1. Chapter 5
Reporting
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2. Chapter Objectives
Upon completion of this chapter, the participant will be able to:
Select the appropriate reporting avenue appropriate in an assignment of a two- to four-unit or multi-family property
Recognize Fannie Mae guidelines and integral obligations applying to the use of the Fannie Mae/Freddie Mac Reporting Form 1025/72 for small residential income properties
Prepare the Fannie Mae/Freddie Mac Reporting Form 1025/72 and develop effective commentary
Compile required data and correctly complete analysis necessary for completion of the Fannie Mae/Freddie Mac Operating Income Statement Form 216/998
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3. Key Terms Gross Building Area (GBA) Gross Living Area (GLA)
Gross Building Area (GBA) Total area of a building measured from the exterior walls that include common areas (e.g., hallways, entryways, common laundry rooms).
Gross Living Area (GLA) Total area of finished heated (and in some markets, cooled) residential living unit space.
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4. Narrative Appraisal Reports
When permitted, they may be favored by many appraisers because:
The free format allows for the report to be structured and flow in the manner that can best be understood
The free format is most beneficial to clients and intended users
Properties with more than four units generally are reported using a narrative reporting format
Fannie Mae Form 1025/Freddie Mac Form 72
An effective narrative appraisal report is considered by some to be an art form in itself, and some appraisers are not comfortable with this type of reporting format.
It is not within the scope of this course to discuss narrative reporting concepts.
However, standardized industry report forms can be helpful to identify specific reporting elements that should be addressed in a narrative report.
Also, much of a residential appraiser’s appraisal work of two- to four-family properties will be for mortgage lending purposes and, as a client requirement, two- to four family properties will be reported on the Fannie Mae Form 1025/Freddie Mac Form 72.
Therefore, we will focus on this particular reporting method in this chapter.
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5. Completing the Fannie Mae Form 1025/Freddie Mac Form 72
Most common reporting form used for reporting the appraisal of a 2- to 4-family property for use by a lender client
7-page report and provides an orderly and systematic flow of information and commentary
Developed for use by Fannie Mae and Freddie Mac
Has been adopted for use by other lending entities such as the FHA and VA and other lenders
<Note> The full form can be found in the Appendix.
As will be discussed later in this chapter, the form is appropriate only for appraisals performed for lenders and lending situations.
Although some clients and intended users might have guidelines and requirements different than Fannie Mae, most of Fannie Mae’s guidelines and requirements represent at least a minimum level of expectations by all lenders.
Therefore, throughout the remained of this chapter, Fannie Mae guidelines and requirements regarding research, analysis, and completion of the form will be illustrated.
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6. General Use Provisions
This section generally sets forth the types of property for which the reporting form is applicable and overviews certain aspects of the assignment.
Also discussed is the unacceptability of modifications, additions, or deletions to those assignment elements with the exception of the scope of work, which may be expanded.
Similar limitations are also imposed regarding the appraiser’s certification, with the exception of additions to the certification that are required by law or specific requirements of an appraisal organization to which the appraiser must observe membership requirements related to the certification.
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7. Scope of Work
This abbreviated description of the assignment’s scope of work establishes the minimum diligence expected of the appraiser regarding inspection, research, verification, analysis, and reporting.
Certainly, the scope of work actually performed by the appraiser will be greatly amplified from the minimum level described here.
As well, the disclosure of the scope of work should include additional commentary from the appraiser to sufficiently communicate the extent of the research and analysis performed in the assignment.
USPAP’s Scope of Work Rule requires the disclosure in the appraisal report to contain sufficient information to allow intended users to understand the scope of work performed.
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8. Intended Use
This statement satisfies the USPAP requirement to state report’s intended use(s)
The existence of this statement, integral with the form, makes using this form for other non-financing uses (e.g., marketing, estates, litigation) unacceptable
This statement satisfies the USPAP requirement to state the intended use(s) of the report. The existence of this statement, integral with the form, makes using this form for other non-financing uses (e.g., marketing, estates, litigation) unacceptable.
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9. Intended User
Satisfying USPAP requirements to state the intended user, the intended user in this case is predetermined to be the lender/client.
