One-Unit Valuation Methods for FHA Chapter 5. Today's FHA and VA 9/20/13 Chapter 5: One-Unit Valuation Methods for FHA Introduction In completing one-unit.

One-Unit Valuation Methods for FHA

Chapter 5

Today's FHA and VA 9/20/13

Chapter 5: One-Unit Valuation Methods for FHA

Introduction

• In completing one-unit FHA appraisal assignments, there are three possible approaches to value. With each approach, Sales Comparison Approach, Income Approach, and Cost Approach, there are different applications and protocols that appraisers must be aware of.

• Appraisers must also follow the detailed process involved in completing URAR reconciliation and forming final value opinions.

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Key Terms

• Comparable Data Pool Properties currently offered for sale, pending closing, or closed, that are used for comparison to the subject property.

• Data Source The initial point of information regarding the data (e.g., MLS, public records).

• Verification Source A party with first-hand knowledge of the transaction (e.g., agent, broker, buyer, seller).

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URAR Report Form Section 6: Sales Comparison Analysis Comparable Data Pool

• The appraiser is required to report the comparable data pool, which is the number of comparable properties currently offered for sale, pending closing, or closed, that are used for comparison to the subject property, as of the effective date of the appraisal.

• The appraiser is also required to report the number of comparable sales in the subject neighborhood within 12 months of the effective date of the appraisal in Section 6.

• If there was difficulty in locating comparable properties, then all such properties in the subject’s neighborhood are to be treated as comparable and counted.

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URAR Report Form Section 6: Sales Comparison Analysis Comparable Data Pool (cont.)

• Comparable Properties Offered for Sale– Enter the number of comparable properties

currently offered for sale, including those under contract, within the subject neighborhood, together with the price range.

• Comparable Sales– Enter the number of comparable sales that

occurred within the 12-month period preceding the effective date of the appraisal, and within the subject neighborhood, together with the price range.



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• Address– Enter the subject property address and the address

for each comparable sale. Comparable sales should be entered in the same manner.

• Proximity to Subject– The appraiser must enter the proximity of the

comparable sales to the subject property, expressed as a distance in miles using a straight line between properties including the direction.

– The method to report the proximity of the comparable sale to the subject is: Numeric to two decimal places + ‘miles’ + directional.



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• Sale Price– The appraiser must enter the sale price of the

subject property, when applicable, and each comparable property. If any of the comparable properties is a listing or pending sale, the appraiser must enter the offering price or contract price as applicable.

• Sale Price/Gross Living Area– Enter the price per square foot for the above

grade living area for the subject, if a purchase transaction, and each comparable sale.



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• Data Source(s)– The appraiser must provide the data source(s), the initial point of

information regarding the data, utilized to obtain the data for each comparable sale. When using MLS, the organization acronym or abbreviation followed by ‘#’ and the listing number must be reported.

– Additionally, the appraiser must provide the DOM (numerically to four digits) for each comparable sale for the latest time period that the property was listed for sale. DOM is defined as the total number of continuous days from when a property is listed or advertised for sale until the date that it is taken off the market or sold.

– If the comparable property was not individually listed or advertised for sale, enter zero (0). If the DOM is unknown, enter ‘Unk.’

• Examples:– MRIS#AA123456789;DOM 220– MRIS#BB123456789;DOM Unk



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• Verification Source(s)– Contacting someone with first-hand knowledge of the

transaction is the preferred method of verification.– A single source may be used if the quality of data is such

that sales data are confirmed and verified by settled transactions.

– Do not use, as market data, sales that are not verified and adjusted to reflect the terms and conditions of sale.

– Special note: While the FHA considers the MLS as an acceptable data source, MLS by itself is not considered a reliable verification source.



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URAR Report Form Section 6: Sales Comparison Analysis Value Adjustments

• Adjustments are made to the price of the sale properties for price-influencing dissimilarities between each sale and the subject property.

• Not all dissimilarities require adjustment because not all dissimilarities achieve price differentials in the market.

• If a property is overvalued, there is a high probability that can be traced to an excessive adjustment made in areas above the room count line.

• Make adjustments only if the dissimilarity has a noticeable effect on the value.


URAR Report Form Section 6: Sales Comparison Analysis Value Adjustments (cont.)

