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Analyzing Appraisals: Focus on Sales Comparison (Presentation Slides)

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This credit-union specific webinar series covers key subjects designed to help you better serve your members and add value to your credit union. From underwriting and analyzing credit to appraisals …

This credit-union specific webinar series covers key subjects designed to help you better serve your members and add value to your credit union. From underwriting and analyzing credit to appraisals and mortgage insurance, you’ll get a comprehensive introduction to the latest strategies and regulatory insights. Learn more at: www.nafcu.org/genworth

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  • 1. Analyzing Appraisals:Focus on Sales ComparisonFebruary 2013 ©2012 Genworth Financial, Inc. All rights reserved.
  • 2. Property Issues…How many cows make the property unacceptable????‫‏‬Analyzing Appraisals: Focus on Sales Comparison 1
  • 3. Session OverviewAgenda – Fannie Mae Update – Comparable Properties – Sales Comparison Grid • Adjustments • Best Practice Recommendations – Sales Comparison Considerations – Common and Serious Sales Comparison Issues – Appraisal Analysis Resources and ToolsAnalyzing Appraisals: Focus on Sales Comparison 2
  • 4. Recent Fannie Mae Appraisal Changes Changes are effective in DU the weekend of October 24,2012Analyzing Appraisals: Focus on Sales Comparison 3
  • 5. General Appraisal Analysis RemindersImportant Point‫‏‬ – Appraisers Choose Comps. – Underwriters Review AppraisalsAnalyzing Appraisals: Focus on Sales Comparison 4
  • 6. General Appraisal Analysis RemindersAppraiser Responsibilities‫‏‬ – Opinion of Market Value-Does it meet Fannie/Freddie Definition – Supporting Data – Explanations – Sales DataUnderwriter Responsibilities‫‏‬ – Appraisal Review. • Consistent. • Supportable. • Makes sense. – Guideline compliance. • Correct form. • Applicable GSE, Investor, Lender and/or MI Company guidelines. • Complete • UAD compliant.Analyzing Appraisals: Focus on Sales Comparison 5
  • 7. General Appraisal Analysis RemindersIf there is inconsistent data: – Appraiser explanation is necessary. – Investors may be apprehensive to purchase the loan.Analyzing Appraisals: Focus on Sales Comparison 6
  • 8. Analyzing Comparable PropertiesGuidelines and Best Practices for Reviewing the Appraiser Chosen‫‏‬Comparable PropertiesAnalyzing Appraisals: Focus on Sales Comparison 7
  • 9. Analyzing Comparable PropertiesAt Least Three Closed Sales – More can be provided. – Pending sales or listings: • Can be used when appropriate. • These might provide additional supporting data.Comp’s Sale Date (Age)‫‏‬ – Check applicable guidelines. – Closed within the past six months preferred. – Explanations and possible time adjustments for older comps.Analyzing Appraisals: Focus on Sales Comparison 8
  • 10. Analyzing Comparable PropertiesShortage of Comparable Properties – Possible Reasons: • Nature of property improvements. • Relatively low number of sale transactions in the neighborhood. – Comparables may have to be: • Older than six months or a year. • From a nearby, competing neighborhood. – Appraiser Explanation and Market Data.Analyzing Appraisals: Focus on Sales Comparison 9
  • 11. Analyzing Comparable PropertiesWhen there is a shortage of comps, theappraiser should explain: – Effort made to find better comps? – Why the shortage of recent sales? – What does the shortage indicate? • Stable market? • Marketability issue? – Shared unique characteristics? – Why a potential comp was not selected? • i.e. Foreclosure sale or non-arms length transaction.Analyzing Appraisals: Focus on Sales Comparison 10
