One of the great benefits of doing appraisals for divorce, tax planning and estates is the gratitude that people have when you help them. Yes, my mortgage clients are also very thankful, and appreciate the work I do for them. However, being able to actually “Help” someone is very rewarding. They’ve come to you with a problem hoping that you can solve it for them.

I recently was referred to a gentleman by a Realtor friend that needed help with his estate. They needed to change some things because his wife had unexpectedly passed away. He felt, and rightfully so, that his tax assessed values (he had two properties) were too high. Depending on the size of the estate, some people may need up to two appraisals (current value, date of death, or an alternate date). By figuring out what type of appraisal would best serve his needs, he was able trim nearly 40% off of the estimated tax value of his properties.

Here’s an excerpt from the letter that is kind gentleman sent me:

….I’ve reviewed the estimates on the two appraisals and they are very thorough and professionally done. They will be quite acceptable to my attorney and estate tax consultant. Thanks!

And this is one of the reasons why I’ve made a concerted effort to do more and more of this  type of work. Knowing that I made a difference for this gentleman was very fulfilling and rewarding. As my business transitions to doing more appraisals for legal, divorce, estate planning, relocations, and tax appeals, I’ll be cutting back on mortgage related appraisals.

Frankly, with all of onerous regulations and extra requirements required for mortgage appraisals, it’s become less and less fulfilling. In the end, and in my humble opinion, eventually there will be one less very qualified appraiser available to do mortgage work for real estate sales and refinances. I’ll gladly let the new and inexperienced appraisers have that type of work.

If you were doing an appraisal inspection for this home, and just did cursory view of the utility room, you wouldn’t of probably of noticed a few things. The big question is, why is there newer block walls in a 1940′s built home? The reason is because the original foundation wall was caving in, and this was most likely done to prevent any further damage. So why did it happen in the first place? Most likely water, they also added drain tiling and a sump pump to this room, to help alleviate the water penetration.

This is something that definitely would need to be addressed. A structural engineer would most likely need to be called-in to provide some type of analysis. It’s not the appraiser’s job to make that determination, just let the lender know that there is a problem, and they make the final decision as what needs to be done. Would you even want to purchase this home, or borrow money against it?

Photo’s From A Recent Appraisal Inspection

Believe it or not, there are some properties that just aren’t capable of going traditional financing. I was recently sent to appraise a property that I knew was going to be a challenge as soon as I pulled-up. This appraisal was for an FHA loan, and from the street (50 feet away) I could see chipping and peeling paint-not a good sign!

After a pleasant greeting, the gentleman starting to show me around inside. It didn’t take long for me to realize that this property didn’t have a hope and a prayer of going regular FHA financing, but I learned long ago that doesn’t mean I cut the appraisal short. It’s not my call whether or not an appraisal should be completed, and there are times when a creative mortgage officer will be able to find some type of financing. But, I soon realized after inspecting few more rooms that this wasn’t probably going to happen.

Good Communication Can Save Major Headaches & Money

I’m not sure what conversation the loan officer had with his client, but whenever you’re ordering an appraisal, especially for an older home (built prior to 1978), there are some questions I would get answered first:

• Is there any peeling paint on the exterior or interior?
• Do yo have any unfinished projects?
• Do you have any potential safety hazards (exposed wiring, falling ceiling panels, plumbing issues )
• If you just finished a project, are all bare surfaces painted?
• If some windows were replaced, should have any of the other windows been replaced?
• If the roof was just replaced, was there any damage that hasn’t been repaired yet?

These are just some of the questions I would ask when talking to a potential client about a getting a mortgage. In this particular example the owners just replaced the roof, however, there was a lot of damage that hadn’t been fixed due to the neglect of not taking care of it sooner. A little detective work would of saved everyone time and money!

One of the major challenges homeowners face when having one of the sale of their home go FHA financing, is what work orders is the appraiser going to call for. With Fannie Mae and Freddie Mac in everyone’s crosshairs, FHA financing is only going to become more prevalent within the housing market. I would highly recommend that Realtors become familar with HUD’s Mortgagee Letter 2005-48, and FHA’s three S’s.

Small Window Cracks Don’t Need Repair

FHA no longer requires that all cracked or broken windows be an automatic repair. Requiring a window to be repaired can be challenging for an appraiser, because what is considered safe and just a maintenance item for one appraiser, may be considered a danger to another. FHA requires that all deferred maintenance be noted within the appraisal report, along with a photo, so the underwriter can make the final decision if it’s in doubt. This window has such a small crack that it wasn’t probably worth mentioning, but I did anyways just to CYA. The underwriter agreed, and no repair was necessary.

