Federal Housing Administration Underwriting Manual
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UNDERWRITING
MANUAL
UNDERWRITING AND VALUATION PROCEDURE
UNDER TITLE II
OF THE
NATIONAL HOUSING ACT
FEDERAL
HOUSING ADMINISTRATION·
WASHINGTON, D. C.
"HA Form No. 2049
Revised Feb. 1938
U.
a. GOVERNMENT
PRINTING
OFFICE: 1938
to
J
For sale by the Superintendent of Documents, Washington, D. C.
Price 30 cents
t
UNDERWRITING MANUAL
TABLE OF CONTENTS
PART I-ORGANIZATION AND PROCEDURE:
Section 1. Underwriting Organization.
Section 2. Underwriting Procedures.
Section 3. Preliminary Examination.
Section 4. Compliance Inspections
Section 5. Minimum Eligibility Requirements------------------
':I
1
v
PART II-MORTGAGE RISK RATING:
Section 6. Methods of Mortgage Risk Rating.
Section 7. Rating of Mortgage Pattern.
._,
Section 8. Rating of Property
-
Section
Section
Section
Section
9.
10.
11.
12.
Rating
Rating
Rating
Rating
of
of
of
of
()
...•.........
-- .
.
101-199
201-299
301-399
401-499
501-599 .'>
601-699
701-799
801-899
Location ••••
._ .. _
-- -- - - - - - -- -- 901-999
Borrower
-- . -- .. - - -- - - - - -- - - - - - -- - 1001-1099
Commercial Borrower __ •...............••.
1101-1199
Earning Expectancy
1201-1299
PART III-VALUATION:
3~i - Section 13. Methods of Dwelling Valuation
- Section 14. Valuation of Amenity Income Dwellings
Section 15. Valuation of Rental Income Dwellings
r!
Paragraphs
. __ .... _..
- - .. - . . .
- - •.. - - - • - - - -- .
1301-1399
1401-1499
1501-1599
PART IV-COST ESTIMATION:
- Section 16. Methods of Dwelling Cost Estimation.______________1601-1699
Section 17. Application of Cost Estimation Methods.
1701-1799
PART V-COMPILATION OF DATA:
Section 18. Compilation and Recordation of Data
Section 19. Construction Cost Data.
1801-1899
1901-1999
1
UNDERWRITING MANUAL
PREFACE
)
1. The Underwriting Manual is issued by the Federal
Housing Administration. It contains instructions and regulations
governing the procedure and policiesto be followedby Underwriting
Staffs of the Federal Housing Administration.
2. The Manual describes the techniques used by the
Federal Housing Administration to determine whether or not mortgages are eligible for insurance under Title II of the National Housing Act. Eligibility is determined by risk rating. This process consists of an examinationof mortgage risk and embracesvaluation.
3. The salaried underwriting personnel and duly appointed fee consultants are furnished with loose-leaf Underwriting
Manuals. Each of these manuals is numbered and remains the property of the Federal Housing Administration. Copies assigned to
staff members or fee consultants are listed in the name of the individual to whom assigned. They shall not be destroyed or transferred and must be surrendered upon demand of the Federal Housing Administration.
4. Revisionsof the Manual are issued by supplying new
or substitute sections for the loose-leafedition. Such sections indicate the dates upon which their contents become effective. They are
to be inserted in their proper places as indicated by the section
numbers.
5. In order to promote a broad understanding of the
underwriting and valuation principles and procedure adopted and
advocated by the Federal Housing Administration, the Underwriting Manual is made available to individuals and institutions. Such
manuals are bound and contain an imprint on the cover indicating
the date to which revisionshave been made.
6. This edition of the Manual, dated February, 1938,
covers policies and procedures to be used in connection with nonfarm mortgages to be insured under the provisions of Section 203,
Title II of the National Housing Act, as amended February 3, 1938.
For mortgages to be insured under Sections 207 and 210, those involving larger projects, and farm properties under Section 203,
policies are basically the same, but procedures and forms are distinctly different. In order to make the Manual available to the
Underwriting Staffs and to the public, this edition has been ordered
to be printed immediately upon enactment of the legislative amendments.
,,
PART I
SECTION 3
PRELIMINARY EXAMINATION
CONTENTS
Paragraphs
Methods of Preliminary Examination
301--309
Purpose of Preliminary Examination
301-302
General Instructions-------------------------------------------303-309
Preliminary Eligibility Tests
310--311)
Preliminary Examination of Property Eligibility_________________ 31()
Preliminary Examination of Location Eligibility
311-312
Preliminary Examination of Borrower Eligibility
313-3)_5
Routine of Preliminary Examination
316--322
Grouping of Cases--------------------------~------------------317
Procedure after Grouping
318-S22
Effective February, 1938
Federal Housing Administration
PART I
SECTION3
PRELIMINARY
EXAMINATION
METHODS OF PRELIMINARY EXAMINATION
301. Purpose of Preliminary Exarnination.-Preliminary examination is the initial survey of an application and occurs
as soon as possible after the receipt of the application by the Underwriting Staff. Preliminary examination is made for the following
purposes:
a. To save mortgagors unnecessary expense for examination
fees in cases which are obviouslyineligible.
b, To save the Federal Housing Administration the expense
of completely processing ineligible cases.
c. To prevent delays in processing,resulting from incomplete
presentations.
d. To ascertain whether certain legal requirements, including
the suitability of contract documents, are complied with
before the issuance of commitments for mortgage insurance.
302. Examination fees are charged by tho Federal Housing Administration to offset the cost of processing cases. Applicants
who submit unacceptable cases are required to bear a portion of the
expense, but only when the actual expense is incurred subsequentto
preliminary examination. Preliminary examination which results in
rejection of the case before additional expense has been incurred
qualifies the applicant for refund of the examination fee. It follows
that preliminary examination, to be fair to the applicant, should
be thorough.
303. General Instructions.-The examination requires
the following two operations:
a. An examination to ascertain (1) whether the case presents
conditions which obviously render it ineligible, thereby
making it inadvisable to require processing by the Architectural, Valuation, and Mortgage Risk Sections of the
Underwriting Staff, or (~) whether it seems that the
l
UNDERWRITING
MANUAL
303-306
completion of such processing may result in a sound insured mortgage.
b, An examination to ascertain whether the application forms
and accompanyingexhibits are complete or whether it is
necessary to secure corrections and amplifications which
will enable the case to be given proper consideration.
When necessary,this operation is followedby one or both
of the following:
1. The securing of supplemental data to amplify, confirm,
or clarify items in the application.
2. The securing of more complete drawings, specifications,
and contract documents.
304. Mortgagees expect the Federal Housing Administration to render its decisionsin the shortest possible time consistent
with sound analysis. It is to their best interests to supply any information which is necessary to assist in processing cases with dispatch. Application forms require only such information as the
mortgagee and mortgagor can conveniently present, and there is a
sound and adequate reason for the presence of every item on the
forms. The completeness of the applications, together with all exhibits, will be reflected in economy of operation and reduction in
processing time.
305. It has been found that someprospective home owners permit loose and vague contractual agreements when building
their homes. Such practices are likely to lead to unnecessary misunderstandings and avoidable difficulties and may result in loss to
one or more of the parties in the transaction. Experience has shown
the importance of well executed and complete drawings and specifications upon which the mortgagor, builder, mortgagee, and the Federal
Housing Administration can make and carry out binding contracts.
Preliminary examination must include a close scrutiny of the adequacy and sufficiency of submitted drawings and specifications.
306. The term "application" is used in this section to
describe all the papers, photographs, drawings, and other exhibits,
jointly, which are presented by the mortgagee and mortgagor. Complete applications include the following items:
a. Proposed or partially completed construction:
1. Mortgagee's Application for Insurance,FHA Form No.
2004, or Mortgagee's Application for Conditional
Commitment, FHA Form No. 2201.
2. Mortgagors' Property Description, FHA Form No.
2004aor Property Description, FHA Form No. 220la.
•
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PRELIMINARY
EXAMINATION
306-309
3. Photographs showing front view of property, and street
view of property with properties adjoining on side.
4, Drawings and specifications.
5. Plot plan showing relationship of proposed improvements to lot.
b. Completed construction:
1. Mortgagee's Application for Insurance, FHA Form
No. 2004 or Mortgagee's Application for Conditional
Commitment,FHA Form No. 2201.
13. Mortgagors' Property Description, FHA Form No.
2004aor Property Description, FHA Form No. 2201a.
3. Photographs showing front view of property and
street view of property with properties adjoining on
side.
4. A description of proposed alterations or additions, if
any, with the estimated cost and complete drawings
and specifications.
307. The Preliminary Examiner shall determine
whether an application has any possibility of being the basis of ultimate commitment for insurance. This requires preliminary analysis
from all underwriting points of view. For example, the application,
with or without drawings and specifications,may indicate that rejection is certain because of lack of adequate access,extremely excessive
lot coverage, or insufficientcash equity, or the fact that the security
may represent an ineligible type of property such as one designed
entirely for commercial use. The detailed instructions contained in
paragraphs 310 to 315 are to be followed in order to arrive at a decision as to probable eligibility or the need for additional information.
308. While the Preliminary Examiner makes the quick,
initial check for probable eligibility he notes any omissionsor errors
on the application and exhibits. Minor corrections may be made
and initialed in red by the Preliminary Examiner, but information
concerning important changes or additions must be received from,
or be confirmedby, the mortgagee prior to such alteration of the application. For example, the amount and term of the application may
not be changed by the Preliminary Examiner, but the computation of
monthly payment may be revised in red pencil or ink and shall be.
initialed. Discrepancies on the Mortgagors' Property Description,
FHA Form 2004a, or 2201a,should be noted on the lower portion,
Preliminary Examiner's Report.
309. Inasmuch as preliminary examination has the dual
purpose of determining probable eligibility and of preparing the case
for undelayed processing, the routine procedure provides for the
UNDERWRITING
MANUAL
309-310
simultaneous accomplishmentof both purposes. Cases :fall into four
groups according to the most efficient method of handling them.
This grouping is described in paragraph 317. The final result of
preliminary examination is either, (a) a recommendationthat the
case be rejected and that the examination fee be refunded to the applicant, or (b) a decision to process the case by Regular or Modified
Procedure. Procedures are described in Section 2. The decision is
recorded in the space designated as Preliminary Examiner's Report
on the Mortgagors' Property Description, FHA Form No. 2004a
or 2201a. Paragraphs 318 to 322 give detailed instructions on the
recording of decisions.
PRELIMINARY ELIGIBILITY TESTS
310. Preliminary Examination of Property Eligibility.-Included in eligibility of property are the factors considered in Rating of Property, Section 8, including Property Standards,
both national and local, Minimum Construction Requirements, and
related Minimum Eligibility Requirements contained in Section 5 of
this Manual. This examination does not include a complete analysis
of mortgage risk, but it does consist of checking the items contained
in an application against definite requirements and past decisionson
similar cases. The application contains the following items which
are useful for the preliminary determination of property eligibility :
a. Diagram showing size of lot, whether it is corner or inside,
presence of alleys or easements,and whether the street is
paved
b. Lot dimensions
c. Age of building
d. Number of family units, rooms, and baths
e. Type of construction and number of stories
f. Presence of garage and type of garage, if any
g. Percentage of non-residential floor area
h, Photographs which (1) supply a partial check of the above,
(YJ) indicate approximate percentage of lot coverage,and
(3) indicate approximate width of at least one side yard
i. Source of water supply
j. Method of sewage disposal
k. Contemplated improvements,if any
The aboveitems of information make it possiblefor the Preliminary
Examiner to arrange for the revision, withdrawal, or rejection of any
case which fails to comply with Property Standards and Minimum
ConstructionRequirements. The Preliminary Examiner should work
in close cooperation with the Architectural Section, and the Chief
•
'
•
11
PRELilVIIN ARY EXAlVI!N ATION
310-313
Architectural Supervisor should advise him as to adequacy of plans
and specificationsor of the need for additional data to expedite
processingof cases.
311. Preliminary Examination of Location Eligibility.-This esamination does not include the actual analysis of locations, but it does use predetermined location ratings made by the
Valuation Section. The Preliminary Examiner should be able to
segregate for rejection many of the applications involving locations
not suitable for long-term amortized loans. Comparisons shall be
made between the location described in the application and nearby
locations previously rated by the Valuation Section. If the accumulated data indicate that the case is on the borderline of location eligibility, preliminary examination shall not result in a recommendation
for rejection solely becauseof location factors.
312. The Preliminary Examiner has the following data
with which to checkprobable eligibility of locations:
·
a. Street address and legal description of land, on Mortgagors'
Property Description, FHA Form No. 2004a.
b, Diagram showing location of lot in block. on FHA Form
No. 2004a.
c. Photographs showing street view of property with properties adjoining on side, attached to FHA Form No. 2004a.
d, Material used for street surfacing, indicated on FHA Form
No. 2004a.
e. Maps of municipalities prepared by Valuation Section
showing outlined neighborhoods, established ratings of
locations, and ineligible areas.
f. Location record files, which show ratings and other data on
all previous cases.
g. Subdivision files, which indicate whether undeveloped subdivisions have been previously analyzed and, if so, the
results of such analysis.
h: Other data files, such as those described in Section 18,
Compilation and Recordation of Data.
313. Preliminary Examination of Borrower Eligibility.-This examination may be made with considerable confidence
because the Preliminary Examiner uses data supplied by the mortgagor himself on FHA Form No. 2004. When the information indicates obviousineligibility, a recommendationto reject the application
is adequately supported becauseof the source of the data. In a case
in which the ratio of total monthly payment to the stated monthly
income or the ratio of property value to stated annual income is
seriously excessive,the Preliminary Examiner should recommendre-
UNDERWRITING
MANUAL
313-317
jection to the Chief Underwriter.
Preliminary Examiners are required to be familiar with and apply the major principles contained
in Section 10, Rating of Borrower, and Section 11, Rating of Commercial Borrower.
314. The Preliminary Examiner shall use data included
in the application for the following purposes:
a. To compare mortgagor's stated income with the amount of
total payment as previously figured. The Mortgage Risk
Section should supply certain outside ratio limits which,
if exceeded, would require recommendation to reject .
. 'b, To compare the amount of mortgage applied for, plus current assets, with cash required in cases of purchase or with
outstanding liens in cases of refinancing. Proper allowance should be made for advance taxes, special assessments
due, delinquent taxes, initial service charges, and other
costs of settlement.
o. To ascertain whether the proposed transaction complies with
the established cash equity requirements.
315. In addition to the data included on the application,
the Preliminary Examiner has the :following available:
a. Borrower cards on all previous applications, FHA Form No.
2006b, which make possible ready reference to other office
files and the decisions made on cases previously submitted
by the same mortgagor.
b. Mortgage Insurance Allotment Cards, FHA Form No. 2211,
prepared for every mortgagor in whose name more than
one formal commitment has been issued.
o. Data on tax rates, insurance rates, and special assessment
areas prepared by the Valuation Section. This information is most useful in checking debt service and the
amount of cash required to close the transaction.
ROUTINE OF PRELIMINARY EXAMINATION
316. Speed is essential in preliminary examination.
However, preliminary examination shall not consist of a mere stamping of the application with no prior analysis. The routine procedure
consists of sorting cases according to a suitable classification and
then treating the cases in the several groups so as to expedite preliminary examination and the rendering of the reports of the Preliminary Examiner.
317. Groupingof cases.-A method of quickly classifying cases by a standard routine shall be used by the Preliminary
Examiner. Described below is a suggested method of grouping:
•
"\
PRELIMINARY
EXAMINATION
317-318
Group 1. 0 aees meeting preliminary eligibility tests and with complete information.
Group 2. 0 ases meeting. pr&Ziminaryeligibility tests but with certain minor information lacking.-Examples are cases in which:
a. The legal description does not conform to the lot size.
b, Specificationsfor repairs are general rather than specific.
c. Minor items are omitted from plans and specifications.
d. The nature of the borrower's assets or income is such that
more detailed information will be required by the Mortgage Risk Section.
The cases to be placed in this group must satisfy two tests. First,
the case must be one which has a fair chance of finally being committed upon, and, second, the missing information is not essential
for processing in the Architectural or Valuation Sections.
Group 3. Oases with certain major information lacking so that
preliminary determination of eligibility cannot be made.-Exampies
of cases falling into this group are:
a. Applications which appear ineligible, but cannot be definitely classed as such without further information.
· b, Applications where information is lacking which is essential for processing in the Architectural or Valuation Sections.
c. Applications where violations of requirements can be corrected, but not without difficulty or considerable expense
to the applicant.
Usually the percentage of cases falling into this group will not be
large.
Group 4. Oases not meeting preliminary eligibility tests.-This
group includes only those cases which are clearly ineligible, and for
which remedies are not possible or practical.
318. Procedure after Grouping.-The lower portion of
the face of Mortgagors' Property Description FHA Form No. 2004a
is used as the Preliminary Examiner's Report. Certain obvious discrepanciesin the application may be corrected and initialed in red by
the Preliminary Examiner. Paragraphs following require that certain correspondence,investigations, and requests be made. Notations
indicating the lines of action should be made on th!' application.
Inasmuch as the two sheets of the application are separated, the
Preliminary Examiner should make certain that notations and correspondence of interest to the Architectural or Valuation Sections are
noted on or attached to FHA Form No. 2004a, and that similar
items of interest to the Mortgage Risk Section are noted on or
L
UNDERWRITING
MANUAL
318-319
attached to FHA Form No. 2004. The Preliminary Examiner decides whether Regular or Modified Procedure is to be used. The
decision is indicated by a check in the proper space on the "Approved" stamp of the Preliminary Examiner. Instructions concerning the choice of Regular or Modified Procedure are contained
in Section 2.
319. When a case has been thoroughly checked, and it
has been found that all information necessary for processing has
been included and the application has met all the preliminary tests
for eligibility (Group 1), the Preliminary Examiner proceeds as
follows:
a. He orders a Factual Data Report. This should usually be
requested from a credit reporting agency by proper notation on and transmittal of FHA Form No. 2006a. The
name of the credit reporting agency and the date of the
request shall be noted on FHA Forms Nos. 2004and 2006b.
The request is forwarded to. an agency approved by Washington Headquarters. It is not required that a Factual
Data Report be requested in every case. The Chief Mortgage Risk Examiner shall indicate to the Preliminary
Examiner the policy with respect to such requests. When
the mortgagee attaches a copy 0£ an adequate credit
report or other satisfactory data on the borrower, the
ordering of a Factual Data Report is not required.
b, He sends out such form. credit inquiries as are necessary to
confirm bank balances, salary statements, and status 0£
other obligations. These form letters are identified as
FHA Form Nos. 2016b, 2016c,and 2016d. The Preliminary Examiner notes on the margin of the Mortgagors'
Statement that such inquiries have been transmitted.
c. For certain cases, he prepares the headings of FHA Form
No. 2217, Certificate of Approval 0£ Private Well, and
FHA Form No. 2218, Certificate 0£ Approval of Private
Sewage Disposal System. These forms are forwarded to
the proper Public Health Authority, and notation of this
should be made on the Preliminary Examiner's Report.
In some offices these forms are mailed at the time of commitment. This practice is acceptable in areas where
private installations are not a frequent cause of rejection.
d, For cases in undevelopedareas, he indicates on the Preliminary Examiner's Report, whether or not subdivision analysis has been made previously. I:f so, the name or number
of the subdivision file should be noted on FHA Form No.
2004a.
•
•
PRELIMINARY
EXAMINATION
319-322
e. For cases in built-up areas, he notes the number of the outlined neighborhoodon FHA Form No. 2004a.
f. He indicates that the case is approved for processing,designates the proper procedure, Regular or Modified, and
transmits the case.
320. When a case has been thoroughly checked,and it
has been found that certain minor information is lacking, but the
information available indicates probable eligibility (Group 2), the
Preliminary Examiner shall follow the instructions in paragraph
319 and shall, in addition, prepare correspondencerequesting the
required information. The replies should be directed to the attention
of the Section Chief concerned. Further correspondenceis prepared
by that Section Chief, not the Preliminary Examiner.
321. For those casesin which the lacking information is
so important that preliminary determination 0£ eligibility is impractical or in which the lacking information is essential to processing in either the Architectural or Valuation Sections (Group 3),
correspondence shall be initiated requesting the information. A
statement shall be included in the letter to the mortgagee to the effect
that rejection will be made if the information is not received by a
specifieddate. No further correspondenceshould be necessary, and
if, on the specifieddate, the requested information has not been received,the case shall be recommendedfor rejection according to the
procedure describedin the following paragraph.
322. For those cases in which preliminary eligibility
tests indicate the necessity for recommendingrejection (Group 4),
the Preliminary Examiner so indicates on the Preliminary Examiner's Report by the standard stamp, "Rejection Recommended."
It is required that the amount and term applied for and the reason
for rejection be indicated on the stamp. The processing time must
also be shown. There should be additional explanation for the information of the Chief Underwriter and Director. All rejections require the approval of the Chief Underwriter and the Director, either
of whom has authority to require that the case be completely
processed.
PART I
SECTION 4
COMPLIANCE INSPECTIONS
CONTENTS
Paragraphs
General Instructions-----------------------------------------------Purpose of Compliance Inspections
401-410
401-403
Procedure for Compliance Inspections---------------------------Methods of Compliance Inspection--------------------------·--------First Compliance Inspection
Second Compliance Inspection
Third Compliance Inspection
Additional Compliance Inspections_________________________________
Repair Compliance Inspections
Compliance Inspection Forms
Compliance Inspection Report.,
Memorandum of Compliance Inspection__________________________
Special Problems
Relation Between Inspector and Builder
Large Operations________________________________________________
Mortgagee's Assurance of Completion
404--410
411-426
411-416
417-419'
420-423:
424
425-42&
427-43(}
427-429'
43(}
431-438
431-432
433
434--437
Eft'ective February, 1938
Federal Hansing Administration
401-404
PART I
SECTION 4
COMPLIANCE INSPECTIONS
GENERAL INSTRUCTIONS
401. Purpose of Compliance Inspections. Commitments for mortgage insurance are agreements binding the Federal
Housing Administration to insure mortgages. The commitmentsare
based upon certain requirements, including the completion of construction, alterations or repairs. The Federal Housing Administration, for its own interest, makes inspections to determine whether
construction, alterations or repairs are made in compliance with the
conditions of commitments. Such inspections are termed Compliance Inspections and are made under the supervision of Chief Architectural Supervisors.
402. The Inspector shall keep the purpose of Compliance
Inspections foremost in his mind while conducting these inspections.
This will guide his actions in any situation for which instructions are
not provided in this Manual.
403. In practice, Compliance Inspections result in the
accomplishment of three functions:
a. The determination of whether the improvements,alterations
or repairs are completed in accordance with the approved
drawings and specifications. The term "approved drawings and specifications"as used here and elsewherein this
Manual, means those drawings and specificationsincluding all amendments,which were approved by the Federal
Housing Administration and made the basis and terms of
the commitment for mortgage insurance.
b, Assistance to builders in the form of advice and suggestions
as a means of securing compliance
o. The rendering of reports and securing of photographs of
the property as evidence and record of completion
404. Procedure for Compliance Inspections. The
Chief Underwriter authorizes Compliance Inspections and notifies
the Chief Architectural Supervisor by transmitting a copy of the
commitment to the Architectural Section. Record of this is kept in
UNDERWRITL'lG
MANUAL
404-408
an active file of properties awaiting inspection. These are usually
separated into groups according to the types of inspection which are
to be made.
405. When the Director transmits the commitment to
the mortgagee in a case which requires compliance inspection, there
are attached Requests for Compliance Inspections, FHA Forms Nos.
2289, 2289a,2289b, 2289c, and 2289d, as required. These are postal
cards which should be used to inform the Insuring Office of the
proper date for the next inspection.
406. When notified that a property is ready for a Compliance Inspection, the Chief Architectural Supervisor assigns an
Inspector to the case. In practically all instances, fully accredited
Architectural Inspectors will be assigned Compliance Inspections.
However, the Chief Underwriter may assign to this work any member of the Underwriting Staff who, in the opinion of the Chief Architectural Supervisor, is qualified.
407. In instances when the Inspector receives the assignment while in the Insuring Office, he may use the office copy of the
approved drawings and specifications and, if necessary, a copy of the
commitment. When the Inspector receives the assignment by telephone or telegraph, he uses that set of approved drawings and
specifications which were forwarded to the mortgagee with the commitment. The most recent Compliance Inspection Report or Memorandum of Compliance Inspection shall be used as a reference.
408. The Inspector executes the Memorandum of Compliance Inspection, FHA Form No. 2200, in duplicate and the original
is posted conspicuously at the site of construction. The Compliance
Inspection Report, FHA Form No. 2051, is executed in pencil and
transmitted to the Chief Architectural Supervisor for his apporval.
For final Compliance Inspection Reports, it is the responsibility of the
Chief Architectural Supervisor to obtain assurance that all certificates of approval which are necessary for occupancy of the property
have been issued. This may include approval by local building authorities or approval of the electrical installation by the public utility
company. With the exception of certificates of approval of private
water supply and sewagedisposal systems, this evidenceis not required
in writing for inclusion in the case binder, but may be obtained during
the final compliance inspection or by telephone. ·when a Compliance
Inspection Report indicates that the construction is finally approved
by the Chief Architectural Supervisor, it is transmitted to the Chief
Underwriter for final approval, which approval is required before the
mortgage may be insured.
•
•
~
I
I
COMPLIANCE
INSPECTIONS
409-411
409. In the event that the Inspector reports noncompliance which adversely affects the cost estimate or Rating of Physical Security, the Chief Architectural Supervisor shall transmit the
Compliance Inspection Report to the Chief Underwriter. l£ the
Chief Underwriter determines that such noncompliancerenders the
proposed mortgage, in the amount committed, ineligible for insurance, and that complianceis not probable, the Director shall notify
the mortgagee that present conditions indicate that it will be impossible to insure the mortgage. H the mortgagee requests that the
case be reconsidered, reprocessing shall be completed at the discretion of the Chief Underwriter. In most instances, a complete revaluation, including reexamination of the property, shall be made.
410. On commitmentsissued for proposed construction,
it is required that a First, Second, and Third Compliance Inspection be made, together with such additional inspections as may be
necessary. When, at the date of commitment, construction has
progressed beyond the stage specified for First Compliance Inspection, the Chief Architectural Supervisor will require that an immediate inspection be made of all completed work. The Inspector will
designate whether this is a First, Second, or Third Compliance
Inspection, depending upon which is applicable to the existing stage
of construction, and will note ·on the report that there has been no
previous inspection. This inspection takes the place of any inspections which ordinarily would have preceded it. For instance, if, at
the date of commitment,construction is past the stage prescribed for
Second ComplianceInspection but not completed,the initial inspection will be indicated as the Second ComplianceInspection and must
include, to the extent possible, examination of all work usually
inspected in both the First and Second ComplianceInspections. In
such instances it may be advisable to have certain vital portions of
the structure uncovered.
METHODS OF COMPLIANCE INSPECTION
411. First Compliance Inspection. The First Compliance Inspection shall be made at either of the two following
stages of construction:
a. When excavation is completed and ready for footings and
foundations, or
b, When the foundation walls are complete and ready for
backfill
An inspection made at the latter stage of construction is designated
"Alternate First ComplianceInspection."
UNDERWRITING
MANUAL
412-416
412. The Chief .ArchitecturalSupervisor shall notify the
Chief Underwriter at which stage of construction the First Compliance Inspection is to be made. This decision shall be indicated
on the Report of Architectural Inspector, FHA Form No. 2014, in
order that suitable notification cards may be selected to accompany
the commitment.
413. In deciding at which stage of constructionthe First
Compliance Inspection is to be made, the Chief .Architectural Supervisor should consider, (a) soil conditions, (b) dependability and
competence of builder, and ( c) anticipated construction conditions.
In some instances it will be advisable to make inspections at both
stages of construction.
414. When making a First Compliance Inspection, the
Inspector determines if the construction is proceeding in conformity
with the approved drawings and specifications and in conformity
. with acceptable standards of workmanship and good engineering
practice by observing the following :
a. Location of ,the building lines on the lot
b. The depth and size of the excavation
e. The character and formation of the subsoil including:
1. Bearing capacity, and
fd. Presence of filled earth or faults
d. The presence of springs or ground water
e. The fall between the house lines and the main sewer as
well as the adequacyof drainage for the entire property
f. The condition of footing trenches and the suitability of
forms where required
415. H unsatisfactory soil conditions are encountered,
the Inspector shall suggest suitable corrective measures, such as the
use of specially designed footings and foundations. The suggested
corrective measures shall be indicated on the prescribed forms, and
the Chief Architectural Supervisor shall determine whether these
remedies are adequate. If deemed necessary, the builder may be
required to obtain the services of a competent engineer to assist in
this work. If no corrective measures are feasible, the Inspector shall
report such conditions.
416. When the First Compliance Inspection is deferred
until foundation walls are completed and ready for backfill, the
Inspector observes,in addition to the items already listed in paragraph 414, the following:
a. Size and shape of footings, foundation walls and piers
b, Quality of the materials and workmanship, particularly
the neatness and soundness of masonry
•
•
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j
····~·-~··
COMPLIANCE
------------
INSPECTIONS
416-418
c. Dampproofing and drainage of foundation
d, Location and quality of columns and other substructure
417. Second Compliance Inspection. This inspection
is made when the main building is enclosedand all structural members are exposed and while roughing-in is in place and visible. Ati
this time all structural details and materials can be inspected. In
addition all heating, plumbing and electrical work that is to be
concealed,is installed and ready for inspection.
418. When making a Second ComplianceInspection, the
Inspector determines whether the construction is proceeding in conformity with the approved drawings and specificationsand in conformity with acceptable standards of workmanship and good engineering practice, by observing the following:
a. Foundations if not inspected during First Compliance Inspection
1. Size and shape of footings, foundation walls and piers
fa. Quality of the materials and workmanship, particularly the neatness and soundness of masonry
3. The dampproofing and drainage of foundation
4. The location and quality of columns and other substructure
b. Superstructure of building
1. The grade or quality and soundness of all materials
used
~. Structural details, such as plates, spacing of structural
members, bridging, corner bracing, sheathing,
masonry wall ties or bonding, and the application
of roofing and flashing
3. Methods of assemblyand workmanship employedin the
construction, including masonry, cutting, fitting and
joining of materials, roofing, flashing and insulation
c. Roughing-in for mechanical and convenienceequipment
1. The plumbing and sewerage,with particular attention
to venting, size and pitch of pipes and methods of
installation
1!. The heating system, with emphasis on the capacity,
location, and method of installing piping or duct
work
3. The electrical system, with special attention to the
type, method, and adequacyof wiring, distribution of
circuits, and location of outlets
...
UNDERWRITING
MANUAL
419-423
419. In the event construction is not proceeding in conformity with the approved drawings and specifications, the Inspector lists the deficiencies or variations on the required forms and suggests a satisfactory remedy to the builder. For example, where the
structural strength of joists or other load bearing members are definitely impaired by cutting, drilling or by inherent defects, the Inspector shall indicate that such members will require replacement or
adequate reinforcement prior to approval of the construction;
420. Third Compliance Inspection. This inspection is
made when all improvements are completed and the buildings are
ready for occupancy. Walks, drives, grading and accessory buildings are included in the improvements which must be complete.
421. When making a Third Compliance Inspection, the
Inspector determines whether all improvements have been completed
in accordance with the approved drawings and specifications and
the terms of the commitment by observing the following:
a. Plaster and plaster base
•
b, Mill, cabinet and stair work
o. Floor and wall materials and finishes
d. Painting, wall covering and decorating
and caulking
f. Rough and finish hardware
g. Plumbing fixtures and equipment
h, Radiators, ducts and grilles, boilers, heaters, air-conditioning units, stokers, oil burners, and auxiliary devices such
as automatic controls.
i. Electrical equipment
j. Certificates of approval if these are on the premises
k. Gutters, downspouts, and other sheetmetal work
l. Walks, drives, and grading
m. Accessory buildings
n. Private water and sewage disposal systems
e. Glazing, weatherstripping,
422. H the Inspector determines that the improvements
have been completed in a satisfactory manner, he indicates his approval on the required forms and then photographs the subject property. One street view is taken showing the adjoining properties and
a front view showing the completed improvements. In order to
identify the photographs it is suggested that the last three digits of
the serial number appear in each photograph.
423. In the event the property is not completed in a
satisfactory manner the Inspector will indicate his findings on the
required forms and withhold his final approval. In such instances,
an additional Compliance Inspection may be necessary.
•
I
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COMPLIANCE
INSPECTIONS
424-426
424. Additional Compliance Inspections. The Chief
Architectural Supervisor may deem it advisable or necessaryto have
more than the three regular complianceinspections made. For example, it may be found that additional compliance inspections are
necessary in cases where special installations are contemplated that
will require more frequent examination, or where certain work will
be concealedearlier in the building operations than ordinarily is the
case. Additional inspections are also necessary in cases where noncompliancewith approved drawings and specificationsis discovered
during one. of the regular complianceinspections, and it is necessary
for the contractor to correct variations, defective work, or materials.
This will be required only when the method of correcting the noncompliance cannot be examined in a subsequent regular compliance
inspection. Reports shall indicate whether such deficiencieshave
been satisfactorily remedied. Additional inspections may be advisable, and shall be made where certain builders have manifested a
tendency toward noncompliancewhich cannot be observed during a
regular complianceinspection. In such cases,unexpected inspections
may be used as a device where they are felt to serve specificpurposes.
When additional equipment or other extras have been installed and
the mortgagee requests a commitment in a larger amount, the Chief
Underwriter may request the Chief Architectural Supervisor to
cause additional inspections to be made.
425. Repair Compliance Inspections. In instances
where commitments in connectionwith existing construction require
the completion of alterations, additions or repairs, the Chief Architectural Supervisor shall furnish evidence satisfactory to the Chief
Underwriter that the requirements have been fulfilled. Such evidence is necessary before the mortgage may be insured. The Chief
Architectural Supervisor may secure such evidenceeither by having
a Repair Compliance Inspection made, or by obtaining from the
mortgagee a statement that the alterations, additions or repairs have
been fully and satisfactorily completed. In all cases involving alterations, additions or repairs which affect the structural qualities or
design of the structure, it is mandatory that a Repair Compliance
Inspection be made.
426. Particular care must be exercised in making Repair ComplianceInspections. The Inspector shall determinewhether
any section or members of the structure have been weakened due to
cutting or changing and whether bearing loads have been dangerously
increased. He shall further determine whether various structural
members have been assembled according to sound and acceptable
building practices.
UNDERWRITING
MANUAL
427-431
COMPLIANCE INSPECTION FORMS
427. Compliance Inspection Report. The Inspector
executesthe portion of FHA Form No. 2051which is allotted to his
use and indicates the required information in accordancewith the directions contained on the form. Spaceis provided for the listing of incompletework, defective materials and variations from the approved
drawings and specifications. The question concerning the effect of
these items upon the cost estimate or Rating of Physical Security
shall be given very careful consideration and shall be answered in
definite terms. The Inspector must reflect the actual condition of
the property, and recognition must be given equally to favorable or
adverse findings. He indicates the amount of the change in the
replacement cost estimate, and the effect on the rating of any of the
physical security features. If changes have no effect, it is so stated.
428. It is permissible to allow changes or deviations
from the approved drawings and specifications, provided that these
changes do not adversely affect the original Rating of Physical
Security or lower the estimate of replacement cost. Substitution of
materials is also permitted, provided that the substituted materials
equal or exceedthose specified.
429. The Chief Architectural Supervisor reviews the
Compliance Inspection Report and reaches a decision, which is
indicated in the space provided in his portion of the report, This
decision is determined by the information contained in the report
and any knowledge based upon previous experiencewith the builder
and conditions surrounding the case.
430. Memorandum of Compliance Inspection. FHA
Form No. 2200 is provided for the purpose of avoiding unnecessary
delays in construction by giving notice directly to the builder that
the construction has, or has not, passed a particular inspection.
The Inspector indicates as clearly as possible those items which
require correction. These items must correspond with the information set forth in the Compliance Inspection Report, FHA Form
No. 2051.
•
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SPECIAL PROBLEMS
431. Relation Between Inspector and Builder. While
compliance inspections render an indirect service to mortgagee,
mortgagor and builder by securing compliancewith approved drawings and specifications,distinction is made between architectural or
construction supervision, and compliance inspections as made. by
the Federal Housing Administration. Compliance Inspections are,
made by the Federal Housing Administration entirely for its own
interest with no direct responsibility to the mortgagee or mortgagor;
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COMPLIANCE
INSPECTIONS
431-434
and these inspections do not in any sense constitute architectural
or construction supervision. In the event that compliance with
approved drawings and specifications is not evident, the Federal
Housing Administration cannot stop construction, nor can it directly
demand corrections. Its only action in such cases is to refuse to
insure the proposed mortgage, on the grounds of noncompliance with
the terms of the commitment, unless proper corrections are made.
432. When a Compliance Inspection reveals a discrepancy which must be corrected to render the property eligible for
mortgage insurance under the terms of the commitment, the Inspector shall point out such conditions to the applicant, builder or their
agents while on the premises, and shall recommend· any, correotioe
measures that are reasonable and in accord with good building
practice. This is the quickest and the preferred method of obtaining compliance. The Inspector should make every effort to dispose
of these problems by direct communication in a dipZ01natw manner.
Future relations may be improved if the Inspector endeavorsto give
builders a better understanding of the requirements of the Federal
Housing Administration.
433. Large Operations. In areas where dwelling construction is conducted on a quantity basis, or where there is a concentration of building activity, it may be necessary for the Chief
Architectural Supervisor to amplify the procedure outlined in paragraphs 404 to 410, so that it will be possible to keep pace with
the construction. The extent and speed of the operations will determine the policy and procedure to be adopted. During certain stages
of work on very large projects, Inspectors may be required to devote
full time to the project. In other instances a schedule of daily or
periodic visits may be a satisfactory solution.
434. Mortgagee's Assurance of Completion. In order
to insure a mortgage when it is impossible to completethe improvements because of weather or conditions beyond the control of the
mortgagee and mortgagor, the Federal Housing Administration
employs a procedure of which Compliance Inspections are a part.
This procedure may be exercised only when all of the following
conditions are effective:
a. The mortgaged premises include a dwelling that is habitable and essentially complete
UNDERWRITING
MANUAL
434-437
b, The work to be deferred is such that completion cannot
be accomplished within a reasonable period of time, but
can be accomplished within the six months period following the presentation of the credit instrument for endorsement
c. The reason for noncompletion is weather or other conditions which make it impractical to proceed. For instance,
in the case of street improvements, this may mean the
retarding of street surfacing until all of the construction
in the block is completed.
435. In order to assure completion of the improvements,
the mortgagee withholds from the proceeds of the mortgage transaction an amount sufficient to secure satisfactory completion. The
method of conducting this transaction between the mortgagor and
mortgagee is not to be construed as a responsibility of the Federal
Rousing Administration.
436. Upon receipt of a written request from a mortgagee
for insurance of a mortgage prior to the completion of required
improvements, the procedure is as follows:
•
a. The Chief Underwriter will require the Architectural Section to make an inspection to determine whether the conditions described in paragraph 434 are present, and to
estimate the cost of completing the deferred improvements.
b, The Mortgagee's Assurance of Completion, FHA Form
No. 2300, is prepared, setting forth the deferred improvements. The designated period of time for completion
shall be as short as is practicable and the sum of money
to be withheld by the mortgagee shall be fixed at not
less than one and a half times the estimated cost of
completing the deferred improvements.
o. When the mortgagee has executed this document and returned it to the Insuring Office the credit instrument is
endorsed for insurance in the usual manner.
437. A record of each use of this procedure is kept in
the file of pending Compliance Inspections and the Insuring Office
endeavors to have the improvements completed as soon as possible.
When the deferred improvements are complete and approved, the
final Compliance Inspection Report is mailed to the mortgagee
which, under the terms of the agreement, disburses the remaining
funds. The Insuring Office then requires the mortgagee to furnish
written notification of the disbursement.
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PART I
SECTION 5
MINIMUM ELIGIBILITYREQUIREMENTS
CONTENTS
Paragraphs
Classificationof Eligibility Requirements---------------------------501
Fixed Requirements Applied Without Field Interpretation____________ 502
Requirements to discharge Statutory Responsibilities
503-504
Requirements With Established Factual Interpretations
505-524
Requirements Pertaining to Property
506-516
RequirementsPertaining to Location__ :_
517-519
Requirements Pertaining to Mortgagors
52()-524
SecondaryRequirements-------------------------------~------------525--532
Property Standards--------------------------------------------526--530
SubdivisionStandards------------------------------------------531
Minimum Construction Requirements for New Dwellings__________ 532
(
Effective February, 1938
Federal Housing Administration
PART I
SECTION 5
MINIMUM ELIGIBILITY REQUIREMENTS
CLASSIFICATION OF ELIGIBILITY REQUIREMENTS
501. The eligibility of mortgages secured by non-farm
properties for qualification and acceptancefor mutual mortgage insurance by the Federal Housing Administration under the provisions
of Section 203 of Title II of the National Housing Act, depends
upon compliance with provisions in the National Housing Act, compliance with Administrative Rules and Regulations, compliancewith
established minimum standards, and compliance with established
policies and practices of the Administration. These eligibility requirementsmay be classifiedinto four groups, as follows:
a. Fiwed Requirements Applied -WithoutField Interpretation.
These are specificrules governing major matters. As requirements precedent to eligibility, they must be and are
applied without interpretation by local offices becausethey
are inflexibleand definite as to meaning and intent, which
meaning and intent are interpreted by the General Counsel, Federal Housing Administration, Washington, D. C.
b, Requirements to Discharoe Statutory Responsibilities.
These are not specificrules. They are general principles
and policies stated in the form of objectives and general
responsibilities. When applied as eligibility requirements,
they must be translated into reasonable decisionsby interpretations and judgment.
o. Requirements with Established Factual Interpretations.
These are rules stated in specificterms, but require analysis
of the effect of factors or combinations of factors and use
of precedents and previous factual interpretations when
applied to determine minimum eligibility. The interpretations in previous cases become precedents. The precedents themselvesbecome,in effect,eligibility requirements
which are applied to new cases.
d. Secondary Requirements. These are specific rules and
standards governing detailed matters. They are stated in
definite terms, but are subject to interpretation and to
UNDERWRITING
MANUAL
501-502
waiver under certain circumstances. Secondary requirements usually are specified means of attaining desirable
objectives. Waiver is permitted only when the desirable
objectivesare fully attained in spite of technical violation
of the stated requirement.
FIXED REQUIREMENTS APPLIED WITHOUT FIELD INTERPRETATION
502. Fixed requirements applied without field interpretation are found in either the National Housing Act, as amended,
or in the Administrative Rules and Regulationsunder Title II of the
Act, The more significant of these requirements are summarized as
follows:
a. The mortgage must be a first mortgage on real estate in fee
simpleor on a leasehold (1) under a lease for not less than
99 years which is renewable,or (2) under a lease having a
period of not less than 50 years to run from the date the
mortgage is executed
b, The application for insurance must involve a mortgage
about to be executedor already executed
c. The mortgage should involve a principal obligation in an
amount of one hundred dollars ($100) or multiples
thereof but must not exceed sixteen thousand dollars
($16,000)and must not exceed eighty percent (80%) of
the appraised value of the property as of the date the
mortgage is accepted for insurance except under the
following circumstances:
1. If the amount of the mortgage does not exceed $5,400
and there is located upon the property a dwelling designed principally for a single family residence, the
construction of which
(a) is begun after February 3, 1938, and which is approved for mortgage insurance prior to the beginning of construction, or
(b) the construction of which was begun after January 1, 1937 and before February 3, 1938, and which
at the time the mortgage is accepted for insurance
has not been sold or occupiedsince completion.
Such mortgage may exceed eighty percent (80%), provided at the
time the mortgage is insured the mortgagor is the owner and occupant and has paid on account of the property at least ten percent
(10%) of its appraised value, but must not exceed ninety percent
(90%) of the appraised value of the property as of the date the
mortgage is accepted for insurance.
•
•
MINIMUM
ELIGIBILITY
REQUIREMENTS
502-504
~. If the amount 0£ the mortgage does not exceed $8,600
and the property complies with all 0£ the conditions
set forth in subparagraph 1. above, except as to the
amount 0£ ·the mortgage, and has an appraised value
(as 0£ the date the mortgage is accepted for insurance)
in excess 0£ $6,000, but not in excess 0£ $10,000,the
amount 0£ such mortgage must not exceed ninety percent ( 90%) 0£ $6,0000£ such value, plus eighty percent ( 80%) 0£ the balance 0£ such value.
d. The mortgage must have a maturity satisfactory to the
Administrator not to be less than four nor more than
twenty years from the date 0£ insurance, except that until
July 1, 1939 a mortgage 0£ the character described in subparagraph c.-1. above may have a maturity not more than
twenty-fiveyears from the date 0£ insurance
e. The mortgage must contain complete amortization provisions requiring monthly payments by the mortgagor
f. The mortgage must not bear interest at a rate in excess of
5% per annum
g. The mortgage must be executed upon a form prescribed for
use in the jurisdiction in which the property is situated
with such modificationsas may be approved by the General Counsel, Federal Housing Administration, Washington, D. C.
h, The mortgage must have been made to and held by, a mortgagee approved by the Administrator as responsible and
able to service the mortgage properly
REQUIREMENTS TO DISCHARGE STATUTORYRESPONSIBILITIES
503. The accomplishment 0£ the purposes 0£ the National Housing Act is the definite obligation 0£ the Federal Housing
Administration. The Act imposes two definite responsibilities on
members of underwriting staffs:
a. To determine that all mortgages accepted for insurance are
economicallysound
b. To further the objective 0£ the Act as stated in the preamble, "------ encourage improvement in housing standards and conditions"
504. In complianc.ewith these responsibilities, the Federal Housing Administration has established broad principles 0£ procedure. These principles serve as general rules of practice. They
must be translated into more specificand precise rules which become
UNDERWRITING
MANUAL
504-506
definite guides to more exact decisions. Among these principles the
following have been established for the insurance of mortgages secured
by non-farm properties:
a. Eligible properties must possess qualities which indicate
sound value, and which promise security and satisfaction
to home owners throughout the term of the loan
b. Eligible properties must possess sufficientpromise of continued utility to give assurance of enduring as sound
investments throughout the life of the mortgage
c. Eligible properties must possess characteristics which will
not induce neighborhood blight or threaten to influence
adversely the mortgage security in neighboring properties
d. The development of land should be such as to (1) comply
with sound and accepted principles of land planning, (2)
create neighborhoods of definite character to meet the
demand for definite types of homes, ( 3) conform to the
needs of the community for additional home sites, and
(4) conform to the type of expansion characteristic of, and
suitable to, the community
e. Eligible mortgages must involve obligations, the periodi.c
payments on which bear a proper relationship to the mortgagor's income and other expenses
f. An eligible mortgage must be intrinsically a sound investment
•
REQUffiEMENTS WITII ESTABLISHED FACTUAL INTERPRETATIONS
505. Requirements with established factual interpretations also appear as specificrules in either the National Housing A.ct,
as amended, or Administrative Rules and Regulations. To obtain
uniform decisionsby the underwriting staffs, these requirements must
be interpreted, the interpretations being based upon policies formulated by Washington Headquarters. In compliance with the provision of the National Housing Act which specifiesthat, "no mortgage
shall be accepted for insurance unless the Administrator finds that
the project with respect to which the mortgage is executed is economically sound", the Federal Housing Administration has developed
a method of determining whether a mortgage submitted for insurance
is economicallysound, The method is referred to as the Risk Rating
System, and is described in Section 6, Methods of Mortgage Risk
Rating. Mortgage transactions not meeting the requirements of this
system shall not be construed to be economicallysound and, therefore,
shall not be accepted for insurance.
506. Requirements Pertaining to Property. Section
203 of the National Housing Act provides that a mortgage to be eligi-
•
MINIMUM
ELIGIBILITY
REQUIREMENTS
50~10
(
ble for insurance shall be secured by a property upon which there is
located a dwelling or dwellings designed principally :for residential
use for not more than four families in the aggregate, irrespective of
whether such dwelling or dwellingshave a party wall or are otherwise
physically connectedwith another dwelling or dwellings.
·
507. Number of Structures on Plot. The phrase,
"dwelling or dwellings designed principally for residential use for
not more than four families in the aggregate", means dwelling accommodations for not more than four families irrespective of whether
such accommodationsare included in one or more, but not more than
four, structures, provided that if the dwelling accommodationscomprise more than a single structure, such structures must be located
on a single plot or parcel and must be related functionally in such
a way as to constitute a readily marketable real estate entity for the
use of not more than four families.
508. Functional relationship between the several structures must be present to such a degree that a natural marketable
real estate entity is created. This functional relationship may be
created by a combinationof several factors or conditions such as the
layout of walks, driveways, lawns, or the location of the several
structures and their relationship to one another. It is important to
note that the mere presenceof a single heating plant, sewage disposal
plant, or common water supply serving two otherwise unrelated
dwellings, does not constitute functional relationship as defined
above. Parenthetically, it should be noted that where two separate
dwellings are served by a single heating plant neither dwelling is
eligible for insurance.
509. In analyzing a case where this problem is involved,
one very significant approach to a satisfactory solution involves the
making of several valuations: (a) a valuation of the property as a
whole, and (b) valuations of the several properties which would be
created by a division of the original large property.
510. If the total of the values of the smaller proper~
ties is less than the value of the original property before division,
there is evidencethat the property, as a complete entity, has greater
marketability than the smaller properties. If this result is obtained,
the property is eligible for insurance as a whole, provided sufficient
functional relationship is present, and provided that all other requirements of the Administration are fulfilled. On the other hand,
if the total value of the smaller properties which will be created by
dividing the property is greater than the value of the whole, greater
marketability of the smaller parcels is indicated. If so, it is required that a division be made, and that each resulting smaller
property becomecollateral security for an individual insured mort-
UNDERWRITING
MANUAL
510-514
gage, provided that all other requirements of the Administration are
fulfilled. It is probable that the higher total value of the several
smaller parcels will occur only if the character of the larger property, undivided, is such that it would find a limited market, and only
if this fact has been reflectedin the valuations.
511. It is the policy of the Administration to require
separate mortgages in cases where the property is readily divisible
without appreciable loss of marketability or value. Therefore, if the
transaction is sound on either basis. a division of the property is
required.
512. Non-residential Use in Addition to Residential Use
for Four Families. The phrase "dwelling or dwellingsdesigned principally for residential use for not more than four families in the aggregate" is further interpreted to mean that a dwelling may include four
living units, any one of which may be partially devoted to nonresidential use, but may not include a nonresidential unit in addition to
the four living units. For example,a building with four living units,
one or two of which may be used in part for physicians' offices, may
be eligible, whereas a building with four living units and a professional suite in addition would not be eligible. The computation of
the ratio of nonresidential area to total floor area is made on the basis
of the entire structure. In other words, a four family structure is
eligible even though most of the floor area of a single unit is devoted
to nonresidential use, provided, as further definedby Property Standards, the floor area devotedto nonresidential use does not exceed25%
of the total floor area, and provided such nonresidential use does not
adversely affect the desirability of the remainder for residential use.
513. L(hnd Shall Oom.priee a Single Plot. Part IV,
Property Standards, "Conditions Determining Acceptability", Item
401, "Plot", states, "all the land offered as security :for a mortgage
shall be contiguous, forming a single plot". "Plot" is defined in
Part III, Property Standards, as "a parcel of land including one or
more lots or portions thereof". This should be interpreted as follows : All the land offered as security for a mortgage shall be contiguous, forming a single plot, except in such cases where the plot
has been bisected by a way offering secondary access to the property
and the two resulting parcels comprise a readily marketable real
estate entity. This condition generally occurs where the garage or
some similar accessory building is located on a parcel adjacent to,
but separated from the principal structure by an alley.
514. Additional Propertsj Offered as Security. The
property constituting the security for an insured mortgage must be a
natural and readily marketable real estate entity. Land in excess of
•
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f
;
MINIMUM
ELIGIBILITY
REQUIREMENTS
514-517
that which is needed to accommodatesuitably the building improvements tends toward the creation 0£ an unnatural real estate entity.
Where excessland is capable 0£ separate utilization without impairing
the marketability 0£ the remainder 0£ the subjectproperty, such excess
land should not be included as security for an insured mortgage. That
portion 0£ the property which may be included should be separated
from the excessportion by delineation and actual changes in the legal
description that provide for the necessary separation. This may be
accomplishedby citing the changed legal description as a condition 0£
the commitment.
515. This policy is established for two reasons:
a. The requirements in relation to the partial release 0£ security make it necessary that substantially all 0£ the sales'
price 0£ the portion to be released be applied to the reduction 0£ the mortgage debt. The major portion 0£ requests
for partial releases 0£ security involve property either
noncontiguous or somewhat unrelated to that portion 0£
the property used for .dwelling purposes. l£ this part of
the property were not included as security for the insured
mortgage, the mortgagor would be in a better position
to manage his property and financial affairs.
b, The success 0£ the Mutual Mortgage Insurance Fund depends partly on the costs 0£ managing and disposing of
the properties tendered in exchange for debentures. It
is the intention 0£ the Administration that all the security
under any single foreclosed insured mortgage may be
rented or sold as one single unit, with the correspondingly
low management costs.
516. Subterfuges Resorted to Prior to Mortgage Insurance. It is imperative that underwriting staffs exercise caution
and actively discourage any applicant from resorting to subterfuges
for the purpose 0£ circumventing requirements 0£ the National Housing Act, the prescribed rules, regulations, and policies 0£ this Administration. For example,if the design of the building indicates either
the intention 0£, or the adaptability for, conversion into more than
four living units, the property is ineligible for mutual mortgage
insurance purposes. The same condition is frequently met in connection with nonresidential use.
517. Requirements Pertaining to Location. It is not
necessary that the mortgaged property be located within the corporate limits 0£ any town or village. However, the property must
be situated in a locality which constitutes, or is adjacent to, a stable
UNDERWRITING
MANUAL
517-523
residential area. The location must be suitable for use primarily as
a residence and must have reasonablemarketability.
518. Isolated Locations. Estates, country homes, and
other residential properties which are not adjacent to land already
developed for residential occupation, may be given consideration if
the use of the land is for residential sites of comparable size in
the area. Generally, land values must derive from residential use
rather than agricultural, commercial or industrial use. The eligibility of such locations is determined by the use of the methods
described in Section 9, Rating of Location.
519. Subsidence. To be eligible for mortgage insurance
properties must be free from the risk of damage by subsidence. In
all caseswhere the danger of subsidenceis present, the property shall
be ineligible for insurance unless satisfactory evidence is submitted
to the Insuring Office to demonstratethat the probability of loss from
such damage is remote or negligible.
520. Requirements Pertaining to Mortgagors. Section 203 of the National Housing Act requires that the periodic payments by the mortgagor shall not be in excessof his reasonableability
to pay.
521. Secondary Liens. A mortgagor must establish that
after the mortgage offered for insurance has been recorded, the
mortgaged property shall be free and clear of all liens other than
such mortgage, and that there will not be outstanding any other
unpaid obligation contracted in connectionwith the mortgage transaction or the purchase of the mortgaged property, except obligations
which are secured by property or collateral owned by the mortgagor
independently of the mortgaged property.
522. (lash. Investment Requirements. In a case involving the purchaseof property it must be establishedthat the prospective
purchaser is, in addition to undertaking the mortgage obligation,
advancing cash or the acceptableequivalent thereto at the time of the
acquisition of the property. This investment must be in an amount
which will provide a sufficientmotive for the mortgagor to keep the
mortgage in good standing. In any case, the cash investment must
be equal to the differencebetween the net proceeds of the mortgage
and the purchase price or cost of the property, and must in no event
be less than 10% of the appraised value of the property. If this
requirement is not met, the mortgage in such instances shall not be
acceptablefor insurance.
523. When other property is offered in lieu of cash on
accountof the purchase price of the property being acquired,the value
of the mortgagor's equity in such other property as establishedby this
Administration shall be used as the basis for computing the amount
f
I
•
I
MINIMUM
ELIGIBILITY
REQUIREMENTS
523-528
0£ the investment. H the applicant has owned the property offered
in lieu 0£ cash for less than six months prior to the date 0£ the application, the price actually paid for such property will usually determine
the amount of the investment. This is a statement of general principle
and the six months period is introduced into the statement solely for
the purpose 0£ guiding judgment. It is not an arbitrary rule and
compliancewith the cash investment requirement is to be determined
solely on the merits 0£ the case.
524. Where applicants for insured mortgages own other
sound assets, such as realty or sound securities, and pledge such
assets for loans, the proceeds 0£ which help establish the required
cash investment,such loans will be interpreted as transactions entirely
separate and apart from the insured mortgage contract. The mortgages so presented are qualified for insurance in this respect, if it is
evident that the borrowed funds, in addition to the insured mortgage, (a) will not create a secondary lien, ( b) are adequately secured
by assets other than property securing the insured mortgage, and
( o) are comfortably within the borrower's ability to pay without
impairing payment on the insured mortgage obligation. Interpretations for actual cases shall be made in accordancewith instructions
contained in Section 10, Rating of Borrower.
SECONDARY REQUIREMENTS
525. Under the provisions 0£ the National Housing Act,
the Federal Housing Administration has established certain definite
standards embracing detailed matters of compliance with minimum
eligibility requirements.
526. Property Standards. Property Standards include
(a) Conditions Determining Acceptability, Part IV, (b) General
Minmum Requirements, Part V, and (o) Local Minimum Requirements, Part VI.
527. Conditions Determining Elig~bility describe requirements as to :
\
a.Plot
~
b. Accessibility
c. Number 0£ living units
d, Types of eligible dwellings
e. Nonresidential use of dwellings
'
528. General Minimum Requirements describe minimim;
conditions precedent to eligibility. These appear under the general
headings of:
a. Compliancewith local regulations
b, Natural light and ventilation
···---
-·
--------
UNDERWRITING MANUAL
528-532
o. Room arrangement
Construction of dwelling
e. Services and equipment
d,
529. Local Minimum Requirements are published separately for each insuring office area, and define for each area the
General Minimum Requirements. Individual items are under identical headings and in the same sequenceas those in General Minimum
Requirements,and are necessarily local adaptations.
530. The only requirements of Property Standards
which are subject to waiver are those contained in Part VI, Local
Minimum Requirements. Waivers are permitted only in those cases
in which the desirable objectives are fully attained in spite of technical violations of the stated requirements. The procedure to be
followed in considering waivers is described in Section 2, Underwriting Procedures.
531. Subdivision Standards. These standards, in addition to outlining desirable objectives,define, under Minimum Requirements, the essential characteristics which must be present to
establish the suitability of the subdivisions as sites for homes eligible for mortgage insurance. These requirementsappear in Circular
No. 5, Subdivision Standards, Part II, under the following general
headings:
a. Convincing Evidence of a Healthy Demand
b, Appropriate Surroundings and Topography
o. Accessibility to Schools, Employment, Shopping and
Recreational Centers
'd, Suitable Utilities and Street Improvements
e. Compliance with Zoning Regulations and Provisions of
Adequate Deed Restrictions
f. Conforming to Planning Regulations
g. Suitability of Subdivision Plan
h, Sound Program with Respect to Mortgage and Tax Indebtedness
532. Minimum Construction Requirements for New
Dwellings. For the purpose of encouraging improvement in housing conditions and construction practices and for the purpose of
minimizing mortgage risk, the Federal Housing Administration has
established Minimum Construction Requirements for New Dwellings for each insuring office area. These are definite eligibility requirements for casesinvolving conventionalmethods of construction.
Individual requirements are listed under the following general
headings:
•
•
MINIMUM
ELIGIBILITY
REQUIREMENTS
532
a. Excavation
b. Masonry: (1) General, (2) Footings, (3) Foundations,
( 4) Exterior masonry walls, ( 5) Chimneys, ( 6) Cement
floors, driveways and walks
o. Dampproo:fing
d. Structural Steel and Iron
e. Lumber
f. Wood Framing: (1) Floors and Roofs, (2) Exterior walls,
(3) Interior partitions
g. Miscellaneous
h, Termite prevention
i. Roof coverings
j. Sheet metal
k. Lathing
l. Plaster work
m. Stucco
n. Painting
o. Plumbing
p. Heating
q. Electric work
r, General
PART II
SECTION
METHODS
6
OF MORTGAGE RISK RATING
CONTENTS
Paragraphs
Definition of Risk Rating___________________________________________
:Nature of :M:ortgage Risk
Essentials in the Measurement of Risk
The Risk Rating Process
Control of Risk Measurement,
601
602~607
008-617
618-635
636--639
Etl'ectlve February 1938
Federal Housing Administration.
601-603
PART II
SECTION 6
METHODS OF MORTGAGE RISK RATING
DEFINITION OF RISK. RATING
601. Mortgage risk rating is the process of thoroughly
analyzing the major factors of risk undertaken in the making of a
mortgage loan and the rating of the mortgage in accordancewith the
risk involved in the loan transaction or in connectionwith the insurance of the mortgage. Risk rating is made necessaryby the terms of
the National Housing Act. It provides a uniform method for determining whether or not a dwelling mortgage is eligible for mutual
insurance under Title II of the National Housing Act. In addition,
it serves as a basis for the classificationof mortgages in accordance
with their quality as investments.
NATURE OF MORTGAGE RISK
602. Mortgage risk is created whenever a mortgage is
made and continuesthroughout the entire life of the loan, although the
degree of risk may change. Each and every mortgage investment is
hazardous in some degree. However, different mortgages vary as to
degree of risk and it is fallacious to presume that mortgages fall
irito merely two classes, viz, those that are safe and those that are
unsafe.
603. Mortgage risk is an entity and can be treated as
such. It is essentialto so treat it in order to make it possibleto express
a measurementof risk in simple terms. As an entity, the over-all degree of risk is composedof all the possibilities of trouble, expense,
and loss in connection with the lending of mortgage funds. In
other words, risk includes probability of:
a. Difficultyin connection with collections
b. Unusual expense in connectionwith collections
o. Excessiveservicing costs
d, Cost of foreclosure
e. Delay in foreclosure
f. Cost of rehabilitation
g. Cost of carrying until sold
l
UNDERWRITING
MANUAL
603-606
h. Cost of resale
i. Loss, if any, on resale
Distinction is made between the above elements which comprise
mortgage risk and the factors which cause or contribute to the
degree of mortgage risk.
604. The factors contributing to mortgage risk are numerous, complex,and subject to an almost infinite number of possible
combinations in practical cases. Included among these factors are
various neighborhood and location characteristics. Different types
of cities create different types of residential neighborhoods. A
variety of factors affects the probable future trends of neighborhoods and of the values of the homes in them. Neighborhoodshave
varying degrees of stability, and some may be expected to have
longer attractive lives than others. In listing factors which contribute to risk, it is necessary to take account of the great variety
of architectural styles and designs. They have differing probabilities with respect to structural durability. They will be acceptable
in future markets in widely differing degrees. Different methods
of dwelling construction, different room arrangements, different sizes
of houses, and different provisions for mechanical equipment introduce differentdegreesof mortgage risk. In general, factors which are
vital in mortgage risk measurementin larger communitiesare sometimes of less significancein smaller communitiesand towns. That is,
the ratings ascribed do not parallel the actual presenceof risk factors
but rather the intensities with which they contribute to over-all risk.
Identical conditions, acceptablein small towns, are frequently unacceptable in larger communities.
605. A most important group of factors which affect
mortgage risk is the one which embracesthe relationship betweenthe
physical property and the neighborhoodin which it is located. This
relationship directly affects marketability of the property. Marketability is a basically important characteristic of good mortgage loan
security. Different degrees of marketability represent different degrees of mortgage risk. There are varying degreesof conformity and
non-conformity between neighborhoods and individual houses in
them and this must be taken into account in listing factors which
contribute to mortgage hazard.
606. Also included are all those elements of risk associated with the earning power of the prospectiveborrower,his attitude
toward obligations,his ability to pay, and his prospects for the future.
In the final analysis the probability that a borrower will be able and
willing to meet the mortgage obligation represents the first line of
defense against trouble with the mortgage investment. Therefore,
•
METHODS OF MORTGAGE RISK
RATING
606-611
a poor borrower, when considered in relation to the mortgage trans'action, requires a low rating of mortgage risk. At the same time,
a good borrower cannot go very far . toward replacing the necessity for sound physical security in the real estate itself.
607. All the individual elements which contribute to
mortgage risk are presumed, in the final analysis, to combine and constitute the over-all risk involved in the insurance of the mortgage loan.
In this sense, mortgage risk is considered to be an entity susceptible
to measurement and expression as a single numerical rating.
ESSENTIALS IN THE MEASUREMENT OF RISK
608. The Underwriting Staff utilizes the risk rating procedure (a) to determine whether or not a proposed mortgage is eligible
for.insurance, and (b) to rate the risk represented by the mortgage so
that it may be grouped correctly for mutual insurance purposes. The
risk rating process accomplishesboth objectives simultaneously.
609. These two operations require the use of a prescribed
system which secures uniform decisionsand conclusionswhen applied
by different competent men. It is necessary to deal with many complex elements of risk. It is apparent that these may combine into an
almost unlimited number of patterns. In order to secure uniformity ·
and consistency in decisions, the risk rating system prescribes that
the elements of risk shall be treated by interrelated groups and then
integrated into a final result according to a specifiedprocedure. Adherence to the procedure is mandatory.
610. Mortgage risk lies in the future. Therefore risk
rating involves forecasting and prediction. It deals with probabilities. Risk rating involvesthe determination of the chances and likelihood of default and loss. It seeks to foresee probable ways in which
failures and trouble may occur. Risk rating, therefore, is equivalent
to predicting chances or likelihoods as seen at the time of analysis.
611. All the factors of risk in mortgage lending are not
included in the list of features in the risk rating system. Some have
been omitted deliberately; others are included under other designations. For example, reference to the ability of the mortgagee to service a loan properly is omitted but not ignored. The Federal Housing
Administration will insure only those mortgages submitted by approved mortgagees, and to gain approval a mortgagee must establish
that it is able to service mortgages properly. Other mortgage risk
factors of prime importance are future changes in conditions affecting world and domestic trade and changes ·in price levels. -These
factors are too complex to be measured in individual cases except in
very general terms and do not come within the scope o:f the risk
r
UNDERWRITING
MANUAL
611-613
rating system except insofar as they are considered in valuations.
Practically all other factors of risk, regarding which membersof the
Underwriting Staff can be expected to have significant opinions, are
embracedin the system.
612. It cannot be presumed that the relative importance
given to the various factors has been determined with the ultimate
degree of accuracy. However,reasonablenessis held as the objective,
and it is anticipated that future research and experiencewill enable a
greater degree of accuracy. Certain weights have been ascribed to
the elementsof risk consideredin the risk rating system. The nature
of these weights should be thoroughly understood by the men who
use. the system. The weights ascribed were fixed by a large number
of experiencedmortgage men. At the present time the introduction
of the weights into the system may be compared with the fire insurance rate system adopted many years ago and gradually corrected
through the years as the relative importance of the risk factors
became known. Experience to date indicates, however, that the
weights used in the risk rating system are sufficiently correct to obtain
results which are reasonable and justified.
613. The absolute weights used in the risk rating system
do not directly reflectthe presumed relative importance of the several
features. Certain features are 'distinguished as readily ratable
through a wide range of degrees of quality. Others are of such a.
character that differencesof acceptable quality are not as ratable by
degrees. The former features have, in general, been given higher
weights than the latter. That is, features which are readily ratable
have higher weights than important features in connection with
which the choice,presented to the man making the rating, is largely
between mere acceptance and a reject rating. Thus, in the Rating
of Location; the feature, Protection from Adverse Influences, which
is both important and ratable through a wide range of degrees of
protection, is ascribed a high weight, while the feature, Level of
Taxes and Special Assessments,which is important but is not ratable
through a wide range of degrees, is ascribed a relatively low weight.
In the latter case the primary consideration is whether the feature
warrants a reject rating or whether it warrants any one of the acceptable ratings. The degree of the acceptablerating is of secondary
importance. Weighting points are not wasted on features such as
the latter. As a consequencethe weights ascribed to the several
features cannot be construed as representing the actual relative
importance of the features in the system unless consideration is
given to this treatment of the features.
•
•
I
METHODS OF MORTGAGE
RISK
RATING
614-;616
614• .Another characteristic of the risk. rating system,
evidenced by the mortgage pattern, is that in determining the total
measure of risk the weaker elements impose their penalties in greater
ratio than do the stronger elements. The relative importance of the
various risk factors differs from case to case and the more important
factors are always those which happen to be the weakest in particular
cases.
615. The risk characteristics and economicsoundness of
a mortgage transaction cannot be determined on the basis of the loanvalue ratio alone. This ratio merely expresses the relationship between the loan and the property value at the time of appraisal. It
cannot throw sufficientlight on the possibility of default by the borrower nor can it fully indicate what relationship may exist betweenthe
loan and the property value at a future time. If the loan is to run
for twenty years, but the building which in part constitutes the
mortgage security cannot be expected to sustain economicusefulness
for that period of time, the loan transaction is not economically
sound; and, though the loan-value ratio may be relatively low, a
rating of the mortgage risk may indicate that the proposed mortgage
is ineligible for insurance. Again, the loan might not be economically sound if the probable rate of decline in property value will be
greater than the rate of amortization of the loan principal. 'Therefore, risk rating is significant because it makes possible the examination of mortgages by other means than the traditional one of determining the ratio between the principal amount of the mortgage and
the valuation. This ratio is included in risk rating but is only a·
part of it.
616. Valuation analyses include consideration of a great
number of factors. .All of them are also mortgage risk factors, since
conditions with regard to them affect value which, in turn, affectsthe
index of risk indicated by the loan-value ratio in any case. Valuation
requires the analysis of structural, functional, and esthetic qualities
of buildings; the making of estimates of the cost of constructing
or reproducing structures; the analysis of the quality and stability
of environments in which individual properties are located; the extent to which desirable or undesirable relationships exist between
individual properties and their surroundings, and numerous other
matters. .All these analyses are significant in mortgage risk rating
as well as in valuation. However, the valuation of property is for
the purpose of establishing an estimate of the price which a purchaser is warranted in paying, while risk rating determines the
quality of a mortgage investment. The two processeshave different
objectives. For this reason it is important to draw a careful distinction between risk rating and valuation. Valuation is used by the
,
UNDERWRITING
MANUAL
.616-619
. Federal Housing Administration (a) to make certain that loans which
exceedthe maximum prescribed percentage of value are not accepted
for insurance, and (b) to ascertain the loan-value ratio, which is one
of the most heavily weighted features in the risk rating system. In
. the first instance, possible ineligibility is determined by valuation.
In the second instance, valuation is used to assist in the determination of eligibility as dependent upon the presence of economicsoundness in the mortgage transaction as revealed by risk rating.
617. The risk rating system is designed to guide the
judgment of Underwriting Staffs, to attain a degree of accuracy, and
to secure a degree of controlled uniformity. The system requires the
exerciseof good judgment at every step in the procedure. It is not a
formula which can be applied without discrimination.
THE RISK RATING PROCESS
618. The many individual factors which contribute to
risk have been grouped into a few significant relationships which are
called "features" in the risk rating system. These features are, in
turn, combined into larger groups described as "categories."
619. In the risk rating processapplied to amenity income
dwellings,that is, to properties salable to prospectivebuyers interested
in the direct services of the properties rather than possible monetary
incomes;there are 27 features grouped into 4 categories,as follows:
Rating of Property:
Structural Soundness
Resistance to Elements
Resistance to Use
Livability and Functional Plan
Mechanical and Convenience Equipment
Natural Light and Ventilation
Architectural Attractiveness
Adjustment for Nonconformity
Rating of Location:
Relative Economic Stability
Protection from Adverse Influences
Freedom from Special Hazards
Adequacy of Civic, Social, and CommercialCenters
Adequacy of Transportation
Sufficiency of Utilities and Conveniences
Level of Taxes and Special Assessments
Appeal
Rating of Borrower :
Social and Economic Characteristics
Motivation in Relation to Transaction
Employability and Earning Stability
Relation of Obligations to Transaction
Relation of Income to Transaction
•
•
METHODS OF MORTGAGE RISX RATING
619
Rating of Mortgage Pattern:
Ratio of Loan to Value
Ratio of Total Payment to Rental Value
Ratio of Life of Mortgage to EconomicLife of Building
Lowest Category Rating
Intermediate Category Rating
Highest Category Rating
620. In the risk rating process applied to rental income
dwellings, there are 34 features grouped into 5 categories, as follows:
Rating of Property:
Structural Soundness
Resistance to Elements
Resistance to Use
Livability and Functional Plan
Mechanical and ConvenienceEquipment
Natural Light and Ventilation
Architectural Attractiveness
Adjustment for Nonconformity
Rating of Location:
Relative Economic Stability
Protection from Adverse Influences
Freedom from Special Hazards
Adequacy of Civic, Social, and CommercialCenters
Adequacy of Transportation
Sufficiencyof Utilities and Conveniences
Level of Taxes and Special Assessments
Appeal
Rating of Earning Expectancy:
Rentability of Units
OccupancyPercentage in Competitive Buildings
Likelihood of Serious CompetitiveConstruction
Reliability of Rental Market Data
Reliability of Expense Prediction
Rating of Property
Rating of Location
Expense Ratio
Rating of Borrower:
Social and EconomicCharacteristics
Motivation in Relation to Transaction
Employability and Earning Stability
Relation of Obligations to Transaction
Relation of Income to Transaction
Rating of Mortgage Pattern:
Ratio of Loan to Value
Ratio of Debt Service to Net Income
Ratio of Life of Mortgageto EconomicLife of Building
Rating of Earning Expectancy
Rating of Borrower
UNDERWRITING
MANUAL
621-625
621. Certain individual elements of risk are incapable of
intelligent rating. For example, if an attempt is made to rate a property accordingto the number of baths, no satisfactory clue to rating is
possible unless the number of baths is related to the requirements
of the local market and the size of the house. However,when rating
a feature such as Livability and Functional Plan, it is possible to
form a very definite conclusion. Such a relationship is ratable.
The system does not rate the income of the borrower. Instead, it
rates the ability of the borrower to pay the debt service. That is,
judgment is applied to the relationship existing between the borrower's income and the debt service of the contemplated mortgage.
The selected features or relationships are sufficientlydifferent from
each other so that an intelligent independent judgment in connection with any one of them can be formed.
622. In the processing of an application for insurance,
each feature is given a rating. Each risk feature is either an individual risk factor or comprisedof a number of correlatedfactors which
can be analyzed separately but treated as a unit. For example, the
feature, Sufficiencyof Utilities and Conveniences,requires consideration of the extent and adequacyof street improvements,public utilities,
and municipal services. The resulting risk contributed by the presence, absence, cost, or quality of any of these is reflected in the
rating of the entire feature.
623. In each of the categories of risk, the individual
feature ratings when combinedcomprise the rating of the category.
The Rating of Property is assigned by Architectural Inspectors and
Valuators. The Rating of Location is assigned by Valuators. The
Rating of Earning Expectancy is also assigned by Valuators. The
Rating of Borrower is assigned by Mortgage Risk Examiners. The
Rating of Mortgage Pattern is assigned by Chief Underwriters. All
ratings are reviewedand finally establishedby Section Chiefs or Chief
Underwriters in accordance with jurisdictions and responsibilities
outlined elsewherein this Manual.
624. In the system used for amenity income dwellings,
the ratings ascribed to the first three categories are treated as three
features in the Mortgage Pattern category and when combinedwith
three other features in the Mortgage Pattern category result in the
final risk rating index of the mortgage. The final result is referred to
as the Total Rating of Mortgage Pattern.
625. In the system used for rental incomedwellings,the
ratings ascribedto the first two categoriesare treated as features in the
Earning Expectancy category. The ratings ascribed to the Earning
Expectancy category and to the Borrower category are then treated
as two features in the Mortgage Pattern category, and, when com-
•
•
METHODS OF MORTGAGE RISK RATING
625-627
bined with three other features in the Mortgage Pattern category,
result in the final risk rating index of the mortgage. The final result
is referred to as the Total Rating of Mortgage Pattern.
626. The forms used by the Underwriting Staff contain
the rating grids, one for each of the categories of risk. Each grid
lists the several features in a column at the left hand side. Opposite,
on the right hand side, are sevencolumnsheaded, respectively,Reject,
1, 13, 3, 4, 5, and Rating. The accompanyingillustration of a grid
indicates the typical arrangement.
Rating of Borrower
FEATURE
"'
""B"'
~
~
.s
~
o:l
.0
-<
REJECT
Social and Economic
Characteristics
Motivation in Relation
to Transaction
Employability and Earning Stability
Relation of Obligations to
Transaction
Relation of Income to
Transaction
1
2
4
3
5
3
6
9
12
15
5
-10-
-15-
2o--
25
4
-8-
-12- -16-
20
6--
9--
-12-
15
-10-
-15-
2o--
25
3
5
I RATING
TOTAL RATING OF BORROWER
(
627. In rating the individual risk features, the risk
rating system requires differentiation between six degrees of excellence or poorness of conditions. First, differentiation must be made
between a condition that results in risk so great as to warrant rejection of the insurance application. Abovethis, differentiationmust be
made between conditions ranging from "poor but acceptable"on up
the scale of excellencethrough "fair" and "good" to "excellent."
These designations are presented here simply to indicate that the
system recognizes that risk measurementsare relative. The terms
themselves are not used on the forms because they would convey
implicationsbeyond the simple idea of rating as suggestedby the use
of the figures 1, ~, 3, 4, and 5. Each feature is rated by placing an
X mark opposite it in the grid. Every feature must be rated but
not more than one such mark is made for any one feature. A feature
rating in the Reject column indicates that conditions relating to
it are such that insurance of the mortgage should be refused. A 1
column rating would indicate a very poor condition just above the
reject margin. A 5 columnrating would indicate that excellentcon-
l
UNDERWRITING
MANUAL
627-631
ditions pertain to the feature. Intermediate ratings would cover the
range in between.
628. A small numeral or "weight" appears in each rating
column after each feature. When all X marks have been entered on
the grid, the indicated weights are copied in the right hand column,
headed Rating. The sum o:f the weights carried over and placed
in the last columnis entered at the lower right hand corner of the grid
and becomesthe total rating ascribed to the entire category. The only
exception is :foundin the Property grid. In it one feature weight is
deducted instead o:f added in securing the final Rating of Property.
629. The final rating for the mortgage is obtained by
recording ratings upon a grid known as Rating o:f Mortgage Pattern .
On this grid there are several features involving certain relationships
in the mortgage transaction, such as the amount o:f the loan and the
mortgage term in years, and matters pertaining to the property, such
as its estimated value and the estimated remaining economic life of
the building. Also listed as :features on this grid are the ratings of
the other risk categories. Ratings on this grid are made :for these last
named features according to the amount of the category ratings
which have been previously determined. The sum of the ratings
made on the Rating of Mortgage Pattern grid is the final index of
the relative risk involved in the mortgage.
630. If the sum of the individual feature ratings in any
category is less than 50 points, this indicates a degree of risk too great
to permit insurance of the mortgage. A large number of low feature
ratings will result in rejection of the application for insurance be~
cause the resulting category rating will fall below the 50 point
margin of acceptability. The range from 50 points to 100 points is
intended to represent different degrees of risk above the lower limit
of acceptability.
631. The risk rating system is so devised that after the
quality of the real estate security and the characteristics of the borrower have been determined and found to be such that no undue
mortgage risk is created on their account, then by means of the
system it can be determined what is the maximum loan principal and
maximum loan term in years which would represent the margin
beyond which economicsoundness and, therefore, insurability would
cease to exist. Thus, after the ratings o:f Property, Location, and
Borrower have been made in a case involving an amenity income
dwelling, the Chief Underwriter, in rating the Mortgage Pattern,
can determine whether or not the loan described in the application
is insurable, and, if not insurable because the loan is too large 01•
the term too long, or both, he can determine how large a loan would
be insurable and for what maximum term the loan could be made.
•
•
i
~j
METHODS
OF MORTGAGE RISK
RATING
631-635
Or in another case, requirements might be made for the purpose of
improving the real estate security, with the result that higher category ratings would render unnecessaryrejection or a counter-proposal
in a reduced amount or term.
632. Under the risk rating system the determination of
economic soundness and eligibility of mortgages proceeds in four
steps, as follows:
a. Determination as to whether mortgages submitted for insurance are eligible or ineligible for further consideration, as
indicated by the application of minimum eligibility
requirements described in Section 5.
b, Determination as to whether mortgages accepted for further
consideration are insurable or noninsurable, by rating individual risk features and ascertaining if any individual
feature receives a "Reject" rating.
o. Determination as to whether mortgages receiving no individual feature reject ratings are insurable or noninsurable,
by rating risk categories and ascertaining if any category
receives a rating of less than 50 points.
d, Final determination of the degree of economicsoundnessof
mortgages receiving no individual feature reject ratings
and no category ratings under · 50 points, by means of a
Mortgage Pattern rating based on all feature and category
ratings.
633. It may be pointed out that the relative importance
of the several categories of risk differs from case to case. For example, in a case of an amenity income dwelling in which either the
Property, the Location, or the Borrower Category receivesa very low
rating and the other two categories receive relatively high ratings,
the relative importance of the one low rated category in the over-all
degree of risk is substantially greater than in a case in which all three
categories are rated alike. For this reason the final category, namely,
the Mortgage Pattern, includes a device by means of which to take
account of this relationship. The category having the lowest rating
is more heavily weighted than the other two on the grid of the
Mortgage Pattern.
634. The Mortgage Pattern is so arranged that it is
possible to determine counter-proposals on a uniformly fair basis.
Thus, in a case in which the loan is too hazardous to be acceptable
for insurance because the amount of the loan is too great, analysis
of the Mortgage Pattern makes it possible to determine how much of
a reduction in the amount of the loan is necessaryto make it eligible.
635. Detailed instructions in connection with the rating
of the features and categoriesare presented in Part II of this Manual.
\
UNDERWRITING MANUAL
636--639
CONTROL OF RISK MEASUREMENT
636. In the use of the risk rating system, Underwriting
Staffs are instructed to consider the features as a check list. As sucli,
it will tend to prevent them from omitting considerationof any matters of vital importance in the determination of risk. Furthermore,
they are expected to rely heavily upon their personal judgment in
establishing the ratings. It is specificallysuggested that they form
an over-all opinion with respect to the proper rating of an entire category· and checkthe rating by a detailed analysis of the features. This
will serve to correct any tendency to treat the features and the
system as a fetish, and will tend to orient and control judgment in
connection with ratings. The minutiae in the system cannot be significant in the absence of the application of broad judgments. On
the other hand, broad general judgments are dangerous in that they
may fail to give sufficientconsideration to important details. Both
approaches are necessaryto a correct rating.
637. The program of the Underwriting Division, Washington, D. C., includes the preparation and distribution of "instruction blocks" containing illustrations of correctly rated cases for the
guidance of the Underwriting Staffs in the Insuring Offices. These
illustrations include descriptions of actual cases and outline the
specificconsiderations which resulted in the risk ratings ascribed. It
is expected that members of the Underwriting Staffs will consult the
illustrations and make comparisons between them and current cases
to seek analogiesand related situations. Such practice servesto bring
a high degree of consistency into the ratings ascribed throughout the
entire country and leads to a more correct segregation of mortgages
according to risk characteristics in the mutual mortgage insurance
groups.
638. Risk rating illustrations are not regulatory. They
represent aids to judgment only. Underwriting Staff members are
instructed to follow the illustrations insofar as feasible, but they are
not accountable for discrepancies between the illustrations and the
ratings which they ascribe in particular cases. Where the discrepancies are unwarrantedly great, Underwriting Staff members may be
held accountable on the basis of incompetence or lack of integrity, but
in such instances the variations between illustrations and actual cases
may not be presented as the sole evidence.
639. Risk. measurementsare also controlled through the
provisions for review, described in Section 2, Underwriting Procedures. Every effort shall be made by Section Chiefs and Chief
Underwriters to bring consistency into the ratings ascribed to
mortgages.
•
•
r
PART II
SECTION 7
RATING OF MORTGAGE PATTERN
CONTENTS
General Rating Instructions
Ratio of Loan to Value
Ratio of Total Payment to Rental Value
Ratio of Life of Mortgage to Economic Life of Building
Category Ratings
Paragraphs
701-705
706-708
709-715
716-718
719-721
Rental Income Dwellings-------------------------------------------- 722-730
Ratio of Loan to Value________________________________________
723
Ratio of Debt Service to Net Income
724-7Zi
Ratio of Life of Mortgage to Economic Life of Building__________
728
Rating of Earning Expectancy__________________________________
729
Rating of Borrower____________________________________________
730
Rejections and Counter-Proposals
731-735
EO'ectiveFebruary, 1938
Federal Housing Administration
PART II
SECTION 7
RATING OF MORTGAGE PATTERN
GENERAL RATING INSTRUCTIONS
Rating of Mortgage Pattern
Ratio of Loan to Value
--%
2
1
REJECT
FEATURE
Lowest Category Rating
(
Intermediate
Rating (
)
Category
)
__
__
5
-6--
9--
-12-
-16-
20
2--
-4-
6--
8--
10
1
2--
~
4--&
-7-
~
rr- ~
27
6--
-10-
1-4-
18
22
4
7
10
13
16
Ratio of Total Payment
to Rental Value
--%
Ratio of Life of Mortgage to Economic Life
of Building
--%
4
3
RATING
pts,
pts.
Highest Category Rating
(
) --·_pts.
---
TOTAL RATING OP MORTGAGE PATTERN
701. The term, Mortgage Pattern, refers to the relationships which exist between the mortgage security, the borrower, and
the provisions and conditions in the mortgage transaction. The ex-:
pression, Rating of Mortgage Pattern, refers to the degree to which
these relationships are satisfactory, acceptable, proper, and advantageous from the point of view of investment in the mortgage. There-.
fore, the Rating of Mortgage Pattern is a measurement of the eco-.
nomic soundness of the mortgage. For practical purposes a mortgage
is considered to be economically sound when the Mortgage Pattern
is rated 50 points or more. 1£ the rating is less than 50 points, the
mortgage is not considered to be economically sound, and is ineligible
for insurance. Ineligible mortgages must be rejected unless modifications can be introduced which raise the rating to at least the 50
point level.
UNDERWRITING
MANUAL
702-703
702. Rating of this category is accomplishedby considering the extent to which risk is created by the characteristics of the
security, the borrower, and the provisions and terms contained in the .
mortgage instrument. In determining the eligibility of mortgages
secured by amenity income dwellings, the Rating of Mortgage Pattern combinesthe Rating of Property, the Rating of Location, the
Rating of Borrower, and the major factors in the mortgage transaction. The six features which are embracedin the Mortgage Pattern,
applied to amenity income dwellings, are listed below with the
weights which have been ascribed to them:
a.. Ratio of Loan to Value-----------------------------'-'----------20
b. Ratio of Total Payment to Rental Value________________________
10
c. Ratio of Life of Mortgage to Economic Life of Building__________ 5
d. Lowest Category Rating--------------------------~~----------27
e. Intermediate Category Rating__________________________________
22
f. Highest Category Rating_______________________________________ 16
I
ln determining the eligibility of mortgages secured by rental income
dwellings, the Rating of Mortgage Pattern combinesthe Rating of
Earning Expectancy,the Rating of Borrower, and the major factors
in the mortgage transaction to arrive at a final conclusion. The five
features which are embraced in the Mortgage Pattern applied to
rental income dwellings, are listed below with the weights which
have been assigned to them:
a. Ratio of Loan to Value---------------------------------------20
b. Ratio of Debt Service to Net Income____________________________ 20
c. Ratio of Life of Mortgage to Economic Life of Building________ 5
d. Rating of Earning ExpectancY-----~----------~----------------40
e. Rating of Borrower-------------------------------------------15
The ratios which comprise the first three features are expressed,
in all cases,in whole numbers, except as stated below. All decimals
and fractions are dropped. Thus, if the ratio of total payment
to rental value is 78.8%,the ratio is recorded as 78%; if 102.3%,it
is recorded as 102%. However, if the ratio of loan to value is any
amount in excess of the legal limit, the exact percentage to one
decimal place must be recorded. This, of course, will occur only
where no counterproposalis feasible.
703. Rating of Mortgage Pattern is accomplished by
rating each feature separately. At the left side of the Mortgage
Pattern grid is a column for the various ratios and ratings used in
rating the features in this category. The Chief Underwriter transcribes or computes these figures and places them in this column.
On the Mortgage Pattern grid for amenity income dwellings, three
blank spaces are provided opposite the last three features in which
to place the abbreviations, "Property", "Location", and "Borrower",
•
RATING
OF MORTGAGE PATTERN
703-705
in the order applicable in the particular case. On the grid used
for rental income dwellings, no such provision is necessary. The
features on either grid have been weighted upon a scale of 100
points in order to retain the relative importance of each when alJ
are combined to obtain the Total Rating of Mortgage Pattern.
Each feature is rated on a scale of from 1 to 5, 5 being the highest
rating. The rating grid, which appears on Report of Chief Underwriter, enables this rating to be recorded easily and quickly. For
example, assume that the Chief Underwriter is ready to rate the
various features. The first is Ratio of Loan to Value. If the ratio
is lessthan 60%, he puts an X mark in the 5 column. He immediately
carries over to the extreme right hand column of the grid the figure
appearing in the marked square, in this case 110. If the mark is in
the 1 column,the number in that square would be carried over, 6 in
this case. If the ratio is more than the legal limit, or more than is
consideredeconomicallysound, the Chief Underwriter determinesthe
amount he is willing to recommendfor insurance and then rates the
feature, Ratio of Loan to Value, in the appropriate column. One
reject rating anywhere in any risk category will necessitatea recommendation for the rejection of the application for insurance. In the
event an X mark appears in the Reject column, the word "Reject"
must be written in the Rating column opposite the feature so rated
and again on the Total Rating line. If no such rating appears after
any of the features, the final rating of the Mortgage Pattern. is
obtained by adding the figures in the right hand column. Paragraphs 706 to 721 describe the rating of the six features in the
Mortgage Pattern grid applied to mortgages on amenity income
dwellings. Paragraphs 722 to 730 describe the rating of the five
features in the Mortgage Pattern grid applied to mortgages on rental
incomedwellings.
