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ANALYSIS IN ACTION.

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Presentation on theme: "ANALYSIS IN ACTION."— Presentation transcript:

1 ANALYSIS IN ACTION

2 Welcome and Course Description
Page 3 Welcome to Analysis in Action, presented by McKissock LP. This course concentrates on analysis – the backbone of all appraisals. We will start with an extensive investigation of market analysis, complete with USPAP and regulatory guidelines, and examples. We will study market analysis for the URAR and the 1004 MC Addendum and look at some charting tools. Then we will concentrate on sales analysis; again with USPAP and regulatory requirements. Then we will focus on comparable sales selection, qualitative, and statistical analysis.

3 Seminar Objectives Page 5 Discuss requirements for market analysis by USPAP and various clients Complete the market analysis sections of the 1004 and 1004 MC report forms Employ analytical tools for better market analysis Explain practical applications Identify requirements for sales analysis by USPAP and various clients Complete the sales analysis sections of the 1004 report form Employ analytical tools for better sales analysis

4 Seminar Agenda USPAP requirements for market analysis
Fannie Mae and Freddie Mac requirements for market analysis FHA and VA requirements for market analysis ERC requirements for market analysis Market analysis in the 1004 and 1004MC forms Market analysis for private appraisals Excel charting functions

5 Seminar Agenda USPAP requirements for sales analysis
Fannie Mae and Freddie Mac requirements for sales analysis FHA and VA requirements for sales analysis ERC requirements for sales analysis Selecting comparable sales Qualitative analysis of sales Statistical analysis of sales

6 Announcements Break times and lunch Restroom locations Smoking areas
Be considerate of those near you Please silence your cell phone, pagers, etc. Attendance sheet Certificates and evaluation forms

7 Definitions Page 6 Analysis The separation of an intellectual or material whole into its constituent parts for individual study The study of such constituent parts and their interrelationships in making up a whole A spoken or written presentation of such study Source: American Heritage Dictionary

8 Synonyms Analysis Study Reasoning Opinion Judgment Interpretation
Page 6 Analysis Study Reasoning Opinion Judgment Interpretation Evaluation Source: Collins Thesaurus of the English Language What other synonyms are appropriate?

9 Definitions Page 6 Analyze to study or determine the nature and relationship of the parts of by analysis Source: Merriam Webster Dictionary to scrutinize information or data with the intention of identifying patterns, trends or anomalies to solve existing problems Source: Analysis implies a depth of work. It goes beyond a simple statement of fact or opinion.

10 Analysis is Required from appraisers What sets us apart
Your best friend The genesis of value opinion What it’s all about Anybody can put X’s into boxes. It takes an appraiser to perform an analysis of data. That’s what sets us apart!

11 Be An Analyzer Bunny You’ve got to really dig deep – and keep going and going…….

12 Definitions Page 7 Market A set of arrangements in which buyers and sellers are brought together through the price mechanism; the aggregate of possible buyers and sellers and the transactions between them. Source: Dictionary of Real Estate Appraisal, 5th Edition

13 Definitions Real Estate Market
Page 7 Real Estate Market Buyers and sellers of particular real estate and the transactions that occur among them. Source: Dictionary of Real Estate Appraisal, 5th Edition

14 Definitions Seller’s Market
Page 7 Seller’s Market An active market in which the sellers of available properties can obtain higher prices than those obtainable in the immediately preceding period; a market in which a few available properties are demanded at prevailing prices by many users and potential users. Source: Dictionary of Real Estate Appraisal, 5th Edition

15 Definitions Buyer’s Market
Page 7 Buyer’s Market A market in which buyers have the advantage; exists when market prices are relatively low due to an oversupply of property or reduced buyer demand. Source: Dictionary of Real Estate Appraisal, 5th Edition

16 Definitions Depressed Market
Page 7 Depressed Market A market in which a drop in demand is accompanied by a relative oversupply and a decline in prices. Source: Dictionary of Real Estate Appraisal, 5th Edition

17 Definitions Market Analysis
Page 7 Market Analysis A process for examining the demand for and supply of a property type and the geographic market area for that property type. Source: Dictionary of Real Estate Appraisal, 5th Edition This is an important term; note the definition focuses on supply, demand, property type, and geographic market area.

18 Definitions Market Area
Page 8 Market Area The area associated with a subject property that contains its direct competition. Source: Dictionary of Real Estate Appraisal, 5th Edition So, a market area is defined in terms of competition – wherever other properties are directly competing with a subject property for the favors of a typical purchaser.

19 Definitions Market Area Delineation
Page 8 Market Area Delineation The process of identifying the market area associated with the subject property. Source: Dictionary of Real Estate Appraisal, 5th Edition Who defines the market area? Why, the appraiser – of course. It’s different for every subject property.

20 Definitions Neighborhood
Page 8 Neighborhood A group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises. A developed residential super pad within a master planned community usually having a distinguishing name and entrance. Source: Dictionary of Real Estate Appraisal, 5th Edition

21 Definitions Neighborhood Analysis
Page 8 Neighborhood Analysis The objective analysis of observable and/or quantifiable data indicating discernible patterns of urban growth, structure, and change that may detract from or enhance property values; focuses on four sets of considerations that influence value: social, economic, governmental, and environmental factors. Source: Dictionary of Real Estate Appraisal, 5th Edition

22 USPAP STANDARD 4 - REAL PROPERTY APPRAISAL CONSULTING, DEVELOPMENT
Page 10 STANDARD 4 - REAL PROPERTY APPRAISAL CONSULTING, DEVELOPMENT In developing a real property appraisal consulting assignment, an appraiser must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete the research and analyses necessary to produce credible results. Source: Uniform Standards of Professional Appraisal Practice Let’s look at where USPAP calls for analyses to be done.

23 USPAP Definition of Appraisal Consulting from the 2012-2013 USPAP:
Page 10 Definition of Appraisal Consulting from the USPAP: APPRAISAL CONSULTING: the act or process of developing an analysis, recommendation, or opinion to solve a problem, where an opinion of value is a component of the analysis leading to the assignment results. Comment: An appraisal consulting assignment involves an opinion of value but does not have an appraisal or an appraisal review as its primary purpose. Source: Uniform Standards of Professional Appraisal Practice Note: The ASB has proposed the retirement of STANDARDS 4 and 5 for the USPAP. A similar proposal was made for the USPAP, but it was not adopted, and STANDARDS 4 and 5 were retained.

24 USPAP SCOPE OF WORK RULE
Page 11 USPAP SCOPE OF WORK RULE Comment: Scope of work includes, but is not limited to: the extent to which the property is identified; the extent to which tangible property is inspected; the type and extent of data researched; and the type and extent of analyses applied to arrive at opinions or conclusions. Source: Uniform Standards of Professional Appraisal Practice

25 USPAP Standards Rule 1-2 (c) (iv)
Page 11 Standards Rule 1-2 (c) (iv) if the opinion of value is to be based on non-market financing or financing with unusual conditions or incentives, the terms of such financing must be clearly identified and the appraiser’s opinion of their contributions to or negative influence on value must be developed by analysis of relevant market data; Source: Uniform Standards of Professional Appraisal Practice

26 USPAP Standards Rule 1-3 (a)
Page 11 Standards Rule 1-3 (a) identify and analyze the effect on use and value of existing land use regulations, reasonably probable modifications of such land use regulations, economic supply and demand, the physical adaptability of the real estate, and market area trends Source: Uniform Standards of Professional Appraisal Practice You can’t just state that the property conforms to current zoning – and be done with it.

27 USPAP Page 11 Standards Rule 1- 4 In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results. Source: Uniform Standards of Professional Appraisal Practice That’s a pretty broad statement – we need to analyze all information (in the whole world) that is necessary for credible results.

28 USPAP Standards Rule 1- 4(a)
Page 11 Standards Rule 1- 4(a) When a sales comparison approach is necessary for credible assignment results, an appraiser must analyze such comparable sales data as are available to indicate a value conclusion Source: Uniform Standards of Professional Appraisal Practice

29 USPAP Standards Rule 1- 4(b)
Page 12 USPAP Standards Rule 1- 4(b) When a cost approach is necessary for credible assignment results, an appraiser must: develop an opinion of site value by an appropriate appraisal method or technique analyze such comparable cost data as are available to estimate the cost new of the improvements (if any); and analyze such comparable data as are available to estimate the difference between the cost new and the present worth of the improvements (accrued depreciation). Source: Uniform Standards of Professional Appraisal Practice

30 USPAP Standards Rule 1- 4(c)
Page 12 USPAP Standards Rule 1- 4(c) When an income approach is necessary for credible assignment results, an appraiser must: analyze such comparable rental data as are available and/or the potential earnings capacity of the property to estimate the gross income potential of the property; analyze such comparable operating expense data as are available to estimate the operating expenses of the property; analyze such comparable data as are available to estimate rates of capitalization and/or rates of discount; Source: Uniform Standards of Professional Appraisal Practice

31 USPAP Standards Rule 1- 4(e)
Page 12 Standards Rule 1- 4(e) When analyzing the assemblage of the various estates or component parts of a property, an appraiser must analyze the effect on value, if any, of the assemblage. An appraiser must refrain from valuing the whole solely by adding together the individual values of the various estates or component parts. Source: Uniform Standards of Professional Appraisal Practice

32 USPAP Standards Rule 1- 4(f)
Page 13 Standards Rule 1- 4(f) When analyzing anticipated public or private improvements, located on or off the site, an appraiser must analyze the effect on value, if any, of such anticipated improvements to the extent they are reflected in market actions Source: Uniform Standards of Professional Appraisal Practice How do we do that? What type of information would be pertinent?

33 USPAP Standards Rule 1- 4(g)
Page 13 Standards Rule 1- 4(g) When personal property, trade fixtures, or intangible items are included in the appraisal, the appraiser must analyze the effect on value of such non-real property items. Source: Uniform Standards of Professional Appraisal Practice

34 Page 13 USPAP Standards Rule 1- 5 When the value opinion to be developed is market value, an appraiser must, if such information is available to the appraiser in the normal course of business: analyze all agreements of sale, options, and listings of the subject property current as of the effective date of the appraisal; and analyze all sales of the subject property that occurred within the three (3) years prior to the effective date of the appraisal. Source: Uniform Standards of Professional Appraisal Practice

35 USPAP Is this a proper analysis?
Page 13 Is this a proper analysis? “The subject property sold 11 months ago for $212,500.” No – that is a statement of fact. It is not an analysis. That would be a violation of USPAP. Source: Uniform Standards of Professional Appraisal Practice An analysis might include such information as to the type and amount of financing, number of days on the market, list to sales price ratio, and whether there were any unusual financing characteristics or sales concessions. What type of mortgage was it? Was it a conventional loan, FHA, or VA? Was it a short sale or a foreclosure? Or was it an arm’s-length transaction? Was any substantial personal property included?