Again, this specification eliminates the use of this form for other non-financing uses and users
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10. Definition of Market Value
There are innumerable ways to define market value. This definition illustrates the most commonly used and described method. The discussion continues with how adjustments for financing terms and concessions should be handled.
Illustrates the most commonly used and described method
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11. Statement of Assumptions and Limiting Conditions
Assists the appraiser in establishing the limitations of responsibility on the part of the appraiser
Some elements also further emphasize the scope of work performed in the assignment, such as providing:
A sketch of the improvements
Research of flood information
Other notes regarding any unfavorable conditions found, or not found, within the subject property
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12. Appraiser’s Certification
Examples of statements include:
Specific methodology used in the assignment and, unless otherwise indicated, the cost approach was not developed
Analysis and reporting of offerings and any current sales agreement of the subject property
Research, verification, analysis, and reporting of prior sales of the comparable data
Process of selecting and analyzing comparable sales data
Techniques for adjusting comparable sales
Competency in the assignment
The certification cannot be modified
The Appraiser’s Certification contained within the 1025/72 form satisfies USPAP’s minimum requirement and then expands the certification statements to a more specific and greater level.
Due to the preprinted and expanded language in the Appraiser’s Certification contained in this form (as well as others), appraisers should be very familiar with the certification’s content and meaning prior to affixing their signature.
The certification cannot be modified.
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13. Subject
Page 1 of the 1025/72 form commences with the general identification of the subject property.
This section is a combination of identifying elements of the subject property and specifics regarding the appraisal assignment.
Much of the information contained in this section is fairly straightforward.
However, there are some specific reporting requirements that should be specifically mentioned and must be observed by the appraiser.
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14. Contract
Applicable only when subject is in connection with financing for a purchase transaction
Fannie Mae specifically indicates the lender is responsible for providing the appraiser with a copy of the sales contract and any additional pertinent information (which the lender is aware of) not included in the sales contract
This section of the 1025/72 form is applicable only when the subject of the assignment is in connection with financing for a purchase transaction. Here, the required responses are fairly obvious.
The appraiser should mark the appropriate box indicating whether or not there is any financial assistance (e.g., loan charges, sales concessions, gift or down payment assistance) paid by any party on behalf of the borrower. If necessary, use the comments section of the appraisal reporting form or an addendum to describe the terms and/or concessions.
<Note>
Fannie Mae specifically indicates the lender is responsible for providing the appraiser with a copy of the sales contract and any additional pertinent information (which the lender is aware of) not included in the sales contract. <end>
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15. Neighborhood
This section should reflect the area surrounding the subject property.
The appraiser must observe neighborhood characteristics and surrounding properties to make determinations that will be incorporated into the valuation of the subject property.
<Note> When using the 1025/72 form, the 1004MC form is also required. The 1004MC form can be found in the Appendix.
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16. Site
The Site section allows the appraiser to report the physical and legal characteristics of the property.
Important factors pertaining to the subject lot include topography, shape, size, and drainage.
Drainage must be away from the improvements to avoid collection of water in or around them.
Steep slopes are generally unfavorable conditions because they may cause erosion, difficulty in maintaining a lawn, and difficult access to the property or a garage.
In some areas where this is common, the appraiser may need to include expanded commentary regarding the condition.
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17. Improvements
The Improvements Section of the 1025/72 form begins on Page 1 and continues through the top of Page 2.
Again, much of this information is fairly direct, but there are a few items that may require additional commentary.
Depending on the design and features of the subject property, it may be necessary to check more than one box on the form triggering further explanation.
<For Example> More explanation may be necessary if the building has more than one type of heating system, or when only part of the building is equipped with central air-conditioning.
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18. Comparable Rental Data
Much of the data for this section will be derived from comparable market rental data from the appraiser’s files, or as part of rent surveys, similar to that presented in Chapter 3.
This analysis is provided in the report to demonstrate support of the appraiser’s opinion of market rent for the subject.
The appraiser’s commentary for this section should include (in part) the appraiser’s rationale for applying the data as a means for forming an opinion of market rent for the subject, which is used in later analysis.