704. If repairs, alterations, or additions are contemplated by the mortgagor, or if the Underwriting Staff determines
that such work is necessary to make the loan acceptable for insurance, the Chief Underwriter shall base his findings upon the assumption that the work has been satisfactorily completed. Architectural
Inspectors and Valuators, in all cases, give due credit in risk rating
and valuation for such necessary repairs or contemplated improvements. The conditions which must be complied with if insurance
is to be granted are stated on the Report of Chief Underwriter, and,
in turn, on the commitmentto insure.
705. Where lack of economicsoundness is evident but
does not appear to be properly reflectedby the normal operation of
the Mortgage Pattern, the Chief Underwriter is authorized to recommend a reduction in the principal amount or term of a proposed
UNDERWRITING
MANUAL
705-708
mortgage. In such instances he shall use lower loan-value ratios or
lower ratios of life of mortgage to economiclife of building. He
need not modify category ratings in these cases.
RATIO OF LOAN TO VALUE
706. The ratio of the mortgage loan to the value of the
property has been used in traditional mortgage lending practice as
the most important and, in some instances, as the sole test for
determining investment quality and risk. Its significance is not
underestimated in the risk rating system of the Federal Housing
Administration. It may be noted that a relatively low rating in this
feature requires considerablecompensationin other Mortgage Pattern
features if a high final rating of the category is to be obtained. It
is a basic assumption of the National Housing Act that high percentage, long term loans are adequately secured when they are made
in good, stable neighborhoods on properties owned by borrowers who
themselves are good risks.
707. The element of safety is increased as the ratio of
loan to value is lowered. This enhances the chance of full recovery
of the money invested in the mortgage if the property is sold in a
forced market. Default is usually preceded by a period of financial
distress of the owner. During this period the property may be alIowed to deteriorate through Jack of proper maintenance. It is, therefore, self evident that the wider the margin between the amount of
the loan and the value, the less is the chance for loss. A further
advantage of the lower ratio is that should default be threatened, an
owner will be better able to dispose of the property before default,
and thus relieve the lending institution or the Federal Housing
Administration from acquiring the property.
708. This feature is rated according to the ratio of the
amount of the loan to the Federal Housing Administration valuation of the property. In casesinvolving leaseholdestates, the ratio
is calculated by dividing the sum of the amount of the loan and the
value of the leased fee by the valuation of the property unencumbered
by lease. The following instructions are used in rating this feature :
. .
If th e ratio 1sLess than
Place X
in column
----------------------------
5
60o/o to
64%---------------------------------------65% to 69%----------------------------------------
60o/o
4
3
70% to 74%------------~--------------------------75% to legal limit__________________________________
2
1
Over legal limiL------------------------------------
Reject
Inasmuch as the Mortgage Risk Section rates the borrower either
on the basis of the application or on the basis of the highest amount
•
•
RATING
OF MORTGAGE PATTERN
708-711
apparently allowed by the valuation and other factors, whichever is
the lower, the feature Ratio of Loan to Value shall be calculated on
the same basis. For this reason reject ratings of this feature will be
recorded only when a ratio in excessof the legal limit is accompanied
by a reject rating of a category other than Rating of Borrower.
RATIO OF TOTAL PAYMENT TO RENTAL VALUE
709. As a feature in the Mortgage Pattern, the Ratio of
Total Payment to Rental Value is only partially analogous to the
foregoing feature, Ratio of Loan to Value. The Ratio of Total Payment to Rental Value introduces another aspect, namely, the ability
of the income of the property itself to pay the total monthly payments as they becomedue. The ability of the monthly rental to pay
the total monthly payment will not only encourage the owner to
fulfill his obligation, but will better enable him to do so in the.
event his financial condition becomes distressed. A favorable ratio
of the total payment to the rental value will also assist the lending
institution or the Federal Housing Administration in recovering:
the investment in the event of acquisition of the property.
710. As the monthly gross rental increasingly exceeds:
the total monthly payment, the degree of security increases. B.)r
the same token, as the monthly gross rental becomes insufficient:
to meet the total monthly payment, the risk becomescorrespondingly
greater. For the purpose of this analysis, the total payment is always
construed to be the total monthly payment which would apply to the
maximum term of loan acceptable to the Federal Housing Administration as economically sound, rather than the payment applicable
to a shorter term of loan for which application may have been made,
711. Total Payment. The total monthly payment consists of all the estimated charges which the mortgagor would pay
each month of the first year, calculated on the maximum term of
loan which the Federal Housing Administration can accept as
economicallysound. Regardlessof the actual term of the loan under
consideration, the Chief Underwriter determines the total monthly
payment, for the purpose of rating this feature, by assuming the'
loan to run for a term equal to the maximum term considered economically sound, but not to exceed the maximum term legally insurable. The total monthly payment is composed of the following:
a. Monthly payment of principal and interest
b, Taxes and special assessments
c. Ground rentals (if leasehold)
d. Fire and other hazard insurance.
e. Mortgage insurance premium
UNDERWRITING
MANUAL
712-716
712. Rental Value. The rental value figure, used in connection with the computation of Ratio of Total Payment to Rental
Value is the monthly rental value reported by the Valuator on Report of Valuator. The rental value of a property will be computed
on the basis of the typical rental being received for similar properties
in accordancewith the instructions contained in Section 13, Methods
of Dwelling Valuation.
·
713. The Chief Underwriter calculates the ratio of the
total monthly payment to the monthly rental value by dividing the,
former by the latter to secure a percentage. Having established
this percentage, the feature Ratio of Total Payment to Rental
Value is rated in the Mortgage Pattern according to the following
table:
i: :::i6u:n
If the ratio is1
Less than 60o/o-------------------~-----------------60o/o to 75o/o---------------------------------------76o/o to 92o/o---------------------------------------93o/o to llOo/o--------------------------------------lllo/o to 130o/o--------------------------------------
Over 130o/o
5
4
3
I-
•
2
1
~~-------~----------- :Reject
714. If the ratio of total payment to rental value is more
than 130%, the Chief Underwriter may recommend a commitment
for a smaller loan amount. This has the effect of cutting down the
total payment. However, the rejection point, over 130%, is liberal
and it is seldom that a slight lowering of the loan amount will appreciably lower the high ratio. The mere fact that the total monthly
payment is 130%, or slightly less, of the monthly rental value and
results in a rating in the 1 column is not sufficientevidence that the.
loan is sound in that respect. If there are other low feature ratings,
lack of economic soundness may be indicated if the ratio of total
payment to rental value is rated in the 1 column. If the latter rating
is caused by unusual circumstances, and is compensated by strong
ratings of other features, the Chief Underwriter must use his judgment in determining whether or not economic soundness is present
and what counter-proposal,if any, shall be made.
715. The point of rejection for this feature has been
placed at a fairly low level, namely, where the ratio of total pay~
ment to rental value is more than 130%. It is so placed because
properties of higher value tend to have relatively low rental values.
RATIO OF LIFE OF MORTGAGETO ECONOMICLIFE OF BUILDING
716. The relationship expressedby the ratio of the "life"
(that is, the term, in years) of the mortgage to the estimated remaining economiclife of the building results in a high or low rating of
•
RATING
OF MORTGAGE PATTERN
716-719
this feature according to the extent to which the remaining economic
life 0£ the building exceeds the life 0£ the mortgage. In rating this
feature, the Chier Underwriter uses the estimate 0£ remaining economic life recorded on Report 0£ Valuator.
717. The Ratio 0£ Lire of Mortgage to Economic Lire of
Building is significant because it deals with the extent of the period
within which there is time to recover the mortgage investment. It
recognizes a strong probability, in practically all cases, that the value
and usefulness of properties will decline. The mortgage pattern
should take account of such declines. It might appear axiomatic
that loans for shorter terms are more attractive as investments and
subject to less risk. If this were universally true it would be feasible
to rate the life of a mortgage rather than the ratio of its life to the
remaining economiclife of the building. It is not feasible to rate
a mortgage directly in accordance with its life, because the factors
which together increase or decrease risk do not affect risk in the same
direction simultaneously. For example, shortening the life of a
loan reduces risk by reducing the hazards which result from rapid
declines in value. At the same time, shortening the life of a loan
increases the total monthly payment, and thereby increases risk.
However, the ratio of the life of the mortgage to the remaining economic life of the building is ratable, and changes in the ratio always
affect risk in the same direction. Thus, while the ratio is admittedly
subject to some criticism because the estimation of the economiclife.
of a building is a matter of considerable conjecture, the use 0£ the
ratio as a factor in the Mortgage Pattern is justified.
718. The ratings shall be made in accordance with the
following instructions:
i!'~~~~;;;n
If the ratio is-
Less than 50'7o-------------------------------------50o/o to 56o/o________________________________________
57o/o to 65'7o--------------------------~------------66o/o to 79o/o________________________________________
80o/o to l()()o/o
~-----------------------Over lOOo/o
5
4
3
2
1
Jteject
CATEGORY RATINGS
719. The final ratings ascribed to the Property, the Location, and the Borrower categories are used to establish the ratings
of the last three of the six features in the Mortgage Pattern. The
relative importance of these three categories differs from case to
case. H, in a given case, the Property and the Borrower have received fairly high ratings and the Location has received a :fairly low
rating, the relative importance of the Location category rating is
UNDERWRITING
MANUAL
719-721
great. If, in another case, the Property receives a low rating and
the other two categoriesreceivehigh ratings, the relative importance
of the Property category is greatly increased. If, in still another
case, the three categories receive ratings which are about the Bame,
there is no great differencein their relative importance. In the last
case,this is true whether the ratings are high or low.
720. In order to reflect the changes in relative importance of the Property, Location, and Borrower categories, the last
three features in the Mortgage Pattern are weighted differently.
The first of these three features, Lowest Category Rating, is the
most heavily weighted and the rating ascribed to it is based on the
rating of the category which has the lowest rating. The second of
the three features, Intermediate Category Rating, is less heavily
weighted and the rating ascribed to it is based on the rating of the
category which has the next to lowest rating. The third of the three
features, Highest Category Rating, is given the smallest weight
and the rating ascribed to it is based on the rating of the category
which has received the highest rating. 1£ the three ratings are exactly alike it does not matter how they are arranged for the purpose of rating the last three :featuresof the Mortgage Pattern. The.
same is true if two are alike, provided the third one is used for the
rating of the first or third feature, depending upon whether it was
rated lower or higher than the other two.
721. In rating the three features, the Chief Underwriter
enters the names of the categoriesand the ratings ascribedto them on
the grid in the spaces provided. The following table is used m
rating these :features:
If category rating is-
•
Place X
in column
80to 100------------------------------------------70 to 79
·________
5
60 to 69.-------------------------------------------55 to 59-------------------------------------------50 to 54--------------------------------------------
3
2
4
•
1
lrnder 50-------------------------------------------- :Reject
J
RATING
OF MORTGAGE PATTERN
722-725
RENTAL INCOME DWELLINGS
Rating of Mortgage Pattern (Rental Income Dwelling)
FEATURE
Ratio of Loan to Value
Ratio of Debt Service
to Net Income
Ratio of Life of Mortgage to Economic
Life of Building
6
--%
4
9--
--8-
3
16
20
12
-,6-
20
1
2
a
4--
;;
a
16
~
3-2-
40
3
6
9
12
v;
--%
pts.
__
pts.
5
4
-12-
--%
Rating of Earning Ex__
pectancy
Rating of Borrower
2
1
REJECT
RATING
TOTAL RATING OF MORTGAGE PATTERN
722. When the property which securesthe mortgage is a
rental income dwelling, the grid illustrated above is used to determine the Rating of Mortgage Pattern. The following rules apply
· to the rating of the five features in the grid.
723. Ratio of Loan to Value. This feature is rated in
accordancewith the instructions contained in paragraphs 706 to 708.
724. Ratio of Debt Service to Net Income. This feature is a direct measure of mortgage risk in rental income dwellings.
It differs considerably from the second feature in the Mortgage
Pattern applied to amenity income dwellings and is relatively much
more important as a determinant of the final index of risk. In
rental income dwellings, the motives of borrowers are controlled by
the returns actually anticipated from equity investment. Furthermore, the marketability of such properties is determined largely by
such a consideration.
725. For the purpose of establishing the rating, the
monthly debt serviceshall be calculated on the basis of the maximum
term of loan which the Federal Housing Administration can accept
as economically sound. The calculation shall include all the estimated charges which the mortgagor would pay each month of the
first year on the insured mortgage, but not including taxes and special
assessments,ground rentals (if leasehold), and fire and other hazard
insurance. The monthly debt service is composedof the following:
a. Monthly payment on principal and interest
b, Mortgage insurance premium
UNDERWRITING
MANUAL
72~730
726. The average monthly net income used to determine
the ratio is the Estimated Net Earnings upon reaching maximum
occupancy reported by the Valuator on FHA Form 2015a. As indicated in Section 15, this estimate 0£ net earnings is a figure determined by deducting from the estimated effectivegross revenue (after
allowance for vacancies and contingencies), all operating expenses,
management expenses, taxes and special assessments, ground rentals (if leasehold), and fire and hazard insurance. Therefore, net
income is an estimate of the actual returns available for mortgage
debt service.
727. In rating this feature, the Chief Underwriter shall
calculate the ratio of the monthly debt service to the average monthly
net incomeby dividing the former by the latter to secure a percentage.
Having established this percentage, Ratio of Debt Service to Net Incomewill be rated in the Mortgage Pattern according to the following
table:
•
Place X
in column
If the ratio is-
Less than 5Qo/o______________________________________
50o/o to 59o/o________________________________________
4
60o/o to 69o/o---------------------------------------70o/o to 77o/o---------------------------------------78o/o to 83o/o-----------------------------------~----
3
2
1
Over 83o/o
5
Reject
728. Ratio of Life of Mortgage to Economic Life of
Building. This feature is rated in accordance with the instructions
contained in paragraphs 716 to 718.
729. Rating of Earning Expectancy. This, the most
heavily weighted feature, is rated after the category, Rating of Earning Expectancy, has been rated. The method used to rate this category
is described in Section 12. The following table is used in rating this
feature:
If the category rating is-
80 to!()()
70 to 79
_
_
60
to 69--------------------------------------------55 to
59
_
50
to 54-------------------------------------------lJnder 50--------------------------------------------
•
Place X
in column
5
4
3
2
1
Reject
730. Rating of Borrower. This feature is rated after
the category, Rating of Borrower, has been rated. The method used
to rate this category is described in Sections 10 and 11. The table
given in Paragraph 729 is then used in the rating of this feature in the
Mortgage Pattern.
~
I
.
~~~J
I
RATING
OF. MORTGAGE :PATTERN
731-733
REJECTIONS AND COUNTER-PROPOSALS
731. The Rating of Mortgage Pattern is made from results already determined, and is therefore a more or less mechanical
processor recapitulation of the risks. If reject ratings of any one of
the features have occurred in one of the risk categories,that category
rating will have been recorded on one of the other report forms as
"Reject"in accordancewith instructionsin this Manual. In such cases
the applicable Mortgage Pattern on Report of Chief Underwriter
shall be filled out according to the following example:
RATING OF MORTGAGE PATTERN
FE.4.TVH
RATING OF MORTGAGE PATTERN
flATURI
REJICT
(RentaJ.fneomeDwelllllg)
1
I
3
11-------1---1·,-ru
Ra.tio oj Loan to Value
Ratingof EarningE:rpectaney
i'6 2i""" ii
8
ll-------'--=---"-'"'-"1''- · 1-Rating of Borrower------ pts.
TOTAL
4
S
R.\TIHG
mm'-
----%
r ar
W1-
u
u'-
RA.TING or MonTa.tae PATftRN
R.t.TINO OF PROPERTY
pts.
RATING OF Loc4TION
•••••••••
pta.
732. If a categoryrating is less than 50 points, the applicable Mortgage Pattern shall be filled out as follows:
RATING OF MORTGAGE PATTERN
RATING OF MORTGAGE PATTERN (Ren.... la .. me Dwelllq)
FEATUJlB
Ulf.CT
Ratio or Leen to Value ---· %
Ratio of Debt Service to Net
Income
••••••%
I
t
3
4
5
JU.TING
r-rr;-r--
Rating of Earning Expectancy
•••.•• pts.
Ratinr of Borrower •••.•• pti.
T
RATING OF PROPERTY
pte.
RATllfO
or LOCATION
---
pit.
It is intended that the Mortgage Pattern grid shall show a rating
only for each category in which no reject feature ratings occur,
and that the need for rejection in any case shall be made apparent
by .entry of the word "Reject" after any category rating which is
less than 50 points. A total is never to be recorded on the Total
Rating line when reject feature ratings or category ratings less
than 50 points occur.
733. In instances in which the Rating of Mortgage Pattern, when based on the loan described in the application, is less
than. 50 points, Chief Underwriters are required to determine
whether or not a modified loan having (a) a smaller principal
amount and a shorter life, or (b) simply a smaller principal
amount, will qualify as economically sound. If a counterproposal appears feasible, the Chief Underwriter recommendsit and
modifies the Rating of Mortgage Pattern to correspond with the
UNDERWRITING
MANUAL
733-734
counter-proposal. The alternative proposal should be made for the
largest principal amount and longest life of mortgage which trial
ratings of the Mortgage Pattern show as eligible. Where the Rating of Borrower is affected, the Report of Mortgage Risk Examiner is amended. In many cases the counter-proposal requires the
re-rating of all three of the first three features in the Mortgage Pattern. In other instances only the first two will be affected. In
cases where no feasible counter-proposal will result in a Rating of
Mortgage Pattern of 50 points or more, the word "Reject" is entered
on the line provided for the Total Rating of Mortgage Pattern.
734. Following are two examples of correctly filled out
Mortgage Pattern grids. It will be noted that whole numbers only
are recorded on the grid, and all fractions or decimals are dropped.
This practice is to be followed in all instances except that if the
ratio of loan to value is in excessof the legal limit, it shall be computed to one decimal place and so recorded. In the first examplethe.
result of examination revealed the following conclusions:
Principal Amount of Loan______________________________
FHA Valuation________________________________________
Total Monthly Payment_________________________________
Rental Value of Property_______________________________
Life of Mortgage
Remaining Economic Life of Building
Rating of Property_____________________________________
Rating of Location____________________________________
Rating of Borrower____________________________________
•
$3, 800
$5, 000
$36. 08
$40. 00
20years
40 years
73.
85.
55.
RATING OF MORTGAGE PATTERN
FEATURE
1~Ra!".'!tio~o~ILoa~·~to..!:Val~u'!O..e
REJECT
--------=--=--~=:"-§'--".%L1··--
ll-"'Ra,,,,tio,_,,o'-'I T'°"'ot,,,,al_,_,Pa""ym""e"'nt-"'to:.:.!R'""en""tal,_,V""alu,,,,e
-"••=-_f=J_f?""'-_%1
Ra.tio of Life of Mortgage to Economic Life of Building
Low.st
Catego'y
Intennedlate
Rating
Categocy
Ra tin<
Hill'.hestCeteeorv Ratlno
3
3
~~~~
2!.~
~11•130~
4
6
~!.__
~~X
I
2
3
~n
..
~
---
::,.,1111
~
__
RATING
6_
ii!!__;,- ~;; ,,,.,"".'-l--4--ll
l""----;~.l' ii"-;~
;•• 12
;""'oo'
fiQ. % ~~
( .. l!l!!:!:l!!!~.I'.
) ..J?li.. pt..
"""-"-"-•
( .. P.fQ!)UJ;t
) 13.. pt..
) .. JHL ~i~
"""-"-"'--
( __ ;J;_tf'~~_t~on
I
.--.--.-,-,-.--.,----6-
__
-
°""- .,,,_ ~~ -·•
18
X
16
TOTAL RATING OF MORTGAGE PATTERN
62
,,,,___
4
7
10
13
16
In the secondexample the result of examination revealed the following conclusions:
Principal Amount of Loan______________________________
FHA Valuation________________________________________
Total Monthly Payment ( 15 years)-------------------Total Monthly Payment (20 years)---------------------Rental Value of Property_______________________________
Life of Mortgage
Remaining Econ~mic Life of Building
Rating of Property____________________________________
Rating of Location____________________________________
Rating of Borrower____________________________________
$2, 000
$4, 000
$21. 72
$19. 10
$37. 50
15 years
45 years
91.
65.
82.
•
RATING
OF MORTGAGE PATTERN
734-735
RATING OF MORTCl.l.GE PATTERN
FEATURE
-----~Q%
RatioorTotalPaymenttoRente.lValue
-----~%
LoweHt Category Rating
(lt0.0.~U.. o.n.
Intermedletc Category Rating (.~O.f.f.:0.!:~f.:
0 • .,1
I
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~~
60
~=-IG- ,--, ,- --.
)
·----~~% o.-.. LOO"6.ft. pts. u_:;=·-
)
JJ..a. p~.
Ratio of Life or Mortgage to Economic Li£e of Building
.--.--.-, -.-.-
~~~r-~~~ .~~~
'°~
r-:. .i~
,REJECT
RatloofJ.oaotoVa1ue
-·~
...
n
~" - ~..
~-
:.x
-
o;<>-56
u.:w
~100
:1~ -
(.~r.._?..P.:~~V
) _ ..~i.
pf.It.
20
_l_O__
5
_1_7__
-t~
~
iii=-l·----11
16
1 -~--~~-~~----~-~-1~=~-~;~-" - ~;"
lli~heat Category Rating
UTrNG
:.!
TOTAL RATING OF MORTGAGE PATTERN
90
735. If the ratio of loan to value exceeds the prescribed
legal maximum, and there are. no reject feature or category ratings,
the Chief Underwriter recommends a counter-proposal for the largest
principal amount which can be insured. In this connection, reference
is made to Section 2, Underwriting Procedures. This procedure will
preclude rejection of any case solely on account 0£ excessive ratio 0£
loan to value.
)
PART II
SECTION 8
RATING OF PROPERTY
CONTENTS
Paragraphs·
General Instructions-----------------------------------------------Structural Soundness
.
801-811
812-824
Resistance to Elements--------------------------------------------Resistanceto Use------------------------------------~-------------Livability and FunctionalPlan------------------------------------Mechanical and Convenience Equipment_
Natural Light and Ventilation-------------------------------------Architectural Attractiveness---------------------------------------Adjustmentfor NonconformitY--------------------------------------
825-829
830-832
833-841
842-850
851-853
854-859
860-874
Effective February, 1938
Federal Housing Administration
\
-
PART II
SECTION 8
RATING. OF PROPERTY
GENERAL RATING INSTRUCTIONS
Rating of Property
PHYSICAL SECURITY
(
FEATURES
5
t'
Structural Soundness
2
~ce
~ Resistance to Elements
A
1
Resistance to Use
~
~
Livability
Plan
and
4
Functional
I
2
§"
Mechanical and Convenience
Equipment
""
Natural Light and Ventilation
2
3
-10-
-,5-
1
REJECT
2
4
4-- 6--
4
5
w---- 25
8--
10
2--
3-- 4-- 5
-s-
~
1-6-
-6-
8--
.--
4-- 6--
8--
~
RATING
8--
1-6-
20
10
10
20
"Architectural Attractiveness
-
Adjustment for Nonconformity
Total Rating of Physical Security
I
112
19
16
13
lo
TOTAL RATING OF PROPERTY
801. Rating of Property is determined by rating eight
features of risk according to the principles outlined in this section
and in Section 6, Methods of Mortgage Risk Rating. The first
seven features are described as the Physical Security Features and
are so weighted that the Total Rating of Physical Security may be
as high as 100 points. The eighth feature, Adjustment for Nonconformity, is separately rated and the result deducted from, not added
to, the Total Rating of Physical Security to determine the Total
Rating of Property.
802. The Total Rating of Physical Security, which is
obtained by rating the first seven features, presumes that the subject property is free from any detrimental influenceresulting from
UNDERWRITING
MANUAL
802-804
nonconformity with typical properties in the immediate neighborhood. The Total Rating of Physical Security presumes a hypothetical condition. Because nonconformity definitely affects the marketability of properties, it is important to compare the subject property
with surrounding properties and make any necessary adjustment in
order to convert the Total Rating of Physical Security into the Rating of Property. Specific instructions for making this adjustment
are in paragraphs 860 to 875 of this section. The Total Rating of
Property represents a measurement of the mortgage risk introduced
by the characteristics of the physical property· and by its relation to
its actual environment. The Rating of Property does not include
consideration of those risk factors introduced by the characteristics
of the neighborhoodand location. These are included in the Rating
of Location, Section 9.
803. Rating o:f Physical Security shall be accomplished
by rating separately each of seven features. The seven features have
been weighted on a scale of 100 points in order to retain the relative
importance of each when all are combined to obtain the Total Rating
of Physical Security. Each feature is marked on a scale from 1 to
5, 5 being the highest rating. After analysis of the factors comprising a :feature, an X mark is placed in the column which is determined to reflectthe degree of risk involved. If the X mark is placed
in any column other than Reject, the figure appearing in the marked
square is carried over to the extreme right hand column of the grid.
If the X mark is placed in the Reject column, the word "Reject" is
carried over to the extreme right hand column of the grid. One
such rating in any feature will necessitate a recommendation :for
rejection of the application for insurance. 1Vhenthe word "Reject"
appears in the Rating column,it must also be written in that column
on the Total Rating line. If no such rating appears after any of
the features, the final rating of the category is obtained by adding
the figures in the Rating column. The system is so designedthat this
figure will be an indication of the rating on a numerical basis.
804. The seven features which are rated to determine
the Total Rating of Physical Security are listed below with the
weights which have been ascribed to them:
a. Structural Soundness-----------------------------------b. Resistance to Elements----------------------------------c. Resistance to Use--------------------------------------d. Livability and Functional Plan---------------------------e. Mechanical and Convenience Equipment-----------------t. Natural Light and Ventilation____________________________
g, Architectural Attractiveness-----------------------------
•
•
25
10
5
20
10
10
20
I
I
____J
BATING OF PROPERTY
804-807
)
An eighth feature appears on the grid, but it is not a Physical
Security Feature. It is designated "Adjustment for Nonconformity." Instructions for rating this eighth feature are given in
paragraphs 860to 875.
805. The sevenfeatures are analyzedfrom severalpoints
of view. The first three features, namely, Structural Soundness,
Resistance to Elements, and Resistance to Use are studied in terms
of durability. The next three features, namely, Livability and Functional Plan, Mechanical and ConvenienceEquipment, and Natural
Light and Ventilation, are studied in terms of function. The words
"Durability" and "Function" have been placed at the left edge of
the grid to remind the inspector to assume the proper points of
view. The last feature, Architectural Attractiveness, is studied in
terms of lasting appeal.
806. Invariably, the physical security features are rated
by assuming the conditions which will exist at the time the mortgage
is insured. In connection with existing construction the rating is
based on the property in its present condition unless the borrower
contemplates alterations, additions, and repairs, or unless the Federal Housing Administration requires certain alterations, additions,
and repairs. If alterations and repairs are contemplated or required,
then the rating is based on the conditions which will exist when the
mortgage is insured. No hypothetical conditions may be assumed
unless they are specifically defined in Report of Architectural Inspector, FHA Form No. 2014,or in Report of Valuator, FHA Form
No. 2015. In the case of new construction the submitted drawings
and specifications are analyzed in detail and the rating reflects the
relative degree of excellence or poorness which the property will
exhibit upon completion according to these drawings and specifications. In cases involving either existing or new construction the
rating is based on possibilities and probabilities of what may happen to the structures in the future. The past experienceand present
condition with respect to the first seven features in this category
are significant only to the degree to which they indicate the likelihood of future difficulty. Surface indications are invaluable clues to
hidden defects or deficiencies.
807. To obtain consistencyfrom case to case and to insure uniform analyses of physical security features, it is essential to
identify conditions which form the basis for ratings in the various
columnsof the several features. This is accomplishedby comparing
subject structures with structures of similar type and size in the
same general area. For this purpose, the words "type and size" refer to classification of dwellings, such as a single family, detached,
UNDERWRITING
MANUAL
807-808
five room, basementlessdwelling containing 1,000 square :feet o:f livable area. Price ranges or differencesin cost o:f structures of similar
type and size shall not be used as criteria in the selection of other
structures for comparison purposes. Such ranges or differences in
costs usually reflect differences in quality, condition, effects of age,
and degrees o:f obsolescence. These factors affect the Rating of
Physical Security and are considered and reflected in the individual
feature ratings. A 5 column, or highest rating, is warranted for
any physical security feature when conditions for the particular
feature are found to be comparable to the best conditions ordinarily
exhibited by structures of the same type and size. A 5 columnrating
in any one feature does not demand the acme of perfection but denotes relative excellenceof a reasonably high order considering the
limitations of the size of the structure and its type. It is imperative
to remember that even small structures may possesssufficientexcellence to warrant 5 column ratings :for any or all the physical security
features. For example,in rating Livability and Functional Plan this
will occur when there has been incorporated in the design a high
degree of livability considering the floor area available. Physical
security feature ratings will vary in the entire range between the
Reject column and the 5 column, by the degree of excellenceor poorness resulting from the actual building practices, :functional plan,
ning, and esthetic design.
..
808. In determining whether a rJiject rating is warranted, the inspector must take into account the provisions in established Property Standards as they affect the individual :features by
considering them to be the minimum requirements necessary to
avoid such reject ratings. Those properties that barely comply with
these requirements usually warrant a low rating, and the degree to
which they surpass them will be favorably reflected by higher
column ratings. In view o:f the fact that the provisions in Property Standards apply to structures of every type and size, it is recognized that for certain of the requirementssmall structures that barely
comply with the individual requirements may receive 4 or 5 column
feature ratings, while large and more pretentious structures that
just barely comply with the. same requirements would receive
low ratings. In cases where a waiver of any Property Standards requirement is recommended because of a technical violation
but the objectives of the particular requirement have been fully
accomplishedby means other than those specificallystated, the feature rating shall receive the same consideration as it would have
under ordinary circumstances. Instructions :for recording ratings in
such cases are contained in Section 2, Underwriting Procedures. For
•
•
~
I
44••••,,llt
RATING OF PROPERTY
80~10
casesinvolvingproposed constructionthe requirementsof both Property Standards and establishedMinimum ConstructionRequirements
shall apply.
809. Experience has indicated, and a national comparison has demonstrated, that conditions affecting the individual features that can be considered "average" or "typical" may warrant
ratings in either the 3 or the 4 column,dependingupon, (a) the effectiveness of local building code requirements and their enforcement,
( b} the caliber of local building customs or practices, and, ( c) the
demands of the market. A structure might possibly create an overall impression of being "average" or "typical", but it must not be
deliberately assumed, by reason of such an impression, that every
feature should be rated in the same column. Rather, the degree to
which conditions affect each particular feature must be recognized
and duly reflectedin the feature rating. Further, in rating the features, personal preferences and prejudices must be subordinated,
except insofar as they are commonly shared by informed persons.
It is not intended to nullify personal judgment, but to obtain·disinterested, uniform analyses of the mortgage security. The inclination
to alter design or to change drawings on the basis of personal tastes
should be avoided and not allowed to influencedecisions.
810. The physical conditions prevailing in the structure
directly affect the ratings of a number of the physical security features and the Total Rating of Physical Security. This is especially
true with regard to the three features relating to structural durability and to the features, Livability and Functional Plan and Mechanical and ConvenienceEquipment. Poor physical condition will tend
to result in low ratings of these five features. The ratings· bear a
direct relationship to the estimate of remaining physical life of the
building. Inspectors are required to give estimates of remaining
physical lives of buildings and it is important to relate these estimates to the ratings ascribed to these five features. Thus, if Structural Soundnessis given a low rating becauseof physical deficiencies
of the building, the estimate of the remaining physical life should be
shorter than if a high rating .had resulted from the analysis. Inasmuch as the actual remaining physical life of a building is a matter
of considerable conjecture, it is evident that estimates of physical
lives are largely significant only in relation to one another. For
example, an inspector cannot be expected to have any very definite
opinion as to the actual remaining physical life of a building, but he
can have a very significant opinion as to which of several structures
may be expected to have longer or shorter lives. It is suggested,
therefore, that well-built newly completed buildings be ascribed re-
UNDERWRITING
MANUAL
810-815
maining physical lives of from 50 to 60 years, and that other buildings be ascribed lives in relation to these arbitrarily established
lives.
811. In cases where repairs, alterations, or additions are
contemplated by the mortgagor, or where such work is found to be
necessary if reject ratings are to be avoided, the instructions stated
in Section 2, Underwriting Procedures, must be followed in making
the physical security feature ratings in the Rating of Property
category.
STRUCTURAL SOUNDNESS
812. The rating of this feature is an index of the ability
of all structural members, materials, and methods of assembly incorporated in a structure to withstand the imposed loads with the
minimum acceptable amount of settlement and deflection. Careful
consideration is given to the adequacy of the structural fabric, the
size, quality, and durability of the materials comprising the structural members, the quality and methods of workmanship in the assemblage, and, finally, the extent to which physical deterioration has
created unsoundnessor weakness.
813. The list of questions in subsequent paragraphs
serves to indicate the principal considerations which enter into the
formation of a judgment with regard to a proper rating of this
feature.
814. Foundation.
a. Soil: Is the nature and condition of the soil such as to with"
stand imposed loads?
b, Footings: Do footings possessadequate width and thickness
to distribute properly the weight on the soil? Are footings of sufficient distance below grade to resist upheaval
by frost? Has adequate reinforcing been provided where
necessary?
c. Foundation Walls or Piers: Are :foundation walls or piers
adequately designed and do they possess sufficient strength
to carry the imposed loads and resist outside earth pressure, movement, and hydrostatic pressure?
d. Columns and Piers: Are columns and piers of sufficient
size and strength to carry beam loads?
815. Floors.
a. Basement Slab: Is basement slab designed and reinforced
so as to resist hydrostatic pressure, if any?
b, Porch and Terrace Slabs: Has adequate reinforcing been
provided to carry the load?
•
.
"
)
RATING OF PROPERTY
815-820
o. Beams and Sills: Are beams, wall sills, and plates of adequate size and construction, and do they possess sufficient
bearing surface?
d: Joists: Are floor joists of sufficientsize and properly spaced
for their span so that there will be no undue deflection?
Are they adequately bridged and unimpaired by the installation of the mechanical equipment? Is there sufficient bearing area on supports? Is there adequate support for joists abutting headers?
e. Openings: Are openings properly framed, trussed, and
headed?
f. Sub-Floors: Is sub-flooringso employed as to provide additional bracing to the structure?
816. Exterior Walls.
a. Are structural members of sufficientsize to carry the imposed load and properly braced or sheathed to resist wind
pressure?
b. Are frame walls well tied to masonry?
c. Have all openings been properly framed and linteled ~
a.
b.
a.
b.
a.
b.
o.
817. Interior Walls and Partitions.
Are structural members of adequate size, properly spaced
and braced?
Have all load-bearing openings been properly framed or
trussed and double studded at jambs?
818. Ceilings.
Are ceiling joists of adequate size, properly spaced and
bridged?
Is there sufficientbearing area on supports, and is the tie
continuous between outside walls?
819. Roofs.
Are main valley and hip rafters of adequate size, properly
tied, and seated so as to carry the roofing material and
resist wind and snow loads?
Is roof properly braced with supports and collar or wind
beams?
Are all rafters unspliced and continuous between bearing
points?
820. Accessory Buildings. Are foundations, floors,
walls, and roof of such materials and construction as to assure a
physical life for the accessory buildings equal to that of the main
building?
UNDERWRITING
MANUAL
821. Although a fire-proof building, properly designed
and constructed,deserves the highest rating under Structural Soundness, this doesnot imply that a building of frame or masonry veneer
construction, when properly designed and constructed, could not
possesssufficientquality to warrant the highest rating. The determination is dependent upon whether the methods of assembly,materials used, and workmanship are such as to assure a long life for
the structure.
'
822. A low or reject rating is warranted in cases involving existing construction if defects such as sagged beams, floor
joists, or rafters, excessive settlement, or cracked basement walls are
present in a serious degree. The fact that it has been necessary for
the present or previous owners to install additional piers and beams
in the basement, or to patch cracked basement walls, or to install
additional roof bracing should serve as a warning to the inspector.
It would also indicate that a close analysis should be made of the
structure to discover other hidden faults which may be expected in
the low quality construction thus reflected. For cases involving new
construction, a reject rating is warranted where the construction
does not equal (or exceed) the establishedMinimum ConstructionRequirements for such items as are included under Excavation,
Masonry,Footings, Foundations, Exterior MasonryWalls, Chimneys,
Cement Floors, Driveways and Walks, Structural Steel and Iron,
Lumber, Wood Framing, Floors and Roofs, Exterior Walls, Interior
Partitions, and Miscellaneous.
823. Certain regions of the United States are subject to
tornadoes, earthquakes, and other natural hazards, and in these areas
Structural Soundness is rated according to the degree with which
the building was designed and erected in order to minimize the
danger from these special natural hazards.
824. In the final analysis it is necessaryto consider the
loads which will be imposed upon the structural fabric by the use
for which it is designed, and to estimate the degree to which it will
be able to withstand these requirements. The cost range of the
structure under analysis should not enter into the consideration of
its structural soundness.
•
•
RESISTANCE TO ELEMENTS
825. The rating of this feature reflects the degree of
resistance exhibited by the structure to the deteriorating and
damaging effects produced by the elements. These effects may in
themselveslessen the durability and may render the entire building
or certain portions 0£ it uninhabitable. The inspector shall bear
in mind that the excellence0£ resistive ability in one material may
J
RATING
OF PROPERTY
·
be off-set by poorness in adjacent materials and· in such cases the
rating will be adversely affected. Conditions entering into the
rating of this feature are discussed below under three headings,
Resistance to Weather, Resistance to Fire, and . Resistance to Decay, Corrosion, and Insect Hazards. Resistance to special natural
hazards such as earthquakes and tornadoes is primarily a structural
resistance and is considered under the feature Structural Soundness.
The following list of questions serves to indicate the principal considerations which enter into the formation of a judgment with regard to the proper rating of this feature.
826. Resistance to Weather.
a. Roof:
1. Is the roof correctly pitched and are the slope and
angles of the roof of such a nature as to afford
proper drainage and to avoid "snow pockets"? Have
crickets or saddles and snow guards been provided
where necessary?
1!. Is roofing material of such quality and condition so as
to resist rain, snow, ice, and sun effectively, and to
withstand high winds in areas where these climatic
conditions occur, and to withstand exposure and
rapid temperature changeswithout resulting damage?
3. Are ridges properly protected?
4. Are the materials and constructionof roof decksof such
nature as to withstand the elements?
b. Sheet Metal:
1. Have ferrous and non-ferrous metals been used m
combinationso that contact corrosion will result?
2. Is the material of all valleys of such quality as to
have a life equal to that of the roofing materials?
3. Are flashing and counter-flashing of proper quality
and workmanship installed where necessary?
4. Have gutters and down-spouts been provided where
necessary and are they so designed as to dispose of
the water adequately and so constructed as to resist
snow loads?
o. Walls or Piers:
1. Are foundation walls or piers adequately designed and
constructed to resist penetration of moisture?
2. Are the principal walls so constructed and in such
condition as to effectively withstand the elements of
the section of the country in which they are erected
and to resist driving rains and rapid freezing and
thawing?
UNDERWRITING
MANUAL
826-829
3. Where more than one type of material is used in prin-
cipal walls, are the different materials properly tied
together and has provision been made for the absorption of their different coefficientsof expansion?
d, Insulation and Weatherproofing:
1. Have the methods of insulation and insulation materials been incorporated in such a way so as to result in adequate comfort and economyof operation?
~- Has weatherstripping and caulking been provided
where necessary?
3. Have storm doors, storm windows, and vestibules been
provided in regions where climatic conditions warrant?
827. Resistance to Fire.
a. Do the materials and structural methods used offer a high
or low degree of fire resistance to both the exterior and
interior construction?
b, Has fire resistance been aided by proper framing around
chimney, by the use of flue tiles, and by adequate firestopping?
828. Resistance to Decay, Corrosion, and Insect
Hazards.
a. Decay and corrosion:
1. In unexcavated portions is there ample circulation of
air around wood or metal members?
~. Is there adequate provision to exclude surface water?
3. A.re materials subject to decay or corrosion adequately
protected?
b. Insect Hazards: In regions where termites or borers are
prevalent, have suitable protective measuresbeen provided,
such as ample circulation of light and air, sufficientclearance from grade, and metal shields under all frame bearings? Have timbers been impregnated?
829. A. reject rating is warranted in cases involving new
construction where the construction does not equal (or exceed) the
established Minimum Construction Requirements for such items as
are included under Excavation, Footings, Foundations, Exterior
Masonry Walls, Chimneys, Cement Floors, Driveways, and Walks;
Dampproofing, Lumber, Wood Framing, Exterior Walls, Termite
Prevention, Roof Coverings, Sheet Metal, Stucco. Painting, and
Miscellaneous.
I
•
RATING
OF PROPERTY
830-831
RESISTANCE TO USE
\
'
830. In rating this feature the inspector reflects the degree to which the workmanship and the quality and condition of
the materials will withstand the wear and tear to which they will
be subjected through continued· use. The inspector must bear in
mind that the expense of maintenance of a dwelling is directly correlated to the factors considered in rating this feature. Since the
interior of the structure contains the major portion of the wearing
surfaces, the considerations entering into the rating of this feature
are concerned primarily with the interior of the main structure and
of accessory buildings. Considerations must also include the surfaces of walks, drives, porches, and terraces. The heaviest wear
resulting from use is experienced by flooring, wall and ceiling finish,
doors, sash, trim, and hardware. The inspector must consider
whether or not the material and workmanship, in both the finish and
base of the following items, are of such a quality as to be highly
resistant to the wear to which they will be normally subjected:
a. Floors, Utility Areas:
1. Basement floor
2. Kitchen, pantry and service porch floors
3. Baths and lavatory floors
b. Floors, Living Areas:
1. First, second, and third floors
~. Porch and terrace floors
c. Walls:
1. Exterior walls
2. Interior walls
3. Bathroom and lavatory walls and wainscot
4. Kitchen walls and wainscot
d. Ceilings
e. Millwork:
1. Doors, jambs, and trim
2. Windows, frame, and trim
3. Finish hardware
f. Accessory Buildings:
1. Floors, walls, and ceilings
'2. Doors, windows, frames, trim, and hardware
g. Walks and Drives, including base and surface
831. A reject rating is warranted in casesinvolving new
construction when construction does not equal (or exceed) the established Minimum Construction Requirements for such items as are
included under Cement Foors, Driveways, and Walks, Lumber, Wood
Framing, Lathing, Plaster Work, Painting, and Miscellaneous.
UNDERWRITING
MANUAL
832,...835
832. The materials and workmanship of both plaster
base and plaster must be noted. The best wall finish is no stronger
than its base, and the best painting or. wall covering applied to poor
plaster may result in an unsatisfactory wearing surface. The quality of interior painting, tinting, or wall covering must be carefully
considered. Doors and sash, either of wood or metal, that are of
light, flimsy construction will not withstand constant use, and for
this reason will affect the rating unfavorably. The wearing qualities
possessed by all such items, assuming ordinary maintenance, shall
be weighed against the severity of wear and tear to which they will
be subjected.
LIVABILITY AND FUNCTIONAL PLAN
833. In rating this feature it is necessary to determine
the degree of practical usefulness for residential purposes to the
typical family likely to occupy properties of similar type and size.
If the property has been planned and constructed so that a high
degreeof livability and functional efficiencyexists,then a high rating
for this feature is warranted.
834. The inspector must determine the degree to which
the layout of the structure is economical,practical, and efficient.
An economicallayout is one which presents the greatest proportion
of usable floor area in relation to the gross floor area. An excessof
unusable space makes a house less desirable. For example, if the
hall area is larger than is necessary in view of the uses to which it
will be put, and perhaps because of this the sizes of other rooms in
the house where increased area is desirable have had to be restricted,
then the layout would to some degree be uneconomical. Again, if
space is provided which is not readily and conveniently usable,
economyis sacrificedbecauseof unwarranted additional cost of construction and maintenance together with the attendant increased
labor involved in the occupancy and use of such a structure. It is
recognizedthat large entrance halls, galleries, and similar spaces are
considered desirable and necessary in dwellings in the higher cost
range. Where such spaces properly serve a functional purpose they
do not indicate inefficiencyof plan.
835. The rating of this feature must reflect the functional qualities, adequacy of sizes, and efficiencyof the individual
rooms. The relation of the location of the service or utility portion
of the house to the living quarters also definitely affects the rating
of this feature. Lower ratings will be warranted if any of the
following objectionableconditions are present:
a. Sleepingquarters with insufficientprivacy
b, Dark or poorly ventilated rooms
•
•
.RATING
O]j' PROPEBTY
835-::838
(
c. Bathrooms not readily accessible,or accessibleonly through
a major room
d. Kitchen inadequate for or ill-arranged for food storage,
food preparation, and dish washing
e. Insufficient provision for hanging clothes, or for storage
of linens, blankets, and brooms
836. I:f future occupantsare likely to have laundry work
done in the home, the rating will be affected by the relative adequacy of the provision for laundry work. This is to be judged, not
merely on the presence or absenceof laundry trays and convenience
outlets, but also upon the space available for drying, and access to
outdoor drying.
837. The rating is influenced by the convenienceof arrangement. The most desirable conditions occur where access from
room to room is according to logical sequence,where there are no
long, dark, or winding corridors, where movementsinto and out of
the various rooms or units cause the least disturbance, where staircases are sufficiently wide, not too steep, and in such locations as to
permit moving of furniture readily. Ratings of this feature will be
favorably affected in the case of houses having rooms of such sizes
and shapes as to accommodatefurniture readily in proper grouping
for convenient living. Shape is very important as well as size.
Broken or short wall areas do not permit flexibility in furniture
arrangement. Protruding radiators that are in the way are objectionable. Windows should be spaced in relation to internal function
as well as to exterior appearance. The rating of this feature must
reflect the practical quality of the interior layout. This factor will
contribute to the rating, favorably or unfavorably, depending on the
existence or absence 0£ agreeable proportions 0£ the rooms..
838. The plan of improvement of the site is another
factor in livability. Consideration should be given to the suitability 0£ the size, shape, and topography of the lot in relation to
the type and size of the dwelling and accessorybuildings. Buildings, walks, plantings, and terracing may be laid out or arranged
on the plot so that either a high degree 0£ livability or an opposite
condition may result. The rating of this feature will be favorably
affected i£ the general plan 0£ improvement is excellent, and the
resultant effect gives the property a strong appeal for those who
ordinarily would be attracted as purchasers 0£ such property. In
any such case the buildings will be found located upon the site in
the most advantageous and desirable positions. Structures will be
found so placed on the lot as to take the fullest advantage of sunshine, ventilation, scenic outlook, privacy, and safety. Where high
UNDERWRITING
MANUAL
838-840
ratings of this feature are warranted, it is also :found that the
grounds have been laid out so that opportunity is afforded for effective landscaping and gardening. Furthermore, in such cases there
exists a high degree of accessibility to garage buildings and other
accessorystructures, and the placing of buildings, walks, and drives
does not result in cutting the grounds into small and unusable
areas. A :favorablecondition is also present if accessory buildings
are so located upon the site as not to create hazardous conditions
affecting the safety of the occupants of the property, and if they are
so placed that the convenienceof the occupants is served in the most
advantageous manner. In cases where customary accessory buildings have not been provided, the rating of this feature will be
influenced by the size and location of the available area of the site
upon which accessorybuildings might be erected.
839. The following list of questions will assist in the
proper rating of this feature:
a. Does the arrangement of the plan present an economical
layout in relation to the ratio of usable floor area to gross
area?
b. Is the separation and relation of living units arranged
to provide ease of circulation and privacy?
c, Has the separation and relation of service units been considered from a circulation and utility standpoint?
d. Do the ingress and egress both from living and service
units contribute to livability 1
e. Are rooms of adequate size for their intended purposes?
Are wall spaces of such size and location, and are openings and radiators arranged to provide for convenientand
customary furniture placing?
f. Are there sufficientbaths and lavatories for the number of
persons,including servants, likely to occupy the property?
g. Has the interior been planned to take the fullest possible
advantage of orientation and the facilities offered by the
plot?
h, Is the plot of suitable size, shape, and topography, and is
the utilization of the plot of such character as to afford
a high degree of livability to the occupants of the property from the standpoint of service, convenience, and
safety?
840. If the property under considerationis intended for
more than one family, certain matters are considered in rating this
feature that do not necessarily pertain to single family dwellings.
To be warranted in giving such a building a high rating as to Liva-
•
•
RATING
OF PROPERTY
840-844
bility and Functional Plan the following are pertinent : (a) that
there is separate access to each family unit without undue annoyance
to other families, (b) that the plan is so arranged that families do
not look into each other's windows across narrow intervening space,
( o) that adequate venting has been provided to remove objectionable
odors properly and effectively, (d) that provision has been made to
retard sound transmission from one unit to another. 1£ the heating
0£ such a building is accomplished by means 0£ separate installations,
rather than a common plant, the rating 0£ this feature is favorably
influenced when there is, (a) proper provision £or access by each
family to the heating rooms, (b) separate £uel storage facilities £or
each family unit, and ( o) adequate and efficient facilities £or £uel
delivery.
841. Reject ratings will be warranted in cases in which
the design £ails to equal (or exceed) Property Standards requirements £or such items as Accessibility, Types 0£ Eligible Dwellings,
Nonresidential Use 0£ Dwellings, Lot Coverage, Dimensions 0£ Front
and Rear Yards, Living Unit, Separation 0£ Living Units, Privacy,
Ceiling Heights, Storage, and Stairways.
MECHANICAL AND CONVENIENCE
EQUIPMENT
842. The rating 0£ this feature reflects the degree 0£
adequacy, durability, and operating economy 0£ the mechanical and
convenience equipment in the subject property to perform the £unctions £or which this equipment is designed, considering the number
and type 0£ people likely to occupy property 0£ this class. Analysis
0£ this feature requires the consideration 0£ three subjects: plumbing
and sewerage, heating, and electric light and power. The second
subject, heating, is construed to include such equipment and systems
as are popularly referred to as air-conditioning systems.
843. Only such items 0£ mechanical and convenience
equipment as are definitely identified as a part 0£ the real property,
either by custom or State law, can be included £or consideration. The
definition which governs the identification is given in Section 16,
Methods 0£ Dwelling Cost Estimation.
844. In general, public water supply, public sewerage,
and public utility electric supply systems are preferable to private
systems on the property itself. Consideration must be given to the
dependability 0£ all supplies and services. Rejection under this feature is mandatory in cases that do not comply with the requirements
0£ established Property Standards £or approval 0£ wells and approval 0£ sewage disposal systems.
_....,-------------.,,,,,..-----·-·-
--·---····.-·-
1
UNDERWRITING
MANUAL
845"""'847
845.Items of mechanical equipment for which replace• ment parts and service are readily obtainable will affect the feature
rating favorably because of probable lower maintenance costs. In
new construction,particular attention should be given to any evidence
of the use of antedated, secondhand, or rebuilt equipment. Such
equipment will necessitate a low rating. Systems in which equipment and fixtures are of poor quality and design, and improperly
installed will show more rapid deterioration and obsolescence and
give rise to frequent damage and heavy repair costs. It is axiomatic
that the rating will be affected by the age and condition of the
equipment. The economical operation and maintenance of mechanical and convenienceequipment has a direct bearing upon its functional qualities.
846. The followinglist of questionsservesto indicate the
principal considerations which enter into the formation of a judgment with regard to a proper rating of this feature.
847. Plumbing.
a. Baths and Lavatories: Are fixtures of proper design, material, and workmanship for this class of structure? Are
trimmings suitable for the class of fixtures? Are trimmings readily accessible and adjustable?
b. Service Facilities:
1. Are the plumbing facilities in kitchen, pantry, and
laundry adequate to perform the service required]
!J. Are fixtures of proper design, material, and workmanship for this class of structure with trimmings
readily accessible and adjustable?
o, Supply, Waste, Drains, and Accessories:
1. Are supply pipes properly graded as to size, of durable material, good workmanship, and provided
with sufficient conveniently placed stop and drain
valves?
2. Are soil, waste, and vent pipes of adequate size, of
durable material, and good workmanship? Are soil
and waste lines properly trapped and vented?
3. Is the domestic hot water supply system of proper
size, kind, design, and workmanship to combine
adequate service with economy, and is the storage
tank properly installed and insulated?
4. Are the cellar, area, and roof water drains of sufficient
size, and properly designed and installed so as to function properly and without excessivemaintenance?
•
•
I
BATING
OF PROPEBTY
847-850
(
5. Is there an ample supply of pure water, preferably.
from public, or municipal utility source?
6. Has adequate provision been made for the disposal of
sewage, preferably by public or municipal systems!
848. Heating.
a. Heating plant, including air-conditioning systems:
1. Is the plant of ample size, design, and construction
to operate conveniently, economically, and efficiently
under all conditions, and is the furnace insulated?
2. Are the pipes or ducts properly pitched, sized, of
good material and workmanship, and insulated
against heat losses?
3. Is the type of heating plant and is the fuel used suitable to the class of dwelling?
b, Radiators and Registers:
1. Are the radiators or registers of sufficient size and
properly placed so that they most effectively distribute the heat and air throughout the various
rooms?
2. Are the radiators or registers effectively designed, of
good material and workmanship, and properly
valved and controlled?
849. Electric Light and Power.
a. Supply and Accessories:
1. Are the feeders, switches, and panels of sufficientsize
to fulfill the requirements to which they are put,
without the overloading of circuit or switch capacities, and do they conform to the Underwriters' Code
and local ordinances?
'2. Are power circuits provided where needed, and separated . from light circuits?
3. Is there an adequate and dependable supply of electric
energy available, preferably from public utilities?
b. Fletures and Outlets: Is there a sufficientnumber of fixtures and outlets to distribute illumination properly and
are fixtures of suitable design and construction?
850. In order to avoid a reject rating all properties must
equal (or exceed) the provisions of established Property Standards
for such items as Compliance With Laws, Plumbing Fixtures, Water
Supply, Approval of Wells, Cisterns, SewageDisposal, Sewage Disposal Systems,Approval of Sewage Disposal Systems,Heating, and
L
UNDERWRITING
MANUAL
850-853
Electric Wiring. In addition, for cases involving new construction
a reject rating is warranted where the construction does not equal
(or exceed) the establishedMinimum ConstructionRequirementsfor
such items as are included under Plumbing, Heating, and Electrical
Work.
NATURAL LIGHT AND VENTILATION
851. The rating of this feature is an index of the degree
and adequacyof natural light and ventilation provided for the various rooms of a dwelling under ordinary conditions. Orientation of
the structure and proper orientation of the individual rooms to
obtain maximum benefit from sunlight and exposure contribute to
sustained marketability. Therefore, if the plan is such that the
principal rooms have the most desirable exposure with respect to
sunlight and prevailing winds, a favorable influenceupon the rating
results. The rating will be adversely affectedif in northern regions,
a sun porch is placed on the shaded side of the building, or if in
regions subject to extreme heat, a living portion is not shielded from
the sun during the hotter part of the day. Unsatisfactory orientation in the case of proposed new structures can frequently be corrected by the reversal or rearrangement of the plan. The rating will
be adversely affectedif accessoryand adjoining buildings are in too
close proximity to the main structure, or if a kitchen is so poorly
lighted and ventilated as to impair its usefulness, convenience,and
comfort.
852. The following items are consideredin ascribing the
rating:
a. The ratio of glass area to floor area
b, Location of openingswith respect to size and shape of room
c. Reduction in light due to obstructions such as other buildings and shaded porches
d. Orientation of the building upon the site
e. Cross ventilation in the individual rooms, particularly
bedrooms
f. Double exposure in principal rooms
g. Natural light and ventilation of stairways, corridors, and
halls
h, Mechanical ventilating equipment to remove odors from
service area
i. Proximity to lot lines and adjoining buildings
j. Relation of accessorybuildings to principal structure
853. Reject ratings will be warranted in cases in which
Property Standard requirements are not equalled (or exceeded) for
such items as are coveredunder Lot Coverage,Dimensionsof Front,
•
•
--
RATING
- --·· -·--·-··
OF PROPERTY
853-856
Rear, and Side Yards, Dimensionsof Courts, Windows, Ventilation
of Bathrooms and Water Closet Compartments,Ventilation of Basement, Laundry, and Utility Rooms, Ceiling Heights, and Basement
Rooms.
ARCHITECTURAL ATTRACTIVENESS
854. In rating this feature, the inspector must be guided
by "taste". However, he must disregard, insofar as it is humanly
possible, his prejudices and preferences where they are not in substantial agreement with the evident trends or likes and dislikes of
the market. The inspector shall consider attractiveness in relation
to the property as a whole and to the exterior and interior characteristics of the buildings. Mortgage risk is presumed to be lessened
in those instances in which architectural treatment may be expected
to remain attractive to the market for sustained periods of time.
Acceptanceof architectural styles may be transient. Simplicity, proportion, and character are qualities which are permanently attractive.
855. The general impression created by the entire property is of primary importance. The degree to which there is unity
is a first consideration. The highest rating is warranted when the
architectural treatment of site, planting, and buildings comprise a
harmonious entity. Such combinations of improvements and land
attain the maximum degree of desirability possible from the standpoint of design. In such casesthe structures are most effectivelyand
pleasingly accommodatedby the width, depth, or area possessedby
the sites upon which they are erected, and topography has been
permitted to contribute to the agreeable impression which is created
when the property is viewed in its entirety.
856. Accessory buildings impair or contribute to the
degree of unity attained. Unless they are planned as integral parts
of the design and ensemble of the house and grounds, a condition
will result which will tend to cause a reduction in the rating of this
feature. Garages and other accessory buildings are too often conceived as afterthoughts without the proper regard for the resulting
effect. The planting upon the site may either be carefully laid out
in an attractive arrangement, or it may be placed upon the site without proper consideration for usefulness of the entire plot of ground.
Planting should also be consideredwith reference, (a) to the measure
in which it servesthe purpose of forming a desirable and harmonious
setting for the buildings, (b) to the measure in which it permits the
occupantsof the buildings to secure the maximum enjoyment possible
from the use of the lot, and, ( o) to the measure in which it succeeds
in screening out and protecting the property from unsightly objects
and surroundings.
------.,
UNDERWRITING
MANUAL
857-859
857. It is necessary in making a rating of Architectural
Attractivenessto give considerationto architectural style. Attention
must be given to the relative excellence or poorness 0£ the particular
design and to the refinements, or lack of them, incorporated in the
subject property. The architectural attractiveness of the interior
should be viewed with consideration of pleasing proportions of
rooms, materials and textures of walls and floors, and the design of
important details such as mantels, staircases, and woodwork. No
consideration should be given to the degree to which the style is in
conformity with the architectural styles prevailing in the neighborhood. 1£ nonconformity with styles in the surrounding environment
is of such a character that it increases mortgage risk, it is taken into
account in the feature Adjustment for Nonconformity.
858. A structure of the so-called "shirt-front", or onesided treatment design, calls for a low rating of this feature because the remaining side walls of the building give it an unattractive exterior appearance. Architectural designs that are considered
freakish, or those characterized as hybrids, should be penalized in
this feature rating. To receive the better ratings, all design motifs
should be in good taste, have a utility basis, or add structural value
and attractiveness to the general scheme. An elaborate use of motif
and detail, the inclusion of an unnecessaryvariety of materials, and
straining for the picturesque cannot increase the rating. Use of
false effects of roofing, false half-timber work, or the unusual handling or combinationof materials, or materials inappropriately used
in the particular case involved, usually affect the rating of this
feature adversely.
859. In assigning a final rating to this feature, the
inspector shall consider the subject property on its merits and in
the same manner as individuals of reasonable tastes, likely to become interested in the property as tenants or owners, will view it.
The following questions will aid in determining the proper rating
of this feature:
a. Do the elevations express frankly the plan contained
therein or is the design of a freakish nature straining for
the picturesque?
b, In whatever style the building has been designed, does it
express, to a reasonable degree, refinement and proper
interpretation of that style, or does the design indulge
in the use of superfluousornament or an improper use of
materials as they relate to each other?
o, Is the fenestration arranged so as to result in a pleasing
effect?
•
.;
RATING
OF PROPERTY
859-862
d, Are room proportions pleasing? Are interior details so
designed as to be appropriate and attractive?
e. Is the entire ensemble,including the arrangement of buildings and the plot plan, attractive?
f. Do the accessorybuildings tie in to the compositionof the
entire project i
g. Has the entire project a pleasing appeal to the typical
potential purchaser?
ADJUSTMENT FOR NONCONFORMITY
860. The last feature of the Rating of Property category
is designated "Adjustment for Nonconformity". It is rated in the
same manner as are the other features in the risk rating system.
However, it will be noted that the weights in the columns in the
rating grid for this feature are in reverse order. Thus, in the 1
columnthe weight is 12, while in the 5 columnit is zero. A 5 column
rating indicates either that nonconformity is not present at all, or
if present, it does not affect adversely the desirability or marketability of the property. The feature rating is always deducted from the
Total Rating of Physical Security, thereby accomplishingwhatever
adjustment is necessary because of adverse effects attributable to
conditionsof nonconformity. The Reject column is used in cases involving such extreme nonconformity that the property would be
practically unmarketable. In the event the X mark appears in the
Reject column, the word "Reject" is written in the Rating column,
and also on the Total Rating of Property line.
861. The Rating of Physical Security does not consider
the relationship of the subject property to its immediate environment, but is based on the hypothetical assumption that the physical
improvements are appropriate for the site and the neighborhood.
Where an unsuitable property-neighborhoodrelationship exists, marketability is to some degree affected and mortgage risk is increased.
Factors that restrict marketability because of nonconformity are
consideredin the feature Adjustment for Nonconformity so that all
elements of mortgage risk attributable to physical improvements
will be reflected in the Total Rating of Property.
862. A residential property of good physical characteristics may not necessarilybe good security for a mortgage loan, even
though situated in a good location. It may be extremely unmarketable if it is not in conformitywith the desires and needs of those who
would ordinarily want to occupy or purchase properties in the
neighborhood. It may be that such a property would be entirely
appropriate at another location, but decidedly out of favor at its
UNDERWRITING
MANU_µ.
862-866
actual location. It may be displeasing when viewed in relation to '
its surroundings; it· may be too costly for the typical purchaser to
own; or it may not conform in other respects to the use which would
be most marketable.
863. Many kinds of nonconformity adversely affect the
marketability of properties. Mere lack of similarity of physical
properties, however, may not necessarily restrict marketability.
Factors other than similarity must be considered in determining the
effect of property-neighborhood relationships on marketability.
Such other factors include a study of the characteristics, needs,
desires, and :financial capacities of the neighborhood occupants and
those likely to be attracted to the location. The degree of marketability depends upon the extent to which the particular property
under analysis is adaptable to such needs and desires.
864. It is apparent that the ease with which a residential
property can be marketed depends largely upon the degree of appropriateness of the property to its location. A study of the neighborhood and the attitude of its present and prospective occupants
provides an acceptable basis upon which to determine degrees of
appropriateness. These factors are clues as to the nature of the predominating market for dwellings in the neighborhood. By observing
the extent and nature of the departure from that which is appropriate
for the location, it is possible to draw conclusionsas to the effect on
mortgage risk.
865. The various ways in which building improvements
may deviate from that which is appropriate are discussedunder the
following headings:
a. Suitability of use-type
b, Appropriateness of functional characteristics
o. Harmony of design
d. Relation of expense of ownership to family income levels
866. Suitability of Use-Type. The term use-type, as
applied here, refers to the use for which a property is designed, such
as single family, two family, multiple family, and nonresidential.
In some neighborhoods the suitable use-type is governed by zoning
ordinances, deed restrictions, or both. However, in some neighborhoods no such controls of land utilization exist. In many neighborhoods the appropriate use-type is clearly evident upon an inspection
of the neighborhood because of the predominance of a single usetype. Frequently, however, neighborhoods are very heterogeneous,
and in such cases several different use-types may be found to be
suitable.
•
•
.
RATING
OF PROPERTY
867-871
867. It is plain that the marketability of a single :family
residencewill be limited if it is located in a neighborhoodof multiple
family buildings. The erection of a multiple family dwelling in a
single family area, on the other hand, will usually adversely affect
the desirability of nearby residences. If a transition to multiple
family use is in process, the multiple family dwelling may not be
restricted in marketability.
868. Appropriateness of Functional Characteristics. The term "functional characteristics" refers to the pattern of
living facilities provided in a dwelling. It relates to the number of
rooms, the arrangement and sizes of rooms, and the plot arrangement. Usually well defined standards are observablewith regard to
these characteristics in individual neighborhoods.
869. Considerable difficultymight be experiencedin the
effort to market a twelve room dwelling in a neighborhood of five or
six room dwellings simply becausethe greater number of rooms may
be ordinarily useless to the typical purchaser.
870. The arrangement and sizes of rooms frequently
conform to certain definite preferences in individual neighborhoods.
For example, in some districts it may be evident that the families
prefer residences having six large rooms: a living room, dining
room, kitchen, three upstairs bedrooms,and two bathrooms. In such
a neighborhood a. two story residence with only two bedrooms and
one bath, or a residence with all rooms on one floor may be inappropriate, hence of limited marketability. A building with rooms
that are too small might be similarly restricted in marketability.
871. The characteristics of the lot, insofar as they affect
livability, are considered a part of the :functional pattern of the
property. The advantages of the side yards, and the front and rear
yards, should conform in desirability with the conditions found to
be typical and appropriate in the neighborhood. Nonconformity is
frequently evidenced by the placement of the house upon the site.
Where general building lines are recognized, any deviation from
the accustomed or accepted practice should be carefully considered
to determine the resultant effect upon desirability. If the site of a
residence is substantially smaller than the size found to be desirable
in a certain neighborhood-for example thirty feet wide where the
customary width is fifty feet-marketability may be seriously restricted. Similar effects on marketability may result in some cases
where the shape or topography of a particular lot makes the dwelling
less desirable than those that are typical of the area.
UNDERWRITING
MANUAL
872-874
872. Harmony of Design.-The degree of conformity
of the design of a structure with other structures in the immediate
neighborhood is not important except insofar as it fails to blend
harmoniously with them. There may be a considerable variety of
designs of residencesin a neighborhood and yet each dwelling may
present a pleasing appearance when viewed in relation to its surroundings. On the other hand, a building may be without any architectural faults and yet clash so violently with neighboring properties that marketability may be seriously restricted. For example,
if a two story Colonial residence were erected in a neighborhood
characterized by one story Spanish bungalows, it is probable that
this property would be difficultto sell, irrespective of the excellence
of its individual design. In cases involving structures which depart from the conventional insofar as design is concerned, a more
pleasing appearance may be created if they are erected in a group
and not mixed with buildings of conventional architecture. Appropriateness may well be questioned, in the absence of any effective
demand for such properties, in the particular community where
they are erected or proposed.
873. Relation of Expense of Ownership to Family Income Levels.-Families of similar financial means generally choose
places of residence in similar neighborhoods. Because of this tendency a residential property must be of such character that the expense of owning or renting it is in proper relation to the incomes
of families for whom the location is a suitable place of residence,
A home that is too costly to purchase and maintain will not suit
the requirements of the typical family, and would therefore have
limited marketability.
874. In many residential developmentsthere are restrictions against the erection of structures below a certain minimum
cost or size. This provides some control over the minimum cost
range of buildings but does not prohibit the building of homes
which are overimprovements. Determination of the cost range which
is proper in a given case will depend upon the costs of structures in
the district and the income range of present and prospective occupants. The range of family incomesis the more significant of these
two criteria. The cost of existing properties may not be a reliable
indication of the costs which are most suitable for the market. This
condition is sometimesencounteredin new developmentswherebuilders start their operations with houses that are too costly, and after
experiencing delay in selling, are forced to build for purchasers of
smaller incomes.
•
ti
PART II
SECTION 9
RATING OF LOCATION
{
\
)
CONTENTS
Paragraphs
General Rating Instructions---------------------------------------l)efinitions----------------------------------------------------Basic Principles of Rating
Analysis of Neighborhoods-------------------------------------Established Ratings of Locations
901-909
903
904-908
909
910-912
Relative EconomicStabilitY----------------------------------------913.-931
EconomicBackgroundRating
917-921
Rating of the Feature
922-931
Protection from Adverse Influences
932-940
Freedom from Special IIazards
941-948
Adequacyof Civic, Social, and Commercial Centers
949-953
Adequacy of Transportation
954-960
Sufficiencyof Utilities and Conveniences
961-963
Level of Taxes and SpecialAssessments----------------------------- 964-967
Appeal-----~------------------------------------------------------968-974
Special Considerationsin Rating UndevelopedSubdivisionsand Other
Sparsely Built Areas---------------------------------------------975-986
Summary of SignificantConsiderations-----------------------------987
Effective February, 1938
Federal Housing Administration.
PART II
SECTION 9
RATING OF LOCATION
GENERAL RATING INSTRUCTIONS
Rating of Location
J
r
REJECT
FEATURE
11==============1===
2
3
4
5
RATING
=== === === === === =====
Relative Economic Stability
4
8
12
16
2_0
_
l
2
3
4
5
2
4
)
8
1(1
1
2
3-·
-4--5
---
1
2
3--4--5
---
Protection from Adverse Influences
Freedom from Special Hazards
Adequacy of Civic, Social, and
Commercial Centers
Adequacy of Transportation
Sufficiency of Utilities and Conveniences
Level of Taxes and Special Assessments
12--4
6
8
10
---
Appeal
TOTAL RATING OF LOCATION
901. Rating of Location shall be accomplishedby rating
separately each of eight features according to the principles outlined
in this section and Section 6, Methods of Mortgage Risk Rating.
The eight features have been weighted on a scale of 100 points in
order to retain the relative importance o:f each when all are combined to obtain the Total Rating of Location. Each feature is
marked on a scale of from 1 to 5, 5 being the highest rating. After
analysis of the factors comprising a feature, an X mark is placed in
the column which is determined to reflect the degree of risk involved.
H the X mark is placed in any column other than the Reject column,
(\{\Q
UNDERWRITING
MANUAL
901-903
the figure appearing in the marked square is carried over to the extreme right hand column of the grid. If the X mark is placed in the
Reject column, the word "Reject" is written in the extreme right hand
column of the grid. One such rating in any feature will necessitate
a recommendation for rejection of the application for insurance. If
the word "Reject" appears in the Rating column, it must also be
written in that column on the Total Rating line. If no such rating
appears after any of the features, the final rating of the category is
obtained by adding the figures in the Rating column. The system
is so designed that this figure will be an expressionof the rating on a
numerical basis.
902. The eight features, together with the weights assigned to them, are listed below :
a. Relative Economic StabilitY-----------------------------------b. Protection from Adverse Influences_____________________________
e. Freedom from Special Hazards--------------------------------d. Adequacy of Civic, Social, and Commercial Centers______________
e. Adequacy of Transportation____________________________________
f. Sufficiency of Utilities and Conveniences-----------------------g. Level of Taxes and Special Assessments_________________________
h. Appeal--------------------------------------------------------
a.
b,
c.
d.
e.
( 40)
20
5
5
10
5
5
10
903. Definitions. The following definitions are used :
Location is defined as the actual site of a property viewed
in terms of relationship with its immediate neighborhood
and general economicbackground.
Rating of Location is defined as the process of determining the degree of mortgage risk attributable to location.
Rating of Location also refers to the numerical index of
risk which results from the process.
Established Ratinq of Location is defined as the rating of
a selected location which is used as a basis of comparison in connectionwith the rating of other locations in the
same outlined neighborhood.
Neighborhood is defined as a single area composedof locations separated only by publicly used land, the residential
portions of which exhibit a degree of homogeneity. In
general, a neighborhoodis available for, or improved with,
dwellings of more or less similar character, age, and
quality.
Outlined Neighborhood is defined as a neighborhood in
which the approximate borders have been established
for the purpose of indexing and classifying Location and
Valuation Data, Real Estate Market Data, and Established
Ratings of Locations.
•
•
RATING
OF LOCATION
903-904
f. Immediate Neighborhood is definedas an area surrounding
a location and embracing the most direct influencesfrom
which the significant characteristics of the 4>catiooare
determined. It is generally smaller in area than an Outlined Neighborhood.
g. Economic Background Area is defined as an area within
which the conditionsof industry, trade, labor, and livingthat is, the economicand social life of a community of
people-are predominantly subject to the same influences.
It may be small, as in the case of a village, or large, as
in the case of a city together with its entire environing
metropolitan area.
904. Basic Principles of Rating. The rating assigned
to the first feature of the Location category, Relative Economic
Stability, is an estimate of the probable continuing marketability
of the subject property, attributable to its site, as affected by the
financial capacities and financial attitudes of owners, occupants,
and prospective purchasers, and as related to similar estimatesof all
residential properties in the EconomicBackground Area, irrespective
of competitive characteristics. The rating of all features of the
Location category, except the feature Relative Economic Stability,
is determined by comparing the subject location with all other competitive locations in the Economic Background Area, through the
mediums of Established Ratings of Locations. Competitive locations are construed as locations which are appropriate for residential structures having price ranges similar to that which is determined as typical in the immediate neighborhoodof the subject location. The price range of an appropriate residential property at the
subject location, and at its competitive locations, is indicated by the
price range of typical properties in their respective immediate
neighborhoods. In general, comparisons should be restricted to a.
price range which does not differ more than the limits of the prices
of properties which the typical prospectivebuyer with specificneeds
would consider for purchase. Similarity of price range does not
provide a basis for such comparisons if certain racial aspects render
the locations actually noncompetitive. Residential structures which
occupy the site of the subject location and its competitive locations
are of no concern in rating Location, except as they participate in'
the neighborhood influences affecting such locations. The price of
a residential property at the subject location should not be used to
determine the price range of competitive residential properties, unless it is representative of the typical price range of the immediate
neighborhood. Under similar environing influences a vacant site
would have the same rating as an improved site.
UNDERWRITING
MANUAL
905-908
905. The competitive basis of rating is the only method
to be used in rating all features, other than Relative Economic Stability. If the number of competing neighborhoodsin an Economic
Background Area are insufficientto provide adequate comparisons,
an additional neighborhood will be assumed by providing arbitrary
requirements for a 5 column rating of each feature, made up from
the desires and requirements of the market. The actual conditions
at the subject location are then rated by comparison with these arbitrary requirements. The arbitrary requirements established may be
regarded as the conditionssurrounding a "best" location, even though
such a location does not actually exist. If this is done, the rating
of conditions at the subject location by comparison with such a
"best" location becomesin itself a competitive area basis of rating.
In general, such arbitrary requirements representing adequacy and
sufficiencyshould not be used unless the Economic Background Area
affords less than three or four competitive neighborhoods.
906. The primary purpose of the Rating of Location is
to determine the degree of mortgage risk involved because of the
location of a property at a specific site. The rating is based on a
prediction of the risks likely to be experienced at such location during a period of approximately the next twenty to twenty-five years.
This point of view makes necessary the study and consideration of
not only what is present at the time of inspection, but also a determination of the future trend in the neighborhood and Economic
Background Area for at least the coming twenty to twenty-five
years. In this connection, data pertaining to the ownership of
property, data pertaining to population, community and neighborhood characteristics, and data relating to city growth conditions and
the market for real estate will prove of inestimable value.
907. The scope of operations of the Federal Housing
Administration necessitates the application of Rating of Location
techniques under widely diverse conditions. A given set of physical
environing conditions which serve to obtain a certain Rating of
Location in one case might obtain a different Rating of Location in
another case. In the first case the trend might be favorable; in the
second case it might be less favorable or even unfavorable. Because
mortgage risk lies in the future, the rating of mortgage risk should
always be a measurementreflecting probable future trends.
908. As a general rule, the attitude of the market reflects the degree of acceptability of prevailing conditions, providing
the market is reasonably cognizant of its needs. However, acceptability and tolerance are not synonymous. In an Economic Background Area it is necessaryto distinguish between conditions which
are acceptable in one case and tolerated in another. Mere tolerance
t
•
•1
RATING
OF LOCATION
90S..-909
may warrant a low rating of any feature, even to the point of rejection, unless it is evident that better conditions will not be provided.
There are many areas which have great charm, where planning has
been well executed, and the surroundings present,to a marked degree,
a harmonious picture of beauty and comfortable living. If properties in such areas possess ready marketability, that is, if there is a
sufficientlylarge number of financiallycapable, prospectivebuyers for
the properties, and if this market is expected to continue and the
financial capacity of buyers is expected to remain the same or increase, then a high Rating of Location is warranted. Mere beauty
and charm, however, are not sufficientto make a satisfactory area,
but if these attributes are combined with the other factors which,
together, sustain a high degree.of marketability, a high Rating of
Location is warranted.
909. Analysis of Neighborhoods. Certain generally
accepted principles should control judgment when analyses of .:
neighborhoods or locations are made. Among the principles are the' ;-.
following:
a. Homogeneousdevelopmentof properties in a neighborhood
tends to reduce mortgage risk. Areas which contain
structures of about the same age are usually better mortgage lending areas than those in which a variety of age
groups is present.
b, Areas in which developmenthas been accomplishedin accordancewith accepted principles of good housing are apt
to prove much more stable than those areas where little
thought or attention has been paid to the requirements for
light and air, lot coverage, and controlled similarity of
types of structures.
o. The Valuator is confronted with different problems in
rating new and old locations. If development has been
completed and there are few vacant lots, a satisfactory
measurement of mortgage risk is usually less difficult
to determine than if the location being rated is in
a sparsely developed area. The latter usually requires a
more thorough study of the future before a significant
rating can be made. There is in progress a definite decentralization of housing which will probably continue
the building up of suburban neighborhoods. If the location under consideration does not lie in a path of city
growth, and there is apt to be a lapse of a number of
years before the neighborhood is well built up, a much
lower rating will be indicated than in the case of a location which lies in a path of city growth with every pros-
UNDERWRITING
MANUAL
909
pect that the neighborhoodwill be built up in a comparatively short time. The present city pattern is the product
of the action, in the past, of the competition of uses for
sites and the historical succession 0£ those uses. City
growth is directional. The directions which it takes are
the consequence0£ favorable market attitudes toward
selected areas. These in turn result from the relative
advantages 0£ different locations with respect to civic,
social, cultural, and natural facilities. The actual physical expansion 0£ cities at border locations is frequently
characterized by speculative activity. Interior locations,
and border locations in less favored directions have a
tendency to exhibit a gradual decline in quality. Neighborhoods not in the paths 0£ city growth usually lack
marketability and tend to deteriorate. There appears to
be an inevitable process 0£ infiltration by lower class
occupancy into such districts. There is either a more
intensive use 0£ land for residential purposes,or a change
of use to commercial and industrial purposes. Neighborhoods in favorable geographic positions in relation to city
growth frequently enjoy a fairly rapid rate of absorption
of newly constructed dwellings. Such neighborhoods
may be remarkably stable if the absorption of new land
into use is controlled and orderly. The income and social
characteristics of future occupants will usually be of such
a character that a suitable environment£or mortgage lending activities is in evidence. On the other hand, neighborhoods in the paths of city growth may be unstable if
the absorption of new land is characterized by imprudent
land speculation, overextension in real estate purchases,
and overdevelopment.
d. Cities grow along communication and travel routes, and
the growth of cities is influencedby topographical conditions, zoning restrictions, legislative policies, and population increases. Newer residential districts are products
of city expansion, and both new and old residential districts undergo a change in quality which is directly
related to the changing types 0£ people who come successively into occupancy. The trend 0£ neighborhood stability usually lies in the same direction as the trend 0£
social quality of the neighborhood. As families rise
above the economicand social status of their neighbors,
they desire to move to better districts. The city pattern
then becomesthe result of the action of the competition
•
•
{
-----·--,,.- . ,9\11!>....,...' ,"'" ...·---------·--·
RATING OF LOCATION
909
of uses for sites and the historical successionof those
uses. Valuators must be aware of the phenomenaof city
growth and the conditions and characteristics of neighborhood trends in order that the probable :future degree
o:f mortgage risk surrounding a location may be accurately
reflected.
e. The mere presence o:f established, financially capable owners
in neighborhoods embracing both old and new structures
does not assure a high degree o:f continuing marketability, even though the same type o:f persons apparently
provide a strong market for properties in such areas.
Such neighborhoods will suffer greatly within the next
twenty years i:f they are not consideredreasonably desirable by the younger :familiesupon whom :future marketability depends. A location with harmonious surroundings will not decline at the same rate as will a location
in a neighborhood containing old structures mixed with
new. Older properties in a neighborhoodhave a tendency
to accelerate the rate of transition to lower class occupancy. Good planning and uninterrupted development
tend to create continuing desirability of neighborhoods.
The past has demonstratedthat neighborhoodsor subdivisions which were laid out many years ago in accordance
with well executedplanning to develop beauty and charm
have continued in high favor, while other neighborhoods
just as well located have sufferedby reason o:f the absence
of good planning.
f. Neighborhoods tend to decline in investment quality.
Sometimes an exception is an undeveloped or partially
developed new neighborhood. I:f such areas are :favorably
situated, attractive to new purchasers constituting the
market, adequately protected :from adverse influences,
and definitely planned in accordancewith accepted good
housing practice, they will frequently improve for a
period.
g. The stage of developmentof a neighborhood is an important factor. It cannot be presumed, however, that a
neighborhood 15%, 50%, or 75% developed represents
any specific degree of mortgage risk when generalization
is attempted. The stability of such an area may be limited at the start. Later it may progress to a point where
definite evidence is available to indicate the probable
future character of the neighborhood. In other words,
the character of the neighborhood will then have been
..---~
UNDERWRITING
MANUAL
909-911
established. At this stage, a higher Rating of Location
may be justified as a result of certainty which was lacking
in the less advanced stage of development.
ESTABLISHED RATINGS OF LOCATIONS
910. Valuation Sections are required to make Established Ratings of Locations. They contribute to speed in the processing of cases and ultimately lead to economy and consistency. The
availability of Established Ratings of Locations also improves the
effectiveness of preliminary examination. Established Ratings of
Locations should be made for locations which are the most typical,
or characteristic, of sites in the neighborhood,and for locations which
are of the . types most frequently encountered in the business of the
Administration. Where several price ranges of properties occur in
the same neighborhood, several Established Ratings of Locations
should be made and the most appropriate one for comparison should
be selected when processinga case. Established Ratings bf Locations
are made available to Valuators so that when a case involving a property situated within the boundaries of an Outlined Neighborhood is
being processed, the Valuator will have an Established Rating of Location available for guidance. The Valuator proceeds to the established location, familiarizes himself with it, and then proceeds to the
location under analysis. By ascertaining the conditions present at
the subject location and comparing them, feature by feature, with
those which determined the Established Rating of Location, he will
be able to rate the subject location accurately and without delay. It
is quite improbable that any one location in a neighborhoodwill rate
higher than all other locations within the same Outlined Neighborhood for all features in the grid. If the subject location differs in
quality from the rating ascribed to any feature of the Established
Rating of Location, the Valuator should reflect such difference in the
rating of the subject location. The Chief Valuator designates or
numbers each Established Rating of Location with appropriate numbers or symbols in accordance with the instructions in Section 18,
Compilation and Recordation of Data.
911. To make Established Ratings of Locations, it is
necessary that the EconomicBackground Rating of the area be completed in accordance with the procedure described in this section.
This provides the maximum weight for the first feature, Relative
Economic Stability. Having determined the Economic Background
Rating for the area, the first step in making Established Ratings of
Locations is to determine ineligible or caution areas. The central
downtown area can usually be outlined and considered as ineligible.
However, such downtown reject areas must be outlined with the great-
•
•
____ ..,._..- . . . , .- ·:~·------··""·""'*'-'"""'".". ""~-.
. RATING
OF LOCATION
911-912
)
est care in order to avoid unfair decisionsin connectionwith applications for mortgage insurance covering properties which lie within
such borders. Central reject areas include slum and blighted areas, as
well as the central business and commercialsectionsof the city. The
second step is the outlining of neighborhoods for the purpose of
indexing and classifying the Established Ratings of Locations. Adjoining areas having properties of similar age and quality are included in one Outlined Neighborhood. In some instances, this treatment permits the inclusion of a considerableexpanse of territory in
an Outlined Neighborhood. It is not necessary that all locations
within the neighborhood boundary exhibit similar degrees of mortgage risk. Wide variations in total ratings will appear when individual cases are handled. When Established Ratings of Locations
in an Outlined Neighborhood have been completed, the Valuator
accomplishesthe rating of all other locations in the Outlined Neighborhood by comparison with the most comparable Established Rating of Location.
912. An Outlined Neighborhood is not intended to embrace all of the influenceswhich are considered in rating a location.
Some conditions in an Outlined Neighborhoodmay have little or no
influence upon the subject location, while other conditions with respect to significant influences may lie well outside the Outlined
Neighborhood. For example, the immediate neighborhood of a location, as referred to in rating Relative Economic Stability, is generally an area of less proportions than the Outlined Neighborhood.
However, some influences which affect such immediate neighborhoods may emanate from a much larger area than the Outlined
Neighborhood. Obviously, many locations will lie along the
boundaries of Outlined Neighborhoods. The influences affecting
these and other locations are not altered by the presence of arbitrary
boundaries of Outlined Neighborhoods. The purpose of outlining
neighborhoods is to provide adequate arid appropriate means of
indexing and classifying Valuation and Location Rating Data, Real
Estate Market Data, and Established Ratings of Locations. The next
step is to rate the first feature on the Established Rating of Location
form, Relative Economic Stability. This is done in accordancewith
the basic principles of rating set forth in paragraphs 904. to 909, and
the specificrating principles in paragraphs 913to 931. The favorable
and unfavorable factors, and the reason for ascribing the rating indicated must be fully set forth on the Established Rating of Location
form. The next step is to rate the remaining features in accordance
with the basic principles of rating set forth in paragraphs 904 to
909, and the specific principles as shown in paragraphs 932 to 986.
The favorable and unfavorable factors and the reasons for the rating
UNDERWRITING
MANUAL
912
E.STABLISHED llA"\'IHG
,~1[£ggo
OUTLINED NEIGH\30QHOOD NCJ. 1.
;ff'
ti
ESTABLISHED RATING
OF LOCATIONN0.1~
~···I
TYPl~1~At%"
OME. $2.500
•
RATING
OF LOCATION
912-915
assigned must be fully indicated on the Established Rating of Location form for each of these features. The Established Rating of
Location form is completedby furnishing appropriate answers to all
questions contained thereon with respect to neighborhood location,
size, and influences. Upon completion of Established Ratings of
Location for an area, the ratings ascribed each feature in connection
with all Established Ratings of Location in the same price range
should be reviewed, compared and adjusted as necessary. This comparison is made in the ratings of all location features except Relative Economic Stability. This review and adjustment process will
afford a proper qualitative analysis of the respective degree of risk
indicated by individual feature ratings.
RELATIVE ECONOMIC STABILITY
913. In rating this feature the Valuator expresses the
extent to which owners and occupants of properties in the immediate
neighborhood of a location may be expected to participate in and
enjoy those employment and income advantages attributable to the
entire Economic Background Area. Within such an area, neighborhoods will reflect these benefitsin varying degrees. The feature is an
expression of the security of the position of the families in the immediate neighborhood in which the location is situated, in relation
to the security of the families in the immediate neighborhoods of all
other locations in the Economic Background Area.
914. Two sets of elements are reflected in rating this
feature. They are :
a. The general economicbackground, including opportunities
for employment and trends of industrial, commercial,and
other activities which affect the risk in all dwelling mortgages located in the Economic Background Area.
b, The relationship between the general economicbackground
and the immediate neighborhood under consideration.
This relationship involves the extent to which owners and
occupants of properties in the immediate neighborhood of
the subject location may be expected to share in and enjoy
the advantages attributable to residence in the Economic
Background Area.
915. These two sets of elementscannot be treated jointly.
The first is the concern of the Chief Valuator. It is necessary for
him to establish for each Economic Background Area the maximum
possible rating which may be ascribed to the feature, Relative Economic Stability, in accordance with the instructions in paragraphs
917 to 921. This rating may not exceed40 points in any case and is
UNDERWRITING
MANUAL
915
scaled downward for different areas in accordance with the Chief
Valuator's Economic Background Rating. When the Chief Valuator
makes an Economic Background Rating, his conclusion includes the
weights applicable to each of the five rating columns. For example,
if he finds it necessary to rate an Economic Background Area with
a maximum possible weight of 30 points, then he has established the
following table of weights for the first feature:
In
In
In
In
the 1 Coluliln--------------------------------~----the 2 Coluliln-------------------------------------the 3 Coluliln------·------------------------------the 4 Ooluliln
6
12
18
24
In the 5 Coluliln--------------------------------------
points
points
points
points
30 points
If he finds it necessary to establish the maximum possible weight at
15 points, then the following table of weights is applied to the first
feature:
In the
In the
In the
In the
In the
1 Coluliln-------------------------------------2 Coluliln---------------------------------·----3 Coluliln--------------------------------------
3
6
9
12
15
4 Coluliln-------------------------------------5 Coluliln--------------------------------------
points
points
points
points
points
•
The following table may be used for ready reference. It indicates
the individual columnar weights for ratings from 10 to 40.
Column
--
1
2
--
2
4
--
s
6
4
-8
5
I
Column
1
2
3
--
--
5
-10
--16
10
4
5
21
--26
--
2
4
7
9
11
5
11
16
22
27
2
7
10
12
6
11
17
22
28
3
5
5
8
10
13
6
12
17
23
29
3
6
8
11
14
6
12
18
24
30
3
6
9
12
15
6
12
19
25
31
3
6
10
13
16
6
13
19
26
32
3
7
7
10
14
17
7
13
20
26
33
4
11
14
18
7
14
20
27
34
7
7
14
21
28
35
14
22
29
36
4
8
11
15
19
4
8
12
16
20
4
8
13
17
21
7
15
22
30
37
4
9
13
18
22
8
15
23
30
38
5
9
14
18
23
8
16
23
31
39
5
10
15
19
24
8
16
24
32
40
5
10
15
20
25
I
•
RATING
OF LOCATION
916-919
)
916. The other set of elements, the general relationship between the economicbackground and the location under consideration, is the concern of the Valuator who renders the Report
of Valuator on the case. It is necessary for him to form a judgment with respect to the degree to which the particular location
and its immediate neighborhood receive the benefits of the economic
background. This judgment is formed in accordance with the instructions below, in paragraphs 922 to 931, and is recorded by an
X mark in one of the spaces opposite the first feature on the rating
grid.
