Last November Fannie Mae announced changes in their appraisal requirements. Some of of these became effective on January 1st, 2009 and others will become effective on April 1st 2009.
As of January 1st 2009 some of the major changes were.
As of April 1st 2009 the “1004 MC” or Marketing Condition Addendum will be required. This form is very comprehensive, requiring the appraiser to extract MLS data, to an excel spread sheet and then taking this information and developing trend lines, absorption rates, sales to list price ratios, days on market, as well as explanation of submarkets and the overall effect of submarkets.
This form is intended to increase the transparency of the appraiser’s conclusions in the report.
From a pragmatic perspective, it will mean more work for the appraiser to explain his or her conclusions, especially in light of that most underwriters that have no or little understanding of appraising theories and/or tools.
Our scope of work is increasing. And with that increase in workload, is an increase in appraisal fees. So as of March 17, 2009, I will include the 1004MC on all appraisal reports and increase my residential fee to $500.00. There will be no additional charge for FHA since all appraisals will be made for FHA standards.
In most cases my appraisal report will include a cost analysis to better support the indicated effective age, and include additional comments regarding the verification of comparables and condition of sale adjustments. Reports will include graphs that will support or give weight to the basis of time adjustments, or lack of one, and in many cases an AVM/Multiple Linear Regression report to support the conclusions made.
Don’t forget that as of October 2009, FHA will require all appraisers to be certified, so expect a reduction in qualified appraisers starting in October 2009
I recommend several links to understand what is going on in the market.
Fannie Mae Announcement November 14, 2008
www.appraiserscope.com Which has comments and solutions from both mortgage representatives and appraisers.
The appraisers water cooler – 1004 MC
In the wake of the mortgage meltdown, new policies and requlations aimed at enhancing the reliability of appraisal reports, are being leveled primarily at real estate appraisers. Some of the changes that are being suggested are:
I would like to remind everyone that appraisers have been around longer than there have been licensing requirements and USPAP. Although there has always been pressure on the appraiser to come to a predetermined value we had this level of a problem before now.
So the question is: How do we make an appraisal more reliable?
Some of the more seasoned appraisers can look at the changes over the years and see that two things have been happening.
What has happen? Have we changed our priorities from being concerned with determining an accurate fair market value to meeting the minimal requirements of USPAP?
Meeting minimal USPAP requirements is just that, meeting minimal requirements.
For this discussion, I propose extending our analysis beyond these minimal requirements, which will increase the reliability and there for the final conclusion.
There are several other factors that I feel are important to recognize and justify this statement.
From a practical stand point these factors will not change anytime soon. However extending our scope or depth of study can change rather quickly and be done at a grass roots level. If we simply make clients aware that exceeding the minimal standards would increase the reliability of appraisal reports and decrease the so called fraudulent appraisals.
Let me give an example of why I feel this statement is correct. Let us say we have four appraisers appraising the same property for four different intended uses.
While each appraiser may or may not come to the same conclusion, the reliability of such conclusion is increased with the depth of study each sequential appraiser provides. Even from a layperson’s point of view, a person would conclude that there a higher reliability factor associated with the appraisal analysis in which the depth of study is greater.
Through all this talk, debate and conversation, appraisers nor their organizations have found or suggested a solution to solve the problem.
My suggested solution is getting back to our principles, get back to being concerned with estimating fair market value and not just meeting the minimal requirements of USPAP.
As appraisers we analyze everything, including how the square footage of a property is measured and calculated. In most cases, we’re providing an appraisal to meet secondary market guidelines, and most commonly Fannie Mae and Freddie Mac.
So let’s look at how Fannie Mae guidelines define GLA, or Gross Living Area.
XI, 405.05: Gross Living Area (11/01/05)
Then there is Gross Building Area or GBA: Gross Building Area sometimes can be the same as GLA (Gross Living Area) and is especially true for single family homes. However, in a multi-family residence there maybe common areas that would not be considered living areas, but part of the size of the structure.
Fannie Mae Guidelines define GBA or Gross Building Area as:
XI, 405.06: Gross Building Area (11/01/05)
The major difference between single-family GLA and GBA in a multi-family is what is actually used as living space (or rented out GLA) and how big the building is (or GBA).
