Property Valuation Analytics: Quality Control Overview

765 The City Drive South, Suite 300

714.520.5737

www.lres.com

Objective
LRES understands that our vendors are the foundation of our success. By educating our vendors on client requirements, we hope to establish long-standing partnerships which will essentially benefit both our clients and vendors. By producing quality products, LRES strives to remain an industry leader and your partner of choice. The tips provided in this course will assist brokers / agents in completing detailed and accurate BPOs according to Freddie Mac guidelines. Upon completion of this course, the vendor is asked to sign an acknowledgment and complete a short quiz. In passing this course with an 85% or higher, you will be eligible to receive residential Freddie Mac valuation assignments in your area.

Contents
The contents of this course do not review BPO basics but detail general guidelines and objectives to allow for easy data validation and quality control. The following subjects will be examined: Comp Selection Mindset Tips for Commentary Market Conditions Valuation Requirements Rules to Abide By FAQs Things to Remember

Comparable Selection
Comp selection
The comparable sales must represent market alternatives. The subject market should dictate BPO comp selection. Many markets are a mix of fair market and REO sales, the agent must first determine the dominant influence. It is recommended that a 2 to 1 comp ratio is provided, with emphasis placed on the dominant influence. Example: If determined that the subject is located within a REO driven market, then at minimum 2 REO comps must be provided.

Required Commentary
Each BPO needs to read as if it were telling a story about the subject property. Each comment section provides necessary support for an engaging plot. When the support is clear and substantiated, the story ending, or in this case, the BPO value makes perfect sense.

Tips for Commentary

1. Begin with an introduction, thoroughly describe the subject property (e.g. age, square footage, condition, location, and the subjects neighborhood setting). 2. The introduction should flow into a description of the condition in which major repair issues are detailed. 3. Describe the local market and how it will effect the sale of the subject property. 4. Conclude with a recommendation of a pricing and marketing strategy and reasons why. Marketing strategies should not be included on preforeclosure BPOs.

Market Conditions
Stable Market
When home values remain constant or have recently stabilized, it is considered a stable market. Even homes listed on the market for longer periods of time will not experience dramatic changes in value. If the property was previously listed within the past 12 months and did not sell, the agent must comment on the issues that may have prevented sale at the time. This could include but is not limited to inaccurate pricing, condition, market, saturation, etc.

Market Conditions
Appreciating Market
In an appreciating market, property values tend to increase over time. In this volatile market, the increase can be reflected in the recent listings but not necessarily be supported by closed sales. The agent needs to be able to describe and support the appreciating market scenario. Selling above list, multiple offers, etc. The most common indicator of an appreciating market occurs when demand is greater than supply. Economic conditions having an impact on an appreciating market include interest rates and inflation, which serve to increase the value of homes in an area.

Market Conditions
Declining Market
Indicators of a declining market are when home values depreciate over time. In a declining market supply is greater than demand This type of scenario is most commonly referred to in the real estate world as a buyers market. The longer a property stays on the market, the higher the probability the price will need to be adjusted down in order to find a buyer. In a BPO, it is important that you explain the reasoning behind your opinion as to whether your local market should be considered stable, appreciating, or declining.

The following ten Valuation Requirements must be adhered to in order to comply with quality control criteria (see checklist). The purpose is so that every BPO is cohesive and well-supported.

Valuation Requirements
Agent Integrity
The BPO signature should always represent the agent / broker that inspected the property and completed the BPO. All agents need to operate as silent parties. Communication with the access contact should remain respectful but pertain primarily to access scheduling. Example agent response: I apologize but I am not at liberty to discuss this property or estimated value with any interested parties. There should be no additional communication with any interested parties such as the listing broker, selling agent, homeowner, servicer, prospective buyer, family member and so forth regarding the BPO value or related analysis. When the agent is presented with any type of property documentation, especially in regards to a latent defect or hazard issue, it can be reviewed and utilized with discretion but should be discarded if irrelevant to the BPO analysis. Please see Valuation Requirement 2 and 8 regarding adjustments.