• Sales or Financing Concessions



Line 2The appraiser must enter the financing type and the total amount of concessions for each settled sale. Types of financing:• Conventional• FHA• VA• Cash• Seller• USDA—Rural Housing• Other

Line 1The appraiser must indicate the sale type for each comparable property. The valid values are:

• REO sale• Short sale• Court ordered sale• Estate sale• Relocation sale• Non-arm’s length sale• Arm’s length sale• Listing

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• Date of Sale/Time– State the month and year of settlement. Comparable properties with active

listings must be specified as “Active.” Time adjustments must be supported by the market and consistent with neighborhood market conditions noted. For comparable properties identify the status of the sale with:

• REO sale

• Short sale

• Court ordered sale

• Estate sale

• Relocation sale

• Non-arms length sale

• Arms length sale

• Listing

– If the comparable property is under contract (“c”), or an expired (“e”), or withdrawn (“w”) listing, the appraiser must indicate the date status type using abbreviations, followed by the corresponding contract, expiration, or withdrawal date in mm/yy format.



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• Location– The appraiser must a rating from the dropdown to describe the

overall effect on value and marketability of the location factor(s) associated with the subject property and each comparable property. The abbreviation for the rating must be entered.

– Descriptors such as “None,” “N/A,” “Typical,” etc., are unacceptable. The text must fit the space.

• Example:• B;AdjPrk;WtrFr

• Leasehold/Fee Simple– State whether the property was sold as fee simple or as a

leasehold estate.



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• Site– The site area in the sales comparison approach must be

entered following the same requirements as in Site information.

– For sites/parcels that have an area of less than one acre, the size must be reported in square feet. For sites or parcels that have an area of one acre or greater, the size must be reported in acreage to two decimal places. The unit of measure must be labeled as either “sf” for square feet or “ac” for acres. A numeric value must be entered followed by the appropriate unit of measure.



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• View– View, in the sales comparison approach is entered the same way as in the

Site section and uses the same dropdown choices for overall view rating and view factors. The appraiser must provide one of the ratings to describe the overall effect on value and marketability of the view factor(s) associated with the subject, and each comparable, property.

• Design (Style)– The appraiser should enter an appropriate architectural design type

descriptor that describes the comparable property. The appraiser should report the name of the design style applicable within the local market area.

• Quality of Construction– Quality of construction uses a rating system similar to property condition.

The appraiser must select a quality rating for the subject, and each comparable, property. The appraiser must indicate the quality rating that best describes the overall quality of the property.

– (Q1, Q2, Q3, Q4, Q5, Q6)



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• Actual Age– The appraiser must report the actual age of the subject

property and each comparable property. For new construction less than one year old, enter zero (0). This is similar to the information provided in the Improvement section.

– Actual Age – Numeric to three digits, whole numbers only

– Estimation of Actual Age – A tilde (~) must be placed before the actual age

• Condition– The appraiser must select one overall condition rating for the

subject property and each comparable property using the C1-C6 condition rating as used in the Improvements section of the report.



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• Above Grade Room Count/Gross Living Area– The process mirrors the Improvements section of the report for the

property. Here, the appraiser must enter the total number of rooms as well as the number of bedrooms and bathrooms for the property and each comparable property. The appraiser must also enter the gross living area for the subject property and each comparable property. The appraiser must follow the same standards outlined in the Improvements section under “Finished Area Above Grade” and “Square Feet of Gross Living Area Above Grade.”

– The format for reporting the information is as follows:• # of Rooms – Numeric to two digits, whole numbers only• # of Bedrooms – Numeric to two digits, whole numbers only• # of Bath(s) – Numeric to two decimal places• Separate full bath count from half bath count with a period (.)• Gross Living Area – Numeric to five digits, whole numbers only



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• Basement and Finished Rooms Below Grade– Line 1

• Total square footage of the property improvements below grade

– If there is no basement, enter the numeral zero (0). No other information may be entered.

• Finished square footage of the property improvements below grade, if applicable. Do not indicate a percent finished.

• The type of access to the basement, if applicable. The allowable values are “Walk-out” (wo), “Walk-up” (wu), or “Interior only” (in), which must be abbreviated on the appraisal report form to fit in the available space.



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• Basement and Finished Rooms Below Grade (cont.)– Line 2– The appraiser must report the number of each type of

finished rooms in the basement on Line 2 of this data field. The room type descriptors are:

• Recreation Room (RR)• Bedrooms (BR)• Bathrooms (BT)• Other (O)

– The appraiser must enter zero (0) if there are no rooms of a particular type.