36 USPAP Page 13 Standards Rule 1- 6 In developing a real property appraisal, an appraiser must: reconcile the quality and quantity of data available and analyzed within the approaches used; and (b) reconcile the applicability and relevance of the approaches, methods and techniques used to arrive at the value conclusion(s). Source: Uniform Standards of Professional Appraisal Practice

37 Fannie Mae Page 14 B , Requirements for the Appraisal Report (04/01/2009) Lenders must ensure that the appraisal report reflects a thorough investigation and analysis of the market value and provides the rationale for the appraiser’s opinion of the market value. Source: Fannie Mae Single Family 2011 Selling Guide

38 Fannie Mae B4-1.2-02, Objective and Unbiased Appraisals (04/01/2009)
Page 14 B , Objective and Unbiased Appraisals (04/01/2009) The lender must ensure that appraiser comments regarding unfavorable conditions—such as the existence of an adverse environmental or economic factor—also discuss how the condition affects the value and/or marketability of the property being appraised and explain how the condition was taken into consideration in the valuation process. In such cases, the appraiser’s analysis must reflect and include comparable sales that are similarly affected, whenever possible. Source: Fannie Mae Single Family 2011 Selling Guide

39 Fannie Mae Page 14 B , Appraisal Report Review: Trend of Neighborhood Property Values, Demand/Supply, and Marketing Time (10/30/2009) The appraiser’s analysis of a property must take into consideration all factors that affect value. Because Fannie Mae purchases mortgages in all markets, this is particularly important for market areas that are experiencing significant fluctuations in property values including submarkets for particular types of housing within the market area. Source: Fannie Mae Single Family 2011 Selling Guide

40 Definitions Submarket
Page 8 Submarket A division of a total market that reflects the preferences of a particular set of buyers and sellers, e.g., fast food restaurants as a submarket of the overall restaurant market. Source: Dictionary of Real Estate Appraisal, 5th Edition

41 Residential Market Analysis - On the URAR Form
Page 15

42 URAR Neighborhood Section
Page 15

43 URAR Housing Trends Page 16

44 Definitions Marketing Time
Page 9 Marketing Time An opinion of the amount of time it might take to sell a real or personal property interest at the concluded market value level during the period immediately after the effective date of an appraisal. Marketing time differs from exposure time, which is always presumed to precede the effective date of an appraisal. Source: Dictionary of Real Estate Appraisal, 5th Edition

45 URAR Housing Trends Page 16

46 Purpose of Analysis Page 16 The appraiser is to take that information and analyze it to determine if adjustments need to be made in the sales comparison grid, to reflect changes in market conditions since the date of sale of a comparable property. It says right on the URAR that the whole purpose of analyzing the market trends in the neighborhood is to decide if adjustments need to be made on that line in the sales grid and how much the adjustments need to be.

47 Definitions Market Conditions
Page 9 Market Conditions An element of comparison in the sales comparison approach; comparable properties can be adjusted for differences in the points in the real estate cycle at which the transactions occur. Sometimes called a time adjustment because the differences in dates of sale are often compared, although that usage can be misleading. Source: Dictionary of Real Estate Appraisal, 5th Edition

48 USPAP Standards Rule 1-3 (a)
Page 16 Standards Rule 1-3 (a) Comment: An appraiser must avoid making an unsupported assumption or premise about market area trends, effective age, and remaining life. Source: Uniform Standards of Professional Appraisal Practice

49 1004MC Page 17 The Market Conditions Addendum was created by Fannie Mae because they felt appraisers were not providing enough support and analysis for market conditions adjustments.

50 1004 MC Instructions Page 17 The appraiser must use the information required on this form as the basis for his or her conclusions, and must provide support for those conclusions, regarding housing trends and overall market conditions as reported in the Neighborhood section of the appraisal report form.

51 1004 MC Instructions Page 18 Sales and listings must be properties that compete with the subject property, determined by applying the criteria that would be used by a prospective buyer of the subject property. The appraiser must explain any anomalies in the data, such as seasonal markets, new construction, foreclosures, etc.

52 Inventory Analysis Page 18

53 Inventory Analysis Page 18 The “Inventory Analysis” section assists the appraiser in analyzing important supply and demand factors in order to reach a conclusion regarding housing trends and market conditions. When completing this section, the appraiser must include the comparable data that reflects the total pool of comparable properties from which a buyer may select a property in order to analyze the sales activity and the local housing supply. When asking for an analysis of the “total pool” of comparable properties, it sounds like Fannie Mae is talking about an analysis of the “market area”, not just the “neighborhood.”

54 Absorption Rate Page 19 One of the tools used to monitor these trends is the absorption rate. The absorption rate is the rate at which properties for sale have been or can be sold (marketed) within a given area. To determine the absorption rate, the appraiser divides the total number of settled sales by the time frame being analyzed. The months of housing supply is based on the total listings for the applicable period divided by the absorption rate.

55 Months of Housing Supply
Page 19 The months of housing supply is based on the total listings for the applicable period divided by the absorption rate.

56 Absorption Rate Example
Page 19 Example Step 1: Calculate the absorption rate. If there were 60 sales during a 6-month period (e.g., “Prior 7 – 12 Months” column), the absorption rate is 10 sales per month (60/6). Step 2: Calculate the months of housing supply. If there are 240 active listings, there is a 24-month supply of homes on the market (240 active sales/10 sales per month).

57 Medians and Trends Page 20 There are 4 lines of data fields that have grey backgrounds. “Fannie Mae recognizes that all of the requested data elements for analysis are not equally available in all markets. In some markets it may not be possible to retrieve the total number of comparable active listings from earlier periods. If this is the case, the appraiser must explain the attempt to obtain such information.”

58 Medians and Trends Page 20 “There may be markets in which the data is available in terms of an ‘average’ as opposed to a ‘median.’ In this case, the appraiser needs to note that his or her analysis has been based on an ‘average’ representation of the data. Regardless of whether all requested information is available, the appraiser must provide support for his or her conclusions regarding market trends and conditions.”

59 Median Vs. Mean Page 20 This table shows medians and means. They are different measures. For all of 2011, the Median sales price of an existing home in the U.S. was $166,100 and mean sale price was $214,000. They change at different rates as well. For 2011, the median sale price nationally declined 2.5% and the mean sale price declined 2.7 %. That’s pretty close – but look at the median sale price decline in the Midwest (7.9%) versus the mean sale price decline (8.7%).

60 Announcement SEL Page 21 In Form 1004MC, in order to provide the most accurate depiction of the “Months of Housing Supply” as of the effective date of the appraisal, the “Total # of Comparable Active Listings” should be based on a specific point in time. For example, when completing the “Current – 3 Months” column for “Total # of Comparable Active Listings”, the number should reflect the listings on the most recent date in the 3-month period (which is also the effective date of the appraisal), and not the cumulative number of listings for the entire 3-month time period.

61 Announcement SEL Page 21 Then, when completing the “Months of Housing Supply”, the number for the “Total # of Comparable Active Listings” is divided by the absorption rate, which provides an accurate depiction of the existing housing stock as of the effective date of the appraisal. (Using a cumulative number of listings during the “Current – 3 Month” time period may result in an artificially high number for the “Months of Housing Supply.”)

62 Announcement SEL Page 21 If data is available for the previous time periods, such as “Prior Months” and “Prior Months”, the “Total # of Comparable Active Listings” should be based on the most recent day in each of those time periods. For example, in the “Prior 4 – 6 Months” column, the “Total # of Comparable Active Listings” should reflect the listings on the last (most recent) day in that time period. Likewise, in the “Prior 7 – 12 Months”, the “Total # of Comparable Active Listings” should reflect the listings on the last (most recent) day in that time period.

63 Time Periods Is this a stable trend?
Page 22 Is this a stable trend? NO – because the first period is 6 months and the next two are each only 3 months

64 That’s why we have the absorption rate
Time Periods Page 22 That’s why we have the absorption rate

65 Overall Trends Everything in the left column is a GOOD thing
Page 22 Everything in the left column is a GOOD thing Everything in the right column is a BAD thing Some of the trends in the left column are increasing and some are declining – the same as in the right column

66 1004MC Page 23 There are limitations in the form in that you are only looking at the medians, or midpoints, of three separate time intervals (and one is longer than the others). Then you have to try to extrapolate trends from those three numbers.

67 Trend Line (Excel) Page 23
Here we took those 29 sales from the previous MC addendum and displayed them in an Excel spreadsheet with a calculated Trend Line. It only took a few minutes. It clearly shows that over the last 12 months, the market declined, bottomed out about 6 months ago, and is now on the rise. What a terrific support for any adjustments you might make for a change in market conditions. Add the Excel chart to your appraisal report. Later we will show you step by step how to create such a chart.

68 Seller Concessions Page 24 Some appraisers decline to make an adjustment for concessions if they are “typical in the market.” That is not the intent of Fannie Mae. The need to make negative dollar adjustments for sales and financing concessions and the amount of the adjustments to the comparable sales are not based on how typical the concessions might be for a segment of the market area.

69 Foreclosure Sales Page 24 The presence and extent of foreclosure/REO sales is worthy of comment when analyzing market data and must be reported on the form. The form also allows for the appraiser to summarize the data and provide other data analysis or additional information, such as analysis of pending sales, which over time can show a market trend.

70 Data Sources Page 25 Federal Housing Finance Agency
Standard and Poor’s/Case-Shiller National Association of REALTORS® HUD Datamap Local MLS Assessor’s records This is certainly not an all-inclusive list, but includes some of the more common sources for market data. Please note that the first three were mentioned in a Fannie Mae Announcement (07-22) that went to all lenders when declining markets were really becoming a problem. It said “Fannie Mae strongly urges lenders to implement processes and apply supplemental sources and tools to validate current housing trends and not rely solely on the information reflected in the appraisal.” Then it mentioned the first three sources above. You can bet that many lenders are still using those sources to check against what you say. If the FHFA data shows a declining market in your area and your local data shows otherwise, be prepared to develop a convincing case. It’s wise to watch those sources yourself and take that information into account in your final decision. We will cover those three sources in detail now.

71 Federal Housing Finance Agency
Page 25 FHFA is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the 12 Federal Home Loan Banks. It was created on July 30, 2008, when the President signed into law the Housing and Economic Recovery Act of In addition, this law combined the staffs of the Office of Federal Housing Enterprise Oversight (OFHEO), the Federal Housing Finance Board (FHFB), and the GSE mission office at the Department of Housing and Urban Development (HUD). You can go on their website and view their quarterly reports on house price appreciation or depreciation. Federal Housing Finance Agency

72 Federal Housing Finance Agency
Page 26 This chart gives you a vivid graphic representation of the data from the previous slide. You can quickly see where the housing market took a nose dive into negative territory in the beginning of 2007 and how it bottomed out in the 3rd quarter of 2008.

73 Federal Housing Finance Agency
Page 26 What transactions are covered in the HPI? The House Price Index is based on transactions involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. Only mortgage transactions on single-family properties are included. Conforming refers to a mortgage that both meets the underwriting guidelines of Fannie Mae or Freddie Mac and that does not exceed the conforming loan limit.

74 Federal Housing Finance Agency
Page 26 How is the HPI computed? The HPI is a weighted, repeat-sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties. This information is obtained by reviewing repeat mortgage transactions on single-family properties whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac. The Index uses Paired data Analysis.

75 Federal Housing Finance Agency
Page 27 You can even drill down to house price changes by state, on their website. Here the states are ranked in order from 1 to 50, and show the latest quarterly change plus 1 and 5 year performances. The last column on the right shows overall change since 1991. Note that over the last year in this chart (September 2010 to September 2011), only 2 states have shown a positive trend. Only three states have shown positive trends over the last 5 years. By the way, the top 6 performing states are all closely grouped in the Mountain West and High Plains.

76 Federal Housing Finance Agency
Page 28 This data is available and changes every quarter, on the FHFA website.

77 Federal Housing Finance Agency
Page 28 It is even possible to get the same data from over 300 MSAs. You can see here they are arranged alphabetically. Go on the website and check out your own area.

78 S&P/Case-Shiller Indices
Page 29 The S&P/Case-Shiller Home Price Indices is a service of Standard and Poor and measures the residential housing market, tracking changes in the value of the residential real estate market . Though it is widely quoted and utilized, it only measures data in 20 large metropolitan areas. Unless you are located in one of them, it will have little application to you and your appraisal work.

