FNMA APPRAISAL GUIDELINES

Selling Part VII - Property and Appraisal Analysis
This Part--Property and Appraisal Analysis--details our general
requirements for analyzing the property appraisal aspects of
conventional mortgages secured by one- to four-family properties and
VA mortgages secured by two- to four-family properties. It also
discusses special considerations for certain types of housing--units in
condominium and PUD projects; properties affected by environmental
hazards or substances; manufactured (and factory-built) housing
units; energy-efficient housing; mixed-use properties; units in
cooperative projects; and properties located in special assessment or
community facilities districts--that merit special consideration in the
property and appraisal review. Because the evaluation of a property
is such a vital part of the risk analysis, we expect lenders to place as
much emphasis on underwriting the property and reviewing the
appraisal as they do on underwriting the borrower's creditworthiness.
Fannie Mae holds the lender responsible for the accuracy of both the
appraisal and its assessment of the marketability of the property;
therefore, it is important for a lender's underwriters to understand
their role in the appraisal process and their relationship to the
appraiser.
. The appraiser's role is to provide the lender with an accurate, and
adequately supported, estimate of value and a complete, accurate
description of the property.
. The underwriter's role is to review the appraisal report to assure that
it is of professional quality and is prepared in a way that is consistent
with our appraisal standards, to analyze the property based on the
appraisal, and to judge the property's acceptability as security for the
mortgage requested in view of its value and marketability.
We require appraisers to provide complete and accurate reports. The
estimate of market value must represent the appraiser's professional
conclusion, based on market data, logical analysis, and judgment.
When the information or methodology of an appraisal requires
additional clarification or justification, the lender's underwriter must
obtain from the appraiser any information that is necessary to make
an informed decision concerning the property.
These requirements are intended to provide guidance to underwriters
and appraisers as to the type of information that is needed to make a
prudent underwriting decision. They are also designed to provide
what we feel are minimum acceptable appraisal standards. We
recognize that our guidelines may not address every appraisal
problem; therefore, we allow the appraiser discretion to properly
develop the value estimate. The appraiser must, however, provide
sound reasoning in his or her appraisal report for any decisions he or
she makes that are not specifically covered by our standards.
This Part VII consists of four Chapters:
Chapter 1--Appraiser Qualifications--discusses the lender's
responsibility for selecting appraisers and for reviewing their
appraisals both initially and on an on-going basis, the use of
supervisory or review appraisers, and Fannie Mae's right to refuse
to accept appraisals prepared by specific appraisers.
Chapter 2--Appraisal Documentation and Certifications--describes
the various appraisal report forms that are to be used to document
an appraisal and any required exhibits to them, discusses
requirements related to the age of an appraisal report, explains the
types of appraisals needed for proposed and existing construction,
and references the various certifications that an appraiser must
make.
Chapter 3--Special Appraisal Considerations--discusses
considerations that should be given to properties with unusual
features, points out the need for properties to meet specific
eligibility criteria in order for the mortgage to be delivered to us,
and explains the detrimental effect that certain environmental
conditions can have on a property's value.
Chapter 4--Reviewing the Appraisal Report--discusses the
requirements for analyzing a property and its appraisal.


Chapter 1 - Appraiser Qualifications
It is essential that lenders obtain an independent, disinterested
examination and valuation of the properties that secure mortgages
they intend to sell to Fannie Mae; therefore, lenders must select the
appraiser and order (and receive) the appraisal report for each
mortgage transaction, rather than allowing the borrower or any other
party who has an interest in the transaction (such as the property
seller or the real estate broker) to do so. This will assure that the
appraiser will remain free of any outside influence in the valuation
process. Fannie Mae does not approve appraisers. Therefore, when
selecting an appraiser, lenders must not give any consideration to an
appraiser's representation that he or she is approved or qualified by
Fannie Mae. Because lenders are solely accountable for the
performance of the appraisers they select, they must take appropriate
steps to ensure that an appraiser is qualified to perform appraisals for
the particular types of property and the property locations that the
lender intends to refer to that appraiser.
If a lender chooses to rely on a specific appraiser or appraisal service
to review the qualifications of--or even to select--an individual to
perform appraisals for the lender, the lender should establish
appropriate qualifications to ensure that acceptable individuals are
selected. We recommend that the lender require the appraiser or
appraisal service that makes the selection to assume full
responsibility for the quality of the appraisal. However, imposing this
responsibility on the appraiser or appraisal service will in no way
relieve the lender of its warranties related to the appraisal or the
condition of the property.
Section 101 - Review of Appraiser's Qualifications
When evaluating an appraiser's qualifications, a lender should review
the appraiser's education and experience, sample appraisals,
professional affiliations, and references from prior clients and
employers. Professional appraisal designations can be helpful to
lenders in evaluating an appraiser's qualifications, particularly when
the designation is from a nationally recognized organization that has
formal experience, education, and ethics requirements that are
strongly administered. If the lender considers an appraisal
designation in its evaluation, it should be familiar with the appraisal
organization's specific requirements to assure that the designation is
evaluated appropriately. However, federal law prohibits a lender from
selecting or hiring an appraiser based solely on the appraiser's
membership in any particular appraisal organization or from not hiring
an appraiser based on his or her lack of membership in any
organization.
The appraiser must be experienced in appraising the types of
properties that the lender intends to use his or her services for,
should have access to the necessary data sources, and should
currently be active in appraisal work. Before using an appraiser's
services, the lender should be satisfied that the appraiser has
demonstrated the ability to perform quality appraisals. Lenders must
not assume that an appraiser is qualified simply based on his or her
membership in, and professional designation from, an appraisal
organization or the fact that he or she is state-licensed or -certified.
Section 101.01 - Licensing and Certification Requirements
We require lenders to use appraisers that are state-licensed or -
certified (in accordance with the provisions of Title XI of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989) to
appraise the properties that secure mortgages they intend to deliver
to us. All Fannie Mae lenders (and any third-party originators they
use) must be aware of, and in full compliance with, state laws for
licensing and certification of real estate appraisers. The lender must
document that the appraisers it uses are licensed or certified as
appropriate under the applicable state law, either by including the
license or certification number with the appraiser's list of qualifications
that the lender has on file or by retaining a copy of the license or
certification in the file the lender maintains for the appraiser. The
appraiser must note his or her license or certification number on the
individual appraisal report forms.
When a lender delivers a mortgage to us, it warrants that the property
has been appraised by a state-licensed or -certified appraiser. Our
appraisal report forms define the appraiser as the individual who
personally inspected the property being appraised, inspected the
exterior of the comparables, performed the analysis, and prepared
and signed the appraisal report as the appraiser. This definition does
not preclude an appraiser from relying on individuals that are not
state- licensed or -certified to provide significant professional
assistance (such as an appraiser trainee or an employee of the
appraiser doing market data research or data verification) in the
development of the appraisal. The state-licensed or -certified
appraiser who signs the appraisal report must acknowledge in the
report the extent of the professional assistance provided by others
and the specific tasks performed by each such individual and must
certify that the named individual(s) are qualified to perform the tasks.
Under some state laws, a lender's use of an unlicensed or uncertified
appraiser who is working as an employee or sub-contractor of a
licensed or certified appraiser will satisfy the state's licensing and
certification requirement, as long as the appraisal report is signed by
a state- licensed or -certified "supervisory" or "review" appraiser.
If a lender is unable to make the required warranty regarding the use
of a state-licensed or -certified appraiser because it is experiencing
significant delays in obtaining appraisals as the result of a scarcity of
state-licensed or -certified appraisers in the state or locality, it must
document the individual mortgage file with a copy of an authorized
temporary waiver of the appraiser licensing and certification
requirements (or a copy of its letter requesting such a waiver).
Requests for these temporary waivers should be directed to the
Appraisal Subcommittee of the Federal Financial Institutions
Examination Council; 2100 Pennsylvania Avenue, NW; Suite 200;
Washington, DC 20037.
Section 101.02 - Use of Supervisory or Review Appraisers
We allow an unlicensed or uncertified appraiser who works as a
employee or sub-contractor of a licensed or certified appraiser to
perform a significant amount of the appraisal (or the entire appraisal if
he or she is qualified to do so)--as long as the appraisal report is
signed by a licensed or certified "supervisory" or "review" appraiser
and is acceptable under state law. In some cases, a lender may
request that the appraisal reports prepared by a specific state licensed
or -certified appraiser be co-signed by his or her employer or
contractor as a "supervisory" appraiser either because that is a
tradition in the locality or because it wants to acknowledge the
relationship between the appraiser and the employer or contractor.
When a "supervisory" appraiser is used, the "supervisory" appraiser
must certify that he or she directly supervises the appraiser who
prepared the appraisal report, has reviewed the appraisal report,
agrees with the statements and conclusions of the appraiser, agrees
to be bound by some of the same certifications that the appraiser
made, and takes full responsibility for the appraisal report. If an
appraiser is performing a "review" function that is different from the
one discussed above, he or she must prepare a separate review
report and attach it to the appraisal report being reviewed. For
instance, this approach would apply when a lender chooses to
delegate the appraisal management function to a specific appraiser
or appraisal service and one of the conditions of the delegation is that
the appraiser or appraisal service must assume responsibility for the
appraisal.
Section 101.03 - On-going Review of Appraisals
Lenders must continually evaluate the quality of the appraiser's work
through the normal underwriting review of all appraisal reports, as
well as through the spot-check field review of appraisals as part of its
quality control system. Lenders may use our Residential Appraisal
Field Review Report (Form 2000) for the spot-check appraisal
component of their quality control system if they chose to do so, but
we do not require its use. Lenders must be satisfied that any
appraisers they use for spot-check field reviews are well- qualified.
The lender must have sufficient knowledge of our appraisal
requirements to enable it to determine that the appraiser has properly
addressed our specific criteria and that the appraiser has not
engaged in any unacceptable appraisal practices.
Section 102 - Unacceptable Appraisal Practices
Since we hold the lender responsible for the quality of the appraisals
it uses to support the value of a security property, the lender should
take appropriate action to assure that the appraisers it uses do not
engage in unacceptable practices. The following are examples of
appraisal practices that we consider as unacceptable:
Inclusion of inaccurate factual data about the subject
neighborhood, site, improvements, or comparable sales;
Failure to comment on negative factors with respect to the subject
neighborhood, subject property, or proximity of the subject
property to adverse influences;
Use of comparables in the valuation process even though the
appraiser has not personally inspected the exterior of the
comparables by, at least, driving by them;
Selection and use of inappropriate comparable sales or the failure
to use comparables that are locationally and physically the most
similar to the subject property;
Use of data--particularly comparable sales data--that was provided
by parties who have a financial interest in the sale or financing of
the subject property without the appraiser's verification of the
information from a disinterested source. For example, it would be
inappropriate for an appraiser to use comparable sales provided
by the real estate broker who is handling the sale of the subject
property, unless the appraiser verifies the accuracy of the data
provided with another source and makes an independent
investigation to determine that the comparables provided were the
best ones available;
Use of adjustments to the comparable sales that do not reflect the
market's reaction to the differences between the subject property
and the comparables, or the failure to make adjustments when
they are clearly indicated;
Development of a valuation conclusion that is based--either
partially or completely--on the sex, race, color, religion, handicap,
national origin, or familial status of either the prospective owners
or occupants of the subject property or of the present owners or
occupants of the properties in the vicinity of the subject property;
or that is based on any other factor that local, state, or federal law
designates as being discriminatory, and thus, prohibited; and
Development of a valuation conclusion that is not supported by
available market data.
Section 103 - Refusal to Accept Certain Appraisals
Fannie Mae has the right, at any time, to refuse to accept appraisals
prepared by specific appraisers or to notify a lender that we will no
longer accept appraisals prepared by a given appraiser. When we
notify a lender that this is the case, we will allow the lender a certain
amount of time to clear its mortgage pipeline--after that, it must not
submit to us mortgages secured by any properties that were
appraised by that individual.


Chapter 2 - Appraisal Documentation and Certifications
The lender must disclose to the appraiser any and all information
about a security property that it is aware of if the information could
affect either the marketability of the property or the appraiser's
estimate of its market value. Specifically, the lender must make sure
that it provides the appraiser with all appropriate financing data and
sales concessions for the subject property that will be, or have been,
granted by anyone associated with the transaction. Generally, this
can be accomplished by providing the appraiser a copy of the
complete, ratified sales contract for the property that is to be
appraised. If the lender is aware of additional pertinent information
that is not included in the sales contract, it should inform the
appraiser. Information that must be disclosed includes:
settlement charges;
loan fees or charges;
discounts to the sales price;
payment of condominium/PUD fees;
interest rate buydowns, or other below-market-rate financing;
credits or refunds of the borrower's expenses;
absorption of monthly payments;
assignment of rent payments; and
non-realty items that were included in the transaction.
The lender must also disclose to the appraiser any information about
an environmental hazard in or on the subject property or in the vicinity
of the property that it obtains from the borrower, the real estate
broker, or any other party to the transaction so the appraiser can
consider any influence the hazard may have on the property's value
and marketability.
