Good News – Fannie Mae Announcement Regarding Revised Sales Contracts


As we develop new products for appraisers, compliance with industry standards is always front and center. Our objective is to help improve appraisal quality and provide efficiencies to the process. Everybody wins by connecting industry needs with appraisal reporting techniques through technology, industry guidance, and practical advice. This is ACI’s contribution to the industry – and we hope you find it informative and helpful. Enjoy.


You’ve likely been there. The sales contract is changed after the effective date of the assignment and the client then asks you to reflect the revised information in your (new) report. You must then review the new contract and summarize your (new) analysis. I’ve blogged on this scenario in the past regarding whether this constitutes a new assignment or just a new report. Perhaps now this nuisance issue will largely become a thing of the past.

On December 6th Fannie Mae published announcement SEL-2016-09 which should make life a little easier for appraisers. Essentially, if the sales contract is changed regarding the sales price or seller concessions, the lender is no longer required to forward that information to the appraiser. Fannie Mae is apparently recognizing that changes to seller concessions or sales price don’t affect the opinion of value. If, however, the contract “is amended in a way that affects the description of the real property used by the appraiser, then the lender must provide the updated contract to the appraiser and the appraisal should be updated.” Note that “updated” in this context would amount to a new assignment, not just a new report. Here’s an excerpt from the announcement.

Currently, we require the lender to provide the appraiser with all amendments made to a sales contract, including amendments that are made after completion of the appraisal. With this update, we have clarified when the appraiser must be provided with updates to the sales contract and circumstances that warrant updates to the appraisal. For example, if the contract is amended in a way that affects the description of the real property used by the appraiser, then the lender must provide the updated contract to the appraiser and the appraisal should be updated. However, minor updates to the contract, such as changes to seller paid closing costs or changes to the contract price, do not require an updated appraisal. In addition, we have updated the policy to require disclosure of changes to financing information (such as loan fees and charges, and subordinate financing provided by interested parties) to the appraiser only for purchase transactions.

So, does this mean you will never again get a request to review an amended contract and issue a new report when the sales price is renegotiated? Probably not, as lenders and their agents often take time to become aware of announcements like this. But it means you will have an opportunity to educate those individuals who ask you to unnecessarily issue a new report. Simply refer them to Selling Guide Announcement SEL-2016-09 issued December 6, 2016. Reference item number 4, “Disclosure of Information to Appraisers.” We suggest you download a PDF copy now, for future use. Here’s the link:

Six Things to Remember When Valuing a Newer Home in an Older Neighborhood

How do you value a new home in an old neighborhood? Here are six things I keep at the forefront of my mind when approaching this situation and choosing comps. What else would you add? I’d love to hear your take in the comments.

  1. Premium: There is usually a premium for new construction. Just as buyers pay more for that new car smell, buyers will typically pay more for a home that has never been lived in.
  2. Fading Premium: However, the premium for new construction fades VERY quickly. This is important to keep in mind because any premium paid when the house was built a few years ago may not exist in today’s resale market.
  3. Infill Location: If the newer home is part of an infill project, it might have a bad location since the best locations were probably already built out. Moreover, infill projects tend to have tiny lots compared to larger ones found with older properties.
  4. Quality: Sometimes newer homes may not have the same quality as older homes, which reminds us new is not always more valuable. Other times though new homes are far superior to the surrounding area.
  5. Conformity: Does the property fit in with the neighborhood in terms of design and size? Or does it stand out in a bad way? The principle of conformity is a very relevant dynamic in real estate, and whether a property fits in the neighborhood or not can impact its value.
  6. Neighborhood Acceptance: Sometimes neighborhoods go through a period of change where it becomes more acceptable for older homes to be torn down and newer bigger ones rebuilt (East Sacramento). Other times it is not common or acceptable, so a new home might look like a sore thumb.

When valuing a newer home next to older ones, it’s easy to automatically assume it’s worth more. Yet we have to ask, how does the market see this new property? Is the market willing to pay more for this or not? What are buyers looking for in the neighborhood? The proof is in the data, so often times we need to dig deep for comparable sales. It might even be helpful to search through the past several years of sales to find something else that was new. What was comparable to the new property at the time of its sale? Did it sell with any premium? Or did it sell right on par with other older homes? Be careful of course when interpreting new construction comps since sometimes newly constructed homes are loaded with concessions and credits, which can inflate the price.

Differentiating Marketing Time and Exposure Time

 The lenders that we work with have made us aware of a concern that they have with the manner in which Exposure and Marketing time are being reported.  While the length of time for each may be similar in some instances, it is important to note that these terms have distinctly different meanings.  As such, they cannot be used interchangeably and need to be independently disclosed.

The additional guidance provided within the ASB, USPAP Frequently Asked Questions section provides a good explanation of these differences.  It states:

  • ·         Although the two may be the same length of time, the meanings are different. The exposure time opinion required by USPAP is specific to the subject property and represents the length of time the subject would likely have been listed for sale prior to a hypothetical sale of the subject property on the effective date of the appraisal. Marketing time, in this context, is the typical length of time the properties in that neighborhood would be expected to be on the market prior to a sales agreement.

 The 2014-2015 edition of USPAP further defines these terms as follows:

  • ·         Exposure Time: Estimated length of time that the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal. Comment: Exposure time is a retrospective opinion based on an analysis of past events assuming a competitive and open market.


  • ·         Marketing Time: An opinion of the amount of time it might take to sell a real or personal property interest at the concluded market value level during the period immediately after the effective date of an appraisal.

Exposure time occurs prior to the effective date on the report and Marketing time occurs after the effective date on the report.  While these time frames can be similar when a market is stable, it is important to note that they can also be vastly different when changing market conditions are present. 

 The following examples are statements that have been included in appraisal reports and deemed unacceptable by our clie

How do appraisers account for a difference in age between comps?

 Ryan originally posted this on his blog  to help real estate agents understand the thought process appraisers go through when choosing comps in the hopes that it would help them when pricing homes.

