser is required to submit a single photograph of
each comparable sale transaction in the addenda to the
appraisal report.
o The map of proposed construction must clearly show proposed
roadways.
o The appraiser must provide a copy of a local street map that
shows the location of the property and each comparable sale.
o If the subject property is proposed construction and the
improvement has not started, the appraiser should take a
photograph that shows the grade of the vacant lot.
3-2 ANALYSIS OF SITE
For both proposed and existing construction, the appraiser must
determine the present highest and best use for the site,
disregarding improvements that may exist or are proposed for the
site. This conclusion serves as the basis of comparison for
estimating the market price of the land and discloses the extent
to which the existing or proposed building improvements are
appropriate or inappropriate for the site. This also forms the
basis for selecting comparable land sales.
The appraiser must analyze the site to:
o establish the basis for comparing the market estimates of
sites in the estimate of replacement cost of the property
o determine suitability for the existing or proposed use
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4150.2
Carefully consider the topography, suitability of soil, off-site
improvements, easements, restrictions or encroachments.
A. TOPOGRAPHY
(3-2)
Proper topography and site grading can be important elements
in preventing wet basements, damp crawl spaces, erosion of
soils, and overflowing sewage disposal systems. To ensure
proper protection, the appraiser must analyze the
relationship of street grades, floor elevations, and lot
grades. If the foundation or its bearing soils may be
affected by seepage or frost, the dwelling is unacceptable
unless the surface and subsurface water is diverted from the
structures to ensure positive drainage away from the
foundation.
B. SUITABILITY OF SOIL
Consider the readily observable soil and subsoil conditions
of the site including the type and permeability of the soil,
the location of the water table, surface drainage
conditions, compaction, rock formations and other physical
features that affect the value of the site or its
suitability for development. Also observe the effects of
the adverse features of the adjoining land.
C. OFF-SITE IMPROVEMENTS
Consider the off-site improvements adjoining the subject
property, including street surface, curbs, sidewalks, curb
cuts, driveways, aprons, etc., that are not contained within
the legal boundaries of the site but enhance the market
acceptance and the use and livability of the property. Also
consider these situations:
o Compare the subject property with the immediate
neighborhood to determine the dominant off-site
improvements required by the market. Note any
necessary off-site improvements that are not in
existence or are proposed for the subject property and
adjust for them in the market value.
o Any proposals for installing off-site improvements and
levying assessments by the local governing body in the
near future may affect value. These proposals will
necessitate a commitment condition that requires the
installation of improvements and the payment of the
assessment before or immediately after insurance
endorsement.
D. EASEMENTS, RESTRICTIONS OR ENCROACHMENTS
Consider all easements, restrictions or encroachments and
their impact on the market value of the subject property and
list them on the appraisal. These factors are often
discovered during the survey and title report once the
appraisal has begun. Perform limited due diligence to
verify the existence of these types of significant limiting
factors. Also record these items in the URAR which were
considered in the value estimate.
E. ENCROACHMENTS
As a general rule, an encroachment will cause a property to
be ineligible for FHA mortgage insurance. However, there
are exceptions to this rule and further information can be
found by calling the lender. The appraiser should identify
any of these conditions:
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4150.
2
o encroachment of a dwelling, garage, another physical
structure or other improvement onto an adjacent
property, right-of-way or utility easement
o encroachment of a dwelling, garage, another physical
structure or improvements on the subject property
o encroachment of a dwelling, garage or another physical
structure into the setback requirement
An encroachment may be acceptable if the adjoining landowner
or the local governing authority provides a perpetual
encroachment easement that is filed in the County Clerk and
Recorder's Office. The Direct Endorsement under-writer will
handle this issue under the General Waiver guidelines.
3-3 ANALYSIS OF PHYSICAL IMPROVEMENTS
Analysis of the physical improvements results in conclusions as
to the desirability, utility and appropriateness of the physical
improvements as factors in determining mortgage risk and the
ultimate estimate of value.
A. GROSS LIVING AREA
Gross Living Area is the total area of finished, above-grade
residential space. It is calculated by measuring the
outside perimeter of the structure and includes only
finished, habitable, above-grade living space. Finished
basements and unfinished attic areas are not included in
total gross living area. The appraiser must match the
measurement techniques used for the subject to the
comparable sales. It is important to apply this measurement
technique and report the building dimensions consistently
because failure to do so can impair the quality of the
appraisal report.
B. BASEMENT BEDROOMS, BASEMENT APARTMENTS
As a rule basement space does not count as habitable space.
If the bedroom does not have proper light and ventilation,
the room can not be included in the gross living area. The
following requirements apply to the valuation of below-grade rooms:
o The windowsill may not be higher than 44 inches from
the floor.
o The windowsill must have a net clear opening (width x
height) of at least 24 inches by 36 inches.
o The window should be at ground level; however,
compensating factors may allow less.
In all cases, use reasonable care and judgment. If these
standards are not substantially met, the basement area
cannot be counted as habitable space.
C. DESIGN
Design is the cohesive element that blends the structural,
functional and decorative elements of a property into a
whole. With good design, the property's parts will be in
harmony (each part with all the other parts). The whole property,
3-3
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(3-3)
in turn, will be in harmony with its immediate site and environment.
Because good design is recognized and desired, the economic
life of properties and neighborhoods will be extended and
prices will typically exceed those for properties offering
the same number of rooms and area but lacking good design.
This competitive advantage usually continues through the
entire economic life of the property.
The appraiser must recognize this demonstrable price
differential and reflect it in the comparative adjustments
of market data and the final finding of value.
D. CONFORMITY OF PROPERTY TO NEIGHBORHOOD
A residential property with good physical characteristics
may not necessarily be good security for a mortgage loan,
even if it is situated in a good location. The property may
be entirely appropriate at another location, but not in its
actual location. The property may be displeasing when
viewed in relation to its surroundings, and it may not
conform in other respects to the most marketable use in the
particular neighborhood. When determining the effect of
property-neighborhood relationships to marketability,
consider elements other than similarity of physical
characteristics.
Analysis of the Elements of Conformity. Analysis of
Conformity requires consideration of Suitability of Use-
Type, Appropriateness of Functional Characteristics, Harmony
of Design and Relation of Expense of Ownership to Family
Income Levels.
o Suitability of Use-Type. The term Use-Type refers to
the use for which a dwelling is designed - single-
family, two-family, etc. In most neighborhoods only
one use-type is suitable. In some neighborhoods,
however, because of their heterogeneous development,
several use-types may be found suitable.
o Appropriateness of Functional Characteristics.
Functional Characteristics refer to the living
facilities provided in a residential property. They
relate to site use and to arrangement, number and size
of rooms. Usually well-defined neighborhood market
preferences are observable.
Nonconformity may exist because of the placement of the
house on the site. Carefully consider any deviation from
the accustomed or accepted placement to determine whether it
adversely affects desirability.
If a site is substantially smaller than the size typical in
the neighborhood, marketability may be limited. The shape
or topography of a particular lot may make it less desirable
than those typical of the area.
The number, arrangement and size of rooms frequently conform
to definite preferences in given neighborhoods. In some
localities where one-story dwellings dominate, a two-story
dwelling may meet considerable market resistance.
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4150.2
o Harmony of Design. Conformity of the exterior design
of a structure with other structures in the immediate
neighborhood is not important unless it contrasts
inharmoniously with them. There may be considerable
variety in the exterior design of dwellings in a
neighborhood and yet each may present a pleasing
appearance when viewed in relation to its surroundings.
On the other hand, a dwelling may be without any
architectural faults and yet clash so violently with
the design of neighboring properties that marketability
may be seriously limited.
o Relation of Ownership Expense to Family Incomes.
Families usually select homes in neighborhoods where
typical occupants have financial means similar to their
own. A home that is too costly for these families to
purchase or maintain will have limited marketability.
3-4 REMAINING ECONOMIC LIFE OF BUILDING IMPROVEMENTS
Because a building is subject to physical deterioration and
obsolescence, its period of usefulness is limited. As a building
deteriorates or becomes obsolete, its ability to serve useful
purposes decreases and eventually ends. This may occur gradually or rapidly.
A. ECONOMIC LIFE VS. PHYSICAL LIFE
o The total physical life of a building is the period
from the time of completion until it is no longer fit
or safe for use or when maintaining the building in a
safe, usable manner is no longer practicable.
o The total economic life of a building is the period of
time from its completion until it can no longer produce
services or net returns over and above a return on the
land value.
Economic life can never be longer than the physical life,
but may be and frequently is shorter. A structure that is
sound and in good physical condition with many years of
physical life remaining may have reached the end of its
economic life - if its remaining years of physical
usefulness will not be profitable.
B. ESTIMATION OF REMAINING ECONOMIC LIFE
In predicting the remaining economic life of a building,
consider these factors:
o the economic background of the community or region and
the need for accommodations of the type represented
o the relationship between the property and the immediate
environment the architectural design, style and utility
from a functional point of view and the likelihood of
obsolescence attributable to new inventions, new
materials and changes in tastes
o the trends and rate of change of characteristics of the
neighborhood and their effect on land values
3-5
4150.
2
o workmanship, durability of construction and the rate
with which natural forces cause physical deterioration
o the physical condition and probable cost of maintenance
and repair, the maintenance policy of owners and
occupants and the use or abuse to which structures are
subjected
C. END OF USEFUL LIFE OF BUILDING IMPROVEMENTS
The useful life of a building has come to an end:
o when the building can no longer produce annual income
or services sufficient to offset maintenance expense,
insurance and taxes to produce returns on the value of
the land AND
o when rehabilitation is not feasible
The improvements on the lot at the time have no more value
than the amount obtainable from a purchaser who will buy
them and remove them from the site.
3-5 CODE ENFORCEMENT FOR EXISTING PROPERTIES
Local municipalities design local housing code standards;
therefore, enforcement of such housing standards rests with the
local authority. HUD does not have the authority or the
responsibility for enforcing local housing codes except for
mortgages on properties to be insured under Section 221(d)(2)-a
program with mortgage limits at $36,000. Loans insured under
Section 221(d)(2) of the National Housing Act require code
enforcement. The appraiser should contact the lender for further
instructions if the mortgage is to be insured under Section
221(d)(2).
3-6 GENERAL ACCEPTABILITY CRITERIA FOR FHA-INSURED MORTGAGES
These criteria define standards for existing properties to be
eligible for FHA mortgage insurance. Underwriters bear primary
responsibility for determining eligibility; however, the
appraiser is the on-site representative for the lender and
provides preliminary verification that these standards have been
met. Many of the requirements are technical and beyond the
expertise of the appraiser. They are presented here for
reference, and the appraiser's responsibility is noted by
category.
These criteria form the basis for identifying the deficiencies of
the property that the appraiser must note in the VC form and that
must be addressed by the lender before closing. When examination
of existing construction reveals noncompliance with the General
Acceptability Criteria, an appropriate specific condition to
correct the deficiency is required if correction is feasible. If
correction is not feasible and compliance can be effected only by
major repairs or alterations, the lender will reject the
property. The appraiser is only required to note conditions that
are readily observable.
As-Repaired Appraisal. The appraiser prepares the valuation "as-
repaired" subject to the conditions noted on the VC form. Those
items not listed on the VC will form the basis of comparison to
comparable properties for physical conditions.
3-6
4150.
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(3-6)
Required repairs are limited to those repairs necessary to
preserve the continued marketability of the property and to
protect the health and safety of the occupants.
Deferred Maintenance. Any operable or useful element that will
have reached the end of its useful life within two years should
be replaced. With respect to such deferred maintenance items,
exercise good judgment in requiring repair.
Replacement Because of Age. If an element is functioning well,
do not recommend replacement simply because of its age.
> If the septic system shows evidence of failure because of
age, recommend a specific inspection.
Valuation Conditions. The Valuation Conditions Form and its
protocol help the appraiser evaluate the standards required by
the General Acceptability Criteria. The criteria are described
below. The appraiser must ascertain if the condition called for
exists and mark yes if it does.
> If the observed deficiencies exist, mark "YES" in the
appropriate location on the Valuation Conditions Form,
condition the appraisal on the requirement for repair or
further inspection and prepare the appraisal "as-repaired"
subject to the satisfaction of the condition.
The following guidelines are HUD's General Acceptability Criteria
for existing properties. They provide general guidance for
determining the property's eligibility for FHA mortgage
insurance. For instructions on filling out the VC form, see the
protocol in Appendix D.
A. GENERAL ACCEPTABILITY CRITERIA
These minimum requirements for existing housing apply to
existing buildings and to the sites on which they are
located. The buildings may be:
o detached
o semidetached
o multiplex
o row houses
o individual condominium units
These requirements also cover the immediate site environment
for the dwelling, including streets, other services and
facilities associated with the site.
1. Subject Property
The subject property must be adequately identified as a
single, marketable real estate entity. However, a
primary plot with a secondary plot for an appurtenant
garage or for another use contributing to the
marketability of the property will be acceptable if the
two plots are contiguous and comprise a readily
marketable real estate entity.
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4150.
2
(3-6) 2. Hazards
The property must be free of all known hazards and
adverse conditions that:
o may affect the health and safety of the occupants
o may affect the structural soundness of the
improvements
o may impair the customary use and enjoyment of the
property
These hazards include toxic chemicals, radioactive
materials, other pollution, hazardous activities,
potential damage from soil or other differential ground
movements, ground water, inadequate surface drainage,
flood, erosion, excessive noise and other hazards on or
off site.
> If the property meets the acceptability guidelines
in the VC protocol (Appendix D), quantify the
deficiency's impact in the property valuation.
> If the property does not meet the acceptability
guidelines, note the appropriate hazard in VC-1 and
explain.
In the appraisal of new and proposed construction,
special conditions may exist or arise during
construction that were unforeseen and necessitate
precautionary or hazard mitigation measures. HUD will
require corrective work to mitigate potential adverse
effects from the special conditions as necessary.
Special conditions include:
o rock formations
o unstable soils or slopes
o high ground water levels
o springs
o other conditions that may have a negative effect
on the property value
The builder must ensure proper design, construction and
satisfactory performance when any of these issues are
present.
For specific instructions about noting this information
in the VC form, see VC-1 in the protocol (Appendix D).
3. Soil Contamination
a. Septic and Sewage
If a septic system is part of the subject
property, the appraiser must determine whether the
area is free of conditions that adversely affect
the operation of the system. Consider the
following:
3-8
4150.2
(3-6) o the type of system
o topography
o depth to ground water
o soil permeability
o the type of soil to a depth several feet
below the surface
If in doubt about the operation of sewage disposal
systems in the neighborhood, mark "YES" in VC-2,
condition the appraisal on further inspection and
prepare the appraisal "as-repaired" subject to
satisfaction of the condition.
The lender will contact the local health authority
or a professional to determine the viability of
the system.
b. Other Soil Contaminants
The following conditions may indicate unacceptable
levels of soil contamination: pools of liquid,
pits, ponds, lagoons, stressed vegetation, stained
soils or pavement, drums or odors.
> If there is evidence of hazardous substances
in the soil, require further inspection. Mark
"YES" in VC-2, condition the appraisal on
further inspection and prepare the appraisal
"as-repaired" subject to the satisfaction of
condition.
c. Underground Storage Tanks
During the site inspection, the appraiser must
walk the property and search for readily
observable evidence of underground storage tanks.
Evidence would include fill pipes, pumps,
ventilation caps, etc.
> If there is evidence of underground storage
tanks, require further analysis. Mark "YES"
in VC-2, condition the appraisal on that
requirement and prepare the appraisal "as-
repaired" subject to the satisfaction of the
condition.
4. Drainage
The site must be graded to provide positive drainage
away from the perimeter walls of the dwelling and to
prevent standing water on the site. Signs of
inadequate draining include standing water proximate to
the structure and no mitigation measures such as
gutters or downspouts.
For specific instructions about noting this information
in the VC form, see VC-3 in the protocol (Appendix D).
> If drainage is inadequate and needs improvement,
mark "YES" in VC-3, make a repair requirement,
condition the appraisal on that requirement and
prepare the appraisal "as-repaired" subject to the
satisfaction of the condition.
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4150.
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(3-6)5. Water Supply And Sewage Systems
Each living unit must contain the following:
o domestic hot water
o a continuing and sufficient supply of potable
water under adequate pressure and of appropriate
quality for all household uses
o sanitary facilities and a safe method of sewage
disposal
Connection must be made to a public water/sewer system
or a community water/sewer system, if connection costs
to the public or community system are reasonable (3% or
less of the estimated value of the property). If
connection costs exceed 3%, the existing on-site
systems will be acceptable provided they are
functioning properly and meet the requirements of the
local health department.
