Appraisers have a responsibility to report the quality and condition of a subject property in specific and factual terms. To do that, it's important that appraisers have a clear understanding of the Uniform Appraisal Dataset (UAD) quality and condition ratings, how they are defined and what they mean.

The Ratings

Freddie Mac requires the appraiser to report two distinct ratings, one for quality of construction (materials and workmanship) and another for condition of improvements (the physical state, regardless of quality), along with information on what may need to be repaired or require inspection.

These rating range from Q1-Q6 and C1-C6 and the full definitions for the ratings can be found in Exhibit 36 of the Single-Family Seller/Servicer Guide. The definitions are written to be absolute, not relative. Simply put, ratings are how a property best fits the actual terms of the definition, not how a property compares to other properties in the market area.

With this in mind, Scott Reuter, Freddie Mac Single-Family Chief Appraiser, answers common questions to provide deeper insights on the topic.

Q: Are quality and condition often conflated?

At times we see appraisers conflate quality and condition. This most commonly happens when an appraiser lets the quality of construction influence the property condition rating. For example, if a particular property exhibits a very high level of workmanship or has certain architectural significance, we have seen inflated condition ratings.

Conversely, we have seen properties with newer components and improvements receive lower condition ratings than appropriate due to basic quality components or lower cost construction. A new kitchen is a new kitchen, regardless of the quality of construction of the home.

Q:  How difficult is it for an appraiser to assign a condition rating?

When selecting a condition rating for a property, the appraiser must develop an overall view of the condition of the improvements. While this seems straightforward, we recognize this can be challenging at times – particularly with older homes. It’s not uncommon to see numerous components in an existing home that have been updated at different times, requiring the appraiser to consider these many different components and determine a single rating.

Given this challenge, a closer look at the written definitions will help. As an example, there is a difference between normal wear and tear and minor repairs versus deferred maintenance and the need for substantial repairs.

Q: How does accuracy in the ratings carry over to the sales comparison grid?

The quality and condition ratings selected by an appraiser are impactful in many ways. Ratings are especially important when comparing the subject property to the comparable sales.

When appraisers use the differences noted in “C” and “Q” ratings as a basis for applying adjustments to the comparable sales, alignment with the definitions is extremely important. Inaccurately captured differences could result in erroneous adjustments that impact the value of the subject property, undermine the credibility of the appraisal report and/or create lending risk.

Q: Which ratings are misinterpreted the most?

The most common blurred lines are between C3 and C4, and between C4 and C5. With a C3 property, an appraiser will be looking at a well-maintained property with some physical concerns due to wear and tear. With a C4 property, minor repairs and updates are needed and some components are at or near the end of their useful life. Both ratings are for a functionally adequate home, but distinguishing between the two can be tricky.

Q: Why is it important to get the C4 to C5 condition rating clarification right?

This line is particularly important because Freddie Mac doesn’t purchase loans secured by properties with a C5 rating. These are homes where significant repairs to the improvements are needed due to a lack of adequate maintenance. A C5 rating is common when short-lived building components are at the end of, or have exceeded, their useful life. While the components may remain functional, the deferred maintenance and significant repairs introduce increased risk. An inaccurate rating here could result in a repurchase for a lender if the rating is determined to be superior to the actual condition of the property.

Q: What can appraisers do to improve consistency and precision in ratings?
Probably the best advice I can give appraisers is to review, and have a thorough understanding of, the definitions. This can help appraisers not only ensure the best alignment for condition and quality when a property appears to straddle two ratings, but also better rate quality and condition and avoid one element influencing the other.

Q: What role do lenders play?

Lenders must carefully review the appraisal reports they receive paying particular attention to the photos and comments – making sure they support the ratings appraisers provide in the appraisal. I encourage lenders to provide feedback to appraisers that reinforces the importance of providing accurate quality and condition ratings. Inconsistent ratings, and subsequent adjustments applied in the sales comparison grid, could expose lenders and Freddie Mac to unnecessary risk.