PLP 103: Appraisals Part Two: The Uniform Residential Appraisal Form
One of the most common things to note when doing real estate transactions is the appraisal of the property. Through this, the value of your property or deal is appropriately assessed. Continuing with the second part of the series on appraisals, Keith Baker goes over the Uniform Residential Appraisal Form, also known as Fannie Mae Form 1004 and Freddie Mac Form 70. Here, he breaks down the document and gives a page-by-page look into the sections that show the things that will help you analyze the properties or deals. If you are new to this, it helps to take a look at this essential form. This is a great tool that you can add to your toolbox when it comes to evaluating the value of a property and more.
Appraisals Part Two: The Uniform Residential Appraisal Form
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Early May 2020, Texas has begun to open back up from the Coronavirus shutdown and lockdown. I understand the death toll is still rising in the United States but hopefully, we can get over and around this quickly. Let's remember to keep our eyes on the prize. The present may be uncertain but the future is to be determined by us. Our topic is Part Two on Appraisals. I'm going to go over the Uniform Residential Appraisal Report or also known as Fannie Mae Form 1004 and Freddie Mac Form 70. It's a seven-page document including definitions, amendments, certifications, some language, and all that fun stuff. There are about three pages that we're going to dive into and go over in detail with the actual report. I'm going over a report from a house I sold several years ago. This appraisal report is 35 pages in length.
Let's go ahead and jump right into it and start looking at this. You can download a blank version of the Uniform Residential Appraisal Report on the website. On the first page is the invoice a lot of times. In this case, the appraiser that the borrowers' lender used put the invoice first. I see that they paid $470 for the appraisal, which several years ago is not bad. I eyeball around the $500 mark for a little bit of inflation. The second page contains appraiser certifications, the requirements, list of the subject property, who the borrower is, especially the lender's name because that is the actual customer of the appraisal report.
The third page of this particular report is a cover page. It has a photo of the house I sold, the lender-borrower address, and basic stuff. The fourth page is a letter to the lender saying, “You hired me. Here it is. Subject to all limitations and discrepancies listed herein.” That’s the formality of communicating the appraisal report to the lender, which in this case is going to be you. You want to read every page of your appraisal report very carefully. Page five is the summary of salient features, which goes on to describe the overall dwelling, the improvements, the number of beds, baths, so on and so forth. I address the legal description. The lender and borrower are both identified.
Page six is the actual first page of the Uniform Residential Appraisal Report as put out by the government. It's broken down into sections or paragraphs, which on the left-hand side you'll see the first being the subject property, the borrower, the lender, the type of loan, whether it's a purchase or a refi, the address, legal description and the current owner of record. The next section discusses the contract on the property. Did the appraiser look at the contract? Were there any provisions or seller concessions in the contract? In this case, the appraiser did look at the contract, and lo and behold, he didn't appraise the house for a spot on the sales price. Funny how that happens. After the contract, there's a section for the neighborhood and this is going to be the boundaries or the streets. It lets you know if it's urban, suburban, or rural. What are the growth trends? Is it a stable neighborhood? Is it a new build? Is it rapidly filling in? Is it a slow in fillers, a declining neighborhood? It’s good information there that the appraiser puts in. It's still an opinion but it's nice to have. You can look and see, and when you're trying to compare apples to apples, this information can help.
The next section is the site, which is going to be the property. Where is it? What are the dimensions? What is it zoned for? Does it have zoning? What is the highest and best use for that property? Does it reside in a FEMA flood zone? Are there any adverse site conditions? It’s very good to look into this, see and make sure to get everything that the appraiser has put down, especially the highest and best use. It's funny because if you're looking at a residential property in a master plan community, the highest and best use is as a single-family residence. Usually, that's a no-brainer but I figured I'd bring it up to feel more time.
The next section we discuss is the improvements or the dwelling. It gives a general description like the year built and the design. What type of foundation? Is there a basement? What type of building materials were used, stick frame 2x4, drywall, tile floor, hardwood floors? How many cars is the garage? Does it have a garage? It also lists any physical deficiencies. Does the property conform to the neighborhood function, style, and condition? Is this a dilapidated house that needs to be flipped? In this case, this was a house hack. I had lived in the house and remodeled it myself, and then sold it for a nice chunk of change. In this appraisal report, the property did conform to everything that the neighborhood had to offer as most will. It was in a little bit better than average condition. That was represented in that section.
On the second page of the Uniform Appraisal Report is the Sales Comparison Approach. This is where the subject property is listed and it'll be three comps that the appraiser uses to arrive at his estimate of value. This section will list things such as sales prices, the square footage design, the construction age, and the room count. What type of HVAC or heating? Is it essential heating or central air? How many porches, patios, fireplaces, any extra amenities? You will also find the data source in this. In this case, it's the MLS, Multiple Listing Service. Also at the very bottom of the page is the reconciliation and final estimated price value. A lot of times, you will see the appraisal come in at the loan amount right on the money or just a little above. However, I do know friends who were selling houses and appraisals are coming back low. It's causing some problems for them given this is the Coronavirus time. I'm keeping my eyes on it and trying to touch base with those friends to find out what's going on and try to keep my pulse on. That's on the sales side. That's ultimately where investors want to be selling on the retail. Those are the Sales Comparison Approach.