> If the correction is feasible, require connection.
Mark "YES" in VC-4, condition the appraisal on the
requirement and prepare the appraisal "as repaired"
subject to the satisfaction of the condition.
a. Individual Water Supply and Sewage Disposal
Systems
If water and sewer systems are not connected to
public systems, the water well and/or septic system
must meet the requirements of the local health
authority with jurisdiction. If the local
authority does not have specific requirements, the
maximum contaminant levels established by the
Environmental Protection Agency (EPA) will apply.
If the authority is unable to perform the water
quality analysis in a timely manner, a private
commercial testing laboratory or a licensed
sanitary engineer acceptable to the authority may
take and test water samples.
o Each living unit must be provided with a sewage
disposal system that is adequate to dispose of
all domestic wastes and does not create a
nuisance or in any way endanger the public
health.
o Individual pit privies are permitted where such
facilities are customary and are the only
feasible means of waste disposal and, if they
are installed in accordance with the
recommendations of the local Department of
Health.
> If there is a well or septic system on the
property, mark "YES" in VC4, condition the
appraisal on further inspection by the lender
and prepare the appraisal "as-repaired" subject
to satisfaction of the condition.
A domestic well must be a minimum of 50 feet from a
septic tank, 100 feet from the septic tank's drain
field and a minimum of 10 feet from any property
line.
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4150.2
> Clearly show the location of private wells and
septic systems on the site sketch and note the
distance between the two.
b. Unacceptable Conditions
The following water well conditions are
unacceptable and must be noted in VC-4:
o mechanical chlorinators
o water flow that decreases noticeably when
simultaneously running water in several
plumbing fixtures (the well may not be able to
provide a continuous, adequate supply of
water)
o properties served by dug wells unless a
complete survey conducted by an engineer was
delivered to the lender and subsequently given
to the appraiser
o properties served by springs, lakes, rivers or
cisterns (3-6)
To be considered acceptable, the engineer's survey
must include these items:
o a health report with no qualifications
o indication that an inoperative well was cased,
sealed and capped with concrete to a depth of
at least 20 feet o a
pump test indicating a flow of at least 3-5
gallons per minute supply for an existing
well, and 5 gallons per minute for a new well
o an acceptable septic report
o no indication of exposure to environmental
contamination, mechanical chlorination or
anything else that adversely affects health
and safety
> If these requirements for individual wells or
septic tanks are not met, note them in VC-4 and
prepare the appraisal "as-repaired" subject to
further inspection.
The lender will require the engineer's follow-up
report and will arrange for any
required corrective measures.
6. Wood Structural Components: Termites
Termites can cause serious problems in the wood
structural components of a house and may go undetected
for a long period of time. FHA requires maximum
assurances that a home is free of any infestation. A
pest inspection is always required for:
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4150.
2
(3-6) o any structure that is ground level
o any structure where the wood touches ground
Structures in a geographic area with no active termite
infestation may not require a pest inspection.
However, the appraiser must always note:
o any infestation
o any damage resulting from previous infestation
o whether damage from infestation has been repaired
or is in need of repair
Observe all areas of the property that have potential
for termite infestation, including the bottoms of
exterior doors and frames, and wood siding in contact
with the ground and crawl spaces. Examine mud tunnels
running from the ground up the side of the house for
possible evidence of termite infestation.
> If there is any evidence of termite infestation,
require an inspection by a reputable licensed
termite company. Mark "YES" in VC-5, condition the
appraisal on the requirement and prepare the
appraisal "as-repaired" subject to the satisfaction
of the condition. For specific instructions on
noting this information in
the VC Form, see VC-5 in the protocol (Appendix D).
7. Streets
Each property must be provided with safe and adequate
pedestrian and vehicular access from a public or
private street. Private streets must be protected by
permanent recorded easements and have joint maintenance
agreements or be owned and maintained by a HOA.
All streets must provide all-weather access to all
buildings for essential and emergency use, including
access for deliveries, service, maintenance and fire
equipment. FHA defines all-weather surface as a road
surface over which emergency vehicles can pass in all
types of weather. Streets must either be:
o dedicated to public use and maintenance
OR
o retained as private streets protected by permanent
recorded easements (when approved by HUD)
> If these requirements are not met, mark "YES" in
VC-6 and prepare the appraisal "as-repaired"
subject to the correction of this deficiency.
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(3-6) 8. Defective Conditions
A property with defective conditions is unacceptable
until the defects or conditions have been remedied and
the probability of further damage eliminated.
Defective conditions include:
o defective construction
o poor workmanship
o evidence of continuing settlement
o excessive dampness
o leakage
o decay
o termites
o other readily observable conditions that impair
the safety, sanitation or structural soundness of
the dwelling
The items outlined in VC-7: Structural Conditions, are
meant to alert the appraiser and the lender to the
possibility of defective conditions. These items are
readily identifiable characteristics that could
indicate one of the defective conditions.
9. Ventilation
Natural ventilation of structural space - such as
attics and crawl spaces - must be provided to reduce
the effect of excess heat and moisture that are
conducive to decay and deterioration of the structure.
All attics must have ventilation to allow moisture and
excessive heat to escape. The appraiser must check the
attic areas to determine whether the ventilation is
adequate.
> If ventilation is not provided, make a condition
for repair, mark "YES" in VC7 and prepare the
appraisal 'as-repaired" subject to the satisfaction
of the condition.
10. Foundations
All foundations must be adequate to withstand all
normal loads imposed. Stone and brick foundations are
acceptable if they are in good condition. The
appraiser must review the conditions in VC-8 for
evidence of conditions that could indicate safety or
structural deficiencies that may require repair.
> If the foundation is deficient, mark "YES" in VC-8
and prepare the appraisal "as-repaired" subject to
the repair of the deficiencies.
11. Crawl Space
To ensure against conditions that could cause the
property to deteriorate and seriously affect the
marketability of the property, it is required that:
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2
(3-6) o There must be adequate access to the crawl space;
the appraiser must be able to access the crawl
space for inspection. Access is defined as ability
to visually examine all areas the crawl space.
Specifically, the minimum distance is 18 inches.
o The floor joists must be sufficiently above ground
level to provide access for maintaining and
repairing ductwork and plumbing.
o The crawl space must be clear of all debris and
trash and must be properly vented.
o The crawl space must not be excessively damp and
must not have any water ponding.
> If these requirements are not met, mark 'YES" in
VC-8 and prepare the appraisal "as-repaired"
subject to repair of the deficiency.
12. Roof
The covering must prevent moisture from entering and
must provide reasonable future utility, durability and
economy of maintenance. When re-roofing is needed for
a defective roof that has three layers of shingles, all
old shingles must be removed before re-roofing. The
details of the process are provided in the protocol.
The appraiser must observe the roof to determine
whether the deficiencies present a health and safety
hazard or do not allow for reasonable future utility.
The appraiser is only required to note readily
observable conditions.
> If the roof is deficient, mark "YES" in VC-9 and
prepare the appraisal "as repaired" subject to the
repair of the deficiency.
Flat roofs typically have shorter life spans and
therefore require inspection.
> If there is a flat roof mark "YES" in VC-9 and
prepare the appraisal "as repaired" subject to
further inspection.
13. Mechanical Systems
These are the requirements for mechanical systems:
o must be safe to operate
o must be protected from destructive elements
o must have reasonable future utility, durability
and economy
o must have adequate capacity and quality
3-14
4150.
2
(3-6) The appraiser must observe the systems in VC-10 and
determine if any of the conditions do not meet the
above stated criteria.
> If the systems require repair, mark "YES' in VC-10,
condition the appraisal on the repair or further
inspection and prepare the appraisal "as-repaired"
subject to the satisfaction of the condition.
> If systems could not be operated due to weather
conditions, explain that in VC-10, condition the
appraisal on assumed functionality, and make a note
of this condition on the Homebuyer Summary - Part 3
of the Comprehensive Valuation Package.
14. Heating
Heating must be adequate for healthful and comfortable
living conditions:
o Dwellings that use wood-burning stoves or solar
systems as a primary heat source must have
permanently installed conventional heating systems
that can maintain a temperature of at least 50
degrees F. in areas containing plumbing systems.
These systems must be installed in accordance with
the manufacturer's recommendations.
o Properties with electric heating sources must have
an acceptable electric service that meets the
general requirements of the local municipal
standards.
o All water heaters must have a non-adjustable
temperature and pressure-relief valve. If the
water heater is in the garage, it must comply with
local building codes.
o All non-conventional heating systems - space
heaters and others - must comply with local
jurisdictional guidelines.
Solar energy systems are discussed in Appendix B.
15. Electricity
Electricity must be available for lighting and for
equipment used in the living unit. Refer to the
specific instructions in the protocol (Appendix D) for
determining adequate electricity.
16. Other Health And Safety Deficiencies
The appraiser must note and make a repair requirement
for any health or safety deficiencies as they relate to
the subject property, including:
o broken windows, doors or steps
o inadequate or blocked doors
o steps without a handrail
o others
3-15
4150.
2
The appraiser must operate a representative number of
windows, interior doors and all exterior and garage
doors, as well as verify that the electric garage door
operator will reverse or stop when met with resistance
during closing.
If conditions exist that require repair, mark "YES" in
VC-11 and prepare the appraisal "as-repaired" subject
to the satisfaction of the condition.
17. Lead-Based Paint And Other Hazards
If the home was built before 1978, the appraiser should
note the condition and location of all defective paint
in the home. Inspect all interior and exterior
surfaces - wars, stairs, deck porch, railing, windows
and doors - for defective paint (chipping, flaking or
peeling). Exterior surfaces include those surfaces on
fences, detached garages, storage sheds and other
outbuildings and appurtenant structures.
> If there is evidence of defective paint surfaces,
condition the appraisal on their repair, mark "YES"
in VC-12 and prepare the appraisal "as-repaired"
subject to the satisfaction of the condition.
For condominium units, the appraiser needs to inspect
only the exterior surfaces and appurtenant structures
of the unit being appraised and address the overall
condition, maintenance and appearance of the
condominium project.
> If the condominium project was built before 1978
and shows signs of excessive deferred maintenance
or defective paint, mark "YES" in VC-13 and prepare
the appraisal "as-repaired" subject to the
satisfaction of the condition.
B. OTHER CRITERIA
There are other eligibility criteria that are not part of
the VC form. The lender bears primary responsibility for
these; however, they are provided here so that the appraiser
may reference them if questions arise during the property
inspection.
1. Party Or Lot Line Wall
There must be adequate space based upon market
acceptability between buildings to permit maintenance
of the exterior walls for detached homes.
2. Service And Facilities
Trespass. Each living unit must have the capacity to
be maintained individually without trespassing on
adjoining properties.
Utilities. Utilities must be independent for each
living unit except that common services - water, sewer,
gas and electricity - may be provided for living units
under a single mortgage or ownership.
o Each unit must have separate utility service shut-
offs.
3-16
4150.
2
(3-6) o Each unit must have individual meters.
o For living units under separate ownership, common
utility services may be provided from the main
service to the building line when protected by an
easement or covenant and maintenance agreement
acceptable to HUD.
o Individual utilities serving a unit must not pass
over, under or through another unit, unless:
- Provisions have been made for repairing and
maintaining those utilities without trespassing
on adjoining properties.
OR
- An easement of covenant is made for permanent
right of access for maintenance and repair of
utilities.
o If a single drain line in the building serves more
than one unit, the building drain clean-outs must
be accessible from the exterior.
o Other facilities must be independent for each
living unit, except common services, such as
laundry and storage space or heating, may be
provided for two-to-four-living-unit buildings
under a single mortgage.
Dedication. Utilities must be located on easements
that have been permanently dedicated to the local
government or appropriate public utility body. This
information must be recorded on the deed record so that
the utility services match the easement.
3. Non-Residential Use Design Limitations
A qualified property must be predominantly residential
in use and appearance. Any nonresidential use of the
property must be subordinate to its residential use,
character and appearance. A property, any portion of
which is designed or used for nonresidential purposes,
is eligible only if the type or extent of the
nonresidential use does not impair and/or remove the
property's residential character and appearance.
4. Access Onto Property
Access to the living unit must be provided without
passing through any other living unit. Access to the
rear yard must be provided without passing through any
other living unit. For a row-type dwelling, the access
may be by an alley, easement or passage through the
dwelling.
3-17
4150.
2
(3-6)5. Space Requirements Each living unit
must have the space necessary to
ensure suitable living, sleeping, cooking and dining
accommodations and sanitation facilities.
6. Bedroom Egress
All bedrooms must have adequate egress to the exterior
of the home. If an enclosed patio (solid walls) covers
the bedroom window, it is possible that the bedroom
won't qualify as a habitable bedroom. Security bars
are acceptable if they comply with local fire codes.
Occupants of a bedroom must be able to get outside the
home if there is a fire.
7. Energy Efficiency
For new and proposed construction and properties less
than one year old, all detached one- and two-family
dwellings and one-family townhouses not more than three
stories in height must comply with the CABO Model
Energy Code, 1992 Edition, Residential Buildings,
except for sections 101.3.1, 101.3.2, 104 and 105.
These sections remain:
o Section 101.3.2.2, Historic Buildings
o The Appendix
o HUD Intermediate MPS Supplement 4930.2 Solar
Heating and Domestic Hot Water Systems, 1989
edition
Valuation procedures for solar energy systems can be
found in Appendix B.3.
C. CONDITIONS NOT REQUIRING REPAIRS
Conditions that do not ordinarily require repair include any
surface treatment, beautification or adornment not required
for the preservation of the property.
These are some examples:
o A wood floor's finish that has worn off to expose the
bare wood must be sanded and refinished. However, a
wood floor that has darkened with age but has an
acceptable finish does not need polishing or
refinishing.
o Peeling interior paint and broken or seriously cracked
plaster or sheetrock require repair and repainting, but
paint that is adequate though not fresh does not need
to be redone.
o Missing shrubbery or dead grass on an existing
property does not need to be replaced.
o Cleaning or removing carpets is required only when
they are so badly soiled that they affect the
livability and/or marketability of the property.
3-18
4150.2
o Installing paved driveways or aprons should not be
required if there is an otherwise acceptable surface.
o Installing curbs, gutters or partial street paving is
not required unless assessment for the same is
imminent.
o Complete replacement of tile floors is not necessary
if some tiles do not match, etc.
Avoid unnecessary requirements because they increase housing
cost without adding any basic amenities to the property.
D. REPAIR CONDITIONS FOR NEW/PROPOSED CONSTRUCTION
The appraiser must develop the cost approach for new or
proposed construction and the normal site development costs
must be included in the lot value. Where unusual cuts,
fills, retaining walls, etc. are necessary to prepare the
site for the proposed building improvements, estimate the
amount by which the cost of the work exceeds the cost of
preparing typical sites for similar structures from the
Marshall and Swift Cost Handbook. This estimate supplements
the estimate of the replacement cost of building
improvements.
o When estimating the market price of a site with unusual
site characteristics that must be corrected, assume
that the site is in the condition that will exist after
the corrective work is completed. Disregard the cost
of the treatment, but use the value of the improved
site in the estimate of the replacement cost of the
property.
o Use the supplemental cost estimate to:
- determine the extent to which the replacement cost
of the property will exceed the cost of a
substitute property produced by constructing
identical improvements on a typical site
- indicate the extent to which value may be less
than the replacement cost for that part in excess
of the cost of preparing the typical site
o Do not include the cost of treating unusual site
characteristics in the estimate of replacement cost of
building improvements. It is necessary to avoid
including both the effect of site treatment and the
cost of the work in the estimate of replacement cost of
the property.
3-19
Chapter 4: THE VALUATION PROCESS
4150.2
4 THE VALUATION PROCESS
4-0 INTRODUCTION
This Chapter addresses the development of the three approaches to
value:
o Sales Comparison Approach
o Income Capitalization Approach
o Cost Approach
It also addresses their impact in arriving at a final value
conclusion that reflects the conditions denoted on the Valuation
Conditions (VC) Form. These approaches form the foundation for
developing a value and lead to the final reconciliation for an
estimated market value.
