Repairs are required. Those can be scary words during an escrow, yet they’re fairly common. Why do appraisers call out some repairs? Is there some sort of list or manual that tells appraisers what to do? Why do some appraisers mandate repairs, but others won’t? Let’s kick around these questions a bit.
Five main reasons why appraisers call for repairs:
- The End-User: If an appraisal report is geared toward Fannie Mae or FHA, the appraiser ultimately is consulting Fannie Mae’s Seller’s Guide or FHA’s housing handbook to be sure the property is appraised according to their specific standards. If something is not up to par, the appraiser needs to call for repairs to be made so the property is acceptable to Fannie Mae or HUD.
- Health & Safety: If there is something blatantly unsafe about a home, an appraiser can call for that item to be fixed. Sometimes we like to think “heath and safety” is only an FHA issue, but if something is unsafe even in a conventional loan, the appraiser can call for it to be repaired.
- Lender Overlays: Some lenders have requirements above and beyond what Fannie Mae or FHA would require. These requirements are referred to as overlays. An example might be requiring smoke detectors in each bedroom even though they might not be required by local code. Another example would be requiring the appraiser to verify there was no fracking on site (no, I’m not kidding).
- Unknown Issues: Appraisers specialize in value, so when they see something like potential mold or huge cracks, the appraiser doesn’t have to try to be a mold or crack expert or guess if there is a real issue at hand or not. The appraiser is not trying to kill the deal, but might need to call in someone who specializes in those areas to offer insight. The appraiser might say in the report: “The appraised value is subject to further inspection of the cracks on the eastern side of the house by a qualified professional to determine there are no issues with structural integrity. The value is based on there being no issues. The appraiser reserves the right to adapt the opinion of value in this report based on new information.”
- Different Appraisers: This is where we get more subjective. Some appraisers might call for certain repairs to be made that other appraisers aren’t calling out. This might be due to the way the appraiser was trained (whether good or bad), or simply the reality that some appraisers do a better job than others. For instance, a friend just bought a house with FHA financing, and there was very clear chipping paint and severe wood decay all over the covered patio (this will be a weekend project that we’ll fix together eventually). The appraiser absolutely should have called for repairs, but that didn’t happen for whatever reason. Ten years ago everyone said, “Hey, can you just ignore that one issue in the appraisal report? Just don’t mention it because it will kill the deal, okay.” Well, appraisers are supposed to describe the property and point out any physical deficiencies. The appraiser is supposed to be the eyes of the lender so to speak (which is what the lender says they want…..theoretically).
NOTE on Private Appraisals: These points are relevant for appraisals for loans, but appraisers may or may not make the same call for repairs when appraising something for a divorce, estate settlement, litigation, a pre-list appraisal or some other private matter. The vast bulk of my work is for private appraisals, and I don’t remember the last time I called for repairs to be made during a private appraisal. I do still have to use what’s called an extraordinary assumption or hypothetical condition though sometimes.
Fun Class: By the way, here are a few images of my class last week at the Sacramento Association of Realtors. Thank you everyone for coming.
Question: Any thoughts, stories, or points to share? I’d love to hear your take.