  • 12. Analyzing Comparable PropertiesUnacceptable Comparison Selection Practices – Misrepresentation – Inappropriate Comps • Unacceptable Locationally • Not Physically Similar – Uninspected Properties • No Appraiser Drive-By – By passing more appropriate comparables • “Cherry Picking”Analyzing Appraisals: Focus on Sales Comparison 11
  • 13. Analyzing Comparable PropertiesRequirements Include: – Same or Competing Market/Neighborhood – Similar Factors Impacting Value • Marketability issues. (Adjacent to dump) • Functional obsolescence. (Only bathroom located through kitchen) • Location issues. (Busy street) • Unique features. (Swimming pool)Analyzing Appraisals: Focus on Sales Comparison 12
  • 14. Analyzing Comparable PropertiesAnalyzing Appraisals: Focus on Sales Comparison 13
  • 15. Analyzing Comparable PropertiesReview Appraisal Map‫‏‬ – Subject “Center of Attention?” – Distances make sense? – Natural boundaries honored? • i.e. Waterways, Highways, Large Parks.Analyzing Appraisals: Focus on Sales Comparison 14
  • 16. Analyzing Comparable PropertiesHow far (distance) can the appraiser go to find comparables? – NO distance rule. – Distances must make sense. – Urban location • Highly densely populated, should be close, within one mile • Blocks might be more appropriate in certain scenarios. – Suburban location • No set distance rule. • Case by case. • Sometimes more than a mile is appropriate. • Track Home subdivision – Rural location • Not a lot of homes to select from. • Might be miles to find similar market alternative. – Appraiser explanation is key.Analyzing Appraisals: Focus on Sales Comparison 15
  • 17. Analyzing Comparable PropertiesEstablished subdivisions, condominium, or PUD projects: – Comps should be within the subject’s project.New subdivisions, condominium, or PUD projects: – At least one comp within the subject’s project. – At least one comp from a nearby competing development.Analyzing Appraisals: Focus on Sales Comparison 16
  • 18. Analyzing Comparable PropertiesBracketing‫‏‬ – At least one comparable superior and one inferior to the subject. – As many bracketed items as possible: • Unadjusted Sale Price • Gross Living Area (GLA) • Lot Size • Adjusted Sale Price • Other Major Physical Characteristics – Bracketing is a best practice. • Upward and downward adjustments balance one another. – Less likelihood of adjustment inflation. • Bracketing may evidence conformity to the neighborhood.Analyzing Appraisals: Focus on Sales Comparison 17
  • 19. Analyzing Comparable PropertiesGross Living Area (GLA) Square Footage and Bedroom Count‫‏‬Analyzing Appraisals: Focus on Sales Comparison 18
  • 20. Analyzing Comparable PropertiesGross Living Area (GLA) Square Footage – Comparables within 30% of the subject are preferred • Anything outside of that is not typically similar. – Differences < 100 square feet are not usually adjusted. • Exception: small homes (<1,200 sq ft).Bedroom Count – Similar bedroom count is best. • Typically, at least two comps should have same bedroom count. • One more or fewer bedroom is ordinarily acceptable for 3+ bedroom homes. – Two bedroom subjects should have one or more two-bedroom comps. – Three and four bedroom homes can usually be compared.Analyzing Appraisals: Focus on Sales Comparison 19
  • 21. Analyzing Comparable PropertiesDeclining Markets – Check applicable guidelines carefully. – Typical guideline requirements: • At least two comparables closed within the past three months. • A minimum of one, preferably two, listing(s) and/or pending sales. – Downward time adjustments may be warranted. • If older comparables used. • If market conditions have changed since the comparable went under contract.Analyzing Appraisals: Focus on Sales Comparison 20
  • 22. Analyzing Comparable PropertiesDo the subject and comparables appear to be similar?‫‏‬Analyzing Appraisals: Focus on Sales Comparison 21
