Is it going to be an appraisal problem if there are cracks in a home’s foundation or walls? I saw the crack below in a home in Sacramento, and stuck a pen in the wall to show how big it was. What do you think? No biggie or big deal? I’d love to hear your take in the comments below.
Here are a few things to consider about cracks:
- Cracks are Common: Buyers buy homes all the time with cracks – especially on the exterior when there is stucco. Cracks are a bit like wrinkles in that they are inevitable at some point as a home ages. Yet sometimes we see a crack like the image above and think, “Yikes, what is going on?”
- Cracks are Subjective: Some cracks might be deemed “normal” by an appraiser because nearly every house in the neighborhood has cracks as such. I know it sounds a bit subjective to talk like this, but after seeing thousands of homes in an area, appraisers have to consider what normal looks like. Yet other times cracks might indicate something is clearly not right. So will the appraiser call for repairs? Well, there really isn’t a one size fits all answer because not all cracks are created equally.
- Fannie Mae Structural Integrity: If you didn’t know, Fannie Mae’s appraisal form asks appraisers to state whether there are any adverse conditions or physical deficiencies that impact the livability, soundness, or structural integrity of the property. Side note: Is it just me, or is it a bit odd that Fannie Mae asks appraisers to verify something like this? Anyway, appraisers either select YES or NO to this question in their appraisal reports. This means if an appraiser observes a crack that looks beyond what might be “normal”, the appraiser will describe the issue, include photographs, and possibly call for repairs or further investigation by the client. If an appraiser essentially believes there could be a problem, it’s prudent and professional for the appraiser to bring the issue up rather than ignore it.
- Qualified Professionals: Lenders sometimes ask appraisers to state that cracks are normal or okay, but since appraisers aren’t crack specialists they need to outsource making that call to someone else – a qualified professional. I do this from time to time in lender reports when I see an iffy crack. I don’t know if there’s an issue or not, but if a crack looks suspicious or too big, I’d rather not guess that things are okay. So I make the value subject to further inspection to make sure things are alright. I don’t do this for every single crack I meet because then I’d be asking for an inspection on virtually every single property. It’s really only when something looks out-of-the-ordinary (or there is a clear trip hazard for FHA). What type of professional should look into the situation? As an appraiser I simply say “qualified professional” and let the client decide. Often times a lender will send out a structural engineer or some other individual they deem qualified, and I can then include that person’s written professional opinion in the appraisal if needed. Keep in mind this is important because a lender will want to be sure there are no structural issues before lending on a property. However, during a cash transaction or private appraisal, an appraiser might not have access to a “qualified professional’s” opinion. Thus the appraiser will render a value, but make assumptions and disclaimers about the cracks – and reserve the right to adapt the opinion of value based on new information. Lastly, in other cases an appraiser might have a documented cost-to-cure from a qualified professional. In a case like this an appraiser would entertain what sort of value impact exists for the repairs so the appraiser can render an “as is” value.
I hope that was helpful. Any thoughts? I’d love to hear your take.
Class I’m Teaching: By the way, I’m teaching a class called How to Think Like an Appraiser at the Sacramento Association of Realtors on March 10 from 9-12pm. This is my favorite class to teach because we set aside a few hours to really tackle issues and get valuation training. You can register here if interested. Thanks.
Questions: Any stories, insight, or ideas to share? Did I miss anything? What is point #5?
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Great article Ryan. Cracks are a common question that I get as an appraiser. Your title made me think that the next blog post in the series could be, “How do plumbers deal with cracks?” 😀 Sorry if there are any plumbers reading this appraiser thread.
Very true, Gary. There are many types of cracks. 🙂
Nice post, Ryan. I think point #5 would be a spin-off from #4 in that the appraiser’s job is to observe and report (only).
That would be an excellent point #5. Appraisers are often asked to comment on issues outside of their expertise. Cracks certainly fall into this category. For any onlookers, what else are appraisers asked to discuss?
Hi Ryan
This is a good subject. I was appraising in So Cal in the aftermath of the Northridge earthquake in ’94. We got more than a faceful of crack observations and dialog. Because of the number or magnitude of cracks the lender perspective was different then. Basically, if a crack was less than 1/8″ and there was no displacement then it was not a concern. It was also felt at that time if a crack was “old” even if it exceeded the gap or displacement limits, it was not a major concern.