There are so many factors to consider when valuing a property. Anyone who works in real estate knows this. So how do we account for a difference in age between comps? Does age matter? Should we make any value adjustments? Someone asked me this recently, so I figured it was worth kicking around the issue together. I’d love to hear your take in the comments below.

Question: How do appraisers account for a difference in year built? Do appraisers give an adjustment when to comps there is an age difference?

Answer: Here’s my take. Most of the time buyers tend to buy based on condition instead of age. Thus if there is a difference of a few years or so within a subdivision, it might not have any impact on value as long as the condition is similar. For instance, in some tracts we see an age range of 1977 to 1983. If one house was built in 1977 and another in 1983, and they are in the same condition, it’s unlikely to see the 1983 home command a value premium unless for some reason it has a higher quality or if it is located on a stronger street. Sometimes buyers are actually not even aware of the age of the home. They’re really just looking at the neighborhood and buying what is there. Do you agree?

My $500 Adjustment: I’ll admit when I first began appraising I used to adjust $500 per year on all comps in every appraisal because that’s what I was taught to do. In very technical terms, this valuation methodology is…. bogus. After all, a $500 adjustment per year certainly doesn’t apply to every neighborhood, every market, or every property type. These days though I rarely make any adjustment for year built since most of the time I’m looking at condition instead. However, if the age gap is too large, there may be a difference in value, and we we have to begin asking if we should even be comparing the homes in the first place. For instance, is 1977 vs. 1990 a good comparison? What about 1990 vs. 2003? Maybe not because we might be dealing with a different quality of construction, different tracts, or different markets. But at the same time, we might see homes in one area were built in 1955 and another nearby area has homes built in 1972. If there is no price difference observed between both areas, then the homes may easily be competitive despite their age gap. The thing we need to do though when valuing a 1955 home is to be sure to find 1955 sales instead of just 1972 sales (this helps prove the market really does pay the same amount for both ages).

Subjective Mush: I know this begins to sound very subjective, but there is no rule out there when an adjustment is needed other than when buyers at large have clearly paid more or less because of a feature. In reality it can be tempting to make value adjustments for every single distinction, but sometimes it’s best to not force adjustments by remembering the market isn’t so sensitive as to warrant a price reaction for every single difference. However, a good rule of thumb when searching for comps is to take an “apples to apples” approach. This means we start by searching for similar-sized homes with a similar age rather than choosing newer or older sales that really might not be competitive. I know this sounds basic, but when we keep the fundamentals in mind, it keeps us sharp (right?).

Brand New Homes: As I mentioned recently, we do need to be careful about comparing brand new homes with ones that are even a year or two old because brand new homes tend to sell at a price premium. This means despite only 1-2 years difference in age, we might see a pretty big difference in value.

What is an Arm’s Length Transaction?

 What is an arm’s length transaction? The question seems simple enough, right? Just mentioning it on an appraiser blog creates a flurry of debate over what exactly is an arm’s length transaction. While doing research for this article, it evoked a lot of emotion from my peers. Everyone has an opinion and many believe their opinion is the correct one.

The Appraisal of Real Estate, 13th Edition, published by the Appraisal Institute, states that an arm’s length transaction is “a transaction between unrelated parties under no duress”. The common definitions of market value usually set out the criteria for an arm’s length sale in detail (1).” On the page prior to this definition in this text, it reads, “Sales that are not arm’s length market transactions (in accordance with the definition of market value used in the appraisal) should be identified and rarely, if ever, used (1).”

In the new FHA/HUD Handbook the definition of arm’s length transaction is, “An Arm’s Length Transaction refers to a transaction between unrelated parties and meets the requirements of Market Value.” This is where the lines get blurred. Grandma can sell me her home at market value, under no duress, and it is not arms length but can be at market value. A property that sells for less than market value may occur because it is under duress, such as REO, but it is not between related parties. They can be mutually exclusive. They are not interchangeable terms.

Simple examples of a non-arm’s length transaction are buying a home from someone you have a relationship with (like a family member or a friend). More complex transactions typically involve builders, developers, “flip” transactions, properties being held in trusts or corporations and being sold to the trust or corporation owner. Other examples include real estate agents selling properties to themselves, etc. It is important to examine the relationship of the buyers and sellers to determine whether or not the transaction is arm’s length.

A good illustration of this involved a vacant land sale in Sedona, AZ that I discovered while researching sales for a vacant land appraisal. The sales price was $800,000 in a market of typically $200,000 properties. To add to the complexity of that sales price, the property backed to a highway and medical center, which would typically adversely impact market value, not add to it. Turns out the developer sold the lot to himself to create comparable sales.

To complicate matterssome State assessor’s offices list REO transactions as “non arms length” when they simply should be listed as REO. There are other influences on value aside from being between related parties.

This article is relatively short on a topic that can be written about at length (no pun intended). There is a lot more that can be said about arm’s length transactions but hopefully this has cleared up some of the ambiguity. I invite any constructive comments and feedback. As appraisal professionals, we all need to continue to evolve, grow and learn from one another in a positive arena.

Depreciated Cost, a Test of Reasonableness

With all of the clamor and excitement that Fannie Mae’s Collateral Underwriter (CU) is creating, we started working on a new article that addresses some possible solutions. In this one, we are expanding a bit on using the cost approach as a means to develop and support some adjustments. Each of the three traditional approaches to value can be used to develop a basis of analysis in any of the approaches. As such, the cost approach can be a reliable means to develop a gross living area adjustment, or lend additional support for it. While it does not work each time, has proven successful for us many times, and as such, we do urge studying it and putting it into your toolbox of solutions for supporting adjustments.

For more great articles by Rachel Massey, Woody Fincham, and Tim Anderson visit their site


Quantitative adjustments require some type of support. CU is not changing anything regarding this premise. Appraisers are supposed to have support within the workfile for adjustments made, and then support the adjustments with commentary within the report. This is in harmony with USPAP. Many appraisers do not address specifics on the adjustments made, let alone explain how they were developed and applied. So here is one method that can be relied on as a means to support a gross living area (GLA) adjustment. Sometimes it can be used for other items.

