173 Technology Drive, Irvine, California 92618

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1 173 Technology Drive, Irvine, California This engagement letter serves as a contract between the vendor listed and SWBC Lending Solutions and can ONLY be completed by the appraiser listed. The appraiser MUST be certified and FHA approved. The fee and due date are not negotiable after the case terms have been accepted by the vendor / appraiser. The report must be completed per the instruction outlined in this letter on or before the above agreed upon due date. You must set your appointment no later than 24 hours after receiving this request and submit the inspection date through the AMC Website. If there are any problems gaining access to the property or meeting the appraisal due date notify SWBC Lending Solutions immediately. Delivery of the appraisal report is expected to be uploaded to the AMC no more than 48 hours (2 business days) after the inspection, regardless of the due date. All Reports MUST be UAD compliant. UAD Requirements: Entering the Subject Property's Address: The appraiser must enter the subject property's USPS address into the Subject section of the appraisal report following USPS mailing format standards (Street Number, Street Name, City, State, and ZIP Code.) Unit number for condominium appraisals: A condominium's unit number must be entered in the Unit Number field of the appraisal report. If the appraiser determines that a unit number is not available for a property known to be a condominium, the appraiser must put a "-"in the Unit Number field. The - symbolizes that the appraiser has researched the property address and was unable to identify a unit number. The address and unit number must be provided consistently for the subject property throughout the appraisal. Variations of the subject property address: Variations in the subject property address may be found because the property is (1) new construction, (2) lacks a USPS address, (3) USPS address is a P.O. Box or (4) USPS address conflicts with the legal address in public records. When these variations are found by the appraiser, take the following steps: If the subject property is new construction, address is a P.O. Box or lacks a USPS address, enter the subject property's physical address as best as possible using the USPS format. When the USPS address conflicts with the legal address in public records, identify and comment on the conflict in the addendum to the appraisal report. Appraisal License number must appear on the report as listed on ASC.gov. Page 1

2 REPORT REQUIREMENTS Loan Number must be noted at the top right hand corner of the form. Copy of your License and E/O must be attached to your report. DO NOT include an invoice within your appraisal report, unless this is a state requirement. (Some states require the appraiser to disclose their compensation). Use the USPS address for the subject. All appraisals must conform to the requirements stated or referenced in this engagement letter, including the applicable requirements in the current edition of the Uniform Standards of Professional Appraisal Practice (USPAP). All reports must be submitted on the appropriate, most recent Fannie Mae,/Freddie Mac form. All reports must be consistent throughout and be well supported. A comprehensive value conclusion is expected. A comment like all comparable sales have been given equal weight is not enough. A detailed analysis on how the comps were selected, adjustments, and your final value conclusion was derived is required. Always ensure the client name on the report is the lender as specified in the order (Not the AMC name). The AMC should only be stated in the client name field on the Signature/Certification Page. Appraiser must have access to local MLS and must be used in comparable selection. Appraiser Independence Statement (AIR) and FIRREA (See Below) must accompany every assignment. AIR: (Appraiser Independence Requirement) No, employee, director, officer or agent of the lender, or any other third party acting as a joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender has influenced or attempted to influence the development, reporting, result or review of this assignment through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery or in any other manner. I have not been contacted by anyone other than the intended user (lender/client as identified on the first page of the report), borrower, or designated contact to make an appointment to enter the property. I agree to immediately report any unauthorized contacts either personally by phone or electronically. Page 2

3 FIRREA Certification Statement: The appraiser certifies and agrees that this appraisal was prepared in accordance with the requirements of Title XI of the Financial institutions, Reform, Recovery, and Enforcement Act (FIRREA) of 1989, as amended (12 U.S.C. 331 et seq.), and any applicable implementing regulations in effect at the time the appraiser signs the appraisal certification. Please include the above comment(s) in the appraisal as the first comments of the Addendum. REQUIRED DISASTER COMMENT ON ALL ASSIGNMENTS Secondary Market participants are requiring all appraisals to contain language specific to disaster related damage. It is, therefore, necessary for Discover Home Loans to require this language in all appraisals. If you want to reference a specific disaster you can refer to: For areas with no disasters: SPECIFIC LANGUAGE REQUIRED There have no disasters in the subject property area. Based on an Exterior/interior inspection on the subject has no damage due to any known or unknown disasters. The marketability of the subject property is not impacted in any way. For Exterior Only Inspections If the home has no apparent damage: Based upon an exterior inspection, from the street, the subject property has no observable disaster related damage as of. The disaster has had no observable impact on the subject s value or marketability. Apparent or Suspected Damage If there are apparent or suspected damages the appraiser is to provide a description and photos of the actual damages. An explanation for the determination that there are suspected damages is to be included when actual damages are not observed. E.g. The subjects neighborhood was reported to have experienced flooding in the subjects location as a result of the recent Page 3