So, I might add that if you are in earthquake country, the limits for observing and reporting a crack are somewhat looser than in other areas. If you are in an expansive soil area, then more cracks can be expected. Same goes for hillside neighborhoods.
Cracks in concrete either flatwork or stem walls are usually more of a concern than in stucco, plaster or drywall. Again, width, displacement and age are factors to be considered.
Just my thoughts.
Russ
Fantastic comment, Russ. This is what I like about blogging because the comments can really build on the post. I like how you said, “width, displacement and age are factors to be considered.” Very well said. Your comment underscores how different markets might have different types of cracks too. Thanks Russ.
Great topic Ryan. I think we need to proceed with caution when it comes to cracks, especially with the increased scrutiny and liability appraisers are under. We are first and foremost appraisers so we should leave the structural issues to engineers or someone else that has more expertise in that area.
Thank you Tom. Well stated. We do need to know our expertise and operate within that. Bottom line. The same holds true for real estate agents giving tax or legal advice. That’s probably not the best move. The interesting part though is we do see cracks all the time, so there is a very real dynamic of having to decide what to call out and what to not call out. Very important.
Hi Ryan
Great post man. This is such an important topic to discuss and you’re right the comments really build up on what you’ve actually posted as a foundation. It may be a conflict of interests, but I tend to agree with both Russ and Tom. Their point of views are two different sides of the same picture. Keeping the info you’ve given in mind combined with Russ and Tom’s views you can go for an almost perfect appraisal where cracks are concerned.
Hi April. Thanks so much for sharing your two cents. I appreciate it. I agree with you in that Russ and Tom’s perspective is key. I’m so glad they made the post better.
Great post, Ryan. I like that you mentioned how cracks could be subjective and dependent on the area. If an appraiser familiar with the area (or engineer/inspector, as Tom said above) deems a crack purely cosmetic, without any effect on the integrity or livability of the house, then there’s not really much that can be done other than go through with the home and repair it as necessary. If it really is that big of a problem for the buyer, they may have to look for another place.
Thanks so much John. Well said. I agree.
I’m planning on getting my house appraised and was worried about a crack. Thanks for the advice about how cracks are common and are inevitable. I’ll have to see about possible getting the crack repaired. Now I just need to find a reputable and professional appraiser.
Glad to help Sarah. Best wishes.
I am trying to get a cash out home equity loan to repair my foundation and other issues including HVAC. I know there are numerous issues. I know they are going to be sending an appraiser. Do you know if foundation issues etc. will exclude me from getting the loan, even if the equity is there? The house is nearly paid for only about $15,000.00 remaining without the issues it is worth approximately $240,000.00, but with them???
Hi Deborah. Thanks for reaching out. It’s hard to say if the foundation will be an issue. If the repairs are vast and the appraiser knows about it, then it would be prudent for an appraiser to ask for the issue to be repaired or at least mention it (which could trigger the lender asking for repairs). A heater typically needs to be in working order for most financing too, though the appraiser probably won’t be testing the system for loans outside of FHA and VA (though sometimes conventional lenders require appraisers to test the system). I just wrote a post about this actually. https://sacramentoappraisalblog.com/2018/03/22/what-type-of-heat-system-is-needed-for-a-loan/
In short, if the cracks are minor, I wouldn’t sweat it. But if there is an obvious and huge problem, then this may be something the lender wants done. You may want to talk with a loan officer about your issues prior to moving much further in the loan process. You may also have to put out feelers with different lenders to find the right bank who will loan on the property so it can be repaired. A community bank might be a good option here. Know also there are repair loans such as the FHA 203K loan or Fannie Mae’s Homestyle Renovation loan that might be able to work in your situation in case the lender does not want to do it “as is”. Lastly, since you hardly owe anything on the property, and if you are not taking much out, you might not even be required to have an appraisal. Or maybe the appraiser would do a “drive-by”. So I suppose the best thing to do is to talk with a loan officer and find out what is needed (before you have to worry about an appraiser calling out repairs for a foundation or HVAC).
Best wishes.