One aspect of Collateral Underwriter (CU) that many have been discussing concerns price/SF. In the example from the CU webinar, it is stated that if an appraiser is using $15/SF for adjustments regarding gross living area (GLA) adjustments and the comparables sales indicate $200-$300/SF, then it will be probably be flagged as a higher-risk item. So part of the advantage of using this technique will help you address this with analysis. Let us look at some improved sales now that we have an idea of what site values are for the market (Read More)


What constitutes as a complex appraisal assignment? Basically a complex property can be anything that is “atypical”; meaning that specific characteristics of the property being appraised differ from what is the norm in the neighborhood or market area of which the property is located.

Examples of what most federal financial institutions consider “atypical” factors which could make an appraisal “complex” include but are not limited to the following:

  • Use of the property when contrasted with other land uses in the neighborhood
  • Location, single family in predominantly commercial or industrial developed area, ocean or lake front, mountain, island, a condominium unit or multi-family in a rural area, etc.
  • Property rights, environmental and zoning issues, etc.
  • Architectural style, unique, dome, earth berm, special use properties, etc.
  • Size of improvements, luxury dwellings, certified Green, under improved cabins, etc.
  • Dwelling historic in age or possibly a new construction home in an area of older construction

When completing complex assignments, it is critical that one expands on each step of the appraisal process in order to complete the assignment correctly. For complex assignments it is important that well written commentary with additional addenda validates the appraiser’s conclusions and helps the reader of the report understand the subject’s complexities.

Before taking on a complex assignment, you must be aware of and understand the methods and techniques that are necessary to produce credible assignment results. Remember to always determine the scope of work necessary and develop an appraisal that is credible given its intended use.

Real Estate Tool

Use these online real estate tools to learn more about building cost, cost vs. value report, neighborhoods & communities, cities, risk hazards, cost of living, crime, schools, buying and selling a home and more. Please note that the home value estimator tools are not reliable. A property value estimate is not an appraisal and you will not be able to use it in place of an appraisal.


 In order to assist you to keep up with changing laws, regulations and guidelines, we have provided this page of links directly to documents related to appraisal regulations and guidelines. 

We have also added links to agency home pages in order to assist in research for other topics.

Appraisers Black Lists




Fannie Mae Creates appraiser Blacklist; Do AMCs Make Sense? Bank M&A Rolls On - Are Mortgage Banks Doing the Same?
Nov, 28 2016, 

If you don't think the nation is changing, think again. California's Latino population is going to overtake the white population in only two months, according to this year's state budget report. And the Golden State is also getting older, with the population of over 65s predicted to hit a boom over the coming months (1,000 people out there turn 65 every day). The state has been getting more diverse for a while, but now the Latino population will be 'the single largest race or ethnic group', and it's thought to be because most Latino groups are in their prime childbearing years. According to the 2013-2014 report, by March Latinos will make up 39 per cent of California's population of 38.2 million and outstrip the white population by 76,000; non-Hispanic whites will make up 38.8 per cent.

Speaking of California, San Francisco's Parkside Lending continues its growth. Parkside's recently broke news about the formation of its REIT, release of its new non-QM product and expansion into new states. One can add to the list new growth and job openings on its San Francisco operations team for a QC Manager, In-house Council, as well as a Closing Manager. Confidential inquiries can be submitted to Rick Nelson at Rick@parksidelending .com or visit "careers".

And First National Bank is expanding its operations in Cleveland, Pittsburgh, and Baltimore and is searching for experienced Mortgage Loan Originators. First National Bank is an affiliate of F.N.B. Corporation, a diversified financial services company with over $12 billion in assets and services including banking, trust, consumer finance, and insurance. "F.N.B. Corporation ( has community banking offices are located in several states including Pennsylvania, Maryland, Ohio, and West Virginia. The Mortgage Originator is responsible for the generating residential mortgages, which includes working with existing customers with residential mortgage needs and developing new business from external sources. This position will also need to provide the highest quality of customer service to both internal and external customers. "We offer a competitive commission structure, 401K, medical, dental, vision, stock purchase program, and much more!" Please visit FNB's careers website to complete an online application.

Just when we think everything is quiet on the appraisal front, Kate Berry with American Banker writes that Fannie Mae has created a blacklist for appraisers. "In its ongoing effort to flag defective loans long before they default, Fannie Mae is taking aim at the home appraisal industry. The government-sponsored enterprise is keeping a virtual blacklist of appraisers that it views as shady and is warning banks and mortgage lenders to be careful about doing business with them. All loans with work done by appraisers on the list will be subject to extra scrutiny before Fannie buys them from lenders and could be rejected outright, Fannie says. The list is a small one, with just four names on it for now, but it is likely to grow as Fannie scours its appraisal database to identify appraisers who repeatedly submit shoddy work. Unacceptable appraisal practices include inflating the appraised value of a home, misstating the characteristics of a house, and failing to use the best comparable sales of physically similar properties...Fannie has moved toward a model in which appraisals are scrutinized early in the mortgage process before it even buys a loan from a lender. Instead of forcing costly buy backs for defective loans years after the fact, Fannie now will reject loans for egregious inconsistences made by appraisers."

Ms. Berry's well-written article continued: "Fannie's aim is to not just make sure that the loans it buys and bundles into mortgage-backed securities meet its standards, but also to collect consistent data on appraisals to ensure that property values are accurate and that borrowers have the ability to repay their loans over the long haul without defaulting. Fannie has not made its blacklist public. The list, to be published monthly, is accessible only by lenders and will not be broadly distributed. Observers say that the mere existence of a blacklist will likely deter banks and mortgage lenders from doing business with appraisers whose names appear on the list."

