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.
If you liked this post, subscribe by email (or RSS). Thanks for being here.
I think one of the more difficult explanations on FHA loans are storage sheds or barns, etc. “way out back” needing to be in at least average condition. People really don’t get the explanation and most appraisers try to be reasonable, but a falling down shed needs to be removed or repaired.
I once had a very old home in an urban area in relatively good condition. There was an old building out back that was in disrepair and completely covered in vines and native growth. Had not been touched in 35 years. FHA calls for that building to be either repaired or removed. Long story short – I found out at the time of the final inspection the home was originally owned by a doctor at the turn of the century and this old building was his stable for his horse he used to make house calls. I certainly felt bad that a piece of history was torn down that day – as bad as condition as it was in.
Thank you Ken. That’s a vivid and fantastic example. Appraisers don’t make the rules, but they need to follow them. I like to tell people that FHA requires everything in the parcels lines to meet FHA minimum guidelines (not just the house). That’s not an easy pill to swallow when there are dilapidated structures on the site. We might see a comment in MLS that states, “the shed is given ‘no value'”, but an appraiser still has to verify the shed meets FHA minimum guidelines. I appreciate your sensitivity to the situation. Too bad that structure could not be repaired. What a bummer.
I refused to tear down the original farmhouse from 1905 on my land. I had a new roof, windows and porch put on it just to keep it water tight and use it for storage. They still said it needed to be scraped. I told them to get bent.
Thanks Alison. I appreciate you sharing, and I hear you. I’m not a huge fan of sometimes how FHA repairs are imposed on such old properties. I get the intent, but I’m not a huge fan. I don’t do FHA appraisals any longer, so I feel pretty comfortable stating my opinion on this. 🙂
Great summary Ryan. The problem with calling for repairs is that there is so much gray area. Does one flake of paint call for a repair on a home built after 1978? I think that it is most important for the appraiser to clearly describe the condition so that user of the report knows exactly what the appraiser sees.
I hear what you’re saying, Gary. Documenting any issues with photos is a good idea too. Sometimes repair items are really not about value at all, but only about a lender’s overlays. For instance, how much more will a house sell for if it has a CO detector? Probably nothing. It’s a formality for the loan (though obviously done for safety too).
I try to look at repairs the way a buyer would. What needs to be fixed? When will I need to fix it? How much is that going to cost me? How much of a discount should be applied to the price to compensate me for making the repairs as well as my time and efforts relative to buying a similar home that does not need repairs. Minor repairs may not merit any discounts – they just need to be disclosed. Same thing with individual lender requirements. Replacing the roof is different. Foundation issues may warrant walking away from the property. The more competitive the market (multiple offers and low inventory levels) the less important the repairs become. It becomes the buyer’s decision as to whether the repairs are significant enough to warrant a discount to the price.
Fantastic comment, Tom. Thank you. Good questions to ask. I like your point on minor repairs sometimes not meriting any discount. We like to think value is so precise as to say, “How much is the house worth now that the latch to the microwave is broken?”, but that’s such a minor issue. The market isn’t that sensitive to where it is going to pay $50 less. It’s hard to imagine a buyer also paying $100 less if there happens to be a broken tile on the kitchen floor. Buyers tend to look at the total package of the house. What are all repairs collectively going to cost? I agree about walking away, and I completely agree about the way buyers respond to repairs depending on what the market is doing. A fixer can become more attractive when inventory is low, but sell at a greater discount when there is an oversupply of homes.
Great points Ryan. I know a lot of people think that appraisers are itching to kill a deal but that just isn’t the case, it’s actually more of a headache if things like this come up. Appraisers are actually looking out for the best interests of their client, the lender to make sure their collateral is worth the money they are loaning on it.
Well said, Tom. I’m really glad you brought that up.
The best interest of the client? Who is the client, the homeowner or the bank? In either case, how is the value of the house determined by some chipping paint, or a non working dishwasher? The job of the appraiser is to appraise the value of the property to see if it’s worth what the bank is intending to finance through a home loan. What happens if someone is trying to refi during the winter when you can’t paint? What does a dilapidated shed have anything to do with the value of the home? The shed was there the day before the home inspector viewed the property, and the home had value on that day. I have the opposite problem with an appraiser right now. I have a $100k secondary structure that is nearing completion of construction, and this appraiser is f-in my loan process because she says the stairs need a handrail. I told her I know, the stairs are in the final phase of construction now, and she just happened to show up before I selected the rail hardware. So now I have to waste hours installing a temporary rail, only to take it all out in a few weeks. What a PITA.
Holding the loan process hostage to a minor thing like paint or a shed removal is akin to taking your car in for an oil change and having the guy tell you that the tires need replacing and the CV joints need to be lubed and you can’t have your car back until you complete their list of repairs.
Tony, thanks so much for the comment. I understand exactly what you are saying. I’m sincerely sorry to hear about your situation. These days lenders are picky about certain issues and they want appraisers to be strict about the standards of the lender. That’s really the bottom line. The appraiser isn’t making stuff up here, but I get how absurd it looks to an owner. Does a missing rail make any difference in the value? I highly doubt it. It’s the same thing with lenders asking appraisers to be sure there are smoke alarms present. This is a legitimate safety issue, but it has nothing to do with value whatsoever. So it’s like appraisers have the unfortunate position of being there to tell the story of value (do an appraisal), but also having to be caught up in some pretty minor details at times. So appraisers take a fine tooth comb to the house in light of the lender’s standards. The client is the bank in this situation, so the appraisal is being done on behalf of the bank. Again, I’m sorry to hear about your situation.
Okay, as an agent I’m having trouble figuring out where the work of the appraiser ends and the work of the home inspector begins.
