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SAR - REOs and the FHA buyer April 23 2009.ppt
Excerpts from HUD -
Single Family Reference Guide
NOTE: The appraiser will also annotate in the appraisal that additional repair requirements may apply once all the utilities are on and fully functional.
Checking Mechanical Systems - Please see: Mortgagee Letter 2005-48 An appraiser must examine mechanical, plumbing and electrical systems to ensure they are in proper working order. The appraiser should turn on the systems and observe their performance. The appraiser may call for a certification of a system when he/she cannot determine if it is working properly. An appraiser should not arbitrarily call for such certifications and should understand that they are still responsible for checking on the adequacy of these systems at the time of appraisal. For 2-4 units, note the type of heating and cooling for each unit, if different. Do not operate the systems if doing so may damage equipment, or when outside temperatures will not allow the system to operate. Note in the appraisal report why the system(s) could not be tested.
Appliances: The Valuation Protocol (page D-26 of Appendix D, Handbook 4150.2) requires the appraiser to note the appliances that are present in the home at the time of inspection and whether the appliance is considered personal property or part of the real estate. The protocol further directs the appraiser to treat non-functioning appliances/equipment as deferred maintenance in the valuation process.
The manner in which an appliance is attached to the dwelling would determine whether or not an appliance should be considered part of the real estate. In some real estate markets, it may be typical and customary for certain appliances to convey with the real estate. In these situations, those appliances should be considered real estate and treated as such in the valuation of the property.
In some cases, such as that of REO properties, all or some of the appliances may be missing and there may be damage to the floor, wall or ceiling finish as a result of the removal. Depending upon the magnitude of the damage, the appraiser is expected to treat the damage to the home as deferred maintenance and reflect such in the conclusion of value. Missing appliances must be addressed by the appraiser in the valuation process, particularly when the comparable sales included a full complement of working appliances.
In cases where appliances are missing and minor repairs may also be needed, lenders are encouraged to have the borrower take advantage of the Streamlined 203(k) loan product, which has no minimum repair cost threshold and is designed to cover such improvements/replacements.
Repairs and Alterations: Deficiencies, required repairs, alterations and/or required inspections must be reported within the appropriate section of the applicable appraisal reporting form. (See Mortgagee Letter 2005-48 and 2005-34)
- Required Repairs: Required repairs are limited to those repairs necessary to preserve the continued marketability of the property and to protect the health and safety of the occupants, A.K.A. the three S's:
- Safety: protect the health and safety of the occupants
- Security: protect the security of the property (security for the FHA insured mortgage.)
- Soundness: correct physical deficiencies or conditions affecting structural integrity
Properties in Poor Condition: If the subject property is in such poor condition that it may be cost prohibitive or impractical to bring it up to FHA's minimum property requirements, the appraiser should recommend rejecting the property and contact the Lender before continuing with the assignment. If continuing:
- Complete the appraisal on an "AS IS" basis, clearly marking the report as recommended for rejection for Section 203(b) and provide reasons for the rejection;
- Provide a list of all major deficiencies and state that the list should not be considered all-inclusive. Additional items may be required before acceptable for FHA Insurance; and
- Provide photographs of deficiencies to support recommended action.
3. Code Enforcement for Existing Properties: As stated in HUD Handbook 4150.2 HUD has neither the authority nor responsibility for enforcing code. This rests with the local municipalities.
4. Clearing Conditions on Existing Homes
- All repair items required by the appraiser or underwriter must be inspected and the clearance documented.
A professionally licensed, bonded, registered engineer, licensed home inspector or appropriately registered/licensed trades person, as applicable, must provide documentation that all deficiencies have been acceptably corrected upon completion of repairs. "As applicable" has been determined to mean any individual who the lender deems to be qualified, which might be the appraiser.
Professionals as defined above may use their company's forms and letterhead to make the certifications. Appraisers and Compliance Inspectors are to use the Compliance Inspection Report, form HUD-92051. The individual signing Section II must be the person who actually performed the inspection. Section III or IV, as appropriate, is to be signed by the Direct Endorsement Underwriter.
- Mortgagee Certification: When a Mortgagee Certification is used to clear minor conditions the HUD-92051 is not required.
1. General: ALL habitable rooms must have a heat source. This does not mean that each room must contain a heating device but that each room must receive sufficient heat. (Exception: Homes located in the Caribbean, Hawaii and the Florida counties of Lee, Charlotte, Glades, Hendry, Palm Beach, Collier, Broward, Monroe and Miami-Dade do not require heat if, the lack of, is "typical" for the market area and does not adversely affect the marketability of the property.
2. Wood Stoves and Solar Systems: Dwellings with wood burning stoves or solar systems as a primary heat source must have permanently installed conventional heating systems that can maintain at least 50 degrees Fahrenheit in all living areas and those containing plumbing systems. These systems must be installed in accordance with the manufacturer’s recommendations.
3. Floor Heaters: Due to the inherit dangers of a floor heater it is highly recommended that floor heaters in need of repair be replaced with another permanent heat source.
4. Non-Conventional Heating Systems: All non-conventional heating systems, such as space heaters and others, must comply with local jurisdictional guidelines. Often these are not acceptable as the primary source of heat.
5. Propane tanks must be a safe distance from the dwelling. Leased tanks are acceptable when not offered for sale. Propane fired furnaces located in a crawl space area is not acceptable.
The property must be free of those foreseeable hazards and adverse conditions that may:
(1) affect the health and safety of the occupants
(2) affect the structural soundness of the improvements
(3) impair the customary use and enjoyment of the property
The hazards include, but are not limited to soil contamination; operating and abandoned oil and gas wells; abandoned wells; slush pits; heavy traffic; airport noise and hazards; runway clear zones/clear zones; proximity to high pressure gas, liquid petroleum pipe lines or other volatile and explosive products; high-voltage transmission lines; radio/TV transmission towers; excessive smoke, fumes, odors and stationary storage tanks containing flammable or explosive material. Other hazards that must be assessed include potential damage from soil or other differential ground movements, subsidence, ground water, inadequate surface drainage, flood, erosion, excessive noise, defective lead base paint (24 CFR Part 35) and other hazards on or off the site. The appraiser is to note the proximity to dumps, landfills and other sites that could contain hazardous wastes. If there is readily observable evidence of on-site contamination, the appraiser will call for further inspection in the “site section” of the appraisal report.
Primary Reference for articles in this section are Mortgagee Letter 2005-48 Appendix D, HUD Handbook 4150.1 Rev-1 Chapter 4, HUD Handbook 4150.2 Section 2-2, & 24 CFR 200.926d