Fannie Mae Selling Guide Update – December 16, 2014
Two items related to appraisal requirements have been revised in the most recent version of the FNMA Selling Guide which was updated on December 16, 2014.
The first item relates to the Improvements section of the report in regards to Energy Efficient Items and solar panels.
“Solar panels that are leased from or owned by a third party under a power purchase agreement or other similar arrangement are to be considered personal property items and are not included in the appraised value of the property. See B2-3-04, Special
Property Eligibility Considerations, for additional eligibility requirements for properties with solar panels.” (Page 604)
If the subject property has solar panels, the appraiser must ascertain from the home owner if they are leased from or owned by a third party. Appraiser’s comments should address this specific guideline for FNMA compliance. If the subject has solar
panels, the comment should address if they are actually owned by the home owner, or whether they are leased from or owned by a third party and thus considered personal property and not included in the opinion of market value.
The second change involves a FNMA guideline that seems to have been around forever: net and gross adjustment guidelines.
Previously, when net adjustments made to comparables exceeded 15% or gross adjustments exceeded 25%, the appraiser would supply commentary related to why that comparable was used instead of a more similar comparable. In a general sense, this alerted
an appraiser or an underwriter that, due to the adjustments, the comparable used might not be as similar as desired. FNMA never stated the appraiser could not usecomparables that exceeded these guidelines; it only stated the appraiser must explain why they
were used. Common reasons were a lack of recent comparable sales or a comparable might have been used in order to bracket or match a certain element of comparison that the subject had and also to provide support for any adjustments that were made to other
Because of these guidelines, some appraisers would reduce the amount of adjustments so that the net and gross adjustments would not exceed these guidelines instead of making correct adjustments based on the market reaction to the differences between
the subject and the comparables. An example might be that the market analysis shows an adjustment for differences in quality to be $50,000, but instead, the appraiser adjusted the comparable by $25,000 so that net or gross adjustment guidelines were not exceeded.
FNMA has now changed their guidance on net and gross adjustments to the following which is noted on page 622 of the updated Selling Guide under “Analysis of Adjustments:”
“Fannie Mae does not have specific limitations or guidelines associated with net or gross adjustments. The number and/or amount of the dollar adjustments must not be the sole determinant in the acceptability of a comparable. Ideally, the best and
most appropriate comparable would require no adjustment; however this is rarely the case as typically no two properties or transaction details are identical. The appraiser’s adjustments must reflect the market’s reaction (that is, market based adjustments)
to the difference in the properties. For example, it would be inappropriate for an appraiser to provide a $20 per square foot adjustment for the difference in the gross living area based on a rule-of-thumb when market analysis indicates the adjustment should
be $100 per square foot. The expectation is for the appraiser to
analyze the market for competitive properties and provide appropriate market based adjustments without regard to arbitrary limits on the size of the adjustment”.
While FNMA has now removed guidance pertaining to net and gross adjustment parameters, we fully expect that these will remain a client-specific requirement, and appraisers should continue adding commentary when comparables used exceed 15% of net
adjustments and 25% of gross adjustments. Appraisers should keep in mind that the prior guidance was originally intended to have appraisers explain why a comparable was used when it may appear that it might not be the best and most appropriate comparable.
When someone unfamiliar with the subject’s market sees a comparable with large net and gross adjustments, it raises questions on the comparability of that sale. Well-worded comments explaining why this sale was used will go a long way in understanding why
a certain sale was selected as a comparable in the report. Rather than limiting the amount of adjustments, apply the full market derived adjustment amounts, regardless of the net and gross percentages, and then provide commentary to support the adjustments
Again, we cannot stress enough that appraisers should continue supplying net and gross adjustment comments providing the rationale for why the sale was selected as a comparable and supporting the adjustment amounts used.