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New Appraisal Requirements Complicate Properties in Need of Minor Repairs

On June 30, 2010 Fannie Mae issued certain changes to its Selling Guide that affect compliance on appraisal reports as of September 1. Some changes are directed at minimizing the negative impact of the HVCC code that was imposed on the appraisal process in May 2009 (a good thing for consumers). Some of the other changes implemented bring greater focus to a property's condition and may potentially complicate the buying process, especially for REOs or properties in less-than-stellar condition.

One client's recent purchase was subjected to these changes, adding a layer of complexity to the transaction. The appraisal of his property - an REO in Richmond - highlighted, per new requirements, minor issues. These included a loose wire in the garage, missing faceplates on two electric sockets and stained carpeting in the master bedroom. The lender then conditioned for all items to be cured, with re-inspection and sign off by the appraiser. Initially, the lender wanted new carpeting for the bedroom, though we were successful in having this condition waived with a statement by the appraiser that the carpeting did not affect market value. The greater trick was in coordinating repair work, re-inspection and delivery of report, and pushing for underwriting of final conditions to close on time.

Increased scrutiny of a property's condition is supported by mandates for more comprehensive interior photos, whenever and interior inspection is needed. At a minimum, photos must include:

  • Kitchen
  • All bathrooms
  • Main living area
  • Examples of any physical deterioration
  • Examples of any recent updates, restoration, remodeling, or renovation.

In the past, an appraiser could take a photo of one bathroom - let's assume the nicer one - and neglect to include a shot of its more funky counterpart. There was also no blanket requirement to highlight any minor deficiencies, such as stained carpeting. With these newly implemented changes, you can expect appraisers to go out of their way to highlight any problem areas, no matter how seemingly insignificant.

Consumers buying a property or considering a refinance should be extremely mindful of the impact these changes could have on their transaction. The time spent addressing a missing electrical socket faceplate - a 59 cent item anyone can install - could easily cause one to lose a rate lock and kill their loan. It is therefore important to carefully inspect the property and draw up a list of "items to fix" so that all can hopefully be tended to before the initial appraisal inspection is done. Lenders can also show a degree of discretion in repair requirements, so it is important to know where flexibility can be found and which lenders' appraisal management companies can move quickly with re-inspections.

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