For example, no AC unit. Sure, that should be pretty obvious to an appraiser and would impact value. But do appraisers test that the AC works? You’re not testing the AC temperature split are you, that’s home inspector stuff. I’m confused where the line is.
So if there are no overlays, how much do appraisers test that stoves work, etc? Does the power have to be on to do an appraisal?
Please forgive if my questions are kinda dumb.
It seems like you’re doing some stuff (like noting a few patches of flaking paint) that don’t affect the value of the house but the lender wants you to look out for it since you’re out at the property anyway and the lender doesn’t want to pay for a full blown home inspection. So the lender is tacking on some home inspection tasks for the appraiser to do that are beyond estimating fair market value. Right?
One last thing. Do you ever get the chance to read home inspection reports on homes before you appraise them? Do they affect your appraisals? I would guess the a seller shouldn’t let an appraiser read a pre-listing inspection report before an appraiser does a pre-listing appraisal because the inspection report would likely point out non-obvious, often typical, problems to the appraiser they could affect the appraiser’s opinion of market value.
I’m sorry this is so long but this is a really cool topic and I’ve been confused about it for a long time.
Fantastic comment, John. I’m really glad you made this. First, you noticed correctly that appraisers are being asked to be a bit more like home inspectors. You are definitely right that appraisers now do some things for loans that have nothing to do with actual value.
– Appraisers test the AC during an FHA inspection, but still rarely during conventional unless the conventional client is asking for all systems to be tested. Even then, the appraiser is simply turning on the system. Did cold air come out or not? Did it seem to do what it is supposed to do? That’s about the gist of the test, and it is definitely not considered to be exhaustive by any means.
– The power does have to be turned on during an FHA inspection so all systems and appliances can be tested (and the hot water heater too). Most conventional clients are still not requiring this, but some actually do (which shows a move for conventional loans to get a bit more strict).
– Lenders are all about managing risk. On one hand the quick appraisal inspection 10 years ago was probably too skimpy with the value and even the inspection, so a move to have the appraiser do more might not be that bad. However, the pendulum has maybe swung a bit too far, and we have to be aware of what appraisers are designed to do (value) vs a home inspector.
– Sometimes I get a home inspection report, but only if the owner provides one during a pre-list appraisal. Otherwise I sometimes get one when doing a report for a lender too (but not often because most parties probably want the appraiser to have less details (and we know how scary home inspection reports can be too, right?). Yes, it can make a difference if I know some things that are wrong or even have access to a cost-to-cure for wood decay and/or various other issues that are not right with the house.
Perhaps FHA should require that a home inspection be completed prior to the appraisal and that a summary report of the inspection be presented to the appraiser so that the items in the inspection report can be independently verified. The appraiser could be the arbiter as to whether or not the home meets FHA minimum standards and if the repair items have a material impact on the value. This would be a higher standard since most appraisers are not trained to be home inspectors.
Also, in California sellers are required to disclose to buyers any known items or property deficiencies that may have a material impact on the value of the property in a seller’s disclosure report. But it is not required that the appraiser get copies of the seller disclosures. One would think that common sense would prevail and that the lenders would require their appraisers to obtain the seller disclosures report. In most cases the lender is investing more money in the property than the buyer. The appraiser is estimating the value for their client – the lender – and you would think that the client would want to be aware of the same seller disclosures that the buyer has been made aware of. The appraiser ,in valuing the property for the client, the lender, is left out in the cold on disclosures thus leaving him/herself wide open for a future liability. It doe not make sense.
So true, Tom. The appraiser often does not have documents such as the pest report, home inspection, or TDS. These documents are intentionally not given to the appraiser. On one hand this sounds fishy, but on the other hand it can be a good thing. Sometimes pest reports and home inspection reports raise so many red flags that a lender would maybe not make the deal (even though the house is solid). A house might sound like it is falling apart, when in actuality it has normal wear and tear or a minor amount of damage. I know a house I bought before had a pest report that said the deck would cost $12,000 to rebuild. We were shocked when the report came back, and it really gave us pause about moving forward too. The thing was though that the deck really didn’t need to be replaced at the time, and there was no active infestation on the deck either. I called up the inspection company to talk with them, and sure enough, the inspector said things like, “Oh yeah, the deck probably has easily 5 years of life left. We were just saying if it needs to be replaced, it would cost $12,000 to build exactly as it is.” Yet the actual report made it sound like replacement was imminent. I’m thinking this could have changed how the deal went had the appraiser or lender seen that report.
I just had an appraisal done on a house I’m wanting to buy and there are windows that do not open in the home. The appraiser did not mention any of the windows not opening only the chipping paint on them. Should I say something about this? It’s for an fha loan and there are multiple that won’t open.
Hi Hope. Thanks for the question. You can definitely say something, and when you do so, this is going to have to be addressed. The seller will either have to fix the issue, or there is going to have to be some other way this issue gets handled before escrow is able to close (sometimes sellers refuse). This is a clear safety issue, so I’d feel most comfortable seeing that this issue is fixed. I think on a practical level, if there are ten other buyers lined up to buy the property, you want to just be aware of your strategy. I’m not saying to say nothing. I’m just saying, this is where I would talk through what to do with your agent, and consider what it is going to take to actually fix this issue too (money, time, skill). If it’s not within your skill set or budget to fix this before you move in, it’s a no-brainer to mention this. I would not want you to move into a house that didn’t meet FHA minimum property standards, and I wouldn’t want you to be in an unsafe situation. The worst-case-scenario here is that the seller will cut bait and move on to a different offer, so this is where talking to your agent is key.
I have an appraiser that always asks for shower opening to be covered on new construction, I don’t provide a shower door, and have to put up a shower curtain to pass.
Thanks Benjamin. That’s interesting. I’ve not heard that before. I wonder what other appraisers do in this regard. I’ve always felt that was more personal property.