Understanding The Appraisal Part 2: Condition and Quality Ratings

A Closer Look at Condition and Quality Ratings

Last week I kicked off my “Understanding The Appraisal” series by discussing the Adjusted sale price of comparables. This week we’re going to look at the Condition and Quality Ratings assigned to the subject property.

Understanding The Appraisal Report Condition and Quality Ratings

Prior to the introduction of the Uniform Appraisal Dataset (UAD), appraisers would typically describe the condition of the property being appraised as poor, fair, average, good, or excellent.

When comparing the sales comparable’s condition to the subject property the terms similar, inferior, or superior were used. In an attempt to make the comparison process more objective rather than subjective a numbered rating system was introduced.

Condition Rating Scale

The number system is pretty straightforward with C1 being new construction in good condition and C6 being the worst condition. The following descriptions are taken directly from the Fannie Mae Selling Guide:

C1-The improvements have been very recently constructed and have not previously been occupied. The entire structure and all components are new and the dwelling features no physical depreciation.

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. All outdated components and finishes have been updated and/or replaced with components that meet current standards. Dwellings in this category either are almost new or have been recently completely renovated and are similar in condition to new construction.

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. The structure has been well-maintained.

C4-The improvements feature some minor deferred maintenance and physical deterioration due to normal wear and tear. The dwelling has been adequately maintained and requires only minimal repairs to building components/mechanical systems and cosmetic repairs. All major building components have been adequately maintained and are functionally adequate.

C5-The improvements feature obvious deferred maintenance and are in need of some significant repairs. Some building components need repairs, rehabilitation, or updating. The functional utility and overall livability are somewhat diminished due to condition, but the dwelling remains useable and functional as a residence.

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. The improvements are in need of substantial repairs and rehabilitation, including many or most major components.

The relatively detailed descriptions allow appraisers to narrow down the condition and make it easier to compare the subject to the sales. Adjustments can then be made for the differences between them.

As is the case with other factors when narrowing down the available sales for use in the appraisal, it is ideal to use sales that have the same condition rating. If you do this it will eliminate the need to adjust for condition differences making the indicated value more accurate.

If there are differences in the Condition rating between the subject and sales there should be an adjustment to reflect this.

Quality Rating Scale

The rating for quality differences between the subject and sales also uses a similar system. The range goes from Q1 to Q6 with Q1 being the highest quality and Q6 being the lowest quality. Here is a breakdown of the differences straight from Fannie Mae:

Q1- Dwellings with this quality rating are usually unique structures that are individually designed by an architect for a specified user. Such residences typically are constructed from detailed architectural plans and specifications and feature an exceptionally high level of workmanship and exceptionally high-grade materials throughout the interior and exterior of the structure. The design features exceptionally high-quality exterior refinements and ornamentation, and exceptionally high-quality interior refinements. The workmanship, materials, and finishes throughout the dwelling are of exceptionally high quality.

Q2-Dwellings with this quality rating are often custom-designed for construction on an individual property owner’s site. However, dwellings in this quality grade are also found in high-quality tract developments featuring residences constructed from individual plans or from highly modified or upgraded plans. The design features detailed, high-quality exterior ornamentation, high-quality interior refinements, and detail. The workmanship, materials, and finishes throughout the dwelling are generally of high or very high quality.

Q3- Dwellings with this quality rating are residences of higher quality built from individual or readily available designer plans in above-standard residential tract developments or on an individual property owner’s site. The design includes significant exterior ornamentation and interiors that are well finished. The workmanship exceeds acceptable standards and many materials and finishes throughout the dwelling have been upgraded from “stock” standards.

Q4-Dwellings with this quality rating meet or exceed the requirements of applicable building codes. Standard or modified standard building plans are utilized and the design includes adequate fenestration and some exterior ornamentation and interior refinements. Materials, workmanship, finish, and equipment are of stock or builder grade and may feature some upgrades.