4 hurricane. An exterior inspection was insufficient to determine if the subject was directly affected. An interior inspection is recommended to confirm the effect on the subject property. For Interior Inspections If the home has no apparent damage: Based upon an interior inspection the subject property has no observable disaster related damage as of. The disaster has had no observable impact on the subject s value or marketability. Apparent or Suspected Damage If there are apparent or suspected damages the appraiser is to provide a description and photos of the actual damages. An explanation for the determination of unobserved yet suspected damage is to be included. Please include the above comment(s) in the appraisal at the bottom of page 1 in the section addressing physical deficiencies or adverse conditions. PHOTOGRAPHS (Granular, blurred, pixilated or obstructed view photos will not be acceptable) Required For All Assignments: Front of property / Rear of property / Side elevations / Street Scene / Kitchen / All Bathrooms / All Bedrooms including Den or Office / Main Living Area(s) / Basement (finished or unfinished) / Pools or other amenities / View(s) (ie: water view, mountain view, city view, recreational area(s), power lines or any external obsolescence) / Examples of Physical Deterioration (If Present) / Examples of recent updates: (ie: Restoration, Remodeling & Renovation) / Photos of specific items which contributory value given (ie: Custom features, Barn, Tack room, horse facilities, Guest house, Casita, Workshop, Detached garage, Boat house,) / All PUD and or Condo project common elements, /Smoke detectors & Carbon Monoxide detectors (CO2) / Water heaters / MUST PROVIDE PHOTOS OF CRAWL SPACE AND ATTIC ON ALL REPORTS MLS photos- are NOT acceptable. In the case where a comparable sale(s) where access is not permitted such as a guarded gate or blocked access the appraiser may provide the MLS photo; however, a photo of the obstruction must also be provided. External Influences or Obsolescence Photos of any reported external influence or obsolescence are required (ie schools, arterial streets, power lines, Rail Road tracks) Final or Appraisal Update Photographs - The Client requires a new front exterior photo, a new rear exterior & street scene photo. Additional photos are required of items of which the subject to condition was placed upon. Page 4

5 Aerial Photos - An aerial photo of the subject and the market area is best practice and should be included in the appraisal addenda. The aerial photo should be of sufficient scale to show the subject property and immediate neighborhood and any external obsolescence, or appraiser must provide comments if the photo is limited or subject is not clearly shown. Labels All photos need to be labeled accurately and identify for the user of the report what the photos is a representation of. (ie. Kitchen, bedroom, bathroom, guest house, interior living area of guest house). Basements When the Subject dwelling has a basement the Client requests interior photos of Finished and un-finished areas. New Construction When the Subject is proposed OR new construction, photos showing various views of the subjects Site and elevations are required. PERSONS, FAMILY PHOTOS, PERSONAL PHOTOS and RELIGIOUS OBJECT must be removed or blurred. Please try and take photos that do not show these items. Health, Safety & Livability Discover Home Loans requires that the Subject property be habitable and free of any health and/or safety hazards OR the report must be made subject-to the repair and/or expert inspection of the specific deficiency. This would include any deficiency that affects Safety, Security or Structural Soundness, such as: Bedroom windows with security bars, with no safety release latches, and no other egress / outside access. Upper level door with no balcony or steps or railings. Obvious deterioration/destruction from water, insects, etc. Other similar conditions that adversely affect the safety and livability of the property STOP STOP & Notify the AMC if the subject is a Manufactured home or Condotel. These properties are NOT eligible for financing by Discover Home Loans. HARD STOP & Notify the AMC if the subject is on a Reservation or Native American Land. These properties are NOT eligible for financing by Discover Home Loans. STOP & Notify the AMC if rural properties include properties with these characteristics: Page 5

6 Secured by agriculture type land (i.e., farms, orchards or ranches) Undeveloped land Secured for land development purposes If the Subject street is NOT considered to be an all-season road STOP & Notify the AMC if during the inspection it becomes evident that the Subject condition deficiencies are such that repair is NOT financially feasible take photograph evidence of the deficiencies, such as C5 or C6 condition rating. STOP & Notify the AMC if the subject property is found to have any type of deed restrictions other than developments that restrict due to minimum age requirements (ie.. 55 plus), or in municipalities with no zoning that utilize restrictions for common and typical land use provisions (minimum lot size, setbacks, ect ). STOP & Notify the AMC if the appraiser is requested to complete an appraisal on a property that is deemed unique to the market area and there are no comparable sales that demonstrate market acceptance for a unique design. (ie Berm home in an area where there are no other properties of similar construction or Log cabin design in an urban area where there are no other sales of similar design). STOP & Notify the AMC prior to inspection on a new construction or proposed construction on a FHA order if the appraiser has not received the form. *if any of the above noted factors were not discovered until the day of the inspection please take photos that can be submitted to Discover Home Loans. NOTE: California: Please ask borrower if; STATE SPECIFIC REQUIREMENTS A. C.O Detector has been installed when setting up your inspection. Carbon Monoxide Detector (CA) - If the subject does not have a Carbon monoxide detector, the report must be made subject to Installation of a carbon monoxide detector. "As of July 1, 2011, the state of California enacted the Carbon Monoxide Poisoning Prevention Act SB183. This act requires all single family homes with an attached garage or a fossil fuel source to install working carbon monoxide alarms (Photos required). Page 6

