Understanding HUD REO-Part Two: The REO Appraisal

Written By: Stacey Sprain

Understanding HUD REO- Part One: Overview of the REO Process

Last week, I presented Part One in a series of articles to help expand your knowledge and understanding of HUD REO (Real Estate Owned) Sales for purposes of FHA lending. This week, in part two of the series, you’ll find further explanation of the appraiser’s responsibilities in regards to the HUD REO appraisal requirements.

Need FHA Training? CLICK HERE: http://www.FHA-Classes.org

The REO Appraisal Report
The HUD REO appraisal report must include, at minimum, the following:
• Appropriate appraisal form for property type;
o 1004 for single family detached, including modular homes and PUDs
o 1073 for condominiums and site condos
o 1004c for manufactured housing
• FHA REO case number;
• Property Condition Report;
• Interior sketch or floor plan;
• Location Map;
• Subject & Comparable Photos;
• Form 1004-MC Market Conditions Addendum;
• Other typical appraisal forms & addenda;
• Interior photos of property condition are always advised but are required when repairs exceed $5,000;
• Optional information may include additional exterior and interior photos, documentation such as reports, studies, analytics, and/or copies of prior listings to support conclusions and analysis.

Overall, the appraiser who inspects the REO property for appraisal purposes must appraise the property according to the exact same appraisal and valuation standards as he/she would for any other property that is to be FHA-insured. However, there are a few specific instructions that the appraiser must follow that are specific to the any appraisal for an REO property.

Need FHA Training? CLICK HERE: http://www.FHA-Classes.org

• The “Assignment Type” on appraisal grid page one should be checked to indicate “other” with “HUD Real Estate Owned (REO)” as a commentary.
• The Owner of Public Record on appraisal grid page one should list HUD but additional information may need to be provided to the appraiser from the asset manager to prove HUD is the current owner in cases where recording of the property transfer to HUD may be delayed.
• The intended user on appraisal grid page one should indicate “Asset Manager, HUD/FHA, and Lender.”
• The intended use on appraisal grid page one should list the following: “To estimate the “as is” market value to provide a basis for determining the listing price for marketing purposes.”
• If the property rights are held by leasehold, the appraiser must indicate “leasehold” under Property Rights Appraised on appraisal grid page one with commentary to “see additional leasehold commentary” to report the term of the lease and determine separate value of leasehold interest.
• Appraiser must provide a list of any buyer incentives typically offered in the market for unrepaired as opposed to repaired properties. These include:
• Closing costs
• Down payment assistance
• $100 down program (in certain areas)
• Good Neighbor Next Door (GNND)
• Other incentives, as appropriate.
• If defective paint is observed in a home built before 1978, the appraiser must enter an “X” in the “Yes” box in the physical deficiencies or adverse conditions section of the appraisal. If no defective paint is observed in a home built before 1978, no explanation is required.
• The appraiser must utilize Sales Comparison approach since it is most applicable and reliable while also considering cost approach and income approach.
• The appraiser should only use another REO sale as comparables when the REO is deemed to be the best available comparable sale for the market area and
• Is located in the subject neighborhood or reasonable proximity;
• Is comparable to the subject REP with reasonable adjustment;
• Is considered with the vacancy rates and rates of foreclosure in the area;
• Was sold with a willing buyer and seller;
• Was exposed to the market for a reasonable period;
• Is supported by appropriate justification/explanation.

• The appraiser must use descriptive terms to define the subject property and comparable sales, include market-based adjustments and explain line, net and gross adjustments that exceed recommended guidelines.

• If utilities are not on at the time of inspection, the appraiser must indicate in the appraisal exactly which utilities were not turned on at the time of inspection and refer to the Property Condition Report (PCR) to add commentary about status of utilities with reference to the Property Condition Report (PCR) as the source of information.

Appraisal completed “As Is”
The "as is" value is the market value for the property as it exists on the effective date of the appraisal.

Need FHA Training? CLICK HERE: http://www.FHA-Classes.org

Statement of Insurability
As mentioned in Part One of this article series on HUD REO, the REO appraisal must include a “Statement of Insurability” in bold font in the Comment Section of the appraisal report to relay whether or not the property can be sold with FHA mortgage insurance. The Statement must indicate one of the following:

• Insurable; which means the property meet HUD MPR or MPS and is insurable in “as is” condition with no necessary repairs;

• Insurable with Repair Escrows; which means the property does not meet HUD MPR or MPS at the time of inspection but is completed “as is” since it will meet MPR or MPS upon completion of repairs listed in the Supplemental Addendum estimated at $5000 or less; or

• Uninsurable which means the property does not meet HUD MPR or MPS at the time of inspection and requires repairs in excess of $5000.

Listing the HUD REO Property
Refer to Part three of Understanding HUD REO next week where we will take a look at the listing process, how agents get approved to list HUD REO properties, HUD Home Store and the bidding process.

About The Author

Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at: contact@mortgageprocessor.org.

Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.