Federal Housing Administration Underwriting Manual
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U.
a.
G
O
V
ERNMENT
PRINTI
NG
OFFI
CE:
1
9
3
8
"
HA Form No.
20
4
9
Revised
Fe
b.
193
8
WASHINGTON, D. C.
FEDERAL
HOUSING
ADMINISTRATION
·
NATION
A
L HOUSING ACT
OF THE
UNDERWRITING AND VALUATION PROCEDURE
UNDER TITLE
II
UNDERWRITING
MANUAL
t
For
sale by
the Superintendent
of Documents,
Washington,
D. C.
Price
30 cents
to
J
PART V-COMPILATION OF DATA:
Section
18.
Compilation and Recordation of Data
1801-1899
Section
19.
Construction Cost
Data.
1901-1999
PART
IV-COST
ESTIMATION:
()
-
Section
16.
Methods of Dwelling Cost Estimation.______________
1601-1699
Section
17.
Application of Cost Estimation Methods.
1701-1799
PART
III-VALUATION:
3~i
-
Section
13.
Methods of Dwelling Valuation
1301-1399
-
Section
14.
Valuation of Amenity Income Dwellings
1401-1499
Section
15.
Valuation of Rental Income Dwellings
1501-1599
PART II-MORTGAGE RISK RATING:
Section
6.
Methods of Mortgage Risk Rating.
...•.........
601-699
Section
7.
Rating of Mortgage
Pattern.
-- .
701-799
1
._,
Section
8.
Rating of Property .
801-899
v -
Section
9.
Rating of Location
••••
._
..
_
-- --
- - -
-
-
-- --
901-999
Section
10.
Rating of Borrower -- . --
..
- -
--
-
-
-
-
--
- -
-
-
-
--
-
1001-1099
Section
11.
Rating of Commercial Borrower
__
•...............••.
1101-1199
Section
12.
Rating of Earning Expectancy
1201-1299
PART I-ORGANIZATION AND PROCEDURE:
Paragraphs
Section
1.
Underwriting Organization. .
__
.... _..
101-199
Section
2.
Underwriting Procedures.
-
-
..
-
. . .
201-299
Section
3.
Preliminary Examination.
- -
•..
- -
-
•
- - -
-
301-399
Section
4.
Compliance Inspections -- .
401-499
':I
Section
5.
Minimum Eligibility
Requirements------------------
501-599
.'>
1
TABLE OF CONTENTS
UNDERWRITING MANUAL
r!
,,
1.
The Underwriting Manual is
i
s
sued by the Federal
Housing
Administration
.
It
con
t
ains instructions and regulations
governing the procedure
a
nd policies to be followed by Underwriting
Staffs of the
Feder
a
l Housing Administration.
2. The Manual
de
s
cribes the techniques used by the
Federal Housing Administration to determine whether or not mort-
gages
a
re eligible for insurance under Title
II
of the National Hous-
ing Act. Eligibility is
d
et
ermined by risk rating. This process con-
sists of an examination of mortgage risk and embraces valuation.
3. The salaried
und
e
rwriting
personnel and duly ap-
pointed fee
con
s
ultant
s are
furni
s
hed
w
i
t
h
loo
s
e-leaf Underwriting
Manuals. Each of these
manual
s
is
numb
e
red and remains the prop-
erty of the Federal
Hou
s
ing Administration. Copies assigned to
staff members or fee
c
on
s
ultant
s
are listed in the name of the in-
dividual to whom assigned. They shall not be destroyed or trans-
ferred and must be surrendered upon demand of the Federal Hous-
ing Administration.
4. Revisions of the Manual are issued by supplying new
or substitute sections
for
the loose-leaf edition. Such sections indi-
cate the dates upon which
their
contents
b
ec
ome effective. They are
to be inserted in
their
proper
pl
a
ces as indicated by the section
numbers.
5.
In
order
to
promote a broad understanding of the
underwriting and valuation
prin
c
iples and procedure adopted and
advocated by the Federal Housing
Adminis
t
ration, the Underwrit-
ing Manual is made available to individuals and institutions. Such
manuals are bound and contain an imprint on the cover indicating
the date to which revisions have been made.
6.
This edition of the Manual, dated February,
1938,
covers policies and procedures
to
be used in connection with non-
farm
mortgag
es
to
be
in
s
ured under
the
provision
s
of Section 203,
Title
II
of the National Housing Act, as amended February
3,
1938.
For
mortgages to be insured under
Sectio
n
s
207 and 210, those in-
volving
larger
project
s
,
and farm
proper
t
ies under Section 203,
policies are
ba
s
ic
a
lly the
same
,
but
proc
e
d
u
res and forms are dis-
tinctly different.
In
order to make the Manual available to the
Under
w
riting
St
a
ffs
and
t
o
the public, this edition
h
a
s been ordered
to be printed
immedia
t
ely upon enactment of the legislative amend-
ments.
)
PREFACE
UNDERWRITING MANUAL
Effective
February,
1938
Federal
Housing
Administration
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
CONTENTS
SECTION
3
PRELIMINARY EXAMINATION
PART
I
METHODS OF PRELIMINARY EXAMINATION
301.
Purpose
of
Preliminary Exarnination.-Prelim-
inary examination is the initial
s
urvey of an application and occurs
as soon as possible
aft
e
r
the
re
ce
ip
t
of the appli
c
ation by
th
e
Under-
writin
g Staff. Preliminary
examin
at
ion is
m
a
de for
th
e following
purpo
se
s:
a.
To save mortgagors unnecessary expense for examination
fees in cases which
a
re obviously
in
e
ligible.
b,
To save the Federal Housing
Admini
st
r
a
tion
t
he expense
of
compl
et
el
y
proces
s
in
g ineligible
cas
es.
c.
To
preve
n
t
delays in processing, resulting from incomplete
presentations.
d.
To ascertain whether
certa
i
n legal requirements, including
the
sui
t
ability of
con
t
r
ac
t
document
s
,
are complied with
before the
i
ss
uance of
c
ommitm
e
nts for mortgage insur-
ance.
302. Examination fees are charged by tho Federal Hous-
ing Administration to offset the
co
s
t
of
proce
ss
ing cases. Applicants
who
s
ubmit
unac
c
eptable
ca
s
es
ar
e
r
e
quired to bear a portion of the
expen
s
e,
but only when the
actu
a
l
e
x
pen
se
i
s
inc
urred subsequent to
preliminary
exami
na
tion. Preliminary
exami
n
ation which
re
s
ults in
rejection of the
ca
se
before additional
exp
e
nse has been incurred
qualifi
es the appli
ca
nt for
refund of the
examin
a
tion fee.
It
follows
that
pr
e
liminary
e
xamination, to be
fair
to the applicant
,
should
be thorough.
303. General
Instructions.-Th
e
e
xamination requires
the following two operations
:
a.
An
examin
a
tion to
asc
e
rt
a
in
(1)
wheth
e
r
the case presents
conditions which obviously render
it
ineligible,
t
hereby
making
it
inadvisable to require pro
ce
ssing by the Archi-
tectural, Valuation, and Mortgage Risk Sections of the
Underwriting Staff, or (~) whether
it
seems
that
the
PART I
SECTION3
PRELIMINARY
EXAMINATION
-
·
•
l
c
ompletion of
s
u
c
h
p
r
o
cess
in
g may
re
s
ult
in a
s
ound
in
-
sured mortgage.
b,
An examination to
a
sce
r
t
ain whether the
applic
a
tion forms
and accompanying
e
xh
ibits are complete or whether
it
is
necessary to secure
c
orr
e
ctions and
amplifica
t
io
n
s
which
will enable the case to be given proper
con
s
ideration.
When necessary,
thi
s
op
er
ation is followed by
on
e
or both
of the following:
1.
The securing of
s
up
p
l
e
men
t
al data to
a
mpl
i
f
y,
c
onfirm
,
or
clarif
y
item
s
i
n
th
e
a
pplication.
2
.
The securing of
mor
e c
ompl
e
t
e
drawings
,
s
pecifications,
and contract
do
c
um
e
nt
s
.
304. Mortgagees expect the Federal Housing Adminis-
tration
to
render its decisions
i
n
th
e
shortest possible time consistent
with sound analysis.
It
is to
their
best interests to supply any in-
formation which is necessary
to
a
ss
i
s
t
in processing cases with dis-
patch. Application forms require
o
n
ly such information as the
mortgagee and mortgagor
ca
n
conv
e
ni
e
ntly present, and there is a
sound and
a
d
e
qua
t
e
rea
s
on for
th
e
pr
ese
nce of every item on the
forms. The
completen
es
s
of
th
e a
pplic
a
tions,
tog
e
ther
w
ith
all ex-
hibit
s,
will be reflected in
eco
n
omy of operation and reduction in
processing time.
305.
It
has been found
that
some
prospe
c
tiv
e home own-
ers permit loose and vague
co
n
tractual
agreements when building
their
homes. Such practices
ar
e likely to lead to unnecessary mis-
understandings and avoidable
diffi
c
ulties and may result in loss to
one or
mor
e
of
the parties in
th
e
tr
a
nsa
c
tion. Experience
ha
s
shown
the importanc
e
of well
exe
c
ut
e
d
an
d
c
omple
t
e drawings and
sp
ec
ific
a
-
ti
o
n
s upon
w
hi
c
h the
mortg
ag
or,
bu
i
ld
e
r, mortgagee, and the Federal
Hou
s
ing
Admini
s
tration
c
a
n
m
a
k
e and carry out binding
c
ontra
c
ts.
Preliminary examination
mu
s
t
in
cl
ude a close scrutiny
of
the ade-
qua
c
y and
suffi
c
iency of
subm
i
tt
e
d
dra
w
ings and specifications.
306. The term
"appli
c
ation" is used in
thi
s s
e
ction to
describe all the papers,
photog
r
ap
hs, drawings, and other exhibits,
jointly, which are presented by
t
he mortgagee and
mortgagor
.
Com-
plete applications include the
follow
ing items:
a.
P
r
opo
s
ed or
partially
compl
ete
d construction:
1.
Mortgagee'
s
Appli
ca
tion for
In
s
urance,
FHA
Form No.
2004, or Mort
ga
ge
e
's
Appli
c
ation for Conditional
Commitment
,
FHA
F
o
rm No. 2201.
2.
Mortgagors'
P
r
op
er
ty
De
s
cription,
FHA
Form No.
2004a or
Property
De
s
cription,
FHA
Form No. 220la.
303-306
UNDERWRITING MANUAL
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 improve-
ments 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.
2004a or 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 ulti-
mate 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
rejec-
tion is certain because of lack of adequate access, extremely excessive
lot coverage, or insufficient cash 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 deci-
sion 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 omissions or 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 confirmed by, the mortgagee
prior
to such alteration of the ap-
plication.
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
306-309
PRELIMINARY EXAMINATION
11
I
'
•
'
•
PRELIMINARY ELIGIBILITY TESTS
310.
Preliminary
Examination of
Property
Eli-
gibility.-Included
in eligibility of property are the factors consid-
ered in
Rating
of
Proper
t
y, Section 8, including
Property
Standards,
both national and
local
,
Minimum
Con
s
truction
R
e
quirements, 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
c
hecking the items contained
in
an application against definite requirements and
past
decisions on
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 above items of information make
it
possible for
the
Preliminary
Examiner to arrange for the revision, withdrawal, or rejection of any
case which fails to comply with
Property
Standards and Minimum
Construction Requirements. The Preliminary Examiner should work
in close cooperation with the Architectural Section, and the Chief
simultaneous accomplishment of both purposes. Cases :fall into four
groups according to the most efficient method of handling them.
This
groupin
g is
de
s
cribed in
par
a
graph
317.
The final
re
s
ult
of
preliminary
e
xamination is either, (a) a recommendation
that
the
case be rejected and
that
the examination fee be refunded to the ap-
plicant, or (b) a
deci
s
ion to
proce
ss
the
c
a
se by
Re
g
ular or
Modifi
e
d
Procedure.
Procedu
r
es are described in Section
2.
The decision is
recorded in
the
space
de
s
ignated as Preliminary
E
x
aminer's Report
on the Mortgagors' Property Description,
FHA
Form No. 2004a
or
2201a
.
Paragraphs
318
to
322
give
det
a
iled instructions on the
recording of decisions.
309-310
UNDERWRITING MANUAL
Architectural Supervisor should advise him as to adequacy of plans
and specifications or of the need
for
additional data to expedite
processing of cases.
311.
Preliminary
Examination of Location Eligibil-
ity.-This
esamination does not include the actual analysis of loca-
tions, 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 accumu-
lated
data
indicate
that
the case is on the borderline of location eligi-
bility, preliminary examination shall not result in a recommendation
for
rejection solely because of location factors.
312. The Preliminary Examiner has the following data
with which to check probable 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 proper-
ties 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 sub-
divisions 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
Eligibil-
ity.-This
examination may be made with considerable confidence
because the Preliminary Examiner uses data supplied by the mort-
gagor himself on
FHA
Form No.
2004.
When the information indi-
cates obvious ineligibility, a recommendation to reject the application
is adequately supported because of the source of the data.
In
a case
in
which the ratio of total
mon
t
hly payment to the stated monthly
income or the ratio of property value to stated annual income is
seriously excessive, the Preliminary Examiner should recommend re-
310-313
PRELilVIIN ARY
EXAlVI!N
ATION
ROUTINE OF PRELIMINARY EXAMINATION
316. Speed is essential in
preliminary
ex
a
mination.
However, preliminary examination
s
hall not consist of a mere stamp-
ing
of the application
with
no
pr
io
r
an
alysis. The routine
pro
c
edure
consist
s of sorting cases
ac
c
ording to a suitable
clas
s
ific
a
tion
and
then
tre
a
ting
the cases
in
the
se
veral groups so as to
exp
e
dite
pr
e
-
liminary
ex
amination and the rend
e
ring
of the reports of
th
e Prelim-
inary
Examiner.
317.
Grouping of cases.-A
method of quickly
cla
ss
i-
fyin
g cases by a
standard
routi
n
e
s
hall
be used by
the Preliminary
Examiner. Described below is a
s
uggested method of
grouping:
•
i
I
I
jection to the Chief Und
e
r
w
riter.
Prel
i
minary Examiners
a
re re-
quired to be
familiar
with
an
d
ap
ply
t
he major principle
s
co
n
tained
in
S
ec
tion
10,
Rating
of
Borro
we
r, and Section 11,
Ratin
g
o
f Com-
mercial Borrower.
314. The
Prelimi
n
ary
E
x
aminer shall use data
i
n
cluded
in
the application
for
the
follow
i
n
g purposes:
a.
To
c
ompare mortga
g
or'
s
sta
t
ed income with
th
e
am
ount of
t
o
ta
l payment as
p
revious
l
y
fi
g
ured. The
Mor
tgage
Ri
s
k
S
e
c
t
ion
s
hould
s
u
p
pl
y
c
erta
in
out
s
ide
r
at
io
limi
ts
w
hich,
if
e
x
cee
ded,
w
ould
requ
i
r
e
r
e
commend
at
ion
t
o
r
e
j
e
c
t
.
.
'
b,
To compare the
a
m
ount of mortgage applied for, plus cur-
rent
assets, with
ca
s
h r
eq
u
i
r
e
d in cases of
pur
c
has
e
or with
outstanding liens in cases of refinancing.
Prop
e
r
allow-
ance should be made
for
ad
v
ance taxes, special
ass
es
sments
due, delinquent
tax
es
,
i
ni
tial
service charges, and other
costs of settlement.
o.
To ascertain whether the
propo
s
ed transaction
compl
ies
w
ith
the
e
s
tablished
cas
h
e
qu
ity
r
e
quirement
s
.
315.
In
addition to
t
h
e
d
ata
included on the
a
pp
l
ic
ation,
th
e
P
re
liminary Examiner
h
as
t
h
e
:follo
w
ing available:
a.
Borrower cards on
a
ll
pr
ev
iou
s
applications,
FHA
Form No.
2006b, which
mak
e
po
ss
ibl
e
ready reference to other
office
files and the
decision
s
m
ade on cases previously submitted
by the same mortgagor.
b. Mortgage Insurance Allotment Cards,
FHA
Form
N
o
.
2211,
prepared
for
every
mort
g
agor in whose name more
than
one formal
commitm
en
t
h
a
s
be
e
n issued.
o.
Da
t
a on
tax
ra
tes
,
in
s
u
ra
n
ce
ra
t
e
s,
and
spe
c
i
a
l
as
se
s
s
ment
areas prepared by
th
e
V
a
luation Section. Thi
s
informa
-
tion is most
u
s
eful in
c
h
ec
king
debt service
a
nd the
amount of cash
requir
e
d to
clo
s
e
the
tran
s
action.
313-317
UNDERWRITING MANUAL
Group
1.
0
aees
meeting preliminary eligibility tests and with com-
plet
e
information.
Group
2.
0
ases
meeting
.
pr&Ziminary
e
ligibility tests but with cer-
tain minor information
la
c
kin
g
.-Examples
are cases in which:
a.
The legal
d
es
c
r
iption
doe
s
not conform to the lot
siz
e
.
b,
Specifications for repairs
a
r
e
g
e
neral
rather than
specific.
c.
Minor items
a
re omitted from plans and specifications.
d.
The nature
o
f
th
e
borrower'
s
a
ss
ets or income is such
that
more detailed information
will
be required by the Mort-
ga
g
e
Ri
s
k Section.
The cases to be placed in
t
his
g
roup
mu
s
t
s
a
tisf
y two tests.
First,
the case must be one which
ha
s a
fair
chance of finally being com-
mitted upon, and,
s
e
cond, the mi
ss
ing information is not essential
for
processing in the Architectural or Valuation
Section
s
.
Group 3.
O
ase
s
wi
t
h
c
e
rtain major
i
nformation lacking
so
that
preliminary
d
e
ter
m
ination
of
e
ligib
i
li
t
y
c
an
n
ot
b
e
made.-Exampies
of
cases
falling
into this group
are:
a.
Applications which appear ineligible, but cannot be defi-
nit
e
ly
clas
s
ed as such without
further
information.
·
b,
Applications where information is lacking which is essen-
tial for
processing in the Architectural or Valuation Sec-
tions.
c.
Applications where violations of requirements can be cor-
rected, but not without difficulty or considerable expense
to the applicant.
Usually the
perc
e
ntag
e
of cases
falling
into this group will not be
large.
Group
4.
Oases not meeting
pr
e
liminary eligibility
t
e
sts.-This
group
includ
e
s
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 dis-
crepancies
in
the application may be corrected and initialed
in
red by
the
Preliminary
Examiner.
P
a
ragraphs
following require
that
cer-
tain
correspondence, investigations, and
requ
e
sts be made. Notations
indicating the lines of action should be made on th!' application.
Inasmuch as the two
she
e
ts of the application are separated, the
Preliminary
Examin
e
r
should make certain
that
notations and corre-
spondence 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
317-318
PRELIMINARY EXAMINATION
"
\
L
at
ta
ched to
FH
A
F
o
rm No.
2004.
The
Prelimina
ry Examiner de-
cid
es
wheth
e
r
R
e
gular
or
M
o
difi
e
d
Pr
oc
ed
ure is to
b
e
us
e
d. The
decision is
indi
c
ated by a check in
t
he proper
sp
a
ce
o
n the "Ap-
pro
v
ed
"
st
a
mp of
t
he
Prelimin
a
ry
Ex
a
min
e
r.
In
s
tru
c
tions
co
n-
cerning the choice of
Re
g
ular or Modified Procedure are contained
in Section
2.
319.
When a
ca
se has
b
ee
n
thoroughly checked, and
it
has
be
e
n found
tha
t
all inform
at
ion
nec
es
sar
y for
proces
s
ing has
been included
a
nd
th
e
appli
cat
ion
h
as
m
et all
t
he preliminary tests
for
eli
g
ibility (Group
1),
the
Prelimina
r
y Examiner proceeds as
follows:
a.
H
e orders a Factual
Dat
a
R
e
port. This
s
hould u
s
ually be
reque
s
ted from a
c
redit
reporti
n
g
a
g
ency by prop
e
r
nota-
•
t
ion
o
n
a
n
d
t
ransmitt
a
l of
FHA
Form
No
.
2006a. The
name of the credit reporting
a
g
ency and
th
e
date of the
r
e
qu
es
t
sh
a
ll
b
e
no
t
ed on
FHA
Form
s
No
s
.
2004 and 2006b.
The
requ
es
t
is forward
e
d
to.
a
n
a
g
en
cy
approv
e
d by W
a
sh-
ingto
n
H
e
adquart
e
rs.
It
i
s
not
req
u
ired
that
a Factual
Data R
e
p
o
rt
b
e
reques
t
e
d in
e
ve
ry
c
as
e.
Th
e
Chi
e
f
Mort-
gage Risk Examiner
s
hall ind
i
cat
e to the
Prelimi
n
ary
Examiner the
poli
cy
wi
t
h
r
es
pect to such
reque
s
t
s
.
When
the
mort
g
ag
ee
at
ta
ch
es a copy
0£
an
ad
e
qua
te
cr
e
dit
report or
oth
e
r
s
a
tisfactory
d
a
ta
on the
borro
w
er, the
order
i
ng of a
Fa
c
tual
D
a
t
a R
e
port is not
r
e
quired.
b,
H
e
sends out
su
c
h
form.
c
redit
inquiri
es
as are
nece
s
sary to
c
onfirm bank
balance
s,
sal
a
ry
st
at
e
ments, and status
0£
o
t
her
obli
g
ations.
Th
e
se
f
orm
le
tte
rs
a
re
i
dentified as
FHA
Form Nos.
2
016b, 2016c, and 2016d. The Prelimi-
n
a
r
y
Ex
a
min
e
r
no
te
s
o
n
t
h
e
ma
r
gin of the Mortgagors'
Statement
tha
t
such inquiries have
b
ee
n transmitted.
•
c
.
For
cer
t
ain
ca
ses
,
h
e
pr
e
par
es
th
e
headin
g
s
of
FHA
F
or
m
No.
2
217,
Cer
t
ifica
t
e of
A
p
proval
0£
Privat
e
W
e
ll,
a
nd
FHA
Form No.
2218,
Certifica
te
0£
Approv
a
l of
Pri
va
te
Se
w
a
g
e
D
i
spo
sa
l
S
ys
tem.
The
se
form
s
a
re forwarded to
the proper Public
Hea
l
th Authority, and not
a
tion of
t
his
should be made on
th
e
Pr
e
lim
i
nar
y
Ex
a
miner'
s R
e
port.
In
some
office
s
the
se forms are mailed at the time of com-
m
itment.
Thi
s practice is
a
cc
ept
a
ble in areas where
priv
at
e
in
s
tall
a
tion
s
ar
e
no
t
a
fr
e
qu
e
nt
c
a
use of rejection.
d,
For
ca
s
es in undeveloped
are
a
s, he indicates on the Prelimi-
nary
Examin
e
r
'
s
Repo
rt
,
wh
et
her or not
s
ubdi
v
ision anal-
y
s
is h
a
s been made pre
v
iou
s
l
y
.
I:f
so
,
the name or number
of the subdivision file
shoul
d be noted on
FHA
Form No.
2004
a.
318-319
UNDERWRITING MANUAL
e.
For
cases in built-up areas, he notes the number of the out-
lined neighborhood on
FHA
Form No. 2004a.
f.
He indicates
that
the case is approved
for
processing, desig-
nates the proper procedure, Regular or Modified, and
tran
s
mits 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 correspondence requesting the
required information. The replies should
b
e
directed to the attention
of the Section Chief concerned.
Further
correspondence is prepared
by
that
Section Chief, not the Preliminary Examiner.
321.
For
those cases in which the lacking information is
so important
that
preliminary determination
0£
eligibility is im-
practical or in which the lacking information is essential to proces-
sing in either the Architectural or Valuation Sections (Group 3),
correspondence shall be
initiat
e
d 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
specified date. No
further
correspondence should be necessary, and
if, on the specified date, the
requ
es
ted information
has
not been re-
ceived, the case shall be recommended
for
rejection according to the
procedure described in the following
parag
r
aph.
322.
For
tho
s
e
ca
s
es in which preliminary eligibility
tests indicate the necessity
for
recommending rejection (Group 4),
the Preliminary Examiner
so
indicates on the Preliminary Exam-
iner's Report by the standard
s
tamp, "Rejection Recommended."
It
is
r
e
quired
th
a
t
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 in-
form
a
tion of the Chief Underwriter and Director. All rejections re-
quire the approval of the Chief Underwriter and the Director, either
of whom has authority to require
that
the case be completely
processed.
319-322
PRELIMINARY EXAMINATION
E
ft'
ec
tiv
e
February
,
1
938
Feder
al
H
a
n
s
i
ng
Admin
i
st
ration
Para
graph
s
Ge
n
eral
I
nst
ru
ct
i
ons-
-
--
-
----
-
-
-
---
--
-
----
-
--
------
--
--
--
-
-
----
--
-
-
-
401-4
10
P
urp
os
e
o
f
Compliance
In
s
pect
i
o
ns
40
1
-403
P
roc
e
d
ure for
Com
pli
ance
Ins
p
ectio
ns-
-
--
-----
-
----
-
--
--
-
----
----
40
4--410
Method
s
of
Com
pli
a
nc
e
In
sp
e
c
tion---
----
--
--
-
-
--
--
--
---
-
-
--
·
--
--
--
--
-
411-42
6
F
i
rst
Co
m
pliance
I
nspe
c
tion
4
11-41
6
Second
Compli
ance
I
n
s
p
e
ct
ion
4
17
-419'
T
h
i
rd
C
om
pliance
In
sp
ect
ion
42
0-42
3
:
A
ddition
al
C
omp
li
a
nc
e
I
ns
pectio
n
s
__
___
__
____
_
__
_
__
__
_
__
_
__
____ __
__
424
R
e
pa
ir
Co
m
pli
ance
I
n
sp
e
ct
i
ons 425-42&
Compli
ance
In
spe
c
tion
F
o
r
m
s 427-43(}
C
omplia
nce
In
s
pec
tio
n
R
e
p
ort.,
42
7-42
9'
M
emora
ndu
m of
Comp
liance
In
sp
e
c
t
io
n__
_
__
__
_
____
_
___
_
_
__
__
_
__
_
4
3(}
S
p
e
ci
al
Prob
le
m
s
43
1-4
38
R
el
a
tion
B
et
w
ee
n
I
n
s
p
e
cto
r
a
n
d
Builder
43
1
-432
L
ar
g
e
Ope
rati
on
s
____
__
__
_
__
___
__
_ _
__
__
__
_
__
_
_
___
__
_
_ _
_
_
__
_
__
_
_
__ 433
M
ortga
gee's
Ass
uranc
e of
Co
m
pleti
on
4
34--437
CO
NT
E
N
TS
COMPLIANCE INSPECTIONS
SEC
T
IO
N 4
PART
I
GENERAL INSTRUCTIONS
401.
Purpose
of Compliance Inspections. Commit-
ments for
mo
r
tgage insurance are
a
g
r
ee
ments binding the Federal
Housing Ad
m
ini
s
tration
to insure mort
ga
ges
.
The commitments
ar
e
based upon
c
ert
a
in
requirement
s
,
including the completion of
c
on-
struction,
alt
e
r
a
tions or
repair
s
.
The
F
e
d
e
ral Housing
Administr
a
-
tion, for
i
ts
o
w
n
inter
e
st, makes
in
s
p
ec
tions to determine
wh
e
th
e
r
constru
c
tion,
a
ltera
t
ions or
r
e
pair
s
ar
e
m
a
de in compliance with
th
e
conditions of
c
ommitments.
Su
c
h
insp
ec
tion
s are termed Compli-
ance
In
s
p
ectio
n
s
a
nd are made under the
s
upervision of Chief Archi-
tectural
Su
p
er
v
i
s
ors.
402. The Inspector shall
k
eep the purpose of Compliance
Inspection
s
for
e
most in his mind
whil
e conducting these
inspection
s
.
This will
gui
de his
a
c
tions in any
situ
a
tion for which instructions
ar
e
not
provid
e
d in
t
hi
s
Manual.
403.
In
practice,
Com
p
li
a
nce
Inspe
c
tions re
s
ult in the
ac
c
ompli
s
hm
e
n
t
o
f
thr
e
e
func
t
ion
s
:
a.
Th
e
d
e
t
e
rmin
a
tion of
w
he
t
he
r
t
h
e
improvements, alterations
or
r
e
pai
rs are
comple
t
ed in
ac
cord
a
nc
e with the
a
ppro
v
ed
dra
w
i
n
g
s
and
specification
s
.
The term "approved draw
-
in
gs
an
d specifications" as
u
se
d here and elsewhere in this
Ma
n
ual, means those drawings and specifications includ-
i
ng
a
ll amendments,
whi
c
h
w
e
re approved by the Federal
Housing Administration and
m
a
de the basis and terms of
the commitment for mortgage
in
s
urance.
b
,
A
ss
i
s
tan
ce
to
builders in
t
h
e
for
m of
advi
ce
and
sugge
s
tion
s
as a means of securing
c
o
mpli
a
nce
o.
The
r
e
ndering of
repo
r
ts
an
d
sec
uring of photographs of
the property as
eviden
ce and
r
ec
ord of completion
404.
Procedure for
Compliance
Inspections.
The
Chief
Underwri
t
er authorizes
Compli
a
nc
e
Inspections and
notifie
s
the Chief
Ar
c
hitectural Supervisor by transmitting a copy of the
commitment
t
o
the Architectural Section. Record of this is kept in
PART I
SECTION 4
COMPLIANCE
INSPECTIONS
401-404
~
I
I
J
•
•
an active file
of propert
ies awaiting
i
ns
pection.
The
s
e are usually
s
e
p
a
rated into groups
a
cc
ording to the
ty
pes of
in
s
p
ec
tion which
ar
e
to be made. 405. When the Director
tran
s
mits the commitment to
the
mortgag
ee in a case which requires
c
ompliance inspection,
ther
e
are attached
R
e
quests for
C
om
pliance
I
ns
pections,
FHA
Forms Nos.
2289, 2289a,
22
8
9b,
2289c
,
an
d 2289d, as
r
e
qu
ired.
Th
ese are
po
sta
l
c
ards
whi
c
h
s
hould be
us
e
d to inform the
In
s
uring
Office
of
t
h
e
proper date
for
the next
in
s
pection.
406. When notified
that
a property is
r
e
ady
for
a Com-
pliance
Insp
ect
ion,
the
Ch
ie
f Architec
t
ural
Supervi
s
or assigns an
Inspector to
th
e
ca
s
e.
In
p
ra
c
tically
a
ll
in
s
tance
s,
fully
accredit
e
d
Architectural
In
s
pectors will be
a
ss
i
gne
d
Compli
a
n
ce
In
s
pe
ct
io
ns
.
However,
th
e
Chief Underwriter may
assi
gn to
thi
s
work any
m
e
m-
ber of the
Un
d
erwriting
S
ta
ff
who, in the opinion of
th
e
Chief Archi-
tectural
Super
v
isor, is
qualifi
e
d.
407.
In
in
s
t
a
n
ces when the
In
s
p
e
c
t
or
r
ece
ives the
a
ss
ign-
ment while in
t
he
In
s
urin
g
Office,
he
m
a
y
u
s
e
th
e
offi
ce copy of
th
e
approved drawings and
s
pe
c
i
fications
a
nd,
if
necessa
ry, a copy of
th
e
commitment. When the Inspector
rec
eiv
es the
assi
g
nment by tele-
phone or
t
e
leg
raph, he
u
se
s
that
set of approved drawings and
specification
s
w
hich were
forw
a
rded to
t
h
e
mortga
gee
w
ith
the
c
om-
mitment.
Th
e
mo
s
t
re
c
en
t
Complian
ce
Inspection
R
e
port
or
M
e
mo-
randum of
C
o
mpliance
In
s
p
e
ction shall be used
a
s a reference.
408. The Inspector
execut
es
the
Memor
a
ndum of
Co
m-
pliance
Insp
e
ction,
FHA
F
or
m No.
2200,
in duplicate
a
nd the original
i
s
posted
c
o
n
sp
i
c
uou
s
l
y at
t
h
e
site of
co
n
s
t
ru
ct
ion.
Th
e
Complian
ce
In
s
pection
R
e
port,
FHA
Form No.
20
5
1,
i
s
exe
c
u
te
d in pencil
a
nd
transmitted to the Chief
A
rc
hitectural
Su
pervisor for his apporval.
For
final
Com
p
liance
Insp
ec
tion
Report
s, i
t
is the responsibility of
t
he
Chief
Archi
te
c
t
ural Sup
erv
i
s
or to
obt
ain assurance
t
h
at
all certifi-
c
ate
s
of
appr
ov
al which
a
re
ne
c
es
s
ary for
occupan
c
y
o
f
the
proper
ty
have been
i
ss
u
e
d.
Thi
s
m
ay include
ap
p
roval by
lo
ca
l building
a
u-
thorities or approval of the
e
lectrical installation by
th
e public
utility
company.
With
the
exc
e
ption of
certifi
c
ates of app
r
oval of
priv
a
te
w
ater
supply
an
d sewage
di
sp
osal
system
s
,
this
eviden
ce is not
requi
red
in
writing for
i
nclusion in
th
e
case
bind
e
r,
b
ut may
b
e
obt
a
ined
duri
n
g
the final
co
m
pli
a
nce
in
s
p
e
ct
i
on or by
te
l
ep
hone.
·
wh
e
n a
Compli
a
n
c
e
Inspection
R
e
port
indica
tes
that
the
co
nstruction i
s
finally approved
by the Chief Architectural Supervisor,
it
i
s
transmit
te
d to
the
Chi
e
f
Underwriter for final appro
v
al
,
which
ap
proval is required before the
mortgage may be insured.
404-408
UNDERWRITL'lG MANUAL
METHODS OF COMPLIANCE INSPECTION
411.
First
Compliance
Inspection.
The
First
Com-
pliance Inspection shall be made
at
either of the two following
stages of
con
s
truction:
a.
When excavation is completed and ready for footings and
foundations, or
b,
When
th
e foundation walls are
comple
t
e and ready for
backfill
An
inspection made at the
latter
stage of construction is designated
"Alternate
First
Compliance Inspection."
409.
In
the event
that
the Inspector reports noncom-
pliance which adversely
a
ffects the cost
es
timate or
Rating
of
Physi-
cal Security, the Chief Architectural Supervisor shall
transmit the
Compliance Inspection R
e
port
to the Chief Underwriter.
l£ the
Chief Underwriter determines
that
such noncompliance renders
the
proposed mortgage, in the amount committed, ineligible
for
insur-
ance, and
that
compliance is not probable, the Director shall
notify
the mortgagee
that
pre
s
ent
condition
s indicate
that it
will be
impos
-
sible to insure the mortgage.
H
the mortgagee requests
that the
case be reconsidered,
reproce
ss
ing shall be completed
at
the discre-
tion of the Chief Underwriter.
In
most instances, a complete reval-
uation, including reexamination of the property, shall be made.
410. On commitments issued
for
proposed construction,
it
i
s required
that
a
Fir
st
,
Second, and
Third
Compliance Inspec-
tion be made, together with such additional inspections as may be
nec
es
sary. When,
at
the date of commitment, construction has
progressed beyond the stage specified
for First
Compliance Inspec-
tion, the Chief Architectural Supervisor will require
that
an imme-
diate inspection be made of all completed work. The Inspector will
designate whether this is a
First,
Second, or
Third
Compliance
Inspection,
dependi
n
g 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 inspec-
tions which ordinarily would have preceded it.
For
instance, if, at
the date of commitment, construction is past the stage prescribed
for
Second Compliance
In
s
p
e
ction but not completed, the
initial
inspec-
tion will be
indicat
e
d as
t
he
S
e
cond Compliance Inspection and must
include, to the extent possible, examination of all work usually
inspected
in
both the
First
and Second Compliance Inspections.
In
such instances
it
ma
y be
advi
sa
ble to h
av
e certain vital portions of
the structure uncovered.
409-411
COMPLIANCE INSPECTIONS
I-
I
I
j
•
•
412.
The Chief .Architectural Supervisor
s
hall notify the
Chief
Underwrit
e
r
at
whi
c
h
sta
ge of
con
s
tru
c
tion the
First
Com-
pliance Inspection is to
b
e
mad
e.
This
d
e
cision
sh
a
ll be indicated
on the Report of Architectural
Insp
e
ctor
,
FHA
Form No. 2014, in
order
that
suitable notification cards may be
se
lected to accompany
the
commitment.
413.
In
deciding
at
which
stag
e
of constructionthe
First
Complian
c
e
In
s
pection is
t
o
be
m
a
d
e
,
the Chief .Architectural Super-
visor should consider,
(a)
soil
condition
s
,
(b)
dependability and
comp
e
tenc
e of
build
e
r,
and
(
c)
a
nti
ci
pat
e
d
con
s
truction conditions.
In
some instances
it
will be
ad
v
isabl
e to make inspections
at
both
stages of
construction
.
414.
When making a
First
Compliance Inspection, the
Inspector
d
et
ermines
if
th
e
construction
i
s
proc
e
edin
g
in
conformity
with the approved
d
r
awings and
specific
a
tion
s and in conformity
.
with acceptable
stan
d
ard
s
of
workmansh
i
p and good
engine
e
ring
practice by
obs
e
rving the following
:
a.
Lo
c
ation of
,
the
buildin
g
lin
es on the
lot
b.
The
d
e
pth
a
nd size of the
ex
c
avation
e.
Th
e
c
haract
e
r
and formation of
t
he
s
ubsoi
l including:
1.
Bearing capacity, and
fd
.
Pr
e
senc
e
of filled earth or faults
d.
The
pr
e
senc
e
of springs or ground water
e
.
The fall
bet
w
een the
hou
se
lin
e
s and the main
sew
e
r
as
well
a
s
th
e
adequacy of
drainag
e
for
the entire property
f.
The condition of footing
tr
e
n
c
hes and
th
e
suitability of
form
s
where required
415.
H
unsati
s
factory
s
oil conditions are
en
c
ountered,
the Inspector
sh
a
ll
su
g
ges
t
suitable
c
o
rrec
t
ive measures, such as the
use of
sp
e
cially
desi
g
ned footings and foundation
s
.
The suggested
corre
c
tive
mea
s
ures shall be indicated on the prescribed forms, and
the Chief
Architectu
r
al Supervisor
s
hall determine whether these
remedies are
ad
e
quat
e
.
If
de
e
med
neces
s
ary, the builder may be
required to obtain the services of a
c
omp
e
tent engineer to
assi
s
t in
this work.
If
no
correctiv
e
mea
s
ures
a
re
f
e
asibl
e
,
the Inspector shall
report such conditions.
416.
Wh
e
n the
Fir
s
t
Co
m
pli
an
ce Inspection is
def
e
rred
until
foundati
o
n walls
ar
e
comple
te
d and
re
a
dy for
ba
c
kfill,
the
Inspector observes, in addition to
th
e items already listed in para-
graph
414, the following:
a.