Section 201 - Age of Appraisal
The property must have been appraised within the 12 months that
precede the date of the note and mortgage. When the appraisal
report will be more than four months old on the date of the note and
mortgage--regardless of whether the property was appraised as
proposed or existing construction--the appraiser must inspect the
exterior of the property and review current market data to determine
whether the property has declined in value since the date of the
original appraisal.
If the appraiser indicates that he or she believes that the property
has declined in value, the lender must obtain a new appraisal for
the property.
If the appraiser indicates that he or she believes that the property
has not declined in value, the lender should request the appraiser
to provide a certification to that effect, based on his or her exterior
inspection of the property and knowledge of current market
conditions. The inspection and the certification must occur within
the four months that precede the date of the note and mortgage.
Generally, the original appraiser should complete the certification of
value; however, the lender may use a substitute appraiser. In such
cases, the substitute appraiser must review the original appraisal and
certify that the appraiser's estimate of market value was reasonable
on the date of the original appraisal report. The lender should note in
its files why the original appraiser was not used.
Section 202 - Status of Construction
For proposed construction, the appraisal may be based on plans and
specifications if the lender obtains a certification of completion before
it delivers the mortgage to us. This certification should be completed
by the appraiser and must be accompanied by photographs of the
completed improvements. The appraiser must certify that the
improvements were completed in accordance with the requirements
and conditions stated in the original appraisal report. Minor items that
do not affect livability may be incomplete (if weather-related
circumstances prevented their completion) as long as the lender has
arranged for an adequate escrow to guarantee their completion. (We
consider funds equal to at least one and one-half times the cost to
complete the items as a reasonable amount to escrow.)
For existing construction, the improvements must be complete when
the mortgage is delivered to us. The appraisal may be based on the
"as is" condition of the property if minor conditions that do not affect
the livability of the property exist--such as minor deferred
maintenance--as long as the appraiser's estimate of value reflects the
existence of these conditions. The lender must review carefully the
appraisal for a property appraised in an "as is" condition to assure
that the property does not have any physical deficiencies or
conditions that would affect its livability. If there are none, the lender
does not need to require minor repairs to be completed before it
delivers the mortgage to us. When there are incomplete items or
conditions that do affect the livability of the property--such as a
partially completed addition or renovation--or physical deficiencies
that could affect the soundness or structural integrity of the
improvements, the property must be appraised subject to completion
of the specific alterations or repairs. In such cases, the lender must
obtain a certificate of completion from an appraiser before it delivers
the mortgage to us. The certification does not need to include
photographs of the property unless those that accompanied the
original appraisal report are no longer representative of the
completed property.
Generally, the original appraiser should complete the certification of
completion; however, the lender may use a substitute appraiser. In
such cases, the substitute appraiser must review the original
appraisal and certify that the appraiser's description of the property
was accurate and the estimate of market value was reasonable on
the date of the original appraisal report. The lender should note in its
files why the original appraiser was not used.
Section 203 - Appraisal Report Forms
Our appraisal report forms are designed to provide a concise format
for presenting both the appraiser's description and analysis of the
subject property and the valuation analysis leading to the estimate of
market value. The appraiser must complete these forms in a way that
will clearly reflect the thoroughness of his or her investigation and
analysis and provide the rationale for the estimate of market value.
Although the scope or extent of the appraisal process is guided by
our appraisal report forms, the forms do not limit or control the
appraisal process. The appraiser's analysis should go beyond any
limitations of the forms, with additional comments and exhibits being
used when they are needed to adequately describe the subject
property, document the analysis, or support the appraiser's
conclusions.
The extent of the appraiser's data collection, analysis, and reporting
must be determined by the complexity of the appraisal assignment.
Only appraisals that have the purpose of estimating market value, as
defined in the Statement of Limiting Conditions and Appraiser's
Certification (Form 1004B), may be used for properties that secure
mortgages that will be delivered to Fannie Mae. The appraisal report
that should be used depends on the type of property that is being
appraised. The appraiser must use the latest version of one of the
following forms and include any other data--either as an attachment
or addendum to the appraisal report form--needed to adequately
support the estimate of market value:
(also see Part IX, Form 1004)
Uniform Residential Appraisal Report (Form 1004), for one-family
properties and units in planned unit developments (including those
that have an illegal second unit or accessory apartment that we
will consider as acceptable security) that secure either first or
second mortgages. Form 1004 may also be used for two-family
properties, if each of the units is occupied by one of the coborrowers
as his or her principal residence or if the value of the
legal second unit is relatively insignificant in relation to the total
value of the property (as might be the case for a basement unit or
a unit over a garage). In addition, appraisals for units in
condominium projects that consist solely of detached dwellings
may be documented on Form 1004, if there are no common area
improvements (other than greenbelts, private streets, and parking
areas) and the appraiser includes an adequate description of the
project and information about the owners' association fees and the
quality of the project maintenance;
(also see Part IX, Form 1025)
Small Residential Income Property Appraisal Report (Form 1025),
for two- to four-family properties (including those that are located
in PUD projects). [For VA mortgages, we also require the
Certificate of Reasonable Value (VA Form 26-1843) or the Master
Certificate of Reasonable Value (VA Form 26-1843a)];
(also see Part IX, Form 1073)
Individual Condominium Unit Appraisal Report (Form 1073), for
single-family properties that are units in condominium projects; or
(also see Part IX, Form 1075)
Individual Cooperative Interest Appraisal Report (Form 1075), for
single-family properties that are units in cooperative projects.
Appraisers may use computer software programs that are designed
to reproduce our appraisal report forms--including programs that have
"expandability" features that allow increases in areas of the forms that
call for the insertion of narrative comments. However, any expansion
must not result in the "Sales Comparison Analysis" section being
separated so that it appears on two pages. In addition, the sequence
of the information--as well as all of the specific information (including
the instructions, entries, directions, etc.)--must be exactly as it
appears on the hard-copy of the form(s).
Section 204 - Exhibits to Appraisal Reports
We require certain exhibits to support each appraisal report. The
exhibits may vary depending on the type of property being appraised
or on whether the borrower is purchasing the property as a residence
or for investment purposes. Specifically, we require:
A street map that shows the location of the subject property and of
all comparables that the appraiser used;
An exterior building sketch of the improvements that indicates the
dimensions. For units in condominium or cooperative projects, the
sketch of the unit must indicate interior perimeter unit dimensions
rather than exterior building dimensions. Generally, the appraiser
must also include calculations to show how he or she arrived at
the estimate for gross living area; however, for units in
condominium or cooperative projects, the appraiser may rely on
the dimensions and estimate for gross living area that are shown
on the plat. In such cases, the appraiser does not need to provide
a sketch of the unit as long as he or she includes a copy of the plat
with the appraisal report. A floor plan sketch that indicates the
dimensions is required instead of the exterior building or unit
sketch if the floor plan is functionally obsolete, resulting in a limited
market appeal for the property in comparison to competitive
properties in the neighborhood;
Clear, descriptive photographs (either in black and white or color)
that show the front, back, and a street scene of the subject
property, and that are appropriately identified. (Photographs must
be originals that are produced either by photography or electronic
imaging);
Clear, descriptive photographs (either in black and white or color)
that show the front of each comparable sale and that are
appropriately identified. (We do not require photographs of
comparable rentals and listings.) Generally, photographs should
be originals that are produced by photography or electronic
imaging; however, copies of photographs from a multiple listing
service or from the appraiser's files are acceptable if they are clear
and descriptive;. Certifications of completion and value--either as a
letter or as a form that provides the necessary information--if
applicable;
An Operating Income Statement (Form 216), if the property is an
investment property (including a two- to four-family property in
which the applicant will occupy one unit as a principal residence).
The form may be prepared by either the applicant or the appraiser.
(If the applicant prepares Form 216, the appraiser's comments on
the reasonableness of the projected operating income must be
included on the form. If the appraiser prepares Form 216, the
lender must make sure the appraiser has operating statements;
expense statements related to mortgage insurance premiums,
owners' association dues, leasehold payments, or subordinate
financing payments; and any other pertinent information related to
the property.);
A Single-Family Comparable Rent Schedule (Form 1007), if the
property is a single-family investment property;
The Energy Addendum (Form 1004A) or a rating form from the
Energy Rated Homes of America, if the borrower is requesting
special consideration for an energy-efficient property; and
Any other data--as an attachment or addendum to the appraisal
report form--that are necessary to provide an adequately
supported estimate of market value.
Section 205 - Appraiser's Certifications
We will not purchase or securitize a mortgage unless the appraisal is
based on our definition of market value and the Statement of Limiting
Conditions and Appraiser's Certification (Form 1004B), as it was
revised in June, 1993. To acknowledge that the current version of the
Form 1004B was used and to assure the lender that the appraiser is
certifying to our current definition of value, the appraiser must insert
"06/93" in the blank that references "Freddie Mac Form 439/Fannie
Mae Form 1004B (Revised ________)" in the "Reconciliation" section
of the applicable appraisal report form.
The Statement of Limiting Conditions and Appraiser's Certification
(Form 1004B) must be submitted as an exhibit to the appraisal report.
The appraiser may not make a change or a deletion to this
certification, although he or she may make additional certifications on
a separate page or form. Acceptable additional certifications might
include those required by state law or those related to the appraiser's
continuing education or membership in an appraisal organization.
(Appraisers may not add additional limiting conditions.) Lenders are
responsible for reviewing any additional certifications made by an
appraiser to assure that they do not conflict with the standard
certifications on Form 1004B or with any of our policies.
Section 205.01 - Definition of Market Value
Fannie Mae's definition of market value is intended to assure that
appraisals reflect an estimate of market value after adjustments for
any special or creative financing or sales concessions--such as seller
contributions, interest rate buydowns, etc.--have been made. The
appraiser must certify that he or she used the following definition of
market value (which is stated in the 06/93 version of Form 1004B):
Market value is the most probable price which a property should
bring in a competitive and open market under all conditions
requisite to a fair sale, the buyer and seller, each acting prudently,
knowledgeably and assuming the price is not affected by undue
stimulus. Implicit in this definition is the consummation of a sale as
of a specified date and the passing of title from seller to buyer
under conditions whereby: (l) buyer and seller are typically
motivated; (2) both parties are well informed or well advised, and
each acting in what he considers his own best interest; (3) a
reasonable time is allowed for exposure in the open market; (4)
payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and (5) the price
represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions*
granted by anyone associated with the sale.
*Adjustments to the comparables must be made for special or
creative financing or sales concessions. No adjustments are
necessary for those costs which are normally paid by sellers as a
result of tradition or law in a market area; these costs are readily
identifiable since the seller pays these costs in virtually all sales
transactions. Special or creative financing adjustments can be
made to the comparable property by comparisons to financing
terms offered by a third party institutional lender that is not already
involved in the property or transaction. Any adjustment should not
be calculated on a mechanical dollar for dollar cost of the financing
or concession but the dollar amount of any adjustment should
approximate the market's reaction to the financing or concessions
based on the appraiser's judgment.
The asterisked section of the definition provides consistent
interpretation for appraisers. Specifically, we want to emphasize that
the phrases " . . . those costs which are normally paid by sellers as a
result of tradition or law in a market area; these costs are readily
identifiable since the seller pays these costs in virtually all sales
transactions . . ." refer to all of the sellers in a specific market area.
No distinction is made between a specific group of sellers, builders,
developers, or individuals in the resale market--they are all
considered to be individual sellers in the market. To illustrate: When a
property seller is paying part of the purchaser's settlement or closing
costs--or is paying for an interest-rate buydown or other below-market
financing--but virtually all of the other sellers in the market are not
doing the same as a result of law or tradition, the appraiser would
need to make an adjustment even if there are other groups of sellers-
-such as builders--who are also offering concessionary financing.
The appraiser can adjust a comparable property that has special or
creative financing or sales concessions by comparing it to other
properties that had financing terms offered by a third party
institutional lender--as long as that lender is not already involved in
the subject property or transaction. The appraiser should use his or
her judgment in establishing the dollar amount for any adjustment to
assure that it approximates the market's reaction to the financing or
concession at the time of the sale.
Section 205.02 - Limiting Conditions and Certifications
The Statement of Limiting Conditions and Appraiser's Certification
(Form 1004B) recognizes the Uniform Standards of Professional
Appraisal Practice (except for the departure provision of those
standards, which does not apply) that the Appraisal Standards Board
of The Appraisal Foundation adopted as the minimum appraisal
standards for the appraisal industry. These standards specifically
require that the appraiser's certification be included with each
individual appraisal report. The appraiser must agree to ten limiting
conditions and nine certifications, all of which are set out in detail in
the Statement of Limiting Conditions and Appraiser's Certification
(Form 1004B). Form 1004B appears in Part IX of this Guide. We
have established our own separate appraisal requirements to
supplement the Uniform Standards of Professional Appraisal Practice
because we believe that this is necessary to assure that all of our
specific concerns are addressed for any given appraisal. Our
appraisal report forms (Forms 1004, 1025, 1073, and 1075) and the
Statement of Limiting Conditions and Appraiser's Certification (Form
1004B) are designed in a way that results in an appraiser's being in
full compliance with our requirements if he or she provides all of the
information required by these forms and presents the applicable data
accurately and completely.