The VC form identifies key components of the property analysis
and requires the appraiser to:
o describe the results of the visual inspection
o identify known conditions, if any
o reconcile their findings with the approaches to value
This Chapter conforms to the current Uniform Standards of
Professional Appraisal Practice (USPAP) and the requirements of
the URAR. In developing and coming to a conclusion about value,
the appraiser must be aware of and comply with all state and
federal laws and requirements. Furthermore, strict compliance
with USPAP is required for all FHA appraisals.
4-1 MARKET VALUE ESTIMATES
In accordance with HUD/FHA requirements, an appraiser must do the
following:
o define the type of value being considered for the property
appraisal
o ascertain the definition of market value appropriate for the
appraisal
o indicate whether the estimate is the most probable price
that the property will sell for on the open market
> Follow the standards of USPAP. Key sections that are most
applicable are provided below. A. DEFINITION OF MARKET VALUE
The definition of market value that applies to HUD/FHA is
cited from the Uniform Standards of Professional Appraisal
Practice. This is the definition of value which must be
used for all appraisals performed for FHA-insured mortgages.
"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 and knowledgeably, and assuming the
price is not affected by undue stimulus."
Implicit in this definition is the consummation of a sale as
of a specified date and the passing of title from seller to
buyer under conditions whereby:
4-1
4150.2
1. The buyer and seller are typically motivated.
2. Both parties are well informed or well advised, and
each is acting in what they consider their best
interest.
3. A reasonable time is allowed for exposure in the open
market.
4. Payment is made in terms of cash in United States
Dollars or in terms of a financial arrangement
comparable thereto.
5. The price represents the normal consideration for the
property sold unaffected by special or creative
financing or sales concessions.
(4-1)
B. PROPERTY RIGHTS APPRAISED
Identifying property rights to be valued determines the
criteria for selecting market data and for comparable
transactions. The following table is an example of property
rights.
Property Type Occupancy Property Rights
Appraised
Single-family Owner Fee Simple
Two-to-Four family One unit owner- Leased Fee
occupied, other units
rented
All property types Ground lease Leasehold Estate
The appraiser examines property rights to determine what
rights, if any, the property owner has conveyed to others.
The conveyance of rights to others impacts the value of the
property. For example, a single-family owner-occupied
property has fee simple property rights that are absolute
and unencumbered - unlike a leasehold estate where property
rights are specified to use and occupancy for a stated term.
The appraiser must determine to what extent, if any, the
transfer of property rights impacts the property's value.
Fee Simple is defined as absolute ownership unencumbered by
any other interest or estate.
Lease Fee is defined as an ownership interest held by a
landlord with the right of use and occupancy conveyed by
lease to others; usually consists of the right to receive
rent and the right to repossession at the termination of
lease.
Leasehold Estate is defined as the right to use and occupy
real estate for a stated term and under certain conditions
that have been conveyed by a lease.
C. PURPOSE
The purpose of an appraisal is the stated reason for
performing an appraisal assignment. The purpose is
typically stated as the basis for an underwriting decision.
For HUD, the purpose is to determine market value for
mortgage insurance purposes.
4-2
4150.2
D. INTENDED USE OF APPRAISAL/FUNCTION
(4-1) The intended use or function for all appraisals
prepared for FHA is to support the underwriting requirements
for an FHA-insured mortgage.
E. USE OF THE APPRAISAL
The use of the appraisal is to support FHA's decision to
provide mortgage insurance on the real property that is the
subject of the appraisal. Therefore, intended users include
the lender and HUD.
F. EFFECTIVE DATE OF VALUE
The effective date of value is either the date when the
appraiser physically inspects the subject property or
another date specifically defined by the lender.
> If another date is used as the effective date, indicate
the alternative date and the date on which the subject
property was physically inspected.
G. SCOPE
The appraiser must perform a complete appraisal as defined
by USPAP, considering all of the applicable approaches to
value and developing the appropriate approaches identified
in this Handbook. Departure is not allowed.
H. SPECIAL LIMITING CONDITIONS AND ASSUMPTIONS
The appraiser must adequately identify, report and quantify
any extraordinary assumptions or limiting conditions that
directly impact the valuation. Examples include:
o a negative external influence (proximity to a municipal
landfill, for example)
o proposed road improvements
o a pending zone change
4-2 HUD/FHA REQUIREMENTS
HUD/FHA requirements for market value estimates are as follows:
o The appraiser must appraise the property to determine market
value under the requirements detailed in Chapter 4-1 of this
Handbook.
o The appraiser must evaluate the physical condition of the
property and note it on the Valuation Conditions (VC) Form
of the Comprehensive Valuation Package. Note any necessary
repairs. If repairs are in process, disclose the extent or
status of those repairs at the time of the appraisal.
Always base the value on the completion of repairs and
include this as a special limiting condition when repairs
are required and expected to be completed.
o The appraiser must evaluate whether the property is free of
hazards, noxious odors, grossly offensive sights or
excessive noises that may:
4-3
4150.2
- endanger the physical improvements
- affect the livability of the property or its
marketability
- affect the health and safety of its occupants
> If any of these conditions exist, recommend correction
of the problem or rejection of the property and explain.
(4-2)
For more information, see Chapter 2-2 of this Handbook.
o The appraiser must determine if the subject property
possesses sufficient remaining economic life to warrant a
long-term mortgage, assuming a reasonable level of continued
maintenance. If the property does not warrant a long-term
mortgage it will be ineligible for FHA mortgage insurance.
o The appraiser must indicate if the property conforms to
applicable Minimum HUD/VA Property Requirements detailed in
Chapter 3.
> If the property does not conform to the Minimum Property
Requirements, note it in the VC section of the appraisal
report and require correction of the deficiency or
rejection of the property and explain.
> If there are so many necessary repairs that an "as-
repaired" value cannot be determined, or if correcting
the deficiencies would require major
rehabilitation/alterations, return the appraisal to the
lender with a detailed explanation.
4-3 NEW AND PROPOSED CONSTRUCTION REQUIREMENTS
Before performing an appraisal for new or proposed construction,
the appraiser must have the plans and specifications and a fully
completed Builder's Certification. The lender must provide this
information to the appraiser prior to issuing the assignment.
Without these items, the property will not be acceptable for FHA
insurance purposes.
A. NEW CONSTRUCTION
The appraiser must develop the cost approach for new
construction less than one year old. Appraise new
construction in the same way that existing properties are
valued under the specifications outlined in this chapter of
the Handbook. Also, consider using the Gross Rent
Multiplier method when developing the income approach for
three- or four-unit buildings.
B. PROPOSED CONSTRUCTION
Appraise proposed construction consistent with the
methodology presented in this chapter. USPAP requires that
the appraiser be provided with written specifications of the
proposed structure. Specifically, the Lender must provide
the appraiser with these documents:
o builder's plans, specifications and construction
documents
o completed builder's certification (Form HUD-92541)
4-4
4150.2
(4-3) o Builder's Warranty (Form HUD-92544)
o the 10-year Warranty, when required (the Secretary has
proposed a 1-year Home-Owner Warranty period)
o all reports and information available (i.e. sales
agreement, title report, environmental assessments or
studies and inspection reports)
> If these documents are not provided, return the
incomplete appraisal to the lender. Check the box
stating that the valuation is subject to completion and
that the value is contingent on the structure receiving a
certificate of occupancy.
4-4 UNIQUE PROPERTY APPRAISALS
Appraisers are sometimes faced with unique properties: a log
home, an extra small home, lower than normal ceiling heights,
etc. Eligibility of these properties depends on whether or not
the property is structurally sound and readily marketable. If a
property meets these criteria, the appraiser estimates market
value. However, depending on the uniqueness of a property, the
final determination to accept or reject the property is made by
the lending institution's underwriter.
Excess land is another area in which to exercise caution. Land
is considered to be excess if it is:
o larger than what is typical in the neighborhood
AND
o capable of a separate use
o If there is excess land, describe it but do not value it.
In this instance, the appraisal is based upon a hypothetical
condition. A legal description of the portion being
appraised is required.
4-5 COST APPROACH
The cost approach is an indication of value based on the premise
that a buyer would not pay more for a property than the cost to
construct a property of equal utility. The cost approach is not
necessarily the best indication of market value for many
properties, but it is often applicable for new(er) or proposed
construction and special use properties. Such situations include
the following for single family one- to four-unit dwellings:
Property Age Cost-Approach Requirement
Proposed Construction Required
New Construction Required
Existing, less than one year Required
Existing, regardless of age
Market acceptability of
cost as an
indication of pricing and
value
4-5
4150.2
Unless the cost approach is deemed reliable on the above table or
considered applicable in the appraiser's judgment, developing
this approach is not required for a HUD/FHA appraisal. The
reporting requirement of USPAP known as the departure rule does
not apply because the appraiser must always use the cost approach
to value when considered applicable.
USPAP Requirements Strict compliance with USPAP standards is required
for all FHA
appraisals.
Reporting Requirements
> If the cost approach was excluded, report it in the
reconciliation and insert the rationale for its exclusion.
A. COST APPROACH METHODOLOGY
1. Land Value Estimate
(4-5) Standard Rule 1-3(b) of USPAP requires appraisers
to "recognize that land is appraised as though vacant
... ". The appraiser estimates the value of the land
because it is generally considered to be a permanent,
non-depreciating asset. There are exceptions to this
generally agreed upon premise, but the exceptions will
rarely be a factor in FHA/HUD related appraisals.
Exceptions may include land with an erosion problem or
a polluted property.
2. Excess Land
Excess Land is defined as the area by which the plot
exceeds the area of a readily marketable real estate
entity. This occurs when the subject lot is
considerably larger than typical lots in the
neighborhood and the excess is capable of separate use.
Generally, the defining characteristic is an excess
portion that can be subdivided and marketed as an
individual parcel. However, in small communities and
outlying areas, appraisers must use different criteria
because the market may accept a wide variance in lot
sizes. This segment of the market may show wide
differences in lot use.
> If the plot contains excess land, delineate and
appraise separately the readily marketable real
estate entity and the existing or proposed
improvements. Describe the excess land but do not
appraise it with the primary 1 - 4 family
residential building that is subject to a mortgage.
The lender will require that the value of excess land
be excluded from the maximum mortgage amount that will
be calculated only on a reasonable amount of land and
improvements. 3. Sales Comparison Approach For Land Value
In areas with an active real estate market, the sales
comparison approach is generally the primary method
used. This method allows for collecting, verifying and
analyzing recent and similar land sales to be compared
with the subject land. Before a conclusion is reached,
the comparable land sales are adjusted for differences
between the sales and the subject property.
4-6
4150.2
(4-5) 4. Alsite
In areas with a significant lack of comparable sales to
develop the sales comparison approach, use the alsite
method, which assumes a market-accepted ratio between
land value and property value. Although the value
estimate from this method is inherently less accurate
than that of the sales comparison approach, it is still
an acceptable approach.
> The appraiser must document, support and justify the
chosen alsite ratio.
5. Extraction
Extraction is a method to deduct the depreciated
contribution of the subject's improvement from the
total sales price of the property. The remainder
represents an estimate of land value. This approach is
also inherently less accurate than the sales comparison
approach.
> The appraiser must document, support and justify the
estimate of the depreciated contribution of the
improvements.
B. IMPROVEMENT COST ESTIMATE
Replacement cost is the preferred method for developing the
Cost New of the subject improvements. Typically the
appraiser uses the Replacement Cost New and quantifies all
forms of depreciation, except obsolescence. An alternative
is the reproduction cost. HUD does not require a specific
method.
The replacement cost of property is estimated to enable the
application of the substitution principle. Estimates of the
replacement/reproduction cost of property are not estimates
of value, although they indicate the possibility that value,
in an equivalent amount, may exist. Value depends entirely
upon usefulness, not on the cost. Value tends to conform to
cost, but this is not to imply that it is always equivalent
to cost.
C. TYPICAL REPLACEMENT COST
The replacement cost estimate must reflect the costs
typically found in an area - not necessarily the costs of a
particular builder or owner. This method is typically
preferred to the reproduction cost.
D. UNUSUAL AND NON-TYPICAL COSTS
Some of the items or allowances in the cost estimate may not
represent equivalent value in a particular case. An owner
might erect a house that would cost more than the houses
that generally characterize the neighborhood, but the value
of the home to the typical prospective owner in that
neighborhood might be less than the replacement cost of the
property. The cost of construction also may be in excess of
value at a given time. Under some circumstances, a
reduction in cost may be in prospect. If construction costs
decline, value may also decline if it was originally equal
to cost.
4-7
4150.2
(4-5) E. RECOMMENDED METHODOLOGIES
Generally, the Marshall and Swift square foot method is the
most applicable method for estimating the Replacement Cost
New. This is a simplified procedure and all appraisers must
have the knowledge and skill to apply this methodology.
This method may not be used for custom-built homes or unique
buildings that require the segregated cost method.
Typical residential construction with which HUD is
involved should be rated "fair," "average" or "good"
quality. Mass produced, tract-built homes are rated either
"fair" or "average," meeting only the minimum construction
requirements of lending institutions, mortgage insurance
agencies and building codes. Appraisers must review the
basic description to determine the correct construction
type.
The appraiser will complete the cost approach for each
proposed construction case based on the construction type
and quality rating of the property as shown in the Marshall
and Swift Cost Handbook.
> Reference on the form the pages and revision date where
the figures were obtained (usually two pages).
> Include a marketing expense with the replacement cost of
improvements and an applicable current multipliers.
F. REMAINING ECONOMIC LIFE
Remaining economic life is an estimate of the remaining time
period in which the improvements continue to contribute
value to the property (building and improvements). The
appraiser must consider the effect, if any, of modifications
or renovations on the improvements. This effect is
typically expressed in years.
4-6 SALES COMPARISON APPROACH
This is often the most applicable approach in estimating the
market value of a single-family one- to four-unit property. This
approach relies on:
o the availability of sales data
o the volume of transactions
o the reliability of reporting the transaction data confirmed
and developed under this approach
When developing a value indication by the sales comparison
approach, always include the assumptions and data from the other
approaches on the VC form.
A. DATA REQUIREMENTS
1. Sales Data vs. Comparable Sale
Any transaction in the market is a sale, but not all
sales are comparable. Consider the type of transaction
and physical characteristics of any sale before
considering the sale a comparable.
4-8
4150.2
(4-6) 2. Selection of Comparable Sales for Analysis
Identify the relevant market based on the area in which
the property competes and the forces/dynamics that affect
the comparable sale properties. This is
necessary in relating the sales to the subject.
Consider the amount of time that has elapsed between
the sale date and the effective date of the appraisal.
Sales data should not exceed six months between the
date of the appraisal and the sale date of the
comparable, and must not exceed twelve months. An
explanation is required for sales dates in excess of
six months.
Consider neighborhood and other external factors that
influence property value, including real estate and
non-real estate influences. For example, when most of
the neighborhood's residents are employed by one major
employer who is relocating out of the region, the
neighborhood may experience a decline in values. The
term "non-real estate influenced", however, must never
include racial composition.
Consider the quality and quantity of data available for
the given assignment. A lack of quality data in a
market may force reliance on data in a similar market
not necessarily the subject's immediate market area.
However, clearly explain and justify any sales from
outside the subject's immediate market area
3. Excluded Sales Transactions
When using conventional sales data, the appraiser must
be aware of the terms of the sale and adjust the
conventional sales price to reflect any unusual terms.
For example, there are sales that must be excluded;
however, some transactions may be included but adjusted
for factors such as below-market financing to provide a
cash equivalent sales price.
4. Current Offerings and Listings Analysis
Using these types of sales are discouraged. However,
under certain slow market conditions or in markets with
rapidly increasing pricing, it may be acceptable to
include properties offered for sale. Proceed with
caution when analyzing and adjusting these offerings.
Recognize the inherent negotiability in price between
an offering and a consummated sale. Clearly label
these comparables as offering, listing, under
agreement, etc., but present them as additional
comparable data only.
5. Sales in Escrow
If a bona fide transaction is imminent, sales in escrow
are considered to be reliable indications of market
pricing. Exercise care in identifying the planned date
of closure for the sale and any extraneous
circumstances that may impede the closing on the
projected date.
6. Distressed Sales
Using distressed sales is strongly discouraged because
of the special circumstances surrounding these
transactions.
4-9
4150.2
(4-6) 7. Resite Sales
Using resite sales from a corporate seller at a below
market value is strongly discouraged when the purchaser
is the resite company because of the unusual
circumstances surrounding these transactions.
