How to Understand the Small Residential Income Property Appraisal Report

The Small Residential Income Property Appraisal Report is commonly referred to as Fannie Mae Form 1025. It is the standard report lenders use to evaluate the value of 2- to 4-unit properties. If you are selling, buying or refinancing a 2- to 4-unit property, the report will play a pivotal role in the transaction. Although it contains a great deal of data, once you know what to look for the form is easily understood.

Instructions

1. Read the report from the top. You will first see basic information about the property including its address, the owner of public record and assessment data. Verify that this information is correct.

2. Understand your neighborhood. Keep in mind the intended audience for most appraisals is a lender that is not located in the same area as the property being appraised. For this reason, a portion of the front page of the standard appraisal form outlines neighborhood information. This includes characteristics such as whether the location is urban, suburban or rural. Information such as the growth or stability of prices, the supply and demand for real estate in the area and the estimated marketing time is also included.

3. Compare rental data. Notice the second page of the report is almost entirely devoted to the potential income the property can produce. The "Comparable Rental Data" section compares the property to similar properties to estimate the rental income that can reasonably be expected. The more the comparable properties resemble the subject property, the more accurate the income estimation. A comparable property is judged by proximity to the subject property as well as its similarity in regard to construction, size, lot size, age and market appeal.

4. Compare sales data. Turn to the next page, where you will find the heart of value determination, the comparable sales. Criteria for these properties are similar to the criteria used to find rental comparables. The more recent the sale of comparable properties, the more accurate the appraised value will be. It is extremely unlikely that an appraiser will find comparables that match exactly. Appraisers will use the closest comparables they can find and make adjustments to arrive at a reasonable estimate.

5. Review the final value estimate and comments. Find the "Reconciliation" section of the report at the bottom of page 3. This is the final appraised value of the subject property. The appraiser has used a formula to determine this value, based on the possible income and sales comparables. On the following pages the appraiser often comments on the approach she has taken, or explains why the comparables used in the report are the best available. The last few pages of the report will include photographs of the subject property and the comparable properties.

References

• The 1025 Form
• Appraisal FAQs