917. Economic Background Rating. A single Economic Background Rating is established for each Economic Background Area. The Chief Valuator shall delineate areas for the purpose of establishing Economic Background Ratings, and he is required to make certain that all Valuators know the established limits
of the areas in which they work. In some cases, twin cities will be
treated jointly and but one rating ascribed. In virtually all cases,
suburban communitieswill be included in the same Economic Background Area and accorded the same rating as the city to which they
are suburban. On the other hand, many satellite cities may be
ascribed ratings independent of the one given to the major city near
which they are located.
918. It is advisable to express the Economic Background Rating in terms of the weight ascribed for the 5 column,
The highest rating ascribed to any area in the United States is 40
points. In no instance,however,is an EconomicBackground Rating
of less than 10 points in the 5 column permitted. To establish these
ratings, the Economic Background Rating Form, FHA Form No.
2096,is provided for the use of Chief Valuators. Its use will insure,
to a major degree, uniform treatment of all areas. This form is not
inserted in the case binders. It is used solely as an aid to the Chief
Valuator in determining the Economic Background Rating for use
in connectionwith all cases in the area to which the rating applies.
Chief Valuators are not permitted to allow their conclusionsto becomeknown to borrowers, mortgagees,the public, or others than the
Director and membersof the Underwriting Staff.
919. In making(ii,n Economic Background Rating, the
Chief Valuator forms an opinion of the probable future stability and
sufficiencyof the industrial, commercial,and other economicactivities
in the Economic Background Area. In arriving at his opinion, he
considers the factors involved in . terms of sources and amounts of
family incomes which support investment in residential real estate.
These elements are viewed in terms of their sufficiency,diversity,
and probable future stability.
UNDERWRITING
MANUAL
920-923
920. The effect of the economic background upon the
risk involved in mortgages has been recognized by mortgage lenders.
Some lenders have excluded entire cities from their lists of acceptable areas. Others have limited their activities to cities beyond
definite population sizes and have favored selected locations within
such accepted cities. It is not the policy of the Federal Housing
Administration to exclude entire cities and towns from the benefits
of mutual mortgage insurance. However, it may be that within
certain communities where present day and expected future stability
is exceedingly low, only certain favored locations which surpass the
general average of the town or community may prove acceptable for
insurance. The rating ascribed shall apply to all locations situated
in the area rated. From time to time Chief Valuators will find it
necessary to revise their Economic Background Ratings to keep
abreast of changing conditions. Such revision does not, of course,
affect cases already processed.
921. The Economic Background Rating gives consideration only to the underlying factors that affect the population of
the entire area. It does not show how the various income groups
are distributed throughout the area or what neighborhoods .are good
or bad from the standpoint of mortgage risk. It cannot be taken
as a substitute for the analysis of specific locations. It must be
recognized that even in areas having the most stable economic backgrounds, there are sections which do not derive any great benefit
from their location in such areas. Specific instructions covering
the process of establishing Economic Background Ratings are given
in Section 18, Compilation and Recordation of Data.
922. Rating of the Feature. The Valuator must ascertain the extent or limits of the area included in the Economic Background Rating in order to rate this feature properly.
These limits
are established by the Chief Valuator according to the principles
described above. The following instructions for the rating of the
feature, Relative Economic Stability, apply to practically all cases
processed by the Underwriting Staff. Occasionally, however, it
may be necessary to consider unusual cases such as those involving
resort properties.
In such cases, the rating of this feature should
reflect the group attitude of owners of such properties, with respect
to continuing ownership and retirement of mortgage indebtedness.
923. The basis of rating the feature, Relative Economic
Stability, is a comparison of the group income characteristics of
the present and prospective occupants of properties in the immediate neighborhood of the location under investigation with the group
income characteristics of present and prospective occupants of properties near all other locations within the Economic Background Area.
•
•
RATING
OF LOCATION
923-925
In this respect it differs from the method of rating the remaining
seven features of the grid. This is necessary because the rating of
this feature reflects the degree to which the occupants of properties
ju the vicinity of the location participate in the general advantages
attributed to the Economic Background Area. The competitive
area basis of rating would fail to produce a satisfactory analysis
of income characteristics. For this reason, when rating Relative
Economic Stability, comparison is made with all other neighborhoods, both competitive and noncompetitive.
924. Stability of Family Incomes. The group income
characteristics of the occupants of properties in the . immediate
neighborhood of the location under consideration are analyzed from
the points of view of their sufficiencyand stability with respect to
both sources and amounts of income received. It is necessary to
devise a method whereby those income characteristics can be analyzed. An examination of the income characteristics of employed
persons, with particular reference to the probable continuance of
employment and incomes, suggests a method which can be readily
adopted for the use of Valuators.
925. At the bottom of the employmentscale, a large percentage of the employed population of a city is found working in
the capacity of laborers. A member of this group has little or no
individual skill, because any one person can usually perform the
work as well as any other. Physical endurance is the primary requisite of this employed group. The next group encountered above
the laborers in the employment field includes the semi-skilled mechanics and lower-grade clerks. The members of this group exhibit
some individuality, because they have demonstrated through knowledge or ability a degree of superiority over laborers. Further up the
employmentscale are encounteredmechanicsand office workers. The
capacity of members of this group is apparent, because they have
shown the ability to rise to a point above the large groups below
them. Next in the scale are found the foremen, chief clerks, and
others of like standing in the employment world. These people usually have well establishedincomes. Above this group are the junior
executives. It is consideredthat this group presents, for the purpose
of determining mortgage risk, the best income characteristics in the
entire employment field. The usefulness, versatility, and ability of
this group have been firmly established. Should they lose their present employment,it is usually possible for them to find ready employment in ai similar line of activity. At least this group possesses
the characteristics which would provide them with the ability to find
ready employmentif there are sufficientsources from which employment may be secured. Should it become necessary for members of
UNDERWRITING
MANUAL
925-928
this group to seek employment in lower strata of the employment
scale, they can readily replace those below them by reason of their
demonstrated superior ability and usefulness. At the top of the employment scale is found the senior executivegroup. Experience has
demonstrated that although their leadership is most firmly established, the stability of incomes is not as great as that evidenced in
the junior executiveclass. Opportunities for employmentin similar
capacities are usually limited. While employment is always available in the various strata of the employment scale below them, the
incomes derived from such employment will usually prove inadequate to maintain their present standard of living and the retirement of mortgage indebtedness on expensive properties. It should
be understood that while the senior executive group will, in most
instances, rate below the junior executivegroup, only in exceptional
cases will the former rate below the 3 column.
926. It is necessary for the Valuator to determine the
character of work performed by occupants of properties in the immediate neighborhoodof the location under investigation. With the
employment charactertistics of occupants determined, the income
levels are indicated. Where the incomelevel of a neighborhoodincludes rental returns from duplex houses and other residential units
within the same area, neighborhoodinfluenceswill be accelerated in
proportion to the degree in which the incomelevel results from such
rentals.
927. Sufficiency of Family Incomes. Such considerations as the standard of living established by the various income
groups and the financial outlay necessaryto maintain that standard,
signs of extravagance in living, and indications that neighborhood
occupantsas a group have bought too expensiveproperties, will have
a direct effect on the rating to be ascribed. Where it is observed
that any group of occupants tends to live in an extravagant manner
or where there is undue optimism in the purchase of dwellings, the
column rating ascribed will be below that which the employment
group might indicate. In the event the condition is so serious that
probability of successful retirement of mortgage indebtedness is
absent, the rating will be in the Reject column.
928. It is recognized that the immediate neighborhoods
of many locations will show a considerable spread in the income
levels of occupants. It is usually possible to determine the typical
income level of occupants, and it should be used as the basis of
rating. The rating ascribed may be affectedonly to a slight degree
by the income characteristics of those occupants not typical of the
neighborhood occupancy.
•
•
RATING
OF LOCATION
929-931
(
929. Social Characteristics of Neighborhood Occupants.
While the rating of this feature is based upon the group income
characteristicsof the occupant group at the immediate neighborhood
of a location, other considerations,such as the varying social characteristics of neighborhood occupants, including the group attitude
toward obligations and living standards, are warranted and will be
reflectedto some degree in the rating. By social characteristicsare
meant the moral qualities, the habits, the abilities and the social,
educational and cultural backgrounds of the people residing in the
immediate neighborhood.
930. Stage and Trend of Neighborhood Development.
In newer neighborhoods,consideration should be given to (a) the
physical need or shortage of homes of the type and in the price class
contemplated, (b) whether the need originates with a :financially
capable group of purchasers, and ( c) whether the sales prices and
values approximate cost of completedproperties. In older, built up
neighborhoodsthe principal consideration will be given to the presence of a ready, :financiallycapable market for the homeswhich exist
:in the neighborhood,at their current value levels.
931. Probability of Forced Sales and Foreclosures. It
is logical to anticipate a change in the class of occupancy in the
neighborhoodif the :financialcondition of the residents is such that
forced sales and foreclosures may become numerous. Properties
must remain desirable to their present owners if a satisfactory lending experienceis to be expected. A change in class of occupancyis
frequently accompanied by a decline in the values and seriously
affects the continued desirability of the properties to their original
owners. Mortgage risk is greater in such neighborhoods. As an
index of Relative Economic Stability an unfavorable foreclosure
experience in a neighborhood is of limited significance if it was
caused by conditions which no longer exist, or if the experiencewas
typical of the entire Economic Background Area. The probability
of future foreclosuresand forced sales, however, may be influenced
by factors which are latent in the present situation. For example,
there is greater risk o:f :foreclosurein residential areas where mortgages represent a high ratio of loans to values, than in an area where
the average mortgage indebtedness is a low percentage o:f values.
The added burden of interest and amortization payments on the
larger loans may be such that during trying times foreclosure becomes almost inevitable. For this reason when properties in a
neighborhood are heavily mortgaged, an element of instability may
UNDERWRITING
MANUAL
931-934
be introduced. The Valuator should give consideration to the relative amount of mortgage indebtedness in the neighborhood as compared to other neighborhoods, which may be measured, for the purpose of rating, in terms of average ratio of loans to current values.
The probable future rate of foreclosure, insofar as it is likely to be
caused by unwise control of expenditure, is of utmost importance.
PROTECTION FROM ADVERSE INFLUENCES
932. This feature has a total weight of 20 points, which
indicates it is one of the most important features in the Rating of
Location. Protection from Adverse Influences is concerned with
more than zoning and deed restrictions. These are of great importance, but they do not represent all of the protection which is or may
be afforded a location. Where little or no protection is provided from
adverse influences, the Valuator must not hesitate to make a reject
rating of this feature.
933. Zoning. Protection in the form of zoning restrictions is becoming more general. One of the best artificial means of
providing protection from adverse influencesis through the medium
of appropriate and well drawn zoning ordinances. If the provisions
of an ordinance have been well worded and drawn from a thorough
knowledge of existing and probable future conditions in the city,
and if the ordinance receives the backing of public approval, an excellent basis for protection from adverse influences exists. If an
ordinance has been drawn with little or no real understanding of its
purpose, or without a desire to promote an orderly city growth, or
if it lacks public approval, the chances are that it will offer little
protection from adverse influences. Even when an ordinance is
ably executed, investigation must be made to determine whether
infractions of the zoning law are permitted. If the law may be
changed readily, or if the provisions themselves are not strictly enforced, such conditions cannot be expected to afford much protection
from adverse influences. Greater importance is attached to zoning
protection in and near large metropolitan centers, than in places
having smaller populations and less rapid rates of growth. Absence
of zoning may be a proper basis for rejection in the former case,
but would not necessarily cause rejection in the latter case.
934. Restrictive Covenants. Deed restrictions are apt to
prove more effective than a zoning ordinance in providing protection from adverse influences. Where the same deed restrictions
apply over a broad area and where the restrictions relate to types of
structures, use to which improvements may be put, and occupancy,
better protection is afforded. Where adjacent lots or blocks possess
•
•
RATING
l
OF LOCATION
934-936
altogether different restrictions, especially for type and use of structures and occupancy, the effect of such restrictions is minimized. A
location lying in the path of business expansion is often unprotected
from the business encroachment even though deed restrictions for residential use may be present. It must be realized that deed restrictions, to be effective,must be enforced. In this respect-they are like
zoning ordinances. If there is a probability of voiding the deed
restrictions through inadequate enforcement of their provisions, the
restrictions themselves offer little or no protection from adverse
influences. In other words, if a property is so situated that its logical
use is other than for residential purposes, it will very likely be put
to its highest and best use in the course of time, even though it is
restricted to residential use.
935. Natural Physical Protection. The geographical
position of a location may afford reliable protection from adverse
influences. If a location lies in the middle of an area well developed
with a uniform type of residential properties, and if the location is
away from main arteries which would logically be used for business
purposes, probability of a change in type, use, or occupancy of properties at this location is remote. The degree of immunity offered to
a location because of its geographical position within the city is to
be considered. Natural or artificially established barriers will prove
effective in protecting a neighborhood and the locations within it
from adverse influences. Usually the protection from adverse influences afforded by these means includes prevention of the infiltration of business and industrial uses, lower class occupancy, and inharmonious racial groups. A location close to a public park or area
of similar nature is usually well protected from infiltration of busi- /
ness and lower social occupancy coming from that direction. Hills
and ravines and other peculiarities of topography often make encroachment of inharmonious uses so difficult that protection is afforded. A high speed traffic artery or a wide street parkway may
prevent the expansion of inharmonious uses to a location on the
opposite side of the street. However, if a high speed traffic artery
passes directly through a desirable neighborhood area with similar
development on each side of the artery, the noise and attendant
danger constitute an adverse influence, rather than a protection.
The same holds true for the presenceof railroads, elevated or surface
lines, and other means of transportation.
936. Surrounding Homogeneous Neighborhood. When
a neighborhood has been solidly developed in accordance with accepted good housing practices, such a development alone usually constitutes good· protection from adverse influences. But many solidly
UNDERWRITING
MANUAL
936-939
developed neighborhood areas present conditions which are :far dif:ferent:fromthat which is regarded as good housing practice. Little
protection is offered to such a neighborhood because of the probability that new and more attractive competing neighborhoods may
be developed. The solidly built up neighborhood where good housing has not been provided is readily subject to change in occupancy.
Narrow streets, excessivelot coverage,inadequate light and air, and
poor circulation within the neighborhood area, as well as the intermixture of types, price levels, and a general absenceof architectural
attractivenessin dwellings,represent adverseinfluencesin themselves.
937. Quality of Neighboring Development. The quality
of dwelling construction is significant, inasmuch as unsubstantial,
flimsy construction is subject to rapid deterioration which hastens
the lowering of class of occupancy. The same result may be expected
for locations whoseproperties present freakish architectural designs.
The rating will be adversely affectedif the neighboring development
consists of old, obsolete dwellings. The presence of overimprovemerit or underimprovementin the neighborhood constitutes a condition which may adversely affect location ratings. Areas surrounding a location are investigated to determine whether incompatible
racial and social groups are present, for the purpose of making a
prediction regarding the probability of the location being invaded
by such groups. If a neighborhoodis to retain stability, it is necessary that properties shall continue to be occupiedby the same social
and racial classes. A change in social or racial occupancygenerally
contributes to instability and a decline in values.
938. Ribbon Developments. The same principles apply
when rating locationson ribbon developmentsalong highways. Such
locations tend to attract uses which are often considered,from a residential standpoint, as n:uisances. Therefore, the prospect of lessened
desirability of such locationsfor residential use directly affects mortgage risk. However,where the likelihoodof such nuisancesis remote
or where prospective purchasers for residential use are tolerant of
present or prospectivenuisances,reject ratings of this feature are not
warranted.
939. Nuisances. Nuisances already present in a neighborhood affect mortgage risk in two ways. The first is the direct
effecton the appeal of the neighborhoodand this is taken into account
when rating the feature, Appeal. The second is the indirect effect
on mortgage risk in that the nuisances may accelerate change to a
lower grade of occupancy. The latter condition is consideredwhen
rating Protection from Adverse Influences. The effect of a nuisance
varies according to the type of neighborhood occupants and their
degree of tolerance of the condition.
•
RATING
OF LOCATION
940-944
940. If a nuisance has already had its effect, that is, if
the class of occupancy has already changed and no further change
appears probable because of the nuisance, the rating of Protection
from Adverse Influences is not affected. On the other hand, if the
nuisance is likely to make the occupants dissatisfied with the location, the rating of this feature will reflect the condition. In either
case, the rating of the feature, Appeal, will be affected if marketability to present class of occupants is impaired.
FREEDOM FROM SPECIAL HAZARDS
941. Special hazards refer directly to conditions which
have an influenceon the personal safety and health of the occupants
in a given neighborhood, as compared with similar conditions surrounding all competitive locations.
942. Topograplvy. Special hazards are frequently found
to result :from the peculiar topography of a location or its neighborhood. Streets with a heavy grade, ravines, abrupt changes in
contour of land, soil erosion, and hillside locations may reflect special
hazards of varying degrees. The topography of some cities is
such that low land will be developed for residential purposes largely
because such ground is located close to centers of employment or
the downtown area of the city. These areas may be subjected to
intense summer heat, poor circulation of air, periodic fogs, and, in
some instances, floods.
943. Subsidence. The danger of subsidenceis a special
hazard which will seldom be encountered except in mining areas.
In such areas a consideration of the extent of mining operations, the
condition and character of the subsurface formations, the depth of
mining operations, and the location of existing shafts and tunnels is
necessary to· determine whether the danger is imminent, slightly
probable, or negligible. In those areas where the danger of subsidence is not determinable in the course of a routine examination,
reject ratings will be warranted unless complete and satisfactory
evidence can be furnished the Chief Valuator that the damage from
such danger would be negligible.
944. Earthquake, Tornado or Hurricane H 'aeard. There
are many types of windstorms, each of which represents some degree
of hazard under certain conditions. In a neighborhood of poorly
constructed homes ;more damage may result from flying debris
than from the force of the wind alone. When this condition is apparent it should be properly reflected in the rating. In general, the
above principle will apply to the hazards associated with the probabilities of earthquakes.
UNDERWRITING
MANUAL
945-950
945. Flood Hazard. In many cities certain low areas
are subject to periodic floods. Frequently the result of flood waters
in a city is nothing more than a temporary inconvenience,but sometimes floods are attended by serious property damage and great
danger to personal safety. It is the relative freedom from such
hazards which is to be rated in this feature.
946. Traffic Hazard. Coincidentalwith the accelerating
rate of traffic accidents is the increasing favoritism for homesites in the more protected areas. This trend results from an effort
to escape the hazards of high speed traffic thoroughfares or the
hazards of principal streets where traffic is not necessarily fast, but
heavy and dangerous. Rating of this feature cannot approach reasonable accuracy unless full cognizance is given to this type of
hazard.
947. Fire and Explosion Hazards. Frequency of occurrences is not necessary to establish hazards. They are real as long
as the elements of danger exist, even though the related occurrences
never transpire. This viewpoint is essential to understand fully the
hazards of fire and explosion. The presenceof commercialor industrial activity dealing with the storage or manufacture of volatile or
explosive mixtures, and conditions which indicate even a remote
probability of conflagration are examplesof this type of hazard.
948. Hazards to Health. Some influencesconsidered in
rating the feature, Protection from Adverse Influences, and some
conditions consideredin rating the feature, Appeal, are likewise considered in rating Freedom from Special Hazards if they affect the
personal safety and health of neighborhood occupants. Some of
these influencesand conditions are smoke, fog, chemical fumes, exhaust gases, stagnant ponds or marshes, poor surface drainage, and
excessiveheat or dampness.
ADEQUACY OF CIVIC, SOCIAL, AND COMMERCIAL CENTERS
949. For a neighborhood to remain stable and retain
desirability for the same class of occupancy,it is necessary for it to
be adequately served by grade and high schools,neighborhood shopping centers, churches, theatres, parks, playgrounds, community
halls, libraries, and colleges. In some instances many of these are
available to the residents at points within the neighborhood, while
in other instances some,or even all, of them may be situated beyond
the boundaries of the neighborhood.
950. Only in a few instances will all the kinds of facilities entering into the consideration of this feature be present. A
favorable rating is made when it is considered that those present
provide adequate means :for convenient and pleasant living with
•
•
RATING
OF LOCATION
950-952
suitable provision for cultural development. The older residential
areas within a city will usually have available more of these facilities than the newer neighborhoods. The centers making for convenience in living and cultural benefit usually follow rather than
precede the building up of any residential area. However,those new'<
neighborhoods which are better served by conveniences will usually)
develop and maintain a character more favorable to stability than
those in which they are lacking. Areas occupied by low-income".
groups will ordinarily require easier access to civic, social, and commercial centers than the areas occupied by residents of higher in- I
come levels. The rating should express the sufficiency,quality, and' j'
availability of these facilities as related to the requirements of the I
social class of occupancy, and the effect resulting from comparison
of similar facilities at competitive locations.
951. Quality and Accessibility of Schools. When considering the question of schools, distances to the schools should be
related to the public or private means of transportation available
from the location to the schools. The social class of the parents of
children at the school will in many instances have a direct bearing.
Thus, physical surroundings of a neighborhood area may be favorable and conducive to enjoyable,pleasant living in its location. However, if the children of people living in such an area are compelled
to attend school where the majority or a considerable number of
the pupils represent a far lower level of society or an incompatible
racial element, the neighborhood under consideration will prove far
less stable and desirable than if this condition did not exist. Frequently, upon payment of a fee, children in such an area could attend
another school with pupils of their same social class. However,
desirability of the neighborhood, when compared with competitive
locations, might be adversely affectedby the additional expense. In
many instances where a school has earned a prestige through the
quality of instruction and adequacy of facilities, it will be found
that such · attributes will be an element in maintaining the desirability of the entire area comprising the school district. In cases
where schools are not immediately present, consideration is given to
convenience and cost of required transportation.
952. Quality and Accessibility of Shopping Centers and
Amusements. The central downtown, commercial,financial and theatrical district serves, in some measure, all inhabitants of an Economic Background Area. Therefore, the only consideration given
in this feature to the downtown district is its relative distance
and availability to competitive locations. Neighborhood shopping
centers are an essential part of community life, in all except the
smaller towns. The benefits they afford to the occupants of a given
UNDERWRITING
MANUAL
952-955
location are measured by their presence, quality, adequacy, availability, and the relationship with similar benefits afforded competitive locations. While the presence of neighborhood stores may be
essential to the convenienceof occupants of a low-incomearea, the
mere existenceof such elements near a location occupied by people
of high incomeswould be a destroying influence,rather than a favorable asset. However,it is desirable for the higher income level area
to have these shopping centers and other facilities easily available,
although it is undesirable for the dwelling locations to be situated
adjacent to such centers.
953. Quality and Aeeessibility of Churches, Clubs, and
Recreation Centers. Similar considerations are to be given to the
presence, quality, and distance to churches, clubs, and recreation
centers. For certain types of neighborhoods, means of recreation
are essential, whereas in others they represent merely a passive
contribution to general welfare. For locations in cities which are
devoted in part or as a whole to the tourist or resort business,almost
the entire basis for stability is represented by the means provided
for recreation and amusement. Ready access to neighborhood
churches, theaters, public and private golf courses, and park and
playground areas is always desirable.
•
ADEQUACY OF TRANSPORTATION
954. Ready accessto places of employment,main shop·
ping districts, and other neighborhoodswithin the city is a requisite
of neighborhood stability. Transportation itself is not rated, but
rather the adequacy of transportation for the type of residents occupying the location. The rating is made by comparing the adequacy of transportation afforded competing locations occupied by
inhabitants of similar income levels. The highest rating is given to
those locations where services and schedulesare the best and where
costs are the lowest. The following deals principally with cities
which, because of their size, require the facilities provided by public
transportation systems. The underlying principles remain the same
for smaller communitieswhich do not have these systems. In the
smaller communities considerations must revolve around the character of the streets and sidewalks, and the distance from the location
to the civic, social,and commercialcenters.
955. Diversity of Available Services. In many cases a
single transportation line may furnish entirely adequate facilities for
the area it serves. However, better service is often afforded, especially with respect to the frequency of service, when two or more
means of transportation are available. Therefore, the diversification
of available services is usually a significant factor in determining
•
BATING
OF LOCATION
955-959
the relative adequacy of competitive locations with respect to transportation facilities.
956. Qurility and. Frequency of Services. The quality of
transportation in general, and especially the quality of its management, equipment, and service, will be reflected in the ratings of
this feature. Frequency of service is another important factor in
determining Adequacy of Transportation. Long delays occasioned
by waiting for a car or bus, and overcrowded conditions resulting
from infrequent service will adversely affect the rating if such inconveniences are absent at competitive locations. The permanence of
the common carrier providing the transportation is considered, and
where there is a probability of discontinuance of service, as the result
of unprofitable operation, a. low rating is warranted. Contemplated
transportation facilities never justify as much weight as facilities
which are actually available.
957. Oost of Service. The fares charged by common
carriers are of no concern if the rates, whether high or low, are the
same for all sections of the area served. Relative cost at competitive locations is the only proper basis of determining the competitive position of a location as reflected by the transportation costfactor relationship. Cost of transportation can be reasonably determined only by considering the transportation requirements of
all members of the family, and of such servants as may be employed
by them. Families of the low-income group require public transportation facilities except in small communities where such facilities are neither provided nor essential. These families also require
cheaper transportation than do the families of higher income groups.
Reliance upon private automobiles makes it possible for families, except in the low-income group, to occupy suburban areas which are
not served by public transportation facilities, without appreciable
effect upon their transportation requirements. In such cases, if competitive locations are served by public transportation facilities, the
transportation cost differential will adversely affect the rating of
locations dependent upon private automobile transportation alone.
958. Distance from Location to Service. The mere
presence of public transportation facilities within the neighborhood
of a location does not indicate adequate facilities. The distance between the location and the boarding point of the public transportation line may cause great inconvenience, especially in bad weather,
or it may introduce certain hazards resulting from intervening
traffic crossings. It may also appreciably increase the time required
to reach the destination of travel from the subject location.
959. Time Required to Destinations. The time consumed in travel on public transportation lines is of much greater
UNDERWRITING
MANUAL
959-961
,,
L_
importance than the distance covered. Therefore, the relative adequacy of transportation afforded competitive locations will be influenced by distance only when adjustment, if applicable, is made to
reflect the time element. In small communities where public transportation facilities are not available, distance becomesthe important
factor. In measuring time, consideration must be given to delays
resulting from necessarytransfers.
960. Oonditiorn of Streets and Roads. Where transportation is wholly or partially dependent upon the use of private
automobilesor buses, the relative adequacy of such means will be influencedby the character and conditions of streets and roads. Consideration must also be given to any unfavorable topographical and
climatic conditions which would require, for example, the crossing
of steep hills, especially during seasons of bad weather.
SUFFICIENCY OF UTILITIES AND CONVENIENCES
961. Presence of Required Utilities. Marketability of
residential properties and, likewise, mortgage risk are affected by
the presence or absenceof such services as police and fire protection,
telephone service,gas, electricity, water supply, storm sewerage,sanitary sewerage, garbage disposal, street lighting, street paving, sidewalks, and curbs. The rating should reflect, with respect . to these
utilities, the comparative advantages or disadvantages of the location under consideration with all competitive locations within the
Economic Background Area. Also, it should reflect the degree to
which the present utilities and conveniences fill the needs and desires of both the present occupants and the prospective purchasers
in the neighborhood of the subject location. Utility requirements
will vary with differencesin the social and financial class of people
occupying the area. In most instances, community water which is
pure and under sufficient pressure is considered a definite requirement. In other communities, individual water supplies will prove
adequate for some of the locations. Thus it is necessaryto interpret
the present and expected future desires of the market when rating
this feature. It may generally be assumedthat the prospective market will be composedof the same class. However, if a neighborhood
is changing in occupancy, the needs and desires of the lower class
which will eventually prove to be the occupants of the neighborhood
shall be taken into consideration. Consideration should be given to
the probability of additional utilities and conveniences being installed. The rating under such circumstances cannot be as high as
it would be if the additional utilities and convenienceswere already
present at the location. Until the service is in actual existence and
•
•·
I
....
RATING
A!§
....
$
OF LOCATION
961-967
available, there is always some doubt regarding "its ultimate
installation.
962. Quality of Utilities. Utilities may be present in an
entirely satisfactory measure and still fail to meet requirements
if the quality of such utilities is substandard. Examples of utilities
and conveniences which offer restricted benefits due to poor quality
are: (a) streets in bad repair, ( b) fire protection dependent upon
inadequate equipment, ( o) gas service of insufficientpressure, and
(d) electrical service whichis frequently interrupted.
.
963. Oost of Services. Cost is another element which
must be considered, together with presence and quality of utilities
and services. Cost is only considered when it produces advantages
or disadvantages of the location being rated as determined by comparison with other competitive locations.
LEVEL OF TAXES AND SPECIAL ASSESSMENTS
964. The rating of this feature reflects the effect which
taxes and special assessmentsmay have on the desirability of the
location for home ownership. Therefore, it is necessary to determine the total amount required for taxes and special assessments.
This amount is compared with the amount required for taxes and
special assessmentsin connectionwith properties of similar value in
competing areas.
965. Relationship of Ta» Burden with Competitive Locations. The only concern in rating this feature is to determine the'
relative advantages or disadvantages of the tax level at the subject location in comparison with other competitive locations within
the area. It is well known that the basis for assessment,and often
the tax rate itself varies for different areas within a city. Where·
specificlocations are receiving preferential treatment in this regard,
and where it is estimated that such condition will continue, a high
rating of this feature is in order, regardless of the reasons for the
condition.
966. Inasmuch as the extent of the general tax burden in
the city as a whole is not considered in the rating of this feature,
it 'should be observed that it is proper to give certain locations a.
high rating even though the city has a relatively high tax level.
Thus, in an Economic Background Area, it is possible to have locations which warrant a 5 column rating even though the tax rate.
may be 3%, providing this is the lowest rate in the Economic Background Area.
967. Nature, Oost, and Duration of Special Assessments.
If special assessmentsexist, or if they are in immediate prospect,
the Valuator should consider the length of time such assessments
""'
i.__
UNDERWRITING
MANUAL
967-970
may continue, as well as the total payment required. Even though
special assessment payments may be required for only a few years,
they should be given consideration in the rating. A few years
of high special assessments may seriously affect marketability and
desirability for home ownership. Special care must be taken in
cases where special assessments are in the nature of ad valorem taxes.
In such cases, each individual property is security for an entire bond
issue and cannot be freed from the special assessment lien until the
bond issue has been entirely retired. Low ratings of this feature
must be given in all such cases, and if the special assessment burdens are excessive, reject ratings may be warranted.
APPEAL
968. The factors affecting this feature are natural physical charm and beauty of surroundings, geographical position of
location, appearance of street layout, harmonious character of buildings, social attractiveness of environment, and freedom from nuisances. In rating Appeal, consideration is not given to factors included in other features in the Rating of Location, except as specifically discussed under the features, Protection from .Adverse Influences and Freedom from Special Hazards. Appeal is purely
relative and is to be measured by the attitude of the income group
or the social class which constitutes the market for properties near
the location under consideration. Thus, it will be possible for a
neighborhood in a low price range to possess as high an appeal for
its prospective market as a neighborhood in a high price range.
Appeal is measured by a comparison between competing areas of
the same price range where the market is made up of the same income
groups.
969. Natural Physieal Charm and Beauty of Location.
In general, mortgage risk is minimized if locations and their surroundings are physically attractive. For example, the market for
high priced properties may prefer certain distinctive characteristics
such as rolling topography, pleasing landscaping, wooded lots, and
presence of brooks. However, the mere presence of these characteristics is not ratable, but the comparison between characteristics found
in competing locations is the basis for rating. It may be that lower
priced locations do not have such attributes. On the other hand,
such locations may possess physical charm principally because of
well kept homes, grounds and streets. Therefore, it is equally possible to obtain high ratings :for this :feature in lower priced locations.
970. Geographical Position of Location. The geographical position of the location may have a distinct bearing upon the
•
•
··--.-----~
RATING
OF LOCATION
970-974
)
rating of this feature. Broad vistas, pleasing views, and climatic
advantages resulting from geographical position are factors which
will tend to attract people to a location. Appeal will be adversely
affected, however, if the approach is through an unsightly area.
971. Layout and Plan of Neighborhood. Attractive
street layouts which are suitable to the character of improvements
and which preserve the natural charm of the land are elements of
appeal. Areas so laid out have a tendency to remain desirable to
present owners and to command the continued interest of prospective
purchasers.
;
972. Architectural Attractiveness of Buildings. The
appeal of a location is strengthened if the buildings in the immediate
neighborhood are attractive as a group and harmonize with each
other and with their physical surroundings. Neighborhoods may be
encountered in which the predominant architectural design is inappropriate to the community. A location under this influence lacks a
degree of the appeal attributable to other locations in more harmonious environments. A pleasing variety that results in harmoniously blended properties is greatly to be desired and should result in
a high rating of this feature. Variety does not mean an incongruous ~
mixture resulting in unpleasing contrasts. It has been demonstrated
that pleasing variety for neighborhoods and entire developments can
be successfully accomplished even in areas designed for modest
homes.
973. Social Attractiveness. Satisfaction, contentment,
and comfort result from association with persons of similar social
attributes. Families enjoy social relationships with other families
whose education, abilities, mode of living, and racial characteristics:
are similar to their own. Appeal which is attributable to significant
social influences is frequently indicated by the relationship of competitive locations to the paths of city growth. Locations which lie
in a path of city growth generally indicate the presence of certain
strong elements of appeal which in themselves have influenced the
direction of residential development. Appeal is, however, purely
relative and is to be measured by the attitude of the income group or
the social class which constitutes the market for properties near the
location under consideration.
974. Nuisances. Billboards, service stations, offensive
noises and odors, unsightly properties, and stables may be examples
of nuisances which are objectionable to neighborhood occupants and
which adversely affect appeal and should be recognized in the rating
of this feature.
l
UNDERWRITING
MANUAL
975-978
SPECIAL CONSIDERATIONS IN RATING UNDEVELOPED SUBDIVISIONS
AND OTHER SPARSELY BUILT AREAS
975. The instructions and principles for developedneighborhoods set forth in the foregoing paragraphs apply equally to undeveloped or other sparsely built areas. When judging the latter, it
is essential to look into the future and forecast the environment that
will likely be created becauseof the existence of certain conditions in
combination with certain assumptions. Special consideration is given
various features when rating such locations. These special considerations are outlined in succeeding paragraphs.
976. Successful new areas are recognized as the best mortgage lending areas. To be successful, a new or partially developed
area must reach a stage of being substantially built up within a
period of a very few years. Due to the fact that most outlying residential areas will be developed as a result of the decentralization
movement rather than as a result of population increases, the economic background of the community assumes great importance, since
those communities which will experience a prosperous future will
decentralize and build new residential areas much faster than those
for which a less advantageous future is forecast.
977. Since assumptions in combination with certain
known conditions constitute the basis for rating, new and partially
developed locations require low ratings; that is, satisfactory areas
receive a passing but not a high rating. As the character of these
areas is established, subsequent ratings will reflect the new existing
conditions. The character of the area becomesevident when a considerable percentage of lots have been improved, or when a satisfactory concentration of dwellings is present. The wave system of
development-or concentration of improvement and building activity
in one portion of the subdivision until it is established, before starting activity in an adjoining section-is an orderly procedure which
may greatly reduce mortgage risk. Such a program assures structures of the same age, and if development is halted for any reason,
the close grouping of homes will not decrease neighborhood and location stability.
978. In the early stages of development, most locations
in undevelopedsubdivisions will not warrant ratings sufficientlyhigh
to qualify for mortgage insurance unless the ratings are predicated
upon compliance with certain conditions designed to assure satisfactory standards of the subdivision. Ratings will usually be predieated upon such conditions as installation 0£ streets and utilities,
restrictive covenants applying to all lots in the subdivision, liquidation of delinquenciesin taxes or mortgage debt, and, in somecases,the
construction and sale of a specificnumber of additional homes. The
t-
•
•
RATING
OF LOCATION
978--980
)
latter predication is made only if additional sales of new homes are
necessary to establish the character of a neighborhood. If such
predications are made, they are set forth as conditions on the Report of Chief Underwriter, FHA. Form No. 2017, and subsequently
on the commitment.
979. Relative Economic Stability. In rating this feature, the Valuator considers the combined income characteristics of
both occupants and persons constituting the market for the price
class of improvements contemplated. Since an assumption is the
basis for rating, high ratings are seldom justified.
980 (1). Protection from Adverse lnfiuences. The
Valuator should realize that the need for protection from adverse
influencesis greater in an undeveloped or partially developed area
than in any other type of neighborhood. Generally, a high rating should be given only where adequate and properly enforced zoning regulations exist or where effective restrictive covenants are
recorded against the entire tract, since these provide the surest protection against undesirable encroachmentand inharmonious use. To
be most effective,deed restrictions should be imposed upon all land
in the immediate environment of the subject location.
980 (2). Carefully compiled and fully enforced zoning
regulations are effectivebecause they not only exercise control over
the subject property, but also over the surrounding area. However,
they are seldom completeenough within themselvesto assure a homogeneous and harmonious neighborhood.
980 (3). Recordedrestrictive covenantsshould strengthen
and supplement zoning ordinances and to be really effective should
include the provisions listed below. The restrictions should be recorded with the plat, or imposed as a blanket encumbrance against
an lots in the subdivision, and should run for a period of at least
twenty-five to thirty years. Recommended restrictions should include provision for the following:
a. Allocation of definite areas for specificuses such as single
or two-:familyhouses, apartments, and business structures
b. The placement of buildings so they will have adequate light
and air with assurance of a space of at least ten feet
betweenbuildings
o. Prohibition of the resubdivision of lots
d, Prohibition of the erection of more than one dwelling per
lot
e. Control of the design of all buildings, by requiring their
approval by a qualified committee, and by appropriate
cost limitations or minimum square foot ground flo'oo;areas
L_
UNDERWRITING
MANUAL
980
f. Prohibition of nuisances or undesirable buildings such as
stables, pig pens, temporary dwellings, and high fences
g. Prohibition of the occupancy of properties except by the
race for which they are intended
h, Appropriate provisions for enforcement
980 (4). The fact that zoning regulations and restrictive covenants exist does not necessarily mean that a high rating
is warranted. The type of use permitted by such regulations should
be carefully analyzed. Frequently areas are zoned and restricted
in a manner that would encourage land use which would greatly
decrease its desirability for residential purposes. The protection
provided should be appropriate to the best use of the land.
980 (5). Some areas in which there are no zoning regulations or restrictions may be considered properly protected because
of the favorable topography or geographical position of the land.
The natural protection afforded in such instances might be sufficient
to warrant a good rating.
980 (6). Additional protection and stability are afforded
by city or county plans and subdivision regulations that are officially recognized and enforced. Such plans will protect residential
streets against becomingnoisy, high speed traffic arteries; will establish barriers between residential properties and industrial or railroad
properties; and will assure that the growth of the city will be
orderly and harmonious. To be favorably considered for mortgage
insurance, any undeveloped subdivision falling within the jurisdiction of a city, county, or regional plan shall conform to such plan
and regulations. These regulations are sometimes evaded through
the sale of property by metes and bounds. When a subdivision is
sold in this way the plot plan can be changed at the wish of the
developer. For this reason, it is highly preferable that a subdivision
be sold from a recorded plat.
980 (7). A partially developed area that remains long in
that condition represents, in itself, an adverse influence which will
make the area undesirable for mortgage lending. Complete reliance
should not be placed on deed restrictions and zoning in such areas.
Other factors which will assure early development of the area must
be considered to weigh fully the protection afforded against stagnation, slow or unhealthy growth. Among the factors which tend to
offer such protection are the following:
a. Situation of development in the path of city growth
b, Contemplated use of land for best purposes, considering
such conditions as topography, character of land, and situation of area
•
•
---~
RATING ·OF LOCATION
980-984
c. The need and demand for properties of the price class
contemplated
d, Combined cost of lot and improvements approximating
selling prices and values of completed properties
e. Development planned in accordance with accepted standards of good housing
f. A financially capable developer who enjoys the confidence
of the market
981. Freedom from Special Hazards. Considerations
under this feature include the degree to which dangers to personal
safety are nullified.
982 (1). Adequacy of Civic, Social, and Commercial
Centers. These elements of comfortable living usually follow rather
than precede development. Those centers serving the city or section
in which the development is situated should be readily available to
its occupants. Schools should be appropriate to the needs of the new
community; and they should not be attended in large numbers by
inharmonious racial groups. Employment centers, preferably diversified in nature, should be at a convenient distance.
982 (2). The development which bases its sales program
almost solely upon lower cost land in order to compensate for its
inaccessibility to community and cultural centers, will seldom prove
successful, especially if the sales appeal is to the low-income group.
983 (1). Adequacy of Transportation. It is necessary
to determine the degree in which transportation facilities will meet
the requirements and desires of the prospective purchasers of homes
in the new area and compare the standing of the area to competing areas. In a development for the low-income group, an increase of a few cents in the cost of transportation may seriously
affect the marketability of otherwise desirable properties. Reliance
upon private automobiles alone cannot be considered adequate transportation for any except the higher income groups, and even in
these groups suitable public transportation facilities greatly increase
the desirability of the area.
983 (2). At times, transportation facilities to outlying
new areas will be planned, though not installed. In such instances a
low rating is required until the transportation is physically present.
A rejection is indicated unless adequate facilities are definitely
assured even though planned and anticipated.
984 (1). Sufficiency of Utilities and Conveniences. In
all cases there must be appropriate and necessary utilities and street
improvements installed, or definite assurance given that such facilities will be furnished. Due to climate and local custom and
UNDERWRITING
MANUAL
984
conditions, street improvements and utilities that might be considered satisfactory in one section of the country may be undesirable in
another. No hard and fast rules can be drawn covering the type of
improvements. However, the streets should be graded and prop~
erly surfaced.
984 (2). H the water is furnished by a private organization rather than from public mains, the financial standing of the
water company should be carefully investigated. It has been a
practice in some localities for developers to increase the water rates
after all the lots have been sold, thereby forcing the lot owners to
purchase the system at an exorbitant price. In many cases it is
advisable to deed the lot owners an interest in the private water
system with appropriate provisions for operation and maintenance.
There must always be definite assurance of an adequate supply of
pure water at reasonable cost.
984 (S). Water supply from wells is seldom satisfactory.
The danger of pollution is always great. Little or no fire protection
is provided, and the cost of the construction of the well and of
installing the necessary pumping system is usually as great or greater
than the per lot cost of water mains. With very few exceptions, and
only when the lots are generous in size, and when the supply and
purity of the water have been certified as satisfactory by the local or
state health authorities, should water supply from individual wells
be considered satisfactory, and only under exceptional circumstances
should a high rating be given. In judging the adequacy of a water
system, the size of the mains, assured supply, and pressure must be
considered.
984 ( 4). There must be means of disposing 0£ domestic sewage in a sanitary and unobjectionablemanner which meets the
approval 0£ the local and state health authorities. H public sewer
mains are not installed or readily available, approved individual
septic tanks may be used. If the soil is heavy and the drainage is
poor, septic tanks or cesspoolsmay becomea real hazard. If the cost
of extending the city sewers is no greater per lot than the cost of a
properly designed septic tank and tile disposal field, the extension
of the sewer line is greatly to be preferred.
984 (5). An excellent gauge of the appropriateness and
the quality of ·utilities and street improvements is the standards
established for dedication and acceptance by the municipality. If
the utilities and street improvements are dedicated to, and accepted
by, the city, township or county, the responsibility for maintenance is
transferred from the property owners and there is assurance that
the construction is appropriate to the climate and needs.
•
•
RATING OF LOCATION
985-986
~
\
985 (l). Level of TarJJes and Special Assessments. The
tax and assessment burden to which properties in an area are liable
exerts a tremendous influence on the future of any residential area.
In the case of an undeveloped area it will be necessary for the
Valuator to determine what the approximate burden will be. He
should ascertain whether the improvements are to be put in by the
developer and included in the lot price, or whether their cost will be
paid by yearly assessments. In either case, he should reduce this
expense to a front-foot cost basis for purposes of comparison. In
most communities complete street improvements and utilities range
in cost from $7 to $15 per front foot. When the improvement costs
are greatly in excess of these figures, heavy delinquencies in purchase
contracts or in assessments may usually be expected. The cost of
these improvements will not always decrease with the cost of the contemplated dwelling, since with small lots and increased density of
population better traffic facilities are needed and larger sewer and
water mains must be installed. Consequently, cases will frequently
be found where the front-foot improvement costs for high priced
homes is considerably less than the cost of such improvements for a
low income group with small lots.
985 (2). In the case of a partially developed area, the
Valuator should investigate the number of delinquencies in purchase
contracts and in assessments. When a disproportionate· number of
owners are found to be in arrears, it should be considered a danger
sign and he should govern the rating accordingly.
985 (3). Some State tax moratorium plans provide an
excellent medium for recasting accumulative burdens from .overdue
tax and assessment payments. The security offered by such plans
as well as the lowering of the taxes payable should be considered
when encountered.
985 (4). If too expensive improvements are installed in
an area or an uneconomical layout has been designed, the tax and
assessment burden will prove heavy. The Valuator will compute
the entire tax and assessment payment required for the typical property in any new area and will make his rating by comparing this
payment with that "required for typical properties in competing
areas,
986 (1). Appeal. In rating the appeal of an undeveloped or other sparsely built area, the effect which the contemplated
program of development will have on the attractiveness of the area
will be considered together with existing conditions.
UNDERWRITING
MANUAL
98~987
986 (2). In addition to the regular considerations under
Appeal, special attention should be given to the :followingfactors:
a. Have care and intelligence been used in planning the street
and lot layout]
b, Has consideration been given to the topography and to
natural features]
c, Have efforts been made to save the trees and to beauti:fy
the landscape l
d. Does sponsorship contribute to appeal]
SUMMARY OF SIGNIFICANT CONSIDERATIONS
987. The following classification summarizes the principal considerations involved in the rating of each feature of the
Location category :
Relative Economic Stability
Stability of Family Incomes
Sufficiencyof Family Incomes
Social Characteristics of Neighborhood Occupants
Stage and Trend of Neighborhood Development
Probability of Forced Sales and Foreclosures
Protection from Adverse Inftul?nces
Zoning
Restrictive Covenants
, Natural Physical Protection
Surrounding Homogeneous Neighborhood
Quality of Neighboring Development
Ribbon Developments
Nuisances
Freedom from Special Hazards
Topography
Subsidence
Earthquake, Tornado or Hurricane Hazard
Flood Hazard
Traffic Hazard
Fire and Explosion Hazards
Hazards to Health
Adequacy of Civic, Social, and Commercial Centers
Quality and Accessibility of Schools
Quality and Accessibility of Shopping Centers and Amusements
Quality and Accessibility of Churches, Clubs, and Recreation
Centers
Adequacy of Transportation
Diversity of Available Services
Quality and Frequency of Services
Cost of Service
Distance from Location to Service
Time Required to Destinations
Condition of Streets and Roads
•
•
-- .
,
.......,.._
... -.
__
.
.._,..,.,....._
~·~
BATING OF LOCATION
•
1! n"'it\es and conveniences
Suifi.c1ellC~ 0~ \J "u
. .,•
-Presence oi l\eq_\1\tea \Jt\.\\\,\e~
Quality of Utilities
Cost .of Services
Level of Taxes and Special Assessments
Relationship of Tax Burden with Competitive Locations
Nature, Cost, and Duration of Special Assessments
Appeal
Natural Physical Charm and Beauty of Location
Geographical Position of Location
Layout and Plan of Neighborhood
Architectural Attractiveness of Buildings
Social Attractiveness
Nuisances
(
41 . PWll
987
PART II
SECTION 10
RATING OF BORROWER
CONTENTS
General Rating Instructions
Social and Economic Characteristics
Motivation in Relation to Transaction
Employability and Earning Stability
Relation of Obligations to Transaction
Relation of Income to Transaction
Co-makers, Co-signers, Endorsers, and Guarantors
Paragraphs
1001-1010
1011-1018
1019-1037
1038-1049
1050--1057
1058-1066
1067-1069
Effective February, 1938
Federal Housing Administration
---~
PART II
SECTION 10
RATING OF BORROWER
GENERAL RATING INSTRUCTIONS
Rating of Borrower
FEATURE
"'"'
'O
.a
1
REJECT
I
2
4
3
5
3
6--
9-
1-2-
5
-,0-
-15-
w-- 25
4
-8-
12
16
20
3
6--
-9-
12
15
5
-10-
-15-
-20-
25
RATING
15
Social and Economic Characteristics
~ Motivation in Relation to
Transaction
Employability and Earning
~
Stability
"'
"".E
.e-
:g
Relation of Obligations to
Transaction
-< Relation of Income to Transaction
TOTAL RATING OF BORROWER
1001. The following instructions apply to all cases in
which the borrower is an individual except those individuals and partnerships engaged in the production of new dwellings for sale, the sale
of existing dwellings, or otherwise conducting the business of real
estate. The rating grid for the Rating of Borrower appears on the
Report of Mortgage Risk Examiner (Individual Borrower), FHA
Form No. 2016, and contains five features. It is illustrated above.
1002. Rating of Borrower shall be accomplished by rating separately each of five features. The five features have been
weighted on a scale of 100 points in order to retain the relative
importance of each when all are combinedto obtain the Total Rating
of Borrower. Each feature is marked on a scale from 1 to 5, 5 being
the highest rating. After analysis of the factors comprising a
feature, an X mark is placed in the column which is determined to
reflect the degree of risk involved. If the X mark is placed in i:tny
column other than the Reject column the figure appearing in the
marked square is carried over to the extreme right hand column of the
UNDERWRITING
MANUAL
1002-1005
grid. H the X mark is placed in the Reject column,the word "Reject"
is carried over to the extreme right hand column of the grid. One
such rating in any feature will necessitate a recommendation for
rejection of the application for insurance. When the word "Reject"
appears in the Rating column, it must also be written in that column
on the Total Rating line. If no such rating appears after any of the
features, the final rating of the category is obtained by adding the
figures in the Rating column. The system is so designed that this
figure will be an indication of the rating on a numerical basis.
1003. Mortgage risk is vitally affected by the borrower.
In recognition of this fact, the National Housing Act requires that
a mortgage, to be eligible for insurance, must "contain complete
amortization provisions ... requiring periodic payments by the
mortgagor not in excess of his reasonable ability to pay, as determined by the Administrator." Therefore, analysis of all credit
factors is a necessary part of the risk rating system. This is interpreted to mean that the practice of attempting to make acceptable
an otherwise ineligible note or bond by requiring co-signers and
co-makers,not closely related to the borrower, is to be discouraged.
Furthermore, the quality and value of real estate security cannot
compensate to any great degree for the lack of a satisfactory
borrower.
1004. Complete information on the borrower must be
assembled. In making the Rating of Borrower, the Mortgage Risk
Examiner may have the following data available:
a. The Mortgagors' Statement accompanyingthe Mortgagee's
Application for Insurance
b, Experience of mortgage lending institutions that have held,
or are holding, mortgages on properties owned by the
borrower, including the property described in the application
o, Remarks in the Report of Valuator
d. Results of inquiry directed to references
e. Factual Data Reports on the borrower from credit reporting agencies
f. CommercialReport from a commercialagencyon employers
and corporations, partnerships, or individual enterprises
from which the borrower derives a substantial portion of
his income
g. Other pertinent information
1005. If it is deemed advisable to direct inquiry to any
reference, definite information should be requested with the understanding that the information will be held strictly confidential. Defi-
•
•
J
BATING
OF BORROWER
1005-1010
nite questions should be asked in an attempt to clear up apparent
discrepancies that may have appeared in information already obtained. This may be accomplished by letter or otherwise. Form
letters are provided for use in making typical inquiries and shall be
used where applicable. Verbal information shall be reduced to written form and recorded with other accumulated factual data.
1006. The procedure used to secure Factual Data Reports from credit reporting agenciesis describedin Section 2, Underwriting Procedures. The Chief Mortgage Risk Examiner has authority, in all cases in which he considers it necessary or advisable, to
obtain Factual Data Reports from any credit reporting agency
approved by the Underwriting Division, Washington, D. C., and
assigned to service the Insuring Office. A standard form of report
is used. Commercial credit reports from an approved agency are
also available to all Insuring Offices.
1007. The information in the Mortgagors' Statement
should be compared with information from all other sources. Particular attention should be given to checking the reported income,
related responsibilities, and the outstanding obligations of the borrower. Should any serious discrepancy appear in the information
derived from the various sources,it must be explained or reconciled
before the Rating of Borrower is completed.
1008. The rating of the borrower is neither a mechanical
compilation of facts and figures, a perfunctory analysis, nor an
expression of a casual conclusion or judgment. It involves careful
study. A very definite responsibility rests on the Mortgage Risk
Examiner not to draw hasty or poorly supported conclusions. The
information which he uses must come from reliable sources and
should be complete. He must always be careful to see that his decisions are well founded and do justice to borrowers as well as to the
Federal Housing Administration. Cases in which the borrowers'
characteristics, circumstances,and prospects are such that insurance
of their mortgages should be declined shall be handled with certainty
and decisiveness.
1009. The five features and their weights are as follows:
a. Social and Economic Characteristics------------~---------------
15
b. Motivation in Relation to Transaction___________________________
25
o. Employability and Earning StabilitY-~----------------.:._________ 20
iL. Relation of Obligations to Transaction
;..___ 15
e. Relation of Income to Transaction---------------'-------------25
1010. The five features are classified into two groups
accordingto the point of view used in rating them. The two groups
are "Attitudes" and "Ability to Pay." The first two features, Social
and Economic Characteristics and Motivation in Relation to Trans-
UNDERWRITING
MANUAL
1010-1013
action, are considered from the point of view of Attitudes. The
word "Attitudes" is placed in the extreme left margin space on the
grid to remind the Mortgage Risk Examiner to consider these features in terms of Attitudes. The other three features, Employability and Earning Stability, Relation of Obligations to Transaction, and Relation of Income to Transaction, are considered from the
point of view of Ability to Pay. The words "Ability to Pay" are
placed in the extreme left margin space on the grid to remind the
Mortgage Risk Examiner to consider these features in terms of
Ability to Pay. The first feature, Social and Economic Characteristics, reflects the inherent attitudes of the borrower. The second
feature, Motivation in Relation to Transaction, reflects the relationship of the borrower's attitudes to the mortgage transaction. The
third feature, Employability and Earning Stability, reflects the
degree to which the borrower is able to establish and maintain income.
The fourth feature, Relation of Obligations to Transaction, reflects
the characteristics of the borrower's obligations in relation to the contemplated mortgage obligation. The fifth feature, Relation of
Income to Transaction, reflects the anticipated relationship between
the borrower's financial prospects and the mortgage transaction.
•
SOCIAL AND ECONOMIC CHARACTERISTICS
1011. The rating of this feature is based upon an analysis of the borrower in his social and economicrelationships, independent of the mortgage transaction, and is determined by analyzing factors such as character, family life and relationships, associates,
maturity, attitude toward obligations, and ability to manage affairs.
1012. 0 haracter. Character is defined as the sum of the
traits and habits that constitute a person's mental and moral being.
.Although the elements of character in their fullest significance are
too deeply rooted to distinguish with complete accuracy, it is reasonable and practicable to assume that in most cases a borrower's character is evidenced in the reputation he has established. A borrower's
reputation over a considerable period of time is usually indicative of
his thoughts, actions, and degree of moral stability. His habits
and conduct are generally a good indication of his moral standards
and ethical principles. Reliance cannot be placed upon character
until complete and definite information on reputation has been
secured.
1013. Family Life and Eelationehip«. The borrower's
immediate family life and relationships usually denote the degree
of his general stability. Harmonious home life is a significant factor in the desire for maintaining a home. The family that pursues
•
RATING
OF BORROWER
1013-1016
the accepted moral and economicallysound courses in its everyday
life presents the best mortgage risk. Disregard o:f moral responsibilities and :failure to guard against excessive expenditures endanger
family unity. The presence o:f discord discourages the assumption
o:f continuing responsibilities. Unsatisfactory domesticrelationships
should be readily discernible because they are usually facts o:f general knowledge.
·
1014. Associates. The characteristics o:f a borrower
are also indicated by the type of persons with whom he associates.
Individuals who have interests, habits, and ethical codes in common
usually associate with each other. This makes it possible to draw
certain conclusionsby obtaining information regarding the people
with whom the borrower constantly associates. It is probable, in
most cases, that more significant information is obtained by considering the character and type of people with whom the borrower
associates socially, rather than those with whom he is associated
in business activities. However, the latter group must not be
ignored. The important consideration is the type o:f people who are
voluntarily selected as associates,rather than those with whom the
borrower is thrown into association by circumstances other than
choice. The highest rating could hardly be ascribed in cases where,
the borrower's chosen associatesare other than substantial, law abiding, sober-acting, sane-thinking people o:f acceptable ethical
standards.
1015. Maturity. Consideration should be given to the
borrower's maturity, for the reason that maturity contributes to
stability. It is not implied that a young borrower necessarily lacks
stability of character or purpose, but age should lend maturity of
judgment to a borrower. Distinction should be made between borrowers with established characteristics and borrowers whose characteristics remain to be established.
1016. .Attitude toward Obligations. This important
factor reflects the borrower's performance with respect to the payment o:f his financial obligations. A review o:f the borrower's past
record in the discharge o:f such obligations will be a clue to his
future attitude in the assumption and payment of obligations. The
borrower's paying record may indicate that he attaches varying
degrees o:f importance to different types o:f obligations. Such an
attitude does not depict a full sense o:f responsibility. The borrower
with the best attitude not only attaches importance to the payment
of debts incurred :for merchandise or services for which there is
recurring necessity,but also to the liquidation of debts incurred for
merchandiseor servicesfor which there is only an intermittent need
UNDERWRITING
MANUAL
1016-1020
or desire. 'Vith regard to mortgage loans, it is usually found that
borrowers with domestic responsibilities are more dependable than
those without such responsibilities. The borrower's attitude toward
his obligations is duly influencedby the degree of cooperation that
he receives :fromthe membersof his immediate family.
1017. The condition of the borrower's obligations is an
indication of his attitude toward them. Past litigations should disclose his control over, and the degree of his adherence to his contractual obligations. A lack of management in his affairs may have
resulted in suits, judgments, or even bankruptcy. Such a situation
may divulge an improper attitude .of the borrower, or may reveal
mitigating circumstances by reason of forces beyond his control.
Tlte attitude of the borrower should be not only one of willingness
but also of eagerness to comply with any agreement or contract to
which he is a party in order to warrant the highest rating of this
feature. While other social and economiccharacteristics of the borrower may contribute to a high rating of this feature, the rating will
be lower in proportion to the degree of irregularity with which he
meets his obligations. The borrower's attitude toward his obligations may be sufficientlycareless or irresponsible to warrant a reject
rating of this feature.
1018. Ability to Manage Affairs. This factor requires
an analysisof the borrower'scharacteristicswith respect to his attitude
in the control of his affairs, particularly those with an economic
significance. The borrower with a senseof balance will guard against
assuming responsibilitiesthat do not enhance his own or his family's
opportunities with a full measureof compensation. He will also maintain a position that will permit some adjustment or adaptation to
unforseen exigencies. He will save, plan, budget his income,and govern his conduct in other activities in a manner that will allow him to
adjust, adapt, or arrange his affairs.
MOTIVATION IN RELATION TO TRANSACTION
1019. The rating of this feature is based upon the analysis of the motives which prompt the borrower to enter into the
mortgage transaction and is determined by analyzing factors such as
cash investment, motives for borrowing, and importance of the property to the borrower.
1020. Oaeh. Investment. Cash investment is the amount
represented by the differencebetweenthe purchase price of the property and all encumbrancessecured by such property. Cash investment is a directly contributing element to motivation. Experience
has shown that a man. will make strenuous effort to preserve the asset
•
•
RATING
OF BORROWER
1020-1025
in proportion to the amount of cash invested in the property. The
greater the cash investment,the greater is the incentivethat motivates
the borrower to faithful performance in the transaction. The cash
investment should be sufficient to indicate that the borrower will
have a continuing motive to keep the mortgage in good standing
until maturity. Therefore, it shall be determined that the borrower
is in a position, in addition to undertaking the mortgage obligation,
to establish a bona fide cash investment in order to create and encourage an attitude toward the mortgage obligation which will justify
the presumption that he will make every effort to discharge the debt.
1021. The minimum requirements for cash investment or
its equivalent are contained in Section 5, Minimum Eligibility Requirements. Although the cash investment eligibility requirement
applies only to transactions in connection with recent purchases, it
is a fact that - the greater the cash investment, the greater is the
motivating influencethroughout the life of the loan.
1022. The cash investment requirement is not a minimum
eligibility requirement when the borrower is (a) placing a mortgage
on property owned continuously for a period of time sufficientlylong
to establish the fact that the proposed mortgage is not a part of the
purchase consideration, (b) refunding a mortgage on such property,
or ( c) placing or refunding a mortgage on property acquired ·by
outright gift, inheritance, or bequest.
1023. Cash investment may be represented by equivalents
in the form of commodities, investments, chattels, labor, or services.
The equivalent value of commodities,investments and chattels should
be determined by the cost or market value of the equity therein,
whichever is the lesser amount. The equivalent value of labor or
services should be determined at prevailing rates. Cases involving
the equivalent of cash investment require the most careful investigation to ascertain the validity of such representation.
1024. In cases of repossession of title, the equity that
may have been established prior to foreclosure shall be deemed as
lost and shall not be accepted in lieu of the required cash investment
or portion thereof, but shall be subjected to the cash investment
requirement as previously outlined with respect to initial purchases.
1025. In rating this feature, it is necessary to take into
consideration the presence and amount of cash investment. This
feature, as influencedby this factor, should reflect a more favorable
rating as the invested equity is in greater amount. Where the borrower is unable or unwilling to make a cash investment sufficientfor
economicsoundnessthe case shall be rejected under this feature. In
every case, the required cash investment must equal or exceed the
..---
UNDERWRITING
MANUAL
1025-1030
minimum requirement prescribed in Section 5, Minimum Eligibility
Requirements.
_
1026. Motives for Borrowing. Where the proceeds of
the mortgage will be soundly used, it may be presumed that the
borrower will maintain a better attitude toward the obligation than
he would if the proceeds are used unsoundly. Generally, the refinancingof existing liens, the purchase of a home, or the financing
of desirable property improvements may be regarded as sound
motives. The refunding of obligations,prudently incurred, is also a
sound motive. On the other hand, use of the proceeds for speculation, pleasure trips, or other purposes which gratify transitory desires, may generally be regarded as unsound motives.
1027.The basis of the analysis is not the precise use
of the loan proceeds but, rather, the justification for the proposed
use. Thus, indebtedness incurred for business, travel, or education
may or may not evidence prudent judgment. The underlying circumstancesshould be regarded in the light of their effect on motivation in the mortgage transaction. Generally, mortgage loans made
becauseof illness, debts, or unemploymentare economically unsound.
There may be conditions, however, that obviate this general rule;
For instance, an illness in the family may entail an appreciable outlay of funds beyond the borrower's immediate ability to meet, but
not beyond his ability to meet over an extended period of time.
Again, while the use of mortgage proceeds for the purchase of a
home is generally sound, the allocation of funds to such purpose
is unsound if the home is excessivelypriced, cheaply constructed,
poorly located, or too costly in relation to income.
1028.The application frequently reveals the intended
use of the proceeds· of the loan. ·where this information is not
revealed, a reasonable attempt should be made to ascertain the
intended use of the money.
1029. Importance of Property to Borrower. This
factor indicates the degree of the sacrificethe borrower will make in
order to retain the property. The borrower's motivation in this
respect should be analyzed from the aspects of owner occupancy,of
an investment, and of speculation. Motives of a borrower who
occupies the property are more significant than the motives of an
investor, and still more so than the motives of a speculator.
1030. The importance of the property to the owner occupant is significant in many phases. Foremost in this respect is the
fact that most borrowers will subject themselves to more sacrifices
in the maintenanceof a home than in any other obligation. A home
is an investment that involves more than dollars and cents. It has
sentimental attachments that cannot be entirely measured with
•
•
RATING
OF BORROWER
1030-1035
money. Such attachments are too numerous to mention completely
but, for illustration, the property may be the family homestead. It
may be the property representing the borrower's first investment.
The architecture and design may have a particular appeal. The
advantages offered in the location of the property may include historical significance, early associations, proximity of relatives or
friends, desirable social environment, or accessibility to daily necessities and conveniences.
1031. The borrower derives a measure of prestige from
home ownershipthat often enhanceshis position or that of his family
in the business and social worlds.
1032. The borrower who acquires property for occupancy in a location inhabited by a class or race of people that may
impair his interest in the property-and thereby affect his motivation-should be ascribed a lower rating in this feature to reflect the
diminishing importance of the property to the borrower. Diminishing importance from this source may reduce motivation to a degree
justifying rejection of the borrower in this feature. A borrower who
has continued to live under similar conditions may not be subject to
as great a penalty in the rating of this feature, becausesome motivation may be evidenced.
1033. The advantages or disadvantages presented by a
comparisonbetweenthe expensesincident to home ownership and the
cost of rent for similar accommodationsare another element in the
consideration of this factor. A borrower may be inclined to strain
his ability to meet the expenses attendant with home ownership to
a greater degree than he would in paying rent for comparable
quarters. However, there is an expense limit for him beyond which
the importance of the property will diminish.
1034. The same concepts as outlined in the preceding
paragraph are the governing considerations of the importance of
the property to the borrower in the comparison of price and value.
A property purchased at a "bargain" price creates free equity for
the purchaser. It is natural that equity acquired without cash outlay
lends an additional interest to the borrower in the property. The
trend of increased value will likewise reflect greater importance to
the borrower.
1035. A distinction should be made between full time
and part time occupancy in analyzing the degree of importance the
property holds for the borrower. It is reasonableto presuppose that
the borrower will attach more importance and undergo greater sacrifice for a home used as a permanent residencethan he will for a temporary shelter used only during certain periods of the year. The permanent home is essentially a necessity, while the seasonal or part
UNDERWRITING
MANUAL
1035-1040
time residence would be relinquished if both dwellings became too
great a financial burden to the borrower.
1036• .A. borrower who owns a property as an investment to be tenanted by someone other than himself will attach
importance to it only so long as it affords or promises to afford him a
net return. The borrower's position should be carefully analyzed in
order to determine from his annual income whether he can afford
to own the property and whether the contemplated mortgage obligation will absorb his incometo an extent that will adversely affect his
motivation.
1037. There will be occasions when the borrower applies
for a mortgage loan on a property primarily intended for sale. The
borrower may even reside in the property but such occupancy does
not have the same elements of motivation attendant with permanent
occupancy. His motive will be greatly influenced by marketing
possibilities and trend of value.
••
EMPLOYABILITY AND EARNING STABILITY
1038. The rating of this feature is based upon an analysis of the borrower's ability to establish and maintain stability of
income. Emphasis is placed on the future continuity of income and
not on the amount of his income. It is rated by analyzing factors
such as versatility, personality, employment, occupational impairment, reemployment possibilities, reserves and contributions, age,
and health.
1039. Versatility. This factor requires an analysis of
the attributes that qualify the borrower for employment. Versatility
is a desirable quality. .A. degree of versatility in a borrower may be
developed by education and training. It may enhance and enlarge
his opportunities, becauseit enableshim to competeon more favorable
terms, not only in his own line of work but in other fields of endeavor.
.A. certain measure of versatility may be necessary in borrowers
whose line of employment evidences the hazards of occupational impairment or indicates a decline through declining economicnecessity.
.A. borrower may have little or no education and still qualify for
employment,but education or training usually lends greater assurance
of employment, and a higher education or training develops greater
adaptability of his talents to the possibilities for advancement.
1040. Knowledgederived from either education or training, or both, when practicably applied, is an essential contribution
to earning stability. The borrower must be able to adapt himself
to the opportunities for which his education and training have fitted
him in order to apply his knowledge to its best use. This does not
mean that the borrower must necessarily have an advanced education
•
RATING
OF BORROWER
1040-1044
to qualify as proficient in his chosen line of endeavor, or in any
other work in which he evidencesinherent aptitude.
1041. Personality. A borrower's ability to becomeand
remain employed is in a measure dependent upon his personality.
Personality is reflected in the borrower's poise, speech, tact, appearance, courtesy, sincerity, and alertness. These are the qualities that
make for agreeable associationbetween employer and employee,and
enhance the borrower's potentialities for continued employment and
promotion.
1042. Employment. An analysis of this factor is imperative in order to estimate, with the greatest possible accuracy, the
borrower's earning stability. A borrower's earning ability depends
upon the exerciseof his mental faculties, the use of his hands, the employment of his funds, or a combinationof these mediums. It is necessary to study the borrower's past employment record because it will
indicate his probable future performance. This record will disclose,
through experience and evidencesof advancement or retrogression,
the extent of the ambitions, application, and steadiness which, when
translated into earnings, reveal the degree of regularity of income
and earning stability. It will divulge his natural ability and the
likelihood of his progress and advancement with his present employer. The future possibilities of the borrower with his employer
involve two considerations. The first deals with the inherent potentialities of the borrower for advancement, and the second relates to
the stability of the employer. Even though a borrower possessesa
full measure of natural ability, his employer's progress may not be
sufficientlysatisfactory to indicate a continued need for the borrower's services, or to offer opportunities for advancement to the
borrower.
1043. Occupational Impairment. There are types of
employment which present hazards to the borrower's earning stability. Such types include (a) artistic careers subject to rapid decline in popular favor, (b) occupations in which skill or facility becomes gradually impaired, (c) lines of endeavor in which gradual
occupational impairment results from the occupation itself; and (d)
occupations in which greater than the normal probabilities of accidental disability are apparent. In analyzing this factor, major consideration must be given to the probable rather than the possible
developmentof the impairment to employmentcontinuity.
1044. Reemployment possibilities. The demand for
the borrower's services and his ability to compete with others
employed in similar lines of endeavor, or other lines in which he
shows sufficientaptitude to receive adequate compensation,are direct
measurementsof mortgage risk. Two borrowers of similar ages and
UNDERWRITING
MANUAL
1044--1048
incomesmay be totally unlike in temperament and pursuits, thereby
constituting entirely different mortgage risks. The one may seek
and know how to grasp opportunities and advantages, while the
other is content with his situation. Furthermore, the one may be
following a vocation for which a reasonable future need can be
anticipated. The other may be trained in highly specialized duties
in a limited field where it would be difficultfor him to obtain employment if, for any reason, his present position should terminate.
1045. This fact-Or also has particular significance in
cases where the borrower is engaged in employment of a temporary
nature. Temporary employment may be that in which the employer's purpose or his use of the borrower's services are limited as to
duration of time. In such cases, however, due recognition shall be
given to the borrower's versatility and consequent ability to turn his
efforts to similar or other lines of employment which have aspects
of permanence.
1046. Reserves and Oontributions. Income can also
be derived from the employment of reserve fonds which the borrower
has accumulated. In analyzing this factor, principal consideration
should be directed to the reserves which produce income, because it
is the production of income that contributes to the borrower's eligibility with respect to his ability to pay. The sources and soundness
of such reserves are subject to the same careful analysis as income
derived from other sources. Net income derived from other assets
against which there are fixed charges shall be considered unstable in
comparisonwith incomederived from comparable assets which are in
the form of fixed investments,such as unpledged bonds or mortgages.
The analysis of assets assumes major importance in cases where
assets must furnish income, in whole or in part, for the liquidation of obligations. In such cases these assets shall be analyzed
as to their degree of stability, amount, and liquidity. The presenceof
reserves does not necessarily result in a high rating of this feature, nor
does their absencenecessarily cause a low rating.
1047. A borrower's earning stability may be supplemented by contributions. They are subject to the same analyses as
other types of income, and their soundness must be considered in
connection with earning stability. Unless contributions evidence
reasonablecontinuity, they cannot be regarded as any part of the borrower's earnings.
1048. Age. Age is significant in rating this feature
only to the degree that it has affected or will probably affect the
borrower's employability and consequent earning stability. While
the young borrower may not have established evidence of complete
training and experience during his initial period of employment,
•
•
RATING
OF BORROWER
104S-1052
youth may be regarded as an asset rather than a liability. A borrower in advanced years, however, may have passed the height 0£
his proficiency to the extent that the demand for his services has
diminished. Such cases would not necessarily constitute a reject
rating, but they should not receive the highest rating unless the borrower, through the employability 0£ funds, has sufficient earning
stability.
1049. Health. The health 0£ the borrower is significant
only in so far as it will affect the borrower's future employment. A
temporary illness or minor disability may not threaten his employment sufficientlyto reflect in the rating. However, a borrower whose
employability has been interrupted by a grave illness might justify
a reject rating 0£ this feature unless satisfactory evidence 0£ his
return to good health is submitted.
RELATION OF OBLIGATIONS TO TRANSACTION
1050. The rating 0£ this feature is based upon an analysis 0£ the characteristics 0£ the borrower's obligations and their
relation to the contemplated mortgage transaction, and is determined
by analyzing factors such as nature 0£ obligations and effect0£ obligations on financial capacity. The rating 0£ this feature will be low
where other ascertained obligations will precede the proposed mortgage payments in the family budget. On the other hand, if the proposed mortgage payments will be accompaniedin the budget only by
the bare necessities 0£ food and clothing, the rating will be high.
Where the mortgage payments do not exceed rent payments which
the mortgagor would be forced to pay for ordinary shelter, the rating shall reflect the relatively favorable position 0£ the mortgage
payments.
1051. Nature of Obligations. This factor requires an
analysis 0£ the nature 0£ the borrower's obligations, to determine
their relative significance without undue emphasis on financial
amounts. For purposes o:f analysis, a borrower's obligations may be
classified as those pertaining to his family and those not directly
connected with family matters. These obligations comprise those
already incurred and those that may recur or be continued into the
£uture. In order to determine their relative significance,the nature
of the obligations shall be analyzed in detail.
1052. The principal obligations 0£ any borrower are
those attendant with family responsibilities, and these obligations
shall be analyzed in the light 0£ the necessities and other benefits
which the borrower and his family require to maintain their standard 0£ living. Obligations for necessities should be considered in
the light 0£ the costs involved in maintaining a required standard 0£
living. For example, an automobile may be considered a necessity
UNDERWRITING
MANUAL
1052-1054
for one man, and more or less a luxury for another. Likewise, an
obligation involved in the purchase and maintenance of an automobile may or may not be considered an obligation arising from
purchase and ownership of a necessity. For example, if the automobile is classifiedas a luxury, it may be reasonable to assume that
the automobile will be sacrificed when conditions demand. This
assumption should be considered in relation to the social and economic characteristics of the borrower. Cognizance shall be taken
of the judgment the borrower exercisesin determining the economic
benefits derived from his expenditures. It is quite natural that the
typical borrower will incur obligations through home ownership
because of increased desires attributable to his pride of ownership.
However, such obligations should always bear a relative measure of
compensationand encourage the maintenance of an adjustable balance in his economic situation. Because of unpredictable circumstances, the future obligations incident to the borrower's family
are not at any time readily determinable. However, conditions
surrounding the borrower, by virtue of his environment and ambitions, permit reasonable inference as to their probable course in the
future. This likewiseholds true with respect to obligations that do
not pertain directly to the family. The very nature of these obligations should permit an analysis of the possibilities of fluctuations.
Certain obligations may be easily determined to be of a temporary
nature, or to hold probabilities of continuance or recurrence in a
greater or lesser degree. A borrower who evidencessufficientinitiative to adapt his budget of expenditures to meet his necessities is
deserving of a high rating in this feature.
1053. The Administrative Rules require that the borrower must establish that after the mortgage offered for insurance
has been recorded, the mortgaged property will be free and clear of
all liens other than such mortgage, and that there will not be outstanding any other unpaid obligation contracted in connectionwith
the mortgage transaction or the purchase of the mortgaged property,
except obligations which are securedby property or collateral owned
by the borrower independently of the mortgaged property. Violations of this rule require reject ratings of this feature.
1054. When the purchase price of the property involved
in the mortgage transaction exceedsthe value, the cash investment
required will exceed the real equity. The excessivepurchase price
in such an instance will usually require a larger cash investment
than anticipated by the borrower and particular attention should be
directed to any probable secondaryindebtednesscontracted, or likely
to be contracted, in connectionwith the acquisition of the property
covered by the contemplated mortgage. If the larger cash invest-
I
•
RATING
OF :BORROWER
1054-1058
ment requires the assumption of an additional obligation incurred
by a loan based on collateral owned by the borrower independently
of the mortgaged property, such a loan shall require an analysis
embodying not only the nature and effect of the obligation, but also
the quality of the pledged collateral. H the Mortgagors' Statement
indicates that the transaction cannot be closed without violation of
the Administrative Rule, the subject application shall be rejected
under this feature.
1055. Continuing obligations of a contingent nature
should be analyzed as to the probabilities of their remaining remote
or becoming actual liabilities. While it is the responsibility of the
Mortgage Risk Examiner to avoid the acceptance of borrowers whose
contingent liability will probably cause default, it is not to be presumed that all contingent liabilities necessarily will become direct
liabilities.
1056. It may be presumed that the borrower will adjust
his accustomed standards of living to a reasonable extent, and
thereby correspondingly reduce his expenses. However, such adjustments will have their limitations because of the average man's inclination to raise, rather than lower his scale of living. The analysis
should reveal the degree of sacrifice and subordination that the borrower, if necessary,will make to maintain the contemplated mortgage
obligation in good standing.
1057. Effect of Obligations on Oapaoity. This factor
requires an analysis of the effect of the borrower's obligationsanalyzed as to their nature and amounts-on his earning capacity
and stability and, therefore, on the transaction. Obligations incurred for the purpose of acquiring income-producing or incomeincreasing assets indicate a more favorable condition than obligations
incurred solely for transitory purposes. The character and certainty
of the income produced or increased affect the rating. Furthermore,
provisions made for the retirement of such obligations is one indication of the effect of the obligation on capacity. An incidental
consideration is involved in the question of whether the borrower
received full value in the form of a sound asset for which he created
the obligation.
RELATION OF INCOME TO TRANSACTION
1058. The rating of this feature is based upon an analysis of the ability of the borrower's income to pay the contemplated
mortgage obligation. Analysis shall include consideration of such
factors as ratio of property value to annual income, and ratio of
total monthly payment to income. These ratios shall be considered
-
----
----~~-------
UNDERWRITING
MANUAL
1058-1061
in the light of the conclusionsalready formed when rating the features, Employability and Earning Stability and Relation of Obligations to Transaction.
1059. Ratio of Property Value to Annual Income.
The maximum value of residential property which the borrower can
reasonably afford to own or purchase with his annual income shall
be determined. H the value of the owned or purchased property is
not properly related to the borrower's income, a substantial risk is involved in the making of a mortgage loan to him. In such a case,
a reject rating of this feature will be warranted. Becausethe most
favorable ratio of property value to annual income in one case
may be substantially different from the most favorable ratio in
another case, its influence on the rating of this feature cannot
be ascertained mechanically. Such rules as the one that a man should
not undertake to purchase a property when the value exceedstwo
or two and one-half times his yearly income, cannot be applied
blindly. An excessive ratio usually forces upon the borrower a
standard of living out of proportion to his annual income. Further
considerationmust be given to the expense of owning and maintain:
ing a larger and more expensiveproperty than his earning capacity
would ordinarily justify.
1060. Ratio of Total Monthly Payment to Income.
This ratio reveals the degree to which the monthly mortgagepayment
absorbs monthly income, and therefore reveals the proportion of
that income available for other living expensesand obligations. In
turn, consideration is given to other living expenses and obligations, such as number of children and other dependents, the borrower's scale of living, cost of home maintenance, and payments required by other obligations. In general, the more burdensomeratios
result in lower ratings.
1061. As in the factor, Ratio of Property Value to
Annual Income, no definite zone limits can be prescribed within
which the ratio of total monthly payment .to income must fall. The
influence it will have on determining the rating of this feature
cannot be ascertained mechanically. Examples cited in the following paragraphs must not be interpreted as prescribing positive rules
for the making of ratings, for they are intended to serve merely as
guides in rating this feature. It is obvious that a favorable ratio
between monthly mortgage obligation and income for one borrower
may be an unfavorable ratio for another. Although the two borrowers may have the same amount of monthly incomes and monthly
mortgage obligations, a lower feature rating may result in one case
than in the other because of a wide difference in the nature. of their
family responsibilities and other obligations.
•
•
I
.J
RATING
OF BORROWER
1062-1063
1062. Generally speaking, as family incomes are found
to be in lower brackets, progressively higher percentages of the
family income will be devoted to paying for the cost of shelter, but
the actual amounts in dollars and cents would be correspondingly
lower. This is a fact which must be carefully considered in each
individual case in order to determine accurately how much the
borrower can afford to pay monthly on the mortgage obligation in
his circumstances and with his financial resources. H, in the judg-
......
~
Cl:
..J
~
~
~
400
~
~
~
~
300
200
100
0
$1000
2000
3000
AVERAGE
4000
5000
ANNUAL
6000
7000
INCOME
ment of the Mortgage Risk Examiner, the monthly payment will
not allow a sufficientremainder of income for other necessities and
responsibilities, it will be obvious that the borrower is attempting
to maintain or purchase a property that is too expensive for him
and not within his ability to pay. In such a case, a reject rating
of this feature is warranted.
1063. The accompanying chart, which shows the average
annual rent paid at a given annual income,has been computed from
data obtained throughout the United States by the Division of Economics and Statistics of the Federal Housing .Administration. The
UNDERWRITING
MANUAL
1063-1068
shaded space between the upper and lower lines drawn across the face
of the chart shows the range of annual average rent paid at a given
income by the individuals included in the investigations. Across the
shaded space a line desiganted "Northeastern Cities", another line
designated "Western and Central Cities", and still another line designated "Southeastern Cities" show the mean, or average, annual rent
paid at a given income by families in the several areas. Thus a wage
earner with an income of $2,500 a year pays, typically, an annual rent
inths range between $295 and $545. The average rent paid by families with the same earning capacity was estimated to be about $425
in the northeastern cities, $380 in the western and central cities, and
$360 in the southeastern cities. These averages are the most frequent
amounts and should be used as the principal guide in applying the
data.
1064. This chart is to be used as a guide by the Mortgage Risk Examiner whose further duty is to determine the difference of rental range existing between local areas and the region and
nation as a whole. In order to derive the greatest benefit from the
chart, the Mortgage Risk Examiner should use it as a starting point
to help him establish with reasonable assurance the prevailing ratios
between annual rent and annual income in local communities.
1065. Cases will be found which fall outside the range
of the ratio prevailing in the local community. Such cases require
close scrutiny in order to ascertain whether the ratio between income
and cost of shelter is so hazardous as to makethe borrower an unacceptable risk for insurance.
1066. This feature reflects the final judgment of the
Mortgage Risk Examiner in determining the ability of . the borrower's income to discharge the mortgage obligation, and shal] reflect
a rating comparable to the relationships that exist between the borrower's available income and the mortgage transaction.
CO-MAKERS, CO-SIGNERS, ENDORSERS, AND GUARANTORS
1067. In some cases the title of the real property involved will be vested in several individuals, In such instances it is
necessary for all the parties owning aninterest in the real property
to execute the note, bond, or other evidence of. debt. In cases of this
nature, all such parties shall be considered separately, but rated as
.one borrower.
1068. Except in remote instances of unusual merit as
determined by the Mortgage Risk Examiner, acceptance of co-makers,
co-signers, endorsers, and guarantors other than those closely related
to the borrower shall be discouraged. The eligibility of a mortgage
loan may rest to a degree upon the motives, financial responsibilities,
•
•
RATING OF BORROWER
1068-1069
and interests of co-makers, co-signers, endorsers, or guarantors who
do not have a title interest in the real estate involved in the application for mortgage insurance in the following cases:
a. Where property is in the name of either the husband or
wife, but not both, and both sign the credit instrument,
their joint income and credit character shall be considered
in the rating of the borrower. This would not be true,
however, i:f the husband or wife were legally separated.
b, Where a son or daughter of legal age signs the credit instrument with the parent or parents, weight may be given
to the amount of income such a son or daughter can and
will contribute. At the discretion of the Mortgage Risk
Examiner, this will also be permitted in cases involving
close relatives where it is assured that their own interest
in the obligation is sincere and dependable.
1069. Under no circumstances should co-makers, cosigners, endorsers, and guarantors be required to have a vested interest
in the ownership of the mortgaged property when such requirements
would compromise the probable dower right of a husband or wife, or
jeopardize probable inheritances.
PART II
SECTION 11
RATING OF COMMERCIAL BORROWER
CONTENTS
Paragraphs
General Rating Instructions-----------------------------------Organization and Competenceof Management_
Motivationin Relation to Transaction
Financial Condition---------------------------------------------Prospective Earning Capacityand Stability
1101-1110
1111-1120
1121-1127
112$-1143
1144-1151
Effective February, 1938
Federal Housing Administration
1101
PART II
SECTION
11
RATING OF COMMERCIAL
BORROWER
GENERAL RATING INSTRUCTIONS
Rating of Commercial Borrower
FEATURE
3
2
1
REJECT
4
5
RATING
3--
6--
9--
1-2-
~
=
4
8
12
16
2-0-
---
6
12
1-8-
24
30
---
7
-H-
21
28
35
---
Organization and Competence of
Management
Motivation in Relation to Transaction
Financial Condition
Prospective Earning Capacity and
Stability
TOTAL RATING OF COMMERCIAL BORROWER
1101. The principles and procedure outlined herein are
applicable to cases involving corporations regardless of type of business, and individuals or partnerships engaging in the production of
new dwellings for sale, or in the sale of existing dwellings, or otherwise conducting the business of real estate. In this classificationare,
operative builders, real estate developers and operators, mortgage
lending institutions, and owners of real estate in quantity, as distinguished from individuals who hold properties for their own occupancy
or long term investment. References made to the commercial borrower will likewise apply to all corporate and individual operative
builder borrowers. The rating grid for the Rating of Commercial
Borrower appears on the Report of Mortgage Risk Examiner (Commercial Borrower), FHA Form No. 2016a,and contains four features.
It is illustrated above.
1102. Rating of Commercial Borrower shall be accomplished by rating separately each of four features. The four
features have been weighted on a scale of 100points in order to retain
UNDERWRITING
MANUAL
1102-1104
the relative importance of each when all are combinedto obtain the
Total Rating of Commercial Borrower. Each feature is marked on a
scale from 1 to 5, 5 being the highest rating. After analysis of the
factors comprising a feature, an X mark is placed in the column
which is determined to reflect the degree of risk involved. If the X
mark is placed in any column other than Reject the figure appearing
in the marked square is carried over to the extreme right hand column
o:f the grid. If the X mark is placed in the Reject column, the word
"Reject" is carried over to the extreme right hand column of the
grid. One such rating in any feature will necessitate a recommendation for rejection of the application for insurance. When the word
"Reject" appears in the Rating column, it must also be written in
that column on the Total Rating line. H no such rating appears
after any of the features, the final rating of the category is obtained
by adding the figures in the Rating column. The system is so designed that this figure will be an indication o:f the rating on a
numerical basis.
1103. Completeinformation on the commercialborrower
must be assembled. In making the Rating of CommercialBorrower,
the Mortgage Risk Examiner may have the following data available:
a. The borrower's latest balance sheet and operating statement
attached to the Mortgagee's Application :for Insurance
b, Experience of mortgage lending institutions that have held,
or are holding mortgages on properties ownedby the borrower, including the property describedin the application
c. Remarks in the Report of Valuator
d. Results of inquiry directed to references
e. Mercantile commercialreport on the business
f. Factual Data Reports on principals
g. Other pertinent data
1104. The Mortgage Risk Examiner may request the
applicant or the approved mortgagee to :furnish documents, statements, reports, articles of incorporation, by-laws, or other detailed
information that will enable him to complete the rating. He should
secure additional pertinent information from all available sources.
The information secured may include an explanation or elaboration
of items appearing in the financial statement, operating statement)
statement of business experience, record and history of the corporation, list of officersand directors, and, particularly if the borrower
is an operative builder, information relative to the technical knowledge and actual experience,executiveability, and general training of
the individual or individuals comprising the management. Verbal
information shall be reduced to written form and recorded with other
accumulated factual data.
•
•
RATING
OF . COMMERCIAL BORROWER
1105-1111
1105. The procedure used to secure credit reports from
approved agencies is described in Section 2, Underwriting Procedures. The Chief Mortgage Risk Examiner has authority, in all
cases in which he considers it necessary or advisable, to obtain commercial reports on the commercial borrower and parent or subsidiary
corporations, and Factual Data Reports on the principals from
credit reporting agencies approved by the Underwriting Division,
Washington, D. C., and assigned to servicethe territory.
1106. The Rating of Commercial Borrower requires
careful study of the responsibility and judgment of the principal
owners and the experience, integrity, ability, and management of the
business displayed by the officers. It must be recognized that the
security and successof a concernis comparableto these same elements
in the individuals controlling its ownership and operations.
1107. In rating a commercial borrower, corporations and
individuals whosesignatures appear as co-signers, endorsers,or guarantors of the note, bond, or other evidence of debt are considered
separately for the purpose of determining sufficiencyof financial
ability. However, all parties to the obligation are rated as one
borrower.
1108. To be considered and rated with the commercial
borrower, it is not required that each individual whose signature
appears as co-signer, endorser, or guarantor of the note, bond, or
other evidence of debt, have a legal interest in the real property to
be mortgaged. However, the Administrative Rules require that the
signatures of all parties who hold the legal title shall appear as
makers of such note, bond, or other evidenceof debt.