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• Basement and Finished Rooms Below Grade (cont.)– Line 1: Finished Square Footage – Numeric to five digits,

whole numbers only– Line 1: Basement Access – Appraiser must select one

value from the specified list (values wo, wu, or in)– Line 2: Room Count/Type – Numeric to one digit* – Examples:

• Line 1: 1000sf750sfwu (1,000 square foot basement, 750 square foot finished, walk-up access)

• Line 2: 1rr1br1.0ba2o (1 recreation room, 1 bedroom, 1 full bath, 2 rooms – other)



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• Functional Utility– Enter “Average,” “Superior,” or “Inferior” as a total of the items rated

in the Improvement Analysis compared to the property. Use the “Summary of Sales Comparison Approach” to explain all differences.

– Adjust for functional obsolescence observed in the subject and not found in the comparables. A floor plan of the subject is required when functional obsolescence is attributable to layout or a poor floor plan.

• Heating/Cooling– Enter the type of heating and cooling systems.– Any adjustment for differences should be based on market

expectations.

• Energy Efficient Items– The appraiser must enter any energy efficient items for the subject

property and each comparable property. Today's FHA and VA 9/20/13


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• Garage/Carport– The appraiser must indicate the total number and type of off-street

parking spaces associated with the subject property and each comparable property.

• Porch, Patio, Deck– Enter these features for the subject and comparable sales if they

exist.

• Blank Lines– Three blank lines are provided for the appraiser’s use to describe

additional amenities, features, or individual characteristics not addressed in the sales grid.

– Enter appropriate adjustments (e.g., a pool located in an area that expects pools might bring a dollar premium in comparison to a comparable without a pool).



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• Adjustments in the Sales Comparison Approach– Adjustments to comparable properties (+/-) are made in

whole dollars only. If a feature or aspect of the subject property differs from that of a comparable property and the appraiser determines that no adjustment is warranted, the appraiser must enter a zero in the adjustment line. The zero will indicate to the reader/user of the report that the appraiser considered the difference and no adjustment should be made.

– When the features for the subject and comparable sale(s) are the same and no adjustment is warranted, leave the field blank.

– Net Adjustment is the sum of all adjustments.



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• Net Adjusted (Total)– Mark either the “+” or “-” box to indicate if the total net adjustments

will increase/decrease the value and note by how much. Explain any excessive adjustments.

• Adjusted Sale Price of Comparables– Total all of the adjustments and add them to, or subtract them from,

the sale price of each comparable. Generally, adjustments should not exceed 10% for line items, 15% for net adjustments, and 25% for gross adjustments.

– Indicate whether your research did or did not reveal any prior sales or transfers of the subject property for the three years prior to the effective date of this appraisal.

– Indicate whether your research did or did not reveal any prior sales or transfers of the comparable sales for the year prior to the date of sale of the comparable sale.



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• If a prior sale occurred, the following is applicable: Date of Prior Sale/Transfer– The appraiser must report the date(s) of prior sale(s) or

transfer(s) of the subject property for the three years prior to the effective date of the appraisal using MM/DD/YYYY format.

– The appraiser must report the date(s) of the prior sale(s) or transfer(s) of any comparable property during the 12 months prior to its date of sale.

– If more than one prior transfer of the subject property or any of the comparable sale(s) occurred within the applicable time period, the additional transfer(s) must be listed and reported in the “Analysis of Prior Sale or Transfer History of the Subject Property and Comparable Sales” field.



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• Sale Price of Prior Sales– The appraiser must report the price(s) of prior sale(s) or transfer(s) of

the subject property for the three years (and of any comparable property for 12 months) prior to the effective date of the appraisal in whole dollars.

– If more than one prior transfer of the subject property or any of the comparable sales occurred within the applicable time period, the additional transfer(s) must be reported in “Analysis of Prior Sale or Transfer History of the Subject Property and Comparable Sales.”

• Data Source(s) and Effective Date of Data Source(s) of Prior Sales– The appraiser must enter the data source(s) and effective date(s) of the

data source(s) associated with the prior transfer of each property.– If the data source is an MLS, the appraiser must enter the abbreviated

MLS organization name, followed by a pound sign and the specific listing identifier.



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• Summary of Sales Comparison Approach– Explain comparable selection and any necessary

explanation of adjustments.– Explain any adjustments exceeding guidelines.– Explain which comparable sale(s) is/are given the most

weight or consideration and why.

• Indicated Value by Sales Comparison Approach– The appraiser must enter the reconciled value of the

Sales Comparison Approach in whole dollars.



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URAR Report Form Section 7: Reconciliation

• Appraisers must fill out this section by marking the appraisal is: • “As Is”

– For HUD REO or Preforeclosure Sale Properties (PFS).