Gross Rent Multiplier

From Wikipedia, the free encyclopedia
 Gross Rent Multiplier is the ratio of the price of a real estate investment to its monthly rental income before expenses such as property taxes, insurance, and even utilities for vacation rental properties. Other expenses could include the cost of hiring a property management company. To sum up Gross Rent Multiplier, it is the number of months the property would take to pay for itself in gross received rent. For the investor looking to purchase, a higher GRM (perhaps over 120) is a poorer opportunity, whereas a lower one (perhaps under 80) is better. The inverse is true of an investor looking to sell.

The GRM is useful for comparing and selecting investment properties where depreciation effects, periodic costs (such as property taxes and insurance) and costs to the investor incurred by a potential renter (such as utilities and repairs) can be expected to be uniform across the properties (either as uniform values or uniform fractions of the gross rental income) or insignificant in comparison to gross rental income. As these costs are also often more difficult to predict than market rental return, the GRM serves as an alternative to a measure of net investment return where such a measure would be difficult to determine.

Example; $200,000 Sale Price / $2,000 gross monthly rents = 100

Today, it is quite common for GRM to be quoted by real estate professionals using annual rents rather than monthly rents. A 100 GRM (monthly rents) = 8.33 GRM (annual rents). An 8.33 GRM calculated on annual rents suggests the gross rent will pay for the property in 8.33 years.

The common measure of rental real estate value based on net return rather than gross rental income is the Capitalization Rate or Cap Rate. In contrast to the GRM, the Cap Rate is not a multiplier but a rate of annual return. A similar multiplier to the GRM derived from net return would be the multiplicative inverse of the Cap Rate.

Income Investment Terms


Capitalization rate (or “Cap Rate”) is a real estate valuation measure used to compare different real estate investments. Although there are many variations, a cap rate is often calculated as the ratio between the net operating income produced by an asset and the original capital cost (the price paid to buy the asset) or alternatively its current market value.

Real estate appraisalproperty valuation or land valuation is the process of developing an opinion of value for real property (usually market value). Real estate transactions often require appraisals because they occur infrequently and every property is unique(especially their location, a key factor in valuation), unlike corporate stocks, which are traded daily and are identical (thus a centralized Walrasian auction like a stock exchange is unrealistic). Appraisal reports form the basis for mortgage loans, settling estates and divorces, taxation, and so on. Sometimes an appraisal report is used to establish a sale price for a property.

Most, but not all, countries require appraisers to be Licensed or Certified. Appraisers are often known as "property valuers" or "land valuers"; in British English they are "valuation surveyors". If the appraiser's opinion is based on market value, then it must also be based on the highest and best use of the real property. In the United States, mortgage valuations of improved residential properties are generally reported on a standardized form like the Uniform Residential Appraisal Report.[1] Appraisals of more commercial properties (e.g., income-producing, raw land) are often reported in narrative format and competed by a Certified General Appraiser.


The expression “some things are better left unsaid” is true, but not in the case of appraisal reports.  Sometimes, what you don’t say can hurt you under USPAP’s Scope of Work Rule.

Appraiser Rhonda lives and works in an area where a nuclear power plant is located.  In addition to the plant itself, several high-voltage corridors emanate from the plant, which is located on the shore of Lake Michigan.  High-priced lakefront homes are located north and south of the plant, but are effectively buffered by densely wooded areas.  The traffic from the plant utilizes a service road that connects with a major arterial several miles from the nearby homes so traffic is not an issue.

Rhonda has worked in the area for decades and has undertaken extensive research as to how the power plant and high-voltage corridors affect property value.  Her data is well documented and tells her that for the lakefront homes the plant is not an issue.  Her sales analysis demonstrates no significant difference in value between homes that are close to or farther from the power plant and her conversations with local real estate agents confirm the sales data.  In short, lake frontage is scarce and always seems to be in high demand, regardless of the proximity to the power plant.  The plant is visually isolated by the woods, emits no odors or noise other than a faint hum, which is also buffered by the woods.

One day Rhonda receives a call from a reviewer regarding a report she completed a few months prior on a lakefront property. The reviewer has looked at aerial imagery and wants to know why Rhonda did not make an adjustment to reflect the subject’s location 2 miles north of the power plant. Rhonda explained that she did not make an adjustment because none was warranted. The reviewer is skeptical about this so Rhonda sends him a substantial amount of data that supports her position. The reviewer reluctantly concedes, but informs Rhonda that she is flirting with a USPAP Scope of Work Rule violation by not providing this information in the initial report. Rhonda is thinking the reviewer doesn’t know what he is talking about but wants to be rid of him and doesn’t pursue the point.



Analyze The Market! Qualitative vs. Quantitative

Appraisers have had blinders on for way too long. It is time to open our eyes wide, keep an open mind and to truly think outside the “check” box.

Most of us learned this crazy business by filling out a form.For me, it was actually preparing forms on the good old typewriter, and since clients didn’t accept White-out, if you made one mistake, you retyped the whole thing …. in my case, normally after almost completing the entire report. My education truly began when I started actually thinking, securing meaningful education and not merely form-filling thanks somewhat to George K. Cox, MAI, SRA.

It’s time for all of us to step back, re-evaluate and employ a little common sense. Most preprinted forms utilize a Quantitative Appraisal Method while a Qualitative Method is more is line with how buyers really act.


Paired Data Analysis: A quantitative technique is normally used to identify and measure adjustments to the sale prices or rents of comparable properties. To apply this technique, sales or rental data on nearly identical properties are analyzed to isolate a single characteristic’s effect on value or rent.

Where do you get these so called adjustments? I know, I know. Paired sales, right? Let me see them. Better yet, the next time you are in the hot seat be prepared to show your paired sales analysis to the court or your state regulatory board. I do believe it is possible to have a proper paired sales analysis and with regression analysis becoming more and more popular there is oftentimes support for your adjustments. However, I would bet that most appraisers do not have this data in their offices to support their adjustments.