1109. The features and their weights are as follows:
a. Organization and Competence of Management__________________
b. Motivation in Relation to Transaction_________________________
c. Financial Condition-------------------------------------------d. Prospective Earning Capacity and Stability____________________
15
20
30
35
1110. The first feature, Organization and Competenceof
Management,requires a study of the anticipated probability of efficient management,based on evidences in the past record. The second
feature, Motivation in Relation to Transaction, reflects the borrower's attitude toward the mortgage transaction. . The third feature,
Financial Condition, reflects an analysis of assets, liabilities, income
and expenses. The fourth feature, Prospective Earning Capacity and
Stability, requires a study of the borrower's financial prospects.
ORGANIZATION AND COMPETENCE OF MANAGEMENT
1111. The rating of this feature is based upon an analysis of the· past. performance of the commercialborrower in order
UNDERWRITING
MANUAL
1111-1114
to predict the probabilities in its future performance and is determined by analyzing factors such as organization and history, characteristics of principals, reputation, and attitude toward obligations.
1112. Organization and History. A review of the articles of incorporation and by-laws will disclosethe purpose of operation, terms, and conditions under which the management has been
conducting the affairs of the borrower. An analysis of the authorized, subscribed,and paid in capital will further reveal the financial
advantages or handicaps under which the management has been operating. A knowledge of the period of time in active business may not be of essential importance in connection with ascertaining the degree of competenceindicated by the present management. It is more important to know the period of time that the.
borrower has been operating under the present management. The
longer the period of time, the greater will be the possibilities for
accuracy in determining the degree of competenceand successof the
present management. In the case of a commercial borrower which
has succeededa private enterprise of the principals under the present
management, investigation should 'cover the operations since the
installation of the present management.
1113. Characteristics of Principals. This factor is of
vital importance in the rating of this feature because the successor
failure of a concern depends, in a large measure, on the individuals
who control and manage its affairs. An analysis should be made of
the social and economiccharacteristics of the majority owners, directors, and officers. A further consideration of analysis is the experience of the officerswho participate in the active management of the
business,since the degree to which operations have been successfulin
the past years will definitelyreflect the influence of the individuals
who have been managing its program.
·
1114. The majority owners in control of the fonds are
empoweredwith the regulation of activities through the management.
They will, either directly or through representatives, dictate the
policies and determine the allocation of profits. Their judgment
will influence the course of the business enterprise. Therefore, an
analysis of their business sagacity in the exercise of such power is
of utmost importance. Major stockholders with long range judgment may sacrificeimmediate personal gains in the interest of their
corporate pursuits. If actively engaged in the business they should
be thoroughly competent to manage it. If not actively engaged in
the business,the degree of judgment exhibited in selecting a management for the businesswill be revealed by analysis. Imprudent principals have been known to transgress on the possibilities of good
management by exhausting the assets of the business to a point
•
RATING
OF COMMERCIAL
BORROWER
1114-1118
where it does not possess adequate funds for normal transactions.
Such practice may, in a very short time, result in insolvency. Many
concernsfail to succeed because they are left to run themselvesand,
through lack of proper attention by the active principals, sound
policies are ineffectivelyexecuted.
1115. Business concerns, in many instances, are dominnated by one individuaL This condition is very prevalent in the
case of operative builders. In such instances the invested capital
is derived principally from the individual's personal funds. The
businesspolicy is a reflection of his judgment and experience. The
achievementsof the concern are largely dependent upon his personal
direction. In organizations of this type the significance of the principal's age cannot be ignored becauseof the uncertainty of succession.
The life of the firm may depend extensively on the ability of the
principal to give personal attention and financial support to the
business.
1116. In an analysis of the operative builder borrower,
consideration of his past record usually reveals the degree of ability,
foresight, integrity, and progress that can be anticipated in future
operations. As is the case in other fields of endeavor and enterprise, an operative builder's knowledge of his business, properly
applied, will take him a long way in the right direction and should
be a contributing influencefor favorable consideration.
1117. Reputation. The security and success of a business are a reflection of the same elements in the individuals behind
its ownership and management. Its reputation will be patterned
largely after the personal reputations of its principals. Therefore,
conclusionson the commercial reputation cannot be reached without
a knowledge of the individual reputations maintained by its principals, particularly those in the management of its activities.
1118. Attitude Toward Obligations. An excellent indication for determining the commercial borrower's probable attitude toward the payment of the contemplated mortgage debt is its
manner of executing contractual obligations with creditors. 'While
this cannot be accepted as complete evidence in the determination
of mortgage risk, it is a direct clue to the borrower's probable paying
performance. Therefore, careful consideration should be given to
the business record in discharging obligations. Does the company
meet its accounts and notes payable according to terms, or is there
evidence that its management assumes a careless attitude toward
debts? Is the management argumentative and arbitrary in demanding discounts to which it is not justly entitled? Is it necessary for
creditors to enter suit against the concern and reduce their accounts
to judgments in order to secure payments of acknowledgedindebted-
UNDERWRITING
MANUAL
1118-1123
Is dealing with the company a constant source of irritation
and litigation? Has the concern ever voluntarily declared itself
insolvent or been forced involuntarily through the bankruptcy courts
by its creditors prior or subsequent to the assumption of its affairs
by the present management1 On the other hand, is it a desirable
concern with which to do business?
1119. In cases where it is required that principals of the
concern join with the commercial borrower as co-signer, endorser,
or guarantor on the note, bond, or other. evidence of debt of the
mortgage obligation, a thorough analysis of the attitude such principals maintain toward their personal obligations shall be made.
1120. Competent management does not require that payments of obligations be made before the net due dates unless compensating discounts make such payments profitable. Therefore, the
prompt payment of debts on the net due dates generally contributes
to a favorable rating of this feature. Irrespective, however, of the
borrower's desirability manifested in other factors of this feature,
the rating of the feature will be lower in proportion to the delay
with which the management meets obligations. The management's
attitude may be sufficientlyindifferent to justify a reject rating of
this feature.
nessj
•
MOTIVATION IN RELATION TO TRANSACTION
1121. The rating of this feature is based upon an analysis of the motives which actuate the commercial borrower to enter
into the mortgage transaction. This feature is rated by analyzing
such factors as cash investment, motives for borrowing, and importance of the property to the borrower.
1122. Oash Investment. For the same reasons stated in
Section 10, Rating of Borrower, the cash investment of the commercial borrower in the subject property is a contributing element
to motivation. Cash investment applies with the same force to the
commercialborrower as to the individual borrower. The minimum
requirements for cash investment or its equivalent are contained in
Section 5 of this Manual, Minimum Eligibility Requirements.
1123. Motives for Borrowing. The purposes for which
the proceeds of the mortgage loan are to be used will also be a contributing element in determining the soundness of the borrower's
motives. Generally, the refinancing of unpaid balances on existing
liens, home development for the benefit of employees,property improvements, and initial financing to facilitate purchase or sale of
homes may be regarded as sound motives. On the other hand, use
of the proceeds for speculation, acquisition of permanent additional
•
RATING
OF COMMERCIAL
BORROWER
1123-1129
working capital, or discharge of unrelated business obligations may
be regarded generally as unsound motives.
1124. Analysis of the proposed use of the proceedsof the
transaction is made in the light of its effect on motivation. Frequently the motive of commercial borrowers, other than operative
builders, is the development of homes for the benefit of employees.
Behind this purpose are usually benefits which the employer will
share, in part, with the employee. In general, the motives behind
such transactions may be considered sound.
1125. The operative builder's principal purpose in Se"
curing a mortgage loan is, quite naturally, to facilitate the financing
and sale of his merchandise. Therefore, his motivation to keep the
loan in good standing is primarily the expectation of a profit and
of the recovery of his cash investment in the mortgaged property.
1126. Importance of Property to Borrower. This
factor indicates to what extent the commercialborrower will endure
sacrifices in retaining the property. The borrower's motivation in
this respect should be analyzed from the point of view of investment and speculation. In either case cognizanceshould be taken of
the possibilities of profitable return. It is necessaryto ascertain the
importance that the commercial borrower attaches to the property
offered as security. Has it been received reluctantly for the payment of a debt, or has it been acquired for a logical purpose'[ Does
it promise profit in money or other benefits1
1127. Dwellings held or acquired for speculation have
little importance to the commercialborrower other than the marketing possibilities for profit. Frequently, motivation to repay the
mortgage debt diminishes when possibilities for profit disappear.
This may not be true where the borrower is confining such sales to
selected employees.
FINANCIAL CONDITION
1128. The rating of this feature is based upon an analysis of the source, character, amount, and distribution of funds and
is determined by analyzing such factors as adequacy of operating
funds, balance sheet, operating statement, and ability to discharge
obligations.
1129. Adequacy of Operatin!J. Funds. A business must
have capital in order to operate. At its inception the acquisition
of capital is accomplished through the medium of capital stock
subscriptions. The investment of the owners should be secured and
protected by adequate assets. In the normal course of active enterprise liabilities are incurred. Therefore, the availability of adequate
operating or working funds is necessary to meet these liabilities.
UNDERWRITING
. MANUAL
1129-1133
A sound enterprise should be able to provide operating funds from
earnings derived from its ordinary operations.
An absence of profit
shall require a close analysis of the· commercial borrower's justification in securing operating funds from other sources and of the effect
that such procedure will have on its future financial position. A
temporary cessation of profits may be explainable, and may justify
the procurement of operating funds from some other source. A continued absence of profit will ultimately result in insolvency.
1130. Sources, other than profits, from which funds can
be obtained include proprietary interests, chattel notes and mortgages, unsecured loans, hypothecation or sale of assets, expansion
of capital investment, and contributions.
Because a company may
convert such assets into cash, an analysis of the value and liquidity of
such assets is made in order to determine the adequacy of operating
funds. Further, the effect of such conversion on the capital structure is included in the analysis.
1131. The operative builder's major problem is to dispose of his properties readily In order to obtain funds for his continued activities. It is an all important matter to him to effect a
quick turnover of completed dwellings because his operating funds
may be restricted until he can make satisfactory disposition of them.
Unless he has substantial capital he will not be able to hold the
properties in his portfolio of investments.
His business will be
retarded or may be even suspended until he can recover his investment in unsold properties.
1132. Balance Sheet. The 'balance sheet is an analysis
of factsregarding the net worth and financial position of a business.
Detailed instructions in-the analysis of a balance sheet are not
attempted in .this text. It is the responsibility of the Mortgage
Risk Examiner to be able to analyze a balance sheet intelligently.
1133. Desirable ratios between various types of assets
and liabilities have a widely diversified significance in different kinds
of enterprise.
Some ratios. are pertinent and some may be disregarded, dependinguponthe
nature of the.line of business. Among
the ratios most· commonly used are. the. following :
·
a. Quick assets to current liabilities
b, Current assets to current liabilities .
c. Sales to receivables
.
·
d. Sales to inventory
e. Sa;les to net worth
f. Sales to fixed assets
g. Net worth to fixed assets
h, Net worth to currentliabilities ·
i. Net worth to total liabilities
•
•
RATING
OF COMMERCIAL
BORROWER
1134'-1139
1134. Business difficultiesreally fall into three main
classes, (a) insufficientnet profit, ( b) improper division of net profit
between stockholders and the company, and (c) improper use of
profit retained by the company. The first condition is the most
serious and is self explanatory. In this connection, it is important
to ascertain the cause for insufficientprofit as well as the fact that
insufficiencyexists. The third condition, which is the next most
serious, may lead to a situation wherein there are insufficientcurrent
assets to meet obligations, irrespective of excellent profit. The sec-'ond condition is not as prevalent as the other two but occurs with
enough frequency to require attention. A comparison of balance
sheet summaries over a period of time will assist in discovering such
weaknesses.
1135. In the assets listed on the balance sheet, items such
as patents and good will may have an indeterminablevalue for credit
purposes. Assets or liabilities, which are too inclusive or obscure,
should require qualitative explanations from the borrower.
1136. Ordinarily, the operative builder's assets reveal
only limited liquidity in cash or readily convertibleholdings, because
the major portion of his worth is invested in the building program:
The operative builder borrower cannot be expected to show sufficient
financial strength to carry an unsold or unrented house indefinitely
after completion, but he should be expected to demonstrate ability
to carry a completed project for a reasonable period of time, The
possibility of rental should be considered.
1137. A comparison of statements over a reasonabl~
previous period of time will indicate the trend of the borrower's
financial position. This review should be accepted as some indication of future performance.
1138. Evidences on the balance sheet will contribute
heavily to the rating of this feature. A · high rating cannot be
ascribed to the commercial borrower unless all pertinent ratios • bei
tween certain assets and liabilities are favorable, and unless the net
worth is intact and shows promise of improvement. A lower rating
will be given in proportion to those business hazards which are ap~
parent in the balance sheet. A reject rating is warranted when
the borrower's financial responsibility to undertake the contemplated
mortgage loan is unsatisfactory.
1139. Operating Statement. This statement, commonly
known as 'the Profit and Loss Statement, is an itemized summary of
the items of incomeand expenseduring a specificperiod of time. It
reveals the accumulation of profits or losses from business activities. In brief, it shows whether the business has been making or
losing money. Analysis of a series of operating statements will
L
UNDERWRITING
MANUAL
1139-1144
indicate the past trend of the business and, to a degree, will assist
in forecasting the future trend.
1140. Some operative builders have a tendency to expand beyond their financial responsibility. Therefore, because of
constant changes in the financial position of operative builders, the
activities and profit and loss statements of such borrowers must be
constantly watched. It is further necessary to be familiar with the
nature of the disposition of the properties for which commitments
have been issued.
1141. Ability to Discharge Obligations. Commercial
enterprises, in general, require credit in order to continue in business,
and, therefore, protect their credit reputations. For this reason, their
credit is usually based on definite audited statements. It is feasible
to accept the current credit record of a commercial borrower as a
clue to its financial capacity. In predicting the borrower's future
ability to discharge obligations, analysis should be made of the judgment employedto secure benefitsfrom expenditures. The nature and
amounts of business obligations are analyzed as to their affect on
earning capacity. Certain types of indebtedness may be only
temporary, while others may show probabilities of continuance or
recurrence. Income producing or income increasing obligations
demonstrate a more favorable situation than those incurred for
strictly transitory purposes. Arrangements made to discharge such
obligations is one indication of the effect of the indebtedness on
capacity. An analysis of the elements in this factor will reveal the
borrower's probable performance in the contemplated mortgage
transaction.
1142. Contingent liabilities that may become burdensome debts in the future should not be overlooked,but, at the same
time, undue concern should not be entertained where the actual
liability of such contingenciesapparently will remain very limited or
remote or will probably be liquidated.
1143. In cases where it is required that principals join
with the commercialborrower as co-signers,endorsers, or guarantors
on the note, bond, or other evidence of the mortgage obligation, a
thorough analysis of the personal financial responsibility of such
parties shall be made.
PROSPECTIVE EARNING CAPACITY AND STABILITY
1144. The rating of this feature is based upon an analysis of the borrower's future ability to obtain and maintain income,
and to pay the contemplated mortgage obligation. It is rated by
analyzing such factors as evidences of net profit, operating possi-
I
•
----~--,
RATING OF COMMERCIAL BORROWER
1144-1149
bilities, and ability to discharge the contemplated mortgage obligation.
1145. Evidences of Net Profit. It may be assumedthat
as long as a businessenterprise can realize net profit it will continue
to stay in business and continue to pay its obligations. The usual
exceptions include corporations chartered for religious, charitable,
and similar purposes. In the absenceof net profit or surplus reserves,
the only alternative sourcesfor the acquisitionof operating funds are
collateral or unsecured loans, and new capital. Sustained absence
of net profit will result ultimately in insolvency.
1146. Demand for the merchandise and services produced by the companyis necessaryfor the proper utilization of capital. Profit is impossiblewithout sales, and sales depend on demand.
Sales cannot rely entirely on need, because need may not be translated into actual purchases. Mere sales do not indicate profit unless
the cost of production and cost of sales are below prices received.
1147. The analysis of this factor depends on the probability and character of future net profit. The presenceof net profit
at the time of analysis is to be noted, but more important is the continuance of profit during the term of the proposed mortgage loan.
A business,in order to continue successfully,must meet competition
not only in its particular line of business,but also in other lines offering substitute products or services.
1148. The foregoing paragraphs apply equally to the
operative builder, whether corporate or individual. He is literally
a manufacturer and merchandiser of dwellings. Not unlike other
enterprises his merchandise and services are for sale, and not for
personal consumption. Likewise,he generally provides himself with
merchandisebefore he has a purchaser.
1149. Operating Possibilities. The continued success
of a business will depend on the availability of facilities which will
permit the functioning of an operating program that can profitably
meet demand. The realization of future profit must be based on
(a) the existenceof a buying market, and ( b) the ability to produce
and sell at prevailing competitive prices. While certain products
can, in a measure, introduce or attract demand, it lies largely
outside of the control of any one business enterprise. It is more
necessaryfor a businessto be able to regulate its chosen activitiesto
demand, than to attempt to regulate demand to its chosen activities.
In order to anticipate and enjoy a stable market it is desirable for
a businessto be in a position to (a) regulate distribution to keep pace
with demand, and ( b) change production with changing demand.
Stability of demand is essential to stability of profit. Stability of
operating profit is essential to stability of earned income.
UNDERWRITING
MANUAL
1150-1151
1150. When considering an operative builder in the capacity of a borrower it will be necessary to analyze the character of
his operations. His characteristics and financial statements will not
disclose all the facts necessaryto determine his desirability as a borrower. A. further determination must be made of the economic
soundness of his projects. The Architectural and Valuation Sections shall be consulted to ascertain whether the operative builder
borrower is constructing appropriate dwellings in suitable locations.
An operative builder who gives buyers what they want, where they
want it, deserves a favorable rating of this feature.
1151. Ability to Discharge the Contemplated Mortgage
Obligation. The purpose of analyzing the commercialborrower is to
determine the degree of credit risk involved in the issuance of mortgage insurance. The previous feature, Financial Condition, involved
a study of the past and present financial position in order to forecast
the future financial situation. In this feature the previous factors
present an analysis of the underlying forces which will govern the
possibilities of continuing business activity. The decision with respect to eligibility as based on this factor shall be predicated on evidences in the factors of these last two features in the Rating of Commercial Borrower grid, and will contribute to a high rating in this
feature where such factors reflect a highly desirable commercial borrower. This factor will effect a lower feature rating in proportion
to the borrower's deviation from such standards. A. reject rating
in this feature will be justified when the borrower's prospective earning capacity and stability are too uncertain to establish, with reasonable assurance, its ability to discharge the contemplated mortgage
obligation.
•
•
I
J
PART II
SECTION 12
RATING OF EARNING EXPECTANCY
CONTENTS
General Rating Instructions
Rentability of Units
Occupancy Percentage in Competitive Buildings_____________________
Likelihood of Serious Competitive Construction
Reliability of Rental Market Data_______________________________
Reliability of Expense Prediction
Rating of Property_~--------------------------------------------Rating of Location_______________________________________________
Expense Ratio___________________________________________________
Paragraphs
1201-1206
1207-1209
1210
1211-1212
1213
1214-1216
1217
1218
1219
Eft'ective February, 1938
Federal Housing Administration
1201
PART II
SECTION 12
RATING OF EARNING EXPECTANCY
GENERAL RATING INSTRUCTIONS
Rating of Earning Expectancy
FEATURE
REJECT
11 I
3
2
3
6
-9-
1
2--
3--
Rentability of Units
Occupancy Percentage in Competitive Buildings
Likelihood of Serious Competitive Construction
Reliability of Rental Market
Data
Reliability of Expense Prediction
2
2
2
-.-.-
-.-
5
4
-12-
-.-
RATING
15
5
6--
8--
10
-6-
8
10
-6-
-8-
10
3
-6-
9--
~
15
3
-6-
-9-
-12-
15
•
8--
-12-
-16-
20
Rating of Property
Rating of Location
Expense Ratio
TOTAL RATING OF EARNING EXPECTA.NCY
1201. The category, Rating 0£ Earning Expectancy, is
utilized only in connection with mortgages secured by rental income
dwelling properties. Before the Rating 0£ Earning Expectancy can
be established the Rating 0£ Property and the Rating 0£ Location
must have been completed. When the total Rating 0£ Earning
Expectancy has been established the result is used in the Rating 0£
Mortgage Pattern.
1202. The total Rating 0£ Earning Expectancy is a rating 0£ the certainty, probable fluctuation, and probable rate 0£ decline 0£ the net earning expectancy 0£ the property. It is a measure-
UNDERWRITING
MANUAL
1202-1205
ment of mortgage risk in terms of the qualitative characteristics of
the earning expectancy. The Rating of Earning Expectancy cannot
be completed until an estimate of the earning expectancy has been
made in accordancewith the instructions given in Section 15, Valuation of Rental Income Dwellings. It should also be noted that the
last step in valuation, namely, capitalization, should not be completed until a:fter the Rating of Earning Expectancy has been established inasmuch as the rating itself should be used as one of the
determinants of the proper capitalization rates used to convert the
earning expectancyinto a final value. estimate.
1203. The Rating of Earning Expectancy shall be accomplished by rating separately each of eight features, in accordance
with the principles outlined in this Section and Section 6, Methods of MortgageRisk Rating. The eight features have been weighted
on a scale of 100. points in order to retain the relative importance of
. each when all are combinedto obtain the total Rating o:f Earning
Expectancy. Each feature is marked on a scale of from 1 to 5, 5
: being the highest rating. .After analysis of the factors comprising
.a feature, an X mark is placed in the column which is determined to
·reflect the degree o:f risk involved. If the X mark is placed in any
'column other than the Reject column, the figure appearing in the
'marked .square is carried over to the extreme right hand column of
the grid. I:f the X mark is placed in the Reject column, the word
"Reject" is written in the extreme right hand column of the grid.
One such rating of any feature will necessitatea recommendationfor
the rejection of the application for insurance. If the word "Reject"
appears in the Rating column,it must also be written in that column
on the Total Rating line. I:f no such rating appears after any of the
features, the. final rating of the category is obtained by adding the
figures in the rating column. The system is so designed that this
·figure will be an expressionof the rating on a numerical basis.
1204. The eight features which are rated to determine
the total Rating of Earning Expectancy are listed below with the
weights which have been ascribed to them:
•
•
a. Rentability of Units -------------------------------------
15
5
Likelihood of Serious Competitive Construction____________ 10
Reliability of Rental Market Data-----------------------10
Reliability of Expense prediction------~------------------ 10
Rating of PropertY--------------------------------------- 15
Rating of Location--------------------------------------15
Expense Ratio___________________________________________
20
b. Occupancy Percentage in Competitive Buildings____________
c.
a.
e.
f.
g.
h.
1205. In establishing the several ratings it is highly important to bear in mind the relationship between mortgage risk and
i
RATING
OF EARNING
EXPECTANCY
1205-1209
(
the characteristics of the earning expectancy. Earning expectancy
is construed to represent a flow of net income extending from the
present indefinitely into the future. One· danger in making an estimate of net earnings is to assume average conditions and ignore
variations and fluctuations from the average through coming years.
The description of an estimate of net earnings as a single amount of
annual income is of little significancein the measurement of mortgage risk until it is described in qualitative terms which indicate its
characteristics. There must be a determination of the probable stability of the earning expectancy. This can be accomplished only
after consideration is given to the probable certainty as to amount,
periodic fluctuation, rate of decline, and duration of the net earnings.
The Rating of Earning Expectancy is an attempt to examine and
measure these qualitative characteristics.
1206. It should be pointed out that certain of the features are rated on the basis of set rules rather than by judgment
alone. Deviation from these set rules may be made only in instances
where the text indicates that the rules are judgment guides. In
other cases compliancewith the rules is mandatory.
RENTABILITY OF UNITS
1207. This feature, Rentability of Units, is rated by
judgment comparison. If the units in the building are in a strong
competitive position in the rental market, a 5 column rating is
ascribed. If the units are in a relatively weak competitive position,
a 1 column or Reject rating is ascribed. In every case the comparisons must take competitive rental rates into account and balance
them against the rental rates used in the valuation of the property.
The Valuator must form his judgment by analyzing the rapidity
with which available rental space is absorbed in other properties
or by known demands for accommodations' in the rental market.
His considerations must take into account the supply of space of
various types in the community and he should compare the supply
with the requirements of typical families for space.
1208. Major emphasis is placed on the probable future
trend of rentability of the units. Even in cases where high occupancies, at current rental rates, can be readily obtained in the current
market, intermediate or low ratings may be justified if evidenceindicates a strong probability that the market will become oversupplied
and cause a future recessionin rental rates during early future years.
1209. To establish a rating of Rentability of Units, consideration is given to those factors used in rating the features in the
Rating of Location and the Rating of Property which appeal to ten-
UNDERWRITING
MANUAL
1209-1212
ants rather than owner occupants. The attractiveness of the space,
the appeal of the location, and the equipment and services offered
will have a strong bearing on rentability. Room sizes, numbers of
rooms in the apartments, transportation facilities, and the character
of local centers near which the property is located are considered in
relation to the preferencesof prospectivetenants in the rental market.
OCCUPANCY PERCENTAGE IN COMPETITIVE BUILDINGS
1210. It is presumed that this feature, Occupancy Percentage in Competitive Buildings, is most successfully rated when
statistics showing average vacancy percentages in competitive buildings are available. It deals with future probable competitive relationships only by inference inasmuch as it is rated in terms of current occupancy percentages. The following table may be used as a
guide to correct rating. Valuators need not be bound by it because
general vacancy statistics do not always cover the precise group of
properties which are strictly and significantly competitive.
.
•
Place I
Current Occupancies in Competitive Space :
tn column
96o/o to lOOo/o---------------------------------------------------5
91 o/o to 95o/o
------------------------------4
86o/o to 90o/o----------------------------------------------------3
79o/o to 85o/o----------------------------------------------------2
70o/o than
to 78o/o----------------------------------------------------Less
70o/o
R.eject1
LIKELIHOOD OF SERIOUS COMPETITIVE CONSTRUCTION
1211. This feature, Likelihood of Serious Competitive
Construction, views future competition in terms of probable new
construction of similar accommodationsin the immediate neighborhood or in strongly competitive neighborhoods. The presence of
vacant land which can, under existing zoning ordinances and other
restrictions, be used as sites for the construction of competitive
buildings, must be balanced against the actual probability of such use.
The following table is used to rate this feature :
•
Likelihood of Large A.mounts of Competitive Construction:
i~l~~fu!n
ltemote-------------------------------------------------------5
Little---------------------------------------------------------4
l\foderate------------------------------------------------------3
Strong--------------------------------------------------------2
Great---------------------------------------------------------1
1212. In general, the future period of time which should
be viewed is the next three or four years :fromthe date of analysis.
The imminence, in point of time, of competitive construction should
color the rating ascribed.
J
--------~-
RATING
OF EARNING
EXPECTANCY
1213-1214
RELIABILITY OF RENTAL MARKET DATA
1213. The rating 0£ this feature, Reliability 0£ Rental
Market Data, is not based upon the failure of the Valuator to assemble data of a reliable character. It is presumed that rental market
data compilation has been complete. This feature takes into account the uncertainties which remain after the compilation 0£ data.
The character of the required data is indicated in Section 15, Valuation 0£ Rental Income Dwellings and Section 18, Compilation and
Recordation 0£ Data. To establish this rating an analysis is made
as to the reliability 0£ all information having a bearing on the
amount 0£ rent the units will command,the rapidity with which they
can be rented and re-rented, and the extent to which they can compete successfullyin future rental markets. It is the quality or degree
0£ reliability 0£ the data which is rated, not the apparent significance
of the data. The rating is decreased when data are meager, unreliable, or of uncertain quality. Such a condition usually exists when
there are £ew comparable properties in the neighborhood or where
the subject property has the characteristics 0£ a pioneering venture.
Special attention should be directed to those items of data concerning factors which may cause wide :fluctuationsin the future gross
earning capacity 0£ the property. The following table is used to
establish the rating of this feature :
Quality of Market Data:
i~i~~fu!n
Excellent------------------------------------------------------Good-----------------------------------------------~----------.:Fair----------------------------------------------------------Questionable___________________________________________________
Poor-----------------------------------------------------------
5
4
3
2
1
RELIABILITY OF EXPENSE PREDICTION
1214. The rating 0£ this feature, Reliability 0£ Expense
Prediction, is not based upon the failure of the Valuator to assemble
data of a reliable character. It is presumed that the operating expense data compilation has been complete. This feature takes into
account the uncertainties of the expense prediction which remain
after the compilation 0£ data. The character of the required data is
indicated in Section 15, Valuation of Rental Income Dwellings and
Section 18, Compilation and Recordation of Data. To establish this
rating an analysis is made as to the reliability of all information having a bearing on the amounts which will be required to operate, maintain, and manage the property. It is the quality or degree of certainty
of the expense forecast which is rated, not the apparent significance
of the data. The rating is decreased when data are meager,unreliable,
or of uncertain quality. It is decreasedwhen only limited confidence
l
UNDERWRITING
MANUAL
1214-1217
can be placed in the correctnessof the final estimate of total operating
expenses. Such a condition usually exists when there are a limited
number of comparable properties or where the plan of operation is
untried and operating data are difficult to obtain.
1215. Special attention is directed to all those items of
data concerning factors which may cause wide fluctuations in
future operating expenses. Among these the principal one is almost
always the uncertainties in the tax situation. The present tax burden
may be heavy or light. As long as it is reasonably. certain not to
change materially, the feature rating is not decreased on this account.
Ratings vary downward according to the necessity for additional
taxes and the likelihood that they will be levied. Some of the contingencies which require lower ratings are:
a. The prospect that the property will become a part of a
special tax district or be subjected to other special
assessments
b. The financial condition of a county or municipal jurisdiction which lacks population and the resources necessary
to maintain local services now attempted
c. The likelihoodof an adverse change of taxing policy
d. The uncertainties with respect to the burdens for relief in
taxation budgets
1216. The following table is used to establish the rating
of this feature :
.
of Expense p rediction
:
inPlaceX
column
ExcellenL-----------------------------------------------------5
Good----------------------------------------------------------4
Fair___________________________________________________________
3
Questionable---------------------------------------------------2
Poor----------------------------------------------------------1
•
· bill
1 1ty
R elia
RATING OF PROPERTY
1217. The Rating of Property is determined in accordance with the principles set forth in Section 8. This feature is
then rated by using the following table :
If
category rating is80to100------------------------------------------------------70 to 79-------------------------------------------------------60 to 69------------------------------------------------------55 to 59-------------------------------------------------------50 to 54-------------------------------------------------------Under 50 -----------------------'--------------------------------
•
Place X
in column
5
4
3
2
1
Reject
I
,,
J
RATING
OF EARNING
EXPECTANCY
1218-1219
RATING OF LOCATION
1218. The Rating of Location is determined in accordance with the principles set forth in Section 9. This feature is
then rated by using the following table :
If
.
cat egory ra timg 1s80 to 100------------------------------------------------------70 to 79-----------~-----------------------------------------60 to 69----------------~--------------------------------------55 to 59------------------------------------------------------50 to 54-------------------------------------------------------Under 50 ------------------------------------------------------
Place X
in ci:;lumn
5
4
3
2
1
Reject
EXPENSE RATIO
1219. This feature, Expense Ratio, is the most heavily
weighted feature in the Rating of Earning Expectancy. The expense ratio is calculated by dividing the total estimated expense of
operating, taxes, insurance, and management by the estimated yearly
effectivegross revenue for the last year specificallyestimated. The
expensesdo not include items for depreciation or vacancy allowances
but do include all items for which actual outlays will have to be
made. The effective gross revenue includes only expected collections.
Therefore, it is the difference between gross revenue at 100%
occupancy and the sum of the allowances for vacancies and collection losses and all other contingencieswhich affect the amount of
revenue collection. The significance of this ratio as an index of
risk is apparent. A net income of $2,000per year, which is the result
of an effective gross revenue of $5,000 and expenses of $3,000,is
more hazardous than a net income of the same amount which derives
from a gross revenue of $3,500and expensesof $1,500. In the first
case, the expense ratio is 60%; in the second case it is 42%. A 20%
recession of rents reduces the $2,000 net income $1,000in the first
case, but only $700 in the second case. That is, the higher the
expense ratio, the greater the risk. In determining expense ratios
all fractions are dropped. This feature is rated strictly by the
following table :
If E xpense R a
ti
.
Place X
in oolumn
101s-
Under 35o/o---------------------------------------------------35o/o to 44o/o---------------------------------------------------
45o/o to 52o/o___________________________________________________
53o/o to 59o/o____________________________________________________
60o/o to 64o/o---------------------------------------------------65o/o and over--------------------------------------------------
1.0/'\{\
. 1£){'\{\
5
3
2
4
1
Reject
PART III
SECTION 13
METHODS OF DWELLING VALUATION
CONTENTS
Porturra
(\
"·
Purpose of Valuation--------------------------------------------The Character of Value
I)efinition of Value
1301-13o5 'i::':
1300-1317
1308-1314
Sources of Real Estate Value---------------------------------Implied Valuation Procedure-------------------------------------Axioms of Valuation-----------------------------------------Delineation of Property to be Appraised________________________
Substitution Theory
13ll>-1317
131&-1332
1319
1320
1321-1322
Basic Procedure--------------------------------------------Selection of Method------------------------------------------Supplementary Procedures---------------------------------------MechanicalEquipmentand Accessories------------------------Dwellings on Higher-Use Sites--------------------------------Leasehold Estates-------------------------------------------'l'axes and Special Assessments________________________________
Valuation of Fragmental Properties____________________________
·Integral Factors in Valuation-------------------------------------Determlnationof Rental Value
Estimation of Remaining Physical and EconomicLife
Land Valuation by Comparison-------------------------------Replacement Cost of Property
1323-1328
1329--1332
1333-1338
1334
1335
1336
1337
1338
1339--1376
1340--1349
1350-1360
1361-1369
1370--1376
Valuation Concepts----------------------------------------------Plottage IncremenL------------------------------------------·
Marketability and ConformitY----------------------~--------Environmental Changes--------------------------------------Depreciation,Deterioration,and Obsolescence___________________
Distinetion betweenCost and Value
_:______________
The Accuracyof Valuations--------------------------------------Sourcesof Errors--------------------------------------------Reasoning Used in Estimation
Desirability of MethodicalProcedure
Valuator's Final Judgment---------'---------------------------
1377-1381
1377
1378
1379
1380
1381
1382-1397
1382-1383
1384-1392
1393-1394
1395-1397
Etrective February 1938
Federal Housing Administration
.. 1 '!)(\1
PART III
SECTION
13
METHODS OF DWELLING VALUATION
PURPOSE OF VALUATION
..~
.1301. Becausethe National Housing Act doesnot permit
the insuring of any mortgage which involvesa principal obligation in
excessof a stipulated percentage of the value of the mortgaged property, it is necessaryfor the Federal Housing Administration to secure
appraisals from its own Valuators. Furthermore, the values of
properties must be ascertained because the ratio of the loan to the
value is one of the considerationsin the risk rating process.
1302. Valuations utilized by the Federal Housing Administration must serve the specific legal purposes of the National
Housing Act. There must be a uniform interpretation of }"hat the
Act means by "appraised value" and uniformity with respect to methods used to estimate value. While it is possible that appraisals will
sometimesvary as a matter of judgment, no variations should be permitted to result from differences in the concept of the purpose of
valuation, the definition of value, or differences in methods of
estimation.
1303. The valuation of dwelling properties for the purpose of determining the amount of security solves only a part of the
mortgage lending problem. While valuation is a most important
element in the analysis of mortgage loans, it does not constitute the
sole basis upon which mortgages are selected. The security for a
mortgage loan is only partially disclosedby valuation, and valuation
is used to analyze the security principally by comparing the amount
of a proposedmortgage with the estimate of value of the property.
1304. In connection with the activities of the Federal
Housing Administration, valuation must produce an estimate which
directly assists in the decision with respect to the eligibility of a
loan for mortgage insurance. Valuation is never an end in itself.
There are two ways in which property value constitutes security for a
loan. The first, and by far the more important one, is the incentive
to make interest and principal payments on the loan because of the
importance of the property to the owner. The second is the value
UNDERWRITING
MANUAL
1304-1308
of the property recoverable under conditions of foreclosure. Emphasis is placed on the order and relative importance of the two
kinds of security. .Security has more to do with the avoidance of
foreclosurethan with the possibility of a recapture of capital by sale
after foreclosure. In general, dwelling properties are primarily
pledges. The first class of security has significance to the lender
chiefly because the borrower has a stake in a valuable and desirable
property and would not care to lose an equity which is of considerable
value to him and of less value to the lender.
1305. The Federal Housing Administration requires the
Valuator to place a value on all the property delineated and described by him as eligible security in accordancewith instructions in
Section 5, Minimum Eligibility Requirements. This does not preclude the setting of separate valuations on fractions or. portions of
the properties submitted, but does require that the Federal Housing
Administration Valuation fixed by the Chief Underwriter shall
embracethe entire eligible security of whatever character it may be.
The requirement that all the property be appraised does not imply
that mortgage insurance limits will be enhanced in direct proportion.
'to value added by pledging additional property as security, but is
prescribed solely in the interests of good practice and uniformity of
procedure.
•
THE CHARACTER OF VALUE
1306. The word "value" refers to the ability of useful
things to produce benefits for human beings in answer to their needs
or desires. The meeting of such needs or the satisfying of such desires requires the occurrenceof events in the future, never in the past.
Value does not exist unless future benefits are in prospect. Its
measure is the present worth of expected benefits which may be
realized only upon the occurrenceof future events.
1307. In the valuation of real estate, properties are appraised. "Property" refers to certain rights which a person enjoys
by virtue of his ownership of wealth. In this sense, property is the
privilege of using physical real estate facilities, not the facilities
themselves.
1308. Definition of Value. The Federal Housing Administration recognizesthat there are many purposes for which valuations are made and that there are, of necessity,many possible definitions of "value". Definition depends upon the purpose for which
the estimate is to be used. At the same time, the Federal Housing
Administration has only one objective in view in connection with
valuation. It therefore utilizes only one concept of value. The word
"value", as used by the Administration, refers to the price which a
•
J
M.ETHOD3 OF DWELLING- VALUATION
1308-1311
(
purchaser is warranted in paying for a property for continued use
or as a long-term investment. This concept is defined as the price
which well-informedtypical buyers, acting intelligently, voluntarily,
and without necessity,would pay for the property. It always presumes a price which is justified by the future long-term benefitswhich
will accrue through ownership to a typical owner.
1309. The above definition of value describes.. the exchange value concept and places emphasis on the idea that value is
a price which typical buyers are warranted in paying. This is presumed to be equivalent to the price a typical owner is justified in paying, whether he is actually a new purchaser or the present owner.
1310. A primary distinction is made between value, as
defined above, and market price. Both are value concepts and take
cognizanceof a market, either present or implied. There are cases
where the two may be identical in amount, but quantitative differences are frequently encountered. Another way of describing this
is to distinguish between what a property is worth and what the
current market thinks it is worth. The accompanyingdiagram illustrates the necessityfor careful distinctions between conceptsof value.
Such concepts vary with the motives and purposes of buyers and
sellers. The diagram on the following pages indicates why "value"
may have several meanings. The concept of value used for mortgage lending purposes is that indicated by the bold type words
opposite "Buyers." The chart explains that there can be several
prices justified by different motives. It shows that market prices
are not necessarily acceptable as valuations.
1311. While it is recognized that the required "justified
selling price" or "justified purchase price" or simply "value" can be
interpreted variously depending upon the differencesin purpose of
appraisal, the Federal Housing Administration recognizes a somewhat general market containing a reasonable number of "typical"
buyers. The value to be estimated, therefore, is the probable price
which typical buyers are warranted in paying. This valuation is
sometimeshypothetical in character, especially under market conditions where abnormalities in price levels indicate the presence of
serious quantitative differentials between the two value concepts.
With the definition of value prescribed for use by the Federal Housing Administration, marked differences between "available market
prices" and "values" will be evident under both boom and depression
conditions of market. No other definition is acceptablefor mortgage
loan purposes inasmuch as one of the objectives of valuation in
connection with mortgage lending is to take into account dangerous
aberrations of market price levels. The observance of this precept
tends to fix or set market prices nearer to value.
UNDERWRITING MANUAL
1311
•
I
METHODS OF DWELLING
VALUATION
1311
UNDERWRITING
MANUAL
1312-1314
1312. Valuation, in accordancewith the prescribed definition of value, cannot be feasible without recognizing that each
property offersa buyer a future incomestream in the form of services
or monetary net profits. The essenceof valuation is in the attempt
to forecast as accurately as possible the certainty, amount, character,
and attractiveness of the future income stream and to translate it,
by such means as are available, into an estimate of present capital
value. The latter value has already been defined as justified or warranted purchase price. By reverse reasoning this definition of the
concept of value controls the considerationswith respect to the forecasts of the future income stream.
1313. One concept is found among many appraisers and
lending agencies, namely, the idea of "loan value." The Federal
Housing Administration recognizes no necessity for the use of such
a term. If it refers to a correct valuation, then the word "value"
should suffice. If it is intended to refer to a valuation somewhat
higher or lower than value, it leads to unsound practice.
1314. "Normal value" is a term which is frequently used.
It is very rarely, however,that it can be satisfactorily defined. Normal value has been used to mean a value which, in the past, was
higher or lower than that which exists. Such a concept is apt to result in unsound valuations becausegenerally it is accompaniedby the
inference that in a short time prices and values will return to the
so-called "normal". Therefore, it is inferred that it is not proper to
recognize existing conditions and facts which have created present
values at points which the appraisers considerto be "abnormal." The
instability of the general price structure in times past has caused great
fluctuations in real estate price levels so that there is really no single
level that can be pointed out as a normal level. It is improper to
assume that a certain level of real estate prices that existed at one
time is "normal", and that prices therefore will inevitably return to
that level in the future. All values depend on future occurrences
and the process of estimating values necessitates the making
of assumptions with regard to the future. The past is often useful
in forecasting the future, and the manner in which events have occurred in the past may be a reliable indication of what will probably
happen in the future. However, an exact repetition of events can
very seldombe contemplated. While the above probably throws suspicion on appraisal conceptsof normal value, it does not necessarily
imply that they are utterly worthless. Without some notion of
the idea of a median trend or normal level of value, appraisers
may find it difficultto distinguish betweenvalue and available market
price. The distinction betweenthe current price and the value must
~
L
•
•
METHODS OF DWELLING
VALUATION
1314-1319
follow more from a forecasting process than from a reference to
value levels in the past.
1315. Sources of Real Estate Value. The value of a
real estate property results from the benefits which its utilization is
expected to confer on the owner. There are various forms in which
real estate may be useful. Residential real estate is useful because
it provides shelter. This obvious fact, however, is significant only
when the motives of the owner or typical prospective owners are used
as the basis for a further examination of the character' of the usefulness. To one owner a house appeals as a dwelling place for his own
family. The appeal of another residence may be related almost
solely to investment motives. In the first case, the expected services
of the property are enjoyed directly as they accrue. In the second
case, the expected services are enjoyed indirectly in the form of
dollar income. In every case, however, the utility of the property
is the source of any value it may have and valuation can be accomplished only by an examination of the usefulness of the property.
1316. The degree of usefulness varies with the characteristics and qualities of the properties, the requirements of the inhabitants of the community, and the scarcity of available properties.
Value thus appears in relation to supply and demand and in terms
of the relative advantages of available properties. Usefulness and
scarcity create eagerness for possession and competition ensues in
the real estate market.
1317. Usefulness is, of necessity, prospective and lies in
the future. The buyers and sellers in the market examine, or are
presumed to examine, the available properties in terms of future usefulness and translate their expectations into present prices which
reflect their forecasts with respect to the extent, quality, and
certainty of the future services and productivity. These considerations by prospective buyers, who compete with one another, create
real estate price levels which become guides in valuation.
IMPLIED VALUATION PROCEDURE
1318. It is evident that sound valuation procedure must
embrace and use both the definition of value and an examination of
the source of value. These lead, by logical derivation, to the establishment of certain axioms of valuation and to the outlining of a
basic procedure.
1319. Axioms of Valuation. There are certain basic
valuation principles which are axiomatic, or self-evident. These
include:
a. Valuation presupposes the existence of a buyer
b. Valuation presupposes the existence of a seller
L
UNDERWRITING
MANUAL
1319-1320 (1)
c, Valuation presupposesa sale in which the buyer is well in-
formed, and acts intelligently, voluntarily, and without
necessity
d. Valuation presupposes a sale in which the seller is well
informed, and acts intelligently, voluntarily, and without
necessity
e. Valuation endeavorsto estimate prices which represent the
worth, at the time of appraisal, of the future benefitsfrom
long-term use which will arise from ownership, rather
than merely prices which can be obtained in the market
f. Valuation recognizesthe importance and usefulnessof sales
prices, provided it is determined whether or not such sales
prices were fair and warranted; and provided the motives,
intelligence,and wisdomof the parties to the sales, as well
as other conditionssurrounding them and influencingthe
determination of the sales prices, are ascertained and
weighed
g. Valuation presupposesand recognizesthat intelligent buyers and sellers consider the utility of real property
h. Valuation recognizes that the prices at which competing
properties are available, either by purchase or by building, set or tend to set the approximate upper limit of
possible value
i. Valuation presupposes and recognizes that well-informed
buyers and sellers are commonly aware of the existence
of competing properties and compare their respective
asking prices, desirability, advantages, and disadvantages,
and future prospects
j. Valuation recognizes that replacement cost at the time of
appraisal sets one approximate upper limit of possible
value
k, Valuation recognizes that value may be much less than
either replacement cost or available market price.
l. Valuation presupposes and recognizes that well-informed
buyers and sellers compare and contrast the advantages
and disadvantages of renting with those involved in
ownership
1320 (1). Delineation of Property to be Appraised.
The Valuator is required to estimate the value of specificproperties.
In a legal sense the word "property " refers to rights which are possessedthrough acquisition of title, that is, of ownership. It is these
rights in relation to specificproperties which must be valued. They
must be delineated before they can be valued. The nature of the
·-
-,
\
•
~
I
J
- ---·-· ------·-----iii
METHODS OF DWELLIN_G.VALUATION
1320 (1)-1320 (3)
title held by the party whose rights are being valued determines the
delineation. Thus, if title is held in fee simple, free of all encumbrances, the rights are the most extensivepossible. If such a title is
encumbered, the rights are correspondingly restricted and may be
less valuable, depending largely on the nature of the encumbrances.
For example, encumbrancesin the nature of easements,reservations,
restrictions, and rights-of-way may cloud the title and lessen the
value of the owner's estate. Valuation cannot be made without
knowledgeof encumbrances or without being based on some assumptions regarding them. Title may also confer only the rights established by a lease. The Jessee'srights are only those described in the
lease or conferred by law and are subject to those reserved by the
lessor. The terms and conditions of the lease must be ascertained
before the lessee's "property" can be delineated and valued. In any
event, regardless of the nature of title, the rights of an owner, though
exclusive, are never absolute for they are always subject to the rights
of the sovereign authority, such as the right to tax, to regulate and
control as by zoning ordinances or other legislative enactments, and
the right of eminent domain. Delineation of property is affectedby
such matters.
1320 (2). Delineation of the property to be appraised
also depends on the extent of the physical property described in the
instrument which conveyedtitle. Valuators are supplied with legal
descriptions of the properties which are offered as mortgage security.
In each case they are required to delineate and describe the portion
which comprises eligible security. Their valuations must embrace
all the property thus delineated and described, even though land
in addition to an area sufficient to suitably accommodate the
building improvements is included. Furthermore, if an easement
over adjoining property for ingress and egress or for light and air,
or some other purpose, is included in the property described, or is
found to be appurtenant to it, the right consisting of the easement
must also be embraced in the valuation.
1320 ( 3). In someinstances the property describedmay
embrace rights other than rights in realty. Proper delineation will
eliminate any such rights from the valuation. They might relate to
such things as stoves and refrigerators (though these are sometimes
classed as realty, in which event they would be included in the delineation), garden tools, household equipment, and other chattels or
personal property. Some items of equipment, window shades and
screens, for example, are appurtenant to the real estate and, therefore, properly included in the property delineated. Some rights are
not appurtenant but are "gross", that is, they do not run with the
UNDERWRITING MANUAL
1320 (3)-1322
land but are simply personal rights vested in the existing owner.
They would not automatically pass to a purchaser as would appurtenant rights. Consequently,they would not be elements of the valuation. Usually rights-of-way, easements, and riparian rights are
appurtenant.
1320 ( 4). Property rights include the right to use and
occupy, the right to lease to others, and the right to sell. The exercise of these various rights results in the realization of benefits. The
extent and nature of the rights determines the extent and nature of
the benefitswhich, in turn, determine the value to be ascribed to the
delineated property. However, the benefits cannot be valued except
in consideration of the characteristics and motives of owners of various types. The right to occupy, or to lease, or to sell vests in any
owner holding title in fee simple unencumbered. The owner might
be an owner-occupantwho values the property because of its desirability as a place of residencefor his family. Or the owner might be
one who values it because of the net rental he can realize from it.
Again, the owner might be a mortgage company,an operative builder,
or a speculator, and to any of these owners the property would be
valuable mainly for the money obtainable in a sale. Obviously,
though the rights possessedby any of these owners would be identical, the value ascribable to these rights could well be different to
several of them. After delineating the property, or rights, to be
appraised, Valuators are required to value them from the point of
view of typical buyers to whom the property exerts strongest appeal,
not from that of an owner who is an operative builder, a financial institution, a speculator, or any other type of temporay owner.
1321. Substitution Theory. The buyer, in any case, is
not warranted in paying more than it would cost him to purchase
other substitute properties affording equal advantages and subject
to equal disadvantages. The buyer is not warranted in paying any
more, and the seller is not warranted in accepting any less, than the
price at which other properties having equal facilities, equal desirability, and equal utility, and subject to the same risk of loss or
possibility of enhancementof desirability or value in the future, can
be purchased. from well-informed owners who act intelligently and
are free to act of their own volition and desire. This principle applies to any means of securing a substitute property, whether by
outright purchase, or by building a duplicate.
1322. This leads to the conclusionthat sound valuation
method must recognizethe market prices at which comparableproperties are available as the approximate upper limit of valuation. It also
means that the cost of replacement of a property, by entering into a
constructionprogram, is also the approximate upper limit of possible
•
•
METHODS OF .DWELLING
VALUATION
1322-1325
c
valuation. Neither the estimation of available market price nor
the estimation of the replacement cost of a property is, in itself, an
appraisal process in accord with the definition of value. These estimates do, however, enter directly into the valuation procedure as
limiting control factors. · In general, these estimates are construed
to be the absolute upper limits of valuation. In certain cases, however, there are logical reasons to consider them as approximate upper
limits only. These reasons are brought out in the descriptions of th~
practical methods.
.t< ·
1323. Basic Procedure. The purpose of valuation, the
definition of value, the axioms of valuation, and the practical limitations of appraisal data dictate the basic valuation procedure. Sound
procedure systematically employs, insofar as it is practicably possible, the theoretically correct method of valuation. The basic procedure embracesthe following:
a. A study of the future utility of the property and of the
motives of possible prospective buyers
b, A forecast representing the most probable series of future.
servicesto be derived from ownership of the property
o. An analysis which converts the forecast services into a
present price or valuation
1324. Study of Future Utility. The first step in the
basic valuation procedure, the study of future utility, includes the
selection of possible uses, the rejection of uses which are obviously
lower uses than others, and the determination of uses in terms of
· alternative kinds of possible buyers and differing motives of such
buyers. The second step, the forecast, relates to either the future
direct services,the amenities, which will be enjoyed by an owner occupant, or to dollar incomeswhich are the source of value to an owner
investor. In some instances, motives of possible typical buyers will
require the forecast to relate to both amenity incomes and dollar
incomes. In every case the forecast must embrace the entire future,
It is incomplete if it includes only a forecast of the services
or returns which are expectedto accrue during the next year, a typical
early year, or "on the average" in early years. The third step, the
conversionof the forecast into a valuation, is accomplishedvariously,
either by determining warranted prices by comparisonof the expected
services with those of other properties on which accepted valuations.
have been established,by capitalization of predicted monetary returns,
or both processesin combination.
1325. Returns from Property. The future services of
properties are best conceived if they are visualized as being in the
form of a flow of returns. The returns will be periodic services in-
UNDERWRITING
MANUAL
1325-1327
eluding actual shelter, enjoyment,pride of ownership, or net income.
They include amenities and monetary earnings. Both forms of returns should be considered as a flow of income, whether the income
takes the form of direct satisfactions or dollars.
1326. In urban residential real estate the flow of returns
is present only when the site is occupiedby useful buildings or other
improvements. Undeveloped vacant land is presumed to become
productive shortly after the completion of construction. Typically,
the flow of returns will rise rapidly to a maximum rate in the early
life of the improvements and gradually decline during midlife and
late life until the improvements have finally lost profitable usefulness and the flow of returns is only large enough to justify purchase
of the property as vacant land. The accompanying diagram shows
the trend of the flow of returns in the typical case. It assumes,but
does not indicate, periodic fluctuations attributable to changes in
gross revenues,taxes, operating expenses,undersupply or oversupply
of competitive properties, or other causes.
~
HE.WCON5,.'ltUt.ilON-~E.MA.1lUNG
E.CONOMltLIFE.
~~~~~-=~~h~E~X~IST~IN~G~ro~N~~~RU~~~IO~N~-R~~~Al~Nl-NG-E-CO_"_OM-lt_U_F~~~
j
1327. Translation of Forecast to Estimate of Value.
The third step in the basic valuation procedure is the translation
of the forecast of returns to an estimate of value. The predicted
returns are amenities, monetary net incomes,or both in combination.
In valuation, these returns are translated to an equivalent present
worth in the form of a price. In theory, this is precisely what the
market does. It compares probable :future amenity and dollar returns and assigns values according to their quantity, quality, and
duration. It is known that there is a relationship between the
level of the net returns a property is capable of producing, and the
value of the property. The ratio of the net returns to the value is
•
METHODS OF DWELLING VALUATION
1327-1331
described as the rate of return. When used to determine the value
from predetermined estimates of net returns, it is described as the
capitalization rate. The rate will be relatively low when the future
returns are certain and of long duration. It will be relatively high
when the returns are uncertain or subject to wide fluctuation.
1328. Capitalization rates used to translate forecast returns into estimates of value may be applied only to net returns.
In certain cases of valuation, it is feasible to forecast gross returns
and to assume that, on the average, the expenses of operating the
different properties are constant for the same sizes and grades of
properties. When gross returns are used, the Valuator translates
his forecasts into an estimate of value by multiplying by a conversion factor. The effect is the same as if he had used net returns and
divided by a capitalization rate. The use of conversion factors is,
however, justified only by the validity of the assumption that the ,
gross returns of several properties embrace expenses which are substantially constant from case to case.
1329. Selection of Method. The basic procedure is described in terms of properties owned in fee simple unencumbered.
All cases require valuation of the unencumberedfee first. If the actual property is a leaseholdestate, the value of the leasehold is determined afterward in accordancewith instructions in paragraphs 1336
(1) to 1336 (12).
1330. There are two alternative methods of valuation
prescribed. As described, they apply to properties owned or to be
owned in fee simple unencumbered. They are:
a. The amenity comparison method of valuation, described in
Section 14
b, The capitalization method of valuation, described in
Section 15
1331. The Arnenity Oomparison. Method is applied to
amenity income dwellings. Amenity income dwellings are defined
as properties which exert appeal to a measurable degree to typical
prospectivepurchasers interested in the direct amenity serviceswhich
the dwelling is capable of rendering an owner occupant. Such
a purchaser will consider buying the property as a place of residence
for himself and his family. In addition, his motivation may include
the desire to secure monetary returns. Most cases of single family
dwellings are appraised by this method. Small multi-family dwellings are correctly appraised·by the method when the motives of the
typical buyers include the intention to live in one of the family
units.
r
UNDERWRITING MANUAL
1332-1334 (2)
1332. The Capitalization Method is applied to rental
income dwellings. Rental income dwellings are defined as properties which exert appeal solely, or almost solely, to prospective purchasers interested typically and only in the net monetary returns
which the properties are capable of producing. Such a purchaser
will consider buying the property only because of the dollar returns
he anticipates. Some cases of single family dwellings are correctly
appraised only by this method. These are cases in which the typical
available prospective buyers are confined to persons other than those
who would wish to live in the premises. The method· is applicable
principally to multi-family dwelling properties.
SUPPLEMENTARY PROCEDURES
I.
1333. Supplementary procedures and modifications of
the appraisal process are used to solve the special problems presented
by mechanical equipment and accessories, dwellings on higher-use
sites, leasehold estates, taxes and special assessments, and the
valuation of fragmental properties.
1334 (1). Mechanical Equipment and Accessories,
Certain electrical and mechanicaldevices are installed in homes. In
many instances the installations are such that some or all of this.
equipment loses its character as personal property and becomesan
integral part of the real property. Equipment which is part of the.
real estate is part of the security for the mortgage on the property,
and therefore affects the value estimate. H the equipment is wisely
chosen and installed, it may enhance the value of the property to the
full extent of its cost in the case of a new dwelling. H, however,
the cost of the equipment is too great an outlay in relation to the
cost of the structure, or if the typical buyer cannot afford the cost of
operating the equipment, it will not enhance the value of the property to the full extent of its cost. First, the Valuator must be able
to know just what equipment in the building is part of the real
property and what is personal property, so that he may know exactly what he is to appraise. Second, he must determine to what
extent the value of the property is enhancedby the equipment which
is part of the realty. Insofar as any of the equipment is in the nature of chattels, he must omit it from the rental value estimates if
feasible to do so. In any event, value of chattels is never to be in'."
eluded in the estimate of value.
1334 (2). If the case involves an old structure, and it is
intended that new mechanical equipment and accessories will be
installed in such a way as to becomepart of the realty, the Valuator's
problem is the same as in the case of new structures. The Valuator
must determine to what extent the installation will enhance the
•
J
-~,
METHODS OF DWELLING VALUATION
1334 (2)-1335 (2)
property value. Many of these mechanical devices are subject to
rapid deterioration due to the wearing out of moving parts, and
to speedy obsolescencedue to continual change and improvement in
design. For these reasons it may not be wise to install them where
the costs of installation, maintenance,and operation will be too great
in relation to the value of the property.
1334 (3). In cases involving rental income dwellings
the value added by special mechanical equipment will be reflected
in the amount of rent these p'ropertiescan command. In estimating
the value of such a property the Valuator must ascertain (a) of what
the equipment consists, (b) what is its replacement cost, (o) what
it will cost to operate and maintain, ( d) how long a probable remaining economiclife it will have, and (e) the number of times it
will have to be replaced during the estimated remaining economic
life of the building improvements. Then he must calculate what
amount per annum will have to be taken from the gross income the
property will produce in order (a) to operate and maintain this
equipment, and (b) to recover the value he assigns to it. This
amount he uses as a deduction in his income analysis in ascertaining
the net income which may be expected from the property. In this
way he can justify the value assigned to the property including its
short-lived equipment.
1334 (4). The Valuator is given assistance, where new
buildings are involved, by the Architectural Inspector, who is instructed to included in his report a separate item representing the
replacementcost of any equipmentwhich is part of the real property
and which will suffer rapid deterioration or obsolescence.
1335 (1). Dwellings on Higher-Use Sites. There are
cases in which the property to be appraised consists of a single
family residence upon a lot suitable at the time for commercialor
multi-family residential use. Some appraisers attempt to estimate
value in such cases by adding a land value based on the higher use
to the so-called "depreciated replacement cost" of the residence.
Such a valuation is incorrect because it is based upon the erroneous
premise that the value so attributed to the land is enhanced by the
residence,by an amount equal to the so-called depreciated replacement cost of the structure. The £act that the residential use does
not represent the highest and best use for the site is thus ignored.
The premise is incorrect and any conclusionbased upon it is likewise
erroneous. It would also be erroneous to ascribe a value to the land
for the existing residential use and then proceed as in ordinary cases.
1335 (2). The value 0£ a residential property can be
equivalent to the sum of the value of the site and the replacement
cost of the structure upon it, only if the structure is new and repre-
UNDERWRITING
MANUAL
1335 (2)-1336 (1)
sents the highest and best use for the land. Furthermore there must
be a demand for such residential properties at prices equivalent to
this sum. Obviously,the conditions described cannot apply in the
case of old residences on apartment or business sites, and therefore a
replacement cost estimate cannot be used for valuation purposes in
such cases,for such an estimate will always exceedthe value of such
properties.
1335 (3). In dealing with properties which are not improved to their highest and best use, if the improvementsare capable
of producing a net return in excess of the sum imputable to the land
and the costsof taxes,operation, and maintenance,then their economic
life has not yet terminated and their value upon the site may be
determinedby the use of the capitalization method of valuation. The
earnings of the improvementscannot be treated as though they were
to continue indefinitely, when, as a matter of fact, they will continue
for only a relatively short time. If the residencehas reached the end
of its economiclife, then the value will not be in excessof the worth
of the land plus the salvagevalue, if any, of the improvements.
1335 (4). If a site used for a residence is found to be
zoned for business use, or if it fronts upon a street portions of
which are being devoted to commercialpurposes, the Valuator must
not assign a value to the lot equal to the value of another nearby
site which actually is being profitably used for commercial purposes. Before the residential site can have a value equivalent to
that of the lot which is actually improved and being utilized
profitably for business purposes, there must be an immediate need
for the site for equally profitable business purposes. Generally
speaking, in American cities, most lots which are being used for
residential purposes, but which front upon commercially zoned
streets, will probably not be utilized for business purposes until the
lapse of long periods of time, during which their owners will receive little or no net return from them but will have to carry excessiveburdens of taxation and sacrificethe interest earnings which
they might enjoy if the sums which they paid for the properties
were invested in some more productive form of property. The
general tendency is to overestimatethe value of such properties.
1336 (1). Leasehold Estates. Section 201 of the National Housing Act permits the insurance of mortgages eligible in
other particulars which are first liens on real estate the titles to
which are held by mortgagors either in fee simple unencumberedor:
a. Under a lease for not less than ninety-nine years, which
is renewable
b, Under a lease having a period of not less than fifty years
to run from the date the mortgage was executed
•
•
METHODS OF DWELLING
VALUATION
1336 (1)-1336 (5)
In certain localities in the United States considerable numbers of
residential properties are leaseholdestates. The valuation procedure
in such cases involves additional steps.
1336 (2). When a long term lease upon real property is
made, the effect is to create two distinct properties. The lessor still
holds his title in fee simple, but since it is encumbered by the lease
which he has given, his interest is designated the "leased fee." The
lesseeacquires the rights to the benefitswhich the property will produce during the term of the lease, provided he does not default in
the performance of those acts required of him under the terms of
the lease. His interest is designated the "leasehold estate." In
exchange for the rights, he is obligated to pay a rental to the owner
of the fee and to discharge the other obligations placed upon him
by the lease. It is not deemed essential here to prescribe the more
complex methods of leasehold estate appraisal. The procedure set
forth herein produces results of the required degree of accuracy
for the valuation of small residential leasehold estates and is presented with the aim of giving sufficientdirection to Valuators, in
order that they may properly perform their functions in cases
where this type of ownership exists.
1336 (3). The Valuator determines the total value of
the property as though owned in :fee simple and unencumberedby
a lease. He then determines the value of the leased fee, Finally,
he deducts the value ascribed to the leased fee from the estimated
value of the unencumbered property and accepts the difference as
a. reasonable approximation of the value of the leaseholdestate. He
then enters the results on the Report of Valuator in the following
manner:
ESTil.IATE OF VALUE OF LEASEHOLD ESTATE ---------------
$4,800
ESTIMATE OF VALUE.-In my opinion the value or the property described above, assuming the contemplated improvement& or new
~::::~~:; i~e;::r:~: ~~v:x:;!~~u~oi~:~:~.c~;~~~.~:.i.~Iii:;c_~~::d~b;;~J.~::~~~.
~~~-~~~~~-~-~-~~~~~:~~:~
l,-.500
0:
Diatribution of valu~ estimate:
-:1.~C~QQ:d~-~:.:
••
$••
@ $...•••••• .30 .•....•... per O lot. II tr. ft., a :i). rt..
Maia Building•.•....•... - •••••• $ .• /.4.0.0.0 .••••••• B.~maining
lease term-.30 yrs. r;gowa le
Land ..•••.....................•••..•
~=;·~;;~·;~::~~~~~:~~:~~:::: :::::::m~::::: Annuat!l
nr~~~e
5
These steps are described in greater detail in the following paragraphs.
1336 (4). The first step is to estimate the value of the
property as though owned in fee simple unencumbered. This is done
in the same manner as in any case where a leasehold estate is not
involved, and all the instructions and suggestions contained in the
Underwriting Manual are to be followed in this step.
1336 (5). The next step is to estimate the value of the
leased fee, that is, of the lessor's estate. In order to do this, it is
necessaryto be familiar with the terms of the lease. This necessitates
UNDERWRITING
MANUAL
1336 (5)-1336 (7)
a reading of that document. A decision must be made as to whether
or not the lease terms are fair and equitable. If they are not, it is
possible that the lessee will default. Of course, if he has erected a
building at a substantial cost to him, and the building is suited to the
site, the default of the lesseemay not result in any loss to the lessor.
On the other hand, it may result in substantial monetary gain to him.
Such would be the case if the lease provided that upon default of
the lessee and consequentforfeiture of his rights, all improvements
upon the land would revert to the lessor without cost to the latter.
Such a condition is usual in cases of long-term leases. The elements
of value in the lessor's rights, that is, the leased fee, are:
a. The present value of the net rentals which the lessee is to
pay under the lease
b, The value of the "reversion", that is, the value of the right
to regain possession of the property and the benefits it
will produce after termination of the lease
1336 (6). The valuation procedure in the case of a lease
for a definite period of years, and not renewable, differs in some
respects from the procedure followed in the case of a lease renewable
forever, but it will not be necessary in the operations of the Federal
Housing Administration Valuators to make any distinction in the
two cases. This is because under the provisions of the National
Housing Act, a lease in an eligible case must run for at least fifty
years. Furthermore, in view of the fact that the values of the sites in
all cases will not be large, the possible error that may result from
failure to follow a different procedure will be so minute that it will
always be inconsequential.
1336 (7). Valuation of the Leased Fee. The ground
rents reserved under a lease renewable forever may be treated as
"perpetuities", that is, as payments which will continue periodically
forever. The valuation of such rentals is by direct capitalization
after a proper rate of capitalization has been chosen. The rate of
capitalization varies in different cases depending upon, (a) the reasonableness of the amounts reserved as rent, (b) the certainty that
the lessee will be able and willing to pay the rents when due, ( c)
the amount of the "stake" of the lessee in the property, (d) the
future prospects of the property with regard to maintaining or enhancing its desirability, utility, and value, and ( e) the rate of return
obtainable from other types of investments. If favorable conditions
exist, it will not be unusual for capitalization rates applicable to the
valuation of leased fees to range upwards from about 4%. The
process of capitalization of a net rental receivable in perpetuity is
simple, merely involving division of the yearly rental by the capitalization rate. ·For example, if the ground rent is $90 per year net to
•
•
II
j
I
METHODS OF DWELLING
1
VALUATION
1336 (7)-1336 (8)
the lessor, and it is assumed that the proper capitalization rate is
4%, the capitalized value of the ground rent payable in perpetuity is
$90 divided by 4%, or $2,250. If, instead of 4%, it were determined
that the capitalization rate should properly be 6%, the value would
be $90 divided by 6%, or $1,500. "Under these conditions, there will
be no "reversion" to the lessor, that is, the property presumably will
never revert to the lessor, inasmuch as the lessee has the right to
renew his lease forever. Therefore, the total value of the leased fee
in the example quoted would be $2,250or $1,500,depending upon the
rate of capitalization.
1336 (8). Valuation of the Leasehold Estate. Having
taken the steps outlined above, the Valuator will have reached a conclusion with regard to :
a. The total value of the property in fee simple unencumbered by the lease.
b, The value of the leased fee (lessor's interest).
The valuation of the leasehold estate (the lessee's interest in the
property) is then determined by deducting the valuation of . the
leased fee from the total valuation of the property in fee simple
unencumbered by the lease. The result so obtained is a close approximation and is accepted by the Administration as the value of
the leasehold estate.
Example No. 1. .A ground lease upon a single family residence site having more than 50 years to run calls for a
rental of $60 per year, representing 6% upon a .ground
value of $1,000 at the time the lease was made. The
lessee erected a residence upon the site at a cost of $5,000
several years prior to the date of appraisal. The value
of the leasehold estate is determined as follows:
(a) Estimated value of the property in fee simple unencumbered------------------------------------------$6,000
Distribution of total valuation :
Land-----------------------------------$1, 500
Buildings -------------------------------4, 500
TotaL .. --------·--------------------------
$6, 000
( b) Estimated value of the leased fee: The lease is well se-
cured, land value has increased since the lease was made,
the district is well protected with appropriate restrictions and zoning, and has developedinto a uniformly
desirable residential area. It is determined that a fair
capitalization rate Of lessor's ground rent is 5% ; therefore, the valuation of the leased fee is $60 divided
by 5%-----------~---------~-------------~--------- $1,200
(c) Valuation of leasehold estate
$4, 800
]
U:NDERWRITING
MANUAL
1336 (8)-1336 (9)
In the foregoing example,it will be noted that the value of the leasehold estate exceedsthe value of the improvements. This is because
the land has enhancedin value and the ground rent is therefore lower
than it would probably be if a new lease were to be made at· the time
of appraisal.
Example No. 2. In this case, conditions are the same as in the
foregoing example except that the district has depreciated in value, and it is found that the owner's expenditure of money for his home has proven unwise. The
lessor's ground rent is still well secured, but because of
unfavorable factors affecting the neighborhood, the
proper capitalization rate is 6%.
(a) Estimated value of the property in fee simple unencumbered-----------------------------------------------$4,000
Distribution of total valuation:
Land------------------------------------$500
Buildings--------------------------------3, 500
Total
$4,000
( b) Valuation of the leased fee, $60 divided by 6%--------
$1,000
(c) Valuation of the leasehold estate
$3,000
•
In the above example the value of the leased fee exceedsthe value of
the land. Likewisethe leaseholdestate is less valuable than the portion of the total valuation ascribedto the improvement. In such cases,
the results are entered on the Report of Valuator in the following
manner:
~:i~~~vS!e ~AJ;?~ro~!rt~~g~~~fRo~~1:1~~ni~gth~-~;;i;~;;pJaf;d-i-;pr!?e'~~g
ESTIMATE OP VALUE.-ln my
or new
ecnstruettcn described iu exhibit.i,, ir any, iacoompanying FHA Form No. 200.fa., or 8..'ISUmiug the rf':pair1:1 or 11.JteratiouB or &dditiom1, ti any,
liated und~r item (J5) have been CGmp)eted,is..•••.....•. )JJ:)..~J)..~).lJtl'Q.§l'.ed..by .. Leasa •.......•••.•... ,
., ..•.. o•······ $.n.4,..QQQ
u
Difltribution of value estimate: Land ••............••...•.......•••••
$..•.•••.•....••• 500.. @ $.....•....• .,5.QQ •••••• per ~ lot, O fr. ft.,
sq, fl.
a
Maio Building···········-······
s..•.....•... 3.,500.. Remaining lease term
Ga.rage........................•..-
$.••.••..•.•••••••••
$.•~············.._. ..•..•
Other Improvements
0•••
~=S~~if
z:«:l r~~~t
valuati.o:%LQf...l.eased
fee
55
i6Qrs
6%
fl,000-
1336 (9). The laws of some states fix the methods
whereby lessees of residential properties under long-term ground
leasesmay "redeem"the ground rentals reserved under their leasesby
purchasing the fee simple title from the lessor, thereby destroying
the lessor-lesseerelationship. In such instances, the appraisal procedure must be consistent with the legal requirements. For example, assume that under a state law a lessee has the right to redeem
the ground rent by paying the lessor a sum equal to the capitalized
value 0£ the ground rent on a 6% basis. Thus, in Example No. 1,
if such state law existed, the value of the leased fee would be $60
divided by 6%, or $1,000rather than $1,200, and the value of the
lessee'sestate would be $5,000 rather than $4,800. Legal enactments
•
j
METHODS OF DWELLING
VALUATION
1336 (9)-1337 (2)
of the type mentioned have the effect of giving lesseesoptions to buy
at definite prices, and if an option to purchase exists in a lease, the
value of the lessor's interest, or leased fee, cannot exceed the option
price, although it may be less than that figure.
1336 (10). Subleasehold Estates. Sometimes lessees
under long term leases create subleaseholdestates by subleasing their
rights to others. Such subleasing is not unusual in cases where one
individual leases several parcels of ground and then subleases each
parcel separately to different persons. The procedure to be followed
in valuing subleasehold, or sub-subleasehold,estates is the same in
principle as that outlined herein for the valuation of ordinary leaseholds. The Valuator simply capitalizes the total rental reserved in
the sublease and deducts the resultant sum from the total valuation
ascribed to the property as if unencumbered.
1336 (11). Valuators must realize that the ownership of
a property which is a leasehold estate involvesmore risk than the ownership of either a leased fee or an unencumberedproperty. Furthermore, mortgage investment in leasehold estates is generally more
hazardous than in unencumbered properties. Consequently, valuation procedure in such cases requires the exercise of discriminating
judgment. ·
1336 (12). The maximum amount of an insurable loan
on a leasehold is determined, in part, by multiplying (a) the valuation unencumbered by lease by (b) the maximum percentage applicable and subtracting ( e) the value ascribed to the leased fee. Thus,
in Example No. 1, assuming the 90% maximum would apply, the
maximum insurable loan on the leasehold would be $4,200 ($6,000 X
90%=$5,400 minus $1,200=$4,200). In Example No. 2, it would be
$2,600 ($4,000 X 90%=$3,600 minus $1,000=$2,600).
1337 (1). Taxes and Special Assessments. The level
of general property taxes and the character and amounts of special
assessmentsaffect the values of properties. The greater the amounts
of such burdens, the less valuable are the properties subjected to
them, even though they may offer identical servicesto their owners.
1337 (2). General property taxes are levied yearly and
must be paid yearly or more frequently. Within any given community the level of taxes is reflected in the market prices which
properties command, and except in cases where the assessed valuations are not properly equalized, appraisal procedure is not affected,
inasmuch as the market price data and rental data used by the Valuators already contain the necessary adjustments. Differences in tax
levels, however, do affect the comparisons which appraisers make and
should be taken into account.
l
UNDERWRITING
MANUAL
1337 (3)
1337 (3). The effects upon value 0£ special assessment
liens are different from those produced by general property tax liens.
Whereas all properties in a community may be subject to general
property taxation, levies in the nature 0£ special assessments are
made only upon the properties within the boundaries 0£ the special
assessment district. Such special assessments differ from general
property taxes, not only in the respect just mentioned,but also in that
they continue for a definite period of years only, whereas the general
property taxes continue indefinitely. Therefore, if special assessment
liens exist, due allowancefor this condition must be made in the valuation process. Properties against which special assessmentliens exist
are less valuable than they would be if these liens did not exist. This
is made apparent by considering the conditions reflectedin the several
cases outlined below.
Case No. 1. A property free of special assessmentliens but subject to general property taxes: Value, $6,000.
Case No. 2. The same physical property, subject not only to
general property taxes but also special assessment liens
totaling $200 now due and payable. A purchaser of this
property must pay the amount due and the value of the
property is therefore less: Value, $5,800.
Case No. 3. The same physical property, subject not only
to general property taxes but also to special assessment
liens totaling $500, payable in ten yearly installments 0£
principal plus interest at 6 per cent per annum on the
deferred amounts. Because0£ the risk created by the possibility of default in paying the installments of interest
and consequent foreclosure and loss 0£ title, or because of
the interest rate charged which may be excessive in the
light 0£ current financial conditions, this property may be
less valuable by $500, or more, than a similar property
free from assessmentliens: Value, $5,500or less.
Case No. 4. The same physical property subject not only to
general property taxes, but also to a special assessmentlien
which is a lien upon all 0£ the properties within the special
assessmentdistrict and which continues a lien upon all of
these properties until it is entirely extinguished. Special
assessmentbonds outstanding, $500,000. Assessedvalue of
the special assessmentdistrict, $3,000,000.Assessedvalue
of the property being appraised, $3,000or 1/1000 of the
district assessed value. The effect 0£ the assessment lien
on the value of the property is much more pronounced
than in Case No. 3. The following paragraph discusses
'
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J
·-----·--·· ·~
METHODS OF DWELLING VALUATION
1337 (3)-1337 (5)
the reasons for this. Value, less than $5,500, probably considerably less.
Case No. 5. The same physical property and condition as in
Case No. 4, except that the assessment district is broken
down into zones, each of which bears a different percentage
of the total levy against the entire district. Assume that
the assessed value of the property is still $3,000and of the
entire district $3,000,000. However, the property is in an
area which is designated Zone A of the assessment district,
which zone is required to pay 20% of the total district lien
($500,000),or $100,000. It is seen now that the assessed
value of the property is Yioo of that of the zone in which it
is located, so that if all owners of properties in the zone
and assessment district pay their yearly assessmentlevies,
the property appraised will be charged Yioo of $100,000or
$1,000 plus yearly interest charges. The value therefore
wil,l be less than $5,000,and probably considerably less:
1337 (4). In Case No. 4, if all of the property owners
in the special assessment district pay installments of principal and
interest each time they becomedue, the owner of the specificproperty
considered will have to pay 1j1000 of $500,000, or $500, in yearly
installments, plus interest. Therefore, the minimum reduction in
value as compared with Case No. 1 would be $500. However, if any
of the other property owners in the district become delinquent in
their assessment payments, the delinquency may cause an increase in
the amounts which will be levied against the properties in the district
during the following year. This may result in an increase in the
amount of delinquency and necessitate a still greater levy for the
next year. In this way, the special assessment burden may mount
up year by year, falling more and more heavily upon the shoulders
of those owners able to pay or unwilling to abandon their properties.
It is possible for such burdens to reach the point where owners in the
district voluntarily surrender their properties. This possibility is
mainly responsible for the statement above that the value probably
would be considerably less than $5,500. If special assessment liens
of the type mentioned in Cases No. 4 and No. 5 exist, it is essential
that information be gathered with regard to (a) the amount of delinquency, if any, (b) the likelihood of foreclosure by the owners of the
lien, and ( c) the likelihood of a pyramiding of the assessmentlevies.
1337 (5). In cases where special assessment liens exist,
the Valuator must appraise the properties as they stand, subject to
the assessment liens. In no such case is it permissible for him to
base his appraisal upon the hypothetical condition of the assessments
UNDERWRITING
MANUAL
1337 (5)-1338 (2)
· being paid. In each such case the estimate will be decreased by at
least the amount of the liens against the property, or that proportion
of the lien upon the entire district which would represent the minimum that would probably be assessedin all the future yearly levies
against the specific property under appraisal. In determining this
minimum.he would be influencedby:
a. The assessmentlevy made during the current year against
the property appraised
b. Whether or not the levies had been increasing in the
prior years during which the assessmentlien had existed
o. The probable trend of the amounts of the levies in the future
d, The total amount of the lien outstanding against the district
e. The ratio of the assessedvalue of the property appraised to
the assessed value of the assessment district, or of the
zone in which the property lies
1337 (6). When properties lying within the boundaries
of special assessmentdistricts are sold, the buyer may either assume
the burden of paying the assessmentsas they come due, or he may
insist upon the immediate payment by the seller of existing special
assessmentliens. Obviously, the purchase price will be different in
the two cases. For this reason, it is essential that when Valuators
obtain sales price data, they ascertain the conditions of the sale with
regard to special assessmentliens as well as other conditions.
1338 (1). Valuation of Fragmental Properties. Valuators are required to place a value on all the property delineated and
described by them as eligible security, in accordance with the rule
cited in paragraph 1305. At the same time, they are required to set
separate valuations on fractions or portions of eligible properties
where such estimates assist in the patterning of an insurable loan
or determining the value of the security remaining when there is tobe a partial release of security. When only a portion of the property described in the application is found by the Valuator to be
eligible security, he is required to delineate and describe and base
his valuation on the portion which is eligible. This valuation of the
eligible fragment is used by the Chief Underwriter in ascertaining
the maximum amount of an insurable loan. The same figure is used
in rating the first feature of the Rating of Mortgage Pattern grid.
1338 (2) When the property described in the Valuator's assignmentis found to include eligible land which is in addition
to the area required to suitably accommodatethe buildings involved
in the case, the Valuator must indicate on his report what portion of
the property includes the building improvementsand what portion is
•
•
METHODS OF DWELLING
VALUATION
1338 (2)-1338 (3)
excess land. He must value the entire property described and in
addition distribute this valuation betweenthe fractions into which he
divides the entire property. The prescribed valuation processes are
followed in making the valuation 0£ the entire property. The value
ascribed to the excessland is the differencebetween the valuation 0£
the entire land area and the valuation of the area required to suitably
accommodatethe building improvements. This latter area must be
sufficient,of course, to constitute a natural, marketable real estate
entity such as described in Section 5, Minimum Eligibility Requirements.
1338 (3). Cases arise in which mortgagors and mortgagees desire the Federal Housing Administration to approve of the
partial release of property subject to the insured mortgage lien.
Valuators are required to make special reports in connection with
these cases. Frequently the area involved in the partial release is
small and unusable by itself. On account of its lack of utility by
itself, it might appear logical to assign it no value but this would be
incorrect. Valuation 0£ the area is accomplishedby ascribing to it a
portion 0£ the utility attached to the entire land area of which it is an
integral part and valuing it accordingly. Sometimesit appears that
the value 0£ the property which will remain under the mortgage after the partial release will be the same as that assigned to the entire
property under the lien before the release and that, therefore, the
area involved in the release is of no value. This would not be true.
Inasmuch as the small area contributes something to the utility of the
whole, it must, therefore, have some value, even though it is nominal.
Usually the partial release is sought from the mortgagee so that the
area involved may be sold to the owner of adjacent property. The
purchase price under such circumstances is a guide to the desired
conclusion,though it very often may greatly exceeda reasonable valuation because of such matters as the presence of necessity or extraordinary motivation on the part of the buyer. In partial release
cases, the Valuator is to take the point of view 0£ an owner of the
subject property and decide what a £air and reasonable demand would
be with reference to a proper consideration for the sale of the area
concerned in the partial release transaction. Such a consideration
would be that which is sufficientto compensatefor any loss in value
suffered by severing the area from the entire property. Sometimes
consideration 0£ the utility which the small area will have in conjunction with the property to which it is to be joined may be 0£ controlling significance. However, the necessity 0£ the buyer does not
enter into this consideration. The Valuator must also report any
restrictions which he concludesshould be required to be imposed on
the area sought to be released. Restrictions recommendedshould be
UNDERWRITING
MANUAL
1338 (3)-1341
such as would prevent use of the area in any way to adversely affect
the property remaining under the insured mortgage lien or any other
property in the neighborhood. In event the area involved in the release is capable of separate and independent use, the value is to
be estimated in the customary way, that is, in view of the highest
and best use of the site as an independent site. Thus, though ten lots
might be valued at $7,000as a unit, one lot for which an immediate
demand for use exists might properly be valued at $1,000.
INTEGRAL FACTORS IN VALUATION
1339. In both the amenity comparison method and the
capitalization method of valuation, Valuators are required to make
four estimates which are integral factors in the appraisal process.
These are:
a. The estimate of Rental Value
b, The estimate of Remaining EconomicLife of Building
o. The estimate of the Value of Land by Comparison
d, The estimate of Replacement Cost of Property in New
Condition
1340. Determination of Rental Value. In the risk
rating system, rental data are used in rating the second feature
in the Rating of Mortgage Pattern. Estimates of rental value
are also used in valuation. By reason of the vital place which
estimates of rental value have in the determination of valuations,
the greatest care must be given to their estimation. Small differences are important and accuracy is attained only by the assemblage of large amounts of evidential data in the rental market. The.
estimates are not to be off hand opinions but the results of thorough
investigation. In practically all residential neighborhoods when
the "newness" of the district has disappeared, it is common to find
many homes vacated by their owners and rented to tenants. Homes
in such neighborhoodsgradually acquire the characteristics of investments. They are no longer bought or sold as homes but merely as
financial investments. The net rental returns they will produce
becomeof primary importance in estimating their values.
1341. All rental estimates must be on a strictly comparable basis. The estimates of monthly rental values reported by the.
Valuator must be estimates which relate to the properties on an unfurnished basis. They are not to relate to properties on either a
wholly or partially furnished basis unless this is the only feasible
basis to use. Usually when single dwellings are rented on an unfurnished basis, the landlord agrees to pay only for the mainte-
•
•
---------·---··
-·---- ~~
METHODSOF DWELLING VALUATION
1341-1345
nance of the structure and for major repairs made necessary for
defects in the structure or its equipment, or because of deterioration which has been allowed to accrue through no fault of
the tenant. To secure the necessary uniformity the basis of the
estimate must be as defined above. In comparing rentals for different properties, the same conditions of tenancy must apply. In
other words, the agreement between landlord and tenant as to who
is to pay for light, gas, water, or any other expensesmust be the
same in each case, or necessary adjustments must be made before
comparing the rentals.
1342. Care should be exercised whenever properties are
located in areas in which there are wide seasonal fluctuations in
rents. Rentals in summer or winter resort areas are cases in point.
Rental values at the height of the rental season should not be reported as the monthly rental value. The same restriction also applies to rentals at the ebb of the rental season. In every case the
reported monthly rental value must be ~!J.2 of the price which a prospectivetenant would be warranted in paying for the right to occupy
the premises on an unfurnished basis for a full year. This is not
equivalent to the average per month of the rents obtainable from
different tenants for different portions of the year.
1343. If a property containsmore than a single rentable
unit, the rental value estimate is the sum of the rental values of the
individual units. This means the gross monthly rental which the,
property is capable of producing if all units are rented for the
amounts determined as their monthly rental values, without any
loss of rent from any cause. If an owner occupiesa unit, its rental
value is included.
1344. The estimate of rental value used for rating the
:feature Ratio of Total Payment to Rental Value of the Mortgage
Pattern is the, rental obtainable from a typical prospective tenant
who will occupy the premises during the ensuing 12 months. The
same estimate is used in an appraisal of an amenity incomedwelling.
by the amenity comparisonmethod of valuation. It is also used to
estimate the net income during the first year in an appraisal of a
rental income dwelling by the capitalization method of valuation.
The rental value estimates applied to the secondor other years, when
several years' estimatesare used, are preductions embracing probable
changes in available rents in the several future early years.
1345. There is practically always a rental market. Sales
prices of real estate have been subject to violent changes as have all
other prices in times past. When realty prices fall, ownerswithdraw
property from sale or else continue to ask prices that will enable
them to recover their costs. The result is that real estate sales, ex-
UNDERWRITING
MANUAL
1345-1348
cept under compelling circumstances,cease to occur and a "frozen"
market comes into being. However, there is usually a residential
rental market, and since rent-paying ability determinesrental levels,
and rental levels and value levels are related and move up or down
sympathetically,there:forerentals obtainablewhen the sales market is
frozen become significant aids in valuation. Again, rent-paying
ability usually is influencedlittle by speculation which creates artificial and unsustainable sales price levels. There:fore, residential
rental levels are usually excellentaids in the estimation of residential
property values and the estimation of the extent of changes in such
values.
1346. Asking prices :for rental purposes are somewhat
different from prices asked :for purposes of sale. Prices asked for
sale frequently do not conform with values. Rental prices asked
usually conform very closely, frequently they conform completely,
with rental values and the rental prices actually paid or readily
obtainable.
1347. Ordinarily there should be no difficulty in determining the proper rental estimate, inasmuch as there is usually
an active rental market so that, by making intelligent comparisons
and using verified data, an accurate estimate can be made. Rentals
which are out of line with others involving similar properties and
facilities are discarded. Competition between landlords and the
discriminating judgment usually exercised by prospective tenants
make most actual rentals for residential properties acceptable as a
basis of comparison. In determining monthly rental value, rents
paid or asked for like accommodationsequally well-locatedmust be
ascertained. Rentals for in:ferior or superior accommodationsare
also useful by comparing and rating the various rental units. Actual
rentals paid can be modified and used in estimating rental value
for vacant or owner-occupiedpremises. The method of comparison
used to estimate land values and available market prices of improved property are applied. The former method is described in
Paragraphs 1361 to 1369. The latter method is described in Section
14, Valuation of Amenity Income Dwellings. It is incorrect to estimate and to report a rental value by basing it on a predetermined
estimate of the value of a property to which an assumed ratio of
rent to value is applied.
1348. Values of amenity income dwellings bear a relationship to monthly rental values. Properties of greater rental value
will have higher values than those of lesser rental values, other
things being equal. However, in amenity income properties, there
exist differencesin the ratios of the total amount of the value to the
•
•
METHODS OF DWELLING VALUATION
1348
rental value according to the various price ranges. It is also important to note that while several properties may have the same monthly
rental value, their capital values may be different because of such
conditions as differencies in the remaining economic lives of the
structures, and differences in tax burdens, maintenance costs, and
in the stability of the neighborhoods. In the application of the
Amenity Comparison Method of Valuation described in Section
14, the monthly rental value for the ensuing 12 months is estimated and recorded in all cases. However, in certain instances an
additional estimate of monthly rental value must be made. In these
cases it is this second estimate which is used as the basis for determining the Derived Monthly Value. This secondestimate of monthly
rental value is required when at the time of appraisal the Valuator
concludesthat at the expiration of the first or second year after the
date of appraisal, there is likely to be a substantial drop in the
monthly rental value of the property under consideration. Such a
conclusionmight be justified if it were ascertained that the demand
factors affecting the real estate rental market substantially outweigh
the supply factors, and have produced a seriously unbalanced and
unstable condition. For example, there might be a shortage of
housing accommodationsand a strong active demand for additional
residential units. A strong demand and inadequate supply would
result in excessiverental values. This condition, however, could not
continue indefinitely inasmuch as new construction would be undertaken and the shortage would be alleviated or entirely eliminated.
During this period rental values would inevitably decline. Other
conditions might also suggest to the Valuator that currently existing
rental values might drop substantially and abruptly in the first few
years subsequent to the time of appraisal. In any event, where the
Valuator foresees such a decline,he is required to reach a conclusion
as to the point to which the monthly rental value will probably fall
after the circumstancesand conditions which are causing the temporarily excessiverental value level have disappeared. He reports this
second estimate of rental value and uses this amount in applying the
Amenity Comparison Method. This procedure is prescribed only in
those instances where an abrupt decline in rental value appears to be
in prospect during the secondor third year subsequentto the date of
appraisal, as it is believed it would be extraordinary to find a reasonable basis upon which to make a specific prediction relating to
years more distant in the future. Rental value changes which are'
likely to occur in these more distant years are taken into account at
UNDERWRITING
MANUAL
1348-1352
another point in the application of the Amenity ComparisonMethod,.
namely in the selectionof ConversionFactors.
