As an appraisal quality leader and former field appraiser, I know firsthand that working in the real estate appraisal industry can be a wild ride. And in recent years, we have experienced a surge in revision requests from lenders and customers. Due to emerging shifts in the mortgage loan market, there is a heightened sense of urgency to review the conventional loan appraisal guidelines.
In the home buying process, the results of an independent, impartial, and objective appraisal report significantly impact the borrower’s experience. Revision requests to correct errors in the appraisal report cause many downstream effects, such as delaying loan decisions and closings. Whether it is for the borrower, the seller, or the lender, a detailed and error-free appraisal report positively influences the purchase decision and credibility of the process.
With so much at stake, a credible appraisal report with the appropriate comparable sales is key to determining the market value of a property and protects the investment of the parties involved in the transaction. Let us look at the six most common reasons for conventional loan appraisal revisions and how to eliminate them to improve the quality and credibility of your report.
1. Choose the right appraisal comps for a Conventional Loan Appraisal
In an ideal world, an appraiser would have comparable sales in the same neighborhood with the same characteristics, similar construction style, square footage, lot size, room counts, upgrades, exterior amenities, condition, and quality of construction. But this is not always the case! Unfortunately, most revisions in the comp selection category come from proximity issues in the report. Here are a few tips for selecting appraisal comps that meet conventional loan appraisal guidelines.
Location, location, location
The three golden rules of selecting comparable sales: No. 1 is location, No. 2 is the location again, and No. 3 is, you guessed it, location!
By bracketing the salient features of the house in the appraisal report, appraisers sometimes overlook the proximity and location factors. They lose sight of this important appraisal comp selection and often do not include them in the report, which warrants a revision request from the lenders and customers. Keeping location top-of-mind minimizes revisions related to comp selection. Let us quickly review some of the specifics we see as an appraisal management company (AMC) for appraisal revisions in this space.
Explain distant property sales in your report
More than one mile from the subject; different cities, townships, and subdivisions; different school districts; across any boundaries, are the factors that need to be reported to avoid revision requests. In the home selection process, location is often the first thing that a buyer looks for in the report. When appraisers use distant sales, they might be looking at a different buyer pool.
When choosing comparable sales, bracket the location or view
Including the specifics of a location or view of the subject and how that compares to each comp helps prevent revisions. For example, a property on a lake with a 180-degree view does not compare to a property in a cove with a limited view. So do the extra analysis to find comps that represent the most accurate indicator of value for the subject property.
Consider proximate property sales
At Clear Capital, we see many revisions for proximate and alternate sales — on the subject street or right next door to the subject property. Even if these sales reflect different characteristics, like larger gross living area (GLA), but represent the same buyer pool, it is a good idea to include them in the report. If you believe it is not a good indicator of the value, provide detailed commentary in the addendum with the specific characteristics and the address.
Analyze price-per-value outliers
If more proximate sales show a reconciled price difference from the distant sales, that can signal to the reader that the other comps might be from a different market. If that happens in your evaluation, take another look at your market analysis, and consider adding more proximate sales or applying location adjustments to the distant sales.
Based on analysis results and the market reaction of sale locations, examine the impact or influence of more proximate sales in the final reconciliation. Consider if proximate sales should be given more weight If that is not the case, provide commentary explaining “why”.
2. Ensure the Date of Sale and Time Adjustments meet conventional loan appraisal guidelines
According to the Fannie Mae Selling Guide, the date of sale and the time adjustment (market conditions) are critical elements in determining an accurate value because the appraisal is based on a specific date. This means the appraiser must analyze the comparable in consideration to determine if there have been any changes in market conditions from the time the comparable went under contract to the effective date of the appraisal. This analysis will determine whether a time adjustment is warranted.
Time adjustments should be supported by other comparables (closed and pending sales) whenever possible. However, in all instances, the appraiser must explain the time adjustment in the appraisal report.
For example, if most recent property sales are not a good indicator of the accurate value, be sure to provide the addresses of those sales in the addendum and explain why they were not used. On the other hand, if appropriate, older comparable sales can be used to determine the market value of a subject property after applying time adjustments but must be accompanied by an explanation for use.
3. Always explain the adjustments with commentary in the appraisal report
Provide commentary on all adjustments, even minor ones. A wise appraiser once said, “The sales grid is where all the magic happens.” However, we are seeing an increase in revision requests from our clients where appraisers have failed to properly report how the market-based adjustments were derived in the sales comparison approach.
