10 things appraisers are now being asked to do for FHA appraisals

Have you heard FHA made some changes recently to their appraisal manual? That’s right. The new FHA 4000.1 Handbook went into effect on September 14th, 2015, and it has stirred quite a bit of conversation and emotion among appraisers. Even agents have expressed fear that appraisers will now be calling for more repairs. In my opinion most of the changes have more to do with how appraisers write their reports rather than new items to look for during an inspection. Let’s scan a few of the changes below to get a general sense of the new manual, but realize it’s nearly impossible to talk through every single change. Have a read and let me know what you think.

FHA changes - image purchased and used with permission from 123rf dot com

10 things appraisers are now being asked to do for FHA appraisals

  1. The Appraiser MUST: FHA has introduced more definitive language for appraisers by highlighting the word “must”. This theoretically helps HUD be more clear about their expectations. For instance, the manual says, “The appraiser MUST operate all conveyed appliances and observe their performance”, and “The appraiser MUST note and comment on all onsite hazards and nuisances affecting the property”.
  2. Observation vs. Inspection: The appraisal “inspection” is now called an “observation” instead of an “inspection”.
  3. Angled Photos: When possible, appraisers MUST take comp photos at an angle to show the front and side of the house. If you didn’t know, this is how appraisers take front photos for the subject property during a FHA appraisal, but it’s now also the case for comps.
  4. Legal Nonconforming: If a property has a legal nonconforming zoning, the appraiser MUST comment whether it can be rebuilt as improved. Of course it’s not always easy to get this type of information, and sometimes cities or counties might even charge $100+ to say whether the property can be rebuilt as is (this is often called a “burn letter”). Remember that appraisers won’t pay for this type of information, so lenders, AMCs, and/or buyers are going to need to obtain this information in a timely manner so the appraiser can do his/her job.
  5. Provide Legal Documents: An appraiser should have a preliminary title report and TDS (disclosure statement in California) for a FHA appraisal since FHA says the mortgagee MUST provide “any other legal documents contained in the loan file” to the appraiser. We all know that rarely happens. Sometimes an AMC may not have all the information, but other times certain documents might be withheld on purpose for whatever reason. Will this actually happen? We’ll see.
  6. Full Attic (Maybe): Appraisers will need to fully access the attic and crawl space if there is space available to do so. If the appraiser cannot observe the full attic, a “head and shoulders” view should suffice. Appraisers have already been required to do a “head and shoulders” inspection at the least. If the attic is fully finished, the appraiser can do the inspection of the entire space, but if it’s not, appraisers won’t be walking on 2x4s in the attic and having legs break through the ceiling (they shouldn’t be doing that anyway).
  7. Airport Contour Maps: FHA is asking appraisers to review airport contour maps and comment on the marketability of the subject being near an airport. You may be wondering what the heck an airport contour map is (like many appraisers). Well, it’s a map that basically shows noise levels surrounding an airport. The old FHA manual actually stated the appraiser must review contour maps, but the new manual takes it a step further to ask the appraiser to do reporting on the map or any issues. Old Handbook: “Appraisers must identify affected properties, review airport contour maps and condition the appraisal accordingly.” New Handbook: “The Appraiser must review airport contour maps and analyze accordingly. The Appraiser must determine and report the marketability of the property based on this analysis.”
  8. Two Years of Roof Life: The appraiser MUST report if the roof has less than two years of remaining life, and make the appraisal subject to inspection by a professional roofer. This is actually an interesting requirement since appraisers probably aren’t qualified to say whether a roof definitively has less than two years or roof life or not. Isn’t that the job of a roofer?
  9. Consider Three Approaches: If you didn’t know, there are three approaches to value in an appraisal report. Appraisers often only use the Sales Comparison Approach (analyze comps), but there is also the Cost Approach and Income Approach. FHA is saying appraisers must consider and attempt all approaches to value and must develop and reconcile each approach that is relevant. This doesn’t mean appraisers are required to complete all three approaches to value in the appraisal, but they do need to at least consider the approaches and do them if they are relevant. I have heard the real estate community say things like, “The Income Approach is now required for FHA”, but that’s not really true. An Income Approach would only be required if the appraiser determines it is relevant for the assignment.
  10. Sump Pump: This is a good point to end on since it highlights that appraisers are ultimately being asked to be more descriptive in their reports. The appraiser MUST notify the mortgagee if the sump pump is not properly functioning at the time of appraisal. This is an interesting issue. How is the appraiser supposed to determine if a sump pump in a basement is working or not? “Hey Mr. Owner, do you mind bringing the hose into the basement so we can do a little test?”  🙂

Do you feel a little stressed? If so, that’s normal. It will take a little while for appraisers to get used to these changes, and it will take some adjusting for the rest of the real estate community too. Again, most of these changes have to do with actually writing the appraisal report instead of what happens during the appraisal inspection observation. DOWNLOAD the new FHA 4000.1 Handbook HERE.