Valuation Requirements
Visible vs. Unseen
The expectation is that the BPO condition rating and / or value should not be negatively or positively impacted by unseen damages or upgrades. A drive-by BPO should not take interior factors obtained from MLS or previous inspection into account. Agent should assume exterior condition is representative of interior condition. An Interior BPO should not incorporate adjustments for hidden or suspected damage. Examples of hidden damage that should not be adjusted for: Methamphetamine contamination Unseen mold Lead paint Asbestos Radon gas Defective dry wall. Examples of hidden upgrades that should not be adjusted for: New copper plumbing New carpet padding New wiring Added insulation in attic The servicer will complete testing or inspection when needed. The agent should provide comments regarding suspected damage. Adjustments can ONLY be applied to damages or upgrades that can be visually identified by agent at time of inspection.

Valuation Requirements Visible versus Unseen

Examples of appropriate adjustments Sloping floors or wall cracks are reasonable indicators of structural damage (adjustment is appropriate). Include photos. Noticeable mold in areas outside of the basement could indicate a serious mold issue (adjustment is appropriate). Include photos. Examples of inappropriate adjustments Adjusting for +$10,000 because the contact stated that the subject featured a new roof, yet from street it appeared to be in same condition as those featured on comps (not appropriate). Adjusting -$52,000 for defective dry wall due to an undefined suspicious odor (not appropriate). See examples of hidden damage that should not be adjusted for.

Valuation Requirements
Repair Estimates
Cosmetic repair issues for items which are otherwise functional should not feature a cost to repair or upgrade. Any clearly visible substantial damages must be adequately described within the comments section and at minimum 1 photo of area must be provided. In the instance that a property is condemned, the agent should make every reasonable effort to determine why and provide explanation within report. Any repair estimate noted within the box marked as OTHER must always be clarified with commentary. Substantial Visible Damages: Mold Structural Water / Flooding Condemned

Severe Disrepair / Vandalism. A BPO with a repair total exceeding $15,000 is considered to have material damages. A property deemed as such must have at least 3 damage photos of the 12 allowed. Excessive individual repairs will be scrutinized. Data source of repair estimate must be provided for repairs over $1,000.

Valuation Requirements
If the property condition necessitates more than three damaged photos, please ensure the BPO had adequate photos showing primary rooms and the exterior. Refer to Valuation Requirement 9 Photos, for additional direction. The overall property condition rating should be consistent with the repair estimate. Condition ratings used on the BPO form are for general designations, so there is room for interpretation, especially since there is no average rating available. It is also important that the agent use personal knowledge of what is perceived as good in that area when choosing a rating.

Condition Rating Key: Excellent: New construction / fairly new (1 3 yrs effective age) with no condition issues. Substantially upgraded for the market. Good: Average condition, some cosmetic repairs, minimal or isolated substantial damage (such as minor holes in drywall, needed paint touch-ups, leaky faucets, etc), upgrades normal or slightly above average for market. No significant neglect. Fair: Below average condition, major cosmetic repairs, some substantial damage. Typically no upgrades. Poor: May not be inhabitable or partial structure, serious substantial damage throughout entire property, environmental issue.

Exterior Repair Checklist

Roof- Check to determine if there is evidence of need for repair. Structural- Look for signs of possible structural problems inside and out and detail in the BPO Carpentry- Check for broken doors and windows. Paint- Check all previously painted exterior surfaces to determine if re-painting is necessary. Heating / air- Read the label on the side of the heating and A/C system to determine its size and type. Plumbing- Check for signs of leaks, rust, or water damage. Other (shed, pool, fence, detached garage, electrical, etc)- Note the condition of any other structure on property.

Interior Repair Checklist

Flooring- Note any area where flooring needs to be replaced. Is there missing carpet? Are there stains, burns, tears, or holes? Paint- Check all previously painted interior surfaces to determine if re-painting is necessary. Wallpaper / sheetrock- Check for signs of damage. Are there any walls with holes larger than 6 inches. Heating / air- Read the label on the side of the heating and air conditioning system to determine its size and type. Carpentry- Determine if carpentry is in good condition, dated or in need of repair. Check kitchens and bathrooms for dated countertops and vanities. Plumbing- Check for signs of leaks, rust or water damage. Check all water sources and waste lines and make sure they are operating properly. Check for presence of hot water heaters. Check hot water tank to determine if it is gas or electric and if it is large enough to service the size of the home. Determine if water tank is operating properly. Other- Address any illegal splicing, missing or exposed wiring, and / or inoperable switches.