79 S&P/Case-Shiller Indices
Page 29 The methodology uses matched sale pairs for pre-existing homes. Home price data are gathered after that information becomes publicly available at local recording offices across the country. The S&P/Case-Shiller indices do not sample sale prices associated with new construction, condominiums, co-ops/apartments, multi-family dwellings, or other properties that cannot be identified as single-family. Here are some further limitations on this Index.

80 S&P/Case-Shiller Indices
Page 30 Here are the 20 cities involved.

81 National Association Of Realtors®
Page 30 The National Association of REALTORS® (NAR) is a goldmine of current and historical data for appraisers. Go on their website and check it out. Click on the link on the left side that says “Research.” Check on new information that comes out each month and quarter. Here is the same chart that we looked at earlier when we compared medians and means. At least it gives you national and regional trends. National Association of REALTORS®

82 National Association Of Realtors®
Page 30 Here is similar information that also includes data on condos and co-ops.

83 National Association Of Realtors®
Page 32 Here you can also drill down to price trends in your local MSA.

84 National Association Of Realtors®
Page 32 These are very valuable Local Market Reports that are available on the NAR website. If you are not a REALTOR®, you will have to register to be able to view them. It’s a very simple process that will only take a minute. You will have to provide a little basic information and then establish a username and password. These reports are not available for all locations. For example, there are only three listed here for Colorado. However, if you work in one of these areas, it has great info. We chose Colorado Springs to illustrate the kind of data you can find. It can be valuable (even if they don’t know how to spell Colorado). Look at the following slides. National Association of REALTORS®

85 National Association Of Realtors®
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86 National Association Of Realtors®
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93 AFFORDABILITY National Association Of Realtors® Page 37
National Association of REALTORS®

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95 National Association Of Realtors®
Page 38 National Association of REALTORS®

96 HUD Datamap Page 38 www.hud.gov/datamap
HUD Data Maps are a recent endeavor by HUD to provide data, advice, and recommendations to HUD underwriting staff, lenders, developers, finance agencies and state and local governments. Of particular interest to appraisers are their market data. Click on the link at the right of their homepage where it says Market at a Glance. That will bring up what you see on the next slide.

97 HUD Datamap Page 39 For this example, we chose Bangor, Maine from the pull down list that popped up. They have data for MSAs and counties throughout the country and most is updated monthly.

98 HUD Datamap Page 40 Here is employment data and trends.

99 HUD Datamap Page 40 This is a concise summary of economic, population, and housing trends in the Bangor area. What a nice resource for any appraisal report!

100 HUD Datamap Page 41 Here is data on vacancy rates and building permits. There is much more. Check out info for your local area.

101 HUD.GOV Page 41 Now back to the HUD.Gov home page. If you click on the tab at the top that says “Topic Areas”, it pulls down a large list of resources. Click on the link at the right that says Housing Research and Sets. That will take you to the next page.

102 HUD.GOV Page 42 Here are some other topics that are worth exploring. Click on the one at the bottom.

103 HUD.GOV Page 42 These are quarterly issues that illustrate many helpful topic areas. Happy Exploring!

104 Sale/Resale Page 43 We know that one of the best ways to establish a price trend is to find sales and resales of the same home. If nothing else has changed physically or functionally with the home – then any change in price can be ascribed to a change in market conditions. Keep your eyes peeled and start a file for any sale/resale data you find.

105 Sale/Resale Page 43 Example A property sold 8 months ago for $224,000 and just sold yesterday for $206,000. $206,000 ÷ $224,000 = .92 or 92%. The property lost 8% of its value in 8 months or an average decline of 1% per month.

106 Sale/Resale Page 43 Example 2 I am appraising a house in December. I don’t have any sales and resales of the same property to rely on. I have 2 comparable sales that sold in the same neighborhood in June. Should I make an adjustment for market conditions – and if so, how much? I research all the sales in that neighborhood and 2 comparable neighborhoods. There were 12 sales in June at an average price of $142,700. There have been 15 sales in the last 30 days in these 3 neighborhoods at an average price of $148,200. What should I do? $148,200 ÷ $142,700 = 1.04 or a 4% increase $148,200 - $142,700 = $5,500 This may not be as good a method as using sales and resales of the same home – but sometimes they are not available. This method uses grouped sales and resales of similar properties. It is some evidence of market behavior – and it may be the best evidence you have.

107 Sales Array Sale Date Sale Price January 12 $137,500 February 27
Page 44 I live in a small town with not a lot of sales data. I can’t find any sales and resales. I have 6 possible comps for an assignment. I just array them according to time of sale. Sale Date Sale Price January 12 $137,500 February 27 $136,000 April 4 $138,000 June 12 $134,000 August 5 $132,000 September 24 $130,000 Does this data show some kind of trend? Do I need to make some kind of market conditions adjustment?

108 Market Conditions Analysis
Page 44 Here is another example. I do my research and find 22 sales in the past 12 months in my subject neighborhood; ranging from $178,000 to $192,000. Look at the listings!

109 Excel 2010 Tools Page 45 I have 22 sales of very similar properties in the same subdivision that I want to analyze. The first step is simply to enter the dates and sales prices in the first two columns of an Excel spreadsheet.

110 Highlight the data columns
Excel 2010 Tools Page 46 Click on Insert 2 Click on Scatter 3 Highlight the data columns 1

111 Excel 2010 Tools Page 47 Excel instantly plots these sales on a scatter diagram. The dates run along the bottom (horizontal) axis and the prices are plotted on the vertical axis. It is easy to see the relationship . Are prices increasing or decreasing?

112 Click Anywhere on the chart
Excel 2010 Tools Page 47 Click on Layout 2 Click Anywhere on the chart 1 Click on Trendline 3 Let’s plot this change more exactly.

113 Excel 2010 Tools Page 48 Click on Linear

114 Excel 2010 Tools Page 49 Now Excel has created a linear trendline based on a calculation of the means of all the observations. It does a regression analysis using a formula based on the method of least squares of the average deviation. This plots the average increase in price over time. It shows a straight line trend. But the same data can be used to make other analyses. Let’s look at the next slide and go a step further.

115 Excel 2010 Tools Page 50 Go back and Click on More Trendline Options

116 Excel 2010 Tools Page 51 Click on Polynomial

117 Excel 2010 Tools Page 52 Now, we have a more descriptive line. The sale prices were going up at a pretty steady rate at the beginning, but are tailing off in the last 6 months or so. They are still going up, but at a decreasing rate. Excel provides measures of hot well a model fits the data. One of these is R-squared, which can be shown by double-clicking on the trendline and then clicking “Display R-squared value on chart” from the Options menu. The closer the R-squared value is to 1.0, the better the fit.

118 FHA – ML Page 53 The purpose of the appraisal is to provide the lender/client with an accurate, and adequately supported, opinion of market value. It is the appraiser's responsibility to determine whether a property being appraised is located in a declining market. The neighborhood section of each property specific appraisal form contains a housing trends section where the appraiser marks a box indicating property values are increasing, stable, or declining. Whichever box is selected, the appraiser is certifying that he or she has performed an objective analysis of quantifiable data supporting the observations made.

119 FHA – ML Page 53 If a property is located in a declining market, the appraiser must provide an explanation in the "Market Conditions" section of the appraisal report that includes relevant information in support of the conclusions relating to trends in property values, demand/supply, and marketing time. The appraiser must also provide a description of the prevalence and impact of sales and financing concessions and/or down payment assistance in the subject's market area. Other areas of discussion may include days on market, list-to-sale price ratios, and/or financing availability.

120 FHA – – APPX D Page 53 Mark the appropriate marketing time – the typical length of time a property similar to the subject property would have to stay on the market before being sold at a price near its market value. FHA has their own definition of marketing time, which is a little different.

121 FHA – – APPX D Page 53 Mark the appropriate demand/supply trend. To determine the equilibrium status of supply and demand in the neighborhood, compare the number of houses sold to the number of houses listed for sale in a recent time period. The similarity or difference between the number of houses sold and listed, not the absolute numbers, should determine the demand/supply level. This is similar to some of the instructions later found in the Market Conditions Addendum.

122 FHA – – APPX D Page 54 Market Conditions (including support for the above conclusions): Provide relevant information in support of conclusions relating to trends in property values, demand/supply, and marketing time. Provide a description of the prevalence and impact of sales and financing concessions and/or down payment assistance in the subject’s market area. Other areas of discussion may include days on market, list-to-sale price ratios, and/or financing availability.

123 VA LENDERS HANDBOOK

124 VA Lenders Handbook Ch. 11, 8-c: Housing Supply and Demand
Page 55 VA Lenders Handbook VA LENDERS HANDBOOK Ch. 11, 8-c: Housing Supply and Demand In every case, the appraiser should: Consider the supply and demand for available housing in the subject market area, and Report, either in the “Neighborhood” section of the URAR or on an addendum, the average listing price-to-sale price ratio for the subject market area. Professional judgment must be used to estimate that ratio if it cannot be determined from available data sources.

125 VA Lenders Handbook Ch. 11, 8-d: Marketing Time and Trend
Page 55 VA LENDERS HANDBOOK Ch. 11, 8-d: Marketing Time and Trend In every case, the appraiser should: Consider the marketing time trend (increasing or decreasing) in the subject market area, and Report, either in the “Neighborhood” section of the URAR or on an addendum, the extent of increase or decrease in the average marketing time (listing period) in that market area. For example, “In the last 3 months, the listing period in the subject’s market area decreased from 180 to 90 days.”

126 VA Lenders Handbook Ch. 11, 8-e: Sales Listings and Contract Offers
Page 55 VA Lenders Handbook VA LENDERS HANDBOOK Ch. 11, 8-e: Sales Listings and Contract Offers In every case, the appraiser should: Analyze sales listings, contract offers, and unsettled sales to determine if market conditions changed between the date each comparable sold and the date of the subject property appraisal. This is especially important in markets with rapidly increasing or decreasing values. If the subject property is in a new subdivision, the analysis should include the builder’s closed sales, sales in competitive subdivisions, and sales of similar existing properties.

127 VA Lenders Handbook Page 56 If a sales listing and/or contract offers addendum is submitted: It should provide all of the following information regarding competitive listings or verifiable, bona fide contract offerings considered the most similar and proximate to the subject: The information usually found in a Multiple Listing Service (MLS) entry or other listing. How long each property has been on the market (total time listed). Any change in the listing price of each property (if known). A short statement comparing the property to the subject. Contract offerings are more desirable than listings.

128 VA Lenders Handbook Page 56 If a sales listing and/or contract offers addendum is submitted: It should provide all of the following information regarding competitive listings or verifiable, bona fide contract offerings considered the most similar and proximate to the subject: Any new construction contract must clearly identify all optional items and variations from the basic house type and any sales/financing concession included in the sales price. Listings should be properly identified and may include a legible copy of an MLS entry. Although not required, it may be helpful to make adjustments or otherwise use a sales comparison analysis grid.

129 VA Lenders Handbook Ch. 11, 8-e: Sales Listings and Contract Offers
Page 56 VA Lenders Handbook VA LENDERS HANDBOOK Ch. 11, 8-e: Sales Listings and Contract Offers In every case, the appraiser should: Certify, either in the “Neighborhood” section of the URAR or on an addendum: “I have considered relevant competitive listings/contract offerings in performing this appraisal, and any trend indicated by that data is supported by the listing/offering information included in this report.” Provide a listings/offers addendum if a significant market transition is indicated in the “Neighborhood” section due to changes in employment opportunity, housing supply/demand, average marketing time, seller concessions, etc.

