Freddie Mac Single-Family Seller/Servicer Guide 5605.7 — Cost and income approaches and reconciliation of market value

Freddie Mac requires that all appraisal reports include a sales comparison approach. This section contains requirements related to: ■ Comparable sales data sources and verification sources ■ Adjustments ■ Sales and financing concessions ■ Market Area analysis and market condition adjustments ■ Location ■ Quality and condition ■ Selection of comparable sales and analysis For special appraisal requirements for HeritageOne® Mortgages, see Section 4504.9.

(a) Comparable sales data sources and verification sources The data source(s) and the source(s) of verification for the comparable sales must be identified in the Sales Comparison Approach section of the URAR in the data source field. Examples of data source(s) and verification source(s) include, but are not limited to: ■ Assessor record ■ Builder or developer ■ Condominium questionnaire ■ Exterior inspection ■ Interior inspection ■ Previous appraisal file ■ Multiple listing service (MLS) ■ Homeowners association ■ Property owner ■ Real estate gent If there is a unique identifier associated with the source of the data or verification (e.g., MLS #123456), it must also be included in the data source field. The appraiser may obtain source data from an interested party to the subject transaction if the data is verified by a disinterested party.

(b) Adjustments Each comparable sale must be analyzed for similarities and differences between it and the subject property. When the appraiser’s analysis concludes an adjustment is necessary, the appraisal report must include adjustments for differences and indicate the dollar amount of the adjustment to reflect the value of the differences to the market. The appraisal report must contain an explanation of the basis and rationale for all adjustments (or, if necessary, lack of adjustments). Comparable sales must be adjusted to the subject property, except for sales and financing concessions that must be adjusted based on their effect on the sales price of the comparable sale. Large adjustments typically occur in rural markets, and with unique properties, due to limited market activity. Freddie Mac does not have limitations on gross or net adjustment percentages. See subsection (c) below for market condition adjustment requirements.

(c) Sales and financing concessions The appraisal report must identify how the comparable sales were verified and whether concessions were granted. Sales or financing concessions may be offered by interested parties to the transaction (e.g., the builder, developer, property seller or real estate agent). Adjustments to the comparable sales must be made for special or creative financing or sales concessions. No adjustments are necessary for costs that are normally paid by property sellers because of tradition or law in a Market Area; these costs are readily identifiable since the property seller pays the costs in virtually all sales transactions in the Market Area. If concessions were granted in a comparable sale, the appraisal report must include adjustments that reflect the effect of the concessions on the sales price of that comparable sale, which may be equal to, lower than or higher than the amount (or value) of the concessions. Note: For Seller treatment of concessions, see Section 5501.6.

(d) Market Area analysis and market condition adjustments The market price trend must be based on factual data from information sources, such as, but not limited to, market data, home price indices, MLS, public records and/or models. The market price trend identified in the appraisal report must reflect the overall movement of the market based on a minimum of 12 months of data. A specific market condition adjustment to a comparable sale may differ from the identified market price trend since the determination whether to make an adjustment to a comparable sale is based on market changes between the contract date of the comparable sale and the effective date of the appraisal. Example: The 12-month price trend indicates a positive overall trend, although the market was stable (or declining) between the contract date of the comparable sale and the effective date of the appraisal report (see Exhibit 44, Market Condition Adjustments). Comparable sales with a contract date that is recent in relation to the effective date of the appraisal report might not have a market condition adjustment, given the inability to identify a change in the market. The appraisal report must contain the market analysis that supports the market price trend and any adjustments made for market conditions.

(e) Location Rural locations often have less real estate sales activity than more populated areas. Property sales in rural locations often involve a variety of property types and may have relatively large parcels compared to other locations. Given the potential challenges with appraising properties in rural Market Areas, the appraiser must be knowledgeable about the varying conditions that characterize properties in a particular geographic area. When appraising properties in rural Market Areas, the appraisal report may contain older comparable sales, comparable sales that are a considerable distance from the subject property or comparable sales that are not ideally similar to the subject property. The appraisal report must include justification and support in the appraisal report for the use of the comparable sales and make appropriate adjustments to account for the differences between the comparable sales and the subject property. Example: If the subject property is a ranch-style home on a large parcel of land (e.g., 44 acres), the most relevant comparable sales may be two-story homes on smaller parcels (e.g., 6–12 acres) that are some distance from the subject property (e.g., 8–18 miles away).