Mortgage lenders have access to multiple listing service (MLS) photos and can question the condition and quality ratings in the appraiser’s report if their findings do not match. For example, if the subject property has an accessory dwelling unit (ADU), outbuildings, functional utility, owned solar panels, or an adjustment is made on the sales grid, make sure a detailed corresponding comment is provided in the report to avoid a revision request.
On property condition and quality factors, we see a lot of adjustment-related revisions because these features can significantly affect the value of the home, so to help prevent getting one, be specific in your comments. Discuss the contribution of amenities and explain support for adjustments.
The “magic” of adjustments must be adequately explained, so the client is assured of a “market-based” reconciled value. Make sure to add a comment, even when adjustments are not made, to avoid getting the dreaded revision email. Detailed and specific commentary and a proper analysis explaining these scenarios go a long way and can help prevent many questions an underwriter may have. Remember that adjustment analysis is critical to the integrity of the appraisal, so it is important to ensure it is not vague.
4. Never underestimate the importance of “Deferred Maintenance” in the appraisal process
When property repairs are not performed regularly, homes can fall into a state of disrepair. In the appraisal world, this is called “Deferred Maintenance.” While appraising, it is important to assess the degree of deferred maintenance experienced by a property and include it in the report.
With respect to deferred maintenance for conventional loans, most lenders prefer “As-Is” values, which means they expect to see the cost-to-cure rather than making a report of “Subject To” repairs being completed. After identifying the key areas, cover these criteria for an error-free report:
- Provide a photo demonstrating the deferred maintenance.
- Add a commentary to the photo. For example, explain the conditions like soiled floorings, missing railings, peeling paint, broken windows, etc.
- Disclose the estimated cost-to-cure in your report. The analysis should have a complete summary of the components of a property that require repairs and a cost-to-cure analysis.
- Include the impact on value and marketability in your conclusion of the report. The notation could be in the form of standardized condition rating guidelines outlined by the Single Family Uniform Appraisal Dataset (UAD) from Fannie Mae. C1-C6 ratings help appraisers determine a subject property’s condition.
5. Keep in mind external influences and their impact on property value
Structures and entities that surround a subject property and have a positive or negative impact on the value. For example, a location on a moderately busy traffic street or street with a double yellow line, or proximity to a non-residential property such as a school or commercial building, could be an adverse influence that must be disclosed in the appraisal report.
Conversely, being adjacent to a lake, ocean, or popular amenities could have a positive market reaction. These external influences impact the appraisal and need to be reported accordingly with an analysis of the impact on marketability.
Include any external factors for the subject and comparables that may be visible from a glance at aerial photographs and street-level images, even if they do not affect value or marketability. Here are some quick points to consider:
- Review aerial maps of the neighborhood and larger market area. Identify any positive or negative influence that someone might question. Remember, the underwriter typically does not live in the area of the subject property, so doing your part to proactively communicate about any external factors visible from a simple aerial map and photo search can assist in gaining the underwriter’s confidence.
- Once external influences are identified, the appraiser must analyze whether any adjustments are warranted and the amount of such adjustments as indicated by the marketplace. Provide detailed support for any adjustments and clear commentary on the impact (or lack of impact) of anything that may raise a question from the client.
- To lend support and demonstrate marketability, use a sale with a similar external influence when possible or consider expanding your search further back in time. If no similar property sales exist, explain your search criteria and results in the report.
6. Carefully select the right photos for a conventional loan appraisal
Snapping a picture is easy peasy! So why do so many photo revisions flood your inbox? The simple answer is it is easy to make an error, and selecting the right photos for a home appraisal is imperative to meeting appraisal guidelines for conventional loans, Federal Housing Administration (FHA) loan appraisals, and Fannie Mae and Freddie Mac appraisal photo requirements.
Missing bathroom photos are the number one reason for appraisal revision. Every bathroom (whether an accessory unit or in the basement) should be included in the report with clear descriptions. If multiple photos of the same bathroom are used, clearly label them. Half-baths should be denoted as “half-baths” to avoid confusion. When you are inspecting a property, take pictures and include photos of every room. Many lenders require pictures of the outbuildings, so make sure you are not missing anything before leaving the property.
As you rearrange appraisal comps, double-check to see that all the photos align with the comparables in the report. Always make a habit of doing one last check to ensure no information is missing.
More ways to improve your appraisal reports
I hope these top strategies provide helpful guidance on what is needed to ace appraisal reports and help you receive fewer appraisal revisions. If you want to dig deeper, check out Clear Capital’s highly-rated webinar series, An Appraiser’s Guide to Quality Appraisals, created by leading industry experts. To harness more appraiser solutions and/or learn about appraisal requirements, contact us or consider joining our nationwide network of appraisers.