 

Chapter 3 - Special Appraisal Considerations
Some types of properties require special consideration in the property
and appraisal review processes to recognize the special contributions
of unusual features, the detrimental effect of certain environmental
conditions, or the need to meet specific criteria in order for a
mortgage on the property to be eligible for delivery to Fannie Mae.
(also see Part VIII)
Units in condominium, PUD, or cooperative projects also require
special consideration because of the interrelationship between the
property being appraised and other units within the development or
project. We will purchase or securitize unit mortgages in
condominium, PUD, or cooperative projects that meet our project
eligibility criteria. To determine project eligibility, a lender often needs
access to certain project information that is not always readily
available--such as information about the project's insurance
coverage, legal documents, or budget; the payment status of owners'
association (or cooperative corporation) fees; and the ownership and
occupancy status of individual units within the project. For this
reason, we allow the lender to rely on the appraiser, the owners'
association (or cooperative corporation), the management company,
the real estate broker, and the project developer as sources for
information, although we expect the lender to make a diligent effort to
ensure the accuracy of the information obtained from these sources.
Project acceptance--and the availability of financing--often depends
on the willingness of the owners' association, cooperative
corporation, or management company to obtain and provide
requested information.
Section 301 - Units in Condominium Projects
A condominium project is one in which individual owners hold title to
units in the project along with an undivided interest in the real estate
that is designated as the common area for the project.
Most appraisals for condominium units must be documented on the
Individual Condominium Unit Appraisal Report (Form 1073).
However, we will accept appraisals of detached condominium units
on the Uniform Residential Appraisal Report (Form 1004) if the
condominium project does not include any common area
improvements (other than greenbelts, private streets, and parking
areas), and the appraiser includes on Form 1004 an adequate
description of the project and information about the owners'
association fees and the quality of the project maintenance.
The appraisal of an individual unit in a condominium project requires
the appraiser to analyze the condominium project as well as the
individual unit. The appraiser must pay special attention to the
location of the individual unit within the project, the project's
amenities, and the amount and purpose of the owners' association
assessment since the marketability and value of the individual units in
a project depend on the marketability and appeal of the project itself.
Section 302 - Units in PUD Projects
A planned unit development (PUD) is a project or subdivision that
consists of common property and improvements that are owned and
maintained by an owners' association for the benefit and use of the
individual units within the project. For a project to qualify as a PUD,
the owners' association must require automatic, nonseverable
membership for each individual unit owner, and provide for
mandatory assessments. Zoning should not be the basis for
classifying a project as a PUD.
Appraisals for PUD units should be documented on the Uniform
Residential Appraisal Report (Form 1004). It may be necessary to
use an addendum to Form 1004 to provide this information for
appraisals related to attached units in new PUD projects (particularly
when the developer is still in control of the owners' association) in
order to assure that all the specific eligibility criteria for this type of
project are adequately addressed.
The appraisal of an individual unit in a PUD requires the appraiser to
analyze the PUD project as well as the individual unit. The appraiser
must pay special attention to the location of the individual unit within
the project, the project's amenities, and the amount and purpose of
the owners' association assessment since the marketability and value
of the individual units in a project generally depend on the
marketability and appeal of the project itself.
Section 303 - Properties Affected by Environmental Hazards
If the real estate broker, the property seller, the property purchaser,
or any other party to the mortgage transaction informs the lender that
an environmental hazard exists in or on the property or in the vicinity
of the property, the lender must disclose that information to the
appraiser and note the individual mortgage file accordingly. (We also
require the lender to disclose such information to the borrower, and to
comply with any state or local environmental laws regarding
disclosure.)
When the appraiser has knowledge of any hazardous condition
(whether it exists in or on the subject property or on any site within
the vicinity of the property)--such as the presence of hazardous
wastes, toxic substances, asbestos-containing materials,
ureaformaldehyde insulation, radon gas, etc.--he or she must note
the hazardous condition on the appraisal report and comment on any
influence that the hazard has on the property's value and
marketability (if it is measurable through an analysis of comparable
market data as of the effective date of the appraisal) and make
appropriate adjustments in the overall analysis of the property's
value.
We do not consider the appraiser to be an expert in the field of
environmental hazards. The typical residential real estate appraiser is
neither expected nor required to be an expert in this specialized field.
However, the appraiser has a responsibility to note in the appraisal
report any adverse conditions that were observed during the
inspection of the subject property or information that he or she
became aware of through the normal research involved in performing
an appraisal.
In rare situations, a particular environmental hazard may have a
significant effect on the value of the subject property, although the
actual impact is not measurable because the hazard is so serious or
so recently discovered that an appraiser cannot arrive at a reliable
estimate of market value because there is no comparable market
data (such as sales, contract sales, or active listings) available to
reflect the impact of the hazard. In such cases, the mortgage will not
be eligible for delivery to Fannie Mae.
We will purchase or securitize a mortgage secured by a property that
is affected by an environmental hazard if the impact of the hazard is
measurable through an analysis of comparable market data as of the
effective date of the appraisal and the appraiser reflects in the
appraisal report any adverse effect that the hazard has on the value
and marketability of the subject property or indicates that the
comparable market data reveals no buyer resistance to the hazard.
To illustrate: We are frequently asked to address the eligibility of
mortgages secured by properties that are located in neighborhoods
affected by radon gas or the presence of hazardous wastes. In such
situations, we expect the appraiser to reflect any adverse effect or
buyer resistance that is demonstrated and measurable through the
available comparable market data. Therefore, when a property is
located in a neighborhood that has a relatively high level of radon gas
or is near a hazardous waste site, we expect the appraiser to
consider and use comparable market data from the same affected
area because the sales prices of settled sales, the contract sales
prices of pending sales, and the current asking prices for active
listings will reflect any negative effect on the value and marketability
of the subject property.
Although our guidelines expressly require the appraiser to include in
the appraisal report comments about any influence that an
environmental hazard has on the value and marketability of the
property and to make appropriate adjustments to the overall analysis
of the value of the property, we expect the lender to oversee the
performance of the appraisers it employs. The lender must make the
final decision about the need for inspections and the adequacy of the
property as security for the mortgage requested. We expect lenders
to exercise sound judgment in determining the acceptability of the
property. For example, since we require the appraiser to comment on
the effect of a hazard on the marketability and value of the subject
property, the appraiser would have to note when there is market
resistance to an area because of environmental hazards or any other
conditions that affect well, septic, or public water facilities. When the
lender has reason to believe that private well water that is on or
available to a property might be contaminated as the result of the
proximity of the well to hazardous waste sites, the lender is exercising
sound judgment if it obtains a "well certification" to determine whether
the water meets community standards.
Section 304 - Manufactured (and Factory-Built) Housing Units
Because we have specific eligibility criteria for mortgages secured by
manufactured (and factory-built) housing units, the appraiser should
make sure that he or she considers these criteria and adequately
addresses them in the appraisal report.
Manufactured housing units are single-width or multi-width units that
are constructed off-site and then transported to their permanent site
where they are completed and/or attached to a foundation. Typically,
manufactured housing units are not subject to building codes. A
manufactured housing unit must be legally classified as real estate,
must be permanently affixed to a foundation, and must assume the
characteristics of site-built housing to be eligible as security for a
mortgage that is delivered to Fannie Mae. It must also have been
built under the Federal Home Construction and Safety Standards that
were established by HUD in June, 1976. Other factory-built housing--
such as prefabricated, panelized, modular, or sectional housing--
needs to assume the characteristics of site-built housing and to meet
local zoning and building codes.
We do not have minimum requirements for width, size, or roof pitch
for manufactured housing units. Each unit must have sufficient
square footage and room dimensions to be acceptable to typical
purchasers in the subject market area. The wheels, axles, and trailer
hitches must be removed when the unit is placed on its permanent
site. We require both perimeter and pier foundations to have footings
that are located below the frost line. When piers are used, they must
be placed where the unit manufacturer recommends. Anchors must
be provided if state law requires them. The foundation system must
have been designed by an engineer to meet the soil conditions of the
site.
The appraiser must address both the marketability and comparability
of manufactured housing units. The materials and construction of the
improvements must be acceptable in the subject market area. The
appraiser should also comment on the sufficiency of the living area of
the unit, interior room size, storage, adequacy of roof pitch and
overhangs, and the compatibility of the exterior finish. In addition, the
appraiser must address the marketability and value of manufactured
housing units in the subject market area in comparison to the
marketability of site-built housing in the area.
(See Part VIII)
Single-width manufactured housing units must be located in a Fannie
Mae-approved project; a multi-width unit may be located on an
individual lot or in any project (although, in certain areas, our regional
office may require subdivision approval for units located on individual
lots.)
The appraiser should use as comparable sales similar manufactured
housing units--comparing single-width units to single-width units and
multi-width units to multi-width units. If comparable sales of similar
units are not available, the appraiser may use site-built housing as
comparable sales, as long as he or she explains why that is being
done. When there is a preference for site-built housing in the subject
market area, the appraiser must adjust the site-built comparables to
reflect the market's reaction to manufactured housing units.
When the subject property is another kind of factory-built housing, the
appraiser should use sales of similar factory-built housing as
comparables if they are available. If they are not available, the
appraiser may use sales of comparable site-built housing, as long as
he or she provides an explanation for doing so and makes
appropriate adjustments if there is a market preference for site- built
housing.
Section 305 - Energy-Efficient Properties
When a lender is giving special underwriting consideration to a
borrower because the property that secures his or her mortgage is
energy efficient, the lender can use either of two methods to qualify
the dwelling as energy-efficient: development of an energy-efficiency
rating by the appraiser or an energy consultant or reliance on the
construction of the dwelling having been in compliance with qualifying
energy conservation programs or the builder's certification that it has
complied with the Council of American Building Officials Model
Energy Code.
Regardless of the method used for qualifying a dwelling as "energy
efficient," the appraiser must consider the reaction of the market to
energy-efficient improvements (or proposed alterations) and reflect
their contributory value in the "sales comparison analysis" adjustment
grid on the appraisal report form. This adjustment should be based on
the appraiser's analysis of comparable properties. However, if
adequate comparables are not available, the appraiser may develop
an analysis of the present worth of the estimated savings in utility
costs. To do this, the appraiser may use a procedure that is similar to
the one used in Part II of the Energy Addendum (Form 1004A).
Section 306 - Mixed-Use Properties
Although we will purchase or securitize mortgages that are secured
by properties that have a business use in addition to their residential
use--such as a property with space set aside for a day care facility, a
beauty or barber shop, a doctor's office, a small neighborhood
grocery or specialty store, etc.--we have special eligibility criteria for
them. Therefore, the appraiser must provide an adequate description
of the mixed-use characteristics of the subject property in the
appraisal report and the lender must make sure that it considers
these criteria and adequately addresses them. Specifically, for a
mixed-use property to be acceptable, the following criteria must be
met:
The property must be a one-family dwelling that the borrower
occupies as a principal residence.
The mixed use of the property must represent a legal, permissible
use of the property under the local zoning requirements.
The borrower must be both the owner and the operator of the
business.
The property must be primarily residential in nature.
The market value of the property must be primarily a function of its
residential characteristics, rather than of the business use or any
special business-use modifications that were made.
Section 307 - Units in Cooperative Projects
When an appraiser evaluates a cooperative unit, he or she must
estimate the market value of the cooperative interest. The
cooperative interest is the cooperative shares or other evidence of an
ownership interest in the cooperative corporation and the
accompanying occupancy rights (excluding the cooperative interest's
pro rata share of the debt service of the blanket mortgage). In other
words, the cooperative interest is the equity portion that is over and
above the pro rata share of the blanket mortgage(s).
To determine the value of the cooperative interest, the appraiser must
include, among other things, the information listed below on the
Individual Cooperative Interest Appraisal Report (Form 1075), or in
an addendum to the appraisal report form. [Much of this information
can be obtained from the Request for Cooperative Project Information
(Form 1074), if the management agent, cooperative board, or project
sponsor/developer uses this form to respond to the lender's or the
appraiser's inquiries for project information. When this form is used,
the appraiser may transcribe the appropriate information to Form
1075 or attach Form 1074 to Form 1075 as an addendum.]
The number of shares attributable to the unit and the number of
shares issued and outstanding for the cooperative corporation;
The name of the lienholder, the lien position, and the amount and
repayment terms of all project blanket financing;
The pro rata share of the blanket mortgage payments that are
attributable to the unit, as determined by dividing the number of
shares attributable to the unit by the total number of project
shares;
The pro rata share of each lien that is attributable to the unit;
Any tax abatements or exemptions that are attributable to the unit,
and their remaining term and provisions for escalation of real
estate taxes. (The dollar amount by which the taxes will increase
and the year in which the increase will occur should be shown);
and
Any monthly maintenance fees (including utility charges if they are
part of these fees), monthly special assessments, ground rent, or
other fees for the use of the facilities that are attributable to the
unit, and their type, amount, and term (if applicable).