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19. Subject Rent Schedule
The first part of the subject rent schedule analysis is similar to the rent roll discussed in Chapter 3.
However, it should be noted that the reporting includes the appraiser’s opinion of market rent for the subject that is supported from market level comparable rental data.
Also in the schedule is the reporting of other sources of income for the subject property in addition to rental income from the living units.
The commentary area of this section allows the appraiser to discuss his logic and reasoning used in forming his opinion of market rent for the subject property.
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20. Prior Sale History
The information reported in this section is not dissimilar to the common reporting diligence for single-family properties using the 1004 URAR reporting form and is, for the most part, straightforward.
The first reporting item of this section requires the appraiser to state if he did or did not research the sale or transfer history of the subject property and the comparable sales.
If an appraiser indicates that he “did not” perform this research, the admission would signal that the appraiser was not in compliance with Standards Rule 1-5 of USPAP, which requires analysis of sales of the subject property for the three years immediately prior to the effective date of the appraisal.
As well, Item 6 of the Appraiser’s Certification on Page 6 of the reporting form affirms the appraiser has researched, verified, analyzed, and reported prior sales of the comparable sales for a minimum of one year prior to the date of the sale of the comparable, unless otherwise indicated in this report.
USPAP does not reference or obligate an appraiser to research or analyze prior sales of comparable properties.
However, Fannie Mae guidelines require research and analysis of comparable sales by the appraiser and thus, compliance with the Competency Rule of USPAP regarding these guidelines is required, which would not be fulfilled without research and analysis of the comparable sales.
As a final note, prior sales of the subject property include other transfers, such as non-arm’s length transactions, transfers between related parties, transfers related to foreclosure, etc.
Refer to USPAP FAQs for further guidance on the issue.
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21. Sales Comparison Approach
See image on page 77
This section may seem somewhat similar to that found in the URAR reporting form for single-family properties
However, there are some distinctive differences that should be quite apparent
The section for reporting the sales comparison approach may seem somewhat similar to that found in the URAR reporting form for single-family properties; however, there are some distinctive differences that should be quite apparent.
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22. Income Approach
Identical to that on the URAR reporting form for single-family properties, using the GRM method
Fannie Mae does not accept appraisals that rely singularly on the income approach as an indicator of market value
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23. Cost Approach
Again, the cost approach section of the 1025/72 form mirrors that found in the URAR.
Therefore, our discussion of this section will be abbreviated.
There are limited circumstances for which the cost approach would be applicable in an appraisal assignment of a small residential income property.
One of those instances would be when the subject property is a new or proposed construction.
Fannie Mae’s guidelines recite that: (Fannie Mae 2010 Selling Guide – B , Appraisal Report Review: Cost Approach to Value (04/01/2009), page 533) Appraisals that rely solely on the cost approach as an indicator of market value are not acceptable.
Further, Fannie Mae does not require development or reporting of the cost approach, except in assignments of manufactured housing.
However, many clients request or require the cost approach be completed.
If such is the case, the appraiser must comply with the request or requirement if agreed to with the client.
The final reconciliation of value should include comments regarding the development and reporting of the cost approach and its applicability as an indicator of value.
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24. Reconciliation
Fannie Mae’s guidelines regarding the final reconciliation of the appraiser’s value opinion are somewhat similar to that found in Standards Rule 1-6 of USPAP.
In the final reconciliation, appraisers must:
Reconcile the reasonableness and reliability of each applicable approach to value.
Reconcile the reasonableness and validity of the indicated values.
Reconcile the reasonableness of available data.
Select and report the approach or approaches that were given the most weight.
<Note:> The final reconciliation must never be an averaging technique. (Fannie Mae 2010 Selling Guide – B , Appraisal Report Review: Valuation Analysis and Final Reconciliation (04/01/2009), page 534)
Commentary should elaborate on the logic used and relevance of the data, as well as the approaches developed.
Many call-backs from clients can be avoided when sufficient explanation is provided here.
The appraiser will also need to check the appropriate box in this section and indicate whether the appraisal is made:
“As is”.
Subject to completion per plans and specifications on the basis of a hypothetical condition that the improvements have been completed.
