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  • Writer's pictureJesse Ledbetter

How to read an appraisal: Part 2

This week we continue to dive into the URAR 1004 Form that is used in most lender transactions.

Above we see the "Neighborhood" and "Site" sections of the report.


It's easy to miss, but vital in the current climate that we address the top line above. "Race and the racial composition of the neighborhood are not appraisal factors." Nowhere in the analysis of the subject property or neighborhood are ANY such factors considered. This line is really a corrective of the policies of the federal government in the pre-1960's when neighborhoods were defined merely exclusively by racial composition. There is no evidence, past or present that the appraisal profession has had a systemic racism issue, however, there is ample, documented evidence that the federal government and lending industry openly engaged in racial discrimination through "redlining." This has had dramatic impacts on neighborhoods to this day.

The appraiser defines the market boundaries by recognizable features (N/S/E/W) and then goes on to describe qualitatively and quantitatively that area. What are the homes like, what is demand like, are they new/old, one/two-level, what is their access like to local amenities and jobs? Finally, the appraiser offers an assessment of the current market conditions - is the market going up/down or flat?


In this area, the appraiser discloses the features of the land itself. Perhaps the most important part of this section however is the question about the "highest and best use." This little question has a lot packed in it - in essence, it asks, is the current improvement of the property the best option, or should something else be done? Most of the time this is a "Yes," however, in areas where there is transition from residential to commercial usage or rapid development, this can become a very complicated analysis very quickly.

Beyond this, the other areas ask vital questions of "is the site safe" and "are there any legal/possession issues with the property?" If there is a gas well within 200 feet of the property or an above-ground fuel storage tank within 1000 feet, the subject property may not be eligible for financing. If your well is on someone else's land... you're gonna have a bad day. Also, we see the word "typical" for the first time on the form. Fannie Mae and lenders love homes to be "typical" because that roughly translates to "easier to sell."

Non-typical homes can pass Fannie Mae. Homes in flood plains can too. Homes with odd-shaped lots can too. However, if you put all of those together in the same property, you might not be closing.

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