Both distressed and resite sales are strongly
discouraged because they fail to meet the test of
"market value," particularly item No. 1: "The buyer and
seller are typically motivated." However, these sales
can exceed normal market transaction and affect market
values.
8. Confirmation of Sales and Transaction Information
The appraiser must verify all market and comparable
information used in the appraisal process and is
accountable for any information presented as "fact"
used to develop the subject property's value estimate.
Verification ensures that the information is accurate
and meaningful and provides the appraiser with a firm
understanding of market motivations and trends. The
goal of the verification process is to ensure that
only information that accurately reflects current
market conditions and trends is presented and that
meaningful conclusions can be reached from this
information.
During the verification process, it is necessary for
the appraiser to gain an understanding of the
motivations surrounding the sale in order to:
o determine if the sale was arm's length and not
distressed
o understand current market conditions that
influence value
Whenever possible, interview a party to the sale to
determine the expectations and motivations for
purchasing the property. Also, determine whether
significant capital expenditures funded by the seller
were made shortly after the transaction occurred. if
so, determine whether the expenditure needs to be added
back into the sale price to reflect the actual
conditions surrounding the sale.
The appraiser must verify sale information with the
buyer, the seller or one of their representatives
(broker, lender, lawyer, etc.) . If the sale cannot be
verified with someone who has first-hand knowledge of
the transaction, use public records. However, the
appraiser must clearly state how the sale was verified
and to what extent. Do not use or rely heavily on any
sale that was not verified with an involved party or
one of their representatives because concessions have
become more common in the market.
B. ADJUSTMENT PROCESS
Other factors that affect the use of comparable sales must
be considered. Account for differences between the subject
property and each comparable sale. The analysis of sales
includes both quantitative and qualitative factors.
Remember that the comparable data is adjusted to the subject
property. Present these adjustments as dollar amount
figures and justify
4-10
4150.2, CHG-1
The sequence of adjustments are part of the URAR. All
FHA appraisers should be familiar with the adjustment
grid within the URAR. Adjustments are indicated as a
dollar amount. If an adjustment is not necessary, the
appraiser can either enter "equal" or $0 as the
adjustment.
(4-6) An individual line item adjustment should not exceed
10%. The total adjustments to
the comparables should not exceed 15% net and 25% gross
of the sales price. If adjustment exceeds a parameter,
the appraiser must explain why as part of the appraisal
report.
Adjustments to the sales include:
o Property Rights Conveyed. Refer to the property
right appraised section of this chapter. This
adjustment is always the first adjustment made to
all sales.
o Sales or Financing Concessions. Account for and
adjust for any special sale or financing terms,
including sales concessions, non-market financing
terms, points, buy downs, closing terms and
swaps/exchanges. The most common scenario involves
the seller paying points in the form of settlement
help to the buyer. To reflect the amount, adjust
the sales price of the comparable sale downwards.
Typically this amount will not exceed six percent of
the sales price for typical transactions.
o Condition of Sale. Account for the conditions
surrounding the sale, including foreclosure/
distressed sale, purchased by an adjoining owner,
sold between family members, auctioned or any
unusual factor that could be reflected in the price
paid.
o Market Conditions. Account for changes that have
occurred or are occurring from the date of sale of
the comparable transaction to the date of
appraisal, including appreciation, new
development, availability of financing, loan
terms, supply and demand.
o Property Adjustments. These are required if the
difference between the sale and the subject is
quantifiable and supported by the market.
Location - Account for location considerations.
Physical Characteristics - Account for physical
differences between the comparables and the
subject, including condition, view, design/
appeal and quality of construction. These are
typically entered as individual categories.
Economic Characteristics - Account for economic
characteristics between the comparables and the
subject, including occupancy, rent level, lease
structure or terms.
4-12 6/99
4150.2
(4-7)
Property Occupancy Applicability Test
Single-family Owner-occupied Market indication of highest
and best use as
improved (either for rental or
for owner-
occupancy)
Single-family Vacant Market indication of highest
and best use as
improved (either for rental or
for owner-
occupancy)
Two-family- One unit is owner- occupied; Optional,
depending on the availability and
the other is vacant. reliability of
market data
Two-family One unit is owner-occupied; Required if the
property is located in a
the other is rented. neighborhood with
other rental properties;
otherwise, optional, depending
on the
availability and reliability
of market data
Three-to-four One unit is owner- occupied; Required Family
other units are rented.
One-to-four Family Leasehold Estate Required
One-to-four Family Leased Fee Estate Required
A. DATA REQUIREMENTS
The appraiser must choose similar market rentals to compare
to the subject property.
Consider the transaction and physical characteristics of a
rental before considering the rental as comparable.
1. Confirmation Of Leases And Transaction Information
The appraiser must verify all comparable information
used in the appraisal process. The appraiser is liable
and accountable for any information presented as a
"fact" in developing the value estimate. This ensures
that the information is accurate and meaningful and
provides the appraiser with an understanding of market
motivations and trends. The goals of the verification
process are to ensure:
o that only the information that accurately reflects
current market conditions and trends is presented
o that meaningful conclusions can be reached from
this information
If possible, interview the lessee or the lessor to
determine their expectations and motivation for
entering into the lease.
4-13
4150.2
Verify lease information with the lessor/lessee or one
of their representatives (broker, agent, lawyer, etc.).
If this verification is not possible, clearly state how
the lease was verified and to what extent. Do not rely
heavily on any lease that was not verified with an
involved party or one of their representatives.
2. Adjustment Process
The appraiser must consider other factors that affect
the use of comparable leases. The appraiser must
account for differences between the subject property
and the comparable leases to reconcile the actual lease
income. This selection of comparable rentals is
significant because the gross income multiplier should
not be adjusted, only the comparable rental rate.
These adjustments are typically presented as percentage
or dollar amount figures. The appraiser must be able
to justify and explain the rationale behind all
adjustments. The sequence of adjustments should follow
the same format as that presented in the sales
comparison approach section; however, tailor the
categories to the comparable rentals.
3. The Income Projection
In developing the projected gross rent for the subject,
the appraiser needs to review and analyze the leases in
place on the effective date of the appraisal. Also,
consider leases that will commence or terminate around
the effective date of the appraisal and the impact, if
any, on the property.
The appraiser must take appropriate steps to ensure
that the development of the income approach reflects
the actual conditions at the subject property. If the
subject is new, consider when the property income will
stabilize. Include the justification for any
assumption made - lease up time, for example. The
income approach is typically based upon the "as
stabilized" premises. Support this approach
appropriately and clearly state the date when
stabilized income will be achieved.
B. DEVELOPMENT OF RATES
The Gross Rent Multiplier (GRM) is the ratio between the
sales price of a property and its gross rental income. This
method is used to develop indications of a property value.
The appraiser must consider the strengths and weaknesses of
each comparable rental and develop an estimated multiplier
that adequately reflects the income-generating ability of
the subject property. This ratio is applied to the
estimated income for the subject to conclude an indication
of value by the income approach.
4-8 FINAL RECONCILIATION
The final analytical step in the valuation process is to
reconcile value indicators. In this step, the appraiser must
measure the strengths and weaknesses of each of the applicable
approaches performed and develop this data into a single value
estimate.
4-9 RECONSIDERATION OF APPRAISED VALUE
The underwriter may request reconsideration of the appraised
value when new market data exists that
4-14
4150.2
may not have been reflected in the appraisal. The lender can
select new comparables and request a reappraisal. This request
from the lender must be in writing and maintained in the
appraiser's work file. The appraiser must decide whether to use
the new comparables and perform the reappraisal. If the
comparables were available when the initial appraisal was
performed, the lender may not offer pay for the reconsideration.
4-15
Chapter 5: REPORTING THE APPRAISAL
4150.2, CHG-1
5 REPORTING THE APPRAISAL
5-0 INTRODUCTION
Accurate and thorough appraisal reporting is critical to the
accuracy of underwriting for the mortgage insurance process. The
need for accuracy is greater for FHA-insured mortgages because
buyers tend to have more limited income and lower equity in the
properties. This chapter presents the requirements for reporting
complete and accurate appraisal information to HUD. An appraisal
performed for HUD/ FHA purposes requires that all sections of the
Comprehensive Valuation Package (CVP) must be completed. The CVP
constitutes the reporting instrument to HUD for FHA-insured
mortgages.
5-1 REPORTING THE APPRAISAL
When the appraisal is completed, submit the CVP and all required
attachments - maps, photographs, sketches, etc. to the lender.
Also, for new and proposed construction, submit the plans,
specifications, construction documents and the completed
builder's certification (Form HUD-92541). Submit the original
package and a complete copy to the lender.
The CVP is required for reporting the appraisal findings,
analyses and conclusions about the observed conditions of the
property. A complete HUD appraisal package includes three parts:
the Uniform Residential Appraisal Report (URAR), the Valuation
Conditions Form and the Homebuyer Summary. These are described
below.
A. PART 1: UNIFORM RESIDENTIAL APPRAISAL REPORT (URAR)
The URAR is the standard appraisal reporting form available
through all lenders. The following are required in
reporting appraisal findings on the URAR:
o All information must be reported consistently with the
HUD protocol in Appendix D of this Handbook.
o All findings must be reported consistent with Standard
2 of USPAP for a summary report.
o All boxes must be filled in and relevant factual data
included, unless specifically noted.
o All calculations must be verified.
o Consistency between the sections must be verified.
1. Departure from HUD Requirements
HUD requirements are presented in this Handbook. Any
departure from these requirements must be explained in
the URAR or as an attachment to the appraisal. Present
the reasoning, the result of such departure and any
additional limitations to the use of the appraisal or
the reported value as a result of this departure.
Departure from USPAP is not permitted for an appraisal
submitted to HUD.
2. Certification
Within the URAR, the appraiser must certify that the
reported value is an unbiased, independent valuation of
the subject property. This certification is consistent
5-1 6/99
4150.2, CHG-1
with that required by USPAP. Of particular importance
is the certification that the appraisal is not based on
any of the following:
o a requested minimum value
o a specific value
o the approval of a loan as indicated
(5-1)
If the appraiser is subject to additional
certifications in developing and reporting the
appraisal, include them in the URAR report. Such
additional certifications may be the result of state
certification requirements in certain jurisdictions or
of relationships with professional appraisal and real
estate organizations.
The assigned appraiser is required to sign the report
making him/her fully and wholly accountable for the
information presented on the URAR and in developing the
appraisal findings. If any party provided significant
professional assistance, name this party on the
certification and note the contribution.
3. Statement of Limiting Conditions
For each appraisal, the URAR includes the standard
limiting conditions. The appraiser must confirm these
limiting conditions and strike any that do not apply.
Also, if there are additional limiting conditions,
clearly state them. If the limiting conditions differ
or are contrary to the limiting conditions stated on
the URAR, fully disclose those limiting conditions and
make them known in the value estimate. Cite any value-
influencing limiting conditions with the report of the
estimate of market value.
The repair conditions reported in the VC segment
of the report constitute a limiting condition for the
development of the appraisal because HUD appraisals
estimate value "as-repaired." The reported estimate
assumes that the noted deficiencies have been
corrected. It is, therefore, important that the
appraiser certify to testing specific systems and
examining all areas of the house to note the
deficiencies.
B. PART 2: VALUATION CONDITIONS FORM
The Valuation Conditions (VC) Form specifically addresses
physical conditions of the property- that may render the
property uninhabitable or cause health and safety concerns.
Note the conditions observed during the walk-through on the
VC form as of the date of appraisal. A home inspection. is
not required to complete the VC. The VC form is divided
into Site and Property Analysis as well as other property
related information.
o VC-1 identifies the site hazards and nuisances that may
render a location ineligible for FHA insurance.
o VC-2 through VC-11 identify the basic structural and
mechanical components of the property and are the bases
for determining if the property is habitable and
eligible for FHA-insured financing.
6/99 5-2
4150.2
(5-1) o VC-12 and VC-13 provide further information on the property.
o The addenda include a provision for current market
assessed value and a summary of estimated repair costs.
Each section must be completed entirely, based on the
instructions in the protocol in Appendix D of this Handbook.
The appraiser must observe the property's components, test
certain basic operations, view areas of the home that may
include adverse conditions and report on readily observed
adverse conditions. In all instances, the observations are
as of the effective date of value, as identified in the VC
and appraisal segments.
o For each item in VC-1, a "YES" renders the property
ineligible for FHA mortgage insurance.
o For each specific item in VC-2 through VC-11, "YES"
indicates a limiting condition on the appraisal subject
to the repair of the deficiency or further inspection.
o For each specific item in VC-2 through VC-11, "NO"
indicates that the appraiser did not observe a
deficient condition.
The appraiser may encounter a negative physical condition
that does not require repair or inspection. In this
instance the appraisal is based upon the existing condition.
"NO" is not a substitute for a home inspection by a
qualified professional home inspector, but merely indicates
that the appraiser did not observe the condition during the
property inspection for valuation purposes.
For both "YES" and "NO" responses, exercise care and
judgment in reporting the extent and the magnitude of the
observed condition. The mere presence of an item may not
require an inspection or repair. Likewise, depending on the
condition observed, a minor observation may prove to be
significant to the soundness of the property. The property
analysis relies heavily on the appraiser's judgment. It is
important to note all considerations as comments for each
Valuation Condition.
For detailed instruction regarding the Valuation Conditions
Form, please see the protocol in Appendix D of this
Handbook.
Appraisals performed for HUD/FHA are not intended to protect
the buyer: they protect HUD. Many homebuyers mistakenly
believe that a HUD appraisal and subsequent inspection is a
guarantee that the property is free from defects when, in
fact, the appraisal only establishes the value of the
property for mortgage insurance purposes. Buyers need to
secure their own home
5-3
4150.
2
inspection through the services of a qualified inspector and
satisfy themselves about the condition of the property. If
available in a timely manner, home inspection reports should
be sent to the appraiser; this affords the appraiser the
opportunity to make valuation adjustments as needed.
C. PART 1: HOMEBUYER SUMMARY
This part summarizes required repairs from the appraiser's
observation of the physical condition. The Homebuyer
Summary intends to protect the homebuyer by informing
him/her of any material conditions that typically make the
property ineligible for FHA mortgage insurance.
> If any of the VC's are marked "YES" in the VC form, the
appraiser must denote it in the appropriate box of the
Homebuyer Summary and explain, in detail, the nature of
the problem.
The summary also includes a notice to the homebuyer
regarding the value of securing a home inspection, by a
qualified inspector.
5-2 ACCESS TO FORMS
The Homebuyer Summary and Valuation Conditions Form are available
electronically from the HUD Internet website:
http://www.hudclips.org.
5-3 RECORD KEEPING
HUD reserves the right to request and review the appraiser's work
files supporting an FHA-insured mortgage at any time and without
prior notice. Appraisers on the FHA Register must comply with
the record-keeping and inspection requirements as a condition of
performing appraisals for FHA-insured mortgages.
A. MINIMUM TERM FOR RECORD KEEPING
The appraiser is required to keep supporting documentation
in addition to a copy of the CVP. These files must be
maintained for five years after the date of preparation or
at least two years after final disposition of any judicial
proceeding in which testimony was given, whichever expires
last. This is consistent with the Record Keeping Rule of
USPAP.
B. DOCUMENTATION FILE REQUIREMENTS
Although there is no prescribed file for-mat or content, the
appraiser's work files must include information to support
all findings, observations and conclusions supporting the
value estimate. The files must indicate the rationale for
adjustments and the market data analyzed in the development
of the appraisal report. The files must include
documentation of the acceptance of the assignment and
historical and factual information, such as photographs and
maps. A sample documentation file index is provided below.
This is not a comprehensive list of information.
5-4
4150.2
C. SAMPLE DOCUMENTATION FILE
Section Supporting Data
Acceptance of assignment File memorandum
Property Description Legal description
Photographs
Floor plans
Tax map and information
Field notes from inspection
Listing information
Offer to purchase
Neighborhood
Notes from the field visit
Photographs
Demographic data
Cost Approach Relevant Marshall Swift
Valuation
(if applicable) information
Calculations performed
Land Sales detail
Sales Comparison Approach Sale details and photographs
Transaction information
Derivation of adjustments
Interview notes
income approach Market rent comparable
information
(if applicable) Cap rate justification
Historical financial
statements VC Conditions Noted
Photograph of condition
Field notes
Support for any assumed
repairs
Calculation of cost to
repair a VC
condition
Additional Information Surveys
Relevant market data
Other sources of data
5-5
Chapter 6: APPRAISAL AND APPRAISER MONITORING
4150.2
6 APPRAISAL AND APPRAISER MONITORING
6-0 INTRODUCTION
The review process is a critical quality control and performance
monitoring mechanism for HUD. FHA will monitor appraisals and
appraisers using statistical analysis and field reviews. Through
analysis of performance measures, FHA will identify candidates
for field reviews. By performing statistical analysis as well as
field reviews, HUD maintains the capability to broadly track its
portfolio and investigate it in greater depth.
