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Fannie Mae released the final format of its new, revised residential forms in March 2005. Fannie Mae is replacing nearly all residential appraisal forms, including the forms for single-unit properties, individual condominium units, individual cooperative units, multiunit residential properties (2-4 units), and field review assignments. These forms have substantial changes, including the addition of many new certifications and some new questions. Since the old Fannie Mae forms are not compliant with USPAP anymore, most appraisers are reluctant to continue to use those forms. The answer may lie within the efforts of some members of the Appraisal Institute. When Fannie Mae announced its test forms and the direction the forms were taking, a committee of residential appraisers was created to look at the possibility of the Appraisal Institute designing and publishing nonlender residential forms. The work of this committee has been completed and the first of these forms-the Residential Summary Appraisal Report for single-unit properties-has been published. The new Residential Summary Appraisal Report appears to be the answer to the problem of what forms should be used for alternative or nonlending assignments. It is recognized that this new form could be used for lending where the loan is not salable to Fannie Mae and there is no desktop or automatic underwriting.

This edition of "Residential Appraising" looks at why the new Fannie Mae appraisal report forms should not be used for non-Fannie Mae appraisals. This column also explains the Appraisal Institute's new, alternative report form for valuations where the Fannie Mae forms are not appropriate.

Background

Fannie Mae released the final format of its new, revised residential forms in March 2005.1 Fannie Mae is replacing nearly all residential appraisal forms, including the forms for single-unit properties, individual condominium units, individual cooperative units, multiunit residential properties (2-4 units), and field review assignments. These forms have substantial changes, including the addition of many new certifications and some new questions. In its announcement, Fannie Mae provided the following directive:

Our final appraisal report forms dated March 2005 are required for appraisals performed on and after November 1, 2005. Lenders and appraisers may continue to use our existing appraisal report forms or the test forms released in 2004 until October 31,2005. All of our standard applicable exhibits that are used to support an appraisal based on the particular property inspection type are required when using these report forms.

It is important to remember, however, that these forms were designed by Fannie Mae for lender use only. With the new Uniform Residential Appraisal Report (Form 1004), and with nearly every other Fannie Mae residential mortgage appraisal form, residential appraisers are now seeing that the new forms are really not designed for other uses.

In the past, it was common for residential appraisers to use the Uniform Residential Appraisal Report (URAR) and other Fannie Mae forms to report appraisals for nonlender uses, including divorce settlement, estate settlement, property owner advice, and in some cases for low-cost relocation appraisals. Some appraisers even stretched the forms for use in eminent domain condemnation proceedings for property owners. At least one appraiser put an appraisal of commercial property (a U.S. Post Office) on the URAR residential form. These forms have been used and misused for many years; now, some appraisers are confused about what to do when the property or assignment is not suitable for the only form they have ever used.

Form Provisions Limiting Fannie Mae Report Use

The new Fannie Mae forms are not conducive to "alternative uses" because of the specific language within the forms. The following are examples of provisions that limit the use of Fannie Mae forms in nonlender appraisal assignments.

Reconciliation section

On page 2 of the new URAR form, the Reconciliation section states:

Indicated Value by: ____________________

Sales Comparison Approach $____________________

Cost Approach (if developed) $____________________

Income Approach (if developed) $____________________

This appraisal is made D "as is", [white square] subject [white square] completion per plans and specifications on the basis of a hypothetical condition that the improvements have been completed, [white square] subject to the following repairs or alterations on the basis of a hypothetical condition that the repairs or alterations have been completed, [white square] or subject to the following required inspection based on the extraordinary assumption that the condition or deficiency does not require alteration or repair:

____________________

____________________

Based on a complete visual inspection of the interior and exterior areas of the subject property, defined scope of work, statement of assumptions and limiting conditions, and appraiser's certification, my (our) opinion of the market value, as defined, of the real property that is the subject of this report is $ ____________________, as of ____________________, which is the date of inspection and the effective date of this appraisal.

The provision in the last line stating "which is the date of inspection and the effective date of this appraisal" will contradict any other statements in the report that indicate an effective date other than the inspection date. An effective date other than the date of inspection, however, is commonly used for estate appraisals, and sometimes for divorce appraisals.

Approaches to Value section

On page 3 of the new URAR form, the following headings appear:

COST APPROACH TO VALUE (not required by Fannie Mae)

INCOME APPROACH TO VALUE (not required by Fannie Mae)

The qualifiers "not required by Fannie Mae" on the cost approach and the income capitalization approach refer to Fannie Mae's standard for appraisals; however, this standard is not necessarily the same as other clients' standards. While the cost approach and income capitalization approach are not applicable in some property appraisals, to exclude them from all appraisals is not mainstream thinking.