Think about it! How many home buyers have you ever seen pull out a legal pad or a 1004 form and make line item adjustments for every little difference. Wait! A bathroom is worth $2,000, a garage $5,000, a deck is $2,000, etc. By the way, why don’t these numbers ever change? Buyers don’t act this way. Has anyone ever seen a buyer operate in this manner? Then why do we? Don’t buyers really analyze differences in the aggregate and make a decision in a lump sum?

At the 3rd annual Association of Texas Appraisers (ATA) conference in Austin, I asked a group of 72 appraisers how many of them had ever seen buyers act this way. The answer was none!

I have interviewed numerous appraisers/brokers nationwide, representing hundreds of years of experience in selling real estate and not one has seen a buyer act this way! If we are charged with analyzing the market, and market participants don’t act that way, why do we?


Relative Comparison Analysis: A qualitative technique for analyzing comparable sales; used to determine whether the characteristics of a comparable property are inferior, superior, or equal to those of the subject property. Relative comparison analysis is similar to paired data analysis, but quantitative adjustments are not derived.

Most appraisers are probably already doing a qualitative method to develop their opinion of site value. Most appraisers don’t grid land sales and make adjustments. You can do the same thing for improved sales. To demonstrate my point, below is an exercise in The Columbia Institute’s course Survey of the Cost Approach, which is an excellent course for those of you who like the cost approach for a land sales analysis utilizing a quantitative method. Look at the results using this same data set performing a qualitative method



Both methods provide support of $43,400 for the subject property. The qualitative/relative comparison analysis provides the same results without guessing for an amount of single line item adjustments.

In the book Down to Earth, Sanders A. Kahn, Ph.D., SREA makes the following statement about Comparative Sales Grids:

“…it became fashionable for some appraisers, with the encouragement of some public agencies, to rate the degree of variation between the subject property and comparative sales. Quantification of the variations, usually by the use of a plus or minus percentage (or dollar amount) from the comp to the subject, became the vogue.

Actually this method is replete with danger. It looks so scientific, but in realty is only pseudo-scientific and converts subjective judgment into what pretends to be objective mathematical absoluteness.”

Consider analyzing property the way the market does: in a Qualitative manner.

The 1004D - Appraisal Update and/or Completion Report - Uses and Misuses

Guest Author:  Ken Shure, Certified Residential Appraiser in the Los Angeles, California area.  Contact: This email address is being protected from spambots. You need JavaScript enabled to view it.

The 1004D form issued by Fannie Mae has two distinct sections. The first section is utilized to produce a summary appraisal report associated with a subject property for which a prior appraisal report was completed and to do so as of a new effective date. The form labels this section as a "Summary Appraisal Update Report" however it must be noted that when completing this section one has undertaken a new assignment and must be aware of the USPAP considerations of doing so. The second section is utilized to confirm whether or not requirements or conditions stated in the original appraisal report have been met. The focus of this writing is on the latter section.

The appraiser completing the lower section of the 1004D form certifies that they have performed a visual inspection of the subject property to determine that the conditions or requirements stated in the original report have been satisfied. This certification language makes the lower section appropriate for use when repairs were called for in a prior appraisal report that utilized the third check box option within the reconciliation section (CB3). Checking this box provides for the appraisal to be based on a hypothetical condition that specific repairs or alterations have been completed. In addition, the 1004D form is appropriate for use when the second check box option within the reconciliation section (CB2) has been utilized in the original report. Checking this box provides for the appraisal to be based on a hypothetical condition that the improvements have been completed according to plans and specifications that were in place as of the effective date.


Requests for completion of the lower section of the 1004D often expand beyond these appropriate purposes and it has become the "go to" form for lenders to request certification by the appraiser that an abundant array of issues are not problematic or have been solved. It is fairly evident to anyone who receives requests for this assignment type with any reasonable frequency that appraisers are being asked to complete assignments mandating the use of the 1004D in instances where this particular form is not appropriate.

The first example of this is the request for the 1004D when the lender requires an issue tobe corrected that was not conditioned for in the appraisal report via the use of CB3. The1004D language specifically states that the issues being confirmed as completed werethose where the requirements or conditions were called for in the original report. While this can be viewed as a minor distinction, it does mandate that the appraiser add in verbiage that the repairs are being required by the client. This will result in the presence of contradicting statements and the potential for one to be accused of producing a misleading document as the preprinted form language indicates that the repairs were a requirement of the original report. One possible action by the appraiser when such a request is made would be to supply an addendum confirming that the repairs required by the lender did in fact take place. Unfortunately this action is typically either not accepted by lenders or will result in the appraiser not being paid for the work involved for confirmation of the repairs in question. Ideally lenders and other clients would not put the appraiser in the position of having to complete an assignment or assignment element in an inappropriate and/or questionable fashion in order to be compensated for it.

The second example is one that can result in unnecessary and undesirable liability for the appraiser that complies. This deals directly with whether the original appraisal report called for repairs using CB3 in the reconciliation section or called for an inspection using the fourth checkbox option (CB4) in the reconciliation section. As was noted previously, an appropriate use of the 1004D form is to confirm that repairs or alterations that were called for by the appraiser via the use of CB3 in the original report have taken place. In these cases the appraiser can reasonably be expected to have the ability to confirm and certify the completion of these items using the 1004D.

Unfortunately, the 1004D is often being utilized by clients to engage the appraiser in cases where an inspection was called for via the use of CB4.This can be highly problematic for the appraiser.

  • First, the form language of the 1004D does not call for the appraiser to certify that an inspection took place, was done properly, or had correct conclusions. The form language calls for verification that the improvements have been completed as required by the original report with certification that confirmation took place via a visual inspection of the subject property by the signing appraiser.
  • Second, when an appraiser does certify that whatever item of concern is now satisfactory the appraiser has taken on a level of responsibility for the professional inspection that took place.