The appraiser must use reliable sources to obtain data on the
cooperative project, the individual subject unit, and the comparable
properties, and indicate the name of each source on Form 1075 (or
on an addendum to it). The appraiser must address any factors that
could result in an increase to the monthly debt service for the subject
unit. For comparison purposes, the appraiser should indicate in the
"sales comparison analysis" adjustment grid the dollar amount of the
monthly assessments for each of the comparable sales.
In many areas, there is limited experience with the cooperative form
of ownership. Appraisers always must comment on the acceptance of
housing cooperatives in the market area. The degree of acceptance
is generally reflected in the availability of similar comparable sales
data for cooperative units. If there is limited market acceptance of the
cooperative form of ownership, or if it is a relatively new form of
ownership in the market area, the appraiser must address any effect
that has on the marketability and value of the unit that is being
appraised. Because Fannie Mae is concerned about the marketability
of the subject property, the appraiser must compare the subject unit
to the general market area as well as to other units in the subject
cooperative project. This comparison should help demonstrate
market acceptance of cooperative units in the area. If the appraiser
believes that the submission of more than the three required
comparable sales is appropriate to support the estimate of market
value, he or she should submit other comparable sales--including
contracts for sale--as additional supporting data. Comparables must
be from similar types of projects --townhouses, mid-rise, high-rise,
etc.--that have similar common amenities and recreational facilities.
Generally, when an appraiser appraises a unit in a cooperative
project, he or she should use sales of cooperative units as
comparables. However, the appraiser may use sales of condominium
units as comparables if cooperative unit sales are not available, as
long as he or she explains why those types of comparables were
used. When there is a preference for condominium ownership in the
subject market area, the appraiser must adjust the condominium
comparables to reflect the reaction of the market to the cooperative
unit.
If the subject property is a unit in a new or recently converted
cooperative project, the appraiser should select as comparables one
closed or settled sale from the subject project (if one is available) and
two closed or settled sales from outside of the project. If closed or
settled sales are not available in the subject project, the appraiser
should use comparable sales from competing projects. When the
subject property is a unit in an established cooperative project--one
that has resale activity-- the appraiser should use as comparables
two closed or settled sales from within the subject project (if
available) and one closed or settled sale from a competing project.
The appraiser must report the value of the cooperative interest,
excluding its pro rata share of the blanket mortgage(s). This value
reflects the market value for the cooperative interest of the unit. [To
illustrate: When the indicated value of the unit encumbered by the
blanket mortgage(s) is $100,000 and its pro rata share of the blanket
mortgage(s) is $25,000, the value estimate that the appraiser should
report for the cooperative interest of the unit is $75,000.] The
appraiser certifies in the appraisal report that "the pro rata share of
the blanket mortgage(s) on the real estate has not been included in
the market value estimate of the cooperative interest."
Section 308 - Properties in Special Assessment or Community
Facilities Districts
Alternative methods for raising the capital necessary to satisfy utility
and infrastructure requirements are sometimes used in the
development of new residential communities. Generally, this involves
the creation of local districts--special assessment districts or
community facilities districts--that have the authority to assess
homeowners for the cost of developing utility services and various
infrastructure facilities (roads, sewer services, schools, police and fire
protection services, libraries, etc.). We expect lenders to know
whether or not a property is located in one of these districts and to be
aware of the effect that assessments levied by the district could have
on property values and the marketability of the subject property. The
lender's appraiser, therefore, must give special consideration to the
valuation of properties located in these districts.
Section 308.01 - Special Assessment Districts
Special assessment districts (which may also be called special tax
districts or municipal utility districts) provide a specific service to
homeowners living in a designated area. They are most often
established to provide water or other utilities in areas that are not
served by existing city or municipal utility services. The need for
these districts arises when an existing utility service does not have
sufficient capacity (or may not find it economically feasible) to provide
services for newly created subdivisions that are located beyond its
current operating area. State law governing the establishment of
special assessment districts varies greatly, as does the financial
strength of the individual districts. The districts are granted the
authority to assess owners of properties within their boundaries for
funds that will be used to cover their operating costs and debt
service.
Special assessment districts that are established to serve newly
developing subdivisions with utilities often base their financial plans
(and the amount of the assessment charged to each property owner)
on the expected number of properties in the area to be served. The
district then depends on the continuation of development to maintain
its budget expectations. If, for any reason, development stops short of
the degree of development that the district anticipated in preparing its
budget, the district can become financially distressed and may need
to impose an additional assessment on the existing homeowners.
When the property being appraised is located in a special
assessment district, the lender should request the appraiser to report
on any special assessments that affect the property. If the special
assessment district is experiencing financial difficulty and that
difficulty has an effect on the value or marketability of the subject
property, the appraiser must reflect the effect in his or her analysis
and note it in the appraisal report. To assure that the reaction of the
market to the potential liabilities that may arise within a financially
troubled special assessment district is reflected in his or her analysis,
the appraiser should consider current listings of properties for sale
within the district and any pending contract sales and recent closed
sales within the district. There may be some instances in which the
financial difficulty of a special assessment district is so severe that its
actual impact on the value and marketability of a property is not
measurable because there is no comparable market data available to
enable the appraiser to arrive at a reliable estimate of market value.
When this is the case, a mortgage secured by a property in that
district will not be eligible for delivery to us--at least until such time as
an active market develops that will enable the appraiser to
demonstrate the value and marketability of the subject property.
Section 308.02 - Community Facilities Districts
Some states may have passed legislation that creates community
facilities districts and permits them to levy a special tax to fund the
capital costs of a wide variety of public improvements, as well as the
on-going operation and maintenance costs of a limited number of
public services. Proceeds of the special tax are used to support the
sale of tax-exempt bonds for the various capital improvements--
roads, sewer services, schools, police and fire protection services,
and libraries-- that are allowed under the legislation.
The assessment that will be used to repay the tax-exempt bonds
becomes an on-going responsibility of the property owner (similar to
state and local property taxes). The assessment lien (and the
obligation to pay the assessment) passes with the title to the property
when ownership of the property is transferred. In some cases, the
term of the assessment obligation can be quite lengthy (up to 40
years-- unless the assessment is prepaid. In some cases in
California, prepayment estimates can range from $20,000 to $40,000
for a single-family property, depending on the amount of
improvements that were financed, the size of the dwelling, and the
year it was purchased.)
Such legislation generally requires full disclosure of the special
assessment to any purchaser of a property located in a community
facilities district. Therefore, lenders originating mortgages in
community facilities districts should disclose to the appraiser any
information that they become aware of regarding special
assessments on a given property. They also should caution their
appraisers in general about the need to be aware of whether or not
the subject property and the comparable sales are located within (or
affected by) a community facilities district since properties subject to
an assessment by one of these districts often compete against
properties that are either subject to a significantly different special
assessment or to no assessment at all. The appraiser must consider
the reaction of the market (if any) to the assessment for the
applicable community facilities district in his or her analysis by
analyzing similarly affected comparable sales, and should note the
effect of the assessment in the appraisal report.
 

Chapter 4 - Reviewing the Appraisal Report
This Chapter is presented in the general order that the major topics
appear in on our different appraisal report forms. Therefore, it should
provide a usable working reference for lenders.
Section 401 - The Subject Property
The first section of our appraisal report forms is used to identify and
describe the location of the subject property; to provide information
about property taxes and special assessments; to indicate the
occupancy status of the property; to describe the property rights to be
appraised; to summarize financing data and sales concessions; and
to identify the borrower, the current owner, the client, and the
appraiser.
The appraiser must identify the subject property by its complete
property address and legal description; a post office box number is
not acceptable. The appraiser should indicate the nearest intersection
if a house number is not available. When the legal description is
lengthy, the appraiser may attach the full description as an addendum
to the appraisal report, or may refer simply to its location in the public
records.
(also see Section 203)
The appraiser must identify the property rights to be appraised as
"fee simple" or "leasehold." In addition, if the appraisal for a PUD or
condominium unit is documented on the Uniform Residential
Appraisal Report (Form 1004) or the Small Residential Income
Property Appraisal Report (Form 1025), the appraiser must indicate
whether the subject property is located in a PUD or condominium
project.
The appraiser must state the total dollar amount of the loan charges
and/or concessions that will be paid by the seller (or any other party
who has a financial interest in the sale or financing of the subject
property) and provide a brief description of the items on the appraisal
report form. If the appraiser knows that the appraisal will be used for
a refinance transaction, he or she should indicate that on the form.
Section 402 - Neighborhood Analysis
The purpose of the appraiser's neighborhood analysis is to identify
the area (based on common characteristics or trends) that is subject
to the same influences as the subject property, not to rate or judge
the neighborhood. The sales prices of comparable properties in the
identified area should reflect the positive and negative influences of
the neighborhood. The results of the neighborhood analysis will
enable the appraiser to define the area from which to select
comparables, to understand market preferences and price patterns,
to examine the effect of different locations within the neighborhood, to
determine the influence of nearby land uses, and to identify any other
value influences affecting the neighborhood.
To perform a neighborhood analysis, the appraiser should collect
pertinent data, make a visual inspection of the neighborhood to
observe its physical characteristics and boundaries, and identify land
uses and any signs that they are changing. Appraisers should extend
their search of the subject market area as far as necessary to assure
that all significant influences affecting the value of the subject
property are reflected in the appraisal report. Appraisers should use
their best judgment in determining and describing neighborhood
boundaries. The limits of a neighborhood can be identified by various
physical characteristics--including, but not limited to, streets, bodies
of water, land uses, types of dwellings, etc. The lender's underwriter
should review carefully the neighborhood description to confirm that
the appraiser used comparables from within the subject
neighborhood in his or her analysis.
A neighborhood analysis should consider the influence of social,
economic, government, and environmental forces on property values
in the subject neighborhood. However, neither the racial composition
nor the age of a neighborhood is an appraisal factor. A property
located in an older neighborhood can be as sound an investment as a
property located in a new neighborhood, and a property located in a
neighborhood inhabited primarily by members of one race can be as
sound an investment as one located in a racially mixed neighborhood
or in a neighborhood inhabited primarily by a different race. The
appraiser must report neighborhood conditions in factual, specific
terms and be impartial and specific in describing favorable or
unfavorable factors in a neighborhood. In addition, the appraiser must
not use subjective terms or phrases--such as "pride of ownership,"
"no pride of ownership," "lack of pride of ownership," "poor
neighborhood," "good neighborhood," "crime-ridden area," "desirable
neighborhood or location," "undesirable neighborhood or location,"
etc.
Fannie Mae does not designate certain areas as being acceptable or
unacceptable--in other words, Fannie Mae does not "red-line."
Redlining can occur when perceived property risks are based on
improper locational factors--such as the arbitrary granting of
unfavorable loan terms on the basis of geographic area--or when the
perceptions of risk are derived from factors that do not predict risk--
either reliably or not at all. An example of a factor that is not
predictive of risk is race--and racial redlining is illegal under federal
law. Other factors that serve as a proxy for race are equally
impermissible. The appraiser, and the lender's underwriter, must be
sensitive to these impermissible factors and apply Fannie Mae's
guidelines in a consistent, equitable manner. None of our property
guidelines is intended to foster redlining--if any provision is
interpreted to do so, it has been misunderstood.
The appraiser should explain any changes that have occurred that
might influence the marketability of the properties within the
neighborhood. For example, the appraiser must comment if there is
market resistance to a neighborhood because of the known presence
of an environmental hazard. The lender must be satisfied that the
neighborhood will be acceptable to a sufficient number of buyers to
support an active, on-going market for the property.
Some lenders underwrite mortgages in urban areas on a block-byblock
basis. Block-by-block underwriting and appraisal analysis are
acceptable in cases in which rehabilitation has started--either in the
block where the subject property is located or in facing blocks visible
to the property--but has not yet spread to the rest of the
neighborhood. This enables the lender's underwriter to place weight
on the positive influences of a neighborhood in an urban area that is
being rehabilitated. The acceptability of this type of appraising or
underwriting is conditioned on the appraiser demonstrating that local
conditions make it appropriate and that all essential factors are
considered.
Our appraisal report forms require the appraiser to address a number
important factors that are used to analyze the impact that the
neighborhood has on the marketability of the property. Some of the
key factors are discussed in the following subsections.
Section 402.01 - Location
We will purchase or securitize mortgages that are secured by
residential properties in urban, suburban, or rural areas. An "urban"
location relates to a city, a "suburban" location relates to the area
adjacent to a city, and a "rural" location relates to the country or
anything beyond the suburban area. We do not designate certain
areas as being acceptable or unacceptable.
The appraiser, and the lender's underwriter, must be sensitive to the
varying conditions that characterize different types of locations.