1349. In forecastingrental values for the first, second,or
third years in the valuation, the rentals ascribed may be either the
same or different for each year. In this connectionit is appropriate
to point out that frequently new dwellings, especially multi-family
structures, experiencemarked decreasesin rental value after the first
few years but may be fairly stable thereafter. In every case the
attempt is made to predict the probable actual levels as seen from
the date of appraisal.
1350. Estimation of Remaining Physical and Economic Life of Buildings. Valuators are required to give estimatesof
the remaining economiclives and physical lives of buildings. Architectural Inspectors also make estimates of the remaining physical
lives of buildings. In either case, the estimates should be for the
period from the time of examination until the predicted end of Iife,
rather than estimates of the total lives described in the following
paragraph.
1351. Becausebuildings are subject to physical deterioration and obsolescence,their periods of usefulness are limited.
As they deteriorate or obsolesce,their ability to serve useful purposes decreases,and eventually disappears. This decline and ultimate disappearance of utility may occur gradually or rapidly.
The total economic life of a structure is the period of time between the completion of the building and the disappearance of its
ability to produce services or net returns over and above a fair
return on the land value. At the end of its economiclife, it may
still be structurally sound and in good physical condition, so that
it can still be useful, though not profitably useful. The period of
time between the completion of the building and the time when
it is no longer fit or safe for use, or when it is no longer practicable to
maintain it in safe, usable condition, is its total physical life.
1352. The differencebetweenthe value of the total services or total revenuesof a property, and the expenses,is the net return.
The flowof returns referred to in the foregoing paragraph is net. As
the value of a property arises from its capacity to producenet returns,
the characteristics of the future net income stream must be forecast
in valuation. The future net income stream has three characteristics, namely, (a) quantity, or the size of the income stream at the
time of appraisal and thereafter, (b) quality, or the changeability
of the size in the future, and ( c) duration, or the period of time
during which the stream in any size will endure. Deterioration and
obsolescencewill decrease the average amount of net returns from
time to time in the future, thereby decreasing the margin between
•
•
METHODS OF DWELLING
VALUATION
1352-1354.
amounts of net returns and the periodic amounts which represent a
fair return on the value of the land. The availability of the serv.ices of the land as a building site is not limited as to duration, but
continues indefinitely into the future, for the land does not deteriorate physically or disintegrate. Its earning capacity usually
continues and is, for all practical purposes, interminable. It generally varies in accordancewith the course of future utilization representing the highest and best use. However, the services of the
buildings are limited in duration, owing to the fact that the buildfogs will eventually becomeuselessdue to the action of forces which
cause deterioration, disintegration, and obsolescence. Therefore,
that portion of the income attributable to the buildings, whether
measured in services or dollars, is of limited duration and subject
to decline during the period of its continuance. Gradually, the value
of the property declinesuntil eventually only land value remains. At
.such time the building has reached the end of its economiclife.
1353. Economic life can never be greater than physical
life. An estimate of the probable remaining physical life of a structure fixes the maximum estimate of remaining economiclife. It also
helps to determine the qualities of the building from an engineering
standpoint. The remaining economiclife may be, and frequently is,
less than the maximumpossiblephysical life. In valuation, estimates
of both physical life and economiclife are made. Both are dealt with
and are jointly treated, becausethe factors which limit each of them
operate to lessen property values, and often cannot be differentiated
one from the other. However,in a great majority of casesthe factors
which result in obsolescenceseem to operate with greater force than
those which result directly in physical deterioration. In most in:stances, this results in the termination of economiclife before the end
of physical life. This fact causes the distinction which is made between the probable physical lives of buildings and their probable
economiclives. It is the probable future economiclife of a building,
rather than its probable future physical life, which is of importance
in valuation.
1354. In predicting remaining economiclives, six types
of factors are considered:
a. The economicbackground of the community or region and
the need for accommodationsof the type represented
b, The relationship between the buildings and the immediate
environment
c. Architectural design, style, and utility from the functional
point of view; the likelihood of obsolescenceattributable
to new inventions,new materials, and changes in tastes
,.....---·~--------
1
!
UNDERWRITING MANUAL
1354-1357
d. The trend and rate of change of the neighborhood
e. Workmanship and durability of construction; the rapidity
with which natural forces cause physical deterioration
f. Physical condition and probable cost of maintenance and
repair; the policy of owners and occupants and the use or
abuse to which structures are subjected
1355. H an old building is incapable of producing an
annual income sufficientto pay the expense of repairs, insurance, and
taxes, and to produce returns upon the value of the land, its useful
li:Ee has come to an end. The improvements upon the lot· possess no
more value than the amount which can be obtained from a purchaser
who will buy them and removethem from the site.
1356. Another example is an old residential property
which produces annual revenue sufficient only to pay for taxes, insurance, maintenance, and an additional amount which is found to be
only a proper and sufficientreturn upon the value of the site. In this
case there is no return which might properly be attributed to the
building. The building is producing only enough revenue to take.
care of necessary expenditures and a return upon the land value. The
economiclife of the improvements has therefore come to an end and
it is found that the value of the property is approximately the same
as that of the land alone.
1357. The future economiclives of buildings cannot be
precisely determined,becauseit is impossibleto foreseethe occurrence
of events or new discoverieswhich affect the values of existing structures by making them obsoleteor by hastening and intensifying the
operation of those forces which produce obsolescence. All that can
be expected is that estimates of future economiclife will be of such
character as will cause them to be accepted as plausible by well-informed and reasonably minded people. While it is impossible to
gauge the accuracy of economiclife estimates except in a very general
way, it is possible and necessary for Valuators to be consistent in
making such estimates. In cases of properties of very similar character and situation, the estimates will also be similar. Poorly built
structures will be ascribed shorter lives. Better built structures will
be ascribed longer lives. Prospective changes in environments may
affect the estimate in either direction. Estimates of remaining lives
have significance in terms of each other. That is, the estimates cannot represent reliable determinations of the actual lives but do indicate probable relative lives as between different properties. While
it is impossible to know how long any building will produce net
returns, it can be indicated that a given building will probably
have a longer or shorter economic life than other buildings.
•
•
METHODS OF DWELLING
VALUATION
1358-136()
(
i
1358. In making these estimates Valuators should receive material assistance from analyses of the conditions and relationships reflected in individual feature ratings in the Property and
Location categories. The feature ratings in these categories are
indexes of the relative stability of the income stream, either in the
nature of dollars or services,which may be expected from the properties to which they apply. High feature ratings in the Property
and Location categories will indicate that estimates of remaining
economiclife should be high when compared to the possible maximum which the Valuator considers might apply under the most
favorable conditions, and the higher the ratings the nearer the
estimate should approach the possible maximum.
1359. Low ratings of the features in the Property category will indicate that the estimate of remaining economiclife should
likewisebe relatively low. The lower the ratings, the farther should
be the estimate from the possible maximum applicable under the
most favorable conditions.
1360. Low ratings of the features in the Location category will not necessarily indicate that the estimate of remaining
economiclife should also be relatively low. The economiclife estimate may be relatively high if the Rating of Property is high, although the Rating of Location may simultaneously be low. This
is true because of the opposite effects produced on the economiclife
estimate and on the Location rating by threatening or probable
encroachments of incongruous land uses and by threatening or
probable infiltration of inharmonious racial groups. The probability
or imminence of such encroachments or infiltrations will result
always in low ratings of some of the features in the Location category. However, these same forces may operate to either extend or
shorten the remaining economiclives of structures in the areas involved; For example, if there is any possibility of encroachmentby
an incongruous use which will tend to raise the level of land values.
in the neighborhood under consideration, it will have the effect of
shortening the remaining economiclives of residential structures in
the district. On the other hand, if the threatened encroachmentinvolvesthe introduction of land uses which will"re'Siiltin lowering the
levels of land value in the neighborhood,the effectwill be to lengthen
the remaining economic lives of the residential structures therein.
In the first instance the introduction of the more profitable uses will
result in higher tax burdens, decreased percentage of owner occupancy, and a decline in the gross rental value of properties in the
neighborhood. These forces will operate to hasten the time when the
residential structures cannot produce income in excess of a fair
UNDERWRITING
MANUAL
1360-1363
return on the value of land and, therefore, will shorten the span of
remaining economic life. In the second case, the introduction of
less profitable uses will tend to lower tax burdens, and, while it will
also decreasethe percentage of owner occupancyand the gross rental
value-and probably will lessen the amount of net returns that can
be produced-it will tend at the same time to maintain net returns
at a point sufficientto provide a return on the buildings. The infiltration of inharmonious racial groups will produce the same effects
as those which followthe introduction of incongruousland uses,when
the latter tend to lower the level of land values and lessenthe desirability of residential areas.
1361. Land Valuation by Comparison. In the prescribed methods of valuation, the land value is separately estimated
by determining the fair price at which comparable sites are available in the same or in competinglocalities. The Valuator is required
to assembleand analyze data regarding sales and asking prices of sites
similar to those he must appraise.
1362. It is recognized that market sales data do not
absolutely control the establishment of land value by comparison.
It is acknowledgedthat the Valuator must deal with the factors
which cause buyers to pay certain prices, as well as directly with
the prices they have paid for sites. In many instances the prices
paid may have resulted from necessitiesand points of view of particular purchasers. Sales data are important only if they embrace
information which accounts for the prices paid. Such information
includes:
a. The actuating motives of buyer and seller
b. The relative intelligence of buyer and seller in negotiating
the sale
c. The relative skill in bargaining of the buyer and seller
d, The fairness of the price paid in view of prices asked for
available sites affording equal advantages and subject to
equal possibilities of enhancementor loss of value
e. The date of the sale and the general and specificenvironing
and economicconditions which then existed and whether
or not such conditions have changed since that date
1363. It must be noted, too, that sales prices are of varying usefulnessand importance according to the rapidity with which
price levels of sites may be changing. In an unusually active sales
market, such as exists in "boom" times, rising prices, stimulated by
strongly competing buyers, reach a point where fairness disappears,
insofar as prices are concerned. Stability and permanence are
nonexistent at such times, as well as in times of rapidly declining
•
•
METHODS OF DWELLING VALUATION
1363--1366
)
prices, and the prices then obtained in sales are almost worthless as
information in estimating value, However, their frequency, coupled
with pyramiding prices, constitutes a warning of the imminence of
a reversal of the price trend. Only in times of comparative stability
of the price structure are sales prices of substantial worth in valuation. Thus, after a price decline has set in, developed, and finally
spent its force, as at the end of a period of economicdistress, and
voluntary sales transactions begin to occur, it is probable that the
sales prices in such transactions will closely approximate value,
provided the parties are well informed and act intelligently. A
Valuator will generally overvalue property unless he recognizes
the changing relationships between sales prices and value. He
should understand that in certain periods, sales prices may generally
exceed value, while during other periods the prices may be below
value. Only in times of comparativestability of the general economic
structure, and during periods when there is a fairly well balanced
relation between the factors of supply and demand, will sales prices
approximate or actually equal value. As sales prices increase in a
rising market, value estimates will accompany the prices in their
climb toward a peak. Before sales prices reach their peak, however,
they may have outstripped value. Later when a break occurs and
prices start down, the Valuator's point of view may cause him to
maintain his value estimates at higher levels, although the value
levels are below the sales prices at the peak and stay below them
in the early stages of the decline. In the later stages they will
becomeequal to the prices and then, for a time, exceedthem.
1364. In general, the rate of change of real estate prices
will indicate the relative usefulness and importance of sales prices.
The greater the rate of price change, the lesser the significanceof
sales prices, and vice versa.
1365. Generally, prices at foreclosure or forced sales are
not fair and are therefore of no use. This may or may not be true
in every case. In times of declining price levels, a forced sale might
be made quickly for an amount which would be higher than that ob~
tainable if a reasonable time elapsed during which efforts to obtain
a higher price were made. Such a forced sales price could easily be
as much as, or even more than, was warranted at the time. In periods of comparative stability, or of advancing price levels, it is probable that forced sales prices are unfair and of little worth as useful
data in valuation.
1366. Sales prices are of importance when they can
be analyzed and made to reveal points of view regarding value held
by a substantial number of persons. Insofar as they represent the
value estimates of isolated individuals, they are of little worth as
L
UNDERWRITING
MANUAL
1366-1370
part of the data. This places emphasis where it belongs, namely, on
the why and wherefore of the particular prices paid in specifictransactions, rather than upon the prices themselves.
1367. Unless information is gathered on sales transactions which occurred close to the time at which the Valuator makes
his appraisal, correction may be necessary because of changed environing and economic conditions.
1368. When sales prices are found to be reasonable and
are used by the Valuator, it is of extreme importance that careful
comparison be made of the environmental influencesand their probable future effects on the desirability and value of each property.
The site under appraisal must be intelligently and correctly graded
in terms of its relative desirability as compared to the others. The
sales price of one can be modified accordingly and regarded as a
tentative index of the value of the other. For example, a comparable
site was sold for $750. Investigation convincesthe appraiser that the
sale price was reasonable. A comparison percentage of 100 is assigned to the site being appraised. The two properties are compared.
The Valuator notes similarities and differences with respect to the
relative stability and permanence of the desirability of their respective environments, tax burdens, and other :factors. A percentage of
comparison is then ascribed to the other site. This percentage must
indicate his opinion as to the relative desirability of the site, measured in terms of the desirability of the site being appraised. If the
site compared to the one under appraisal is graded at 125%, the sales
price $750 is divided by the grading 125%. The resulting figure of
$600 is tentatively assigned as the value of the site being appra.ised.
1369. Many of the considerations herein with regard to
sales prices also apply to asking or listing prices for sales purposes.
The latter are useful when comparisonsare made betweenlisted properties and a site being appraised. The listing prices are modified so
as to determine a probable sales price for the property involved.
The procedure is the same as in the use of sales prices. Listing prices
generally may be regarded as fixing the maximum valuation for
properties of equal desirability. However, they do not, of themselves, indicate the values.
1370. Replacement Cost of Property. The approximate upper bracket or limit of possible value is the cost of replacement of the property, assuming the building improvements to be in
new condition. Estimates of the cost of replacement of building improvements in new condition are made, and are then used by the
Valuator to estimate the cost of replacement of the entire propertyland, buildings, and all miscellaneous costs-in new condition. This
latter estimate becomesthe approximate upper limit o:f possiblevalue.
•
•
METHODS OF DWELLING
VALUATION
1370-1371
\.._
...
While value may possibly be equal to this uppermost limit, it is also
possible that it may be any amount below this limit. ~liJ&_depengs
~:ntirelyupon usefulness,not upon the cost of construction or replacement. Value tends to conform to cost but this is not to imply that
it is always equivalent to cost. The expenditure of money for a
dwelling structure does not necessarily create value equal to the cost.
Estimates of replacement cost of property are not intended as measures of value, and are not to be so regarded. They merely indicate
the possibility that value may exist to an equivalent amount. It is
the Valuator's task to decide whether or not the possibility is an
actuality in any case.
1371. Cost of construction also may be in excessof value
at a given time becauseunder some circumstances a reduction in cost
may be in prospect. If construction costs decline, value will also
decline if it was originally equal to cost. Thus, it might be assumed
that a new method of constructing buildings is invented. At first
the costs of using it are great, (a) because of high production costs
attendant upon the construction of newly devised machinery required
to manufacture special materials, or to fabricate special units used
in the new construction method, (b) because of high promotional
costs attendant upon the introduction of a new method to the public,
and the creation of a public demand for its use, and ( c) because of
high labor costs while the method is being introduced, resulting
from lack of skill of building craftsmen in dealing with unorthodox
materials, or in utilizing construction devicesor methods not familiar
to them. Obviously,when the pioneering stage has been passed, production costs will be decreased through mass production, and labor
costs will decline through increased skill of the laborers. It is plain
that the costs involved in the beginning must exceed value because
of the prospect of declinesin costs, if for no other reason. Perhaps
this would not be true if a dwelling were a short-lived commodity.
For example, certain articles of wearing apparel when they are new
may be much more valuable than their cost because they represent
the first appearance of a new style. The satisfaction ofhaving been
first to introduce the style compensates the wearer :for the initial'
excessivecost. Although he may quickly discard the article, he feels
that he has received value for his money. But dwellings involve
substantially large expenditures and they must last for a long time.
Therefore, if a decline in construction cost is in prospect, the intelligent buyer will consider the value, at most, to be no higher than
the point to which construction costs will decline. He may believe
that somebenefit will accrue to him by being the first to own a house
of a new style, but it is more than likely that he will not believe any
such benefit will accrue from style alone. Any benefit would have to
I"'". -
UNDERWRITING
MANUAL
1371-1372
come from superior living qualities and lesser operating and maintenance costs, combined with lower construction costs than for houses
of usual type. It follows that, in cases involving new construction
methods or materials, replacement costs may be of relatively little
significance in valuation analyses, while the costs of replacement of
building improvementsof the same design, size, and layout, but built
with orthodox materials and by traditional methods, are likely to
be of greater significance. In such cases, the latter costs rather than
the former tend to fix the upper limit of possible value.
1372. The replacement cost of property is estimated to
make possible the application of the substitution theory described
in paragraph 1321. As a consequence,the concepts on which the substitution theory rests constitute the basic assumption on which the
replacement cost estimate must rest. Therefore, the estimate of
replacement cost of property should include all items of expense to
which a typical prospective owner would be subjected if he were
to undertake to replace or reproduce the improvementsinvolved upon
a site of equal value. These items include not only cost o:f land
and buildings, but additional items. The items are indicated in the
following list:
a. Price at which an equally desirable site can be purchased
or the value ascribed to the subject site
b. Cost of survey
c. Cost of preparing site for improvement, including cost of
finished grading, terracing, retaining walls, and landscapmg.
d. The cost required to replace building improvements in new
condition, determined in accordance with.the instructions
in Section 16
e. Appraisal fee of lending institution, if customary
f. Federal Housing Administration examination fee
g. Initial service charge
h, Cost of showing condition of title
i. Cost of revenue stamps
j. Preparation of mortgage or deed of trust
k. Recordation of mortgage or deed of trust
l. Preparation of note or bond
m. Notary fee
n. Settlement fee
o. Pro rata expense for taxes on land during the construction period
p. Pro rata expenses for taxes, if any, on building improvements during the construction period
•
•
METHODS OF DWELLING
VALUATION
1372-1373
q. Pro rata premium expense for fire, windstorm, and other
hazard insurance during the construction period
r. Interest on invested capital during the constructionperiod
(
From the foregoing, it is apparent that the Valuator's estimate of
the replacement cost of a property in new condition would exceed
the sum of the replacement cost of the building improvements and.
the land, as such. At the same time this emphasizesthe distinction
between"land and buildings" and "property". The land and buildings are simply material things, while the property which an individual purchaser seeks and buys is, in reality, the rights and benefits
arising from ownership. It is the replacement cost of the property,
rather than merely of land and buildings, which sets the upper limit
of possible value.
1373. An illustration of an estimate of the cost of re>
placement of a property in new condition is given below.
Estimated Cost of Replacement of Building Improvements in New Condition
Main building
$6, 447
Garage------------·-----------------·-------------------------------Other Improvements------------------------------------------------
412
205
Total---------------------------------------------------------
$7,.Q64
Estimated Cost of Replacement of Property in New Condition
(
Price of site------------------------------------------$1, 350
Survey of site----------------------------------·
25
Grading and landscaping________________________________
320
Building improvements (as above)-'--------------------7, 064
Appraisal fee of lender_________________________________
10
FHA examination fee___________________________________
21
Initial service charge___________________________________
70
Title insurance----------------------------------------49
Preparation of deed -----------------------------------5
Recordation of deed____________________________________
5
Preparation of note
.
_
Notary fee--------------------------------------------Taxes on land during construction period of 4 mos.
( $30x 4/121) -----------------------------------------Taxes on building improvements during construction
period. (No tax)----------------------------------Hazard insurance during construction period
_
Subtotal (Total cash investment)
Interest on invested capital at 6% per yr. for construction
period of 4 mos. ( $8.946X6% X 4/12) -----------------Subtotal (Miscellaneous items>------------------------Total Estimated Cost of Replacement of Property
in New Condition
0
10
$8, 946
$1,350
$25
3ID
7,064
10
21
70
49
5
0
10
179
$391
391
$9, 125
UNDERWRITING
MANUAL
1374-1377
1374. Prepaid future items of expense attendant on
acquisition of the property are not allowable items for inclusion in the
estimate of replacement cost of property. Taxes for any period· beyond the typical construction period may not be included, nor may
any portion of the premiums for hazard insurance extending beyond
completion of construction. The premium paid on account of mortgage insurance is a prepaid expense item and may not be included in
the estimate of replacement cost of property. No allowance is permitted to cover commissionsto brokers for the arrangement of a sale
of either the site or the finished property, or for the arrangement of
mortgage financing.
1375. Some of the items or allowances in the cost estimate may not create equivalent value in a particular case. For example, the structure erected might be inappropriate to the neighborhood,
and the completed property would be less valuable than its cost. This
again calls attention to the fact that estimates of replacement cost are
of little significancein valuation work, except as maxima. An owner
might erect a house which would cost him 50% more than the houses
which generally characterize the neighborhood,but the value might be
less than that of other houses nearby providing the same facilities.
The expenditure of money for retaining walls and terracing and landscaping may also prove wasteful, since excessive expenditures on
account of such items may create value to the extent of but a fraction
of their cost.
1376. The building cost estimates which are used by the
Valuator give the cost of duplicating the structures in new condition.
The significance of such estimates is greatest in the case of new, or
nearly new, structures. They become of less and less significance as
older and older buildings are the subjects of valuation. In a great
many cases the buildings to be appraised will not be new ones. The
cost estimates, therefore, will be of little significancein such cases.
VALUATION CONCEPTS
1377. Plottage Increment. Plottage increment is defined as the increase in unit land value produced by combining smaller
ownerships into larger single ownerships. The presence of the plottage increment is accounted for solely in the greater utility of larger
tracts. Plottage increment is not a characteristic of a single tract of
land. It is a concept which applies only in comparing a large tract
with the specific smaller units of which it is composed,and is based
upon the potential utilization. In residential real estate, the assemblage of smaller parcels produces a plottage increment only if the
smaller parcels by themselves are of such a size and character as to
•
•
METHODS OF DWELLING VALUATION
1377-1379 (1)
/
{
have small utility. The maximum effect of plottage obtains if the
lot and the improvementstogether constitute a naturally marketable
real estate entity. Excess land is rarely worth as much per unit
of area. As a consequence,land cannot be valued except in terms of
the actual amount of land in single ownership.
1378 (1). Marketability and Conformity. The essence
of the analysis used to estimate the value of a dwelling property is
found in a consideration of marketability factors. Marketability
refers to the state of being salable. Ease of marketability may result
from fitness and adaptability, or from demand. Current salability
at a price is significant,but of relatively less significancethan factors
which improve or detract from the continuous probability of ready
sale during a long period of time in the future. The odd and strange,
the peculiar and the unusual tend to impair long time marketability
and to reduce values. The typical, usual, regular, and popular increase marketability. The study of the extent to which properties
may be expected to be marketable should include cognizance of the
lack or existence of, and probable breadth of markets. Any factor
which limits the probable number of possible willing purchasers
becomesa valuation factor and not infrequently estimates of value
must be deliberately lowered until the estimates reach a level at which
a reasonably general market is tapped.
1378 (2). The extent to which the property being appraised is suited to its environment must be determined by the
Valuator. This matter is dealt with in some detail in Sections 8 and
9. Data relating to conformity are of very great importance because
nonconformity may produce adverse effects,such as the shortening of
economiclife, hastening of obsolescence, and limiting of marketability, thereby affecting value. Regardless of the characteristics of any
residential property, its value can be utterly destroyed by influences
external to itself.
1379 (1). Environmental Changes. A superficial examination of residential areas in any American city reveals the fact
that, with practically no exception, such districts decline in desirability with the passage of substantial periods of time. It is possible
that the rate of such declines will generally be slower in the future
than it has been in the past, becausethe rate o:f population growth in
the United States is, and has been, on the decline. This factor, population growth, has been one of the main causes of the loss of desirability which residential districts have experienced. It is obviousthat
as new population comes into a given region, new residential areas
spring up within communities that have already been established.
These newer districts present a strong appeal as placesof residence,and
--
--
-
-
·-
.
_
·-
·-·------------
UNDERWRITING MANUAL
1379 (1)-1379 (5)
people living in the older districts experience the urge to sell or rent
their old homes and acquire new ones in the newly developing residential areas. In this matter the older districts gradually lose the
aspects of owner-occupant communities and take on the aspects of
tenant-occupant districts.
1379 (2). The older district still remains desirable, but
only to families whose social status or standards of living are lower
than those of the families which have vacated the district. This
process of change in occupancyby families of successivelylower standards of living is accompaniedby declines in desirability and value.
The value decline may be arrested in some cases where the utility of
the sites in a particular district undergoes a transition to more productive uses. However, the district almost inevitably declines in
desirability, and usually in value as well, after it is once established
and before any such transition to higher uses takes place. The rate
of decline varies in different districts according to the rapidity with
which new forces destructive of residential values operate within each
district and according to the intensity with which these forces act.
Many districts enjoy sustained value levels for long periods of time.
In fact, most of them decline very slowly and the lapse of a number
of years is necessary before the fact that a decline is taking place
becomesobvious.
1379 (3). The phenomenonto which attention is here directed also results from causes other than population growth. The
development of modern transportation systems, extensions of, and
changes in the routes of transportation lines within individual communities, and the making available of automobiles to families of
comparatively low purchasing power, have promoted the development of new residential districts and greatly speeded the rate of
declines in the desirability and value of the established ones. The
encroachment of nonconforming uses in residential sections, such as
the introduction of commercial,manufacturing, and industrial enterprises, and the physical deterioration of the buildings in these sections
are other obviousand commoncauses.
1379 (4). It is very important that the Valuator make a
study of the causes of declines in the desirability and utility of residential districts. Otherwise he will not developthe greatest accuracy
in his valuation estimates and in the ratings which he must make.
1379 (5). It is not possible to totally exclude or prevent the growth or operation of value destroying influences,for it is
practically inevitable that all residential property will eventually
declinein desirability or utility, and therefore in value, even though it
may require substantial periods of time. This risk is known and
•
•
· ·---,
METHODS OF DWELLING VALUATION
1379 (5)-1380 (1)
).
acknowledged. If the decline is slow, the resulting risk can be offset
in mortgage transactions by requiring periodic amortization payments
on the loan. However, the important thing is to discover whether,
during the mortgage loan period, especially during early life, the
property. involved will be subject to unusual, extraordinary, and
excessive loss of desirability, such as would occur if the district
experienced a transition from fine residential use to industrial use, or
from occupancyby people with high annual family incomesto people
with low incomes.
1379 (6). It is, therefore, especially important to search
diligently for the presence of any adverse influences which lessen or
destroy desirability or utility, and to discover the absence of safeguards which are intended to protect against declines in value or
desirabilty. In such categories the following are included:
a. A declining population in the neighborhood or community
or region
b. A decline, or danger of decline, of the desirability of the
neighborhood through the influx of people of lower living
standards
o. A decline, or danger of decline, of the desirability of the
neighborhood as a place of residencethrough the introduction of commercial, industrial, or manufacturing enterprises, or nuisances or inharmonious uses of any kind
d. Lack of appropriate and adequate deed restrictions and
effectiveprovisions for the enforcement thereof
e. Lack of appropriate and adequate zoning regulations
1380 (1). Depreciation, Deterioration, and ObsoIesence, Depreciation is defined as loss in value from any cause
whatever. Frequently the term is used in the narrow sense of loss in
value caused by physical deterioration, and sometimes it is used to
signify deterioration itself. Accrued depreciation at any time is
defined as the difference between value at the time of appraisal and
the replacement cost of the structure in new condition. The word
"deterioration" refers to the decay and disintegration which takes
place in structures with the passage of time. It is caused by natural
forces, by the elements, and by use. It operates to terminate the
physical lives of buildings. The term "obsolescence"refers to those
changes in the usefulness of structures which causes them to become
less desirable and less useful. It operates to terminate the economic
lives of buildings. It does not affect physical life as it does not cause
' deterioration. Deterioration and obsolescencecause a lessening of
utility and thereby result in depreciation, that is, loss in value. It
UNDERWRITING
MANUAL
1380 (1)-1380 (3)
is essential to understand the nature of the. causes of depreciation,
not because of any necessity of measuring the amount of depreciation
which has occurred since the completion of a building, but because
of the· necessity of estimating how these forces will probably affect
utility in the future. The forces which cause deterioration and
obsolescenceoperate continuously. They may operate in the future
in the same manner or in different manner than in the past. By
studying the manner in which they have operated in the past, greater
accuracy in the estimates as to how they may operate in the future
is attained.
1380 (2). Obsolescence has greater significance in valuation than deterioration. It is caused by :
a. New inventions and discoveries
b, Changes in the preferences and tastes of the public, as for
example, with regard to styles of architecture, geographical locations as places of residence,the extent of plumbing
facilities provided in residences,sizesof rooms, and heights
of ceilings
o. The encroachment of incongruous uses, as when commercial
and industrial enterprises are introduced into residential
neighborhoods
d. The infiltration into residential districts of people whose
living standards are lower than those of the people who
already inhabit these districts
e. The failure of substantial numbers of property owners in
the district to maintain their properties in good condition
f. Increases in land values which result from changes in the
highest and best uses for which land is suited
1380 (3) • .Accrued depreciation is not of primary importance in valuation. It is the difference between value and cost
of replacement. To measure it, it is necessaryto make two estimates:
the value as of date of appraisal, and the cost of replacement in new
condition as of the same date. The differencebetween the two estimates is the amount of accrued depreciation. The determination of
accrued depreciation is a byproduct of the valuation process rather
than an essential step in it because value always depends on the
amount of future benefits,not upon the deduction of expired benefits
from the benefits presumed to be indicated and measured by the
cost of replacement. Therefore, the valuation process is properly
confinedto the estimation or forecasting of the probable extent and
nature of future benefits and the translation of such predictions into
estimates of present value.
•
•
METHODS OF DWELLING
VALUATION
1380 (4)-1380 (5)
/
.;
l
1380 (4). Attempts to estimate accrued depreciation directly, rather than to measure it after the value estimate has been
made, are likely to produce grossly inaccurate results. Such attempts usually start by estimating the replacement cost of the building in new condition. It is then assumedthat this cost represents the
value of the building new, an assumption which frequently is incorrect. Next, it is assumed that the amount of accrued depreciation
caused by deterioration and obsolescencecan be determined (a) by
ascertaining the time which has elapsed since the building was completed, (b) by considering the physical condition of the structure as
revealed by examination, so as to discover how deterioration has
occurred, and (e) by observing the extent to which the structure is
obsolete in architecture, design, and equipment. Then accrued depreciation is presumably determined by (a) assuming some annual percentage rate of depreciation 'due to deterioration, ( b) multiplying
it by the replacement cost and the age of the building, and (c) adding an amount equal to the cost of needed repairs and of modernizing the structure to offset unusual deterioration and obsolescence.
However,the resulting total may be, and usually is, very inaccurate.
In valuation, the emphasis properly belongs upon the length of the
probable remaining economiclife, rather than upon the length of the
past physical Iife, and upon probable future benefits, rather than
replacementcosts. The reason for this is: all value derives from the
future, none from the past.
1380 (5). In valuation great reliance, unfortunately, is
commonly placed upon a valuation procedure which starts with
replacement cost in new condition, then estimates accrued depreciation of building value by a direct method-usually the so-call:d
straight-line method or some variation of it-next deducts this item
from cost, then adds present land value, and calls the result the value
of the property under appraisal. Sometimes,by coincidence,use of
this procedure gives a correct conclusion, but it is erroneous in
principle, since it places major emphasis upon the past and does
not estimate the extent of future utility. The straight-line method
of estimating accrued depreciation is defective in a number of important particulars. Its use requires acceptanceof the premise that
replacement cost in new condition is equivalent to value in new
condition, and therefore that so-called "depreciated replacement
cost" is equivalent to value. In other words, it is assumed that re""
placement cost,
less accrued depreciation calculated by some arbitrary method of direct estimation based on cost and age data, is
equivalent to value at the time of appraisal. The straight-line
method is also defective in that it is based upon the premise that
buildings declinein value in equal yearly amounts. While the aver-
L __
UNDERWRITING
MANUAL
1380 (5)-1381 (4)
age depreciation per year may be 2%, it does not follow that in
10 years the building value will have declined 20%, in 30 years 60%,
45 years 90%, and so on. Therefore, such a procedure is of questionable merit. Methodsof depreciation which utilize sinking fund computations are subject to the same criticism and have no place in real
estate valuation.
1381 (1). Distinction between Cost and Value. Cost
and value are sharply distinguished. Value depends on the extent
of utility in the future, while cost may depend on conditions in the
market or on outlays for labor and materials, and these conditions
or outlays do not necessarily deal with factors which create value.
The only exception is the case of a building which is new and represents the highest and best use for the site. This implies there must
be a proper relationship between supply and demand and also between construction costs and other costs in general. Costs are related to value only from the point 0£ view of substitution, the cost
required to replace an equal amount of function. In this sense, cost
of replacement becomes the approximate upper limit of value.
There is a tendency, but no certainty, that value of a dwelling in
new condition will be equivalent to replacementcost in new condition.
Since value and replacement cost can be equal, estimates of replacement cost in new condition can be used as approximate "ceiling"
estimates of possible value, thereby acting as controls on the
judgment of the Valuator.
1381 (2). The distinction between cost and value is better appreciated by a consideration of certain valuation concepts,
including highest and best use, overimprovement,and underimprovement, and improved value.
1381 (3). Highest and Best Use. The highest and best
use of a real estate site is that use or succession of uses which makes
the land most productive. In determining highest and best use,
the test is to discover which program of future utilization is capable
of developing the highest return on the land over a substantial
period of time. Highest and best use does not refer to a building of
the greatest size that someonemight be induced to erect. The concept of highest and best use is without meaning unless the available
uses compared are thought of in terms of buildings having different
functional designs.
1381 ( 4). Overimprovement and Vnderimprovement.
An overimprovement is an improvement so costly or so.. large as to
produce land returns lower than those which could ,have been produced on the same site by a less costly. or smaller improvement. An
underimprovement is an improvement which, because of its size or
•
•
--,
METHODS
OF DWELLING VALUATION
I
1381 (4)-1385
cost, produces ,a land return less than could have been produced on
the same site by some other larger or more costly improvement. Both
overimprovement and underimprovement fail to develop fully the
potential capacity of the site. The land value is not modified or
changed, but the total value of the property is adversely affected.
Therefore, buildings which are overimprovementsor underimprovements are always worth less than the costs required to replace them.
THE ACCURACY OF VALUATIONS
1382. Sources of Errors. Incorrectness or inaccuracy of
valuations results from various causes. The following list is provocative of thought :
a. Lack of judgment and experience.
b. Haste and carelessness
o. Inadequate data
d. Data of poor quality
e. Incorrect interpretation of data
f. Incorrect method of valuation
g. Faulty application of correct method
h. Influence on Valuator
The lines of action required to minimize inaccuracy in valuations are
obvious. At the same time, the considerations discussedin following
paragraphs are worthy of examination.
1383. The accuracy of valuations is relative only. V111uations are based on judgment and cannot be regarded as precise
measurements. Relative accuracy is obtained when the estimate of
value falls between limits which are reasonable. Valuations are
deemed correct when expressed precisely in dollars at any point between the limits. Valuators with long experience find that 'their
opinions with respect to values take form, during the process of
appraisal, by direct and simultaneous comprehension of all factors,
as much as by the detailed method itself. The process tends to be a
corroboration rather than the source of the final opinion.
1384. Reasoning Used in Estimation. The technique
of estimating embraces the use of thought habits and patterns of
mental discipline. Reasoning to correct conclusionsrequires the subordination of prejudices and preconceivednotions, and necessitates a
rigid application of logic.
1385. Integration of Items. The principal justification
for the use of analytical methods of appraisal is that the number of
items on which the appraiser's judgment is permitted to play is
materially increased. The formation of an opinion by an over-all
"sizing up" of the problem can rarely be as accurate as one formed
UNDERWRITING
MANUAL
1385-1389
after integrating a number of estimates which relate to' individual.
items. Therefore, valuation procedure which progresses first by the
making of a number of estimates of individual items and then progresses to a logical integration of the estimates, leads to greater
accuracy in the final estimates of value.
,
1386. Plausibility. Accuracy is derived only when the
integral and final estimates are characterized by plausibility, Valuators should always set estimates at the most reasonable, most fair,
and most likely amounts, as opposed to placing them at possible
extremes.
1387. Bracketing. In establishing criteria to determine
plausibility and probability, competent Valuators testithem in terms
of possible upper and possiblelower limits of items, thereby bracketing the zone within which the final estimate should lie. Next, they
proceed to narrow the limits as much as possible, and finally select
as their estimate a figure lying approximately midway between the
narrowed limits. It may not always be precisely midway between
the limits, but in general the bracketing process does conclude with
a strong presumption of correctness attaching to some one level of
estimate.
1388. Interpolating. In many problems of estimation,
the bracketing limits establishedwill be derived from estimates made
in connection with other properties. In such cases, it is logical to
derive the new estimate by sandwiching it between established estimates. For instance, the approximate levels of value of two types
of properties may have been set. The level of value attributable to
a third type may be recognized as "more than", or "less than" the
others. The directions in which estimates tend to move under
changed conditions are usually known. Thus, by interpolation between established limits or extension beyond limits it is possible to
give some control to the process of estimation and thereby secure
consistency and plausibility in final opinions.
1389. Averages. A word of caution should be given in
connectionwith the use of averages. Expressions such as "average
conditions", "average price", "average value", "average house", or
"average lot", are frequently used. Ordinarily, "typical" is meant
rather than "average." An average figure or condition can only be
of substantial use in appraisal procedure if it is composedof quantities that do not vary considerably from the average itself. Some
appraisers are tempted to use published statistics reporting various
facts applying to entire municipalities. This practice is dangerous
unless it is first ascertained that the average figure can be properly
utilized in the specificcase.
•
•
METHODS OF DWELLING VALUATION
1390-1393
1390. Normal Relationships. Ordinarily, the relationships between several individual estimates are reasonably similar insofar as typical properties are concerned. It is well to bear in mind
and use the normal relationships as checks and guides in making
estimates.
1391. Consistency by Arbitrary Treatment. The general valuation problem, from the point of view of estimation, may
be divided into two parts. First, there is the desirability of ascertaining the correct general level of values. Secondly, there is the
desirability of placing valuations on a large number of properties
in such a manner that they are consistent one with another. As
estimation problems, the two phases of valuation fall in different
ranges. The first is solved by the application of adequate data and
sound method. The second is secured by arbitrary but reasonable
adjustments which bring about consistency. Consequently,after the
limits within which an estimate of value should fall have been established, the actual setting of the precise dollar valuation is and
should be done by making the estimate consistent with other valuations.
1392. Probability. Inasmuch as prospective services of
properties occupy such a dominating position in the valuation process, the accuracy of results necessarily depends upon the quality of
the forecasts which are made. The Valuator cannot know to a certainty which future events will occur. Therefore, he bases his predictions upon the most probable course of future events. Forecasting
is a necessity in valuation. It is impossible to assume a position
which declares that it is neither feasible nor justifiable to make forecasts. The very nature of value itself makes prediction an integral
part of valuation method. All the devices which aid in forecasting
the most probable course of future events are used. The principal
one of these is the use of information relative to the past because
there is a strong presumption that, under like circumstances, future
events will follow much the same course and derive from much the
same causes as did past events.
1393. Desirability of M ethodical Procedure. The advantages of methodical procedure in valuation include the :following:
a. The discovery,isolation, and identification of individual influenceswhich combineto create, sustain, or destroy value
is accomplished
b, Appraisal procedure is standardized to a reasonable and
desirable degree
o. The extent of the zones within which acceptable valuation
estimates must fall is limited, bringing under some control
the estimates of individual appraisers
UNDERWRITING
MANUAL
1394-1395
1394. In valuation it is preferable to resort to analytical
methods rather than to depend on unaided judgment. Judgment controls the valuation process, but a methodical procedure will serve to
break down the complexities of the problem. It allows the Valuator
to piece together and weigh more phases of the problem, and to consider the manner in which various factors operate in creating value.
Part of the relative accuracy is derived directly from the quality of
the data. The remaining accuracy is derived from the method of
valuation employed. Illogical reasoning in correlating the elements
and a faulty process impair accuracy, while a logical process, sound
methods, and the correct interpretation of the factors contribute to
accuracy. The methods used in valuation have definite limitations
and are useful aids only when the appraiser knows their limitations
and uses the methods intelligently. No method of calculating realty
values can be relied on implicitly to the exclusion of what the experienced appraiser knows to be in accord with common sense and good
judgment. The data deal with many matters that are incapable of
exact measurement. Furthermore, valuation requires forecasting of
matters that cannot be definitely ascertained. Estimates are used in
place of measurable quantities. If the estimates are based on such
knowledge as is available with regard to the matters considered, and
are in accord with sound, common sense principles, the conclusions
produced will be sound and will be acceptable as reasonable and accurate estimates by reasonable and well informed individuals. Absolute
necessity for good judgment characterizes every step in valuation
procedure.
1395. The Valuator's Final Judgment. The Valuator
should never lose sight of the fact that the value which he must estimate is the price which a well-informed typical buyer would pay, and
be warranted in paying, for the property appraised, rather than the
maximum price which could be obtained if the property were offered
:forsale. In determining such a warranted price, a buyer will give consideration to both the cost and the value which may be assigned separately to the land and to the improvements upon it. He will also
consider the prices at which he can obtain other equally desirable
properties of like characteristics, from well-informed sellers who,
when selling, would be acting intelligently, voluntarily, and without
necessity. He will contrast the advantages of renting with the advantages of buying, as indicated by comparison of the cost of renting and
cost of buying, and he will consider the many other matters to which
attention is drawn in this Section of the Underwriting Manual. He
will not be especially interested in, or greatly influenced by what the
property has cost someone else in times past, or what it would cost to
build it today, though he will desire information regarding these mat-
•
•
I
j
METHODS OF DWELLING
VALUATION
1395-1397
r
ters; but he will be vitally interested in the ability of the property to
produce a stream of future benefits for him if he were to purchase it.
The characteristics of this stream of benefits-its present size, the
extent of any probable diminution in its size in the future, the certainty of the continuation of the flowingstream, and the length of the
period during which the flowmay be expectedto continue-will determine the price which he is warranted in paying, and, hence, the value
of the property.
1396. There is no virtue in undervaluation of properties, and great risk of loss is introduced by overvaluation. Federal
Housing Administration Valuators must avoid both undervaluation
and overvaluation. Their attention is directed to the fact that speculative elements cannot be considered as enhancing the security of
residential loans. On the contrary, such elements enhance the risk
of loss to mortgagees who permit them to creep into the valuations of
properties upon which they make loans. Valuators shall not report
valuations that cannot be justified by existing conditions which they
find and of which they are aware, and by reasonable and plausible
estimates with regard to the effects of conditions which may reasonably be expected to prevail in the near future subsequentto the date
of valuation.
1397. The valuation process requires the Valuator to
gather, analyze, and interpret a great volume and variety of data.
Because the necessary data are gathered piecemeal, there is danger
that he will assign greater importance to some of the data than they
are rightly entitled to receive, and reach a conclusion which is premature and unsound. Before reaching his final conclusion, it is
essential that he place himself at a distance, figuratively speaking,
from the problem with which he is dealing in order that he may
get a broad, comprehensive view of the whole group of data and of
the aspects of the problem in its entirety. He must not remain
so close to the great volume and variety of data which he must consider that he will fail to properly appraise the relative importance of
the various matters which comprise the data and lose sight of the
general characteristics of the entire problem. Let him stand off at
a distance after analyzing the data, and consider the resultant effect
produced by the multiplicity of influenceswhich operate in every case.
Then it is more' likely that the conclusions which he reaches as a
result of any valuation method or procedure which he may follow,
or comparisonswhich he may make, will accord with that which will
be required of all Federal Housing Administration Valuators, namely,
that their conclusionsin every case shall be fully supported, reasonable, sound, and sensible.
PART III
SECTION
VALUATION
OF AMENITY
14
INCOME DWELLINGS
CONTENTS
Paragra,;.
c
Valuation Process--------------------------------------~---------Selection of Method__________________________________________
Steps in Valuation Process____________________________________
The Determination of Derived Capital Value
Ratings and Economic Life
------------Monthly Rental Value-----------------------------------~---Degree of Owner-OccupancyAppeaL
Monthly Amenity IncremenL---------------------------·-----Determination of Derived Monthly Value
Conversion Factors------------------------------------------Valuation of Land------------------------·-------------------Determination of Derived Capital Value________________________
The Estimate of Available Market Price
The Estimate of Replacement Cost of Property
.:._
Determination of Estimate of Value
Judgment Control of Results~--------------------------------Distribution of Estimate of Value---------------------------------Comparative Valuations---------------·---------------------
1401-1~
1~
1~
1406-1~
140S-1409
1410-1411
1412--1413
1414-1417
1418-1420
1421-1424
1425
1426
1427-1432
1433
1434-1439
1431)-,1439
1440-1442
1443-1444
I
Effective February, 1938
Federal Housing Administration
I
J
f
1401
PART III
SECTION 14
VALUATION OF AMENITY INCOME DWELLINGS
VALUATION PROCESS
-,·
1401. Most single family and certain multi-family properties, salable to prospectiveowners interested to somedegree in direct
services and amenity income,are best appraised by the amenity comparison method of valuation. This method consists of. four principal
operations, as follows:
a. The making of an estimate of the value· of the property by
determining the gross returns which the property is ca.pliable of producing, and then converting them into an estimate of derived capital value
b, The setting of possible upper limits of valuation by making
estimates of the replacement cost of the property in new
condition and of the price which the property would
probably bring in a reasonable time if offered for sale ih.
the market
·
o. The establishment of a final valuation by comparing the
estimates of derived capital value, replacement cost of
property in new condition, and price available in a sale
d. The distribution of the final valuation to its component
parts.
1402. In the process, the estimation of derived capital
value constitutes the essenceof the method and is the major attempt
to ascertain a proper valuation. The estimates of replacement cost
of property are used solely as possible upper limits of value. Estimates of available market price, if lower than either of the other two,
are used, with certain exceptions, as approximatiorjs of the upper
limits of valuation.
1403. The process requires the separate estimation of the
total value and of the land value, but not a separate valuation of the
building improvements. However, the building improvements are
ascribed values which are the portion of the total valuation remaining after deducting the separately made land valuation.
UNDERWRITING
MANUAL
1404-1405
1404. Selection of Method. The first step in any valuation is to determine the basic assumption on which the valuation is
to rest by following the line of thought developed in Section 13,
Methods of Dwelling Valuation. The Valuator is required to study
the characteristics and environment of the property being appraised
so as to ascertain whether it exerts appeal to prospective purchasers
who are interested typically in the amenity returns, i. e., direct services and satisfactions, which the property is capable of producing for
an owner-occupant; or whether it exerts appeal solely, or almost
solely, to prospective purchasers interested typically and only in the.
monetary returns obtainable through ownership and renting of the
property. This enables him to select the proper method of valuation.
If the appeal is solely, or almost solely, to purchasers desiring only
monetary returns, the property should be appraised by the capitalization method described in Section 15, Valuation of Rental Income
Dwellings. H a measurable degree of appeal is exerted to purchasers for amenity returns receivable through owner-occupancy,
then the property should be appraised by the amenity comparison
method of valuation described in this Section. This method rarely
applies to the valuation of four-family properties.
1405. Steps in Valuation Process. The first step in
the valuation process is the determination of the basic assumption on
which the valuation is to rest. This is described in paragraph 1404.
If the amenity comparison method is found to apply to the case, the
valuation process normally proceeds in 14 additional steps. The
order of the steps is designated by letters as follows:
a. The Rating of Location is determined in accordance with
the instructions in Section 9.
b, The Rating of Property is determined in accordance with
the instructions in Section 8.
c. An estimate of the remaining economic Zife of the building is
made in accordancewith instructions in Section 13.
d. The monthly rental. value of the property is ascertained in
accordancewith instructions in Section 13.
e. A study is made to determine the degree to which the property exerts owner-occupancy appeal, that is, the extent of
its ability to satisfy fully all the desires which owneroccupants typically seek from a property. The results of
this study are expressed as a percentage, thus: "Owneroccupancy appeal 60%." This analysis is described in
paragraphs 1412 and 1413.
••
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VALUATION
OF AMENITY
INCOME DWELLINGS
1405
f. Selection is made of an amenity increment percentage which
reflects the degree to which the monthly value of the services of the property to a typical owner-occupant exceeds
the monthly rental value. The owne,r-occupancy appeal
percentage enters into this selection. Amenity increment
percentages and the methods of selecting them are described in paragraphs 1414 to 1417.
g. The derived monthly value is determined by multiplying the
monthly rental value by the selected amenity increment
percentage and adding the amount thus derived to the
monthly rental value. This step is described in paragraphs 1418 to 1420.
h. Selection is made of a conversion factor reflecting the certainty, quality, and duration of the derived monthly value.
Conversionfactors and the methods used to select them are
described in paragraphs 1421 to 1424.
i. An estimate of the value of the land is made by comparison
in accordancewith the instructions in Section 13. H excess
land, as defined in paragraph 1425, exists a separate valuation of the excess area may be required. Instructions
are found in paragraph 1425.
j. The derived capital value of the property is determined by
multiplying the derived monthly value by the selected
conversion factor and adding the valuation, if any, of
excess land. This process is described in paragraphs
1425 and 1426.
k. A judgment is formed with respect to the available market
price of the subject property in accordancewith the instructions in paragraphs 1427 to 1432. This requires consideration of sales data relating to improved properties of
similar type and characteristics in the same or in competing neighborhoods.
l, An estimate of the replacement cost of property in new condition is made in accordance with the instructions in
Section 13.
m. The derived capital value is compared with the estimates
of available market price and replacement cost of property
in new condition. This comparisonleads to the determination of the estimate of value. The latter figure is the
Valuator's final total valuation. The instructions covering the making of the comparison and the determination
of the final value estimate are given in paragraphs 1434 to
1439.
<,
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UNDERWRITING
MANUAL
1405-1408
n. Finally, the total amount of the estimate of value is distributed to the component parts of the property in accordance with the instructions in paragraphs 1440 to 1442, and
the results are entered on FHA Form No. 2015.
THE DETERMINATION OF DERIVED CAPITAL VALUE
I
1406. The estimate of derived capital value is found by
first determining the derived monthly value attributableto the property for the ensuing 12 months, multiplying this amount by a conversion factor, and then adding the value ascribed to excess land, if
any. The derived monthly value is determined from an analysis
of the rent obtainable from a typical tenant and an analysis of the
direct services the property is capable of rendering an owner
occupant during the ensuing 12 months. The validity of the method
depends, in part, upon the assumption that expense ratios are quite
similar for amenity income dwellings of the same type, in the same
general locality. The translation of derived monthly value to the
estimate of derived capital value by the use of conversion factors
reflectingthe probable certainty, quality, and duration of the returns
in future years, is in accord with general capitalization theory. It is
practical to the extent that data compilation is thorough, judgment is
used in the determination of derived monthly value, and consistency
. characterizesthe selectionof conversion factors.
1407. The use of estimates of gross returns as the basis
of valuation is justified because expense ratios in amenity income
dwelling properties of the same type, quality, and price group are.
relatively constant and variations are adequately allowed :for· in the
conversion factors. The only items of expense subject to wide
variations in these properties are the expenses for repairs, maintenance, replacements, and taxes. These expense items are factors
which affect the ratings ascribed to the Property and Location categories in the risk rating system. These ratings, in turn, are
used as criteria. in the selection of conversion factors. Therefore, the
use of estimates of gross returns is feasible in the process.
1408. Ratings and Economic Life. After the Valuator
has determined that the amenity comparison method applies to the
case, he proceeds with the first steps. The first three steps comprise
the determination of the Rating of Location, the Rating of Property, and the estimate of remaining economiclife. These steps are
included early in the process because they require the Valuator to
becomethoroughly familiar with the detailed characteristics of the
property and its environment. As finally used for valuation purposes, the two risk categories will have significance both because
•
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VALUATION
OF AMENITY
INCOME DWELLINGS
1408-1410
of the ratings ascribed to individual features 0£ the categories and
because of the total ratings of the categories as well.
1409. For purpose 0£ illustration the steps in the amenity
comparison method of valuation are shown by means 0£ an example.
The conclusions thus far reached may be listed as follows:
a. Total Rating of Location
b. "I'otal Rating, of Property
c. Remaining Economic Life of Building
)
'----------------
57
86
35 years
1410. Monthly Rental Value. Instructions regarding
the estimation of monthly rental values are given in Section 13. The
instructions deal with the making of rental value estimates in rental
markets in which the demand and supply factors are approximately
balanced and rental values reasonably stable. They also deal with
markets in which the demand factors substantially outweigh supply
factors, resulting in seriously unbalanced conditions, and excessive
and unstable rental values.· Under such circumstances the instability
dfthe rental value structure cannot be given effect satisfactorily in the
amenity comparison method of valuation except by use 0£ an estimated
monthly rental value which the Valuator determines to be a reasonably
stable one. He must, therefore, reach a conclusion as to the point to
which the temporarily inflated rental values are likely to decline when
forces which have produced the "inflated conditions have spent themselves. For example, assume that in a particular 'case the rental
actually obtainable for the ensuing 12 months is estimated at $70 per
month and this figure is found to be the rental value for that period,
that is, it is found to be in line with rentals asked and paid for residential accommodations of the type and quality under consideration.
However, the Valuator concludes that in a year or two the rental obtainable and rental value will probably drop to $60 per month. In
this case $60, rather than $70, isthe monthly rental value to be usedin
the amenity comparison method. Aside from this modification, the
Valuator proceeds in accordance with the procedure as described in
this Section. It might appear that some adjustment will be needed on
account of the use of a figure for monthly rental value lower than the
amount actually obtainable. However, no adjustment is needed.
This is true because the amount by which the currently existing
monthly rental value is excessive represents a premium which prospective tenants in the market are willing to or must pay in order to secure
residential accommodations of the type and quality desired by them
or available for their use. A purchaser for owner-occupancy could
avoid thenecessity of paying this premium. It would be manifestly
improper to use a currently existing excessive rental value in the
amenity comparison method and make an addition thereto of an
UNDERWRITING
MANUAL
1410-1412 (1)
amenity increment determined by using the temporarily high rental
value as a base. H this were done it would presume that the typical
purchaser for owner-occupancycould avail himself of both a rental
return as an owner-landlordduring the period of excessiverental value
levels and an amenity return as an owner-occupantat the same time.
Obviously this is both impossible and an illogical assumption. The
currently existing high rental value cannot be used becausethe amenity
comparison method postulates a typical purchaser for owner-occupancy. The point at which the prospectivelydeclining rental values
are likely to becomerelatively stable must, therefore, be used. It is
emphasized that the foregoing procedure is to be followed only in
instances where the Valuator is reasonably certain that there will be
an abrupt and unusual decline from rental value levels within a year
or two from the date of appraisal. Declineswhich rnay occur in more
distant years are taken into account directly when selection is made
of the conversionfactor applicable in any given case.
1411. In instanceswhere the Valuator is required to make
two estimates of monthly rental value covering different periods of
time in the future he records his conclusionsin this manner opposite
question (21) on FHA Form No. 2015:
($70)
(21) Monthly rental value,unfurnished-----------------------
•
$60
The example being used in this Section assumes that only one estimate of monthly rental value is required. The Valuator's conclusion
is expressedas follows:
a.
Monthly Rental Value---------------------------~-------
$40
1412 (1). Degree of Owner-Occupancy Appeal. The
Valuator next proceedswith step ( e) to ascertain the degree to which
the property exerts owner-occupancyappeal. He must study the
property and its environment so that he may reach a conclusion as
to the relative intensity of the desire for ownership and owneroccupancy of the subject property which would be aroused on the
part of a typical person or family which could afford to own the
property and which is in the market to purchase and occupy a home.
He must outline in his own mind the nature of the conditions with
reference to a property, neighborhood, and neighborhood inhabitants which would be most acceptable to such typical persons or
families. The immediate objective of this phase of the valuation
process must be uppermost in his mind. That is, he must constantly remember that this step' is the major one in estimating the
extent to which the services of the subject property may be more
valuable to a typical owner-occupantthan to a typical tenant-occupant, or the extent to which the returns a typical owner-occupant
·-
VALUATION
OF AMENITY
INCOME DWELLINGS
1412 (1)-1412 (2)
would receive may have a monthly value in excess of the monthly:
rental value. It is obvious that anything pertaining to the property or the immediate neighborhood which enhances the owneroccupancy appeal of the property will likewise enhance its appeal
for tenant-occupancy. While the prospective owner-occupant will
demand at least as much as a prospectivetenant-occupant,the former
will be more exacting in his requirements, more discriminating, and
more critical of the property and its surroundings. Therefore, in'
considering significant factors which determine the degree of owneroccupancyappeal, the Valuator must view them from the standpoint
of the highly critical and carefully discriminating attitude of a
prospective typical owner-occupant, rather than from that of the
relatively tolerant and superficial attitude of a typical tenantoccupant.
1412 (2). Shelter is a universal necessity and is obtained either by renting residential accommodationsor by purchasing
them. Nearly all individuals at some time or other have a desire to
own and occupy their own homes. The hopes and wishes from
which this desire emanates are fulfilled in varying degrees by home!
ownership and owner-occupancy. The extent to which they are satisfied in this way depends upon matters pertaining to the properties
purchased, to the neighborhoods in which they are located, and to
the characteristics of the people inhabitating these neighborhoods.
When the best possible conditions exist relating to a property, the
neighborhood,and the neighborhood'sinhabitants, fulfillment of these
hopes and wishes is possible to the greatest degree and the owneroccupancy appeal of the property will likewise be greatest. There
is no statistical or mathematical basis of measuring the degree of
owner-occupancy·appeal in any case; therefore, degrees of owneroccupancy appeal ascribed to properties are merely relative. However, the standard, in terms of which comparative degrees are expressed, embracesthe very best conditions which would have to exist
with reference to properties in various price groups, neighborhoods
for such properties, and inhabitants of such neighborhoods in order
to fulfill completelythe hopes and wishes which depend for realization on ownership combined with occupancy of a home. A property which exerts strong owner-occupancyappeal will arouse an
intense desire for both ownership and occupancy of it on the part
of a p~rson or family financially able to buy and maintain such a
property and in the market to purchase and occupy a home. This
desire would be aroused as the person or family would approach the
neighborhood,
It would be stimulated- upon approach to the property, and would attain to great intensity upon inspection of the
r
UNDERWRITING
MANUAL
1412 (2)-1412 (3)
property and the gaining of knowledge that the neighborhood inhabitants were consideredvery desirable from the standpoint of the
person or family inspecting the property. To the extent that characteristics of the approach to the neighborhood, the neighborhood
itself, the subject property, and the neighborhood inhabitants were
less favorably regarded, the intensity of the desire for ownership
combinedwith occupancy of the property would be restricted, and
owner-occupancy appeal would likewise grade downwards.
1412 (3). In determining the extent to which a property exerts owner-occupancy appeal, the Valuator may be guided, in
part, by the evidences indicated in recent sales. The fact that
buyers have been purchasing with occupancy in mind probably indicates a degree of owner-occupancy appeal. However, such indications can be used as evidence only by considering the actuating
motives of the buyers and numerous other significant factors. The
real test is: To what extent would the existing condition with reference to any significant factor under consideration meet the maximum requirements of an exacting and discriminating typical prospective owner-occupant? This calls for a contrasting of the maximum requirements pertaining to the condition from the point of
view of prospective typical owner-occupants with the requirements
of prospective tenant-occupants. The matters listed below are considered to be significant factors in estimating the degree of owneroccupancy appeal. The first four and the eighth items relate to
the neighborhoodand the others relate to the specific property being
appraised.
a. The appearance of the immediate neighborhoodand of the
approach to it as they affect or create owner-occupancy
appeal.
b. The life-stage of the immediate neighborhood. Residential
neighborhoods usually enhance in desirability if they build
up sufficiently fast. When building stops, they remain relatively stable for a period of time, and then decline. The
tendency is for owner-occupancyappeal to go up, level off,
)--·: · and then go down as the life-stage progresses. Evidences of
the life-stage,so far as owner-occupancyappeal is concerned,
may be found in the age of the neighborhood,though this
may not be of major importance; the proportions of owneroccupancy and tenant-occupancy; the percentage 0£ vacant
residential units in the neighborhood; the percentage of
vacant lots in the area and the rate of absorption of such lots
into use; the rate of increase or decrease in population inthe
neighborhood; and the general impression gained from an
,,
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VALUATION
OF AMENITY
INCOME DWELLINGS
1412 (3)~1413
inspection of the area to ascertain if evidences of obsolescence
are observable.
c. The degree· of prestige associated with the neighborhood as
a place for owner-occupancy in contrast with tenantoccupancy.
d, The degree of social and racial compatibility of the inhabitants of the neighborhood. The presence of socially or
racially inharmonious groups in a neighborhood tends to
lessen or destroy owner-occupancy appeal.
e. The extent to which the subject property in its external
9tt
aspects and interior finish and appointments are especially
ff~'
attractive to the eye and create a desire for ownership as
contrasted with tenancy.
f. The extent to which the functional quality of the property,
t /,.>.< as evidenced by the ratings of the "Function" features in
/..c
Rating of Property, would be satisfactory to a prospective
owner-occupant in contrast with a tenant-occupant.
g. The relative newness of the building improvements of the
subject property, considered from the standpoint as to how
this condition adds to the desire to own and occupy rather
than to merely occupy as a tenant.
h: The extent and effect of neighborhood detractions, that is,
of things or conditions not already mentioned which detract
:from appeal for owner-occupancy. A dilapidated or ugly
of obsolete building would lessen the owner-occupancyappeal
of adjoining and nearby properties. Traffic hazards, noise;
smoke, and obnoxious odors also are detractions.
i. The extent and effect on owner-occupancy appeal of any
inappropriateness of the subject property to its immediate
neighborhood.
The first seven matters listed may be considered positively, while the
last two require consideration as negative factors; that is, they operate
to reduce the degree of owner-occupancyappeal.
1413. The conclusion takes the form of a percentage
expression which represents the degree of appeal for owner-occupancy. If the conclusion is that the owner-occupancy app~al)s
negligible, then the amenity comparison method will not be applicable.. In such cases the capitalization method described in Section
15, Valuation of Rental Income Dwellings, should be used. It is
assumed for the purposes of the . example, that the Valµator has
reached a conclusion in this step as follows:
e. Owner-Occupancy AppeaL----------------,.------~-------~
65%
l
UNDERWRITING
MANUAL
1414-1417
1414. Monthly Amenity Increment. A residential
property which exerts owner-occupancyappeal will produce returns
or services to typical owner-occupantswhich are more valuable than
is indicated by the monthly rental value to typical tenants. For example, owner-occupantsof such properties obtain returns which include independencein use and control, satisfaction and pride from
the mere fact of ownership, and enhanced social status. Tenants
cannot realize these returns in the same degree, if at all. Therefore,
while the monthly rental value fully represents the value of the returns received by the tenant, the value of the returns realizable by a
typical owner-occupantis greater. The amount by which it is greater
is designated· herein as the monthly amenity increment. Amenity
increment percentages are utilized for the purpose of ascertaining
monthly amenity increments which in turn are used to determine the
value of the monthly returns to typical buyers desiring to become
owner-occupants.
1415. Amenity increment percentagesindicate the extent
to which the value of the monthly returns or services of a property
to a typical purchaser for owner-occupancyexceeds the monthly
rental value of the property to a typical tenant. The returns to the.
owner-occupantare not received in monetary form but rather in the
form of direct servicesand satisfactions. However, for the purposes
of valuation a monetary value must be ascribed to these returns.
This is accomplishedby multiplying the monthly rental value by the
appropriate amenity increment percentage and adding the amount
thus derived to the monthly rental value.
1416. Amenity increment percentages are ascertained by
studying cases in which valuations have already been established.
In this study the various conditions entering into the valuation and
justifying it must be known and available for analysis. The :factors
vary :for properties in different value groups and for properties
exerting various degrees of owner-occupancyappeal. Thus, within
any one value group, the higher amenity increment percentages are
found to relate to properties of higher owner-occupancy appeal.
With regard to properties in different value groups, the higher percentagesrelate to the properties in the higher value groups, assuming
equal degrees of owner-occupancyappeal. Amenity increment percentages are assembled in tabular form so that an appropriate incrementmay be readily selectedafter classification of a property into
the proper value group and after a conclusionhas been drawn as to
the owner-occupancyappeal percentage.
1417. Amenity increment percentages are used to estimate the monthly value, for the ensuing 12 months only, of the
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VALUATION
OF AMENITY
INCOME DWELLINGS
I
1417-1420
returns to typical owner-occupants. The certainty, constancy, and
duration of returns thereafter do not enter into the selection of
amenity increment percentages. These characteristics of the future
returns are given consideration at another point in the valuation
process. The value range and owner-occupancy appeal percentage
are the criteria which dictate selection of these increment percentages. In the example it is assumed that the amenity increment
percentage selectedby the Valuator is as :follows:
t.
Amenity increment percentage for value range $4,000 to
$6,000 and for owner-occupancy appeal 65%~------------ 10%
1418. Determinationof Derived Monthly Value. The
next step requires the Valuator to determine the derived monthly value
imputable to the property for valuation purposes. Like the estimate
of monthly rental value, the derived monthly value is for the period
embracing the ensuing 12 months.
1419. The derived monthly value represents the value
ascribed for the next 12 months to the servicesand satisfactions realizable by a typical purchaser of the property for owner-occupancy. It
is always in excessof the monthly rental value, although sometimes
the excessmay be small as in cases where relatively low owner-occupancy appeal percentages apply.
1420. The derived monthly value is ascertained by mul- ·
tiplying the monthly rental value by the applicable amenity increment
percentage,thus:
fl,
c
Determination of Derived Monthly Value:
Monthly Rental Value_____________________________
Amenity Increment Percentage_____________________
Monthly Amenity Increment_______________________
Derived Monthly Value ($40+$4)------------------
$40
X10%
$4
$44
If the amenity comparison method is used in appraising a small
multi-family property, the process is the same as in the case of a
single-family amenity income dwelling except that a slightly different treatment is prescribed in determining the derived monthly value.
The monthly rental values of the individual units are estimated as
in other cases. The owner-occupancy appeal percentage will be
lower than in the case of the single-family property, inasmuch as
the owner occupant must share the premises in certain respects with
tenant occupants and must also assume the burdens of operating a
rental business in connection with his own home accommodations.
The amenity increment percentage will be applied only to the rental
value of the unit likely to be occupied by a typical purchaser. After
this addition has been made, the derived monthly value is deter-
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UNDERWRITING
MANUAL
1420-1422
mined by obtaining the sum of the resulting figure and the monthly
rental value of the accommodationswhich would be rented. This
step in the process, in the case of a two-family amenity income
dwelling is illustrated as follows:
g. Determination of Derived Monthly Value:
Owner-Occupant's Unit:
Monthly Rental Value
$40. 00
Amenity Increment-10%_______________ 4. 00
Total-------------------------~------------$44.00
Tenant-Occupant's Unit:
Monthly Rental Value_________________________
40.00
Derived Monthly Value
$84.00
1421. Conversion Factors. There is a relationship between the level of the returns a property is capable of producing
and the value of the property. The ratio of the total amount of
the value to the monthly amount of the returns will be relatively
high or low depending upon the certainty, quality, and probable .
duration of the returns in the future. This ratio is described as
the conversion factor. The conversion factor in any given case is
equal to the value of the property divided by the derived monthly
value. Such a ratio may be used to determine a derived monthly
value figure when the value of the property is known, or to ascertain
an estimate 0£ value when the derived monthly value is known.
When a conversionfactor is used, it serves the same purposes as do
capitalization rates and remaining economiclife estimates in the capitalization method of valuation described in Section 15.
1422. Tables of conversion factors are established by
Chief Valuators to make certain that they conform to conditions in
local areas and in all types of markets. In setting up tables Chief
Valuators select a number of typical properties, the total valuations
and derived monthly values of which, have been previously established. A substantial number 0£ properties should be selected for
this purpose. The Chief Valuators ascertain then what conversion
:factorswill produce the individual derived monthly values previously
estimated :for each property. Thus, if the total valuation of a property is $5,000,and the derived monthly value is $45, the conversion
:factoris 111. A tabulation should be made so as to facilitate study
of the various casesin order to discover and analyze the causes for
differences in conversion :factors. The significance of remaining
economic life estimates, and of category and feature ratings of
Location and of Property should be analyzed in each case.
•
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~----~-~-------~~----.,....-....--
VALUATION OF AMENITY INCOME DWELLINGS
1423-1425 (2)
1423. Tabulations should be separately made according
to economicbackground areas, and should include properties characterized by upper and lower extremes and midway points as to
factors of major significance,such as remaining economiclife estimates, location ratings, and property ratings. Properties having
substantially similar characteristics are arranged in the tabulation
by separate groups, and a table of conversion factors is set up by
analysis of the various significant factors. Valuations on the indi-\,
vidual properties selected for the purpose are deemed correct when
the estimates of value are supported by market prices, the level of
which has developed during a period characterized by the absence
of extreme conditions of the real estate market. This is evidenced •·
when supply and demand are in close correspondence, when the
sales prices are in proper relation to the various group income levels
of purchasers, and when sales have been consummated on sound
financialbases. In using the tables, Valuators make adjustments and
interpolations as their judgment dictates. They are required, how-ever, to use the same conversion factor when identical conditions
apply to various cases and to use higher and lower :factorsin logical
relation to the differencesin conditions applying to different cases.
1424. High ratings of the features in the Property and
Location categories when combined with long remaining economic
life estimates indicate the applicability of high conversion factors.
Lower feature ratings combined with shorter economiclives require
the use of lower conversion factors. Intermediate combinations of
these elements, which reflect the quality and duration of future returns, indicate the application of intermediate conversion factors.
In the example it is assumed that the Valuator's decision is as
follows:
h . .ApplicableConversionFactor
103
1425 (1). Valuation of Land. The Valuator is next required·to reach a conclusionas to the value to be ascribed to all the
land which comprises an eligible area. This is accomplishedin accordance with instructions contained in Section 13. In determining
the extent of an eligible land area, the Valuator is guided by instructions in Section 5. In the example it is assumed that the
Valuator's conclusionis as follows:
i. Valuation of land------------------------------------
$650.00
1425 (2). If eligible excess land is found to exist, the
Valuator treats it in accordance with instructions which follow.
Excess land is defined as an area in excess of the area of a land
1
UNDERWRITING
MANUAL
1425 (2):,_;1427
unit which is typical in the immediate neighborhood, or an area in
excess of that which is adequate to suitably accommodatethe building improvementsin the case. If the excessland enhances the rental
value of the property, or the amenity increment percentage which
is applicable, or both, no special treatment is necessary. If the
eligible excessland does not enhance the rental value or the amenity
increment percentage, the Valuator estimates the value of the entire
eligible land area and ascribes a value to the excess land equal to
the difference between the valuation of the entire eligible area and
the valuation of an area typical in the immediate neighborhood, or
one which is adequate to suitably accommodatethe building improvements. In such cases, therefore, three land valuations are.neeessary, namely: (a) Valuation of the total eligible area; ( b) valuation of typical area or area suitable for building improvements;
(e) valuation of the remaining portion of the eligible area, that is,
the excess land. If it is assumed that excess land exists in the
example, the Valuator's conclusionsmight then be as follows:
i. Valuation of Land (i. e., the entire eligible area)
•
$1, 050. 00
Valuation of area suitable for building
improvements---------------------$650.00
Valuation of excess land________________ 400.00
1426. Determination of Derived Capital Value. The
Valuator next proceeds to the determination of the derived capital
value. This merely involves multiplication of the derived monthly
value by the applicable conversion factor and the addition to the
amount thus determined of the valuation, if any, ascribed to excess
]and. The process is illustrated in the following.
j. Determination of Derived Capital Value:
Derived Monthly Value____________________________ $44
.Applicable Conversion Factor---------------------- X103
Excess Land-none-------------------------------
$4,532
00
Derived Capital Value
$4, 532
••
THE ESTIMATE OF AVAILABLE MARKET PRICE
1427. After the Valuator has made the estimate of derived capital value he proceeds to make the estimate of available
market price. He assembles data on sales of similar improved
properties in the same locality or in competing localities and forms
a judgment with respect to the available market price of the subject
property.
I
VALUATION
OF AMENITY
INCOlVIE DWELLINGS
1428-1430
1428. Market price estimation requites the use of sales,
asking prices, and offers, for the purpose of eslimating prices obtainable for properties in the open market at the time, or within ai
reasonable period after the date of appraisal. This necessitatesmany
comparisons relating to the nature and mutability of the characteristics, environments, desirability, and utility of the properties under
appraisal, and of those of like properties involved in the sales and
listing transactions or negotiations. In making such comparisons,
consideration is given to the entire range of data useful in estimating
residential property values. Inasmuch as sales and asking prices
may be greater, or less, than acceptablevalue estimates, it is plain that
market price estimation merely produces a conclusion with respect to
the price obtainable, irrespective of whether this price is warranted.
Of course, if the sales and asking prices considered are fair, when
viewed from the standpoint of future benefits which are likely to accrue to an owner, then the final conclusionas to the market price obtainable for any property under appraisal will also be the final conclusion as to a reasonableestimateof the value of the property. Therefore,
after making the comparisons and analyses necessary in market price
estimation, the Valuator must realize that the resulting conclusioncannot be accepted as a reasonable value estimate unless results produced
by other estimates indicate that the market price obtainable represents
a price that is warranted. This is tantamount to indicating that the
estimate of available market price is not a method of valuation. The
final use of the estimate in the amenity comparison method is to
establish one of the approximate upper limits of possible valuation,
except as noted in paragraph 1438.
1429. There are several devices used by Valuators in
making comparisons between properties. One obvious device is to
make direct comparisons of properties by over-all judgments of
their relative values. Another is to assign a comparison percentage
to the various properties, basing the percentages on a figure of 100%
for the property under appraisal. A third device is to make the
comparisons in terms of lump sum differences in market price by
allowances for variations, such as sizes, accommodations, and
locations.
1430. When comparison percentages are used, the property being valued is assumed to have a market price status of 100%.
Comparison percentages are then ascribed to the other properties with
respect to which the Valuator has obtained sales data. These percentages must indicate his opinion as to the relative desirability and
worth of the properties, measured in terms of desirability and worth
of the property being appraised. Before ascribing percentages, he
L_
UNDERWRITING
MANUAL
1430-1431
should familiarize himself with all the characteristics, physical and
otherwise, of all the properties to be embraced in the comparisons.
Furthermore, he must consider the characteristics of the environments in which the several properties are located, the nature, prospects
and the probable effect of any changes which may occur. After making the comparisons,he ascribes percentages and applies them to the
purchase prices o:f the properties compared with the one under appraisal. He thereby obtains indications o:f the available market price
for the property which he is appraising. The illustration below indicates how the comparison computations are made:
k, Estimate of Available Market Price:
Sales
Prices
Properties Compared
A---------------------------------------------------B---------------------------------------------------c
D---------------------------------------------------E
---- - - --- -- --- ------- --- - - - - -----------------Estimate of Available Market Price
$5,000
_
4,250
4, 700
4,850
4,000
Comparison
Percentages
105%
90%
95%
95%
85%
Indicated
Available
Market
Price for
Property
Under
Appraisal
$4, 762
4, 722
4,947
5, 105
4, 706
$4, 850
The above method o:f computation enables the Valuator to visualize
easily the comparisons, and his judgment is partially guided by
"bracketing." The amount finally selected as the estimate o:f available market price is not determined by averaging the indicated
available market prices, because some of the sales used in the comparison may have been made under varying conditions such as all
cash, substantial cash or instalment payments, or :for motives which
may have affected the sales price.
1431. Some Valuators may find it easier to think in
terms of market price differentials. By "price differential" is meant
a lump sum addition or deduction :fromthe price paid, asked, or offered, in order to correct :for differenceso:f whatever nature between
the properties used :for comparison and the one under appraisal.
These differences may relate to number o:f rooms, number of baths,
basement area, quality of materials or workmanship, or livability.
For example, suppose that property "E" recently sold :for $4,000.
Suppose that the property to be appraised is apparently on a par
with "E", except that the one under appraisal has one more room.
Assume also that the Valuator is justified in concluding that the
extra room would enhance the ability to command a price in the market to the extent o:f $750. The price differential then would be
"plus $750." The indicated price obtainable :for the property to be
appraised would be $4,750. The illustration below shows how this
type o:f comparison is made:
•
•
j
VALUATION
OF AMENITY INCOME DWELLINGS
1431--1434
k: Estimate of .AvailableMarket Price:
Sales
Prices
Properties Compared
A-----------------------------------------------B-----------------------------------------------c
D-----------------------~-----------------------E------------------------------------------------
: __
Estimate of Available Market Price
Price
Differentials
$5, 000
4, 250
4, 700
4,850
4,000
Indicated
Available
Market
Price for
Property
Under
Appraisal
-$450
350
$4,550
4,600
5,100
5,200
4,750
+
+400
+350
+ 750
$4,850
1432. When the Valuator has made the estimate of available market price, he enters the result in the place provided for it
on FHA Form No. 2015,Report of Valuator.
THE ESTIMATE OF REPLACEMENT COST OF PROPERTY
1433. After the Valuator has completed the estimate of
available market price, he is "required to determine an estimate of
the replacementcost of property in new condition in accordancewith
the instructions in Section 13. In the example, the conclusionsare
as follows:
l, Replacement Cost of Property :
Main building
Garage----------------------------~-------Other improvements-------------~-----~----
$3, 900
_
400
Total Replacement Cost of Improvements
$4,300
Land valuation-----------------------------------650
Miscellaneous allowable costs
...:______________
150
Total Replacement Cost of Property
$5, 100
DETERMINATION OF ESTIMATE OF VALUE
1434. The determination of the total value estimate is,
in its simplest form, merely the acceptance of the particular one
which happens to be the lowest of the three estimates: If the estimate of derived capital value is less than either the estimate of
replacement cost of property or the estimate of available market
price, then it is accepted as the total valuation. If, however, the
estimate of derived capital value is not the lowest of the three estimates, it cannot be accepted as the final estimate of total value.
This is the practical application of the substitution theory described
in Section 13. The final estimate of value may not exceed the replacement cost of the property. Furthermore, except as noted in
paragraph 1438, it cannot exceed the price at which an equivalent
property is available to a purchaser, either by purchasing a lot and
building the structures or by purchase of a completed property. In
the example the following comparisonof the three estimates occurs:
UNDERWRITING MANUAL
1434-1438
m. Determination of Estimate of Value:
Estimate of Derived Capital Value--------.,-------Estimate of Replacement Cost of Property
Estimate of Available Market Price
Estimate of Value (lowest of the three)
$4,522
$5, 100
$4, 85()
$4,525
1435. Judgment Control of Results. All estimates of
value are reported in round numbers to the nearest $100,$50, or $25,
depending upon the general price range within which the estimate
lies. While the general rule which usually governs the setting of
the estimate of value is to adopt the lowest of the three estimates,
there are certain exceptions. Thus, when the differencebetweenthe
highest and lowest is less than 3% of the highest of the three, the
Valuator may report a valuation equal to any amount within the
limits of the three figures. Another exception is stated in paragraph 1438.
1436. In the case of new construction or properties in
early life, the three estimates are frequently reasonably closetogether;
In a runway market in which building costs, land prices, and real
estate sales prices are soaring far beyond levels which can be sustained for reasonably long periods they would not be close.
1437. In the case of existing properties in midlife or
new properties which are overimprovementsor underimprovements,
the three estimates are usually different by greater amounts. For
example, the estimate of derived capital value may be $3,900,and the
other two estimates may be $4,100and $4,600. In such a case the
derived capital value of $3,900is accepted.
1438. In some cases during recessions the estimate of
derived capital value may exceed the estimate of available market
price. For example, the estimate of available market price may be
$4,100, and the other two estimates may be $4,525and $4,610. The
general rule would require the Valuator to submit $4,100 as his
valuation. However, because the valuation is made for the purpose
of long-term mortgage financing, and because the prices which properties command in such depressed markets may be unduly low, the
Valuator is justified in giving consideration to the propriety of submitting a figure higher than the estimate of available market price.
In the case cited, he might very properly submit $4,300as his final
valuation, that is, the figure lying between the estimate of derived
capital value and the estimate of available market price. This line
of reasoning may be applied only during periods of recession. It
is always incorrect and is conduciveto overvaluation during periods
of reasonableor intense market activity or during short lived periods
of inactivity.
I
•
~
I
J
r
VALUATION OF AMENITY INCOME DWELLINGS
1439-1441
)
1439. In localities where operative-builderserect numerous homesfor sale on a volumeproduction basis, it frequently happens
that of the three estimates the cost estimate is highest, the derived
capital value estimate is intermediate, and the available market price
estimate is lowest. In such cases, the reasons for this relationship
may be as follows: the replacement cost estimate is based on the presumption of a single building operation such as described in Section
16, Methods of Dwelling Cost Estimation, whereas the actual cost to
the operative builder is substantially less. This permits the builder
to quote reduced prices to the buying public in order to stimulate.
demand, and accounts for the fact that the available market price is
the lowest of the three estimates. Where this condition exists, the
substitution theory applies with full force and the lowest of the
three estimates, namely the estimate of available market price, is the
accepted final valuation. If the three estimates are: derived capital
value, $5,100, replacement cost of property, $5,240,and available market price, $5,000,and if, in addition, the actual cost of replacement
of the property to the operative builder and land developer is only
$4,500, the Valuator uses the $5,000figure as his final valuation. The
$500 differenceis the profit of the operative builder and land developer.
DISTRIBUTION OF ESTIMATE OF VALUE
)
1440. After the Valuator has determined his final estimate of the total value of the property, he proceeds to make a
proper distribution of the total to the several component parts of
the property. This is done by ascribing to the land the land valuation secured in step i and distributing the remainder between the
main building and other improvements in approximate proportion
to the amounts of the several items as they appear in the estimate of
replacement cost of property. Computations may be rounded off
to the nearest $10 or $25, as judgment suggests. The results so
obtained are entered on FHA Form No. 2015.
1441. The distribution of estimate of value, in the case
of the example, appears as follows:
n. Distribution:
Replacement
Cost of
Property
Land
Main Building
Garage
Other Improvements
Miscellaneous Allowable Costs
Total
Distribution
of Estimate
of Value
_
_
_
_
_
$650
3, 900
$650
3,500
400
375
_
$5, 100
150
$4, 525
UNDERWRITING
MANUAL
1442-1444
1442. When the difference between the total valuation
and the land valuation is less than the cost 0£ replacement 0£ property minus the land valuation, the difference is the amount 0£ accrued
depreciation as a result of overimprovement, underimprovement, deterioration, or other causes.
COMPARATIVE VALUATIONS
1443. Valuations will customarily be made according to
the complete amenity comparison procedure described in foregoing
paragraphs, unless the capitalization method described in Section
15 applies. However, it is desirable to make direct comparisons between very similar properties which have recently been care£ully
appraised by the amenity comparison method, not only to save effort
and expense, but to make the valuation activities result in strictly
consistent conclusions. Such comparative valuations are therefore
prescribed as sound procedure when large numbers of directly comparable properties are £ound in the same immediate neighborhoods
and are made the basis 0£ large numbers 0£ applications £or mortgage insurance,
1444. l£ an operative builder or land developer is engaged in large operations, the valuations 0£ properties will be advantageously made by direct comparisons in many 0£ the cases a£ter
a satis£actory valuation has been made of one or more properties
in the building operation. The various elements which are standard
should be jointly considered for all properties simultaneously, if
possible. By comparison, the valuation of properties differing only
in minor details may be determined by making adjustments which
adequately compensate £or the differences. This should result in the
establishment of suitable tentative valuations before applications £or
commitments are formally received;
•
•
PART III
SECTION 15
VALUATION OF RENTAL INCOME DWELLINGS
CONTENTS
Valuation Process-----------------------------------------------EstiJnates of Gross Revenue--------------~-----------------------Determination of Rental Values
Total Rental Value of Space__________________________________
Miscellaneous Revenues
,
Occupancy Percentage
Calculation
of E1l'ective Gross Revenue________________________
EstiJnates of Operating Expenses
Renting and Administrative Expense
Regular Operating Expense___________________________________
Repairs, Maintenance,and Replacements
Taxes and llazard Insurance----------~---------------------EstiJnates of Net Earnings
Estimation of Value by Capitalization
Steps in Capitalization Process------------------------------Value Adjustments------------------------------------------Completionof Forms----------------------------------------Mathematics of Capitalization-----------------------------------Present Value of an Amount_________________________________
Present Value of a Declining Annuity
Perpetuities-------------------------------------------------Interest '!'ables----------------------------------------------Provision for Future Depreciation
Determination of Capitalization Rates
General Level of Capitalization Rates-----------------------Selection of Rates------------------------------------------Furnished Apartments'--------------------------------------------
Effective
February,
Paragraphs
1501-1502
1503-1511
1505-1506
1507
1508
1509_1510
Hi11
1512-11
1516--11
11
1520-U
1524--lt
152¬ >>-15
1532-15..v
1533-1536
1537-1538
1539
1540-1549
1542
1543-1544
1545-1546
1547
1548-1549
1550--1555
1550--1553
1554-1555
1556--1566
1938.
Federal Housing Administration.
---- ----.
--------
<
4
#.-&4
=~
PART III
SECTION 15
VALUATION OF RENTAL INCOME DWELLINGS
VALUATION PROCESS
(
1501. Multi-family dwelling properties and single family dwellings which, because of their· character or location, are
salable to investors ·interested only in monetary returns, are best
appraised by the capitalization method of valuation. This process
consistsof four major steps, as follows:
a. The making of estimates of the probable effective gross
revenues to be derived from rental operations under the
supervision of ordinary competentmanagement
b. The making of estimates of the probable expenses of operation, under the supervision of ordinary competent management which would have to be incurred in producing
the effectivegross revenues in the amounts estimated
c. The estimation of the net earning expectancy in both
quantitative and qualitative terms. The amount is determined by calculating differences between the estimates
of effective gross revenue and the estimates of expenses
of operation and taxes. The quality or character of the
net earning expectancy is determined by analyzing the
factors which indicate the certainty, stability, possible
and probable fluctuation, and duration of the earning
expectancy
d. The translation or conversionof net earning expectancy by
capitalization into an estimate of the value of the
property
1502. The capitalization process, herein prescribed, establishes the land valuation by comparison and assumes that the
building value is the remaining portion of the total valuation. In
other words, the value of the building is estimated by capitalizing
the portion of the net incomeremaining after deducting land returns.
The process of valuation in which the land valuation is determined
by capitalizing the land returns which remain after building returns
are deducted from the total net income, is not applicable to rental
-
UNDERWRITING
1
MANUAL
1502-1506
income dwellings of the type with which the Federal Housing Administration is concerned. It provides no control over the land
value estimate because the land value is ordinarily but a small
portion of the total valuation and slight variations in the earning
estimates produce great differencesin the estimate of land value.
ESTIMATES OF GROSS REVENUE
i
I
!
l
1503. Gross revenue at 100% occupancy is defined as the
estimated total income actually derived from operations derivable at
100% occupancybefore deductions for operating expenses,taxes, insurance,management,maintenance,and replacements. Effective gross
revenue is defined as the gross revenue actually anticipated. It is
distinguished from the gross revenue at 100% occupancy and is an
estimate of total collections. It equals the gross revenue at 100%
occupancyless allowancesfor expected vacancy and collection losses
and allowancesfor all other contingencieswhich reduce the amount
of revenue collections.
1504. Estimates of effective gross revenue are usually
made for yearly periods commencingwith the year following the
date of appraisal and running for as many years as the Valuator
can make plausible forecasts. Ordinarily, forecasts are made for
one, two, or three years only. This is accomplished for each year
by (a) ascribing rental values to all rental spaces in the property,
( b) adding them to secure the total rental value of space, ( c) adding
to the total the estimates of miscellaneousrevenue other than rents,
( d) determining the probable percentage of occupancy for the year,
and (e) calculating the estimated effective gross revenue. Each of
these steps is describedbelow.
1505. Determination of Rental Values. There are
usually ample evidences upon which to base estimates of current
rental value. Rental values must be ascribed to each individual
rental unit. This is necessary because very often the units in a
structure have different sizes, layouts, elevations, equipment, and
exposures and differ in appeal and desirability. Rentable units
occupied rent free shall be included at their rental values.
1506. Rental values are ascribed for each of the ensuing
years for which plausible estimates can be made. Ordinarily, this
will be for one year only, the ensuing 12 months, and will reflect
the current rental values of the units. The Valuator must reach a
decision as to whether these rental values are likely to increaseor decrease during the yearly periods following. If the information
gathered shows the probability or certainty of an increase or decline,
then the next step will be to estimate the rental values of the units
for each succeedingyear, during the years subsequentto the time of
•
•
VALUATION
OF RENTAL
INCOME DWELLINGS
1506-1509
appraisal, during which predictions can be made with reasonable
confidence. In this connection it is appropriate to point out that
very often new rental income dwellings experience marked decreases
in rental value after the first few years of their existence, after which
the downward trend is likely to continue at a much slower rate.
1507. Total Rental Value of Space. After ascribing
rental values to each rental unit for each early year, the results are
tabulated in the following manner:
1st Year
Monthly Rental Value
2nd Year
ApartIIlent A-2
A-1----------------------------------ApartIIlent
___________________________________
ApartIIlent B-l ___________________________________
Apartment B-2 ___________________________________
$62. 50
65.00
62. 50
67. 50
$62. 50
67. 50
62. 50
70. 00
Total Yearly Rental Value___________________
$257. 50
$3,090. 00
$262. 50
$3, 150.00
-
1508. Miscellaneous Revenues. In certain cases there
will be miscellaneous revenues in addition to revenues derived from
rents. These include items such as collections for gas, electricity,
equipment rentals, and garage rents, if not included as rental units.
