5 reasons why appraisers call for repairs to be made

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.

reasons why appraisers call for repairs to be made

Five main reasons why appraisers call for repairs:

  1. 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.
  2. 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.
  3. 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).
  4. 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.”
  5. 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).

appraisal repairs verbiage - example from sacramento appraisal blog

cracks example by sacramento appraisal blog

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.

How to think like an appraiser class at SAR

Question: Any thoughts, stories, or points to share? I’d love to hear your take.

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

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.

difference in year built in the appraisal report - sacramento appraisal blog

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.

I hope this was helpful.

Questions: Anything else you’d add? When do you think age does matter to buyers? Any stories or examples?

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