Conditions that are typical of certain types of locations may not be
present in other locales. This does not mean that the conditions are
unacceptable, rather that they must be viewed in context with the
nature of the area in which the security property is located. For
example, rural properties often have large lot sizes and rural
neighborhoods can be relatively undeveloped. If a security property is
located in an area that has one of these characteristics, the appraiser
may have to go a considerable distance to find properties that can be
used to estimate the value of the security property. On the other
hand, if the security property were located in a suburban or urban
area, the appraiser would most likely use comparable properties in
the immediate vicinity of the property since suburban and urban
areas are usually more highly developed and comparable sales
typically are available in the subject neighborhood. However, if the
security property were located in an area in which there is a shortage
of recent truly comparable sales--either because of the nature of the
improvements of the subject property or the relatively low number of
sales transactions in the neighborhood--the appraiser might need to
analyze and use as comparables sales that are not truly comparable
to the subject property. This is acceptable as long as the appraiser
adequately documents his or her analysis in the appraisal report and
explains why such comparables were used. When a security property
is located in an urban neighborhood that has vacant or boarded up
properties, the appraiser would need to look at comparable properties
in the same neighborhood to assure that any effect of the vacant or
boarded up properties is taken into consideration in developing the
estimate of value for the security property.
To be eligible for purchase or securitization by Fannie Mae, a
mortgage must be secured by a property that is residential in nature--
based on the characteristics of the subject property, zoning, and the
present land use. We do not purchase or securitize mortgages on
agricultural-type properties (such as farms, orchards, or ranches), on
undeveloped land, or on land development-type properties.
Lenders must give properties with outbuildings special consideration
in their underwriting and appraisal review. Properties with minimal
outbuildings--such as a small barn or stable--that are of relatively
insignificant value in relation to the total appraised value of the
subject property are acceptable if they are typical of other residential
properties in the subject area. For example, a property that has a
small barn or stable is acceptable if the appraiser demonstrates
through the use of comparable sales with similar improvements that
the improvements are typical of properties for which an active, viable
residential market exists. If the outbuildings do not represent typical
residential improvements for the location and property type, the
typical purchaser in the market would probably recognize minimal, if
any, contributory value for them. A property with an atypical minimal
outbuilding is acceptable to Fannie Mae, as long as the appraiser's
analysis reflects little (or no) contributory value for it.
On the other hand, the presence of significant outbuildings--such as a
large barn, a storage area or facilities for farm-type animals, or a silo-
-will probably indicate that the property is agricultural in nature. In
such cases, the lender must review the property with great care,
regardless of whether the appraiser assigns any value to the outbuildings.
All properties must be readily accessible by roads that
meet local standards, and must have adequate utilities available and
in service. The appraiser must also consider the present or
anticipated use of any adjoining property that may adversely affect
the value or marketability of the subject property.
Certain aspects of the location of a property will require special
consideration. For example, properties in resort areas that attract
people for seasonal or vacation use are acceptable only if they are
suitable for year-round use. Any property that is not suitable for yearround
occupancy--regardless of where it is located--is unacceptable.
Section 402.02 - Degree of Development and Growth Rate
The degree of development of a neighborhood (which is referred to
as "built-up" on the appraisal report forms) is the percentage of the
available land in the neighborhood that has been improved. The
degree of development of an area may indicate whether a particular
property is residential in nature. When underwriting mortgages
secured by properties located in rural or relatively undeveloped
areas, lenders should focus on the characteristics of the property,
zoning, and the present land use to determine whether the property
should be considered residential in nature. For example, if the typical
single- family building site in a particular area (based on the zoning,
the highest and best use of the land, and the present land use) is two
acres in size, the mortgage will be eligible for purchase or
securitization regardless of the percentage of the total appraised
value of the property that the site represents--as long as the
appraiser demonstrates through the use of comparable sales that the
property is a typical residential property for that particular
neighborhood.
Because we do not purchase or securitize mortgages secured by
agricultural-type properties, undeveloped land, or land-developmenttype
properties, the lender must review carefully the appraisal report
for properties that have sites larger than those typical for residential
properties in the area. Special attention must be given to the
appraiser's description of the neighborhood, zoning, the highest and
best use determination, and the degree of comparability between the
subject property and the comparable sales. If the subject property
has a significantly larger site than the comparables used in the
appraiser's analysis, the subject property may not be a typical
residential property for the neighborhood.
Section 402.03 - Property Values
The appraiser must indicate whether property values in the subject
neighborhood are "increasing," "stable," or "declining." Maximum
financing is acceptable when property values are stable or increasing.
The lender generally must not offer maximum financing in any
instance in which property values are declining. However, we do
make some exceptions to this policy. For example, we permit
maximum financing for "no cash-out" rate/term refinance transactions
that involve Fannie Mae-owned or -securitized mortgages even if the
property is located in a declining market.
We will also consider granting a waiver of our prohibition against
maximum financing in declining markets if the lender can
demonstrate that it is (or will be) participating in a focused local
redevelopment effort that is designed to infuse capital and provide
lending programs as a means of revitalizing or stabilizing a
neighborhood in which values are declining. "Focused local
redevelopment efforts" must concentrate on a specific neighborhood
or community that has been targeted for substantial and coordinated
investment activity that is intended to help arrest or reverse declining
property values by doing such things as improving the public or
private infrastructure, providing increased levels of public services,
building new schools or modernizing existing ones, establishing local
enterprise zones to encourage business development, offering
special housing finance programs, etc. While special housing finance
programs (such as those offered by Fannie Mae and others) are an
important component of the overall community development, they
must not be the only component; the redevelopment effort should
also consist of specific non-housing components. The "infusion of
capital and lending programs" can come from local, state, or federal
government programs that are targeted to specific neighborhoods or
communities or from programs that are funded by either the nonprofit
sector or public-private partnerships that were created to revitalize a
particular neighborhood or community.
To request a waiver of our prohibition against maximum financing in
declining markets, a lender must submit its written request to its lead
Fannie Mae regional office. The request should include
documentation that substantiates the reason the waiver is being
requested (including evidence that the mortgaged properties are
located in an area that is undergoing a specific and significant
infusion of private and/or public reinvestment as part of a focused
local redevelopment effort) and demonstrates that the lender and the
governmental and/or private sources are willing partners in actively
trying to increase home values in the neighborhood. Focused local
redevelopment efforts and the definitions used to determine targeted
communities and neighborhoods may be documented in whatever
manner the locality uses to obtain the different forms of assistance
that are needed to carry out its plans for the effort (for example, an
application for a community development block grant, a
comprehensive housing assistance strategy plan, etc.). Once we
have granted the lender a waiver for a particular local redevelopment
effort, the lender may deliver to us maximum financing mortgages
located in that community or neighborhood--without having to request
an individual waiver for each mortgage.
Section 402.04 - Demand, Supply, and Marketing Time
An over-supply of housing is not desirable since it indicates that
properties are selling slowly with a lot of competition. An over-supply
of properties may be a neighborhood-wide or a city-wide problem. In
either case, the appraiser must comment on the reason for the oversupply
and its effect on the value of the property.
Marketing time is the average time that it takes for a reasonably
priced property to sell in the subject neighborhood. When marketing
time for a particular area is greater than six months, the appraiser
must comment on the reason for the extended marketing period and
its effect on the value of the property.
Section 402.05 - Predominant Occupancy
The appraiser should categorize the predominant occupancy status
of the neighborhood--as "owner" or "tenant" and as "vacant (0-5%)"
or* "vacant (over 5%)"--as part of his or her description of the
neighborhood.
The fact that the properties in a neighborhood are predominantly
owner-occupied or tenant-occupied is a characteristic of the
neighborhood that the appraiser needs to take into consideration
when performing the neighborhood analysis and defining the
neighborhood boundaries. To assure that any effects (positive or
negative) of occupancy status will be reflected in the sales
comparison analysis, the appraiser should select comparable sales
from within the same neighborhood whenever possible. If the
appraiser uses as comparables sales that are outside of the subject
neighborhood, he or she may need to make "neighborhood" or
"location" adjustments to the sales comparison analysis for any sales
that are not subject to this same neighborhood characteristic.
Section 402.06 - Price Range and Predominant Price
The appraiser must indicate the price range and predominant price of
properties in the subject neighborhood. The price range must reflect
high and low prevailing prices for residential properties that are
comparable to the property being appraised (one-family properties,
two- to four-family properties, condominium units, or cooperative
units) and, in some cases, for competing properties (one-family
properties when the property being appraised is a two- to four-family
property or a condominium unit and condominium units when the
property being appraised is a cooperative unit). Isolated high and low
extremes should be excluded from the range, which means that the
predominant price will be that which is the most common or most
frequently found in the neighborhood. The appraiser may state the
predominant price as a single figure or as a range (if that is more
appropriate).
When the subject property has a sales price (or value) that exceeds
the upper price range, the property is considered as an "overimprovement"
for the neighborhood. The property is considered as an
"under- improvement" if its sales price (or value) is less than the
lower price range. If the subject property is an over-improvement, the
mortgage terms generally should be more conservative because the
property may not be acceptable to typical purchasers. The appraiser
must explain why the property is an over- or under-improvement and
comment on the adjustments that were made in the "sales
comparison analysis" adjustment grid to reflect that condition.
The lender should consider whether a property in an urban area is
among those being renovated. Since demand for this type of property
can be strong, the property should not be regarded as over-improved
if there is a strong market interest, which is indicated by the existence
of comparable properties.
Section 402.07 - Age Range and Predominant Age
The appraiser must indicate the age range and predominant age of
properties in the subject neighborhood. The age range should reflect
the oldest and newest ages for similar types of residential properties
(one-family properties, two- to four-family properties, condominium
units, or cooperative units) and, in some cases, for competing
properties (one-family properties when the property being appraised
is a two- to four-family property or a condominium unit and
condominium units when the property being appraised is a
cooperative unit.) However, isolated high and low extremes should be
excluded from the range. The predominant age is the one that is the
most common or most frequently found in the neighborhood. The
appraiser may state the predominant age as a single figure or as a
range (when that is more appropriate). The appraiser should select
independently the properties that he or she uses to represent the age
range and predominant age, rather than merely relying on the same
properties he or she used to illustrate the price range and
predominant price.
The age of a property should be within the general age range of the
neighborhood. Normally, neighborhoods are developed over a
relatively narrow span of time so that most dwelling units will fall
within a particular age range. A property that has an age outside of
the general age range must receive special consideration. Unless
there is strong evidence of long-term neighborhood stability, a new
dwelling in an old neighborhood will carry some marginal risk.
Conversely, an old dwelling in a newly developed area is generally
acceptable if renovation will result in its conforming with the
neighborhood.
Section 402.08 - Present Land Use
The appraiser should provide the relative percentages of the
developed land in the neighborhood when discussing the present
land use in his or her neighborhood analysis, rather than simply
referring to the zoning classifications. The appraiser should report
separately the percentage of developed single-family sites,
developed two- to four- family sites, etc. Undeveloped land should be
reported as vacant. In addition, if there is a significant amount of
vacant or undeveloped land in the neighborhood, the appraiser
should include comments to that effect to assure that he or she
adequately describes the neighborhood. If the present land use in the
neighborhood is not one of those listed on the appraisal report form--
such as parkland--the appraiser must also indicate the type of land
use and its related percentage. The total of the types of land uses
must equal 100%.
Typically, dwellings best maintain their value when they are situated
in neighborhoods that consist of other similar dwellings. However,
some factors that are typical of a mixed-use neighborhood--such as
easy access to employment centers and a high level of community
activity--can actually enhance the market value of the property
through increased buyer demand. Viable urban neighborhoods also
frequently reflect a blend of single-family residential and nonresidential
land uses--including residential multifamily properties,
other properties that are used to provide commercial services (such
as groceries and other neighborhood stores) in support of the local
neighborhood, industrial properties, etc.
When different land uses and property types are present in a
neighborhood, that fact should be considered a neighborhood
characteristic that the appraiser needs to take into consideration
when performing the neighborhood analysis and defining the
neighborhood boundaries. To assure that any positive or negative
effects of the mixed land uses are reflected in the sales comparison
analysis, the appraiser should select comparable sales from within
the same neighborhood whenever possible. If this is not possible, the
appraiser may need to make "neighborhood" or "location"
adjustments to the "sales comparison analysis" grid for any sales that
are not subject to this same neighborhood characteristic.
Section 402.09 - Changes in Land Use
The appraiser must indicate in his or her neighborhood analysis
whether the present land use in the neighborhood is "likely" or "not
likely" to change or whether it is "in process" of changing. If the land
use is likely to change or is in the process of changing, the appraiser
should indicate the anticipated new land use(s). Fannie Mae relies on
the present land use, the predominant occupancy composition, and
the likelihood that either will change to determine whether a
neighborhood is undergoing transition. However, a "neighborhood in
transition" description must not be used to refer to the racial or ethnic
composition--or the prospective racial or ethnic composition--of a
neighborhood. If the appraiser indicates that an area is undergoing
transition, he or she should describe the changes and comment
about their effect on the marketability and value of the subject
property.
Section 402.10 - Competitive Properties
When the subject property is a two- to four-family property, the
appraiser must include in his or her appraisal report listing information
about at least three competitive properties from the subject
neighborhood, choosing available listings that represent the most
current, similar, and proximate competitive properties to the subject
property. The listing comparables can be the rental comparables or
the sales comparables that are used later in the appraiser's market
data analysis (as long as they are currently listed for sale). Although
we do not require it, the appraiser may also provide additional
comparisons of properties listed for sale outside of the subject
neighborhood if he or she chooses to do so, as long as they are
relevant to the analysis. We are primarily concerned about
competitive properties that are for sale in the subject neighborhood;
therefore, if there are fewer than three competitive properties for sale
in that neighborhood, the appraiser should simply state that fact in the
"comments" section of the appraisal report form and provide an
explanation of why that is the case (for example, because of an
undersupply, non-conforming property types, etc.).
