Client Needs Are Important: Some Assignments are Different

Government-sponsored entities (GSEs) do not back non-qualified mortgage (non-QM) real estate investor loans. Due to the differences in criteria between conventional mortgages and these loans, the appraisal expectations can also differ. Appraisers must consider these differences when appraising real estate investment properties for private or hard money lenders to ensure they supply the client with the details they need to make informed collateral risk decisions.?

When appraising a property for a conventional mortgage, the focus is typically on the subject's "As Is" value. However, the assignment must also meet the selling guide expectations of Fannie Mae and Freddie Mac. For example, suppose the appraiser identifies safety, soundness, or structural integrity concerns during the property visit. In that case, the appraiser must acknowledge the issues and make the report subject to repair.?

On the contrary, when appraising a property for a real estate investor fix & flip loan, the appraiser may be asked to include and support both an "As Is" value and an anticipated after-repair value (ARV). Estimating both the "As Is" and ARV can be an essential component for a fix & flip loan because it allows the lender and the real estate investor to determine the potential profitability of the project. For these assignments, the "As Is" value refers to the current market value of the property in its present condition without considering any repairs or renovations.

To estimate the ARV, lenders will supply an appraiser with a scope of work (SOW) and budget costs that outlines the proposed renovations. Nonetheless, if an appraiser identifies any safety, soundness, or structural integrity issues not included in the furnished SOW during their inspection, they should estimate the cost to correct the deficiencies and have the repair included in the ARV but not the "As Is" value. Remember, the "As Is" value refers to the current market value of the property in its present condition without considering any repairs or renovations. Again, the appraisal report for these loans does not need to meet the expectations of the GSEs and their selling guides.

In addition to providing recent sales to support the reported "As Is" value, the appraiser must also incorporate recent transactions of renovated properties to substantiate the reported ARV. The typical expectation is for the appraiser to include at least three comparable properties for each valuation.?

When evaluating a single-family rental loan application, lenders typically consider the property's potential rental income as a primary factor in determining the loan amount and terms. This information is critical for the lender to determine the debt-service coverage ratio (DSCR). As such, when it comes to single-family rental loans, the client may include an assignment condition for the appraiser to estimate the property's potential rental income based on comparable rentals in the area. When accepting these assignments, the appraiser must have sufficient recent rental data and the expertise to provide a supported rental analysis that reflects current market conditions. Delivering a report that does not include this analysis doesn't give the lender client the information they need to make an informed lending decision.?

In both cases, the appraiser must have a solid understanding of the local real estate market, including recent sales and rental data, as well as an understanding of the specific needs and goals of the client. Depending on the product, the appraiser must be prepared to provide credible assignment results regarding a property's "As Is" value, a potential ARV, and possibly an estimated market rent of the subject. Doing so is essential to provide a comprehensive appraisal report tailored to the lender's needs for their fix & flip or single-family rental loans.

Bill Waltenbaugh is a certified appraiser with over 30 years of experience in the real estate appraisal industry. As a Chief Appraiser and Director of Compliance, Bill has developed a proven track record of implementing necessary policies and procedures to ensure quality and compliance.

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