7 B. Water Heater has been installed with double straps when setting up your inspection. Water heaters (CA) - If the subject does not have double straps, the report must be made subject to Installation Two straps securing the unit (Photos required). NOTE: HAWAII The Appraiser is required to provide a lava zone map for properties on the Big Island of Hawaii. The subject property location must be identified within the appropriate zone on the map. *Note: properties located in lava zones 1 or 2 on the Big Island of Hawaii are ineligible. STOP & Notify the AMC if the subject property is noted to be on homestead lease / Hawaiian Home Land SOLAR PANNEL REQUIREMENTS Solar Panels must be owned by the homeowner if they are included in value. If the solar panels are leased then the solar panels may NOT be included in value. (Many home owners are under the assumption that the panels are owned when they are in-fact leased. The appraiser is required to complete his/her due diligence and verify ownership). FHA REQUIREMENTS FHA Number must be at the top right hand corner of ALL pages of your report. An affirmative statement that The subject property meets all FHA Requirements in Sections & is required or the appraisal must be completed Subject To Repairs to bring it to Average or Better Condition and so that the property will in fact meet FHA Minimum Property Standards. HUD INTENDED USER STATEMENT REQUIRED - Appraiser must state that the lender client and FHA/HUD is the intended user. The appraiser must state they have completed a 'head and shoulders' inspection of the crawl space and attic areas DISCOVER HOME LOANS REQUIRES THE APPRAISER TO PROVIDE PHOTOS OF THE ATTIC AND CRAWLSPACE. The Appraiser has tested all of the Mechanical Systems and found them to be in working order; or outline any issues found. For FHA appraisals on properties with private well and septic the Client requires that the appraiser indicate on the Sketch the distance between the: 1. Well & Septic tank 2. Well & septic tank drain field. * If any of this information was not available, please explain. Water, Wells, Septic and Sewage Systems Page 7

8 Water, well, septic and sewage systems must meet community standards, be adequate, be in service and be accepted by area residences. If Public water and /or sewage facilities are not available then private well and septic facilities must be available and utilized by the subject property. The private facilities must be viable and adequate to service the subject property. Generally, the private well and septic facilities must be located on the subject property site. However, off-site private facilities are acceptable if the inhabitants of the subject property have the right to use and access the off-site facilities and there is an adequate, legally binding agreement for use, access and maintenance. The appraiser must comment when the viability, adequacy or market acceptance of or access to the well and septic facilities are an issue. If not an issue, the appraiser should demonstrate market acceptance by selecting comparable sales (sales, listings, rentals) with same/similar characteristics. When the Subject has a private well or septic, commentary is required stating whether or not Public Utility(s) connection is available to the Subject Site. If Yes, the following are required: 1) An estimated cost-to-cure AND 2) Name(s) and phone number(s) of the data source(s). If any of this information is not available, describe the attempt made to obtain the information. Builders Certification (92541 form), the appraiser must receive a fully executed form HUD before performing the appraisal on proposed or under construction properties less than one year old and never occupied. The appraiser must review Item One and note in the appraisal report any discrepancies between the information in Item One and the actual conditions observed on site. The appraiser must take into consideration the effects of any site conditions on the value of the property. The appraiser must state in the report: 1) That a signed HUD-92541, dated prior to the inspection, was reviewed prior to the inspection and 2) Weather or not there were any discrepancies between the description provided in Item #One (Site Analysis Information) and the actual site conditions Note: The form must be dated PRIOR TO the date of the inspection and must be reviewed BEFORE preforming the inspection for proposed or under construction properties. Note: This is a reminder that the Date of Inspection located at the top right of the form is the Effective Date of the compliance inspection and must follow the Effective Date of the original inspection. PUD Information & Analysis Page 8

9 *When the subject is in a PUD, the appraisal MUST contain the following: Legal name of PUD HOA dues and assessments Description of common elements and condition of amenities for the subject community and the comparable sales community. Photos of common elements (mandatory requirement). Address how the subject s development compares in its amenities and costs to surrounding (comparable sales) PUD developments. When using non-pud comparable provide an analysis to support the inclusion of non- PUD comparable sales, and address the impact the subject s deed restriction may have on its marketability and value compared with the non-pud comparable sales. SCOPE of WORK The scope of work for this appraisal is defined by the complexity of this appraisal assignment and the reporting requirements of the appraisal appraisal report form, including the following definition of market value, and the relevant statement of assumptions and limiting conditions, and certifications. The appraiser must, at a minimum: 1. Perform a complete visual inspection of the interior and exterior areas of the subject property 2. Inspect the neighborhood 3. Inspect each of the comparable sales from at least the street 4. Research verify, and analyze data from reliable public and/or private sources 5. Report his or her analysis, opinions, and conclusions in this appraisal report. All assignments must include the UAD definitions in the addendum for all UAD reports. All assignments must include the Fannie Mae 1004MC form. Provide total days on market, list date, contract date, original list price for the subject and all comparable sales. Commentary is required to explain the use of ANY comparable with a DOM that exceeds the Neighborhood Marketing Time trend as reported on page 1. All assignments must include the COST APPROACH for all interior appraisals and must include a fully developed opinion of site value. When the subject is currently listed or has been listed in the past year, a full 12 Page 9

