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FHA Appraisal Articles

Does FHA require permits on an addition?

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Permit or no permit? That is the question. Does FHA require permits for an addition? I have local real estate agents ask me this question quite a bit. The answer in short is “no”, but there is really more to understand about this issue other than just a simple “no”.

Straight from FHA/HUD:

HUD feels that any addition or modification should comply with applicable building codes of the local jurisdiction; however we do not require proof. Pursuant to HUD Handbook 4150.2, the Department has neither the authority nor responsibility for enforcing laws of the municipality; therefore, permits are not required. The property must however be in compliance with local land use regulations (zoning) of the subject site, i.e. a legal use.

The appraiser is not expected to have the expertise or knowledge to determine if an addition or modification is properly designed and constructed, however, the appraiser should; describe the addition/modification, indicate differences, if any, in the actual gross living area compared to public records, and note if the addition/ modification appears to be completed in a workmanlike manner.

The appraiser should value the addition/modification appropriately according to its contributory value in the market. It is not acceptable to exclude the addition or modification from value solely for the lack of permits issued by the local jurisdiction.

Basically, if there is an addition, it must be built in a professional workmanlike manner as well as serve a use. This addition, whether permitted or not, can contribute to market value according to HUD (if it does legitimately contribute to market value). However, keep in mind that the lender doing the FHA loan may have a big problem with a lack of permits. Some lenders require permits and will not fund a loan with an illegal addition. Moreover, if there is an illegal addition, how does the city or county view such an add-on?

Let me know if you have any questions. Call 916.595.3735, email me, or contact me through my website.

NOTE on 04/02/2013: I cannot find the original document where I quoted HUD in this post. I believe it was from an email from HUD. Please read this post and the comment thread for more information. It is important to realize that appraisers have to rely on the HUD Handbook as well as information provided by HUD for issues that are not readily addressed in the Handbook. Call 800-CALL-FHA to get in touch with FHA, who can then put you in touch with your local HUD Home Ownership Center if need be.

One Year of HVCC & My Son’s Birthday

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It’s my youngest son’s birthday tomorrow and it’s also the one-year anniversary of the Home Valuation Code of Conduct. People ask me all the time what I think about HVCC, so I figured on the eve of twelve months of HVCC, it would be appropriate to have a little discussion. In short, I think the Home Valuation Code of Conduct has been difficult for the appraisal industry, the consumer, and the real estate industry.

Appraisers definitely make less money now for loan work. I know, who cares, right? But listen between the lines because what if the government stepped into your industry and said you could no longer do business with clients you’ve had a relationship with for years. Many appraisers have gone out of business because their client-base was swept under the rug last year when HVCC was implemented.

Secondly, the consumer pays more for a real estate appraisal now. Under the direction of HVCC, appraisals geared toward Fannie Mae & Freddie Mac cannot be ordered directly by a lender or broker, but must be ordered from a neutral third-party (often times an AMC – Appraisal Management Company). These companies charge the consumer more than what an appraiser would typically charge, and many times pay the appraiser quite a bit less than what is customary in the market. There are some upstanding AMCs out there that I am thankful to do business with, but on the other hand it’s too bad to see some companies really taking advantage of the situation at hand. For example, I received an email yesterday from an AMC offering appraisers $125 for an appraisal order, while their website shows fees at nearly $500.

Lastly, HVCC has definitely impacted the real estate market. Since appraisers cannot be chosen directly by lenders, loan officers or brokers, the best appraiser for the job may no longer be hired. One might make the case therefore that there is a serious issue right now with the quality of real estate appraisals because of less experienced appraisers being hired to complete appraisals they are not as qualified to do. That’s definitely the case, but on the other hand I also think HVCC has been a bit of a microscope to the appraisal industry in some regards because it has illuminuated some shoddy work in the appraisal field.