Some Window Cracks That May Need Repair

It’s tough to see, but this crack is much larger, however, it was dual pane glass and the owner could operate the window without getting hurt. That doesn’t mean that someone on the outside touching or moving the window wouldn’t get injured. On this appraisal I just reported it to the underwriter; “That this window has the potential for injury,” and let them make the call. The underwriter ended up requiring that this window to be repaired.

The Obvious Window Cracks That Should Be Repaired

This window is pretty much a no-brainer, and would be required to be repaired. It doesn’t meet FHA’s MPR (minimum property requirements) guidelines, which is to protect the improvement (house) from the outside elements, and the safety of the homeowner. However, the underwriter does have the final say, but most likely will require that it be repaired.

The bottom line is that if you have any window that is cracked or broken, and has the appearance of being a safety hazard, have it repaired before listing the property for sale. This will keep your sale from being delayed at the last minute by an FHA work order.

When people think of peeling and chipping paint being a problem, they tend to associate it with only FHA properties. These pictures are from a recent appraisal of an early 1900’s duplex that had a ton of peeling and chipping paint around the entire house and garage.

This appraisal was for a conventional refinance, which lenders don’t typically require the owner to repair. However, they did want to know the cost to cure, and have the appraisal adjusted accordingly. In this case it was about $20,000 to $30,000 to repair.

If this appraisal would have been for a sale, the lender may or may not have required the property to be repaired. So keep in mind that if a property needs extensive repairs, that the sales price should reflect those repairs, because the appraisal most likely will.

FHA guidelines state that a house has to meet MPR (minimum property standards) for existing houses, and MPS (minimum property requirements) for new construction. FHA is very concerned with the three S’s: Safety, Security, and Soundness.

When a Realtor was asked what the three FHA S’s were, he replied, “Stupid, more stupid, and seriously stupid FHA appraisers,” which I thought was pretty funny, however, a little off the mark. The three FHA S’s have to do with the following:

Safety:

Per FHA, “Safety refers to the health, habitability and sanitary condition of the property.” When determining what is safe and what is not, involves some subjectivity on the appraiser’s part, while other issues are pretty straight forward. Here is a list of the some of the most common safety issues that require correcting:

• Any peeling or chipped paint on homes built prior to 1978
• Holes in the fire door between the house and garage (doggy doors, missing dead bolts, etc.)
• Missing or damaged handrails for full set of stairs.
• Improper spacing of balusters for decks and balconies (would allow a child to climb in between the balusters).
• 2nd level sliding door not secured when there is no deck.
• Exposed wiring and/or missing outlet covers.
• Missing fire and carbon monoxide detectors.
• Missing carpet over a wood sub floor (If carpet is missing over a concrete floor not an issue-FHA considers concrete to be a permanent floor; however, most lenders may want this addressed).
• Broken or missing windows.

Some of the more challenging issues is what is considered to be minor deferred maintenance, that which doesn’t need to be corrected. The appraiser is still required to note within the appraisal all the deficiencies with the property, thus giving the underwriter the final say. Here are some of the most common deferred maintenance issues that don’t require an automatic repair:

• Worn, dated, or sagging carpet.
• Cracked windows.
• Minor damaged interior walls or doors.
• Minor plumbing leaks.
• Shoddy workmanship.

Soundness:

This relates to the structure and structural components of the dwelling. These types of issues will have to be addressed, which they will either have to be repaired or certified by a professional that they’re not a problem. Some of the most common structural issues that I’ve run across are the following:

• Foundation problems (shifted and bowed walls, large cracks from settling).
• Water damage to walls.
• Roof beyond expected life of two years; more than 3 layers of roofing.
• Decks not properly built to code.
• Additions or basement finishing that wasn’t properly built.

Security:

This is the most misunderstood of the three S’s. Most assume that if refers to securing the property from the weather, and/or intruders. However, it actually refers to the properties ability to serve as collateral for the FHA insurance fund. The main point here is the marketability of the property to serve as collateral. Here’s a list of some of the most common things that I’ve run into that can affect the marketability of a property is when it’s:

• Located near HV (high voltage) power lines (see detailed explanation).
• Located  near a municple sewage treatment plant.
• Located near a major freeway or county road.
• Located near a hazardous site or landfill.
• Located near railroad tracks.

Just because the property is located near any of the above, doesn’t automatically make it ineligible for FHA financing; however, the appraiser is going to have to be able to address the marketability of the property. The best way to do this is to find similar sales that were subject to the same type of issue(s). The appraiser would then have to be able to use those comparable sales within the appraisal report to help bracket the property, and at the same time meeting all of the lender’s other guidelines and/or overlays.

FHA Appraisals and High Voltage Power Lines

Many times there are circumstances that real estate professionals don’t have to deal with on a regular basis, and power lines are one of them. Understanding what to do will keep your sale from being….Zapped!!!