So that is pretty simple, not tough at all.
Click here to continue reading . . .
Square footage calculation of single family residence by the American National Standard Institute or ANSI has a slightly different approach.
ANSI Z765-2003
ANSI standards have been adopted by most MLS services and real estate agents.
ANSI looks at the outside dimensions, but also may "extract" a few areas in the interior and provides some additional guidance when it comes to unique properties.
Detached Single-Family Finished Square FootageFor detached single-family houses, the finished square footage of each level is the sum of finished areas on that level measured at floor level to the exterior finished surface of the outside walls. Openings to the Floor BelowOpenings to the floor below cannot be included in the square footage calculation. However, the area of both stair treads and landings proceeding to the floor below is included in the finished area of the floor from which the stairs descend, not to exceed the area of the opening in the floor.
Detached Single-Family Finished Square FootageFor detached single-family houses, the finished square footage of each level is the sum of finished areas on that level measured at floor level to the exterior finished surface of the outside walls.
Openings to the Floor BelowOpenings to the floor below cannot be included in the square footage calculation. However, the area of both stair treads and landings proceeding to the floor below is included in the finished area of the floor from which the stairs descend, not to exceed the area of the opening in the floor.
Whoops, Lets read that one again: So while Fannie Mae guidelines would include open area ( such as the stair well and cathedral area over living room, in their determination of GLA, ANSI standards does not.
There is a simple reason for that: Fannie Mae wants the appraiser to measure the GLA of the subject consistently with how the GLA is measured on the comparables. Since appraisers do not get in to inspect the interior of the comparables they can not determine open area from non-open area. Again open areas are included in GLA defined by Fannie Mae, but are not included as determined in GLA as defined by ANSI standards.
Above- and Below-Grade Finished AreasThe above-grade finished square footage of a house is the sum of finished areas on levels that are entirely above grade. The below-grade finished square footage of a house is the sum of finished areas on levels that are wholly or partly below grade.
Fannie Mae and ANSI are both consistent with this definition. Any level that is partially below grade makes the entire area ineligible for being determined in GLA.
Whoops again: Fannie may states: The appraiser may deviate from this approach if the style of the subject property or any of the comparables does not lend itself to such comparisons. However, in such instances, he or she must explain the reason for the deviation and clearly describe the comparisons that were made
So as long as the appraiser can define consistent comparables with below grade and above grade areas, and they give reasonable cause, below grade areas can be included.
Continuing on ANSI Standards:
Ceiling Height RequirementsTo be included in finished square footage calculations, finished areas must have a ceiling height of at least 7 feet (2.13 meters) except under beams, ducts, and other obstructions where the height may be 6 feet 4 inches (1.93meters); under stairs where there is no specified height requirement; or where the ceiling is sloped. If a room’s ceiling is sloped, at least one-half of the finished square footage in that room must have a vertical ceiling height of at least 7 feet (2.13 meters); no portion of the finished area that has a height of less than 5 feet (1.52 meters) may be included in finished square footage.
Again, Fannie Mae differs because they are considered with the accuracy of an analysis not necessarily the particulars of a property. That is not to say, if the appraiser is aware of an inconsistency or unique property, they are not to take it into consideration.
For example: Two Cape Cod style homes - 24 feet wide with a full dormer on one side. The width on the second floor may be 20 feet. Four feet has been taken away from the width of the second floor to accommodate or meet the requirements that GLA is defined as a minimum of 5 feet.
Yet we know that some homes may have been finished off to accommodate 6 feet of living area, creating additional eve storage but reducing living area. In this particular situation, GLA would be different based on ANSI standards which would eliminate that area, and Fannie Mae, which is based on the exterior measurements, would include this area.
Again, how would an appraiser know if a comparable only had 18 feet wide living area on the second floor if they had not inspected the interior of the comparable sale? The emphasis is on consistency for the purpose of estimating value then on ANSI standards that appears to be primarily concerned with walking space.