Definitions section

Page 4 of the URAR includes the Definition section of the form. A number of provisions in this section limit the use of the form in non-Fannie Mae appraisals, especially the provisions on changes and on intended uses.

Limits on Changes. Near the top of the Definitions section the following statement appears:

This appraisal report is subject to the following scope of work, intended use, intended user, definition of market value, statement of assumptions and limiting conditions, and certifications. Modifications, additions, or deletions to the intended use, intended user, definition of market value, or assumptions and limiting conditions are not permitted. The appraiser may expand the scope of work to include any additional research or analysis necessary based on the complexity of this appraisal assignment Modifications or deletions to the certifications are also not permitted. However, additional certifications that do not constitute material alterations to this appraisal report, such as those required by law or those related to the appraiser's continuing education or membership in an appraisal organization, are permitted.

This provision precludes changing the assumptions, limiting conditions, and certifications contained in the appraisal report. This may or may not be a limitation on alternative intended uses of the Fannie Mae appraisal reports; it certainly limits an appraiser's option to amend or alter the form. Some appraisers also believe that this increases liability to legal suits; however, that is best determined by each appraiser's attorney.

Limits on Intended Use. The Definitions section of the URAR form includes the following definitions related to intended use:

INTENDED USE: The intended use of this appraisal report is for the lender/client to evaluate the property that is the subject of this appraisal for a mortgage finance transaction.

INTENDED USER: The intended user of this appraisal report is the lender/client.

These URAR definitions clearly show that this form does not lend itself to nonlender uses. Using the URAR form, which contains these statements, will only confuse the report reader about the intended use of the appraisal report.

Appraiser's Certification section

If for no other reason, many appraisers are not using the new URAR for alternative uses because of the certifications found in that form. The Appraiser's Certification section includes multiple attestations. For example, Certification 2 on page 5 of the URAR states:

APPRAISER'S CERTIFICATION: The Appraiser certifies and agrees that:

2.1 performed a complete visual inspection of the interior and exterior areas of the subject property. I reported the condition of the improvements in factual, specific terms. I identified and reported the physical deficiencies that could affect the livability, soundness, or structural integrity of the property.

Obviously, it makes perfect sense for this certification to be in a form designed by Fannie Mae for Fannie Mae loans; however, it may not be an appropriate certification for an appraiser in other types of valuations. The provisions regarding "complete" and "specific terms" may be a problem for many appraisers.

Also on page 5, Appraiser's Certification 4 states:

4. I developed my opinion of the market value of the real property that is the subject of this report based on the sales comparison approach to value. I have adequate comparable market data to develop a reliable sales comparison approach for this appraisal assignment. I further certify that I considered the cost and income approaches to value but did not develop them, unless otherwise indicated in this report.

Again, this provision is appropriate for appraisers conducting a Fannie Mae appraisal, but not necessarily for an appraiser doing a divorce appraisal or another type of appraisal. The words "I have adequate comparable market data" are a problem for appraisers performing some other types of appraisals, especially when appraising unusual properties and/or in areas with few comparables available.

A number of the certifications explicitly or implicitly are tied to a lender relationship. For example, Appraiser's Certification 10 states:

10.1 verified, from a disinterested source, all information in this report that was provided by parties who have a financial interest in the sale or financing of the subject property.

This statement implies this report would only apply if the appraisal were used for lending.

Appraiser's Certification 21 (page 6) states:

21. The lender/client may disclose or distribute this appraisal report to: the borrower; another lender at the request of the borrower; the mortgagee or its successors and assigns; mortgage insurers; government sponsored enterprises; other secondary market participants; data collection or reporting services; professional appraisal organizations; any department, agency, or instrumentality of the United States; and any state, the District of Columbia, or other jurisdictions; without having to obtain the appraiser's or supervisory appraiser's (if applicable) consent. Such consent must be obtained before this appraisal report may be disclosed or distributed to any other party (including, but not limited to, the public through advertising, public relations, news, sales, or other media).

These words do not apply to nearly any alternative use assignment, and if used in a nonlender situation, this language would only confuse the reader about the intended use of the report.

Appraiser's Certification 23 states:

23. The borrower, another lender at the request of the borrower, the mortgagee or its successors and assigns, mortgage insurers, government sponsored enterprises, and other secondary market participants may rely on this appraisal report as part of any mortgage finance transaction that involves any one or more of these parties.

Here again, the wording of the certification would create confusion if the form were used for non-Fannie Mae clients and alternative intended uses.

Other provisions in the Fannie Mae form contain language that an appraiser may not want to adopt. For example, Appraiser's Certification 25 states:

25. Any intentional or negligent misrepresentation(s) contained in this appraisal report may result in civil liability and/or criminal penalties including, but not limited to, fine or imprisonment or both under the provisions of Title 18, United States Code, section 1001, et seq., or similar state laws.

