Fannie Mae launched the required 1004MC Market Conditions Addendum to the 1004 Appraisal Report, in April of 2009, as a way for real estate appraisers to better communicate and to support market condition conclusions within home appraisals. This form is now standard for almost all home lending appraisals in the United States, including FHA. At the time, many appraisers complained that the 1004MC form is additional work that does not result in a higher-quality appraisal. Five years later, I think most appraisers concur (Please comment and let me know if you agree.).
Contrary to the assumed majority, A Quality Appraisal believes that the 1004MC is an overall good thing for the appraisal profession. Prior to this form, few appraisers were doing much more of a market conditions analysis than merely citing an area report from the local multiple listing service (MLS) (See our past blog on problems with RMLS Area Report.). Now, many home appraisers commonly analyze detailed statistical data of the micro market surrounding the subject home. However, some appraisers continue to discount the 1004MC completely by only citing MLS or other data sources.
For many home appraisers, ignoring the 1004MC is made easier by its several flaws. The following lists ways that I think the 1004MC appraisal form could be improved:
1. Move the focus of the Market Conditions Addendum and the appraisal report away from neighborhood to competitive market area. Often, competitive market areas are larger than neighborhoods and include larger samples of data for the appraiser to analyze statistically. This is particularly helpful when working with complex or rural properties where buyers often search a large area; and where a market conditions search of only the neighborhood often results in very little comparable data for statistical analysis.
2. The 1004MC table should be composed of at least two years of data. This will help appraisers to identify if observed changes are a result of an overall trend change or just a seasonal swing.
3. Stop displaying data for two quarters and then a six month period on the 1004MC, because it is confusing to the reader. The following example shows a stable trend, but as displayed on the 1004MC form, it looks like the number of sales declined.
The above is a screenshot from an actual 1004MC appraisal form showing the Total # of Comparable Sales (Settled) row.
4. Include a price per square foot trend analysis. Price per square foot is often a stronger indicator of price trends than median sales price because changes in the size of homes can result in a change in median price trends, without a corresponding change in value.
5. Remove the Overall Trend check boxes for either Total # of Comparable Sales (Total Sales/Quarter) or Absorption Rate (Total Sales/Month). A trend check box for each suggests that these are two separate indicators of the market health when they are really the same (just quarterly vs. monthly). If both trends are checked as “Declining,” it appears to the appraisal reader that two areas of the market are suffering, rather than just one. The 1004MC should display both, but only have a check box for one.
The above is a screenshot from an actual 1004MC appraisal form showing Total # of Comparable Sales and Absorption Rate lines.
6. In addition to a table of numerical data, the 1004MC should feature some graphical displays. With today’s technology, it takes no additional effort by the appraiser to include a graphical display of data. Some appraisers already do this, but a standard set of graphs would make it easier for users of the data, and for appraisers to quickly determine if the market is healthy or changing. The following are the four charts that I suggest be included with the 1004MC (Note that all of the following charts display two years of data and not just one.):
Chart A shows the appraiser how median list prices and median sales prices are trending in relation to each other.
Chart B shows appraisers how price per square foot of living area is trending. This chart is particularly helpful as a way to check the results of Chart A. Sometimes the market can shift toward selling smaller homes, making Chart A decline while Chart B increases.
Chart C shows the appraiser a component breakdown of inventory (sales and listings) and gives the appraiser a better feel for what supply and demand is doing and at what time of the year.
Chart D shows the appraiser the overall trend in home inventory.
The appraisers at A Quality Appraisal already incorporate all of the above-proposed suggestions for improvement of the 1004MC on every appraisal (and not just appraisals for Fannie Mae or other lending). We use Microsoft Excel to produce the graphs, but free software called Total Solutions 1004MC is also available to appraisers, as are many other similar programs.
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