Typically appraisers agree to ANSI standards that Fannie Mae does not address. They are:
Finished Areas Connected to the House and Not Connected to the Main HouseFinished areas that are connected to the main body of the house by other finished areas such as hallways or stairways are included in the finished square footage of the floor that is at the same level. Finished areas that are not connected to the house in such a manner cannot be included in the finished square footage of any level. Finished Areas Adjacent to Unfinished AreasWhere finished and unfinished areas are adjacent on the same level, the finished square footage is calculated by measuring to the exterior edge or unfinished surface of any interior partition between the areas.
Finished Areas Connected to the House and Not Connected to the Main HouseFinished areas that are connected to the main body of the house by other finished areas such as hallways or stairways are included in the finished square footage of the floor that is at the same level. Finished areas that are not connected to the house in such a manner cannot be included in the finished square footage of any level.
Finished Areas Adjacent to Unfinished AreasWhere finished and unfinished areas are adjacent on the same level, the finished square footage is calculated by measuring to the exterior edge or unfinished surface of any interior partition between the areas.
NOW: Assessors, Insurance Agents, Architects, Contractors and Mobile Home dealers all have different ways of measuring a property.
A prime example is assessors may measure a New England home as 1.75 story building while the exterior measurements and the interior measurements and ceiling height measurements may constitute the property being a full 2 story building.
It does get confusing for the un-trained. So, it's no wonder that many real estate agents opt not to measure the property, but take the information from a secondary source.
However that secondary source may not be the best representation of the property for an MLS listing.
The best source is someone that knows the differences and understands what sales agent's obligations are . . . An APPRAISER!
In the commotion that has pebbled out industry about the factors that influence the reliability of the appraisal report, has mostly been placed on appraisers. Some of the changes that are being suggested are:
Some of old farts can look at the changes over the years and see that two things have been happening.
I for this discussion, I propose that extending our analysis beyond these minimal requirements, which will increase the reliability and there for the final conclusion.
Let me give an example of why I feel this statement is correct let us say we have four appraisers appraising the same property for four different intended uses.
Through all this talk, debate and conversation, appraisers nor their organizations have found or suggested a solution to solve the problem. My suggested solution is getting back to out principles, get back to being concerned with estimating fair market value and not meeting the minimal requirements of USPAP.
As appraisers we tend to see the world from the perspective of what we are exposed to. Our sources of information come from those that derive a profit for us, through the sale of software, subscriptions and dues.
Software providers, appraisal organizations and vendors tend to focus on the mainstream of our work . . . the lending industry. These companies allow us the ability to discuss the applicability of their service as it relates to their revenue generation.
As we squabble over our ever reducing source of our own revenue and discuss applicability of BPO’s, AVM’s, AMC’s that compete on the basis of fast and cheap services More so than not our conversation of what are the minimum acceptable standards are, what are the expectations of our clients, and what is legally correct as oppose to prudently correct get emphasized. Although the opinions and explanations of our leaders sometimes creates even more confusion based on the answers and interpretations we receive. Even more frustrating many times the opinions of our leaders tend to reinforce their own revenue stream or the revenue stream of their association.
"Because most appraiser revenue comes from the lending industry, we tend to overlook the niches in which the quality of our analysis, the reliability of our reports."
That said, there are other markets, niches we can provide that are not so concerned with prices, speed and cost. They are more concern with accuracy, reliability and professionalism. Appraisers can extend beyond the mainstream of the industry, to capture a market by doing what we do best. Gather information and coming to a conclusion.
My personal quest to determine how can an appraiser sell quality? This search brought me across Gary Crabtree’s site http://www.affiliatedappraisers.biz .
Gary provides a trend analysis, similar to what many people are learning for the first time through several wonderful providers of education, products and services. He provides it on a regular basis and charges a fee. Download 07_08_Monthly_Housing_Report_Crabtree.pdf
I asked Mr Crabtree if I could interview him for this article and he agreed. The result of our conversation is posted below.
Gary: My report is a monthly report of market conditions in Bakersfield, CA (my area of expertise) for which I charge my clients $350 per year for 12 issues. My report addresses the market trends of supply, demand, pricing, marketing times, and strength of market. More recently, I have added the impact "distressed" sales are having on the market and the competition between new and existing homes. My subscribers include Realtors, other appraisers, builders and developers, economists and building trades. I have also reported upon the impact that mortgage fraud is having on the market. The report is quite successful.