130 Worldwide ERC® Appraisal Report
Page 57 Here is the Neighborhood section from the ERC form. They recognize the difference between neighborhood and market area. They have two different sections; Neighborhood Analysis and Market Trends Analysis. They make it clear that in their Market Trends Analysis section, the appraiser may use different data and analyze sales from a larger market area, than just the immediate neighborhood.

131 Worldwide ERC® Appraisal Report
Page 58 This form provides probably the best venue for properly analyzing trends in both the neighborhood and market area. Read carefully the instructions at the top as to how to define the market area (which they define as the market segment).

132 Worldwide ERC® Appraisal Report
Page 58

133 Worldwide ERC® Appraisal Report
Page 59 The ERC form also makes you focus on competing properties – not just ones that have already sold and closed. Here you list all the pertinent factors of competing listings and then make a qualitative rating at the bottom – stating whether each of these properties is superior, similar, or inferior to the subject property. This is all part of a proper and cogent analysis.

134 AI REPORTS™ Summary Appraisal Report
Page 59 AI Reports are produced by the Appraisal Institute but are available to all appraisers. You probably already have them in your appraisal software forms program. Here is where you complete a market area analysis (in addition to the previous neighborhood analysis). There is plenty of room for a narrative description.

135 RESIDENTIAL SALES ANALYSIS
Page 60 In the first part we concentrated on market analysis. From here on we will focus on sales analysis. TOOLS STRATEGIES

136 USPAP Standards Rule 1- 4(a)
Page 60 Standards Rule 1- 4(a) When a sales comparison approach is necessary for credible assignment results, an appraiser must analyze such comparable sales data as are available to indicate a value conclusion. Source: Uniform Standards of Professional Appraisal Practice

137 USPAP Standards Rule 2-2(b)(viii)
Page 60 Standards Rule 2-2(b)(viii) Summarize the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions, and conclusions; exclusion of the sales comparison approach, cost approach, or income approach must be explained; Comment: A Summary Appraisal Report must include sufficient information to indicate that the appraiser complied with the requirements of STANDARD 1. The amount of detail required will vary with the significance of the information to the appraisal. Source: Uniform Standards of Professional Appraisal Practice

138 USPAP Standards Rule 2-2(b)(viii)
Page 60 Standards Rule 2-2(b)(viii) The appraiser must provide sufficient information to enable the client and intended users to understand the rationale for the opinions and conclusions, including reconciliation of the data and approaches, in accordance with Standards Rule 1-6. Source: Uniform Standards of Professional Appraisal Practice

139 USPAP Standards Rule 2-2(b)(viii)
Page 61 Standards Rule 2-2(b)(viii) When reporting an opinion of market value, a summary of the results of analyzing the subject sales, options, and listings in accordance with Standards Rule 1-5 is required. If such information is unobtainable, a statement on the efforts undertaken by the appraiser to obtain the information is required. If such information is irrelevant, a statement acknowledging the existence of the information and citing its lack of relevance is required. Source: Uniform Standards of Professional Appraisal Practice

140 Fannie Mae Announcement 2010-09
Page 62 Appraiser Selection Criteria  Lenders are reminded that appraisers must have the requisite knowledge to perform a professional quality appraisal for the specific geographical location and particular property types.

141 Fannie Mae Announcement 2010-09
Page 62 Appraiser Selection Criteria  The use of an appraiser who has: Appropriate knowledge of specific geographical markets Access to the appropriate data sources Experience in appraising specific property types within those markets will help to ensure that valuations are accurate and that appraisal practices are appropriate

142 Fannie Mae Announcement 2010-09
Page 62 Appraiser Selection Criteria  Although USPAP allows an appraiser who does not have the appropriate knowledge and experience to accept an appraisal assignment by providing procedures with which the appraiser can complete the assignment, Fannie Mae requires that lenders use only appraisers who have the appropriate knowledge and experience and does not allow the USPAP flexibility.

143 Fannie Mae Announcement 2010-09
Page 62 Appraiser Selection Criteria  Consequently, the Selling Guide has been updated to state that appraisers who lack the requisite knowledge, experience, and access to appropriate data must not be utilized.

144 Fannie Mae Announcement 2010-09
Page 62 Appraiser Selection Criteria  The Selling Guide has also been updated with regard to the lender’s use of third-party vendors such as appraisal management companies (AMC) to clarify that: Neither the HVCC nor Fannie Mae requires the use of a third-party vendor Lenders are ultimately responsible for representations and warranties related to the value, condition, and marketability of the subject property Lenders must hold the AMC responsible for complying with Fannie Mae’s requirements

145 Fannie Mae Announcement 2010-09
Page 63 Communication under the HVCC Lenders are reminded that excessive sale concessions can artificially inflate the sales price of a property, which can then lead to an inflated market value. Particular attention should be given to unusual sale or financing concessions to ensure that they are properly accounted for in the appraisal report.

146 Fannie Mae Announcement 2010-09
Page 63 Treatment of Personal Property Whether an item is real or personal property is generally determined by the law of the jurisdiction where the property is located. A professional appraiser who has the knowledge, experience, and geographical competence to complete the appraisal assignment must also possess the expertise to identify personal property items in the appraisal.

147 Fannie Mae 2011 Selling Guide
Page 64 B , General Information on Appraisal Requirements (12/01/2010) The lender is responsible for: The accuracy and completeness of the appraisal and its assessment of the marketability of the property Selecting the appraiser Underwriting the completed appraisal report to determine whether the subject property presents adequate collateral for the mortgage Continually evaluating the quality of the appraiser’s work through normal underwriting review of all appraisal reports and spot-check field review of appraisals as part of its quality control system

148 Fannie Mae 2011 Selling Guide
Page 64 B , General Information on Appraisal Requirements (12/01/2010) The lender is responsible for: Ensuring that the appraiser uses sound reasoning and provides evidence to support the methodology used for developing the value opinion, particularly in cases that are not covered by Fannie Mae guidelines Ensuring that the appraiser provides an accurate opinion, an adequately supported value, and an accurate description of the property

149 Fannie Mae 2011 Selling Guide
Page 65 B , Examples of Unacceptable Appraisal Practices (12/01/2010) The following are examples of unacceptable appraisal practices: Development of and/or reporting an opinion of market value that is not supportable by market data or is misleading Development of a valuation conclusion based on factors that local, state, or federal law designate as discriminatory, and thus, prohibited Misrepresentation of the physical characteristics of the subject property, improvements, or comparable sales Failure to comment on negative factors with respect to the subject neighborhood, the subject property, or proximity of the subject property to adverse influences

150 Fannie Mae 2011 Selling Guide
Page 65 B , Examples of Unacceptable Appraisal Practices (12/01/2010) The following are examples of unacceptable appraisal practices: Selection and use of inappropriate comparable sales Failure to use comparable sales that are the most locationally and physically similar to the subject property Creation of comparable sales by combining vacant land sales with the contract purchase price of a home that has been built or will be built on the land Use of comparable sales in the valuation process when the appraiser has not personally inspected the exterior of the comparable property

151 Fannie Mae 2011 Selling Guide
Page 65 B , Examples of Unacceptable Appraisal Practices (12/01/2010) The following are examples of unacceptable appraisal practices: Use of adjustments to comparable sales that do not reflect market reaction to the differences between the subject property and the comparable sales Not supporting adjustments in the sales comparison approach Failure to make adjustments when they are clearly indicated Use of data—particularly comparable sales data—provided by parties who have a financial interest in the sale or in the financing of the subject property without the appraiser’s verification of the information from a disinterested source

152 Fannie Mae 2011 Selling Guide
Page 65 B , Examples of Unacceptable Appraisal Practices (12/01/2010) The following are examples of unacceptable appraisal practices: Development of and/or reporting an appraisal in a manner that is inconsistent with the requirements of the Uniform Standards of Professional Appraisal Practice in place as of the effective date of the appraisal Failure to address and note adverse factors or conditions that affect value or marketability with respect to the neighborhood, site, or improvements

153 Fannie Mae 2011 Selling Guide
Page 66 B , Lender Disclosure of Information to Appraisers (10/30/2009) The lender must disclose to the appraiser any and all information about the subject property of which it is aware, if the information could affect either the marketability of the property or the appraiser’s opinion of the market value of the property

154 Fannie Mae 2011 Selling Guide
Page 66 B , Lender Disclosure of Information to Appraisers (10/30/2009) The lender must provide the appraiser with all appropriate financing data and sales concessions for the subject property that will be, or have been, granted by anyone associated with the transaction. In addition, the lender must provide the appraiser with a copy of the complete, ratified sales contract and all addenda for the property that is to be appraised, therefore ensuring that the appraiser has been given the opportunity to consider the financing and sales concessions in the transaction and their effect on value. If you don’t get this stuff – ask for it! Fannie Mae says the lender must give it you.

155 Fannie Mae 2011 Selling Guide
Page 66 B , Lender Disclosure of Information to Appraisers (10/30/2009) If the lender is aware of additional pertinent information that is not included in the sales contract, the lender must inform the appraiser. If the sales contract is amended during the process, the lender must provide the updated contract to the appraiser.

156 Fannie Mae 2011 Selling Guide
Page 67 B , Lender Disclosure of Information to Appraisers (10/30/2009) Information That Must Be Disclosed: Settlement charges Loan fees or charges   Discounts to the sales price   Payment of condo or PUD fees   Interest rate buydowns Below-market-rate financing Credits or refunds of borrower expenses   Absorption of monthly payments   Assignment of rent payments   Non-realty items included in the transaction   Any environmental hazard information

157 Fannie Mae 2011 Selling Guide
Page 67 B , Special Appraisal Considerations for Properties Affected by Environmental Hazards (04/01/2009) Environmental Hazards: Eligible Properties Fannie Mae purchases mortgage loans secured by properties affected by environmental hazards if: The effect of the hazard is measurable through an analysis of comparable market data as of the effective date of the appraisal, and The appraiser reflects in the appraisal report any adverse effect that the hazard has on the value and marketability of the subject property or indicates that the comparable market data reveals no buyer resistance to the hazard.

158 Fannie Mae 2011 Selling Guide
Page 68 B , Manufactured Housing Appraisal Requirements (04/01/2009) Manufactured Housing Appraiser Qualifications The valuation principles for appraising manufactured homes are essentially the same as for other types of residential property. However, not all appraisers are knowledgeable and experienced about the unique construction process, as well as the manufacturers’ and federal, state, and local requirements for both construction and installation.

159 Fannie Mae 2011 Selling Guide
Page 68 B , Manufactured Housing Appraisal Requirements (04/01/2009) Manufactured Housing Appraiser Qualifications Fannie Mae recommends that the lender review the appraiser’s education and experience as well as sample manufactured home appraisals. The appraiser should be knowledgeable about the local manufactured home market and the unique construction process for manufactured homes, and have access to appropriate data sources in order to render an opinion of value for the manufactured home.

160 Fannie Mae 2011 Selling Guide
Page 68 B , Manufactured Housing Appraisal Requirements (04/01/2009) Fannie Mae’s appraisal report forms require appraisers to develop an opinion of value solely for the real property as completed consisting of: The manufactured home Site improvements The land on which the home is situated

161 Fannie Mae 2011 Selling Guide
Page 68 B , Manufactured Housing Appraisal Requirements (04/01/2009) Fannie Mae requires market-based property valuations for manufactured homes demonstrated by a well-developed sales comparison approach to value that is further supported by the cost approach to value.

