Clarification of FLS’s As-Is Appraisal Policy

FLS has seen an increase in appraisals that are being made “As Is”, with a list of deferred items that underwriters are determining need to be cured prior to lending. We are issuing this guidance to assist our panel in completing reports that will be acceptable on the secondary market, and reduce the need for second touches by our appraiser partners.

Although the Fannie Mae guide states that properties with Condition Ratings C5 are eligible for delivery in “As Is” condition, their definition of C5 and requirements under Appraisal Completed “As Is”, contradicts this allowance. C5 as shown below, uses the words significant and somewhat diminished, and for “As Is” it can only be minor and typical. For this reason, FLS requires all properties in C5 or C6 to be made “subject to” repair or replacement of items that cause the subject property to fall below C4 condition. The appraiser needs to use the Hypothetical Condition that the significant items have been repaired or replaced to bring the property to at least C4 condition, provide photos of items that need to be repaired along with the commentary to support their condition. The sections of the guide dealing with these area are provided below (with underlines for emphasis) to refresh the appraiser on the requirements.

Please reach out to FLS if you have any questions when appraising properties with significant deferred items, prior to completion of your report.

FNMA Guidelines Property Condition

  • Appraisal reports must reflect adverse conditions that were apparent during the inspection or discovered while performing research, such as, but not limited to, needed repairs, deterioration, or the presence of hazardous wastes, toxic substances, or adverse environmental conditions.

  • Detrimental conditions of the improvements must be reported in the appraisal even if the conditions are typical for competing properties.

  • The appraiser must identify o items that require immediate repair; and o items where maintenance may have been deferred, which may or may not require immediate repair.

  • The appraisal Additional Comments section must address needed repairs and physical, functional, or external inadequacies.

  • Property Condition Ratings

  • C4 - The improvements feature some minor deferred maintenance and physical deterioration due to normal wear and tear. The dwelling has been adequately maintained and requires only minimal repairs to building components/mechanical systems and cosmetic repairs. All major building components have been adequately maintained and are functionally adequate. Note: The estimated effective age may be close to or equal to its actual age. It reflects a property in which some of the short-lived building components have been replaced, and some short-lived building components are at or near the end of their physical life expectancy; however, they still function adequately. Most minor repairs have been addressed on an ongoing basis resulting in an adequately maintained property.

  • C5 - The improvements feature obvious deferred maintenance and are in need of some significant repairs. Some building components need repairs, rehabilitation, or updating. The functional utility and overall livability are somewhat diminished due to condition, but the dwelling remains useable and functional as a residence. Note: Some significant repairs are needed to the improvements due to the lack of adequate maintenance. It reflects a property in which many of its short-lived building components are at the end of or have exceeded their physical life expectancy, but remain functional.

  • C6 - The improvements have substantial damage or deferred maintenance with deficiencies or defects that are severe enough to affect the safety, soundness, or structural integrity of the improvements. The improvements are in need of substantial repairs and rehabilitation, including many or most major components. Note: Substantial repairs are needed to the improvements due to the lack of adequate maintenance or property damage. It reflects a property with conditions severe enough to affect the safety, soundness, or structural integrity of the improvements.

Appraisals Completed “As Is” Fannie Mae permits appraisals to be based on the “as is” condition of the property provided existing conditions are minor and do not affect the safety, soundness, or structural integrity of the property, and the appraiser’s opinion of value reflects the existence of these conditions. Minor conditions and deferred maintenance are typically due to normal wear and tear from the aging process and the occupancy of the property. While such conditions generally do not rise to the level of a required repair, they must be reported. Examples of minor conditions and deferred maintenance include worn floor finishes or carpet, minor plumbing leaks, holes in window screens, or cracked window glass. Physical Deficiencies That Affect Safety, Soundness, or Structural Integrity of the Subject Property The appraisal report must identify and describe physical deficiencies that could affect a property’s safety, soundness, or structural integrity. If the appraiser has identified any of these deficiencies, the property must be appraised subject to completion of the specific repairs or alterations. In these instances, the property condition and quality ratings must reflect the condition and quality of the property based on the hypothetical condition that the repairs or alterations have been completed. If the appraiser is not qualified to evaluate the alterations or repairs needed, the appraisal must identify and describe the deficiencies and the property must be appraised subject to a satisfactory inspection by a qualified professional. The appraisal may have to be revised based upon the results of the inspection. If so, the report must indicate the impact, if any, on the final opinion of value. The lender must review the revised appraisal report to confirm that no physical deficiencies or conditions that would affect the safety, soundness, or structural integrity of the property are indicated.
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