10 month listing history is required. This should include offering dates, price and data sources for each occurrence. Commentary is required if any of the data is not available (FISBO, private offering ect.). The Client requires a 12 month listing history of all comparable sales including: data sources, offering dates, list prices and closing prices. On all assignments, present and adjust a minimum of three closed sales preferably closed within 6 months and two current listings and/or under contract (Pending) sales on the market grid. (Include listing history and days on the market). If sales within 6 months are not available, the Client requires commentary explaining why the 6 month requirement could not be met. Use of comparable sales which exceed 12 months will require additional explanation. All walkthrough assignments require the room locations to be labeled on the floor sketch. (i.e. BR, BA, KIT, LR, DR, etc.) The sketch must include ALL improvements, with dimensions (items such as a pool will not require dimensions), including but not limited to patios, outbuildings, pools, tennis courts, etc. Also, basement must be included in sketch addendum. All walkthrough assignments must include photos for any condition, feature or amenity for which adjustments have been made (e.g. view, pool, outbuildings, deferred maintenance or other positive or adverse factors). All walkthrough assignments require interior photographs of the main living areas that include but are not limited to the living room, kitchen, all bedroom(s), all bathroom(s), and basement. (finished & Unfinished). All walkthrough assignments require a photo of all OUTBUILDINGS and an estimated replacement cost for each structure. Comment whether the foundation of each outbuilding is permanent or the structure is portable. All photos must be clear, current, in color, and well-framed. They must be specifically labeled (subject interior or subject exterior and similar vague labels are not acceptable). Plat Map is required on all assignments. If plat map is unavailable then please indicate and why. Page 10

11 Crawl Space inspection & photo (required in all assignments where applicable). Attic inspection & photo (required in all assignments where applicable) TITLE Do Not Request the Title report. Title reports are often not available or even ordered until after the appraisal is obtained. CRITERIA USED FOR SELECTION OF COMPARABLE SALES / SEARCH RESULTS Appraisers are required by USPAP to include their search criteria documented in their work file. Discover Home Loans believes by being transparent with this information appraiser independence is strengthened because there are fewer opportunities to second guess appraiser's comparable sales selection and at the same time let the reader understand the scope of research completed by the appraiser. Discover Home Loans believes that including this information initially will reduce second touches by the appraiser and increase underwriter efficiency and reduce unnecessary revision requests. Discover Home Loans therefore requires the appraiser to state the search criteria used when researching sales as possible comparable sales and the resulting number of potential comparable sales. When the appraiser determines the initial output is not sufficient and extends the criteria the appraiser should note the revised search criteria and the resulting number of potential comparable sales. Sequential searches should all be documented to show the increasing number of sales analyzed by the appraiser. Only the final list of property addresses considered by the appraiser needs to be listed. Example: Search criteria included properties that sold within 6 months, were within one half mile of the subject and were within 10% +/- of the subject's living area. The results of the search produced only one property. The search was extended to twelve months and two miles and 20% +/- of the subject's living area. The result of the search produced three sales, one pending sale and two listings. The final search criteria were twelve months, five miles and 25% +/- of the subject's living area. The search criteria resulted in six sales, two pending, and four listings. Note: The listings of street addresses can be hand typed, MLS outputs or property records outputs. Only the street addresses are required to be shown, this data may be provided as a one line CMA report; however, greater detail is permissible. ACCESSORY UNITS & SECOND KITCHENS Page 11

12 A single family home may contain an accessory dwelling unit (ADU), also referred to as a "mother-in-law unit" or "guest apartment." ADUs are self-contained living units (including a private bath and kitchen) that have their own direct access from the outside. An ADU can be either attached or detached and above or below grade. ADUs should only be included in the GLA if they are attached and have direct interior access. ADUs with only exterior access are to be reported, and valued, separately from GLA. An attached non-permitted second unit (Guest Unit or ADU) should not be valued but the area should be included in the area calculations as if the kitchen components have been removed. The report should be "as is" as long as the appraiser describes the functional obsolescence for the cost of removing the kitchen and returning the structure to its original state. A detached non-permitted second unit (Guest unit or ADU) should not be valued unless the appraiser can find similar non-permitted units to demonstrate the acceptance of the non-permitted unit in the market and zoning does not prohibit a second unit (e.g., illegal use). Guidance for non-permitted second kitchen: Non-permitted second kitchens do not have to be removed unless as it stands provides a health or safety issue or is not allowed per zoning (i.e., illegal use). For a single family home where the non-permitted second kitchen is allowed by zoning and is not a health or safety issue; A non-permitted second kitchen should not be valued but the area should be included in the appropriate area calculations (GLA, Basement or other living area) as if the kitchen components have been removed. The report should be "as is" as long as the appraiser describes the functional obsolescence for the cost of removing the kitchen and returning the structure to its original state; However, the non-permitted second kitchen can be valued in its "as is" state without functional obsolescence if the appraiser can find two comparable sales with similar non-permitted kitchens to demonstrate market acceptance. ACREAGE When the assignment includes large acreage or multi-parcels, the appraiser must determine if it is residential in nature. Discover Home Loans does not impose limits on acreage or the percentage of the value to which the excess land is attributed when the property meets these conditions: The property is common and customary to the market, and supported by comparable sales. Page 12

