Appraising: Confused and Misunderstood

As the quality control manager for a national appraisal management company, I am directly involved with a large volume of escalated appraisal matters that are placed upon my desk for mediation and resolution. In most cases, these matters involve either a loan officer who is dissatisfied with the results of an appraisal report, or an appraiser who is confused or upset about a request for specific underwriting revisions. I have noticed that the root of many of these disputes is a misunderstanding or a lack of knowledge in relation to specific HUD requirements with regard to the appraiser, the appraisal process or the appraisal report on FHA or reverse loan files.

A great deal of misinterpretation is noted on the part of many loan officers as it relates to HUD requirements surrounding comparable sales listed in the report, specifically the date of sale and proximity to the subject property. Many times I receive complaints or requests for a refund of appraisal fees due to the fact that a report included comparables that were greater than 6 months old and located more than one mile from the subject property, and as such, the report is considered not to be HUD credible. HUD 4150.2 guidance states that comparables that have transferred within the past six months are preferred, but that does not prohibit an appraiser from utilizing sales that are older, so long as the appraiser provides a detailed explanation as to why an older sale was cited. Only closed/settled sales may be listed in the first three slots for comparable positions on the report, and these comparables must have transferred within 12 months of the effective date of the report.

Another widespread misconception noted among loan officers is that HUD has a predetermined limit with regard to the distance of comparable sales from the subject property. This issue regularly presents itself in cases including manufactured homes that may also be situated on acreage parcels. HUD’s 4150.2 guidance is that sales or resales from within the subject subdivision or project are preferred, so long as the builder/developer is not in control of the transactions. Furthermore, in rural areas it is not uncommon for these comparables to be located a considerable distance from the subject. With properly detailed commentary related to the need to use such distant comparables, this is an acceptable practice. There is no maximum-distance limit imposed upon the appraiser for comparable sales. That does not mean, however, that a lender cannot put forth specific guidelines regarding the proximity of comparables. But it should be noted that these would be guidelines related to loan eligibility for that particular lender, and not limitations placed upon the appraiser in the analysis of the subject’s market, 8 selection of appropriate comparables or processing of the appraisal report. In some cases, comparable sales that meet the specific guidelines of the lender are just not available. However, this does not mean the appraiser is unable to appraise the subject property or produce a HUD-credible report.

Many appraisers are confused or misinformed about deferred items or deficiencies that require repair. HUD 4150.2 guidance states that required repairs must be limited to those that impact the three S’s: safety, security and soundness. The health and safety of the property’s occupants must be ensured, the overall security of the property must be upheld, and the structural integrity of the property must be maintained. If any condition exists that affects the property in any of these areas, the appraisal report must be based upon the hypothetical condition that these items will be corrected. Furthermore, the appraiser is to provide the lender with a detailed list of these required repairs and provide an estimated cost to cure (or fix) these items. Cosmetic or other deficiencies that do not fit into these categories should be mentioned and factored into the overall condition rating for the property, but there should not be any requirement for their repair included in the basis of the report.

Many appraisers are confused about comparable sales. I often see reports with closed/settled comparable sales listed in the first three positions that transferred more than one year prior to the effective date of the appraisal report. HUD 4150.2 guidance states that any comparable sales older than 1 year must be located in position 4 or higher on the report, and may be utilized as “additional sales.” I advise appraisers to place appropriate weight on these comparables in the reconciliation of sales data and derivation of value by the Sales Comparison Approach based upon their applicability to the subject property, regardless of their position in the appraisal report.

I recommend reviewing HUD 4150.2 guidelines, available at They are useful tools that can be relied upon to bridge the gap between appraisers and loan officers.

Written by John Golden

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