Size and
sh
a
pe of
foo
ti
ngs,
found
a
tion walls and piers
b,
Quality of the materials and workmanship, particularly
the
neatne
ss
and
soundn
ess of masonry
412-416
UNDERWRITING MANUAL
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 enclosed and all structural mem-
bers 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 Compliance Inspection, the
Inspector determines whether the construction is proceeding
in
con-
formity with the approved drawings and specifications and in con-
formity with acceptable standards of workmanship and good engi-
neering practice, by observing the following:
a.
Foundations
if
not inspected during
First
Compliance
In-
spection
1.
Size and shape of footings, foundation walls and piers
fa.
Quality of the materials and workmanship, particu-
larly the neatness and soundness of masonry
3.
The dampproofing and drainage of foundation
4.
The location and quality of columns and other sub-
structure
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 assembly and workmanship employed in the
construction, including masonry, cutting, fitting and
joining of materials, roofing, flashing and insulation
c.
Roughing-in for mechanical and convenience equipment
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 adequacy of wiring, distribution of
circuits, and location of outlets
416-418
COMPLIANCE INSPECTIONS
····~
·
-
~
·
·
-
-
-
-
-
-
-
-
-
-
--
..
.
I
I
I
-~
j
•
•
419.
In
the event
c
on
st
ru
ct
ion is not
proceedi
ng in con-
form
i
ty
w
ith the
approved
dr
a
wi
ngs and
s
pecification
s
,
th
e
In
s
p
ec
-
tor lists
th
e
d
e
ficiencies or
variat
i
ons on the required
fo
rms
an
d sug-
gests a
s
a
ti
s
factory remedy to
t
he builder.
For
example, where
the
structural strength of
joists or
oth
e
r
load bearing members
ar
e
defi-
nitely impaired by cutting,
drilli
ng or by inherent
defect
s
,
th
e
In-
spector
sh
a
ll indicate
that
s
u
c
h
m
e
mbers will require
repla
ce
m
e
nt
or
adequ
a
t
e
r
e
info
r
cement
prior
to
appr
o
va
l
of
the
construction
;
420
.
Third
Compliance
Inspection
.
This
in
s
p
ec
tion is
mad
e
w
h
en
a
ll
impro
v
e
me
nt
s
are
co
mpl
et
ed
a
nd the
buildin
gs are
re
a
d
y
fo
r
o
cc
up
a
n
c
y.
Wa
lk
s
,
dri
ves,
gra
d
i
ng and
accessor
y build-
in
gs
ar
e
i
nclud
e
d in
the
im
pro
v
e
m
ents which must
b
e
c
o
m
pl
ete
.
421. When
makin
g a
Th
i
rd
Compliance
In
s
p
ect
ion,
the
Insp
ect
or
d
et
e
rmines whether
a
ll
imp
ro
v
ements have
be
e
n
c
o
mp
leted
in
accorda
n
ce with
t
he approved drawings and specifications and
the
term
s
of
the commitment by
ob
se
rving
the
fo
ll
owing:
a
.
Pl
as
ter
and
plaster
b
ase
b,
Mill
,
c
abinet and
s
t
ai
r
wor
k
o
.
Floo
r
and
w
all
m
ate
ri
a
l
s
an
d
fini
s
hes
d.
P
ai
n
t
ing,
wa
ll
cove
rin
g
a
n
d
d
ec
or
at
ing
e
.
Glazing,
w
ea
t
h
e
r
s
trippi
ng
,
a
nd caulking
f.
Rou
g
h and
fini
s
h
h
a
rd
ware
g.
Plumbing fixtures
a
n
d
eq
uipment
h
,
Radiators, ducts and
g
rill
es
,
boilers, heaters, air-condition-
ing units, stokers, oil
b
ur
ners, and
a
u
xiliary
d
e
vic
es such
a
s automatic
control
s
.
i.
El
ectrical equipment
j
.
C
e
rt
i
fi
c
a
t
es
of
appr
o
v
a
l
i
f
t
h
ese
a
re on the
p
re
mi
se
s
k
.
Gu
tt
e
r
s
,
dow
n
spo
u
t
s
,
a
nd
ot
h
e
r
s
h
eet
metal
w
ork
l
.
Wal
ks
,
drive
s
,
and
grad
i
ng
m.
A
cces
s
ory
buil
d
in
gs
n.
P
r
i
vat
e
water
and sewage
dis
po
s
al
s
ystem
s
422.
H the
Inspe
c
tor
determines
that
the
imp
r
ovemen
ts
have
b
een completed in a
satis
factor
y manner, he
indic
ates hi
s
ap-
proval on the
require
d forms and
th
e
n photographs the
s
u
b
j
ect
p
rop-
erty.
O
ne
stre
et view is
tak
e
n
showi
n
g the adjoining pro
pe
r
t
i
es and
a
front
v
i
e
w
s
howing the
c
o
m
pl
e
ted improvements.
In
or
de
r
to
iden
t
i
fy
t
h
e
p
ho
t
ograph
s
it
i
s
s
u
gg
es
te
d
th
a
t
t
he
la
st
t
hr
ee
di
g
its
of
the
se
rial
num
be
r
appe
a
r
in each
p
h
otog
raph
.
423.
In the
event
t
h
e
p
rop
e
rty
is
not
completed
in
a
sa
ti
s
fa
c
tory
ma
n
ner
the
In
spec
t
or will indicate his
find
i
ng
s on the
requi
r
ed
fo
r
m
s
and withhold hi
s
fina
l
app
r
oval.
In
such
i
n
st
ances,
an
additional Compliance
Insp
ec
t
i
o
n
ma
y be necessary.
419-423
UNDERWRITING MANUAL
424.
Additional
Compliance
Inspections.
The Chief
Archite
c
tural
Superv
i
sor may deem
it
advisable or necessary to have
more
than
the three
regular
compliance inspections made.
For
ex-
ample,
it
may be found
that
addition
a
l compliance inspections are
necessary in
ca
s
es where special installations are contemplated
that
will require more frequent
exami
n
ation, or
wh
e
re certain work will
be concealed earlier in
th
e
buildin
g
op
e
ra
t
i
o
ns
than
ordinarily is the
cas
e
.
Additional
in
s
pections are
a
lso
nece
s
sary in cases where non-
compliance
w
ith
approved drawings and specifications is discovered
during
one.
of the regular compliance
inspection
s
,
and
it
is
n
e
cessary
for the
cont
r
actor to
corr
e
ct
varia
t
ions,
defecti
v
e
work, or
materi
a
ls.
This will
b
e
required only when the method of correcting the non-
compliance cannot be
examin
e
d in a subsequent regular compliance
insp
e
ction.
R
epo
r
ts shall indi
c
a
t
e
wh
e
ther such deficiencies have
been
satisfactoril
y
r
e
medi
e
d. Additional inspections may be advis-
abl
e
,
and shall be made
whe
r
e certain builders have manifested a
tendency
to
w
ard noncompliance
w
hich cannot be
observ
e
d during a
regular
compliance inspection.
In
such cases,
unexp
e
cted inspections
may be used as a
devi
c
e
w
here they are felt to serve
s
pecific purposes.
When additional equipment or other extras have been installed and
the mortgagee
r
e
que
s
ts a commitment in a
larger
amount, the Chief
Underwrit
e
r
m
a
y
r
e
que
s
t th
e Chief Architectural Supervisor to
cause additional
insp
e
ctions to be made.
425.
Repair
Compliance
Inspections. In
instances
where
commitm
e
nts in connection with existing construction require
the completion of alterations, additions or repairs, the Chief Archi-
tectural
Supervi
s
or shall
furni
s
h evidence satisfactory to the Chief
Underwriter
that
the requirements have been fulfilled. Such evi-
dence is necessary before the mortgage may be insured. The Chief
Architectural Supervisor may secure such evidence either by having
a Repair Compliance
In
s
pection
mad
e
,
or by obtaining from the
mortgagee a
stat
e
ment
that
the
alt
e
rations, additions or repairs have
been fully and satisfactorily completed.
In
all cases involving alter-
ations, additions or
repair
s 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 Re-
pair
Compliance Inspections. The Inspector shall determine whether
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
member
s
have been assembled according to sound and acceptable
building practices.
424-426
COMPLIANCE INSPECTIONS
'
~J
SPECIAL PROBLEMS
431.
Relation Between Inspector and Builder.
While
compliance inspections render an indirect service to mortgagee,
mortgagor and builder by securing compliance with approved draw-
ings and specifications, distinction is made between architectural
or
construction supervision, and compliance inspections as made. by
the Federal
Hou
s
ing
Admini
st
ration
.
Compliance Inspections
are
,
made by
the
Federal
Housin
g Administration entirely
for its
own
interest with no direct
r
es
pon
s
ibility to the mortgagee or mortgagor;
•
•
COMPLIANCE INSPECTION FORMS
427.
Compliance Inspection Report.
The Inspector
executes the portion of
FHA
Form No. 2051 which is allotted to his
use and indicates the required information in accordance with the di-
rections contained on the form. Space is provided for the listing of in-
complete work,
defe
ct
ive materials and variations from
t
he approved
drawings and specifications. The question concerning the effect of
these items upon the cost estimate or
Rating
of Physical Security
shall be
giv
e
n
v
e
ry
car
e
ful
con
s
ideration and shall be answered in
definite terms. The Inspector must reflect the actual condition
of
the
proper
t
y, and
recogni
t
ion
mus
t
be given equally to favorable or
adverse findings. He indicates the
amou
n
t of
the change in the
replacement
co
s
t
es
timate, and the
eff
ec
t
on the
rating of
any
of the
physical security
featu
res
.
If
chang
es
hav
e
no
effe
c
t,
it
is so stated.
428.
It
is permissible to allow changes or deviations
from the appro
v
ed
dra
w
ing
s
and
sp
ec
ifications
,
provided
that
these
changes do not adversely affect the original
Rating
of Physical
Security or lower the
estimat
e
of replacement cost. Substitution
of
materials is also permitted, provided
that
the
sub
s
titut
e
d materials
equal or exceed those specified.
429.
The Chief Archi
tec
tural
Super
v
isor reviews the
Compliance Inspection Report and
reach
e
s a decision, which is
indicated in the space provided in his portion of the report, This
deci
s
ion is determined by the information contained
in
the
r
e
port
and any
knowled
g
e
bas
e
d
upo
n previous experience with the builder
and conditions surroun
d
ing
th
e
ca
se.
430.
Memorandum of Compliance Inspection.
FHA
Form No.
2
200
is
provid
e
d for
t
he
purpos
e
of avoiding unnecessary
delays
in
co
nstru
c
tion by giving not
i
c
e
dir
e
ctly to the builder
that
the construction has, or has not, passed a
particular
inspection.
The
Insp
e
ctor indicates
a
s
cl
e
arly
a
s
po
ss
ible those items which
require correction. Th
e
se items must
corr
e
spond with the informa-
tion set
forth
in the Compliance
In
s
pection Report,
FHA
Form
No.
2051.
427-431
UNDERWRITING MANUAL
and these
insp
e
ctions do not
i
n
any
sen
se
co
n
stitute
ar
c
hitectural
or
c
onstru
c
tion
sup
er
vi
s
i
o
n.
In
th
e
ev
e
nt
that
compli
a
nce with
appr
o
ved drawings
a
nd
s
pecifi
c
ations is not evident, the Federal
Hou
s
ing
Admi
ni
s
t
ra
t
ion
c
annot stop
con
s
truction, nor can
it
dir
ec
tly
dem
a
nd corrections.
Its
only
a
ction in
s
uch cases is to refu
s
e
to
insure the
propo
s
ed mortgage, on the
grou
n
ds of
noncomplianc
e with
the
term
s of
th
e
commitm
e
nt, unless proper corrections are
m
a
de.
432. When a
Complian
c
e Inspection
r
e
veals a
di
sc
rep-
ancy which must be corrected to
r
e
nder the property eligible
for
mort
g
age insurance under the
t
e
rm
s of the
commitm
e
nt,
t
he
In
s
pec-
tor
s
hall
p
o
int
out
su
c
h
conditions to the
a
ppl
i
cant,
build
e
r
or
their
agents while
o
n
the premises,
a
nd shall
recommend
·
any
,
c
orr
e
otio
e
mea
s
ures
that
are
r
e
ason
a
ble
a
nd
in
ac
c
ord with good building
pra
c
tice.
This is
th
e
qui
ck
est
a
nd the
pr
e
ferr
e
d
m
e
thod of obtain-
ing
compliance.
T
h
e
In
s
p
e
cto
r
should
m
a
ke
e
v
ery effort to
di
s
pose
of
th
es
e problems by
dir
ec
t
communi
c
ation in a
dipZ01nat
w
manne
r
.
Future
rel
a
tion
s may be
i
m
prov
e
d
if
the Inspector endeavors to give
builders a
bett
e
r
understanding of the
requir
e
ments of the
Federal
Hou
s
ing
Admi
n
istration.
433.
Large
Operations.
In
area
s
wher
e
dw
e
lling con-
stru
c
tion is
conduct
e
d on a
qua
n
tity
basis, or
w
here
ther
e is a con-
centration of building activity,
it
may
b
e
ne
ce
ss
ary for the Chief
Architectural
Superv
is
or to amplify the procedure outlined in
para-
graphs 404 to
410,
so
th
a
t it
will be
p
os
sibl
e to keep pace with
the
construction
.
Th
e
ext
e
nt
and
sp
e
ed of the operations will deter-
mine the policy and
proc
e
dure to be
a
dopt
e
d.
Durin
g certain
s
t
ages
of work on
ver
y
larg
e
proj
e
cts,
Insp
e
ctors may be required to devote
full time to the
proj
e
ct.
In
other
in
s
tan
c
e
s a
sc
hedule of daily or
periodic
vi
s
its may
b
e
a
satisfa
c
tory solution.
434.
Mortgagee's Assurance
of Completion.
In
order
to insure a mortgage
w
h
e
n
it
is
impo
s
sibl
e to complete
th
e improve-
ment
s because of
w
e
ather or
c
o
nditions beyond
th
e control of the
mortgagee and mortgagor,
th
e
Federal
Hou
s
ing Administration
employs a
pro
ce
dure of
w
hich
Com
p
lian
c
e
In
s
pections
a
re a part.
This procedure may be
e
x
ercis
e
d only when all of the following
conditions are
e
ffective:
a.
The mortg
ag
ed
pr
e
mi
ses include a
d
w
ellin
g
that
is habit-
able and
es
sentially
c
ompl
e
te
431-434
COMPLIANCE INSPECTIONS
J
t-
i
•
•
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 follow-
ing the presentation of the credit instrument for endorse-
ment
c.
The reason for noncompletion is weather or other condi-
tions 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 trans-
action 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 Sec-
tion to make an inspection to determine whether the con-
ditions described in paragraph 434 are present, and to
estimate the cost of completing the deferred improve-
ments.
b,
The Mortgagee's Assurance of Completion, FHA Form
No. 2300, is prepared, setting forth the deferred improve-
ments. 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 re-
turned 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.
434-437
UNDERWRITING MANUAL
Effective February, 1938
Federal Housing Administration
(
Paragraphs
Classification of 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
Requirements
Pertaining
to Location
__
:_
517-519
Requirements
Pertaining
to Mortgagors 52()-524
Secondary
Requirements-------------------------------~-------------
525--532
Property Standards---------------------------------------------
526--530
Subdivision
Standards-------------------------------------------
531
Minimum Construction Requirements for New Dwellings__________ 532
CONTENTS
PART
I
SECTION
5
MINIMUM
ELIGIBILITY
REQUIREMENTS
CLASSIFICATION OF ELIGIBILITY REQUIREMENTS
501.
The eligibility of mortgages secured by non-farm
properties for qualification and acceptance for mutual mortgage in-
surance by the Federal Housing Administration under the provisions
of Section
203
of Title
II
of the National Housing Act, depends
upon
complianc
e
w
ith
provisions in the National Housing Act, com-
pliance with Administrative Rules and Regulations, compliance with
established minimum standards, and compliance with established
policie
s and
pr
a
ctices of the
Adminis
t
ration. These eligibility re-
quirements may be classified into four groups, as follows:
a.
Fiw
e
d Requirements Applied -Without Field Interpretation.
These are specific rules
govern
i
ng major matters. As re-
quirements precedent to
eligib
i
lity, they must be and are
applied without interpretation by local
offices
because they
are inflexible and definite as to
m
e
aning and intent, which
me
a
ning and intent are interpreted by the General Coun-
sel,
F
e
deral Housing Administr
a
tion, Washington, D. C.
b,
R
equire
ments to Discharoe Statutory Responsibilities.
The
s
e are not specific rules. 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 decisions by inter-
pretations and judgment.
o.
Requir
e
m
e
nts with
Establi
s
h
e
d Factual Interpretations.
These are rules stated in specific terms, but require analysis
of the effect of factors or
combination
s of factors and use
of precedents and previous factual interpretations when
applied
to
determine minimum eligibility. The interpre-
tation
s
in previous
ca
s
es become precedents. The prece-
dents themselves become, 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
PART I
SECTION
5
MINIMUM ELIGIBILITY REQUIREMENTS
•
•
FIXED REQUIREMENTS APPLIED WITHOUT FIELD INTERPRETATION
502.
Fixed requirements applied without field interpre-
tation
are found in either the National Housing Act, as amended,
or
in the Administrative Rules and Regulations under 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
simple or 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 executed or 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 de-
signed principally for a single family residence, the
construction of which
(a)
is begun
after
February
3,
1938,
and which is ap-
proved
for
mortgage insurance
prior
to the begin-
ning of construction, or
(b)
the construction of which was begun
after Janu-
ary
1,
1937
and before February
3,
1938,
and which
at
the time the mortgage is accepted
for
insurance
has not been sold or occupied since completion.
Such mortgage may exceed eighty percent (80%), provided
at
the
time the mortgage is insured the mortgagor is the owner and occu-
pant
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.
waiver under certain circumstances. Secondary require-
ments usually are specified means of attaining desirable
objectives. Waiver is permitted only when the desirable
objectives are fully attained in spite of technical violation
of the stated requirement.
501-502
UNDERWRITING
MANUAL
REQUIREMENTS TO DISCHARGE STATUTORY RESPONSIBILITIES
503.
The accomplishment
0£
the purposes
0£
the Na-
tional 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
economically sound
b.
To
further
the objective
0£
the Act as stated in the pre-
amble,
"------
encourage improvement in housing stand-
ards and conditions"
504.
In
complianc.e with these responsibilities, the Fed-
eral
Housing Administration has established broad principles
0£
pro-
cedure. These principles serve as general rules of practice. They
must be translated into more specific and precise rules which become
~.
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 per-
cent
(
90
%
)
0£
$6,000
0£
such value, plus eighty per-
cent
(
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 sub-
paragraph
c.-1.
above may have a maturity not more than
twenty-five years from the date
0£
insurance
e.
The mortgage must contain complete amortization provi-
sions 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 modifications as may be approved by the Gen-
eral Counsel, Federal Housing Administration, Washing-
ton, D.
C.
h,
The
mortgag
e
must have been made to and held by, a mort-
gagee approved by the Administrator as responsible and
able to service the mortgage properly
502-504
MINIMUM ELIGIBILITY REQUIREMENTS
•
•
REQUffiEMENTS WITII ESTABLISHED FACTUAL INTERPRETATIONS
505.
Requirements with
e
s
tablished factual interpreta-
tions also appear as specific rules in either the National Housing
A.ct,
as amended, or Administrative Rules and Regulations. To obtain
uniform decisions by the underwriting staffs, these requirements must
be
interpreted, the interpretations being based upon policies formu-
lated by Washington Headquarters.
In
compliance with the provi-
sion of the National Housing Act which specifies that, "no mortgage
shall
be
accepted for insurance unless the Administrator finds
that
the project with respect to which the mortgage is executed is eco-
nomically sound", the Federal Housing Administration has developed
a method of determining whether a mortgage submitted for insurance
is economically
sound,
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 economically sound 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-
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 sufficient promise of con-
tinued 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 mort-
gagor's income and other expenses
f.
An
eligible mortgage must be intrinsically a sound invest-
ment
504-506
UNDERWRITING MANUAL
ble for insurance shall be secured by a property upon which there is
located a dwelling or
dwelling
s
designed principally :for residential
use for not more than four families in the aggregate, irrespective of
whether such dwelling or dwellings have a
party
wall or are otherwise
physically connected with 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 accom-
modations
for
not more
than
four families irrespective of whether
such accommodations are included in one or more, but not more
than
four, structures, provided
that if
the dwelling accommodations com-
prise 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 struc-
tures must be present to such a degree
that
a
natural
marketable
real estate entity is created. This functional relationship may be
created by a combination of 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 presence of 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 evidence
that
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 re-
quirements 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 re-
quired
that
a division be made, and
that
each resulting smaller
property become collateral security
for
an individual insured mort-
(
50~10
MINIMUM ELIGIBILITY REQUIREMENTS
~
i
•
•
gage, provided
that
all other requirements of the Administration are
fulfilled.
It
is
p
rob
a
ble
t
hat
the
high
e
r
to
t
al value of the several
smaller parcels will occur only
if
the character of the larger prop-
ert
y
,
undivided, is
su
c
h that it
w
ould find a limited
market
,
and only
if
this fact has
b
e
en reflected in the valuations.
511.
It
is the policy of the Administration to require
separate
mortga
g
es in
ca
se
s
wher
e
the property is readily divisible
without appreciable loss of marketability or value. Therefore,
if
the
transaction is sound on either
ba
s
is. a
div
ision of the property is
required.
512.
No
n
-re
s
idential Use in Addition to
R
e
s
i
dent
i
al Use
for
Fou
r
Famil
ies
.
The phrase
"d
w
elling or dwellings
de
s
igned prin-
cipally for residential use for not more than four families in the aggre-
gate" is
further
interpreted to mean
that
a dwelling may include four
living units, any one of which may be
partially
devoted
to
nonresi-
dential use, but may not include a nonresidential
unit
in add
i
tion
to
the four living units.
For
example, a building with four living units,
one or two of which may be used
in
p
a
rt for
physicians'
offices,
may
be eligible,
wher
e
as a
buildin
g with four
livin
g
units and a profes-
sional suite in addition
w
ould not be
e
ligible. The
comput
a
tion of
th
e ratio of
nonr
e
sid
e
ntial area to total floor area is made on
t
he
b
a
sis
of
the entire structure.
In
o
t
her words, a four family structure is
eligible even though most of the floor area of a single unit is devoted
to
nonr
e
sidential use, provided, as
furth
e
r
defined by
Pro
p
erty Stand-
ards,
th
e floor
ar
e
a devoted to
nonr
e
sidential use
doe
s not exceed 25%
of
the total floor area, and provid
e
d such
nonresiden
tial
use does not
adv
e
rsely
aff
e
ct the
d
es
ir
a
bility
of
the
rem
a
inder for
re
s
idential use.
513.
L(hnd Shall Oom.priee a
Sin
g
le
Plot.
Part IV,
Property
S
t
and
a
rd
s
,
"Co
n
ditions
Det
e
rmining Acceptability", Item
401,
"Plot",
s
tat
e
s,
"all the land offered as security
:for
a mortgage
shall be contiguous, forming a single plot".
"Plot"
is defined
in
Part III,
Prop
e
rty
Standards, as
"a
p
a
rcel
of
land including one or
more lots or portions
th
e
reof". This should be interpreted as fol-
lows
:
All the
la
nd
offer
e
d as security
for
a mortgage
s
hall be
con
-
tiguous, forming a
singl
e
plot,
e
x
cept in such
case
s where the plot
has
bee
n
bi
s
ected by a way offering
se
c
ond
a
ry
ac
cess to the prop
e
rty
and
th
e
t
w
o
resulting
parcel
s
compri
s
e
a readily marketable
re
al
estate entity. This
c
ondition generally
oc
c
urs where the garage or
some similar
acc
essory building
i
s
loca
ted on a
par
c
el
adja
ce
nt
t
o,
but separated from the principal structure by an alley.
514.
Additional
Prop
e
rtsj
Off
e
r
e
d
as
S
e
curi
t
y.
The
property
con
s
titutin
g the
s
ecurity
for
a
n insured
mortga
g
e
must be a
natural and
read
i
ly marketable
re
a
l estate
e
ntity. Land in
exces
s of
510-514
UNDERWRITING MANUAL
--
--
·
···-
---
-
------
-
·
·
· ·
--
--
--
--
that
which
is
needed to accommodate suitably the building improve-
ments tends toward the creation
0£
an unnatural real estate entity.
Where excess land is capable
0£
separate utilization without impairing
the marketability
0£
the remainder
0£
the subject property, 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 excess portion by delineation and actual changes in the legal
description
that
provide for the necessary separation. This may be
accomplished by 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£
secur-
ity make
it
necessary
that
substantially all
0£
the sales'
price
0£
the portion to be released be applied to the reduc-
tion
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
de-
pends
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 Insur-
ance.
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 Hous-
ing Act, the prescribed rules, regulations, and policies
0£
this Admin-
istration.
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
con-
nection with nonresidential use.
517.
Requirements
Pertaining
to Location.
It
is not
necessary
that
the mortgaged property be located within the cor-
porate limits
0£
any town or village. However, the property must
be situated in a locality which constitutes, or is adjacent to, a stable
514-517
MINIMUM ELIGIBILITY REQUIREMENTS
f
;
•
I
f
I
residential area. The location must be suitable for use primarily as
a residence and must have reasonable marketability.
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 eligi-
bility 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 cases where the danger of subsidence is present, the property shall
be ineligible for insurance unless satisfactory evidence is submitted
to
the Insuring
Office
to demonstrate
that
the probability of loss from
such damage is remote or negligible.
520.
Requirements Pertaining to Mortgagors.
Sec-
tion 203 of the National Housing Act requires
that
the periodic pay-
ments by the mortgagor shall not be in excess of his reasonable ability
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 connection with the mortgage trans-
action 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 involv-
ing the purchase of property
it
must be established
that
the prospective
purchaser is, in addition to undertaking the mortgage obligation,
advancing cash or the acceptable equivalent thereto
at
the time of the
acquisition of the property. This investment must be in an amount
which will provide a sufficient motive for the mortgagor to keep the
mortgage in good standing.
In
any case, the cash investment must
be equal to the difference between 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
acceptable for insurance.
523. When other property is offered in lieu of cash on
account of the purchase price of the property being acquired, the value
of the mortgagor's equity in such other property as established by this
Administration shall be used as the basis for computing the amount
517-523
UNDERWRITING MANUAL
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 Require-
ments,
Part
VI.
527.
Conditions Determining Elig~bility describe re-
quirements 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.
Compliance with local regulations
b,
Natural light and ventilation
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 applica-
tion, 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
compliance with 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 mort-
gages so presented are qualified for insurance in this respect,
if it
is
evident
that
the borrowed funds,
in
addition to the insured mort-
gage, (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. Interpre-
tations for actual cases shall be made in accordance with instructions
contained in Section
10,
Rating of Borrower.
523-528
MINIMUM ELIGIBILITY REQUIREMENTS
•
•
l
o.
Room arrangement
d,
Construction of dwelling
e.
Services and equipment
529.
Local Minimum Requirements are published sep-
arately
for
each insuring
office
area, and define for each area the
General Minimum Requirements. Individual items are under iden-
tical headings and in the same sequence as 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 tech-
nical violations of the stated requirements. The procedure to be
followed
in
considering waivers is described in Section 2, Under-
writing Procedures.
531.
Subdivision
Standards.
These standards, in ad-
dition to outlining desirable objectives, define, under Minimum
Re-
quirements, the essential characteristics which must be present to
establish the suitability of the subdivisions as sites
for
homes eli-
gible
for
mortgage insurance. These requirements appear 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
In-
debtedness
532. Minimum
Construction Requirements for
New
Dwellings.
For
the purpose of encouraging improvement in hous-
ing conditions and construction practices and for the purpose of
minimizing mortgage risk, the
Feder
a
l Housing Administration has
established Minimum Construction Requirements for New Dwell-
ings
for
each insuring
office
area. These are definite eligibility re-
quirements for cases involving conventional methods of construction.
Individual requirements are listed under the following general
headings:
528-532
UNDERWRITING
MANUAL
·
··---
-·
-
------
-
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
532
MINIMUM ELIGIBILITY REQUIREMENTS
Etl'ectlve
February
1938
Federal
Housing
Administration.
Pa
r
agraphs
Definition of
Ri
s
k
Rating
_
_____
___
___
_
_______
_
_
__
___
_
__________
_
____ 601
:Nature of :M:ortgage Risk
602
~
607
Essential
s
in t
he Measurement of
Ri
s
k 008-617
The
Risk
Rating
Process 618-635
Control of
Risk Measurement,
636--639
CONTENTS
PART
II
SECTION
6
METHODS OF MORTGAGE
RISK
RATING
NATURE OF MORTGAGE RISK
602.
Mortgage risk is created whenever a mortgage is
made and continues throughout 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 essential to so
treat it
in order to make
it
possible to express
a measurement of risk in simple terms. As an entity, the over-all de-
gree of risk is composed of all the possibilities of trouble, expense,
and loss in connection with the lending of mortgage funds.
In
other words, risk includes probability
of:
a.
Difficulty in connection with collections
b.
Unusual expense in connection with collections
o.
Excessive servicing costs
d,
Cost of foreclosure
e.
Delay in foreclosure
f.
Cost of rehabilitation
g. Cost of carrying until sold
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 accordance with the
risk involved in the loan transaction or in connection
with
the insur-
ance of the mortgage. Risk
rating
is made necessary by the terms of
the National Housing Act.
It
provides a uniform method for deter-
mining 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 classification of mortgages in accordance
with
their
quality as investments.
PART
II
SECTION
6
METHODS OF MORTGAGE RISK RATING
601-603
•
l
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 nu-
merous, 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 neighbor-
hoods and of the values of the homes in them. Neighborhoods have
varying degrees of stability, and some may be expected to have
longer attractive lives
than
others.
In
listing factors which con-
tribute to risk,
it
is necessary to take account of the great variety
of architectural styles and designs. They have differing probabili-
ties 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 intro-
duce different degrees of mortgage risk.
In
general, factors which are
vital in mortgage risk measurement in larger communities are some-
times of less significance in smaller communities and towns.
That
is,
the ratings ascribed do not parallel the actual presence of risk factors
but
rather
the intensities with which they contribute to over-all risk.
Identical conditions, acceptable in small towns, are frequently unac-
ceptable in larger communities.
605. A most important group of factors which affect
mortgage risk is the one which embraces the relationship between the
physical property and the neighborhood in which
it
is located. This
relationship directly affects marketability of the property. Market-
ability is a basically important characteristic of good mortgage loan
security
.
Different degrees of marketability represent different de-
grees of mortgage risk. There are varying degrees of 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 asso-
ciated with the earning power of the prospective borrower, 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,
603-606
UNDERWRITING MANUAL
ESSENTIALS IN THE MEASUREMENT OF RISK
608.
The Underwriting Staff utilizes the risk
rating
pro-
cedure (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 accomplishes both
obje
c
tives simultaneously.
609.
These two operations require the use of a prescribed
system which secures uniform decisions and conclusions when applied
by different competent men.
It
is necessary to deal with many com-
plex 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 specified procedure. Ad-
herence to the procedure is mandatory.
610.
Mortgage risk lies in the future. Therefore risk
rating
involves forecasting and prediction.
It
deals with probabili-
ties. Risk
rating
involves the determination of the chances and likeli-
hood 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
ri
s
k 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 designa-
tions.
For
example, reference to the ability
of
the mortgagee to serv-
ice a loan properly is omitted
but
not ignored. The Federal Housing
Administration will insure only those mortgages submitted by ap-
proved 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
affect
-
ing 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
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 neces-
sity
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 con-
stitute 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.
606-611
METHODS OF MORTGAGE
RISK RATING
I
...I
•
•
rating
system except insofar as they are considered
in
valuations.
Practically all other factors of risk, regarding which members of the
Underwriting Staff can be expected to have significant opinions, are
embraced in 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, reasonableness is held as the objective,
and
it
is anticipated
that
future research and experience will enable a
greater degree of accuracy. Certain weights have been ascribed to
the elements of risk considered in the
ri
s
k
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 experienced mortgage men.
At
the present time the introduction
of the weights into the system may be compared with the fire in-
surance rate system adopted many years ago and gradually corrected
through the years as the
relati
v
e
import
a
nce of
the
risk factors
became known. Experience to date indicates, however,
that
the
weights used in the risk
rating
system are
sufficien
t
ly correct to obtain
results which are reasonable and
justifi
e
d.
613.
The absolute weights used in the risk
rating
system
do
not directly reflect the 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
differences of 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
wei
g
ht.
In
the
latter
case the primary consideration is whether the feature
warrants a reject
rating or
whether
it
warrants any one of the ac-
ceptable ratings. The degree of the acceptable
rating
is of secondary
importance. Weighting points are not wasted on features such as
the latter. As a consequence the 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.
611-613
UNDERWRITING MANUAL
r
615. The risk character
i
stics and economic soundness of
a mortgage
t
ransaction cannot be determined on the basis of the loan-
value ratio
a
lone. This ratio merely expresses the relationship be-
tween the
lo
a
n and the property value
at
the time of appraisal.
It
cannot throw sufficient
light
on the possibility of default by the bor-
rower nor can
it
fully indicate what relationship may exist between the
loan and the property value
at
a
future
time.
If
the loan is to
run
for
twenty
ye
a
rs
,
but
the building which in
part
constitutes the
mortgag
e security cannot be expected to
s
ustain economic usefulness
for
tha
t
p
e
riod of time, the loan transaction is not economically
sound; and, though the loan-value ratio may be relatively
lo
w
,
a
ratin
g
of
th
e
mortgage risk may
indicat
e
that
the proposed mortgage
is ineligible for
in
s
urance. Again, the loan might not be economi-
cally sound
if
the probable rate of
de
c
line in property value will
be
greater
than
the
rate
of amortization of the loan principal. 'There-
fore, risk
rating
is significant because
it
makes possible
the
examina-
tion of mortgages by other means
than
the traditional one of deter-
mining the ratio between
the
prin
c
ipal amount of the
mortgag
e and
the valuation. This ratio is included in
ri
s
k
rating
but is only
a
·
part
of
it
.
616. Valuation
an
a
ly
s
es include consideration of a great
number of fa
ct
ors.
.All
of them are also mortgage risk factors, since
conditions with regard to them
aff
e
ct value which, in
turn,
affects the
index of risk indicated by the loan-value ratio
in
any case. Valuation
requires the analysis of structural, functional, and esthetic qualities
of buildi
n
gs;
the
making of estimates of the cost of constructing
or
reprodu
c
in
g
structures; the
analy
s
is of the quality and stability
of environments in which individual
pr
o
perties are located; the ex-
tent
to
whi
c
h
desirable or undesirable relationships
exi
s
t
between
individual properties and
their
surroundings, and numerous other
matters
.
.All
t
hese
analy
s
es are
signific
a
nt
in mortgage risk
rating
as well as
in
valu
a
t
i
on. However, the valuation of property is
for
the
purpose of establishing an estimate of the price which a pur-
chaser is warranted in paying, while risk
rating
determines the
quality of a mortgage investment. The two processes have different
objectives.
For
this reason
it
is important to draw
a
careful distinc-
tion between risk
rating
and valuation. Valuation is used by the
cases.
614
•
.Another characteri
s
tic 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
alway
s
those which happen to be the weakest in
particular
614-;616
METHODS
OF
MORTGAGE RISK RATING
•
•
THE RISK RATING PROCESS
618.
The many individual
fa
c
tors 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
larg
e
r
groups described as "categories."
619.
In
the
ri
s
k
rating
process applied
to
amenity income
dwellings,
that
is, to properties salable to prospective buyers 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
U
s
e
Livability and
Fun
c
tional
Pl
a
n
Mechanic
a
l and
Convenienc
e Equipment
Natural Light and Ventilation
Archite
c
tural
Attr
a
ctivene
s
s
Adjustment for
Nonconformity
Rating
of
Location:
Relative Economic
Stability
Protection from
Adverse
Influ
e
nces
Freedom from Special
Hazards
Adequacy of Civic, Social,
and
Commercial Centers
Adequ
a
cy of
Tran
s
portation
Sufficien
c
y of
Utilities
and Conveniences
Level of
Taxes and
Special
A
ss
essments
Appeal
Rating
of Borrower
:
Social
and
Economic
Characteristics
Motivation
in
Rel
a
tion to
Tr
a
nsaction
Employability and
Earning Stability
Relation
of Obligations to
Transaction
Relation
of Income to
Tr
a
nsaction
.
Federal Housing Administration
(a)
to make certain
that
loans which
exceed the maximum
pr
e
scribed
p
e
rcentage of value are not accepted
for
insurance, and
(b)
to ascertain the
loan-
v
alue 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,
va
luation
i
s
used to assist in
the
determina-
tion of eligibility as dependent upon
the
presence of economic sound-
ness 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
exercise of good judgment at every step in the procedure.
It
is not a
formula
w
hich can be applied without discrimination
.
.
616-619
UNDERWRITING MANUAL
,
Rating
of Mortgage
Pattern:
Ratio
of Loan to Value
Ratio
of
Total Payment
to
Rental
Value
Ratio
of Life of Mortgage to Economic Life 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
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
Commercial Centers
Adequacy of
Transportation
Sufficiency of
Utilities and
Conveniences
Level of
Taxes and
Special Assessments
Appeal
Rating
of
Earning Expectancy:
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
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
Rating
of Mortgage
Pattern:
Ratio
of Loan
to
Value
Ratio
of Debt Service to Net Income
Ratio
of Life of Mortgage
to
Economic Life of Building
Rating
of
Earning
Expectancy
Rating
of
Borrower
619
METHODS OF MORTGAGE RISX RATING
J
•
•
621. Certain individual
el
e
ments of risk are incapable of
intelligent rating.
For
example
,
if
an attempt is made to rate a prop-
erty according to the number of
bath
s,
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
i
s applied to the relationship existing between the bor-
rower's income and the debt service of the contemplated mortgage.
The selected features or relationships are sufficiently different from
each other so
that
an intelligent independent judgment in connec-
tion 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 indi-
vidual risk factor or comprised of a number of correlated factors which
can be analyzed separately but treated as a unit.
For
example, the
feature, Sufficiency of Utilities and Conveniences, requires considera-
tion of the
ex
t
ent and adequacy of street improvements, public utilities,
and municipal services. The
r
e
sulting
ri
s
k contributed by the pres-
ence, 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 combined comprise 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
a
s
signed by Chief Underwriters. All
ratings are reviewed and finally established by Section Chiefs or Chief
Underwriters in accordance with jurisdictions and responsibilities
outlined elsewhere in
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 combined 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.
625.
In
the
sy
s
tem used for rental income dwellings, the
ratings ascribed to the first two categories are 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-
621-625
UNDERWRITING MANUAL
627.
In rating
the individual risk features, the risk
rating
system requires differentiation between six degrees of excel-
lence or poorness of conditions.