162 Fannie Mae 2011 Selling Guide
Page 68 B , Manufactured Housing Appraisal Requirements (04/01/2009) An appraiser who is unable to locate sales of manufactured homes that are truly comparable to the subject property may decide that it is appropriate to use either older sales of similar manufactured homes or sales of similar manufactured homes that are located in a competing market so that he or she can establish a baseline for the “sales comparison analysis” and determine sound adjustments to reflect the differences between the comparable sales that are available and the subject property.

163 Fannie Mae 2011 Selling Guide
Page 69 B , Manufactured Housing Appraisal Requirements (04/01/2009) The appraiser must analyze the contract and manufacturer’s invoice for new homes and provide a summary in the appraisal report. Analysis and summary go hand in hand. Anytime you perform an analysis, you must provide a summary of your reasoning. It is not appropriate to just state your conclusions.

164 Fannie Mae 2011 Selling Guide
Page 69 B , Manufactured Housing Appraisal Requirements (04/01/2009) The appraiser must use a minimum of two comparable sales of similar manufactured homes   The appraiser may use either site-built housing or a different type of factory-built housing as the third comparable sale

165 Fannie Mae 2011 Selling Guide
Page 69 B , Manufactured Housing Appraisal Requirements (04/01/2009) When site-built housing or a different type of factory-built housing is used as the third comparable, the appraiser must: Explain why site-built housing or a different type of factory-built housing is being used for the third comparable sale Make (and support) appropriate adjustments in the appraisal report

166 Fannie Mae 2011 Selling Guide
Page 69 B , Manufactured Housing Appraisal Requirements (04/01/2009) When site-built housing or a different type of factory-built housing is used as the third comparable: If the appraiser is unable to develop a reliable appraisal based on at least two comparable sales of similar manufactured homes, the mortgage is not eligible for delivery to Fannie Mae

167 Fannie Mae 2011 Selling Guide
Page 69 B , Manufactured Housing Appraisal Requirements (04/01/2009) Traditional appraisal data sources do not provide enough quality manufactured home data for the appraiser to develop a supportable and well-documented manufactured home appraisal. While sources such as MLS and public records are important, appraisers must develop other data sources such as manufactured home dealers and construction companies/builders experienced in the installation of manufactured homes.

168 Fannie Mae 2011 Selling Guide
What sources could be used?

169 Fannie Mae 2011 Selling Guide
Page 70 B , Special Appraisal Considerations for Modular, Prefabricated, Panelized, or Sectional Housing (04/01/2009) Fannie Mae does not have minimum requirements for width, size, roof pitch, or any other specific construction detail for modular homes. Each such home must have sufficient square footage and room dimensions to be acceptable to typical purchasers in the subject market area.

170 Fannie Mae 2011 Selling Guide
Page 70 B , Special Appraisal Considerations for Modular, Prefabricated, Panelized, or Sectional Housing (04/01/2009) The appraisal must address both the marketability and comparability of modular homes The appraiser must include the most appropriate comparable sales to support the opinion of value for the subject property

171 Fannie Mae 2011 Selling Guide
Page 70 B , Special Appraisal Considerations for Properties Subject to Leasehold Interests (04/01/2009) Appraisers must develop a thorough, clear, and detailed narrative that identifies the terms, restrictions, and conditions regarding lease agreements or ground leases Appraisers must include this information as an addendum to the appraisal report

172 Fannie Mae 2011 Selling Guide
Page70 B , Special Appraisal Considerations for Properties Subject to Leasehold Interests (04/01/2009) Appraisers must discuss the effect, if any, the lease agreement or ground lease has on the value and marketability of the subject property   The appraiser’s sales comparison approach to value must use comparable property sales that have similar leasehold interests

173 Fannie Mae 2011 Selling Guide
Page 70 B , Special Appraisal Considerations for Properties Subject to Leasehold Interests (04/01/2009) When there are sufficient numbers of closed comparable property sales with similar leasehold interests available, the appraiser should: Use the property sales in the analysis of market value of the leasehold estate for the subject property Report the property sales in the “sales comparison analysis” grid on the applicable appraisal report form

174 Fannie Mae 2011 Selling Guide
Page 70 B , Special Appraisal Considerations for Properties Subject to Leasehold Interests (04/01/2009) When there are sufficient numbers of closed comparable property sales with similar leasehold interests available, the appraiser should: If comparable sales with the same lease terms and restrictions are not available, appraisers may use sales of similar properties with different lease terms or, if necessary, sales of similar properties that were appraised as fee simple estates

175 Fannie Mae 2011 Selling Guide
Page 70 B , Special Appraisal Considerations for Properties Subject to Leasehold Interests (04/01/2009) When there are sufficient numbers of closed comparable property sales with similar leasehold interests available, the appraiser should: Appraisers must explain why the use of these sales is appropriate, and make appropriate adjustments on the “sales comparison analysis” grid to reflect the market reaction to the different lease terms or property rights appraised

176 Fannie Mae 2011 Selling Guide
Page 71 B , Special Appraisal Considerations for Units in Co-op Projects (04/01/2009) Appraisers must use reliable sources to obtain data on the co-op project, the individual subject unit, and the comparable properties Appraisers must indicate the name of each source in the appraisal report or in an addendum to the appraisal report

177 Fannie Mae 2011 Selling Guide
Page 71 B , Special Appraisal Considerations for Units in Co-op Projects (04/01/2009) For comparison purposes, appraisers should indicate in the “sales comparison analysis” adjustment grid the dollar amount of the monthly assessments for each of the comparable sales   Appraisers must report the value of the co-op interest, excluding its pro rata share of the blanket mortgage(s) Note: This value reflects the market value for the co-op interest of the unit.

178 Fannie Mae 2011 Selling Guide
Page 71 B , Special Appraisal Considerations for Units in Co-op Projects (04/01/2009) Appraisers must comment on the acceptance of housing co-ops in the market area. The degree of acceptance generally is reflected in the availability of similar comparable sales data for co-op units. If there is limited market acceptance of the co-op form of ownership, or if co-op forms of ownership are relatively new in the market area, appraisers must address any effect that has on the marketability and value of the unit that is being appraised.

179 Fannie Mae 2011 Selling Guide
Page 71 B , Special Appraisal Considerations for Units in Co-op Projects (04/01/2009) If submission of more than three required comparable sales is appropriate to support the market value opinion, appraisers must submit other comparable sales—including contracts for sale—as additional supporting data Comparable sales must be from similar types of projects—townhouses, mid-rise, high-rise, etc.—that have similar common amenities and recreational facilities  

180 Fannie Mae 2011 Selling Guide
Page 72 B , Special Appraisal Considerations for Units in Co-op Projects (04/01/2009) Appraisers should use sales of co-op units as comparables However, appraisers may use condo units as comparables sales if co-op unit sales are not available, provided the appraiser explains why those types of comparables were used Appraisers must adjust the condo comparables to reflect the reaction of the market to the co-op unit when there is a preference for condo ownership in the subject market area  

181 Fannie Mae 2011 Selling Guide
Page 72 B , Special Appraisal Considerations for Units in Co-op Projects (04/01/2009) If the subject property is a unit in a new or recently converted co-op project, appraisers should select as comparables - one closed or settled sale from the subject project (if one is available) - two closed or settled sales from outside of the project If closed or settled sales are not available in the subject project, appraisers must use comparable sales from competing projects.

182 Fannie Mae 2011 Selling Guide
Page 72 B , Special Appraisal Considerations for Units in Co-op Projects (04/01/2009) When the subject property is a unit in an established co-op project—one that has resale activity—appraisers should use the following as comparables: - two closed or settled sales from the subject project (if available) - one closed or settled sale from a competing project

183 Fannie Mae 2011 Selling Guide
Page 72 B , Appraisal Report Review: Site Analysis Parameters (10/30/2009) Site Analysis Parameters The subject property site should generally conform to and be acceptable in the market area in terms of size, shape, and topography The appraisal must include the actual size of the site and not a hypothetical portion of the site for the subject property

184 Fannie Mae 2011 Selling Guide
Page 73 B , Appraisal Report Review: Subject Property Zoning (12/01/2010) Lenders must ensure that the specific zoning class has been reported in the appraisal, along with a general statement as to what the zoning permits. The appraisal must include a statement that the subject property presents a legal conforming use, a legal non-conforming (grandfathered) use, or an illegal use under the zoning regulations; or that there is no local zoning.

185 Fannie Mae 2011 Selling Guide
Page 73 B , Appraisal Report Review: Subject Property Zoning (12/01/2010) Permissible Use of Land Fannie Mae does not purchase or securitize mortgage loans on properties if the improvements do not constitute a legally permissible use of the land.

186 Fannie Mae 2011 Selling Guide
Page 73 B , Appraisal Report Review: Subject Property Zoning (12/01/2010) Will a one- or two-unit property that includes an illegal additional unit or accessory apartment (sometimes referred to as a mother-in-law, mother-daughter, or granny unit) be eligible for purchase? Yes, but the appraisal report must demonstrate that the improvements are typical for the market through an analysis of at least three comparable properties that have the same illegal use.

187 Fannie Mae 2011 Selling Guide
Page 73 B , Appraisal Report Review: Subject Property Zoning (12/01/2010) Highest and Best Use If the current improvements clearly do not represent the highest and best use of the site as an improved site, the appraiser must so indicate on the appraisal report. Fannie Mae will not purchase or securitize a mortgage that does not represent the highest and best use of the site.

188 Fannie Mae 2011 Selling Guide
Page 74 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) Sources of Comparable Market Data Data and/or verification source(s) for each comparable sale must be reported on the appraisal report form. Single or multiple sources for data and verifications are acceptable provided the appraiser adequately verifies the comparable sales.

189 Fannie Mae 2011 Selling Guide
Page 74 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) Sources of Comparable Market Data Examples of data sources include, but are not limited to, a multiple listing service, deed records, tax records, realtors, builders, appraisers, appraisers’ files, and the Internet. The appraiser must state the specific data source and refrain from using broad categories, such as “public records.” Data source(s) must be reliable sources for the area where the subject property is located.

190 Fannie Mae 2011 Selling Guide
Page 74 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) Information used to verify the data is obtained from a “verification source.” Verification sources include, but are not limited to, the buyer, seller, listing agent, selling agent, and closing documents in certain situations. Regardless of the source(s) used, there must be sufficient data to understand the conditions of sale, existence of financing concessions, physical characteristics of the subject property, and whether it was an arm’s-length transaction.

191 Fannie Mae 2011 Selling Guide
Page 74 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) When comparable sales data are provided by parties that have a financial interest in either the sale or financing of the subject property, the appraiser must verify the data with a party that does not have a financial interest in the subject transaction.

192 Fannie Mae 2011 Selling Guide
Page 74 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) Selection of Comparable Sales The appraiser must perform a neighborhood analysis in order to identify the area that is subject to the same influences as the property being appraised (based on the actions of typical buyers in the market area). The results of a neighborhood analysis enable the appraiser not only to identify the factors that influence the value of properties in the market area, but also to define the area from which to select the market data needed to perform a sales comparison analysis.

193 Fannie Mae 2011 Selling Guide
Page 75 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) Selection of Comparable Sales The appraiser is responsible for determining which comparables are most appropriate for the assignment. Fannie Mae expects the appraiser to account for all factors that affect value when completing the analysis.

194 Fannie Mae 2011 Selling Guide
Page 75 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) Selection of Comparable Sales For example, if the appraiser believes a foreclosure sale or a short sale is an appropriate comparable, then the appraiser must identify and consider any differences from the subject property, such as the condition of the property and whether any stigma has been associated with it. The appraiser cannot assume it is equal to the subject property.