Gary: My report is a monthly report of market conditions in Bakersfield, CA (my area of expertise) for which I charge my clients $350 per year for 12 issues. My report addresses the market trends of supply, demand, pricing, marketing times, and strength of market.
More recently, I have added the impact "distressed" sales are having on the market and the competition between new and existing homes. My subscribers include Realtors, other appraisers, builders and developers, economists and building trades. I have also reported upon the impact that mortgage fraud is having on the market. The report is quite successful.
ME: How did you market you’re tend analysis service and how did you get started?
Gary:I started doing a short trend analysis as a public service about 3 years ago and was "giving it away". After word had spread around the community I became "overwhelmed" with requests for the data. That's when I decided it had value and I started marketing the report through the local association of Realtors and through the press when I gave interviews about the data, plus during speaking engagements to Realtors, brokers, service clubs and trade groups.
ME: Who are you clients and why are they willing to pay for your service?
Gary:
1. Realtor use it in their listing presentations to give their clients "the truth" about the market, thus preventing them from "over listing" the property. 2. Builders and developers use it to track the market and their competition. 3. Lenders use it as a check and balance for their appraisal and loan underwriting. 4. Economists use it to track a single market that has had a lot of volatility in the past four years.
1. Realtor use it in their listing presentations to give their clients "the truth" about the market, thus preventing them from "over listing" the property.
2. Builders and developers use it to track the market and their competition.
3. Lenders use it as a check and balance for their appraisal and loan underwriting.
4. Economists use it to track a single market that has had a lot of volatility in the past four years.
ME: What are the benefits and etc that get from providing such services beyond the fee you charge:
Gary: Benefits to me besides the income, is that my business is promoted to clients that want good quality and expert appraisal services and are willing to pay for it. (Attorneys, Relocation Companies, CPA's, Buyers, Sellers and Realtors). The down side is that the lenders know of me and my ethics and standards thus I have been declared the appraiser "pariah" of my market - resulting in very little lender work, which is fine with me as they don't pay a fair fee (wage), like to hassle you, and pressure you in some way and/or form.
Gary: Benefits to me besides the income, is that my business is promoted to clients that want good quality and expert appraisal services and are willing to pay for it. (Attorneys, Relocation Companies, CPA's, Buyers, Sellers and Realtors).
The down side is that the lenders know of me and my ethics and standards thus I have been declared the appraiser "pariah" of my market - resulting in very little lender work, which is fine with me as they don't pay a fair fee (wage), like to hassle you, and pressure you in some way and/or form.
End of interview:
My conversation with Mr. Crabtree was insightful, and the process he followed appears to be consistent with what several people have conveyed when they develop their own niche. Consistently it takes time, hard work, some education and a commitment and desire to move outside the mainstream of business produced by the lending industry.
I am slowly coming to the conclusion that to survive I need to look for appraisal organizations, associations, and software companies that provide me the alternative of developing product and services to capitalize on my own niche. Some type of consistent format that would help me market niches in my area that are looking for quality of analysis and reliability of the report.
I believe as the number of appraisers dwindle, software providers, vendors and appraisal organizations are going to see a drop in subscriptions and memberships they will have to compete for the individual appraiser. Keep a look out for those companies that start to off us alternatives to the mainstream of our work which has been lenders. In fact promote it, bring it to their attention, and suggest to them it might be prudent to assist you in making money.
Also, be careful of being sold a pile of goods. Quick fixes will not work, only research and education like what Gary Crabtree has done will be necessary.
Two things as I close this blog:
First: Thank you Gary for not only for sharing your experience, but for presenting yourself as a professional appraiser to the public. You’re an inspiration to other appraisers that are looking to sell quality and reliability. Second: If you or anyone you know is working a niche, selling related services other than what typical appraisers provide, please contact me.
First: Thank you Gary for not only for sharing your experience, but for presenting yourself as a professional appraiser to the public. You’re an inspiration to other appraisers that are looking to sell quality and reliability.
Second: If you or anyone you know is working a niche, selling related services other than what typical appraisers provide, please contact me.
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