  • 23. Sales Comparison GridBasics‫‏‬Analyzing Appraisals: Focus on Sales Comparison 22
  • 24. Analyzing Sales Comparison Grid Start: Comp’s Actual Sales Price Compare: To make the comp more like the subject, one must add/remove a ______. Consider: Does ______ bring value to property? If not, no adjustment warranted. If yes, how much? Example: To make this comp more like the subject, add the finished basement rooms. (+) The appraiser’s research indicates the rooms bring $3,000 in value, so there is a + $3,000 adjustment. Value: Indicated Value for Subject is established by adding/subtracting the column.Analyzing Appraisals: Focus on Sales Comparison 23
  • 25. Analyzing Sales Comparison GridValue Adjustment Basics‫‏‬ – Adjustment based on value feature contributes to property. – Not based on building cost. – Differ by market area. – Must be supported, justified and explained. – Should make sense.Analyzing Appraisals: Focus on Sales Comparison 24
  • 26. Analyzing Sales Comparison GridField Types – Non-Value Adjustment Fields – Value Adjustment Fields • Basic Information • Guidelines and Best PracticesAnalyzing Appraisals: Focus on Sales Comparison 25
  • 27. Analyzing Sales Comparison GridAdjustment Percentage Red Flags‫‏‬ Single Adjustment* > 10% Net Adjustment > 15% Gross Adjustment > 25% – Best practice benchmarks. – Fannie Mae® requires appraiser comment/explanation if net or gross exceeded. – Severity and frequency should be considered. – Appraisers often exceed these. • Explanation warranted. • Must make sense. *The Single Adjustment recommendation, 10%, is no longer a GSE guideline, but is a helpful rule of thumb.Analyzing Appraisals: Focus on Sales Comparison 26
  • 28. Analyzing Sales Comparison GridNet Adjustment Calculation‫‏‬ – Percent difference between comp’s Sales Price and Adjusted Sale Price. Example: Net Adjustment is the comp’s Actual Sales Price minus the Adjusted Sales Price equals Net Adjustment. $155,000 - $153,000 = $2,000 Net Adjustment/Sales Price is the Percent Net Adjustment. $2,000/$155,000 = 1.3%Analyzing Appraisals: Focus on Sales Comparison 27
  • 29. Analyzing Sales Comparison GridGross Adjustment Calculation‫‏‬ – Percent dollar amount of all adjustments, without regard to whether they are positive or negative. Example: Gross Adjustment is the total of the absolute value of all adjustments. $5,000 + $3,000 = $8,000 Gross Adjustment/Sales Price is the Percent Gross Adjustment. $8,000/$155,000 = 5.2%Analyzing Appraisals: Focus on Sales Comparison 28
  • 30. Analyzing Sales Comparison GridTrue or False?‫‏‬ – Given the Adjusted Sales Price of the Comparables shown here, the indicated value for the subject is $158,200. ( $153,000 + $157,800 + $163,800 ) / 3 = $158,200 False it is NOT an averageAnalyzing Appraisals: Focus on Sales Comparison 29
  • 31. Analyzing Sales Comparison GridIndicated Value by Sales Comparison Approach‫‏‬ – Summary – Written rational – Weighted average • Not simply a numeric averageAnalyzing Appraisals: Focus on Sales Comparison 30
  • 32. Non-Value Adjustment FieldsAddress, Proximity to Subject, Sale Price, Price/GLA, Data and Verification‫‏‬SourcesAnalyzing Appraisals: Focus on Sales Comparison 31
  • 33. Analyzing Sales Comparison GridNon-Value Adjustment Lines (Disclosure) – Address – Proximity to Subject – Sales Price – Sales Price/Gross Living Area – Data Source – Verification SourceAnalyzing Appraisals: Focus on Sales Comparison 32
  • 34. Analyzing Sales Comparison GridNon-Value Adjustment Lines – Address • Verify at http://www.usps.com – Proximity • Distance – In miles, to two decimal points. – As the crow flies. • Direction – From the subject, to the comp. – Sales Price • Actual sales price,Analyzing Appraisals: Focus on Sales Comparison 33