These should be estimated on the basis of 100% occupancy and added
to the total rental value of space, as follows:
1st year
Total Yearly Rental Value___________________________
Extra Garage Spaces, 4 at $4.00 per month _____________
\
,I
Total Revenue at 100% Occupancy_____________
2nd year
$3,090
192
$3, 150
192
$3,282
$3, 342
In the typical properties with which the Federal Housing Administration deals, there are seldom miscellaneous revenues.
1509. Occupancy Percentage. "Occupancy" refers to
performance in relation to the securing of gross revenue. The estimate of gross revenue at 100% occupancy is taken as the standard,
and "occupancy" is expressed as the ratio between actual gross revenues or estimates of effective gross revenues and the standard. The
occupancy percentage is, therefore, an expression of revenue-producing efficiency. The word "occupancy" is frequently used to denote
the percentage of space occupied by tenants. As used in valuation,
however, the word refers to effective gross incomes, not space. It is
common practice to estimate the occupancy which will be equivalent
UNDERWRITING
MANUAL
1509-1510
to the average for the remaining economiclife after the initial years
for which specificoccupancy predictions are made. This average is
what is herein referred to as the "long-term average occupancy." It
is used to embraceall the years subsequentto the initial ones for which
specificestimates are made.
1510. The Valuator makes an estimate of the occupancy
percentage for each early year. In the case 0£ new construction he
presumes a long-term average occupancy to be reached in early
life, usually in the secondyear, sometimesin the third year following
completion 0£ construction. The occupancy during the first year
may be estimated at a lower percentage or at the maximum, depending upon the probable experience indicated by current and prospective conditions in the rental market. A prediction of future occupancy requires that a .study of pertinent data be made, embracing not
only the immediate neighborhood but of the entire economicbackground area as well. The Valuator assumes ordinary competent
management and considers the probability of attaining various occupancy percentages. The question of supply and demand is of
paramount importance in the prediction. The economicbackground
of the area, directions of city growth, space supply, rate of growth
of population, and probable future supply data, properly arranged
in time series, form the basis 0£ the prediction. With such information as to both probable supply and demand, it is possible to forecast occupancy year by year until the selected.standard of occupancy is reached. The factor relating to supply-demandrelationships
necessitates consideration of the rate at which additional units of a
competitive character may be constructed in the community, and of
the ability of the market to absorb these units into use. In no case
is it proper to omit a deduction for vacancy and collection loss, for
it is not sound procedure to assume that none will occur. In some
instances, however, the Valuator may be warranted in assuming no
losses on this account for a very short time subsequentto appraisal.
This would be true in caseswhere it was well established that a shortage of accommodationsexisted. In these instances,however,the provision :for vacancy and collection loss must be introduced into the
calculations after the expiration of a short period during which it is
certain no such allowanceneed be made. Vacancies,concessions,and
collectionlosses are generally computed as a percentage of the rental
value 0£ the property, although sometimesit is estimated by assuming that the vacancy and collectionloss allowancewill equal the rent
obtainable during a certain period such as a month per year. The
amount to be chosen should be the Valuator's best judgment as to
the most probable arithmetical average of yearly vacancy and collection losses. There are a number of factors which will influence and
•
VALUATION
OF RENTAL INCOME DWELLINGS
1510--1511
guide the Valuator's judgment such as the past actual experience of
the property; the past experience of like properties in the same or
similar locations; the desirability of the rental units under consideration; present and prospective relationships between the supply of
rental units of competitive character, and of the present and prospective demand for such units. The desirability of the rental units
under considerationobviouslyinvolves considerationof a great numben of related elements, including all those dealt with in making
feature ratings in the Property, Location, and Earning Expectancy
categories.
1511. Calculation of Effective Gross Revenue. After
arriving at plausible conclusionswith respect to the occupancy percentages during early years, they are used to determine the estimates
of effectivegross revenue. A typical calculation of this kind follows:
1st year
2nd year 3rd year
Total Revenue at 100% Occupancy____________ $3,282
$3,342
$3,342
Predicted Occupancies_______________________
70%
80%
90%
Effective Gross Revenue _______________$2,297
$2,674
$3,008
I
An estimate of the effective gross revenue differs from an estimate
of the gross revenue at 100% occupancy in that it contemplates an
expected reality. It represents the predicted actual collections. In
the example, the Valuator has used two sets of predicted rental
values. Usually one set at present market rates is used, inasmuch
as the direct forecasting of specificchanges in rates is difficult. On
the other hand, if space is now under lease at rates which differ
from market rental values, the two sets of rates would be used. It
is also permissible and desirable if there is a sound basis for expecting the rental values to change within one or two years. In the
example, the Valuator used three different occupancy predictions.
Two usually reflect reality more accurately. In any case of new or
old construction, however, the estimate placed in the right hand
column (90% in example) is the expectedperformance which should
characterize performance on the average throughout a number of
years in the remaining life of the property. The figure does not,
however, make any allowance for the general long time decline in
gross earning capacity which will result from future deterioration
and obsolescence. Allowance for this decline is provided for in the
adoption of an incomepremise applicable to the net returns attributable to the building improvements and is described in paragraph
1528.
UNDERWRITING
MANUAL
1512-1513
ESTIMATES OF OPERATING EXPENSES
1512• .As used here, "Operating Expenses" denotes all
actual outlays occasioned by the ownership and operation of the
property. In this sense, operating expenses do not include vacancy
allowances,collection losses, allowances for deterioration and obsolescence,or expenses connected with mortgage indebtedness. They
include the expenses incurred for heat, light, service, repair, and
maintenance of the premises. They include the expense for management. They embrace the premiums paid for fire and other hazard
insurance. They contain taxes and amounts paid on account of
special assessments. They also include amounts accumulated for the
purpose of actual physical replacementsof equipment and machinery.
In making estimates of operating expenses, Valuators must assume
ordinary competent management and must set the several estimates
at levels where they parallel and justify the rental rates, occupancy
estimates, and predictions of economiclife. .As a consequence,the
actual operations of determining the effectivegross revenues and the
estimated operating expenses are accomplished simultaneously by
the Valuator.
1513. In establishing estimates of operating expenses,
Valuators use three processesto securethe final estimate of total operating expenses. These three processesinclude the following:
a. Making careful estimates of the probable average yearly
amount of each detailed item. The first step is to make
certain that the list of items is complete and embraces
allowancesfor every type of actual expenditure for which
outlays will have to be made during the economiclife of
the building improvements. Then an estimate is made
of the amount of each item. The data are applied on a
per square foot, per cubic foot, per room, or per dwelling
unit basis, or on some other suitable basis. Some items
are examined on several of the possible bases before the
final estimate for the item is accepted, and greater weight
is given for the results secured from one basis than from
others, depending upon the appropriateness of the unit.
The last step is to add the several estimates to secure the
first estimate of the total operating expenses.
b, Determination of the second estimate of total operating
expensesby assuming such expensesto be a percentage of
the effectivegross revenue at maximum or average occupancy. This percentage is defined as the expense ratio
and is determined by examining data on the operations
of similar properties.
•
•
.J
VALUATION
OF RENTAL INCOME
DWELLINGS
1513-1516
a. Examination of the ratios of the four major classes of ex-
penses,mentionedbelow,to the estimate of total operating
expenses found by the first and second processes above,
and the making of adjustments to determine the third
estimate of total operating expenses.
1514. The Valuator then studies the three estimates he
has made and arrives at his final conclusion with respect to total
operating expenses. For illustration, the first process, the totaling
of estimates of all the individual items, produces a figure of $1,528.
The second process, the application of a typical expense ratio, say
45%, to the estimated effective gross revenue, say $3,008, produces.
a figure for total expenses of $1,354. The third process makes it
appear that all major classes of expenses are in logical relation,
except that the allowancefor heating appears high. Then, the Valuator restudies the heating item. H it is presumed that he finds it
$100 higher than he can now justify, he will probably establish his
final estimate of total operating expenses at $1,400. H, in any case,
the three processes give substantially like results, he accepts the
result as an acceptable estimate. H the processes give dissimilar
results, he studies the three detailed analyses until he can either
(a) explain the differences,or ( b) properly correct the results until
they are in alignment. In the first case, the first process will usually
be accepted as the final estimate. In the second case, adjustments
are made in the directions indicated by the reexamination.
1515. The four major classes of expense, used in the
third process above, are (a) renting and administrative expense,
( b) regular operating expense, ( c) repair, maintenance,and replacements, and ( d) taxes and hazard insurance. These are used as
major headings in the following paragraphs. Under each of these
headings are listed the detailed items of expense on which the first
process above is based.
1516. Renting and AdministrativeExpense. The detailed items included may embracemost of the following:
a. Advertising
b. Commissions
c. Alterations for tenants
d. Office salaries
e. Office expenses
f. Legal and auditing expenses
g. Telephone
h. Expense of collections
i. Management
j. Miscellaneous
UNDERWRITING
MANUAL
1517-1519
1517. Small rental income dwellings are usually managed by their owners. Frequently, they reside in the property and
personally manage it. No payments are made for wages or salaries
for managerial services. Notwithstanding this fact, it is usually
necessary to make a charge against income for the expense of management. The item is calculated on the basis of the usual expense
of employing services of property management concerns. This
charge is made even if there is no actual outlay of money, because
the valuation is for the purpose of determining the value of mortgage security. Payment for management services will fall on the
new owner after acquisition. The fact that the property offers the
present owner a combination of amenity returns, money returns,
and an opportunity to earn additional income motivates prospective
owners to buy. These motives and their effect upon valuation are
recognizedin the selectionof suitable capitalization rates.
1518. In some cases, the estimate of Renting and Administrative Expense does not include some of the above enumerated
items such as advertising, commissions,office salaries, office expenses,
and legal and auditing expenses. In these instances, a single charge
is made under the heading of Management. Care should be exercised,
however, to make certain that items not readily apparent are not
omitted. Advertising includes newspaper advertising, circulars,
signs, donations made for advertising purposes and similar items.
Commissionsinclude all payments actually to be made and commissionspaid to tenants in the form of concessions. Under the item,
alterations for tenants, the charge should be the average amount expected yearly for this purpose. Alterations for tenants do not include.
papering, painting, decorating, resurfacing floors, and routine maintenance. They include only the cost of changes such as moving partitions, changing cabinets, and similar items. Services rendered to
tenants personally by the owners should be taken into account in
order to determine a correct estimate of expenses.
1519. Regular Operating Expense. The detailed items
included usually embrace most of the following:
a. Heating and ventilating expense
b, Janitor expense
o. Lighting expense
a. Refrigerating expense
e. Water expense
f. Gas
g. Garbage and rubbish removal
h: Protection
•
•
~
j
VALUATION
OF RENTAL
INCOME DWELLINGS
1519-1520
i. Grounds expense
j. Cleaning
k. Exterminating
t. Miscellaneous
The determination of expenses grouped under this heading can be
accomplishedeasily by referring to the expenditures for such items
in other properties of the same type as the building being appraised.
When data on these items are taken from the actual expense experience in a sufficientnumber of properties, the Valuator resolves the
various items into costs per unit. Costs are frequently expressed in
units such as cubic feet, square feet, apartments and rooms. He then
selects unit costs for the subject property by ascertaining the most
frequent unit costs found in the data relating to properties most
like the one being appraised. The amounts selected as final are not
necessarily the average of all the amounts within the group of properties compared. The expense for heating and ventilating and the
wages of workmen employed to operate the equipment are included
under the heading of heating and ventilating expense. The item,
janitor expense, should include not only wages and the expense for
janitor supplies, but the rental value of any rooms occupied rent free
by him, which could otherwisebe rented. Lighting expense includes
the cost of electricity, light bulbs, other electric supplies, fuses, and
similar items. ·wheneverpossible,the expense for electricity, gas, or
other medium used for refrigeration should be set up separately, together with minor supplies used in refrigerator upkeep. If water
and gas are supplied by the management, the respective expenses
should be shown. In handling these data on the regular operating
expense items, the expense units applied are based on areas, cubical
contents, revenue, or other suitable bases. Thus, fuel may be based
on cubical contents, lighting on areas, refrigerating, water, and gas
on rentable units, and other items, such as exterminating, on number
of rooms.
1520. Repairs, Maintenance, and Replacements. The
detailed items included embrace most of the following:
a. Repairs to structure
b, Repairs to equipment and fixtures
c. Painting
d. Decorating
e. Structural replacements
f. Equipment replacements
g. Miscellaneous
..
UNDERWRITING
MANUAL
1520-1523
Allowancesfor repairs, maintenance, and replacements should be included in amounts equivalent to the probable average yearly expenses
for these items. Except insofar as it may indicate that the average
is likely to be high or low or usual, the present physical condition
of the building is not a factor. Neither is the fact that a buliding is
new and will not have burdensome maintenance and replacement
expenditures for a considerable period. These allowances must be
sufficientlylarge to be adequate to cover the average expensethroughout the remaining economic life of the building. For example,
limited amounts must be spent each year for maintenance and repair
items o:f more or less minor character. The exterior walls o:f :frame
structures must be maintained by painting them every two, three,
or more years. Many types of roof covering must be replaced once
or more during the useful life of the structures. Certain items of
mechanical and plumbing equipment must be periodically replaced.
1521. The expense data on most properties exhibit wide
fluctuations from year to year in the actual expenditures made for
maintenance and replacements. For this reason the actual figures
for any particular year cannot be used in the estimation of future
expenses. The experience in a number of years of operation, however, may be illuminating. For illustration, it may indicate the presence of structural deficienciesthat can be corrected, or the probability of relatively high maintenance costs in the future.
1522. The allowance for maintenance should represent
the probable future average expense per year of maintaining the
property in such physical condition as will sustain its attractiveness
to tenants and prevent occurrence of physical deterioration at an
excessiverate. Relatively small items of expense which occur :frequently are considered as maintenance. Examples are painting,
decorating, minor repairs to mechanical and electrical equipment,
plastering repairs, and pointing of masonry.
1523. Generally,items having fairly long spans of useful
life but less than the estimated economic life of building improvements and involving a substantial monetary outlay are considered as
replacements. Examples of such items are roof covering, heating
plant, plumbing fixtures, and electrical refrigerators and cooking
stoves when classed as realty. Determination of the expense item to
to used for replacements is accomplishedin five steps as follows:
(a) An estimate is made of the replacement cost of each
replaceableitem.
(b) An estimate is made of the probable total span of useful
life of the item.
I
•
I
J
VALUATION
OF RENTAL INCOME DWELLINGS
1523
( c) Determination· is made of the number of times the item
will probably have to be replaced during the remaining
economiclife of building improvements by dividing the
estimated remaining economic life of the building improvements by the estimated total span of useful life
of the item. If the result is a whole number, the number of times replacement must be provided for is one
less than this number. If the result contains a fraction,
then only the fraction is deducted to obtain the number of complete replacements. These deductions are
made because replacement is not necessary at the end of
economiclife of building improvements.
( d) The amount of expenseto be charged on account of each
replacement item is determined by multiplying the result found in (a) by the result found in (c) and dividing by the estimated remaining economiclife of building improvements.
( e) The total expense item on account of replacements is
determined by adding the result found in ( d) for each
item.
The basis used in making the calculations relates to an item of the
same quality as the one to be replaced. .An example assuming a
probable remaining economic life of building improvements illustrating the method of estimating allowances for maintenance and
replacementsfollows:
Maintenance Items
Exterior Painting:
Estimated cost $220. Required every
4 years. Averageexpense per year., , $55
Interior Decorating:
Estimated cost 16 rooms at $12 per
room $192. Required every 3 years.
Averageexpense per year___________ $64
MiscellaneousRepairs and Minor Plumbing system $30, heating system
Repairs:
$30, roof repair $20, refrigerator repairs $20, cooking stove repairs $10,
miscellaneous$24. Average expense
per year
$134
Replacement Items
Roof Covering:
Floor Covering:
Estimated cost of replacement, $250.
Estimated total span of useful life,
15 years. Number of times replacement required (35+15=2.33) 2. Average expenseper year($250X2+35)_ $14
Linoleum in the kitchens and bath
rooms. Cost of replacement, $150.
Estimated total span of useful life,
8 years. Number of times replacement required (35+8=4.38)
4.
Average expense per year ($150X4
+35)
$17
UNDERWRITING
MANUAL
1523-1524
Replacement Items
Window Shades:
Electrical Refrigeration:
Heating System:
Plumbing Equipment:
Electrical CookingStoves:
Special Electrical Equipment:
*
Estimated cost of replacement, 60 @
$1.00=$60. Estimated total span of
useful life, 5 years. Number of
times replacement required (35+5= 7
- 1=6) 6. Average expense per
year ($60X 6+35)
-~__
_ __ $10
Estimated cost of replacement, $360.
Estimated total span of useful life,
10 years. Number of times replacement required (35+10=3.50) 3. Average expense per year ($360X3+35) $31
Estimated cost of replacement, $800.
Estimated total span of useful life,
20 years. Number of times replacement required (35+20= 1.75) 1. Average expense per year($800X 1+35) _ $23
Estimated cost of replacement, $600.
Estimated total span of useful life, 25
years. Number of times replacement
required (35+25= 1.40) 1. Average
expense per year ($600X1+35)_____ $17
Estimated cost of replacement, $400.
Estimated total span of useful life, 15
years. Number of times replacement
required (35+15=2.33) 2. Average
expense per year ($400X2+35)
$23
Ventilating or exhaust fans $120. Estimated total span of useful life, 10
years. Number of times replacement
required (35+ 10=3.50) 3. Average
expense per year ($120X 3+35) =$10.
Oilburner$180. Estimated total span
of useful life, 8 years. Number of
times replacement required (35+8=
4.38) 4. Average expense per year
($180X4+35) =$21------ ---------$31
Total Yearly Expense for Repairs,
Maintenance,and Replacementa, $419
1524. Taxes and Hazard Insurance. Taxes and insurance are ordinarily referred to as fixed charges, because frequently
the amounts are comparativelyconstant. As a rule, the allowancefor
taxes is equivalent to the taxes for the latest period. If it is possible to forecast with certainty an impending change in taxes, the
expenseitem may be different from the amount actually devied upon
the property for the last period. The amount should include all
taxes on the property and recurring assessments,if any. A breakdown of the item should be made. Special assessmentsare not to be
included as the existence of a special assessment lien is accounted for in
t
•
VALUATION
OF RENTAL
INCOME DWELLINGS
!
1524-1528
a lump sum adjustment as directed in Section 13. In new construction cases,taxes include the estimated tax on the completedimproved
property.
1525. The allowance for insurance is the average annual
cost of such types of insurance protection as are customarily carried
in the locality where the property is situated, and for such total
coverage as is customary, appropriate, and adequate. If, in a given
case, it is concluded that the maximum recoverable loss from destruction by fire is $12,000,the item for fire insurance should be for the
average annual cost of $12,000coverage. If liability, windstorm, or
other hazard insurance is customarily carried by property owners
in the locality, then the premium expense for such insurance is used.
If the yearly cost is cheaper when policies are bought for a period
of years in advance, usually three or five, the item should be based
upon the lower average yearly expense. It is important to determine
that the amount recorded is the figure applicable to one year and
not the total amount which would be needed to cover the entire term
of the policy.
ESTIMATES OF NET EARNINGS
1526. The estimate of net earnings during early years
is, of course, determined directly by deducting the estimated total
expenses of operation from the estimate of effective gross revenue.
A typical tabulation of the results appears below:
1st year
Effective Gross Revenue _____________________
Estimated Total Expenses _____ ~-------------Estimated Net Earnings---------------
2nd year 3rd year
$2,297
1,400
$2,674
1,400
$3,008
1,400
$897
$1,274
$1,608
1527. Not only the probable amount of the net earning
expectancy, but its qualitative characteristics must be determined.
This is accomplishedby analyzing the factors which indicate the certainty, stability, possible and probable fluctuation, and duration of
the net income. This analysis is made by examining factors such as
those listed as features in the risk rating category, Rating of Earning
Expectancy. In fact, the Valuator should, at this stage of his work,
actually complete the Rating of Earning Expectancy.
·
1528. The estimate of net earnings is not complete until
it has been made to embrace the entire remaining economiclife of the
building improvements. The specific predictions made for the en.suing 12 months, and sometimesfor one or two additional years, are
1
r
UNDERWRITING MANUAL
1528
presumed to be within the estimating powers of the competent
Valuator, at least within the limits of plausible prediction. Beyond
this, however,recourse is made to more general forecasting and the
predicted probable net earnings are based on several assumptions,
as follows:
a. That the net earnings produced by the property will decline, on the average, during the life of the buildings.
This is equivalent to assuming that the property will
gradually deteriorate and obsolescein spite of periodic
repairs and betterments.
b. That the decline in net earnings will result finally in a low
earning capacity which will not justify purchase of the
property at a price in excessof the value of the site. This
is equivalent to assuming that the building improvements
have a finite or limited economiclife. An actual estimate
of the remaining economiclife is made in accordancewith
the instructions in Section 13, Methods of Dwelling
Valuation.
a. That the net earnings are divisibleinto two portions : (a) the
return on land which is assumedto continue, without substantial increase or decline, beyond the end of economic
life of the buildings and indefinitely into the future, and
(b) the return on the building improvements which is
assumedto decrease gradually until it is nil at the end of
their economiclife.
d. That the downward trending earnings attributable to the
building improvements will follow a plausible premise.
In the prescribed procedure the building returns are assumed to decline in accordancewith the following mathe. mati cal premise:'
That the building returns will be collected as annual installments
of net income at the end of each year, continuing for the economic
life of the building; that the annual installments will approach
zero in the last year of economic life and will terminate with
that year's installment; that the successiveinstallments of building returns, after the first year of maximum or long-term average occupancy, will gradually decline, the annual amounts being
proportional to the correspondingyearly values of a level annuity
at 10% for a term equal to the ·remaining economiclife of the
building.
This premise does not ignore the fact that wide fluctuations in net
earnings are to be expected. It is simply a standardized assumption
representing a plausible equivalent of future conditions which are
t
•
,. - ·-··----
....-............. "".P.!"'llllllZP---·•:.-.. 1•1.11114!1(11"1.. Jilll!l!llt•.•--•t•Z...............
.
VALUATION OF RENTAL INCOME DWELLINGS
1528-1530
unpredictable in detail. As such, the premise presumes a future
decline which takes account of the future accrual of deterioration and
obsolescence.
1529. In the valuation of rental income dwellings, the
Valuator's quantitative estimates and assumptions with respect to net
earnings include:
a. Actual estimates of the net earnings for the ensuing twelve
months or for several years
b, An estimate of the remaining economiclife of the building
improvements
c. An estimate of the returns on the land. This estimate is
determined by multiplying an estimate of the value of the
land by the selectedland capitalization rate.
1530. With these three sets of estimates made, the quantitative estimate of net income is complete and ready for use in connection with the final process of capitalization to estimate the value
of the property. If the estimates of net earnings in early years are
as stated in Paragraph 1526, if the estimate of economiclife of the
building is forty years, and if the returns attributable to the land are
estimated to be equivalent to $150per year, then the future net earnings of the entire property are assumed, for purposes of valuation, to
be equivalent to the amounts in the following tabulation, although
they undoubtedly will fluctuate from year to year. It is not necessary
to convert these estimates into the following form which is here
presented solelyto indicate, in figures,what the estimates and assumptions mean.
Year
1 ____________
2 ____________
3 ____________
4 ____________
5 ____________
6 ____________
7 ____________
8------"----9 ____________
10 ____________
11 ____________
12 ____________
13
~------14 ____
____________
15 ____________
Net Income
Year
$897
1,274
1,608
1,604
1,600
1,595
1,589
1,584
1,577
1,570
1,562
1,554
1,544
1,534
1,522
16 ____________
17 ____________
18 ____________
19 ____________
20 ____________
21 ____________
22 ____________
23 ____________
24 ____________
25 ____________
26 ____________
27 ____________
28 ____________
29 ____________
30 ____________
Net Income
1, 510
1,496
1,481
1, 464
1,446
1,425
1,403
1,379
1,352
1,322
1,289
1,254
1,214
1, 171
1, 123
Year
31 ____________
32 ____________
33 ____________
34 ____________
35 ____________
36 ____________
37 ____________
38 ____________
39 ____________
40 ____________
41 _________ . ___
42 ____________
43 ____________
Yearly thereafter __ ------
Net Income
1,070
1, 013
949
879
802
718
625
523
410
286
150
150
150
150
}
t
UNDERWRITING
MANUAL
1531~1533
1531. The following diagram illustrates the net earning
expectancy used in the above example:
t)
TOTAL NE.T EARNINGS, IST, 2ND (. 3RD VE.AR5,SPECIFIC E.$TIMATES
[:-::::), BUILDING. RE.TUR.NS, lR.D TO 40TH VE.ARS, BASE.D ON INCOME. D! s.9.5.•.o.c 1.6a.oc1
A.::J.
________ [,~~---·---'- ...9.7. •.5.( ...6.7.5.( .. fi~.5!
.. :m. •.O.( ..• 70 •.Q( •••65• .0J
·---/}·::!
______ _!!.::?
•.. Ti!.• 5.(
']2..,j_( .• .6.7.5l
----------·------·-
·-.------- ···-----· ·--------·
s.2.75
Ueed.,. ., ...
W.75 ... s.:?..55 ..•.
ffTeDH
u-...,.a....,___
_
-----------------------Tolallleveoaeat 100% ()oeupan<)'•• •.:lJ.QQ_ 133.0.0... s.3.0.(<0_
95_% •• -90% .... 90. %
Preditted Oceupuele&..__
Elr..,ive Oro.. Re•"'"'------···----··
...... 13.'L
Mant!;gement .•••.•.•.. ----································
h!iscellaneous ••••••.•.-·-·············•······"'··- .. ·-··•
Total Renting and Administr'ative Expense, $..•... 13.'Z
s.'U35 .. s.:9.'.10... s275.G..
.
···········--··--
··-·-···-·--·-$ .•.•.•
42.7. ..•• -.
Repairs, M.rlintens.nf;f;, and Replacements:
Repairs to structure • .--····--·-··········-··$... :.... ..35..
_
Repairs ii> equipm~nt a.nd 1\xtures --··-·--·-•••••••••el..
_
Painti_ng expense... •-········-·-·-···----·•••.•.•• .5.Q·-·····
Decorating e:!ipenae·-··-·················-·--·-········
~--·-··SQ
_
Bttuctural replacements ... ·-····--·····-·····-·····-·
~ .••.•.. 2.0. ..• _._
Equipment replaeementa................................
..:..•.•.. 1J...
_
Mi.acellaneoua
.
Toto.I Reps.ire, Mainkna.nce, a(d Replace·
meete
$ .•••••
..3.3.1
S..
4i\1' ....•.••
.
Taxes and Bua.rd Insurance:
Tuea.-----~----··········-'····--···-····················
i~:::~~=:~~~=:=:::~-:~~::::~:=:=:::::::::~: ::::::j~~:::::::
Total Taxes and Hamrd Insurance..•.•...•.•
$.•••••.
45_9- ....•...
Notel on revenue and expenee itema:
Units A-1 and B-1 on Mrtb side of building and get very little euaehfne ,
Units B-l and B-2 on upper noor.
Rental demandvery strong end decline in rental ve.l\le in third yeal' and in
occupancy rat~o in second year anticipated
due to expected rate of competitive
building.
Tenant. pay for light, cooking fuel, and power Co~ electric 1'.efrigerators.
2015a-Supplemtnlar1
_
P..egular Operating Expen~:
Heating and ventilating expense
·-·--··· $.••••• .Jl.O._, __
Janitor ••.....••• ·-···-·--············-·•·········-···-····9.Q
_
Lighting ex:pen&e----········---···········12... __
Refrigerating e11:pense..--·····--·-···········-······-······-·_______ .15_ _
Water•.•.•.•• ·-·····--···-··············~···-'···-,·····-~Gas ....••..••••.•••••••••••••••..•....••••••••••...••••••••..•
dfl.rbage and rubblsh remove! ••••.•••••••••....
_
Protection .•....•••• __ •••••••••••••••..•. _
.
Grounds e.z:pense...... ---····-···········.:..·-············
Cleaning expense..•••••• ---·-·····-····················
Exterminating expense••• H··-········---~---··-·····
MLBcellaneou~---····-···-··-······-···········-..-···--··
Tota.I Regular Operating Expense .•••..••.••••
-------------------8al>tota1o..
Advertising expe':lse----····---------·-··················
•-···-·····-·Commi6Sicns
.
Alterations for tenants
----------·
Office salaries.-.:
.
Office expense•••.•.••••••....•••••.••.•...•. ~-------·-···
Legal and auditing expense
--·-··-···
Telephone.•...•••..••. --··········--················· -··Expense pf collections .••••••••••.••••••••••..••..••.••••
Report of Valuator
I
VALUATION
OF RENTAL
INCOME DWELLINGS
1541
2015 a-SupplemeQlarJ' Report of Valu&lor
Total Renting and Admlniitrative Expense.-. S. •.lJ.7.- .. .l.0.%
Total Regulat Operating Expenaea...•••·-···-~··· •••
427--.Jl %
Total Repairs, Maintenance and Replacements.
•••33.'Z....
Total Tues and Hazard Insurance.................
• .. J..59.•.•••.3A. %
'J'olal Operatins
%
Ezpe.a.L-····-·············-··s.l3.{>/L.. 100%
Etreetlve GtoBI Revenue: 0 lat; 0 2d; [II 3d year.
(lnaert Bgure fOr laBt: year specifically eatima.ted)
Expense Ratio ..••.....•..... ---------·---··---·---··-----·----·klmatu
--~
$ .•
.2.754.•..•
H.iTURS
BEJBCT 1
11---------.11-"'~'-""!;'":"'~:"'·~~o1,.P"'!='n!."'~'"' .."'•"'1n:- ---12
8
'
IS RATING
3
f-r .J'L
~e~~:c!t~~e S~~~n15om- -- - - - ~ _!---1L._
~~~~~I~
11~_.,ee;o;'
';;:·ti:;;v•~C"io~n•C'
""i""i'Market
'o'<"i'cn=r
Reliability
of Rental
11~11o.:;~;o;:c::m~·,-y-of~E~.-p-.nee-P~ re- --11 _ _,,d•°"·ot,,,io:::•------I---
2
•
11
10
1
2 .. G .x.. iii_ _.a_
J t: D:-ii'"" __s_
.x_ -12_
1~ ', '. .~ ~
Rating of Property
RAting of L'lcation
_ Ex__E.ense Ratio
-------~9_, %
9
.-.-;;-i0-
'
8
:-15_
111
~
~·
TOTAL RATING OF EARNING EXPECTANCY
etNet Earnla111:
'"''"''
u,.,
12
80
8irnr
~:~::.:.:.~::::;;::::::::::.:::::::::::::::::::::::--·----- ..il~L::::::: ·:n:-..:..--:::::: ·:N~:::=
..l.725.
EoUmated net eamlngs. •• _ ••••••••••••••·--·················--------·---Ee&lataUon of Val•• br Capltallaatlon:
Vtluation or land by comparison---··-··-···--·-----s__A,_75fJ
Land caplt.al11ationrah ·----·-•H••·····-··-6. %
Eotlmated
yoadylandretumo.-------·····-····--··········----····Estimatedbuilding
returna.-·-···------·-····-----···-··-------··
_ . .l6l.Q____
.lJ94
·-·~
s . ..l.6.i
_
_
$••..l65
~==~
$•••l.65
..l.6.J..O..________ .l.445.----
.l.229 ..._. __
J..
==~::a!~i~d~:~·~;~~zat.io~-;~~-~;;~~~~}i~;::ra______________
_
._______ ·--~~
9.!.7J_ __
Valueol e.nriuity at beginning
of O ht; O 2d; O 3d year-··---···········-- S.J.:~:..
or $._!l,
or$~~
Table I factors at building capitalization rate·-·-------··------------·-····"'"··-... 92.6..____ ...
.85.'1.__
Present veiuee of building returnil------···-····---------------···-····--·-···-·-···········
$_14.9.l.•.:~-- S.l2Jit_~·-··-S•• :1l.1l4J __
Tots.I valUAtionof building improvementa ····-··-··-·····--·Sd..4.,D.72.. .• LEstimate ot Total Value by Capitalization_
··-···- $.l.6_,.822..... • ...,.
J!s..7._________ _ ..
Eetimate o! Total Replacement Cost of PropertY--··········---~--------~-···-···--·· S-~~A..6:~--Est.ime.teof Available Market Price---------------------··------·"········-··-··.··-···--····--$.l.7_,500... -
.•
ESTIMATE OF VALUE.-ln my opinion the value of the property described above, assuming the contemplated
Improvements or new construction described in exhibits, if any, accompanying FHA Form No. 2004a, or assuming
the rep&lraor alterations or additions, if any, listed under item (15) on FHA Form No. 2015 have been completed~is..__ $._,l.,P_,_eQQ __ ..
Distribution of value estimate: Land_·········-····-··-·· $ 2.,.75.0 .. @ $._ ••50
~;~-'J>er O lot, Mi rr. n., 0Jaq. ft.
Main Building__________ •• lJ..,.050.- •.••
0 ........ -..................
Other lmprovementa.__
Non,...;.It b not ~:v
• ..•.....750.
_
·····--2.50 ..... - •..•
'° traoscri5o estlmuWIIQ. thb report to Items~ to 28, Inclusive, ~d
to Estimate~
Valua appearl!lg oa FHA Form No. 2016..
REMARKS:
CERTIF!CATION.-1, the undersigned, have read section 512(a) of the National Rousing Act and do hereby e:ertlty that I have
caroelulJy i~ted
this propP.rty; that to the best of my knowledge and belief the statements made in this report are oorrect; that I have
no pereonal mtereat, present or prospective, in tht1 property, applicant, or proceeds of the mortgage; that in my opinion the decisions set
tortb'hereio are justified; and ihat I have never iaspected this property befo~
----····--··-·····cWh«i~Uidj;"WhOib)"-------·--
n
---~-~-!!~.rr .. J __i3J.ll
Rllau.8Jt8:
__
Ii Approved •• nhmitted.
O Apprond as modl8ed br me.
CERTIFICATION.-1, the und.ersigned, do hereby certify that
applicaDt, or proceed8 of the mortgage.
r have
DO
ODlsapproved.
personal internt. present or proapectivc. in the property
I
UNDERWRITING
MANUAL
1541-1543
stallments decline in accordancewith the Income Premise
described in Paragraph 1528. The building returns commencing with the year of maximum long-term average
occupancy and running to the end of the economic life of
the building are presumed to approximate,on the average,
such a declining annuity. The initial values of such annuities are ascertained by discounting them at compound
interest by the use of TableII, described below.
c. Perpetuities: A perpetuity is an income which is expected
to continue indefinitely into the future. In valuation,
land returns are assumed to be a series of equal yearly
net incomes, accruing at the end of each year, and continuing perpetually. In reality, land returns will increase
or decrease. The assumption of level returns is adopted
as the most plausible probable expectancy. Tables are not
required to determine the present values of perpetuities.
1542. Present Value of an Amount. The present value
of an amount due at some given future time may be considered as
being the sum which, if invested today at the selected interest rate,
will accumulate at compound interest to the amount at the future
date. The table giving the present values of 1 due at :future dates is
in the following form :
Years deferred
}
2
3
4
5
._
_
_
_
_
7%
8%
9%
0.
.
.
.
.
0.
.
.
.
.
0.917
. 842
. 772
. 708
. 650
935
873
816
763
713
926
857
794
735
681
To determine the present value of an item of income of $1,000due
two years from now, at 8%, the amount, $1,000,is multiplied by the
factor .857and the result is $857,
1543. Present Value of a Declining Annuity. The
present value of a declining annuity, of the type which follows the
Income Premise described in Paragraph 1528, may be considered as
the sum of the present values of all the installments of income of
which it is composed. Or it may be considered as the sum which, if
invested today at the selected rate, will accumulate in such amanner
that the income installments in the series may be paid when due, the
last installment exactly exhausting the remaining portion of the
investment and accumulation. The table giving the present values of
I
·~
I
VALUATION
OF RENTAL
INCOME DWELLINGS
1543-1544
declining annuities, commencingone year from now with an income
of 1, is in the following form:
Length of Annuity in years
!
_
2
_
3
_
5
10
48
_
_
_
49
_
50
_
7%
8%
0.
1.
1.
2.
0.
1.
1.
2.
94
39
84
72
4. 77
12. 91
12. 99
13. 06
93
38
81
66
4. 60
11. 58
11. 64
11. 69
9%
0.92
1. 36
1. 79
2. 61
4.
10.
10.
10.
44
47
52
56
To determine the present value, at 9%, of a declining annuity which
commencesone year from today with an income item of $1,000 and
runs for a period of 50 years, the first year's income,$1,000, is multiplied by the factor 10.56 and the result is $10,560. To determine the
present value, at 8%, of a declining annuity which commencesone
year from today with an incomeitem of $2,000 and runs for 10 years,
the first year's income is multiplied by 4.60 and the result is $9,200.
1544. In cases where the declining annuity commences
at a date later than one year from the present time, its present value
is less than the figure secured by the above process. In such instances, the initial value of the declining annuity is determined as
described in Paragraph 1543. Then the initial value is treated as a
single item of income due at the beginning of the first year of the
annuity and its present value is determined by the process described
in Paragraph 1542. For example, assume that the declining annuity commencesin the third year with a payment of $2,000 at the
end of that year and runs for 48 years. The initial value of the
annuity, at 8%, is 11.58 x $2,000, or $23,160. This is the value of
the annunity at the beginning of the first year of the annuity, that is,
the beginning of the third year. This date is two years from the
present time. Thus, for all practical purposes the $23,160 may be
considered as a single item of income due two years from now. The
present value of the deferred annuity is therefore determined by
multiplying $23,160 by .857, the factor at 8% giving the present value
of an amount of 1 deferred two years. The result is $19,848. These
calculations may be summarized as follows:
Building Return for 3rd year--------------------------------------$2, 000
Table II factor for present value of decliningannuity, at 8%, running
for 48 years----------------------------------------------------11.58
Initial Value of building returns of 3rd to 5oth year, both inclusive, as
of end of 2nd year, 11.58x $2,000---------------------------------$23,160
Table I factor for present value, at 8%, of 1 deferred two years_________ . 857
Present value of the deferred annuity, .857x $23,160--------~--------- $19, 848
L ..
UNDERWRITING
MANUAL
1545-1547
1545. Perpetuities. The present value 0£ a perpetuity,
such as land returns are assumed to be, may be considered as being
the sum which, if invested today at the selected interest rate, will
earn interest in such a manner that the income installments in the
series may be paid when due without impairment or increase 0£ the
principal amount. Tables are not used. The present value 0£ a perpetuity is found by dividing the amount 0£ the yearly incomeby the
capitalization rate. To determine the present value, at 6%, 0£ a
perpetuity 0£ $120 per year, in which the first $120 is due one year
from now, $120 is divided by .06 and the result is $2,000.
1546. Inasmuch as the valuation process prescribed for
rental income dwellings requires the establishment of land value by
a process of comparison rather than by capitalizing estimated land
returns, the foregoing operation, namely, the direct capitalization of
a perpetuity, is not used. Instead, the Valuator first determines the
land value, and then computesthe amount of yearly income attributable to the land, that is, what perpetuity is required to support the land
value. In other words, he starts with the $2,000valuation of the land
by comparison, and determines the land returns by multiplying the
$2,000by the land capitalization rate, 6%, and secures the figure of
$120per year. This is to determine what amount must be deducted
from the estimate of total net earnings to arrive at the amount of the
building returns. Having made the deduction,he is justified in using
the land valuation in the total valuation.
1547. Interest Tables. Tables of compound interest
functions are used for the above purposes. Table I gives the present
values of the amount 1 deferred for from 1 to 10 years, at various
rates :from7% to 12%. Table II gives the present values 0£ declining annuities which run from 10 to 60 years, at various rates from
7% to 12%.
I
•
$
VALUATION
OF RENTAL
.U.LMij:\!I
@JI.....
id!.$
INCOME DWELLINGS
1547
Table 1.-THE PRESENT VALUE OF ONE
Yrs.
__::__/ 7H%
_ -----------------------0.
2l ________________________
.
3 ________________________
.
.
4--------------------~--5 ________________________
.
6 ________________________
.
7 ________________________
.
8 ________________________
.
.
9----~------------------10
________________________
.
935
873
816
763
713
666
623
582
544
508
l~l
0.
..
.
. 749 .
.
. 697
~~
5'
.
.
.
.
.
648
603
561
522
485
.
.
.
.
.
9%
8H%
10%
926 0.922 0. 917 0. 909
. 850 . 842 . 827
857
. 783 . 772 . 751
794
. 722 . 708 . 683
735
. 650 . 621
681
. 665
630
584
540
500
463
.
.
.
.
.
613
565
521
480
442
.
.
.
.
.
596
547
502
460
422
.
.
.
.
.
565
513
467
424
386
12%
0.
.
.
.
.
89.3
797
712
636
567
.
.
.
.
.
507
452
404
361
322
~
•
UNDERWRITING
MANUAL
1547
Table 11.-THE PRESENT VALUES
Yrs.
1 __________________
2 __________________
3 __________________
4 __________________
5 __________________
6-----------------7---------------C-8-----------------9 __________________
1
o __________________
1 __________________
1 2 __________________
1 3 __________________
1 4 __________________
1 5 __________________
1
6 __________________
1 7 __________________
1 3__________________
1 9 __________________
1
2
Q __________________
1 __________________
2 2 __________________
2 3 __________________
24 __________________
2 5 __________________
2
6 __________________
2 7 __________________
28 __________________
2 9 __________________
2
3
o __________________
7%
OF DECLINING ANNUITIES
77~%
8%
--- ---
8.Yi%
9%
10%
12%
0.94
1. 39
1. 84
2.29
2. 72
0. 93
1. 38
1. 83
2. 27
2. 69
0. 93
1. 38
1. 81
2. 24
2.66
0. 92
1. 37
1. 80
2. 22
2. 64
0. 92
1. 36
1. 79
2. 20
2. 61
0. 91
1. 34
1. 96
2. 17
2.56
0. 89
1. 31
3. 15
3. 57
3. 98
4.38
4. 77
3. 11
3. 52
3. 92
4.31
4. 68
3.
3.
3.
4.
4.
07
47
86
24
60
3.
3.
3.
4.
4.
04
42
80
17
52
3. 00
3.38
3. 75
4. 10
4.44
2.
3.
3.
3.
4.
93
29
64
98
30
2. 80
3.13
3. 44
3. 74
5.
5.
5.
6.
6.
15
52
89
24
58
5.05
5. 41
5. 76
6. 10
6. 42
4.
5.
5.
5.
6.
96
30
63
96
27
4.
5.
5.
5.
6.
86
20
51
82
12
4. 77
5.09
5. 40
5. 69
5. 98
4.
4.
5.
5.
5.
60
90
18
45
71
4.
4.
4.
5.
5.
29
54
79
01
23
6.
7.
7.
7.
8.
92
24
55
85
15
6.
7.
7.
7.
7.
74
04
34
62
90
6. 57
6. 86
7. 14
7. 40
7.66
6.
6.
6.
7.
7.
40
68
94
20
44
6. 25
6. 51
6. 76
7.00
7. 22
5.
6.
6.
6.
6.
95
19
41
62
83
5.
5.
5.
5.
6.
43
62
80
97
13
8. 43
8. 70
8. 96
9. 22
9. 46
8.
8.
8.
8.
9.
16
42
66
90
12
7.91
8. 15
8. 37
8. 59
8. 80
7.67
7. 89
8. 10
8. 31
8. 50
7.
7.
7.
8.
8.
44
65
85
03
21
7.02
7. 20
7. 37
7. 54
7. 69
6. 28
6. 42
6. 56
6.68
6. 80
9. 70
9. 92
9.34
9. 55
9. 74
9. 93
9.00
9. 19
9. 37
9. 55
9. 71
8.
8.
9.
9.
9.
8.
8.
8.
8.
8.
38
55
70
84
98
7.84
7. 97
8. 10
8. 23
8. 34
6.91
7. 01
7. 10
7. 19
7. 28
10. 14
10. 35
10. 55
10. 11
68
86
03
18
34
1. 71
2.09
2. 45
.~. Q2
-·
tq
VALUATION
OF RENTAL
INCOME DWELLINGS
1547
Table II.-THE
PRESENT VALUES OF DECLINING ANNUITIES-Con.
Years
•
7%
772%
--31 __________________
32 __________________
33 __________________
34 __________________
____ "------------35
36 __________________
37 __________________
38 __________________
39 __________________
40 __________________
I
8%
872%
9%
10%
9. 11
9. 24
9.35
9. 46
9. 57
8.
8.
8.
8.
8.
12%
45
55
65
74
83
7.
7.
7.
7.
7;
35
43
49
56
61
67
76
84
93
00
8. 91
8. 98
9.05
9. 12
9. 18
7.
7.
7.
7.
7.
67
72
77
81
85
55
63
70
77
83
10.08
10. 14
10. 21
10. 27
10. 33
9. 24
9. 29
9.34
9. 39
9. 43
7.
7.
7.
7..
8.
98
92
95
98
01
10.
10.
11.
11.
11.
89
95
00
05
10
10.
10.
10.
10.
10.
38
43
47
52
56
9.
9.
9.
9.
9.
8. 0 4
8. 0 6
8.0 8
8. 21
8. 1 0
74
79
84
88
92
11.
11.
11.
11.
11.
14
19
22
26
29
10.
10.
10.
10.
10.
60
63
67
73
75
9. 64
9.66
9. 69
9. 71
9. 73
11. 96
11. 99
12. 03
12. 06
12.09
11.
11.
11.
11.
11.
33
36
38
41
43
10.
10.
10.
10.
10.
78
80
82
84
86
9.
9.
9.
9.
9.
10.
10.
11.
11.
11.
74
92
09
26
42
10.
10.
10.
10.
10.
30
45
61
76
90
9.
10.
10.
10.
10.
87
02
16
30
42
9.48
9. 61
9. 74
9. 96
9.98
11.
11.
11.
11.
12.
57
72
85
99
11
11. 04
11. 17
11..29
11. 41
.11. 52
10.
10.
10.
10.
10.
55
69
77
87
97
10.
10.
10.
10.
10.
09
19
29
38
47
9.
9.
9.
9.
10.
12.
12.
12.
12.
12;
23
34
45
55
71
11.
11.
11.
11.
11.
62
72
81
90
99
11.
11.
11.
11.
11.
06
15
23
31
38
10.
10.
10.
10.
10.
12.
12.
12.
12.
13.
74
83
91
99
06
12.
12.
12,
12.
12.
07
14
21
28
35
11.
11.
11.
11.
11.
45
52
58
64
69
13.
13.
13.
13.
13.
13
20
26
32
38
12.
12.
12.
12.
12.
41
46
52
56
61
11.
11.
11.
11.
11.
13.
13.
13.
13.
13.
43
48
53
58
62
12.
12.
12.
12.
12.
66
70
74
78
81
L>" ~
41------------~
42
__________________
43 __________________
44 __________________
45 __________________
46 __________________
47 _________ c ________
48 ___________
c ______
49 ___________ c ______
50 __________________
51-----------~---C-52 __________________
53 __________________
54 __________________
55 __________________
56 __________________
57 __________________
58 _____________
~---~9 __________________
60 ___________ c ______
I-
47
51
55
58
61
75
77
79
81
82
------
--------------.-------------~.- ... ------ - ... -·----- ...
-
UNDERWRITING
IU:ANUAL
1548-1549
1548. Provision for Future Depreciation. It is evident that whatever value is ascribed to the building improvements
must be considered as depreciable over the remaining economic life
of the building. The building returns must therefore provide not
only for the interest return on the value of the building, but also
for the return of the capital investment in building presumed to be
made by a purchaser who buys the property at a price equal to the
valuation. Future depreciation is not included in the estimates of
expense. Under the prescribed valuation procedure the value of the
building is set at the figure representing the capital investment on
which the predetermined building returns can pay interest at the
building rate and return the total investment in installments over
the economic life of the building.
1549. This result is obtained automaticallyby the use of·
the declining annuity process. The building returns, under the
Income Premise, are just sufficientto provide for the interest return
and for the return of the value of the building. This is illustrated by
the following tabulation in which the remaining economic life is 10
years. The predicted building returns at the end of the first year
are $1,500, the building capitalization rate is 81f2%.
End of Year
Valuation ______
Building
l ____________________
2 ____________________
3 ____________________
4 ____________________
5 ____________________
6 ____________________
7 ____________________
8 ____________________
9 ____________________
10 ____________________
Interest
at 8;1%
Building
Returns
Capital
Returned
-------------------------------$923. 70
$1,500.00
$576. 30
1, 404.
1, 302.
1, 189.
1, 060.
923.
775.
606.
422.
223.
39
55
44
60
36
45
88
16
22
497. 79
420. 72
345. 77
274.06
207. 20
146. 33
92. 85
49. 16
17. 46
906.60
881. 83
843. 67
786. 54
716. 16
629. 12
514. 03
373. 00
205. 76
I
Unreturned
Balance
$6, 780. 00
5,856.30
4,949. 70
4,067. 87
3, 224. 20
2, 437, 66
1, 721. 50
1,092.38
578.35
205. 35
------------
In the above calculations, the Valuator has estimated the building
returns in the first year to be $1500. Next he determines the valuation of the building by multiplying the $1500 by the Table II factor
for 8%%, 10 years. This factor is 4.52, and· the resulting valuation
is $6,780.00. Iri practical valuation he stops at this point. The above
tabulation is made only to demonstrate that the future building returns do provide for both the interest return and the completereturn
of the value ascribed to the building. The computation commences
by determining the interest return in the first year. In that year
there is $6,780.00 invested. It must earn 81/2%, or $576.30. The re-
•
VALUATION
OF RENTAL
INCOME DWELLINGS
1549-1551
mainder of the building return during the first year, $1500.00minus
$576.30, or $923.70,is available as a return of capital. It is therefore deducted from the original valuation of $6,780.00,leaving
$5,856.30invested during the secondyear. This amount must earn at
the rate of 81/2%, or $497.79,during the secondyear. Under the IncomePremise the building return in the second year is $1,404.39 and
there remains $906.60to reduce the outstanding amount of the investment. This operation continues through the years until, in the last
year, the final installment toward the reduction of investment is just
sufficientto retire the then remaining balance. During the 10 year
period the building returns have been just sufficientto pay an interest
return of 8%% per year on the principal amounts which remained
invested and, in addition, to return the entire initial investment, or
building valuation, in installments over the remaining economiclife:
of the building.
DETERMINATION OF CAPITALIZATION RATES
1550. General Level of Capitalization Rates. Capitalization rates are the percentages of return used to convert predetermined income expectanciesinto estimates of value. The determination of proper capitalization rates requires the utmost care and
is one of the most important steps in the capitalization process because of the great differencein result produced by seemingly slight
variation in the rate used. A proper capitalization rate is one which
is sufficientlyhigh to attract investment of capital and is appropriate to balance the advantages and hazards of the risk. The determination and selection of capitalization rates is based primarily on
probability. A high rate of capitalization is proper when uncertainty
characterizes the quality of predictions or when the hazards and
risks are great. Low rates apply where the probabilities indicate
relative certainty and safety. The definitenesswith which the characteristics of the earning expectanciescan be forecast is a factor in
the selection of proper capitalization rates. Thus, the reliability of
the data is, itself, a factor which greatly affects the rate.
1551. The rates of capitalization applicable to real estate
investments in rental income dwellings arise from the position of
real estate in general and rental income dwelling properties in particular in the general list of investments available to persons with
investment funds. The availability of different types of investments
to the particular group of purchasers interested in the type and size of
properties for which the capitalization rate is sought will necessarily
control the general level of correct applicable rates. It is not proper
to comparethe merits of investments not related by size, amount of
J
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L
UNDERWRITING
MANUAL
1551-1554
capital required, marketability, popularity, safety, and other characteristics. Inasmuch as the rate applicable to a given risk is a
market phenomenon, an analysis of the various hazards, as interpreted by average investors, is necessary. It is necessary to select
specifickinds of typical, staple, real estate investments to ascertain
the general level of applicable rates. A limited number of instances
of sales does not suffice to establish proper capitalization rates. The
proper level of rates is indicated only by the general average acceptable rate of return sought by a large number of investors.
1552. An individual capitalization rate should be considered to represent an average of a number of different degrees of investment risk. Thus, investment in the first earned portion of the net
income would be safer than in the last earned portion. Therefore,
markets demand higher .rates of return on investments in equities
than in mortgages. As a consequence,over-all rates of capitalization applicable to real estate valuation lie between acceptable rates
of return on mortgage investments and acceptable rates of return on
equity investments. Furthermore, the accepted rate of return on investments in land is lower than the acceptedrate of return on investments in buildings because the land returns are more certain and of
indefinite duration, i. e., perpetuities, whereas the returns imputable
to buildings are subject to uncertainty and to total disappearance; In
this sense it may be said that the land returns are consideredto be the
'first earned portion of the total net income. This is clearly seen in
cases involving . ground leases and leasehold valuations. Further
justification for ascribing lower capitalization rates to land than to
buildings is found in the recognition that land has, in general, greater
variety of possible uses and is, therefore, a safer investment, and may
have speculative potentialities as well.
1553. The current rate of return is defined -as the net
earnings in any year divided by the value of the property as of that
year. In rental incomedwelling properties, the over-all rate of return
is expected to lie between 8% and 15%. Usually, it is from 8% to
10% if no unusual conditions prevail. The land capitalization rate is
usually close to 6%; the building capitalization rate is usually 8%
to 9%. These specified rates of capitalization are averages which
have been applicable in most parts of the Unitel States for a number
of years and are here presented solely to describethe approximate inc
vestment position of this class of real estate and to provide Valuators
with a criterion for the selection of the general level of capitalization
rates applicable to valuation of rental income dwellings.
1554. Selection of Rates. The actual selection of the
land capitalization rate and the building capitalization rate consists
I
•
·----.-,
VALUATION OF RENTAL INCOME DWELLINGS
. 1553
of considering the factors in the particular case to determine modifications of the general criteria set up in the foregoing paragraph.
These factors embrace every element which increases or reduces the
uncertainty or risk which attaches to investment in the property as
compared with investment in the most typical classes of rental income
residential properties. The following list of factors suggests the
nature of the considerations required in the selection of rates:
a.. Regional modifications: The suggested basic rates of 6%
for land and 8% for building are subject to modification
to take regional differences into account. In general, the
more recently settled portions of the country, and the
more rapidly growing sections, require the use of higher
rates than in older and more stable regions, especially
when accompanied by excessive real estate speculation.
b, Modifications for Economic Background Areas: Location
of a property in a large population center usually justifies
the use of lower rates than may be properly applied in
less populous centers. Higher rates are applicable in areas
where wide variations in rental values and occupancies occur in different seasons of the year than in areas where
comparative stability exists through all seasons.
a. Quality Modifications : The suggested basic rates are also
subject to modification to take account of the differences
in the qualities of different kinds and grades of properties
and locations. Differences in structural quality, age, and
utility of buildings and differences in the advantages of
locations require modifications.
d, Modifications for Income Factors: Differences in the probable stability of future net incomes require modifications
of the basic rates suggested. High expense ratios indicate the desirability of higher capitalization rates and
low expense ratios permit lower rates. Poorer quality,
greater age, when combined with shorter economic life,
lack of adaptability to different uses, and poorer locations
require use of higher rates.
e. Modifications for Differences in the Reliability of Data :
Uncertainty in the making of forecasts, from any source,
requires the use of higher capitalization rates. Where
data, of suitable character to justify confidence in the predictions based on them are unavailable, the uncertainty
introduced is felt by the market as well as the Valuator
and higher rates are applicable.
·
UNDERWRITING
MANUAL
1555-1558
1555. The Chief Valuator should study the area under
his jurisdiction and determine the general level of rates applicable.
That is, he should-determine the regional modification of the basic
rates herein suggested. The other four types of modifications are
made, from case to case, by the Valuators and include the elements
which are reflected directly in the Rating of Earning Expectancy.
The Valuator should establish the Rating of Earning Expectancy
in accordance with the instructions given in Section 12 and use the
rating as a partial basis for the selection of land and building capitalization rates. If the Rating of Earning Expectancy is low,
capitalization rates should be higher than the modified basic rates
determined by the Chief Valuator. If the rating is high, capitalization rates should be lower than the modified basic rates. When the
Rating of Earning Expectancy is at an intermediate point, the modified basic rates will usually apply without further modification.
I
FURNISHED APARTMENTS
1556. In some localities it is customary to rent some
multi-family units on a furnished basis. In instances where this is
true, Valuators may find it necessary to adapt the procedure described in the preceding portion of this Section.
1557. Where it is common practice to rent apartment
units on a furnished basis, the Valuator may find it feasible to utilize
any o:f three basic assumptions,namely :
a. He may make his revenue and expense and capitalization
estimates on the usual basis of operation as an unfurnished property, as already describedin this Section. This
is to be done whenever it is possible to use this basis.
b, He may make the estimates on the basis of the rental obtainable by the owner from a lesseeof the entire property who
would furnish it and operate it as a furnished apartment
property. This is to be done, if possible, where the first.
basis cannot be used.
o. He may make the estimates on the basis of the rentals
obtainable for the apartment units after they have been
furnished properly, assuming management and operation
by a competent owner. This is to be done only when
neither the first nor the second basis can be utilized.
1558. If the basic assumption contemplates lesseeoperation of the property, the procedure is identical with that followed in
cases where the basic assumption is that the owner, or a manager
in his employ, operates the property. The revenue and expense
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VALUATION
OF RENTAL INCOME DWELLINGS
1558-1559
estimates will differ under the two assumptions. The occupancy
ratio will be higher on the basis of lessee operation, and the expense
estimate lower as there will be fewer items due to the fact the lessee
must pay most of the various expensesof operating and maintaining
the property. Conditions assumed in the hypothetical lease would
largely govern the estimate. The capitalization rates applicable in
case of lessee-operation should also be a little lower than in cases
where owner operation is the basic assumption.
1559. If the property is to be valued on the basis of
owner operation and as a furnished property, additional considerations enter into the Valuator's calculations. Revenue and expense
estimates are somewhat different. Certain items in the estimates
for unfurnished properties must be increased if the operation is
changed to a furnished basis. These would include taxes, insurance,
repairs, replacements, labor charges, management costs, and administrative expense. Some additional items would be introduced.
They are dealt with below. It must also be recognized that operation of the property is in the nature of a business enterprise in
which the owner-.oper3f r assumes an additional risk ov.er and abov.e
that which he would~~perience as an operator of an unfurnished
property or as a lessor to a lessee who would, assume the burdens
and expense of operation. The estimates of expense involved in
operation must provide for the following items in addition to those
already discussedin paragraphs in this Section:
a. An adequate return upon the value of the furnishings and
on the operating capital.
b, Recovery of the amount ascribed as value of the furnishings, to be effected out of yearly revenues and fully
accomplishedduring the estimated remaining useful life
of the furnishings.
From this it is apparent that the Valuator must take the following
steps:
a. Ascribe a value to the furnishings.
b. Estimate the probable total and probable remaining useful
life of the furnishings.
c. Estimate the annual amount required to keep the furnishings in good repair and to make necessary replacements,
d, Estimate the salvage value of the furnishings as of the end
of their useful life.
e. Determine the annual amount to be charged against income
in order to recover the value ascribed to the furnishings
during their estimated remaining useful life.
UNDERWRITING
MANUAL
1559-1561
f. Determine what is an adequate return upon the value of
the furnishings and operating capital in view of risk,
and managementburdens· assumedin the enterprise.
1560. Furniture Valuations, Usually, a value equal to
cost is ascribed to suitable furnishings which must be put into a
vacant apartment building in order to make it productive of revenue.
This is logical because the furnishings will not be installed unless
an adequate return on their cost can be obtained. If no such return
can be obtained, the furnishings can be withdrawn and placed in
service elsewhere. Furnishings already in use are valued by (1)
estimating the cost of new furnishings of the same kind and quality;
(2) estimating the probable total and probable remaining useful
life of the furnishings in use; (3) ascribing a value to the furnishings equal to the amount derived by multiplying the cost of new
furnishings of the same kind and quality by the ratio of probable
remaining to probable total useful life. For example, assume that
each of a number of different articles of furniture is ascribed a
total useful life of 10 years, that each of the articles will have a
remaining useful life of 7 years, that the total cost of new articles
of the- same kind and quality is $9,400. These assumptions indicate
that all the articles have been found upon inspectionto be in equally
good state of repair. The value ascribed to the entire group would
be calculated thus :
a. Cost of new furnishings of same kind and quality
b. Ratio of remaininguseful life to total useful life (7-+-10)------
I
$9,400
.7
c. Estimated value of furnisJlincs------------------------------ $6,580
It is to be noted that the value ascribed is a "value in use" and not
the amount obtainable in a sale of the furnishings as second hand
or used goods. In ascribing values, articles having the same estimated total and estimated remaining useful lives are treated in
groups and the results added to obtain a grand total for the furnishings involved.
1561. Useful Life Estimate. Estimates of the probable
total and probable remaining useful life of furnishings must be
based upon experience data relating to articles of the specifickind
and quality under appraisal. The character of the use which the
articles will probably experiencein the specificproperty where they
are installed also influencesthe estimates,as well as the actual physical condition of the articles. Relatively short total useful lives
characterize all furnishings used in rental properties because they
are generally subjected to rather severe wear. Obsolescencealso
plays an important part because furnishings must be in currently
favored styles if rentals are to be maintained at profitable levels.
•
VALUATION
OF RENTAL
INCOME DWELLINGS
1562-1564
1562.Furniture Repairs and Replacements. During
their useful life, furnishings must be kept in repair. Adequate
amounts to offset such costs must be provided in the expense estimates. Replacements must also be made of articles which get
broken or stolen and allowance must be made accordingly for these
contingencies.
1563.Reeovery of Furniture Investment. Furnishings
are wasting assets. Therefore, the investment in them or the value
ascribed to them must be recovered. This necessitatesan appropriate
charge against income. To determine the charge the Valuator takes
the following steps :
a. He estimates the amount probably receivable in a sale of
the furnishings at the end of their useful life in the
property under consideration. This is their salvage value
as of that time.
b. He deducts this salvage value from the value in use ascribed at the time of appraisal.
e. He divides the remainder thus obtained by the estimated
remaining useful life, thereby obtaining the annual
charge which must be made against income to enable
full recovery of the value ascribed at the time of
appraisal.
These steps are illustrated in the following:
Value in use of furnishings at date of appraisal.,
Estimated salvage value as of end of useful life
$6,580
$ 600
Remainder---------------------·------------------$5,980
Annual charge against income,assuming 7 years of remaining useful life ($5,980+-7)----------------------------$ 854
In making calculations, articles assigned the same remaining useful
lives are treated in groups and the results of the computations relating to each group are added together to get .the final figure.
Thus, there might be groups of items each having estimated remaining useful lives of 5, 6, 7, or more years and separate calculations
would be made for each group.
1564. Adequate Return on Value of Furnishings. The
furnishings represent most of the capital necessary to the establishment of the operating furnished apartment enterprise. The operator
of the enterprise must take the risk of having someof his furnishings
stolen or destroyed by irresponsible tenants from whom no recovery
or damages is feasible. He must deal with tenants whose tenure is
generally for only relatively short periods. He must assumethe risk
of rapid dissipation of his invested capital through the occurrence
of obsolescencethrough a change of public favor as to furniture
UNDERWRITING
MANUAL
1564-1566
styles, or the refurnishing with new articles of other apartment properties which competewith his enterprise. He must assume a burden
of management which is greater than in the case of operating on an
unfurnished basis, Furthermore, he must pay all expenses and
charges commonto the operation of an unfurnished property before
he can credit any returns to himself for his managerial services and
for his capital invested in :furnishings. Under this combination of
circumstances, it is plain that the rate of return on the value o:f or
investment in furnishings should be substantially higher than that
applicable to the real estate investment. A return of :from 9% to
12% is not unreasonable or unusual. The Valuator calculates the
return as follows:
Value ascribed to furnishings
Return on $6,580at 10% ($6580x.10)
$6, 580
_:_ __ $ 658
1565. Return on Operating Capital. Some capital may
have to be available in the form of cash at all times to enable continuous operation and meeting of current bills. Since this capital
is in the form of cash and can be easily conserved or withdrawn
from the enterprise, a relatively low rate of return is applicable, say
4% or 5%. Thus, if $2,000 of operating capital is necessary, the
charge against income at 5% would amount to $100. This deduction
from incomeis made only in those cases where the required operating
capital is substantial in amount.
1566. To illustrate the additional steps necessarilyintroduced when the valuation relates to a real estate property which
must be treated as an operating furnished apartment enterprise, the
:followingcalculations are shown :
Revenue at 100% occupancy
$22,150
Assumed long-term average occupancy_____________________
88%
Estimated effective gross revenue
$19,492
Estimated expense of operation:
Repairs, maintenance, and replacements of rurnlshings, $250
All other items of expense
9, 610
9,860
Estimated net earnings of operating furnished property______ $9,632
Capital charges on account of furnishings and operating capital :
Annual amortization charge to effect recovery of value
ascribed to furnishings during their remaining. useful
life ----------------------------------------------- $854
Annual return on value ascribed to furnishings at
10% ($6,580x .10)
658
Annual return on operating capital at 5% ($750x .05) _ 38
TotaL----------------------------------------------
$1,550
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VALUATION OF RENTAL INCOME DWELLINGS
1566
Esti!Ilated net earnings of real estate
Returns on land valuation at 6% ($15,000x .06)
_ $8,082
_
900
Returns of building i!Ilprovements------------------------ $7,l~
Valuation of building returns at 87\io/o, 40 year remaining
economiclife, as per income premise ($7,182x 10.47)
$75, 100
Land Valuation
$15,000
Estimate of value of real estate by capitalization
$90,100
The estimate of value by capitalization of the operating furnished
apartment house enterprise would be the sum of the values ascribed
to the real estate and the furnishings and the operating capital or
$97,526. The Valuator would report the value of the real estate, not
of the operating furnished apartment house enterprise.
'
PART IV
SECTION 16
METHODS OF DWELLING COST ESTIMATION
CONTENTS
Paragraphs
Purpose of Cost Estimation
1601-1602
Basis of the Cost Estimate
1603--1614
Items Included
1608-1609
Equipment and Accessories___________________________________ 1610
Items Subject to Rapid Deterioration and Obsolescence_________
1611
Items of Unreasonable or Excessive Cost______________________ 1612
New Materials and Methods af Construction
1613--1614
Prescribed Methods of Cost Estimation
1615--1619
Selection of Method
1615--1616
Steps in Integrated Square Foot Method
1617-1618
Steps in Inplace Unit Method________________________________ 1619
Components of the Building
1620-1621
Determination of Calculated Area
1622-1623
Measurement of Components------------------------------------1624
Determination of Square Foot Cost in the Integrated Square Foot
Method--------------------------------------------------------1625--1638
Classification of Buildings
1626--la"o
Selection of Basic Square Foot Cost__________________________ 1'
Materials and Size Adjustments
1630--11
Determination of Square Foot Cost in the Inplace Unit Method
1639-11
Determination of Final Square Foot Cost;
1642--11
Quality Adfustment.,
1643--11
Locality Adjustment----------------------------------------Determination of Total Replacement Cost.,
1646---11
1649-1650
Effective February 1938
Federal Housing Administration
PART IV
SECTION 16
METHODS OF DWELLING COST ESTIMATION
PURPOSE OF COST ESTIMATION
1601. The Valuator is required to make an estimate of
the total cost of replacement of property in accordance· with the instructions given in Section 13, Methods of Dwelling Valuation. This
estimate constitutes the approximate upper limit of possible valuation. The total cost of replacement of property is distinguished
from the estimate of the cost of replacement of building improvements. The former includes the latter. Therefore, the estimate of
the costs required to replace building improvements in new condition serves to control, in part, the estimate of value.
1602. This section and Section 17, Application of Cost
Estimation Methods, prescribe the methods to be employed in determining the estimate of cost required to replace building improvements. In these sections, the words "Cost Estimate" refer to the
estimate of Cost Required to Replace Building Improvements in New
Condition, not to the estimate of the total cost of replacement of
property.
BA8IS OF THE COST ESTIMATE
1603. Estimates of the cost required to replace building
improvements in new condition shall be made by either Architectural Inspectors or Valuators for use in connection with the valuation
of the real estate pledged as security for mortgages submitted for
insurance. Estimates of replacement cost shall be made on the basis
of fair costs which would have to be met by an individual lot owner
who would secure suitable drawings and specifications,obtain competitive bids, and contract with a responsible builder for the
construction of one dwelling only.
1604. The estimate shall be based upon replacement of
the physical improvementsin new condition. In a case where alterations or additions to the improvementsare to be made, the cost estimate shall be based on replacement of the improvements in new
condition as they would exist with the proposed alterations or additions incorporated. However, in the event the buildings include excessiveor wasteful use of materials or details, excessiveceiling heights
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UNDERWRITING
MANUAL
1604-1607
or room sizes, attention shall be called to this :fact under Estimate of
Cost Required to Replace Building Improvements in New Condition
on FHA Forms No. 2014or 2015.
1605. The required cost estimates differ in few particulars from those ordinarily made by contractors bidding for work.
The differencesresult solely from differences in the purposes for which
the estimates are made. Contractors' cost estimates are usually made
by determining the quantities of materials, equipment, labor, and
superintendencerequired, and then pricing these quantities at predetermined current prices modified for anticipated changes in conditions. The cost estimates made for the purposes of the Federal Housing Administration are similar in this respect, except that the proficiency of the contractor, subcontractors, and workmen is assumed to
be only ordinary and equivalent to the typical degree of competency
available in the community. Contractors ordinarily make allowances
:for such items as overhead, insurance, and profit. They consider
available supplies of material and labor as well as the location of the
project. The quantities are usually grouped by trades in the order
in which· the work will be done in constructing the building. The
cost estimate made for the Federal Housing Administration is similar
except that normal conditions are assumed to apply and the quantities are measured in combinationswhich permit a reasonably accurate
estimate to be made without particular regard to the sequence followed by . the various trades in the construction operation. Contractors take probable weather conditions into consideration in their
estimates. The Administration makes no particular modification of
estimates becauseof probable weather conditions.
1606. The items included in contractors' estimates di:ffer
somewhat from the items included in the Federal Housing Administration's estimates. Contractors' bids embrace only the cost of the
work the contractor proposes to undertake. His estimate represents
the amount which he is willing to accept in payment for the construction of the building at the time and place indicated, and under
the conditions specified. The amount which he is willing to accept
depends, in part, upon his eagerness to secure work. This amount
usually does not include architectural service and frequently does not
include walks and drives, special equipment, and various other items.
The cost estimate used by the Federal Housing Administration must
include those items necessary to complete the physical improvements
as indicated in paragraphs 1608 to 1612.
1607. The estimate is invariably predicated upon the
ability and experience of the estimator and is not entirely the result
of a mathematical computation. Cost estimates are usually. based
upon past building operations under conditions which may differ
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METHODS OF DWELLING
COST ESTIMATION
1607-1609
greatly from those under which the subject building will be constructed. It follows that the estimator must call upon his experience
in practical building operations to recognizethe probable variations
which will occur between one job and another.
1608. Items Included. The estimate shall include the
cost of all materials, labor, sub-contracts, builder's overhead and
profit, permits, inspection fees, and architectural serviceentering into
the cost of construction of the following:
a. Main building, including porches, built-in garages and
attached terraces supported on foundation walls
b, Garage, attached or detached, and other accessorybuildings
c. Walks, drives, and terraces not supported on foundation
walls
d. Private sewage disposal, water supply, and electric generating plants
The allowance for builder's overhead and profit is the customary
local and current charge for the type and class of building under
consideration. Suitable allowances shall be made for workmen's
compensation, social security, and liability insurance where these
items are a part of the cost of the building construction. The allowance for architectural service shall be calculated on the basis of the.
percentage customarily charged in the locality for this type of work
at the time the estimate is made. If the building is of the type for.
which plans are ordinarily purchased outright, no more than the
purchase price ordinarily charged for such plans shall be included.
1609. The estimate shall not include the following:
a. Savings due to quantity production of buildings or unusual
efficiencyof builder or workmen
b, Deductions for accrued deterioration, obsolescence, and
depreciation
c. Carrying charges during construction and cost of financing
d. Structures of .temporary character or structures not permanently affixedto the ground
e. Landscaping, including shrubs,trees, .grass,retaining walls,
and finish grading of site
f. Chattels, that is, equipment and accessorieswhich arc not,
legally; part of the realty
In i:iiterpreting the meaning of (1; above, when the main building is
one of a number of row houses separated only by pitfiy walls, the
proportionate cost attributable to the subject building' as a part of
an operation embracing several houses· is 'u.8ed as the 'basis of estimation. Items listed under e above, while:not:,'}ncluded inth~ Esti-:
j
UNDERWRITING
MANUAL
1609-1613
mated Replacement Cost of Building Improvements, are considered
in the Cost of Replacement of Property as described in Section 13.
1610. Equipment and Accessories. Some dwellings
contain great amounts of mechanical equipment and accessories
which are provided by the builder to create sales appeal. Determination as to whether certain equipment or accessoriesare chattels or
parts of the realty depends oh local custom and state laws. To
assist the Chief Architectural Supervisors who must make this decision, the Underwriting Division, "Washington,D. C., has supplied
Underwriting staffs with opinions :from the Legal Division concerning the items to be construed as parts of the realty or as chattels in
the di:ff erent jurisdictions.
1611. Items Subject to Rapid Deterioration and Obsolesenee, Certain items of equipment and accessoriesmay be subject to rapid deterioration and obsolescenceas a result of the wearing out of moving parts, changes in design, and anticipated reductions in initial and operating costs. Therefore, such items, although
included in the total estimate at full cost, are separately listed on
FHA Form No. 2014, to indicate to the Valuator that special treatment of the amounts may be necessary in establishing the estimate of
value. If possible,the probable rate of :future depreciation should be
indicated under "Remarks."
1612. Items of Unreasonable or Excessive Cost. Occasionally properties incorporating unusual :features,but of conventional construction, will be offered for consideration. These properties reflect the individual desires, hobbies, and idiosyncrasies of the
owner to such an extent that the living utility provided may not be
proportionate to the replacement cost. The estimated cost of these
features shall be included as individual items in the replacement cost
estimate and 'expressed as a separate lump-sum item and indicated
on FHA Form No. 2014 under the heading, Other Improvements.
Typical examples are as follows:
a. Objects of art and museum pieces incorporated in the building construction
b, Excessive development of service features in proportion to
habitable area of house
c. Excessive provision for hobbies, such as laboratories, conservatories, private art galleries, and swimming pools
d, Construction materials of unusual or unjustifiable permsnence and excessivecost, obviously inconsistent with the
size and character of the dwelling
1613. New Materials and Methods of Construction.
New materials and methods of construction which have not been generally used in dwellings may be subject to wide fluctuations in cost
I
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METHODS OF DWELLING
I
COST ESTIMATION
1613-1616
over comparatively short periods of time. To meet this conditionthe
cost of the subject building shall be estimated according to the drawings and specifications, except that conventional materials and
methods 0£ construction shall be assumed for the new materials and
methods of construction. The substituted conventional materials and
methods 0£ construction shall offer the same structural soundness,
relative resistance to fire, to use, and to the elements,the same insulation value, and maintenance costs as the units they replace. In the
event this substitution increases the thickness of the walls or partitions, the size 0£ the building shall be correspondingly increased so
that the house will contain the same finished area as the building it
replaces. This cost establishes the Maximum Allowable Estimate of
Cost Required to Replace Building Improvements in New Condition.
Where it is obvious that the cost of the actual, existing, or contemplated improvementswill exceedthis estimate, the cost of the actual
improvementsneed not be determined. The words "MaximumAllowable" are inserted before "Estimate of Cost Required
," on
J1"'HA Form No. 2014.
1614. Some new construction methods may permit economies which will result in contract prices lower than the Estimate
of Maximum Allowable Cost Required to Replace Building Improvements in New Condition as described above. In these cases the final
estimate shall be governed by the probable actual costs and not by
the cost of conventional types of construction of equivalent character.
PRESCRIBED METHODS OF COST ESTIMATION
1615. Selection of Method. The cost estimate shall be
obtained by one of the two prescribed methods. A majority of the
cases presented for consideration are handled by the Integrated
Square Foot Method. The remaining cases are handled by the Inplace Unit Method. The basis for selection of method is the complexity of the problem presented. Typical properties for which
suitable cost data have been compiled are estimated by the Integrated Square Foot Method. If this method cannot be applied
for any reason, recourse is had to the Inplace Unit Method.
1616. The prescribed Integrated Square Foot or Inplace
Unit methods are considered to be best adaptable for the purpose
of obtaining uniformity throughout all the Federal Housing Administration offices, and for statistical purposes. No methods except
the prescribed Integrated Square Foot andxInplace Unit Methods
shall be used without the written permission 0£ the Underwriting
Division, Washington, D. C. Such permission will be granted only
if circumstances and conditions of an unusual character indicate
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UNDERWRITING MANUAL
1616
STEPS IN COST ESTIMATION
INTEGRA~ED SQUARE FOOT
METHOD
INPLACE UNIT METHOD
~
DETERMINE WHICH
METHOD IS APPLICABLE
DETERMINE
CALCULATED AREA
, DETERMINE THE NUMBER OF INPLACE
UNITS IN EACH COMPONENT
SELECT APPLICABLE BASiC
SQUARE FOOT COST FROM
COST DATA HANDBOOK, PART l
a
SELECT APPLICABLE INPLACE
UNIT PRICES FROM COST
DATA HANDBOOK,PART 2
I
MULTIPLY THE SELECTED INPLACE
UNIT PRICES BY THE NUMBER OF
UNITS IN EACH COMPONENT TO D.
OBTAIN COST PER COMPONENT
ADD COSTS OF 27 COMPONENTS
TO OBTAIN TOTAL WITHOUT
OVERHEAD AND PROFIT
ADD AN ALLOWANCE FOR
OVERHEAD AND PROFIT
MAKE NECESSARY MATERIALS
ANO SIZE ADJUSTMENTS TO
OBTAIN SQUARE FOOT COST
E. MAKE NECESSARY
DIVIDE TOTAL OBTAINED IN F BY
CALCULATEO AREA TO OOTA\N
SQUARE FOOT COST
QUALITY
ADJUSTMENT H.
F. MAKE NECESSARY LOCALITY ADJUSTMENT
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TO OBTAIN SQUARE FOOT COST
•
G,
MULTIPLY FINAL SQUARE FOOT COST
BY CALCULATED AREA TO OBTAIN.
COST OF MAIN BUILDING
J.
H.
DETERMINE COST OF GARAGE
K.
I.
DETERMINE COST OF OTHER
IMPROVEMENTS
L,
J.
DETERMINE ALLOWANCE FOR
ARCHITECTURAL SERVICE
M.
K.
AQO MAIN BUILDING, GARAGE, OTHER
IMPROVEMENTS AND ARCHITECTURAL
SERVICE TO OBTAIN
TOTAL REPLACEMENT COST
N.
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METHODS OF DWELLING
COST ESTIMATION
1616-1617
the necessity or strong desirability of the use of a method other
than those prescribed.
1617. Steps in Integrated Square Foot Method. This
method of estimation proceeds in the order of the following listed
steps:
a. The calculated. area of the main building is determined in
accordance with the instructions in paragraphs 1622 to
1623
b, The building to be estimated is compared with the cl(Msification. of buudings and is identified according to classification criteria as falling in one of the established classifications. The classificationof buildings and the classification criteria are described in Paragraphs 1625 to 1628.
If the building fails to classify because no basic square.
foot costs have been supplied for the type, the Integrated
Square Foot Method is not used and the estimate is made
by the Inplace Unit Method. If it comesunder the established classifications,the Integrated Square Foot Method
is applied
c. The basic square foot cost applicable to the subject building
is selected from Part 1 of the Cost Data Handbook. Instructions covering the compilation of cost data and its
recordation in cost data handbooks are given in Section
19, Construction Cost Data. The method of selecting the
applicable Basic Square Foot Cost from the handbook is
described in paragraph 1629
d. The Basic Square Foot Cost is then adjusted, if necessary,
by making materials and size adjustments in accordance
with the instructions given in paragraphs 1630 to 1638.
These adjustments comprise additions to and deductions
from the Basic Square Foot Cost to take account of differences in materials, size, and shape of the subject building as compared with the basic specificationsused in the
Classificationof Buildings. After the Materials and Size
Adjustments, if necessary, have been made, the resulting
figure is the square foot cost
e, The Square Foot Cost is then modified to take account
of the differences in cost, due to the quality variations
between the subject building and the . basic specifications
which are . used in the Classification of Buildings. . This
process is called the quality adjustment, and is made by
applying a Quality Adjustment Percentage to the Square
Foot Cost
UNDERWRITING
MANUAL
1617-1618
f. The next step is to make a further modificationto take into
account the differences in cost of erecting buildings in
different localities. This processis called the locality adjustment and is accomplishedby applying a Locality Adjustment Percentage to the Square Foot Cost already
adjusted for quality.
g. After the Quality Adjustment and the Locality .Adjustment have been made, the resulting figure is the fonal
square foot cost applicable to the subject building. The
Final Square Foot Cost is multiplied by the number of
square feet in the Calculated .A.rea to secure the cost of
main. building
h. The cost of replacement of garage is then determined
i. The next step is to determine the cost of other improvements such as walks, driveways, accessorybuildings, and
items of special equipment not reflected in the Final
Square Foot Cost
j. The sum of the costs obtained in g, Ii, and i ordinarily
constitutes the basis on which architectural service, if
any, is computed. Therefore the next step is to determine the allowance for architectural service
k. The estimated costs of Main Building, Garage, Other Improvements, and Architectural Service are then totalled
to obtain the estimate of cost required to replace building
improvements in new condition. This figure is the total
cost estimate used for Federal Housing Administration
purposes, and correct entries are made on FHA. Form
No. 2014 or FHA. Form No. 2015
1618. In some cases involving existing construction, it
will be found that the replacement cost of building improvements
is considerably higher than that portion of the valuation ascribed
to the building improvements. This occurs most frequently in cases
involving building improvements, the value of which has been
greatly affectedby deterioration or obsolescence,or both. Wben such
cases are encountered,the Valuator will not be required to prepare
FHA Form No. 2052, Cost Estimate-Integrated Square Foot
Method, but may use the selectedbasic square foot cost as the Final
Square Foot Cost without adjustment or modification. When this
procedure is employed,the Valuator is required to make an appropriate statement on FHA. Form No. 2015, Report of Valuator,
explaining the absenceof FHA Form No. 2052.
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•
METHODS OF DWELLING
COST ESTIMATION
1619
1619. Steps in lnplace Unit Method. This method
proceeds in the order of the following listed steps:
a. The oaloulated;area of the main building is determined in
accordance with the instructions in paragraph 1622 to
1623
b. The number of inplace units in each component part of the
building is measured or estimated. Components are those
integral assembled parts of a building which are susceptible to separate examination with respect to costs, such as
excavation, exterior walls, or plumbing. An inplace unit
is used as a basis of measurement and refers to the completed and finished aspect of a component or element of
a component. As a consequence, many inplace units
embrace assemblies of diverse things
c. 1 nplace unit prices applicable to the components of the subject building are selected from Part 2 of the Cost Data
Handbook
d, The Jnplace Unit Prices are multiplied by the corresponding number of units of each component to obtain the costs
of the individual components.
e. The costs of components are added to obtain the total cost
of components, not including overhead or profit.
f. An allowance for overhead and profit is added to the above
estimate to obtain a total
g. This total obtained in f is then divided by the number of
square feet in the Calculated Area to obtain the square foot
cost
h. The Square Foot Cost is then modified to take account
of the differences in cost due to quality variations between the subject building and the quality assumed in
establishing the inplace unit prices. This process is called
the quality adjustment and is made by applying a Quality
Adjustment Percentage to the Square Foot Cost. Cost
Data Handbook, Part 1, is used
i. The next step is to make a further modification to. take into
account the differences in cost of erecting buildings in
different localities. This process is called the locality adjustment and is accomplished by applying a Locality
Adjustment Percentage to the Square- Foot Cost already
adjusted for quality. Cost Data Handbook, Part 1, is
used
j. After both the Quality Adjustment and Locality Adjust-.
ment have been made, . the resulting figure is the final,
square foot cost applicable to the subject building. The
UNDERWRITING
MANUAL
1619-1621
Final Square Foot Cost is multiplied by the number of
square feet in the Calculated Area to secure the cost of
main bidlding
k. The cost of replacement of garage is then determined
l. The next step is to determine the cost of other improvements, such as walks, driveways, accessorybuildings, and
items of special equipment not reflected in the Final
Square Foot Cost
m. The sum of the costs obtained in j, k, and l ordinarily
constitutes the basis on which architectural service,if any,
is computed. Therefore the next step isto determine the
allowance for architectural service
n. The estimated costs of Main Building, Garage, Other Improvements, and Architectural Service are then added to
secure the estimate of cost required to replace buildinq
improvements in new condition. This figure is the total
cost estimate used for Federal Housing Administration
purposes and correct entries are made on FHA Form
No. 2014
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COMPONENTS OF THE BUILDING
1620. Both the Integrated Square Foot Method and the
Inplace Unit Method of cost estimation consider a building to be
comprised of a number of component parts. Components are those
integral assembled parts of a building which are susceptible to
separate examination with respect to costs. These componentscomprise the parts of the building which are separately subject to variations in cost according to the character, sizes, and quality of
materials specified for a particular building.
1621. In cost estimation the components of a building
are used in accordance with the established grouping given below.
In order to secure uniformity and accuracy, the indentifying reference numbers set before the components of the building in this
paragraph shall be maintained throughout. the cost estimating procedure in all offices. As a further step toward uniformity, each
component shall include all incidental elements properly associated
with it, as indicated under each component. The 27 components
include all elements of cost of the building except certain items
which are. included separately in the estimate summary as described
in paragraphs 1649 and 1650. No deviation from this division of
the estimate, numbering of the componentsor inclusion of associated
elements is permitted, because uniformity-in procedure is essential
to accuracy and to the utilization of cost-data. The components,
each with its associatedelements,are as follows:
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METHODS OF DWELLING
COST ESTIMATION
1621
1. Excavation:
Basement
Trench walls
Pier
Grading of unexcavated portions under first floor construction
2. Foundations:
a. With Basement:
Wall footings, basement walls, including dampproofing
Basement floor
Basement stairs, windows, doors, columns or piers
including footings, girders, areas, tile drains, coal
bin partition and coal chute
b. Without Basement:
Wall footings, trench walls, curtain walls, piers
including footings, and girders
3. Chimney:
Single flue with required enclosing masonry and foundation
4. Fireplace:
Fireplace including complete foundation, masonry, flue,
hearth, lining, damper, facing, and mantel
5. Exterior Walls:
All items of construction and exterior finish of the exterior
walls including interior dampproofingor furring where
used, but not including plaster base or plaster or other
interior wall finish materials
6. Floor Framing:
Structural floor framing, but not including subflooring,
finish flooring, or plaster base and plaster or other
ceiling finish. Concrete slabs, self-supporting, supported on joist framing, or those laid on the ground
in structures without basements are included in this
component. Monolithic cement finish is considered
part of the slab
7. Subflooring:
Subflooring, but not including finish flooring. Sleepers
and floor fill over floor construction are· included in
this component
UNDERWRITING
MANUAL
1621
8. Finish Flooring:
Building paper, wood flooring, sanding, scraping, and
finishing
9. Partition Framing :
Structural framing including furring or nailing strips,
but not including plaster base and plaster or wall finish
materials
10. Ceiling Framing:
Structural ceiling framing including furring or nailing
strips, but not including plaster base and plaster or
other ceiling finish materials
11. Roof Framing:
Structural roof framing including roof sheathing or
shingle lath
12. Roofing:
Roof covering materials, together with felt, if any, including all flashings, valleys, hip and ridge coverings
13. Gutters and Downspouts:
Gutters and downspouts, including shoes, splash blocks,
dry wells, or connectionsto drains
14. Plaster Base and Plaster:
Lath and plaster, wallboard or other wall and ceiling
materials, but not including decorations or coverings
15. Decorating:
Finish or coverings applied to wall and ceiling surfaces,
but not including finish on doors, windows,trim, floors,
or cabinets
16. Interior Doors and Trim :
Interior doors including trim, hardware, and finish
Trim for cased openings including finish
Running trim, base, floor mould, and picture mould, including finish
Closet shelves and hook strips
17. Windows:
Frames, sash, glass, hardware, interior trim, and finish
18. Entrance and Exterior Detail:
Main entrance door with side and transom lights, and all
other exterior doors including glass, hardware and finish. All added exterior architectural treatment, includ-
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METHODS OF DWELLING
COST ESTIMATION
1621
ing additional entrance steps, exceptional chimney, halftimbering, unusual cornice and porch detail, louvers,
and shutters
19. Cabinets and Interior Detail:
Kitchen cabinets, medicine cabinets, bookcases, china
closets, wardrobes, and other special cabinet work, including glass, hardware, and finish
20. Stairs:
All stairs except basement or exterior stairs, including
balustrades and finish
21. Special Floors and Wainscot:
Special flooring and wainscoting such as used in kitchen,
bathrooms, and lavatories
22. Plumbing:
Plumbing fixtures complete with fittings, piping for
water, soil, waste and vent lines, gas piping, hot water
equipment, water softeners, sewer and water supply
connections up to public utilities or to private equipment; but not including private sewage disposal or
water supply plants
23. Heating:
Typical complete heating plant and appurtenances, but
not including unusual fuel burners or conditioning
equipment of the character referred to in paragraph
1611
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24. Electric Wiring:
Items such as service connection, wmng, outlets and
switches, but not including private electric generating
plant
25. Lighting Fixtures:
All lighting fixtures
26. Insulation:
Any insulation which is additional to sheathing or plaster
base
27. Miscellaneous:
Items not otherwise readily classified under other components, such as screens, storm-sash, caulking, weatherstripping, basement garage, finished rooms in basement, finished rooms in attic, termite shields, wood
preservation, and special basement waterproofing
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UNDERWRITING
MANUAL
1622-1623
DETERMINATION OF CALCULATED AREA
1622. Both the Integrated Square Foot Method and the
Inplace Unit Method 0£ cost estimation require the determination
of the Calculated Area 0£ the building. Calculated Area is the
number of square feet in a building measured in accordance with
a standard set of rules and used as a basis for comparing the costs
0£ constructing buildings. The prescribed rules for the determination of Calculated Area are as follows:
a. To be Included and Calculated in Full :
The square foot area of finishedfloors abovethe basement,
including bays, oriels, dormers, light shafts and stairwells, utility rooms, vestibules, enclosed porches, open
porches within the main wall line, and built-in garages.