First,
differentiation must be made
between a condition
that
results in risk
so
gr
e
at as to warrant rejec-
tion of the insurance application. Above this, differentiation must be
made between conditions ranging from "poor but acceptable" on up
the scale of excellence through
"fair"
and "good" to "excellent."
These designations are
present
e
d here simply to indicate
that
the
system recognizes
that
risk measurements are relative. The terms
themselves are not used on the forms because they would convey
implications beyond the simple idea of
rating
as suggested by 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
column
rating
would indicate
that
excellent con-
(
FEATURE REJECT
1
2 3 4 5
I
RATING
Social
and Economic
3 6
9
12
15
"'
"'
Characteristics
""
B
~
Motivation
in
5
-10-
-
15- 2o--
25
Relation
to
Transaction
Employability and Earn-
4
-8-
-
12- -16-
20
~
ing
Stability
.s
3 6
-- 9-- -12-
15
Relation of Obligations
to
~
Transaction
o:l
.0
5
-10- -15- 2o--
2
5
-<
Relation
of Income
to
Transaction
TOTAL RATING OF BORROWER
bined with three other
featur
e
s 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 seven columns headed, respectively, Reject,
1,
13,
3,
4,
5,
and Rating. The accompanying illustration of a
grid
indicates the typical arrangement.
Rating
of Borrower
625-627
METHODS OF MORTGAGE RISK RATING
i
~
j
•
•
l
ditio
ns p
e
rtain
to the feature.
Int
erm
e
diate
rating
s
w
ould
c
over the
ran
ge in
b
e
t
w
een.
628.
A small
num
e
r
a
l or "weight" appears
i
n
eac
h rating
column
after
each feature.
Wh
e
n
a
ll
X
marks have
be
e
n entered on
the grid, the indicated weights
a
re copied in the
right
hand column,
headed Rating. The sum
o:f
th
e
weights carried over and placed
in
the
la
s
t
column is entered
at
th
e
lo
we
r right
hand corner of
th
e
grid
and
becomes
th
e total
rating
ascrib
e
d to the entire category. The only
exception is :found in the
Pr
o
p
e
rty
grid.
In it
one
f
e
ature weight is
deducted
in
s
t
ea
d
o:f
added in
sec
ur
ing the final Rating of
Prop
e
rty
.
629. The
fin
a
l
r
a
t
i
ng
for
the mortgage is
ob
ta
in
e
d by
re
c
ording ratings upon a
gri
d k
n
o
w
n
a
s
Rating
o:f
Mortgage
Pattern
.
On this
g
rid
there are several
fe
atur
es involving certain relationships
in
the mortgage transaction,
su
ch as the amount
o:f
the
lo
a
n and the
mortga
g
e
term in years, and
matt
e
rs pertaining to the property, such
as
it
s
e
s
timated value and
th
e e
stimated remaining
economi
c
life of
the
building. Also listed as
:f
e
atur
es on this grid are the
r
a
tings of
the
oth
e
r
ri
s
k categories. Ra
t
in
gs on this
grid
are made
:fo
r
the
se
la
s
t
nam
e
d
featur
es according to
th
e amount of the
cat
e
gor
y
r
a
tings
whi
c
h ha
v
e
b
e
en pre
v
iou
s
l
y
d
e
t
e
rmined
.
The sum of
t
h
e
ra
tings
mad
e on
t
he Rating of
M
o
r
tgage
P
a
tt
e
rn grid
is the
fi
na
l
in
d
ex of
the
relative
ri
s
k involved in
th
e mortgage.
630.
If
the sum of the individual feature
rating
s
in any
category is less than
50
points,
thi
s indicates a degree of risk too great
to
permit insurance of the
mortga
g
e.
A large number of low feature
ratings
will result in rejection of the application
for
insurance
be~
cause the resulting category
ratin
g will fall below the
50
point
margin
of
a
cc
eptability
.
The
r
ang
e
from
50
points to
100
points is
intended to
r
e
present
differ
e
nt
d
e
gr
ee
s
of risk above the lower limit
of
a
c
ceptabilit
y
.
631. The
ri
s
k
rating
s
y
st
em
i
s
s
o
devi
s
ed
that
af
te
r
the
quality of the real estate
s
ec
urit
y and the
characteris
t
ics of the bor-
rower have been determined and found to be such
that
no undue
mort
ga
ge risk is created on their account, then by
me
a
n
s
of the
system
it
can be determined what
i
s the maximum loan
pri
ncipal and
maximum loan term in
yea
r
s
whi
c
h
would represent the margin
beyond which economic
sound
ne
ss
a
nd, therefore, insurability would
ceas
e
to
exi
s
t. Thus,
after
the
ratin
gs
o:f
Property
,
Lo
c
ation, and
Borrower have been made in a
c
a
se
involving an amenity income
dwelling, the Chief
Underwri
te
r, in
rating
the
Mortg
age
P
a
ttern,
can
d
e
termine
w
hether or not the loan
de
sc
ribed
in
th
e
appli
ca
tion
is
insurable, and,
if
not
in
s
ur
a
bl
e
becau
s
e the loan is too
lar
g
e
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.
627-631
UNDERWRITING MANUAL
Or in another case, requirements might be made for the purpose of
improving the real estate security, with the result
that
higher cate-
gory ratings would render unnecessary rejection 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
insur-
ance 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
in-
dividual risk features and ascertaining
if
any individual
feature receives a "Reject" rating.
o.
Determination as to whether mortgages receiving no indi-
vidual 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 economic soundness of
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
ex-
ample, in a case of an amenity income dwelling in which either the
Property, the Location, or the Borrower Category receives a 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 necessary to make
it
eligible.
635.
Detailed instructions in connection with the
rating
of the features and categories are presented in
Part II
of this Manual.
631-635
METHODS
OF MORTGAGE
RISK RATING
•
•
636.
In
th
e use of the risk
rating
sy
s
tem, Underwriting
St
a
ff
s are
in
s
tr
u
c
ted
to
c
o
n
sider the
fe
a
tures
a
s a
ch
e
ck list. As
s
u
c
li,
it
will tend to prevent them from omitting consideration of any mat-
ters of vital importan
c
e
in the determination of risk. Furthermore,
they are
expec
te
d to
r
e
l
y heavily upon
their
personal judgment in
establishing the ratings.
It
is specifically
sug
ges
t
e
d
that
they form
an over-all opinion with respect to the proper
rating
of an entire cate-
gory
·
and check the
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 sig-
nificant 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 sufficient consideration to important details. Both
approaches are necessary to a correct
r
a
t
ing.
637. The program of the Underwriting Division, Wash-
ington, D. C., includes the preparation and distribution of "instruc-
tion blocks" containing illustrations of
c
orrectly rated cases
for
the
guidance of
t
he Underwriting Staffs in the Insuring
Office
s
.
Th
ese
illustrations include descriptions of actual cases and outline the
specific
consid
e
rations
w
hich resulted in the risk
r
a
tings
as
c
ribed.
It
is
exp
e
cted
that
members of the Underwriting Staffs will consult the
illustrations and make
compari
s
ons between them and current cases
to
se
ek analogies and related situations. Such practice serves to
bring
a
hi
g
h
degre
e
of
consi
s
tency into the ratings ascribed
throu
g
hout the
entire country and
l
e
ads to a more
co
r
r
ec
t
segre
g
ation of mortgages
according to risk characteristi
c
s in the mutual mortgage insurance
groups.
638.
Risk
rating
illustration
s are not regulatory.
Th
ey
represent aids to judgment only. Underwriting Staff members are
instructed to follow the illustrations insofar as feasible,
but
they are
not
ac
count
a
ble for
discrepanci
e
s
betw
e
en the illustrations and the
ratings
whi
c
h they ascribe in
particular
cases. Where the discrep-
anci
es
are unwarrantedly great, Underwriting Staff members may be
held
a
c
count
a
ble on the basis of
incomp
e
t
e
nce or lack of integrity, but
in
su
c
h instances the variations
b
e
tween illustrations and actual
cas
e
s
may not be presented as the sole
eviden
c
e.
639. Risk
.
measurements
ar
e
also controlled through the
provi
s
ions
for
revie
w,
describ
e
d in
S
ec
tion
2,
Underwriting Pro-
cedures. Every effort shall be made by Section Chiefs and Chief
Underwriters to bring consistency into the ratings ascribed to
mortgages.
CONTROL OF RISK MEASUREMENT
636--639
UNDERWRITING MANUAL
\
EO'ective February, 1938
Federal Housing
Admini
s
tration
Paragraphs
Gen
e
ral Rating Instructions
701-705
Ratio
of Lo
a
n
to
Value 706-708
Ratio
of
Total Payment
to
R
e
ntal
Value 709-715
Ratio
of Life of Mortgage
to
Economic Life of Building 716-718
Category
Ratings
719-721
Rental
Income
Dwellings
-
---------------
--
--------------
--
--
-----
-
--
722-730
Ratio
of
Lo
a
n to
Value_____
___
___
_
_
_
___
_
_
_
_____
_
___
_
_______
_
__ 723
Ratio
of Debt Service
to
Net
I
n
come 724-7Zi
Ratio
of Life of Mortgage
to
Economic Life of
Building
__
________ 728
R
a
tin
g of
E
a
rning
Expectan
c
y
___
__
___
____
_____
_
____
__
____ __
____ 729
Rating
of
Borrow
e
r
_
________
__
______
_
_________________
_
___ _____
730
Rejection
s
and
Counter-Proposal
s 731-735
CONTENTS
PART
II
SECTION 7
RATING OF MORTGAGE PATTERN
r
701.
The term, Mortgage
Pattern,
refers to the relation-
ships which
exi
s
t
bet
w
een the mortgage
se
curity, the borrower, and
the provisions and conditions in the mortgage transaction. The
ex-
:
pr
e
ssion, Rating
of
Mortgage
Pattern,
ref
e
rs to the degree
to which
these relationships are
sati
s
factory, acceptable, proper, and advan-
tageous from the point
of
view
of
investment in
th
e
mortgage.
There-
.
fore
,
the Rating
of
Mortgag
e
Pattern
is a measurement
of
t
he
eco-
.
nomic soundness
of
the mortgage.
For
practical purposes a mortgage
is
c
onsidered to be economically sound wh
e
n
the Mortgage
Pattern
is rated
50
points or more.
1£
the
r
a
ting
is less than 50 points, the
mortgage is not considered to be economically sound, and is ineligible
for insurance. Ineligible
mortgage
s
must be rejected unless modifi-
cations
c
an be introduced which raise
th
e
rating
to
at
least the 50
point level.
F
E
ATURE
REJ
EC
T
1
2
3
4
5
RATING
-6-- 9--
-
1
2- -16-
2
0
Ratio of Loan
to
V
a
lue
--
%
2--
-
4
- 6-- 8--
1
0
Ratio of
Total Payment
to
Rent
a
l
Valu
e
--
%
Ratio of Life of Mort-
1
2
-- ~ 4--&
gage
to
Econo
m
ic Life
of Building
--
%
L
o
west Category
Rating -7- ~ rr- ~
27
(
)
__
pt
s,
6-- -10- 1-4-
18
2
2
Int
e
rmedi
a
te
C
a
tegory
Rating
(
)
__
pt
s
.
16
--
-
Highest
C
a
tegory
Rating
4
7 10 13
( )
--
·
_p
t
s
.
TOTAL RATING OP MORTGAGE PATTERN
GENERAL RATING INSTRUCTIONS
Rating of Mortgage Pattern
PART
II
SECTION
7
RATING OF MORTGAGE PATTERN
•
I
702.
Rating of this category is accomplished by
con
s
id-
ering the
ext
e
nt
to
whi
c
h
ri
s
k is
create
d by the characteristics of the
security
,
the borrower, and the provisions and
term
s contained in the
.
.
mortgage instrument.
I
n determining the eligibility of mortgages
secured by amenity income dwellings,
th
e Rating of Mortgage
Pat-
tern
combines the
Rating
of Property, the
Rating
of Location, the
Rating of Borrower, and
t
he major
fac
t
ors
in
the mortgage
trans
a
c-
tion. The
si
x
f
e
a
t
ures
w
hich are embraced
in
the Mortgage Pattern,
applied to amenity income
dwelling
s
,
are listed below with the
weights which have been ascribed to
th
e
m:
a
.
.
Ratio
of Loan to
Value------------
--
---------
-
---
-
-'
-'
-----------
20
b.
Ratio of
Total Payment
to
Rental
Value________________________ 10
c
.
Ratio
of Life of
Mortga
ge to
Economi
c Life of Building__________
5
d.
Lowe
s
t
Category
Ra
tin
g
--------------------------~
~
-
----------
27
e.
Intermediate
Category
Rating____
___
___________________________ 22
f.
Highest Category
R
a
ting_______
_
_______
_
________
__
_____________ 16
ln
determin
i
n
g the eligibility of
mortg
a
ges secured by
rental
income
dwellings, the Rating
of
Mortgage
Pattern
combines the
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
whi
c
h are embraced in the Mortgage
Pattern
applied to
rental income dwellings, are listed below with the weights which
have been
a
s
signed
to
them:
a.
Ratio
of Loan to
V
a
lu
e
----------------------------------------
20
b.
Ratio of Debt Service to Net
Income_________________
_
__________ 20
c.
Ratio
of Life of
Mor
tg
age to Economic Life of Building________ 5
d.
Rating
of
Earning
ExpectancY-----~----------~
-
--
--------------
40
e.
Rating
of
Borrower-
-
----------------
-
------------------
-
------
1
5
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
r
a
tio of loan to value is any
amount in excess of the legal limit,
th
e
exact
p
e
r
ce
ntage to one
decimal place must be recorded. This, of course, will occur only
w
here no counterproposal is feasible.
703.
Rating of
Mortgag
e
Pattern
is
a
c
complished by
rating
each
f
e
ature
se
par
a
t
e
l
y. At the
l
e
f
t
side of the Mortgage
Pattern
grid
i
s a column for the various ratios and
ra
t
ings used in
rating the features in this category. The Chief U
n
derwriter
tran-
scribes or computes
thes
e
figures and places them in this column.
On the
Mort
ga
ge
Pattern
grid for amenity income dwellings, three
blank
spa
c
es
a
r
e
provided opposite
th
e
l
as
t
three features in
whi
c
h
to place the
a
bbreviation
s
,
"Property", "Location", and "Borrower",
702-703
UNDERWRITING MANUAL
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
poi
n
ts in
ord
e
r
to retain the relative importance of each when
alJ
are combined to obtain the Total
R
a
ting
of
Mortgag
e
Pattern.
Each feature is rated on a scale of from
1
to
5,
5 being the highest
rating. The
rating
grid,
whi
c
h appears on Report of Chief Under-
writer, enables this
rating
to be recorded easily and quickly.
For
example, assume
that
the
Chi
e
f
Underwriter is ready to rate the
various features. The first is Ratio of Loan to Value.
If
the ratio
is less than
60
%
,
he
put
s
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
considered economically sound, the Chief Underwriter determines the
amount he is willing to recommend
for
insurance and then rates the
feature, Ratio of Loan to Value, in the appropriate column. One
reject
rating
anywhere in any risk category will necessitate a recom-
mendation 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
th
e
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. Para-
graphs
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
income dwellings.
704.
If
repairs, alterations, or additions are contem-
plated by the mortgagor, or
if
the Underwriting Staff determines
that
such work is necessary to make the loan acceptable for insur-
ance, the Chief Underwriter shall base his findings upon the assump-
tion
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 improve-
ments. 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 commitment to insure.
705. Where lack of economic soundness is evident but
does not appear to be properly reflected by the normal operation of
the Mortgage
Pattern,
the Chief Underwriter is authorized to recom-
mend a reduction in the principal amount or term of a proposed
703-705
RATING
OF
MORTGAGE PATTERN
•
•
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 considerable compensation in 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
percent
-
age, long term loans are adequately secured when they are made
in good, stable
neighborhood
s on properties
own
e
d 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
re
c
overy
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 al-
Iowed
to deteriorate through Jack of proper maintenance.
It
is, there-
fore, 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
Admini
s
tration val-
uation of the property.
In
cases involving leasehold estates, 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
. .
Place
X
e
ra
t
io
1
s
- in column
Less
than
60
o/o
-----
-
-----
--
---------------
5
60o/o
to
64%---
-
-----------
-
-
-
----
-
--
-
---
--
------
-
-
-
4
65
%
to
69
%
---
-
----
-
------
-
-
--
------
-
----
- -
-
----
-
- -
3
70%
to
74%-
----------
-~-----------
-
-----
--
-
-------
2
75%
to
legal
limit_
__
______
_
_
_
____
___
_______
_
____
___
1
Over legal
limiL---
-
-------
-
--------
-
---------------
Reje
c
t
Inasmuch as the Mortgage Risk Section rates the borrower either
on the basis of the application or on the basis of
the
highest amount
mortgage.
In
such instances he shall use lower loan-value ratios or
lower ratios of life of mortgage to economic life of building. He
need not modify category ratings in these cases.
705-708
UNDERWRITING MANUAL
RATIO OF TOTAL PAYMENT TO RENTAL VALUE
709.
As a
featur
e
in the Mortgage
Pattern
,
the Ratio of
To
ta
l
Paymen
t
to Rental Value
i
s only
partiall
y
analogou
s to the
foregoing feature, Ratio of Loan to Value. The Ratio of Total
Pay-
ment to Rental Value introduces another aspect,
namel
y
,
the ability
of the income of the property itself to pay the total monthly pay-
ments as they become due. The ability of the monthly rental to pay
the total monthly p
a
yment will not only encourage
t
he owner to
fulfill his obligation, but will better enable him to do
so
in
the.
e
ve
nt
his financial condition becomes
distre
s
sed. A favorable ratio
of the total payment to the rental value will also assist the lending
in
s
titution or the Federal Housing Administration in recovering:
the
inves
t
ment in the
e
vent of acquisition of the proper
t
y.
710.
As the monthly gross
r
e
ntal
increasingly
exceeds
:
the total monthly pa
y
ment, the degree of
se
c
urity increases.
B.)
r
the same token, as the monthly gross
r
e
ntal becomes
insufficient
:
to meet the total monthly payment, the risk becomes correspondingly
greater.
For
the purpose of this analysis, the
total
payment is
a
lways
construed to be the total monthly payment which would apply to the
maximum term of loan
accept
a
ble to the
F
e
deral Housing
Adminis
-
tr
a
tion as economically sound,
rather
th
a
n the payment
applicabl
e
to a shorter term of
lo
a
n for which application may ha
v
e
been
made,
711.
Total
Pay
me
nt.
The total monthly
p
a
yment con-
sists of all the estimated charges which the mortgagor would pay
each month of the
fir
s
t
yea
r
,
cal
c
ulated on the maximum term
of
lo
a
n which
th
e
Fed
e
ral Housing Administration can
acc
e
pt
as
economically sound. Regardless of the actual term of the loan under
consideration, the
Chi
e
f
Underwriter
det
e
rmines the
t
otal
monthl
y
payment, for the purpose of
rating
this
featur
e
,
by assuming
the
'
loan to run for a term equal
to
th
e
maximum
te
rm considered
eco
-
nomically sound, but not to
e
x
ceed the maximum term legally insur-
able. The total monthly payment
i
s composed of the following:
a.
Monthly payment of principal and interest
b,
Taxes and special
a
s
sessm
e
nts
c
.
Ground
ren
ta
l
s (if
lea
s
ehold)
d.
Fire
and
oth
e
r
haz
a
rd insurance.
e
.
Mortga
g
e
in
s
uran
ce
premium
apparently allowed by the valuation and other factors, whichever is
the lower, the feature Ratio of Loan to Value
sh
a
ll be calculated on
the same basis.
For
this reason reject ratings of this feature will be
recorded only when a ratio in excess of
th
e legal limit is accompanied
by a reject
rating
of a category other than Rating of
Borrow
e
r.
708-711
RATING
OF MORTGAGE
PATTERN
•
•
I-
RATIO OF LIFE OF MORTGAGE TO ECONOMIC LIFE OF BUILDING
716. The relationship expressed by the ratio of the "life"
(that
is, the term,
in
years) of the mortgage to the estimated remain-
ing economic life of the building results
in
a high or low
rating
of
712.
Rental Value.
The rental value figure, used in con-
nection with the computation of Ratio of Total Payment to Rental
Value is the monthly
rent
a
l
value reported by the Valuator on Re-
port
of Valuator. The rental value of a property will be computed
on the basis of the typical rental being received for similar
properti
e
s
in accordance with 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:
If
the ratio
is-
i:
1
:::i6u:n
Less
than
60o/o-------------------~
--
-------------
--
-
5
60o/o
to
75o/o--------
--
-----------------------
-
------
4
76o/o
to
92o/o----------------------------------------
3
93o/o
to
llO
o/o
-------
-
----------------------------
-
--
2
lllo/o
to
130o/o----------------
--
--------------------
1
Over
130o/o
~ ~
-------~-----------
: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 ap-
preciably 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 sufficient evidence
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
judg
-
ment 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.
712-716
UNDERWRITING MANUAL
CATEGORY RATINGS
719.
The final ratings ascribed to the Property, the
Lo-
cation, and the Borrower
categorie
s
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 re-
ceived fairly high ratings and the Location has received a :fairly low
rating, the relative importance of the Location category rating is
this feature according to
th
e
exten
t
to
which the remaining economic
life
0£
the building
e
xceed
s
the life
0£
the mortgage.
In
rating this
feature, the
Chi
e
r
Und
e
rwriter uses the estimate
0£
remaining eco-
nomic 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
re
cogniz
e
s
a strong probability, in practically all cases,
that
the value
and usefulness of properties will
decline
.
The mortgage pattern
s
hould take account of such declines.
It
might appear axiomatic
t
hat loans for shorter terms
ar
e
more
a
ttracti
v
e
as investments and
s
ubject to less risk.
If
thi
s
were universally true
it
would be feasible
to rate the life of a mortgage rather than the ratio of its life to the
remaining economic life of the building.
It
is not feasible to rate
a mortgage directly in accordance with its life, because the factors
which together increase or
d
e
crease risk do not affect risk in the same
direction simultaneously.
For
example, shortening the life of a
loan reduces
ri
s
k by reducing the hazards which result from rapid
declines in value. At
t
he same time,
s
hortening 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 eco-
nomic life of
th
e
building is ratable, and
c
hang
e
s 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 economic
life.
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:
If
t
he
r
a
tio
is-
i
!'~~~~ ;;;
n
Le
ss
th
a n
50'7o-
-
---
-
---
-- --
-
---
-- --
--- --
- -
----
-
-----
5
50
o/o
to
56
o/o_
___
_
__
_
____
__
_
_
_
_
___
_
__
__
__
__
__________
4
57
o/o
to
65
'7o
--
-
----
-
--
---
-
-
-
--
- -
----
-
-
~-
----
-
-
-
-----
3
66
o/o
to
79
o/o_
_
__
____
_ __ __
___
_
__
_
____
_
_
__
__
_______
_
__
2
80
o/o
to
l()()
o/o
~
-----
-
-----
-
---
- -
-
----
-
-
1
Ov
e
r
lOOo/o
Jteject
716-719
RATING
OF MORTGAGE
PATTERN
J
great.
If,
in another case, the
Property
receives a low
rating
and
the other two categories receive high ratings, the relative importance
of the
Property
category is greatly
increa
s
ed.
If,
in still another
case, the three categories receive ratings which
a
re about the
Bame,
there is no great difference in
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 impor-
tance of the Property, Location, and Borrower categories, the last
three features in the Mortgage
Pattern
are weighted differently.
The first of these three featur
es
,
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
Ratin
g
,
is
le
s
s
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
Cat
e
gory 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 ex-
actly alike
it
does not matter how they are arranged for the pur-
pose of
rating
the last three :features of the
Mort
g
age
Pattern
.
The
.
same is
true if
two are alike, provided the
third
one is
us
e
d for the
rating
of the first or
third
feature, depending upon whether
it
was
rated
lower or higher than the other
t
w
o.
721.
In rating
the three features, the Chief Underwriter
enters the names of the categories and the ratings ascribed to them on
the grid in the spaces provided. The following table is used m
rating
these :features:
Place X
If
category
rating is- in column
80
to
100-------
--
------
--
------------------
-
--
--
---
5
•
70
to
79
·
__
_ _
_
___ 4
60
to
69
.
----
---
--------
--
--
------
-
--
-
------
-
--------
3
55
to
59-----
-
---------
--
-
--
-----
-
--
--------
---
-----
2
50
to
54---------
-
-----
-
---
-
----
--
--
-
-
---
-
----------
1
lrnder
50-------------------------
-
---
-
----
-
-
--------
:R
e
ject
719-721
UNDERWRITING MANUAL
722.
When the property which secures the mortgage is a
rental income dwelling, the
grid
illustrated above is used to deter-
mine 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
accordance with the instructions contained in paragraphs
706
to
708.
724.
Ratio of Debt Service to Net Income.
This fea-
ture is a direct
me
a
sure 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
investm
e
nt.
Further-
more, the marketability of such properties is determined largely by
such a consideration.
725.
For
the purpose of establishing the rating, the
monthly debt service shall 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 esti-
mated
charge
s
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 composed of the following:
a.
Monthly payment on principal and interest
b,
Mortgage insurance premium
FEATURE REJECT
1
2
3
4
5
RATING
Ratio
of Loan
to
Value
6
9-- -12-
1
6
20
--%
Ratio
of
Debt
Service
4
--
8
-
12
-,6-
20
to Net
Income
--%
Ratio
of Life of
Mort-
1
2
a
4--
;;
gage
to Economic
Life of Building
--%
a
16
~ 3-2-
40
Rating
of
Earning
Ex-
pectancy __ pts.
3
6
9
12
v;
Rating
of Borrower
__ pts.
TOTAL RATING OF MORTGAGE PATTERN
RENTAL INCOME DWELLINGS
Rating of Mortgage
Pattern
(Rental Income Dwelling)
722-725
RATING
OF MORTGAGE
PATTERN
i
I
I
~
I
I
. I
~
~
~
J
•
•
lJnder
50
-
---------
-
-----
--
-----
-
----
- -
-----
-
---
-
----
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.
Place X
i
n column
5
4
3
2
1
If the
category
rating is-
80
to!()()
_
70
to
79
_
60
to
69-----
-
-----
-
-
-
---------------
-
---------------
55
to
59
_
50
to
54------
-
-----
-
---
---
--
- -
--
--------
---
---
-
--
-
-
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 indi-
cated in Section
15,
this estimate
0£
net earnings is a figure deter-
mined by deducting from the estimated effective gross revenue (after
allowance for
va
c
ancies and contingencies), all operating expenses,
management expenses, taxes and special assessments, ground rent-
als
(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,
th
e
Chief Underwriter shall
calculate the ratio of the monthly debt service to the average monthly
net income by dividing the former by the
latter
to secure a percentage.
Having established this percentage, Ratio of Debt Service to Net In-
come will be rated in the Mortgage
Pattern
according to the following
table:
Place X
If the ratio is- in column
Less
than
5Q
o/o
____
_
_ _
____
_
___
_ _
_
___
___
_____
__
_______
5
50o/o
to
59o/o_______
_
____
_
____________
_
__________
_
___
4
60o/o
to
69
o/o
-----
--
-
--
-------
- -
-
-----
-
-----
-
-----
-
--
3
70o/o
to
77o/o--------
-
-------------------------------
2
78
o/o
to
83o/o--------------
-
----
-
------
-
----
-
---
~
----
1
Over
83
o/o
R
e
ject
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 Earn-
ing 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:
72~730
UNDERWRITING MANUAL
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
Pat-
tern, 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 counterpro-
posal appears feasible, the Chief Underwriter recommends
it
and
modifies the Rating of Mortgage
Pattern
to correspond with the
RATING OF
PROPERTY
pte.
RATllfO
or LOCATION
--- pit.
T
r-rr;-r--
Ratinr
of Borrower •••.••
pti.
Rating of
Earning
Expectancy
•••.•• pts.
Ratio of
Debt
Service
to
Net
Income ••••••
%
FEATUJlB
Ulf.CT
I t
3 4 5
JU.TING
Ratio or Leen
to
Value ---·
%
RATING OF MORTGAGE PATTERN (Ren
.... la ..
me
Dwelllq)
RATING OF MORTGAGE PATTERN
732.
If
a category
rating
is less than
50
points, the appli-
cable Mortgage
Pattern
shall be filled out as follows
:
R.t.TINO
OF
PROPERTY pts. RATING OF Loc4TION ••••••••• pta.
TOTAL
RA.TING
or MonTa.tae PATftRN
Rating of Earning E:rpectaney
8 i'6
2i"""
ii
W
1
-
ll-------'--=---"-'-
"'-"
1
''--·
1-- r ar u u'-
Rating of Borrower------ pts.
REJICT
1
I 3 4 S
R.\TIHG
11-------1---1·,-ru mm'-
Ra.tio oj Loan
to
Value
----%
RATING OF MORTGAGE PATTERN
(RentaJ.fneome
Dwelllllg)
flATURI
FE.4.TVH
RATING OF MORTGAGE PATTERN
REJECTIONS AND COUNTER-PROPOSALS
731. The Rating of Mortgage
Pattern
is made from re-
sults already determined, and is therefore a more or less mechanical
process or 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 accordance with instructions in this Manual.
In
such cases
the applicable Mortgage
Pattern
on Report of Chief Underwriter
shall be filled out according to the following example:
731-733
RATING
OF. MORTGAGE
:PATTERN
In
the second example the result of examination revealed the follow-
ing conclusions
:
Principal Amount of
Loan______________________________ $2, 000
FHA
Valuation________________________________________ $4, 000
Total Monthly Payment
(
15
years)--------------------
$21. 72
Total Monthly Payment
(20
years)----------------------
$19. 10
Rental Value
of Property_______________________________ $37. 50
Life
of
Mortgage
15
years
Remaining
Econ~mic
Life of Building
45
years
Rating of
Property____________________________________ 91.
Rating
of Location____________________________________ 65.
Rating of
Borrower____________________________________ 82.
•
REJECT FEATURE
TOTAL RATING OF MORTGAGE PATTERN 62
I 3
3 4
6
RATING
.--.--.-,-,-.--.,----6-
1~Ra!".'!tio~o~ILoa~·~to..!:Val~u'!O..e
--------=--=--~=:"-§'--".%L1··-- __ ~~~~ ~ ---
ll-"'Ra,,,,tio,_,,o'-'I
T'°"'ot,,,,al_,_,Pa""ym""e"'nt-"'to:.:.!R'""en""tal,_,V""alu,,,,e
-"
••
=-_f=J_f?""'-_%
1
2!.~
~
11
•
130
~ ~!.__ ~~X ~n
::,.,
1111
__
6
_
I
2
3
..
~
Ra.tio of Life of Mortgage
to
Economic Life of Building
fiQ.
%
~~
;""'oo'
ii!!__;,-
~;; ,,,.,"".'-l--4--ll
Low.st Catego'y Rating ( ..
l!l!!:!:l!!!~.I'. ) ..
J?li..
pt.. """-"-"-•
-
l""----;~.l'
ii"-;~
;••
12
Intennedlate Categocy Ra tin<
(
..
P.fQ!)UJ;t
)
13
..
pt..
"""-"-"'-- ,,,,___
°""-
.,,,_
~~
-·•
18
Hill'.hest
Ceteeorv
Ratlno
(
__
;J;_tf'~~_t~on
)
..
JHL
~i~
4 7
10
13
16
X
16
RATING OF MORTGAGE PATTERN
•
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 Rat-
ing of Borrower is affected, the Report of Mortgage Risk Exam-
iner is amended.
In
many cases the counter-proposal requires the
re-rating of all three of the first three features in the Mortgage
Pat-
tern.
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 excess of the legal limit,
it
shall be com-
puted to one decimal place and
so
recorded.
In
the first example the.
result of examination revealed the following conclusions:
Principal Amount of
Loan______________________________ $3, 800
FHA
Valuation________________________________________ $5, 000
Total Monthly
Payment_________________________________ $36. 08
Rental Value of
Property_______________________________ $40. 00
Life of Mortgage 20years
Remaining Economic Life
of
Building
40
years
Rating of
Property_____________________________________ 73.
Rating of
Location____________________________________ 85.
Rating of
Borrower____________________________________ 55.
UNDERWRITING MANUAL
)
735.
If
the ratio of loan to value exceeds the
pr
e
scribed
legal maximum, and
th
e
re
ar
e.
no
reje
c
t
feature or category
ratings
,
the Chief Underwriter recommends a
count
e
r-proposal for the largest
principal amount which can be insured.
In
this connection, reference
is made to Section 2, Underwriting Procedures. This
proc
e
dure will
preclud
e rejection of
a
ny case solely on account
0£
excessive ratio
0£
loan to value.
FE
A
TU
RE
,REJECT
I
UTrNG
.--.--.-,
-.-.-
..
Ra
tl
oofJ
.oa
otoVa1ue
-
--
- -
~Q
%
~
~~
r-
~~~
~
~
~
20
Ra
t
i
oo
r
Total
Paymentt
oRe
n
te.l
V
a
l
ue
---
--
~
%
0
•
.,
1
'°
~
~iH
-.
~
~
r-
:...i
~
60
_l_O __
Ra
t
i
o
of
L
i
f
e
or
Mor
t
gage to
E
conom
i
c
L
i£e
o
f
Bu
i
lding
·
-
--
-
~~
%
o
.
-..
L
OO"-
-
·~ ... n
~
-
-
o;<>-
56
u.
:
w
5
Lo
weHt
Catego
r
y
Rati
ng
(
lt0
.
0.
~U
..
o.n
.
)
6
.
ft
.
pts
.
u
_
:
;=·
- ~" -
~
..
:.
x
~
100
:
1
~ - _1_7 __
I
nte
r
me
d
l
etc
Catego
ry
Ra
ting
(
.
~O.
f.
f.:0
.
!:~f.:
)
J
J..a.
p
~
.
~
=-I
G-
,
-
,
-
,
-,
--
..
-
t~ ~
11
-~--~~-
~~
----
~-
~-1
~=
~-~
;
~
-
"
-
~;
"
iii=
-l·----11
l
li~
h
eat
C
atego
r
y
Rat
i
ng
(
.
~r..
_
?
..P.:~~V
)
_
..
~i
.
p
f.It. :.
!
16
TOTAL
RATIN
G OF MORTGAGE PATTERN
90
RATING OF MORTCl.l.GE PATTERN
734-735
RATING
OF MORTGAGE
PATTERN
-
\
Effective
February
,
19
3
8
F
e
der
a
l Housing
Admi
n
istr
a
tion
Paragraphs
·
G
e
neral
Instructions----
--
-
---
--------
--
-------
-
------------
-
-------
801-811
Structural
Soundness
.
812-82
4
R
es
istanc
e to
El
e
ments-
--
------
-
--
--
-----
----
--
--
-
-
--
-
--
-
----
-
-----
825-829
Resistance
to
Use-
-
--
--
---------
-
---
-
--
-
-----------
-
-~---
-
----
-
-----
830-832
Livab
ili
ty
and
Functional
Plan--------
--
--
-
---------
-
----
-
---------
833-841
M
e
ch
a
nic
a
l
and
C
on
v
eni
e
nce
Equipmen
t_ 842-850
N
a
tur
a
l
Light and
V
e
ntilation----
--
----------
--
----
-
-
----
-
--
-
------
851-853
Architectural
Attrac
t
iveness----
-
--
--
-----
--
--
-
---
-
--
-
-----------
-
--
854-859
Adjustment
for NonconformitY-----
--
---
-
-
-
--
------
-
-----
-
------
--
--
860-874
CONTENTS
PART
II
SECTION
8
RATING OF PROPERTY
801.
R
ating of
Proper
t
y
i
s
determi
ned by
rating
ei
gh
t
features of risk
acc
ording to the
prin
c
i
p
l
es
outlined in this section
and in
S
ect
i
o
n
6
,
M
e
thods of
Mor
tg
a
ge
R
is
k Rating. The first
seven
featu
res
a
re
d
esc
r
i
b
e
d as the
Ph
ys
i
ca
l
S
ec
urity Features
an
d
are
so
w
ei
ght
e
d
that
the Total
R
ating of
Ph
ysica
l Security may be
as high as
100
po
i
n
ts. The
e
ighth feat
u
re,
Adju
stmen
t
for
N
o
n
con
-
formi
ty
,
i
s
separate
l
y
r
at
e
d and
t
h
e
res
ul
t
d
e
du
cte
d
from
,
n
o
t
a
dded
t
o
,
the
To
ta
l
R
ating of
Phy
s
i
ca
l
Sec
u
rity
to
d
et
ermine the
Tot
a
l
Rating
o
f
Pro
p
ert
y
.
802. The Total Rating of
P
h
ysi
cal Security,
whi
c
h
i
s
obtained by
r
a
ting
t
he first seven
fe
a
tu
res
,
pr
e
sumes
that
the sub-
ject property is free from any
detrim
e
n
tal
i
nfluence resulting
fro
m
PHYSI
C
A
L
SECURITY
FEA
TURES
RE
JECT
1
2
3
4
5
RA
TI
NG
5
-
1
0
-
-
,5-
w----
25
t'
St
r
u
ctura
l Soundness
~
2
4-
- 6-- 8--
10
ce
R
es
i
stance
t
o E
l
ements
~
A
1
2
-
-
3
-
-
4-
-
5
Res
i
stance
to
U
s
e
4
-
s
- ~
1-6
-
20
Li
vability and
Fun
c
t
i
ona
l
Plan
I
~
2
.-
-
-6
-
8
--
10
~
Mec
han
i
ca
l
a
nd
C
on
ve
ni
e
nce
"
Equi
pmen
t
§
""
2
4-
- 6-- 8--
10
Natural
Li
ght
an
d Ventila-
tion
4
8
-
- ~
1
-6
-
20
"
Archit
e
ctur
a
l
A
ttract
i
veness
-
To
ta
l
R
ating
o
f
Ph
y
s
i
ca
l
Securi
t
y
Adju
st
m
e
nt
fo
r
N
onconformity
I
11
2
19
1
6
13
lo
TOTAL
R
A
TING OF PROPERTY
(
G
EN
ER
A
L
R
A
TI
N
G
I
NSTR
UC
TIONS
Rating of
P
r
operty
PART
II
SECTION
8
RATING
.
OF PROPERTY
I
I
____J
L
c.
Re
s
i
s
tance to
Use-------
-
----------------------
--
-------
d.
Livability and Functional
Pl
an
------------------
-
---
-
-----
e.
M
ec
h
a
nic
a
l and
Con
ve
ni
e
n
c
e
Equipm
e
nt--------
-
------
--
-
t
.
Na
tur
a
l Light
and
V
e
ntil
at
i
on
_ _
___
_
__
__________
_
_____
_ _
__
10
g
,
Architectural
Attrac
t
i
ve
n
ess
-----
-
-----------------------
20
b.
