By Mike Sandburg

Reverse Mortgage FHA Appraisal Notes

Reverse mortgages, aka Home Equity Conversion Mortgages (HECM) are federally insured by the Federal Home Administration (FHA). As a part of the reverse mortgage application process, FHA will require an appraisal of your real estate to be conducted pursuant to FHA guidelines.

As you prepare for your appraisal, you would be wise to read and be familiar with the FHA appraisal guidelines that appraisers are required to follow. A new draft of these guidelines, dated 8/27/14 is available here.

Reading these guidelines will give you an idea as to what appraisers are supposed to be looking for. If you come across something that you know may be deficient on your property, investing the time and money to address such items before the appraiser arrives will likely improve your appraisal.  Remember, even though you are not planning on selling your home, you want this appraisal to come in as high as possible.

Look at your property with a critical eye before the appraiser does.  Be aware that the appraiser will be taking photographs of the exterior and interior of the home. While they are more interested in the condition of the structure than in your housekeeping habits, be aware that all appraisals are highly subjective — based heavily upon the personal opinion of the appraiser. If there are things you can do without spending a fortune, such as a fresh coat of paint, that may not be a bad idea.

Expect the appraiser to be more nosy than most visitors. I’ve never had a visiting neighbor turn on the gas burners on my stove, for example. But expect your appraiser to do so. If you have baked-on stains on your stove top, I found that Easy Off works like magic. Making the stove shine like new won’t hurt.

A day or two before your appraiser arrives, be sure to flip on the lights to make certain all of your light bulbs work. That may seem silly, but your appraiser will likely do so at random. If a switch doesn’t turn on the light, or the ceiling fan, the appraiser will wonder why.

Part of the appraiser’s responsibility is to be sure everything works.  So you should check first to insure that the appraiser doesn’t turn up any surprises.

If your local building codes require smoke and carbon monoxide detectors, you can be sure your appraiser will be looking for these. In some localities water heaters are required to be strapped to the wall with at least two straps. If these items are missing, your appraisal will be held up, subject to these deficiencies being corrected. These are things you can also expect the appraiser to photograph.

One interesting thing I learned from having multiple appraisals done on my property is how they value driveways.  My home has a driveway that is 13 feet wide.  That is wider than necessary to accommodate one car, but not wide enough to fit two.  What I learned is that appraisers assign driveways a value of $5,000 per car.  Had I known this ahead of time, I could easily have widened the driveway a few feet to accommodate two cars. Such a project would have cost only a few hundred dollars, yet likely would have raised the appraisal by as much as $5,000.  Had I widened it a few more feet, to accommodate 3 cars, for example, the increased value might have been as much as $10,000. Here’s a situation where investing a couple thousand dollars to improve the driveway, would have returned far more than the actual cost.

No discussion of reverse mortgage appraisals would be complete without talking about the appraiser himself, or herself. While one may expect two professional appraisers working under the same guidelines to produce nearly equal appraisals of the same property, appraisals are highly subjective. The fact of the matter is, if you were to hire 3 different appraisers to appraise the same property on the same day, you would likely get 3 very different values. This is disconcerting, but true. No one would do such a thing, of course, because each appraisal would cost approximately $500.  FHA only requires one appraisal, and once that appraisal is linked to your property and your FHA Case Number, you’ll be stuck with that appraisal for four months.

Because appraisals are so subjective, dependent upon the personal opinion of the individual appraiser, it is important that you insure that your appraiser has plenty of experience and is familiar with the real estate market in your neighborhood.

Two areas of appraisal expertise seem to be involved.  First, of course, relates to evaluating your property.  At least equally important, however, and probably even more critical, is the ability to select appropriate “comps.” Comps are comparable properties that have recently sold in your area, and are extremely important in arriving at a fair valuation of your property. The appraiser should select properties that are as similar as possible to your property.

It would be foolhardy, for example, to consider a 4 bedroom, 2 bathroom house, that has a one and a half car garage, and an extra wide driveway in a very quiet neighborhood — and compare that home with a property on a busy street, in a different zipcode, that has only 2 bedrooms, 1 bathroom, and no garage or driveway. Such dissimilar properties are simply not comparable.

In my case, however, one appraiser actually included such a dissimilar property as a comp.  In fact, none of the seven properties he used as comps were really valid. Of the seven “comps” he used to value my property, two of them were not even in my zipcode. One was not even a recent sale, but was actually a run-down vacant house currently in foreclosure. Another was on a major thoroughfare with a great deal of traffic. In contrast, my house is on a very short and quiet street that only sees traffic from the residents of the couple dozen homes on my street.

As a consequence of this very poor choice of comps, his appraisal suggested that my home was worth many thousands of dollars less than I expected.  You definitely don’t want this to happen to you.  I share this experience only to illustrate how subjective real estate appraisals can be.  A different appraiser, perhaps with more experience in the profession, would have arrived at a very different value.

My advice is to ask a real estate broker to give you a Broker’s Price Opinion (BPO) before having your FHA appraisal. This BPO will include a comparative analysis, selecting a number of properties that have recently sold in your neighborhood. It is likely that the real estate broker will be far more familiar with prices of nearby properties that are actually similar to your property.

When the appraiser arrives, show him the list of properties used in the BPO, and suggest he take these into consideration when selecting comps for your appraisal. You’ll be doing him a favor, saving him some time finding comps. More importantly, you’ll be doing yourself a huge favor if it means your appraisal comes in higher than might have been the case with a less knowledgeable appraiser.

While the appraisal will cost close to $500, the real estate broker may do the BPO at no charge. Pay her something anyway, even if it is only in the form of a Starbucks gift card.