Valuation Requirements
Land Only
If the structure is missing or the agent determines based on the amount of needed repairs that an existing structure has little to no contributory value, a land only value can be assessed. If the BPO is completed as land only, the majority of comps utilized should represent land only sales. Comps with existing structures can be used to establish the repaired value (see 2/1 ratio from Valuation Requirement 6). The as-is value reflects the land value minus estimated costs to remove any existing structure and the as-repaired value reflects the cost as if the structure were in good condition. If the BPO is completed as land only, include a cost per acre in the addendum comments. When supplying a land only value for Hazard Distressed BPOs, include a cost per acre in addition to the land value.

Valuation Requirements
EXAMPLES #1The subject was involved in a recent fire. The structure has no contributory value and will likely have to be removed. The cost to remove remaining structure should be adjusted for IF the comps used did not feature a similar structure to be removed. Agent would adjust for the cost to demolish and remove structure from property. #2 A destroyed or missing condo is never completed as land only. Typically, there is $0 value so the BPO is completed with an as-is value of $1 (system will not accept $0), and the as-repaired value reflects a hypothetical structure in good condition.

Valuation Requirements
Neighborhood
It is important to include relevant location influences that have a significant impact on the subjects marketability or that of the neighborhood. The agent should be clear regarding the location influences of each of the listing and sold comparables. Include a photo of important influences, when applicable. All comments and adjustments must be non-discriminatory and consistent with fair housing practices. View is an extremely impactful amenity for condos. For condos, always note what type of view for the subject unit and all comps and include a photo for the subject view. Examples include ocean, garden, atrium, parking lot, back street, etc. Common Location Influences: Waterfront Golf course Industrial Resort Busy thoroughfare school. The agent should note whether the area is rural, suburban or urban along with other appropriate commentary in this section.

Valuation Requirements
List History
If the subject is currently listed, pending or accepting back-up offers, it is important that the accurate list price and list dates are represented on the BPO as found in the local MLS. If the subject has no MLS data available, then agent must note No MLS within addendum. The agent can also include expired listing information, if he / she feels it is relevant to the current list price. This information does not feature a required field on form and is frequently lacking on the BPO.

Valuation Requirements
Comparables Grid
For a Fair or Poor condition property, a 2/1 comp ratio is preferred. Two similar condition comps and one superior condition comp. It is always assumed that the Repaired value is the subject adjusted to Good condition. The superior condition comps validate the Repaired value. If unlike condition comps are selected due to lack of availability, this always needs to be clarified in the BPO Addendum. When proximity to subject exceeds one mile (urban), three miles (suburban), five miles (rural) detailed comments must be provided within the addendum explaining comp selection.

Valuation Requirements
Adjustments
It is important that adjustments are reasonable for the local market and consistent across the board. Agents should apply adjustments based on a determined market response to the added feature or lack thereof in comparison to the subject. Example: Comp 1 and 2 sold for the same price within the same month. With the exception of a pool, both properties were considered model matches otherwise the agent applying an adjustment for the pool would not be supported. If the market is declining as evidenced by dated sale comps (3+ months) and / or list comps with extended days on market, adjustments for depreciation should be made, when appropriate. Example Comp Comments: **Sale 1, SS, 156 miles from subj, rural, - 5k garage, + 5k fence, -12k lot, -10k age, +5k bathrooms.

Comp Adjustment Formulas

Lot Size: Determine the difference between the size of the lot of the subject property and comparable. Based on current land value, determine the value of the difference in lot size. Add or subtract that amount from the comparable property to make it like the subject. Views: The value you give for more favorable views is determined by your best opinion of what the view is worth to a typical buyer in the neighborhood. When the subject property has more favorable views, add to the comparable. If the subject has less favorable views, subtract from the comparable. Non-Conforming Design and Appeal: If the design and appeal of the subject is non-conforming to the neighborhood, subtract the appropriate value from your comparable. If the comparable is non-conforming to the neighborhood, and no other comparables are available, add value to the comparable. Age: Age adjustments are appropriate when the subject to comparable range extends beyond five years. Adjust the value according to your market area. Condition: The condition adjustments should be applied in accordance to the market response. The estimated repair total is not always the right adjustment as more often than not the repair estimate is not reflective of the market value of the repair. Agent should apply the market value adjustment- not necessarily the total repair.