R
e
si
s
tance to
Elements---
-
--------
--
------------
-
--------
10
5
20
10
•
•
non
co
nfo
r
mi
t
y with
t
y
pi
ca
l
pr
o
p
e
r
t
ie
s
in the
imm
e
diate neighbor-
hood
.
The Total Rating of
Phy
si
ca
l
S
ecu
rity
presumes a h
y
potheti-
cal
cond
i
tion. Because
nonco
n
form
i
ty
d
e
finitely affects the
ma
r
ket-
ability of properties,
it
is
impo
r
t
a
nt
to compare the subject
p
roperty
with surrounding properties and make any necessary adjustment in
order to convert the Total
Ra
t
in
g of Physical Security
i
n
to the Rat-
ing of Property. Specific
in
s
tructions for making
thi
s adjustment
are in
p
a
ragraphs
860
to
875
of
thi
s
s
ect
ion. The Total
Rating
of
Property represents a
me
as
ur
e
m
e
nt
o
f
the mortgage
ri
s
k
introdu
ce
d
by the
c
haracteristics of the
ph
y
s
i
ca
l
prop
e
rty
·
and by
its
r
e
l
a
tion to
its actual environment. The
R
a
tin
g of Property does not include
con
s
ideration of those
ri
s
k
fa
c
tors introduced by the
characteri
s
ti
cs
of the neighborhood and
loca
t
ion. These are included in the Rating
of
Lo
c
ation, Section
9.
803.
Rating
o:f
Physical Security shall be accomplished
by
rating
separately each of
se
ven features. The seven features have
been weighted on a scale of
100
points in order to retain the
r
e
lative
importance of each when all are
comb
i
ned to obtain the Total
Rating
of Physical Security. Each feature is
m
a
rked on a scale from
1
to
5,
5
being the highest rating.
After
analysis of the factors compris-
ing a :feature, an
X
mark is placed in the column which is deter-
mined to reflect the degree of
ri
s
k
involved
.
If
the
X
mark is placed
in any column other than
Rej
e
ct, 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 R
e
ject column, the word "Reject" is
carried over
to
the extreme
ri
g
ht
hand column of the grid. One
such
rating
in any feature will
n
e
cessitate a recommendation
:for
rejection of the application for insurance. 1Vhen the word "Reject"
appears in the Rating column,
it
mu
st 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
figure
s
in the Rating column. The
sy
s
tem is
so
designed
that
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---
--
---
---
---
---
-------------
--
-
-
-
-
25
802-804
UNDERWRITING MANUAL
An eighth feature appears on the grid, but
it
is not a
Phy
s
ical
Security
Fe
a
tur
e
.
It
i
s
designat
e
d
"
Adjustment
for
Nonconform-
ity." Instructions
for rating
this eighth feature are given in
paragraphs 860 to
875.
805. The seven features are analyzed from several points
of view. The first three features,
n
a
mely,
Structural
Soundness,
Resistance to Elements, and Resistance to Use are studied in terms
of
dur
a
bility.
T
he next
thr
e
e features,
nam
e
ly, Livability and Func-
tional Plan, Mechanical and Convenience Equipment, and Natural
Light
and
V
e
ntilation, are
s
tudi
e
d
in
term
s
of function. The words
"Durability" and "Function" have
be
e
n placed
a
t
the
left
edge of
the
grid
to
remind the
in
s
pector to
assu
m
e
the proper points of
view. The last feature, Architectural Attractiveness, is studied in
t
e
rms of lasting
a
ppeal.
806.
Invariabl
y
,
the physical
s
e
curity features are rated
by
as
s
uming the conditions which will
e
xist
at
th
e
tim
e
the mortgage
is insured.
In
conne
c
tion with existing construction the
rating
is
b
a
sed on the property in its present
cond
i
tion unless the borrower
contemplat
e
s alterations, additions, and repairs, or unless the Fed-
eral
H
o
using
Admini
s
tration
requires
cert
a
in alterations, additions,
and repairs.
If
alterations and
r
e
pairs are
c
ontemplat
e
d or required,
then the
rating
is based on the conditions which will exist when the
mortg
a
ge is insured. No hypothetical conditions may be assumed
unle
ss they are
s
pecifically defined in Report of
Ar
c
hitectural In-
spector
,
FHA
Form No. 2014, or
in
R
e
port
of Valuator,
FHA
Form
No.
2015.
In
the
ca
se of new construction the
s
ubmitted drawings
and
specifica
tions are analyzed in detail
a
n
d the
rating
reflects the
r
e
lati
v
e
de
g
ree of
excellen
ce
or poorness which the property will
exhibit upon completion
a
cc
ordi
n
g to
the
se
drawings
a
nd specifica-
tions
.
In
c
a
s
es
invol
v
ing
e
ither
exi
s
ting or new construction the
rating
is based on
po
s
sibilities and probabilities of what may hap-
pen to the
s
tructures in the future. The
pa
s
t
experience and present
condition with respect to the first
se
ven
f
e
atur
es
in this category
are
si
g
nifi
c
ant only to the
degr
ee
to which they indicate the likeli-
hood of future difficulty.
Surfa
ce
indications are invaluable clues to
hidden
def
e
cts or deficiencies.
807. To obtain consistency from case to case and to in-
sure uniform analyses of physical security
featu
r
es,
it
is essential to
identify conditions which form the
b
a
sis for
ratings
in the various
columns of the
sever
a
l features.
Thi
s
is
ac
c
omplished by comparing
subject structures with
structur
es
of similar type and size in the
s
ame general
ar
e
a.
For
this purpose, the words "type and size" re-
f
e
r
to
clas
s
ification of dwellings, such as a single family, detached,
804-807
BATING
OF
PROPERTY
)
~
I
•
•
five room, basementless dwelling containing
1,000
square
:feet
o:f
liv-
able area. Price ranges or
diff
e
rences
in
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
degre
e
s
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
high
e
st
rating, is warranted
for
any physical
s
e
curity feature when conditions for the
particular
feature are found to be comparable to
th
e best conditions ordinarily
exhibited by structures
of
the same type and size. A
5
column
rating
in any one feature does not demand the acme
of
perfection but de-
notes relative excellence of 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 possess sufficient excel-
lence
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
th
e
entir
e
range between the
Reject column and the 5 column, by the degree of excellence or poor-
ness resulting from the actual building practices, :functional
plan,
ning, and esthetic design.
.
...
808.
In
determining whether a rJiject
rating
is war-
ranted, the inspector must take into account the provisions
in
estab-
lished
Property
Standards as they affect the individual :features
by
considering them to be the minimum requirements necessary
to
avoid such reject ratings.
Tho
s
e 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
Prop-
erty
Standards apply to structures of every type and size,
it
is recog-
nized
that
for certain of the requirements small 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
Stand-
ards requirement is recommended because of a technical violation
but the objectives of the
particular
requirement have been fully
accomplished by means other than those specifically stated, the fea-
ture 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
807-808
UNDERWRITING MANUAL
cases involving proposed construction the requirements of both Prop-
erty Standards and established Minimum Construction Requirements
shall apply.
809. Experience has indicated, and a national compari-
son has demonstrated,
that
conditions affecting the individual fea-
tures
that
can be considered "average" or "typical" may
warrant
ratings in either the
3
or the
4
column, depending upon, (a) the effec-
tiveness 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 over-
all 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 reflected in the feature rating.
Further,
in
rating
the fea-
tures, 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· disin-
terested, 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 influence decisions.
810. The physical conditions prevailing in the structure
directly affect the ratings of a number of the physical security fea-
tures and the Total Rating of Physical Security. This is especially
true
with regard to the three features relating to structural durabil-
ity
and to the features, Livability and Functional
Plan
and Mechan-
ical and Convenience Equipment. 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 esti-
mates to the ratings ascribed to these five features. Thus,
if
Struc-
tural
Soundness is given a low
rating
because of 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. Inas-
much 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-
80~10
RATING
OF
PROPERTY
44••••,,llt
814. Foundation.
a.
Soil: Is
the
n
at
ure
an
d
c
ondition of the
so
il such as to with"
st
a
nd
impo
se
d
lo
a
d
s
?
b,
Foo
tin
gs:
Do
footing
s possess
a
d
e
quate
wi
dth
and
thickn
ess
to distribute
properl
y the
w
e
i
g
ht
on the soil? Are foot-
in
gs of
suffici e
nt
di
sta
n
ce
b
e
l
ow grade to
re
s
i
s
t
uph
ea
v
a
l
by frost?
Ha
s
ade
qu
at
e reinforcing
b
ee
n
pro
v
id
e
d
wh
e
r
e
ne
ce
s
s
ary?
c.
Fo
un
d
ati
on
W
all
s
or
P
ie
r
s
:
Ar
e
:found
a
tion
wall
s
or
pier
s
adequatel
y
de
s
igned
a
n
d do
th
ey
po
ss
ess
suffici e
n
t
s
trength
to
c
arry
th
e
imposed loads
a
nd resist outside
ea
rth
pres-
sur
e
,
movemen
t
,
and
h
y
dro
stat
i
c
pre
ss
ure?
d.
Col
u
mn
s
and
P
iers
:
A
re
c
o
lu
m
n
s
a
n
d
pier
s of
s
ufficient
siz
e
a
nd strength to
ca
rry
b
eam loads?
815. Floors.
a
.
Bas
eme
nt Slab:
Is
ba
se
men
t
s
l
a
b
de
s
igned and reinforced
so
a
s
to
re
s
i
s
t
hydro
s
tatic
p
res
sure,
if
any?
b,
Por
c
h and
T
err
ace
Sl
a
bs:
Ha
s
adequ
a
te
reinfor
c
ing been
p
r
o
v
ided to
ca
rry
th
e load?
feature.
STRUCTURAL SOUNDNESS
812. The
r
ating
o
f
this feature is an index of
t
he ability
of all
structur
a
l
memb
ers
,
m
a
t
er
ials,
a
nd
method
s of
a
ss
embly
i
n
-
•
corpor
a
ted in a
stru
ct
ur
e
t
o
w
i
t
h
stand the
impo
se
d
lo
a
d
s
with
t
h
e
minimum
acc
ep
table
a
m
ount of
settlem
e
nt
and deflection. Careful
.
consideration is given to the
ad
e
quacy of the structural fabric, the
size, quality
,
a
nd
dur
a
bili
t
y of
th
e
mat
e
ri
a
l
s
compri
s
in
g the struc-
tural
memb
e
r
s
,
the
q
ua
lity and
m
et
hod
s
of workmanship in the
as
-
semblage, and, finally, the extent to
whi
c
h
physic
a
l deterioration has
created unsoundness or
w
eakn
ess
.
813.
Th
e
li
s
t of
que
s
tion
s
in
sub
se
quent pa
ragraph
s
serves to
ind
ic
ate the
p
rincipal
c
onside
ra
tions which
ent
er into the
formation of a judgm
en
t
with regard to a prop
e
r
rati
ng of this
maining phy
si
cal lives of from
5
0
to
60
years, and
that
other build-
ings be
ascrib
e
d
live
s in relation to these
arbitrarily
established
lives
.
811.
In
cas
es
w
h
ere
repair
s,
a
lteration
s
,
or
addi
t
ion
s
are
contemplated by the mortgagor, or
whe
r
e
such work is found to be
necessary
if
reject
rat
ings are to be
avoid
e
d,
th
e
in
s
tructions stated
in Section
2
,
Underwriting
Pro
ce
dures
,
must be followed in
makin
g
the physical
s
ecurity feature ratings in the
Rating
of
Propert
y
category.
810-815
UNDERWRITING MANUAL
o.
Beams and Sills:
Are beams, wall sills, and plates of ade-
quate size and construction, and do they possess sufficient
bearing surface?
d:
Joists:
Are floor joists of sufficient size and properly spaced
for
their
span so
that
there will be no undue deflection?
Are they adequately bridged and unimpaired by the in-
stallation of the mechanical equipment?
Is
there
suffi-
cient bearing area on supports?
Is
there adequate sup-
port
for joists abutting headers?
e.
Openings:
Are openings properly framed, trussed, and
headed?
f.
Sub-Floors:
Is
sub-flooring
so
employed as to provide addi-
tional bracing to the structure?
816.
Exterior Walls.
a.
Are structural members of sufficient size to carry the im-
posed 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
~
817.
Interior Walls and Partitions.
a.
Are structural members of adequate size, properly spaced
and braced?
b.
Have all load-bearing openings been properly framed or
trussed and double studded at jambs?
818. Ceilings.
a.
Are ceiling joists of adequate size, properly spaced and
bridged?
b.
Is
there sufficient bearing area on supports, and is the tie
continuous between outside walls?
819. Roofs.
a.
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?
b.
Is
roof properly braced with supports and collar or wind
beams?
o.
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?
815-820
RATING
OF
PROPERTY
"
)
J
•
•
,
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
themselves lessen the durability and may render the entire building
or certain portions
0£
it
uninhabitable. The inspector shall bear
in mind
that
the excellence
0£
resistive ability in one material may
821.
Although a fire-proof building, properly
design
e
d
and constructed,
deserv
es
the highest
rating
under
Structural
Sound-
ness, this does not
impl
y
that
a building of frame or masonry
ven
ee
r
construction, when properly designed and constructed, could not
possess sufficient quality to warrant the highest rating. The deter-
mination is dependent upon whether the methods of assembly,
m
a
-
terials used, and workmanship are
su
c
h as to assure a long life for
the structure.
'
822. A low or reject
rating
is warranted in cases in-
volving existing
con
st
ruction
if
defects such as sagged beams, floor
joists, or rafters,
exce
ss
ive 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
a
dditional piers and beams
in the basement, or to patch cracked basement walls, or to install
additional roof
bracin
g 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 established Minimum Construction
R
e
-
quirements for such items as are included under Excavation,
Masonry, Footings, Foundations, Exterior Masonry Walls, Chimneys,
Cement Floor
s
,
Driveways and Walks, Structural Steel and Iron,
Lumber, Wood Framing, Floors and
Roof
s
,
Exterior Wall
s
,
Interior
Partitions, and Miscellaneous.
823.
Certain
regio
ns of the United States are subject to
tornadoes, earthquakes,
a
n
d
o
t
he
r
n
a
tur
a
l
hazards, and in these areas
Structural
Soundness is rated
a
ccording 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 necessary to 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.
UNDERWRITING MANUAL
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 De-
cay, 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
que
s
tions serves
to
indicate the principal
con
-
siderations which enter into the formation of a judgment with re-
gard 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 changes without resulting damage?
3.
Are ridges properly protected?
4.
Are the materials and construction of roof decks
of
such
nature as to withstand the
e
lements?
b.
Sheet Metal:
1.
Have ferrous and
non-ferrou
s
metals been used m
combination
so
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.
A
r
e
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
a
s
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?
RATING
OF
PROPERTY
·
I
826-829
UNDERWRITING MANUAL
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 ab-
sorption of
their
different coefficients of expansion?
d, Insulation and Weatherproofing:
1.
Have the methods of insulation and insulation ma-
terials been incorporated in such a way
so
as to re-
sult in adequate comfort and economy of operation?
~-
Has weatherstripping and caulking been provided
where necessary?
3.
Have storm doors, storm windows, and vestibules been
provided in regions where climatic conditions war-
rant?
827.
Resistance to Fire.
a.
Do the materials and structural methods used
off
er 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 fire-
stopping?
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 measures been provided,
such as ample circulation of
light
and air, sufficient clear-
ance from grade, and metal shields under all frame bear-
ings? 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.
RESISTANCE TO USE
830.
In rating
this feature the inspector reflects the de-
gree 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 cor-
related 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
con
ce
rned primarily with the
int
e
rior of the main structure and
of accessory buildings. Considerations must also include the sur-
faces 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.
M illwork:
1.
Doors, jambs, and
trim
2.
Windows, frame, and trim
3.
Finish hardware
f.
A
cc
essory
B
u
ildings:
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 cases involving new
construction when construction does not equal (or exceed) the estab-
lished Minimum
Con
s
truction Requirements for such items as are
included under Cement Foors, Driveways, and Walks, Lumber, Wood
Framing, Lathing, Plaster Work, Painting, and Miscellaneous.
\
'
830-831
RATING
OF
PROPERTY
•
•
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
degree of livability and functional efficiency exists, 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 economical layout is one which presents the greatest proportion
of usable floor area in relation to the
gro
s
s floor area.
An
excess of
unusable
spa
c
e 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
s
ome degree be uneconomical. Again,
if
space is provided which is not readily and conveniently usable,
economy is sacrificed because of unwarranted additional cost of con-
struction and maintenance together with the attendant increased
labor
involv
e
d in the occupancy and use of such a structure.
It
is
recognized
that
large entrance halls,
g
a
lleries, and similar spaces
a
re
considered desirable and
neces
s
ary
in
dwellings in the higher cost
range. Where such spaces properly serve a
function
a
l purpose they
do not indicate inefficiency of plan.
835. The
rating
of this feature must reflect the
func
-
tional qualities, adequacy of sizes, and
e
fficiency of 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 objectionable conditions are present:
a.
Sleeping quarters
w
ith insufficient privacy
b,
Dark
or poorly ventilated rooms
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 qual-
ity
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
with
s
tand
constant use, and
for
this reason will affect the
r
a
ting
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.
832,...835
UNDERWRITING
MANUAL
c.
Bathrooms not readily accessible, or accessible only through
a
major
room
d.
Kitchen inadequate
for
or ill-arranged for food storage,
food preparation, and dish
wa
s
hing
e.
Insuffici
e
nt
provision for hanging clothes, or for storage
of
linens, blankets, and brooms
836.
I:f
future occupants are likely to have laundry work
done
in the
home, the
rating
will be
a
ffected by the relative ade-
quacy of the provision
for
laundry work. This is to be judged, not
merely on the
pr
e
s
e
nce or absence of
lau
n
dry trays and convenience
outlets, but
al
s
o
upon the space available for drying, and access to
outdoor drying.
837. The
rating
is
influen
c
ed by the convenience of
ar
-
rangement.
Th
e 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
m
ovements into and out of
the various rooms or units
cau
s
e
the
le
as
t
disturbance, where stair-
ca
s
es
are
sufficien
t
ly
w
ide, not too
st
eep
,
a
nd
in
such
lo
c
ations as to
permit
movin
g of
furniture
readil
y
.
R
a
tings of this feature will be
favorably
a
ff
e
ct
e
d in the case of houses having rooms
of
such sizes
and
shape
s as to accommodate
furniture
r
e
adily
in
proper grouping
for
conveni
e
nt
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 objec-
tionable.
Windo
w
s should be spaced in relation to internal function
as well as to
e
x
terior appearance. The
rating
of this feature must
reflect the
pr
ac
ti
c
al
qu
a
lity of
the
interior layout. This factor will
contribute to
th
e
rating,
favorably or
unf
a
vorably, depending on the
exist
ence or
a
b
se
n
c
e
0£
agreeable
propor
t
ions
0£
the rooms
..
838.
The plan of
improv
e
m
e
nt
of the site is another
factor in
liv
a
bility. Consideration
s
hould be given to the suit-
ability
0£
th
e size, shape, and topography
of
the lot in relation to
the type and
s
i
ze
of the dwelling and accessory buildings. Build-
ings, walks,
pl
an
tings, and terracing
m
a
y be laid out or arranged
on the plot
so
that
either a high degree
0£
livability or an opposite
condition may
r
e
sult. The
rating
of this feature will be favorably
affected i£ the general plan
0£
impro
v
ement is excellent, and the
resultant
eff
ec
t
gives the property a
stron
g appeal for those who
ordinarily
w
ould be attracted as purchasers
0£
such property.
In
any such
ca
se
th
e
buildings will be found
lo
c
ated upon the site in
the most
adv
a
ntageous and desirable positions. Structures will be
found so placed on the lot as to take the fullest advantage of sun-
shine, ventilation, scenic outlook, privacy, and safety. Where high
(
835-::838
.
RATING
O]j'
PROPEBTY
J
•
•
ratings of this feature are warranted,
it
is also :found
that
the
grounds have been laid out
so
that
opportunity is afforded for effec-
tive landscaping and gardening. Furthermore,
in
such cases there
exists a high degree of accessibility to garage buildings and other
accessory structures, and the placing of buildings, walks, and drives
does not result in cutting the grounds into small and unusable
areas. A :favorable condition 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 convenience of the occupants is served
in
the most
advantageous manner.
In
cases where customary accessory build-
ings 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 accessory buildings 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 con-
sidered 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 open-
ings and radiators arranged to provide for convenient and
customary
furniture
placing?
f.
Are there sufficient baths 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 prop-
erty from the
s
tandpoint
of
service, convenience, and
safety?
840.
If
the property under consideration is 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-
838-840
UNDERWRITING MANUAL
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 £unc-
tions £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 fea-
ture is mandatory
in
cases
that
do not comply with the requirements
0£
established Property Standards £or approval
0£
wells and ap-
proval
0£
sewage disposal systems.
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 require-
ments £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.
840-844
RATING
OF
PROPERTY
I
~
•
•
1
845.
Item
s of
m
ec
h
a
ni
c
al
equ
i
pmen
t
fo
r
whi
c
h
r
e
pl
ac
e-
•
ment
parts
and
s
ervice are
r
ea
dil
y obtainable
will
aff
ec
t
th
e
fea
t
ure
rating
favorably because of probable lower maintenance costs.
In
new construction, particular
at
ten
t
io
n
should be given to any evidence
of the use of antedated,
secondha
n
d, or rebuilt equipment. Such
equipment will necessitate a low rating. Systems in
whi
c
h
equip-
ment and fixtures are of poor
qu
a
lity
and design, and improperly
installed will show more
rapid
d
e
te
r
ioration and
ob
s
olescence and
give rise to frequent damage
an
d
h
ea
vy
r
e
pair
costs.
It
i
s
axiomatic
that
the
r
at
ing
w
ill
be
a
ff
ecte
d
b
y
the
ag
e
and
c
ondition of the
equipm
e
nt. The
econom
ic
al
op
erat
ion and
mainten
a
nce of
m
ec
hani-
cal and convenience equipment
h
as a direct bearing upon its func-
tional qualities.
846. The following
li
s
t
of questions serves to indicate the
principal considerations which
e
n
te
r
into the formation of a judg-
ment with regard to a
prop
e
r
ratin
g of this feature.
847.
Plumbing.
a.
Baths and Lavatories:
Ar
e
fixtures of proper design, mate-
ri
a
l, and workmanship for
thi
s
cla
ss
of structure? Are
trimmings suitable for the
cla
ss
of
fi
x
tures? Are trim-
mings readily
a
cc
essible
a
nd adjustable?
b.
Service Facilities:
1.
Are the
plumbi
ng facilities in kitchen,
pantry,
and
laundry adequate to perform the service required]
!J.
Are fixtures of proper design, material, and work-
manship for this
cl
a
ss of structure with trimmings
readily
acce
s
sible and adjustable?
o,
Supply,
Waste, Drains,
a
n
d
A
ccess
ories:
1.
Are supply pipes properly graded as to size, of dur-
able material, good workmanship, and provided
with sufficient
con
v
eniently placed stop and drain
valves?
2.
Are soil, waste, and
v
e
nt
pipes of
adequ
a
te
s
ize, 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
t
a
nk properly
in
sta
ll
e
d and
in
s
ulated?
4.
Are the
cell
a
r,
a
r
e
a, and roof water drains of
suffi
c
ient
size, and properly
de
s
i
g
n
e
d and installed
so
as to func-
tion properly and without excessive
m
a
inten
a
nce?
845"""'847
UNDERWRITING MANUAL
_....,-------------.,,,,,..---
-
-
·-
·
-
--·---····.-·-
847-850
5.
Is
there
an
ample supply of pure water, preferably
.
from public, or municipal
utility
source?
6.
Has adequate provision
be
e
n made
for
the disposal of
s
ewage, preferably by public or municipal systems!
848.
Heating.
a.
Heati
n
g plant, including
air-co
nditionin
g systems:
1.
Is
the
pl
a
nt
of
a
mple
siz
e,
design, and construction
to
opera
te
conv
e
niently,
economic
a
lly, and efficiently
under all conditions, and is the furnace insulated?
2.
Are the pipes or ducts properly pitched, sized, of
good material
a
nd
w
orkmanship, and insulated
against heat
los
s
es?
3.
Is
the
typ
e of heating
plant
and
i
s the fuel used suit-
able to the
clas
s
of
dwellin
g
?
b,
Rad
i
ators and
Regist
e
rs:
1.
Are the radiators or registers of sufficient size and
properly placed
so
that
they most effectively
dis
-
tribute the heat and air throughout the various
rooms?
2.
Are the radiators or registers effectively designed,
of
good material and workmanship,
and
properly
valved
a
nd controlled?
849.
Electric Light and Power.
a.
Supply
and
A
cc
es
sori
es
:
1.
Are the feeders, switches, and panels
of
sufficient size
to fulfill the requirements to
whi
c
h
they are put,
without the overloading of circuit or switch
capaci
-
ties, and do they conform to the Underwriters' Code
and local ordinances?
'2
.
Are power circuits provided where needed, and sep-
arated
.
from
light
circuits
?
3.
Is
there an adequate and dependable supply
of
electric
energy available, preferably from public utilities?
b.
Fl
e
tures
and Outlets:
Is
there a sufficient number of fix-
tures and outlets to distribute illumination properly and
are fixtures of suitable design and construction?
850.
In
ord
e
r
to avoid a
rej
ec
t rating
all properties must
equal (or exceed) the
provision
s
of established Property Standards
for such items as
Compli
a
nce
With
Laws, Plumbing Fixtures, Water
Supply, Approval of Wells,
C
i
ste
rns, Sewage
Di
s
posal, Sewage Dis-
posal Systems,
Approv
a
l of
Se
w
age Disposal Systems, Heating, and
(
BATING
OF
PROPEBTY
J
L
•
rating:
a.
The ratio of glass area to floor area
b,
Location of openings with respect to size and shape of room
c.
Reduction in
light
due to obstructions such as other build-
ings 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 accessory buildings 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 covered under Lot Coverage, Dimensions of
Front,
•
NATURAL LIGHT AND VENTILATION
851. The
rating
of
this
feature is an index of the degree
and adequacy of
natural light
and ventilation provided
for
the vari-
ous 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 influence upon
the rating
results. The
rating
will be adversely affected
if
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 orienta-
tion in the case of proposed new structures can frequently be cor-
rected by the reversal or rearrangement of the plan. The
rating
will
be adversely affected
if
accessory and 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 considered in ascribing the
Electric Wiring.
In
addition, for cases involving new construction
a reject
rating
is warranted where the construction does not equal
(or exceed) the established Minimum Construction Requirements for
such items as are included under Plumbing, Heating, and Electrical
Work.
850-853
UNDERWRITING MANUAL
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
sub-
stantial 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 charac-
teristics 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.
Acceptance of architectural styles may be transient. Simplicity, pro-
portion, and character are qualities which are permanently attractive.
855. The general impression created by the entire prop-
erty 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 stand-
point of design.
In
such cases the structures are most effectively and
pleasingly accommodated by the width, depth, or area possessed by
the sites
upo
n
which they are erected, and topography has been
permitted to contribute to the agreeable impression which is created
when the prop
e
rty
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 con-
ceived 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
plac
e
d upon the site with-
out proper
con
s
ideration for usefulness of the entire plot of ground.
Planting
should also be considered with reference, (a) to the measure
in which
it
serves the purpose of forming a desirable and harmonious
setting
for
the buildings, (b) to the measure in which
it
permits the
occupants of 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.
Rear, and Side Yards, Dimensions of Courts, Windows, Ventilation
of Bathrooms and
Water
Closet Compartments, Ventilation of Base-
ment, Laundry, and
Utility
Rooms, Ceiling Heights, and Basement
Rooms.
853-856
RATING
OF
PROPERTY
-
-
-
--
·
·
-·--·
-··
----
--.,
.
;
•
857.
It
is
ne
c
essary in making a
rating
of Architectural
Attractiveness to give consideration to architectural style. Attention
must be given to the
r
e
lative
exc
e
llence or
poornes
s
0£
the
particular
design and to the
refin
e
ments, or lack of
t
hem,
in
c
orporated in the
subject property. The
a
r
chitectural
attr
a
ctivene
ss
of the
interior
should be viewed with
c
onsider
a
tion of
pleasin
g proportions of
rooms,
materi
a
l
s and
te
x
t
ures of
wa
lls and
floors
,
a
nd the design of
important details such as
man
te
l
s
,
stair
c
a
s
es,
a
n
d woodwork. No
consideration should be
g
iven to the
degr
e
e to
whi
c
h
the style is in
conformity
w
i
t
h
t
he
ar
c
hit
e
ctur
a
l
st
yle
s
p
re
v
ailin
g
in
the
n
e
ighbor-
hood.
1£
non
c
onformit
y
wi
t
h
style
s
in
th
e
surrounding
environm
e
nt
is of such a
ch
a
racter
th
a
t it
incr
ea
ses
mor
t
gage risk,
it is
taken into
account in the
f
ea
ture
Adjustment for Nonconformity.
858. A
stru
c
ture of
t
he
so-c
all
e
d
"shi
rt-
front", or one-
sided
treatme
n
t
design, calls
for
a low
ra
ting
of this
fe
a
ture be-
cause the
rem
a
ining side walls of the
bu
i
lding give
it
an unattrac-
tive exterior
a
pp
e
aranc
e
.
Archite
c
tural
d
e
signs
th
a
t
are
c
onsidered
freakish, or those
char
ac
terized as hybrids, should be
pen
a
lized in
this
feature rating. To receive the better ratings, all
desig
n motifs
should be in good
ta
s
te, have a
u
t
ility
b
as
i
s
,
or add
stru
c
tural
value
and
attractiven
e
ss to the general
s
c
heme. An elaborate
u
s
e
of motif
and
d
et
ail, the inclusion of an unnecessary variety of materials, and
straining for
th
e
pictur
e
sque cannot
in
c
rease
th
e
rating.
Use of
false
eff
ec
ts of roofing, fal
s
e
half-
t
imber
w
ork, or
t
he
unu
s
u
a
l
h
a
n-
dling or combination of
material
s
,
or
mat
e
rials
in
a
ppropri
a
tely used
in the
particul
a
r
case involved,
u
s
ually
a
ffect the
rating
of this
featur
e
adv
e
r
se
l
y
.
859.
In
a
ss
i
gning a final
rating
to this
fea
t
ure, the
inspector shall consider the
subj
e
ct
prop
e
rty
on its merits and
in
the same
m
a
nner as
individual
s of
rea
s
ona
ble
t
a
stes, likely to be-
come interested in the property as tenants or owners, will view it.
The following questions will aid in determining the proper
rating
of this
featur
e
:
a.
Do
th
e
elev
a
tions
expr
es
s
fr
a
nkly
th
e plan contained
there
in or is the design of a freakish nature
stra
i
ning for
the
p
i
cturesque?
b,
In
whatever style the building has been designed, does
it
expre
s
s, to a reasonable
degr
e
e,
refinement and proper
interpretation of
that
style,
o
r
does the design indulge
in
th
e use of superfluous
ornam
e
nt
or an improper use of
materials as they relate to each other?
o,
Is
the fenestration arranged
so
as to result in a pleasing
effe
c
t?
857-859
UNDERWRITING MANUAL
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
column the weight is
12,
while in the
5
column
it
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 marketabil-
ity of the property. The feature
rating
is always deducted from the
Total
Rating
of Physical Security, thereby accomplishing whatever
adjustment is necessary because of adverse effects attributable to
conditions of nonconformity. The Reject column is used in cases in-
volving 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 environ-
ment, but is based on the hypothetical assumption
that
the physical
improvements are appropriate for the site and the neighborhood.
Where an unsuitable property-neighborhood relationship exists, mar-
ketability is to some degree affected and mortgage risk is increased.
Factors
that
restrict marketability because of nonconformity are
considered in 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 character-
istics may not necessarily be good security
for
a mortgage loan, even
though situated
in
a good location.
It
may be extremely unmarket-
able
if it
is not in conformity with 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
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 build-
ings and the plot plan, attractive?
f.
Do the accessory buildings tie in to the composition of the
entire project
i
g.
Has the entire project a pleasing appeal to the typical
potential purchaser?
859-862
RATING
OF
PROPERTY
l
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 market-
ability 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 appro-
priateness of the property to its location. A study of the neigh-
borhood 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 pre-
dominating 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 conclusions as to the effect on
mortgage risk.
865. The various ways in which building improvements
may deviate from
that
which is appropriate are discussed under 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 neighbor-
hoods no such controls of land utilization exist.
In
many neighbor-
hoods the appropriate use-type is
cl
e
arly evident upon an inspection
of the neighborhood because of the predominance of a single use-
type. Frequently, however, neighborhoods are very heterogeneous,
and in such cases several different use-types may be found
to
be
suitable.
862-866
UNDERWRITING MANU_µ.
867.
It
i
s
pl
a
in
that
the marketability of a
s
ingle :family
residence will be
limit
e
d
if it
is located in a neighborhood of multiple
family buildings. The erection of a multiple family dwelling in a
s
ingle family area, on
th
e
o
t
her hand, will usually adversely
affe
c
t
the
de
s
irability of
ne
a
rby r
e
sidence
s
.
If
a transition to multiple
family use is in process, the multiple
famil
y dwelling may not be
re
s
tricted in
mark
e
tabilit
y
.
868.
Appropriateness
of
Functional Characteris-
tics. The term
"fun
c
tional characteristi
c
s" refers to the
pattern
of
living facilities provided in a dwelling.
It
relates
to
the number of
rooms, the
arran
g
em
e
nt
and
s
iz
es of
ro
o
m
s
,
and the
plot
arrange-
ment. Usually
w
e
ll
d
e
fin
e
d standards are observable with regard to
these
char
a
cteristics in individual
ne
i
ghborhoods.
869.
Con
s
iderabl
e difficulty might
be
experienced in the
effort to
m
a
rk
e
t
a twelve room dwelling in a
nei
g
hborhood of five or
six room
dwelling
s simply because the
gr
e
ater number of rooms may
be ordinarily
u
s
el
es
s to the typical purchaser.
870.
The arrangement
a
nd
s
iz
es
of
rooms frequently
conform to certain definite
preferenc
es
in individual neighborhoods.
For
example, in
som
e
di
s
tricts
it
m
a
y be evident
that
the families
prefer residences
ha
v
ing
s
ix
la
r
ge rooms: a living room, dining
room, kitchen,
thr
ee
upstairs bedrooms, and two bathrooms.
In
such
a neighborhood
a
.
two story residence with only two bedrooms and
one bath, or a
re
s
ide
n
ce
wi
t
h
all rooms on
on
e floor may be inap-
propriate,
hen
c
e of
limit
e
d
m
a
rk
e
tabilit
y
.
A building
with
room
s
that
are too small might be similarly restricted in marketability.
871. The characteristics of the lot, insofar as they affect
livability, are
consid
e
red a
part
of the :functional
pattern
of
th
e
property.
Th
e
advantag
es
of the
sid
e
yards, and
th
e
front
and
rear
yards, should conform in desirability with the conditions found to
be typical and appropriate in
th
e
n
e
ighborhood. Nonconformity is
frequently
eviden
c
ed by the
placem
e
nt
of the
hou
se upon the sit
e
.
Where general building lines are
recogniz
e
d, any deviation from
th
e
a
cc
ustomed or
a
cc
ept
e
d practice should be
c
arefully considered
to
det
e
rmine the
resul
t
ant
eff
e
ct upon
d
es
ir
a
bili
t
y
.
If
the site of a
residence is
substanti
a
lly
s
maller than the size found to be desirable
in
a certain
neighborhood-for
example
thi
r
ty
feet wide where the
customa
ry
width
i
s
fift
y
fe
e
t-marke
ta
bility may be seriously re-
stricted. Similar
eff
ec
ts on marketability may result in some cases
where the shape or topography of a
p
a
rticular lot makes the dwelling
le
ss
d
es
ir
a
ble
t
han
tho
se
t
h
a
t
a
re
t
y
pi
ca
l of
th
e
ar
e
a.
867-871
RATING
OF
PROPERTY
I
---
~
···
_J
ti
I
•
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 residences in a neighborhood and yet each dwelling may
present a pleasing appearance when viewed in relation to its sur-
roundings. On the other hand, a building may be without any archi-
tectural faults and yet clash
so
violently with neighboring prop-
erties
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 difficult to sell, irrespective of the excellence
of its individual design.
In
cases involving structures which de-
part
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. Appro-
priateness 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
In-
come
Levels.-Families
of similar financial means generally choose
places of residence in similar neighborhoods. Because of this tend-
ency a residential property must be of such character
that
the ex-
pense 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 developments there are restric-
tions 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 occu-
pants. The range of family incomes is 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 sometimes encountered in new developments where build-
ers
start their
operations with houses
that
are too costly, and
after
experiencing delay in selling, are forced to build for purchasers of
smaller incomes.
872-874
UNDERWRITING MANUAL
Effective
February,
1
9
38
Federal Hou
s
ing
Admini
st
ration.
Paragraphs
General
Rating
Instructions--------------
-
-----
-
-----
-
-------------
901-909
l)efinitions--
-
---------
--
-----
-
-------------------
-
------
-
------
903
Basic Principles of
Rating
904-908
Analysi
s of
Neighbo
r
hood
s
---
-
-
-
---
--
--
---
--
---
---
------
-
-------
909
Establish
e
d
Ratings
of
Location
s 910-912
Relative Economic
StabilitY-
----
-------
---
--
---
-
----
-
---------------
913.-931
Economic Background
Ratin
g 917-921
Rating
of
the Feature
922-931
Protection from
Adver
s
e
Influence
s 932-940
Freedom from
Sp
e
cial
IIazards
941-948
Adequacy of
Civi
c,
Social,
and
Commerci
a
l
Cen
t
er
s 949-953
Adequacy of
Transport
a
tion 954-960
Sufficiency of
Utilities and
Conveni
e
nce
s 961-963
Level of
Taxe
s
and
Special
Asse
s
sment
s
-------
-
-------
-
-
-----
-
---
---
964-967
Appeal-----~-----------------
-
--
-------
--
-
---
----
--
--------
--
-
-
--
-
-
968-974
Speci
a
l Considerations
in Rating
Undeveloped Subdivisions
a
nd Other
Sparsely
Built
Areas-----------------------
---
--
-
-----
---
-
-
--
-
-
--
-
975-986
Summary of Significant
Considerations
-
----
-
----
-
--
-
--
---
-
--
--------
987
CONTENTS
\
)
{
PART II
SECTION 9
RATING OF LOCATION
. .
--
-
--
-
-
-
-
--~
(\{\Q
901.