Subject to the following repairs or alterations on the basis of a hypothetical condition that the repairs or alterations have been completed (note the repairs and alterations in commentary).
Subject to the following required inspection based on the extraordinary assumption that the condition or deficiency does not require alteration or repair (note the required inspection).
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25. Planned Unit Development (PUD) Information
Fannie Mae defines a PUD as a project or subdivision consisting of common property and improvements owned and maintained by a homeowner’s association for the benefit and use of the individual PUD units*
This definition may or may not be the same as some jurisdiction’s definition of a PUD.
In order for a project to qualify as a PUD, each unit owner’s membership in the homeowners’ association must be automatic and non-severable, and the payment of assessments related to the unit must be mandatory.
In areas where the concept is common, appraisers may already have some of the data stored in their files.
Although some of the questions posed in this section, such as number of units for sale and units rented, may require current research in each assignment.
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* Fannie Mae 2010 Selling Guide – B , PUD: Lender Full Review Requirements (04/01/2009), page 585

26. Completing Operating Income Statement Form 216/998
Required exhibit to accompany the 1025/72 Small Residential Income Property Appraisal Report for a 2- to 4-unit income property
We already discussed most of the information necessary to complete the form as well as the applicable concepts for deriving and applying the information in earlier chapters of this text.
Here, we will overview the completion of the form, applying what we already discussed.
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27. General Instructions and Rent Summary
Completion of the form is a joint effort of the loan applicant, appraiser, and lender’s underwriter
Rental is based on an unfurnished unit
Rent schedule states:
Which units are currently rented
Expiration date of any lease agreement
Contract and market rent
Party responsible for payment of specified utility expenses
Even though the borrower is permitted to complete the form, most often the appraiser will prepare the form, considering information provided by the borrower, and then reviewed by the lender’s underwriter.
<Note> The lender must ensure the appraiser has operating statements; expense statements related to mortgage insurance premiums, homeowners’ association dues, leasehold payments, or subordinate financing payments; and any other pertinent information related to the property. (Fannie Mae 2010 Selling Guide – B , Appraisal Forms and Report Exhibits (10/30/2009), page 487)
If the borrower prepares the form, the appraiser must review the form and comment on the reasonableness of the projected operating income.
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28. Annual Income and Expense Projection for Next 12 Months
Very similar to the Reconstructed Operating Income Statement presented in Chapter 3
Some expenses are not included in this projection (e.g., real estate taxes and hazard insurance)
These are later included in the owner’s monthly housing expense
Income and expenses for owner-occupied units are not included
Notice the information for this section is very similar to the Reconstructed Operating Income Statement presented in Chapter 3.
However, it should also be noted that some expenses are not included in this projection, such as real estate taxes and hazard insurance that are included in the Reconstructed Operating Income Statement.
These expenses are handled a little differently in the 216/998 form as they are later included in the owner’s monthly housing expense.
Fannie Mae offers the following from their website regarding expenses:
Any income or operating expenses that relate to an owner-occupied unit in a two- to four-family property should not be included.
Heating, Cooking, Hot Water If any of these items are provided by the applicant as part of the rent for a unit, the projected cost and type of fuel used should be included. When the costs for heating relate to public areas only, an appropriate notation should be made.
Electricity This should include only those projected expenses that will be incurred by the applicant over and above any similar expense for heating, cooking, or hot water already taken into account. If the expense relates to the cost of electricity for public areas only, an appropriate notation should be made.
Water/Sewer These projected expenses should not be included when they are part of the real estate tax bill or when the units are serviced by an on-site private system.
Casual Labor This includes the costs for public area cleaning, snow removal, etc., even though the applicant may not elect to contract for such services.
Interior Paint/Decorating This includes the costs of contract labor and materials that are required to maintain the interiors of the living units.
General Repairs/Maintenance This includes the costs of contract labor and materials that are required to maintain the public corridors, stairways, roofs, mechanical systems, grounds, etc.
Management Expenses These are the customary expenses that a professional management company would charge to manage the property.
Supplies This includes the costs of items like light bulbs, janitorial supplies, etc.