The signing appraiser has in effect become a potential responsible party in the event of a problem. The most common purpose of CB4 is for the appraiser to call for an inspection by an appropriate professional in cases where the appraiser is not qualified to make a particular determination. In these cases the inspection report is the proper vehicle to assist in the lending decision and complete the file, not a 1004D signed by an appraiser who has indicated via the use of CB4 in the original report that they do not have the expertise to make the determination in question. The only possible purpose of the 1004D in this instance is to add the appraiser to the list of liable parties should the inspection prove to be faulty. Appraisers would be well served to let other professionals such as roof inspectors, home inspectors, engineers, and pest controllers maintain full responsibility for their services and not sign certifications that make them responsible for the services, opinions, and conclusions of another professional.

As has been noted, when CB3 has been checked and the original appraisal has been based on a hypothetical condition that certain repairs have been made, it is reasonable for the client to expect that the appraiser is able to determine if the repairs have been completed and provide certification via the 1004D. Appraisers need to carefully review what they are requiring via the use of CB3 and determine if they will be competent to make the determination that the repairs or alterations have been completed. If the issue is sufficiently complex as to possibly require substantial construction or significant alteration then the appraiser needs to be clear if the issuance of a building permit would be necessary to certify completion via the 1004D. If the situation of concern will involve the use of plans and specifications that have been prepared as of the effective date, then consideration should be given as to whether the second check box in the reconciliation section (CB2) would be the more appropriate avenue by which to proceed. This option is typically utilized for new construction or major renovations and is only engaged if proper plans are already in place that can be reviewed by the appraiser.

The time to ensure a proper engagement and completion of a 1004D begins during completion of the 1004 or related form. When it becomes apparent that the appraisal will need to be conditioned via CB2, CB3, or CB4 it is important to outline within the report what exactly the specific issues are and to classify them on an individual basis as to whether they have resulted in the report being conditioned subject to an inspection by another professional, subject to repairs, or subject to completion according to plans and specifications. It is also important to outline to the client precisely what the appraiser will be able to certify to in the event a 1004D is requested. Language within the original report clarifying that the appraiser will not be able to certify the conclusions of an inspection report called for via CB4 and completed by another professional (ie: roof inspection or termite inspection) is certainly proper. In cases where CB3 is utilized the appraiser needs to consider their own comfort level with certifying completion of the specific repairs that are being called for. While certifying that paint had been applied, a kitchen sink installed, or a window repaired would all be within reasonable expectations, would one be competent to certify that a roof had been repaired adequately to prevent the reoccurrence of water damage to the ceiling? If there is a question as to comfort level or competence in determining that the repairs being called for have been completed properly, one should evaluate if the more appropriate step would be to proceed via CB4. In the case of a roof issue, perhaps calling for repairs of the ceiling via CB3 if the damage is seen as extensive enough while also calling for an inspection of the roof by a qualified professional via CB4 to determine conclusively if repairs to the roof are needed and to what extent.

The 1004D form provides a desired format for a necessary function often required by lenders. When utilizing the lower section of this form appraisers would be well advised to proceed in a manner that conforms with the form language and to avoid the potential liability of certifying the inspection results of another professional. In addition, when conditioning a report for specific repairs via CB3 the appraiser should be confident that they will be able to competently determine if the repairs requested have been completed properly. If not, consideration should be given to proceeding via CB4 and requiring an inspection by the appropriate professional to determine if the need for repairs does in fact exist and if so to what extent.

Know your E & O Policy


Insurance IQ
By David Brauner, Senior Insurance Broker, OREP

Here are some quick insurance fun facts; some things you may know and some you may think you know.

Prior Acts: As we’ve preached for years: please don’t let your policy lapse if you plan on continuing to appraise. As we have advised many times over the years, you must renew without a lapse in your policy or risk losing coverage for prior appraisals. If you let your policy expire and fail to renew, either with your current carrier or with a new provider, you will lose coverage for your past appraisals. The same is true if your policy is cancelled due to nonpayment—you will lose coverage for your past work. This is the way all appraiser E&O works no matter who your policy is with. You can switch insurance companies as long as it is before your policy expires, and provided that the company you’re switching to provides prior acts—most do but not all.

If you plan on retiring/leaving appraising, check with your agent about tail coverage. Several programs, including the ones OREP offers, provide free tail coverage for appraisers of retirement age. This can save you thousands of dollars. Tail coverage covers previous work into the future. If you’re approaching retirement age you may want to consider switching to a company that provides free tail coverage. Some special rules apply for the free tail coverage, so ask your agent(s) before switching. If you don’t qualify for free tail coverage, the coverage is typically available (for premium)- it is on the policies OREP handles. If you have assets, it is smart to buy the coverage. Who needs the worry in retirement?

E&O and General Liability: By now most of you understand that E&O or errors and omissions covers mistakes made in your professional appraisal services- like malpractice insurance. General Liability (GL) can cover many things, including your office and any bodily injury or property damage (BIPD) that you may cause while performing your professional services at the subject property. BIPD is typically a part of a GL policy but not always. BIPD covers you, for instance, if you knock over and break an expensive vase in a walkthrough or say, drop something heavy from the roof on a homeowner’s foot (bodily injury). Many see increased exposure and liability in the new requirements involved in FHA appraising and a good reason to consider GL/BIPD- such as testing appliances and inspecting attics and crawl spaces. We agree and now you don’t have to pay for the extra coverage. One policy offered by OREP includes the BIPD premises liability (bodily injury/property damage) at no cost (free). This offers great protection and great savings. Not every policy OREP offers includes this coverage so please call OREP for details.

Two’s Company (Company Coverage): Most applications are explicit about whether they cover one appraiser only or more than one. OREP handles both types of policies. If you have individual appraiser coverage and intend on adding appraiser staff within the next year, a good strategy at renewal is to purchase the “company” or “group” policy which will allow you to add staff fairly seamlessly during the year- at a lower cost than two individual policies. You don’t pay more until you add the staff. If you have a single appraiser policy you can still elect to keep the new appraiser on a separate individual policy, which has the added advantage of not entangling you in someone else’s claims or complaints. In any case, there should never be any confusion about this issue, and truth be told, there never is. An individual policy will only cover a single appraiser and that is always spelled out on the application in bold type.