Rating
of Location shall be accomplished by
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 com-
bined 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,
TOTAL RATING OF LOCATION
Appeal
12--4
6 8 10
---
Level of Taxes
and
Special Assess-
ments
1
2
3--4--5 ---
Sufficiency of Utilities
and
Con-
veniences
1
2
3-·
-4--5 ---
Adequacy of
Transportation
2 4
)
8
1(1
Adequacy of Civic, Social,
and
Commercial Centers
l
2
3
4
5
Freedom from Special
Hazards
Protection
from Adverse Influ-
ences
4 8 12 16
2_0
_
Relative
Economic
Stability
11==============1=== === === === === === =====
FEATURE REJECT
r
2 3 4 5
RATING
J
GENERAL RATING INSTRUCTIONS
Rating of Location
PART
II
SECTION
9
RATING OF LOCATION
•
•
L
the figure
a
p
pearing in
th
e
marked
s
qua
re
i
s carried over to the
e
x-
treme
ri
g
ht
hand column of
th
e
grid.
If
th
e
X
mark is placed in the
Rej
e
ct
c
olumn,
t
he
w
ord
"Reje
ct
" is written in the extreme
right
hand
column of the grid. One
s
uch
rating
in
a
n
y feature will
nec
e
ssit
a
te
a
r
e
commendation
for
rej
e
ction of the
a
pplication for in
s
urance.
If
the word "Reject"
a
ppe
ars in the Rating
c
olumn
,
it
mu
s
t
a
l
s
o
be
written in
that
column on the
Tot
a
l
Rating
line.
If
no such
rating
appears
aft
e
r
an
y of
t
he
fe
at
ure
s
,
t
he final
rating
of the cat
e
gory is
obtained by adding the
figur
e
s in the
Rat
i
ng column. The
syst
em
is
so
de
s
igned
th
a
t
thi
s
figure will be
a
n expression of the
rating
on a
numerical
ba
s
is.
902.
The eight features, together with the weights as-
signed to
th
e
m, are
li
s
ted
belo
w
:
a
.
Relat
i
ve
E
c
onomic
St
a
bilit
Y
---
-
---
-
-
-
---
--
---
---
--
-
-
-
--
-----
-
--
(
4
0)
b.
Prote
c
tion from
Adv
e
rse
Influen
c
es
_
_
___
_
_____
__ __
_
_
____
_
___
____
20
e. Freedom
fr
o
m Special
H
aza
rd
s
-
-
--
-
---
-
------
--
----------
-----
-
5
d
.
Adequacy of Civic, Social,
a
nd
C
omm
e
rci
a
l
Ce
n
t
e
rs_
_ _
___
_
___
_
_
__ 5
e
.
Adequ
a
cy of
Tr
a
nsportation____
_
_
_
__
_
__
_
___
_
_ _
___
_
_
_
__
_
___
__
_
__
10
f.
Suffi
c
i
e
ncy of
Utiliti
es and
Conveni
e
nces
--
---
--
-
--------
--
------
5
g.
Level of
T
a
xes and
Speci
a
l
As
sess
ments__
__ __
_
_
__
__
_ _
__
__
_______ 5
h
.
Appeal--------
-
---
-
----
-
----
--
-----
-
----
-
-
-
--
---------
-
---
-
---
10
903.
Definitions.
Th
e
followi
n
g
defini
t
ion
s are
u
s
ed
:
a.
Lo
c
ation
is
defin
e
d as the actual site of a property viewed
in terms of relationship with its immediate neighborhood
a
n
d
gener
a
l economic background.
b,
Ra
t
ing
of
Location
is defined as the process of determin-
ing the degree of mortgage risk attributable to location.
R
a
ting
of Location also refers to the numerical index of
risk which results from the
proc
e
ss.
c.
Est
a
bli
s
h
e
d Ratinq of
Lo
c
at
i
on
i
s defined as the
rating
of
a selected location which is used as a basis of compari-
son in connection with the
r
a
ting
of other locations in the
s
a
me outlined neighborhood.
d. Neighborhood
is defined as a single area composed of loca-
tions
se
parated only by publicly
u
s
ed land, the re
s
idential
portions of which exhibit a
de
g
ree of homogeneity.
In
g
e
ner
a
l, a
n
eighborhood is available for, or improved with,
dwellings of more or less similar
c
haracter, age, and
quality.
e.
O
ut
lin
e
d
N
ei
ghborhood
i
s defined
a
s a neighborhood in
which
th
e approximate borders have been established
for the purpo
se
of
inde
x
ing and classifying Location and
Valuation Data,
Re
a
l
E
s
tate Market Data, and
Est
a
blished
Ratings of
Lo
c
ations.
901-903
UNDERWRITING MANUAL
f.
Imm
e
dia
te
N
eig
hborhood
i
s defined
a
s an area surrounding
a location
a
nd
embracin
g the most direct influences from
which
th
e significant
cha
racteristics of the 4>catioo are
determin
e
d.
It
is
gen
e
rally smaller in area
than
an Out-
lined
Nei
g
hborhood.
g
.
E
c
onom
ic
Ba
c
kground
A
re
a
is defined as an area within
which
th
e
conditions
o
f
industry, trade, labor, and
living-
that
is, the economic and social life of a community of
people-ar
e predominantly subject to the same influences.
It
may be
s
mall, as in the
c
as
e
of a
v
illage, or
large
,
as
in the
c
ase of a city together with its entire environing
metropolitan area.
904.
Basic
Principles of Rating.
The
rating
assigned
to the
fir
s
t
feature of the Location category, Relative Economic
Stability,
i
s an
e
stim
ate of the probable continuing marketability
of the subject
prop
e
rty,
a
ttribu
t
able to its
sit
e
,
as
affected
by
the
financial capacities
an
d financial attitudes of owners, occupants,
and
pro
s
p
e
ctive
purch
a
sers, and as related to similar estimates of all
residential propertie
s
in the Economic Background Area, irrespective
of
compe
t
itive
chara
c
t
e
ristics.
Th
e
rating
of
a
ll features of the
Location
c
ategory
,
e
x
ce
pt
the feature
Relati
v
e
E
c
onomic Stability,
is determined by comparing the subject location with all other com-
petitive locations in the Economic Background Area,
throu
g
h
the
mediums of
Establish
e
d
Rating
s of Locations. Competitive loca-
tions are construed as locations which are appropriate
for
residen-
tial
structures having price ranges similar to
that
which is deter-
mined as typical in the immediate neighborhood of the
subje
c
t
loca-
tion. The price range of an appropriate residential property
at
the
subject location, and
at its
competitive
location
s
,
is indicated by the
price range of typical properties
in their
re
s
p
ec
tive immediate
neighborhoods.
In
g
eneral,
comp
a
risons should be restricted to
a
.
price
rang
e which does not differ more
than
the limits of the prices
of
prope
r
ties which the typical prospective buyer with specific needs
would consider
for
purchase. Similarity of
pri
c
e range does not
provid
e a
ba
s
is
for
su
c
h
compari
s
ons
if
certain
r
a
cial aspects
r
e
nder
the
loc
a
tions actually
noncompetiti
ve
.
Residential structures which
occupy the site of
th
e subject location and its competitive locations
are of no concern
in
r
a
ting
Location, except as they
participate in'
the neighborhood
influ
e
nces
aff
ec
ting
such locations. The price of
a
re
s
identi
a
l
prop
e
rty
a
t
the
s
ubj
ec
t
loc
a
tion
s
hould not be used to
deter
m
i
n
e the price
r
ang
e
of
comp
e
titi
v
e residential properties, un-
less
it
is representative of the typical price
ra
ng
e
of the immediate
neighborhood. Under similar environing influences a vacant site
would have the same
r
a
ting
as an improved site.
903-904
RATING
OF LOCATION
•
1
I
I
•
905.
The competitive basis
of rating
is the only method
to be used in
rating
all features, other
than
Relative Economic Sta-
bility.
If
the number
of
competing neighborhoods in an Economic
Background Area are insufficient to 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 arbi-
trary
requirements. The
arbitrary
requirements established may be
regarded as the conditions surrounding 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 becomes in itself a competitive area basis
of
rating.
In
general
,
such
arbitrary
requirements representing adequacy and
sufficiency should 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 dur-
ing 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 de-
termination
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 neighbor-
hood characteristics, and data relating to city growth conditions and
the market
for
real estate will
prov
e
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 diff
er
e
nt
R
a
ting of
Location
in
another case.
In
the first case the trend might be favorable; in the
second case
it
might be
le
ss
favorable or even unfavorable. Because
mortgage risk
li
e
s
in the future, the
rating
of mortgage risk should
always be a measurement reflecting probable
future
trends.
908.
As a general rule, the attitude of the market re-
flects the degree of
a
c
ceptability of prevailing conditions, providing
the market is
r
e
asonably cognizant of its needs. However, accepta-
bility and tolerance
a
re not synonymous.
In
an Economic Back-
ground Area
it
is necessary to distinguish between conditions which
are acceptable in one case
a
nd tolerated in another. Mere tolerance
t
l
905-908
UNDERWRITING MANUAL
may warrant a low
rating
of any feature, even to the point of rejec-
t
ion
,
unle
ss
it
is evident
that
be
t
ter conditions will not be
pro
v
ided.
Ther
e
are many areas which have great charm, where planning has
been
w
ell
e
x
ecut
e
d, and the surroundings present,
to
a marked degree,
a harmonious picture of beauty and comfortable living.
If
proper-
ties in such areas
po
ss
ess
read
y mark
e
tability,
that
i
s
,
if
there is a
sufficiently large number of financially capable, prospective buyers for
the
properti
es
,
a
nd
if
this market is expected
to
continue and the
financial capacity of buyers is expected to remain the same or in-
crease, then a high Rating of
Lo
c
ation is warranted. Mere beauty
and charm, however, are not sufficient to make a satisfactory area,
but
if
the
s
e
attribute
s
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.
Homogeneous development of
properti
es
in a neighborhood
tends to
r
e
duce mortgage
ri
s
k. Areas which contain
structures of about the same age are usually better mort-
g
a
ge lending areas than those in which a variety of age
groups is present.
b,
Ar
e
as in which development has been accomplished in ac-
cordance with accepted principles of good housing
ar
e
apt
to prove much more
stabl
e
than those areas where little
thought or attention has been paid to the requirements
for
light
a
nd air, lot coverage, and controlled similarity of
types of structures.
o.
The
V
a
lua
t
or
i
s
confront
e
d with different problems
in
rating new and old locations.
If
development has been
completed and there are few vacant
lot
s
,
a satisfa
c
tory
measurem
e
nt
of mortgag
e
risk is usually less difficult
to determine
th
a
n
if
the
lo
c
ation 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 de-
centralization of housing
whi
c
h will probably continue
the building up of suburban neighborhoods.
If
the loca-
tion under consideration does not lie in a path of city
growth, and
th
e
re is apt to be a lapse of a number of
years before the neighborhood is
w
e
ll built up, a much
lower
rating
will be indicated than in the case of a loca-
tion which lies
in
a
path
of city growth with every pros-
90S..-909
RATING
OF LOCATION
•
•
pect
that
the neighborhood will be built up in a compara-
t
ively
s
hort
tim
e
.
The
pre
s
ent city
pattern
is the product
of
the action, in
t
he
p
as
t,
of
the competition
of
u
s
es
for
s
ites and the
hi
s
to
r
ical
s
uccession
0£
those uses. City
growth is directional. The directions which
it
takes are
the consequence
0£
favorable market attitudes toward
selected areas.
Th
es
e in
turn
result from the
r
e
lative
advantages
0£
diff
e
r
e
nt
locations with respect to civic,
s
o
c
ial, cultural
,
and
n
a
tural
facilities. The
actu
a
l
ph
y
s-
ical
expan
s
ion
0£
ci
t
ies at border locations
i
s
fr
e
quently
c
haracterized by
spe
c
ulat
i
ve activity.
Interior
loca
t
ions,
and border locations in less favored directions have a
tendency to exhibit a
g
radual decline in quality. Neigh-
borhoods 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
su
c
h
di
s
tricts. There is
eith
e
r
a more
i
ntensive use
0£
land for residential purposes, or a
c
hange
of
u
s
e
to
commer
c
i
a
l and
indu
s
trial
purpos
e
s.
Neighbor-
hoods in
favorabl
e
g
eographic positions in
r
e
lation
to
city
growth
frequ
e
n
t
ly
e
njoy a
fairly rapid
rate
of
ab
s
orption
of
newly
con
s
tru
c
ted dwellings. Such neighborhoods
may be remarkably
st
a
bl
e
if
the absorption
of
new land
into use is controlled
a
n
d orderly. The income and social
characteristics
of
future occupants will usually be
of
such
a character
that
a suitable environment £or mortgage lend-
ing activities is in evidence. On the other hand, neigh-
borhoods in the
path
s
of
city growth may be
un
st
able
if
the absorption of
n
e
w
la
n
d
i
s
characterized by imprudent
l
a
nd speculation,
ov
e
r
ex
tension
in
real
e
s
tate purchases,
and overdevelopment.
d.
Citie
s
grow
alon
g communication and travel routes, and
t
he growth
of
citi
e
s
i
s
influenced by topographical condi-
tions, zoning restriction
s
,
legislative policies, and popula-
tion increases. Newer
re
sidential districts are products
of city expansion, and both new and old residential dis-
tricts undergo a
chan
ge in quality which is directly
related to the changing types
0£
people who come succes-
siv
ely into occupancy. The
trend
0£
neighborhood sta-
bility usually lies in the same direction as the trend 0£
so
c
ial quality
of
th
e
n
e
ighborhood. As families rise
above the economic and social status
of their
neighbors,
they desire
to
move to better districts. The city
pattern
then becomes the result
of
the action of the competition
909
UNDERWRITING MANUAL
of uses for sites and the
hi
s
torical succession of those
u
se
s.
Valuators must be aware of the phenomena of city
growth and the conditions and characteristics of neigh-
borhood trends in order
that
the probable :future degree
o:f
mortgage risk surrounding a
lo
c
ation may be accurately
reflected
.
e.
The mere
presen
c
e
o:f
establi
s
hed,
financi
a
lly capable
own
e
rs
in
ne
i
ghborhoods embracing both old and new structures
does not assure a high degree
o:f
continuing market-
ability, even though
the
s
a
me type
o:f
persons apparently
provide a strong market
for
properties in such
are
as
.
Su
c
h neighborhoods will suffer greatly within
the
next
twenty years
i:f
they are
not
considered reasonably desir-
able by the younger :families upon whom :future market-
ability depends. A location
wi
t
h harmonious surround-
ing
s will not decline
at
the same
r
a
te as will a location
in a neighborhood containing old structures mixed with
ne
w
.
Older properties
in
a neighborhood have a tendency
to
a
cce
lerate the
rate
of transition to lower class occu-
pancy. Good planning and
u
n
interrupted
development
tend to create continuing desirability of neighborhoods.
The
p
as
t
has demonstrated
that
n
e
ighborhoods or subdivi-
sions
w
hich were laid out many years ago in accordance
with well executed planning to
d
e
velop beauty and charm
ha
v
e
co
n
tinued in high favor,
wh
i
le other neighborhoods
ju
s
t
a
s well located have suffered by reason
o:f
the
ab
s
ence
of
g
ood
pl
a
nning.
f.
Neighborhoods tend to
declin
e in investment quality
.
Some
ti
m
es an exception is an
unde
v
elop
e
d or
partially
dev
e
loped new neighborhood.
I:f
s
uch areas are :favorably
situ
a
ted, attractive to new
purchas
e
rs constituting the
m
a
rk
e
t, adequately
protect
e
d :from adverse influences,
and definitely planned in accordance with accepted good
hou
s
ing practice, they will frequently improve
for
a
period.
g. Th
e st
a
ge
of
development of a neighborhood is an impor-
tant
f
ac
tor.
It
cannot be presumed, however,
that
a
nei
g
hborhood
15
%
,
50
%
,
or
75
%
developed represents
any
s
p
e
cific degree of mortgage risk when generalization
is attempted. The stability of such an area may be lim-
ited
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
909
RATING
OF LOCATION
-----·
-
-
,
,
.--..,9\11!>
...
. .
.
,...
,
..
''"'"
...
·---------·--·
..
---~
{
•
•
ESTABLISHED RATINGS OF LOCATIONS
910.
Valuation
Se
c
t
i
ons are required to make Estab-
lished Ratings of Locations. They
c
ontribute to speed in the process-
ing of
ca
ses and ultimately lead to economy and
consi
s
tency
.
The
availability of Established Ratings of Locations also improves the
effe
c
tiveness of preliminary
e
xamination. Established Ratings of
Locations
s
h
o
uld be made for
lo
c
ations which are the
mo
s
t
typical,
or
characteri
s
tic, of sites in the
nei
g
hborhood, and
for
locations which
are of the
.
types most frequently encountered in the
bu
s
in
es
s
of the
Admini
s
tration. Where several price ranges of
properti
es occur in
the same neighborhood, several Established Ratings of Locations
should be made and the most appropriate one
for
comparison should
be
s
ele
c
ted when processing a
c
ase
.
E
s
tablished Ratings bf
Lo
ca
tions
are
m
a
de
a
v
ailable
to Valuator
s so
that
when a case involving a prop-
erty
s
i
tu
at
ed
w
ithin the boundaries of an
Ou
t
lined
Nei
g
hborhood is
being
pro
c
esse
d, the
Valu
a
tor
w
ill
h
ave an
E
s
tablished
R
a
tin
g of
Lo
-
ca
tion available
for
guidan
c
e
.
The Valuator pro
c
eeds to
th
e estab-
lish
e
d location, familiarizes
hims
e
lf
w
ith
it
,
and then
proc
e
eds to the
lo
c
ation under analysis. By ascertaining the conditions
pr
e
sent
at
the
subje
c
t
location and
comp
ar
in
g them, feature by
fe
a
ture, with
those which determined the Established
Rating
of Location, he will
be able to rate the subject
locatio
n accurately and without
d
e
lay.
It
is quite
i
mprobable
that
any
on
e
lo
ca
tion in a neighborhood will rate
high
e
r
than all other locations
wi
t
hin the same Outlin
e
d Neighbor-
hood
for
a
ll features in the
g
rid.
If
t
h
e subject
lo
c
ation differs
in
qualit
y from the
rating
a
sc
ribed to any feature of the
E
s
t
a
blished
Rating of
Lo
c
a
t
ion, the
Valuato
r
s
hould
refle
c
t
such
diff
e
r
e
nce in the
rating of
the subject location. The Chief Valuator designates or
numbers each Established
Rat
i
ng
of
Location with appropriate num-
bers or symbols in accordance
w
i
th
the instructions in Section
18,
Compilation and Recordation
of
Data.
911.
To make
Establ
i
shed Ratings of Locations,
it
is
necessary
that
the Economic Background Rating
of
the area be com-
pleted in
ac
c
ordance with the
proc
e
dure described in this
se
ction.
This provides the maximum
w
e
i
g
ht for
the
fir
s
t
featur
e
,
Relative
E
c
onomic Stability. Having
de
te
rmined the Economic Background
Ra
t
ing for the area, the
fir
s
t
step in making
E
s
tabli
s
h
e
d Ratings of
Locations is to determine
inelig
ible or caution areas. The central
downtown area can usually be outlined and considered
a
s ineligible.
However, such downtown reject areas must be outlined with the great-
established.
At
t
his
s
t
ag
e
,
a higher R
a
ting
of Location
may be justified
a
s a
r
es
ult of certainty which was
la
c
king
in the less
advanc
e
d st
a
ge of development.
909-911
UNDERWRITING MANUAL
est care in order to avoid unfair decisions in connection
with
applica-
tions 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 commercial sections of the city. The
second step is the outlining of neighborhoods for the purpose of
indexing and classifying the
E
s
tablished Ratings of Locations. Ad-
joining areas having prop
e
rties of similar age and quality are in-
cluded in one Outlined Neighborhood.
In
some instances, this treat-
ment permits the inclusion of a considerable expanse of
territory
in
an Outlined Neighborhood.
It
is not necessary
that
all locations
within the neighborhood boundary exhibit similar degrees of mort-
gage
r
isk.
Wid
e
var
i
ations in total ratings will appear when indi-
vidual cases are handled. When Established Ratings of Locations
in an Outlined Neighborhood have been completed, the Valuator
accomplishes the
rating
of all other locations in the Outlined Neigh-
borhood by comparison with the most comparable Established Rat-
ing of Location.
912.
An Outlined Neighborhood is not intended to em-
brace all of the influences which are considered in
rating
a location.
Some conditions in an Outlined Neighborhood may have
little
or no
influence upon the subject location, while other conditions with re-
spect to significant influences may lie well outside the Outlined
Neighborhood.
For
example, the immediate neighborhood of a loca-
tion, as referred
to
in
rating
Relative Economic Stability, is gen-
erally an area of less proportions than the Outlined Neighborhood.
However, some influences which affect such immediate neighbor-
hoods 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
alter
e
d 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
E
s
tablished 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 accordance with
the basic principles of
rating
set
forth
in paragraphs
904
.
to
909,
and
the specific
rating
principle
s
in
paragraphs 913 to
931.
The favorable
and unfavorable factors, and the reason for ascribing the
rating
in-
dicated must be fully set
forth
on the Established R
a
ting
of Location
form. The next step is to rate the remaining features in accordance
with the basic
prin
c
iples of
rating
set
forth
in
par
a
graphs 904 to
909,
and the
sp
e
cific principles as shown in paragraphs
932
to
986.
The favorable and unfavorable factors and the reasons for the
rating
)
911-912
.
RATING
OF LOCATION
___
_
..,._
.
.
.
-
. .
...
.
,
.-
.·
:
~
·
------··""
·
""'*'-'"""'""
..
.
""~-
.
•
t
i
ESTABLISHED RATING
OF
LOCATION N0.1~
TYPl~
1
~At%"
OME.
$2.500
~·
·
·-
I
E.STABLISHED llA"\'IHG
,
~1[£ggo
;ff'
OUTLINED
NEIGH\30QHOOD
NCJ.
1.
912
UNDERWRITING MANUAL
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, neighbor-
hoods will reflect these benefits in varying degrees. The feature is an
expression of the
se
c
urity
of the position of the families in the im-
mediate 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 economic background, including opportunities
for employment and trends of industrial, commercial, and
other activities which affect the risk in all dwelling mort-
gages located in the Economic Background Area.
b,
The relationship between the general economic background
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 elements cannot
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 Eco-
nomic Stability, in accordance with the instructions in paragraphs
917
to
921.
This
rating
may not exceed 40 points in any case and is
assigned must be fully indicated on the Established Rating of Loca-
tion form
for
each of these features. The Established Rating of
Location form is completed by 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 com-
parison is made in the ratings of all location features except Rela-
tive Economic Stability. This review and adjustment process will
afford a proper qualitative analysis of the respective degree of risk
indicated by individual feature ratings.
912-915
RATING
OF LOCATION
•
•
Colu
mn
I
Colum
n
I
1
2
s
4
5
1
2
3
4
5
-- -- --
-
-
-
-
-
-
-
- -- -- --
2
4
6
8
10
5
10
1
6
21
26
2 4
7
9
11
5
11
1
6
2 2
27
2
5
7
10
12
6
11
17
22
2
8
3
5
8
10
13
6
12
17
23
2 9
3
6 8
11
14
6
12
18
24
3
0
3 6
9 12
1
5
6
12 19
25
3
1
3 6
10 13
16
6
1
3 19
26
3
2
3
7
10
14 17
7
13
20
2 6
33
4
7
11
14 18
7
14 20
2 7
3 4
4
8
11
1
5 19
7
14
21
2 8
35
4 8
12
16
20
7
14
22
29
3 6
4
8
13
17
21
7
1
5
22 30
3 7
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
2 0
2
5
scale
d
do
w
nw
a
r
d for
d
i
ffer
en
t
areas in
acco
rd
ance
w
i
t
h
th
e Chief
Va
luat
o
r
's
E
cono
mic
B
a
ckg
ro
und
R
at
ing.
Wh
en the
Ch
ie
f
V
a
luator
m
a
kes an Economic
B
ac
kgro
u
nd
R
at
ing, his
co
n
clusion
inclu
des the
weig
hts
a
ppli
cabl
e
t
o
ea
ch of
t
he
fi
ve
r
at
in
g
column
s
.
For
exam
pl
e,
if
he
find
s
it
n
ec
essary to
rat
e an
E
c
onom
i
c
Ba
c
kground
Ar
ea with
a maximum
p
ossi
ble
we
i
gh
t
o
f
30
po
int
s
,
t
h
e
n
h
e
has
esta
bli
s
h
ed
th
e
followin
g
tabl
e
o
f
wei
ght
s for the
fi
rs
t
fe
at
ure:
In
the
1
Co
luliln---
-
----
-
--
-
--
------
-
--
-
-
--
- -
-
-
-~
--- --
6
poi
nts
In
the
2
Co
luliln
--
-
-
--
--
-
-
--
-
-- --
-
-
---
--
- -
--
- -
----
--
--
12
poi
nts
In
t
he
3
Co
luliln
--
-
--
-·--
-
---
--
---
-
--
-
- -
-
-
-
-
--
-----
--
-
18
poi nts
In
t
h
e
4
Oo
lu
liln
2
4
poin
ts
In
t
h
e
5
C
ol
ulil
n
-
-
-- --
-
--
--
--
-
--
-- --
---
-
-- --
- -
-
-
--- ---
3
0
poin
ts
If
he finds
it
n
ece
ssary to
es
t
ablish
t
he
m
a
ximum possible
w
e
i
g
ht
at
15
point
s
,
t
h
en the
follo
w
in
g
tabl
e
of
weig
h
ts
i
s
a
ppli
e
d to
t
h
e
fir
s
t
f
e
ature:
In
t
h
e
1
Colu
liln
-
-
--
-----
--
---
----
--
------
--
--
----
--
- -
3
point
s
In
th
e
2
Co
luliln--
-
- -
---
-
-
--
-
- -
-
- -
- -
--
-
-
-
- -
-
-----
·-
----
6
poi
n
t
s
In
the
3
C
o
luliln
-
- -
-
---
-- --
--
----
---
--
-
-
- -
-
--
-----
---
-
9
point
s
In
t
h
e
4
Co
l
u
liln
-
--
--
--
-
--
-
--
---
- -
- -
-
-
-
-
-
-
---
--
- -
--
-
--
1
2
poin
ts
In
th
e
5
C
ol
uliln
-
-
-- --
-
--
--
- -
-
- -
-
------
---
----
-
-----
-- 1 5 poi
nts
The following table may be used
fo
r
r
eady
re
fer
enc
e.
It
indicates
the
ind
i
vidual
c
o
lumn
a
r
wei
ghts
for
ratin
gs
fr
om
10
t
o 4
0.
915
UNDERWRITING MANUAL
916. The other set
of
elements, the general relation-
ship between the economic background and the location under con-
sideration, is the concern of the Valuator who renders the Report
of Valuator on the case.
It
is necessary for him to form
a
judg-
ment with respect to the degree to
whi
c
h
the
particular
location
and its immediate neighborhood receive the benefits of the economic
background. This judgment is formed in accordance with the
in-
structions 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
Eco-
nomic Background
Rating
is established for each Economic Back-
ground Area. The Chief Valuator shall delineate areas
for
the pur-
pose of establishing Economic Background Ratings, and he is re-
quired 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 communities
will
be included in the same Economic Back-
ground 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 Back-
ground
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 Economic Background
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 connection with all cases in the area to which the
rating
applies.
Chief Valuators are not permitted to allow
their
conclusions to be-
come known to borrowers, mortgagees, the public, or others than the
Director and members of the Underwriting Staff.
919.
In
making(ii,n
Economi
c
Background Rating,
the
Chief Valuator forms an opinion of the probable
future
stability and
sufficiency of the industrial, commercial, and other economic activities
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.
916-919
RATING
OF LOCATION
)
•
•
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 accept-
able 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
expect
e
d
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
r
e
vision does not, of course,
affect cases already processed.
921. The Economic Background
Rating
gives consid-
eration 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 back-
grounds, there are sections which do not derive any
great
benefit
from
their
location
in
such areas.
Sp
e
cific instructions covering
the process of establishing Economic
Ba
c
kground Ratings are given
in
Section
18,
Compilation and Recordation of Data.
922.
Rating
of
the Feature.
The
Valuator
must ascer-
tain the
extent or limits of
the
area included
in the
Economic Back-
ground
Rating in order
to
rate this feature
properly. These limits
are established by
the
Chief
Valuator
according to
the
principl
e
s
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
cas
es
such as those involving
resort properties.
In
such cases, the
ra
t
ing 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
prosp
e
ctive occupants of properties in the immedi-
ate neighborhood of
the
location
under
investigation
with the
group
income
characteri
s
tics of present and prospective occupants of prop-
erties near all other locations
within
the Economic Background Area.
920-923
UNDERWRITING MANUAL
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 neighbor-
hoods, 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
sufficiency and stability with respect to
both sources and amounts of income received.
It
is necessary to
devise a method whereby those income characteristics can
be
ana-
lyzed. 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 employment scale, a large per-
centage 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
requi-
site of
this
employed group. The next group encountered above
the laborers in the employment field includes the semi-skilled me-
chanics and lower-grade clerks. The members of this group exhibit
some individuality, because they have demonstrated through knowl-
edge or ability a degree of superiority over laborers.
Further
up the
employment scale are encountered mechanics and
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 usu-
ally have well established incomes. Above this group are the junior
executives.
It
is considered
that 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
pres-
ent employment,
it
is usually possible
for
them to find ready employ-
ment in
ai
similar line of activity.
At
least this group possesses
the characteristics which would provide them with the ability
to
find
ready employment
if
there are sufficient sources from which employ-
ment may be secured. Should
it
become necessary
for
members of
923-925
RATING
OF LOCATION
•
•
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 em-
ployment scale is found the senior executive group. Experience has
demonstrated
that
although
their
leadership is most firmly estab-
lished,
the
stability of incomes is not as
great
as
that
evidenced in
the
junior
executive class. Opportunities
for
employment in similar
capacities are usually limited. While employment is always avail-
able in the various
strata
of the employment scale below them, the
incomes derived from such employment will usually prove inade-
quate to maintain
their
present standard of living and
the
retire-
ment of mortgage indebtedness on expensive properties.
It
should
be understood
that
while the senior executive group will, in most
instances,
rate
below the junior executive group, 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 im-
mediate neighborhood of the location under investigation.
With
the
employment charactertistics of occupants determined, the income
levels are indicated. Where the income level of a neighborhood in-
cludes rental returns from duplex houses and other residential units
within the same area, neighborhood influences will be accelerated in
proportion
to
the degree in which the income level results from such
rentals. 927.
Sufficiency
of Family
Incomes.
Such considera-
tions as the standard of living established by the various income
groups and the financial outlay necessary to maintain
that
standard,
signs of extravagance in living, and indications
that
neighborhood
occupants as a group have bought too expensive properties, 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 affected only to a slight degree
by the income characteristics of those occupants not typical of the
neighborhood occupancy.
925-928
UNDERWRITING MANUAL
929.
Social Characteristics of Neighborhood Occupants.
While the
rating
of this feature is based upon the group income
characteristics of the occupant group
at
the immediate neighborhood
of a location, other considerations, such as the varying social charac-
teristics of neighborhood occupants, including the group attitude
toward obligations and living standards, are warranted and will be
reflected to some degree in the rating. By social characteristics are
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 completed properties.
In
older,
built
up
neighborhoods the principal consideration will be given to the pres-
ence of a ready, :financially capable market
for
the homes which 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
neighborhood
if
the :financial condition of the residents is such
that
forced sales and foreclosures may become numerous. Properties
must remain desirable to
their
present owners
if
a satisfactory lend-
ing experience is to be expected. A change in class of occupancy is
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 experience was
typical of the entire Economic Background Area. The probability
of
future
foreclosures and forced sales, however, may be influenced
by factors which are latent
in
the present situation.
For
example,
there is greater risk
o:f
:foreclosure in residential areas where mort-
gages 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 be-
comes almost inevitable.
For
this reason when properties
in
a
neighborhood are heavily mortgaged, an element of instability may
(
929-931
RATING
OF LOCATION
•
•
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 impor-
tance, 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 restric-
tions is becoming more general. One of the best artificial means of
providing protection from adverse influences is 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 ex-
cellent 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 en-
forced, 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 protec-
tion 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
be introduced. The Valuator should give consideration to the rela-
tive amount of mortgage indebtedness in the neighborhood as com-
pared to other neighborhoods, which may be measured, for the pur-
pose 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.
931-934
UNDERWRITING MANUAL
l
altoget
her
differ
e
nt
r
es
trictions, especially for type and use of struc-
tures and
occupan
c
y, the effect
of
su
c
h restrictions is minimized. A
lo
c
ation lying in
the
path
of
busines
s
expansion is often unprotected
from the
bu
s
iness
encroachm
e
nt
even though deed
re
s
tric
t
ions for res-
idential
u
s
e
m
a
y be present.
It
mu
s
t
be
re
a
liz
e
d
t
hat deed restric-
tions, 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
them
s
elves offer little or no protection from
adverse
influences.
In
oth
e
r
word
s
,
if
a property is
so
situated
that
its logical
use is other
t
han for residential purposes,
it
will very likely be
put
to its highest and
be
s
t
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
oc
c
upancy
of
prop-
ert
i
es
at
this location is remote. The degree
of
immunity offered to
a location because
of
its geographical position within the city is to
be
con
s
idered.
N
a
tur
a
l or
a
r
tificially
establi
s
hed barriers will prove
effective
in
protecting a neighborhood and the locations within
it
from adverse influences. Usually the protection from adverse
in-
fluenc
e
s afforded by
the
se
mea
ns
in
c
lud
e
s prevention of the infiltra-
tion of
busin
e
ss
and industrial uses, lower class occupancy, and in-
harmonious racial groups. A location close to a public
park
or area
of
similar nature is
u
s
ually well protected from infiltration of busi-
/
ne
s
s
and lower social occupancy coming from
that
direction. Hills
and ravines and other peculiarities of topography often make en-
croachment of
inharmoniou
s
uses
so
difficult
that
protection is af-
forded. A high
spe
e
d
traffi
c
artery or a wide street parkway may
pr
e
vent the expansion of inharmonious uses to a location on the
opposite side of the stre
e
t. However,
if
a high speed traffic artery
passes
dir
e
ctly
throu
g
h 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 presence of railroads, elevated or surface
lines,
a
nd other means of
transportation
.
936.
Surrounding Homogeneous
N
e
ighborhood.
When
a neighborhood has been solidly developed in accordance with ac-
cepted good housing practices, such a
de
v
elopment alone usually con-
stitutes
good
·
protection from adverse influences. But many solidly
934-936
RATING
OF LOCATION
•
developed neighborhood areas present conditions which are :far dif-
:ferent :from
that
which is regarded as good housing practice.
Little
protection is offered to such a neighborhood because of
the
prob-
ability
that
new and more attractive competing neighborhoods may
be developed. The solidly
built
up neighborhood where good hous-
ing has not been provided is readily subject to change in occupancy.
Narrow streets, excessive lot coverage, inadequate
light
and air, and
poor circulation within the neighborhood area, as well as the inter-
mixture of types, price levels, and a general absence of architectural
attractiveness in dwellings, represent adverse influences
in
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 whose properties present freakish architectural designs.
The
rating
will be adversely affected
if
the neighboring development
consists of old, obsolete dwellings. The presence of overimprove-
merit or underimprovement in the neighborhood constitutes a condi-
tion which may adversely affect location ratings. Areas surround-
ing 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 neighborhood is to retain stability,
it
is neces-
sary
that
properties shall continue to be occupied by the same social
and racial classes. A change in social or racial occupancy generally
contributes to instability and a decline
in
values.
938.
Ribbon Developments.
The same principles apply
when
rating
locations on ribbon developments along highways. Such
locations tend to
attract
uses which are often considered, from a resi-
dential standpoint, as n:uisances. Therefore, the prospect of lessened
desirability of such locations for residential use directly affects mort-
gage risk. However, where the likelihood of such nuisances is remote
or where prospective purchasers for residential use are tolerant of
present or prospective nuisances, reject ratings of this feature are not
warranted. 939.
Nuisances.
Nuisances already present in a neigh-
borhood affect mortgage risk in two ways. The first is
the
direct
effect on the appeal of the neighborhood and
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 considered when
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.
936-939
UNDERWRITING MANUAL
FREEDOM FROM SPECIAL HAZARDS
941.
Special hazards refer directly
to
conditions which
have an influence on the personal safety and health of the occupants
in a given neighborhood, as compared with similar conditions sur-
rounding all competitive locations.
942.
Topograplvy.
Special hazards are frequently found
to result :from the peculiar topography of a location or its neigh-
borhood. 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 subsidence is 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 sub-
sidence 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.
Earthq
u
ake, 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 ap-
parent
it
should be properly reflected in the rating.
In
general, the
above principle will apply to the hazards associated with the prob-
abilities of earthquakes.
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 loca-
tion, the
rating
of this feature will reflect the condition.
In
either
case, the
rating
of the feature, Appeal, will be affected
if
market-
ability to present class of occupants is impaired.
940-944
RATING
OF LOCATION
•
•
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 shop-
ping 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 facili-
ties 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
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 some-
times 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.
Coincidental with the accelerating
rate of traffic
accid
e
nts is the increasing favoritism for home-
sites 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.
Ra
t
ing of this feature cannot approach rea-
sonable accuracy unless full cognizance is given to this type of
hazard.
947.
Fire and Explosion Hazards.
Frequency of occur-
rences 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
ess
e
ntial to understand fully the
hazards of fire and explosion. The presence of commercial or indus-
trial
activity dealing with the storage or manufacture of volatile or
explosive mixtures, and conditions which indicate even a remote
probability of conflagration are examples of this type of hazard.
948.
Hazards to Health.
Some influences considered in
rating the feature,
Prot
e
ction from Adverse Influences, and some
conditions considered in
rat
i
ng the feature, Appeal, are likewise con-
sidered
in rating
Freedom from Special Hazards
if
they affect the
personal safety and health of neighborhood occupants. Some of
these influences and conditions are smoke, fog, chemical fumes, ex-
haust gases, stagnant ponds or marshes, poor surface drainage, and
excessive heat or dampness.
945-950
UNDERWRITING MANUAL
suitable provision
for
cul
t
ural
developm
e
nt. The older
resid
e
ntial
areas within a city will
u
s
ually have
av
a
ilable more of these facili-
ties
than
the newer neighborhoods.
Th
e
centers
makin
g
for
con-
v
enie
n
ce in
liv
i
ng and
c
ultural
ben
e
fit
u
s
ually follow
rather
than
precede the building up
o
f
any
resid
e
ntial
a
rea. However, those
new
'
<
neighborhoods
w
hich are
bett
e
r
serv
e
d
b
y
convenien
c
es will
usually
)
develop and
m
a
int
a
in a
chara
c
ter
m
ore
favor
a
ble to stability than
those
in
which they are lacking. Areas occupied by low-income
"
..
groups will ordinarily require
ea
s
ier
acce
ss to civic, social, and com-
mercial centers than the
a
rea
s
occu
pi
ed
b
y
resident
s
of higher in-
I
come levels. The
r
a
ting
s
hould expr
e
ss the sufficiency,
q
ua
lity, 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
Acces
s
ibil
it
y
of
Schools.
When con-
sidering 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
sc
hool
s
.
