Appraiser Update

Environmental Hazards

Environmental hazards include things like the presence of asbestos-containing materials, peeling lead paint, radon, other toxic substances, contaminated drinking water, and proximity to external hazards such as waste sites, to name a few. Because environmental hazards may impact the value and marketability of a property, the Fannie Mae Selling Guide defines requirements for appraisals of properties with environmental hazards.

While Fannie Mae does not expect the appraiser to be an expert in the field of environmental hazards, we do expect appraisers to analyze and report any information about environmental hazards that is available in the normal course of business.

If an appraiser has knowledge of or identifies an environmental hazard in or on the subject property or on any site within the vicinity of the property, we require the appraiser to:

• note in the appraisal report any adverse conditions that were observed during the inspection of the subject property or information that they became aware of through the normal research involved in performing an appraisal;
• comment on any adverse effect that the hazard has on the value and marketability of the subject property, if it is measurable through an analysis of comparable market data as of the effective date of the appraisal, or indicate that the comparable market data reveals no buyer resistance to the hazard;
• make appropriate adjustments in the overall analysis of the property’s value; and
• make the appraisal "subject to" inspection by a qualified professional.
   

Fannie Mae expects the appraiser to consider and use comparable market data affected by the same hazards because the prices of settled sales, the contract prices of pending sales, and the current asking prices for active listings should demonstrate any negative effect on value and marketability from the hazard.

If the appraiser cannot arrive at a reliable opinion of market value because the hazard is so serious or so recently discovered that there are no comparable market data available to measure the impact, then the loan is ineligible for sale to Fannie Mae.

For more information, see Selling Guide B4-1.4-08, Environmental Hazards Appraisal Requirements.

More on Seller Concessions

The article about seller concessions in our December 2023 Appraiser Update generated a lot of questions and buzz.

First, we heard that some appraisers, in reaction to our article, adopted a practice of always adjusting dollar for dollar for seller concessions. While this may seem sensible from a theoretical perspective, it could have adverse unintended consequences (such as undervaluation) if the concession did not actually have a dollar-for-dollar impact on the price. Making either assumption (that there is no impact or that the impact is dollar-for-dollar) is not the correct approach.

Our Selling Guide prohibits appraisers from the use of unsupported assumptions and requires appraisers to support their adjustments (see B4-1.1-04, Unacceptable Appraisal Practices). The appraiser should never assume but should always analyze to determine the impact.

We also heard from some home builders who shared examples of seller concessions that they assert had no impact on the contract price. The common scenario is when the builder offers a financing concession as an inducement for the buyer to use the builder’s subsidiary mortgage company. Builders can grant these concessions with no impact to the contract price because they recover the program cost through the efficiencies gained by the economy of scale, working repeatedly with their preferred lender.

Appraisers should not take such assertions at face value but rather should test them by analyzing any available evidence. One way to analyze the impact is paired sales analysis – compare the price of the sale with concessions against similar sales with no concessions. They can also be compared to cash sales.

Another good reference point is the builder’s standard price sheet – if all three types of buyers (cash, financed with no concessions, and financed with concessions) are offered the same standard price, then arguably the concessions do not impact the price. Of course, in actual practice this can be complicated because there are other factors that result in buyers paying more than standard price – things like upgrades, change orders, and lot premiums. The appraiser may need to have a conversation with a party to the transaction in order to unravel the various impacts.

Appraisers should describe their efforts to determine the impact of seller concessions on the price of the comparables in their report. This is consistent with the broader theme of supporting all adjustment rates with evidence and analysis.

Finally, we heard from appraisers asking what our expectation is when the local MLS does not disclose seller concessions. The answer is that our expectations for disclosure, analysis, and adjustment do not change, but the appraiser may need to take additional steps to identify seller concessions:

• Contact the Parties Involved
  Appraisers can reach out to the real estate agents, sellers, or buyers involved in the transaction to inquire about any seller concessions. This direct communication can provide valuable insights that may not be available through the MLS.
• Review the Sales Contract
  If accessible, appraisers should review the sales contract for the subject property and comparable properties. The contract often includes details about any seller concessions, such as contributions towards closing costs or other incentives.
• Analyze Public Records
  Public records, such as property tax records or deed records, may contain information about seller concessions. Appraisers can use these records to cross-check and verify any concessions that may have been part of the transaction.
• Consult with Lenders
  Appraisers can also consult with lenders who financed the transaction. Lenders may have documentation that outlines any seller concessions provided during the sale.
   

We’re happy to hear that our newsletter is generating thoughtful dialogue about appraisal best practices. Identifying, analyzing, adjusting when warranted, and describing the thought process in the report are practices that will help appraisers improve the quality of their results and increase their reputation for professionalism.

PSAs