If you have a question, ask your agent- that’s what we are here for. If you can’t get someone on the phone to help you, call a new agent. In addition to low-cost group appraiser policies, OREP offers combination policies for appraising and real estate sales/brokering for the price of one policy.

Reporting Claims and Incidences: I know no one reading would ever intentionally misrepresent anything on an insurance application but sometimes it happens by accident. Try to avoid this mistake. We have seen appraisers not report to their insurance company/agent an inquiry from their state board and then also fail to mention it when renewing on their application, thinking it was frivolous and would just go away. Sometimes it is “dismissed” as being without merit and in some states, an initial inquiry that does not rise to the level of a “complaint” is expunged. It’s a good idea to know how your state board works. However, if the inquiry does turn into a complaint or a claim, you run the risk of the insurance company refusing to respond because it was not reported. Sometimes it can be cause for a non-renewal. With our help, underwriters are getting pretty good about distinguishing between frivolous and serious complaints/claims and you likely won’t get dinged or dinged much until a claim or complaint actually amounts to something. It’s in your interest to reporting everything.

Claims Help: Most large appraiser insurance programs, and every one that OREP handles, provides free pre-claim and claim assistance furnished by legal and claims experts. If you ever encounter trouble, these trained and experienced professionals should be your first call. It pays to seek professional help first. Regarding state board complaints, the programs OREP handles provide reimbursement for defense costs. The amounts vary. One program OREP handles provides up to $10,000 in reimbursement for defense costs with no deductible! (There is no reimbursement for any fine that may be imposed.) Ask your agent about what’s in your policy.

In addition to help from the carrier, OREP provides insureds with free help dealing with state board complaints from Bob Keith, MNAA, IFA, and Former Executive Director of the Oregon Appraisal Board. Bob will help you chart an effective course of action from the outset and help you avoid shooting yourself in the foot while defending yourself. Bob is on your side and there is no conflict of interest: he serves no other interests than yours (he is not affiliated with the insurance carrier).

Simplified Applications: I recently had a client call me to say they were advised to not use short, online insurance applications so as to avoid making a mistake. What? OREP has used streamlined applications for over 14 years with tens of thousands of clients successfully insured without a hitch. The ease and convenience of these streamlined applications are the point! If you can complete an appraisal, you can read, understand and complete an insurance application! If not, call the agent (and if you can’t get the agent on the phone, call OREP). Streamlined applications can be completed in one step, so you can get back to work fast!

Now here’s the pitch: if you want an insurance agency that puts your interests first and has many decades of combined experience serving the appraisal industry, give OREP a call when your insurance is coming due, we answer the phone!

Extraordinary Assumption or a Hypothetical Condition



By Phil Spool, ASA

Every now and then, I come across an appraisal report where the appraiser is confused about whether the appraisal requires an extraordinary assumption or a hypothetical condition. One appraiser even went as far as to erroneously describe the situation as being a “hypothetical assumption,” with another calling it an “extraordinary condition.” What?

Some situations are complicated and I can understand the confusion. Others should be simple to understand. This article will hopefully help you understand the basic difference between an extraordinary assumption and a hypothetical condition.

While the Uniform Standards of Professional Appraisal Practice (USPAP) does not require you to label your situation as either an extraordinary assumption or a hypothetical condition, USPAP states in Standards Rule 2-1 (c) that each written or oral real property appraisal report must “clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.” Therefore, you must disclose all extraordinary assumptions and limiting conditions.

Extraordinary Assumption
The Uniform Standards of Professional Appraisal Practice (USPAP) defines an extraordinary assumption as: “An assumption, directly related to a specific assignment, as of the effective date of the appraisal results, which, if found to be false, could alter the appraiser’s opinions or conclusions.” In essence, an extraordinary assumption is what you assume to exist. Extraordinary assumptions can be based on a number of factors or conditions, including:

(a) Not being able to gain access to a bedroom or other area. This can leave doubt as to the size or physical condition of that particular room or rooms. Why was that area not available for you to observe? One appraiser I know was told by the homeowner that the bedroom was occupied by his daughter who had chickenpox. The appraiser was not allowed to even open the door of the bedroom to see its condition. Another appraiser could not gain access to a bedroom as the teenage child had a lock on his door and wouldn’t permit his parents to gain access. It turns out that the bedroom with the chickenpox child had physical issues and the appraiser did not question the homeowner and did not mention in his report that access was not made. The appraiser was then sued by the buyer of the house.

Therefore, the appraiser should make the extraordinary assumption that the condition of the room(s) or area(s) not observed is similar to the other bedrooms or other areas of the building being appraised. This also applies when appraising a multi-tenant building, such as an apartment complex, shopping center, office building or warehouse.

(b) The subject’s unobserved physical condition. In addition to the situation described above, the appraiser should also be observant of the areas outside of the building but still on the subject’s site. If you notice that there are a number of deferred maintenance items (items that need repairing or replacing), then you need to mention this in your appraisal report and be as specific as possible. An extraordinary assumption might refer to the areas you did not observe, making an assumption that they are similar to the areas you did observe. Also, if there are any additional unforeseen deferred maintenance items that you did not observe, you can make the extraordinary assumption that any additional unforeseen deferred maintenance items may have an effect on the value of the property. This would be a good time to suggest that a general contractor or home inspector be hired and arrive at an appropriate cost to cure.

(c) The physical condition of unobserved comparable sales. I have seen only a few appraisal reports where the appraiser makes the extraordinary assumption that the comparable sale’s Multiple Listing Service remarks about the property, the MLS photographs (interior and exterior) and the verification of the physical condition (renovations, etc.) by the real estate agent are deemed to be true and correct. Other appraisers make the extraordinary assumption that the information supplied to the appraiser from verified sources is deemed to be reliable and correct. By making this extraordinary assumption, you are stating to your client that you made your best effort regarding the information obtained about your comparable sales and assumed that the information you obtained was reliable.