In computing these areas, measurementsshall be taken
to the outside surfaces of exterior walls or partitions
enclosingthe areas and no deductionsshall be made £or
stair-wells or light shafts. In structures without basements, the area included is that above foundations.
b. To be Included and Calculated in Part:
1. Open porches outside of main wall line, at one-hal£0£
actual area
2. Attached masonry terraces supported on foundation
walls, at one-quarter of actual area
o. Not to be Included in Calculated Area:
1. Finished rooms in basement
2. Finished rooms in attic
3. Basement garages
4. Attached or detached garages
5. Masonry terraces without foundation walls
1623. While the five items listed above under c are
excluded from the calculated area, they are not omitted from the
cost estimate. The following definitions apply to the interpretation of the above rules:
a. Attached garage is one having one or more walls common
to the walls of the main dwelling, but without living
quarters above. However, where one story dwellings
predominate and the garage is of construction comparable in quality with the main house, and :formsan integral
part of the architectural design, the garage may be considered as "built-in"
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METHODS OF DWELLING
COST ESTIMATION
1623-1624
b. Built-in garage is one located above the basement level
within the main walls of a house, and which has living
quarters above, except as provided in a above
c. Basement garage is one located in a basement
MEASUREMENT OF COMPONENTS
1624. Quantity measurements in terms of Inplace Units
are taken from drawings or from the building itself, in the case of
existing construction. Overall outside dimensions are used to determine areas. In computing areas of walls, partitions, floors or
roofs, no deductions are made for openings occasioned by doors,
windows, cased and uncased openings, stair wells, shafts, louvers,
vents, or chimneys. The cost of quantities not deducted compensates for the cost of forming the openings. Likewise, the cost of
excess quantities, included by using outside dimensions for exterior
walls and by measuring partitions through intersections to outside
of exterior walls or intersecting partitions, compensates for the cost
of forming the corners and intersections. Excess quantity due to
measuring basement floor to outside of basement wall compensates
for the cost of excavation beyond walls, back-filling and· footing excavation. The cost of excess quantities, obtained by measuring halfstory ceilings to outside of enclosing partitions and partitions under
sloping portion of roof at full ceiling height, compensates for the
cost of. waste in cutting and the additional labor required in forming the intersections. Measurements are taken for each of the
components or elements as follows:
1. Excavation:
a. Basement: Measured in cubic yards, equals the product
of the area within outside surfaces of basement walls
and the average depth from natural grade to under·
side of basement floor.
b, Trench Wall: Measured in cubic yards, equals the
product of the wall thickness plus one foot and the
depth from grade to underside of. footing, by the
total of the exterior dimensions of the trench wall.
This element includes excavation for curtain walls
where they occur.
c. Pier: Measured in cubic yards, equals the total of the
products of each pier footing area and the depth
from grade to underside of footing.
d. Grading of Uneecaoated Portione : Measured jn cubic
. yards, equals the product of the unexcavated area and
the ~verage 'depth below natural grade.
1
UNDERWRITING
MANUAL
1624
2. Foundations:
a. Footings: Measured in lineal feet, equals the total of
the exterior dimensions of the walls or piers having
footings.
b, Basement Walls: Measured in square feet, equals the
area of the outside surface of the walls from the top
of the footings to the underside of first floor construction. This element includes bench walls but
does not include non-bearing partitions. Non-bearing partitions are included under ComponentNo. 27.
c. Trench Walls: Measured in square feet, equals the area
of the outside surface of the walls, from the top of
the footing to the underside of first floor construction.
This element includes curtain walls and piers where
they occur.
d. Basement Floor: Measured in square feet to the outside surfaces of basement walls.
e. Basement Essentials: Estimated as a lump sum amount
to include basement stair, basement sash and doors,
floor girders, lally columns or piers, coal bins or
similar items not otherwiselisted.
3. Chimney:
Measured in lineal feet from underside of footing to
top of chimney. No deduction is made for any portion commonto foundation or exterior walls.
4. Fireplace:
Estimated as a lump sum amount to include complete
foundation, masonry, flue, hearth, lining, damper,
:facing,and mantel.
5. Exterior Walls:
Measured in square feet, equals the area of the outside
surface of the walls, from underside of first floor
construction to the intersection with roof surfaces.
Walls o:f gables and dormers are included. Party
walls are measured in square feet, to include both
party walls and listed separately from the exposed
exterior walls. The unit cost for the party wall is
halved in estimating, so as to include only that cost
applicable to the subject structure.
6. Floor Framing:
Measured in square feet with dimensionstaken to outside
of exterior walls or to outside edges where walls do
not occur.
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PART IV
SECTION 16
METHODS OF DWELLING COST ESTIMATION
PURPOSE OF COST ESTIMATION
1601. The Valuator is required to make an estimate of
the total cost of replacement of property in accordance· with the instructions given in Section 13, Methods of Dwelling Valuation. This
estimate constitutes the approximate upper limit of possible valuation. The total cost of replacement of property is distinguished
from the estimate of the cost of replacement of building improvements. The former includes the latter. Therefore, the estimate of
the costs required to replace building improvements in new condition serves to control, in part, the estimate of value.
1602. This section and Section 17, Application of Cost
Estimation Methods, prescribe the methods to be employed in determining the estimate of cost required to replace building improvements. In these sections, the words "Cost Estimate" refer to the
estimate of Cost Required to Replace Building Improvements in New
Condition, not to the estimate of the total cost of replacement of
property.
BA8IS OF THE COST ESTIMATE
1603. Estimates of the cost required to replace building
improvements in new condition shall be made by either Architectural Inspectors or Valuators for use in connection with the valuation
of the real estate pledged as security for mortgages submitted for
insurance. Estimates of replacement cost shall be made on the basis
of fair costs which would have to be met by an individual lot owner
who would secure suitable drawings and specifications,obtain competitive bids, and contract with a responsible builder for the
construction of one dwelling only.
1604. The estimate shall be based upon replacement of
the physical improvementsin new condition. In a case where alterations or additions to the improvementsare to be made, the cost estimate shall be based on replacement of the improvements in new
condition as they would exist with the proposed alterations or additions incorporated. However, in the event the buildings include excessiveor wasteful use of materials or details, excessiveceiling heights
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UNDERWRITING
MANUAL
1604-1607
or room sizes, attention shall be called to this :fact under Estimate of
Cost Required to Replace Building Improvements in New Condition
on FHA Forms No. 2014or 2015.
1605. The required cost estimates differ in few particulars from those ordinarily made by contractors bidding for work.
The differencesresult solely from differences in the purposes for which
the estimates are made. Contractors' cost estimates are usually made
by determining the quantities of materials, equipment, labor, and
superintendencerequired, and then pricing these quantities at predetermined current prices modified for anticipated changes in conditions. The cost estimates made for the purposes of the Federal Housing Administration are similar in this respect, except that the proficiency of the contractor, subcontractors, and workmen is assumed to
be only ordinary and equivalent to the typical degree of competency
available in the community. Contractors ordinarily make allowances
:for such items as overhead, insurance, and profit. They consider
available supplies of material and labor as well as the location of the
project. The quantities are usually grouped by trades in the order
in which· the work will be done in constructing the building. The
cost estimate made for the Federal Housing Administration is similar
except that normal conditions are assumed to apply and the quantities are measured in combinationswhich permit a reasonably accurate
estimate to be made without particular regard to the sequence followed by . the various trades in the construction operation. Contractors take probable weather conditions into consideration in their
estimates. The Administration makes no particular modification of
estimates becauseof probable weather conditions.
1606. The items included in contractors' estimates di:ffer
somewhat from the items included in the Federal Housing Administration's estimates. Contractors' bids embrace only the cost of the
work the contractor proposes to undertake. His estimate represents
the amount which he is willing to accept in payment for the construction of the building at the time and place indicated, and under
the conditions specified. The amount which he is willing to accept
depends, in part, upon his eagerness to secure work. This amount
usually does not include architectural service and frequently does not
include walks and drives, special equipment, and various other items.
The cost estimate used by the Federal Housing Administration must
include those items necessary to complete the physical improvements
as indicated in paragraphs 1608 to 1612.
1607. The estimate is invariably predicated upon the
ability and experience of the estimator and is not entirely the result
of a mathematical computation. Cost estimates are usually. based
upon past building operations under conditions which may differ
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METHODS OF DWELLING
COST ESTIMATION
1607-1609
greatly from those under which the subject building will be constructed. It follows that the estimator must call upon his experience
in practical building operations to recognizethe probable variations
which will occur between one job and another.
1608. Items Included. The estimate shall include the
cost of all materials, labor, sub-contracts, builder's overhead and
profit, permits, inspection fees, and architectural serviceentering into
the cost of construction of the following:
a. Main building, including porches, built-in garages and
attached terraces supported on foundation walls
b, Garage, attached or detached, and other accessorybuildings
c. Walks, drives, and terraces not supported on foundation
walls
d. Private sewage disposal, water supply, and electric generating plants
The allowance for builder's overhead and profit is the customary
local and current charge for the type and class of building under
consideration. Suitable allowances shall be made for workmen's
compensation, social security, and liability insurance where these
items are a part of the cost of the building construction. The allowance for architectural service shall be calculated on the basis of the.
percentage customarily charged in the locality for this type of work
at the time the estimate is made. If the building is of the type for.
which plans are ordinarily purchased outright, no more than the
purchase price ordinarily charged for such plans shall be included.
1609. The estimate shall not include the following:
a. Savings due to quantity production of buildings or unusual
efficiencyof builder or workmen
b, Deductions for accrued deterioration, obsolescence, and
depreciation
c. Carrying charges during construction and cost of financing
d. Structures of .temporary character or structures not permanently affixedto the ground
e. Landscaping, including shrubs,trees, .grass,retaining walls,
and finish grading of site
f. Chattels, that is, equipment and accessorieswhich arc not,
legally; part of the realty
In i:iiterpreting the meaning of (1; above, when the main building is
one of a number of row houses separated only by pitfiy walls, the
proportionate cost attributable to the subject building' as a part of
an operation embracing several houses· is 'u.8ed as the 'basis of estimation. Items listed under e above, while:not:,'}ncluded inth~ Esti-:
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UNDERWRITING
MANUAL
1609-1613
mated Replacement Cost of Building Improvements, are considered
in the Cost of Replacement of Property as described in Section 13.
1610. Equipment and Accessories. Some dwellings
contain great amounts of mechanical equipment and accessories
which are provided by the builder to create sales appeal. Determination as to whether certain equipment or accessoriesare chattels or
parts of the realty depends oh local custom and state laws. To
assist the Chief Architectural Supervisors who must make this decision, the Underwriting Division, "Washington,D. C., has supplied
Underwriting staffs with opinions :from the Legal Division concerning the items to be construed as parts of the realty or as chattels in
the di:ff erent jurisdictions.
1611. Items Subject to Rapid Deterioration and Obsolesenee, Certain items of equipment and accessoriesmay be subject to rapid deterioration and obsolescenceas a result of the wearing out of moving parts, changes in design, and anticipated reductions in initial and operating costs. Therefore, such items, although
included in the total estimate at full cost, are separately listed on
FHA Form No. 2014, to indicate to the Valuator that special treatment of the amounts may be necessary in establishing the estimate of
value. If possible,the probable rate of :future depreciation should be
indicated under "Remarks."
1612. Items of Unreasonable or Excessive Cost. Occasionally properties incorporating unusual :features,but of conventional construction, will be offered for consideration. These properties reflect the individual desires, hobbies, and idiosyncrasies of the
owner to such an extent that the living utility provided may not be
proportionate to the replacement cost. The estimated cost of these
features shall be included as individual items in the replacement cost
estimate and 'expressed as a separate lump-sum item and indicated
on FHA Form No. 2014 under the heading, Other Improvements.
Typical examples are as follows:
a. Objects of art and museum pieces incorporated in the building construction
b, Excessive development of service features in proportion to
habitable area of house
c. Excessive provision for hobbies, such as laboratories, conservatories, private art galleries, and swimming pools
d, Construction materials of unusual or unjustifiable permsnence and excessivecost, obviously inconsistent with the
size and character of the dwelling
1613. New Materials and Methods of Construction.
New materials and methods of construction which have not been generally used in dwellings may be subject to wide fluctuations in cost
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METHODS OF DWELLING
I
COST ESTIMATION
1613-1616
over comparatively short periods of time. To meet this conditionthe
cost of the subject building shall be estimated according to the drawings and specifications, except that conventional materials and
methods 0£ construction shall be assumed for the new materials and
methods of construction. The substituted conventional materials and
methods 0£ construction shall offer the same structural soundness,
relative resistance to fire, to use, and to the elements,the same insulation value, and maintenance costs as the units they replace. In the
event this substitution increases the thickness of the walls or partitions, the size 0£ the building shall be correspondingly increased so
that the house will contain the same finished area as the building it
replaces. This cost establishes the Maximum Allowable Estimate of
Cost Required to Replace Building Improvements in New Condition.
Where it is obvious that the cost of the actual, existing, or contemplated improvementswill exceedthis estimate, the cost of the actual
improvementsneed not be determined. The words "MaximumAllowable" are inserted before "Estimate of Cost Required
," on
J1"'HA Form No. 2014.
1614. Some new construction methods may permit economies which will result in contract prices lower than the Estimate
of Maximum Allowable Cost Required to Replace Building Improvements in New Condition as described above. In these cases the final
estimate shall be governed by the probable actual costs and not by
the cost of conventional types of construction of equivalent character.
PRESCRIBED METHODS OF COST ESTIMATION
1615. Selection of Method. The cost estimate shall be
obtained by one of the two prescribed methods. A majority of the
cases presented for consideration are handled by the Integrated
Square Foot Method. The remaining cases are handled by the Inplace Unit Method. The basis for selection of method is the complexity of the problem presented. Typical properties for which
suitable cost data have been compiled are estimated by the Integrated Square Foot Method. If this method cannot be applied
for any reason, recourse is had to the Inplace Unit Method.
1616. The prescribed Integrated Square Foot or Inplace
Unit methods are considered to be best adaptable for the purpose
of obtaining uniformity throughout all the Federal Housing Administration offices, and for statistical purposes. No methods except
the prescribed Integrated Square Foot andxInplace Unit Methods
shall be used without the written permission 0£ the Underwriting
Division, Washington, D. C. Such permission will be granted only
if circumstances and conditions of an unusual character indicate
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UNDERWRITING MANUAL
1616
STEPS IN COST ESTIMATION
INTEGRA~ED SQUARE FOOT
METHOD
INPLACE UNIT METHOD
~
DETERMINE WHICH
METHOD IS APPLICABLE
DETERMINE
CALCULATED AREA
, DETERMINE THE NUMBER OF INPLACE
UNITS IN EACH COMPONENT
SELECT APPLICABLE BASiC
SQUARE FOOT COST FROM
COST DATA HANDBOOK, PART l
a
SELECT APPLICABLE INPLACE
UNIT PRICES FROM COST
DATA HANDBOOK,PART 2
I
MULTIPLY THE SELECTED INPLACE
UNIT PRICES BY THE NUMBER OF
UNITS IN EACH COMPONENT TO D.
OBTAIN COST PER COMPONENT
ADD COSTS OF 27 COMPONENTS
TO OBTAIN TOTAL WITHOUT
OVERHEAD AND PROFIT
ADD AN ALLOWANCE FOR
OVERHEAD AND PROFIT
MAKE NECESSARY MATERIALS
ANO SIZE ADJUSTMENTS TO
OBTAIN SQUARE FOOT COST
E. MAKE NECESSARY
DIVIDE TOTAL OBTAINED IN F BY
CALCULATEO AREA TO OOTA\N
SQUARE FOOT COST
QUALITY
ADJUSTMENT H.
F. MAKE NECESSARY LOCALITY ADJUSTMENT
l
.
TO OBTAIN SQUARE FOOT COST
•
G,
MULTIPLY FINAL SQUARE FOOT COST
BY CALCULATED AREA TO OBTAIN.
COST OF MAIN BUILDING
J.
H.
DETERMINE COST OF GARAGE
K.
I.
DETERMINE COST OF OTHER
IMPROVEMENTS
L,
J.
DETERMINE ALLOWANCE FOR
ARCHITECTURAL SERVICE
M.
K.
AQO MAIN BUILDING, GARAGE, OTHER
IMPROVEMENTS AND ARCHITECTURAL
SERVICE TO OBTAIN
TOTAL REPLACEMENT COST
N.
•
METHODS OF DWELLING
COST ESTIMATION
1616-1617
the necessity or strong desirability of the use of a method other
than those prescribed.
1617. Steps in Integrated Square Foot Method. This
method of estimation proceeds in the order of the following listed
steps:
a. The calculated. area of the main building is determined in
accordance with the instructions in paragraphs 1622 to
1623
b, The building to be estimated is compared with the cl(Msification. of buudings and is identified according to classification criteria as falling in one of the established classifications. The classificationof buildings and the classification criteria are described in Paragraphs 1625 to 1628.
If the building fails to classify because no basic square.
foot costs have been supplied for the type, the Integrated
Square Foot Method is not used and the estimate is made
by the Inplace Unit Method. If it comesunder the established classifications,the Integrated Square Foot Method
is applied
c. The basic square foot cost applicable to the subject building
is selected from Part 1 of the Cost Data Handbook. Instructions covering the compilation of cost data and its
recordation in cost data handbooks are given in Section
19, Construction Cost Data. The method of selecting the
applicable Basic Square Foot Cost from the handbook is
described in paragraph 1629
d. The Basic Square Foot Cost is then adjusted, if necessary,
by making materials and size adjustments in accordance
with the instructions given in paragraphs 1630 to 1638.
These adjustments comprise additions to and deductions
from the Basic Square Foot Cost to take account of differences in materials, size, and shape of the subject building as compared with the basic specificationsused in the
Classificationof Buildings. After the Materials and Size
Adjustments, if necessary, have been made, the resulting
figure is the square foot cost
e, The Square Foot Cost is then modified to take account
of the differences in cost, due to the quality variations
between the subject building and the . basic specifications
which are . used in the Classification of Buildings. . This
process is called the quality adjustment, and is made by
applying a Quality Adjustment Percentage to the Square
Foot Cost
UNDERWRITING
MANUAL
1617-1618
f. The next step is to make a further modificationto take into
account the differences in cost of erecting buildings in
different localities. This processis called the locality adjustment and is accomplishedby applying a Locality Adjustment Percentage to the Square Foot Cost already
adjusted for quality.
g. After the Quality Adjustment and the Locality .Adjustment have been made, the resulting figure is the fonal
square foot cost applicable to the subject building. The
Final Square Foot Cost is multiplied by the number of
square feet in the Calculated .A.rea to secure the cost of
main. building
h. The cost of replacement of garage is then determined
i. The next step is to determine the cost of other improvements such as walks, driveways, accessorybuildings, and
items of special equipment not reflected in the Final
Square Foot Cost
j. The sum of the costs obtained in g, Ii, and i ordinarily
constitutes the basis on which architectural service, if
any, is computed. Therefore the next step is to determine the allowance for architectural service
k. The estimated costs of Main Building, Garage, Other Improvements, and Architectural Service are then totalled
to obtain the estimate of cost required to replace building
improvements in new condition. This figure is the total
cost estimate used for Federal Housing Administration
purposes, and correct entries are made on FHA. Form
No. 2014 or FHA. Form No. 2015
1618. In some cases involving existing construction, it
will be found that the replacement cost of building improvements
is considerably higher than that portion of the valuation ascribed
to the building improvements. This occurs most frequently in cases
involving building improvements, the value of which has been
greatly affectedby deterioration or obsolescence,or both. Wben such
cases are encountered,the Valuator will not be required to prepare
FHA Form No. 2052, Cost Estimate-Integrated Square Foot
Method, but may use the selectedbasic square foot cost as the Final
Square Foot Cost without adjustment or modification. When this
procedure is employed,the Valuator is required to make an appropriate statement on FHA. Form No. 2015, Report of Valuator,
explaining the absenceof FHA Form No. 2052.
I
•
METHODS OF DWELLING
COST ESTIMATION
1619
1619. Steps in lnplace Unit Method. This method
proceeds in the order of the following listed steps:
a. The oaloulated;area of the main building is determined in
accordance with the instructions in paragraph 1622 to
1623
b. The number of inplace units in each component part of the
building is measured or estimated. Components are those
integral assembled parts of a building which are susceptible to separate examination with respect to costs, such as
excavation, exterior walls, or plumbing. An inplace unit
is used as a basis of measurement and refers to the completed and finished aspect of a component or element of
a component. As a consequence, many inplace units
embrace assemblies of diverse things
c. 1 nplace unit prices applicable to the components of the subject building are selected from Part 2 of the Cost Data
Handbook
d, The Jnplace Unit Prices are multiplied by the corresponding number of units of each component to obtain the costs
of the individual components.
e. The costs of components are added to obtain the total cost
of components, not including overhead or profit.
f. An allowance for overhead and profit is added to the above
estimate to obtain a total
g. This total obtained in f is then divided by the number of
square feet in the Calculated Area to obtain the square foot
cost
h. The Square Foot Cost is then modified to take account
of the differences in cost due to quality variations between the subject building and the quality assumed in
establishing the inplace unit prices. This process is called
the quality adjustment and is made by applying a Quality
Adjustment Percentage to the Square Foot Cost. Cost
Data Handbook, Part 1, is used
i. The next step is to make a further modification to. take into
account the differences in cost of erecting buildings in
different localities. This process is called the locality adjustment and is accomplished by applying a Locality
Adjustment Percentage to the Square- Foot Cost already
adjusted for quality. Cost Data Handbook, Part 1, is
used
j. After both the Quality Adjustment and Locality Adjust-.
ment have been made, . the resulting figure is the final,
square foot cost applicable to the subject building. The
UNDERWRITING
MANUAL
1619-1621
Final Square Foot Cost is multiplied by the number of
square feet in the Calculated Area to secure the cost of
main bidlding
k. The cost of replacement of garage is then determined
l. The next step is to determine the cost of other improvements, such as walks, driveways, accessorybuildings, and
items of special equipment not reflected in the Final
Square Foot Cost
m. The sum of the costs obtained in j, k, and l ordinarily
constitutes the basis on which architectural service,if any,
is computed. Therefore the next step isto determine the
allowance for architectural service
n. The estimated costs of Main Building, Garage, Other Improvements, and Architectural Service are then added to
secure the estimate of cost required to replace buildinq
improvements in new condition. This figure is the total
cost estimate used for Federal Housing Administration
purposes and correct entries are made on FHA Form
No. 2014
I
COMPONENTS OF THE BUILDING
1620. Both the Integrated Square Foot Method and the
Inplace Unit Method of cost estimation consider a building to be
comprised of a number of component parts. Components are those
integral assembled parts of a building which are susceptible to
separate examination with respect to costs. These componentscomprise the parts of the building which are separately subject to variations in cost according to the character, sizes, and quality of
materials specified for a particular building.
1621. In cost estimation the components of a building
are used in accordance with the established grouping given below.
In order to secure uniformity and accuracy, the indentifying reference numbers set before the components of the building in this
paragraph shall be maintained throughout. the cost estimating procedure in all offices. As a further step toward uniformity, each
component shall include all incidental elements properly associated
with it, as indicated under each component. The 27 components
include all elements of cost of the building except certain items
which are. included separately in the estimate summary as described
in paragraphs 1649 and 1650. No deviation from this division of
the estimate, numbering of the componentsor inclusion of associated
elements is permitted, because uniformity-in procedure is essential
to accuracy and to the utilization of cost-data. The components,
each with its associatedelements,are as follows:
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METHODS OF DWELLING
COST ESTIMATION
1621
1. Excavation:
Basement
Trench walls
Pier
Grading of unexcavated portions under first floor construction
2. Foundations:
a. With Basement:
Wall footings, basement walls, including dampproofing
Basement floor
Basement stairs, windows, doors, columns or piers
including footings, girders, areas, tile drains, coal
bin partition and coal chute
b. Without Basement:
Wall footings, trench walls, curtain walls, piers
including footings, and girders
3. Chimney:
Single flue with required enclosing masonry and foundation
4. Fireplace:
Fireplace including complete foundation, masonry, flue,
hearth, lining, damper, facing, and mantel
5. Exterior Walls:
All items of construction and exterior finish of the exterior
walls including interior dampproofingor furring where
used, but not including plaster base or plaster or other
interior wall finish materials
6. Floor Framing:
Structural floor framing, but not including subflooring,
finish flooring, or plaster base and plaster or other
ceiling finish. Concrete slabs, self-supporting, supported on joist framing, or those laid on the ground
in structures without basements are included in this
component. Monolithic cement finish is considered
part of the slab
7. Subflooring:
Subflooring, but not including finish flooring. Sleepers
and floor fill over floor construction are· included in
this component
UNDERWRITING
MANUAL
1621
8. Finish Flooring:
Building paper, wood flooring, sanding, scraping, and
finishing
9. Partition Framing :
Structural framing including furring or nailing strips,
but not including plaster base and plaster or wall finish
materials
10. Ceiling Framing:
Structural ceiling framing including furring or nailing
strips, but not including plaster base and plaster or
other ceiling finish materials
11. Roof Framing:
Structural roof framing including roof sheathing or
shingle lath
12. Roofing:
Roof covering materials, together with felt, if any, including all flashings, valleys, hip and ridge coverings
13. Gutters and Downspouts:
Gutters and downspouts, including shoes, splash blocks,
dry wells, or connectionsto drains
14. Plaster Base and Plaster:
Lath and plaster, wallboard or other wall and ceiling
materials, but not including decorations or coverings
15. Decorating:
Finish or coverings applied to wall and ceiling surfaces,
but not including finish on doors, windows,trim, floors,
or cabinets
16. Interior Doors and Trim :
Interior doors including trim, hardware, and finish
Trim for cased openings including finish
Running trim, base, floor mould, and picture mould, including finish
Closet shelves and hook strips
17. Windows:
Frames, sash, glass, hardware, interior trim, and finish
18. Entrance and Exterior Detail:
Main entrance door with side and transom lights, and all
other exterior doors including glass, hardware and finish. All added exterior architectural treatment, includ-
•
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fr
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METHODS OF DWELLING
COST ESTIMATION
1621
ing additional entrance steps, exceptional chimney, halftimbering, unusual cornice and porch detail, louvers,
and shutters
19. Cabinets and Interior Detail:
Kitchen cabinets, medicine cabinets, bookcases, china
closets, wardrobes, and other special cabinet work, including glass, hardware, and finish
20. Stairs:
All stairs except basement or exterior stairs, including
balustrades and finish
21. Special Floors and Wainscot:
Special flooring and wainscoting such as used in kitchen,
bathrooms, and lavatories
22. Plumbing:
Plumbing fixtures complete with fittings, piping for
water, soil, waste and vent lines, gas piping, hot water
equipment, water softeners, sewer and water supply
connections up to public utilities or to private equipment; but not including private sewage disposal or
water supply plants
23. Heating:
Typical complete heating plant and appurtenances, but
not including unusual fuel burners or conditioning
equipment of the character referred to in paragraph
1611
r
'·
24. Electric Wiring:
Items such as service connection, wmng, outlets and
switches, but not including private electric generating
plant
25. Lighting Fixtures:
All lighting fixtures
26. Insulation:
Any insulation which is additional to sheathing or plaster
base
27. Miscellaneous:
Items not otherwise readily classified under other components, such as screens, storm-sash, caulking, weatherstripping, basement garage, finished rooms in basement, finished rooms in attic, termite shields, wood
preservation, and special basement waterproofing
\
1
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I
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UNDERWRITING
MANUAL
1622-1623
DETERMINATION OF CALCULATED AREA
1622. Both the Integrated Square Foot Method and the
Inplace Unit Method 0£ cost estimation require the determination
of the Calculated Area 0£ the building. Calculated Area is the
number of square feet in a building measured in accordance with
a standard set of rules and used as a basis for comparing the costs
0£ constructing buildings. The prescribed rules for the determination of Calculated Area are as follows:
a. To be Included and Calculated in Full :
The square foot area of finishedfloors abovethe basement,
including bays, oriels, dormers, light shafts and stairwells, utility rooms, vestibules, enclosed porches, open
porches within the main wall line, and built-in garages.
In computing these areas, measurementsshall be taken
to the outside surfaces of exterior walls or partitions
enclosingthe areas and no deductionsshall be made £or
stair-wells or light shafts. In structures without basements, the area included is that above foundations.
b. To be Included and Calculated in Part:
1. Open porches outside of main wall line, at one-hal£0£
actual area
2. Attached masonry terraces supported on foundation
walls, at one-quarter of actual area
o. Not to be Included in Calculated Area:
1. Finished rooms in basement
2. Finished rooms in attic
3. Basement garages
4. Attached or detached garages
5. Masonry terraces without foundation walls
1623. While the five items listed above under c are
excluded from the calculated area, they are not omitted from the
cost estimate. The following definitions apply to the interpretation of the above rules:
a. Attached garage is one having one or more walls common
to the walls of the main dwelling, but without living
quarters above. However, where one story dwellings
predominate and the garage is of construction comparable in quality with the main house, and :formsan integral
part of the architectural design, the garage may be considered as "built-in"
I
•
·----.-,
METHODS OF DWELLING
COST ESTIMATION
1623-1624
b. Built-in garage is one located above the basement level
within the main walls of a house, and which has living
quarters above, except as provided in a above
c. Basement garage is one located in a basement
MEASUREMENT OF COMPONENTS
1624. Quantity measurements in terms of Inplace Units
are taken from drawings or from the building itself, in the case of
existing construction. Overall outside dimensions are used to determine areas. In computing areas of walls, partitions, floors or
roofs, no deductions are made for openings occasioned by doors,
windows, cased and uncased openings, stair wells, shafts, louvers,
vents, or chimneys. The cost of quantities not deducted compensates for the cost of forming the openings. Likewise, the cost of
excess quantities, included by using outside dimensions for exterior
walls and by measuring partitions through intersections to outside
of exterior walls or intersecting partitions, compensates for the cost
of forming the corners and intersections. Excess quantity due to
measuring basement floor to outside of basement wall compensates
for the cost of excavation beyond walls, back-filling and· footing excavation. The cost of excess quantities, obtained by measuring halfstory ceilings to outside of enclosing partitions and partitions under
sloping portion of roof at full ceiling height, compensates for the
cost of. waste in cutting and the additional labor required in forming the intersections. Measurements are taken for each of the
components or elements as follows:
1. Excavation:
a. Basement: Measured in cubic yards, equals the product
of the area within outside surfaces of basement walls
and the average depth from natural grade to under·
side of basement floor.
b, Trench Wall: Measured in cubic yards, equals the
product of the wall thickness plus one foot and the
depth from grade to underside of. footing, by the
total of the exterior dimensions of the trench wall.
This element includes excavation for curtain walls
where they occur.
c. Pier: Measured in cubic yards, equals the total of the
products of each pier footing area and the depth
from grade to underside of footing.
d. Grading of Uneecaoated Portione : Measured jn cubic
. yards, equals the product of the unexcavated area and
the ~verage 'depth below natural grade.
1
UNDERWRITING
MANUAL
1624
2. Foundations:
a. Footings: Measured in lineal feet, equals the total of
the exterior dimensions of the walls or piers having
footings.
b, Basement Walls: Measured in square feet, equals the
area of the outside surface of the walls from the top
of the footings to the underside of first floor construction. This element includes bench walls but
does not include non-bearing partitions. Non-bearing partitions are included under ComponentNo. 27.
c. Trench Walls: Measured in square feet, equals the area
of the outside surface of the walls, from the top of
the footing to the underside of first floor construction.
This element includes curtain walls and piers where
they occur.
d. Basement Floor: Measured in square feet to the outside surfaces of basement walls.
e. Basement Essentials: Estimated as a lump sum amount
to include basement stair, basement sash and doors,
floor girders, lally columns or piers, coal bins or
similar items not otherwiselisted.
3. Chimney:
Measured in lineal feet from underside of footing to
top of chimney. No deduction is made for any portion commonto foundation or exterior walls.
4. Fireplace:
Estimated as a lump sum amount to include complete
foundation, masonry, flue, hearth, lining, damper,
:facing,and mantel.
5. Exterior Walls:
Measured in square feet, equals the area of the outside
surface of the walls, from underside of first floor
construction to the intersection with roof surfaces.
Walls o:f gables and dormers are included. Party
walls are measured in square feet, to include both
party walls and listed separately from the exposed
exterior walls. The unit cost for the party wall is
halved in estimating, so as to include only that cost
applicable to the subject structure.
6. Floor Framing:
Measured in square feet with dimensionstaken to outside
of exterior walls or to outside edges where walls do
not occur.
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·-
METHODS OF DWELLING
COST ESTIMATION
1624
7. Subftooring:
Measured in square :feet with dimensions taken to outside
o:f exterior walls or partitions enclosing the areas.
8. Finish Flooring :
Measured in square feet, with dimensions taken to outside of exterior walls or partitions enclosing the
areas. Where no wall or partition occurs the measurement is taken to outside edge.
9. Partition Framing:
Measured in square feet, with a height from the finish
floor to the finish ceiling and a total length measured
through all intersecting partitions to the outside o:f
exterior walls or cross partitions. No reduction in
height is made for enclosing partitions under sloping
portions of roo:f.
10. Ceiling Framing:
Measured in square feet to the outside of exterior walls
or enclosing partitions under sloping roo:f. No deduction is made for sloping portions under rafters.
Where no wall or partition occurs the measurement
is taken to outside edge.
11. Roof Framing:
Measured in square feet of roof area to include the overhang at eaves and gable ends. Areas of dormer roofs
and the triangular parts of connecting roofs are not
added, nor are the openings occasionedby the dormers
deducted.
12. Roofing:
Measured in square feet, equals the total area. of the roof
framing. When more than one type o:f roof covering
occurs, each type is measured separately in the same
manner as described for roof framing. Flashings
and counter-flashings,valleys, saddles and ridge caps
are not measured separately, as their cost is included
in the unit cost of the roofing.
13. Gutters and Downspouts:
Measured in lineal feet, each separate run being measured to the nearest foot. Shoes, splash blocks, dry
wells, or connections to drains are estimated as individual items and expressed as a lump sum amount.
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UNDERWRITI:N"G
MANUAL
l
1624
14. Plaster Base and Plaster:
Measured in square feet as the sum of the following
items: (a) total area of the exterior walls and party
walls, betweenfloor and ceiling levels of each finished
story and half -story ; ( b ) twice the area of the partition framing where finished on both sides; ( c) area
of the. enclosing partition framing under sloping
portions of. roof; and ( d) area of all ceilings.
~
15. Decorating:
Measured in square feet, equals the decorated area of walls
and ceilings.
16. Interior Doors and Trim:
a. Interior Doore: Measured as a number of units complete with standing trim, hardware and finish.
Units are based on average size and type.
b, Oased Openings: Measured as a number of units of
standing trim with finish.
e, Running Trim: This item includes base and picture
mould complete with finish and is measured in lineal
feet, equals the sum of: (1) perimeters of all :finished stories, (£) twice the lineal feet of partitions
finished on both sides, ( 3) lineal feet of partitions
finished on one side. From the total obtained a deduction is made for door openings.
d: Oloset Shelving: Estimated as a lump-sum amount
including hook· strips.
17. Windows:
Measured as a number of units complete with, frame,
sash, glass, hardware, interior trim and finish.
18. Entrance and ~xterior Detail:
a. Entrances: Estimated as individual items and expressed
as a lump sum amount, .to include all exterior doors,
frames, glass, added architectural features, finish and
hardware.
b. Exterior Detail: Estimated as individual items and expressed as a lump sum amount, to include such items
as entrance steps, added architectural :features, ex·
ceptfoD.archimney, half-timbering, unusual cornice
and porch detail, louvers and shutters.
·'fo .. C~hine.ts' Jnt~rior D~t~il:
Estimated as individual items and expressed as a lump
sum amount to include such items as kitchen cabinets,
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and
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•
METHODS OF DWELLING
COST ESTIMATION
1624
medicine cabinets, bookcases, china closets, wardrobes and other special cabinet work, including glass,
hardware and finish.
20. Stairs:
Estimated as a lump sum amount including all stairs
above first floor, complete with balustrades and finish.
21. Special Floors and Wainscot:
Estimated as individual items and expressed as separate
lump sum amounts equal to the differencebetween the
cost of the special materials and .the cost of the finish
flooring or wall material that is replaced. This applies to various special materials used for flooring and
· wainscoting for kitchens.. bathrooms, lavatories,
shower stalls and other spaces.
22. Plumbing:
Estimated as individual items and expressed as lump
sum amounts for:
a. Fixtures for one bath, kitchen and laundry complete with all piping for water, soil, waste and
vent lines, gas piping, hot water equipment,
sewer and water-supply connectionsup to public
utilities or to private equipment. Private sewage disposal or water supply plants are not included in this element.
b. Fixtures for additional bathroom including tub,
lavatory and water closet with connections carried to the basic plumbing.
c. Stall shower complete with all fixtures, accessories
and connections to the basic plumbing.
d. Lavatory, including lavatory fixture and water
closet, with connections to the basic plumbing.
e. Other plumbing fixtures complete with connections
to the basic plumbing.
23. Heating:
Estimated as a lump sum amount for complete heating
equipment of customary type. This sum includes appurtenances, but shall not include the cost of .unusual fuel burner or cooling equipment of the character referred to in paragraph 1611.
24. Electric Wiring:
Measured as a number of outlets for lighting fixtures,
switches and convenience receptacles. Service panel,
UNDERWRITING
MANUAL
1624-1627
power outlets and bell wiring are estimated as separate lump sum amounts.
25. Lighting Fixtures:
Estimated as a lump sum amount.
26. Insulation:
Measured in square feet, separately for walls and ceilings
where insulation is additional to sheathing or plaster
base.
27. Miscellaneous:
Estimated as separate lump sum amounts for items such
as screens, storm sash, caulking, weatherstripping,
basement garage, finished rooms in basement, finished
rooms in attic, termite shields, wood preservation and
special basement waterproofing.
DETERMINATION
OF SQUARE FOOT COST IN THE
SQUARE FOOT METHOD
I
INTEGRATED
1625. After the Calculated Area has been determined,
the building to be estimated is compared with the Classification of
Buildings and is identified according to classificationcriteria as falling in one of the established classifications. This makes it possible
to select a Basic Square Foot Cost :from the Cost Data Handbook,
Part 1. The selected Basic Square Foot Cost is then adjusted, if
necessary,in accordance with the instructions in Paragraphs 1630 to
1638. Where no deviations from basic specificationsoccur, no adjustments are necessary.
1626. Classification of Building. The classificationof
buildings is used to identify a structure for which an estimate is
to be made and to select the applicable cost data from the handbook.
The first step in classifying a building is to ascertain whether it is
sufficientlytypical to be comparable to a reasonably large number
of similar buildings, and, as a consequence, to be capable of estimation by the Integrated Square Foot Method. The use 0£ the Integrated Square Foot Method is :feasibleonly when the cost data have
been derived from buildings of the same classificationas the building to be estimated.
1627. In order to secure accuracy in estimation and to
provide a basis for cost comparison,buildings are classifiedon a uniform basis according to the following criteria:
a. Type: detached, semi-detached, row house, end row house
b. Number of family units
a. Number of stories
d. Calculated area
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METHODS OF DWELLING
COST ESTIMATION
1627-1628
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\.
In general, no further subdivision of classificationsis necessary as
to the number of rooms, shape of the house, extent of porches or the
materials specified. However, additional classification criteria may
be advantageously set up for buildings having like characteristics, if
they occur frequently enough. Roof design is usually characteristic
of each particular classification of building and consequently does
not, in general, make further subdivision of classificationsnecessary.
Customary practice in a locality likewise determines the presence or
absenceof basements in typical buildings.
1628. A precise understanding of classification criteria
is essential to insure a proper application of the compiled cost data.
Therefore, certain of the classification criteria require careful definition. The definitions used apply to cost estimation only and
should not be confused with other definitions of the same items used
for purposes of local interpretation. The following definitions
apply to the classification of buildings:
a. Full story is one in which the finish floor extends to the exterior walls and the ceiling is of required height but does
not drop below the heads of full height windows.
b. Half-story is one in which the rooms· are located partly under the slope of the main roof and the finish floor does
not extend to the exterior walls because of insufficient
headroom beyond the enclosing partitions. This definition is conditioned on the fullest use of the area for finished rooms. If less area is utilized, the space becomesan
attic with finished rooms. The presence or absence of
plumbing or heating equipment in the space does not affect
this definition.
c. Attic is the unfinished space immediately beneath the roof
which is not utilized or is only partially utilized for
finished rooms.
d, Basement is usually an enclosed usable space having full
headroom below the main floor level of the building.
This definition is not altered by the presence of one or
more finished rooms.
e. Family unit, as defined for cost estimation purposes, is that
portion of a dwelling designed primarily for the use of
one family, provided with independent sanitary and
cooking facilities and an entrance which is not through
the living quarters of another unit.
f. Detached bitilding is a building in which no exterior walls
are common to any other building.
i
.11
!.·
UNDERWRITING
MANUAL
1628-1631
g. Semi-detached building is one of two adjoining buildings
standing independently of others and having a common
party wall.
h. A row house is one of four or more buildings in which two
walls are commonto adjoining buildings.
i. An end row house is one which is located at the end of a
group of four or more row houses and may differ in plan,
window arrangement, and extent of exterior walls, from
the other houses in the group by virtue of its location.
Where only three houses occur in a row, separate classifications are set up for the end houses and for the center
house.
1629. Selection of Basic Square Foot Cost.-After
the subject building has been classified, an applicable Basic Square
Foot Cost is selected from Part 1 of the Cost Data Handbook. Basic
square foot costs of typical buildings, derived according to basic
specifications,are tabulated in Part 1 of the Cost Data Handbook
under various classificationsand for usual exterior wall constructions
in each classification. The applicable Basic Square Foot Cost is
selected from these tabulations under the proper classificationand in
the column indicated by the calculated area of the subject building. The figure thus selected is the Basic Square Foot Cost to be
used for the subject building. The basic square foot cost of a building is the integrated cost, per square foot of livable floor area, of all
components of the main building but not including porches or attached terraces. Inasmuch as the character of porches and terraces
ordinarily corresponds with the character of the main building, it is
assumed that their costs per square foot are in the same ratios to the
selected basic square foot cost as the fractional parts at which their
actual areas are included in the Calculated Area. Porches and terraces are not considered in Basic Specificationsor in the Classification of Buildings. Therefore, peculiarities of these items do not
necessitate making adjustments to basic square foot costs.
1630. Materials and Size Adjustments.-When the
subject building does not substantially conform to the selected typical building and its basic specifications,it is necessary to make adjustments to the Basic Square Foot Cost to account for deviations in the
character, sizes, or grades of materials and in the shape or size of the
structure. These adjustments comprise additions to and deductions
from the Basic Square Foot Cost and are jointly described as
Materials and Size Adjustments.
1631. Ordinarily a subject building deviates from the
selected typical building in only a few items, but those deviations
I
•
METHODS
OF DWELLING
COST ESTIMATION
1631-1633
which do occur may relate to any of the 27 componentsof the building and may occur in any of the following items:
a. Alternate materials and equipment
b, Alternate grades of materials and equipment
c. Added exterior and interior detail
d. Added miscellaneous items
e. Added mechanical and electrical equipment
f. Basement garage and finished rooms in basement or attic
g. Insulation
h, Addition or omissionof basement
i. Depth of excavation
j. Height of exterior walls
k. Perimeter of building
In general, the adjustments for the last three items will be used only
in unusual cases. If such adjustments occur frequently enough,
separate classifications are developed. Such exceptional cases will
frequently warrant estimation by the architectural section.
1632. Adjustments of Basic Square Foot Cost to compensate for deviations of a subject building from the selected typical
building and its basic specificationsare computed according to prescribed rules and are made by using one or more of the following:
a. Component Unit Adjustments, as described in Paragraphs
1633 and 1634
b, Lump Sum Adjustments, as described in Paragraph 1635
o. Perimeter Adjustments, as described in Paragraph 1636
d. Exterior Wall Height Adjustments, as described in Paragraph 1637
The first two types of adjustment are most frequently used. The
adjustments listed under o and d are used only occasionallyin cases
where substantial deviations from the selected typical building occur
in connection with the height of exterior walls and perimeter of
building.
1633. Component Unit Adjustment is defined as the difference in cost, per square foot of calculated area, due to a deviation
from the basic specifications for a component part of the building.
These adjustments, which are for commonlyencountered deviations,
are available in conjunction with Basic Square Foot Costs in Part
1 of the Cost Data Handbook. These adjustments are tabulated separately for each increment of area on each classificationsheet. Component Unit Adjustments are used to compensate for deviations in
the following items: (a) alternate materials, ( b) alternate grades of
materials and equipment, ( c) addition or omission of basement, and
( d) insulation. When an alternate material is encountered for only
UNDERWRITING
MANUAL
1633-1636
a part of a component or element, the adjustment is computed as a
fractional part of the Component Unit Adjustment for the alternate
material as tabulated in Part 1 of the handbook.
The fraction used is equal to the measurement o:f the alternate
material divided by the total measurement o:f the component.
1634. When a Component Unit Adjustment is not available in the handbook for a particular deviation :from basic specifications, the adjustment is estimated as a lump-sum amount equal
to the difference between the estimated costs of the alternate and
the basic items. This applies to deviations that affect a component
as a whole or in part.
1635. Lump sum adjustment is defined as the difference in cost, expressed in dollars, between a subject component and
the corresponding basic component. For commonly encountered deviations, these adjustments are available in Part 1 of the Cost Data
Handbook, and are tabulated under each classification of typical
buildings in conjunction with Basic Square Foot Costs. For less
commonly encountered deviations Miscellaneous Unit and Lumpsum Costs are tabulated separately in Part 1 of the handbook. For
certain items which are variable in extent according to each subject
specification, Lump Sum Adjustments may not be available in the
Cost Data Handbook, and therefore they are to be computed as lump
sum amounts equal to the difference in cost of such items above or
below any allowances included in the Basic Square Foot Cost according to basic specifications. Lump-sum Adjustments are used to
compensate for deviations in items such as the following: (a) added
exterior and interior detail, (b) alternate equipment or grades of
equipment, ( c) added mechanical or electrical equipment, ( d) basement garage and finished rooms in basement or attic, and ( e) added
miscellaneous items designated as elements of Component No. 27.
The lump sum adjustments are totalled and the amount so obtained
is converted into a cost adjustment per square foot of Calculated
Area.
1636. Perimeter adjustment is necessary when the
perimeter of the subject building is, because of irregularities in plan,
substantially different :from the perimeter o:f the basic building. The
perimeter adjustment is computed as a lump-sum amount equal to
the product of the deviation in perimeter, measured in lineal feet,
and the cost per lineal foot of exterior wall construction. The cost
per lineal foot of exterior wall construction is tabulated separately
for each type of exterior wall construction on each classification
sheet in Part 1 of the handbook. The basic perimeter is tabulated
:for each classification of building under the applicable floor area
column of Basic Square Foot Cost.
I
••
METHODS OF DWELLING
COST ESTIMATION
1637-1641
1637. Wall height adjustment is necessary where the
height of the exterior walls of the subject building is substantially
in excessof the exterior wall height of basic building. This adjustment is computed as a lump-sum amount equal to the product of
excesssurface of wall, measured in square feet, and a unit cost of the
particular exterior wall construction. The excess wall surface is
equal to the excessheight multiplied by the subject perimeter.
1638. When the Materials and Size Adjustments described above have been made, the resulting figure is the Square Foot
Cost used to determine the Final Square Foot Cost.
DETERMINATION OF SQUARE FOOT COST IN THE INPLACE UNIT
METHOD
1639. The Inplace Unit Method, an adaptation of the
quantity survey method, is designed to reduce the number of computations. This is accomplishedby considering each component part
of the building as an integral assemblyof associatedelements erected
in place. In general, components are measured in units of surface
or length. Certain components and elements not conveniently reduced to such units are measured in units of assembled items. Inplace unit prices applicable to the units used in measuring the components are multiplied by the corresponding number of units in each
component to obtain the assembled cost of the individual components. This requires the actual measurement of the components in
the subject building. Inplace unit prices include the cost of materials
with allowancesfor waste and the cost of erection, but do not include
an allowance for overhead and profit.
1640. After the numbers of inplace units in each component part of the building are measured, inplace unit prices applicable to the components of the subject building are selected from
Part 2 of the Cost Data Handbook. Then the inplace unit prices
are multiplied by the number of units in each component. These
computations result in the costs of components. The costs of all
componentsare then totalled.
1641. An allowance for overhead and profit is then
determined. Overhead and profit allowances are determined on the
basis of percentages ordinarily included in contract bids in the territory. Included in overhead and profit are allowances for fire, tornado, public liability and workmen's compensation insurance, and
social security only where these items are customarily included by
the contractors in the territory. The allowance for overhead and
profit is added to the Total Cost of Components to obtain a total
which is then divided by the number of square feet of Calculated
Area in order to convert this amount into a Square Foot Cost. The
,'
-
--
··--
---
·----------
UNDERWRITING
MANUAL
1641-1648
Square Foot Cost in the Inplace Method is directly comparable to
the Square Foot Cost obtained in the Integrated Square Foot method
and is used in exactly the same manner to determine the Final Square
Foot Cost.
DETERMINATION OF FINAL SQUARE FOOT COST
1642. After the Square Foot Cost has been determined
in either the Integrated Square Foot Method or in the Inplace Unit
Method, the next step is to determine the Final Square Foot Cost by
making the Quality and Locality Adjustments.
1643. Quality Adjustment. - Quality Adjustment,
where necessary, is made by applying a percentage described as the
Quality Adjustment Percentage to the Square Foot Cost. Recommend limits are tabulated in Part 1 of the Cost Data Handbook.
1644. The quality adjustment percentage represents the
difference in the quality of construction in the subject building as
compared with the quality of construction to which the Basic Square
Foot Costs are applicable. The quality adjustment recognizesvarying degrees of workmanship under identical specificationsand that
careful workmanship may cost more than inferior but acceptable
workmanship.
1645. The quality adjustment percentage is determined
by comparing the quality of the subject construction with the quality
of construction to which the Basic Square Foot Costs are applicable
and selecting a percentage to make the adjustment.
1646. Locality Adjustment.-All Inplace Unit Prices
and Basic Square Foot Costs are based upon prices and costs in a
city selected as the base at the time the basic cost data are established
and compiled in the cost data handbooks. Final Square Foot Costs
for other cities or economic background areas are obtained by the
application of Locality Adjustment Percentages to the Square Foot
Costs already adjusted for quality. Locality Adjustment Percentages
for all important localities in the territory are tabulated in Part 1 of
the Cost Data Handbook.
1647. The locality adjustment percentage expresses the
relationship between the cost of a building constructed in the selected base city and the cost of an identical building constructed
in another city within the cost data territory. The use of the locality adjustment percentages obviates the necessity for providing complete independent basic cost data for each city or economic back.
ground area within the territory. Detailed instructions for determination of these percentages are contained in Section 19.
1648. Major changes in cost level are provided for by
revisions of basic cost data, Minor changes are provided for by
l
II
•
METHODS OF DWELLING
COST ESTIMATION
1648-1650
revisions of the locality adjustment percentages. Temporary or
seasonal fluctuations are disregarded.
DETERMINATION OF TOTAL REPLACEMENT COST
I
i
1649. After both the Quality Adjustment and Locality
Adjustment have been applied to the Square Foot Cost obtained
either in the Integrated Square Foot Method or in the Inplace Unit
Method, the resulting figure is the Final Square Foot Cost applicable
to the subject building. The Final Square Foot Cost is multiplied
by the number of square :feet in the Calculated Area to obtain the cost
of main building. Then estimates are made of the separate costs
required to replace improvementsother than the main building, such
as garage, accessorybuildings, walks, and driveways. An allowance
is determined :for special equipment such as described in paragraph
1611 which is not reflectedin the Final Square Foot Cost. An allowance is also determined for items of unreasonable or excessivecost
such as described in paragraph 1612 which are not reflected in the
Final Square Foot Cost.
1650. The total of the costs of main building, garage, accessory buildings, walks, driveways, and the items described in paragraphs 1611 and 1612, ordinarily constitutes the basis on which architectural service, if any, is computed. The allowance for architectural service when determined as described in paragraph 1608 is
added to the foregoing total. The resulting figure is the Estimate
of Cost Required to Replace Building Improvements in New Condition. This resulting amount is the total cost estimate used for
Federal Housing Administration purposes and correct entries are
made on FHA Form No. 2014 or FHA Form No. 2015.
\_
•. •
SECTION 17
__
__
.-
APPLICATION OF COST ESTIMATION METHODS
CONTENTS
(
,_:_,
I
__
PART IV
Paragraphs
Description of Examples
Description and Use of Estimate Forms
Application of Integrated Square Foot Method----------------~--Classification of Subject Building____________________________
Cost Data IIandbook-------------------------~--------------Selection of Basic Square Foot Cost___________________________
Materials and Size Adjustments______________________________
Determination of Square Foot CosL-------------------------~
Determination of Final Square Foot Cost;
Determination of Total Replacement Cost.,
Application of Inplace Unit Method
Measurement of Inplace Units________________________________
Selection of Inplace Unit Prices---------------------~-------Determination of Square Foot CosL----------------------'--Determination of Final Square Foot CosL
Determination of Total Replacement Cost.,
1701-1703
1704-1709
1710-1724
1710
1711-1717
1718
1719
17~
1721-1722
1723-1724
1725-1732
1726
1727
1728
1729-1730
1731-1732
Effective February 1938
Federal Housing Administration
PART IV
SECTION 17
APPLICATION
OF COST ESTIMATION METHODS
DESCRIPTION OF EXAMPLES
1701. This section of the Manual illustrates in detail the
process of making estimates of replacement costs, in accordancewith
the instructions contained in Section 16. For this purpose, illustrative drawings and specifications are used. The material and 'erection
costs used in the examples throughout this section are assumed, and
are not actual costs. These examples are more complicated than
cases ordinarily presented for mortgage insurance.
1702. The building which is used as an example in this
section may be considered as either a proposed or an existing structure. In the case of an existing building, the dimensions shown on
the drawings would be obtained by actual measurement at the site.
Likewise, the materials and equipment described in these specifications would be noted from actual observation. Therefore, the following examples apply equally to drawings and specifications for a
proposed building and to an existing structure. The examples and
text which follow make reference only to the drawings and
specifications.
,
1703. Before undertaking an estimate, it is necessary to
determine which method is applicable and best suited to the subject
building. This is accomplished by an inspection of the subject drawings or existing structure to determine whether the Basic Square Foot
Costs are applicable. If so, the Integrated Square Foot Method is
used, and the estimate is made on FHA Form No. 2052. If not, the
Inplace Unit Method is used, and the estimate is made on FHA Form
No. 2053.
DESCRIPTION AND USE OF ESTIMATE FORMS
1704. Two forms are provided for making cost estimates,
FHA Form No. 2052, Cost Estimate-Integrated Square Foot
Method, and FHA·Form 2053,OostEstimate=-Inplace Unit Method.
UNDERWRITING
MANUAL
1704
FEDERAL
HouslNG
Al>MINISl'RATION
COST ESTIMATE-INTEGRATED SQUARE FOOT METHOD
!City)
(Sta~
I
.
COMPUTATION
;
. OF CALCULATED AREA
Torn
AUA
CALCULATBD
MODlflCATION OF SOUARE-FOOT COST
~------------------·-----------------S-----
Square fooi
Quallty adjuet.ment •.••• -------------
% ------
Loealit;~~=~-F~--(;~ ·-----~------------~ s I,__
_.
Deta<'hed
Sem1..detached
Row
~nd ro'll(
I
I
I
l
4
I
I
I
I
2
I
ll! I
I
I
I
Sq.
r~
SUMMARY OF REPLACEMENT COST
Main Luild.Js,g ----~----- ------·-····-··-·················---
Garage_.......................................................
Other improvement.a:
Accessory buildings
------Sq.
ft. ® ----Sq. ft. @ -----
•••••••••. ----- Sq. rt. @ ----Sqilt. @ ----Sq: ft. @ ----_
Walko_.............................
Driveways..........................
Additiona1 meelumieal eqQ.ipment
$
ltel'JUI of exceBBive coat
···--·-·············--············-·····················---·--·-·
&wage diepoeal -·····················.·····-····-·····-··············-···················
Wa.wr·Supply ..•••..•.•••••.•...••...••••.••••.•..••.•.••.•••.•••.••..•••....•••••..••.•
_
_,$ ----$--~--
Str8'1'0T4L S
Architeetliral eervtee
En11u.n
OI' Corn
,
R.Eqm»»
'\'O R2Pt.1.c•
B"Ctt.nUfO lMPM>Tir.tllS.in'& m
E81'111ATZD JIY
Nsw
Co1'.l)TnON
S
_$
--1--1--1--lf--1--1--
;;;;;;;f;;;;;;;l;;=l:::;ji;;;;;;;j;;;;;;;I;;;;;;;
·.L-.._ .... __.~._.._ .... _..
•
APPLICATION
OF COST ESTIMATION
METHODS
1704
C.u.ctrLA.TED
Sq. It.
Au..t.
Type of nterior wall
Add(+)
Ded. (-)
1. El:ca.vation
2. Founde.tions
a.
Chimney
6.. Exterior walls
Height adjustment
Perimeter adjustment
6. Floor framing
7. Subdoorlng
8. Finish 8.ooring·
9. Partitfon framing
JO. Ceilirlgframing
U. Roof framing
13. Gutters and downspouts
14. Plaster base and plaster
JS.
16.
17.
18.
Deoor&t.ing
Interior doors and trim
Windows
Entrarioo and exterior det.&il
19. Cabinets and interior detail
20. Stain
21. Special floors and wainacot
Bath floor
Bath warn.cot
Kitchen
22. Plumbing
Additional bathroom
Stall &bower
Toilet;
23. Heating
24.. Electric wiring
25. Lighting 1irl1J.re.<1
2&. Insulation
Walb
Ceiling
27. MiiroeUaneo1.1s
TOTAL
Lv111P
Bulll ITEMS
TOT.4.L ADDITIONS AND DEDl1Cl'lON8
...
,._.,.,
Nzr_ ADDJTioN ca Dput'Tlox
s~:::!:~c!,·~
~11----1
0
UNDERWRITING
MANUAL
1704
FEDERAL HOUSING ADMINISTRATION
COST ESTIMATE-INPLACEUNIT METHOD
(PrcportyBddms:s)
(City)
(State)
..
..
I
I
.
COMPUTATION OF CALCULATED AREA
,,
C.1.1.cuw..'1'110
.......
MODIFICATION OF SQUARE.FOOT COST
COBL.·--·-·----··················--•----%------
I
Square foot
Qua.lity adjustment- ••..-...........
Detached
Setui-deteched
Localit~~::;·;~-~ -·················-~ $ ri ----.,
Row
I
I
End row
I
C.nctJLAT&D
Awu.
SUMMARY OF REPLACEMENT COST
MaiQ liuUdiog
. ------Sq.
...............................................................------Sq.
Other improvement.a:
Accessory buildiuga
•••••••••••. -----
ft,
@ -----
ft
®-----
Sq. ft, @ ----Sq.
ft @ ----Sq. ft. @ -----
Walks_.............................
Driveways ••.••••••••••.•.•..••.••. ,
Additional mechanical equipment
_
ltema of eseeeerve coat. •• ·
Sewage diepoeal · .•.••••••...•••••••••••••••••••••••••••• ;
Water supply
.
.
H··-·············
StH:l'tOT.11.L
4rcn1ie~tur&I 18J'Vioe ••.••••..•.•••.•••.•.••.•• .. .•. ..•.••. ..•.•. .•••. .. .••.•.••.•••••••..
Es1'1.11ATBOJI' Co&T RsQUIUD TO REPLACE BtnLDlNO. IKPBOVEMEHTS lN
ESTIMATED
. ..•.......•...•..•
NEW CoNDJ't,ON
BT
20li3-Cost Estimate-lnplace
Unit Melhocl·
Amu.
l'.UW.1'
I
°"""
1
.I
4
I
I
t
I
I~
9
I
I
I
Sq.
ft.
•
APPLICATION
OF COST ESTIMATION
METHODS
1704
2053-Cost l!stimate-Jnplaee llnit Method
1., Eseavation
2. Foundations:
Walls
Basement floor
a Chimney
5. EneriOt walls
6. Floor framing
. 7. Bubftooring
8. Finish ftooring
9. Partition fra.tniug
10. Celling framing
11. Roof framing
13. Gutters
Downspout.
1&. Decorating
18. Interior doora
Running trim
17. Windows
18.. Entrance
Extm-Or detail
lQ.
Cabinets:
Interior detail
20. 8tainl
21.: Special ft00l'8
22. Plumbing:
Exira bathroom
i.vatory
Toilet
23. Heating
2'- Electric wiring
· Service panel
26. Lighting fbtures
26. Inaulation:
Walt
Ceiling
.,._,_
__ ......
,
Tor.AL Con u Colll'oDJ1'19
'GonBAC'l'OB'a OvnnAD- D» Pawn
TOT.U.
Scav.1.u:roaroW
UNDERWRITING
MANUAL
1704-1707
The face sides of these forms are arranged identically for entries
of certain case data, and for determining the Estimate of Cost
Required to Replace Building Improvements in New Condition.
FHA Form No. 2052is used in the Integrated Square Foot Method,
as shown and described in paragraphs 1710to 1724,and the reverse
side is ruled especially for the adjustment of a selected Basic Square
Foot Cost. FHA Form No. 2053 is used in the Inplace Unit Method,
as shown and described in paragraphs 1725 to 1732. The reverse
side is ruled especially for the computation of Component Costs
and to obtain the Square Foot Cost, Space is provided on the face
side of both forms for applying Quality and Locality Adjustments.
Space is provided also on the face side of both forms for computing
the costs of Main Building, Garage, Other Improvements and Architectural Service, and to obtain the Estimate of Cost Required to
Replace Building Improvements in New Condition.
1705. Inasmuch as both estimate forms are arranged
identically on the face side, the entries and computations on the face
side are treated in the same manner for both methods of cost estimation. Nevertheless, it is necessary first to select the proper form
according to the method to be used.
1706. Space is provided on the face side of the forms
for the following entries : (a) serial number, ( b) property address,
( c) diagram or rough sketch, ( d) computation of calculated area, ( e)
classificationof building, (f) quality and locality adjustments, (g)
name of contractor, (h) summary of replacement cost, (i) date of
estimate, and (j) signature.
1707. An illustration of the computation of Calculated
Area follows:
"'De
i'it'OR
0.AY
-
POR""'
STOOPS
~PAA
..
ft
<'L.noR
-
COMPUTATION OF CALCULATED AREA
,
t>A'~-QllY -'.:\(\1.:-&;:11
..........,,..
-·
3~0· x 61 "'611
8'-6"
\21-0"
t4-o•xs-o,.ta~o"X4'-o">
x 30'-6'
3'- 3" x · 2s•.:.n•
3'-~" x 3' - N'
.s
.as
10.2
36
R"AR nQRM"R
9
10
Ca:u:vw.'l'U) AnA
MODIFICATIOH OF SQUARE-FOOT COST
~
19
Tm<
I
P.ui:n.yUlftfl
"
0
5 I
5 0
16'-6"
,,-RnNT nnRMERS
......"
8
2
I
•
9
3
·i;
0
I 4 4 .3
INu11 ... or&rOllrSI
The above computation o:f the Calculated Area o:f the subject building
is made in accordance with the instructions contained in Section 16.
The fractions, expressed in decimal form and entered in the "Fraction" column,apply to those areas which are included in the calculated
area in part. The areas of the two front dormers are equal, and this
is indicated by entering "2" in the fraction column.
~--~-----4
APPLICATION
OF COST ESTIMATION
METHODS
1708-1713
1708. The reverse side of FHA Form No. 2052 is used
for making adjustments to a selected Basic Square Foot Cost. The
reverse side of FHA Form No. 2053is used for entering the measurements of components, applicable inplace unit prices, the resulting
costs of components,and for obtaining a Square Foot Cost.
1709. The Square Foot Cost, after having been determined on the reverse side of the appropriate form, is transferred to
the face side and then adjusted for quality and for locality to obtain
the Final Square Foot Cost. Computations are then made to determine the estimated costs of the main building, garage, other improvements and architectural service. Appropriate entries are made in
the Summary of Replacement Cost on the face side of the form.
APPLICATION OF INTEGRATED SQUARE FOOT METHOD
• t
1710. Classification of Subject Building. The subject
building is identified with one of the classificationslisted in Part 1
of the handbook. This identification reveals that the subject building is classifiedas detached,one-family,11h story, 1,400to 1,500 square
feet. This classification enables correct selection of the applicable
Basic Square Foot Cost and the Component Unit Adjustments.
1711. Cost Data Handbook. Part 1 of the handbook
contains cost information necessary for the estimation of a building
by the Integrated Square Foot Method. This data is tabulated for
ready reference under the following headings:
Basic Specifications
Basic Square Foot Costs
ComponentUnit Adjustments
MiscellaneousCosts
Quality Adjustment Percentages
Locality Adjustment Percentages
1712. Basic Specifications comprise an outline of the
materials with descriptions of character and grades customarily used
in typical buildings. Separate basic specificationsare provided for
each of the basic types of buildings : detached, semi-detached,row
and end-row. The materials are described by their character, sizes
and grades, or by the lump-sum amounts normally allowed for them.
The specificationsare arranged in the sameorder as the numberedcomponents of a building, and the descriptions of customary materials
are grouped under the componentsto which they refer.
1713. Basic Square Foot Costs are tabulated separately,
to two decimal places, under each classification for usual exterior
wall constructions. They are also tabulated according to the various
calculated areas which are typical for each classification. In gen-
UNDERWRITING
MANUAL
1713
SUBJECT SPECIFICATIONS
Footings. Concrete.
Footing Drain. 4" agricultural tile.
Foundation walls. 10'' poured concrete.
Columns. 4" diameter steel pipe with cap and base.
Girders.
Basement floor. 3" concrete with monolithic finish.
Exterior brick veneer. Face brick.
Chimneys. Brick chimneys, flue lining, cement cap, refractory brick
fireplace lining, cast iron damper, throat, ash-dump and
cleanout doors.
Rough lumber. Joists, studs, plates, rafters of No. 1 common Y. P.,
sheathing, sub-flooring,and roof boards of No. 2
commonY. P.
Exterior trim & millwork. No. 2 white pine, 1%," thick doors.
Interior trim. Stock trim, 1% " thick doors, white pine.
Windows. D. H. stock white pine.
Basement sash. Standard quality steel.
Floors. Clear white oak throughout except kitchen to be linoleum
over yellow pine or fir.
Tile. Tile floor and wainscot in bathroom.
Linoleum finished floor in kitchen.
Stairs. Pine treads and risers to basement.
Oak treads and pine risers to secondfloor.
Roofing. !!-10# asphalt compositionshingles, rear dormer 40# tin.
Sheet metal. Copper valleys, gutters, flashing, and downspouts.
Lath. 2.3#, paper-backed metal lath.
Plaster. 2 coat work.
Exterior paint. a. Wood-priming coat and 2 regular coats.
b. Sheet metal-1 coat lead and oil and 2 regular
coats.
Interior paint. a. Walls and ceilings-1 coat size, 2 coats semi-flat.
b. Woodwork-1 coat flat, 2 coats enamel.
c. Floors-stain and fill, 2 coats varnish or equivalent finish.
Finish hardware. Medium grade.
Electrical. BX wiring-Fixture allowance $50.00.
Plumbing. Copper water piping, cast-iron soil pipe, medium grade
fixtures and fittings. Enamel iron sink, vitreous china
lavatories and enameled iron double shell tub, syphon
action closets, cement laundry trays-30 gallon automatic hot water heater.
Heating. Automatic, forced warm-air furnace, oil burner.
Accessories. Medicinecabinet in bathroom.
Parcel receiver.
Kitchen ventilating fan.
Cabinet in basement hall.
Kitchen cabinets.
Refrigerator, electric or gas.
Weatherstrip. All exterior doors and D. H. wood windows.
Insulation, Rock wool batts on uppermost ceiling and exterior walls.
Recreation room. Ceiling plastered on metal lath, exterior walls
plastered over waterproof bond coat, 2" gypsum block partitions, painted walls, ceilings
and floor.
I
I
~
J
APPLICATION
OF COST ESTIMATION
METHODS
1713
~-----~-~
ASPHACf SHINGLES
I
CEit.iNG
UID FOOR
D.S.
D.S.
I ST F lllOR
GRADE
i
U•
u
11
tl------il
I
I
~-----11
11----i
U--1
I
r-1J
Q
l
~
:
8ASl!.M NT FL.
.,t""--=--=--=--=--=-= =-=--=---===--=----==--=--======-:==---=-
~-- --- --- ----- ----------------t
FRONT ELEVATION
3(l- 6
11
....
1
--
I
1 ...
JOIST 2"Kto"- 1e• O.C.
PLASTER WALLS AND
CEILING, CEMENT fL.
BASEMENT
PLAN
UNDERWRITING
MANUAL
1713
I
FIRST FLOOR PLAN
•
ASPHALT
SHINGLE&
SECOND FLOOR PLAN
APPLICATION
OF COST ESTIMATION
METHODS
1713
CEILING
2NO
n.
IST. t ,
GRAOIE
SIDE
PLOT
LOT'
PLAN
50' X 125°
ELEVATION
WALL
SECTION
UNDERWRITING
MANUAL
1713-1719
eral, two or more sheets are required for each classificationto provide for the usual areas in increments of 100 square feet. Eight
columns appear on each sheet, each column being captioned by the
area to which the Basic Square Foot Costs are applicable. The
tabulations also indicate the basic perimeters established for each
area increment and the cost per lineal foot of each type of exterior
wall. The basic wall height establishedfor each classificationis shown
at the top of each sheet and it is applicable to all areas tabulated on
the sheet.
1714. Component Unit Adju8tment8 are tabulated, to two
decimal places, in conjunction with Basic Square Foot Costs under
each classification. These adjustments are arranged in columns for
the respective area increment. Some adjustments are indicated as
lump sum amounts, if lump sums are more readily applicable.
1715.MiscellaneoU8 Costs are available for those elements for which cost data has not been otherwise tabulated. These
miscellaneouscosts include contractors' overhead and profit, and are
either lump sum amountsor unit costsof the elementserectedin place,
complete.
1716. Quality Adjustment Percentaqes are confined
within the limits tabulated as the recommendedupper and lower
limits of Quality Adjustment Percentage. These limits are established for various important cities and localities in the territory.
1717.Locality AdjU8tment Percentages are tabulated
for the base city and all other important cities and localities in the
territory. If necessary, these percentages are tabulated separately
for more than one type of exterior wall construction.
1718. Selection of Basic Square Foot Cost. The accompanying illustration shows the tabulation of Basic Square Foot
Costs for detached, one-family, 11h story buildings. The column
headed 1,400to 1,500is chosenbecauseit correspondsto the calculated
area of the subjectbuilding, whichis 1,443 square feet. In this column,
opposite "Face Brick Veneer", is found the Basic Square Foot Cost,
$3.64,applicableto the subjectbuilding. This basic square foot cost is
then entered at the top of the right hand column on the reverse side
of FHA Form No. 2052. An entry, "Face Brick Veneer", is made
on the blank line opposite Type of Exterior Wall. Necessaryadjustments to the basic square foot cost are next made accordingto instructions in the followingparagraphs.
1719.Materials and Size Adjustments. As the next
step, the subject drawings and specificationsare compared with the
applicable Basic Specifications to determine deviations from the
established typical building and basic specifications. Although few
adjustments are ordinarily necessary, a subject building has been
I
•
APPLICATION
OF COST ESTIMATION METHODS
1719
selected to include. a variety of deviations from basic specifications
for the purpose of illustration. In order to obviate possible oversight, the necessary Materials and Size Adjustments are made in a
sequence corresponding to the numbering of the components of a
building.
'"',,..,..
.. 'li'T"'llf!
Tt\U
FEDERAL'HOUSING .AD.IINISTRATION
Metronoliten
Type
Family
Insuring 'Of'fice
Stories
Area in.Souare Feet
900 1000 1100
16m non l"""
Ci!:z
Exterior W8l.l Construction
.,____ ., ... , __,_,, ,.,. ~4"-"
It>---
"~·---
""
"-""-'
""Aft,,_,_,,
1:>•
..,_
,.,
.,
JO
'iA
.., t.n
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'ff'1 "'
~s
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....
'7<
.. _,,
'>,6'7
JC
"> L
., '"' .,~ ., .,.,
ii
i~ H~ ~-H~ +m
1
f~
., ',.,1<
•=
., ,.
a ... .; .. ,.._ --1.1ii
'1
.,., 1,1..6
., ~., '>., ,,.,
., 6~
~5.37
T •""'"
; 11nmmnn ,,_, •" "---r.nmmnn ,,_, •" A• "'• 11
• "•ft& ,,_. _,, ,,_____
.,
lldi!:Qilg
"""- ,+_ ...
.
~ ;:1
'1,'12 11,:>Q
., '20 I~ '>C
'1,26
., ~c
., .,.,
'1./.Q 1.., '"
'> C1 1.., ,,
.,
., Jtf
., '71'1
., f..'7
., f..1
lo
*r.o Rt. --- lineal f'oot nf' exterior wall includin" foundation
1n.,
I"
""'--.!- . .L-I Cl'i I ClA I rnr I in'>
tt-' _ .... 1 n11. ft
I
r,,..-.,.,, ,_...,_._ rr-.c·•
•-
L'
Jf..
I 111
11n
; tl.a a4
., ':>?
""'
., '"
I 11a
11'. o<" w. 11
,
-
2'i'!: Baseaen t
'"" Basemerrt
f
2 - Foundatd.on - 12• R•ick
Foundatd on - 1n• r.onc•"+" l
l
J, - Fi ---1 """
; - r.u++e•o ..nln·--·•--"--· -- f
V ~ Metal Lath
t
22 - "-•-a Ra+.h-"---1-•t
2'1 _
u-• or-•-- u--•
26 - Insulation
- 411 Ri'l-Walls
Ceilin"S
'"
/.
0-
1.. • Footin"
Drain-T.i neal Foot
Sewer Connection - Lineal Foot
Shin.,les
210# Asnhalt - Sauare Foot
Clear Red Cedar - ~~;·~ "·-•
Heavv '·-hal + - "-··--- "'--•
c+ ....... d ..... ~
C1 ...+-
_
c::i,,. ....... _,.
'&'--""
"huttoro - ner •n<,.
Kitchen Cabinet - Nall So. 1't.
Kitchen Cabinet - Floor Sa. Ft,
Tile Floor
'l'ile "'·'- aco+
Extra Lavatorv
Extra ~lORot f'n-bln.•t'""
Conner ninin" - ner fi >rt.n-Laundrv Travs
Weather~trinnina - "'er dnnr
Weather•trinnin" - ... ,. ....i-dnw
Standard Linoleum on Pine Floor
40# Tin Roonng - S
1 J.
1?
no
.11----·
11
""
-r e
0
""
.11
2f..
1q
12
no
J.O
""
,.,.,
.11
~·
,,
no
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'" """
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,.,,
..... ---
~ ... --
,.,,.,
nn
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no
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....- ~
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,..,_~,----~-.!II
c,..- ............
-
;;.,.,
"'----
-
---
____
.t .... ,...,..
~ ............... -
i
-
_.!II
oc::i
~-,_.!- . ..:Le
...
-
..... .,.
_
-------
-- -- ...... _ _._
.... ,
- ... _ .... _ -t...-.:1
- Datached
-
... ....
.... _ _._ - _,___..:i
.
"""
---
A,..,.. ....
-- -- --"---
""'"'-~
--
IT
~•Ln
n'>
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,.,
'"
n'>
,.,
,,
.,.,
n'>
fl'>
n~
nl
-t .,
10
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., "'"
""
nr
,.,,
,,,
..,,
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rv r
~
o'f
, o
""
"L
""
'·'0 11 Ca"'" t>-'--1 ?fl I? --- 1',.Am<>
1 "" 1 car B, V.
1 nn I? --- "
"
1 "" 1 car Fr6lll"
,., nn 1 car B. v.
1n nn I~• concrete
-----··., nn
?n nn
t. nn !Ki t.chen «:.:
? .,~
.cs
•11n
••n"
..,..,
.22
l.
R<"r.F"IV"R
WEATHERSTRIPPING 16WINDOWS 3 DOORS
RECREATION ROOM
IN BASEMENT
OAOrC"
TOTAL
t---
a nn
62.00
4•1.nn
Suu lTEm
1054.00
.73
I.OS
.12
Nrr ADnmoN oa DE?Vc:rroN kDn(+)~
8QtrARll Fom Cosr
LtrMP
TOT.u. ADQJTJONSAND D:tl>VCTIONB
··--- ~·
.93
A.,.,.
APPLICATION
OF COST ESTIMATION
METHODS
1720-1721
The computation is made as follows:
$1,054.00 $0 73
1,443
.
b, All adjustments in the "plus" column, including the converted total of the lump sum adjustments in (a) above,
are added together to obtain the Total Additions, $1.05.
Likewise, all adjustments in the "minus" column are
added together to obtain the Total Deductions, $0.12.
a. The difference between the total additions and the total
deductions, $0.93,is the net square foot cost adjustment
and is entered in the right hand column on the line opposite "Net Addition or Deduction". The word, "Deduct",
on the same line, is crossed out to indicate that the net
adjustment is added.
d. The net addition, $0.93, is now combinedwith the selected
Basic Square Foot Cost and the result is the Square Foot
Cost. This result, $4.57,is transferred to the space provided for "Modificationof Square Foot Cost" on the face
side of FHA Form No. 2052.
1721. Determination of Final Square Foot Cost. The
character and grades of materials specifiedfor the subject building
are reflected in the Square Foot Cost. However, for the purpose
of this example,it is assumed that the quality of construction found
or likely to be found in the completed structure would represent a
saving of 2% in cost, due to less costly construction than was assumed in the development of the Basic Square Foot Cost. Therefore, 98% is selected as the applicable Quality Adjustment Percentage, it being within the recommended limits designated in the
handbook. The selected percentage is entered in the space provided for "Modification of Square Foot Cost" on the face side of
FHA Form No. 2052,and the Square Foot Cost is modified accordingly. The result is entered in the space opposite the Quality
Adjustment Percentage.
r
r
I
,,. I
C.u.cvw.TSD Au,.
r..
-1
l
MODIFICATION Of SOUAllUOOT COST
Square1ootu1sL~.--·-·-····-·····-'
QuaUl7 adJUBlmenl
, .••••••-..
98
97
1'0""1 .
a;..,.~":;"~-;~'·t;;;
_
_
%
4.57
4 .48
~,I 4. 35
Delaobed
Seml-delacbed
Row
Endmw
I
I
I
f
x
...l
·a
4
~, iC
111
ix
I
I
2
I
I
1443
SUMMAR'i' OF
REPLACEMENT COST
·1
I
I.
8q. ft.
UNDERWRITING
MANUAL
1722-1723
1722. After the quality adjustment has been made, the
resulting square foot cost is next adjusted for locality. Locality
Adjustment Percentages are available in the handbook where they
are tabulated for all important cities and localities in the territory.
Where necessary,they are tabulated separately for different types of
exterior walls. This tabulation reveals the Locality Adjustment
Percentages applicable to the city in which the subject building is to
be erected, as 95% for frame structures and 97% for brick veneer
structures. Inasmuch as the subject building is predominantly brick
veneer, 97% is selectedas the Locality Adjustment Percentage. The
selected percentage is entered in the space provided for "Modification of Square Foot Cost" on the face side of FHA Form No.
2052. The square foot cost already adjusted for quality is then
modified by the locality adjustment percentage. The result is the
Final Square Foot Cost which is entered in the space provided.
1723. Determination of Total Replacement Cost.
Items included in the Summary of Replacement Cost on the face
side of FHA Form No. 2052are arranged in the following order:
a. Main building
b. Garage, other than built-in
c. Other improvements, including accessorybuildings, walks
and terraces laid on the ground, driveways, additional
mechanical equipment, items of excessive cost, private
water-supply, sewage disposal and electric generating
plants, and other elements not reflected in the Final
Square Foot Cost
d. Architectural Service
•
I
1443
Sq. I~
SUMMARY OF REPLACEMENT COST
1443
20 0
Main_ Luilding -·············-···--····--····················
0.,...
lQ..~.gQ
..
.±UO)H8')
....
.,.b
!Id·
..
18
89
614
Additional mecbsnica1 equipment KITCHEN
Sq.ft.®
Sq. r~ @
Sq. rt. @
FAN
($ 22.00)
Sq.ft. ®---=4=35~
Sq. ft. @
1.25
.2s
.I 8
AUTOMATIC FORCED WARM AIR AND OIL
BURNER
( $ 552.00)
Items of esceeetve Cost .~ ••••••~----·-······---~-----··········-··-·----------··----·~---
--------------McMteo\u,al eeevtee
!,,!M!J.E:.R. .$J;:_l\\1!.C.E:.
EBTIMAU OF COST RBQUI8.Jl:D TO REPLACE BUILDING lKPBOVEMENTS llf
DATE-----
EwnHATZD
6 2 1 1 0
2 5 0 0
0
0
20.00
16.00
13500
.2 2
Sewage,disposal ···················----··········--······································
Water supply .•••••,, •••••••.••••••~---·······················---.-----···················
'
574.00
$ ---$
'----
_
SUBTOTAL
~.......
NEW CONDITION
BT
2052-Cost Estimate;-Integrated Square FO'!I Me~
-+-1-'~-.+-"-~+g"-+'g'-
$
S ;=l;;;;;;!;:=t:;;t=:!::=;!::::;
$
O 0
2
I
•
~\
APPLICATION OF OOST ESTIMATION METHODS
1724-1726
1724. In order to completethe estimate of total replacement cost, it is necessary to make the following computations and
entries:
a. The cost of main building is obtained by multiplying the
Final Square Foot Cost by the number of square feet in
the Calculated Area, and entries are made in the spaces
provided.
b. The cost of garage is computed from the estimated area
and a unit cost obtained from the handbook.
c. Costs of accessory-buildings,walks, terraces, and driveways
are computed separately from estimated areas and unit
costs obtained from the handbook.
d. The costs of additional mechanical equipment which have
been entered directly in the summary of replacement cost
are only the additional amounts for items specifiedfor the
subject building, in excess of allowances included in the
Basic Square Foot Cost. The additional amounts have
been computed as described in paragraph 1719 under Components #23 and #27, and their combined total has been
entered in the total column.
e. The allowance for Architectural service is determined according to the instructions contained in Section 16. It is
assumed for this example that limited architectural service is usually obtained for similar houses in the particular
locality, and that the customary charge for such service in
the locality is $150. This amount is entered in the "Total"
column on the line opposite "Architectural service", and a
qualifying notation is made.
f. The total of all costs included in the summary of replacement cost is the Estimate of Cost Required to Replace
Building Improvements in New Condition.
APPLICATION OF INPLACE UNIT METHOD
1725. For the purpose of illustrating the application of
theInplace Unit Method, it is assumed that tabulated Basic Square
Foot Costs are not applicable to the subject building and therefore
the Integrated Square Foot Method cannot be used. The following
example of the application of the Inplace Unit Method employs the
same drawings and specificationsfor the subject building which were
used above to illustrate the application of the Integrated Square
Foot Method.
1726. Measurement of Inplaee Units. In order to
assure the inclusion of all elements shown on the drawings or specifications, the measurements of the number of Inplace Units are made
UNDERWRITING
MANUAL
1726
in a sequencecorresponding to the numbering 0£ components 0£ a
building. The reverse side of FHA Form No. 2053,Cost EstimateInplace Unit Method, is used to record the measurements of Inplace
Units. In general, measurements for length and height are taken
to the nearest 3 inches, and areas are taken to the nearest square foot.
An example of making the measurementsin accordancewith instructions contained in Section 16, Methods 0£ Dwelling Cost Estimation,
is described as follows:
1. Eecaoation:
a. Basement:
Width
Main
Bay
Areas
"
"
Length
Depth
6' 6" X
5' O" X
5' O" X
4' O" X
19' 6" x
6'
2'
2'
4'
4'
x 30' 6" x 6' 6"
_ 24' 9"
_ 3' O" X
_ 1' 6" X
2' 6" X
2' 611 X
2' 6" x
611
6" X 2
6" X 2
3" X 2
3"
=
=
=
=
Total,
4,908cu. ft.
127 "
38 "
63 ,,
85 "
207 "
I
5,428cu. ft.
5,428cu. ft. X 1/27 = 201 cu. yds.
b. Trench Wall:
Width
Length
Depth
Porch______ 1' 9" X 28' 8" X 2' 6"
Rear Stoop.,, 1' 6" X 3' O" X 2' 6"
Front Stoop; l' 6" X 4' O" X 2' 6" X 2
TotaL-----------------------------166cu. ft. X 1/27 = 6 cu. yds.
125cu. ft.
11 "
=
30 "
166cu. ft.
The computed yardages are entered separately on lines
under Component #1, and descriptions of the classes
of excavation, as basement and trench, are entered
under "Explanation".
93. Foundations.
a. Footings:
Front , ,
Sides
Rear
Bay
Porch, ,
30' 6"
24' 9" X
19' 6" +
(1' O") X
8' 6" +
Total;
2
3' 6"
2 + (2' 9") X 2
12' 0" + 8' 6"
+ 3' 8"
31 lin. ft.
50 "
23 "
11
29
"
144 lin. ft.
This measurement is entered in the "Quantity" column opposite "Footings", and a descriptive notation
is made under "Explanation". No measurement is
made for the chimney footings as they are part 0£
Component #3, or for column footings which are
part of ( e), Basement Essentials, of this component.
•
APPLICATION
OF COST ESTIMATION
METHODS
1726
b. Basement Walls:
Length
Height
114' O" X 7' 3"
=
827 sq. ft.
The length used above is the total of the measurements used in computing footings under (a), excluding the length of porch footings. The measurement
for basement walls is entered in the "Quantity" column opposite "Walls", and a description is noted
under "Explanation". No measurements are made at
this time of the chimney, which is part of Component
#3, or for interior partitions, which are part of
Component #9.
o. Trench Walls:
Length
Height
6'' thick walls:
Areas (1' 6" + 5' O" + 1' 6") X 2' 6" X 2 =
" (2' 6" + 5' O" + 2' 6") X 2' 6" X 2 =
" (2' 6" + 4' O" + 2' 6") X 4' 3" X 2 =
" (2' 6" + 3' 9" + 6' O"
+ 3' 9" + 3' 6" + 3' 0") x 4' 3"
Stoop
x 3' 6" x 2 =
4' O"
x 3' 6"
3' 0"
"
x 5' 3"
3' O"
40 sq. ft.
50 "
77
96
"
"
28
11
u:
16
"
"
318 sq. ft.
9" thick walls:
Porch (8' 6"
+
12' 0"
+
8' 6") X 3' 0"
=
87 sq.
~t.
The measurements for 6" thick and 9" thick trench
walls are entered separately in the "Quantity" column
opposite "Walls", and descriptions are noted under
"Explanation".
d. Basement Floor :
24' 9" X 30' 6" = 755 sq. ft.
3' 0" x 6' 6" = 20 "
TotaL
775 sq. ft.
This measurement is entered in the "Quantity" column
opposite "BasementFloor", and a description is noted
under "Explanation".
e. Basement Essentials :
This element is measured as a lump-sum amount equal to
the total of the separate costs of the individual items.
The cost of each item is computed as the product of
UNDERWRITING
MANUAL
1726
a measured quantity and an inplace unit price selected
from Part 2 of the Cost Data Handbook, as follows :
Closedstair.pinetreads ds riscrs, 13 risers
Steel sash-3 light___________ 5 units
"
"-6
" ----------5
"
6" X 10" girder
20 lin. ft.
6" x 8" " ------------14 "
Lally column & footing_______
1 unit
Tile drain
llO Jin. ft.
Drain conn. to sewer
40
Area gratings (I' O" X 4' 0") X 2
+ (2'0"
X 3'0")
"
@ $3.25 = $42.25
@ 6.40 = 32.00
@ 13.15 = 65.75
@
.28 = 5.60
@
.23 =
@ 4.90 =
@ .06 =
@ .80 =
14 sq. ft. @
TotaL_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
.90 =
3.22
4.90
6.60
32.00
12.60
__ _ _ _ _ _ _ _ $204.92
This amount is entered as $205.00,in the column
headed "Cost" opposite Basement Essentials, and a
brief description of the element is noted under
"Explanation".
3. Chimney:
Measurement is taken from the underside of footings to
top of chimney. For the subject building, the measurement is 31' l". This measurement,taken to the
nearest foot, is entered in the "Quantity" column. No
description is necessaryunder "Explanation", because
this component includes only the chimney construction necessary for the heating plant.
4. Fireplace:
This component is estimated as a lump sum amount for
the fireplace, including complete foundation, masonry, flue, hearth, lining, damper, facing, and mantel. Regardless of the fact that the subject drawings
call for a combined, two flue chimney, the cost of this
component is calculated on the basis of a separate
chimney for fireplace only. The cost of the fireplace,
amounting to $125.00is selected from the handbook
and is entered in the "Cost" column.
5. Exterior Walls:
a. Brick Veneer:
Length
Front ,
Rear ,
Ends
Bay
30' 6"
22' 8"
24' 9"
11' 3''
TotaL
I
Height
X 11' 4"
X 11' 4"
X 10' 4" X 2
X 3' O"
------------------
346 sq. ft.