195 Fannie Mae 2011 Selling Guide
Page 75 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) When appraising new construction, the appraiser may need to rely solely on the builder of the property he or she is appraising to provide comparable sales data in accordance with the requirements stated in Properties in New or Recently Converted Subdivisions, Condos, or PUDs, below, as this data may not yet be available through typical data sources, such as public records or multiple listing services. In this scenario, it is acceptable for the appraiser to verify the transaction of the comparable sale by viewing a copy of the HUD-1 Settlement Statement from the builder’s file.

196 Fannie Mae 2011 Selling Guide
Page 75 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) By using the HUD-1 to verify a recent sale of new construction not yet available through other data sources, an appraiser may be better able to comply with the requirement that he or she must provide at least one comparable sale from the subject’s subdivision or project. The appraiser must also select one comparable sale from outside the subject subdivision or project and one comparable sale from either inside or outside the subject subdivision or project, provided it is a good indicator of value for the subject property.

197 Fannie Mae 2011 Selling Guide
Page 75 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) Both of these sales must be verifiable from reliable data sources, other than the builder. The appraiser may also provide additional recent comparable builder sales from competing projects that are not presently available through traditional data sources as long as the appraiser verifies the sale through the applicable HUD-1. Additionally, the appraisal must include discussion and analysis of sales concessions and upgrades for the subject property relative to concessions and upgrades for each builder sale.

198 Fannie Mae 2011 Selling Guide
Page 76 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) General requirements for selecting comparable sales: Influences that may affect value based on market evidence — such as closed sales, contract sales, and offerings or listings of the most comparable properties for sale in the market area, market studies, etc.— must be researched, analyzed, and considered in the appraisal report. A minimum of three comparable sales must be reported as part of the sales comparison approach to value. More than three comparable sales may be submitted to support the opinion of market value provided at least three are actual settled or closed sales.

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Page 76 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) General requirements for selecting comparable sales: It is preferable for the appraiser to provide comparables from the subject’s neighborhood; however, Fannie Mae does allow for the use of comparable sales that are located in competing neighborhoods, as these may simply be the best comparables available and the most appropriate for the appraiser’s analysis. If this situation arises, the appraiser must not expand the neighborhood boundaries just to encompass the comparables selected. The appraiser must indicate the comparables are from a competing neighborhood and address any differences that exist.

200 Fannie Mae 2011 Selling Guide
Page 76 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) General requirements for selecting comparable sales: The appraiser must also provide an explanation as to why he or she used the specific comparable sales in the appraisal report and include a discussion of how a competing neighborhood is comparable to the subject neighborhood Comparable sales that have been settled or closed within the last 12 months should be used in the appraisal. Older comparable sales that are the best indicator of value for the subject property can be used if appropriate.

201 Fannie Mae 2011 Selling Guide
Page 76 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) General requirements for selecting comparable sales: Comparable sales that are more than six months old must be accompanied by an appraiser explanation for use. For example, if the subject property is located in a rural area that has minimal sales activity, the appraiser may not be able to locate three truly comparable sales that sold in the last 12 months. In this case, the appraiser may use older comparable sales as long as he or she explains why they are being used.

202 Fannie Mae 2011 Selling Guide
Page 77 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) General requirements for selecting comparable sales: The subject property can be used as a fourth comparable sale or as supporting data if it was previously sold and closed or settled. Contract offerings and current listings can be used as supporting data if appropriate. Rural properties often have large lot sizes and rural locations can be relatively undeveloped; therefore, there may be a shortage (or absence) of recent truly comparable sales in the immediate vicinity of a subject property that is in a rural location.

203 Fannie Mae 2011 Selling Guide
Page 77 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) General requirements for selecting comparable sales: Comparable sales located a considerable distance from the subject property can be used if they represent the best indicator of value for the subject property. The appraisal must include an explanation of why the particular comparables were selected.

204 Fannie Mae 2011 Selling Guide
Page 77 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) Properties in Established Subdivisions, Condos, or PUDs Comparable sales from within the same subdivision or project as the subject property must be used if the subdivision or project has resale activity. Resale activity from within the subdivision or project is the best indicator of value for properties in that subdivision or project. Note: Use of comparable properties located outside of the established subject neighborhood must be explained in the appraisal analysis.

205 Fannie Mae 2011 Selling Guide
Page 77 B , Appraisal Report Review: Sales Comparison Approach (11/04/2010) Properties in New or Recently Converted Subdivisions, Condos, or PUDs The subject property must be compared to other properties in its general market area as well as to properties within the subject subdivision or project. Except for units in a non-gut rehabilitation condo conversion project, the appraiser must select one comparable sale from the subject subdivision or project and one comparable sale from outside the subject subdivision or project. The third comparable sale can be from inside or outside of the subject subdivision or project, provided it is a good indicator of value for the subject property.

206 Fannie Mae 2011 Selling Guide
Page 78 B , Appraisal Report Review: Lender Review of the Adjustment Grid (10/30/2009) Lenders must thoroughly review the “sales comparison analysis” adjustment grid. Ensure that there are no calculation errors in the dollar adjustments. Scan the appraisal for substantial adjustments. They raise questions about the validity of using a specific comparable sale. Ensure that substantial adjustments are addressed in the appraisal.

207 Fannie Mae 2011 Selling Guide
Page 78 B , Appraisal Report Review: Lender Review of the Adjustment Grid (10/30/2009) Evaluating Sales or Financing Concessions The dollar amount of sales or financing concessions paid by the seller must be reported for the comparable sales if the information is reasonably available.   Appraisers must provide the sales and financing concession information that was available and verified for the comparable sales.

208 Fannie Mae 2011 Selling Guide
Page 78 B , Appraisal Report Review: Lender Review of the Adjustment Grid (10/30/2009) Evaluating Sales or Financing Concessions If information is not available because of legal restrictions or other disclosure-related problems, the appraiser must explain why the information is not available. Note: Fannie Mae will not accept an explanation that indicates that the appraiser did not make an effort to verify the information.

209 Fannie Mae 2011 Selling Guide
Page 78 B , Appraisal Report Review: Lender Review of the Adjustment Grid (10/30/2009) Evaluating Sales or Financing Concessions Adjustments based on dollar-for-dollar deductions that are equal to the cost of the concessions to the seller as a strict cash equivalency approach would dictate are not appropriate.  

210 Fannie Mae 2011 Selling Guide
Page 78 B , Appraisal Report Review: Lender Review of the Adjustment Grid (10/30/2009) Evaluating Sales or Financing Concessions Adjustments must reflect the difference between what the comparables actually sold for with the sales concessions and what they would have sold for without the concessions so that the dollar amount of the adjustments will approximate the reaction of the market to the concessions.

211 Fannie Mae 2011 Selling Guide
Page 78 B , Appraisal Report Review: Lender Review of the Adjustment Grid (10/30/2009) Evaluating Sales or Financing Concessions Positive adjustments for sales or financing concessions are not acceptable. For example, if local common practice or law results in virtually all of the property sellers in the market area paying a 1% loan origination fee for the purchaser, and a property seller in that market did not pay any loan fees or concessions for the purchaser, the sale would be considered as a cash equivalent sale in that market.

212 Fannie Mae 2011 Selling Guide
Page 79 B , Appraisal Report Review: Lender Review of the Adjustment Grid (10/30/2009) Evaluating Sales or Financing Concessions The appraiser must recognize comparable sales that sold for all cash or with cash equivalent financing and use them as comparable sales if they are the best indicators of value for the subject property. Such sales also can be useful to the appraiser in determining those costs that are normally paid by sellers as the result of common practice or law in the market area.

213 Fannie Mae 2011 Selling Guide
Page 79 B , Appraisal Report Review: Lender Review of the Adjustment Grid (10/30/2009) Evaluating Sales or Financing Concessions Sales or financing data for comparable sales are generally available. Sales or financing data should be obtained from parties associated with the comparable transaction, such as the broker, buyer or seller, or a reliable data source. The need to make negative dollar adjustments for sales and financing concessions and the amount of the adjustments to the comparable sales are not based on how typical the concessions might be for a segment of the market area; large sales concessions can be relatively typical in a particular segment of the market and still result in sale prices that reflect more than value of the real estate.

214 Freddie Mac 2011 Seller/Servicer Guide
Page 80 44.6: Unacceptable appraisal or inspection practices (10/09/09) Inclusion of inaccurate or incomplete data about the subject property, the neighborhood, or any comparable sale used in the appraisal analysis Failure to report and/or consider any apparent factor that has an adverse effect on the value and/or marketability of the subject property

215 Freddie Mac 2011 Seller/Servicer Guide
Page 80 44.6: Unacceptable appraisal or inspection practices (10/09/09) Reliance in the appraisal analysis on comparable sales that were not personally inspected by the appraiser. A personal inspection requires at least a visual inspection of the exterior of the comparable property. Reliance in any appraisal analysis on inappropriate comparable sales or the failure to use comparable sales that are more similar to or nearer to the subject property without adequate explanation.

216 Freddie Mac 2011 Seller/Servicer Guide
Page 80 44.6: Unacceptable appraisal or inspection practices (10/09/09) Use of comparable sales data provided by interested parties to the transaction, without verification by a disinterested party The use of inordinate adjustments for differences between the subject property and the comparable sales that do not reflect the market's reaction to such differences, or the failure to make proper adjustments when they are clearly necessary

217 Freddie Mac 2011 Seller/Servicer Guide
Page 80 44.15: Property description and analysis (10/15/10) If the appraiser has selected comparables from a competing neighborhood, the appraiser must identify the competing neighborhood in this section or an appropriate addendum and describe why it is comparable to the subject neighborhood. The appraiser should explain why the competing neighborhood is a more relevant source of comparables than the subject neighborhood, as of the effective date of the appraisal.

218 Freddie Mac 2011 Seller/Servicer Guide
Page 80 44.15: Property description and analysis (10/15/10) The utilities serving the subject property must meet community standards. In addition, the comparable sales should have utilities similar to the subject property. When differences in utilities exist between the subject property and the comparable sales, any adjustments or lack of adjustments made to the comparable sales for significant differences must be explained in the comments area or on an attached addendum. In addition, the appraisal must evaluate the effect these differences have on the subject property's value or marketability.

219 Freddie Mac 2011 Seller/Servicer Guide
Page 81 44.15: Property description and analysis (10/15/10) For properties that have recently undergone rehabilitation or renovation, the appraiser must list the changes made and provide photographs of the rehabilitation or renovation

220 Freddie Mac 2011 Seller/Servicer Guide
Page 81 44.15: Property description and analysis (10/15/10) Sales comparison approach Freddie Mac considers the sales comparison approach to be the most reliable approach to value. Therefore, a seller must place primary emphasis on this approach when reviewing and judging the acceptability of each appraisal. Each comparable sale must be analyzed for similarities and differences between it and the subject property. The appraiser must make appropriate adjustments for differences, and indicate the dollar amount of the adjustments to reflect the value of the differences to the market. Comparable sales must be adjusted to the subject property, except for sales and financing concessions that must be adjusted to the market at the time of the sale.