Comp Adjustment Formulas

Varying Square Footage: Generally, follow appraisal guidelines of greater than 100 square feet; however, as the GLA gets larger, the difference may need to increase. 1) Compute the difference in square footage from the subject and the comp, 2) Take the price per sq ft per the comp (market price per square foot, not calculated price per square foot per comp sale average) and divide in half, 3) Multiply this figure times the difference in square footage. If your comparable has more square feet than the property, then subtract from the total. If the comparable is smaller in square feet, then add back the total to the comparable. Bedrooms and Bathrooms: Bedroom and bathroom variances should also be adjusted in accordance to market reaction. If by adjusting for GLA it has been determined that the sales are in line with one another, then no adjustment would be supported for individual bed/bath counts. Example: Subject features 1,000 sqft, 3 bdrm, 2 bath. Comp 1 sold for $100k- features 1,100 sqft, 4 bdrm, 2 bath (superior GLA & bdrm) Comp 2 sold for $90k- features 875 sqft, 3 bdrm, 2 bath (inferior GLA) Comp 3 sold for $95k- features 1,000 sqft, 3bdrm, 2 bath (model match) After adjustments have been made for GLA, the adjusted value of all comps is $95k. In this case it can be determined that the additional bedroom feature of comp 1 had no value.

Comp Adjustment Formulas

Garage Space: Determine the value of a garage space in your local market. If the subject has more garage spaces than the comp, add the value of the difference in garage spaces back to the comparable. If the subject has fewer garage spaces than the comp, subtract the value of the difference in garage spaces from the comparable. In some instances you may find that a property has far more car storage spaces than what is typical in an area. The law of diminishing returns may apply. If the property has a feature which is considered super adequate or overbuilt for an area, a unilaterally adjustment may not be appropriate. Determine the marketable value of that feature based on that particular market area. Pools: The adjusted value for a pool is never as high as the full original cost. Find out what the market value of an average in-ground pool is in your market. If the subject property has an inground pool and the comparable does not, add value to the comparable. If the comparable has a pool and the subject does not, subtract the value of a pool from the comparable. Fencing: Fences vary on style and qualify, so familiarize yourself with market prices of fencing most common to your local market. If the subject property has fencing and the comparable does not, add the cost of fencing to the comparable. If the comparable has fencing and the subject property does not, subtract the cost of fencing from the comparable. Upgrades or Custom Features: Use the other section of the BPO when adjusting for upgrades or custom features. The value is based on your opinion of what the upgrades would be worth to a typical buyer. If the subject property is highly upgraded and the comparable is not, add the estimated value of the upgrades from the comp and vise versa. If the neighborhood cannot support a highly upgraded value, reduce the adjusted value to keep the home marketable in its area.

Valuation Requirements
Photos
Photos should be clear and of good quality. Blurry photos should never be included. Agents should take a wide angle room approach versus zoomed in, so more of the room is visible. For a drive-by, it is not necessary for the agent to leave the car but to inconspicuously and safely capture a clear shot of the front of the property. If the property is located down a private drive off the main road, the agent should not continue onto private property. It is appropriate for the agent to take a photo of the drive or no trespassing / privacy sign and provide comments. Suggested photos for a typical property (damages or atypical situations may warrant additional photos): Front Exterior Address Verification Neighborhood / Street Kitchen Living Room Master Bedroom Master Bathroom 2nd Bedroom or Dining Room 2nd Bathroom Improvement, Damage or Additional Room Improvement, Damage or Additional room.

Valuation Requirements
Suggested List Price
The Probable Sales Price should indicate a 90 to 120 day fair market value as supported by the BPO comparable data. If the area is REO or short sale driven, a 90 to 120 day value indicative of the local market should be provided. The Probable List Price is the value the property should be listed at anticipating a 90 to 120 day marketing time. Both values should never be the same value. And should never be 0. (What you would list if for vs. your opinion of what the eventually selling price would be after negotiations). If an atypical property situation or local market factors support a non-standard marketing time or variance, this should be substantiated within the comments. If the determined 90 value exceeds the subjects current list price (if applicable); agent must provide detailed rationalization.

The following Rules to Abide By are additional valuations tips with examples of problems / solutions which will provide the agent with a broad understanding of BPO requirements.