• Per Plans and Specs– For proposed, less than 90% complete, or ongoing construction—or a 203(k)

with a Plan Review and Specification of Repairs

• Subject to Repairs or Alterations– For existing housing, or new construction more than 90% complete with only

buyer preference items remaining, requiring repairs or alterations to:

• Protect the health and safety of the occupants.

• Protect the security of the property.

• Correct physical deficiencies or conditions affecting structural integrity.

• Complete buyer preference items for new homes.

• Complete repairs/improvements noted in work orders or contractor estimates for the Streamline K.

• Meet FHA minimum property requirements.Today's FHA and VA 9/20/13


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URAR Report Form Section 7: Reconciliation (cont.)

• Subject to a Required Inspection– Mark when the appraisal calls for a required inspection to:

• Certify the condition and/or status of a mechanical or structural element of the property.

• Protect the health and safety of the occupants.

• Protect the security of the property.

• Meet FHA minimum property requirements or minimum property standards.

• Opinion of Market Value– The appraiser must enter the value of the subject property. The

value of the subject property must match the appraised value of the subject property in the Appraiser Certification section.

• Date of Inspection and Effective Date of Appraisal– The appraiser must enter the date of the inspection in MM/DD/YYYY

format, which is also the effective date of the appraisal.Today's FHA and VA 9/20/13


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URAR Report Form Section 9: Cost Approach

• If the subject property is new construction, or the cost approach is used as a basis for pricing in the market, the appraiser may use the cost approach (though it is not required for an FHA appraisal). – If, however, the subject is a unique property, has specialized

improvements, is manufactured housing, or the client requests the cost approach be completed, then the cost approach is required and must be completed.

• State the remaining economic life as a single number or as a range. This line must be completed for every FHA appraisal whether or not the cost approach is completed. An explanation is required if the remaining economic life is less than 30 years.

• When completing this section, make sure to provide adequate data for the lender/client to replicate the indicated cost figures and calculations. There are no specific UAD requirements for the cost approach.



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URAR Report Form Section 9: Cost Approach (cont.)

• Support for Opinion of Site Value– Provide a summary of the comparable land sales or other methods of

estimating site value in support of the opinion of site value.

• Reproduction or Replacement Cost– Indicate which cost estimating method was used.– Reproduction Cost: Exact duplicate with deficiencies and obsolescence.– Replacement Cost: Cost at current prices with equivalent utility.

• Source of Cost Data– Provide the name of the cost service and reference page numbers of

cost tables or factors.

• Quality Rating– Enter the quality rating of the cost tables or factors referenced.

• Effective Date– Enter the edition and date of latest updates referenced.



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• Comments– Describe how physical depreciation was calculated, functional or

external obsolescence, and enter the gross living area calculations.

• Economic Life– Enter remaining economic life of improvements.

• Opinion of Site Value– Enter the opinion of site value.

• Dwelling Sq. Ft. @$– Enter the GLA, multiply it by the square foot factor, and enter the

result.

• Basement Sq. Ft. @$– Enter the basement square feet, multiply it by the square foot factor,

and enter the result.



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• Blank Line– Use this line for lump sum adjustments for plumbing fixtures,

fireplaces, pools, etc. Add together, then enter the sum.

• Garage/Carport Sq. Ft @$– Enter the car storage square feet, multiply it by the square foot

factor, and enter the result.

• Total Cost New– Add the results of the first five lines together, then enter the sum.

• Less Depreciation– Enter the amount of estimated depreciation as a specific dollar

amount, as a percentage, or as a combination. Entries made in functional or external depreciation need explanation in the Comments section. Add together all forms of depreciation, enter the sum, and deduct this total from the total cost new.



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• Depreciated Cost– Enter the difference from the total cost new less

depreciation.

• “As Is” Value of Site Improvements– Enter the “As Is” value of site improvements.

• Blank Line– Enter marketing costs here; these will generally average

6%. Also, if applicable, identify and include impact fees.

• Indicated Value– Add together depreciated cost of improvements, the “As

Is” value of site improvements, marketing expense, and/or impact fees, then enter the total.



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URAR Report Form Section 10: Income Approach

• With a single-family residential property, the income approach is generally not recognized as a basis for buying by the market.

• Therefore, the income approach is not required for FHA appraisals completed on the Uniform Residential Appraisal Report, Fannie Mae Form 1004, nor are there any specific UAD reporting requirements.