13 The property is not a known Texas Homestead 50(a)(6) property > 20 acres. The property is residential in nature The property is not used for income producing purposes; the appraiser must comment fully on the excess land and compare it to properties with like characteristics. The property must be serviced by adequate utilities and roads which meet local standards. The property must be accessible for year-round use. Ineligible rural properties include properties with these characteristics: Secured by agriculture type land (i.e., farms, orchards or ranches) Undeveloped land Secured for land development purposes Appraisal should value the subject property based on the typical property size as found through the comparable sales and consider the remainder excess land. The appraiser is required to describe and include the full parcel even when excess land is considered. Community Owned or Privately Maintained Streets If the property is located on a community-owned or privately-owned and maintained street, an adequate, legally enforceable agreement or covenant for maintenance of the street is required. The agreement or covenant should include the following provisions and be recorded in the land records of the appropriate jurisdiction: Responsibility for payment of repairs, including each party's representative share, Note: Default remedies in the event a party to the agreement or covenant fails to comply with his or her obligations, and The effective term of the agreement or covenant, which in most cases should be perpetual and binding on any future owners. If the property is located within a state that has statutory provisions that define the responsibilities of property owners for the maintenance and repair of a private street, no Page 13

14 separate agreement or covenant is required. Appraiser to provide comments supporting statutory provisions. If the property is not located in a state that imposes statutory requirements for maintenance, and either there is no agreement or covenant for maintenance of the street, or an agreement or covenant exists but does not meet the requirements listed above, the property is not eligible for lending with Discover Home Loans. The appraiser is not required to provide a copy of the Maintenance agreement, but must report that the subject meets the aforementioned requirements. If the appraiser is provided with the Maintenance agreement then it would be recommended that the appraiser include this with in the report. Non Owner Occupied Property Requirements When completing an appraisal report of a non-owner occupied property for Discover Home Loans, a FNMA Form 1007, Single Family Comparable Rent Schedule is required. If the FNMA Form 216, Operating Income Statement is required this will be a special request from DHL. 1. Non-owner occupied SFR: requires FNMA Forms 1007 and All 1007 reports require rental comparable photos. MLS photos for rent comparable sales will be accepted. 3. Small Income Property: Upon request from DHL the report must include FNMA Form LET THE AMC KNOW IMMEDIATELY IF THE PROPERTY IS NON-OWNER OCCUPIED SO THE APPROIATE FORMS CAN BE REQUESTED. COST APPROACH SECTION All assignments must include the COST APPROACH for all interior appraisals and must include a fully developed opinion of site value. The Client requires the following comment to be provided in the Cost Approach section of the report: This appraisal is not to be used by any party for insurance purposes. UNPERMITTED IMPROVEMENTS / CONVERSIONS When the Subject has undergone improvement and/or conversion WITHOUT legal permits, and the remodeled area was included in the GLA, the Client requires the following: Page 14

15 1. The appraiser to state what sources / attempts were made to verify if permits were obtained. 2. The appraiser MUST comment on the quality and appearance of the work and its impact, if any, on the market value of the subject property. Was the improvement / conversion completed in a workmanlike manner? 3. Statement on the improvement. Did the improvement/conversion increase the 'footprint' OR elevation of the original structure? 4. Photos verifying that the improvement was completed in a 'workmanlike' manner. 5. At least one comparable sale with a similar non-permitted improvement /conversion to demonstrate market acceptance. 6. Garage conversion must not violate Zoning or other governing documents. Non-permitted additions or enclosures that are not typical for the market area are not to be included in the GLA, basement or other living area. The report can be made "as-is" as long as the appraiser describes the functional obsolescence for the cost of removal and returning the structure to its original state. Guidance for non-permitted second kitchen: Non-permitted second kitchens do not have to be removed unless as it stands provides a health or safety issue or is not allowed per zoning (i.e., illegal use). For a single family home where the non-permitted second kitchen is allowed by zoning and is not a health or safety issue; A non-permitted second kitchen should not be valued but the area should be included in the appropriate area calculations (GLA, Basement or other living area) as if the kitchen components have been removed. The report should be "as is" as long as the appraiser describes the functional obsolescence for the cost of removing the kitchen and returning the structure to its original state; However, the non-permitted second kitchen can be valued in its "as is" state without functional obsolescence if the appraiser can find two similar non-permitted kitchens to demonstrate market acceptance. Guidance for non-permitted additions for a 2-4 unit property: If the additional unit was created by converting a portion of another unit (including basement) and is allowed by zoning but is not permitted, the property should be appraised based upon the number of permitted units/kitchens it possesses. Page 15