Th
e social class of the parents of
children
at
the school will in many instances have a
dire
c
t
bearing.
Thus, physical surroundings of a neighborhood area may be favor-
able and
condu
c
ive to enjoyable, pleasant
li
v
ing in its location. How-
ever,
if
the children of people living in such an
ar
e
a are compelled
to attend school where the majority or a considerable number of
the pupils
repre
s
ent a
far
lower level of society or an incompatible
racial element, the neighborhood under
consid
e
ration will prove
far
less
s
table and desirable
than if
this condition did not exist. Fre-
quently, upon payment of a fee, children in such an area could attend
another school with pupils of their
sam
e
so
c
ial class. However,
desirability of the neighborhood, when compared with competitive
locations, might be adversely affected by 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 desir-
ability of the entire area comprising the school district.
In
cases
where schools are not immediately present, consideration is given to
convenien
c
e and cost of required transportation.
952.
Quality and Accessibility
of
S
hopp
i
ng C
e
nter
s and
Amu
se
ment
s
.
The
c
e
ntral
downtown, commercial, financial and the-
atrical district serves, in some measure, all inhabitants of an Eco-
nomic Background Area. Therefore, the only consideration given
in this feature to the downtown district is its relative distance
and availability to competitive
loca
t
ions. 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
950-952
RATING
OF LOCATION
•
•
ADEQUACY OF TRANSPORTATION
954. Ready access to places of employment, main shop·
ping districts, and other neighborhoods within the city is a requisite
of neighborhood stability. Transportation
itself
is not rated,
but
rather
the adequacy of transportation for the type of residents oc-
cupying the location. The
rating is
m
a
de by comparing the ade-
quacy of
transportation
afforded competing locations occupied by
inhabitants of similar income levels. The highest
rating
is given to
those locations where services and schedules are the best and where
costs are the lowest. The following deals principally with cities
which,
becau
s
e
of
their
size, require the facilities provided by
publ
i
c
transportation
systems. The underlying principles remain the same
for
smaller communities which do not have these systems.
In
the
smaller communities considerations must revolve around the char-
acter of the streets and
sid
e
walks, and the distance from the location
to
the civic, social, and commercial centers.
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, espe-
cially with respect to the frequency of
s
e
rvice, when two or more
means of
tran
s
portation are available. Therefore, the diversification
of
availabl
e
s
ervices is usually a significant factor in determining
location are measured by
their
presence, quality, adequacy, avail-
ability, and the relationship with similar benefits afforded competi-
ti
v
e locations. While the presence of
n
e
ighborhood stores may be
essential to the convenience of occupants of
a
low-income area, the
mere existence of such elements near a location occupied by people
of high incomes would be a destroying influence,
rather than
a favor-
a
ble 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
Church
e
s,
Clubs, and
R
ec
reation
C
e
nt
e
rs.
Similar considerations are
to
be given
to
the
presence, quality, and
di
s
tance to churches, clubs, and recreation
centers.
For
certain
typ
es
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
p
a
rt
or as a whole to the tourist or resort business, almost
the entire
b
as
is
for
stability is represented by the means
provid
e
d
for
recreation and amusement. Ready access to neighborhood
churches, theaters, public and private golf courses, and
park
and
playground
ar
e
as is
alway
s
desirable.
952-955
UNDERWRITING MANUAL
the relative adequacy of competitive locations with respect to trans-
portation facilities.
956.
Qurility
a
nd.
Frequency of Services. The quality of
transportation
in
general, and especially the quality of its man-
agement, equipment, and service, will be reflected in the ratings of
this feature. Frequency of service is another important factor in
determining
Adequa
c
y of Transportation. Long delays occasioned
by waiting for a car or bus, and overcrowded conditions resulting
from infrequent service will
adv
e
rsely affect the rating
if
such incon-
venien
c
es are absent at competitive locations. The permanence of
the common carrier providing the transportation is considered, and
w
here 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 competi-
tive locations is the only proper basis of determining the competi-
tive position of a location as reflected by the transportation cost-
factor relationship. Cost of transportation can be reasonably de-
termined only by considering the
tr
a
nsportation 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 trans-
portation
fa
c
ilities except in small
c
ommunities where such facili-
ties are neither provided nor essential. These families also require
cheaper transportation than do the families of higher income groups.
Reliance upon private automobiles
mak
e
s
it
possible for families, ex-
cept in the low-income group, to occupy suburban areas which are
not served by public transportation
fa
c
ilities, without appreciable
effect upon their transportation requirements.
In
such cases,
if
com-
petitive 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.
Dis
ta
nc
e
from Lo
c
ation to
Serv
i
ce.
The mere
presence of public transportation facilities within the neighborhood
of a location does not indicate adequate facilities. The distance
be-
tween the location and
th
e
boarding point of the public transporta-
tion 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 con-
sumed
in
travel on public transportation lines is of much greater
955-959
BATING
OF LOCATION
I
~
•
·
•
L
_
SUFFICIENCY OF UTILITIES AND CONVENIENCES
961.
Presence
of
Required Utilities.
Marketability of
residential properties and, likewise, mortgage risk are affected by
the presence or absence of such services as police and fire protection,
telephone service, gas, electricity, water supply, storm sewerage, sani-
tary
sewerage, garbage disposal, street lighting, street paving, side-
walks, and curbs. The
rating
should reflect, with respect
.
to these
utilities, the comparative advantages or disadvantages of the loca-
tion under consideration with all competitive locations within the
Economic Background Area. Also,
it
should reflect the degree to
which the present utilities and
conveni
e
nces fill the needs and de-
sires of both the present occupants and the prospective purchasers
in
the neighborhood of the subject location. Utility requirements
will vary with differences in 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 require-
ment.
In
other communities, individual water supplies will prove
adequate for some of the locations. Thus
it
is necessary to
interpret
the present and expected future desires of the market when
rating
this
feature.
It
may generally be assumed
that
the prospective mar-
ket will be composed of 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
utilitie
s
a
nd conveniences being in-
stalled. The
rating
under such circumstances cannot be as high as
it
would be
if
the additional utilities and conveniences were already
present
at
the location. Until the service is in actual existence and
importance than the distance covered. Therefore, the relative ade-
quacy of transportation afforded competitive locations will be influ-
enced by distance only when adjustment,
if
applicable, is made
to
reflect the time element.
In
small communities where public trans-
portation facilities are not available, distance becomes the important
factor.
In
measuring time, consideration must be given to delays
resulting from necessary transfers.
960. Oonditiorn
of Streets and Roads.
Where transpor-
tation is wholly or partially dependent upon the use of private
automobiles or buses, the relative adequacy of such means will be in-
fluenced by the character and conditions of streets and roads. Con-
sideration 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.
,,
959-961
UNDERWRITING MANUAL
..
.
..
""'
LEVEL OF TAXES AND SPECIAL ASSESSMENTS
964.
The
rating
of this feature reflects the effect which
taxes and special assessments may have on the desirability of
th
e
location for home ownership. Therefore,
it
is necessary to deter-
mine the total amount required for taxes and special assessments.
This amount is compared with the amount required for taxes and
special assessments in connection with properties of similar value in
competing areas.
965.
R
e
lationship of Ta»
Bu
r
d
e
n with Competitive Lo-
cations.
The only concern
in
rating
this
f
e
ature is to determine
the
'
relative advantages or disadvantages of the tax level at the sub-
ject location in
compari
s
on with other competitive locations within
the area.
It
is well known
that
the basis for assessment, and often
the tax rate itself var
i
es
for different areas within a city.
Where
·
specific locations 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
t
hough the city has a
r
e
l
a
tively high tax level.
Thus, in an
E
c
onomic Background Area,
it
is possible to have loca-
tions which warrant a
5
column
rating
even though the tax rate.
may be
3%
,
providing this is the lowest rate in the Economic Back-
ground Area.
967.
Nature,
Oost,
and Duration of Special Assessments.
If
special assessments exist, or
if
they are in immediate prospect,
the Valuator should consider the length of time such assessments
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
quali
t
y of
s
u
c
h utilities is substandard. Examples of utilities
and
conveni
e
n
ces
w
hi
c
h offer restricted benefits due to poor quality
are:
(a)
stre
et
s
i
n bad repair,
(
b)
fire protection dependent upon
inadequate
equ
i
pm
e
nt,
(
o)
gas service of insufficient pressure, and
(d)
electric
a
l
se
rvice which
is
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 com-
parison with other competitive locations.
961-967
RATING
OF LOCATION
A!§
$
....
•
•
i._
_
969.
Natural
Phy
siea
l
C
harm and Beauty
of
Location.
In
general, mortgage risk is minimized
if
locations and their sur-
roundings are physically
attra
c
tive. 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 character-
istics is not ratable, but the comparison between characteristics found
in competing locations is the
b
a
sis 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
s
t
reets. Therefore,
it
is equally pos-
sible to obtain high ratings
:for
this :feature in lower priced locations.
970.
Geographical Position of Location. The geograph-
ical position of the location may have a distinct bearing upon the
groups.
APPEAL
968.
The factors affecting this feature are natural phy-
sical charm and beauty of surroundings, geographical position of
location, appearance of street layout, harmonious character of build-
ings, social attractiveness of environment, and freedom from nui-
sances.
In
rating Appeal, consideration is not given to factors in-
cluded
in
other features in the Rating of Location, except as spe-
cifically discussed under the features, Protection from .Adverse In-
fluences 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
nei
g
hborhood in a high price range.
Appeal
is
measured by a comparison between competing areas of
th
e
same price range where
th
e
m
a
rket is made up of the same income
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 bur-
dens are excessive, reject ratings may
be
warranted.
967-970
UNDERWRITING MANUAL
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 inap-
propriate
to
the community. A location under this influence lacks
a
degree of the appeal attributable to other locations in more har-
monious environments. A pleasing variety
that
results in harmoni-
ously 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 com-
petitive 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.
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.
;
970-974
RATING
OF LOCATION
··
--
.
-
-
---~
)
•
•
t-
i
l
SPECIAL CONSIDERATIONS IN RATING UNDEVELOPED SUBDIVISIONS
AND OTHER SPARSELY BUILT AREAS
975. The instructions and principles for developed neigh-
borhoods set forth in the foregoing paragraphs apply equally to un-
developed 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 because of the existence of certain conditions in
combination with certain assumptions. Special consideration is given
various features when
rating
such locations.
The
se
special considera-
tions are
outlin
e
d in succeeding
paragra
p
hs.
976.
Succ
e
ssful new areas are
recogniz
e
d as the
b
e
st mort-
gage lending areas. To be
succ
e
ssful, a new or partially developed
area
mu
s
t
r
e
ach a stage of being substantially built up within a
period of a very few years. Due to the fa
c
t that
most outlying resi-
dential areas will be developed as a result of the decentralization
movement
rather
than as a result of population increases, the eco-
nomic background of
th
e 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 becomes evident when a con-
siderable percentage of lots have been improved, or when a satis-
factory 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
start
-
ing activity in an adjoining
section-is
an orderly procedure which
may greatly reduce mortgage risk. Such a program assures struc-
tures of the same age, and
if
development is halted
for
any reason,
the close grouping of homes will not
decrea
s
e
neighborhood and loca-
tion stability.
978.
In
the early stages of development, most locations
in undeveloped subdivisions will not
warrant
ratings sufficiently
high
to qualify for mortgage insurance unless the ratings are predicated
upon compliance with certain conditions designed to assure satis-
factory standards of the subdivision. Ratings will usually be predi-
eated upon such conditions as installation
0£
streets and utilities,
restrictive covenants applying to all lots
in
the subdivision, liquida-
tion of delinquencies
in
taxes or mortgage debt, and, in some cases, the
construction and sale of a specific number of additional homes. The
975-978
UNDERWRITING MANUAL
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 Re-
port
of Chief Underwriter, FHA. Form No.
2017,
and subsequently
on the commitment.
979.
Relative Economic Stability.
In rating
this fea-
ture, 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
influences is greater
in
an undeveloped or
partially
developed area
than
in any other type of neighborhood. Generally, a high
rat-
ing should be given only where adequate and properly enforced zon-
ing regulations exist or where effective restrictive covenants are
recorded against the entire tract, since these provide the surest pro-
tection against undesirable encroachment and 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 effective because they not only exercise control over
the subject property, but also over the surrounding area. However,
they are seldom complete enough within themselves to assure a homo-
geneous and harmonious neighborhood.
980
(3). Recorded restrictive covenants should strengthen
and supplement zoning ordinances and to be really effective should
include the provisions listed below. The restrictions should be re-
corded 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 in-
clude provision for the following:
a.
Allocation of definite areas for specific uses such as single
or two-:family houses, 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
between buildings
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
)
978--980
RATING
OF LOCATION
L
_
•
•
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 restric-
tive 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 regu-
lations 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
offi-
cially recognized and enforced. Such plans will protect residential
s
treets against becoming noisy, high speed traffic arteries; will estab-
lish 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 jurisdic-
tion 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 stagna-
tion, 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 sit-
uation of area
980
UNDERWRITING MANUAL
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 stand-
ards 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 diver-
sified in nature, should be
at
a convenient
di
s
tance.
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
com-
peting areas.
In
a development
for
the low-income group, an in-
crease 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 trans-
portation
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 fa-
cilities will
be
furnished. Due
to
climate and local custom and
980-984
RATING
·
OF LOCATION
--
-
~
•
•
conditions, street improvements and utilities
that
might be consid-
ered 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 organiza-
tion
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£
domes-
tic sewage in a sanitary and unobjectionable manner 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 cesspools may become a 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.
984
UNDERWRITING MANUAL
986
(1).
Appeal.
In rating
the appeal of an undevel-
oped or other
spar
s
ely
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.
areas,
985
(l).
Le
v
el
of
TarJJes
and Special Assessments. The
tax
and assessment
burd
e
n to
w
hich properties
in
a
n area are liable
exert
s
a
tr
e
mendous influence on
the future
of any residential area.
In
th
e c
ase of an
und
e
veloped area
it
will be necessary
for the
Valuator
to determine what the
approxim
a
te burden will be. He
should ascertain whether the
improv
e
ments are to be
put
in by
the
de
v
eloper
a
nd included in the
lot
price
,
or
w
hether their
cost will be
paid
by yearly
a
ss
essm
e
nts.
In
either case, he should reduce this
expen
s
e to a
front-foot
cost
b
as
is for
purpos
e
s of comparison.
In
mo
s
t
communiti
es
compl
e
te
str
ee
t
improvem
e
nts
and
utilities
ran
g
e
in
c
os
t
from $7 to $15
p
e
r front
foot. When
the
improvement costs
are
g
r
e
atly
in
ex
cess
o
f
t
h
es
e
fi
g
ure
s
,
h
eav
y delinquencies in
pur
c
hase
contracts or
in
as
s
essments may usually be
expect
e
d. The cost of
the
se
improvement
s will not
al
wa
ys decrease with
the
cost of the con-
templated
d
w
ellin
g
,
sin
c
e with small lots and increased density of
population better traffic facilities are needed and
larger
sewer and
wat
e
r
mains must be
in
s
t
a
lled.
Con
se
quentl
y
,
ca
s
es will
frequ
e
ntly
be found
w
here
the
front-foot
impro
v
ement costs
for high
priced
hom
es
is considerably less
than the
co
s
t
of
su
c
h
improvem
e
nts
for
a
low income group with small
l
ots
.
985 (2).
In
the
ca
s
e of a
partially
d
e
veloped area, the
Valuator should
in
v
estig
a
te the
numb
e
r
of
d
e
linquencies in purchase
contracts and in
as
sessments. 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
ex
ce
llent medium
for
r
ecas
ting
accumulati
v
e
burdens from
.
overdue
tax
and assessment payments. The security offered by such plans
as well as
the
lo
w
ering
of the taxes payable should be considered
when encountered.
985
(4).
If
too expensive improvements are installed in
an area
or
an
un
ec
on
o
mical layout
h
a
s been designed,
the tax
and
assessment burden will prove heavy. The
Valuator
will compute
the
entire
ta
x and assessment payment required
for the typical
prop-
erty in any new area and will make his
rating
by comparing
this
payment with
that
"
required
for
typical properties
in
competing
~
\
985-986
RATING
OF LOCATION
~
'
·
•
•
SUMMARY OF SIGNIFICANT CONSIDERATIONS
987. The following classification summarizes the prin-
cipal considerations involved in the
rating
of each feature of
the
Location category
:
Relative Economic Stability
Stability of Family Incomes
Sufficiency of Family Incomes
So
c
ial Characteristics
of
N
e
ighborhood
Occupant
s
Stage
and
Trend of Neighborhood
De
v
elopment
Pr
o
bability of
Forc
e
d
Sal
e
s
and
Foreclosures
Pro
te
ction from
Ad
v
erse
Inftul?nc
e
s
Zoning
Re
s
trictive Covenants
,
Natural
Physical
Prote
c
tion
Surrounding Homogeneous
Ne
ighborhood
Quality of Neighboring Development
Ribbon Developments
Nuisances
Freedom from Special
Hazards
Topography
Subsidence
Earthqu
a
ke, Tornado or H
u
rricane Hazard
Flood
Hazard
Traffic
Hazard
Fire
and Explosion H
a
z
a
rd
s
Hazards
to
Health
Adequacy of Civic, Social,
a
n
d Commercial Centers
Quality and Accessibility of Schools
Quality
and
Accessibility of Shopping Centers
and
Amusements
Quality and Accessibility of Churches, Clubs, and
R
ec
r
e
ation
Centers
Adequ
a
cy of
Transportation
Diversity of Available
Servic
e
s
Quality
and
Frequency of
Ser
v
ic
e
s
Cost of Service
Di
s
tance from Location to Service
Time Required to
De
s
tin
a
tions
Condition of
Streets
and
Road
s
986 (2).
In
addition to the
regular
con
s
idera
t
ions under
Appeal, special
attention
should be given to the :following
fa
c
tors:
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
s
ave the trees and to beauti:fy
the landscape l
d
.
Does sponsorship
c
ontribute to appeal]
98~987
UNDERWRITING MANUAL
(
•
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,
Co
s
t, and Duration of Special Assessments
Appeal
Natural
Physical Charm and Beauty of Location
Geographica
l
Position of
Lo
c
ation
Layout and Plan of Neighborhood
Architectural Attractiveness of Buildings
Social Attractiveness
Nuisances
987
BATING
OF
LOCATION
--
,
..
.......,.._
...
-.
__
.._,..,.,....._
..
41
..
PWll
~
·~
E
ffe
ctive
February,
1938
F
e
d
e
ral Housing
Administra
t
ion
Par
agraphs
General
Ratin
g
Instru
c
tions
1001-1010
Social
and E
c
onomi
c Characteristics
1011-1018
Motivation in
Rel
a
tion to Transaction
1019-1037
Employability and Earning Stability
1038-1049
Relation of
Oblig
a
tion
s to Transaction
1050--10
5
7
Relation of
In
c
om
e to
Tran
s
a
c
tion
1058-1066
Co-makers, Co-signers, Endorsers, and Guarantors
1067-1069
CONTENTS
PART
II
SECTION
10
RATING OF
BORROWER
1001.
The following
in
st
ru
ctio
ns
appl
y to all
ca
ses in
whic
h the borr
ow
er
i
s
a
n
indivi
d
u
a
l
exc
ep
t
t
ho
se
indi
vi
dual
s
and part-
ner
s
hips
eng
a
ge
d in
t
he
p
ro
du
c
t
io
n
o
f
ne
w
dwe
llings
fo
r
s
a
l
e
,
the sale
of
e
x
i
s
tin
g d
we
llin
gs, or
o
ther
w
ise
c
ond
uc
tin
g
t
he
busin
es
s of
r
eal
e
s
tate.
T
he
r
at
ing
gr
id
fo
r
th
e
Ra
t
i
n
g
o
f
Borrowe
r
appears
o
n the
Report of
Mo
rtg
ag
e Risk
Examine
r
(Individu
a
l Borrower),
FHA
Form No.
2016
,
a
nd
c
on
ta
in
s
fi
v
e
feat
ur
es
.
It
is
illustr
a
ted
a
bove.
1002.
R
a
ting
of
Borro
we
r
s
h
a
ll
be
acco
m
pli
s
hed
b
y rat-
ing
se
pa
ra
t
e
ly
e
ach of
fi
ve f
ea
tur
es
.
T
he
fi
ve
fe
at
ure
s have been
wei
g
hted on a
s
cal
e of
100
p
o
int
s
in
o
r
der
t
o
re
ta
in
th
e
rel
a
tive
imp
or
ta
nce of
e
a
ch
w
hen
a
ll
a
re combined
t
o
obtain the Total R
a
ting
of
B
o
rro
we
r.
E
a
ch
fe
atu
re is
ma
rk
ed on a
s
cal
e from
1
to
5
,
5
bein
g
t
he
high
es
t
r
ati
ng
.
After
an
a
ly
sis of
t
he
fac
to
rs
co
m
pri
s
i
n
g a
feat
u
re
,
an
X
m
ark is
pl
ac
ed
i
n the
c
olu
m
n
w
hich is
de
te
rmined to
refl
ec
t
th
e
deg
ree of
r
is
k
in
v
ol
ve
d.
If
th
e
X
ma
rk
i
s
pl
ac
ed in
i:tny
c
olumn
o
t
her
t
han
t
he R
e
ject
c
ol
umn
th
e
fi
g
u
r
e
a
ppea
r
ing in the
mar
ked square
i
s
car
rie
d
o
ve
r
to the
e
x
trem
e
right han
d column of the
1
I
2
3
4
5
FE
ATURE
RE
J
EC
T
R
ATI
NG
3
6
--
9
-
1
-
2
-
15
"'
Soc
ial
an
d
Eco
no
mic
C
hara
c-
"'
'O teri
stics
.a
~
Mo
ti
vati
on in
R
e
l
a
tio
n
5
-
,0
-
-
1
5
- w--
25
t
o
Tra
nsac
t
ion
E
mpl
oya
bili
ty
a
n
d
Ea
rnin
g
4
-
8
-
12
16
20
~
Sta
bili
ty
"'
""
3
6
--
-
9
-
1
2
1
5
.E
Re
lat
ion
o
f
Obli
gat
io
ns
t
o
.e-
Tr
ansa
cti
on
:g
Re
la
tion
of
In
co
m
e to
T
rans
-
5
-
10
-
-
1
5
-
-
20
-
2
5
-<
a
ct
ion
TOTAL RATING OF BORROWER
GENERAL
RAT
I
NG INSTRUCTIONS
Rating of Borrower
PART
II
SECTION
10
RATING OF BORROWER
-
-
-~
J
•
•
grid.
H
the
X
mark is
pl
a
ced in
th
e
R
e
je
c
t
column, the word "Reject"
is
carri
e
d
o
ve
r
to the
ex
t
r
e
me
right
hand
c
olumn of the grid. One
su
c
h
rating
in any
f
ea
ture
w
ill
ne
ce
s
s
itate a recommendation for
rejection of the application for
in
s
ur
a
nc
e.
When the word
"Rejec
t
"
appears in
th
e
R
a
ting
c
olumn,
it
mus
t
al
s
o
be
w
ritten
in
that
column
on the Total
Rat
i
ng
li
n
e.
If
no
su
c
h rating
appears
af
t
er any of the
features, the final
rati
n
g of
th
e
c
at
e
g
or
y
i
s
obtained by adding the
figures
in
the
Rati
n
g column. The
s
ys
t
em is
so
d
es
igned
that
this
figure will be an indication of the
rating
on a numerical
b
as
is.
1003.
Mortgag
e
ri
s
k is vitally
affect
e
d by the borrower.
In
recogni
t
ion of this
fa
ct
,
the
N
a
tion
a
l
Hou
s
in
g
Act requires
that
a
mort
g
age, to be eligible for
i
n
s
uran
ce
,
must "contain complete
amortiz
a
tion
provi
s
ions
..
.
requiring periodic payments by the
mortgagor not
in
exc
es
s
of his
r
e
asonable ability to
pay
,
a
s deter-
mined by the Administrator."
Th
e
refore,
a
nalysis of all credit
factors is a
n
e
cessary
part
of the risk
rating
s
ystem. This is inter-
preted to mean
that
the
practi
c
e of attempting to make acceptable
an otherwise
in
e
ligibl
e
not
e
or bond by requiring co-signers and
co-makers, not closely
rel
a
ted to the borrower,
i
s to
b
e
di
s
couraged.
Furthermore, the quality and value of real
e
s
t
a
te
se
c
urity
cannot
compensate to any great degree
for
the
l
a
ck of a
s
a
ti
s
factory
borrower.
1004.
Complete information on the borrower must be
assembled.
In
making the Rating of
Borrow
e
r
,
the Mortgage Risk
Examiner may have the following data available:
a.
The
Mortg
a
gor
s
'
S
t
atement accompanying the Mortgagee's
Application for
Ins
u
rance
b,
Exp
e
rience of mortgage
l
e
nding institutions
that
have held,
or are holding,
mortgage
s
on properties owned by the
borrower, including
the
property described in the appli-
cation
o,
Remarks in the Report of Valuator
d.
Results of inquiry directed to
r
e
f
e
rence
s
e.
F
a
ctual Data Reports on the borrower from credit report-
ing
agen
c
ies
f.
Commercial Report from a commercial agency on employers
a
nd corporations, partnerships, or individual
e
nt
e
rprises
from
wh
i
ch
th
e
borrower derives a substantial portion of
his
in
c
ome
g.
Other pertinent information
1005.
If it
is deemed advisable to direct inquiry to any
reference, definite information should
b
e
r
e
quested with the
u
n
der-
standing
that
the information will be held strictly confidential. Defi-
1002-1005
UNDERWRITING MANUAL
nite questions should be asked
in
an attempt to clear up apparent
discrepancies
that
may have appeared
in
information already ob-
tained. 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 writ-
ten form and recorded with other accumulated factual data.
1006.
The procedure used to secure Factual Data Re-
ports from credit reporting agencies is described in Section 2, Under-
writing Procedures. The Chief Mortgage Risk Examiner has author-
ity, 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.
Par-
ticular attention should be given to checking the reported income,
related responsibilities, and the outstanding obligations of the bor-
rower. 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 deci-
sions 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
Transa
c
tion---------------'--------------
25
1010.
The five features are classified into two groups
according
to
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-
1005-1010
BATING
OF BORROWER
•
•
SOCIAL AND ECONOMIC CHARACTERISTICS
1011.
The
rating
of this feature is based upon an anal-
ysis of the borrower in his social and economic relationships, independ-
ent of the mortgage transaction, and is determined by analyzing fac-
tors
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
di
s
tinguish with complete accuracy,
it
is reason-
able and practicable to assume
that
in most cases a borrower's char-
acter 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 fac-
tor
in the desire for maintaining a home. The family
that
pursues
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 fea-
tures
in
terms of Attitudes. The other three features, Employ-
ability and Earning Stability, Relation of Obligations to Transac-
tion, 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 Charac-
teri
s
tics, reflects the inherent attitudes of the borrower. The second
feature, Motivation
in
Relation to Transaction, reflects the relation-
ship 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 con-
templated mortgage obligation. The fifth feature, Relation of
Income to Transaction, reflects the anticipated relationship between
the borrower's financial prospects and the mortgage transaction.
1010-1013
UNDERWRITING MANUAL
the accepted moral and economically sound courses in its everyday
life presents the best mortgage risk. Disregard
o:f
moral responsi-
bilities and
:failur
e
to guard against
exc
e
ssive expenditures endanger
family unity. The presence
o:f
discord discourages the assumption
o:f
continuing responsibilities.
Uns
a
tisfactory domestic relationships
should be readily discernible because they are usually facts
o:f
gen-
eral know ledge.
·
1014.
Associates.
The characteristics
o:f
a borrower
are also indicated by the type of
p
e
r
s
ons with whom he associates.
Individuals who have interests, habits, and ethical codes in common
usually associate with each other. This makes
it
possible to
dr
a
w
certain conclusions by obtaining information regarding the people
with whom the borrower constantly associates.
It
is probable, in
most cases,
that
more significant information is obtained by con-
sidering 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 associates are other than substantial, law abid-
ing, 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 bor-
rowers with established characteristics and borrowers whose char-
acteristics remain to be established.
1016.
.
Attitude toward Obligations.
This
important
factor reflects the borrower's performance with respect
to
the pay-
ment
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
r
e
sponsibility. The borrower
with the best attitude not only attaches importance to the payment
of debts incurred
:for
merchandis
e
or services for
wh
i
ch there is
recurring necessity, but also to the liquidation of debts incurred
for
merchandise or services for which there is only an intermittent need
1013-1016
RATING
OF BORROWER
•
•
MOTIVATION IN RELATION TO TRANSACTION
1019.
The
rating
of this feature is based upon the an-
alysis 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 prop-
erty
to the borrower.
1020.
Oaeh.
Investment.
Cash investment is the amount
represented by the difference between the purchase price of the prop-
erty
and all encumbrances secured by such property. Cash invest-
ment is a directly contributing element
to
motivation. Experience
has shown
that
a
man
.
will make strenuous effort
to
preserve the asset
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 influenced by the degree of cooperation
that
he receives :from the members of his immediate family.
1017.
The condition of the borrower's obligations is an
indication of his attitude toward them.
Past
litigations should dis-
close his control over, and the degree of his adherence to his con-
tractual
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 economic characteristics of the bor-
rower 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 obliga-
tions may be sufficiently careless or irresponsible to
warrant
a reject
rating
of this feature.
1018.
Ability
t
o
Manage Affairs.
This factor requires
an analysis of the borrower's characteristics with respect to his attitude
in the control of his affairs, particularly those with an economic
significance. The borrower with a sense of balance will guard against
assuming responsibilities
that
do not enhance his own or his family's
opportunities with a full measure of compensation. He will also main-
tain
a position
that
will permit some adjustment or adaptation to
unforseen exigencies. He will save, plan, budget his income, and gov-
ern his conduct
in
other activities in a manner
that
will allow him to
adjust, adapt, or arrange his affairs.
1016-1020
UNDERWRITING MANUAL
in proportion to the amount of cash invested in the property. The
greater the
ca
s
h investment, the greater is the incentive
that
motivates
the borrower to
faithful
performance in the transaction. The cash
investment should be sufficient to
indi
c
ate
that
the borrower will
have a continuing motive
to
ke
e
p the mortgage in good standing
until maturity. Therefore,
it
shall be
det
e
rmined
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 encour-
age an attitude toward the mortgage obligation which will justify
the presumption
that
h
e 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
Re-
quirements. 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 influence throughout the life of the loan.
1022.
The cash
inve
s
tment requirement is not a minimum
eligibility requirement
w
hen the borrower is (a) placing a mortgage
on property owned continuously for a period of time sufficiently long
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,
inheritan
c
e,
or bequest.
1023.
Cash investment may be represented by equivalents
in the form of
commodi
t
ies,
inve
s
tments, 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 investiga-
tion to ascertain the validity of
su
c
h representation.
1024.
In
c
as
es
of
r
e
possession of title, the equity
that
may have been established
prior
to
foreclosure shall be deemed as
lost and shall not be
ac
c
epted in lieu of the required cash investment
or portion thereof,
bu
t
shall be
subje
c
t
e
d
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 influenced by this factor, should reflect a more favorable
rating
as the invested equity is
i
n greater amount. Where the bor-
rower is unable or unwilling to make a cash investment sufficient
for
economic soundness the case shall be rejected under this feature.
In
every case, the required cash investment must equal or exceed the
1020-1025
RATING
OF BORROWER
•
•
minimum requirement prescribed in Section
5,
Minimum Eligibility
Requirements.
_
1026.
Motiv
es
for
Borro
w
ing.
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
un
s
oundly.
Gen
e
rally, the re-
financing of
e
xi
s
ting
liens, the
purchas
e
of a home, or the financing
of desirable property improvements may be
r
e
garded as sound
motives.
Th
e
r
e
funding of obligations, prudently incurred, is also a
sound motive. On the other hand, use of the
proc
e
eds
for
specula-
tion, pleasure trips, or
oth
e
r
purposes which
gratify transitory
de-
sires, may
gen
e
rally be
re
ga
rded as
un
s
ound motives.
1027. The
b
as
is of the
an
a
ly
s
is is not the precise
u
s
e
of the loan proceeds but,
rather,
the
ju
s
tification
for the
propos
e
d
use. Thus, indebtedness incurred for business, travel, or education
may or may
not
evidence
prudent
jud
g
ment. The underlying cir-
cumstances should be regarded in the
light
of
their
effect on moti-
vation in the mortgage transaction.
Ge
ne
rally, mortgage loans made
because of illness, debts, or unemployment are
economi
cally unsound.
There may be conditions, however,
that
obviate this general rule;
For
instance, an illness in the family
m
a
y entail an appreciable out-
lay 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 excessively priced, cheaply constructed,
poorly located, or too costly in relation to income.
1028. The application
fr
e
quently 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.
Importan
ce
of
Prop
e
rty
to Borrower.
This
factor indicates the degree of the sacrifice the 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 occu-
pant
is significant in many phases. Foremost
in
this respect is the
fact
that
most borrowers will subject themselves to more sacrifices
in the maintenance of a home
than
in any other obligation. A home
is an
investm
e
nt that
involves more
than
dollars and cents.
It
has
sentimental attachments
that
cannot be entirely measured with
1025-1030
UNDERWRITING MANUAL
..---
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 his-
torical significance, early
association
s
,
proximity of relatives or
friends, desirable social environment, or
a
cc
e
ssibility to daily neces-
sities and
conv
e
ni
e
nces.
1031.
The borrower derives a measure of prestige from
home ownership
that
often enhances
hi
s
position or
that
of his family
in the business and
s
ocial worlds.
1032.
The borrower who acquires property for occu-
pancy in a location inhabited by a class or race of people
that
may
impair his interest in the
property-and
thereby affect his motiva-
tion-should
be ascribed a lower
rating
in this feature to reflect the
diminishing importance of the property to the borrower. Diminish-
ing importance from this source may reduce motivation to a degree
justifying
reje
c
tion 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, because some motiva-
tion may be evidenced.
1033.
The advantages or disadvantages presented by a
comparison between the expenses incident to home ownership and the
cost of rent for similar accommodations are 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.
Howe
v
er, 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 reasonable
to
presuppose
that
the borrower will attach more importance and undergo greater sacri-
fice
for a home used as a permanent residence than he will for a tem-
porary shelter used only during certain periods of the year. The per-
manent home is essentially a necessity, while the seasonal or
part
1030-1035
RATING
OF BORROWER
•
•
•
EMPLOYABILITY AND EARNING STABILITY
1038.
The rating of this feature is based upon an anal-
ysis 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 impair-
ment, reemployment possibilities, reserves and contributions, age,
and health.
1039.
V
e
rsatility.
This factor requires an analysis of
the attributes
that
qualify the borrower for
e
mployment. Versatility
is a desirable quality.
.A.
degr
ee
of versatili
t
y in a borrower may
be
developed by education and training.
It
may enhance and enlarge
his opportunities, because
it
enables him to compete on 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
evidenc
es the
haz
a
rds of occupational im-
pairment or indicates a decline through declining economic necessity
.
.A.
borrower may have little or no education and still qualify for
employment, but education or
training
usually lends greater assurance
of
employm
e
nt, and a higher education or
training
develops greater
adaptability of his talents to the
possibiliti
es
for
advancement.
1040.
Knowledge derived from either education or train-
ing, 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
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 invest-
ment to be tenanted by someone
oth
e
r 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
analy
zed in
order to determine from his annual income whether he can afford
to own the property and
w
hether the contemplated mortgage obliga-
tion will absorb his income to an
e
x
tent
that
will adversely affect his
motivation.
1037.
There will be
o
c
casion
s when the borrower applies
for
a mortgage loan on a property primarily intended
for
sal
e
.
The
borrower may even reside in the property but such occupancy does
not have the same elements of
moti
vation attendant with permanent
occupancy. His motive will be greatly influenced by marketing
possibilities and trend of value.
1035-1040
UNDERWRITING MANUAL
to qualify as proficient in his chosen line
of
endeavor, or in any
oth
e
r
work in which he evidences inherent aptitude.
1041.
Personality.
A borrower's ability to become and
remain employed is in a measure dependent upon his personality.
Personality is reflected in the borrower's poise, speech, tact, appear-
ance, courtesy, sincerity, and alertness. These are the qualities
that
make
for
agreeable association between employer and employee, and
enhance the borrower's potentialities for continued employment and
promotion.
1042.
Employment.
An analysis
of
this factor is im-
pera
t
ive in order to estimate, with the greatest possible accuracy, the
borrower's earning
s
tability. A
borrower
'
s
earning ability depends
upon the exercise
of
his mental faculties, the use
of
his hands, the em-
ployment
of
his funds, or a combination
of
these mediums.
It
is neces-
sary to study the borrower's past employment record because
it
will
indicate his probable future performance. This record will disclose,
through experience and evidences
of
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 em-
ployer. The future possibilities of the borrower with his employer
involve two considerations. The first deals with the inherent poten-
tialities of the borrower for advancement, and the second relates to
the stability
of the
employer. Even though a borrower possesses a
full measure of
natural
ability, his employer's progress may not be
sufficiently satisfactory to indicate a continued need
for
the bor-
rower's
servi
c
es, or to offer opportunities
for
advancement to the
borrower.
1043.
Occupational Impairment.
There are types
of
emplo
y
ment which present hazards to the borrower's earning sta-
bility. Such types include (a) artistic careers subject to
rapid
de-
cline in popular favor,
(b)
occupations in which skill or facility be-
comes gradually impaired, (c) lines
of
endeavor in which gradual
occupational impairment results from the occupation itself; and (d)
occupations
i
n which greater
than
the normal probabilities of acci-
dental disability are apparent.
In
analyzing this factor, major con-
sideration must be given to the
probabl
e
rather than
the possible
development of the impairment to employment continuity.
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 sufficient aptitude to receive adequate compensation, are direct
measurements of mortgage risk. Two borrowers
of
similar ages and
1040-1044
RATING
OF BORROWER
•
•
incomes
m
a
y be totally unlike in
temperam
e
nt
and pursuits,
th
e
reby
co
nst
ituti
n
g entirely
differen
t
mor
tg
age
ri
s
k
s
.
The
on
e
m
ay
se
ek
and know how
t
o
gra
s
p
opportuni
t
ies and
adv
a
ntages,
whi
le the
oth
e
r
is
c
ontent
w
i
t
h his
si
t
u
a
tion.
Fur
t
h
e
rmor
e,
the
o
ne
m
ay be
foll
o
wing a
vo
c
ation
for
which a
reaso
n
able
fut
ure
ne
ed can be
anticipated.
Th
e other may
b
e
trai
ne
d in
high
ly specialized
d
uties
in
a limited field where
i
t
would be
d
i
fficult
fo
r
him to
obta
in employ-
ment if,
for
any reason, his present
p
osition should terminate.
1045.
This
fact-Or
also has
p
a
rti
c
ul
a
r
significan
ce
in
case
s
where the
borrow
e
r
is engaged in
employm
e
nt
of a
temp
o
rary
nature.