The appraiser must provide a narrative comparison of the competitive
listings that are comparable to the subject property, describe the
general market conditions that affect two- to four-family properties in
the subject market area, and identify trends in listing prices, average
days on market, and recent changes. The purpose of reporting active
listings is to provide support for the primary indicators of market
condition (growth rate, property values, demand/supply, and
marketing time). The analysis of active listings should be used to
evaluate both the inventory of two- to four-family properties currently
for sale in the subject neighborhood and competing with the subject
property, as well as the recent price and marketing time trends that
affect the subject property.
Section 403 - Site Analysis
The property site should be of a size, shape, and topography that is
generally conforming and acceptable in the market area. It must also
have competitive utilities, street improvements, and other amenities.
Since amenities, easements, and encroachments may either detract
from or enhance the marketability of the site, the appraiser must
comment on them if the site is not typical for the neighborhood. If
there is market resistance to a property because its site is not
compatible with the neighborhood or with the requirements of the
competitive market, the lender should underwrite the mortgage more
carefully and, if appropriate, require more conservative mortgage
terms.
Section 403.01 - Zoning
The appraiser is responsible for reporting the specific zoning
classification for the subject property. The appraiser must include a
general statement to describe what the zoning permits--"singlefamily,"
"two-family," etc.--when he or she indicates a specific zoning
such as R-I, R-2, etc. The appraiser must also include a specific
statement indicating whether the improvements represent a legal use;
a legal, but non-conforming (grandfathered) use; or an illegal use
under the zoning regulations; or whether there is no local zoning.
We generally will not purchase or securitize a mortgage on a property
if the improvements do not constitute a legally permissible use of the
land. We do make certain exceptions to this policy, as long as the
property is appraised and underwritten in accordance with the special
requirements we impose as a condition to agreeing to make the
exception:
We will purchase or securitize a mortgage that is secured by a
one- to four-family property or a unit in a PUD project if the
property represents a legal, but non-conforming, use of the land--
as long as the appraiser's analysis reflects any adverse effect that
the non- conforming use has on the value and marketability of the
property.
We will purchase or securitize a condominium unit mortgage or a
cooperative share loan from a project that represents a legal, but
non-conforming, use of the land only if the improvements can be
rebuilt to current density in the event of their partial or full
destruction. (In such cases, the mortgage file must include a copy
of the applicable zoning regulations or a letter from the local
zoning authority that authorizes reconstruction to current density.)
We will purchase or securitize a mortgage secured by a singlefamily
or a two-family property that includes an illegal additional
unit or accessory apartment (which may be referred to as a
mother-in-law, mother-daughter, or granny unit) as long as the
illegal use conforms to the subject neighborhood and to the
market. The property must be appraised in conformity with its legal
use, that of a single-family or two-family property (and the
borrower must qualify for the mortgage without considering any
rental income from the illegal unit). The appraiser must report that
the improvements represent an illegal use and demonstrate that
the improvements are typical for the market through an analysis of
at least three comparable properties that have the same illegal
use. The lender must also make sure that the existence of the
illegal additional unit will not jeopardize any future hazard
insurance claim that might need to be filed for the property. We will
not purchase or securitize a mortgage secured by a three- or fourfamily
property that includes an illegal accessory apartment.
We will not purchase or securitize a mortgage secured by a
property that is subject to certain land-use regulations (such as
coastal tideland or wetland laws) that create setback lines or other
provisions that prevent the reconstruction (or maintenance) of the
property improvements if they are damaged or destroyed. (The
intent of these types of land-use regulations is to remove existing
land uses and to stop land development--including the
maintenance or construction of seawalls--within specific setback
lines.)
Section 403.02 - Highest and Best Use
The highest and best use of a site is that reasonable and probable
use that supports the highest present value on the effective date of
the appraisal. For improvements to represent the highest and best
use of a site, they must be legally permitted, be financially feasible,
be physically possible, and provide more profit than any other use of
the site would generate. All four of these criteria must be met if the
improvements are to be considered as the highest and best use of a
site.
A strict theoretical highest and best use analysis identifies the perfect
improvements for a site--assuming that the site is vacant and
available to be developed. The appraiser's highest and best use
analysis of the subject property should consider the property as it is
improved. This treatment recognizes that the existing improvements
should continue in use until it is financially feasible to remove the
dwelling and build a new one, or to renovate the existing dwelling. If
the use of comparable sales demonstrates that the improvements are
reasonably typical and compatible with market demand for the
neighborhood, and the present improvements contribute to the value
of the subject property so that its value is greater than the estimated
vacant site value, the appraiser should consider the existing use as
reasonable and report it as the highest and best use.
On the other hand, if the current improvements clearly do not
represent the highest and best use of the site as an improved site,
the appraiser must so indicate on the appraisal report. In such cases,
we will not purchase or securitize a mortgage that is secured by the
subject property.
Section 403.03 - Utilities
For a mortgage to be eligible for purchase or securitization, the
utilities of the security property must meet community standards and
be accepted generally by area residents. If public sewer and/or water
facilities--those that are supplied and regulated by the local
government-- are not available, then community or private well and
septic facilities must be available and utilized by the subject property.
If community facilities are used, the owners of the subject property
must have the right to access those facilities, which must be viable on
an ongoing basis. Generally, private well or septic facilities must be
located on the subject site. However, off-site private facilities are
acceptable if the inhabitants of the subject property have the right to
access them and if there is an adequate, legally binding agreement
for their access and maintenance.
If there is market resistance to an area because of environmental
hazards or any other conditions that affect well, septic, or public water
facilities, the appraiser must comment on the effect of the hazards on
the marketability and value of the subject property.
Section 403.04 - Off-Site Improvements
The appraiser must state the type for any off-site improvements--
streets, curbs/gutters, sidewalks, street lights, and alleys--that are
present and indicate whether they are publicly or privately
maintained.
The property should front on a publicly dedicated and maintained
street that meets community standards and is accepted generally by
area residents. If the property is on a community-owned or privately
owned and maintained street, there should be an adequate, legally
enforceable agreement for maintenance of the street. A street that
does not meet city or state standards frequently requires extensive
maintenance, and property values may decline if it is not regularly
maintained. If a property fronts on a street that is not typical of those
found in the community, the appraiser must comment on the effect of
that location on the marketability and value of the subject property.
The presence of sidewalks, curbs and gutters, street lights, and alleys
depends on local custom--if they are typical in the community, they
should be present on the subject site. The appraiser must comment
on any adverse conditions and address their effect on the
marketability and value of the subject property.
Section 403.05 - The Lot
The topography, shape, size, and drainage of the lot are all equally
important. Steep slopes that cause erosion, difficulty in maintaining a
lawn, or difficult access to the property itself or to a garage are
generally unfavorable conditions. Drainage must be away from the
improvements to avoid the collection of water in or around them.
Section 403.06 - Flood Hazard Area
The appraiser must indicate on the appraisal report whether or not
the property is located in a Special Flood Hazard Area that is
identified on the Federal Emergency Management Agency's (FEMA)
Flood Insurance Rate Maps (FIRM). These maps include areas that
are within the 100-year flood boundary. (Note: The term "100-year
flood" does not mean that a flood will occur once in every 100 years,
but rather that there is a 1% or greater chance that a flood level will
be equal or exceeded in any given year.) The appraiser must also
indicate the specific FEMA flood zone and the map number and its
effective date.
Flood Insurance Rate Maps (FIRM) can be obtained by contacting
FEMA at the following address or telephone numbers. FEMA requires
that requests for more than five maps be in writing.
Federal Emergency Management Agency
Flood Map Distribution Center
6930 (A-F) San Tomas Road
Baltimore, MD 21227-6227
1-800-638-6620, for the Continental U.S.;
1-800-492-6605, for Maryland only;
1-800-638-6831, for Alaska, Hawaii, Puerto Rico, and Virgin
Islands.
If the property improvements are located in a Special Flood Hazard
Insurance Rate Maps (FIRM). These maps include areas that are
within the 100-year flood boundary. (Note: The term "100-year flood"
does not mean that a flood will occur once in every 100 years, but
rather that there is a 1% or greater chance that a flood level will be
equal or exceeded in any given year.) The appraiser must also
indicate the specific FEMA flood zone and the map number and its
effective date.
If the property improvements are located in a Special Flood Hazard
Area--zones A, AE, AH, AO, A1-30, A-99, V, VE, or Vl-30--flood
insurance is required. If the land is in the hazard area, but the
improvements are not, flood insurance is not required.
Section 404 - Improvement Analysis
The appraiser must provide a clear, detailed, accurate, and
comprehensive description of the improvements. The appraiser
should be as specific as possible (commenting on such things as
needed repairs, additional features, modernization, etc.) and should
provide supporting addenda, if necessary.
The description of the improvements should include a general overall
description and specific descriptions of the exterior, foundation,
basement, insulation, interior surfaces, heating and cooling systems,
kitchen equipment, attic, amenities, and car storage. If the property
that is being appraised includes an accessory apartment, the
appraiser should describe it in the "comments" section of the
improvement analysis portion of the appraisal report form.
Section 404.01 - Conformity to Neighborhood
The improvements should generally conform to the neighborhood in
terms of age, type, design, and materials used for their construction.
If there is market resistance to a property because its improvements
are not compatible with the neighborhood or with the requirements of
the competitive market--because of adequacy of plumbing, heating,
or electrical services; design; quality; size; condition; or any other
reason directly related to market demand--the lender should
underwrite the mortgage more carefully and, if appropriate, require
more conservative mortgage terms. However, the lender should be
aware that many older neighborhoods have favorable heterogeneity
in architectural styles, land use, and age of housing. For example,
older neighborhoods are especially likely to have been developed
through custom building; this variety may be a positive marketing
factor.
In the appraisal and underwriting process, special consideration must
be given to properties that represent special or unique housing for the
subject neighborhood. Non-traditional types of housing--such as earth
houses, geodesic domes, log houses, etc.--are eligible for delivery to
us, provided the appraiser has adequate information to develop a
reliable estimate of market value. It is not necessary for one or more
of the comparable sales to be of the same design and appeal as the
property that is being appraised (although appraisal accuracy is
enhanced by using comparable sales that are the most similar to the
subject property). On a case-by-case basis, both the appraiser and
the underwriter must independently determine whether there is
sufficient information available to develop a reliable estimate of
market value. This will depend on the extent of the difference
between the special or unique property and the more traditional types
of houses in the market and the number of such properties that have
already been sold in the market area. If recent comparable sales of
the same design and appeal are not available, but the appraiser is
able to determine sound adjustments for the difference between the
comparables that are available and the subject property and to
demonstrate the marketability of the property-- based on older
comparable sales, comparable sales in competing neighborhoods,
the existence of similar properties in the market area and any other
reliable market data--the mortgage is acceptable for delivery to
Fannie Mae. On the other hand, if the appraiser is not able to find any
evidence of market acceptance and the characteristics of the property
are so significantly different that he or she cannot establish a reliable
estimate of market value, we will not accept the property as security
for a mortgage.
We do not specify minimum size or living area requirements for
properties. However, dwelling units of any type should contain
sufficient living area to be acceptable to typical purchasers or tenants
in the subject market area. There should be comparables of similar
size to the subject property to support the general acceptability of a
particular property type.
Section 404.02 - Actual and Effective Ages
The relationship between the actual and effective ages of the
property is a good indication of its condition. A property that has been
well maintained will generally have an effective age somewhat lower
than its actual age. On the other hand, properties that have an
effective age higher than their actual age probably have not been well
maintained or may have a particular physical problem. In such cases,
the lender must pay particular attention to the condition of the subject
property in its review of the appraisal.
(also see section 402.07)
We do not place a restriction on the age of eligible dwellings.
Consequently, mortgages on older dwellings that meet our general
requirements are acceptable. The improvements for all properties
must be of the quality and condition that will be acceptable to typical
purchasers in the subject market area.
Section 404.03 - Insulation and Energy Efficiency
Our appraisal report forms provide an area for the appraiser to state
the "R" value for insulation if he or she is aware of it and to comment
on the adequacy of the insulation. The appraiser should list the
additional energy-efficient features in the "comments" area. The
appraiser should also compare the energy-efficient features of the
subject property to those of the comparable properties in the "sales
comparison analysis" grid to assure that the overall contribution of
these items is reflected in his or her estimate of the market value of
the subject property.
(also see Section 305)
An energy-efficient property is one that uses cost-effective design,
materials, equipment, and site orientation to conserve nonrenewable
fuels. Special energy saving items should be recognized in the
appraisal process. The nature of these items and their contribution to
value will vary throughout the country because of climatic conditions
and differences in utility costs.