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Summary

1. For “date of sale” in the sales comparison approach, the month and year of settlement is stated (closing date). Showing the contract date and settled date is also acceptable when a time adjustment is warranted for changes in market conditions between the two events.

2. In reporting the sales comparison approach, the appraiser is required to report the number of comparable properties currently offered for sale, as of the effective date of the appraisal, and the number of comparable sales in the subject neighborhood, within 12 months of the effective date of the appraisal.



Summary (cont.)3. Adjustments in the sales comparison approach should not

exceed 10% for line items, 15% for net adjustments, and 25% for gross adjustments. If any adjustments exceed stated guidelines, an explanation must be provided including reasons for not using more similar comparable sales.

4. The cost approach is meaningful if the subject property is a new construction (less than one year old), or if the cost approach is recognized in the market as a basis for pricing. In such cases, the appraiser may complete the cost approach; however, it is not required for an FHA appraisal.



Summary (cont.)

5. With a single-family residential property, the income approach is generally not recognized as a basis for buying by the market. Thus, the income approach is not required for FHA appraisals completed on the URAR.


Chapter 5 Quiz

1. Under the section Adjusted Sale Price of Comparables, generally, adjustments should NOT exceed ___ for line items, ___ for net adjustments, and ___ for gross adjustments.a. 5%, 10%, 20%

b. 10%, 10%, 15%

c. 10%, 15%, 25%

d. 15%, 20%, 25%



Chapter 5 Quiz

2. The _______ Approach is NOT required for FHA appraisals completed on the Uniform Residential Appraisal Report, Fannie Mae Form 1004 in the case of a single-family residential property.a. Cost Data

b. Income

c. Indicated Value

d. Summary of Sales Comparison



Chapter 5 Quiz

3. Under the URAR Report Form Section 4: Under Reconciliation, the box “Subject to Repairs or Alterations” should be marked when the appraisal involves existing housing or new construction more than 90% complete, requiring repairs or alterations to complete

a. buyer preference items for new homes.

b. the certified property rehabilitation checklist.

c. interior cosmetic repairs/improvements.

d. landscaping repairs/improvements.



Chapter 5 Quiz

4. An appraiser may use a single source for the Verification Source section only whena. the quality of sales data is confirmed by settled

transactions.

b. a single source is never acceptable.

c. the source is located on the FHA Approved Source Verification list.

d. the source is MLS.



Chapter 5 Quiz

5. When an appraiser’s site area is 1,120 square feet, the size must be reported asa. .112 ac.

b. 11.20 ac.

c. 11.20 sf.

d. 1120 sf.



Chapter 5 Quiz

6. If an appraiser is reporting the actual age of a subject property with an age of 30 years and 10 months, it should be entered as _____ in the Actual Age section. a. 30.83

b. ~30.83

c. 31

d. ~31



Chapter 5 Quiz

7. The Cost Approach a. is always required for FHA appraisals.

b. is mandatory for all multi-family dwellings over one year old.

c. is meaningful if the subject property is over 25 years old.

d. is required for manufactured housing or at the client’s request.



Chapter 5 Quiz

8. Under Functional Utility, appraisers should enter _______, _______, or _______ as a total of the items rated in the Improvement Analysis compared to the subject. Any differences should use the _________ Approach to explain any differences. a. inadequate, adequate, satisfactory; Adjusted Sale

Price

b. inferior, average, superior; Summary of Sales Comparison

c. poor, fair, first-rate; Base Market Value

d. unacceptable, acceptable, excellent; Sales or Financing Concessions



Chapter 5 Quiz

9. When entering the appropriate architectural design (style), appraisers may use the type descriptora. Brick.

b. Conventional.

c. Farmhouse.

d. 2-Story with Porch.



Chapter 5 Quiz

10. If an appraiser is appraising a property that includes one small bedroom, one master bedroom, 1 full bath, and one half bath, he would input ____ for # of Bedrooms and ____ for # of Baths under the Above Grade Room Count. a. 1.1; 1.1

b. 1.5; 1.5

c. 2; 1.5

d. 2; 1.1



Chapter 5 Quiz

11. The method to report the proximity of the comparable sale to the subject property isa. numeric whole number + ‘miles.’

b. numeric whole number + ‘miles’ + directional.

c. numeric whole number to two decimal places + ‘miles.’

d. numeric whole number to two decimal places + ‘miles’ + directional.



One-Unit Valuation Methods for FHA Chapter 5. Today's FHA and VA 9/20/13 Chapter 5: One-Unit Valuation Methods for FHA Introduction In completing one-unit.

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