Ultimately, I’m thankful that HVCC only applies to loans geared toward Fannie & Freddie (HUD/FHA has something similar in place now too). I still do many appraisals for investors, Realtors, and home owners, and these types of valuations are NOT affected at all by HVCC. Of course I’m not immune to some of the consequences of HVCC as I mentioned above, and the whole thing upsets me, but I’m choosing to focus on other things. I may be limited in business right now with what I can do for loan appraisals, but I can still chase other avenues of appraisal work such as bankruptcy, divorce, estate settlement, investor valuations, and assignments from local governmental agencies. In fact, just yesterday I had another Sacramento estate settlement retrospective appraisal come my way.

I know this almost sounds like a positive spin, but there is something philosophical here for me because it’s about focus. HVCC has been a sincere difficulty, but focusing all my attention on it and being negative won’t do me any good (and it won’t pay the bills either). Therefore HVCC won’t define me today, and it won’t be fuel on the fire tomorrow either on the one-year anniversary. Tomorrow I’ll be burning some hot dogs on a grill, enjoying the company of family as we celebrate my youngest son’s birthday, and intentionally not focusing on HVCC.

I’d like to hear from you as a real estate agent, consumer, or appraiser. How have you seen HVCC impact the real estate market over this past year?

Why won’t this property pass for FHA financing?

By 12 Comments

I get a lot of questions about FHA / HUD standards and what a property needs to qualify. Here’s the deal: FHA is primarily concerned that everything in a house functions properly and that there are no health and safety issues. FHA continually says, “Soundness, Safety & Security” as their motto. As an FHA certified real estate appraiser, the inspections I do are based upon guidelines from the United States Department of Housing & Urban Development (HUD).

I was in the town of Locke a couple weeks ago and I snapped the following shot of a property I happened to pass. Do you think this property would qualify for an FHA loan?

Here is a sample of some of the things I look for while on an FHA inspection:

  • Appliances must be in functional use. If there is a hood, it must work. If there is a dishwasher it must work. If there is a stove, it must work…
  • The heating unit must be in working order (and AC if applicable)
  • Paint must not be chipping, peeling, or flaking on homes built before 1978. There must be no defective paint or exposed wood for properties built after 1978. If there is an issue with paint, it needs to be cured properly by actually scraping the paint instead of just painting over with new paint.
  • The water pressure must be adequate for the house. Appraisers flush toilets, turn on all faucets and ensure that both hot and cold water are working.
  • The water heater must be in working order.
  • The attic must be inspected and we make sure that there are vents, no evidence of a previous fire, no exposed or frayed wires, and that sunlight is not beaming through.
  • Attics and crawlspaces are to be viewed at least with head and shoulders into them (if present)
  • The crawl space must be inspected and we make sure there is not excessive debris or signs of standing water or any other foundation support issues.
  • Electrical outlets must work.
  • Toilets must flush and be mounted
  • No leaks in the roof.
  • The carpet does not have to be perfect (stains or minor tears okay). If there is a health or safety issue with the flooring, then that is a red flag.
  • A house does not need new interior paint.
  • Windows cannot be broken. Cracks can be okay so long as there is not an issue with safety, soundness and security.
  • No dangling wires from missing fixtures.
  • Water heaters must be properly attached with straps (local code says that water heaters need to be strapped and FHA requires water heaters to meet code).
  • Stoves are not required unless they are drop in stoves.
  • FHA doesn’t require air conditioning, insulation, smoke detectors or the like, but if they are there they must work as they were intended.

The photo above clearly demonstrates there might be a safety issue with the structure. It doesn’t look very sound, does it? Do you see any other violations of HUD minimum standards?

This type of knowledge is vital for first-time buyers, sellers and investors especially. Please let me know if you have any questions. I am glad to help buyers, agents, investors, brokers and anyone else know more about FHA standards and the appraisal process. FHA loans have really dominated the market in the Sacramento Region, so it’s important to be aware of potential issues that might make or break a deal. You can reach me at 916-595-3735 or ryan@lundquistcompany.com.

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