  • 35. Analyzing Sales Comparison GridSale Price/Gross Living Area – AKA Price per Square Foot: – Sales Price divided by Gross Living Area square footage. – Can indicate whether the subject and comparables are similar.Analyzing Appraisals: Focus on Sales Comparison 34
  • 36. Analyzing Sales Comparison GridData and Verification Sources – Specific Data Source used for each comparable shown. • Specific MLS and MLS#, when applicable. • Other sources explained in the “Comments” section. • Days on Market (DOM), to four digits, must be included. – Verification Source required. – Data Source can be party related to transaction. • So long as Verification Source public, published, and verifiable.Analyzing Appraisals: Focus on Sales Comparison 35
  • 37. Value Adjustment FieldsBasic Grid Reading, General Best Practices, UAD Impacted Fields, Field‫‏‬Specific Best Practices and GuidelinesAnalyzing Appraisals: Focus on Sales Comparison 36
  • 38. Analyzing Sales Comparison GridAdditional Best Practices for Reviewing Adjustments‫‏‬ – Subjective and Objective Adjustments – Field Specific, Including UAD Requirements • Sales Concessions • Time Adjustments • Basement Space – Value – Finished versus Unfinished – Additional RemindersAnalyzing Appraisals: Focus on Sales Comparison 37
  • 39. Analyzing Sales Comparison GridAcross the Board Adjustments – Subject feature • No similarly featured comparable • Adjustments to each comp in the same direction for any single item of comparison. • Common Examples: Swimming Pool, Shed, Barn, Greenhouse or Workshop – Questionable market acceptance – Unsupported value additions/subtractions – Additional comparables • Older, distant or otherwise not usually acceptable • Market acceptance • ValueAnalyzing Appraisals: Focus on Sales Comparison 38
  • 40. Field Specific AdjustmentsIncluding Best Practices and UAD Impacted Fields‫‏‬Analyzing Appraisals: Focus on Sales Comparison 39
  • 41. Analyzing Sales Comparison GridSale or Financing Concessions‫‏‬ – First Line • Type of sale. – Second Line • Financing type. • Concession Amount. – See Fannie Mae and Freddie Mac Uniform Appraisal Dataset Specification, Field-Specific Standardization Requirements (Appendix D) for abbreviations.Analyzing Appraisals: Focus on Sales Comparison 40
  • 42. Analyzing Sales Comparison GridSales and Financing Concessions‫‏‬ – Fannie Mae® Selling Guide §B4-1.4, Appraisal Report AssessmentAnalyzing Appraisals: Focus on Sales Comparison 41
  • 43. Analyzing Sales Comparison GridSales and Financing Concessions‫‏‬ – Freddie Mac® Single-Family Seller/Servicer Guide §44-15Analyzing Appraisals: Focus on Sales Comparison 42
  • 44. Analyzing Sales Comparison GridFinancing Concessions‫‏‬ – Within allowable limit? – Adjustment required? – Narrative included? – Is sales price inflated by concession’s inclusion? – Excessive financing concessions deducted from sales price? – LTV recalculated, if necessary?Sales Concessions‫‏‬ – Non-real property items in contract? – Non-real property items deducted from sales price? – LTV recalculated, if necessary?Analyzing Appraisals: Focus on Sales Comparison 43
  • 45. Analyzing Sales Comparison GridDate of Sale/Time‫‏‬ – Sale date and contract date. – Market condition adjustments: • Sometimes warranted for significant market changes. • Explanation required. • Measured from date of contract, not sale.Analyzing Appraisals: Focus on Sales Comparison 44
  • 46. Analyzing Sales Comparison GridLocation‫‏‬ – Look for similar ratings and factors. – Impact on value rating. • Neutral (N) • Beneficial (B) • Adverse (A) – Factor(s). • One or Two • Explain what impacts the value rating. – Value adjustment may be warranted: • Otherwise similar properties. • Appraiser explanation. – Check Location, View and Site value adjustments to ensure the same influence is not adjusted twice. • i.e. Oceanfront Property *Any necessary location adjustment would appear on the “Other” line, per UAD Appendix D. .Analyzing Appraisals: Focus on Sales Comparison 45