221 Freddie Mac 2011 Seller/Servicer Guide
Page 81 44.15: Property description and analysis (10/15/10) Sales comparison approach The appraiser must independently verify and analyze all pending and recent sales of comparable properties, report how the sales were verified and whether concessions were granted. At least three verified, closed (settled) sales of comparable properties must be analyzed and market-based adjustments made for significant differences between the comparable sales and the subject property

222 Freddie Mac 2011 Seller/Servicer Guide
Page 81 44.15: Property description and analysis (10/15/10) Sales comparison approach Sales or financing concessions are offered by interested parties to the transaction (e.g., the builder, developer, property seller or real estate agent). Because the effect of concessions on sale prices can vary with the type and amount of the concessions, any adjustments to comparable sales must be based on the market reaction to them. The appraiser should provide comparable sales that sold without concessions to support the adjustments made in determining the market reaction to the concessions.

223 Freddie Mac 2011 Seller/Servicer Guide
Page 81 44.15: Property description and analysis (10/15/10) Sales comparison approach Adjustments may not be based solely on dollar-for-dollar deductions equal to the dollar value of the concessions. If comparable sales without concessions are not available, adjustments to comparable sales with concessions must reflect the differences between what the comparable sales actually sold for with the concessions and what they would have sold for without the concessions. The appraiser's opinion of value must reflect the value of the subject property without the concessions. The appraiser must also provide the dollar value of the concessions as a comment in the appraisal report.

224 Freddie Mac 2011 Seller/Servicer Guide
Page 82 44.15: Property description and analysis (10/15/10) Sales comparison approach The three comparable sales listed in the report must be: Similar to and located near the subject property Properties with closing (settlement) dates that occurred before the effective date of the appraisal of the subject property Recently sold. If the sale of a comparable property occurred more than 12 months before the date of the appraisal, the appraiser must justify in the appraisal report the use of the comparable property

225 Freddie Mac 2011 Seller/Servicer Guide
Page 82 44.15: Property description and analysis (10/15/10) Sales comparison approach Additional comparables, in the form of closed sales, sales under contract, or current listings, may be used to support the appraiser's adjustments and conclusions, address changes in the market, support the use of older comparables in stable neighborhoods or support the use of distant or less similar comparables in rural areas. Additional comparables are not always needed, but may contribute significantly to understanding unusual situations, such as limited markets, neighborhoods with little turnover of property, and areas with a variety of distinct property types.

226 Freddie Mac 2011 Seller/Servicer Guide
Page 82 44.15: Property description and analysis (10/15/10) Sales comparison approach Comparables may be taken from a competing neighborhood if: The appraiser has established that the neighborhoods are comparable and compete for the same buyers, and Comparables taken from the competing neighborhood are better indicators of current market trends in the subject neighborhood than the existing comparables available in the subject neighborhood

227 Freddie Mac 2011 Seller/Servicer Guide
Page 83 44.15: Property description and analysis (10/15/10) Sales comparison approach For properties located in existing established subdivisions, Planned Unit Developments, or ground lease communities and for units in existing Condominium Projects, the appraiser may use three comparable sales from within that subject project or subdivision. However, if the subject property is in a controlled market (such as a new subdivision or project, a newly-converted project, or an area where the property seller owns a substantial number of units), at least one comparable sale must be outside the influence of the developer, builder, or property seller.

228 Freddie Mac 2011 Seller/Servicer Guide
Page 83 44.15: Property description and analysis (10/15/10) Sales comparison approach Resales from within the subject project or subdivision may be used to meet this requirement. When comparable sales from outside the subject project or subdivision are used, they must also be outside the influence of the subject property's developer, builder, or property seller.

229 Fannie Mae – Freddie Mac Repurchases
SELLER’S GUIDE

230 Fannie Mae – Freddie Mac Repurchases
Page 84 Secondary market lenders usually require lenders who sell mortgages to them to include a warranty of compliance with the Seller’s Guide. Failure to comply can cause the lender who sold the loan to the secondary market owner of the mortgage to repurchase it at face value. Many secondary market lenders are forcing the originating institution to buy the loan back. If the deficiency in the portfolio involves an appraisal, the originating lender may look to the appraiser for responsibility. Source: This is from Bulletin Underwriting Changes

231 Fannie Mae – Freddie Mac Repurchases
Page 84 Many appraisers are reporting their work has shifted from appraisal to appraisal review Forensic review work is now a large percentage of appraisal assignments

232 Fannie Mae – Freddie Mac Repurchases
Page 84 Forensic review appraisals Review appraisal reports where fraud or appraisal ethical lapses are suspected Usually differ from normal review work where the standard of evidence is different If the review appraiser knows there will be court testimony required on the assignment, the level of research, verification, and inspection will usually need to be higher

233 Fannie Mae – Freddie Mac Repurchases
Page 85 Many appraisers are complaining about Conflicting data, opinions, and underwriting loans in markets with substantial troubled properties Some appraisers are classifying a two-tiered market First market includes the “retail – owner occupant” buyer Second market is the “investor – owner” who buys the property as an investment and therefore requires a profit

234 Short Sales, REO Sales, and the MC Form
Page 85 Including or not including REO sales depends upon who is most likely to buy the subject property if an opinion of market value is how much the sellers can sell the property for if they put a sign in the yard Owner occupant—REO sales may not be the best choice to reflect that property’s value Investor—If comparable sales were sold to investors, those sales should reflect the buyer’s requirements of a profit and therefore would be valid

235 Short Sales, REO Sales, and the MC Form
Page 85 An appraiser has to discern who the likely buyer for the subject is and then find comparable sales, listings, or pending sales that reflect that buyer’s motivations. This is true in all appraisals, not just houses in troubled markets. Second, if the subject is in fair to poor condition, the likely buyer may not be an owner-occupant because of the cost of repairs and the time required.

236 FHA Handbook 4150.2, CHG 1 FHA HANDBOOK
Page 86 FHA HANDBOOK 4-6, A., 1.: SALES DATA VS. COMPARABLE SALE (05/99) Any transaction in the market is a sale, but not all sales are comparable. Consider the type of transaction and physical characteristics of any sale before considering the sale a comparable.

237 FHA Handbook 4150.2, CHG 1 FHA HANDBOOK
Page 86 FHA HANDBOOK 4-6, A., 2.: SELECTION OF COMPARABLE SALES FOR ANALYSIS (05/99) Identify the relevant market based on the area in which the property competes and the forces/dynamics that affect the comparable sale properties. This is necessary in relating the sales to the subject.

238 FHA Handbook 4150.2, CHG 1 FHA HANDBOOK
Page 86 FHA HANDBOOK 4-6, A., 2.: SELECTION OF COMPARABLE SALES FOR ANALYSIS (05/99) Consider the amount of time that has elapsed between the sale date and the effective date of the appraisal. Sales data should not exceed six months between the date of the appraisal and the sale date of the comparable, and must not exceed twelve months. An explanation is required for sale dates in excess of six months.

239 FHA Handbook 4150.2, CHG 1 FHA HANDBOOK
Page 86 FHA HANDBOOK 4-6, A., 2.: SELECTION OF COMPARABLE SALES FOR ANALYSIS (05/99) Consider the quality and quantity of data available for the given assignment. A lack of quality data in a market may force reliance on data in a similar market -- not necessarily the subject's immediate market area. However, clearly explain and justify any sales from outside the subject's immediate market area.

240 FHA Handbook , CHG 1 Page 86 4-6, A., 3.: EXCLUDED SALES TRANSACTIONS (05/99) When using conventional sales data, the appraiser must be aware of the terms of the sale and adjust the conventional sales price to reflect any unusual terms. For example, there are sales that must be excluded; however, some transactions may be included but adjusted for factors such as below-market financing to provide a cash equivalent sales price.

241 FHA Handbook , CHG 1 Page 87 4-6, A., 4.: CURRENT OFFERINGS AND LISTINGS ANALYSIS (05/99) Using these types of sales is discouraged. However, under certain slow market conditions or in markets with rapidly increasing pricing, it may be acceptable to include properties offered for sale. Proceed with caution when analyzing and adjusting these offerings. Recognize the inherent negotiability in price between an offering and a consummated sale. Clearly label these comparables as offering, listing, under agreement, etc., but present them as additional comparable data only.

242 FHA Handbook 4150.2, CHG 1 4-6, A., 5.: SALES IN ESCROW (05/99)
Page 87 4-6, A., 5.: SALES IN ESCROW (05/99) If a bona fide transaction is imminent, sales in escrow are considered to be reliable indications of market pricing. Exercise care in identifying the planned date of closure for the sale and any extraneous circumstances that may impede the closing on the projected date.

243 FHA Handbook 4150.2, CHG 1 4-6, A., 6.: DISTRESSED SALES (05/99)
Page 87 4-6, A., 6.: DISTRESSED SALES (05/99) Using distressed sales is strongly discouraged because of the special circumstances surrounding these transactions.

244 FHA Handbook 4150.2, CHG 1 4-6, A., 7.: RELOCATION SALES (05/99)
Page 87 4-6, A., 7.: RELOCATION SALES (05/99) Using relocation sales from a corporate seller at a below-market value is strongly discouraged when the purchaser is the relocation company because of the unusual circumstances surrounding these transactions. Both distressed and relocation sales are strongly discouraged because they fail to meet the test of "market value“, particularly item No. 1: "The buyer and seller are typically motivated." However, these sales can exceed normal market transaction and affect market values.

245 FHA Handbook , CHG 1 Page 88 4-6, A., 8.: CONFIRMATION OF SALES AND TRANSACTION INFORMATION (05/99) The appraiser must verify all market and comparable information used in the appraisal process and is accountable for any information presented as "fact" used to develop the subject property's value estimate. Verification ensures that the information is accurate and meaningful and provides the appraiser with a firm understanding of market motivations and trends. The goal of the verification process is to ensure that only information that accurately reflects current market conditions and trends is presented and that meaningful conclusions can be reached from this information. FHA makes the strongest statement and definition of verification of anybody.

246 FHA Handbook , CHG 1 Page 88 4-6, A., 8.: CONFIRMATION OF SALES AND TRANSACTION INFORMATION (05/99) During the verification process, it is necessary for the appraiser to gain an understanding of the motivations surrounding the sale in order to: Determine if the sale was arm's-length and not distressed Understand current market conditions that influence value

247 FHA Handbook , CHG 1 Page 88 4-6, A., 8.: CONFIRMATION OF SALES AND TRANSACTION INFORMATION (05/99) Whenever possible, interview a party to the sale to determine the expectations and motivations for purchasing the property. Also, determine whether significant capital expenditures funded by the seller were made shortly after the transaction occurred. If so, determine whether the expenditure needs to be added back into the sale price to reflect the actual conditions surrounding the sale.

248 FHA Handbook , CHG 1 Page 88 4-6, A., 8.: CONFIRMATION OF SALES AND TRANSACTION INFORMATION (05/99) The appraiser must verify sale information with the buyer, the seller, or one of their representatives (broker, lender, lawyer, etc.). If the sale cannot be verified with someone who has first-hand knowledge of the transaction, public records must be used. However, the appraiser must clearly state how the sale was verified and to what extent. The appraiser should not use or rely heavily on any sale that was not verified with an involved party or one of their representatives because concessions have become more common in the market.

249 FHA Handbook , CHG 1 Page 89 4-6, B., 1.: SUPPORT FOR ADJUSTMENTS (06/99) Adjustments must be supported by the market. The appraiser must use caution in developing adjustments; not all differences between the sale properties and the subject property are recognized as price-influencing factors in the marketplace. Only those factors that are accepted as value-influencing factors warrant adjustments.

250 VA LENDERS HANDBOOK

251 VA Lender’s Handbook Page 90 Ch. 11, 7: Selection and Analysis of Comparable Sales The appraiser must select the three best closed comparable sales available and properly adjust the sales price of each comparable sale for market-recognized differences between it and the subject property. The goal is to obtain a VA value estimate that does not exceed the price at which similar properties can be purchased in the current market. The appraiser must adequately explain any reliance on sales that are not truly comparable to the subject. Sales listings, contract offers, and unsettled sales must not be used as comparables.