Section 404.04 - Layout and Floor Plans
Dwellings with unusual layouts, peculiar floor plans, or inadequate
equipment or amenities generally have limited market appeal. A
review of the room list and floor plan for the dwelling unit may indicate
an unusual layout--such as bedrooms on a level with no bath, or a
kitchen on a different level from the dining room. If the appraiser
indicates that such inadequacies will result in market resistance to the
subject property, he or she should make appropriate adjustments to
reflect this in the overall analysis. On the other hand, if market
acceptance can be demonstrated through the use of comparable
sales with the same inadequacies, no adjustments are required.
Section 404.05 - Unit/Room List
The Uniform Residential Appraisal Report (Form 1004), and the
Individual Condominium Unit Appraisal Report (Form 1073) contain a
"room list" section to describe the subject property and provide a
column for the square footage per level, as well as space for a
summary of the above-grade room count(s) and the above-grade
gross living area for the finished area.
The Small Residential Income Property Appraisal Report (Form 1025)
contains a "unit/room" list section to describe the subject property and
requires the appraiser to indicate the square feet per each unit. The
unit/room list section gives the appraiser the flexibility to report the
units individually or to report them as a single line entry if they are all
equal in size. The total square footage reported in the unit/room list
section of Form 1025 should reflect the net rentable area of the
property (and, as such, will not necessarily equal the gross building
area).
The Individual Cooperative Interest Appraisal Report (Form 1075)
does not contain a "room list" section; however, it provides space for
the appraiser to indicate a summary of both the finished area "above
grade" and the finished area "below grade"--breaking it down by total
rooms, bedrooms, baths, and square feet of gross living area.
Section 404.06 - Gross Living Area
The most common comparison for single-family properties (including
units in PUD, condominium, or cooperative projects) is above-grade
gross living area. The appraiser must be consistent when he or she
calculates and reports the finished above-grade room count and the
square feet of gross living area that is above-grade. For units in
condominium or cooperative projects, the appraiser should use
interior perimeter unit dimensions to calculate the gross living area. In
all other instances, the appraiser should use the exterior building
dimensions per floor to calculate the above-grade gross living area of
a property. Only finished above-grade areas should be used--
garages and basements (including those that are partially abovegrade)
should not be included. We consider a level to be below-grade
if any portion of it is below-grade--regardless of the quality of its
"finish" or the window area of any room. Therefore, a walk-out
basement with finished rooms would not be included in the abovegrade
room count.
Rooms that are not included in the above-grade room count may add
substantially to the value of a property--particularly when the quality
of the "finish" is high. For that reason, the appraiser should report the
basement or other partially below-grade areas separately and make
appropriate adjustments for them on the "basement and finished
areas below-grade" line in the "sales comparison analysis" grid. To
assure consistency in the sales comparison analysis, the appraiser
generally should compare above-grade areas to above-grade areas
and below- grade areas to below-grade areas. The appraiser may
deviate from this approach if the style of the subject property or of
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.
Section 404.07 - Gross Building Area
Gross building area, which is the total finished area (including any
interior common areas, such as stairways and hallways) of the
improvements based on exterior measurements, is the most common
comparison for two- to four-family properties. The gross building area
must be consistently developed for the subject property and all
comparables that the appraiser uses. It should include all finished
above- and below-grade living areas, counting all interior common
areas (such as stairways, hallways, storage rooms, etc.) but not
counting exterior common areas (such as open stairways).
We will accept the use of other comparisons for two- to four-family
properties (such as the total above-grade and below-grade areas as
discussed above in Section 404.06), as long as the appraiser
explains the reasons he or she did not use a gross building area
comparison and clearly describes the comparisons that were made.
Section 404.08 - Infestation, Dampness, or Settlement
If the appraiser indicates that there is evidence of wood-boring
insects, dampness, or settlement, he or she must comment on its
effect on the marketability and value of the subject property. The
lender must provide either satisfactory evidence that the condition
was corrected or submit a professionally prepared report, which
indicates that--based on an inspection of the property--the condition
does not pose any threat of structural damage to the improvements.
Section 405 - Property Condition and Appraiser Comments
Based on the factual data of the improvement analysis, the appraiser
must express an opinion about the condition of the improvements.
The appraiser must report the condition of the improvements in
factual, specific terms. Any condition that may affect the value or
marketability of the subject property must be reported to assure that
the appraiser adequately describes the property. The appraiser must
report a detrimental condition of the improvements even if that
condition is also typical for competing properties. For instance, the
appraiser should note if a property is characterized by deferred
maintenance or a lack of updating even if the same condition applies
to competing properties in the neighborhood.
Section 405.01 - Remaining Economic Life
Because our appraisal report forms are designed to meet the needs
of several different user groups, they address the remaining
economic life for the property being appraised. For mortgages that
will be delivered to us, the appraiser does not need to report the
remaining economic life. Even if the appraiser does report this
information, the lender does not need to consider it because any
related property deficiencies will be discussed in the sections of the
appraisal report that address the improvement analysis and
comments on the condition of the property. Fannie Mae has no
requirements that the mortgage term have any correlation to the
remaining economic life of the property.
Section 405.02 - Appraiser's Comments
The appraiser must address any needed repairs or any physical,
functional, or external inadequacies in the "Comments" section. In
addition, the appraiser must address adverse environmental
conditions (such as, but not limited to, hazardous wastes, toxic
substances, etc.) that are present in the improvements, on the site, or
in the immediate vicinity of the subject property in the space provided
for that purpose.
Section 406 - Valuation Analysis
The valuation section of our appraisal report forms enables
appraisers to develop and report in concise format an adequately
supported estimate of market value--based on the cost, sales
comparison, and income approaches to value, and, in the case of
small residential income properties, on comparable rental data. If the
appraiser believes that additional information needs to be provided
because of the uniqueness of the property or some other condition,
he or she should provide additional supporting data in an addendum
to the appraisal report form.
Section 406.01 - Cost Approach
The cost approach to value assumes that a potential purchaser will
consider building a substitute residence that has the same use as the
property that is being appraised. This approach, then, measures
value as a cost of production. The reliability of the cost approach
depends on valid reproduction cost estimates, proper depreciation
estimates, and accurate site values.
Since units in condominium and cooperative projects are integral
parts of the total project, the cost approach is generally impractical for
estimating the value of any given unit; therefore, the appraiser does
not have to consider the cost approach when appraising these units.
The cost approach can be a good indicator of value for newer or
renovated properties that are one- to four-family residences, or
detached, semi-detached, or townhouse type units in PUD projects.
However, as the effective age of a property increases, the reliability of
the cost approach may decrease because the depreciation estimates
may be subjective. Appraisers should use their best judgment
regarding the applicability of the cost approach when the property
being appraised is an older property. If the appraiser does not use the
cost approach in such cases, he or she must explain why it was not
used and provide an estimated site value.
We will not accept appraisals that rely solely on the cost approach as
an indicator of market value.
A. Determining the indicated value. There are three principal types
of depreciation--physical, functional, and external--that the appraiser
must consider:
Physical depreciation--traditionally referred to as physical
deterioration--is a loss in value that is caused by deterioration in the
physical condition of the improvements. Appraisers classify physical
deterioration as "curable" or "incurable." Curable physical
deterioration refers to items of deferred maintenance--for example,
painting or items currently in need of repair (such as broken stair
rails). Incurable physical deterioration refers to other items that
currently are not practical or feasible to correct--for example, furnaces
or roof shingles that have not reached the end of their economic life.
Functional depreciation--traditionally referred to as functional
obsolescence--is a loss in value that is caused by defects in the
design of the structure--for example, inadequacies in such items as
architecture, floor plan, or sizes and types of rooms. It also can be
caused by changes in market preferences that result in some aspect
of the improvements being considered obsolete by current standards-
- for example, the location of a bedroom on a level with no bathroom,
or access to a bedroom only through another bedroom.
External depreciation--traditionally referred to as economic
obsolescence--is a loss in value that is caused by negative influences
that are outside of the site, such as economic factors or
environmental changes--for example, shopping centers,
expressways, or factories that are adjacent to the subject property.
The appraiser arrives at the indicated value of a property by
estimating the reproduction cost of new improvements, subtracting
the amount of depreciation from all causes, and adding an estimate
of the value for the site if it were vacant and available to be
developed to its highest and best use. The reproduction cost estimate
should reflect the cost of construction based on the current prices of
producing a replica of the property being appraised--including all of its
positive and negative characteristics. Although the construction
materials used for the estimate should be as similar as possible to
those used for the subject property, they do not have to be exactly
the same.
If the appraiser's estimate of the value for the site is one that is not
typical for a comparable residential property in the subject
neighborhood, he or she must comment on how the variance affects
the marketability of the subject property.
B. Appraiser's comments and adjustments. In reviewing the
appraisal report, the lender should make sure that the appraiser's
analysis and comments in the cost approach are consistent with
comments and adjustments mentioned elsewhere in the report. For
example, if the neighborhood or site description reveals that the
property backs up to a shopping center, the lender should expect to
see an adjustment for external depreciation in the cost approach.
Similarly, if the improvement analysis indicates that it is necessary to
go through one bedroom to get to another bedroom, the lender
should expect to see an adjustment for functional depreciation.
Section 406.02 - Comparable Rental Data
In developing the valuation for a two- to four-family investment
property, the appraiser must analyze the most current and most
comparable rental properties that are available to develop an
estimated market rent for the subject property. The appraiser must
report and analyze at least three rental comparables (which do not
have to be the same comparables used in the sales comparison
analysis). The appraiser should reconcile the comparable rental data
and provide support for the estimated market rents for the individual
subject units, providing information about lease dates, number of
vacant units, actual rents, and estimated market rents for the subject
property. The appraisal report should assure the lender that the units
and properties selected as comparables are comparable to the
subject property (in terms of both the units and the overall property)
and accurately represent the rental market for the subject property,
unless the appraiser states otherwise in the report.
Section 406.03 - Sales Comparison Approach
The sales comparison approach to value--traditionally referred to as
the market data approach--is an analysis of comparable sales,
contract offerings, and current listings of properties that are the most
comparable to the subject property. However, we require the
appraiser to report only the comparable sales in the appraisal report.
The appraiser's analysis of a property must take into consideration all
factors that have an impact on value, recognizing that a well-informed
or well-advised purchaser will pay no more for a property than the
price he or she would pay for a similar property of equal desirability
and utility if it were purchased without undue delay. To accomplish
this, the appraiser must analyze the closed or settled sales, the
contract sales, and the current listings of properties that are the most
comparable to the subject property. This is particularly important in
soft or declining markets because the competing current listings and
contracts probably reflect the upper-end of value for the subject
property as of the effective date of the appraisal, and we expect
appraisers to accurately report and reflect market conditions as of
that date.
The comparable market data must be verified, analyzed, and
adjusted for differences between the comparable properties and the
subject property. Because the appraiser's estimate of market value is
no better than the reliability of the comparable data that is used, the
appraiser must exercise due diligence to ensure the reliability of the
comparable sales data that he or she uses. The appraiser must
report his or her data and/or verification source(s) for each
comparable sale on the appraisal report form. An appraiser may use
a single source for the data and verifications or multiple sources if
they are needed to adequately verify the comparable sales. The
quality of the data available varies from source to source and from
one locality to another. In view of this, a single data source may be
adequate if the appraiser uses a source that provides quality sales
data that is confirmed or verified by closed or settled transactions. On
the other hand, if the appraiser's basic data source does not confirm
or verify the sales data, the appraiser will need to use additional
sources. When comparable sales data is provided by a party that has
a financial interest in either the sale or financing of the subject
property, the appraiser must re-verify the data with a party that does
not have a financial interest in the subject transaction.
A. Selecting the comparables. The appraiser must report a
minimum of three comparable sales as part of the sales comparison
approach. The appraiser may submit more than three comparable
sales to support his or her estimate of market value, as long as at
least three are actual settled or closed sales. Generally, the appraiser
should use comparable sales that have been settled or closed within
the last 12 months. However, the appraiser may use older
comparable sales as additional supporting data if he or she believes
that it is appropriate. The appraiser must comment on the reasons for
using any comparable sales that are more than six months old. In
addition, the appraiser may use the subject property as a fourth
comparable sale or as supporting data if the property previously was
sold (and closed or settled). If the appraiser believes that it is
appropriate, he or she also may use contract offerings and current
listings as supporting data.
For properties that are in established subdivisions or for units in
established condominium or PUD projects (those that have resale
activity), the appraiser should use comparable sales from within the
same subdivision or project as the subject property if there are any
available. Resale activity from within the subdivision or project should
be the best indicator of value for properties in that subdivision or
project. If the appraiser uses sales of comparable properties that are
located outside of the subject neighborhood, he or she must include
an explanation with the analysis.
For properties in new subdivisions or for units in new (or recently
converted) condominium or PUD projects, the appraiser must
compare the subject property to other properties in its general market
area as well as to properties within the subject subdivision or project.