DOWNLOAD an FHA inspection checklist HERE (pdf) (made a few months ago, but still relevant for today despite the manual changing)

Possible Impact of these FHA Changes:

  1. Ripple: In recent years conventional appraisals have seemingly been on a trajectory to become more like FHA appraisals, so there may be more required of appraisers for conventional loans in coming time.
  2. Fees: It’s possible that some appraisers will charge more for FHA assignments since there is more work involved.
  3. Rejection: It’s also possible that some appraisers will simply choose not to accept FHA assignments because of the extra work and/or liability.
  4. Agents Be Ready: It is going to be important for real estate agents to be aware of some of the things appraisers need during a transaction so turn-times don’t have to be extended needlessly. For instance, if an appraiser needs disclosure statements (called a TDS in California) or a “burn letter” (a letter stating the property can be rebuilt as it is),  agents may be able to help track down that type of information. Or if an appraiser is going to observe the attic, be sure your seller knows to remove personal belongings under the scuttle so the appraiser can do the observation.

Questions: Any other changes you want to mention below? Did I leave anything out? What other impact might these changes bring? I’d love to hear your take.

UPDATED POST: This post was updated to further explain what a TDS and “burn letter” are (I had questions via email and on Facebook).

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Why do appraisers hold FHA loans hostage for such minor repairs?

Have you ever felt like an appraiser required ridiculously small repairs? I mean, can an inoperable dishwasher, missing carbon monoxide detector or minor amounts of chipping paint seriously hold up an FHA loan? If a house is worth $200,000 and $20 worth of repairs are needed, is it really legit for the appraiser to require repairs?

It’s understandably frustrating when a sale or refinance is held up by repair items noted by the appraiser – especially for very small-ticket items. However, appraisers aren’t in the hostage business, and they should only be requiring repairs as outlined by FHA / HUD. Any required repairs for an FHA loan should be about bringing the property up to FHA Minimum Property Requirements (MPR) so the property can be guaranteed for a loan by HUD. The appraiser acts as the eyes of the lender and FHA, so the appraiser will put on FHA “goggles” (I don’t literally put on goggles like the picture) to inspect the property to look for FHA standards and any issues that might impact security, safety, soundness and economic longevity. Sure, the appraiser gets paid for a reinspection, but that’s not the motivating factor for calling out repairs (or shouldn’t be).

Does the appraiser actually have to reinspect the property? Most of the time the appraiser is called to go back out to verify repairs were made. It’s my understanding the underwriter can overrule a reinspection, but my clients typically want me to go back out so they know repairs were truly done.

Why can’t the appraiser use photos from the owner or agent? The appraiser cannot verify repairs were completed simply by someone else’s word or even photos. In my experience most agents and owners are telling the truth about repairs (and I believe them), but if my client has hired me to go back out to a property, and I have to sign my name to verify repairs were made, then I need to be the person doing the reinspection. It can sometimes feel like appraisers are being difficult and picky about needing to do a reinspection, but they’re simply following instructions from the client. Besides, if your client hired you to verify work was done, would you sign your name to something if you didn’t actually see the work in person? Here is a recent email conversation that illustrates misunderstanding and frustration about this scenario.

Agent: The repairs are being installed by tonight. Please consider sending in your report tonight. The seller is committed to making sure these items are done. We are truly in a time crunch.
Me: I can only sign off when it is done.
Agent: You’re killing me.
Me: I’ll get out there right away when it’s done.

Common FHA Repair Issues: If you’re going to be selling a property or doing a refinance, you may wish to brush up on FHA standards. Please see the video below (or here) for 25 of the most common FHA repair issues, and take a look at the FHA Appraisal Article Library on the Sacramento Appraisal Blog.

What is the most random repair you’ve seen an appraiser call out? What types of repairs are most common? If you work in the real estate industry, do you find appraisers to be handling reinspections right away? I’d love to hear any stories or questions you have below in the comments.

If you have any questions or Sacramento area real estate appraisal or property tax appeal needs, contact me by phone 916-595-3735, email, Twitter, subscribe to posts by email or “like” my page on Facebook