I recently had a Realtor friend call me in a panic; a house he had just sold (a short sale he had been working on for months) was located near High Voltage (HV) power lines, and the underwriter didn’t want to approve the loan due to the property being located near the HV power lines. This was for a FHA loan, and there was some confusion as to the interpretation of the FHA guidelines.

What does FHA  have to say:

The guidelines for this are pretty straightforward; however, the challenge is proving the property is located outside the easement.

The guideline from the HOC Reference Guide (Hazards and nuisances 1-18) states (this is also reaffirmed in HUD’s FAQ’s): “If the dwelling and related property improvements are located outside the easement, the property is considered eligible and no further action is necessary.”

 To help my friend satisfy the underwriter (this wasn’t my appraisal) I put together a plat with the power line and easements, and the estimated location of the subject property. A better solution would have been to obtain a copy of the actual survey with the house and power company’s easements located on it, however, this is all I had access to (see photo below).

Below is an example of what to show the underwriter:

With this picture the Realtor was able to show the underwriter that the property met HUD (FHA) guidelines of being located outside of the easement for the power line. The actual location of the house could be verified with the plat from the title company, or one could be obtained from other sources. The main point is to show that the house is outside the easement.

What to do if built within the easement:

The real challenge comes when you’ve had someone who built a portion of their home, or added other improvements (fence, pool, garage, shed, etc.) located within the easement. HUD’s guideline for this is the following: “If the dwelling or related property improvement is located within such an easement, the DE Underwriter must obtain a letter from the owner or operator of the tower indicating that the dwelling and its related property improvements are not located within the tower’s (engineered) fall distance in order to waive this requirement.”

Below are two examples of where you might have a hard time proving that the improvements are not under the HV lines. Both pictures clearly show that the owners have built improvements under the HV lines, although the actual house wasn’t under the HV lines.

With improvements located under the HV power lines I would get the letter from the owner of the power lines indicating that the actual house isn’t under them. I would then seek a waiver from HUD (HOC). This is something that the lender has to do. But knowing what can and can’t be done can make all of the difference.

Similar comparable sales are needed:

The appraiser still has to address the effect on the marketability due to the property being located near a hazard or nuisance (external obsolescence), in this case the power line. The best way to do this is to have at least one or two comparable sales that similar exposure to the same type of hazard or nuisance.

If you are unable to find any similar sales that have sold near a HV line, then try to find similar sales near one of the following: a major freeway or busy road, radio or transmission tower, heavily used commercial property. Your goal is to find a similar sale that suffers from similar external obsolescence; in layman’s terms, something that buyers are going to have similar objections too and that can’t be corrected.

How to keep your sale from being electrocuted:

In summary if you’re getting ready to list or sell a property that is located near high voltage transmission lines, I would do the following:

•  Get a plat of the property that shows the location of all of the improvements, as well as the easements.
• Locate all improvement on the plat, measure the actual distance from the lot lines if necessary.
  
• If there are no encroachments to the easement, then the property would qualify for FHA financing.
• However, if there are encroachments the lender will most likely require a letter from the owner of the tower stating the designed fall distance of the lines (get the letter).
• Have some similar comparable sales that sold near the same power line or something similar, even if they’re older sales (12-18 months).

With some proper pre-sale legwork you’ll be able to have a smooth transaction from start to finish, and no last minute shocking surprises.

*Photo used courtesy of the American Museum of Science and Energy.

The Green Monster

When I was appraising a house the other day I came across this fuel oil tank in the basement, which is slightly uncommon given where the house is located. I asked the homeowner about it, in which she replied, “You mean that dirty old Green Monster in the basement, we quit using that years ago.”

So now it’s gone from being just a fuel oil tank, to an abandoned fuel oil tank. So what is the appraiser going to do, well I’m glad you asked.

The MN State Department of Public Safety (State Fire Marshall) does have very specific guidelines for abandoned fuel oil tanks:

• The tank has to be completely drained.

• It has to be completely disconnected.

• Residential heating oil tanks don’t need to be filled with an inert material, however, they do have to be permanently capped to prevent filling.

This is a truncated description, please see the following link for a complete set of guidelines.

So what does FHA have to say? Well HUD’s handbook doesn’t have any specific guidelines for abandoned home heating fuel oil tanks (see this link for HUD’s guidelines) . So it’s going to come down to being a safety issue, does the appraiser feel that this may be of some safety concern. It’s very hard to argue that having an abandoned fuel oil tank in someones basement isn’t a safety issue. Most of the time HUD has the appraiser refer to the state or local municipality for guidance. In nearly all instances when I’ve come across this, which isn’t very frequent, I’ve conditioned the appraisal stating that the abandoned fuel oil tank be sealed or removed in accordance with state and local guidelines. Always bear in mind that the underwriter does have the final say, but no one is going to want to be responsible if something bad were to happen-like blowup!