252 VA Lender’s Handbook Page 90 Ch. 11, 7: Selection and Analysis of Comparable Sales Comparable sales should preferably exhibit a narrow price range. The appraiser must adequately explain a wide range in the sales prices of comparables before or after adjustment. A single data source is adequate if it provides quality sales data verified by closed transactions. Sales data provided by a party to the sale or financing of the subject property must be verified by a secondary data source or a party without an interest in the transaction

253 VA Lender’s Handbook Page 90 Ch. 11, 7: Selection and Analysis of Comparable Sales Comparable sales should be recent sales, typically within 6 months and generally not more than 12 months old. In some markets, sales over 6 months old may be considered outdated. Note: The appraiser must adequately explain the use of sales over 12 months old.

254 VA Lender’s Handbook Page 90 Ch. 11, 7: Selection and Analysis of Comparable Sales The appraiser must adequately explain any reliance on sales located either: Further from the subject than similar recent comparable sales readily available in the subject neighborhood, or Outside of the subject's market area. Note: In some rural areas, comparable sales may be 5, 10, or 20 miles away from the subject property and still be within the subject’s immediate market area.

255 VA Lender’s Handbook Page 91 Ch. 11, 7: Selection and Analysis of Comparable Sales Generally, good comparables require minimal adjustment for individual feature differences and a minimal total net adjustment. The appraiser must adequately explain large adjustments. Adjustments based on some factor other than market reaction, such as builder costs for materials, project development, etc., are not generally acceptable.

256 VA Lender’s Handbook Ch. 11, 8: Other Market Analysis Considerations
Page 91 Ch. 11, 8: Other Market Analysis Considerations The following market analysis considerations are provided as a reminder of VA appraisal expectations and as an aid in development of the appraisal report. Reporting each consideration separate from the requirements of the appraisal report form is optional, unless time adjustments are used in the report

257 VA Lender’s Handbook Ch. 11, 8-b: Sales Or Financing Concessions
Page 91 Ch. 11, 8-b: Sales Or Financing Concessions The appraiser should report: In the “Neighborhood” section of the Uniform Residential Appraisal Report (URAR) or on an addendum, the prevalence of sales or financing concessions (for example, interest rate buy-downs, inclusion of non-realty items in the transaction, seller payment of any buyer closing costs, etc.); and If any comparable sale involved concessions, the effect of the concessions on the sales price of the comparable should be noted. In doing so, the appraiser should consider: – that the effect of financing/sales concessions can vary in different locales

258 ERC Form Page 4 Page 92 The items in the second box deal with historic and current market trends. The items in the third box analyze forecasted or future trends. In the last section, you are to coordinate the information developed in the historic trends and current factors to analyze and develop any market change adjustments that you will later make on page 5 in the Sales Comparison Section. Interestingly, most of the information in lines 3-7 is covered in the new 1004MC Market Conditions addendum – even though the ERC was last updated in 2003.

259 ERC Form Page 4 Page 93 This section is called Market Trends Analysis. It is an analysis of three competing properties that are currently listed for sale and in direct competition with the subject property in the mind of a typical buyer. Most items are similar to items listed in the Sales Comparison Grid of the URAR. Changes are noted above. Listing prices are to be noted, as compared to sales prices.

260 ERC Form Page 4 Page 94 Here we get to analyze and explain differences between the subject property and the three competing listings. The Reconciliation of Market Trends section is to support the use of the forecasting adjustment in the Sales Comparison Analysis on the next page. Then, at the bottom, a competitive list price range for the subject property is developed.

261 Comparable Selection Page 95 When you choose comparable sales, what are the three most important things you look for?

262 What is the most important feature you look for first?
Comparable Selection Page 95 What is the most important feature you look for first?

263 Comparable Selection What if your subject: is a 2-bedroom house?
Page 95 What if your subject: is a 2-bedroom house? has 10 acres? is new? is in the best school district? has 2 units? is in a flood zone?

264 Comparable Selection What if your subject: is a condo? is a ranch?
Page 95 What if your subject: is a condo? is a ranch? is a 2-story colonial? is a “handyman’s special”? is a cabin on a lake? is a green home?

265 Comparable Selection Can a comparable sale be sold over one year ago?
Page 95 Can a comparable sale be sold over one year ago? Must a comparable sale have the same highest and best use as the subject property? Must a comparable sale have the same zoning?

266 Selection of Comparable Sales
Page 96 First – delineate the market area. Market area is defined as: The area associated with a subject property that contains its direct competition. Market area delineation is defined as: The process of identifying the market area associated with the subject property.

267 Market Areas Market area
Page 96 Market area The geographic or locational delineation of the market for a specific category of real estate, i.e., the area in which alternative, similar properties effectively compete with the subject property in the minds of probable, potential purchasers and users.” Source: The Appraisal of Real Estate, 13th Edition

268 Market Areas Page 98 Market areas are defined by a combination of factors – e.g. physical features, the demographic and socioeconomic characteristics of the residents or tenants, the condition of the improvements (age, upkeep, ownership and vacancy rates), and land use trends. Source: The Appraisal of Real Estate, 13th Edition

269 Selection of Comparable Sales
Page 96 Selection of appropriate comparable sales is impacted by: The competency of the appraiser The availability of verifiable sales data Ethical standards (USPAP) Client standards (Fannie Mae, FHA, VA, ERC, private clients, etc.)

270 Selection of Comparable Sales
Page 97 URAR Certification 7 says: I selected and used comparable sales that are locationally, physically, and functionally the most similar to the subject property.

271 Bracketing Sales Do you need to bracket sales?
Page 97 Do you need to bracket sales? Bracketing is defined as: A process in which an appraiser determines a probable range of values for a property by applying comparative analysis techniques to data such as a group of sales. The array of comparable sales may be divided into three groups—those superior to the subject, those similar to the subject, and those inferior to the subject. The sale prices reflected by the sales requiring downward adjustment and those requiring upward adjustment refine the probable range of values for the subject and identify a value range (i.e., a bracket) in which the final value opinion will fall.

272 Bracketing Sales Strengths include:
Page 97 Strengths include: Can be used to support a value opinion in the mid-range Adjustments tend to move in both directions – reducing the spread of the adjustments When data is plentiful, this is the preferred method

273 Bracketing Sales Weaknesses include:
Page 97 Weaknesses include: May not be possible if data is limited May result in forced and inaccurate results May force the appraiser to use sales that would not be considered appropriate May result in omitting better sales May result in a misleading opinion of value

274 FHA – ML 94-3 (1994) Page 98 In selecting comparables, the bracketing method must be used. Ideally, one of the comparables should be a little larger (200 sq. ft. to 300 sq. ft.); another, a little smaller; and the third should be approximately the same size (generally within a hundred square feet of the subject). DO NOT SELECT COMPARABLES BY SALES PRICE. All adjustments must be extracted from the market. No adjustment should be made unless it has a material effect on value.

275 FHA – – Appendix D (2006) Page 98 In selecting comparables, use the bracketing method. It is advisable to bracket sales using both dwelling size and sales price whenever possible. If bracketing is not possible, the appraiser should explain why.

276 Comparable Adjustments
Page 98 Do you need to make an adjustment for: A swimming pool? A 2-car garage versus a 1-car? A 1-car garage versus a carport? A one-car garage versus no garage?

277 Comparable Adjustments
Page 98 Which is most important? Number of adjustments made Size of adjustments made Number of plusses versus number of minuses Total gross adjustments Total net adjustments Absolute amount of adjustments

278 Do you have to make quantitative adjustments?
Comparable Adjustments Do you have to make quantitative adjustments? WHY

279 APPRAISAL USPAP defines an appraisal as:
Page 99 USPAP defines an appraisal as: the act or process of developing an opinion of value; an opinion of value. Comment: An appraisal must be numerically expressed as a specific amount, as a range of numbers, or as a relationship (e.g., not more than, not less than) to a previous value opinion or numerical benchmark (e.g., assessed value, collateral value).

280 Comparative Analysis Page 99 Comparative analysis is defined as: The process in which a value indication is derived in the sales comparison approach. Comparative analysis may employ quantitative or qualitative analysis, either separately or in combination. Source: The Dictionary of Real Estate Appraisal, Fifth Edition

281 Quantitative Adjustment
Page 99 Quantitative adjustment is defined as: In the sales comparison approach, the process of making numerical adjustments to the sales prices of comparable properties, including data analysis techniques (paired data analysis, grouped data analysis, and secondary data analysis), statistical analysis, graphic analysis, trend analysis, cost analysis (cost-to-cure, depreciated cost), and capitalization of rent differences; usually precedes qualitative analysis. Source: The Dictionary of Real Estate Appraisal, Fifth Edition

282 Qualitative Analysis Page 100 Qualitative analysis is defined as: The process of accounting for differences (such as between comparable properties and the subject property) that are not quantified; may be combined with quantitative analysis. Source: The Dictionary of Real Estate Appraisal, Fifth Edition

283 Qualitative Data Page 100 Qualitative data are defined as: Data that are based on subjective measures, where the data tend to fall into nominal or ordinal categories; usually represented in the form of words. For example, a characteristic like curb appeal may indeed affect market value but may be difficult to quantify numerically. Also referred to as categorical data. Source: The Dictionary of Real Estate Appraisal, Fifth Edition

284 Relative Comparison Analysis
Page 100 Relative comparison analysis is defined as: A qualitative technique for analyzing comparable sales; used to determine whether the characteristics of a comparable property are inferior, superior, or similar to those of the subject property. Source: The Dictionary of Real Estate Appraisal, Fifth Edition

285 Relative Comparison Analysis Sale Rating Sale Price 3 Superior
Page 101 Sale Rating Sale Price 3 Superior $248,500 1 $246,000 4 Similar $242,000 5 $239,000 2 Inferior $235,000 6 $231,000 What do you think the subject is worth?

286 Ranking Analysis Page 101 Ranking analysis is defined as: An ordinal technique for analyzing data, commonly used in the analysis of comparable sales; a variant of relative comparison analysis in which comparable sales are arrayed in descending or ascending order of desirability and each is analyzed to determine its comparability to the subject property. Source: The Dictionary of Real Estate Appraisal, Fifth Edition

287 Ranking Analysis Sale SF Sales Price 1 2,485 $181,500 2 2,350 $178,000
2,285 $175,000 4 2,200 $173,000 Subject ? 5 2,140 $171,000 6 2,100 $170,000 7 2,080 $168,000 1,950 $165,000 What do you think the subject is worth?

288 Ranking Analysis Page 102 Data could be ranked in ascending or descending order by: Sales price Price per square foot Date of sale Lot size GLA Number of rooms, bedrooms, baths, etc.

289 Quantitative Analysis
Page 102 Quantitative Analysis tools include: Paired Data Analysis Grouped Data Analysis Statistical analysis - Graphic analysis - Simple linear regression analysis - Multiple linear regression analysis - Automated Valuation Models

290 Computer-Aided Appraisal Software
Page 103 To get started you pay for your CompCruncher training- you will go through two full days of training and be eligible to be certified at the end of the second day. The cost is $699. Then, each report you use costs $25 to $30. It does not produce an appraisal report, nor is it an AVM. It is meant to compete against BPO’s and is useful in review work. The appraiser determines the neighborhood. The result is what Compcruncher calls a Collateral Valuation Report.

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300 Thanks for coming! I hope you enjoyed the course, and if you have any questions, please don’t hesitate to call McKissock at


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