This comparison should help demonstrate market acceptance of new
developments and the properties within them. Generally, the
appraiser should select one comparable sale from the subject
subdivision or project and one comparable sale from outside the
subject subdivision or project. The third comparable sale can be from
inside or outside of the subject subdivision or project, as long as the
appraiser considers it to be a good indicator of value for the subject
property. In selecting the comparables, the appraiser should keep in
mind that sales or resales from within the subject subdivision or
project are preferable to sales from outside the subdivision or project
as long as the developer or builder of the subject property is not
involved in the transactions.
Because rural properties often have large lot sizes and rural
neighborhoods can be relatively undeveloped, there may be a
shortage (or absence) of recent truly comparable sales in the
immediate vicinity of a subject property that is in a rural location. This
means that the appraiser will often need to select comparable sales
that are located a considerable distance from the subject property. In
such cases, the appraiser must use his or her knowledge of the area
and apply good judgment in selecting comparable sales that are the
best indicators of value for the subject property. The appraiser should
include an explanation of why the particular comparables were
selected in his or her analysis.
B. Adjustments to comparable sales. Each comparable sale that is
used in the sales comparison approach must be analyzed for
differences and similarities between it and the property that is being
appraised. The appraiser must make appropriate adjustments for
location, terms and conditions of sale, date of sale, and the physical
characteristics of the properties. "Time" adjustments must be
representative of the market and should be supported by the
comparable sales whenever possible. The adjustments must reflect
the time that elapsed between the contract date (or the date of the
"meeting of the minds") for the comparable sale and the effective
date of the appraisal for the subject property.
Comparable sales must be adjusted to the subject property--except
for sales and financing concessions, which are adjusted to the market
at the time of sale. The subject property is the standard against which
the comparable sales are evaluated and adjusted. Thus, if an item in
the comparable property is superior to that in the subject property, a
negative adjustment is required to make that item equal to that in the
subject property. Conversely, if an item in the comparable property is
inferior to that in the subject property, a positive adjustment is
required to make that item equal to that in the subject property. The
proper selection of comparable properties minimizes both the need
for, and the size of, any dollar adjustments. Occasionally, there may
be no similar or truly comparable sales for a particular property--
because of the uniqueness of the property or other conditions. In
such cases, the appraiser must use his or her knowledge and
judgment to select comparable sales that represent the best
indicators of value for the subject property and to make adjustments
to reflect the actions of typical purchasers in that market. Dollar
adjustments must reflect the market's reaction to the difference in the
properties, not necessarily the cost of the difference. Swimming
pools, electronic air filters, intercom systems, elaborately finished
basements, carpets, and other special features generally do not
affect value to the extent of their cost.
We have established guidelines for the net and gross percentage
adjustments that underwriters may rely on as a general indicator of
whether a property should be used as a comparable sale. Generally,
the dollar amount of the net adjustments for each comparable sale
should not exceed 15% of the sales price of the comparable. When
the adjustments exceed 15%, the appraiser must comment on the
reasons for not using a more similar comparable. Further, the dollar
amount of the gross adjustments for each comparable sale should
not exceed 25% of the sales price of the comparable. The amount of
the gross adjustment is determined by adding all individual
adjustments without regard to the positive or negative adjustments.
When the adjustments exceed 25%, the appraiser must comment on
the reasons for not using a more similar comparable.
Individual adjustments that are excessively high should be explained
by the appraiser and reviewed carefully by the lender's underwriter. In
some circumstances, the use of comparables with higher-than-normal
adjustments may be warranted, but the appraiser must satisfactorily
justify his or her use of them.
The appraiser must research the market and select the most
comparable sales that are available for the subject property, and then
adjust them to reflect the reaction of the market to the differences
(except for sales and financing concessions) between the
comparable sales and the subject property, without regard for the
percentage or amount of the dollar adjustments. If the appraiser's
adjustments do not fall within our net and gross percentage
adjustment guidelines, but the appraiser believes that the comparable
sales used in the analysis are the best available, as well as the best
indicators of value for the subject property, the appraiser simply has
to provide an appropriate explanation. If the extent of the appraiser's
adjustments to the comparable sales is great enough to indicate that
the property may not conform to the general market area, the lender's
underwriter must review the property carefully.
C. Unadjusted units of comparison. For two- to four-family
properties, the appraiser must report certain unadjusted units of
comparison for the subject property and the comparable sales--the
sales price per gross building area, the sales price per unit, and the
sales price per room. Because purchasers of small residential income
properties may rely on these unadjusted units of comparison, the
appraiser should consider them in his or her analysis and
reconciliation if they are relevant to the typical purchaser's motivation
in the subject market area.
D. Sales comparison analysis adjustment grid. The lender's
underwriter should review thoroughly the "sales comparison analysis"
adjustment grid. Because the sales comparison analysis provides
many places in which an error can be made in the use of dollar
adjustments, the lender should spot check the positive and negative
adjustment calculations.
The underwriter should pay particular attention to the following items.
Because a substantial variance raises questions about the validity of
using a specific comparable sale, the appraiser should address the
reason for a variance.
1. Proximity to subject property and location. The description of the
proximity of the comparable to the subject property must be specific
(e.g., two blocks south). Whenever possible, the appraiser should use
comparable sales in the same neighborhood as the subject property
because the sales prices of comparable properties in the
neighborhood should reflect the same positive and negative
locational characteristics.
2. Sales price. The sales price of each comparable sale should be
within the general range of the estimate of market value for the
subject property. A $100,000 comparable sale for a $75,000 subject
property would raise questions about the validity of the comparable.
3. Sales or financing concessions. The dollar amount of sales or
financing concessions paid by the seller must be reported for the
comparables if the information is reasonably available. Generally,
sales or financing data for comparable sales--such as the mortgage
amount, loan type, interest rate, term, and any fees or concessions
the seller paid--is available. The appraiser should obtain this
information from an individual who was a party to the comparable
transaction (the broker, buyer, or seller) or from a data source that
the appraiser considers to be reliable. We recognize that there may
be some situations in which sales or financing information is not
available because of legal restrictions or other disclosure-related
problems. In such cases, the appraiser must explain why the
information is not available--however, we will not accept an
explanation that indicates that the appraiser did not make an effort to
verify the information. In all other cases, the appraiser must provide
the sales and financing concession information that was available
(and verified) for the comparables. If the appraisal report form does
not provide enough space to discuss this information, the appraiser
should make adjustments for the concessions on the form and
explain them in an addendum to the appraisal report.
Examples of sales or financing concessions include interest rate
buydowns or other below-market rate financing; loan discount points;
loan origination fees; closing costs customarily paid by the buyer;
payment of condominium or PUD, or cooperative fees or assessment
charges; refunds of (or credit for) the borrower's expenses;
absorption of monthly payments; assignment of rent payments; and
the inclusion of non-realty items in the transaction. The amount of the
negative adjustment to be made to each comparable with sales or
financing concessions is equal to any increase in the purchase price
of the comparable that the appraiser determines to be attributable to
the concessions.
The need to make negative adjustments and the amount of the
adjustments to the comparables for sales and financing concessions
are not based on how typical the concessions might be for a segment
of the market area--large sales concessions can be relatively typical
in a particular segment of the market and still result in sale prices that
reflect more than the value of the real estate. Adjustments based on
mechanical, dollar-for-dollar deductions that are equal to the cost of
the concessions to the seller (as a strict cash equivalency approach
would dictate) are not appropriate. We recognize that the effect of the
sales concessions on sales prices can vary with the amount of the
concessions and differences in various markets. The adjustments
must reflect the difference between what the comparables actually
sold for with the sales concessions and what they would have sold for
without the concessions so that the dollar amount of the adjustments
will approximate the reaction of the market to the concessions.
Positive adjustments for sales or financing concessions are not
acceptable. For example, if local tradition or law results in virtually all
of the property sellers in the market area paying a 1% loan origination
fee for the purchaser, and a property seller in that market did not pay
any loan fees or concessions for the purchaser, the sale would be
considered as a cash equivalent sale in that market. The appraiser
should recognize comparable sales that sold for all cash or with cash
equivalent financing and use them as comparables if they are the
best indicators of value for the subject property. Such sales can also
be useful to the appraiser in determining those costs that are
normally paid by sellers as the result of tradition or law in the market
area.
4. Date of sale/time adjustment. We will accept more than three
comparable sales as part of the appraisal report, but at least three of
them must be actual settled or closed sales. The appraiser should
provide the date of the sales contract and the settlement or closing
date for each comparable sale. Unless the appraiser believes that the
exact date is necessary to understand the adjustments, only the
month and year of the sale need to be reported. If the appraiser does
not report both the contract date and the settlement or closing date,
he or she must identify the reported sale date as either the "contract
date" or the "settlement or closing date." If the appraiser reports the
contract date only, he or she must state whether the contract resulted
in a settlement or a closing.
5. Above-grade room count and gross living area. Only finished
above- grade areas should be included in the calculation of the gross
living area for a single-family property or a unit in a condominium or
PUD project. The appraiser should report the basement and other
partially below-grade areas separately and adjust for them
accordingly. The room count and gross living area should be similar
for the subject property and all comparables. For example, a four
bedroom comparable sale generally is not acceptable to support the
value of a two bedroom subject property. The appraiser must address
large differences between the subject property and the comparable
sales since they raise doubts about the validity of the comparables as
good indicators of value.
6. Over-improvements. In some instances, the improvements can
represent an over-improvement for the neighborhood, but still be
within the neighborhood price range--such as a property with an inground
swimming pool, a large addition, or an oversized garage in a
market that does not demand these kinds of improvements. The
appraiser must comment on such over-improvements and indicate
their contributory value in the "sales comparison analysis" adjustment
grid.
Because an over-improved property may not be acceptable to the
typical purchaser, the lender's underwriter must review appraisals on
this type of property carefully to ensure that the appraiser has
reflected only the contributory value of the over-improvement in his or
her analysis.
E. Appraiser's comments and indicated value. The appraiser's
analysis for a property should include narrative comments about any
prior sales of the subject property and the comparable sales that took
place in the 12 months preceding the effective date of the appraisal
report, as well as about any current agreement of sale, option, or
listing of the subject property. The appraiser's comments should also
reflect his or her reconciliation of the adjusted (or indicated) values for
the comparable sales and identify the comparable(s) that were given
the most weight in arriving at the indicated value for the subject
property. For two- to four-family properties, the appraiser should also
provide an evaluation of the typical purchaser's motivation for
purchasing the property and an analysis of any current agreement of
sales, option, or listing for the subject property.
Section 406.04 - Income Approach
The income approach to value is based on the assumption that
market value is related to the market rent or income that a property
can be expected to earn. Its use generally is appropriate in
neighborhoods of single-family properties when there is a substantial
rental market, and it can be an important approach in the valuation of
a two- to four-family property. However, it generally is not appropriate
in areas that consist mostly of owner-occupied properties since
adequate rental data generally does not exist for those areas. We will
not accept an appraisal if the appraiser relies solely on the income
approach as an indicator of market value.
To arrive at the indicated value by the income approach, the
appraiser multiplies the total gross estimated monthly market rent for
the subject property by a reconciled gross monthly rent multiplier.
(Because of the way value is estimated under the income approach,
this approach provides a reliable indication of value only if the
comparable sales are truly comparable.)
Estimated market rent is based on an analysis of comparable
rentals in the neighborhood. After appropriate adjustments are
made to the comparables, their adjusted (or indicated) values are
reconciled to develop an estimated monthly market rent for the
subject property.
The gross rent multiplier is determined by dividing the sales prices
of comparable properties that were rented at the time of sale by
their monthly market rent, which is then reconciled to create a
single gross rent multiplier (or a range of multipliers) for the subject
property.
Appraisers must use their best judgment regarding the applicability of
the income approach. An instance in which the income approach may
not be an appropriate indicator of value involves the appraisal of a
two-family property in a neighborhood that is dominated by two-family
properties that are owner-occupied. In such cases, the appraiser
does not need to develop a gross monthly rent multiplier, but must
report the estimated market rent for the subject property. In such
cases, the appraiser should provide an appropriate explanation of
why he or she chose to report in this manner.
(also see Part VI, Chapter 3)
When the property being appraised is a single-family property that will
be used as an investment property, the appraiser must prepare a
Single-Family Comparable Rent Schedule (Form 1007) in addition to
the appropriate appraisal report form. This form is not required for a
two- to four-family property since the Small Residential Income
Property Appraisal Report (Form 1025) provides substantially the
same information. When the appraiser is relying on the income
approach, he or she should attach the supporting comparable rental
and sales data, and the calculations used to determine the gross rent
multiplier, as an addendum to the appraisal report form.
Section 407 - Final Reconciliation
The reconciliation process that leads to the estimate of market value
is an on-going process throughout the appraiser's analysis. In the
final reconciliation, the appraiser must reconcile the reasonableness
and reliability of each approach to value and the reasonableness and
validity of the indicated values and the available data, and then must
select and report the approach or approaches that were given the
most weight. The final reconciliation must never be an averaging
technique.
If the appraiser has provided a comprehensive and logical analysis of
the neighborhood and the property, the lender's underwriter should
be able to reach a sound conclusion on the adequacy of the property
as security for the mortgage.

These have been reproduced from FNMA Guidebook for Appraisers-

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