How To Prepare for a Home Appraisal

You’ve just signed all of the paperwork for your refinance, handed the loan officer the check for the appraisal, and now you’re wondering what is going to happen next. Good news-the appraisal inspection is painless, and usually takes anywhere from 30-60 minutes to complete. However, there are a few things that you should do to help the process move along as smooth as possible.

Preparing for the appraisal inspection:

• Create a detailed list of the recent improvements, which should include the following: when completed, cost of the improvement, before and after pictures if available.
• Make sure each room is accessible; the appraiser is required to inspect each room.
• If there is a crawl space, this area will also have to be made accessible for inspection for an FHA appraisal.
• Give the appraiser room to do their job. Errors are more likely to occur when the appraiser isn’t able to concentrate on their inspection.
• Keep all pets restrained. I’ve been bitten twice by a dog, and once by a cat; the owners had assured me that their pets were friendly-not so much!
• If you live within a development that has a homeowners association, have the name and phone number of the contact person available, along with a fee statement.
• If the appraisal is for an FHA loan, then the area leading to the attic will have to be cleared and made accessible-the appraiser is required to make at least a head and shoulders inspection of the attic area.
• Walk through each room and straighten up as if you were getting ready for company to visit. Appraisers are objective and can look past many things, however, the underwriter reviewing the appraisal photos may feel differently.
• Complete any unfinished projects-most appraisals are done “as is”, and any projects that haven’t been completed, will have to be adjusted for within the appraisal report.
• A copy of any agreements regarding easements (shared driveways and/or garages,etc.) should be made available.

Concerns about value:

For years I’ve been a big proponent of developing a relationship with a Realtor. I’m not talking about a real estate agent who happens to be a relative that lives half way across the state. I’m talking about one that does a lot of work within your neighborhood.

By building a relationship with a professional Realtor (this is all they do and they do it well), they’ll be able to give you great insight as to what’s happening within your neighborhood, and they would be glad to let you know what similar homes are selling for.

Once the appraisal is complete:

You have a right to a copy of your appraisal, so ask for it. If you should find any errors or have any concerns, talk with your loan originator. This is hard for borrowers to understand, being that they paid for the appraisal, but the mortgage company is the appraiser’s client, and they can’t discuss the appraisal with anyone else unless given permission.

Trying to understand an appraisal can be like trying to read the “Dead Sea Scrolls,” so ask questions and get clarification when needed-you paid for it!

Choosing Comparable Sales

When choosing comparable sales for an appraisal, often times there is more analysis done than most people realize. The use of distressed properties for an appraisal is sometimes unavoidable, especially if their concentration is more prevalent than non-distressed sales.

Why Distressed Sales May Be Needed

The appraiser should indicate as to why distressed sales were needed within their appraisal report, which is why for every appraisal I estimate the concentration of distressed sales within the subject’s market area.

The chart above is for cities within a certain county; however, I use the same process when appraising a property within a certain neighborhood and/or market. This helps to explain to the client as to why they were needed within the appraisal report.

Adjusting for Stigma

If a decision has been made to use a distressed comparable sales for an appraisal, then there is most likely going to be an adjustment for stigma. As you can see from the chart above, there is definitely a significant difference between the different median selling prices for the different types of properties. I do a similar analysis for the particular type of property being appraised within it’s neighborhood or market area.

Adjusting for Condition

When using distressed sales for an appraisal, besides making an adjustment for stigma, there is most likely going to have to be an adjustment for condition. This is going to be based on some research done by the appraiser. The following is some examples of ways to assess the condition of comparable sales:

• Use interior/exterior photos supplied by the MLS
• The MLS description will often tell if there were major problems
• Check for prior expired and or cancelled MLS listings
• Contact the agents involved in the sale for any major issues
• Get the opinion(s) other Realtors that do a lot of work in the area as to how a particular comparable sale compares to other sales

By juxtaposing two pictures of bank foreclosed properties, you can see that there can be a significant difference between the levels of condition. That’s why it’s important to do some investigating, and try to ascertain the condition of the comparable sales being used within an appraisal report.

Making the Adjustment When Using a Distressed Sale

There is no magic formula for determining how much of an adjustment should be made to comparable sales when using distressed sales (short sales, bank REO’s, divorce properties, estates, or relocation) for an appraisal; however, by doing an some analysis of the different median sales prices, and by confirming the condition of the comparable properties, the appraiser will be able to come up with a very defensible adjustment, or why one wasn’t used.

 If you have any questions, or MN real estate appraisal needs (divorce, bankruptcy, tax appeal, or estate planning) please contact Michael at 612.599-2581, or use the form on the contact page.