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.
10 things appraisers are now being asked to do for FHA appraisals
- 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”.
- Observation vs. Inspection: The appraisal “inspection” is now called an “observation” instead of an “inspection”.
- 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.
- 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.
- 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.
- 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).
- 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.”
- 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?
- 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.
- 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:
- 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.
- Fees: It’s possible that some appraisers will charge more for FHA assignments since there is more work involved.
- Rejection: It’s also possible that some appraisers will simply choose not to accept FHA assignments because of the extra work and/or liability.
- 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).