T
e
mpor
a
ry
employment may be
that in
w
hich
t
he employ-
er'
s
purpo
s
e or his
u
se
of
th
e
borro
w
er'
s
se
rvic
es are limited as to
duration of time.
In
such cases, however, due
r
e
cognition shall be
gi
v
e
n to the
borro
w
er'
s
ve
r
sa
tility
a
n
d
con
s
e
quent
a
bility
t
o
tu
rn
his
efforts to
s
imila
r
or
o
t
her
li
nes of
e
mplo
y
ment which have
a
s
pects
of
p
e
rmanence.
1046.
R
ese
r
ve
s
an
d
O
o
ntri
b
u
t
i
o
ns
.
Income can
a
lso
be derived from the
employm
e
nt
of reserve fonds which the borrower
has
accumulated
.
In
an
a
lyzing
thi
s
factor, principal consideration
should be directed to the
res
e
rves which produce income,
bec
a
u
s
e
it
is the production of income
that
contribut
es to the borrower's eligi-
bility with
respe
c
t
to his ability to
p
a
y. The
sourc
es
and
soundnes
s
of such reserves are subject to the same careful
analysi
s as income
derived from other
s
ources. Net income derived from other
a
ss
et
s
against which there are fixed charges shall be considered unstable in
comparison with income derived from comparable
a
ssets which are in
th
e form of fixed investments,
s
uch as
unpl
e
dged bonds or mortgages.
The analysis of assets assumes major importance in cases where
assets
mu
s
t
furnish income, in whole or in
part,
for the
liqui
-
dation of
oblig
a
tions.
In
such cases
thes
e
asse
t
s shall be analyzed
as to their degree of
stability
,
a
mount, and liquidity. The presence of
re
s
erves
do
es not
neces
s
arily
re
s
ult in a high
rating
of this feature, nor
does their absence
neces
s
arily
c
ause a low rating.
1047.
A
borrow
e
r
's earning
st
abili
ty may be
s
upple-
mented by
con
t
ributions.
T
he
y
ar
e
subject to
th
e
sam
e analyses as
other
typ
es
of income, and their
soundn
es
s
must be considered in
connection with earning
s
tability.
Unle
ss
con
tr
ibutio
ns evidence
reasonable continuity, they cannot be
regard
e
d as
a
n
y
part
of the bor-
ro
w
er's earnings.
1048.
Ag
e
.
Ag
e is
s
i
gn
ifican
t
in
r
a
ting
t
his
fea
t
ure
only to the degree
that it
h
as
affe
c
ted
o
r
will probably
affe
c
t
the
borro
w
er's employability and
c
on
seq
uen
t
ea
rnin
g
stabilit
y
.
While
the young
borro
w
er may not have
es
tabli
s
hed evidence of complete
training
and experience during his initial period of
e
mployment,
1044--1048
UNDERWRITING MANUAL
RELATION OF OBLIGATIONS TO TRANSACTION
1050.
The rating
0£
this feature is based upon an anal-
ysis
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 effect
0£
obliga-
tions on financial capacity. The
rating
0£
this feature will be low
where other ascertained obligations will precede the proposed mort-
gage payments in the family budget. On the other hand,
if
the pro-
posed mortgage payments will be accompanied in the budget only by
the bare necessities
0£
food and clothing, the rating will be high.
Where the mortgage payments do not exceed
r
e
nt payments which
the mortgagor would be forced to pay for ordinary shelter, the rat-
ing shall reflect the relatively favorable position
0£
the mortgage
payments.
1051.
Natur
e
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.
The
se
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
stand-
ard
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
youth may be regarded as an asset
rather than
a liability. A bor-
rower in advanced years,
howev
e
r, 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 bor-
rower, 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 employ-
ment sufficiently to reflect in the rating. However, a borrower whose
employability has
be
en interrupted by a grave illness might justify
a reject
rating
0£
this feature unless satisfactory evidence
0£
his
return to good health is submitted.
104S-1052
RATING
OF
BORROWER
•
I
for
one man, and more or less a luxury for another. Likewise, an
obligation involved in the purchase and maintenance of an auto-
mobile may or may not be considered an obligation arising from
purchase and ownership of a necessity.
For
example,
if
the auto-
mobile is classified as 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 eco-
nomic characteristics of the borrower. Cognizance shall be taken
of the judgment the borrower exercises in 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
compensation and encourage the maintenance of an adjustable bal-
ance in his economic situation. Because of unpredictable circum-
stances, 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 ambi-
tions, permit reasonable inference as to
their
probable course in the
future. This likewise holds
true
with respect to obligations
that
do
not
pertain
directly to the family. The very nature of these obliga-
tions 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 evidences sufficient initia-
tive 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 bor-
rower 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 out-
standing any other unpaid obligation contracted in connection with
the mortgage transaction or the purchase of the mortgaged property,
except obligations which are secured by property or collateral owned
by the borrower independently of the mortgaged property. Viola-
tions of this rule require reject
ratings
of this feature.
1054.
When the purchase price of the property involved
in the mortgage transaction exceeds the value, the cash investment
required will exceed the real equity. The excessive purchase 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 secondary indebtedness contracted, or likely
to be contracted, in connection with the acquisition of the property
covered by the contemplated mortgage.
If
the larger cash invest-
1052-1054
UNDERWRITING MANUAL
me
n
t
requires the assumption of an additional obligation incurred
by a loan
ba
s
ed on
co
llate
ral owned by
th
e
borrow
e
r
independen
tly
of the
mortgag
e
d property, such a loan shall require an analysis
embodying not only the
natur
e
and
eff
e
ct of
th
e
obligat
i
on, but also
the quality of the
pledg
e
d
coll
a
teral.
H
the Mortgagors'
St
a
tement
indicates
that
the transaction cannot be closed without violation of
the
Admini
s
trative
Rul
e
,
the subject application shall be
reje
c
t
e
d
under this feature.
1055.
Continuing
ob
l
igations of a contingent nature
should
b
e
analyz
e
d
a
s to
t
he probabilities of
their
remaining remote
or becoming
act
u
al liabilities. While
it
is the responsibility of the
Mortgage
Ri
s
k
Examiner to
a
v
oid the
a
cceptanc
e
of
borrower
s whose
contingent liability will probably cause default,
it
is not to be pre-
sumed
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 adjust-
ments will have their limitations because of the average man's in
c
li-
nation to raise,
rather than
lower his scale of living. The analysis
should reveal
th
e
degree of sacrifice and subordination
that
the bor-
rower,
if
necessary, will make to maintain the contemplated mortgage
obligation in good standing.
1057.
Effect
of
Obligations on Oapaoity.
This fa
c
tor
requires an analysis of the effect of the
borrower
'
s
obligations-
analyzed as to
their
nature and
amounts-on
his earning capacity
and stability and, therefore, on the transaction. Obligations in-
curred for the purpose of acquiring income-producing or income-
increasing assets indicate
a
more favorable condition
than
obligations
incurred
sole
ly for transitory purposes.
Th
e
character and certainty
of the income produced or increased affect the rating. Furthermore,
provisions made for the
r
etir
e
ment of such obligations is one indi-
cation 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 anal-
ysis of the ability of the
borro
w
er's income to pay the contemplated
mortgage
obligation
.
Analysis shall include consideration of such
factors as ratio of property
valu
e
to annual income, and ratio of
total monthly payment to income. These ratios shall be considered
1054-1058
RATING
OF
:BORROWER
I
.J
•
•
in the
light
of the conclusions already formed when
rating
the
fe
a
-
tures, Employability and
Earning
St
a
bility and R
e
lation
of
Obli
-
gations to Transaction.
1059. Ratio of Property Value to Annual Income.
The maximum value of
re
s
idential property which
the
borrower can
reasonably afford to own or purchase
w
ith
his
annu
a
l income
sh
a
ll
be
determin
e
d.
H
the value of the
o
w
n
e
d or purchased property is
not properly
re
lated to
th
e
borrower'
s
i
nc
ome, a
sub
s
tantial
ri
s
k is in-
volved in the making
o
f
a mortgage loan to him.
In
such a
c
a
se,
a reject
ratin
g of this
fe
a
ture will be
w
arranted. Because the most
favorable
r
a
tio of
prop
e
rty
value to
a
nnual
incom
e
in one
ca
s
e
may be
s
ub
st
anti
a
lly
diff
e
r
e
nt
from
t
h
e
mo
s
t
fav
o
r
able ratio in
another
ca
s
e,
it
s
influ
e
n
c
e on the
ra
t
in
g of
t
hi
s
feature cannot
be
ascertain
e
d mechanically. Such
rul
es as the one
t
ha
t
a man should
not
underta
k
e
to
purchas
e
a
property
w
hen the value exceeds two
or two and one-half tim
es
his
yea
r
ly income, cannot be applied
blindly. An
ex
c
e
s
sive
r
at
io
u
s
uall
y forces upon the borrower a
standard of
l
iv
ing out of proportion to
hi
s
a
nnual
inc
ome.
Furth
e
r
consideration must be
giv
e
n
to
the
exp
e
n
s
e
of owning and
main
t
ain
:
ing a larger
a
nd more expensive property
than
his earning capacity
would
ordi
na
rily justify.
1060.
Ratio of Total
M
o
n
t
hly
P
a
y
me
nt
to
Inco
me
.
Thi
s
ratio
r
eve
als the
d
e
gree to which the monthly mortgage
paym
e
nt
absorbs monthly income, and therefore reveals the proportion of
that
income
a
vailable
for
other living expenses and obligations.
In
turn,
consid
er
ation is
g
i
v
e
n to other
li
v
ing
expen
se
s
and
obliga
-
tions, such as number of children and other dependents, the bor-
rower's
scal
e
of living
,
co
s
t
of home
m
a
intenanc
e, and
payment
s re-
quired by
oth
e
r
obligation
s
.
In
general, the more burdensome ratios
result in
low
e
r
ratings.
1061.
As in the factor,
R
a
tio of
Prop
e
rty
Value
t
o
A
nnual
In
c
ome, no definite zone
limi
t
s can be pre
s
cribed within
which the
ra
t
io of
total
monthly
p
a
ym
e
n
t
.t
o
incom
e must fall. The
influence
it
w
ill
have on
determini
ng
the rating
of
this
feature
cannot be
asc
e
rtained mechanically. Examples
cit
e
d in the follow-
ing
paragraph
s must not
b
e
interpret
e
d
a
s prescribing positive rules
for
the
m
a
k
ing of
ratin
gs
,
for
the
y
ar
e
in
t
ended
t
o
se
rve merely
a
s
guides in r
ati
ng
thi
s
f
ea
t
u
r
e
.
It
i
s
obv
ious
that
a favorable
ratio
between monthly mortgage
obligatio
n
a
nd income
for
one
borrow
e
r
may be an
u
n
favorable
ra
tio for
ano
the
r.
Althou
g
h the two bor-
r
owers may
h
a
ve the
sa
me
a
mount of monthly
income
s and monthly
mortgage
o
bli
gat
ions, a
lo
we
r
fea
t
ur
e
r
a
t
ing may
r
es
ult
in one case
t
h
a
n in
t
he
ot
h
e
r
becau
se of a wide
d
i
ff
ere
n
ce
in
th
e
nature
.
of
their
family
resp
onsi
bilitie
s
and
o
t
her
obli
g
ations.
1058-1061
UNDERWRITING MANUAL
- ----
-
---~~----
-
--
ment of the Mortgage Risk Examiner, the monthly payment will
not allow a sufficient remainder 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
a
c
companying 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 Eco-
nomics and Statistics of the Federal Housing .Administration. The
AVERAGE ANNUAL INCOME
7000
6000
5000
4000 3000
2000
......
~
Cl:
..J
~
~
~
~
400
~
300
~
~
200
100
0
$1000
1062.
Generally speaking, as family incomes are found
to
be in lower
brackets
,
pro
g
ressively 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
a
nd with his financial resources. H, in the judg-
1062-1063
RATING
OF
BORROWER
•
•
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 des-
ignated "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 fami-
lies 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 Mort-
gage Risk Examiner whose
further duty
is to determine the differ-
ence 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
unac-
ceptable risk for insurance.
1066.
This
feature reflects the
final
judgment of the
Mortgage Risk Examiner
in
determining the ability of
.
the bor-
rower's income to discharge the mortgage obligation, and shal] reflect
a
rating
comparable to the relationships
that
exist between the bor-
rower's available income and the mortgage transaction.
CO-MAKERS, CO-SIGNERS, ENDORSERS, AND GUARANTORS
1067.
In
some cases
the title
of the real property in-
volved 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,
1063-1068
UNDERWRITING MANUAL
and intere
s
ts of co-makers, co-signers, endorsers, or guarantors who
do not have a title interest in the real
esta
t
e
involved in the applica-
tion
for
mortgag
e
insurance in the following cases
:
a.
Wher
e property is in the
nam
e of either the husband or
wife, but not both, and both
s
i
gn the credit instrument,
their joint income and
cr
e
dit
ch
a
ra
c
ter shall be
consid
e
red
in
th
e
ra
t
ing of the
borro
w
er. This would not be true,
ho
w
e
ve
r,
i:f
the husband or
wi
fe were legally separated.
b,
Wh
e
re a son or
daught
e
r
of
l
ega
l
a
ge
s
igns the credit in-
st
rument with the parent or
paren
ts, weight may be given
to
th
e amount of income
su
c
h a son or daughter can and
will
c
o
ntribute. At the
di
s
cr
e
tion of the Mortgage Risk
Examiner, this will also
b
e
permitted in cases involving
clo
se
re
latives where
it
is
a
ss
ur
e
d
that
their own interest
in the
o
b
ligation is
sincer
e and dependable.
1069.
U
nder no
cir
c
um
sta
n
ces
s
hould
co-mak
e
r
s
,
co-
signer
s
,
e
ndorser
s
,
a
nd guarantors be required to have a vested
intere
s
t
in the
owner
s
hip of the
mor
t
gag
e
d
p
roper
ty
w
hen such
requirem
e
nts
would
compromi
se
the probable
do
w
er
ri
g
ht
of
a
husband or wife, or
jeopardize
prob
a
bl
e inheritances.
1068-1069
RATING
OF BORROWER
1101
Effective
February,
1938
Federal Housing Administration
Paragraphs
General
Rating Instructions------------------------------------
1101-1110
Organization and
Competence of Management_ 1111-1120
Motivation
in Relation
to
Transaction
1121-1127
Financial Condition----------------------------------------------
112$-1143
Prospective Earning
Capacity
and Stability
1144-1151
CONTENTS
PART
II
SECTION
11
RATING OF COMMERCIAL
BORROWER
1101.
The principles and procedure outlined herein are
applicable to cases involving corporations regardless of type of busi-
ness, and individuals or partnerships engaging in the production of
new dwellings for sale, or in the sale of existing dwellings, or other-
wise conducting the business of real estate.
In
this classification
are,
operative builders, real estate developers and operators, mortgage
lending institutions, and owners of real estate in quantity, as distin-
guished from individuals who hold properties for
their
own occupancy
or long term investment. References made to the commercial bor-
rower 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 (Com-
mercial Borrower),
FHA
Form No. 2016a, and contains four features.
It
is illustrated above.
1102.
Rating
of Commercial Borrower shall
be
accom-
plished by rating separately each of four features. The four
features have been weighted on a scale of 100 points in order to retain
FEATURE REJECT
1
2
3
4 5
RATING
3-- 6-- 9-- 1-2- ~ =
Organization
and
Competence of
Management
4
8
12 16
2-0- ---
Motivation in Relation
to
Trans-
action
1-8-
24
30
---
6
12
Financial Condition
-H-
21 28
35
---
7
Prospective
Earning Capacity and
Stability
TOTAL RATING OF COMMERCIAL BORROWER
GENERAL RATING INSTRUCTIONS
Rating of Commercial Borrower
PART II
SECTION
11
RATING OF COMMERCIAL BORROWER
•
•
the relative importance of each
w
hen all
ar
e combined to obtain the
Total Rating of
Commer
c
ial Borrower. Each
f
e
ature
i
s marked on a
scale from
1
to
5
,
5
bein
g the
hi
g
he
s
t
r
a
ting.
After
analy
s
is of the
factors comprising a feature, an
X
mark is placed in the column
which is determined to reflect the
d
e
gree of risk involved.
If
the
X
mark is
plac
e
d in any column other
than
R
e
ject the figure
a
pp
e
aring
in the marked
squ
a
re is
carri
e
d
o
v
er
to
the
ex
t
reme
right
hand column
o:f
the grid.
If
the
X
mark is placed in the
Rej
e
ct column, the word
"Reject" is
carri
e
d over to the
extrem
e
ri
g
ht
hand column of the
grid. One
su
c
h rating in
any feature will
nece
ss
itate
a
recommenda-
tion
for
rejection of the application
for
insurance. When the word
"Reje
c
t"
app
e
ars in the
Rating
column,
it
mu
s
t
al
s
o
be
w
rit
te
n in
that
column on the
Tot
a
l
Rating
line.
H
no
s
uch
rating
appears
after
any of the features, the
fina
l
rating
of the category is obtained
by adding the figures
in
the
Rating
column. The system is so de-
signed
th
a
t
this figure
w
ill be an indication
o:f
the
rating
on a
numerical ba
s
is.
1103.
Complete information
on
the commercial borrower
must be assembled.
In
making the
Rating
of Commercial
Borrower
,
the Mortgage Risk Examiner may have the following data available:
a.
The
borrow
e
r's
late
s
t
balan
c
e
s
h
eet and operating statement
attached to the Mortgagee's Application
:for
Insurance
b,
Exp
e
rience of
mor
t
gag
e
lending
in
s
titutions
that
have held,
or are holding mortgages on properties owned by the bor-
rower, including the property described in the application
c.
Remarks in the Report of Valuator
d.
Re
s
ults of inquiry directed to
referenc
e
s
e.
Mer
c
antile commercial
report
on the business
f.
Factual Data Reports on principals
g.
Other pertinent data
1104.
The Mortgage Ri
s
k
Ex
a
miner may request the
applicant or the approved
mort
g
agee
to
:furnish documents,
s
tate-
ments,
report
s
,
articles of incorporation,
by
-
la
w
s, or other detailed
informati
o
n
that
w
ill
en
a
ble him to
c
omplet
e the
rating
.
He should
se
c
ure additional pertinent information from all available sources.
The information secured may include an explanation or elaboration
of
items appearing in the
finan
c
ial
s
tat
e
ment, operating statement)
statement of
busines
s
experience
,
re
c
ord
a
nd history of the corpora-
tion,
list
of officers and
dire
c
tor
s
,
and, particularly
if
the borrower
is an operative
build
e
r, information relative to the technical knowl-
edge and
a
ctual experience, executive ability, and general
training
of
the individual or individuals comprising the
mana
g
ement. Verbal
information
s
h
all be
r
e
du
ce
d to written form
a
nd
record
e
d
w
ith other
ac
c
umulated
factu
a
l data.
1102-1104
UNDERWRITING MANUAL
ORGANIZATION AND COMPETENCE OF MANAGEMENT
1111.
The
rating
of this feature is based upon an an-
alysis of
the
·
past
.
performance of the commercial borrower in order
1105.
The procedure
u
s
ed to
se
c
ure credit reports from
approved
a
ge
n
c
i
es
i
s
de
sc
rib
e
d in
S
ec
t
ion
2,
Underwritin
g Pro-
cedures. The
C
hi
ef
Mort
g
ag
e Risk
E
x
aminer has authority,
in
all
case
s
in
whi
c
h he
con
s
ider
s
it
nece
ss
ary or
a
dvi
s
able, to obtain com-
mercial reports on
th
e
commer
c
ial borrower and
parent
or
sub
s
idiary
corporations, and
F
ac
tual
D
a
ta Reports on the principals from
credit
repor
t
ing
a
gen
c
ies
a
pproved by the Underwriting Division,
Washington, D.
C.,
and
as
s
igned to service the territory.
1106.
Th
e Rating of Commercial Borrower requires
careful study of the responsibility and judgment of
th
e principal
owners and the
e
x
perience,
int
eg
rity,
ability, and
ma
n
agement of the
business
display
e
d by the
offi
ce
rs.
It
must be
recogniz
e
d
that
the
security and
s
uccess of a concern is comparable to these same elements
in
the individuals controlling its
o
w
nership and operations.
1107.
In
rati
n
g a
c
ommerci
a
l borrower, corporations and
individuals whose signatures appear as
co-si
gners, endorsers, or
gu
a
r-
antors of the note, bond, or other
evid
e
nce of debt are
con
s
idered
separately
for
the purpose of determining sufficiency of financial
abil
i
ty.
Ho
w
ever
,
all parties to the obligation are rated as one
borrower.
1108.
To
be
considered and rated with the
c
ommercial
borrower,
it
is not
r
e
quired
that
each individual whose signature
appears as co-signer, endorser, or guarantor of the note, bond, or
other
evidenc
e of debt, ha
v
e 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
a
s
mak
e
rs of
su
c
h note, bond, or other evidence of debt.
1109.
The features and
their
weights are as follows
:
a.
Organization and
Compet
e
nce of
M
a
nag
e
ment____
_
_
_
_______
_
___
15
b.
Motiva
t
ion
in Relation to
Tra
n
saction_
_
____
_
_
____
_
_
_______
__
__
20
c.
Financial
Condition-
-
------
-
-------
-
--------
-
----
-
-----------
--
30
d.
Prosp
ec
tiv
e
Earning
Capacity
and
Stability_________________
___
35
1110.
The first feature, Organization and Competence of
Management, requires a study of the
anticip
a
ted
prob
a
bility of
effici-
ent management, based on
evidence
s
in the past record. The second
feature, Motivation in R
e
lation to Transaction,
refle
c
ts
the borrow-
er's attitude toward the
mort
ga
ge
tran
s
action.
.
The
third
feature,
Financial Condition,
r
e
flects an analysis of assets, liabilities, income
and expenses. The fourth feature,
Prosp
e
ctive
Earning
Capacity and
Stability, requires a study of the borrower's financial prospects.
1105-1111
RATING
OF
.
COMMERCIAL
BORROWER
•
to predict the probabilities in its future performance and is deter-
mined by analyzing factors such as organization and history, charac-
teristics of principals, reputation, and attitude toward
oblig
a
tions.
1112.
Organization and History.
A review of the ar-
ticles of incorporation and by-laws will disclose the purpose of opera-
tion, terms, and conditions under which the management has been
conducting the affairs of the borrower. An analysis of the author-
ized, subscribed, and paid in capital will
further
reveal the financial
advantages or handicaps under which the management has been op-
erating. A knowledge of the period of time in active busi-
ness may not be of
essen
t
ial importance in connection with ascer-
taining the degree of competence indicated by the present
manage
-
ment.
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 competence and success of the
present management.
In
the case of a commercial borrower which
has succeeded a 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 success or
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 economic characteristics of the majority owners, direc-
tors, and
officers.
A
further
consideration of analysis is the experi-
ence of the officers who participate in the active management of
the
business, since the degree to which operations have been successful in
the past years will definitely reflect the influence of the individuals
who have been managing its program.
·
1114.
The majority owners in control
of
the fonds are
empowered with 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 judg-
ment may sacrifice immediate personal gains in the interest of
their
corporate pursuits.
If
actively engaged in the business they should
be
thoroughly competent
to
man
a
ge it.
If
not actively engaged
in
the business, the degree of judgment exhibited in selecting a manage-
ment for the business will be revealed by analysis. Imprudent prin-
cipals have been known to transgress on the possibilities of good
management by exhausting the assets of the business to a point
1111-1114
UNDERWRITING MANUAL
where
it
does not possess adequate funds for normal transactions.
Such practice may, in a very short time, result in insolvency. Many
concerns
fail
to
suc
c
eed
becaus
e
they are
left
to run themselves and,
through lack of proper attention by the active principals, sound
policies are
in
e
ffectively executed.
1115.
B
u
sin
es
s
con
c
ern
s
,
in many instances, are domin-
nated by one individuaL This condition is very prevalent
in the
cas
e
of operative builders.
In
su
c
h
instances the invested capital
is derived principally from the individual's personal funds. The
business policy is
a
refle
c
tion of his judgment and experience. The
achievements of the concern are largely dependent upon his personal
dire
c
tion.
In
organizations of this
t
ype
t
he
si
g
nific
a
nce of the prin-
cipal's age cannot be ignored because of 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,
con
s
ideration of his past record
usu
a
lly
re
v
eals the degree of ability,
foresight, integrity, and progress
that
can be anticipated
in future
operations. As is
the
c
a
se in
oth
e
r
fields of endeavor and
enter
-
prise, an operative builder's knowledge of his business, properly
applied,
w
ill
t
ake him a long
w
ay in the
right
direction and should
be a contributing influence
for
favorable consideration.
1117.
R
e
putation.
The
s
ecurity and success of a busi-
ness are a reflection of the same
element
s
in the individuals behind
its
owner
s
hip and management.
Its
repu
t
ation will be patterned
largely
after
the personal reputations of
its
principals. Therefore,
conclusions on the
comm
e
rcial
r
e
putation
c
annot be reached without
a knowledge of the individual reputations maintained by
its
prin-
cipals,
particul
a
rly
t
hose in the management of its activities.
1118.
Attitude
Toward Obligations.
An excellent in-
dic
a
tion
for
determining the commercial borrower's probable
atti-
tude toward the payment of the contemplated mortgage debt is its
manner of
ex
e
cuting
contra
c
tual obligations with creditors.
'
While
this cannot be accepted as complete evidence in the determination
of mortgage
ri
s
k,
it
is a direct clue
to
the
borro
w
er's probable paying
performance. Therefore, careful consideration should be given to
the business record in
di
s
charging obligations.
Do
e
s
t
he company
meet its accounts and notes payable according to terms, or is there
evid
e
nce
that
its
manag
em
e
nt
assumes a careless attitude toward
debts?
Is
the
mana
g
ement argumentative and
arbitrary
in demand-
ing
di
s
counts to which
it
i
s
not justly entitled?
Is it
necessary
for
creditors to enter suit against the concern and reduce
their
accounts
to judgments in order to secure
payment
s of acknowledged indebted-
1114-1118
RATING
OF COMMERCIAL
BORROWER
•
MOTIVATION IN RELATION TO TRANSACTION
1121.
The
rating
of this feature is based upon an analy-
sis 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
im-
portance of the property to the borrower.
1122.
Oash Investment.
For
the same reasons stated
in
Se
c
tion
10,
Rating
of
Borrow
e
r,
the cash
in
v
estment of
the
com-
mercial borrower
in
the subject property
is
a contributing element
to
motivation. Cash investment applies with the same
for
c
e
to
the
commercial borrower as
to
the individual borrower. The minimum
requirements for cash
investmen
t
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 con-
tributing
el
e
ment in determining the soundness of the borrower's
motives.
G
e
nerally, the refinancing of unpaid balances on existing
liens, home development
for
th
e benefit of employees, property
im-
prov
e
ments, 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
•
n
essj
Is
dealing with the company a constant
s
ource
of irritation
and
litigation
?
Has
the
conc
e
rn
ever voluntarily declared itself
in
s
olve
nt
or been forced involuntarily through the
bankrupt
c
y courts
by its creditors
prior
or
subsequ
e
nt
to the assumption of
its
affairs
by the present management
1
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
comm
e
rci
a
l
borrower as co-signer,
e
ndorser,
or guarantor on the note, bond, or
o
t
her
.
evidence of debt of the
mort
g
a
g
e obligation, a thorough analysis of the
attitude
such prin-
cipals maintain toward
their
p
e
rsonal obligations
s
hall
be
ma
d
e
.
1120.
Comp
e
tent
man
a
g
e
ment does not require
t
hat
pay-
ments of obligations be made before the net due dates unless com-
pensatin
g 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
manife
s
t
e
d in other factors of
this
feature,
the
rating
of
the
feature will be lower in proportion to the delay
with which
t
he management
me
e
t
s obligations. The management's
attitude may be sufficiently
indiff
e
rent
to
justify
a
reje
c
t rating
of
this feature.
1118-1123
UNDERWRITING MANUAL
FINANCIAL CONDITION
1128.
The
rating
of this feature is based upon an analy-
sis 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 enter-
prise liabilities are incurred. Therefore, the availability of adequate
operating or working funds is necessary to meet these liabilities.
working capital, or discharge of unrelated business obligations may
be regarded generally as unsound motives.
1124.
Analysis of the proposed use of the proceeds of the
transaction is made
in
the light of its effect on motivation. Fre-
quently 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 commercial borrower will endure
sacrifices in retaining the property. The borrower's motivation
in
this respect should be analyzed from the point of view of invest-
ment and speculation.
In
either case cognizance should be taken of
the possibilities of profitable return.
It
is necessary to ascertain the
importance
that
the commercial borrower attaches to the property
offered as security. Has
it
been received reluctantly for the pay-
ment of a debt, or has
it
been acquired for a logical purpose'[ Does
it
promise profit in money or other benefits
1
1127.
Dwellings held or acquired for speculation have
little importance to the commercial borrower other than the market-
ing 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.
1123-1129
RATING OF COMMERCIAL BORROWER
•
•
A
sound
ent
e
rprise
should
b
e
able to provide operating funds from
e
arnings
deri
ve
d from
i
t
s
ordinary
op
e
ra
t
ion
s
.
An
abs
e
nce of profit
s
hall
requir
e a close analysis of
the
·
commercial
bo
r
rower's
justifica
-
tion in
secu
r
ing
operatin
g funds
from
other sources and of the
eff
ec
t
that
such procedure will have on its
future
financial position. A
temporary
ce
ssation
of
profits may be explainable, and may
justif
y
the
procurem
e
nt
of
oper
at
in
g funds
from
s
ome
o
t
her source.
A
con-
tinued
absen
c
e of profit will
ultim
a
t
e
ly
re
s
ult
in insolvency.
1130.
Sourc
es
,
other
than
profits, from which
funds
can
be obtained include
prop
ri
etary
intere
s
ts, chattel notes and mort-
gages, unsecured loans, hypothecation or sale of
a
sse
ts, expansion
of
c
a
pital
in
v
estment, and
contribu
t
ion
s
.
Becau
se a company may
c
onvert
s
u
c
h
ass
e
ts into cash, an
analy
s
is of the
valu
e
and
liquidity of
such assets is made
in
ord
e
r
to determine the
adequ
ac
y of
operating
funds.
Further, the
effe
ct of such conversion on
the capital
struc-
ture
is
includ
e
d
in
the
anal
ys
is.
1131.
The oper
a
tive
build
e
r'
s
major
problem is
to
dis-
pose of
hi
s properties readily
In
ord
e
r to
obtain funds
for his
con-
tinued
act
i
vitie
s
.
It
is
a
n all
important matter
t
o him to
effe
c
t
a
quick turnover of completed dwellings because his operating funds
may be restricted
until
he
c
a
n make
sat
is
factory disposition of them.
Unless he
h
a
s
substanti
a
l
c
apital
he
w
ill
not
b
e
able to hold
the
properties
in
hi
s portfolio of
in
vest
m
e
n
t
s
.
Hi
s
bu
s
iness
will
be
retarded
or
m
a
y be even
s
u
s
pended
u
n
til
he can
r
e
cover his
inv
es
t-
ment in unsold properties.
1132.
Balan
ce
Sheet.
Th
e
'
balance
she
e
t
is an analysis
of
factsreg
a
rding
the net
wo
rt
h
and
fin
a
ncial position
of
a
bu
s
ines
s.
Detailed
in
str
u
c
tions
in
-t
he
analy
s
is
o
f
a balance sheet
are not
attempted
in
.
this
text.
It
is the
r
es
po
n
sibility
of
the
Mortgage
Risk Examiner to be able to analyze a balance sheet
intelligently.
1133.
Desirabl
e
ratios
b
e
t
w
ee
n
variou
s types of assets
and
liabilitie
s
h
av
e
a
wid
e
l
y
di
versifi
e
d
s
ignificance
in
different kinds
of enterprise. Some
ratios
.
are
pertinent and
some
m
a
y be disre-
garded, dep
e
ndinguponthe nature
of
the
.
line of business. Among
the ratios
mo
s
t
·
commonly used are.
the
.
following
:
·
a.
Quick assets to
current liabilitie
s
b,
Current
asse
t
s
to
c
u
rr
ent
liabili
t
ies
.
c.
Sal
es
to
recei
v
ables
.
·
d.
Sales to inventory
e.
Sa;les
to net
worth
f.
Sal
es to fixed
ass
e
t
s
g.
Net worth to
fix
e
d
a
ss
ets
h,
Net
w
orth
to
currentliabilities
·
i.
Net worth to
total
liabilities
1129-1133
UNDERWRITING
.
MANUAL
1134.
Business difficulties really
fall
into three main
classes, (a) insufficient net 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 insufficient profit as well as the fact
that
insufficiency exists. The
third
condition, which is the next most
serious, may lead to a situation wherein there are insufficient current
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 indeterminable value 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 convertible holdings, 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 indica-
tion 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 income and expense during a specific period of time.
It
reveals the accumulation of profits
or
losses from business
activi-
ties.
In
brief,
it
shows whether the business has been making
or
losing money. Analysis of a series of operating statements will
1134'-1139
RATING
OF COMMERCIAL BORROWER
•
I
L
PROSPECTIVE EARNING CAPACITY AND STABILITY
1144.
The rating of this feature is based upon an analy-
sis 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-
indicate the past trend of
the
business and, to a degree, will assist
in forecasting the future trend.
1140.
Some operative
build
e
rs have a tendency to ex-
pand 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
neces
s
ary to be familiar with the
nature of the disposition of the properties for which commitments
have been issued.
1141.
Ability
to Di
s
charge Obligations.
Commercial
enterprises, in general,
r
e
quire 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
di
s
charge obligations, analysis should be made of the judg-
ment employed to
s
ecure benefits from
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
in
c
ome 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 burden-
some 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 contingencies apparently will remain very limited or
remote or will probably be liquidated.
1143.
In
cases where
it
is required
that
principals join
with the commercial borrower 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.
1139-1144
UNDERWRITING MANUAL
bilities, and ability to discharge the contemplated mortgage obli-
gation.
1145.
Evidences of Net Profit.
It
may be assumed
that
as long as a business enterprise 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 absence of net profit or surplus reserves,
the only alternative sources
for
the acquisition of 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 pro-
duced by the company is necessary for the proper utilization of capi-
tal. Profit is impossible without sales, and sales depend on demand.
Sales cannot rely entirely on need, because need may not be trans-
lated 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
prob
-
ability and character of future net profit. The presence of net profit
at the time of analysis is to be noted,
but
more important is the con-
tinuance 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 offer-
ing 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
merchandise before he has a purchaser.
1149.
Operating
Po
s
sibilities.
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 existence of 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
necessary for a business to be able to regulate its chosen activities
to
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
business to 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.
1144-1149
RATING
OF COMMERCIAL
BORROWER
- -
--
~-
-,
I
J
•
•
1150.
Wh
e
n
c
on
s
id
e
ring an operative builder in the ca-
pacity of a borrower
it
will be
ne
ces
sary to analyze the
c
haracte
r
of
his operations. His
characteristic
s and financial
statem
e
nts
will
not
disclose all the facts necessary
to
determine his desirability as a bor-
rower.
A.
further
determination must be made of
th
e
ec
onomic
soundness of his projects. The Architectural and Valuation Sec-
tions
sh
a
ll be consulted
to
a
s
c
e
rtain
whether the operative builder
borrower is constructing
appropriat
e dwellings in suitable
loc
a
tions.
An operative builder who
giv
e
s
bu
ye
r
s
w
hat
they want, where they
want
it,
deser
v
es a favorable
rating
of
thi
s
feature.
1151.
Ability
to
D
i
s
c
h
ar
g
e
the
Contemplat
e
d Mortgage
Obligation.
The
purpo
s
e of analyzing the commercial borrower is to
determine the degree of credit
ri
s
k involved in the issuance of mort-
gag
e insurance. The previous
f
e
ature, Financial Condition, involved
a study of the past and present
fi
n
ancial position in order to forecast
the future financial situation.
In
this feature the previous factors
pr
e
s
e
nt
an analysis of the
und
e
rlying forces which will govern
the
po
s
sibiliti
es of continuing
bu
s
ine
ss
a
c
tivity. The
de
c
i
s
ion with re-
s
pect to
e
ligibi
lity as
ba
s
e
d on
thi
s
fa
c
tor
s
hall be
predi
cate
d on
evi
-
d
e
n
ces in the fa
c
tors of the
s
e
las
t
t
w
o
feature
s in
t
he
R
ati
ng of
Com
-
mer
c
i
a
l Borrower grid, and will contribute to a high
r
a
ting in this
fe
a
tur
e where
s
uch factors
refle
c
t
a highly desirable
comm
e
rcial bor-
ro
we
r. This factor will effect a lower feature
rating
in proportion
to the borrower's deviation from such standards.
A.
r
e
j
e
ct
rating
in
thi
s feature will be justified
wh
e
n the borrower's prospective earn-
ing capacity and stability are too
u
n
certain to establish, with reason-
able
a
ssurance, its ability to
di
sc
h
a
rge the contemplated mortgage
obli
g
ation.
1150-1151
UNDERWRITING MANUAL
1201
Eft'
e
ctive
F
e
bruary,
1
9
38
F
e
deral Housing
Administrat
i
on
Paragr
a
phs
Gen
e
r
a
l
Rat
ing
In
struction
s
1201
-
1206
Rent
a
bility
of Units
1207
-
1209
Occup
a
ncy
P
e
r
c
entag
e in
Co
m
p
et
iti
ve
Buildi
ngs_
__
_
___
_
__
___
_ _
______ 1210
Likeliho
o
d
of
Seriou
s
Co
mp
eti
ti
v
e
Co
n
s
tru
c
tion
1211
-
1212
Reliability
of
Rental Mark
e
t Data__
_
___
__
_
____
_
__
__
____
___
______ 1213
Reliability
of
Expen
se
Predi
c
tion
1214-1
2
16
Ra
t
ing of
Prop
e
rty_~--------
-
---
--
-
-
-----
-
--
--
-
---
----
--
--
-------
1217
Rating
of
Lo
ca
tion
__
_______
___ ___
__
_
_
____
_
_____
_
________
_
______
__
1218
Expen
s
e
Ratio
__
___
_
_____
__
_
__
___
_
_
_
__
_
___
_____ ____
_______
_
______ 1219
CONTENTS
PART
II
SECTION
12
RATING OF EARNING EXPECTANCY
1201.
Th
e
cate
gory,
Rati
ng
0£
Earn
i
ng
Expe
c
tan
cy,
i
s
ut
il
i
z
e
d
onl
y in
con
nect
i
o
n
w
i
t
h
m
ortga
ges
sec
u
re
d
b
y ren
ta
l
in
c
ome
dwelli
ng
p
ro
pertie
s
.