16 The report should be "as is" as long as the appraiser describes the functional obsolescence for the cost of removing the kitchen and any other requirement of returning the structure to its original state (the original number of units). However, the non-permitted addition can be valued in its "as is" state if allowed by zoning, conversion was made in a workman-like manner and the appraiser provides three similar non-permitted conversion/units to demonstrate market acceptance. DECLINING MARKETS Refer to and utilize Fannie Mae Guidelines regarding defining and reporting declining markets. All reports indicating a declining market should include the following: Three closed sales within 90 days of the date of the appraisal. Explain if unavailable. Two listings and/or pending sales (pending sales are preferable). If time adjustments are not applied, the reason must be explained in the analysis Time adjustments should be applied based on the contract date of the sales. CONDOMINIUM REQUIREMENTS 1. ASK BORROWER/REALTOR/OWNER TO HAVE DEVELOPMENT ASSOCIATION INFORMATION AVAILABLE TO YOU WHEN SETTING APPT. TO EXPEDITE THE PROCESS- (Ex. # of units, phases, rented, for sale, sold, amenities, pending litigation, etc). 2. Site size should be identified considering entire condo development. Density of site will be based upon the size of site divided by the number of units please identify in units/acre. Please identify when this information is not obtainable. 3. Please accurately report the Specific Zoning Classification and at minimum report the basic minimal lot size and minimal density requirements (units/acre). Residential or R1 for condominiums is not applicable. Familiarize yourself with city/county codes/regulations of area you service. This is a significant source of determination for the test of Zoning Compliance. 4. Please describe any adverse site requirements (double check when adding your location map). Within the section which asks if there are any adverse site conditions Report what directly surrounds the subject development (Ex. Similar quality SFR s to N,S,E with similar SFR across the street to the West). 5. Project information Contacting Management Agency or HOA is necessary to verify details of development. Please discuss attempts to reach one of these agencies if appraiser is not able to. Report number of phases/units accordingly and identify source of information. If reporting 1 phase because phase information is not available, please Page 16

17 report you are doing this and attempts at gaining this information. # of units rented is a critical portion of information and should be very accurate so that the loan can be properly underwritten. Explain how this information was obtained. Provide information contact and phone number. 6. Condition - Be specific indicating individual unit numbers/conditions. Pay special attention to the location of the individual unit within the project. 7. Photos are required for all items being valued. Typically condominiums have some type of common area. Submit photos representative of Clubhouse/rec. room, common pool/spa, tennis courts, or any other common amenity. 8. Selection of Condo Comparable sales At minimum, two sold comparable sales within the development, and two sold comparable sales outside the subject development (from competing development(s)) are to be utilized. Also, at least one pending sale or listing (same development) should be added to show current asking prices. Due to the current economic stigma of condominiums, we have found this comparable selection to provide the strongest support of value for the majority of lenders. This applies to new or existing constructed condominium complexes. Condominiums with Commercial Space: Discover Home Loans will finance properties within a condominium project that includes commercial space. The appraiser must determine the percentage of commercial space in the project. If the commercial space represents more than 20% of the total square footage for the project, the appraiser must also: State whether the amount of the commercial space is common for the local market Address whether the commercial space has an impact on the residential nature of the project Identify three projects with similar square footage of commercial space. Their actual commercial square footage does not need to be itemized. (The appraiser is not required to provide the percentage of commercial space for the three projects. The appraiser is not required to use comparable sales located within one of these three projects. The appraiser must identify, in an addendum, three projects by providing their respective addresses). Site Condominiums: A site condominium is defined as a single family, totally detached dwelling (no shared garages or any other attached buildings) encumbered by a declaration of condominium covenants or condominium form of ownership. The appraiser must adhere to the following guidelines when completing an appraisal for a site Condo (Detached Condominium): FHA/VA is to be completed on form FNMA1073/FHLMC 465 Non-FHA/Non-VA may also be completed on FNMA 1004/FHLMC 70 when the appraiser includes an adequate description of the project and information about the homeowners' association fees and the quality of the project maintenance. Required information when form 1073/465 not used: Leave the checkbox blank adjacent to PUD. / The total number of units, the number of units completed, and number of units sold / Description of what comprises the common areas / The name of Page 17

18 the HOA, Management Group or builder if in control of HOA / Does any single entity own more than 10% of the units in the project? / Are any common elements leased to or by the HOA? / Is the project adequately maintained? / What is the HOA fee and what does it cover? Condo Questionnaire: In instances where the appraiser has not received a condo questionnaire, the appraiser is asked to complete the report to the best of their ability with the information that is available to them. The appraiser should make an attempt to obtain the questionnaire from the HOA. 2 4 Small Income Properties Appraisal (1025) Rental Analysis: Provide at least two rent comparable sales for each unit type within the subject property. Pay particular attention to rent/sf. and rent/bedroom. You will have to calculate these indicators; this is what reviewers and underwriters are very particular about. Please thoroughly explain how you derived the opinion of market rent for the subject property. Also, when forecasting market rents for the subject property pay particular attention to current restrictions in being able (legally) to raise rents (ex. rent control, leasing restrictions). Gross Rent Multiplier: GRM must be supported. Be careful when weighting your comparable sales when determining your GRM. Two unit GRM s for instance are typically higher than three and more units. You should make every effort to utilize similar unit properties when determining your GRM. Please provide detailed analysis as to how the GRM was extracted from the market, how the comparable GRM s ware weighted and why, and how the final estimate was determined in the income approach to value. Units of Comparison: Carefully analyze unadjusted and adjusted units of comparison (price per unit/room/gba, bedroom). Comment on how units of comparison were selected from within the range of comparable sales. If units of comparison are reconciled outside of the range of adjusted units of comparison, explanation will need to be made and supported. It is necessary to comment on which units of comparison are weighted most heavily and why. CONDITION DEFICIENCIES When the Subject is in C5 or C6 (below average) condition, the Client requires the report be made 'subject to the required repairs/inspections necessary to bring the subject up to C4 (average) condition AND that the following be provided: Page 18

