Anyone can appraise a 203k, right? You might think so but we see this all too many times that they don't have a clue in many cases. This year alone if I turned them in to their licensing boards they would be fined at a minimum. USPAP - Uniform Standards of Professional Appraisal Practice says you must be competent to accept an assignment, so when they get the assignment they typically take it as their fees have been cut for no good reason...
There are two values that are needed for an FHA 203k loan, one is the "as is" value and the other requires an "after improved" value appraisal. Why did I say it that way? Originally there were two appraisals required but in 1995 this was thought to be an excessive cost to the borrower. It was relaxed and today only one appraisal is required but two values need to be determined.
"As Is" value appraisal in the old days required the appraiser to go out and find homes that were like the subject in condition, quality and design but in most cases it was impossible to get any information about the boarded up home next door that is being sold by an asset manager who doesn't have the time to talk to anyone, especially an appraiser. We'll come back to how we arrive at the "as is" value in a little while. Since the latest 4000.1 handbook came out there are some lenders requiring two appraisals again.
"After Improved" value is simple right... NOT. The concept is simple. The appraiser just appraises the home as though it were complete. This is not an easy task if you don't have the experience. This year alone we have had to go back to the appraiser and remind them of what their task was. The appraiser should consider their "scope of work" and that is to appraise the home or small income unit "as though completed" that means all that rhetoric about the fire and all the garbage that is stacked up around the property, and the broken driveway that is being completely removed and replaced with a new one is out of place. If you are appraising this home as though completed then it has a "new driveway" not a broken one that is falling apart, etc. HUD wanted a lender to buy back a loan the other day due to a comment about what used to be on the site as opposed to what will be on the site at the end of the project so this is serious business. I think we have that one solved now but the appraiser had to clean up the report by adding an addendum. If you talk about the three burned out houses on the site and go from there when at the end it is one newly updated house you will be failing to follow your "scope of work". The fact that a barn and six cows were there at one time in the past has no place in a report that is about what will be there upon completion. The cows and the barn will no longer exist will they? Take the time to educate yourself as these type mistakes will not only cause delay in closing these 203k loans but they may get someone mad enough at your lack of knowledge about your job to turn you in for a USPAP violation that could cost you a lot more than the course on how to appraise these animals. Don't get me wrong here, there are a whole bunch of appraisers who do know how to appraise these critters, and kudos to those, you are doing a wonderful job.
So now we arrive at an "after improved" value what happens next? There are a couple ways to arrive at an "as is" value that are acceptable.
1) Take the "after improved" value appraisal less the "cost to cure" or the construction costs and fees and what is left is an indication of the "as is" value, or
2) The purchase price is also an indication of the "as is" value, isn't it? Yes, or
3) in the case of a refinance, the "existing debt" is acceptable as an "as is" value but I don't necessarily agree with this one but it is in the guideline that way. Why don't I agree with it is simply this - if it is paid off, this method would indicate the "as is" value as "ZERO" and that isn't ever going to be true. In many cases it might be true if they owed anything on the home but seldom if they have been paying down on the home for more than ten to fifteen years.
What if the appraisal on a purchase transaction comes in a little low? This is happening all the time these days isn't it? The appraisal comes in say, 5% lower than the sales price plus the renovation costs and fees. All is not lost, the 203k loan program allows the loan to be up to 10% higher than the "after improved" value appraisal so the deal can still fly. Good news, everyone is still happy and the loan can close. That is the loan can be up to 110% of the "after improved" appraised value.
In the case of a refinance however this is not the case. When you refinance your home or small income units you can only go up to 97.5% of the "after improved" value from the appraisal. You don't get to use the 110% feature of the FHA 203k so this has to be right the first time and that isn't always easy in the current 2010 climate. Home values are not stable in all neighborhoods yet but luckily some are actually increasing in value.
How about the Limited 203k does it have the 110% rule in effect? Yes but again only on the purchase money, not a refinance. It works the same way.
Why is this important? If you have a transaction that is that close that is a 203b loan and the appraisal isn't coming in quite high enough... FIX SOMETHING, anything and switch it to a Limited 203k and take advantage of the 110% rule. Don't let your deals fall apart. How many times have got close to closing, the last thing you need is the appraisal, and it comes in a little low. Now the buyer needs to come up with more money to close and they are already at their limit. Two things might come into place depending on the type of loan you are using.
1) If it is a 203b, you may consider making a small repair and switching it to a Limited 203k to achieve the 110% benefit.
2) If it is already a 203k or Limited 203k how can you get that little push on the value? Take a close look at the energy improvements that are being made, if any. Your answer may be staring you in the face. I had one years ago that was to close on 26 December of one year... everything was coming together and the agents were looking forward to a Christmas bonus by closing this one the day after Christmas. You probably guessed it, the borrowers went out and charged their Christmas presents and ran their debt up.. the deal was about to die when I happened to call the lender to congratulate him and found this was about to go in the toilet. I went back to my report and found we had $8,000 in energy related items, they filled out the paperwork and added an EEM - Energy Efficient Mortgage to it and were able to pull that much out of the loan, re-qualify the client and then put those items back into the mix and close the loan. It is was all in the way you look at the problem.