Written by Bill Waltenbaugh, as originally published in The Reverse Review.

Q: Why have appraisers become so picky about repair items such as minor peeling paint on structures and even fences?

A: To be honest, I was a little confused when I first read your question. The way it’s phrased makes it sound like something recently changed; that appraisers are now singling out more repair items than they did in the past. A lot of things have changed, but the way concerns like peeling paint are reported isn't one of them.

Before I go any further, I need to clarify a few things. Conditioning an appraisal and making the value subject to repair has a lot to do with the assignment type, the intended use and the intended user(s). In other words, what is the purpose of the appraisal and who is relying on the results? This is important because the intended user has some say as to how these concerns are addressed. Do they want to know what the property is worth before repairs are made or what it is worth after repairs are made? The appraiser can complete the report either way but the fact that the condition currently exists remains unchanged. Just because a client isn’t interested in having a condition concern repaired doesn’t keep it from affecting the subject’s appeal, value and/or marketability.

The way a condition concern is reported for an FHA assignment completed for HUD can be very different from how it is completed for a conventional lender for a conventional assignment. That’s because HUD has specific policy regarding condition, how it is reported and whether repairs are required before closing.

Based on the question above, I can assuredly assume your inquiry has to do with FHA assignments because peeling paint and how it is addressed is a well-known HUD concern. As such, to provide clarification and to be sure everyone is on the same page, I will answer your question from HUD’s perspective regarding an FHA-insured mortgage-related transaction.

HUD has general acceptability criteria for all FHA-insured mortgages. To qualify, a property must meet minimum property requirements mandated by HUD. Before 2006, these requirements were fairly strict and included general maintenance items, cosmetic items and even concerns over normal wear and tear. To qualify for FHA-insured financing, it wasn’t uncommon to find repairs for items such as cracked window glass, minor plumbing leaks like leaky faucets, defective floor coverings such as badly soiled carpet and even the removal of debris from the crawl space.

On December 19, 2005, HUD revised their minimum property requirements and limited their concerns to items that affect the safety of the occupants and the security and soundness of the property. Let me be very clear: This doesn’t mean inferior cosmetic items shouldn’t be reported within the appraisal; it simply means HUD doesn't require these items to be repaired to be eligible for an FHA-insured mortgage. All condition concerns still need to be reported and, if necessary, accounted for in the final value by making adjustments in the appropriate approaches.

If an item is found that affects the safety of the occupants and the security and soundness of the property, the appraiser should make the report “subject to” the repair of that item. Since the value is made “subject to,” no adjustment is necessary and the value reported is reflective “as if” the repair was already complete. Once the repair is completed, an inspection is made to verify acceptability and the condition is cleared for closing.

When it comes to defective surfaces including peeling, scaling or chipping paint, HUD requires all defective paint, both interior and exterior, to be corrected if the home was constructed before January 1, 1978. However, there is some confusion when it comes to peeling paint on exterior surfaces. All exterior surfaces, despite the age of the home, require repair when the exterior finish and materials are unprotected. That’s because unprotected exterior surfaces will eventually become soundness concerns without current maintenance. All exterior surfaces include, but are not limited to, garages, storage sheds, decks, porches, railings, eaves, windows, doors and even fences. Whether interior or exterior, it is the appraiser’s responsibility to provide a detailed description and exact location of the deficiency and condition the appraisal “subject to” repair.

At the end of the day, one would expect a decline in repair requirements given the changes made in 2006. If you are finding an increase in the number of defective paint repair requirements, the only explanation I can offer is tied to changes in appraiser independence. It wouldn’t surprise me if loan production staff applied a little pressure to appraisers to overlook what they considered minor defective paint concerns in the past. Now that there is a stronger firewall between the appraiser and loan production, appraisers may feel more at ease identifying these legitimate and required repairs.