According to HUD Handbook 4000.1, the intended users for an FHA appraisal report are the FHA and the mortgagee. FHA appraisals are not a guarantee that the property is free from defects. The appraisal establishes the value of the property for mortgage insurance purposes only. If you are appraising a property that needs cosmetic repairs but meets FHA minimum property requirements (MPR) in its current condition, you should make the appraisal “as-is.” Here is some guidance on cosmetic repairs vs. MPR repairs.
When can an FHA appraisal be completed “as-is” vs. “subject to”?
An FHA appraisal report may be rendered “as is” if the property meets MPR in its current condition. The appraisal report must be completed “subject to,” under the following conditions:
- If the property is under construction, the report must state “subject to completion per plans and specifications on the basis of a hypothetical condition that the improvements have been completed.”
- If the property needs repairs in order to meet MPR, the report is “subject to the following repairs or alterations (list them) on the basis of a hypothetical condition that the repairs or alterations have been completed.”
- If the appraiser notes a potential deficiency but cannot determine whether it’s an actual deficiency, the report must state, “subject to a required inspection based on the extraordinary assumption that the condition or deficiency does not require alteration or repair.”
You may complete an as-is appraisal for existing property when minor property deficiencies (which generally result from deferred maintenance and normal wear and tear) do not affect the health and safety of the occupants or the security and soundness of the property.
Cosmetic or minor repairs are not required. However, they must be reported, and they must be considered in the overall condition when rating and valuing the property.
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Examples of cosmetic repairs vs MPR repairs
With a better understanding of writing FHA appraisals based on “as-is” and “subject to” criteria, let’s consider the difference between cosmetic vs. MPR repairs.
Example: Mismatched tiles
In this example, there were damaged or missing floor tiles in the subject property kitchen. The owner replaced them with new floor tiles that do not match the existing tiles. Is this ugly? Yes. Is it cosmetic? Yes. Is this an MPR repair item? No. Must it be reflected in the appraiser’s overall condition rating of the property? Yes. You should report it as a cosmetic item, but it is not a repair item.
Other cosmetic repair items
More examples of cosmetic repairs include:
- Missing handrails that do not pose a threat to safety
- Holes in window screens
- Cracked window glass
- Defective interior paint surfaces in housing built after 1978
- Minor plumbing leaks that do not cause damage (e.g., dripping faucet)
- Other inoperable or damaged components that, in the appraiser’s professional judgment, do not pose a heath or safety issue
Example: Broken window
What if you encounter a broken window in an attached garage in an FHA appraisal? This is a broken window, not a cracked window. A broken window allows moisture to penetrate the interior, often causing damage or mold. Furthermore, broken glass is a safety hazard to occupants, particularly children. The FHA appraisal should be made “subject to” the repair of this broken window.
No matter how many different MPR repair items you note in your report, according to HUD Handbook 4000.1, the mortgagee is responsible for determining which repairs are required.
When examination of existing construction reveals non-compliance with MPR, you (the appraiser) must:
- Note the repairs necessary to make the property comply
- Provide an estimated cost to cure
- Provide descriptive photographs, and
- Condition the appraisal for the required repairs
You must limit required MPR repairs to those repairs necessary to:
- Maintain safety, security, and soundness
- Preserve the continued marketability of the property
- Protect the health and safety of the occupants
If an element is functioning well but has not reached the end of its useful life, you should not recommend replacement simply because of age.
Conditions that require inspection
Example: Cracked foundation
This crack in the foundation is likely more than a simple cosmetic “shrinkage” crack. It goes right through a block (in the center of the photo). It also appears as though there is some in/out shifting or movement of the blocks along the crack line. In this situation, an appraiser is not qualified to determine whether a repair is necessary or what type of repair should be made.
In this example, an expert should be engaged to inspect this wall and render a professional opinion, and the appraisal should be made “subject to inspection” by a qualified expert.
Other conditions requiring inspection
Examples of conditions that require an inspection include, but are not limited to:
- Standing water against foundation
- Excessively damp basements
- Hazardous materials on the site or within the improvements
- Faulty or defective mechanical systems
- Evidence of structural failure (e.g., settlement or bulging foundation wall, unsupported floor joists, cracked masonry walls or foundation)
- Evidence of possible pest infestation
- Leaking or worn-out roofs
A reason must be given when requiring an inspection of any mechanical system, structural system, etc.
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Editor’s Note: This post was originally published on October 13, 2020 and updated August 2023.