  • 47. Analyzing Sales Comparison GridSite‫‏‬ – Lot size. • Not description. (i.e. Average) – Entire site. – Less than one acre: • Whole numbers, square footage. – One acre or more: • Acreage to two decimal points. – Similarly sized lots. – Adjustments • Consistent with lot value in cost approach. • Supported with market data.Analyzing Appraisals: Focus on Sales Comparison 46
  • 48. Analyzing Sales Comparison GridView‫‏‬ – Look for similar ratings and factors. – Impact on value rating: • Neutral. (N) • Beneficial. (B) • Adverse. (A) – Factor(s): • One or Two. • Explain what impacts the value rating. – Value adjustment may be warranted: • Otherwise similar properties. • Appraiser explanation. – Check Location, View and Site value adjustments to ensure the same influence is not adjusted twice. • i.e. oceanfront property.Analyzing Appraisals: Focus on Sales Comparison 47
  • 49. Analyzing Sales Comparison GridDesign‫‏‬ – Architectural design/style – Narrative – i.e. Mid-Century Modern, Colonial, Craftsman, Ranch – Does the market react to different property designs?Analyzing Appraisals: Focus on Sales Comparison 48
  • 50. Analyzing Sales Comparison GridQuality of Construction‫‏‬ – UAD Quality Rankings: Q1-Q6 • See Appendix D for specific ratings definitions. – Similar rankings. • Otherwise, possible adjustment. • Appraiser explanation.Actual Age‫‏‬ – Adjustments can be – Validate no double counting for age and conditionAnalyzing Appraisals: Focus on Sales Comparison 49
  • 51. Analyzing Sales Comparison GridCondition‫‏‬ – UAD Condition Rankings: C1-C6 • See Appendix D for specific ratings definitions. – Subject’s condition rating must be the same as rating indicated in Improvements Section. • Appraisal subject to completion/repair. • Sales comparison based on anticipated condition upon completion. – Similar rankings. • Otherwise, possible adjustment. • Appraiser explanation.Analyzing Appraisals: Focus on Sales Comparison 50
  • 52. Analyzing Sales Comparison GridBedrooms‫‏‬ – Appraiser explanations for adjustments. – Particular markets.Bathrooms‫‏‬ – Full and half baths reported.Square Footage‫‏‬ – Similar adjustments.Analyzing Appraisals: Focus on Sales Comparison 51
  • 53. Analyzing Sales Comparison GridBasement‫‏‬ – First Line • Square footage. • Finished square footage • Basement access: – Walk-out (wo), walk-up (wu) or interior only (in). – Second Line • Number of rooms. • Type of finished rooms: – Rec room (rr), bedroom (br), bath (ba) or other (o). – Baths reported in ‘full.half’ format. – Basement value and adjustments must make sense. • Check basement and basement finished adjustments to value given above grade living area.Analyzing Appraisals: Focus on Sales Comparison 52
  • 54. Analyzing Sales Comparison GridFunctional Utility‫‏‬ – If adjusted, explained in comments.Heating/Cooling, Energy Efficient‫‏‬Items, Garage/Carport,Porch/Patio/Deck, Fireplace. – Adjustments need to make sense.Other‫‏‬ – In blank spaces. – Need to make sense.Analyzing Appraisals: Focus on Sales Comparison 53
  • 55. Other Sales Comparison ConcernsPrevious Sales/Transfer History. Genworth Guidelines, Common Sales‫‏‬Comparison Issues and Resources.Analyzing Appraisals: Focus on Sales Comparison 54
  • 56. Other Sales Comparison DataSale History Reporting and Analysis‫‏‬ – USPAP and GSEs require: • Three year sale history reporting/analysis for subject. • One year history reporting/analysis for comps – Can help identify: • Value increases. • Foreclosure, short sale or quit claims in title. • Unsupported or supported changes in value. • Seasoning of ownership of property.Analyzing Appraisals: Focus on Sales Comparison 55
