BLOG VIEW: Most are familiar with the appraisal standards used to identify the condition of homes during the appraisals process. Fannie Mae, Freddie Mac, HUD and VA use codes to simplify this process. These codes are C1 thru C6 – the former being the best-condition homes and the latter the worst. These organizations often comment and review the use of these codes on appraisals and send letters to appraisers, lenders and underwriters on their proper use.
The accurate use of these codes and a homes condition is critical to the proper understanding of home values. The (PCC) Property Condition Calculation promotes a greater understanding of a home’s condition and the more efficient implementation of these codes used in this process by the GSEs and lenders. The improvements come with the application of an algorithm that considers the relationship between market value, land value, and replacement cost new. This relationship holds true throughout all of the housing markets of the U.S. and with all homes and structures.
All that is needed are the three values mentioned: market value, land value and total cost new – which are often included on appraisals by most appraisers even if not required, especially in FHA and VA reports.
There is a relationship between the price of a home new and the price of a home at different levels of condition or depreciation. Once this is known, the relationship can be applied to any home or structure regardless of the location or market. The technique can be used to improve comp selection in AVM systems or QC the condition of appraisals before delivery.
In a way, the condition is determined by inspection. With exposure to market forces, potential buyers make their feelings about the condition known on real estate with the price mechanism.
This calculation is likely more accurate than most valuation products or even appraisers themselves. It does require that appraisers or AVMs apply an accurate application of the cost approach and accurate land value, for the calculation to work best.
Here is a link to an online calculator that I developed – currently in beta – that lenders can use in their risk models to uncover irregularities in condition codes based on the above formula. The calculator can be used on an individual appraisal, or applied as a batch analysis. It can be used in automated underwriting, by individual appraisers, reviewers/underwriters, or to make AVMs more accurate.
Steve Wiese is the creator of Envirocheck, Domustoria, The Homevaluemap and the Neighborhood Condition Report.
Photo: Agence Olloweb