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Page eight goes on to provide comments regarding the Sales Comparison Approach and also gives some neighborhood analysis. Is this neighborhood subject to a homeowner's association or a Planned Unit Development? That's PUDs. That's the master plan community or the developer. How many units have been purchased? Are any rented? Was the project created by the conversion of an existing building within a unit development? In this particular report, nothing is filled out because the house was not subject to HOA fees. That was in the City of Houston proper and we’re under city ordinance rather than an HOA control.
Those were good aspects and bad aspects. I didn't have to pay HOA fees, but then I got the same service. I got what I paid for in a manner of speaking. You’ll also see the cost approach and the income approach. I look at the cost approach because my day job is an insurance adjuster. I want to see what our replacement costs would be. In this case, it was $1,000 more than the sales price of the property. That's probably a good thing. You don't want that replacement cost being way too high, especially if you're insuring it for the sales price. The sales price was $315,000. If it would cost $400,000 to rebuild that house, I would want to insure it for that amount, not what I paid on the note or what I borrowed for or how much I paid on the contract. Keep that in mind when it comes to the cost approach.
The income approach is mostly for commercial buildings and income-generating properties. My understanding is that the income approach does not do justice for single-family residences. That's why the Sales Comparison Approach is still used. You go down to page eight of this. It had comments. The scope of work, the intended use, definition of market value, statement of the assumptions, and limiting conditions. Run through those and see if there are any limiting conditions or any caveats that the appraiser has left in because he had some difficulties doing the appraisal. You want to look through that. This is a house hack, but let's say you're planning to rehab it and sell it in 90 days. You provide that scope of work to the appraiser so that he could look at an as-is condition and then after-repair value. Your LTV is going to be pinned to that or it should be. You definitely want to find out if there are any limiting conditions or any concerns or caveats.
The rest of it is bull at this point. It's redundant stuff. The meat and potatoes have been delivered. This is just a bunch of verbiage that talks about what the appraiser certifies, that he or she went to the property, check the MLS, so on and so forth. If it's done under the supervision, let’s say it's a new appraiser and they haven't broken out yet. They haven't gone out on their own, so somebody oversees everything, all the reports. There's a blur, a little area for their supervisor to sign off. At the bottom of that page is where the appraiser signs as well.
From page 13 through 35, I'm going to go through pretty quickly because we just went through the meat and potatoes. That Uniform Residential Appraisal Report is what banks are going to look at when they buy notes. They want to see that this loan was originated properly within certain guidelines. Mostly, they can sell the loan to Freddie or Fannie. Nonetheless, that's what this form is there for. Don't stop reading it there. There are 35 pages in this report. I'm going to pick out a few that I feel we should go over briefly and that you should be aware of.
You're going to find supplemental addendums, photos of the subject property, photos of comparables, a building sketch, the complication map, and flood map. That's key, you always want to see that. Usually, they’ll have a tax assessor's map and a market condition addendum. A page that says they've studied the local real estate market and these are the trends. Prices are going up, days on market are decreasing, increasing, or staying the same or steady. The other thing I like is you get to see the front photo of the comp. In this case, the house was half-brick and half-wood exterior, half-cedar shake shingles. One of the comps didn't list it for the pricing, but it was a similar size of the lot. It was an all-brick building, which would bring a higher price.
See if you’d be able to look through and see the comps. Are they close to apples to apples? You want them to get as close as they can. That's what the appraiser's job is to do. The cool thing I like is they give the definitions of ratings. For example, a C-1 is a brand-new built house. This is in a subdivision or a custom home. C-2 is not a new building, but one that has been recently updated with the modern bells and whistles. These go down all the way to C-6, which says, “Improvements have substantial damage.” The dwelling is not in good shape and it's damaged enough to affect the safety of the building. That’s what you want to see as a rehab, the C-5s, and whatnot. You want to see some distress properties and those C-6 or C-5 definitely in that area.
[caption id="attachment_2907" align="aligncenter" width="600"] Uniform Residential Appraisal Form: If you want to sell your note, have a copy of the original appraisal to go along with the loan package so that whoever buys it sees that you followed prudent underwriting guidelines.[/caption]
To recap, this is a Fannie Mae Form 1004, Freddie Mac Form 70, Uniform Residential Appraisal Report. Especially if you don't have any experience in comping properties, do not loan money without one of these. This is non-negotiable. This will break the deal if the borrower will not pay for an appraisal. Keep that in mind. It’s a great tool to have. It's a standardized method of evaluating the value of a property based on sales comps. Especially if you want to sell your note, you'll definitely want to have a copy of the original appraisal to go along with the loan package so that whoever or whatever buys it, sees that you followed prudent underwriting guidelines in making that loan.
There are lots of important things there. That's going to do it for this episode. I want to thank you for sharing your time with me because I do appreciate it. This is the part where I ask for your honest rating and review over at iTunes, Google Podcast or whatever platform you're using. Also, keep a lookout for some more episodes of Ask A Private Lender to pop up here and on Facebook. Besides self-awareness, I wish you all safe and prosperous private lending. I hope everybody stays safe. I'll catch you on the next episode.