Total Replacement Reserves This represents the total average yearly reserves that were computed in the "Replacement Reserve Schedule" portion of the form. Generally, all equipment that has a remaining life of more than one year—such as refrigerators, stoves, clothes washers/dryers, trash compactors, etc.—should be expensed on a replacement cost basis--even if actual reserves are not provided for in the operating statement or are not customary in the local market.
It is important to note when completing this section of the form, income and expenses for owner-occupied units are not included.
Also, the amount entered for total replacement reserves is the total indicated by the Replacement Reserve Schedule which is found on Page 2 of the form.
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29. Replacement Reserve Schedule
Replacement reserves must be calculated regardless of whether actual reserves are provided for on the owner’s operating statements or are customary in the local market
The replacement reserve calculations are similar to the methods illustrated in Chapter 3.
However, here the estimated cost of the component which has a remaining life of more than one year is designated on a single unit basis (with the exception of roof and carpeting) and then multiplied by the number of units.
<For Example> A four-unit apartment building has appliances furnished by the landlord. If the refrigerators in the four units are three years old, and refrigerators typically last ten years, the refrigerators have a remaining life of seven years. The anticipated replacement cost at that time is $800 per refrigerator. The replacement reserve for refrigerators on the 216/998 form would be reported as:
$800 (each) ÷ 7 (years) x 4 (units) = $ (annual reserve for refrigerators)
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30. Operating Income Reconciliation
First analysis addresses the monthly operating income of the property, based on the annual income and expense projection from Page 1 of the form
Second analysis concludes on a net monthly cash flow for the property by subtracting monthly housing expense from monthly operating income
The final operating income reconciliation, with the exception of monthly housing expense, is a summary of the conclusions reached thus far in the analysis.
The section has two lines with two separate analyses.
The first analysis addresses the monthly operating income of the property, based on the annual income and expense projection from Page 1 of the form.
Here, the effective gross income from the projection is entered and total operating expenses are subtracted to arrive at annual operating income.
The annual operating income is then divided by 12 to conclude at a monthly operating income.
<For Example> The annual income and expense projection indicates a property has an effective gross income of $34,200 and operating expenses of $11,970, annually. The analysis reported on the first line of the form would be reported like this:
$34,200 (EGI) - $11,970 (Total Operating Expenses) = $22,230 (Annual Operating Income) ÷ 12 = $1, (Monthly Operating Income)
The second analysis in the operating income reconciliation concludes on a net monthly cash flow for the property by subtracting monthly housing expense from monthly operating income.
Monthly housing expense is the sum of principal and interest; hazard, flood, and mortgage insurance premiums (as applicable); real estate taxes; special assessments; homeowners’ association dues; leasehold payments; and any subordinate financing payments on mortgages secured by the subject property (e.g., second mortgage).
The appraiser must communicate with the client regarding the treatment of this analysis.
The amount to be entered on the form for monthly housing expense will need to be supplied by the client, and often at least some of this information is not furnished at the time the assignment is accepted.
If necessary information is not furnished or available to the appraiser, the analysis should not be performed by the appraiser, but rather left to the underwriter to complete.
<For Example> Continuing with the previous example, the appraiser has been furnished a total monthly housing expense by the client of $1, The analysis would be reported as:
$1, (Monthly Operating Income) - $ (Monthly Housing Expense) =
-$ (Net Cash Flow)
It can be seen here that the cash flow is negative in this case.
This may not be at all uncommon in some assignments, and would be especially true when one of the property’s units is owner-occupied. In this circumstance, the borrower must have sufficient income to off-set the negative cash flow, which is part of the underwriting decision.
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31. Other Report Addenda
In most cases, especially for appraisals reported on the Fannie Mae Form 1025/72, the following exhibits are required:
Exterior building sketch indicating dimensions
Calculations demonstrating how the estimate for GBA and GLA are derived
Street map showing location of subject and all comparables used
Clear, descriptive, original photos showing front, back, and a street scene of the subject and the front of each comparable sale*
Depending on guidelines and regulations applicable to an assignment and specific client requirements, there may be various types of exhibits required to be included in an appraisal of a two- to four-unit or multi-unit property.
