Q&A: Fannie Mae and the Cost Approach

Q&A: Fannie Mae and the Cost ApproachWe often receive questions from appraisers regarding Fannie Mae and the cost approach. For example: “I’m appraising a property and have been instructed to comply with Fannie Mae guidelines. I understand that Fannie Mae requires the sales comparison approach, but what if there aren’t enough good comps? Can I use the cost approach as the primary method of valuation?

Take a deep dive into Fannie Mae’s guidelines, policies, and guidance with our CE course: Fannie Mae Appraisal Guidelines: Debunking the Myths.

Answer: No!

In order to comply with Fannie Mae guidelines, the sales comparison approach must be the primary method used to determine the value. In fact, Fannie Mae will not purchase a mortgage on a property if the cost approach is the primary or only method of valuation used.

Quite simply, if there isn’t enough data for the appraiser to develop a reliable opinion of value by the sales comparison approach, the mortgage will not be marketable to Fannie Mae.

However—and it’s a big however—as an appraiser, you and you alone are responsible under the SCOPE OF WORK RULE for developing whatever approach or approaches necessary to produce credible assignment results. There is nothing in USPAP to prevent you from valuing a property solely by the cost approach. But if you do, Fannie Mae won’t purchase the mortgage, which may not work for your client.

The SCOPE OF WORK RULE states, “An appraiser must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use.”

So, what if there’s not enough sales data?

If you end up in a situation where you’re required to comply with Fannie Mae guidelines, and there isn’t enough sales data to complete the sales comparison approach, you would need to contact the client immediately to let them know that the assignment cannot be completed in compliance with Fannie Mae guidelines.

It could very well be that your only choice at that point is to withdraw from the assignment, because you cannot produce a credible value and be in compliance with Fannie’s guidelines.

Learn more about Fannie Mae’s guidelines, policies, and guidance with our CE course: Fannie Mae Appraisal Guidelines: Debunking the Myths. Plus, check out our upcoming Pro-Series Webinars, designed to help you stay up-to-date on hot topics from around the appraisal profession.

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