6-1 MONITORING AND STATISTICAL ANALYSIS
The Real Estate Assessment Center (REAC) will conduct statistical
analysis to track the performance of appraisers and properties
and to identify problematic appraisals for review. If the review
and subsequent analysis indicate behavior that is out of
compliance with FHA guidelines, FHA may take enforcement action.
The performance categories below will guide the monitoring and
enforcement efforts.
6-2 PERFORMANCE CATEGORIES
The following performance categories allow FHA to monitor each
aspect of the appraiser's performance. The table below lists
examples of performance measures for each category.
Performance Category Performance Measure
Appraisal Process Transaction quality
Proof of analysis
Relevance of data
Appraisal Reporting Completeness
Mathematical Accuracy
Valuation Conditions Identified repairs
Maintenance of Professional Maintenance of state
licensure
Standards Disciplinary actions
Field reviews Supported findings
Required record keeping
Responsiveness to field
review
HUD expects a high level of professionalism, customer service,
technical expertise and record keeping from appraisers. The
above measures demonstrate HUD's focus on:
o complete, justifiable and accurate appraisals
o qualified and competent appraisers
o professionalism
o accuracy
6-1
4150.2
6-3 APPRAISAL REVIEW PROCESS
The oversight process includes statistical analysis of appraisals
and field reviews. The reviews will be used to determine the
reliability of the appraisal supporting FHA financing as well as
the performance of the appraiser. To gauge an appraiser's
performance, REAC will review a sample of appraisals performed
for FHA over a specified time period and/or a specified number of
appraisals performed.
6-2
Chapter 7: REGULATORY ENVIRONMENT, ENFORCEMENT AND SANCTIONS
4150.2
7 REGULATORY ENVIRONMENT, ENFORCEMENT AND SANCTIONS
7-0 INTRODUCTION
This chapter describes the regulatory environment in which FHA
single-family appraisals are performed and the enforcement and
sanctions that are available to HUD and other government entities
in that environment. Appraisers are subject to:
o federal laws and regulations
o state licensing laws and regulations
o the requirements associated with any professional appraisal
designations
This chapter enumerates these requirements and explains their
connection to HUD's enforcement and sanctions processes.
7-1 REGULATORY ENVIRONMENT
A. FINANCIAL INSTITUTIONS REFORM, RECOVERY, ENFORCEMENT
ACT OF 1989 ("FIRREA")
FIRREA instituted reform and regulation of real estate
appraising through Title XI, the Real Estate Appraisal
Reform Amendments. The amendments achieved the following:
o established the Appraisal Foundation, comprising the
Appraiser Qualifications Board (AQB) and the Appraisal
Standards Board (ASB):
- The AQB determines the minimum education,
examination and experience requirements for state-
certified and state-licensed appraisers.
- The ASB promulgates the Uniformed Standards of
Professional Appraisal Practice (USPAP).
o required that only a state-certified or state-licensed
appraiser may perform appraisals for federally related
transactions
o established that an appraiser trainee can sign an
appraisal if a state-certified or state-licensed
appraiser closely supervises the trainee, signs the
appraisal report and inspects the property
o established the definition of a "state-certified real
estate appraiser" as someone who has satisfied the
requirements in a state or territory whose criteria for
certification meets the minimum criteria for
certification by the Appraiser Qualification Board of
the Appraisal Foundation
o established the state agencies to license, certify and
supervise appraisers 7-1
4150.2
All appraisers performing services for FHA-insured mortgages
must comply with USPAP in developing and reporting
appraisals. Key aspects of USPAP include:
Standard Citation
Ethics Rule Conduct management, confidentiality
and recordkeeping
Competency Rule Full responsibility of appraiser to
have the knowledge and experience
to complete the assignment
competently or disclose any
discrepancy before acceptance and
take all necessary steps to correct
Departure Rule 1 Permits limited departures from acceptable
portions of USPAP reducing the
reliability of the valuation
Jurisdictional Exception Individual portions of USPAP can be
superseded by law or public policy
Standard 1 In developing a real estate
property appraisal, an appraiser
must be aware of, understand and
correctly employ the recognized
methods and techniques that are
necessary to produce a credible
appraisal
Standard 2 In reporting the results of a real
estate property appraisal, an
appraiser must communicate each
analysis, opinion and conclusion in
a manner that is not misleading
In compliance with USPAP, unacceptable practices include:
(7-1)
o estimating a specified (predetermined) value determined
by the lender
o fee splitting between lenders and appraisers
o other practices that do not comply with HUD's standards
Also, USPAP contains statements on appraisal standards that
have the full weight of USPAP. These statements were issued
to clarify the existing standards. The ASB has also issued
advisory opinions that currently do not establish new
standards but offer advice on complex technical issues.
B. FEDERAL FINANCIAL INSTITUTION REGULATORY AGENCIES
The Federal Financial Institution Regulatory Agencies issued
a final rule on appraisals in June 1994. In general, the
threshold for requiring state-certified appraisers to
perform appraisals on federally related transactions was
raised to Two Hundred Fifty Thousand Dollars ($250,000).
1/ FHA does not permit departure from USPAP.
7-2
4150.2, CHG-1
D. FALSE, FICTITIOUS OR FRAUDULENT CLAIMS ON HUD (18
U.S.C. 1010, CRIMINAL PENALTIES AND FINES 1012)-
(7-1) These
statutes prescribe criminal penalties for any person who
knowingly files a false claim on or against HUD.
E. FEDERAL FALSE CLAIMS ACT (31 U.S.C. 3_729) - CIVIL FRAUD
The Federal False Claims Act defines the civil monetary
damages imposed on any person who knowingly presents or
files a false claim that was paid or approved by the United
States Government.
F. 24 CFR PART 28 - PROGRAM FRAUD CIVIL REMEDIES ACT
(PFCRA)
These regulations define the administrative procedures for
imposing civil penalties and assessments by HUD officials
against any person who makes or submits false claims or
false statements to Federal authorities or to their agents.
G. 24 CFR PART 30 - CIVIL MONEY PENALTIES
These regulations define the money penalties that HUD may
levy for submission of a false certification by another
person - for example, an appraiser who makes a false
certification at the bottom of the USPAP appraisal form
about the truth/ correctness of the appraisal data.
H. 24 CFR PART 24 -
ADMINISTRATIVE SANCTIONS
These regulations define the administrative sanctions
available to HUD officials for any person determined to have
violated HUD regulations and policies.
I. STATE LAWS AND PROFESSIONAL ORGANIZATIONS
The appraiser must adhere
to all state and local laws
relating to appraisal, licensing and certification
requirements. Also, as a voluntary member of an appraiser's
professional organization, the FHA appraiser should adhere
to that organization's guidelines on appraiser conduct.
However, HUD has no enforcement powers in private
organizations.
1. State Certifications
Appraisers on the FHA Register must be licensed,
certified-residential or certified-general appraisers.
To perform appraisals for FHA, appraisers must maintain
and be able to prove that they are so certified. While
some states do not require an appraiser to be
certified, they provide a licensing program so
appraisers can meet federal guidelines.
Appraisers must comply with the practices of their
state unless the requirements of the state contradict
those of the federal government; federal requirements
preempt any and all state requirements.
The appraiser must report to HUD any action or pending
action that relates to appraisal reports prepared by
the appraiser two years subsequent to the date on which
the action was initiated. After disposition of any
disciplinary action or adjudication of the action, the
appraiser must provide HUD with the documentation and
official findings within 14 days.
7-3 6/99
4150.2, CHG-
1
2. Professional Organizations
The appraiser may be a member or hold designations in
professional organizations. Such involvement is
encouraged, but not required. If the appraiser is a
member, candidate or associate of any organization, the
appraiser must report any adjudicated actions resulting
in the suspension of the appraiser to HUD within 14
days of such action. On disposition of the-action or
adjudication of the action, the appraiser must provide
HUD with documentation and official findings. HUD
reserves the right to suspend any appraiser found
guilty of professional misconduct as adjudicated by the
professional organization.
7-2 ENFORCEMENT
FHA intends to hold appraisers accountable for valuations that
are inconsistent with USPAP or this Handbook. The Valuation
Conditions Form must accurately reflect any site, structural or
mechanical deficiencies. FHA recognizes that most appraisals are
properly valued and do not indicate improper action.
Accordingly, HUD emphasizes quality assurance, but will take
enforcement action when necessary.
A. STATE CERTIFICATION BOARDS
HUD will enforce actions
against appraisers through existing
state certification and licensing boards. HUD is required
by law to refer appraisers to these boards if HUD considers
the actions to be of such magnitude or frequency as to
warrant such referral.
B. PROFESSIONAL ORGANIZATIONS
HUD will cooperate with and
refer cases to the enforcement
arms of all applicable professional organizations.
7-3 APPLICABLE REMEDIES AND SANCTIONS
FHA will review appraiser and appraisal performance data. In
making any determination, the following will be considered:
· the seriousness and extent of the non-compliant action
· the degree to which the appraiser is responsible for that
action
· the frequency of the action(s)
· any mitigating factors
HUD will impose sanctions on four tiers:
1. Notice of Appraisal Deficiencies and Remedial Education
2. Administrative Sanctions
3. Civil Sanctions
4. Criminal Sanctions
7-4 6/99
4150.2
o the frequency of the action(s)
o any mitigating factors
HUD will impose sanctions on four tiers:
1. Notice of Appraisal Deficiencies and Remedial Education
2. Administrative Sanctions
3. Civil Sanctions
4. Criminal Sanctions
(7-3)
HUD expects that all appraisers performing appraisals for FHA are
knowledgeable of HUD's policies and procedures. If, however,
minor appraisal errors indicate lack of knowledge, HUD may
require remedial education and training. For offenses arising
from unethical behavior or for repeated offenses, HUD will apply
more serious sanctions. All sanctions will be reported to the
state regulatory agencies.
The following sections generally define the actions taken under
each tier. Generally, these penalties will be expunged after
three years. A table providing examples of offenses and possible
sanctions is included at the end of this chapter.
A. NOTICE OF APPRAISAL DEFICIENCIES AND REMEDIAL EDUCATION
Education and training directives will be managed internally
by HUD. If the evidence indicates that the appraisal
deficiency is a matter of training, then the appraiser must
undergo professional training. HUD will notify the
appraiser and inform the appraiser of:
o the appraisal's deficiencies
o the findings that support the recommended training
o the recommended training
o the appraiser's right to refute the findings of the
notice
The appraiser must appeal within 20 days from receipt of the
notice if he or she disagrees with the findings. If the
findings are adequately refuted, no action will be taken
against the appraiser and the circumstances surrounding that
particular incident will be noted in the appraiser's file.
However, if the findings hold, the appraiser must comply
with HUD's requirements for improved performance, including
the type of training required and the time-frame for
completion. This action will go on record in the
appraiser's file.
B. ADMINISTRATIVE SANCTIONS
Administrative sanctions will be managed internally by HUD
and consist primarily of removal from the FHA Register for a
specified time. Removal from the FHA Register can be
imposed for
7-5
4150.
2
noncompliance with FHA policies and requirements on
appraisals. HUD will consider the seriousness of the
appraiser's acts or omissions and any mitigating factors.
HUD/FHA will notify the appraiser of the alleged violation
and pending sanction in writing. If the appraiser believes
that removal from the FHA Register is unwarranted, the
appraiser must appeal in writing within 20 days and may
arrange a meeting or conference call with FHA at a mutually
acceptable time. If there is evidence and documentation of
unacceptable performance, appraisers will be removed from
the FHA Register at HUD/FHA's sole discretion.
Upon any legally effected removal, HUD will notify the state
licensing or certification agency in writing that such
appraiser has been removed from the FHA Register. HUD will
provide the state agency with:
o the state license or certification number of the
appraiser
o the reason for removal
o copy of the original appraisals
o copy of the review report
In addition to removal from the FHA Register, administrative
sanctions include sanctions under 24 CFR Part 24, Debarment,
Suspension and Limited Denials of Participation (LDP) from
HUD and government-wide programs.
C. CIVIL SANCTIONS
HUD will pursue civil sanctions by initiating an
investigation of the alleged non-compliant action. A report
containing the findings and conclusions of the investigation
will be submitted to HUD's Office of the General Counsel or
The Enforcement Center. If the Office of General Counsel or
The Enforcement Center determines that the investigation
report supports an action, the respective office will submit
a written request to the Department of justice for approval
to pursue civil sanctions. Civil sanctions are pursuant to
Part 24 CFR 28-PFCRA and are described in Chapter 7-1.
D. CRIMINAL
If the non-compliant action is so egregious as to violate
criminal law, HUD's Office of General Counsel or the
Inspector General will refer the case to the Attorney
General at the U.S. Department of Justice.
E. PERFORMANCE VIOLATIONS AND LEVEL OF SANCTION
The following chart outlines the type of sanction to be
levied by the type of performance violation. For example,
the appraiser may receive a Notice of Appraisal Deficiencies
for a square footage error of less than 10% as a first
offense. However, repeatedly making this mistake will
result in removal from the FHA Register. If the violation
is repeated so that it constitutes a pattern of misconduct,
it may be considered gross negligence. The offense could
also be considered gross negligence if the offense is so
obvious that it could not have reasonably been the result of
simple error. In this example, the sanction for gross
negligence includes removal from the FHA Register and may
include a Limited Denial of Participation or Debarment.
7-6
Violations of intent include knowing and willful
noncompliance with FHA/HUD requirements, as well as
extensive or repeated intentional violations. In this
example, the appraiser is guilty of intentional misconduct
if he or she chooses to disregard the requirement.
Sanctions at this level may include debarment and civil
and/or criminal penalties. The Department may impose civil
money penalties or other sanctions for minor violations if
the Department determines that circumstances warrant.
7-6a
4150.2
7-4 PERFORMANCE AND SANCTION MATRIX
This is not an exhaustive list of violations. It is meant to highlight the
ramifications for non-compliant performance. This does not preclude the
Department from pursuing other remedies or related sanction(s); the Department
reserves the right to take any such other actions and remedies in accordance
with applicable law. Time frames are included for illustration and can vary
depending on the degree of violation.
PAGES 7-7 THRU 7-12 WHICH INCLUDE THE MATRIX IS IN A SEPARTE FILE.
Chapter 8: MANUFACTURED HOMES
4150.2, CHG-1
8 MANUFACTURED HOMES
8-0 DEFINITION
A Manufactured Home is a structure that is transportable in one
or more sections. In traveling mode, the home is eight feet or
more in width and forty feet or more in length. A Manufactured
Home is designed and constructed to the Federal Manufactured
Construction and Safety Standards and is so labeled. When
erected on site, the home is:
· at least 400 square feet
· built and remains on a permanent chassis
· designed to be used as a dwelling with a permanent
foundation built to FHA criteria
The structure must be designed for occupancy as a principal
residence by a single family.
8-1 PROPERTY STANDARDS FOR TITLE II MORTGAGE INSURANCE
The appraiser should be aware of the primary standards in this
Handbook to prepare an appraisal for underwriting purposes.
These are the key standards:
o The site must be served by permanent water and sewer
facilities approved by the local municipal authority, if
available at the site.
o An all-weather roadway must serve the site.
o The entire property must be taxed as real estate.
o The towing hitch or running gear must have been removed.
The towing hitch or running gear must also have been removed
for properties greater than one year.
o No part of the finished grade level under the home is below
the 100-year flood level.
o Structural integrity must have been maintained during
transportation and sufficient anchoring, support and
stability must be evident.
All manufactured homes must have an affixed HUD seals(s) located
on the outside of the home. If the home is a multi-wide unit, each
unit must have a seal. These seals will be numbered sequentially.
If the tags are missing from the property, the appraiser must recommend
rejection of the property and notify the lender.
In some states, a manufactured home may not be resold without a
seal and homes without a HUD seal must be rejected. In states
where resale without a HUD seal is permissible, a manufacture's
certification must be obtained verifying the date of the sale.