In most cases, especially for appraisals reported on the Fannie Mae Form 1025/72, the following exhibits are required:
An exterior building sketch indicating the dimensions
If the floor plan is atypical or functionally obsolete, thus limiting the market appeal for the property in comparison to competitive properties in the neighborhood, Fannie Mae requires a floor plan sketch.
Calculations demonstrating how the estimate for gross building area and gross living area are derived
A street map showing the location of the subject property and all comparables the appraiser used
Clear, descriptive, original photographs showing the front, back, and a street scene of the subject property and the front of each comparable sale. The subject and all comparables must be appropriately identified. Photographs of comparable rentals and listings are not required.
Acceptable photographs include clear, descriptive, original images from photographs or electronic images, copies of photographs from a multiple listing service, or copies from the appraiser’s files. The report should indicate when the photo is from a source other than the appraiser, taken at the time of the subject assignment, and state the source.
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*Fannie Mae 2010 Selling Guide – B , Appraisal Forms and Report Exhibits (10/30/2009), page 486

32. Chapter 5 Quiz
1. If a neighborhood is fully developed, which box should be checked in the Neighborhood Characteristics section for the category of Growth?
Not Applicable
Rapid
Slow
Stable
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33. Chapter 5 Quiz
2. When a subject property is something other than “legal” for zoning compliance, when reporting, the appraiser should
modify the scope of work.
provide additional commentary.
state that the improvement should be razed.
withdraw from the assignment.
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34. Chapter 5 Quiz
3. A mother-in-law unit created by converting the detached garage of a primary dwelling
could not be reported on the 1025/72 reporting form.
is an example of an accessory unit.
is never permitted by Fannie Mae.
is not considered a separate living unit.
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35. Chapter 5 Quiz
4. Which is a TRUE statement if physical deficiencies that could affect the property’s soundness are noted in the subject structure by an appraiser?
The appraiser must cease the appraisal.
The property cannot be appraised subject to satisfactory inspections.
The report must be based on an “as is” scenario.
They must be described in the report.
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36. Chapter 5 Quiz
5. Which is NOT a component of the Subject Rent Schedule integral with form 1025/72?
actual (contract) rent
fixed expenses
other monthly income
utilities included in estimated rents
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37. Chapter 5 Quiz
6. The Prior Sale History section of Form 1025/72 requires an appraiser to research and comment on whether the subject property
has been listed for sale in past 36 months.
has ever sold in the past.
is currently, or in the past 12 months prior to the effective date, been listed for sale.
is listed for sale currently; however, there is no requirement for prior listings.
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38. Chapter 5 Quiz
7. Regarding the selection of comparable sales, which is NOT a guideline of Fannie Mae?
Comparable sales older than six months cannot be used.
Current listings may be used as supporting data.
A minimum of three comparable sales must be reported.
The prior sale of the subject property can be used as a fourth comparable.
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39. Chapter 5 Quiz 8. Per Fannie Mae requirements, the cost approach
does not need to be reported, except for manufactured housing.
is a primary indicator of market value.
must be developed and reported for all two- to four-family properties.
should be developed if the improvements are less than five years old.
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40. Chapter 5 Quiz
9. According to Fannie Mae, the final reconciliation must never
be based on an averaging technique.
elaborate on the relevance of data used in each approach.
give most weight to the sales comparison approach.
reconcile the reasonableness of available data.
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41. Chapter 5 Quiz
10. Regarding two- to four-family properties in which one of the units is owner-occupied, which statement is TRUE?
Income and expenses for owner-occupied units are not included.
Operating expenses for the unit are included but income is not.
The Operating Income Statement is not included in such case with the 1025/72 report.
Potential income from the unit is estimated and used in determining effective gross income.
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42. Chapter 5 Quiz
11. In a three-unit apartment building which has no owner-occupied units, if dishwashers in all units are expected to be replaced in four years, what is the total annual replacement reserve for the property? Dishwashers cost $400 per unit and should last 15 years from date of purchase.
$25
$100
$300
$400
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43. Chapter 5 Quiz
12. If the subject property has an annual effective gross income of $26,040 and annual expenses of $10,416, what is the monthly cash flow reported on the Operating Income Statement 216/998 if monthly housing expense is $937?
$234
$365
$401
$552
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