HUD and FHA Guidelines for Valuation Analysis for Single Family and One to Four Unit Dwellings - Part 11
Purpose of this Section: The following section contains appraisal guidelines for HUD and FHA appraisals. I've included this section to be used as a reference for you. These guidelines can help further clarify the appraisal topics discussed in this book. The text is written in a very formal and technical style of writing since it is used by HUD and FHA for their appraisal procedures. You don't need to try and memorize everything right away since it will seem overwhelming if you try to do that. Just take your time so you can learn at your own pace and refer back to this book as needed, like a reference manual.
- APPENDIX A: VALUATION OF OTHER PROPERTIES
A-1 REAL ESTATE OWNED (REO)
HUD'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, REO properties were owned by the lender because the borrower defaulted on the mortgage. The appraiser must coordinate a specific time for a full site inspection of the property with the property manager. Generally, REO property is secured with the utilities turned off. However, the appraiser should attempt to have the utilities turned on to examine all building systems during the appraisal.
A. Appraiser Requirements
Requirements for appraisers who perform REO appraisals are the same as for appraisers of any other property. An appraiser of REO property must be state licensed and be a current member of the FHA Register.
B. Appraisal Requirements - "As-Is" Value
REO properties are to be appraised "as-is ". The Dictionary of Real Estate Appraisal, third edition, defines "as-is" market 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 that which physically exists and is legally permissible and excludes all assumptions concerning hypothetical market conditions or possible reasoning."
The "as-is" value is the market value for the property as it exists on the date of the appraisal. The appraisal shall consist of the Uniform Residential Appraisal Report (URAR) and the Valuation Conditions (VC) form. The appraiser shall indicate on the appraisal or an addendum to the appraisal if the property can be sold with FHA mortgage insurance (meets FHA minimum property requirements) either (1) in its as-is condition without repairs or (2) in its as-is condition with repairs costing $5,000 or less. If the property can be sold with FHA mortgage insurance by making $5,000 or less in repairs, the appraiser shall provide a list of the repairs and their estimated cost. If the property needs more than $5,000 in repairs to make it eligible for FHA mortgage insurance, the appraiser needs only to list the general areas of repairs and provide a statement that such repairs will exceed $5,000.
C. 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
- The date when the subject property was physically inspected
The appraiser must perform the complete appraisal process, which includes considering all applicable approaches to value and developing appropriate approaches identified in this Handbook.
The purpose of the REO appraisal is to help establish the sales price for the subject property. REO appraisals will estimate the "as-is" value of a foreclosed property owned by HUD.
F. Intended Use of Appraisal/Function
The intended use or function of a REO appraisal is to provide the 'as-is " value of foreclosed property for marketing and bidding purposes. Great reliance will be placed on the as-is value of the property for future sale. The as-is value supports FHA's sales price for the disposition of the property. The extent of repairs needed to the property will determine if it is offered for sale with FHA-insured financing or without insured financing. If the property meets minimum FHA property requirements without repairs, or meets FHA minimum property requirements with $5,000 or less of repairs, the property will be offered with FHA insured financing. If required repairs exceed $5,000 the property will be offered without Section 203(b) insured financing, but eligible for Section 203k insured financing.
G. Additional 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 Chapter 4-Valuation Analysis-of this Handbook. Include all transaction data of the previous homeowner, date of that transaction and sale prices based on USPAP requirements. This provides a benchmark or frame of reference for the property and neighborhood market conditions. For properties where the interior cannot be inspected because of adverse occupants or other reasons, estimate the value based on an exterior inspection of the property. Use the Freddie Mac 704 form, Second Mortgage Property Value Analysis Report, in conducting exterior estimates of value. Prepare a narrative report on the outside condition and the apparent maintenance of the property in contrast to the neighborhood properties. Include the estimate of Value and include photographs of the exterior, as well. A building sketch is required, but a floor plan or room layout of the property is not required. The appraiser must consider and note the exposure period and estimate how long the property is expected to remain on the market. The exposure period differs from the marketing period. The exposure period estimates the length of time the property interest would have been offered on the market before the effective date of the appraisal. The concept of reasonable exposure encompasses not only adequate, sufficient and reasonable time but also adequate, sufficient and reasonable effect. The Valuation Analysis must be based upon a Reasonable Exposure Period. When appraising REO properties, the appraiser must adhere to all other valuation and appraisal requirements discussed in previous chapters.
A-1.1 Approaches To Value
A. Cost Approach
Generally, the Cost Approach is not developed for REO properties. If the Cost Approach is justified, follow the specifications outlined in Chapter 4: Valuation Analysis. The appraiser is required to quantify repair costs in depreciation for an "as-is" value.
B. Sales Comparison Approach
Often, the Sales Comparison Approach is the most applicable approach to estimate the market value of a REO property. Appraisers must utilize sales comparables from other REO transactions from HUD, the Department of Veterans Affairs, Fannie Mae, Freddie Mac, or a conventional lender, as long as they include the following requirements:
- 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
If comparables such as these are not available, regular market comparables may then be used. Do not use distressed sales such as Sheriff Sales in the Sales Comparison Approach. 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. Always use the sales comparison approach for one- and two- unit properties. This approach relies on:
- The availability of sales data
- The volume of transactions
- The mirroring of Sales Comparison Approach
- The market
- The ability to observe and report the most recent market trends
Data confirmed and developed under this approach has direct application to the other approaches used and should be considered therein. At least three comparable sales must be used with this approach. At all times, the appraiser must carry forth the assumptions and data from the other approaches and the VC form in developing a value estimate by the Sales Comparison Approach.
C. Income Approach
Generally, the Income Approach is not developed for one- or two-family REO properties. If the market indicates that the Income Approach is justified, follow the specifications outlined in Section 5: Valuation Analysis. For three- and four-unit properties, always use the income approach.