406.05: Underwriter's Review of Adjustment Grid

The lender's underwriter should review thoroughly the "sales comparison analysis" adjustment grid.  The underwriter should spot check the positive and negative adjustment calculations when a quantitative sales comparison analysis is used because there are many places in which an error can be made in the use of dollar adjustments.

The underwriter should pay particular attention to the following areas.  Because a substantial variance raises questions about the validity of using a specific comparable sale, the appraiser must have addressed the reason for a variance.

A.   Proximity to subject property and location.  The description of the proximity of the comparable sale to the subject property must be specific (e.g., two blocks south).  Whenever possible, the appraiser should use comparable sales in the same neighborhood as the subject property because the sales prices of comparable properties in the neighborhood should reflect the same positive and negative locational characteristics. 

B.   Sales price.  The sales price of each comparable sale should be within the general range of the appraiser's opinion of market value for the subject property.  A $100,000 comparable sale for a $75,000 subject property would raise questions about the validity of the comparable.

C.   Sales or financing concessions.  The dollar amount of sales or financing concessions paid by the seller must be reported for the comparable sales if the information is reasonably available.  Examples of sales or financing concessions include interest rate buydowns or other below-market rate financing; loan discount points; loan origination fees; closing costs customarily paid by the buyer; payment of condominium, PUD, or cooperative fees or assessment charges; refunds of (or credit for) the borrower's expenses; absorption of monthly payments; assignment of rent payments; and the inclusion of nonrealty items in the transaction.

Generally, sales or financing data for comparable sales -- such as the mortgage amount, loan type, interest rate, term, and any fees or concessions the seller paid -- is available.  The appraiser should obtain this information from an individual who was a party to the comparable transaction (the broker, buyer, or seller) or from a data source that the appraiser considers to be reliable.  We recognize that there may be some situations in which sales or financing information is not available because of legal restrictions or other disclosure-related problems.  In such cases, the appraiser must explain why the information is not available -- however, we will not accept an explanation that indicates that the appraiser did not make an effort to verify the information.  In all other cases, the appraiser must provide the sales and financing concession information that was available (and verified) for the comparable sales.  If the appraisal report form does not provide enough space to discuss this information, the appraiser should make an adjustment (or a relative relationship assessment) for the concessions on the form and include an explanation in an addendum to the appraisal report.

When a quantitative sales comparison analysis is used, the amount of the negative dollar adjustment for each comparable with sales or financing concessions should be equal to any increase in the purchase price of the comparable that the appraiser determines to be attributable to the concessions.  The need to make negative dollar adjustments for sales and financing concessions and the amount of the adjustments to the comparable sales are not based on how typical the concessions might be for a segment of the market area -- large sales concessions can be relatively typical in a particular segment of the market and still result in sale prices that reflect more than the value of the real estate.  Adjustments based on mechanical, dollar-for-dollar deductions that are equal to the cost of the concessions to the seller (as a strict cash equivalency approach would dictate) are not appropriate.  We recognize that the effect of the sales concessions on sales prices can vary with the amount of the concessions and differences in various markets.  The adjustments must reflect the difference between what the comparables actually sold for with the sales concessions and what they would have sold for without the concessions so that the dollar amount of the adjustments will approximate the reaction of the market to the concessions.

Positive adjustments (or relative relationship assessments) for sales or financing concessions are not acceptable.  For example, if local tradition or law results in virtually all of the property sellers in the market area paying a 1% loan origination fee for the purchaser, and a property seller in that market did not pay any loan fees or concessions for the purchaser, the sale would be considered as a cash equivalent sale in that market.  The appraiser should recognize comparable sales that sold for all cash or with cash equivalent financing and use them as comparable sales if they are the best indicators of value for the subject property.  Such sales can also be useful to the appraiser in determining those costs that are normally paid by sellers as the result of tradition or law in the market area.

D.   Date of sale/time adjustment.  We will accept more than three comparable sales as part of the appraisal report, but at least three of them must be actual settled or closed sales.  The appraiser should provide the date of the sales contract and the settlement or closing date for each comparable sale.  Unless the appraiser believes that the exact date is necessary to understand the adjustments, only the month and year of the sale need to be reported.  If the appraiser does not report both the contract date and the settlement or closing date, he or she must identify the reported sale date as either the "contract date" or the "settlement or closing date." If the appraiser reports the contract date only, he or she must state whether the contract resulted in a settlement or a closing.    

E.   Above-grade room count and gross living area.  Only finished above-grade areas should be included in the calculation of the gross living area for a one-family property or a unit in a condominium or PUD project.  The appraiser should consider the basement and other partially below-grade areas separately and adjust for them accordingly.  The room count and gross living area should be similar for the subject property and all comparable sales.  For example, a four bedroom comparable sale generally is not acceptable to support the value of a two bedroom subject property.  The appraiser must address large differences between the subject property and the comparable sales since they raise doubts about the validity of the comparable sales as good indicators of value.    

F.    Overimprovements.  In some instances, the improvements can represent an overimprovement for the neighborhood, but still be within the neighborhood price range -- such as a property with an in-ground swimming pool, a large addition, or an oversized garage in a market that does not demand these kinds of improvements.  The appraiser must comment on such overimprovements and indicate their contributory value in the "sales comparison analysis" adjustment grid.  Because an overimproved property may not be acceptable to the typical purchaser, the lender's underwriter must review appraisals on this type of property carefully to ensure that the appraiser has reflected only the contributory value of the overimprovement in his or her analysis.