20 Things An FHA Appraiser May Find Wrong With Your Duplex

Let’s face it, many would-be duplex buyers aren’t walking around with a 25% down payment. That’s the minimum banks expect from investors.

Those that do have it are going to expect a return on their investment. After all, why else would you invest?

And that return typically results in a lower sales price.

There are, frankly, far more would-be owner-occupants who’ve saved enough for a down payment on an FHA-insured mortgage than there are folks with 25%. And because they’re buying a property as both a home and an investment, they are often willing to pay more for a property than someone focused solely on a rate of return. In other words, sellers who are willing to accept an offer from a buyer with an FHA-insured mortgage will likely get a higher price for their duplex than those who won’t.

So why would someone be opposed to taking more money for their property?

It is usually because they don’t really understand what an FHA loan involves. In fact, they think that FHA requires an “inspection” and will give them a laundry list of repair items that will cost tens of thousands of dolllars.

The irony is, FHA doesn’t perform an inspection at all.  Rather, when the appraiser comes to the property to confirm the value of the sale for the bank, he or she is also charged with comparing it to specific health and safety standards. If these thresholds aren’t met, FHA won’t insure the mortgage, and consequently, the buyer won’t be able to qualify for the loan.

Consider that. FHA insures the mortgage so if the buyer, who doesn’t have much of a down payment into the property defaults, FHA is on the hook for paying the note.

So what are these requirements perceived to be so big a seller would agree to sell for less?

That’s what’s so funny. They aren’t much more than anything that would be caught by either a city-required time of sale inspection or a regular buyer’s inspection.

So let’s take a look at the 20 common most common FHA-required repairs as an example.

  1. Peeling paint. This is probably the most common repair cited by FHA appraisers. And if you think about it, peeling and flaking paint makes your property look bad anyway but isn’t terribly expensive to address. FHA’s concerns, however, are more around decay and, if the property is older, the presence of lead-based paint and paint chips.
  2. Loose or missing handrails. These are often cited by city-required inspections as well. Again, it’s a safety item that’s relatively easy and inexpensive to repair. Whether you sell or not, if someone slips and falls as a result of a missing or loose rail, it’s likely to cause a much more expensive bill than the cost of the repair.
  3. Windows sealed shut. Again, this makes sense. If a window is sealed shut and there’s a fire, a resident can’t get out, the cost of the liability is far greater than that of hiring a handyman to unstick it in the first place.
  4. Broken glass. This one comes down to the appraiser. Some appraisers will ask that a cracked window pane be fixed. Others may ignore it unless it’s a clear safety issue. Odds are however, your property would look better with it repaired.
  5. Holes in siding. While this is tougher to label as a health and safety issue, holes do allow for water and vermin intrusion.
  6. No running water. Imagine insuring a property without running water. Or, worse yet, trusting it is there and working, turning it on and discovering the pipes had frozen and now leak.
  7. Roof near the end of its useful life. Roofs have an expected lifespan. Those with one or two years left in that expected timeline may be required to be replaced; regardless of the type of mortgage a buyer uses.
  8. Bedrooms without egress windows. If it doesn’t have an egress window, it isn’t a legal bedroom. Period.
  9. Bad foundation and grading sloping toward the house. Again, who wants to insure a property with a crumbling foundation or water intrusion? True, an investor might. But they are going to expect to do so at a discount.
  10. Can’t access the crawl space or attic. This one came up on the very first sale I ever had. The diameter had to be big enough for a larger human to crawl through. Again, it’s a way to check for a leaking roof, insulation, or the presence or absence of unwanted critters.
  11. Utilities shut off. It’s tough to judge a property if you can’t turn the power or water on.
  12. Trip hazards (uneven concrete). Think of uneven sidewalks. Think of the lawsuit they could cause.
  13. Broken appliances. If a stove isn’t working, FHA will require it to be repaired or replaced. Same with a refrigerator.
  14. Inoperable furnace. Unless it’s a cash buyer, a property is required to have a working heat source for a bank to finance a loan. Again, it’s a repair a seller is likely going to have to make regardless of the type of buyer.
  15. Broken air conditioner. While a working AC may not be required for a conventional bank loan, any buyer who has an inspection is likely to either ask for it to be repaired or replaced prior to closing, or for a large price discount to tackle the problems themselves.
  16. Inoperable, missing, or inadequate smoke and/or carbon monoxide detectors. As landlords, these are required anyway.
  17. Dangling electrical wires as a result of missing fixtures. Cap it or replace the fixture. Again, a buyer is likely to either want it repaired or a price concession.
  18. Insufficient electrical system. While you don’t need 200 amp or more service, or breakers rather than fuses, you do need an appropriate amount of power to run the property. If you have a Stablock or Federal Pacific electrical panel, they are known fire hazards and are uninsurable. You will likely be asked to replace it by any buyer who would like to insure the property.
  19. Missing appliances. It’s strange, but if there is a spot in the cabinets for a built-in dishwasher, range, microwave or built-in sub-zero style refrigerator, the appliance must be there and working. However, the seller does not have to provide a slide-in refrigerator, washer or dryer.
  20. Exposed wires or uncapped gas lines. If there are loose or dangling wires where there should be a fixture, it makes sense to install an inexpensive fixture or cap the wires and cover them in accordance with best electrical practices. The same is true of gas lines. It’s just good common sense.

If a seller receives and accepts an offer that doesn’t appraise either due to value or the seller’s refusal to address repair items in the appraisal, that information silently follows the property in the FHA system for 120 days.

While this list seems daunting, in reality, the required repair items make perfect sense. Moreover, they are just as likely to come up; regardless of the type of financing a buyer uses. And that will cost the seller money.