These words do not conflict with alternative use appraisals, but most appraisers would prefer not to include such wording in an appraisal report. Here again, while this provision makes sense as a Fannie Mae requirement, it is not necessarily appropriate for a divorce client.

Ad Hoc Modifications to Fannie Mae Forms

Some appraisers have indicated that they plan to use the Fannie Mae forms, but modify the attached limiting conditions pages to reflect the appraisal's needs. While this can be done, it does not solve all the problems since most of pages 1-3 of the forms are designed for lending, not alternative uses, and just changing the last three pages of the forms may not resolve all the problems; there will still be some contradictions. Additionally, any appraiser using the URAR with substitute pages will have to ensure that they are compliant with the Uniform Standards of Professional Appraisal Practice (USPAP).

A New Form from the Appraisal Institute

What are residential appraisers to do if they are hired to do an appraisal for an estate or divorce settlement, property owner advice, or even for a perspective buyer? Since the old Fannie Mae forms are not compliant with USPAP anymore, most appraisers are reluctant to continue to use those forms. The answer may lie within the efforts of some members of the Appraisal Institute.

When Fannie Mae announced its test forms and the direction the forms were taking, a committee of residential appraisers was created to look at the possibility of the Appraisal Institute designing and publishing nonlender residential forms. The work of this committee has been completed and the first of these forms-the Residential Summary Appraisal Report for single-unit properties-has been published.2

The possible uses of the new Appraisal Institute residential forms include the following:

1. Settlement of estates involving residential properties

2. Settlement of divorces involving residential properties

3. Foreclosure appraisals for many lenders or investors

4. Litigation involving residential properties

5. Advice to property owners

6. Advice to property buyers

7. Government uses, other than condemnations, involving residential properties

The advantages of the new Residential Summary Appraisal Report include the following:

1. Compliance with the current USPAP

2. A design that is intended for uses other than for lending

3. Flexibility to allow use for unusual properties or unusual markets

4. Letter-sized format to allow compliance with many clients' file sizes

5. Inclusion of a Land Sale Comparison Grid for supporting land values

6. Inclusion of a rental comparison adjustment grid for the gross rent multiplier (GRM) analysis under the income capitalization approach.

7. Inclusion of a GRM extraction grid for development of the GRM ratio

8. Assumptions and limiting conditions that are designed for nonlender intended uses

Figure 1 shows the first page of the ten-page summary appraisal report. It is expected that this form will be available from major software vendors concurrent with the new Fannie Mae forms effective in fall 2005.

The Residential Summary Appraisal Report includes a number of important sections.

Subject section

The Subject section includes check boxes for the appraiser's designations. There is space for the appraisal company name, phone numbers, and Web page address as well as the appraiser's name and email address.

Scope of Work

The Scope of Work section allows the appraiser to discuss specific issues and includes sections for the following:

1. Interest Appraised

2. Intended Use

3. Intended Users

4. Hypothetical Conditions, with ample space for narrative comments

5. Extraordinary Assumptions, with ample space for narrative comments

6. Inspection, including the level and who did what part of the inspection

7. Data Sources Used

8. Approaches to Value Developed, including why the approaches to value where used

9. Disclosures, indicating if anyone contributed to the appraisal other than those that signed the report.

Executive Summary section

Another feature of the Residential Summary Appraisal Report is an Executive Summary section for a statement of the opinion of value. It is somewhat unusual for residential appraisals to include an executive summary, but this is common in nonresidential narrative appraisal reports. The Executive Summary section allows the reader to turn to page 2 for the bottom-line conclusions.

Certifications

The Residential Summary Appraisal Report also includes sections for a number of certifications: a USPAP Certification, an Appraiser Certification, and an Appraisal Institute Certification. These certifications are required in most appraisal reports, and they are designed to allow the report to be used for a variety of purposes. The certification page has signature blocks for both the appraiser and the co-appraiser, if any. Note that the second appraiser is called a "co-appraiser," not a "supervisor appraiser"; this is much more compatible with situations where appraisers join together to do a project.

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Market Area Analysis section

The Residential Summary Appraisal Report includes a Market Area Analysis section. The market area analysis is used instead of the neighborhood analysis found in Fannie Mae forms. A market area analysis is probably more relevant than a neighborhood analysis in most cases. A quick look at the definitions of neighborhood and market area explains why.

Neighborhood is defined as

A group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises.3

Whereas, market area is defined as

The geographic or locational delineation of the market for a specific category of real estate, i.e., the area in which alternative, similar properties effectively compete with the subject property in the minds of probable, potential purchasers and users.4

The Market Area Analysis section of the form provides substantial space for narrative comments on factors affecting martketability.