  • 57. MC 1004Do the comments confirm the adjustments?‫‏‬Analyzing Appraisals: Focus on Sales Comparison 56
  • 58. Analyzing Appraisals: Focus on Sales Comparison 57
  • 59. Sales ComparisonSome Commonly Identified Appraisal Red Flags‫‏‬ – Using dated comps without sufficient explanation. – Not relying upon the most similar comparable property. • Closest. • Most recent sale. • Most similar property. – Indicated value outside the value range for the neighborhood. – Photos show a feature/situation not reflected in the appraisal. • Major farm structures or livestock may evidence farm use. • Appraiser should explain unusual circumstances and that land is used residentially. – Gross adjustments in excess of 25% of the original sales price on several comps. • Without sufficient explanation and justification. – Not identifying an area as declining when credible evidence suggests a decline.Analyzing Appraisals: Focus on Sales Comparison 58
  • 60. Tools and Job AidsAppraisal Review Checklist, Appraisal Review Reminders, Top MI‫‏‬Appraisal Issues, Additional Training, Websites and Resources.Analyzing Appraisals: Focus on Sales Comparison 59
  • 61. Genworth Appraisal Review Checklist – http://www.mortgageinsurance.genworth.com/LenderServices/Underwriting.aspx Consult Fannie Mae and Freddie Mac Uniform Appraisal Dataset Specification: Field Specific Standardization Requirements and all applicable guidelines for complete UAD requirements.Analyzing Appraisals: Focus on Sales Comparison 60
  • 62. Job AidsAnalyzing Appraisals: Focus on Sales Comparison 61
  • 63. Sales Comparison and Genworth“Value Not Supported by Comparables” is a top Genworth Top MI‫‏‬Decision Error.Analyzing Appraisals: Focus on Sales Comparison 62
  • 64. Resources • http://www.realtor.com •http://maps.yahoo.com • http://listingbook.com •http://earth.google.com • http://www.realquest.com •http://www.freddiemac.com/learn/pdfs/u w/apr_reminders.pdf (Freddie Mac • http://www.realtytrac.com checklist) • http://www.zillow.com •https://www.efanniemae.com/sf/guides/ • http://www.corelogic.com ssg/relatedsellinginfo/appcode/ (Fannie Mae Appraisal Guidance and Code of • http://www.platdata.com Conduct Information) • http://mortgagefraudblog.com •www.mortgageinsurance.genworth.com • http://www.appraisalfoundation.org • http://www.hud.gov Genworth Action Center 800 444.5664Analyzing Appraisals: Focus on Sales Comparison 63
  • 65. Appraisal Review RemindersGenworth Appraisal Webinars – Appraisal Underwriting – Condominium Appraisal Review – Manufactured Housing – Calculating Rental Income – Rural Property Appraisals – 1004MC and Appraiser IndependenceAnalyzing Appraisals: Focus on Sales Comparison 64
  • 66. Thank You!©2012 Genworth Financial, Inc. All rights reserved. 65
  • 67. Legal Disclaimer Genworth Mortgage Insurance is happy to provide you with these training ‫‏‬ materials. While we strive for accuracy, we also know that any discussion of laws and their application to particular facts is subject to individual interpretation, change, and other uncertainties. Our training is not intended as legal advice, and is not a substitute for advice of counsel. You should always check with your own legal advisors for interpretations of legal and compliance principles applicable to your business. GENWORTH EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, ‫‏‬ EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THESE MATERIALS AND THE RELATED TRAINING. IN NO EVENT SHALL GENWORTH BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER WITH RESPECT TO THE TRAINING AND THE MATERIALS. ‫‏‬©2012 Genworth Financial, Inc. All rights reserved. 66