The certification label/seal shall be located at the tall-light
end of each transportable section of the manufactured home
approximately one foot up from the floor and one foot in from the
road side, or as near that location on a permanent part of the
exterior of the manufactured home unit as practicable. The
roadside is the right side of the manufactured home when one
views the manufactured home from the tow bar end of the manufactured home. (24 CFR 3280.11 (d))
o The home must be erected on a permanent foundation in
compliance with the Permanent Foundation Guide for
Manufactured Housing. All proposed or newly constructed
8-1 6/99
4150.2, CHG-1
manufactured homes must meet the standards set forth in the
Permanent Foundation Guide. A licensed professional engineer's
seal and signature (certification) is required to indicate
compliance with the Foundation Guide. The lender should
furnish the appraiser with a design engineer's inspection of
the foundation prior to the appraisal.
o Existing manufactured homes in place over one year are to be
inspected by the appraiser for evidence of permanent
concrete footings with tie-downs anchored to the footings.
o The appraiser must inspect the crawl space for the
following: poured in place concrete footings placed below
the frost line supporting the manufactured home carriage
frame, tie-downs anchored to the footings, protection from
the elements and enclosed with material imperious to rot and
infestation and perimeter foundation-type construction with
footings extended below the frost line. The appraiser must
require an engineering inspection if there is evidence of
structural defects or other problems relating to the
foundation or set-up of the home.
o The manufactured home must not have been constructed before
June 15, 1976. The unit must have been built to the
manufactured housing construction safety standards as
evidenced by having a small, red metallic label attached to
it. Any unit without this label is unacceptable. If it has
been removed, it cannot be reattached to make it acceptable
for FHA insurance.
o New, never occupied homes that are transported directly from
the manufacturer or directly from the dealership to the site
are eligible for insurance. For an existing manufactured
home, evidence must be provided to verify that the home was
assembled in accordance with the above paragraphs and has
not been moved from its initial installation site.
o Additions or structural modifications may put the home at
risk if changes were not performed in accordance with the
HUD Manufactured Home Construction Safety and Standards. If
the appraiser observes changes to the original home, an
inspection by the State Administrative agency, which
inspects manufactured homes for compliance, must be
required. If there is no agency willing or able to inspect
existing homes for compliance to the Manufactured Home
Construction and Safety Standards, the manufactured home is
unacceptable and should be rejected.
8-2 PROPERTY DESCRIPTION
Measurement is based on the overall length, including living
areas and other projections that are at least seven feet in
height. Length and width should not include bay windows, roof
overhangs, drawbars, couplings or hitches. Each manufactured
home must have a data plate with the name of the manufacturer and
the construction date.
8-3 APPRAISER QUALIFICATIONS FOR MANUFACTURED HOMES CLASSIFIED
AS PERSONAL PROPERTY
For all appraisals of manufactured homes classified as personal
property, lenders must engage independent fee appraisers who have
successfully completed a specialized course in manufactured home
valuation based on the N.A.D.A. appraisal system. These
independent fee appraisers must be knowledgeable in the business
of manufactured home retail sales. Appraisal services may be
obtained from an appraisal company if their appraisers meet these
qualifications.
6/99 8-2
4150.2, CHG-1
8-4 MANUFACTURED HOME LOT APPRAISALS
A manufactured home lot appraisal may be requested to estimate
land value in determining the maximum loan proceeds allowable for
a manufactured home lot loan or a combination loan (home and
lot). A lot appraisal may also be requested to establish value
for claim purposes on a foreclosed lot or manufactured home-and-
lot combination.
When appraising manufactured housing, appraisers should use
normal single-family residential appraisal techniques (see
Chapter 4 of this Handbook). Give special consideration to other
manufactured homes as comparables in appraising manufactured
homes. This will provide a comparable value indication from
which to make justifiable conclusions. Therefore, make all
efforts to obtain such comparables even though their distance
from the subject may be greater than normally desirable.
If there are no manufactured housing sales within a reasonable
distance from the subject property, use conventionally built
homes. Make the appropriate and justifiable adjustments for
size, site, construction materials, quality, etc. As a point of
reference, sales data for manufactured homes can usually be found
in local transaction records.
A. MANUFACTURED HOME LOT SITES
A manufactured home lot may consist of:
o an interest in a manufactured home condominium project
(including an undivided interest in the common areas)
OR
o a share in a cooperative association that owns and operates
a manufactured home park
The lot may be located within Native American Trust Lands if the
borrower owns or leases the lot.
B. HOW TO PERFORM A MANUFACTURED HOME LOT APPRAISAL
In addition to the single-family residential appraisal techniques
(see Chapter 4 of this Handbook), the appraiser must take the
following steps when performing manufactured home lot appraisals:
o The appraiser must obtain Form HUD-92802, Application and
Request for Manufactured Home Lot and/or Site Preparation
and the FHA case number from the mortgagee.
o The appraiser must receive a copy of the design engineer's
inspection of the foundation from the mortgagee.
o The appraiser must estimate the value of the lot by
comparison with other lots offering similar amenities.
o When the appraisal is complete, the appraiser must send the
original and one copy of the appraisal report, a photograph
of the lot and one photograph of each comparable to the
lender for review.
8-3 6/99
4150.2
o The appraiser must receive a copy of the design
engineer's inspection of the foundation from the
mortgagee.
o The appraiser must estimate the value of the lot by
comparison with other lots offering similar amenities.
o When the appraisal is complete, the appraiser must send
the original and one copy of the appraisal report, a
photograph of the lot and one photograph of each
comparable to the lender for review.
8-4
Chapter 9: PLANNED UNIT DEVELOPMENTS AND CONDOMINIUMS
4150.2
9 PLANNED UNIT DEVELOPMENTS AND CONDOMINIUMS
9-0 PLANNED UNIT DEVELOPMENT (PUD)
A PUD is defined as a mixed-use residential development of
single-family dwellings in conjunction with rental, condominium,
cooperative or town house properties. A residential development
should be processed as a PUD if it has these minimum
characteristics:
o a homeowner association that holds either title in fee or a
lease of prescribed length on the common area
o mandatory membership of all unit owners (or units) in the
association
o the right of all unit owners to participate by vote in the
operation of the association
o lien supported assessment of the members to meet the
association's budgeted operating costs (special assessments
may be handled differently)
To be eligible for insurance endorsement, PUDs must be approved
by HUD. The lender is responsible for obtaining a case number
from HUD to ensure that the PUD is already approved. The
appraiser should note whether there is a case number.
A. APPROACH TO VALUE
The approach to value for a PUD is the same as the approach
to value for other types of developments (see Chapter 4 of
this Handbook). Frequently, however, no valid comparisons
are available that estimate market value. In these
instances, appraisers should use the replacement cost
estimate in valuation. Estimate the replacement cost of
improvements, miscellaneous allowable costs and marketing
expenses the same as any Section 203(b) case. If properties
in similar developments in the area have been sold, then
direct comparisons are possible and the Comparative Approach
would be valid and should be used.
B. ESTIMATE OF MARKET PRICE
Estimating the market price of an equivalent site requires
consideration of these factors not usually encountered in
ordinary appraisals:
o Consider the size of individual sites when approaching
the use of common areas and recreational facilities.
o If there are similar developments in the neighborhood,
consider a comparison of common areas, including
recreational amenities.
o If there are no similar developments, place more
emphasis on the cost to produce a similar site with
similar facilities and benefits.
o Distribute the pro rata supportable cost to maintain
the common improvements, facilities and land owned by
the homeowner's association to each site in the
development (subdivision) and add it to the estimated
value.
9-1
4150.2
o To reflect additional amenities to the common areas,
include an estimate on the Marshall and Swift Form
1007. On line 32, cross out "landscaping cost" and
enter additional amenities".
o Consider maintenance charges regarding cluster
arrangements. For example, note whether the advantages
of cluster arrangements are negated by high maintenance
charges.
o Before performing the assignment, check with the lender
to ascertain that the project is on an approved list
maintained by the Home Ownership Center (HOC). Check
the URAR item indicating that the property is within a
PUD project.
9-1 CONDOMINIUMS
A condominium is a form of fee ownership or long-term leasehold
of separate units or portions of multiunit buildings that
provides for formal filing and recording of a divided interest in
real property. In contrast to a PUD, a joint share in ownership
of the common area is part of the mortgaged property, and
therefore, constitutes a measure of the security backing the
mortgage loan. FHA's interest is therefore more immediate and
direct with respect to the common areas of condominiums than
those of PUDS.
Before performing the assignment, the appraiser must check with
the lender to ascertain that the project is on an approved list
maintained by the HOC or by a DE underwriter who has performed a
spot condominium approval. The appraiser must check the URAR
item indicating that the property is within a condominium
project, and therefore, eligible for FHA endorsement.
A. DEFINITIONS
Mortgage: a lien covering a fee interest or eligible
leasehold interest in a one-family unit in a project,
together with an undivided interest in the common areas and
facilities serving the project.
Family Unit: a one-family unit including the undivided
interest in the common areas and facilities and such
restricted common areas and facilities as may be designated.
Common Areas and Facilities: areas that are for the use and
enjoyment of the owners of family units located in the
project, including the land, roof, main walls, elevators,
staircases, lobbies, halls, parking spaces and community and
commercial facilities.
Restricted or Limited Common Areas and Facilities: areas and
facilities restricted for use by a particular family unit or
number of family units.
Project: a structure or structures containing four or more
units.
Conversion: the creation of the condominium as of the date
when all of the documents necessary to create a condominium
regime have been recorded under state and/or local law.
9-2
4150.2, CHG-1
Bona fide Tenants' Organization: an association formed
by the tenants to promote their interest in a
particular project whose membership is open to each
tenant and whose requirements apply equally to each
tenant.
Condominium Fee (Assessment): the apportionment of
common expenses that are to be charged to a unit owner
in a manner to be determined in the declaration or by-
laws. The charge may include costs for utilities on
individual units and on common use buildings, security
requirements, salaries for employees of the association
and repairs to common facilities.
(9-1)
B. APPROACH TO VALUE
The approach to value for a single unit in a
condominium project is similar to that for other home
mortgage programs. As in other home mortgage
appraisals, value indications from the Sales Comparison
and Income Capitalization Approaches are developed and
considered (see Chapter 4 of this Handbook). The cost
approach can not be performed for a condominium unit.
1. Sales Comparison Approach
The appraiser should obtain sales data from any
other units in the project and from other
competitive condominium projects, including
adjustments because of site factors, such as:
o differences in views from the unit
o proximity to recreation areas (swimming
pools, clubhouses, tennis courts, etc.)
o proximity to odors and the nuisance of
incinerators proximity to garbage chutes or
refuse areas proximity to noisy pumps or
boiler rooms
Adjustments must also be made for the following:
o differences in physical improvements within
the dwelling that have been made by the owner-
occupant
o differences in preferences of purchasers
between upper and lower floors and all other
site factors
6/99 9-3
APPENDIX A: VALUATION OF OTHER PROPERTIES
4150.2
APPENDIX A: VALUATION OF REAL ESTATE OWNED PROPERTIES
A-1 REAL ESTATE OWNED (REO)
FHA’s Real Estate Owned (REO) properties are a result of paying a claim to a lending institution and
the lender transferring ownership of the property to HUD. Typically, title to REO properties is held by
the lender prior to transfer to HUD due to the borrower’s default on the mortgage.
The appraisal process is HUD’s primary tool for determining the listing price of FHA REO properties.
FHA appraisers provide preliminary verification that FHA’s Minimum Property Requirements (MPR)
for existing housing and Minimum Property Standards (MPS) for new construction have been met for
properties evaluated as “insurable” or “insurable with repair escrow” prior to being listed for sale.
A. Appraiser Requirements for REO properties
Requirements for appraisers who perform REO appraisals are the same as for appraisers of
any other property type. An appraiser of REO property must be state licensed or certified in
the state in which the property is located and listed on the FHA Appraiser Roster.
B. Appraisal Requirements for REO properties
Per Mortgagee Letter 2005-34 and Revised Appendix D to Handbook 4150.2, the appraiser
must report the appraisal on the applicable property specific revised Fannie Mae appraisal
reporting form.
Under “Assignment Type” in the Subject Section of the applicable property specific appraisal
reporting form, the appraiser is to mark the box labeled “other” and indicate that the property
being appraised is a HUD Real Estate Owned (REO) property. If the appraiser is performing
a land only appraisal which is not reported on a Fannie Mae appraisal reporting form, the
appraisal must note, in bold font, that the property being appraised is a REO property in the
section of the report providing information on the subject property.
The guidance provided in Appendix D, Appraisal Protocol, to Handbook 4150.2, applies
equally to REO properties, unless otherwise indicated in the guidance presented in this
appendix.
REO properties are to be appraised "as-is". The Dictionary of Real Estate Appraisal, Fourth
Edition, Appraisal Institute defines an "as-is" value as follows:
"The value of specific ownership rights to an identified parcel of real estate as of the
effective date of the appraisal; relates to what physically exists and is legally permissible and
excludes all assumptions concerning hypothetical market conditions or possible rezoning."
The "as-is" value is the market value for the property as it exists on the effective date of the
appraisal.
The appraisal report shall consist of the applicable property specific appraisal reporting form,
all required exhibits and a copy of the Property Condition Report (PCR).
A-1 5/06 4150.2
M&M contractors are required to complete a PCR prior to ordering an appraisal of a REO
property. The PCR contains information specific to the condition and functionality of the
property. Prior to performing a site visit of a REO property, the appraiser must be provided
a copy of the PCR by the M&M contractor.
The appraiser must coordinate a specific time for a full site inspection of the property with
the property manager. Generally, a REO property is secured with the utilities de-activated.
The appraiser should request that the M&M contractor make sure the utilities, including the
mechanical systems, are activated at the time the appraiser makes the property inspection. If
an appraisal is completed without the utilities turned on and/or the mechanical systems
functioning, the appraiser must note this in the appraisal report and must rely upon the
information provided by the M&M contractor in its Property Condition Report (PCR);
reference the PCR in the applicable sections of the appraisal report (condition of property or
physical deficiencies) as well as append a copy of the PCR to the appraisal report.
There will be occasions when the appraisal of a REO property may involve extraordinary
conditions which dictate additional research, documentation and due diligence on the part of
the appraiser. For example, a single family property that features a second unit which is an
illegal use due to non-compliance with the local zoning code/regulations, the appraiser must
provide an estimate of the costs necessary to bring the property into compliance. The
appraiser should provide documentation for such conclusions, such as a copy of the pertinent
portion of the zoning code and a summary of any discussions with local authorities. When
appraising a REO property that is impacted by complex or extraordinary circumstances, the
appraiser must contact the M&M Contractor for guidance and clarification before completing
the appraisal. The M&M Contractor may, in turn and in cases of problematic appraisals,
seek additional guidance from the Homeownership Center that has jurisdiction over the
locality where the property is located. Any discrepancies between the information contained
in the PCR and what the appraiser observed during the inspection of the property must be
noted and highlighted in the appraisal report.
A land appraisal may be warranted when the improvements are in such deteriorated condition
as to provide no contributory value to the property or when condemnation proceedings by the
local authority have acquired the improvements in part or in their entirety. In such cases,
when the supporting land represents the value of the property, the appraiser must report the
appraisal on a form or in a narrative format that must address, at minimum, the following:
• Detailed information similar in scope to the Subject section of Fannie Mae Form
1004 March 2005 (Uniform Residential Appraisal Report) including, but not limited
to, property address, legal description, owner of record, occupancy, assessment/tax
information, and property rights appraised.
• Detailed information similar in scope to the Site section of Fannie Mae Form 1004
March 2005 (Uniform Residential Appraisal Report) including, but not limited to,
size, zoning, highest and best use, shape, topography, drainage, utility availability,
and location in a FEMA designated Special Flood Hazard Area.
A-2 5/06 4150.2
• A sales grid similar in scope to that presented in the Sales Comparison Approach
section of Fannie Mae Form 1004 March 2005 (Uniform Residential Appraisal
Report) including, but not limited to, detailed information on three comparable
sales, attributes, number of comparable unimproved sale properties and
offered/listed for sale properties.
Form FW 68, Land Appraisal Report, is an acceptable reporting format.
The appraiser must adjust the sales of comparable, unimproved building lots/sites for
differences in location, size, zoning, utility connection and/or availability, site improvement
and any other pertinent factors. Any costs incurred in razing the existing improvements
and/or clean up should be extracted from the value of the supporting land to arrive at a final
conclusion of value.