257
512 "
34 "
1,149sq. ft.
I
•
APPLICATION
OF COST ESTIMATION
METHODS
1726
b. Wood siding:
Length
Gables
Rear dormer
Front dormer
Bay
Porch Gable
24'
35'
9'
11'
12'
Height
9" X
6" X
O" X
3" X
O" X
6'
5'
4'
5'
5'
O" X 2 =
6"
=
6" X 2
6"
=
O" X ~ =
TotaL
297 sq. ft.
195 "
81 "
61 "
30 "
664 sq. ft.
The measurementsfor brick veneer,1149 sq. ft. and for
wood siding, 664 sq. ft. are entered separately in the
"Quantity" column, and descriptive notations are
made under "Explanation". No deduction is made for
that portion of exterior wall covered by porch roof
construction.
6. Floor Framing:
a. Wood joist construction:
24' 9" X 30' 6" X 2
3' O" X 6' 6"
=
Total;
1,510 sq. ft.
20 "
1,530 sq. ft.
No deductions are made for stairwell or chimney
openmgs.
b. Concrete slabs:
Porch
Front stoop
Rear stoop
8' 6" X 12' O" = 102 sq. ft.
4' O" X 6' O" = 24 "
3' 0" X 4' O" = 12 "
Total
138 sq. ft.
The totals of the measurements of wood joist construction and concrete slabs are entered separately in
the "Quantity" column, and descriptive notations are
made under "Explanation".
7. Subfiooring:
First floor , _ _ _ _ _ _ _ _ _ 24' 9"
Bay________________
3' O"
Second floor
16' 6"
Rear dormer________ 3' 3"
Front dormers______ 3' 3"
TotaL
X
X
X
X
X
30'
6'
30'
26'
3'
6"
6"
6"
O"
O" X 2 =
755 sq. ft.
20 "
503 "
85 ,,
20 "
1, 383 sq. ft.
This measurement is entered in the "Quantity"
column and a notation is made under "Explanation".
In measuring the subflooring of the second floor no
UNDERWRITING
MANUAL
1726
deduction is made for the stairwell opening or for
the unfinished area in back of the enclosing partition
at stairwell.
8. Finish Flooring:
The measurement of this component is identical in this
example with the measurement for Component #7,
"Subflooring",. inasmuch as subflooring is indicated
for both floors and the same finish flooring is specified
throughout. Therefore, the measurement is taken as
1383 sq. ft. and entered in the "Quantity" column
opposite Component #8. A description of the finish
flooring is entered under "Explanation". The linoleum over yellow pine, specified for the kitchen, and
the tile as specifiedfor bathroom, are measured and
described under Component #21.
9. Partition Framing:
a. Wood stud framing, plastered on two sides :
Length
First story
Second " ---------------
I
Height
80' 6" X 8' O"
93' 4" X 7' 6"
Total;
=
=
644 sq. ft.
700 "
1, 344 sq. ft.
No deductions are made for the areas of chimney,
fireplace and door openings.
b, Wood stud framing, plastered on one side:
48' 8" X 7' 6" = 365 sq. ft.
The enclosing partitions of the second story, which
are finished on one side only, are taken at full ceiling
height, and the total length includes the lengths of
sides of dormers. The lengths of dormer fronts are
not included because the area of the enclosing partitions located there approximately balance the excess
areas included along dormer sides.
c. The total of wood stud partition framing is taken as
the sum of (a) and (b) above, 1344+365=1709 sq. ft.
d. 2" gypsum block:
41' 0"X7'
3" = 297 sq. ft.
The partitions enclosing the finished room in basement are measured without deduction for openings.
The measurements derived in ( c) and ( d) above are
entered separately in the "Quantity" column, and descriptive notations are made under "Explanation".
•
···--···--·---,
APPLICATION
. OF COST ESTIMATION
METHODS
1726
10. Ceiling Framing:
Second floor
Rear dormer__________
Front dormers
Bay
Porch________________
16'
3'
31
3'
8'
6"
3"
3"
O"
6"
X
X
X
X
X
30' 6"
= 503 sq. ft.
26' O"
85 "
3.'.0" X 2 = 20 "
6' 6"
= 20 "
12' O"
= 102 "
TotaL
730 sq. ft.
This measurement is entered in the "Quantity" column, and a notation is made under "Explanation".
11. Roof Framing:
a. Rafter framing :
Front
Rear
"
"
Rear dormer
Bay
Porch
_ 16' 6" X 31' O"
_
16' 6" x 2' 6" x 2
2' 9" X 26' O"
1' 6" X 26' O"
_ 9' 9" x 26' 6"
_ 3' 6" x 11' 3" x %
_ 7' 6" x 8' 6" x 2
=
=
Total;
512 sq. ft.
83 "
72 "
39 "
258 "
20 "
128 .,
1, 112 sq. ft.
The measurement for rear dormer is taken from its
intersection with the main roof to the eaves of the
dormer, allowing for the overhang at the sidewalls
of the dormer. The measurement of the roof over
the bay is computed as the product of half the slope
dimension and the perimeter of the bay.
b. Roof sheathing:
The measurement for this element is taken equal to
.
the area of the rafter framing, 1112 sq. ft.
These measurements are entered separately in the
"Quantity" column and descriptive notations are
made under "Explanation".
12. Roofing:
The total measurement of roofing is identical with the
measurement of roof framing. Three classes of roof
covering are specified and the separate quantities of
each class are computed as follows:
Total area of all roofing 1112 sq. ft.
Area of roof over
bay___________
20 sq. ft. -
copper.
1092 sq. ft.
Area of roof over
reardormer____
258 sq. ft. -
tin.
834 sq. ft. -
210# Asphalt shingles;
UNDERWRITING
MANUAL
1726
The areas for roofs over bay and rear dormer are
taken equal to corresponding areas of roof framing
under Component #11. These measurements are
entered separately in the "Quantity" column, and
descriptivenotations are made under "Explanation".
No measurements are made of flashings, counterflashings,valleys, ridges and saddles.
13. Gutters and Downspouts:
a. Gutters:
(31' O" X 2)
+ 26' 0" + 12' O" + (9' O" X 2) =
118 lin. ft.
b. Downspouts:
(12' 0" X 4) + 4' 0"
+ 9' O" + (6' O" X 2) =
73 Iin, ft.
These measurements are entered separately in the
"Quantity" column, and notations regarding sizes,
shapes,and materials are made under "Explanation".
c. Splash blocks:
Four
II
@ $0.75=$3.00
This amount $3,00 is entered m the column headed
"Cost"
14. Plaster Base and Plaster:
a. Metal lath and plaster:
Exterior walls:
Length
Height
First story
102' 8" X 8' O"
821 sq. ft.
Bay_____________
11' 3"- X 7' O"
79 "
Gables__________
16' O" X 7' 6" X 2 = 240 "
Dormer fronts __ (26' O" + 3' O"
240 "
+ 3' O") X 7' 6"
Partitions plastered on
two sides
1344 sq. ft.
x 2 = 2688 "
Partitions plastered on
one~de
_
365 "
Ceilings of first and second stories
--- - _ ------ - - ---1383 "
5816
Length
Basement ceiling___ 13'
3'
5'
3'
TotaL _ ~
Height
O" X 23' O" = 299
O" X 5' O" = 15
6" x 7' 6" = 41
6" X 5' O" = 18 =
-- __ - _ _
373
"
6189 sq. ft.
•
---i!
APPLICATION
OF COST ESTIMATION
METHODS
1726
The lengths of first story walls and bay are taken
from the dimensions used for element (a) of Component # 5. The areas of partitions are taken from
measurements of elements (a} and (b) of Component
#9. The total area of first and second story ceilings
is equal to the area of the finish :flooring,Component
#8, inasmuch as the areas of ceilings are the same
as areas of the finish flooring in the same story. The
dimensions for the gables, dormer fronts, and basement ceiling are taken :fromthe drawings.
b, Plaster on gypsum block:
Length
(23' O"
+
17' O"
Height
+
26' O") X 7' O" = 479 sq. ft.
o. Plaster and waterproof bond coat :
(18' 6"
+ 23' O" + 22' O") X 7' 3"
=
460 sq. ft.
d. Porch ceiling, wood, painted:
8' 6" X 12' O" = 102sq. ft.
These measurements are entered separately in the
"Quantity" column, and appropriate notations are
made under "Explanation".
15. Decorating:
a. Because the same treatment is specified for the walls
and the ceilings, this measurement is taken equal to
the total area of the plastered surfaces computed for
elements (a), (b), and (c), of Component #14, thus:
Area of metal lath and plaster
6,189 sq. ft.
Area of plaster on gypsum block_______________
479 u
Area of plaster and waterproof bond coat_______ 460 "
7,128 sq. ft.
Total,
b. Painting basement concrete floor:
13' O" X 23' O"
3' O" X 5' O"
x
=
=
299 sq. ft.
15 "
7' 6" =
41
,,
3' 6" X 5' O" =
18
"
5' 6"
TotaL
373 sq. ft.
These measurements are entered separately in the
"Quantity" column, and descriptions are noted under
"Explanation".
UNDERWRITING
MANUAL
1726
16. Interior Doors and Trim:
a. Interior doors:
Basement_________ 2
First story________ 5
Second story, _ _ _ _ _ 10
TotaL
17
b. Cased openings:
Living room
1-(4' 9" X 7' O")
Dining " _ _ _ _ _ _ 1-(2' 8" X 7' O")
TotaL
2
o, Running Trim:
;.,,
Basement rooms_____ 66' O" + 63' 6"
First story exterior
walls
114' 0" + 11' 311
=
Second story gables..;
16' O" X 2 =
Dormer fronts_c_____ 26' 011 + (3'0" X 2) .;:,,,
Partitions finished on
two sides
.__ (80' 6" + 93' 4") X 2 =
Partitions finished on
one side_______________________________ =
130lin. ft.
125
32
32
I
.
"
"
348
"
49
"
716 lin. ft
Deduction for door
openings__________ (3' O" X 2 X 17) +
(5' O" X 2) + (3' O" X 2) = 118 "
TotaL
598 lin. ft.
The lengths of the first story exterior walls are taken
:from the dimensions used for element (a) of component #5. The lengths of the finishedbasementwall
surfaces, and the second story gables are taken from
the drawings. The lengths of the partitions are taken
from the dimensions used :for elements (a) and ( b)
of Component #9.
d. Closet Shelving:
First story
Second story
(3' O" X 5) + 2' O" = 17lin. ft.
5' O" + (3' 0" X 2)
+ (2' O" X 7) = 25 "
TotaL _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ __ _ _ _ _ __ _ _ _ __ __ _ 42 lin. ft.
These measurements are entered separately in the
"Quantity" column, and descriptive notations are
made under "Explanation".
•
APPLICATION
OF C'OST ·ESTIMATION
·METHODS
1726
17. Windows:
First storY--------------------~-------------SecondstorY----------------'-------~"'"""'""'------
9
7
16
Total-------~---------------------------
The total number of windowsis entered in the "Quantity"
column, and a description of the. type is noted under
"Explanation."
18. Entrance and Exterior detail:
a. Entrances:
1 Main entrance
;.. $53. 20
1 Porchdoor--------~-----24. 55
1 :Rear entry door
19.50
Total--------------------~'-------
$97. 25
This element embraces completely installed items for
which inplace unit prices are selected from Part 2
of the handbook. Therefore, no detailed measurements are made. The total of the individual costs,
to the nearest whole dollar, is entered as a lump-sum
amount in the "Cost" column, and a descriptive notation is made under "Explanation."
b, Exterior detail :
Entrance steps
(-
(6' O" X 2' O")
+ 4' O" = 16 lin. ft.
Porch columns , , 6" X 6"
8 units
"
"
4" x 6"
2 "
Porch beam
8" X 10"
(9' O" X 2) + 12' O" = 30 lin. ft.
Shutters________
5 prs.
Iron railings_____ 3' O" X 2 = 6 lin. ft.
TotaL
~
@ $0.55
=
$8.80
@ 6.20 = 49.60
@ 5.60
=
11.20
@ .50 = 15.00
@ 5.00 = 25.00
@ 1.80 = 10.80
-----
$120.40
Applicable inplace unit prices, selected from Part 2
of the handbook, are multiplied by the above numbers of units to obtain the cost of each. The total
amount resulting from adding together all the individual costs is entered as a lump sum in the column
headed "Cost" opposite "Exterior Detail."
19. Cabinets and Interior Detail:
Kitchen Cabinets:
12" wall type 11' 6" X 3' 6" = 41 sq.ft. @$1.10 = $45.10
20" floor " 12' O" X 2' 6" = 30 "
@ 1.40 = 42.00
Bathroom Medicine Cabinet_____________________________
9. 75
Cabinet located in basement_____________________________
30. 00
Total-----------------------------------------
$126.85
r-·····
UNDERWRITING
MANUAL
1726
Applicable inplace unit prices :from the handbook
are multiplied by the above estimated quantities to
obtain individual costs. The total of these costs, figured to the nearest whole dollar, is entered as a lump
sum amount in the '1Cost" column opposite Component #19. Descriptive notations are made under
"Explanation."
$JO.· Stairs:
This component is estimated as a completely installed
unit and it is measured by the number of risers in the
flight. The number of risers is entered in the
"Quantity" column, and a brief description of the
materials used is noted under "Explanation."
111. Special Floors and Wainscot:
a. Bath floor:
f
I
4' O" X 5' O" = 20 sq. ft. of ceramic tile
b. Bath wainscot:
11' 0"
10' 0"
x 3' 6"
x 4' 8"
TotaL
= 39 sq. ft.
= 47
86 sq. ft. of glazed tile
o. Kitchen floor:
9' 0" X 13' 4" = 120 sq. ft.
2'6" x 5'0"=
13
"
TotaL----
133 sq. ft. of linoleum
The unit prices selected for the above special floors
and wainscoting, are the differencesbetween the unit
prices of the special materials and the unit prices of
the materials which are replaced. These measurements are entered separately in the "Quantity" column, and the classes of materials specifiedare noted
under "Explanation".
~. Plumbing:
This component is estimated as individual elements and
the cost of each element is computed as a separate
lump-sum amount, as follows:
a. Bath, kitchen, and laundry:
1 Double-shell 5 foot recess tub
..:.
$72.00
1 Enameled iron pedestal lavatory, 27 X 22" -------43. 00
1 Vitreous china tank and closet combination__________ 45. 00
1 Enameled iron sink with apron front, 60 X 22" ---53. 00
Carried
forward------------------------------
213.00
•
APPLICATION
OF COST ESTilV[A.TION METHODS
1726
Brought forward----------------------------$213. 00
1 pair of cement laundry trays______________________ 12. 00
Extra for copper piping, 7 fixt. @ $1.75_____________ 12. 00
Water service
40 lin. ft. @ .30------------12. 00
Sewer connection
40 lin. ft. @ .75_____________ 30. 00
$279.00
b. Lavatory:
1 ·Vitreous china tank and closet combination
1 Enameled iron, lavatorY-------'--------------------
$35. 00
27. 00
$62.00
I
'
o. Water heater:
1 Automatic heater, 30 gaL-------------------------- $60. 00
Gas connection for water beater____________________ 3. 00
$63.00
=
Applicable inplace unit prices are selectedfrom the handbook and the total costs are entered as separate lump sum
amounts in the column headed "Cost". Descriptivenotations are made under "Explanation''.
~3. Heating:
The subject building indicates an automatic, oil fired,
forced circulation, warm air heating system. In the
absence of detailed specifications, an inplace unit
price corresponding to the type of heating equipment
assumed is selected from the handbook. The unit
price for the customary type of heating equipment
is also selected from the handbook. The diff erence
between these two inplace unit prices is the cost of
additional mechanical equipment, and it is computed
as follows:
a. Automatic, forced circulation warm air, oil burning unit, including 275 gallon fuel tank, and supply and return ducts
$760. 00
b. Gravity warm air, band-fired, coal burning unit,
including supply and return ducts____________ 258. 00
Difference ------------------------------------$502. 00
Allowance for contractor's overhead and proflt.,., 50. 00
c. Cost of additional heating equlpment.,
$552. 00
The inplace unit price of the specified heating equipment, as assumed in (a) above, is the contractor's
UNDERWRITING
MANUAL
1726
cost of the equipment called for and no entry of this
amount is made. However, the inplace unit price of
the customary heating equipment, $258.00from (b)
above, is entered in the "Cost" column on the line
opposite Component #23, and a description of the
usual type is noted under "Explanation". The cost
of additional heating equipment resulting from the
computation, $552.00 in ( o) above, is entered directly
in the Summary of Replacement Cost on the face
side of FHA Form No. 2053 on the line opposite
"Additional mechanical equipment".
1!4. Electric Wiring:
a. Lighting circuits:
Celling
Basement:
Recreation room~---~-Lavatory _____________
Stairs ________________
1
Laundry ______________
Switch
Sidewall
4
1
1
1
2
8
Reesptacles
I
4
2
First Story:
Living room __________
Porch ___ c __ -·- _ ~ ______
1
Stairs __ c _____________
1
Stoop ________ c------Dining room ______ ---1
Kitchen ______________ 2
Ceiling
Second Story:
Master bed room ______ 1
Hall _______ ----- _____ 1
Bedroom __ ----- ______ 1
Bath ___ c _____________
Bedroom _____________
1
12
4
4
2
2
1
1
Switch
2
Reeep"
Sidewall tacles
1
3
2
1
1
1
1
· 16
Total
2
1
2
20
16
64 outlets
=
The number of outlets is entered in the "Quantity"
column. A notation of the method of wiring, BX
wiring, is noted under "Explanation". For the purpose of this measurement, each outlet for lighting
fixtures, switches, and conveniencereceptacles is considered one outlet.
b. Power wiring:
1 outlet for electric range
1 "
" oil burner
1
" " laundry machine
TotaL - _ _ _ _
3 power outlets
•
APPLICATION
OF COST ESTIMATION
METHODS
The number of power outlets is entered in the "Quantity" column.
o. Service Panel:
This item is entered in the "Quantity" column as
"1 panel" and a description is noted under "Explanation".
es. Lighting Fietures:
An allowance of $50.00 is specified for. the . lighting fixtures in the subject building. This amount is entered
in the "Cost" column on the line opposite Component
#25 and a notation is made under "Explanation."
e6. Insulation:
a. Walls:
Length
Front------~---------30'
Rear
22'
End
24'
Bay
ll'
Gables
24'
Rear dorner
35'
Front dormers__ ~_____ 9'
Enclosingpartitions __ -48'
6"
8"
9"
3"
9"
6"
O"
8"
Height
X
X
X
X
X
X
X
X
346 sq. ft.
ll' 4"
11' 4"
10' 4" X 2 =
8' 6"
6' 0" X 2 =
5' 6"
4' 6" X 2 =
7' 6"
257
511
96
297
"
"
"
"
195
"
81
"
365
"
2, 148 sq. !t.
The lengths of exterior walls, shown above, are taken
from the dimensionsused to compute areas of exterior
walls under Component #5. The dimensions for
enclosingpartitions of secondstory are those used for
element (b) of Component #9.
b. Ceilings:
Second floor
Rear dormer___________
Front dormers
Bay
.
16' 6"
3' 3"
3' 3"
3' O''
X
X
X
X
30' 6"
=
26' O"
3' O" X 2 =
6' 6"
=
503 sq. ft.
85 "
20 "
20 "
628 sq. ft.
The dimensions used above are the same as those
used in computing the area of ceiling framing under
Component #10, except that the area of porch ceiling
is not included.
The measurements for wall and ceiling insulation are
entered separately in the "Quantity" column, and
descriptions of the materials are noted under "Explanation". The insulation materials measured· under this component are restricted to those which are
UNDERWRITING
MANUAL
1726-1727
installed exclusively for the purpose of insulation.
Insulation materials used primarily as a base for
plaster or as an interior wall or ceiling surface are
not measured under this componentinasmuch as they
are considered part of and included in Component
#14 "Plaster Base and Plaster".
tJ7. Miscellaneous:
The subject drawings and specificationsare carefully reviewed to disclose any elements or items which have
not been measured previously. This review indicates
the following items which have not been included
under other components: parcel receiver, kitchen
ventilating fan, mechanicalrefrigerator, and weatherstripping for all openings above basement. These
miscellaneouselements are treated in the following
manner:
a. The inplace unit price of parcel receiver selected from
the handbook is entered in the "Cost" column and a
description of it is noted under "Explanation".
b, The inplace unit price of kitchen ventilating fan is
selected from the handbook and it is entered directly
in the Summary of Cost Estimate on the face side of
FHA Form No. 2053 on the line opposite "Additional mechanicalequipment", as illustrated.
c. The cost of the mechanical refrigerator is not included
in this estimate inasmuch as it is assumed here to be
a chattel.
d, The cost of weatherstripping is computed from the
number of openings so equipped and the inplace unit
prices designated in Part 2 of the handbook, as
follows:
16 windows @ $2. 50 = $40.00
3 doors @ 5. 40 = 16. 20
$56.20
The computed cost of this element, amounting to
$56.00, is entered in the "Cost" column opposite Component #27, and an appropriate notation is made
under "Explanation."
1727. Selection of Inplace Unit Prices. After all of
the components have been measured, the applicable Inplace Unit
Prices, to three decimal places, are selected from Part 2 of the Cost
Data Handbook and entered in the "Unit Price" column opposite
I
•
APPLICATION
OF COST ESTIMATION
METHODS
1727-1729
the respective components or the elements for which they were
selected. The selected inplace unit prices are multiplied by the
number of units of the corresponding items in the "Quantity"
column. The resulting products are the estimated costs of the components or elements of the components. The individual costs so
obtained are entered in th~ "Cost" column. The costs of some components or elementsof componentsfor which no measurementsoccur
in the "Quantity" column have been entered as lump-sum amounts
directly in the "Cost" column,as explained in the foregoing example.
The individual costs of componentsor elements are added together
and the result is the Total Cost of Components.
1728. Determination of Square Foot Cost. A suitable
allowance is determined for contractor's overhead and profit. For
the purpose·of this example, the allowance is assumed to be $600.,
and it is added to the Total Cost of Components,resulting in a Total
of $6,613. The Calculated Area computed on the face side of the
estimate form is entered in the space provided in the upper right
hand corner of the reverse side. The Total of $6,613. is then divided
by the number of square feet in the Calculated Area, resulting in a
Square Foot Cost of $4.58 which is transferred to the space provided
for "Modificationof Square Foot Cost" on the face side of FHA
Form No. 2053,as illustrated.
1729. Determination of Final Square Foot Cost. The
character and grades of materials specifiedfor the subject building
are reflected by the Square Foot Cost. However, for the purpose
of this example,it is assumedthat the quality of construction found
or likely to be found in the completed structure would represent a
saving of 2% in cost, due to less costly construction than was assumed in the development of the Inplace Unit Prices. Therefore,
98% is selected as the applicable Quality Adjustment Percentage,
it being within the recommendedlimits designated in the handbook.
The selectedpercentage is entered in the space provided for "l\fodification of Square Foot Cost" on the face side of FHA Form No. 2053
and the Square Foot Cost is modified accordingly. The result is
entered in the space opposite the Quality Adjustment Percentage.
I
IVl()DIRCATION OF •SQUARE-FOOT
Square
foot rot:t·------·-------·----------S
gu.tityadju.tinent~ ..•.••-···98
I
I
I
cosr
%
Looallt~!~~·F;;.;·c~--··----~-~----~-~$I
<
o
NVUU
4.58
4: 49
4. 36
Semi-detached
Row
End row
IX
I
t
I
I
•
IX
I
I
I
1443
SUMMARY OF REPLACEMENT COST
'
Cll'
ltromid
I
IK IX
2
I
I
Sq.ft.
UNDERWRITING
MANUAL
1729
2053-Coat Eslimate-lnplaee Unit Method
cALCULA"-
ElPUW.1.ftOW
1. Excavation
2. Foundations:
Footings
wan.
-·Boor
s..men&-.itials
a. Chimney
4. l'heplMe
&. E::derior walls
QUAtmn'
6~6" DEED
TR'"'nH
8"Xl8" CONCRETE
1n11ft4'1H''H~ft
CON';;R"TE
6"
"
,.
,.. "
,.,...,,,
201
6
144
827
318
87
775
"
MONO. FINISH
31 ·
fi'CE BRICl< VENEER
~RAM." all• SIDIN'-'
1149
664
8. Finisb flooring
2X10-11i"Q.Q., #I .Y.P.
4"CONCRETE··MONO. FINISH.
l"v"" '#'> Y.P. DIAGONAL
Ob"X21'4""' ,,.., WMITI' OAK
153n
138
1~8"
1383
9. Partition
i> X 4 -16"n,r.
6. Floor bming
•• Oubftooring
fr&ID.ing
10. Ceiling framing
11. Roof framing
Sheathing
12. Roofing
ta Gutters
Do\VWlpouts
14. Plaster beee and plut.er
15. Deoontlng
18. Interior doon
Running trim
.,.., Y.P.
170Q
!>Q7
'730
1112
'>" r.yp~UM "L"""
2 X6-l6"0.C:tr1 Y.P.
2 XS -16"0.C •. 'li'I Y.P.
~!i\U
,2:fo.i
II 12
Y.P. SHINGLES
A~HALT
PPER
5" MOULDED COPPER 16 oz.
3"X4 COPPER 16 OZ.
-2.3 • ~APmrM>~Jrfl~TAI.:
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67
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269
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a7
120
II
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e 6"
I 7
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7n
.90
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-
7"
14
77
13
279
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62
AUTOMATIC 30 GAL. GAS
GRftVlTY WARM AIR a Dur:Ts
63
noa
BX CABLE
PANEL~'ii15.00 POWERour• ET"
SPECIFIE~ii ALLOWANC~
MINERAL W~,OLB~TTS
PARCELRECEIVER
16 w1Nnows " eooas
2 COATS nN ·.,,N, c.-M. FLnnR
I
""'
Pi~~~ ~~!~ 8-
-
-
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-
111
5
39
'>68
80
27
93
20"
1?4
140
.067
.189
.n7'.'I
ft.
COJlroJIUT
622
IQI
tlNIT!' 16.80
l.,i:T.
Sq
CQft' OJ'
.541
287
~n
2
OAK TREADS PINE RISERS
'iiATu ~"RAMt"r.WHIT" ru "
4'X4 'GLAZED"
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COPPER WATER PIPING
~
C~D
L.FT.
S.FT.
..."° . ..... ~
..-.
CASED OPENINGS
20.St.airs
21. Special floors
Special wainscot
.....
,55
118 L.FT.
~60 __
73
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'16"
nu
17
11 .. ,an
.145
598
L.FT.
"°"So"T SH~LVINti
17. WindOW8
A
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64
3
OUT•
2148
628
S.FT.
.062
.062
37"
"
"'17
002
44
~n
133
39
A
TOTAL Ccee OF CoruoNENTS
CONTRACTOR'S OVElUDlAD .A.NJ> P~FI'l'
To•uL
SQUAU: FoOT Co&T
""
14
6013
600
6613
s 4.58
•
APPLICATION
OF COST ESTIMATION
METHODS
1730-1731
1730. After the quality adjustment has been made, the
resulting square foot cost is then adjusted for locality. Locality
Adjustment Percentages are available in the handbook where they
are tabulated for all important cities and localities in the territory. Where necessary, they are tabulated separately for different types of exterior walls. This tabulation reveals the Locality
Adjustment Percentage applicable to the city in which the subject
building is to be erected, as 95% for frame structures and 97% for
brick veneer structures. Inasmuch as the subject building is predominantly brick veneer,97% is selectedas the Locality Adjustment Percentage. The selectedpercentage is entered in the space provided for
"Modificationof Square Foot Cost" on the face side of FHA Form No.
2053. The square foot cost already adjusted for quality is then modified by the locality adjustment percentage. The result is the Final
Square Foot Cost which is entered in the space provided.
1731. Determination of Total Replacement Cost.
Items included in the Summary of Replacement,Cost on the face
side of FHA Form No. 2053 are arranged in the following order:
a. Main Building.
b. Garage, other than built-in.
o. Other Improvements, including accessorybuildings, walks
and terraces laid on the ground, driveways, additional
mechanical equipment, items of excessive cost, private
water-supply, sewage disposal and electric generating
plants, and other elementsnot reflectedin the Final Square
Foot Cost.
d. Architectural Service
1443
SUMMARY OF REPLACEMENT COST
lolainlluildh1a•.• --····························'···········--''=4-'14-"-3_
°"'"""·························-'Q..ll..?.Q..................
200
llq.rt.@
Sq.Ii. @ _
4.36
_,_1.._..2""5-
c»her Improvement&:
AwJb-..,J:~-~-f!!-1876
1877-1878
1879-1883
1880-1881
1882-1883
1884
1938
Federal Housing Administration
PART V
SECTION 18
COMPILATION AND RECORDATION OF DATA
GENERAL INSTRUCTIONS
)
1801. Systematic compilation, orderly recordation, and
habitual reference use of valuation and risk rating data are required
of Preliminary Examiners, Architectural Inspectors, Valuators,
Mortgage Risk Examiners, Section Chiefs, and Chief Underwriters.
These operations are an established part of the routine of underwriting activity and are essential in the interests of uniformity, consistency, and accuracy. The following instructions deal with the
sources of information, the procedures to be used in compiling data,
the analysis and interpretation of data, and the recordation of data
in forms suitable for use. They do not deal with the application of
the data to valuation and rating problems. The use of data is prescribed and described in other sections of this Manual.
1802. Sound underwriting practice depends on adequate
data facilities. The quality of data determines the limits of the
zones within which estimates of all kinds will fall. These zones
must be narrowed to practical limits which are sufficientlyclose together to give reasonable certainty to conclusions and decisions.
1803. Data compilation must embrace a recognition of
the many qualities of data. The significance of any compilation is
modifiedby the probable accuracy of the information which it contains. The quality of data may be judged in part by the sources
from which they come,and in part by the nature of the material itself.
1804. The sourcesof information are usually local. Little of the information is secured by actual surveys made by the
Underwriting Staff. Most of the data are assembled from secondary
sources. Suggested sources are outlined below in connection with
the several kinds of data to be secured. Other data are supplied by
certain divisions of Washington Headquarters, such as the Technical
Division and the Division of Economicsand Statistics.
1805. The following items are contained in the typical
Insuring Office data recordation system:
a. File of Economic Background Ratings and. Summaries,
FHA Forms No. 2096 and 2096a. The Chief Valuator is
UNDERWRITING
MANUAL
1805
responsible :for this file which contains the results of examinations of Economic Background .Areas.
b, File of Established Ratings of Locations, FHA Form No.
f30893. The Chie:f Valuator is responsible for this file
which contains the results of examinations and studies of
selected locations in outlined neighborhoods to establish
comparison criteria for Iocation rating activities.
o. File of Valuation and Location Record. Cards, FHA Form
No. 1!073. The Chief Valuator is responsible for this file
which contains one card for each case processed.
d. Subdivision File, FHA Forms No. '£084 and 'E084a. This
file contains the results of examinations of subdivision
projects and the Chief Valuator is responsible for its
maintenance.
e. Real Estate Market Data File. This file contains data on
rentals, sales, occupancy, construction and other aspects
of residential properties, also significant community and
neighborhood characteristics including trends and transitions. The Chief Valuator is responsible :for its maintenance.
f. File of Maps and Plats. Maps of cities, city plans, zoning
plans, and plats of subdivisions are the responsibility
of the Chief Valuator and are displayed on racks, stored
in cases, or appropriately filed in folders.
g. File of Data on Legal Status of Property. The Chief
Valuator is responsible for this file which contains data
pertaining to title and other legal aspects of ownershipand
tenancy, distinctions between chattels and real property,
and legislative enactments or policies affecting the real
estate market.
h. File of Population Statistics. The Chief Valuator is responsible for this file which contains population statistics
suitable for use in making market analyses,economicbackground ratings, economic life estimates, valuations, neighborhood analyses and location ratings.
i. File of Rental Income Property Valuation Data. This file
is maintained by the Chief Valuator and contains information and experience data of use in making estimates
of revenues and operating expenses of rental income
properties.
j. File of Established Ratings of Physical Security. This file
is prepared and maintained under the direction of the
Chief .ArchitecturalSupervisor and serves both the .Architectural Section and the Valuation Section as criteria data
I
•
COMPILATION
AND RECORDATION
OF DATA
1805-1806
in connectionwith the establishment of correct ratings of
properties.
k: File of Eetobtished Standards and Requirements. These
are files of the Property Standards, Minimum Construction Requirements, and rulings on new methods of
construction establishedby the Technical Division, Washington Headquarters. The Chief Architectural Supervisor is responsible for the maintenance of the files or
handbooks containing these data.
l. File of Technical and Advisory Data. This file is prepared
and maintained under the direction of the Chief Architectural Supervisor and contains advisory data on the
utility, durability, strength and other qualities of materials.
m, File of Catalogues of Construction Material and Equipment. Manufacturers' catalogues, building material advertising pamphlets, and all similar publications and
bulletins are maintained in available form by the Chief
Architectural Supervisor.
n. Cost Data Handbooks. These are prepared by the Cost
Analyst responsible for the compilation of construction
cost data and are under the jurisdiction of the Chief
Architectural Supervisor. They are used by both the
Architectural Section and the Valuation Section in connection with the estimation of the replacement cost of
buildings.
o. Mortgage Insuranoe Allotment Record File. The Chief
Mortgage Risk Examiner is responsiblefor this file which
reflects the current status of formal commitments issued
with respect to a borrower for whom more than one commitment has been previously issued.
p. Credit Data File. This file contains credit data used in
analyses of requests for the establishment of lines of
credit with respect to those borrowers requiring recurring consideration. The Chief Mortgage Risk Examiner is responsible for its maintenance.
1806. The form and location of the above data items
should be selected with the object of facilitating and encouraging
the general, habitual, and effectiveuse of the data by the staff. In
addition to the items listed above, each Insuring Office should establish a General Subject File and Library in which miscellaneouspublications, reports, surveys, newspaper articles, and other items of
value are made available to the staff. Economic trends and busi-
UNDERWRITING
MANUAL
1806--1810
ness conditions may be observed through the mediums of trade
journals and financial publications. Economicstudies and the publications of mortgage lending institutions provide a background for
the work of Mortgage Risk Examiners. The Chief Mortgage Risk
Examiner should mark material of particular value and require
it to be read by the members of the staff of the Mortgage Risk
Section. The same material will frequently be of interest to other
sections. All data compiled are the property of the Federal Housing Administration and should always be available to the Director
and members of the Underwriting Staff. They should not be kept
in desks or lockedfiles as this may cause great inconvenienceduring
the absenceof certain members of the staff from the office.
ECONOMIC BACKGROUND DATA
1807. Economic Background Data consist of completed
Economic Background Ratings, FHA Forms No. 2096 and 2096a.
These data bear great significance because they reflect the income,
employment,and other factors which create cities and influence the
extent, character, and direction of city growth.
1808. Underlying economicfactors within an Economic
Background Area will be revealed through the Economic Background Rating Form which is compiled from (a) statistics dealing
with the volume, trend, and composition of population, (b) compilations relating to the cyclical fluctuations, trends, and diversifications of industrial employment, and the cyclical fluctuations and
trends of commercial and specialty employment, ( o) information
pertaining to natural resources, social and cultural advantages, business conditions, and legislative policies, and ( d) facts concerning
geographical, meteorological and topographical characteristics of
the area.
1809. Information and statistics used to compile Economic Background Data should be very carefully weighed and selected. A large portion of them will be drawn from other data files
of the Insuring Office, namely: Real Estate Market Data File, File
of Maps and Plats, File of Data on Legal Status of Property, and
File of Population Statistics. The remainder will be drawn from
sourcestabulated in Paragraph 1844.
1810. 0 ompilation and Recordation of Economic Background Data. Chief Valuators are directed to take the following
steps in establishingEconomic Background Ratings:
a. One Valuator is designated, whenever possible, to make
and to review periodically Economic Background Ratings. This work is under the direct supervision of the
I
•
I
j
COMPILATION AND RECORDATION OF DATA
1810-1812
Chief Valuator, who is held responsible for its proper
continuance. It is highly desirable that the area being
rated be visited, although it is not always necessary.
b, Areas for rating are selected on the basis of the volume of
business, in order that the ratings will be properly completed at an earlier date in those areas where current
business is the greatest.
o. Economic Background Ratings shall be made in accordance with these instructions for all areas from which 10
or more mortgage insurance applications have been received. Other areas may be rated on a comparative
basis.
d. Two Economic Background Rating ·Record Cards, FHA
Form No. 2096a,are prepared for each rating made. To
facilitate frequent reference, a card for each area rated
should be filed alphabetically in the Valuation and Location Record file.
e. Immediately upon rating an area and completing FHA
Form No. 2096a, three reports are transmitted to the
Underwriting Division, Washington, D. C., as follows:
1. A summary report on the Economic Background of the
area, paralleling those reports supplied Insuring
Offices by Washington Headquarters
2. Completed Economic Background Rating Form, FHA
Form No. 2096
3. One completed Economic Background Rating Record
Card, FHA Form No. 2096a
1811. Economic BackgroundRating Form. The Economic Background Rating Form provides three categories:
a. 111.dustry (Manufacturing, Assembling, Fabricating and
Refining)
b, Specialty (Embracing activities not specifically covered
under Industry and Trade, such as exploitation of natural
resources,tourist resorts, educational centers, and political
capitals.)
c. Trade (Trade, Finance, and Transportation)
1812. The initial step is the gathering of information
pertinent to the economic structure of the area under consideration.
This material embraces, (a) the nature and history of the principal
economic activities prevalent in the area under consideration, (b)
the nature, size and stability of industrial and commercialactivities
within the area, ( c) population trends, including rate of growth and
UNDERWRITING
MANUAL
1812-1815
racial, age, and :family distribution, ( d) natural resources, and ( e)
miscellaneousitems such as type of tenure prevalent in the community, distribution of incomes,taxation policies and schools and cultural institutions. Unusual factors encountered,not provided for in
the rating form, such as exceptional growth or decline, geographical
or climatic peculiarities, or unusual industrial conditions, are important guides to judgment and should be fully considered.
1813. The next step is to analyze the material to determine which categoriesapply to the area. In most large areas both
the Industry category and the Trade category will apply. In
smaller areas, other than manufacturing centers, the Trade category
alone may apply. Specialty cities require the use of the Specialty
category. If a category does not apply to the economicbackground
being considered,it is omitted. This determination is made by ascertaining whether 5% or more of the persons employed in the Economic Background Area are employed directly in the activities covered by the category caption. If less than 5% are so employed, no
consideration is given to that category. For example, if, in a given
Economic Background Area, 23% are employed in industry and the
balance in trade, only the Industry and Trade categories are used
and the Specialty category is ignored.
1814. The second step is to establish the weight to be
ascribed to each of the applicable categories. If the number employed in Industry and Specialty activities cannot be determined
from statistics, reasonable estimates should be made. The percentage of the total number employed in each of the applicable categories except Trade is multiplied by two to determine the weight.
This calculation is necessaryunder the assumption that for each person employed in the activities embraced in the category there is
another employedin servicing activities within the area. The weight
for the Trade category is determined by subtracting the sum of the
weights of the other applicable categories from 100%. For example,
if the total number employed is 4,100,of whom 575 are employed in
industry, the ratio of 575 to 4,100, or 14%, is established. This
factor multiplied by two equals 28%, the Industry category weight.
If 250 persons are engaged in state or governmental activities, the
ratio is 250 to 4,100,or 6%. This factor multiplied by two equals
12%, the Specialty category weight. The sum of the Industry and
Specialty category weights, 40%, subtracted from 100% leaves 60%,
the Trade category weight.
1815. In certain instances, due to the large number employed in the activities embraced in one category, the resulting category weight exceeds 100%. In such cases it is to be assumed that
I
•
COMPILATION
AND RECORDATION
OF DATA
1815-1818
those engaged in trade are absorbed by the servicing activity and
hence no weight will be obtained for Trade. For example, if 2,600
persons are employed,1,600 of whom are engaged in industrial activities, the ratio of 1,600 to 2,600,or 62%, is established. This factor
multiplied by two equals 124%. The Industry category weight is
then arbitrarily reduced to 100%,with no weight resulting for Trade.
1816. The next step is to rate the features in the applicable categories on the Economic Background Rating Form in
accordancewith the instructions given below covering each category.
These ratings are made by entering X marks in the appropriate
spaces, carrying the indicated feature weights to the column captioned Rating, multiplying each category weight by the sum of its
respective feature weights, and extending the products to the right
hand column to be added. The completed sample form shown in
paragraph 1843 illustrates the correct procedure.
1817. The final step is the calculation of the Economic
Background Rating. This is accomplishedby multiplying the sum
of the category ratings by the applicable Scopeof the Market factor.
The Economic Background Rating thus calculated is the 5 column
weight for the feature, Relative Economic Stability, of the Rating
of Location grid on the Report of Valuator. The other column
weights of the feature are computed,the nearest whole number being
used in all instances,and the final record transferred to the Economic
Background Rating Record card. The 5 column weight for the
feature, Relative Economic Stability, may never be less than 10
points. Hence, if the rating calculated falls below 10 points, an
arbitrary rating of 10 points must be assigned. In such a case,
extreme weaknessin the EconomicBackground Area is indicated.
1818. The Economic Background Rating is an expression of a portion of the hazard to which mortgage funds are subjected and is strongly influencedby the employment opportunities
and the marketability of residential properties in the area under
consideration. In the course of time residential property values in
any community are affectedby the action of economicforces, which
are extraneous to any given property and which operate over a wide
area. It is usually assumedthat an increase in employmentwill be
accompaniedby the maintenance of the level of the earned incomes
of employedpersons. Therefore considerationis given to the volume
and trend of employmentrather than to payroll amounts. Since the
risks involved in mortgage investments lie in the future, the Economic Background Rating should reflect the probable future trends
of employment. Such forecast should embrace at least a ten to
twenty year period.
,
UNDERWRITING
MANUAL
1819-1822
1819.Industry Category Rating. Industry includes
manufacturing, assembling,fabricating, and refining of products for
distribution beyond the borders of the Economic Background Area
under consideration. Employment in agricultural activities is not
includedin the Industry category. The Industry category is divided
into three features, (a) Predicted EmploymentTrend, (b) Diversification, and ( c) CyclicalFluctuations.
1820.Predicted Employment Trend, The rating of this
feature should express the net result of weighing all favorable and
unfavorable factors affecting the trend of employment,except cyclical fluctuations which are independently rated in the third feature. In making the forecast of the trend of employment, care
should be exercised to determine the long time trend. Short time
movementsare usually those which act in sympathy with temporary
nation-wide fluctuations. Limited significanceis attached to a decline in local employmentduring a temporary period of nation-wide
decline such as occurred from 1929 to 1933, but a downward long
time trend is evidencedif over-all local employmentruns counter to
expanding industrial employment such as occurred in the United
States during the period from 1921 to 1929. There are many combinations of factors that may deserve consideration. A few are
reviewed in the paragraphs immediately following. All important
factors are to be taken into account whether or not they are
mentionedhere.
1821. The permanenceof the market or the demand for
the type of goods produced in the area is one of the fundamental
considerations. Industries producing articles subject to the caprice
of the market lack the stability of those industries producing branded
food products, machinery, glassware and similar products of strong
demand. However, the stability of an industry is not always indicated by the determination of whether the goods produced are necessities or luxuries, becausethere are many conventionalproducts such
as cosmetics,cigarettes, and a number of luxuries, that have all the
indications of a permanent and stable market. Whether the demand
for the article produced is local, regional or national is important.
For example, a depression confined to one small section of the
country would not seriously affect the automobile or cigarette
industries.
1822.The demand for the particular brand of a commodity manufactured in the area should be fully considered. The
automobile industry as a whole has had a remarkable growth, but
many individual automobile companies have failed. Hence, each
important industry must be consideredwith respect to the stability
I
•
COMPILATION
AND RECORDATION
OF DATA
1822-1824
of the demand for competitive brands. A new industrial enterprise
without an established market for its product does not merit the
same weight as does another industrial enterprise with an established
market. The demand for a product may be excellent,but the manufacturers in a given area may be unable to competewith manufacturers producing the same article in other areas because of high labor
costs, high taxes, unfavorable freight rates, remoteness from the
principal markets, or from supplies of raw material, and other
factors. In such cases, the local industry may be expected to suffer
from competition with industries in other cities, and the effects, as
far as the particular city is concerned,will be just as injurious as if
the demand for the product declined. The relative costs of production of competitive plants within an industry are difficult to
ascertain but can be inferred from the general trend of growth. If
the output of local plants is growing faster than the national output
of the same product, it may be assumed that the local plants are in
a strong competitive position and are producing on a relatively
favorable basis.
1823. Single-industry areas are usually extremely hazardous. The industrial advantages of most large metropolitan areas
are such that if someindustries move away, others will enter, thereby
maintaining a balance in the number of people actually employed. It
is not the number of industries, but the volume of employment afforded that is vital in establishing the rating of the feature Predicted
Employment Trend. Increases in employment offered by one large
industry may offset decreasesin many smaller ones. It is the number gainfully employed and the accompanying trend that indicate
demand for housing. The effect of seasonalemploymentfluctuation,
insofar as it affects the continuity of incomes,must also enter into
consideration in rating this feature. Certain areas may have excellent employment conditions from the standpoint of diversification
and cyclical fluctuations, but, due to the seasonal nature of the
activities, an undesirable situation may exist.
1824. In consideringthese factors it must be remembered
that a serious weaknessin any one may have a pronounced effect on
the rating. Even if the general demand for a product is exceptionally good, if the plants in the city cannot produce it in competition
with plants in other cities, this competitiveweaknessmay be decisive.
Or, if the plants in a city can produce a product at exceptionallylow
costs but the general market for the product declines, then the low
cost is of little avail. The person rating the area must always bear
in mind that the total anticipated volume of employmentin the area
is the fundamental consideration and he should carefully weigh all
UNDERWRITING
MANUAL
1824-1829
the elements that may affect it favorably or unfavorably. Of the
Industry category features, Predicted Employment Trend is considered the most important and is given a weight of 70%.
1825. Diversification of Industry. Diversification of industry is a favorable factor. In a general economic depression,
employment in some industries usually declines farther and faster
than in others, with the result that the net decline is generally less
in those areas enjoying the greatest diversification. If there is ample
diversificationof industry, the cyclical fluctuations of different industries tend to counterbalance each other, resulting in greater stability
of employment. If 50% or over of all the industrially employed in
a city are employed in the plants of a single industry, the lowest
rating is given this feature. If less than 10% of all the industrially
employed are in a single industry, the highest rating is given.
1826. Cyclical Fluctuations. Economic Background
Areas that show extreme fluctuations in employment from prosperity
to depressiondo not possess the stability of areas subject to less fluctuation. Statistics can be obtained showing the percentage of minimum
employment to maximum employment for the period 1921 to 1933 in
metropolitan areas having populations in excessof 25,000. Areas are
considered most stable where there has been a decline of 10% or less
in employmentfrom the peak year to the period of depression. Those
where the decline has been 50% or more are considered least stable.
In smaller areas for which adequate statistics cannot be obtained, the
Valuator should ask local bankers or other reliable, well informed
sources about the extreme fluctuations in employment and the date
of their occurrence in order to secure a basis for rating this feature.
1827. Specialty OategoryRating. In the Specialty category, employment resulting from activities not specifically covered
under Industry and Trade is considered. It may also apply to an
activity typical only to a particular section. Agriculture will not
be considered under the Specialty category.
1828. Predicted Employment Trend. Of primary consideration is the trend of employment which can be anticipated to
result from the activities during the forecast period. As in industry,
only the predominant trend is to be considered. Two facts, the life
of the merchantable supply and the cost of production, must always
be weighed when considering activities classified as exploitation of
natural resources, such as mining, lumbering, fishing, and oil
extraction.
1829. Either short life of the supply, excessivecost of
production, or lack of continued demand will indicate instability of
employment. A low cost of production is of no advantage if the merchantable supply will be exhausted in a short period of time. Simi-
I
•
COMPILATION AND RECORDATION OF DATA
1829-1833
larly, it matters little if there is a vast supply if it cannot be extracted
at a cost less than the market price. Such resources may, at some
future time, come into the field of profitable operation as the result
of new techniques or higher market prices, but such a speculativepossibility should not be consideredin rating this category. The highest
rating in the category is given to areas with the ·largest supply of
these resourcesand the lowest cost of operation, coupled with a strong
demand for the product and evidence of increasing employment.
1830. When rating tourist resorts, educational centers,
and political capitals, it is important to consider employment given
to the area as the result of persons bringing money to it from outside sources, or drawing their support or income from regions or
persons outside the area. Accordingly, the rating is governed by
employment resulting from tourists, outside students, non-resident
taxpayers, or residents whose incomes are received from outside
the Economic Background Area. In rating this feature, the attractiveness of the area as a particular type of center, its continued
drawing power, its income and social characteristics, and the wealth
of the region supporting it, must be weighed.
1831. Generally, because of the instability and uncertainty of tourist resorts, the rating of this category for an area predominantly of this type is lower than apparent from surface
indications. However, a resort that has acquired, to a considerable
degree,a year-round character and has demonstratedmarked stability
may be rated fairly favorably. Accurate statistics for employment
resulting from tourist activities are generally not available. The
Valuator estimates as accurately as possible, after investigation, the
number of persons employed in such activities.
1832. Political capitals may be consideredin most cases
as immovable. Contractions and expansions of state or county
functions decrease or increase the volume of governmental employment. The relative wealth of the state or county, and the legislative policies, should be considered in this connection. The political
capital of a state or county with declining population or resources
may be forced to curtail its expenditures for governmental functions,
with a consequentreduction in employment. The same effect would.
result from decentralization of these functions.
1833. Educational centers are usually established to a
degree which precludes likelihood of reduced employment resulting
from the removal of educational institutions. Consideration should
be given, however, to the difference in the rate of growth of the
larger universities and the resulting effect upon employment trends
in their respective centers.
,
UNDERWRITING
MANUAL
1834-1837
1834. Cyclical Fluctuations. If more than one activity
is involved, it is necessary to measure the effect 0£ the fluctuation
in its relation to all the employment estimated for the category.
In the event only one activity is being considered, the fluctuation is
more easily measured, and therefore more readily ratable. H data
for accurate determination are not available, reasonableestimatesmay
be used.
1835. Trade Category Rating. In the Trade category,
trade, finance, and transportation are considered. The term, Trade,
includes retail, wholesale, jobbing, and other distributing activities
with the region outside the Economic Background Area under consideration. It does not include trade with those who reside in the
Economic Background Area, inasmuch as that is considered in assigning the multiplier .2 for servicing activities heretofore mentioned.
In some cities trade factors are of paramount importance, in others
they are relatively minor elements.
1836. Predicted Employmemt Trend. The rating of this
feature involves an analysis of the trade region, taking into consideration its population, natural resources, and purchasing power.
A serious decline in the purchasing power of the trading region
would reduce the number employed in trade in the Economic Background Area. The purchasing power of the trading region may
decline because of a number of conditions, such as the growth of
competitive cities, loss of soil fertility, exhaustion of mineral resources, loss of manufacturing plants, decline in population, decrease in incomes or inherited wealth of the region, or a combination of these factors. On the other hand, the trading region may
increase in purchasing power because of an increase in its population or income, discovery of new resources, more intensive cultivation of the adjacent areas, or because of additional land being
placed under cultivation.
1837. Diversification of employment within the Economic Background Area afforded by the activities classified under
the Trade category, as well as the diversificationof types of trading
activity with the region outside the Economic Background Area, is
to be considered because these factors definitely affect employment
trends. l£ a community is dependent entirely upon trade with the
outside region which lacks diversification of activity, an undesirable
condition may be indicated. An example of this is the plight of a
community entirely dependent upon trade from its surrounding onecrop agricultural area, when left with little more than subsistence
support during periods of crop failure.
I
•
COMPILATION
AND RECORDATION
OF DATA
1838-1843
1838. Cyclical Fluctuations. If dependable statistics are
not available, from which a satisfactory determination of cyclical
fluctuations of employment in trade can be made, an estimate based
upon the best information available should be the basis of rating
this feature. In many cases the percentage of minimum to maximum employment in trade from 1921 to 1933 will parallel the
cyclical fluctuation of the principal category indicated in the Economic Background Rating.
1839. Adjustment for Scope of the Market. The Scope
of the Market refers to the degree of marketability of residential
properties at current value levels in the EconomicBackground Area.
1840. The Scope of the Market is a reflection of the
ability of financially capable purchasers to absorb the housing available to the market at current value levels. It embraces a consideration of many factors and is affectedby (a) the income characteristics
of the population contrasted with the types of housing available,
(b) the percentage of home ownership, ( c) the ratio of residential
property foreclosures to total residential property transfers, and
( d) the gross population of the area. The test of the Scope of the
Market is whether a typical property can be readily sold to a
financially capable purchaser at current value levels.
1841. The Scope of the Market adjustment feature has
five columns to reflect the various degrees of marketability, namely,
(1) Poor, (2) Limited, (3) Moderate, (4) Satisfactory, and (5)
Good. It may prove desirable, in some cases, to use an "in between"
weight, such as 22 or 37, as the applicable Scope of the Market
factor. The use of this factor is largely a matter of judgment and
the soundness of its application will, to a measurable degree, determine the soundness of the Economic Background Ratings established. ·
1842. The accompanyingEconomic Background Rating
Form has been executed in a manner to demonstrate the mechanics
of rating. The name of the city is fictitious and hypothetical statistics are employed for the purposes of this illustration.
1843. File of Economic Background Ratings and
Summaries. Completed EconomicBackground Rating Forms, FHA
Form No. 2096,and summaries, together with the data used in their
compilation, should be filed in folders, using a separate folder for
each area rated. The ratings are recorded on Economic Background
Rating Record cards, FHA Form No. 2096a, and filed in the Valuation and Location Record Card file immediately behind the guides
representing the respective cities rated. Some of the data used in
l,
UNDERWRITING
MANUAL
1843
Jl'RA 'f'orm No. 2096
(Rev. Dec.15, 1937)
FEDERAL HOUSING ADMINISTRATION
ECONOMIC BACKGROUND RATING FORM
Economic background area ••...
znt~. ~f.~·-···-···--····-·······-~~1'
1
Population-1920 ... 7.~.• ®0.................
Rating .. ~Q. .••
!!9{ll!~-~"-········-
1930 ..... 85~9.00...............
1936.
.
82~!KIO ...................•...
(Estimated)
Pate of rating .. Jlft~.,•t1' .. lli .... lll3'.L ...•. made by ..... J.itllll.. Slal.\ll,.J!Ml!CYl!l'QlQ.11" ...........•...........•..•..•...
(Namt)
8ELECTJON AND WEIGHTING
OF CATEGORIES
NUMHER EMPLOYED
CATEGORIES
PERCENT OF TOTAL
(Stllti~ti('&i '" esUlf';iled)
Total
Industry
Spec!Alty
39 720
100%
12,310
31 %
3,200
8%
100%
Trade
miJ\IJS sum of
CATEGORY WUOB'TS
100%
X2=
62%
16%
other category weights hr last column
22%
INDUSTRY CATEGORY (Manufaduring, Assembling, Fabricating, and Refining)
RA TINO
Declineof __,!!_ Decllne of ~
Predicted Einployment
10% and
1%to9%
Trend
-----------1~50~')1~,-.,-1-~3
30% to __!_
Diversification
over em·
49% emf~~year~~
eet Indus-
r~~yeat~~
est Indus-
~
~
.Declineof
4J
Increase ~
0% to inof 5% to
4%ase of _
~~
20% to _9._ 10% to ____!!_
29% em19% em-
Increase
of 10%
and over
Less than
10% em-
r~~y~r~~
est Indus-
rl~ye~r~~
est Indus-
~
~c~,,~u-,a1~F~Iu-,,-u-.t-iona~.-"-.·r.i-~t"h-•n---2..
50"%~
centage of Minimum to 50%
59%
Maxim1'.m Employment.
60%
69%
6
x
f~~year~~
est iudus-
to
~
'
70%
79%
to
12
W£tOHTED
RA TINO
-.!!..
56__
I
_.!!_
~
9
80%tO -!!.--100%
J.
~1•'-'2-'"1~to~1~•3~3----~--~~---~~---~~---~c"a"'te'::g=:o.-y:::-.wrr:,o:;•"•ti-z$"2%"',"x"'?.it-=«%
SPECIALTY CATEGORY (Stale TypeofAedridea)
Zeni\ll 'OlliY•reiv.
($'6W
PoUUoal
ClmUal)
J\A'l':lNO
Predicted
Trend
Employment
~~in:;J
2..
Lesa than
50%
'
P%c~~~~
over
Cyclical Fluctuations Per.
eentege of Minimum "to
Maximum Employment.
50%
59%
to
!~5r%a~
~%cl~~ei~~ ~
crease of X
__.!_
!';%
69%
12
to
9%
70%
79%
18
X
~to~
!fcrt0%
____!!._
_.!!_
and over
to
80%
100%
Zi
to
111;~
u
Category
Weight 16%X 60
Id%
TRADE CATEGORY (Trade, Finance, and Transportation)
RATING
Pr~jed
Employment
Ciclical Fluctuations
Nr.
M~~~u!' ~~\:~::en~
?o~m:;J _..!!_ Dechneof
over
1%to9%
Less than
50%
3 ·~
59%
~~a::
i~{
!~%
to
Decline of
_..E,_
s
Increase
9~5% to
_...!!..
70%
79%
g
69%
,_ "A-0.-·~· .
68
X
to -rf
X
Increase
~d ~~e~
_1!_
8,
--------·------"
-------------·-------
~~:~:~
_
---------------- ------ ----- -----
M:~:~~:~eous and { ~et:~::i~:~~~:n~~-~-~~-~~~~~~:~~:~~~~~:~~::::::::~~~:~~:~:~~~:~~~:~~:~~:~~::~~~~~~~:::~~~~~~~~~~~~~~~~~~~~~~~~~~:~~:~~~:~~~:~:~:~
;::<
------------------------------------
(Assuming proposed or required repairs or
alterations have been made)
REJECT
1
-5-
2 3 4 5 RATING
IO I5 20 25 ---
Structural Soundness
~ Resistance to Elements
::I
A Resistance to Use
Livability and Functional
i:::
Plan
0
:;:> Mechanical and Conven- --i:::
"' ience Equipment
::I
--~ Natural Light and Ventilation
---
2 4
-6-
8-
IO
-1- 2-
3-
4-
-5-
4-
8-
12 16 20 ---
2-
4-
6-
8-
IO ---
2-
4-
-6-
8
IO ---
-4-
8-
12 16 20 ---
Architectural Attractiveness
TOTAL RATING OF PHYSICAL SECURITY·
------ -~----
(9) Is there any evidence of termites, dampness, dry rot, or undue
settlement? D Yes. D No. Explain under "Remarks."
(10) Does property comply with Property Standards, regulations, and
ordinances? D Yes. D No. Explain under "Remarks."
(11) Describe substandard materials or workmanship, if any----------
(12) Estimated annual cost of fuel for heating
(13) Estimated
average
$
-- ------ ----( 14) Estimated remaining
annual
cost of
$
ordinary
_
maintenance
physical life of building with ordinary
maintenance --------------- years.
(15) The following repairs, alterations, additions, or changes in drawings and specifications, estimated by me to cost$ .. ~------------------------
are D required to avoid rejection;
Item
_
D none required.
Cost
2014---Report of Architectural Inspector·
16-6729
61:Ll}-9[
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~UNDER ·''n->
,,
- - (. 'XPLAIN
n.EMARKS.
(10) Does property comply with Property Standards, regulations and ordinances?
D Yes. D No.J
(11) Describe substandard materials or workmanship, if any -------------------------------------------------------------------------------------------------------(12) Estimated annual cost of fuel for heating $_________________
(13) Estimated average annual cost of ordinary
(14) Estimated remaining physical life of building with ordinary maintenance ---------------years.
(15) The following repairs, alterations, or additions, estimated by me to cost $
maintenance
$
c
_
, are D required to avoid rejection;
D none required.
Item.
ESTIMATE OF COST REQUIRED
TO REPLACE BUILDING
Cost.
IMPROVEMENTS
(16) List and state cost of each
IN NEW CONDITION
(assuming proposed or required repairs or alterations have been made):
Main Building --------------------------------- sq. ft. @ $
$
Garage ------------------------------------------sq. ft. @ $-----------c--------- $
Other Improvements______________________________________________________________
$
"-
Architectural Service·-------------------------------------------------------------$
ToT AL
---- -- - -------- -- - ---- -- -- - -- ---- ------ -- - - - - - -------- ---- ----- --- --- -- $
_
item of
mechanical equipment (included in
cost estimate) that is subject to rapid
deterioration and obsolescence.
_
_
_
--------- -- ------
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FHA. Form No. 2016
(Revised February 1938)
'\ .:» /
-·-'
FEDERAL HOUSING ADMINISTRATION
Individual
Borrower
REPORT OF MORTGAGE RISK EXAMINER
(Serial number)
Property address --------------------------------------------------------------City -----------------------------State ----------------Name of principal mortgagor_________________________________________________________ Relationship --------------------- Age --------Address of principal mortgagor -------------------------------------------- City -----------------------------State -----------------Name of secondary mortgagor ------------------------------------------------------Relationship --------------------- Age --------Address of secondary mortgagor ------------------------------------------City -----------------------------State -----------------Type of transaction:
D New mortgage on unencumbered property.
D Refinancing mortgage.
D Purchase.
D Refinancing sales contract.
D Proposed construction on owned lot. -
n
:o
b
Borrower is
occupant,
landlord;
other-----------------------------~---------------------~------------------~-------------------------------Occupation of principal borrower ~~:;_:_:: ::.~:_::~c:.:.:s::~~~-~:.::~---:.-::_-c_ - · 3. Employer's business ~------~---:~-------------------~.:---"
Occupation of secondary borrower -----------------------.---------l). Employer's business -----------"~----------------------Total .income of principal borrower: Annually, $---~----------------,----; monthly, $~:.
_
Total income of secondary borrower: Annually, $c
; monthly, $
_
8. My best estimate of the borrowers' net worth is $.
_
-1-.
2.
4.
6.
7.
1 ~:
11:
12.
13.
15.
16.
18.
~;!,i~~~
t~~tlh&fh~:shl::~~~~~---~~~~~================~~=~==================================================-$========================
Prospective monthly housing expense: .-
Heating
••
$
_
Main ten an ce
~
•
----- -- - -- - -- - -- -- $_ - --- - - - - ---- ---- --- - - -Total monthly mortgage payment.,
~---------------------------------- $
c
_
Tot_ al expense
-- - -- - - $_ - - - - ------ --------_ --__
Current fixed charges against income
~------------------------------------------------------------------ $
_
Cash required for settlement:
14. Source of cash required for settlement:
Purchase price, contract price, or present
From cash deposited
$
_
liens
$_______________
From amount of mortgage____________ $
_
Additional costs____________________________________ $_______________
From cash to be invested______________ $
_
Necessary repairs ------------------------------- $ _ _ __ _
__
TOTAL_________________________________ $
_
TOTAL----------------------------------------- $ _ ------- - -----Assets available for settlement---------------------------------------------------------------------------------------------------------$
_
Valuation: $___________________________ 17. Ratio value of property to annual income ------------------------------------- %.
This borrower has been rated on ---------------------------D Basis of application.
D Basis of this schedule.
Mortgage principal
--------------__ _ _ $
-----------------_ ----- $_ --------- - -----------------_
~i!~i~fo}1~~0[Jg:!i~~ti~~-~--~~===::::::::::::::::::::::::=== ============-----~~=====~~----~==-~~% ===================----=--=--=--===-~~%
Total monthly payment for first year
$
per month
$
per month
Ratio monthly mortgage payment to income
--------------------------------% ---------------------------------%
Rating of Borrower
FEATURE
.,
"""
Social and Economic Characteristics
Motivation
10'
Employability
.s
.t'
:=I
:a
-q
5
in Relation to Transaction
-
-6--
-9--
4
_1_2 __
-10--
-15--
-20--
2
1
-3--
i-<
p..
REJECT
3
-4--
-8--
-12--
_1_6 __
3
-6--
-9--
_1_2 __
_1_0 __
-15--
-20--
and Earning Stability
Relation of Obligations to Transaction
5
5
-15
___
RATING
25
20
-15-_2_5 __
Relation of Income to Transaction
TOTAL RATING OF BORROWER
REMARKS:
CERTIFICATION.-!, the undersigned, have read Section 512 (a) of the National Housing Act, as amended, and do hereby certify
that, to the best of my knowledge and belief, the statements made in this Report of Mortgage Risk Examiner are correct; that I have
no personal interest, present or prospective, in the property, applicant, or proceeds of the mortgage; that, in my opinion, the findings
and decisions set forth above are justified; and that I know of no reason why they should be altered or modified.
(Signed) -------------"------------------------------------------------------------Mortgage Risk Examiner.
DATE --------------------------------------------REMARKS:
D Approved as submitted.
o Approved as modified by me. D Disapproved.
CERTIFICATION.-!, the undersigned, do hereby certify that I have no personal interest, present or prospective, in the property,
applicant, or proceeds of the mortgage.
DATE ---------------------------------------------
(Signed) ---------------------------------------------------------------------------·
Chief Mortgage Risk Examiner.
201&-Report of Mortgage Risk Examiner
(INDIVIDUAL BORROWER)
16-6772
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FHA Forni No. 2017a
(Revised February 1938)
FEDERAL HOUSING ADMINISTRATION
Eligible Amenity
Income Case
(Serial number)
REPORT OF CHIEF UNDERWRITER
(County-city code)
Property address --------------------------------------------------- City ------------------------------------ County ------------------------ State --------------Name of mortgagee -------------------------------------------------------------------------------------------------------------------------------------------------------------Address of mortgagee: City --------------------------------,------------------------------------------------------C--------------------------------State --------------Name of mortgagor ( s) ---~------------------------------------------------------------ ----------Source
D
O
O
D
of application:
(Check one of the following)
No previous conditional commitment or insured mortgage
180-day conditional commitment
90-day conditional commitment
Wholesale conditional commitment
-j ~
Now constru cti on.c,
O Rewrite of Section 203 insured mortgage
O Release from Section 207 insured mortgage
O Release from Section 210 insured mortgage
D Other ------------------------------------------------
Under construction or to be constructed.
Use FHA Form No. 2008.
Construction completed within last 12 months.}
Use FHA Form No. 2007.
Date completed Mo. -------------- Yr. -----------
Existing construction___________________________________________________ D All other cases.
Type of transaction:
O Refinancing mortgage
O Refinancing sales contract
Year built-------------------------
Use FHA Form No. 2007.
O Mortgaging unencumbered property
O Proposed construction on owned lot
O Purchase
Borrower is 0 owner; D landlord; D other; and is rated as D individual; O commercial enterprise.
SUMMARY OF DATA
$_____________________
Typical family annual income
Monthly rental value
Amenity increment
----------------------------Derived monthly value____________________________________
Remaining economic life__________________________________
Conversion factor
Derived capital value______________________________________
Replacement cost of property___________________________
Available market price____________________________________
Neighborhood price range.c., $
to
FHA VALUATION is hereby fixed at
Distribution of total valuation:
Land______________________________
Main Building___________________
Garage____________________________
Other Improvements__________
-------------------- %
$
_
--------------- years
----------•-----------$
_
$
$
_
_
$
_
Borrower's age ----------------- years; annual income
Borrower's age ----------------- years; annual income
Previous monthly housing expense_____________________
Prospective monthly housing expense
Estimated total monthly payment first year________
Assets available for settlement
Cash required for settlement_____________________________
Application term ---------------------- years; amount
FHA VALUATION
---------------------------------------------------------------------------------------$
$
_
$
_
$
_
$
_
$
_
$
$
_
_
$
_
$
_
$
_
$
_
$
_
$------------------------------------------
per O lot, O front foot, 0 square foot.
@ $
RATING OF MORTGAGE PATTERN
FEATURE
I
REJECT
1
6
Ratio of Loan to Value
--------- %
Over Legal Limit
Ratio of Total Payment to Rental Value
--------- %
Over 130
--------- %
Over 100
Under 50 pta.
Ratio of Life of Mortgage to Economic Life of Building
Lowest Category Rating
(. __________________________ ) --------- pts,
Intermediate Category Rating (__ ---- ---------------------) _________ pts,
Highest Category Rating
( ___________________________ ) _________ pts.
--12
3
4
1_6___
5
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FHA
Fol'll'.l No.
2017b
(Revised February 1938)
FEDERAL HOUSING ADMINISTRATION
(Serial number)
Eligible Rental
Income Case
REPORT OF CHIEF UNDERWRITER
"(County-city code)
Property address ---------------------------------------------------------City -----------------------------County -----------------------State --------------Name of mortgagee -------------------------------------------------------------------------------------------------------------------------------------------------------------Address of mortgagee: City ------------------------------------------------------------------------------------------------------------------------State --------------Name of mortgagor ( s)
_
Source of application:
(Check one of following)
D No previous conditional commitment or insured mortgage
D 180-day conditional commitment
D 90-day conditional commitment
D Wholesale conditional commitment
New construction_______________________________________________________
Existing construction_·-------------------------------------------------
l
D Rewrite of Section 203 insured mortgage
D Release from Section 207 insured mortgage
D Release from Section 210 insured mortgage
D Other -----------------------------------------------Use FHA Form No. 2008.
D Under construction or to be constructed.
D Construction completed within last 12 months.}
Date completed Mo.---------------- Yr"
_
D All other cases. Year built------------------------------
Type of transaction:
D Refinancing mortgage
D Refinancing sales contract
Use FHA Form No. 2007.
Use FHA Form No. 2007.
D Mortgaging unencumbered property
D Proposed construction on owned lot
D Purchase
Borrower is D owner; D landlord; D other; and is rated as D individual; D commercial enterprise.
SUMMARY
Rating of Property
pts. Rating of Location
pts.
Remaining economic life --------------------------------------------- years.
Monthly rental range of units
$
to $________________
OF DATA
Capitalization estimate ----------------------------------Replacement cost of property___________________________
Available market price
Predicted occupancy_________________
------------------year
-------------%
Expense ratio_____________________________________________________
------------- %
Estimated yearly net earninga.,., _
year $________________
Capitalization rates: land
%; building______ -------------- %
Estimated total monthly payment first year
Assets available for settlement__________________________
Cash required for settlement_____________________________
Application term
; amount
$
_
$
$
_
_
$
$
$
_
_
_
$
_
FHA VALUATION
FHA VALUATION is hereby fixed aL-----------------------------------------------------------------------------------$
Distribution of total valuation:
Land
$
@ $
per O lot O front foot O square foot.
Main Building__________________ $
_
Garage____________________________ $
_
Other Improvements__________ $
_
_
RATING OF MORTGAGE PATTERN (Rental Income Dwelling)
FEATURE
2
1
REJECT
_
6 ___
5
4
3
-12
___
-16
___
20-
9
Ratio of Loan to Value
--------- %
Over Legal Limit
75-Limit
70-74
_8
___
65-89
-12
___
6CHl4
-16___
Under 60
Ratio of Debt Service to Net Income
--------- %
Over 83%
78-83
70-77
60-69
50-59
Under 50
Over 100%
80-100
~
57-65
3_2
___
2_4
___ 50-56
3---
~
6CHl9
70-7\}
-12
___
80-100
50-54
55-59
60-69
70-79
80-100
4--1
Ratio of Life of Mortgage to Economic Life of Building --------- %
Rating of Earning Expectancy
Rating of Borrower
______ pts,
------ pts,
Under 50 pta.
Under 50 pte.
8--50-54
2--- 3--- 4--16
6
9---
RATING
20
5
Under 50
40
15
TOTAL RATING OF MORTGAGE PATTERN
CHIEF UNDERWRITER'S FINDINGS AND DECISIONS
I have carefully considered all data relative to the mortgage described in the application identified by the serial number above, and
find that the mortgage described in the said application is economically sound in the amount of ------------------------------------------------------dollars ($
), for an amortization period of
years, bearing interest at
% per annum, with mortgage insurance
premium of --------- % per annum, and payable in ------------------ monthly installments of $
, provided that the
requirements, if any, listed on reverse side hereof shall be met. A Commitment for Insurance in accordance with these conditions and
terms should be issued under the provisions of Section 203, b, 2: D A; D B; D C of the National Housing Act, as amended.
CERTIFICATION.-!, the undersigned, have read Section 512 (a) of the National Housing Act, as amended, and do hereby certify that,
to the best of my knowledge and belief, the statements made in this Report of Chief Underwriter are correct; that I have no personal interest,
present or prospective, in the property, applicant, or proceeds of the mortgage; that, in my opinion, the findings and decisions set forth
above are justified; and that I know of no reason why they should be altered or modified.
DATE -----------------------------------·----------
(Signed) --------------------------------------------------------------------------0 hief Underwriter.
DIRECTOR'S APPROVAL
1. I approve the "Report of Chief Underwriter."
2. I authorize issuance of Commitment for Insurance in accordance with the conditions and terms stated above.
NoTE.-ln case of disapproval, omit signature and state reasons for disapproval, together with Director's recommendation, in an attached
memorandum. Then immediately forward complete Case Binder, with application and all reports, together with a memorandum by the
Chief Underwriter, to the Federal Housing Administration, Washington, D. C. No Commitment for Insurance or Notice of Rejection
shall then be issued, or other action taken, until an Administrative decision has been made by the Deputy Administrator, Title II, and
transmitted to the Insuring Office.
Date application received -----------------------------------Date case approved by Preliminary Examiner ----------------------------------Processing time from application to commitment ------------ days; from Preliminary Examination to commitment ------------ days.
DATE ------------- -------------------------16-6759
(Signed) --------------------------------------------------------------------------Director.
2017b-Report of Chief Underwriter
(OVER)
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FHAForm.No.2017c
(Revised February 1938)
FEDERAL HOUSING ADMINISTRATION
Named Borrower
Ineligible Case
(Serial number)
REPORT OF CHIEF UNDERWRITER
(County-city code)
New construction
-------{
Existing construction
construction or to be constructed.
Construction completed within last 12 months.
8 Under
Date completed Mo."
Yr.-----------D All other cases.
Property address ---------------------------------------------------Name of mortgagee ----------- ------------
Year built--------------------------
City ---------------------------
County ---------------------------
Address of mortgagee: City
------------------------ ----------------- ------------------------Name of mortgagor (s) __ ---------Term of application -------------------------------------------
years.
State --------------------------------_
---------------------
State --------------------_
Amount of application --------------------------------
$
_
FHA VALUATION
FHA VAL U ATI 0 N is hereby fixed at
Distribution of total valuation:
Land_______________________________
Main Building__________________
Garage____________________________
Other Improvements.c.c.L;
--------------------------------------------------------------------------~---------...
$
@ $
$
_
$
_
$
_
RATING OF MORTGAGE PATTERN
FEATURE
REJECT
1
---
-6-
Ratio of Loan to Value ____ %
--Ratio of Total Payment to
Rental Value
------% --Ratio of Life of Mtge. to Economic Life of Bldg. ______ %
--Lowest Category Rating
<-----------------------)
______ pts. --IntermediateCategory Rating
<-----------------------)
______ pts,
Highest Category Rating
( _______________________ ) ______ pts.
I
2
3
RATING OF MORTGAGE PATTERN (Rental-Income Dwelling)
4
5
-2- 4
6-
8-
10
1
2
3-
4
5
7
12 i7 32
6
4-
per D lot D front foot D square foot.
RATING
REJECT
FEATURE
12 16 20 ---
9
---
-----
27
w
Ratio of Loan to Value ----- %
Ratio of Debt Service to Net
Income
------ %
Ratio of Life of Mtge. to Economic Life of Bldg. ______ %
Rating of Earning Expectancy
______ pts,
---
10 14 18 32
-7-
$------------------------------
---
13 16
2
1
3
4
5
RATING
---
-6- 9-
12 16 20 ---
---
4-
12 16 20 ---
---
-1- -2- 3-
---
8-
16 24 32
---
3-
6
8
-9-
4
-5-
---
4c)
---
12 15 ---
Rating of Borrower ______ pts,
---
TOTAL RATING OF MORTGAGEPATTERN
TOTAL RATING OF MORTGAGE PATTERN
I
RATING OF PROPERTY--------- pts.
RATING OF LOCATION--------- pts.
CHIEF UNDERWRITER'S FINDINGS AND DECISIONS
I have carefully considered all data relative to the mortgage described in the application identified by the serial number above, and I
find that it is necessary to reject the application for the following reasons:
CODING OF REASONS FOR REJECTION
(1) D WITHDRAWN
(8) 0 RATING OF EARNING EXPECTANCY
(8) 0 RATING OF MORTGAGE PATTERN
(2) D RATING OF PROPERTY (Name "reject" features, if any)
(3) D RATING OF LocATION (Name "reject'' features, if any)
(4) D RATING OF BORROWER (Name "reject" features, if any)
16-6758
2017 c-Report of Chief Underwriter
(OVER)
·.iopa.t'K[
---------------------------------------------------------------------------
- ----- - --- - ----- ----- ---- - ----- --- u va
(pau1l!S)
·s.&up ------------ UO!!J.O'H S!lll tn aputrr squouraqnqs
.43
.874
.874
.073
.024
3.888
3888
.011
.150
.. o.:i2 .U41
.093 .082
.047
.072
.053
.065
.058
.058
.063
.052
.068
.047
.072
.043
.037
.036
.035
".035
.034
.033
.032
* 1.23
"•oi-Q
Snecial Fl.oor-s
Ba.th Floor
Ba th Wainscot
fl,
mr
0•-~--•
*
I.I I
I.I I .
1.00
1.34
.47
.889
.889
.109
.048
4.235
4.235
.011
.. 150
~
22.
2~
PlumbinE?
H.. af.in.,.
21'
,.., __ ,.._.,,.,
?~
T.< ah+inl' lN
m.;....;.,..,..
26. Insulation
*
*
.038
If alls
CeilinEZs
71
u<-
1----··-
'I.I
'lt QUANTITY RATIOS FOR COi PONE TS N~S. I.~-
18 19 ~
22. 23 25 ANO 27 ARE EXPRI SSEO AS F te.CTIO s ANb
THEREFORE ARE NOT TAE ULATI o.
•
CONSTRUCTION
COST DATA
1917-1922
DETERMINATION OF BASIC SQUARE FOOT COSTS
1917. A selection of typical buildings to form a basis
for the tabulation of Basic Square Foot Costs is made from those:
types of buldings which have been, or are likely to be frequently
offeredas security for insured mortgages. A field survey is made and
case files are examined in order to select the types for which Basie
Cost Data should be first developed.
1918. Basic Specifications, The selected types .of construction are classified in accordance with instructions contained in
Section 16 under ·the heading, "Classification of Buildings." Basic
specificationsare established for the selected types. The materials
and equipment frequently used as alternates to the basic specifications
are next listed in the order of their prevalence.
1919. Basic square foot costs for each classification of
buildings are determined for an area range, starting at the lowest
probable area and progressing to the largest probable area. Each
area range is divided into increments of one hundred square feet.
Columns are provided for several areas on each of the sheets used
for tabulation of cost data. Each of these columns represents one
division of areas and is used for all areas between the two limits
indicated. The cost data tabulated in these columns are based upon
the average of the two limiting areas.
1920. Ordinarily, one set of basic specifications is required for each classification. As an example, for detached, singlefamily, one-story dwellings, one set of basic specificationsmay suffice. It is not necessary to indicate the sizes of the various structural members, quality of plumbing equipment, and other similar
elements, since the sizes of structural members and quality of materials are increased in proportion to the increased areas of dwellings
and these differences are included in the basic square foot costs. For
example, in establishing basic square foot costs for a six hundred
foot area dwelling, the costs include plumbing equipment of a passable quality, while in a fourteen hundred foot area dwelling, better
equipment of a quality in keeping with the size of the structure ·is
included.
1921. Component Unit Costs. Inplace unit prices for
separate elements to which are added allowances for overhead and
profit, are multiplied by applicable Quantity Ratios to obtain component unit costs.
1922. Basic Square Foot Costs. The component unit
costs of all of the 27 components selected according to the basic
specification are added together to form Basic Square Foot Costs.
These basic square foot costs are computed for each range of Calculated Area for each type and are tabulated in Part 1 of the handbook.
UNDERWRITING
MANUAL
1922
Classification
FEDERAL HOUSING ADMINISTRATION
__ M_E_T_R_O_P_O_L_l_T_A_~_~C_IT_V
Iueuring Office
No.
Basic oouare Foot Cost
Component
1. Excavation
2. Foundations
Footilll!e
Foundation Walls
Basement Floor
Basement Essentials
3. Chimnev
4. Fireolace
5. Exterior Walls.
b. Floor Framirur
7. Subflooring
8. Finish Floorilll!
9. Partition 1·raming
10. Ceiling Framine:
11. Roof Framing
12. Roofing
Roof Sheathing
13. Gutters & Downsoouts
14. Pl.ester !lase & Plaster
15. Decorating
16. Interior Doors & Trim
17. Windows
18. Entrance & Ext. Detail
19. Cabinets & Int. Detail
20. stkirs
21. Soecial Floors & Wainscot
Bath Floor
Bath Wainscot
Kitchen Floor
22. Plumbing
23. Heating
24. Electric Wiring
25. Lighting Fixtures
26. Insulation
Walls
Ceilinirn
27. Miscellaneous
-iype
OFTllCHED
Family
ONE
Stories -""1 :.r-V?>2--Sq.Ft .Ares 1400 -1500
Illlls:e Un'.1 Ou
C
~ice Cost ~~otu.8~~i
.5 50
.60
.180
.07
.264
.270
.120
.120
2.65
.29
.297
.13
.13
2.90.
.082.
.587
.553
,553
.023
.02
.17
.07
.07
tJ7
.541 .595 1.26
.75
.124 .136
.067 .073
.166 .183
.15
.07
.18
I.I I
1.00
1.00
.073
.053
.060
.066
.060
.200
.051
.035
[)80 1.25
.058 .520
.066 .707
.707
.073
.066
.707
.22
.065
.056 4.24
.038 424
.10
.03
.05
.05
.05
.03
.2.4
.16
.5 I
16.80 18.50 .012 .23
72.00 80.00 .06
80.00 88.00
.06
75.00 83.00 .06
.730
.900
.80
1.00
327.00
258.00
1.59
-
BASIC SQUARE FOOT COST
.015 .01
.063 .06
360.UI
.26
283;:x
.2.1
1.75 .035 .06
40.00
.03
3.64
•
CONSTRUCTION
COST DATA
1922
-
FEDER.AL HOUSING AIJ.IINISTRATION
Metro~olitan
Insuring
Ci~
,m
Exterior Wall Construction
""'n"la..l
~..1-~--- ,. . .,.
'T:O----
I l'~mm~n
nY'
"'"a"
Ua+1111 T -.a..1..
Ven.,er
n-< ,.;.
I'---R• "'" 11
... ___ ,,_,n-•,.;. .1,"----I"-··,,_,,.,, l?n Woll
,
.-
*r.os+ csr lineal
IP~.,;.~,.
""'
"••'"Woll
, __
~ .,.,
wr.,»
-
"-•-'-•
?':t -
.....,..
u-• _,_ .. __
q"
r
/.
Vi
I
'l'-t 1£1 '1111n~ ..........._·.i.
Extra Lavatorv
IFvtra m .. cot r.o-U·~ ··-Conner· ninin" - ner r<-•-·-Laundrv' Travs
Weathe-rstrinnin" - ner- doorWea•t"t.A..;stri:r.Y'\iY'I~
·- n~r ~-dl"I•.
1stann"""'llinoleumon
Pine Floor
41Jlf 'l'in Roofing ... ':iquare Foot.
.
.
,.._
• ..L-
7
0
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.
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< "1 1'2 "'
o L'1 1'2 &.J.
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concrete walks - sm•a"0
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r 't rra
'._.. . ··--·-· _ . -
.12
.
i» Footina Drain -T.les
210#Asnhalt - Sauare Foot
Clear Red Cedar - "-··-- "'-~+
Heavv A snhal t - "~'°-· "'--•
N~-d--~ <'1 •-' - - "--•-• "'"".
·"'hutte-0 - -·- ""•'KHch"n C•binet - Wall sc, Ft.
Kitchen Cabinet - Floor Sa. Ft.
Tile Floor
l~
r
QR
"on ainn
n'J
O?
n?
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'
D ....
26 - Insulation - 4" RW-Walla
Ceilin<>s
-~
L
.• 20
.16
• l
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n.i, .., ,.,._
Tot~_:.._
., ~" .,., ,..,
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., -s-a ., ..,,..
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o
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J.
r.ntter.s-D•n•n~n+•-"~-·.,·Metal Lath
li'v+,.a Jl•+h-l'~mnl_.,t.P
.........
wall includin" foundat.< on
lntJH
"' ___ , ---
<'1 ---
'>Rn
I
"n
., ·..a 1'2 .,~
'Dn
F,.nmA
.
Type
Fmnily
Office
Stories
Area in Sauare Feet
........
-
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UNDERWRITING
MANUAL
1922
DERlVATlON OF ADJUSTMENTS
COMPONENT UNIT ADJUSTMENTS
A.
SELECT AND RECORD USUAL
ALTERNATE MATERIALS AND
EQUIPMENT
QUALITY ADJUSTMENTS
DETERMINE DEGREES .OF QUALITY
OF CONSTRUCTION ENCOUNTERED
IN BUILDINGS RECENTLY COMPLE~D
OR UNDER CONSTRUCTION
,&.
,&.
ADD OVERHEAD AND PROFIT TO
INPLACE UNIT PRICES OF USUAL
8.
ALTERNATE MATERIALS ANO
EQUIPMENT TO OBTAIN UNIT COSTS
'
ESTABLISH RECOMMENDED QUALl"N
ADJUSTMENT PERCENTAGES BASED
ON LOWEST AND HIGHEST QUALITY B.
OF CONSTRUCTION FOR EACH
CITY OR LOCALITY
'
·~
.MULTIPLY UNIT COSTS BY
C. APPLICABLE QUANTITY RATIOS TO
OBTAIN COMPONENT UNIT COSTS
A.
TABULATE RECOMMENDED QUALITY
PERCENTAGES IN
PART l OF
COST DATA HANDBOOK
,&.
c,
•
I
COMPUTE DIFFERENCES BETWEEN
COMPONENT UNIT COSTS OF BA.SIC
D. MATERIALS OR EQUIPMENT AND
COMPONENT UNIT COSTS OF
ALTERNATE MATERIALS OR EQUIPMENT
~
TABULATE THE DIFFERENCES
COMPUTED IN STEP 0 ABOVE AS
E. COMPONENT UNIT ADJUSTMElllTS
IN PART I OF COST DATA HANDBOOK
LOCALITY
ADJUSTMENTS
SECURE MATERIAL AND ERECTION
PRICES FOR LOCALITIES
OTHER
THAN BASE CITY WITHIN THE
COST DA.TA TERR\TOR't
A.
.&.
DETERMINE I NPLACE UNIT PRl.CES
FOR EACH OF THE ABOVE
LOCALITIES
e.
"
SELECT A TYPICAL BUILDING AND
COMPARE ITS COST IN EACH
..--~
cos;;4TA
li4NDBooK
PART I
,..__i.
LOCALITY WITH THE C.OST IN THE
BASE CITY BY THE
INPLACE' METHOD
e,
'
DETERMINE LOCALITY ADJUSTMENT
.PERCENTAGES TO COMPENSATE FOR
DIFFERENCES BETWEEN COSTS OF D.
THE BUILDING IN VARIOUS
LOCALITIES ANO THE BASE CITY·
..j,
TABULATE LOCALITY ADJUSTMENT
PERCENTAGES ACCORDING TO
NAMES OF LOCALITIES
E.
I-
CONSTRUCTION
COST .DATA
1923-1926
DERIVATION OF COMPONENT UNIT ADJUSTMENTS
1923. Component Unit Adjustments are derived from
component unit costs as follows :
a. The various materials and combinations o:f materials which
are commonly used in the territory are listed in the order
o:f the 27 components and are arranged so that the elements
o:f each component are grouped together.
b, Component unit costs for each material or element am computed :for each tabulated area and are recorded in the
proper column :for each classified type.
o. Component unit costs o:f materials which are selected aspart
o:f the basic specifications are compared with alternate
materials, and their differences are tabulated as component
unit adjustments. These adjustments are derived separately for each increment o:f area in each classification.
Adjustments :for certain components are o:f such character
that a single adjustment is applicable to the entire area
range on a given classification sheet.
DETERMINATION OF QUALITY ADJUSTMENT PERCENTAGES
(
1924. The quality adjustment provides :for the differences
in workmanship and materials, as well as details o:f construction between the quality o:f construction reflected by the square :foot cost in
either method, and the quality of the actual construction, assuming
the same specifications. This difference results from varying degrees
o:f workmanship under identical specifications. The adjustment is
accomplished by the application o:f a percentage described in Section
16 as the Quality Adjustment. These quality adjustment percentages
are indexes o:f comparative quality, expressed as a percentage o:f the
quality o:f construction reflected in the square :foot costs.
1925. A care:ful field examination o:f buildings involved
in recently processed cases in each locality within the territory is
made to determine the degrees o:f quality o:f completed construction.
At the same time an inspection is made o:f other buildings under
construction to determine the quality of construction which is customary and readily acceptable in various parts of the territory. This
degree o:f quality is the basis on which the cost data are established,
and the quality adjustment percentage :for such construction in each
locality is, therefore, 100%.
1926. Recommended limits are set :for the lowest quality
o:f construction which is acceptable, and the highest quality which is
encountered. The e:ffect upon the cost o:f construction is considered
when setting these limits. In general, the range between these
limits does not exceed 10%. The recommended limits o:f Quality
Adjustment Percentages are included in Part 1 of the Cost Data
Handbook.
UNDERWRITING
MANUAL
1926
FEDERAL HOUSING AlllIRISTRATIOR
Metro~olitan Citl
Insuring Office
Recom111ended Quality Adjustment Percentages
Localitv
Hi"h
Low
a~~
11'\~
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Title : Federal Housing Administration Underwriting Manual
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