How to read an appraisal: Part 3
Today we reach the bottom of page 1 of the most commonly used form for real estate appraisal.
I'll address the different portions of the "Improvements" section from left to right, and top to bottom:
"General Description" - This area gives a basic description of the dwelling, most of which is self-explanatory, with the exception of "effective age." Year built is an objective measure of the age of the dwelling. However, some of the features may have been replaced, updated, remodeled or well/poorly maintained over the course of that time. Effective age is a subjective report of how those things have affected the home. For example, imagine a brand new house that was finished yesterday. Its age is 0 years. However, overnight vandals break-in, tear out all of the copper wire and pipe, rip out all of the light fixtures, and generally make a mess of the place. In one night the "effective age" might skyrocket from 0 years to 10, 15, 20 depending on the level of damage done. Obviously, some elements would be unaffected (we hope), like the foundation, framing, roof which would have an effective age of 0 still, but much of the short-lived items would have their ages shoot up to 30-60 year (appraiser shorthand for needing to be replaced immediately). Effective age tries to take all of that into consideration.
Likewise, imagine an 1800's built farmhouse, that has been completely remodeled (with the exception of the foundation and parts of the framing). While this home might have an age of 221 years, the effective age might be closer to 5-10.
"Foundation" - This section gives an understanding of any lower levels. It is important to understand that Fannie Mae (who wrote this form for their purposes) requires that any level that has ANY portion even slightly below the grade of the soil, MUST be called "basement" in this form. This means that even "walk-out" basements and many split/multi-levels have a basement, and the square footage of these areas can not be included in the above-grade calculations, except in very specific examples.
"Exterior/Interior Description" - This portion walks through the major interior and exterior components present in nearly every home. The appraiser reports the materials present and the condition of each on a scale from Poor-Fair-Average-Good-Excellent.
"Attic/HVAC/Amenities/Car Storage" - These areas are relatively self-explanatory, simply reporting what is present in each area.
"Appliances/Above Grade Finish" - The built-in appliances (those that are actually attached to the structure) are reported here, and the rooms and square footage ABOVE GRADE (see "foundation" above) is reported. Gross Living Area (or GLA) is measured by the exterior measurements in conventional properties, and by the interior measurements in condominiums (because in these cases the owner does not own the exterior of their home).
"Additional Features" - this extremely short section is provided to explain any custom/special features about the home. The more complex the home, the more will tend to be reported on a supplemental addendum. These would be factors that will likely affect the Quality Rating of the home (which we will address in an upcoming blog in this series).
"Condition" - This portion asks the appraiser to report the age of renovations and updates to the kitchen and bathrooms in five-year increments and to place a condition rating on the home (we'll cover this with the Quality rating mentioned above later). Additionally, any other factors that may affect the condition of the home will be reported here.
"Livability/Soundness/Structural Integrity" - The lender (and FNMA) want to know that the home will be around for the life of the loan (typically 30 years). If there are serious structural issues that will threaten this, they will want those corrected. Likewise, if there are safety issues, they will want these corrected as well to ensure that there is not a likelihood of insurance claims against the home for negligence.
"Property Conformance" - Finally, FNMA and the lender want to know if the property "conforms" to the neighborhood. They like properties to be "typical" because this means that the home is likely to be able to be sold in a reasonable time frame at a reasonable price. This is a highly subjective judgment as most market areas will have a wide variety of homes. Obviously, a newly built plan will be the exception to this rule but imagine the following. A standard Mid-Grade builder plan, with two-story modern styled homes. 199 of these homes are built, but one lot gets sold to a private buyer, and there are no restrictions on what they can build. Instead of the typical 2,000 sf home, this buyer builds a 7,000 sf mansion, of the highest quality and craftsmanship. It sticks out like a sore thumb, and the typical buyer of a home like that is not looking in a mid-grade builder plan. The market value will likely severely suffer due to the location of the home because the property "does not conform" to the plan.
Next time we move to page 2 of the URAR 1004, and the sales comparison approach to value.