(d) Regarding deferred maintenance and the estimated cost to cure, an appraiser can make the extraordinary assumption that the cost to cure the subject’s deferred maintenance is based on reliable sources and if not, then any change may have an effect on the final value determined.

(e) Regarding a “retrospective” market value, the appraiser makes the extraordinary assumption that the physical condition of the subject as of the date of value (value date in the past) is similar to the date of observation (date you went out to the property). This assumption needs to be confirmed with the property owner or owner’s representative at the time of the visit.

Hypothetical Condition
The Uniform Standards of Professional Appraisal Practice (USPAP) defines a hypothetical condition as: “A condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis.” In essence, a Hypothetical Condition is something contrary to what exists as of the effective date of value.

Hypothetical Conditions could be based on a number of factors or conditions, including:

(a) Appraising a proposed property (such as a house) while the property is currently a vacant lot. In this case, you will be making a hypothetical condition that the non-existent improvements actually exist as of a current date and not the expected completion date, which is referred to as a prospective date. When appraising a proposed house for lending purposes, the Fannie Mae Form 1004 states that you are using the hypothetical condition that the subject improvements are completed as of the effective (current) date of appraisal. The hypothetical condition is that the improvements do not exist or are under construction and your valuation is based on the completion of the improvements.

(b) Valuing the property “subject to curing the deferred maintenance.” The improvements have deferred maintenance that you personally observed and there may be unseen deferred maintenance that you did not observe. Perhaps the cost to cure is something you don’t feel comfortable estimating as it is beyond your expertise. If you decide to value the property “subject to curing the deferred maintenance,” then it becomes a hypothetical condition as your value is contrary to what exists. This is different than deducting the estimated deferred maintenance to arrive at the “as is” market value of the subject, In that case, you would be making an extraordinary assumption that the estimated cost to cure the subject’s deferred maintenance is based on reliable sources and if not, then any change may have an effect on the final value determined. In other words, determining the “as is” market value, and deducting the deferred maintenance, requires an extraordinary assumption, while determining the value “subject to” is a hypothetical condition.

(c) An addition was added illegally and you are requested to value the property as if it didn’t exist. This is considered a hypothetical condition as it is “contrary to what exists.” I had an appraisal assignment where the addition was made over a canal maintenance easement. The survey was a barely readable copy. The title company and lender did not pay attention to the existing easement until the property went into foreclosure. My assignment was to value the property without the existing canal maintenance easement. The value that excludes the existing easement reflected a hypothetical condition (contrary to what existed).

(d) Valuing a property with a different zoning than it currently has, providing that the alternate zoning is a feasible choice. A prime example would be valuing a single family residence zoned for residential use along a busy street while single-family residences across the same street, with commercial zoning, were converted into commercial usage, such as a dentist office or an insurance agency. If it appears feasible that the residential zoning can be converted into commercial zoning, then the appraisal of the subject single family residence as a commercial usage would require a hypothetical condition. In conclusion, each extraordinary assumption and hypothetical condition should be included in the General Assumptions and Limiting Conditions section of the appraisal report. Most importantly, the extraordinary assumption and/or hypothetical condition must be reasonable and supportable in the context of the appraisal assignment that results in a credible opinion of value.

Standards of Professional Appraisal Practice

Effective January 1, 2015, the Appraisal Institute Standards of Professional Appraisal Practice are composed of:

GUIDE NOTE 14 The Role of Exposure Time

The Appraisal Institute text The Dictionary of Real Estate Appraisal, 5th Edition, includes the following in its entry for “market value”:

The most widely accepted components of market value are incorporated in the following definition: 

The most probable price that the specified property interest should sell for in a competitive market after a  reasonable exposure time, as of a specified date, in cash, or in terms equivalent to cash, under all conditions  requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, for self-interest, and  assuming that neither is under duress. [Emphasis added]

Because market value definitions typically include a condition that a reasonable time is allowed for exposure in the open  market, the concept of Exposure Time has an important role in the appraisal process. Appraisers must develop an opinion  of the Exposure Time linked to the value opinion because reasonable exposure in the market is a condition of the definition  of market value.1 

The Appraisal Institute text The Dictionary of Real Estate Appraisal, 5th Edition, defines “Exposure Time” as:

The estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal; a retrospective estimate based on an analysis of past events assuming a competitive and open market. 

Guide Note 8 Use and Applicability of Letters of Transmittal


When used appropriately, a letter of transmittal is a good business practice. Used inappropriately, the letter of transmittal may inadvertently cause the appraiser to be in violation of USPAP.

The letter of transmittal can serve the following purposes:

1. It is a communication between the appraiser and the client, identifying the client who authorized the appraisal and establishing the fact that the appraiser has completed his or her contractual obligation in compliance with a previous      contract, agreement, or letter of engagement.

2. It confirms the business and/or fiduciary relationship agreement between the client and the appraiser as to the work product embodied in the assignment and may enable the appraiser to limit the widening of that relationship to unintended users.

3. It may call attention to unusual conditions of the engagement, hypothetical conditions, extraordinary assumptions, or unusual limiting conditions that affect the assignment.

4. It may be used to establish the client as the party ordering the report and responsible for payment of the associated fee, while putting the client on notice that certain limitations (such as the right of publication and the possibility of      submitting the report to a peer review committee) apply.

5. It may disclose the scope of work applied in the assignment so that the client and intended users of the report understand the level of reliability. 

6. It may state the report option used and, in a Restricted Use Appraisal Report, may contain the use restriction required by Standards Rule 2-2(c) that limits reliance on the report to the client.

7. It may, if the letter of transmittal is a part of the appraisal report, include the signed certification required by Standards Rule 2-3.