­

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

  • 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.
  • 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:

  • The economic background of the community or region and the need for accommodations of the type represented
  • 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
  • The trends and rate of change of characteristics of the neighborhood and their effect on land values
  • Workmanship, durability of construction and the rate with which natural forces cause physical deterioration
  • 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:

  • 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

  • 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.

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:

  • Detached
  • Semidetached
  • Multiplex
  • Row houses
  • 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.

2. Hazards

The property must be free of all known hazards and adverse conditions that:

  • May affect the health and safety of the occupants
  • May affect the structural soundness of the improvements
  • 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:

  • Rock formations
  • Unstable soils or slopes
  • High ground water levels
  • Springs
  • 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).

Log in to comment
­