(f) Quality and condition Adjustments must be made for differences in quality and condition between the subject property and each comparable sale. The appraisal report may contain an adjustment for differences in quality and condition between the subject property and a comparable property, even though the properties have the same Uniform Appraisal Dataset (UAD) quality or condition rating. In this case, an explanation must be provided in the Reconciliation of Sales Comparison Approach section of the appraisal report. Refer to Section 5605.5 for information related to property condition and quality of construction, Section 5606.1 for information related to the UAD requirements and Exhibit 36, Condition and Quality Ratings.

(g) Selection of comparable sales and analysis The appraisal report must contain a minimum of three comparable sales as part of the sales comparison approach. The appraisal report may include more than three comparable sales, including contract sales (pending sales) and/or current listings, to support the opinion of market value. The appraisal report should include comparable sales that closed within 12 months; provided, however, older comparable sales may be used. The appraisal report must provide commentary on the reasons for using any comparable sales that are more than six months old. The proper selection of comparable properties minimizes both the need for, and the size of, any adjustments. This typically includes characteristics such as: ■ Finished area ■ Room count ■ Quality ■ Site When choosing comparable sales, it’s important to identify the Neighborhood in which the subject property is located and determine whether the Neighborhood represents the Market Area or the Market Area is larger than the Neighborhood. The appraiser may need to use comparable sales from outside the subject property’s Market Area and, in such cases, location adjustments may be necessary. When comparable sales are located outside the Market Area, the appraisal report must contain commentary explaining the rationale for the selected comparable sales. There may be no similar comparable sales for a subject property because of the uniqueness of the subject property or other conditions Comparable sales may be taken from a competing Market Area if they are better than the comparable sales in the subject property’s Market Area. (i) Comparable sale requirements for properties in established subdivisions, established Planned Unit Developments (PUDs) and Established Condominium Projects For properties in established subdivisions, units in established PUDs or units in Established Condominium Projects, the appraisal report should contain comparable sales from within the subject subdivision or project when they are the best indicators of value for the subject property. See Section 5705.8 for specific requirements regarding selection of comparable sales for units in a Cooperative Project. (ii) Comparable sale requirements for properties in new subdivisions, new PUDs and recently converted or New Condominium Projects To demonstrate the marketability and develop an opinion of market value for properties in new subdivisions, units in new PUDs or units in recently converted or New Condominium Projects, the appraisal report must contain: 1. At least one comparable sale from inside the subject subdivision, PUD or project, when available. Additionally: ■ The comparable sale from inside the subject subdivision, PUD or project can be a sale by the builder or developer of the subject property ■ If there are no closed comparable sales from inside the subject subdivision, PUD or project, contract sales from inside the subject subdivision, PUD or project may be used to satisfy this requirement. The use of contract sales must be in addition to the three actual closed sales from outside the subject subdivision, PUD or project. ■ If the subject subdivision, PUD or project is so new that a closed sale or a contract sale is not available, comparable sales from outside the subject subdivision, PUD or project may be used. In this case, the appraisal report must contain commentary on the marketability of the new subdivision, PUD or project and justification supporting the use of the comparable sales from outside the new subdivision, PUD or project. 2. At least one comparable sale from outside the subject subdivision, PUD or project Resales from inside the subject subdivision or project are preferable as comparable sales and should be given significant consideration, as they provide a reliable indicator of the market value of units within the subdivision, PUD or project. At least two comparable sales must be sales in which the builder or developer of the subject property was not involved in the sale transaction. See Section 5705.8 for specific requirements regarding selection of comparable sales for units in a Cooperative Project.