Q5-Dwellings with this quality rating feature economy of construction and basic functionality as main considerations. Such dwellings feature a plain design using readily available or basic floor plans featuring minimal fenestration and basic finishes with minimal exterior ornamentation and limited interior detail. These dwellings meet minimum building codes and are constructed with inexpensive, stock materials with limited refinements and upgrades.

Q6-Dwellings with this quality rating are of basic quality and lower cost; some may not be suitable for year-round occupancy. Such dwellings are often built with simple plans or without plans, often utilizing the lowest quality building materials. Such dwellings are often built or expanded by persons who are professionally unskilled or possess only minimal construction skills. Electrical, plumbing, and other mechanical systems and equipment may be minimal or nonexistent. Older dwellings may feature one or more substandard or nonconforming additions to the original structure.

Comparing homes of a similar quality rating is preferable because this will reduce the number of adjustments necessary to bring the comps in line with the subject. If this is done, the adjusted sale price of the comparables will provide a more reliable range of value.

As is the case with the Condition rating, if there are differences in Quality ratings between the subject and sales there should be an adjustment to reflect this.

When completing an appraisal the appraiser must report if the home has been updated. It is important to know the difference between updating and remodeling. On the Fannie Mae website their description is as follows:

Not Updated- Little or no updating or modernization. This description includes but is not limited to, new homes.
Residential properties of fifteen years of age or less often reflect an original condition with no updating, if no major components have been replaced or updated. Those over fifteen years of age are also considered not updated if the appliances, fixtures, and finishes are predominantly dated. An area that is ‘Not Updated’ may still be well-maintained and fully functional, and this rating does not necessarily imply deferred maintenance or physical/functional deterioration.

Updated- The area of the home has been modified to meet current market expectations. These modifications are limited in terms of both scope and cost.

An updated area of the home should have an improved look and feel, or functional utility. Changes that constitute updates include refurbishment and/or replacing components to meet existing market expectations. Updates do not include significant alterations to the existing structure.

Remodeled- Significant finish and/or structural changes have been made that increase utility and appeal through complete replacement and/or expansion.

A remodeled area reflects fundamental changes that include multiple alterations. These alterations may include some or all of the following: replacement of a major component (cabinet(s), bathtub, or bathroom tile), relocation of plumbing/gas fixtures/appliances, significant structural alterations (relocating walls, and/or the addition of square footage). This would include a complete gutting and rebuild.

Appraisers look at whether a home has been updated or remodeled so they can determine the effective age of the subject property. I’ve written about effective age in the past and you can read that more in-depth article here.

The effective age is the age the subject appears to be due to the updating and remodeling and is typically less than the actual age. This also helps the appraiser to determine whether an adjustment should be made for differences in updating between the subject and sales.

If a home has had extensive remodeling it is ideal to compare it to another home of similar age with similar updating. If this type of comp is not available they can also compare it to a newer home with similar effective age.

Generally speaking, homes with Condition ratings of C1 to C5 can be submitted in “as is” condition. In addition, those homes with a quality rating of Q1 to Q5 typically qualify for financing.

Homes with a Condition rating of C6 and/or a Quality rating of Q6 usually do not qualify for financing in “as is” condition. If a home has one of these ratings it will typically need to be completed “subject to” completion of all deficient items.

Question

Do you have any questions relating to the Condition and Quality ratings included in an appraisal report? If so, leave a comment below or contact me and I’ll try to get your question answered. As always, thanks for reading.

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Comments

  1. This post was Q1, Tom. Nice job. 🙂

  2. Thanks for this thorough explanation of Quality and Condition ratings!

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  1. […] don’t have x-ray vision to see through walls, but they can spot the signs of neglect like cobwebs in a haunted mansion. Peeling paint, leaky faucets, cracked foundations – these […]

  2. […] Understanding The Apprisal Part 2: Condition and Quality Ratings – Birmingham Appraisal Blog […]

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