19 1. A description of the repair/inspection items. 2. An itemized cost-to-cure estimate for the repair items. 3. A Subject overall condition rating which reflects the 'as-improved' condition of the property 4. Comparable sales that reflect the 'as-improved' condition of the property. 5. Demonstrative photos of observations which indicate needed repair(s)/inspection(s). * NOTE: If during the inspection it becomes evident that the Subject condition deficiencies are such that repair is NOT financially feasible take photograph evidence of the deficiencies. Stop & Notify the AMC. New Construction For new construction, when property taxes have not yet been assessed on the improvement (land taxes only), Discover Home Loans requires that the appraiser provide an estimated tax assessment based upon the completed / improved property and identify it as an estimate. A calculation based on one of the following methods must be provided: 1. The recent sale of a similar new house, its sales price, and its subsequent property assessment. 2. If the Equalization Rate and the Tax Millage Rate are available, the property taxes can be calculated using a 2 step formula: STEP 1: (Appraised Value of the Subject) X (Equalization Rate) = Assessed Value; STEP 2: (Assessed Value) x (Tax Millage Rate) = PROPERTY TAX ASSESSMENT, or Another reasonable basis which is fully explained by the appraiser. NOTE: NA or Unknown will no longer be acceptable in the R.E. Tax fields. When the Subject is new construction, the following comparable sales are required: 1. At least one comparable sale from the Subject development 2. Either one similar, current sale from a competing builder/developer OR a resale from within the Subject development that has closed within the past 30 days. (NOTE: Two of the comparable sales (e.g. spec homes and/or re-sale transactions) must have had exposure to the market after construction). 3. At least Two MLS active listings and/or pending sales from a competing development. If these requirements cannot be met, commentary is required. PRIVACY AND DATA SECURITY You represent and warrant that you have, and covenant that for so long as you retain Personally Identifiable Information (Personally Identifiable Information has the meaning of nonpublic personal information under the Gramm-Leach-Bliley Act (Pub. L (1999) Page 19

20 (GLBA)) you will continue to have, adequate administrative, technical, and physical safeguards to (A) ensure the security and confidentiality of such Personally Identifiable Information (as defined under the GLBA as implemented); (B) protect against any anticipated or reasonably likely threats or hazards to the security or integrity of such Personally Identifiable Information; (C) protect against unauthorized access to or use of such Personally Identifiable Information; (D) ensure the proper disposal of Personally Identifiable Information and (E) without limiting the generality of items (A) through (D) preceding, comply with the requirements contained in Section 501(b) of the GLB Act and the Interagency Guidelines Establishing Information Security Standards adopted by federal bank regulatory agencies, including the OCC and Board of Governors of the Federal Reserve System. In addition, you represent and warrant that the manner in which Personally Identifiable Information is maintained, transported and transmitted will comply with applicable state laws imposing data security requirements, including 201 CMR et seq., Massachusetts Standard for the Protection of Personal Information of Residents of the Commonwealth. In addition to the prior representations and warranties, you agree to: 1. Develop, implement and maintain, at your own expense, a proven system or methodology to audit for compliance with your administrative, technical, and physical safeguards. 2. Not share Discover Home Loans Information with any subcontractor or third party. 3. DO NOT DISCUSS APPRAISAL FEES OR VALUE CONCLUSION with borrowers, realtors, or any parties other than the AMC. 4. If required by the terms of this Service Engagement Letter or Applicable Law to store Discover Home Loans Confidential Information or any modification thereto and Supplier is the primary source for such data, you must ensure a back-up or alternate copy of such data exists. Backup copies shall be maintained in a physically secured environment. 5. Ensure documents created which contain Discover Home Loans Confidential Information are labeled in accordance with your data classification labeling. 6. Maintain documents within a physically secure facility. You must employ commercially reasonable controls to prevent unauthorized access and establish tracking mechanism to establish physical access to the Information. When documentation is not in use it shall be locked away in a cabinet, ideally with fire resistant capability. 7. Destroy paper documentation using a commercial shredder, into confetti-sized pieces. 8. No electronic copies may be made or maintained of Discover Home Loans Information. Page 20

