Can FHA Appraisals Double As Home Inspections?

Peter G. Miller
OurBroker®

"Before Christmas," writes a consumer, "my sister purchased a house and it was qualified through FHA, the house was inspected for defects and was said to be in good condition. For the last couple of months they have had roof leaks that have done more damage than you could imagine. They have contacted there insurance company who will only cover the damage on the inside of the house. Doesn't the FHA program offer some kind of 'Buyer Protection Plan?'"

One answer comes from HUD.

"Under the Homebuyer Protection Initiative," says HUD, "homebuyers with FHA mortgages must receive a new form written in plain English that summarizes all defects found by the appraisal before they purchase a home. The homebuyer cannot receive an FHA mortgage until all defects found by the appraiser have been corrected -- protecting the homebuyer from being hit with the repair costs."

The new standard -- which has not been adopted by either conventional lenders or the Veterans Administration -- requires that "all defects" must be found in an appraisal -- not a professional home inspection.

For many in real estate the use of appraisers to find physical defects is troublesome.

While appraisers are trained to value properties they are not home inspectors -- appraisers do not climb roofs, open electrical service boxes, or check inside furnaces. They are not trained to perform home inspections, a process which typically requires two to three hours on-site for a single-family home.

This is not in any way to knock appraisers. In the same way that lawyers don't remove gall stones and doctors don't write incorporation papers, appraisers and home inspectors are each professionals with specialized -- and different -- areas of expertise.

"We appraisers certainly are aware that we are not inspectors and certainly should not be expected to have the same expertise as inspectors regarding the detection of possible problems in a home," says William G. Hicks, Jr., an appraiser in Clifton, VA.

What concerns Hicks and other appraisers is that HUD is promoting the new FHA appraisal standards in a way which may cause consumers to believe that an appraisal equals a professional home inspection.

HUD has been airing two commercials which -- according to several sources -- show an appraiser at the property and then tell the public that "if any problems are found you'll know about them before you close."

The HUD ad program, says Hicks, "more than implies that the purchase of a home via an FHA loan accompanied, of course, by an FHA appraisal, guarantees the physical condition of the home."

The ads, says Hicks, could translate into greater liability for appraisers.

"I suspect that eventually some smart attorney will figure out how to make an unsuspecting appraiser liable for damages," he says. The logic for such a suit might be that appraisers were aware of the commercials "and because they continued to perform FHA appraisals, had implicitly agreed as to the content."

Barry Wilson, vice president for quality control with Market Value Systems in Renton, WA and the Puget Sound area, says brokers have been overheard telling consumers that "The FHA appraisal is as thorough as a regular home inspection, so you don't really need to spend that additional money."

Wilson, a member of the Expert Review Appraiser Panel for the Washington Department of Licensing, says the cost for FHA valuations has risen 12.5 percent since the rules went into effect because of the extra time required to complete the report, greater liability, and more paperwork.

Francois (Frank) K. Gregoire, with Gregoire & Gregoire, Inc., a Florida appraiser active in St. Petersburg and Pinellas County, says the HUD ads suggest that "appraisers are offering services which consumers might see as a home inspection."

"Nowhere in the television ad is a home inspection mentioned," says Gregoire. "The impression given the viewer, in my opinion, is the appraiser is looking out for the homebuyer and will make sure the improvements are in GOOD Condition."

HUD guidelines, says Gregoire, specifically state that, "Appraisals performed for HUD/FHA are not intended to protect the buyer: they protect HUD. Many homebuyers mistakenly believe that a HUD appraisal and subsequent inspection is a guarantee that the property is free from defects when, in fact, the appraisal only establishes the value of the property for mortgage insurance purposes. Buyers need to secure their own home inspection through the services of a qualified inspector and satisfy themselves about the condition of the property."

Gregoire, an appraiser since 1977 and a member of the Florida Real Estate Appraisal Board, the regulatory agency that licenses appraisers in the state, says that "during recent US Senate hearings on mortgage fraud and predatory lending the Chairman, Senator Susan Collins of Maine, seemed to know the difference between and appraisal and a home inspection and, during a review of the advertisements, was amazed HUD-FHA had the audacity to continue airing them."

"My appraisal fee for HUD-compliant residential appraisals entails an extra $75.00. This is an increase over the price of a conventional appraisal," says Tom Settlemyre with Mimosa Appraisals in Tampa.

Settlemyre, who has 15 years of appraisal experience, says the new FHA requirements result in "more work, more concentration, more time, more responsibility, more risk. More work includes more research time, more time with the inspection and more time in report writing."

But not everyone sees a negative impact or higher fees from the new FHA initiative.

In Anchorage, Niel Thomas, an associate broker with Coldwell Banker Fortune, says FHA appraisal costs "seem to have settled back down because lenders and appraisers have developed a comfort level with the new VC forms."

Thomas adds that the number of appraisers willing to do FHA work appears steady. "I'm not aware," he says, "that the list of appraisers willing to take these assignments has decreased either."

"Rates increased at first," says Mike Boyd, a certified residential appraiser in Santa Rosa and California's North Bay area, "but I have returned to the previous fee schedule."

"FHA appraisals have always taken longer than a standard appraisal," says Boyd. "With the new VC report, they may take a few minutes longer. If a house requires lots of work in order to qualify, it will take more time to note the additional repairs needed and to type them on the VC report form. It takes longer on the new VC report form in that there is a page of redundant statements for the benefit of the borrower. The next to last page could be submitted to the borrower instead of repeating the same thing on the last page."

So what's the answer to the original question: "Doesn't the FHA program offer some kind of 'Buyer Protection Plan?'"

My response goes like this: Regardless of what HUD offers or does not offer, to determine a property's physical condition consumers are best served by hiring a home inspector to get the job done right.

If you don't believe me, just ask an appraiser.

Published: August 1, 2000

Use of this article without permission is a violation of federal copyright laws.

Editor's Note: This article reflects the opinions of Peter G. Miller only and not necessarily the views of this or any other publication, organization or Website owner.