C. Scope
The appraiser must develop and report the appraisal in accordance with the scope of work
requirements established by USPAP and HUD/FHA.
D. Contractual Responsibility of Appraisers
The appraiser is hired by the M&M contractor and, therefore, has a contractual responsibility
to the M&M contractor. Additionally, as with any appraisal performed for a HUD/FHA
program, the appraiser has an obligation to perform appraisal services commensurate the
standards and requirements of HUD/FHA.
E. Intended Use of Appraisal
The intended use for an REO appraisal is to estimate the “as is” market value of the property
in order to provide a basis for determining the listing price of the property for marketing
purposes.
F. Intended User
The intended user of a REO appraisal is the M&M contractor, the lender (under certain
circumstances) and HUD/FHA.
G. Statement of Insurability
The following definitions shall apply to the insurability of a REO property:
Insurable: Properties marketed as "insurable" are those that meet FHA's Minimum Property
Requirements (MPR) for existing housing and Minimum Property Standards (MPS) for new
construction at the time of the appraisal in their as-is condition without repairs being
necessary.
Insurable With Repair Escrow: A property that requires no more than $5,000 for repairs to
meet FHA's MPR or MPS as estimated by the PCR and as reviewed and determined to be
reasonable by the appraiser, is eligible to be marketed for sale in its as-is condition with FHA
A-3 5/06 4150.2
mortgage insurance available, provided the purchaser(s) establishes a cash escrow to ensure
the completion of the required repairs. Purchaser(s) are permitted to include in the mortgage
an amount equal to 110% of the estimated cost of the repairs.
Uninsurable: Properties offered for sale "Uninsured" do not meet, in their as-is condition,
FHA's MPR or MPS and the cost of repairs identified by the appraiser, to meet MPR or MPS,
are estimated to exceed $5,000. Uninsurable properties can qualify for FHA’s Section
203(k) rehabilitation program and, depending upon the scope and extent of repairs needed,
the Streamlined (k) Limited Repair Program.
A Statement of Insurability, in bold font, must be included in the Comment section of the
appraisal report. This Statement of Insurability shall indicate if the property can be sold with
FHA mortgage insurance (meets MPR if existing construction or meets MPS if new
construction) either (1) in its “as-is” state without repairs or (2) in its “as-is” state with
repairs costing $5,000 or less with repair escrow or (3) uninsurable. In appraising REO
properties, as with the performance of any FHA appraisal, a FHA Roster appraiser must
denote any deficiency to the supporting site or improvements in the appraisal report. The
appraiser is to note those repairs necessary, together with a cost to cure, to bring the property
into compliance with either MPR or MPS.
The marketing categorization, “Insurable with conditions”, introduced in Mortgagee Letter
2000-27 and defined under “HUD REO Marketing Approaches” is no longer available. All
other instructions and requirements outlined in Mortgagee Letter 2000-27 remain unchanged
except where updated by the guidance and requirements provided in Mortgagee Letters 2005-
34 and 2005-48.
H. Effective Date of Value
The effective date of value is the date when the appraiser performs the site visit for the
subject property. If another date is used as the effective date, the appraiser must specifically
indicate:
• the alternative date (with detailed explanation of why)
• the date when the subject property was physically inspected
I. Additional Appraisal Requirements
The appraiser must value the subject property from the information gathered and arrive at an
estimated market value of the subject property based on the requirements detailed in the
Appraisal Protocol, issued as an attachment to Mortgagee Letter 2005-48.
A building sketch is required, but a floor plan or room layout of the property is not required
unless there is evidence of functional obsolescence. Representative interior photos are
required in cases where there is significant interior repair (in excess of $5,000 repair costs)
required.
A-2 Sales Comparison Approach
Typically, the Sales Comparison Approach is the most applicable approach to estimate the
A-4 5/06 4150.2
market value of a REO property. Appraisers may utilize sales comparables from other REO
transactions only when such sales are deemed to be the best available for the market area and
they meet all of the following criteria:
• located in the subject neighborhood or reasonable proximity
• comparable property subject to reasonable adjustment
• sold with a willing buyer and seller
• exposed to the market for a reasonable period
Appraisers are reminded that an explanation, as well as support, must be provided for any
adjustments to the sales price of comparable sales that exceed the guidelines set forth in
Revised Appendix D: Appraisal Protocol, pages D-31, D-68, D-98 and D-127, attachment to
Mortgagee Letter 2005-48.
Inclusion of vacancy rates, rates of foreclosure and a discussion of foreclosure sales in the
subject’s market area may be used as additional support for reliance on sales of other REO
transactions.
Do not use distressed sales such as Sheriff Sales. These sales do not involve a willing seller
nor are they exposed to the market under normal conditions. The resulting value indication
derived from the use of such sales is not consistent with the definition of market value.
A-3 Reporting Requirements
As with any appraisal performed by a FHA Roster Appraiser, an REO appraisal must be
performed in accordance with the Uniform Standards of Professional Appraisal Practice
(USPAP).
Other reporting requirements are as follows:
• With each appraisal, the appraiser must provide a list of any buyer incentives that
would enhance the marketability of the property to provide an incentive to buy the
property unrepaired as opposed to repaired.
• For all property constructed before 1978, the appraiser must condition the appraisal
on the completion of a lead-based paint test.
• For appraisals of vacant lots (land), complete a land appraisal report form.
A-5 5/06
APPENDIX B: SPECIAL PROGRAMS
4150.2, CHG-1
APPENDIX B: SPECIAL PROGRAMS
B-1 203(K) REHABILITATION HOME MORTGAGE INSURANCE
The Section 203(k) program is HUD's primary program for
rehabilitating and repairing single-family properties. A Section
203(k) mortgage provides financing for the acquisition and
rehabilitation construction of a property. The mortgage is
funded by a HUD-approved lender and insured by HUD/FHA. A
Section 203(k) mortgage may be used to perform the following:
o Purchase a property and repair/renovate it.
o Purchase a dwelling on another site, move it onto a new
foundation and repair/ renovate it.
o Refinance existing indebtedness and repair/ renovate a
property.
o Repair/renovate a presently owned property.
The following table summarizes which properties are eligible
under Section 203(k).
Type of Property Eligibility
Condominiums Yes 2
Mobile homes Yes
Cooperatives No
Non-residential being converted to
single family (1-4 unit) Yes
Single family (over 1 year old) Yes
A 203(k) mortgage may be originated on a "mixed use" residential
property provided that:
o The percentage floor area used for commercial purposes
follows these standards:
- One story building 25%
- Two story building 49%
- Three story building 33%
o The commercial use will not affect the health and safety of
the occupants of the residential property
o The rehabilitation funds will only be used for the
residential functions of the dwelling and areas used to
access the residential part of the property.
______________________________
2 Condominiums are eligible only if they meet the following
requirements:
- FHA/VA approved
- Maximum loan does not exceed 100%
- Improvements are only within the unit walls
- Condominium is complete with no ongoing or anticipated
addition of any units or common areas
- Unit owners have had control of the common area for at least
one year
- The condominium association has proof of hazard, liability and flood insurance coverage
- Unit is owned fee simple
- There are no restrictive covenants or provisions restricting
conveyance of the unit
- A minimum of 90% of the units in the project have been sold
- 51 % or greater of the units in the project are owner
occupied
- No single entity owns more than 10% of the units in a project
with more than 30 units.
- No single entity owns more than 20% of the units in a project
with less than 30 units.
B-1 6/99
4150.2, CHG-1
A. ELIGIBLE IMPROVEMENTS
(B-1) A minimum of $5,000 must be used in part for renovation
and/or repair of an existing property. Minor or cosmetic
repairs or new fixtures alone, such as stoves and
refrigerators, are not acceptable. The repair or renovation
may include:
o making structural alterations such as repair or
replacement of structural damage, additions to
structure and finished attics and/or basements
o eliminating health and safety hazards that would
violate HUD's Minimum Property Standards
o installing wells and/or septic systems and
reconditioning plumbing
o making changes for improved functions and modernization
o making changes for aesthetic appeal and eliminating
obsolescence
o repairing or adding roofing, gutters and downspouts
o making energy conservation improvements
o landscaping, grading, repairing patios and terraces
that improve the property equal to the dollar amount
spent on the improvements
o creating accessibility for the handicapped
B. INELIGIBLE IMPROVEMENTS
Any luxury item and/or improvement that does not become a
permanent part of the subject property is not eligible,
including:
o additions or alterations to support commercial use or
to equip or refurbish space for commercial use
o recreational or luxury improvements, such as swimming
pools, hot tubs, whirlpool baths and saunas
o barbecue pits, bath houses, tennis courts, satellite
dishes or tree surgery
C. BORROWER, PLAN REVIEWER AND APPRAISER
The borrower must have the following items prepared before
an application, review or appraisal can occur:
o an existing plan of the structure
o a proposed plan detailing where structural or planning
changes are contemplated
o inspection reports from a qualified engineer or
inspection service denoting the presence of rodents,
dry rot or termites and evaluating the adequacy of the
existing structural, heating, plumbing, electrical and
roofing systems
o specifications of repairs
o for site improvements, a plot plan denoting the
location of the structure, walkways, drives and other
relevant details
o description of materials (HUD Form 92005 or similar
form)
6/99 B-2
4150.2
203k Consultant: The borrower selects a HUD approved 203(k)
Consultant to do the following:
o visit the site
o prepare work write-up that specifies a description and
cost of each work item
o review the architectural exhibits for compliance with
HUD's Minimum Property Standards
o inspect any of the property's health and safety items
noted on the drawings
In comparing the cost estimates with others projects, the
consultant can use R.S. Means & Company Repair and
Remodeling Cost Data Book or The Home-Tech Remodeling and
Renovation Cost Estimator. When the consultant has reviewed
the property and respective plans, an appraisal can be
requested. The lender will hire the same or another 203(k)
Consultant to inspect the rehabilitation during construction
and sign off on all draw requests.
Appraiser. The appraiser is required to perform an "as-
repaired" appraisal and to report it on the URAR. When
performing an "as-repaired" appraisal, appraise the subject
property at its expected market value when the proposed
rehabilitation and/or improvements are complete.
Also, a lender may request an "as-is" appraisal to be
recorded on a separate URAR. Under an "as-is" appraisal,
the subject property is appraised in its present condition
to establish the value before rehabilitation. Repair
requirements or VC conditions are not included in the "as
is" valuation.
The appraiser must visit the property, review the
architectural exhibits showing the proposed work and review
the proposal for standard valuation conditions that may have
been overlooked. If conditions exist that impact the safety
and health of the occupants, discuss these items with the
plan reviewer to correct them in the architectural exhibits.
B-2 SECTION 255: HOME EQUITY CONVERSION MORTGAGES (REVERSE
MORTGAGES)
A Reverse Mortgage allows a borrower aged 62 and older to
borrow against the equity in a property that has limited
outstanding debt. A subject property under this program
must be a one- to four-unit dwelling in which the mortgagor
occupies one of the units. The appraiser must perform the
appraisal with the same standards and forms expected in an
FHA single-family appraisal. It may be a unit in an
approved condominium or Planned Unit Development (PUD).
Manufactured homes are eligible if the home complies with
outstanding FHA guidance. The same deficiencies and repair
items must be noted on the URAR forms. In certain
instances, the borrower is not required to treat any
defective paint surfaces after closing for properties built
before 1978.
B-3
4150.2
B-3 SECTION 223(E)
Section 223(e) is a mortgage insurance program for properties
located in older, declining urban areas. The program allows for
the acquisition, repair and/or renovation or construction of a
residential property. Under this program, FHA waives the
requirement that the subject property have a remaining economic
life of at least five years if the property is in a reasonably
viable location where there is a need for affordable housing.
Appraisal: The property must comply with HUD's Minimum Property
Requirements of , and the appraisal must denote any deficiencies
on the VC form. When conducting an appraisal on a subject
property eligible for this program, the appraiser must determine
the remaining economic life by examining the pattern of recent
changes in the adjacent sites' land use strategies that would be
incompatible with single-family use. If the remaining economic
life is less than five years, prepare a plan of the subject
property denoting the land use patterns surrounding it.
The physical life of the property must be sufficient to permit a
long-term mortgage. Under this program, the physical life of a
property can be substituted for the economic life because of the
special risk provisions that compensates for the economic factors
that adversely affect the property.
B-4 TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME LOAN
PROGRAM
Title I is two-loan programs, one for property improvements and
one for the purchase of manufactured homes and/or lots on which
the manufactured homes are to be placed. No appraisal is needed
for a property improvement loan; however, an appraisal of any real
property involved in a manufactured home is required or for
any existing home. This would be:
o a manufactured home lot loan
o the lot portion of a combination loan for the purchase of a
lot and manufactured home
o a used manufactured home
If a loan defaults, the lender repossessing the manufactured home
under the Uniform Commercial Code or through judicial processes
must request an N.A.D.A. appraisal. Appraisals of repossessed
manufactured homes should be made before removal by the lender.
B-5 SOLAR ENERGY
To encourage the use of solar energy in homes, HUD will insure a
mortgage up to 20 percent above the maximum allowable insurable
amount in a geographical area if such increase is necessary to
account for the increased cost of the residence due to the
installation of a solar energy system which may not exceed 20
percent of the value of the property.
An eligible solar energy system is defined as any addition,
alteration, or improvement to an existing or new structure which
is designed to utilize wind or solar energy to reduce energy
requirements obtained from other sources. Active, passive and
photovoltaic solar energy systems are permitted in this program,
provided they are accompanied by operational 100 percent back-up
conventional systems.
B-4
4150.2
The solar energy system's contribution to value will be limited
by its replacement cost or by its effect on the market price of
the dwelling. In the event that market data is not available to
indicate the additional amount which would be paid for a property
containing a solar energy system, the amount of increase would be
the lesser of the actual cost of the solar system installed in
the subject house or 20 percent of the market value of the
property. The difference in added value contributed by the solar
system in comparison to the conventional system must represent a
reasonable proportion of the total value of the property and may
never exceed 20 percent of the market value of the property
without a solar energy system.
A. Appraisal Procedure
The appraiser shall reflect in value the local market
acceptance of solar heating equipment. Solar collectors
must be located where they will be free from natural or man
made obstructions to the sun.
1. Solar Hot Water Systems
Acceptability. When such systems are proposed to be
installed, they must comply with the provisions of Use
of Materials Bulletin Number 100, Subject: HUD Building
Product Standards and Certification Program for Solar
Water Heating Systems, issued August 15,1993. [Use of
Materials Bulletin are available for public inspection
during regular business hours in the Office of Consumer
and Regulatory Affairs, Department of Housing and Urban
Development, Room 9156,451 7'h Street S.W., Washington,
DC 20410. They will soon be available on the HUD Web
Page.] When such a system is already installed in an
existing home, the appraiser may request an inspection
by a qualified solar system inspector/contractor for
recommendations as to acceptability in operations,
maintenance and life expectancy.
2. Photovoltaic Systems [In Preparation]
3. Limits to Value
The solar heating or hot water system's contribution to
value will be limited by its replacement cost and by
its effect on the market price of the dwelling. In
estimating market value by comparing a subject property
that has a solar heating system to a recently sold
comparable property with a fossil fuel system only,
increased the sale price of the comparable by the
amount typically paid in the market for the solar
heating system.
4. Temporary Procedure
Lack of Market Data. In the event that market data is
not available to indicate the additional amount which
would be paid for a property which does include solar
heating or hot water system, then the amount of the
increase shall be the difference in cost between all
heating equipment, including solar installed in the
subject house, less the cost of all heating equipment
installed in the comparable property without a solar
installation.
B-5
4150.2
However, in making this adjustment based on differences
in cost, the appraiser shall consider the ratio between
the value added by a solar heating system and the value
of the property with a conventional heating system
only, to ensure that the contribution of a solar
heating system to the total value represents a
reasonable proportion of the total value of the
property.
5. Responsibility for Temporary Limit
The HOC will consider the costs of acceptable solar
energy systems for homes of several sizes, and will
consider the market prices of typical homes of these
several sizes (without solar energy systems) in order
to set a limit on the amount which a solar energy
system can add to the estimated value of the subject
property. This limit shall be expressed as a
percentage of the market value of the subject property
(before consideration of the solar energy system) and
this limit shall not exceed 20 percent of the market
value of the subject property (without a solar energy
system).