21 You must immediately notify the AMC if you discover there has been a material breach of, or a serious attempt to breach, your security safeguards required by this Section [Internal cite to above requirements], or if the security of Personally Identifiable Information has been or may be compromised for any reason (including unauthorized access to and unauthorized attempts to access Personally Identifiable Information by colleagues, coworkers or any other internal or external individuals or entities (Personnel necessary to perform the obligations under this Service Engagement Letter for which such Personally Identifiable Information was disclosed. You must ensure that Personnel cannot attempt to access, or allow access to, any Personally Identifiable Information that they are not permitted to access in connection with the provision of Services under this Service Engagement Letter. Desk Review: Complete on Form 2006 Provide analysis and conclusions Client is looking for AS IS or Other Discuss Market Conditions REVIEWS Field Review: Complete on form 2000 Provide your own value conclusion Provide subject exterior photos and your own comp photos. (not MLS photos) 1004D Certificate of Completion: Describe ALL improvements completed or not completed Provide photos of each item (completed or not completed) If FHA assignment you must address how subject now meets HUD minimum property standards. Update of Value: You must provide support for current market condition 1004MC is required and should be consistent with your conclusion Provide exterior photo of subject 1007 Market Rent PROVIDE OWN PHOTOS (Not MLS) Page 21

22 DELIVER A QUALITY REPORT Subject Section: Properly identify all information concerning the legal description for the subject property identify if the property is for a purchase, refinance or other (describe) purpose. If the property is a purchase, please indicate all marketing that the property has gone through including but not limited to canceled, expired, hold, pending and/or sold statuses. Please fully identify the times spent throughout each status and if there were any reductions in pricing. If the property is a purchase you MUST indicate that a contract for sale was reviewed and analyzed AND, you must indicate if there were or were not any items which may affect the sales price. Neighborhood Section: Identify the neighborhood appropriately. Check built up rate vs. Present land use percentage. Consider Urban, Suburban and Rural ratings in conjunction with your comparable search. Consider distances to support facilities, employment. Neighborhood boundaries are to be defined based on the subject property s neighborhood and not based on the extended market area. Properly define only the homogeneous neighborhood. Market conditions within the neighborhood section can encompass the range of properties throughout the neighborhood. This is opposed to the 1004MC, which should only include properties comparable to the subject property. Site Section: Site dimensions should be utilized if at all available (even if irregular). Appraiser is to check calculations against the reported size in public records/assessor role to determine accuracy. Plat map to be submitted for every appraisal and is publicly available in most instances. Please utilize your city/county sources and/or subscription services to make available. Identify subject parcel. Please accurately report the Specific Zoning Classification and at minimum report the basic minimal lot size and minimal density requirements (units/acre). Residential or R1 for every report is not acceptable. Please familiarize yourself with city/county codes/regulations of area you service. This is a significant source of determination for the test of Zoning Compliance. Please describe any adverse site requirements (double check when adding your location map). Within the section which asks if there are any adverse site conditions Report what directly surrounds the subject property (Ex. Similar quality SFR s to N,S,E with similar SFR across the street to the West). If the subject property exceeds the size of a typical city size lot, or over 1 acre, please describe the topography of the site, what is on the site, if the site is likely to be divisible, Page 22

23 and what the lot utility is. Subject Section: Adequately identify the subject property. Please reflect actual effective age of property based on upgrades. If effective age greatly differs from actual age, identify all upgrades that have been made paying particular attention to: electrical, plumbing, heating, cooling, roofing, doors, windows, siding, foundation, flooring, kitchens, and baths. Report any physical, functional, or external depreciation to the subject property. All Depreciations are also to be reflected in the Cost Approach and within the Sales Comparison Approach. Functional obsolescence concerning floor plan MUST be reflected in the Sketch by drawing interior walls. Gross Living Area: The appraiser is to measure the exterior of the subject property to determine the gross living area. Interior dimensions are permitted for condos and townhouses. Only areas that are attached and have continuous interior access, and are suitable for year round occupancy, can be included in Gross Living Area (GLA). Living areas that are detached from the main structure, do not have direct interior access, or are partially or fully below grade, are to be fully described and reported separately from the Gross Living Area. To ensure consistency in the sales comparison analysis, appraisers must compare above-grade areas to above-grade areas and below-grade areas to below-grade areas. In extreme instances appraisers may deviate from this approach if the style of the subject property or any of the comparable sales does not lend itself to such comparisons. However, in such instances, the appraiser must explain the reason for the deviation and clearly describe the comparisons that were made. The appraiser is to reconcile any substantial difference between their measured living area and the living area reported on public records. Addition(s): When the appraiser determines an addition to the original structure is present, they are expected to describe the added improvements, and comment on: a. Whether the appraiser was able to confirm the existence of permits, b. The conformity of the addition in both quality and functional utility to the original improvements, c. The effects on marketability and compliance with local zoning laws including the consequences of being out of compliance within the municipality. When the additions or modifications create "Health and Safety" issues or are not allowed by zoning the appraisal is to be made "subject-to" remediation of the item, or removal of the addition, depending on severity of the issue. If zoning does not allow the non-permitted addition (e.g., a single family with a guest unit; a 3 Page 23