Rules to Abide By
Ideally, all subject characteristics must be bracketed within the comparable sales selection. Sales over 12 months are never acceptable regardless as to whether commentary has been provided. If the determined 90 day value exceeds the subjects current list price (if currently listed); the agent must provide detailed rationalization. Comparable Sales range should provide the reader with a reasonable idea of what is going on within the subject market. Lot sizes should be considered. It is not typically reasonable to compare property located on multiple acres to one which is located within a standard subdivision. The proximity to the subject must be identified in mileage as the crow flies or straight line mileage. Neighborhood boundaries must be considered during comp selection. City boarders should not be crossed if other sales within the city are available. Natural and man-made landmarks often define a market areas boundaries. Pay attention to major highways, lakes, rivers or clearly visible zoning changes.

Rules to Abide By- Examples

Problem #1 Agent is assigned a Drive-By BPO. The subject is a difficult property due to an atypical design or limited amount of available market data. How should the agent proceed? -Specialized market OR atypical property design Expand GLA parameters (while maintaining bracketing) in an attempt to stay within the immediate market. Example: Subject is 1500 square feet. The only comps available within the prior 12 months were within the ranges of 800-900 square feet (40%+ variance) and 2200-2400+ square feet (46% variance). It would be acceptable to utilize sales from both ranges within the report. The agent must explain why this area does not compare to the surrounding areas in order to proceed in this manner. -Typical marketing area with limited available sales data Expand the proximity search to provide the most recent comparable sales available from neighboring communities. The agent must explain the similarities between the two neighborhoods.

Rules to Abide By- Examples

Problem #2 Agent is assigned a Drive-By BPO. The property appears to need major repairs based on your exterior inspection. The windows are boarded up, the paint is in poor condition, and the roof appears to be worn down (broken and missing shingles). The agent is unsure if the structure has any contributory value. How should the agent proceed? Given that the assignment is a drive-by, it is reasonable to assume that the property is in POOR condition and still salvageable. The agent should attempt to find other sales which were also sold in FAIR to POOR condition so that minimal adjustments would be necessary. If the property is tagged as condemned, then the agent may have a reasonable basis to determine that property has no contributory value depending on the reason for condemnation. Agent must attempt to find out if there is any way condemnation can be listed by local municipality.

The below Frequently Asked Questions are to provide the agent with further information regarding the LRES Valuations Process

FAQs
How are orders assigned? Using an Auto Assign system, vendors are notified by email when work becomes available. We do not have auto accept; however, our system is mobile friendly and orders can be accepted via smart phone. Vendors are chosen based on quality of work, location, turn-around time, and fees. Once an order is available, you will be notified by email with instructions on how to confirm or decline the assignment. Freddie Mac orders require vendors to be located within 5-10 miles of the subject property (exception- rural areas). To be eligible to receive assignments, please be sure your vendor information is current and up-to date. Will there be volume in my area? LRES is a nationwide company. Orders will be dispersed throughout the country; however, at this time we cannot predict the areas of concentration. Volume of assignments will vary per month. How can I be eligible to receive assignments? To be eligible to receive assignments, please be sure your vendor information is current and up-to date. All agents / brokers interested in completing Freddie Mac BPOs will be required to review training material, sign acknowledgement document, and pass a quiz with an 85% or higher.

FAQs
Can another person inspect and take the photos for the BPO? No, the BPO signature should always represent the agent / broker that inspected the property and completed the BPO. Failure to meet these terms could result in reassignment, non-payment, and inactivated status on our vendor panel. What information can be shared with the contact person? Communication with the contact person should remain respectful but pertain primarily to access scheduling only. Example agent response: I apologize, but I am not at liberty to discuss this property or estimated value with any interested parties. Who can I contact if I have any questions? For questions or concerns regarding a specific BPO order, contact your account manager whose information can be found on the engagement letter. For questions regarding your vendor profile, please contact Vendor Management.

Things to Remember
Always read the BPO engagement letter and closely follow instructions! If the BPO is ordered as a drive-by, only complete a drive-by. Be aware of due dates, client requirements, and order instructions. Communication is key! Ensure that your Account Manager is always updated as to the status of open orders. Understand that you will be required to agree to an Attestation of Compliance before submitting a Freddie Mac BPO. Return correction requests / client conditions within timely manner. Remember we are a team! The LRES valuations staff is here to answer any and all questions. It is our common goal to satisfy the client requirements in order to create an on-going and successful relationship.