Working RE Online: E-mailed twice a month  to over 45,000 appraisers, inspectors and real estate professionals. View archive.   
Vol. 88  February 8, 2006
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Fannie Says: Replacement Cost-New Niche for Appraisers
At a recent conference, Fannie Mae’s Mark Simpson, Director Property Standards, Single-Family Credit, shared how insurance industry changes offer appraisers a new opportunity to provide lenders with an additional service: replacement cost data.

The data is used to determine an appropriate level of hazard insurance for Fannie loans. Fannie requires hazard insurance that settles on a replacement cost basis. For the most part, insurers are not providing this information any longer, leaving appraisers an opportunity to furnish the data to lenders using the Cost Approach. 

The definition of “replacement cost” is not the same for appraisal and insurance purposes, however. (story continued below)





 



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(story continued)
 In the new issue of Working RE Magazine (print edition), you’ll find a replacement cost “explainer” written by Gretchen Gary of Marshall & Swift that details the differences.

"Both cost approach appraisals and insurance policies use the term replacement cost,” Gary says. “While the term is the same, what they define is quite different. When using the cost approach, the appraiser must first identify the appropriate cost basis for the assignment and determine if the opinion of value would be represented best by the replacement cost or the reproduction cost." 

What is replacement cost as it applies to the insurance policy? "Recommended over actual cash value, replacement cost coverage insures a home for the estimated cost to reconstruct an exact duplicate or replica of the building at current prices,” Gary said. (story continued below)  


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(story continued)
 Appraisers Wanted (& Needed)
A recent Q&A issued by Fannie Mae offers the following guidance to lenders and helps explain why the expert hand of appraisers is still needed: 

“It is not appropriate for the lender simply to subtract the reported site or land value from the appraised value of the property to make that determination because that result is an estimate of the depreciated value of the improvements, not an estimate of their replacement cost.” You’ll find the complete Fannie Mae Q&A at www.workinge.com.

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OREP members and WRE Online subscribers enjoy 10 percent off their first replacement cost report from Marshall and Swift using their new service: www.accucoverage.com. (source code MAGWREAU06)

Related stories
Cost Approach-  Why Sidestepping it Can be Costly

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