Are Diamonds a Realtors best friend?

DiamondIn the world of diamonds (many married men reading this will have some experience here), there are the four C’s – Cut, Color, Clarity and Carat (weight). Each of the four Cs is broken down into ratings. Color has five categories: Colorless, Near Colorless; Faint Color, Very Light Color and Light Color. Every gemologist in the world can put every diamond they ever see into one of these five categories. The ratings have nothing to do with any other diamond, only the one being rated. This is called an “absolute rating”.

In the world of real estate (according to Fannie Mae and Freddie Mac) there are six C’s:

  • C1: The improvements have been recently constructed and have not been previously occupied.
  • C2: The improvements feature no deferred maintenance, little or no physical depreciation, and require no repairs. Virtually all building components are new or have been recently repaired, refinished, or rehabilitated.
  • C3: The improvements are well maintained and feature limited physical depreciation due to normal wear and tear. Some components, but not every major building component, may be updated or recently rehabilitated.
  • C4: The improvements feature some minor deferred maintenance and physical deterioration due to normal wear and tear.
  • C5: The improvements feature obvious deferred maintenance and are in need of some significant repairs.
  • C6: The improvements have substantial damage or deferred maintenance with deficiencies or defects that are severe enough to affect the safety, soundness, or structural integrity of the improvements.

*Please note that the above definitions have been abbreviated for this article to improve readability. The complete descriptions can be found in the addenda of most appraisal reports.

The appraiser must select the one rating that best describes the overall condition of the subject property. And only one selection is permitted. The condition rating must describe the physical condition of the subject property on an absolute basis, not on a relative basis or how the property relates to other properties in the neighborhood.

Think about that for a moment. Real Estate agents are often asked to compare one property to another. Yet according to Fannie Mae and Freddie Mac appraisers must rate properties on an absolute basis and not as compared to the subject property!

How, you may ask, does this affect you? That requires a brief explanation. Are you familiar with UAD? If you have heard of it but haven’t examined specific details don’t worry – you are in the majority. I was invited to speaking to the Real Estate Networking Group (https://www.linkedin.com/pub/bud-mauro/15/318/315) this past week. During the question-and-answer period I asked for a show of hands to see if anybody knew about the six C’s. There were over 40 real estate professionals in the room and not one hand went up. This was surprising to me as the UAD mandate has been in place since late 2011.

Here is an overview:

  • The Uniform Appraisal Dataset (UAD) is a component of the Uniform Mortgage Data Program® (UMDP®), jointly established by Fannie Mae and Freddie Mac …..
  • According to Fannie Mae and Freddie Mac the purpose of the Uniform Appraisal Dataset (UAD) is: “To improve the quality and consistency of appraisal data for loans delivered to the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac…”
  • Among other things UAD provides for “Standardized ratings and definitions for the “Condition” and “Quality” of the property…”

In other words big brother is collecting standardized data from tens of thousands of appraisal reports. This is the very definition of data mining. (http://en.wikipedia.org/wiki/Data_mining) Has the quality and consistency of the appraisals improved as a result of these standardized ratings? Probably, but at what price? Are appraisal reports harder to understand if you are a Realtor or borrower? In my opinion, yes! Take a look at the UAD addenda in any appraisal report. There are literally dozens of abbreviations and definitions. It is more difficult to contest a poor quality appraisal if you cannot readily translate all of the abbreviations and jargon that have been introduced under UAD. Hopefully this short article has given you a reason to learn more about UAD and how it affects you. As always, please feel free to contact me if I can provide further clarification or assistance.

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