Site section

The form also includes a Site section for a description of the site and its particular elements. This section is very similar to the one found on the URAR except it also includes a subsection for Covenants, Conditions, and Restrictions; these have not been listed on any other recent residential forms.

Improvements section

An Improvements section of the appraisal report has some features that differ from those found on the Fannie Mae form, including the following:

1. Check boxes for preprinted features such as security systems, exterior spaces, and saunas

2. Separate floor plan grids for the above-grade and below-grade areas

3. A narrative section for discussion of floor plan issues

4. A narrative section for discussion of highest and best use issues

The addition of narrative discussion space is a great improvement over most other forms that offer little space to discuss these sometimes-critical issues.

Site Valuation section

The Residential Summary Appraisal Report includes an all-new Site Valuation section; this appears to be the first residential form to ever include a specific section for this most critical part of the analysis. For years, appraisers in areas where land values are very high have complained about the lack of site valuation analysis in reports. This has been a problem in markets where a land value opinion is not recognized as important, but the land in fact is worth more than the improved property.

The Site Valuation section includes check boxes for the sales comparison approach, market extraction approach, and other alternative methods; the grid in this section also has a check box for qualitative or quantitative analysis procedures. The section includes a site valuation comparison grid, which is adequate for most residential site valuations. This grid is a great improvement for the analysis of singleunit residential properties.

Cost Approach section

The Cost Approach section is similar to what has been used for many years, but is much larger to allow for more extensive comments. A check box for Reproduction Cost New and another for Replacement Cost New also have been added.

Income Capitalization Approach section

There is an entirely new section for the income capitalization approach, including a new comparable rental grid and an analysis for gross rent multiplier extraction from sales. This is an adjustment grid, so it is superior to the information listed in the Fannie Mae Small Residential Income Property Appraisal Report (SRIP) form, which was only qualitative. The gross rent multiplier analysis is also on a page by itself. Compared to the single line in most forms, this is a vast improvement for appraisers that are proud of their detailed analysis. For properties to which this does not apply, it would be beneficial for the software companies to permit the deletion of this page when it does not apply.

Sales Comparison Approach section

The Sales Comparison Approach section of the Residential Summary Appraisal Report is also an improvement over past appraisal forms. The analysis here includes lines for list prices, list-to-sale price ratio, days on market, and price per square foot of gross living area. The sale date is listed as the contract date rather than closing date, which is more logical. This analysis also includes separate lines for bedroom and bathroom counts. There is even a line for "Other Living Area," which could be used for apartments over a garage or even a small rental unit. There are several lines for listing the sales history of the subject and comparable sales. This is a vast improvement for appraisers that want to show the details of their work products. In addition, there is an entire page for comments on sales, reconciliation of sales comparisons, and the final reconciliation of the appraisal; again, this is a great addition for those appraisers that want to show information that is more detailed.

Statement of Assumptions and Limiting Conditions section

The last page of the new appraisal report form is the Statement of Assumptions and Limiting Conditions. These are appropriate without being punitive or overly restrictive. This section also includes a blank space for recording the total number of pages in the report.

Conclusion

The new Residential Summary Appraisal Report appears to be the answer to the problem of what forms should be used for alternative or nonlending assignments. It is recognized that this new form could be used for lending where the loan is not salable to Fannie Mae and there is no desktop or automatic underwriting. It is possible that some banks will allow appraisers to use the summary appraisal report, and if so, the appraiser may be better off using this form instead of the standard Fannie Mae forms.

For appraisers that sometimes find their nonlender work converted for lender use, this new form will stop the automatic transfer of a divorce appraisal to a loan broker. If an appraiser uses the Residential Summary Appraisal Report form, there will less confusion on the intended uses of the report and less chance of misuse by a future unintended user.

The Appraisal Institute has indicated that forms for other residential properties could be developed in the future depending on the success of this format. It is hoped that the Residential Summary Appraisal Report will become the staple of the appraisal industry for nonlender work.

[Footnote]

1. These forms can be viewed at http://www.allregs.com/efnma. Click on "Announcements and Letters" and then Click on "Ann. 05-02: Final Appraisal Report Forms," where you will find the links to the new forms in PDF files. Do not go directly to the lender announcements and letters section of Fannie Mae's Web site (http://www.efanniemae.com) because that Web page does not show the new forms.

2. For more information on the Residential Summary Appraisal Report, see the Appraisal Institute Web site http://www.appraisalinstitute.org or e-mail aireports@appraisalinstitute.org.

3. Appraisal Institute, The Dictionary of Real Estate Appraisal, 4th ed. (Chicago: Appraisal Institute, 2002), 193.

4. Ibid., 174-175.