B-6
APPENDIX C: APPRAISAL OF SINGLE FAMILY HOMES ON NATIVE AMERICAN LANDS
4150.2
APPENDIX C: APPRAISAL OF SINGLE FAMILY HOMES ON NATIVE AMERICAN
LANDS
C-1 OVERVIEW
For purposes of this appraisal guidebook, if a lender specifically needs an appraisal under
HUD/FHA's Section 248 program on Tribal Trust land or for HUD's Office of Native American
Program (HUD/ONAP) Section 184 on Tribal Trust, allotted (which is also known as individual
trust) and fee simple lands, these guidelines will apply. If the property is on allotted (or
individual) trust or fee simple land located on Native American Reservations and it will be
mortgaged under HUD/FHA's Section 203(b), the appraiser must use the basic appraisal
methodology addressed in this handbook.
Within designated Native American Reservations, treaties and tribal laws have created a
variety of ownership patterns. Some parcels may be unrestricted fee simple, other parcels
restricted tribal trust or allotted trust land. The appraiser must be familiar with the different
restrictions and develop a reasonable value for the subject property. Following are the general
designations.
C-2 PROPERTY RIGHTS APPRAISED
A. FEE SIMPLE UNRESTRICTED
Fee simple unrestricted ownership is ownership real property which may be bought, sold
and transferred between Native American or non-Native American purchasers without
review by the Tribe or Bureau of Indian Affairs, (BIA). For the HUD/FHA Section 203(b)
program, appraisals must conform to all other standard HUD appraisal policies. For the
HUD/ONAP Section 184 program, fee simple land on a reservation, the procedures utilized
for tribal trust and allotted trust may be followed.
B. TRIBAL TRUST LANDS
1. Restricted Trust Land is land held by an individual Indian or Tribe which is subject
to Federal restriction against alienation or encumbrance. Before any lien can be placed
against restricted land, the transaction must be approved by the Bureau of Indian
Affairs (BIA). All HUD loans must comply with this requirement and provide
evidence in the HUD loan file. Lenders are encouraged to make contact with the
appropriate BIA and Tribal realty officers early in the loan processing.
Tribal trust lands are held in trust for the tribe by the United States government. Tribes
may lease portions of the tribal trust land for the use of specific individuals, but
ownership, through the Federal trust, remains with the tribe.
HUD/FHA's Section 248 insures mortgages and HUD/ONAP's Section 184 guarantees
mortgages on homes that are located on Native American Tribal Trust Land. For these
properties, leased ownership of the underlying land remains with the tribe and will be
subject to a long-term 50-year ground lease (or a 25 year lease with a 25 year
renewable term). Determining the value for the leasehold estate is the purpose of the
appraisal and the subsequent use is to provide supporting documentation for a HUD
C-1 5/06 4150.2
insured or guaranteed mortgage. Mortgages on tribal trust sites must include an
acceptable lease signed by the mortgagor and Tribal authority and approved by the
BIA.
2. Allotted (or individual) Trust Land is land owned by individual tribal members but
held in trust by the United States government. It is common for allotted trust lands to
be owned by several individuals. If a prospective borrower proposes to use all or a
portion of a fractionated property, all other owners must indicate acceptance of this
arrangement by becoming parties to the mortgage or subdividing the subject parcel out
to the individual for undivided ownership.
Mortgages on allotted (or individual) trust sites do not involve a lease, but a specific
mortgage rider is required. All HUD loans must have a Deed of Trust Rider attached
approving the mortgage pursuant to 25 USC 483 (a) and approved by the BIA.
HUD/ONAP's Section 184 guarantees mortgages on allotted trust land. Allotted trust
land is held in trust by the federal government for individual Native Americans. The
land is owned by the individual and value is given for the land. When appraising
allotted trust land for Section 184, appraisers may follow the method given for Tribal
Trust Land.
HUD/FHA insures mortgages on homes that are located on allotted trust land under
Section 203(b). The appraiser can use this data for background information, but must
use the typical appraisal practices for FHA Section 203 addressed in Chapters 3 and 4
of this handbook.
The appraiser must perform the complete appraisal process according to current
USPAP and HUD/FHA standards. This includes consideration of all applicable
approaches to value and complete development of all applicable approaches, as
identified herein.
C-3 APPROACHES TO VALUE
The appraiser must be familiar with the different restrictions and develop the appropriate value
for the subject property. The supply of comparable sales and rental transactions vary by site
and by tribes. Until sufficient sales exist on a reservation or within the specific Native
American area to provide a reasonable sales comparison approach for determining the value of
tribal trust leaseholds or allotted land sales, the appraiser must rely on other value indicators.
The appraisal process must be documented more thoroughly than a typical market appraisal.
USPAP Standards #1 and # 2 are effective to allow the appraiser to "correctly employ those
recognized methods and techniques that are necessary to produce a credible appraisal." And "in
reporting the results of a real property appraisal an appraiser must communicate each analysis,
opinion and conclusion in a manner that is not misleading." An appraisal on trust land may rely
more on the cost approach, or data developed from other tribes. HUD will accept the report if
the appraiser has documented the search, information developed and conclusions clearly for the
intended users to understand.
A. Cost Approach
C-2 5/06 4150.2
The cost approach is often the primary indication of value based on the unique nature of the
reservation setting. In Conjunction with the completion of this approach on tribal trust sites,
the value of the site as vacant does not apply. On the cost approach addenda to the URAR the
value of the site is zero or a small leasehold value. if the land lease is at market and there was
no upfront payment the lease-fee value is equivalent to the leasehold value, which is zero. This
is the typical scenario and no value exists for the underlying land. The appraiser should enter
the statement "subject is on Tribal Trust Land with annual rent not capitalized" in comments. If
a market exists and the land was purchased, the value is estimated via traditional methods.
1. New Construction
Due to the flexibility allowed by law, HUD permits the inclusion of development costs
for new construction, which can exceed market value, to be used in both section 248
and Section 184. Following are instructions specific to new construction on tribal
lands. The basic appraisal methodology is addressed in Chapter 4 of this handbook.
In addition to including the cost of water, septic, and any other on-site costs in the cost
approach, for lands within the reservation, the appraiser may provide an allowance for
off-site development costs. The lesser of actual pro-rated costs or up to 15% of the cost
of the construction of the subject house may be added for off-site infrastructure
associated with development of the subject lot. This policy applies principally to new
construction where such charges are assessed by tribally approved entities such as
housing entities or housing authorities, or agreements with other federal or local
government bodies for providing power, utilities, sewer/water and/or road construction.
The costs to bring utilities; including public water, sewer, electricity, and telephone
represent significant development costs. The traditional tract development of
residential homes may not be a part of the local culture. Therefore, the utility costs to
hook-up to any form of a public system in a more rural area can exceed local standards.
In remote areas, the construction costs in the Marshall & Swift guide or related cost
manuals may have to be adjusted for transportation, labor or other costs not included in
the basic estimate. Architect fees are not typically reflected in the base building costs.
Due to special circumstances the normal allocation for this fee may not automatically
reflect the above actual cost. The appraiser must provide a supporting explanation in
the adjustments to the construction costs.
2. Existing Construction
Where market sales are limited, HUD requires the cost approach to be completed on all
tribal trust appraisals, including a credible estimate of depreciation.
B. Sales Comparison Approach
Native American communities are developing economies at varying rates and degrees. It is
important for the lender and HUD to understand the economic factors which affect value.
Therefore the appraiser must communicate the local tribal housing market. The sales
comparison approach will generally be completed, and in remote areas may involve sales up to
18 months old. Where no credible comparables are available, a narrative justification that
discusses the market, and provides any sales, rental or vacancy information pertinent to the
C-3 5/06 4150.2
subject will be acceptable to support value developed from the cost approach. In addition to
the typical data sources the appraiser may obtain sales information from the local tribal or
Bureau of Indian Affairs (BIA) realty office. Sales from other reservations within the region
may be considered. Each situation will have unique factors and the appraiser should explain
deviations from the sales comparison approach instructions outlined in Chapter 4 of this
Handbook. The order of selection preferences for sales would depend on the type of
land being appraised.
? Tribal Trust Leasehold sales (market sales between tribal members)
? Sales of allotted land trust between tribal members
• Fee Simple within the Reservation (residual value of the improvements by
adjusting out the land contribution)
• Fee Simple proximate to the Reservation
For comparable sales that include land value, an adjustment is required to back-out the raw
land value. This adjustment is required when comparing a fee simple comparable sale to a
Native American trust sale transaction.
Enter adjustments on the form under "Other" and label as "Raw Land Value," which is
determined separately for each of the comparable sales.
C. Income Approach
The income approach is generally not developed with regard to Native American Trust Land.
If the property includes a rental unit(s), the appraiser must provide an estimate of monthly rent
for each unit and note whether or not the rent is limited to the tribal sub-market. If the appraiser
determines that this approach is justified, the appraiser should complete the income approach
according to the specifications outlined in Chapter 4 of this Handbook.
D. Reconciliation of Value
The appraiser must determine the market value for the restricted trust properties from the
limited data available. Value determination on trust land is an exception to typical HUD/FHA
instructions; value is not limited to the lower of cost or market. Where market information is
limited, greater weight may be given to the replacement cost approach. Document the decision
process and the value.
C-4 HUD/FHA REQUIREMENTS
On loans involving restricted trust land, with either Section 184 or Section 248, HUD waives
the requirement of a strict interpretation of market value and will accept loans based on the
above market cost approach. All other HUD health, safety, access, and property condition
issues must conform to FHA requirements.
The appraiser must indicate if the property is in need of, or in the process of receiving any
repairs. Make appropriate requirements for repairs-to-be-completed and appraise the property
C-4 5/06 4150.2
"as repaired."
The appraiser must indicate if the property conforms to the applicable Minimum Property
Requirements of this Handbook. If it does not, the appraiser must recommend correction of the
deficiency or rejection of the loan and explain. Tribally owned and maintained streets and
utilities are considered publicly owned. Appraisers must require easements and a maintenance
agreement for non-public, common ownership situations.
HUD accepts tribal enforcement of building codes and inspections to the extent they are
standard and enforced. At the point tribal support is not available, review and certification that
the work complies with an appropriate national standard must be contracted out to a licensed or
certified specialist. Example, a tribe issues building permits, but has no provisions for
inspections. The lender/borrower must contract with a lender approved qualified specialist
such as an engineer, architect or inspector. Inspection/approval by the Indian Health Service is
acceptable for individual or community water and sewer systems.
The remaining economic life must be estimated and reported but does not limit the mortgage.
The subject property must possess sufficient remaining physical life to warrant a long-term
mortgage. The mortgage term may not exceed the remaining physical life of the property.
A. HUD/FHA Section 248 and HUD/ONAP Section 184 Requirements
For both Section 248 and Section 184 programs, the property must be free of hazards, noxious
odors, grossly offensive sights or excessive noises which might endanger the physical
improvements, affect the livability of the property, its marketability, or the health and safety of
its occupants. If any of these conditions exist, the appraiser must recommend correction of the
problem or rejection of the loan
and explain.
For both programs, the appraiser will make appropriate requirements to correct any observed
or potential environmental problems. Many reservations have not been mapped for the 100-
year flood plain. If the appraiser observes a possible flood plain problem, they are to require
flood insurance on existing properties. The Underwriter may waive the flood insurance
requirement if the borrower or the tribe provides an elevation certificate from a licensed
engineer that the property is not at risk from flooding. Note that the lowest floor (including
basement) for new construction must be at or above the 100-year flood elevation.
B. REPORTING REQUIREMENTS
The appraiser must report if an approach was not developed and insert the rationale for
exclusion of the approach. The appraiser must attach an addendum complete with the
assumptions supporting the indication of value by the cost approach. The cost approach is
reconciled to the other values, if any, on the URAR. The appraiser will indicate any work
requirements or VC pursuant to outstanding instructions. The DE underwriter/lender must
assure acceptable completion of any work requirements pursuant to existing instructions.
C-5 INSTRUCTIONS FOR ASSISTED APPRAISAL PROCESSING IN APPRAISAL HIGH
C-5 5/06 4150.2
COST AREAS
To accommodate the special conditions associated with remote sites on Native American lands,
the following assisted appraisal process is allowed.
The assigned appraisers may network with local personnel where the high cost of real estate
appraisals is a concern for underwriting single family mortgages in Native American
communities. To minimize this problem, FHA and ONAP will allow the use of trained local
personnel to perform the inspection, provide current analysis of the local market, and draft the
appraisal report. The report must be forwarded to the assigned appraiser who win review the
report, provide additional documentation, sign the URAR and forward the report to the lender.
Using the Assisted Appraisal Process is restricted to remote areas where licensed appraisers are
not readily available. It may be used when the cost of transportation and/or time increases
the cost of the appraisal to twice the cost of typical appraisals in the local urban areas. The
process must be monitored and acceptable to the DE underwriter/lender. The assigned
appraiser may use local subcontractors who:
• Have general real estate skills (construction, lending, sales, management)
acceptable to the appraiser (such as Housing Authority staff, Tribal Designated
Housing Entities (TDHE) staff or BIA realty personnel, local real estate
professionals).
• Must comply with the Conflict of Interest limitations (have no personal or
financial interest with the buyers or sellers of the property).
• An appraiser who signs a real property appraisal report prepared by another,
even under the label of "review appraiser" must accept full responsibility for the
contents of the report, USPAP Standard 2-5.
• The assigned appraiser is responsible for the entire appraisal and signs the
URAR. The individual assisting in the report must document the extent of help
provided and certify no conflict of interest exists in the certification.
• The assigned appraiser must be familiar with the Competency Rule in the
USPAP. This includes key issues such as the unique property rights conveyed,
the local market involved and market conditions. It is assumed the remote area
markets will change slowly. If conditions have changed, an updated analysis is
required. The assigned appraiser assumes all responsibility that the appraisal
meets all HUD/FHA and ONAP program requirements.
C-6 5/06
APPENDIX D: VALUATION PROTOCOL
4150.2
1/06
D- 1
APPENDIX D: VALUATION PROTOCOL
The appraisal process is the lender’s tool for determining if a property meets the minimum requirements
and eligibility standards for a FHA-insured mortgage. Underwriters bear primary responsibility for
determining eligibility; however, the appraiser is the on-site representative for the lender and provides
preliminary verification that the General Acceptability Criteria standards have been met.
FHA RESIDENTIAL APPRAISAL REQUIREMENTS
This section provides specific instructions for completing appraisal report forms.
The appraisal reporting form to be used will depend on the property type that is being appraised. The
appraiser must select the appropriate appraisal form for reporting an FHA appraisal from the following:
1. Uniform Residential Appraisal Report (Fannie Mae Form 1004 March 2005) – Required to report an
appraisal of a one-unit property or a one-unit property with an accessory unit.
2. Manufactured Home Appraisal Report (Fannie Mae Form 1004C March 2005) – Required to report
an appraisal of a one-unit manufactured home.
3. Individual Condominium Unit Appraisal Report (Fannie Mae Form 1073 March 2005) – Required to
report an appraisal of a unit in a condominium project or a condominium unit in a planned unit
development (PUD).
4. Small Residential Income Property Appraisal Report (Fannie Mae Form 1025) – Required to report
an appraisal of a two- to four-unit property.
An appraisal performed for HUD/FHA purposes requires that all sections of the appraisal form be
addressed. The appraiser must complete the form in a manner that clearly reflects the thoroughness of
the investigation and analysis of the appraisal findings. The conclusions about the observed conditions
of the property provide the rationale for the opinion of market value. The completed appraisal form
utilized, together with the required exhibits, constitutes the reporting instrument to HUD for FHAinsured mortgages.
The FHA Appraisal is made Under the following conditions
A. “As Is” 1. There is/are no repair(s), alteration(s) or inspection conditions
noted by the appraiser, or
2. Establishing the “as is” value for a regular 203(k), or
3. The property is being recommended for rejection
B. “Subject to Completion per
Plans and Specifications”
1. Proposed Construction where construction has not started, or
2. Under Construction but not yet complete (less than 90%), or
3. Regular 203(k)
C. “Subject to the following
Repairs or Alterations”
1. Repair or Alteration Condition(s) noted by the appraiser, or
2. Streamline 203K, or
3. Under Construction, more than 90% complete with only minor
finish work remaining (buyer preference items i.e., floor
coverings, appliances, fixtures, landscaping, etc.). This
eliminates the need for construction exhibits.
D. “Subject to the following
Required Inspection”
1. Required Inspection(s) noted by the appraiser
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