B
ef
ore the
R
atin
g
0£
E
arning
Expec
ta
ncy
c
an
be
establi
s
h
e
d the
R
at
in
g
0£
P
r
o
pert
y and
th
e
R
a
t
i
ng
0£
Location
mu
st have
b
een
c
o
mp
l
e
ted.
W
hen the total
Ra
ti
n
g
0£
E
a
rning
E
x
p
ectancy has
b
ee
n
estab
li
s
hed
t
he
r
es
ult
i
s
u
se
d
i
n the R
a
tin
g
0£
Mortgage
P
a
t
te
rn
.
1202.
T
he
t
o
t
al
Ratin
g
0
£
Earnin
g
E
x
pectancy
i
s a
ra
t
-
ing
0£
t
he certainty,
pro
bable
flu
ctuat
ion, and probable
rat
e
0£
de-
cline
0
£
t
h
e
net
earnin
g
ex
pectan
cy
0
£
t
he
propert
y.
It
is a
meas
ure-
FEA
TU
RE
RE
J
EC
T
1
1
I
2
3
4
5
RATING
3 6
-9
-
-12
-
15
Ren
tab
ili
ty
o
f
Unit
s
1
2--
3
--
-.-
5
Occ
upancy
Percentag
e
i
n
C
om-
p
etitive
Buildings
2
-.-
6
--
8
--
10
Li
ke
lih
oo
d
o
f
S
er
i
ou
s
Co
m
peti-
t
i
ve
Constr
u
c
t
io
n
2
-
.-
-
6
-
8
10
Reli
ab
ilit
y of
Rental
M
arket
Dat
a
2
-.-
-
6
-
-
8
-
10
R
e
li
ab
ility
of
E
x
p
ense
Pr
e
d
i
c-
t
i
on
3
-
6
-
9
-- ~
15
R
ating
o
f
Propert
y
3
-6-
-
9-
-12
-
15
Ratin
g
o
f
Lo
cation
•
8
--
-
12
-
-1
6
-
20
Ex
p
ense
Ratio
TOTAL RATING OF EARNING
EXPECTA
.
NCY
GE
NE
R
A
L
R
A
TI
N
G
I
NS
TRUCTIONS
Rating of Earning Expectancy
PART
II
SECTION
12
RATING OF EARNING EXPECTANCY
i
J
•
•
ment of mortgage risk in terms of the qualitative
charact
e
ristics of
the earning expectancy. The Rating of
Earning
Expectancy cannot
be completed until an estimate of the earning expectancy has been
made in accordance with the instructions given in Section
15,
Valua-
tion of Rental Income Dwellings.
It
should also
be
noted
that
the
last step in valuation, namely,
c
a
pitalization, should not be com-
pleted until a:fter the Rating of
Earning
Expectancy has been estab-
lished inasmuch as the
rating
it
s
elf should be used as one of the
determinants of the proper capitalization rates used to convert the
earning expectancy into a final
value
.
estimate.
1203.
The
Rating of Earning
Expectancy shall be accom-
plished by
rating
separately each of eight features, in accordance
with
the
principles outlined in this Section and Section
6,
Meth-
ods of Mortgage Risk 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 combined to 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
a
nalysis 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 necessitate a recommendation
for
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
r
a
ting
appears
after
any of the
features,
the
.
final
rating
of the category is obtained by
a
dding the
figures in the
rating
column. The system is
so
designed
that this
·
figure will be an expression of the
rating
on a numerical
b
a
sis.
1204.
The eight features which are rated to
d
e
termine
the total Rating of
Earning
Expectancy are listed below with
the
weights which have been ascribed to them:
a.
Rentability
of Units
------------------------------
-
------
15
b.
Occupancy Percentage
in
Competitive
Buildings_____
__
_
__
_ _
5
c.
Likelihood of Serious
Competiti
v
e
Construction______
___
___ 10
a.
Reliability of
Rental
Market
Data---
-
--------------
-
-----
10
e
.
Reliability of Expense
prediction------~---------------
-
--
10
f.
Rating
of
PropertY-----------
-
--------------------
--
--
-
-
-
15
g
.
Rating
of
Location------
-
----
-
---------------------------
15
h
.
Expense
Ratio________
_ _
__ __ __
__
___
______________
_
______
_
20
1205.
In
establishing the several ratings
it
is highly
im-
portant
to bear in mind the relationship between mortgage risk and
1202-1205
UNDERWRITING MANUAL
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 compari-
sons 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 occu-
pancies,
at
current rental rates, can be readily obtained in the current
market, intermediate or low ratings may be justified
if
evidence indi-
cates a strong probability
that
the market will become oversupplied
and cause a future recession in rental rates during early future years.
1209.
To establish a
rating
of Rentability of Units, con-
sideration is given to those
factors
used
in rating
the features
in
the
Rating of Location and the Rating of
Property
which appeal to ten-
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 esti-
mate 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 significance in the measurement of mort-
gage risk until
it
is described in qualitative terms which indicate its
characteristics. There must be a determination of the probable sta-
bility 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 fea-
tures 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 compliance with the rules is mandatory.
(
1205-1209
RATING
OF
EARNING EXPECTANCY
J
•
•
LIKELIHOOD OF SERIOUS COMPETITIVE CONSTRUCTION
1211.
This feature, Likelihood of Serious Competitive
Construction,
v
iews future competition in terms of probable new
construction of similar accommodations in the immediate neighbor-
hood or in strongly competitive neighborhoods. The presence of
vacant land which can, under existing zoning ordinances and other
restrictions,
b
e used as sit
e
s for the construction of competitive
buildings,
mu
s
t
be balanced against the actual probability of such use.
The
follo
w
ing table is used to rate this feature
:
Likelihood
of
L
a
r
ge
A.mount
s
of
Competitive
Construction:
i~l~~f
u
!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
thre
e
or four years :from the date of analysis.
The
imminen
ce
,
in point of time, of competitive
constru
c
tion should
color the
rating
ascribed.
OCCUPANCY PERCENTAGE IN COMPETITIVE BUILDINGS
1210.
It
is presumed
that
this feature, Occupancy Per-
centage in Competitive Buildings, is most successfully rated when
statistics showing average vacancy percentages in competitive build-
ings are available.
It
deals with future probable competitive rela-
tionships only by inference
inasmu
c
h as
it
is rated in terms of cur-
rent occupancy
percentag
e
s.
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
Comp
eti
ti
v
e
Space
:
t
n column
96o/o
to
lOO
o/o
-----
-
------------------
--
- -
--
--------
--
- -
----
-
-----
5
91
o/o
to
95
o/o
--
--
---
-
-------------
-
--------- 4
86o/o
to
90
o/o
----------
-
---
-
-
--
--------
-
-
---
-
-------
- -
-
--
-
-
--
-----
3
79o/o
to
85
o/o
-
-
---------
-
--
-
---------
-
--
-
---
- -
-------
-
-
--
-
--
-
-----
2
70o/o
to
78
o/o
-
----------
- -
-
----
-
----
-
-
-
--------------------
-
------ 1
Less
than
70
o/ o
R.ej
e
ct
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
rentabilit
y
.
Room
siz
es
,
numbers of
rooms in the apartments,
tran
s
portation facilities, and the character
of local
cent
e
rs near which the property is located are considered in
relation to
th
e
preferences of prospective
t
e
nants in the rental market.
1209-1212
UNDERWRITING MANUAL
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 ex-
pense data compilation has been
complet
e
.
This feature takes
into
account the uncertainties of the expense prediction which remain
after
the compilation
0£
data. The
chara
c
ter
of the required data is
indicated in Section
15,
Valuatio
n of R
e
ntal Income Dwellings and
Section
18,
Compilation and R
ec
ordation of
Data
.
To
est
a
blish this
rating
an analysis is made as
t
o
the reliability of all information hav-
ing a bearing on the amounts which will be required to operate, main-
tain, and manage the property.
It
is the
qu
a
lity or degree of certainty
of the
expens
e
foreca
s
t
w
hich
i
s
rated, not the apparent
significanc
e
of the data. The
rating
is
decre
as
ed when data are meager, unreliable,
or of uncertain quality.
It
is decreased when only limited confidence
RELIABILITY OF RENTAL MARKET DATA
1213.
The
rating
0£
this feature,
R
e
liability
0£
Rental
Market Data, is not based upon the failure of the Valuator to assem-
ble data
of
a reliable character.
It
is
pre
s
umed
that
rental market
data compilation has been
complete
.
This feature
tak
e
s into ac-
count the uncertainties which remain
after
the compilation 0£ data.
The character of the required
da
ta
is
indic
a
ted in Section
15,
V alua-
tion 0£ Rental Income
Dwellin
gs and
S
ec
tion
18,
Compil
a
tion and
Recordation
0£
Data. To establish
thi
s
rating
an
analy
s
is is made
as to the reliability
0£
all
informatio
n having a
bearin
g on the
amount
0£
rent the units will command, the
rapidity
with which they
can be rented and re-rented,
a
n
d the
ext
e
nt
to which they
c
an com-
pete successfully in 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, unre-
liable, 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
dat
a concern-
ing factors which may cause wide :fluctuations in 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-----
--
------------------
-
---
-
-----
-
---
--
-----------
- -
-
5
Good-
-
-------
--
-----
-
-------
-
-
-
-
--
----
- -
--
---
------
~
-
---
-
----
--
4
.
:Fair-----
- -
--
-------
--
-
-
-
-----
---
--
---
-
--
-
-
-
----
-
--
-
------
-
--
-
-
3
Questionabl
e
_______
__
___
_
____
_
__
_ _
______
_
_
_
__
_____________
_ _
___
2
Poor----
--
----------
-
-------
--
--
-
--
---
---
-------
--
-
-
- -
-
--
-
-
- -
--
1
1213-1214
-
--
-
-
---
~
-
l
RATING
OF
EARNING EXPECTANCY
J
I
,,
Place
X
If
category
rating
is-
i
n
column
80to100-----------------
-- --
----
---
---
- -
-------------
-
---
--
---
5
70
to
79-----
-
----------
--
-
-
-- --
-
-
--
-
-
-------
-
--------
-- -- --
----
4
60
to
69- ---
--
-
--------
----
-
--
--
-
-
-
-
--
-----
----------
----
-
--
---
3
55
to
59-
- -
--
--
-
---------
--- -- --
--
------
--
- -
---
-
-----
---
--
----
--
2
50
to
54
-
-
----
------------
--
- -
-------
---
----------------
---
-----
1
Under
50
---
---------
-
---
----
---
'-
---
- -
--
-------------
--
-
---
-----
Reject
1217.
The Rating of
Property
is determined
in
accord-
ance with the principles set
forth
in Section
8.
This feature
is
then rated by using the following table
:
•
RATING OF PROPERTY
•
can be
pl
ac
ed in the correctness of the final estimate of total operating
expen
s
e
s
.
Su
c
h a condition
u
s
u
a
lly
ex
i
s
ts
w
hen there are a limited
number of comparable
properti
es
or
w
here the plan of operation is
untried and operating data are
diffi
c
ult to obtain.
1215.
Special attention is directed
to
all those items of
data concerning factors which
m
a
y cause wide
fluctuatio
ns
in
future
op
e
rating
expenses.
Am
o
ng these the principal one
i
s almost
always the uncertainties in
th
e
t
a
x situation. The present tax burden
may be heavy or light.
A
s
long as
it
i
s
reasonably
.
c
e
rt
a
in not to
change materially, the
fea
t
ure
ra
t
ing
i
s
not
decrea
s
ed on this
a
c
count.
Ratings vary downward
a
c
cord
i
ng to the necessity
for
additional
taxes and the likelihood
th
a
t
t
h
e
y will be levied. Some
o
f
the
con
-
tingencies which require
lo
w
er
rating
s are:
a.
The prospect
that
th
e
prop
e
rty
will become a pa
r
t
of
a
special tax district or be subjected to other
s
pecial
assessments
b.
The financial condition of a county or municipal jurisdic-
tion which lacks population and the resources
ne
ces
sary
to maintain local
se
r
vice
s
now attempted
c.
The likelihood of
a
n
ad
ve
r
se
c
hange of taxing
poli
cy
d.
The
un
c
ertainties with r
es
p
e
ct to the burdens for relief
in
taxation budgets
1216.
The following table is used to establish the
rating
of
this
feature
:
R
·
bill p
.
PlaceX
elia
1
1ty
of
Expense
rediction
:
in
column
Exc
e
llenL-
--
--------------
---
-
-
- -
--
-
---------------------
-
----
-
5
Good------
-
- -
-----------
--
---
- -
--
-
-
---
- -
--
-----------
----
-
---
--
4
Fair__
___
______________
_
_
_ _
____
____
_ _
____
__
__________
___ __
_
____
3
Questi
o
nabl e---
---
-
------
-
----
-
---
-
------
--
-
----------
--
- -
--
-
- -
-
2
Poor---
- -
-
-----------------
--
------
-
----
--
-
------------
-
-------
1
1214-1217
UNDERWRITING MANUAL
1
.
0/'\{\
.
1
£){'\{\
EXPENSE RATIO
1219.
This feature, Expense Ratio, is the most heavily
weighted feature in the Rating of
Earning
Expectancy. The
ex
-
pense ratio is calculated by
di
v
iding the
tot
a
l estimated expense of
operating, taxes, insurance, and
m
a
na
gement by the estimated yearly
effective gross revenue
for
the last year specifically
e
stimated. The
expenses do not include
it
e
ms
for
depreciation or vacancy
allowance
s
but do include all items for
whi
c
h
a
ctual
outla
y
s
will have to be
made.
Th
e
eff
e
ctive 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 collec-
tion losses and all other contingencies which affect the amount of
revenue collection. The
s
ignificance of this ratio as an index
o
f
risk is apparent. A net
in
c
ome of $2,000 per year, which is the result
of
a
n
e
ffec
t
ive 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 $3,500 and expenses of $1,500.
In
the first
case, the expense
ratio
is
60
%
;
in the second case
it
is
42
%
.
A
20
%
rec
e
ssion of rents reduces the
$2
,
000 net income $1,000 in the first
case, but only $700 in the second case.
That
is, the higher
th
e
expense ratio, the
gre
a
ter
the
ri
s
k.
In
determining expense ratios
all fractions are dropped. This feature is rated
stri
c
tly
by the
following table
:
If E R
ti
.
Plac
e
X
xpense
a
10
1s- in
oolumn
Under
35o/o------
-
---
-
--
---
-----
-
---
-
--
-
----
---
----
-
-
-
-------
-
-
5
35o/o
to
44o/
o
---
-
---
--
--
---
---
-
---
-
-----
-
-
--------
-
---
-
---------
4
45
o/o
to
5
2
o/o
____
__
_
_
_ _
___
_
__ ___
_ _
_
__
_
___ ___
_ _
__
____
__ __
_
___
____
3
53o/o
to
59o/o____
_
___
_
____
_
__
_
____
_
___
_ _
_
__
__
_
___
__
_
_____
_ _
__ ___
_
2
60o/o
to
64o/o-----
-
--
---
---
-
-
--
--- ---
--
-
-
-
--
--
---
---
-
--
-
---
-
-----
1
65o/o
and
over--
---
-------
-
---
-
------
---
-
-
-----
-
--
-
------------- Reject
RATING OF LOCATION
1218.
The Rating of Location
i
s determined in accord-
ance with the principles set
forth
in Section
9.
This feature is
then rated by using the
follo
w
ing table
:
If t ti
.
Pla
c
e
X
ca egory
ra
m
g
1
s
-
in
c
i:;l
umn
80
to
100
-
--
--- ----
-
--
-
-
-
--------
-
---
-- --
-
- -
-----
---
--
--
--
-
---
- -
5
70
to
79
-
-------
-
--~----
-
-- -- -- ---
---
---
-
----
- -
---
------------
4
60
to
69-
-
-------
-
----
-
-
~
------
-
--
-
----
- -
--
--
--
--
-
----
-
-
--
-
-
-
---
3
55
to
59---
-
----
--
-----------
-
--
--
--
-
-----
-
-
-
----
-- -- --
--------
2
50
to
54----
-
---
--
- -
----
---
-
-
- -
---
-
-- --
--
-
-
- -
---
---
- -
---
------
--
1
Und
e
r
50
---
-
------------
--
--
----
-
----
----
--
-
--
------
-
---------
R
e
ject
1218-1219
RATING
OF
EARNING EXPECTANCY
..
1 '!)(\1
Etrective
Febru
a
ry
19
3
8
Federal
Housing
Administration
Portur
ra
"
·
P
urp
os
e of
V
a
lu
a
ti
on
--
--
-
--
-
--
------
--
-
--
---
-----
-
----
-
---
------
-
13
01
-13
o5
'i::
'
:
,
"""
The
Char
a
cter
of
V
a
lu
e 1300-1317
·
I)
e
finition of
V
a
lu
e 1308-1314
Sourc
es of
R
ea
l
E
state
V
al
u
e-----
-
------
-
--
---
----
--
-----
-
--
--
13ll>-1317
Implied
Valu
a
ti
o
n
P
ro
cedur
e
-
---
-
------
-
--
----
-
--
-
---------
---
---
-
131&-1
33
2
Axiom
s of
V
a
l
uati
on
--
-
--
-
--
-
---
-
-------
-
-----------
---
---
--
-
-
1319
D
e
lineati
on of
Prop
e
r
ty to
b
e
A
p
prai
s
e
d
__
_
__
_
____
_
____
_
___
__
___ 1320
Su
bs
titu
t
ion
T
h
eo
r
y 1321-1322
Ba
s
ic Pr
oc
edu
re-
--
--
----
-
-
----
----
-
------
-
----
-
----
--
-
--
-
---
13
2
3-1328
Sel
ect
ion
of
M
e
tho
d-
-
----
-
-
--
-
--
-------
-
----
---
--
-
----
----
----
1329--1332
Supplemen
ta
r
y
Pro
ce
dures-
------
-
--
----
--
--
-
------
--
--
-
----
--
--
--
1333-1338
Mechanical Equipment
and
A
c
c
ess
ori
es
--
-
----
--
----
--
-
--
-
------
1334
Dw
e
lling
s on
Higher-U
s
e
Sites-
-----
-
-----
-
---
-----
--
---
--
---
-
-
1335
Lease
hold
E
s
tat
es
--
-
----
-
--
-------
--
---
--
--
-----
-
----
-
----
-
--
13
36
'l'ax
es and
Spe
c
ial
A
sses
sm
e
nt
s_
___
_
___
_
_ _
__
_
__
__
___ ___
____
_
__ _
1337
Valu
at
i
o
n of
Fragm
e
nt
a
l
Prop
e
rti
es
_
_
_
___
_ _
_ _
__
___
___
_
_______
_
_
1338
·
Integral Factors in
Valu
a
tion
-
--
--
-
--
-
--
---
-
--
-
-
-
---
--
-
------
---
-
--
1339--1
3
76
Determlnation of
R
e
nt
a
l Value 1340--1349
Estimation of Remaining
Phy
s
ical and
E
c
onomic Life 1350-1360
Land Valuation by
Comparison-
-
-
----
--
-
--
-
--
-
--
-
-------------
1361-1369
Replac
e
ment
C
o
st of
Property
1370--1376
Valuation
Conc
e
pts
-
-
-
----
-
--------
--
--
------
--
--
------
--
--
-
--
----
1
377-1381
Plott
a
ge
IncremenL-
--
---
--
---
-
----
--------
----
--
------
-
--
---
·
1377
Mark
e
tability and
Conformit
Y--------
---
--
-
--
-
----
-~
-
-
--
--
-
--
1378
En
v
ironm
e
ntal
Changes-----
--
-
----
-
-
-
------
--
--
--
--
--
-----
--
-
1379
D
e
preciation, Deterioration,
and
Ob
sol
esc
ence
__ __
_
_
_
_____
_
_____
_
1380
D
is
tinetion between
Co
s
t
and
Valu
e
_:
__
_
____
_
_ _
__
_
_
1381
The Accuracy of
Valuations---
-
-
--
--
-
--
-
--
-
-
---
-
--
-
--
--
-
---
-
------
13
8
2-1397
Sources of
Errors-
-
-
--------
--
---
-
---
---------
-
--
--
------
-
--
-
-
1382-1383
Rea
s
oning Used in
E
s
tim
a
ti
o
n 1384-1392
Desirability of Methodical
Pro
c
edure 1393-1394
Valuator's
Final
Judgment-
-
--
---
--'
-
---
-
-
----
------
-
---
-
------
1395-1397
(
\
CO
N
TENTS
PART III
SECTION
13
METHODS OF DWELLING VALUATION
PURPOSE OF VALUATION
.1301.
Because the National Housing Act does not permit
the insuring of any mortgage which involves a principal obligation in
excess of a stipulated percentage of the value of the mortgaged prop-
erty,
it
is necessary
for
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 considerations in the risk
rating
process.
1302.
Valuations utilized by the Federal Housing Ad-
ministration 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
meth-
ods used to estimate value. While
it
is possible
that
appraisals will
sometimes vary as a matter of judgment, no variations should be per-
mitted 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 pur-
pose 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
disclosed by valuation, and valuation
is used to analyze the security principally by comparing the amount
of a proposed mortgage 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
..
~
PART III
SECTION
13
METHODS OF DWELLING VALUATION
J
•
•
>
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 de-
sires requires the occurrence of 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 occurrence of future events.
1307.
In
the valuation of real estate, properties are ap-
praised. "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 Ad-
ministration recognizes
that
there are many purposes
for
which valu-
ations are made and
that
there are, of necessity, many possible defi-
nitions 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
of the property recoverable under conditions of foreclosure. Em-
phasis is placed on the order and relative importance of the two
kinds of security. .Security has more to do with the avoidance of
foreclosure
than
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 de-
scribed by him as eligible security in accordance with instructions
in
Section
5,
Minimum Eligibility Requirements. This does not pre-
clude 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
embrace the 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.
1304-1308
UNDERWRITING MANUAL
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-informed typical buyers, acting intelligently, voluntarily,
and without necessity, would pay for the property.
It
always pre-
sumes a price which is justified by the future long-term benefits which
will accrue through ownership to a typical owner.
1309.
The above definition of value describes
..
the ex-
change value concept and places emphasis on the idea
that
value is
a price which typical buyers are warranted in paying. This is pre-
sumed to be equivalent
to
the price a typical owner is justified in pay-
ing, 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
cognizance of a market, either present or implied. There are cases
where the two may be identical in amount, but quantitative differ-
ences 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 accompanying diagram illus-
trates the necessity for careful distinctions between concepts of 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
mort-
gage 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 differences in purpose of
appraisal, the Federal Housing Administration recognizes a some-
what 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
sometimes hypothetical
in
character, especially under market condi-
tions 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 Hous-
ing Administration, marked differences between "available market
prices" and "values" will be evident under both boom and depression
conditions of market. No other definition is acceptable
for
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.
(
1308-1311
M.ETHOD3
OF DWELLING-
VALUATION
•
1311
UNDERWRITING MANUAL
1
I
1311
METHODS
OF
DWELLING VALUATION
I
•
•
~
L
1312.
Valuation, in accordance with the prescribed defi-
nition of value, cannot be
f
e
asible without recognizing
that
each
property
offers a buyer a future income stream in the form of services
or monetary net profits. The essence of 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
b
e
en defined as justified or war-
ranted purchase price. By reverse reasoning
this
definition of the
concept of value controls the considerations with respect to the fore-
casts 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. Nor-
mal 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
re-
sult
in
unsound valuations because generally
it
is accompanied by 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 consider to 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 oc-
curred in
th
e past
m
a
y be a
r
e
liable indication of what will probably
happen in the future. However, an exact repetition of events can
very seldom be contemplated. While the above probably throws sus-
picion on appraisal concepts of normal value,
it
do
e
s not necessarily
imply
that
they are utterly worthless. Without some notion of
the idea of a median trend or
norm
a
l level of value, appraisers
may find
it
difficult to distinguish between value and available market
price. The distinction between the current price and the value must
1312-1314
UNDERWRITING MANUAL
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 useful-
ness. 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 accom-
plished only by an examination of the usefulness of the property.
1316.
The degree of usefulness varies with the char-
acteristics and qualities of the properties, the requirements of the in-
habitants 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 use-
fulness 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 considera-
tions 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 estab-
lishment 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
1314-1319
METHODS OF
DWELLING VALUATION
~
I
I
I
J
•
·
-
L
\
-,
c,
Valuation presupposes a 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 endeavors to estimate prices which represent the
worth, at the time
of
appraisal,
of
the future benefits from
long-term use which will arise from ownership,
rather
than merely prices which can be obtained in the market
f.
Valuation recognizes the importance and usefulness
of
sales
prices, provided
it
is determined whether or not such sales
prices were
fair
and warranted; and provided the motives,
intelligence, and wisdom
of
the parties to the sales, as well
as other conditions surrounding them and influencing the
determination
of
the sales prices, are ascertained and
weighed
g.
Valuation presupposes and recognizes
that
intelligent buy-
ers 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 build-
ing, 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
1
320
(1). Delineation of
Property
to be Appraised.
The Valuator is required to
e
s
timate the value
of
specific properties.
In
a legal
se
nse the word "property " refers to
rights
which are pos-
sessed through acquisition of title,
that
is, of ownership.
It
is these
rights in relation to specific properties which must be valued. They
must be delineated before they can be valued. The nature of the
1319-1320 (1)
UNDERWRITING MANUAL
title held by the
party
whose
rights
are being valued determines the
delineation. Thus,
if
title is held in fee simple, free of all encum-
brances, the rights are the most extensive possible.
If
such a
title
is
encumbered, the rights are
corr
e
spondingly restricted and may be
less valuable, depending largely on the nature of the encumbrances.
For
example, encumbrances in the nature of easements, reservations,
restrictions, and rights-of-way
m
a
y cloud the
title
and lessen the
value of the
o
w
ner's
es
tate.
V
a
luation cannot be made without
knowledge of
encumbran
c
es
or without being based on some assump-
tions regarding them. Title may also confer only the rights estab-
lished by a lease. The Jessee's rights 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
les
s
ee's "property" can be delineated and valued.
In
any
event, regardless of the nature of title, the rights
of
an owner, though
exclus
i
ve,
are never
absolute
for they are always subject to the rights
of the
s
overeign authority, such as the
right
to tax, to regulate and
control as by zoning ordinances or other legislative enactments, and
the
ri
g
ht
of eminent domain.
D
e
lineation of property is affected by
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 conveyed title. Valuators are supplied with legal
descriptions of the prop
e
rties which are offered as mortgage security.
In
each case they are
r
e
quired
to
delineate and describe the portion
which comprises eligible security. Their valuations must embrace
all the property thus
d
e
lineated and d
e
scribed, even though land
in addition to an
ar
e
a
s
uffi
c
i
e
nt
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 purpo
s
e,
i
s
includ
e
d in
th
e property described, or is
found to be appurtenant to it,
th
e
right
consisting of the
ea
s
ement
must also be embraced in the valuation.
1320
(
3).
In
some
in
s
tances the property described may
embrace rights other
th
a
n
right
s
in realty. Proper delineation will
eliminate any such
rights
from the valuation.
Th
e
y might relate to
such things as
s
toves and refrigerators (though
th
ese
are sometimes
clas
s
ed as
re
a
l
ty
,
in
whi
c
h
even
t
they would be included in the de-
lineation),
gard
e
n tools, household equipment, and other chattels or
perso
n
al
prop
e
rty. Some items of equipment, window shades and
scre
e
n
s
,
for
e
xam
ple,
a
re
appur
ten
ant to
t
he real estate
a
n
d, there-
fore, properly
in
cluded in the property delineated. Some rights are
not appurtenant but are "gross",
that
is, they do not run with the
METHODS OF
DWELLIN
_
G
.
VALUATION
1320 (1)-1320 (3)
-
--
-
·-·
-
-
-
--
-
·
-----iii
•
•
land but are simply personal rights vested in the existing owner.
They would not automatically pass
to
a purchaser as would appurte-
nant rights
.
Consequently, they would not be elements of the valua-
tion. 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 exer-
cise of these various
rights
results in the realization of benefits. The
extent and nature of the rights determines the extent and nature
of
the benefits which, 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 vari-
ous types. The
right
to
occupy, or to
lea
s
e,
or to
s
ell vests in any
owner holding title in fee simple unencumbered. The owner might
be an owner-occupant who values the property because of its desira-
bility as a place of residence for his family. Or the owner might be
one who values
it
becau
s
e 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 possessed by any of these owners would be identi-
cal, 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 in-
stitution, a speculator, or any other type of temporay owner.
1321.
Substitution
Theory. The buyer, in any case,
is
not
warrant
e
d 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
facilitie
s
,
equal
de
s
ir-
ability, and equal utility, and subject
to
the same risk of loss
or
possibility of enhancement of 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 ap-
plies to any means of
se
c
uring a
sub
s
titute property, whether by
outright purchase, or by building a duplicate.
1322.
This leads to the conclusion
that
sound valuation
method must recognize the market prices
at
which comparable proper-
ties are
avail
a
ble as the approximate upper limit of valuation.
It
also
means
that
th
e
cost of replacement of a property, by entering into a
construction program, is also the approximate upper limit of possible
1320 (3)-1322
UNDERWRITING
MANUAL
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.
The
s
e
esti-
mates do, however, enter directly into the valuation procedure as
limiting control factors.
·
In
general, these estimates are construed
to be the absolute upp
e
r
limits of valuation.
In
certain cases, how-
ever, 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 limita-
tions of appraisal
data
dictate the basic valuation procedure. Sound
procedure systematically employs, insofar as
it
is practicably pos-
sible, the theoretically correct method of valuation. The basic pro-
cedure embraces the following:
a.
A study of the future utility of the property and of the
motives of
pos
s
ible prospective buyers
b,
A forecast representing the most probable series of
future
.
services to 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 oc-
cupant, or to dollar incomes which 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 expected to accrue during the next year, a typical
early year, or "on the average" in early years. The
third
step, the
conversion of the forecast into a valuation, is accomplished variously,
either by determining warranted prices by comparison of the expected
services with those of other properties on which accepted
valuations
.
have been established, by capitalization
of
predicted monetary returns,
or both processes in combination.
1325.
R
e
turns from Property. The future services
of
properties are
b
es
t
conceived
if
they are visualized as being in the
form of a flow of returns. The returns will be periodic services in-
c
1322-1325
METHODS OF
.
DWELLING VALUATION
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 re-
turns
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
•
~
HE.W CON5,.'ltUt.ilON-~E.MA.1lUNG E.CONOMlt LIFE.
j
~~~~~-=~~h~E~X~IST~IN~G~ro~N~~~RU~~~IO~N~-R~~~Al~Nl-NG-E-CO_"_OM-lt_U_F~~~
eluding actual shelter, enjoyment, pride of ownership, or net income.
They include amenities and monetary earnings. Both forms of re-
turns
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 occupied by 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 useful-
ness 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.
1325-1327
UNDERWRITING MANUAL
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 re-
turns 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 conver-
sion 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 sub-
stantially constant from case to case.
1329.
Selection
of
Method.
The basic procedure is de-
scribed in terms of properties owned in fee simple unencumbered.
All cases require valuation of the unencumbered fee first.
If
the ac-
tual property is a leasehold estate, the value of the leasehold is deter-
mined afterward in accordance with 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
prospective purchasers interested in the direct amenity services which
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 dwell-
ings are correctly appraised· by the method when the motives of the
typical buyers include the intention to live in one of the family
units.
1327-1331
METHODS OF
DWELLING VALUATION
J
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··
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•
SUPPLEMENTARY PROCEDURES
1333.
Suppl
eme
ntary
pro
ce
dure
s and modifications of
the appraisal
p
rocess are
us
e
d to solve
th
e special problems presented
b
y
mechani
ca
l equipment
an
d
acces
s
orie
s,
dwelling
s
o
n
higher-us
e
sites,
lea
se
hold
estat
es,
t
axe
s and special
as
s
essments, and
the
valuation of
fr
a
gmental
prop
e
rties.
1334
(1). Mechanical Equipment and Accessories,
Certain
electric
a
l and mechanical
devic
es are installed in homes.
In
m
a
ny
instanc
es
the install
a
tions are
su
c
h
that
som
e
or all of
this
.
equipment
lo
ses its character
a
s
person
a
l property and becomes an
integral
part
of the real
pr
o
perty.
Equ
i
pment
whi
c
h is
part
of the.
real estate is
part
of the
s
e
curity
for
th
e mortgage on the
property,
and therefore affects the
v
a
lue estimate.
H
the equipment is
wis
e
ly
c
hosen and
in
s
t
a
lled,
it
may
e
nhance
th
e value of
th
e property
to
th
e
full extent of its
c
ost in the
c
as
e of a new dwelling.
H
,
however
,
the cost of
t
he equipment
i
s
too great an outlay in relation
to
th
e
cost of the
stru
c
ture, or
if
the typical buyer cannot afford the
co
s
t of
operating
th
e e
quipment,
it
will not enhance the value of the
prop
-
erty to the full extent of
it
s cost.
Fir
s
t, the Valuator must be
abl
e
to know
ju
s
t
w
hat
equipm
e
nt
in the building is
p
a
rt
of the
r
e
al
property and
w
hat
is
p
e
r
s
onal
prop
e
rty, so
that
he may know
ex
-
actly what
h
e is to
apprai
se
.
Second
,
he must
det
e
rmine to
what
extent the value of the
prop
e
rty
is enhanced by the equipment which
is
part
of the realty.
Insofar
as any of the equipment is in the na-
ture of
chatt
e
l
s
,
he
mu
s
t
omit
it
from
t
he rental value estimates
if
fea
s
ible to do
s
o.
In
any
eve
nt,
value of
c
hattels is never to be
in'."
eluded in
th
e
e
stimate of
v
alue.
1334
(2).
If
the case
involv
e
s
an old structure, and
it
is
intended
that
new
mechani
c
al
equipm
e
nt
and
acc
esso
ries will
b
e
installed in
s
u
c
h
a way as
t
o
become
part
of
t
he realty, the
Valuator'
s
problem is
th
e
same as in
t
h
e
c
ase of
n
ew
s
t
ru
c
ture
s
.
Th
e
Valu
a
tor
must
determi
ne to what
e
xtent the
in
s
tallation will enhance
t
he
I.
1332.
The
C
a
p
it
alization
M
e
thod
is
a
pplied to
rent
a
l
income
dwellin
gs
.
Rental
in
c
ome
d
we
lling
s
are defined as
prop
e
r-
t
i
e
s which
e
x
er
t
appe
a
l
s
ol
e
ly
,
o
r
a
lmo
st solely, to prospective
pur
-
chasers
inter
es
ted typically
a
nd only in the net monetary
return
s
which the properties are
c
apable of producing. Such a purchaser
will consider buying the
p
roperty only
b
ec
ause of
th
e dollar
return
s
he anticipat
es
.
Some
c
ases of
s
ingle family
dwellin
gs are
correctl
y
a
ppraised
onl
y by
thi
s
m
et
hod.
The
se are
ca
s
es in
w
h
ic
h the typic
a
l
available
pro
s
p
e
ctive
buy
e
r
s
are
confin
e
d
to
persons
o
t
her
than
thos
e
who would
w
is
h to live in the premises. The
method
·
is applicable
principally to multi-family dwelling properties.
1332-1334 (2)
UNDERWRITING MANUAL
r
property value. Many of these mechanical devices are subject
to
rapid
deterioration due to the wearing out of moving
parts,
and
to speedy obsolescence due 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'roperties can 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 re-
maining economic life
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 in-
structed to included in his report a separate item representing the
replacement cost of any equipment which 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
commercial or
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 replace-
ment 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 conclusion based 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-
METHODS OF
DWELLING VALUATION
1334 (2)-1335 (2)
-~,
•
•
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
de
sc
ribed cannot apply in
the
case of old
re
s
idences on apartment or
bu
s
i
n
e
s
s
sit
e
s, and therefore a
replacement cost estimate cannot be used for valuation purposes
in
such cases, for such an estimate will always exceed the value of such
properties.
1335
(3).
I
n dealing with properties which are not im-
proved to
their
highest and best
u
s
e,
if
th
e
improvements are
capabl
e
of
producing a net return in
exc
es
s
of
t
he
s
um imputable to the land
and the costs of taxes, operation, and maintenance, then
their
economic
life has not yet terminated and
their
value upon the site may be
determined by the use of the
capit
a
lization method of valuation. The
earnings
of
the improvements cannot be treated as though they
wer
e
to continue indefinitely, when, as a matter of fact, they will continue
for
only a relativ
e
ly
sho
r
t
time.
If
the
re
s
idence has reached the end
of
its economic life, then the value will not be in excess of the worth
of the land plus the salvage value,
if
any, of the improvements.
1335
(4).
If
a site
u
s
ed 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 commercial purposes, 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 pur-
poses. 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
mu
s
t
be an immediate need
for the site for equally
profit
a
ble
bu
s
iness 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
bu
s
iness purposes
until
the
lapse of long periods of time, during
whi
c
h their
owners will re-
ceive
little
or no net
return
from them
but
will have to carry ex-
cessive burdens of taxation and sacrifice the intere
s
t
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 overestimate the value of such properties.
1336
(1). Leasehold
Estates.
Section
201
of the Na-
tional 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 unencumbered
or:
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
e
xecuted
1335
(2)-1336 (1)
UNDERWRITING MANUAL
These steps are
d
e
scribed in greater detail in the following para-
graphs.
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
necessary to be familiar with the terms of the lease. This necessitates
ESTil.IA
T
E
OF
VALUE
OF
LEASEHOLD
ESTATE
--------------- $4,800
ESTIMATE OF
VALUE.-In
m
y opinion
th
e
v
alue or
th
e
p
r
operty
de
s
cri
be
d
above
,
ass
uming
the
contemplated improvement& or new
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.
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Dia
tributi
on of
v
al
u~
e
sti
ma
te
:
Land
..
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•
.
......
..
.
.
.
....
.
..
..
•
••
..
•
$ ••
l,-.500
@
$
...
•
• •
••
•
.30
.•.
.
..
•
... per O
lot
.
II tr
.
f
t.,
a
:i)
.
rt..
Ma
ia
Building
•
.
•.
. .
.
•.
.
.
-
••••
••
$
.
•
/.
4
.0.0.0
.
••• •• ••
B.~maining
lease
term-.30
yrs. r;gowa le
~=;·~;;~·;~
:
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:
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:::::m~:
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:
Annuat!l nr~~~e
5
In
certain localities in the United States considerable numbers
of
residential properties are leasehold estates. 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
cre
a
te two distinct properties. The lessor still
holds his
title
in fee simple, but since
it
is
e
ncumbered by the lease
which he has given, his interest is designated the "leased fee." The
lessee acquires the
rights
to the benefits which the property will pro-
duce during the term of the lease, provided he
do
es
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
es
s
ential 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 pre-
sented with the aim of giving sufficient direction 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 unencumbered by
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 leasehold estate. He
then enters the results on the Report of Valuator in the following
manner:
METHODS OF
DWELLING VALUATION
1336
(1)-1336 (5)
I
I
j
•
•
a
reading of
that
document. A
d
e
cision 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 lessee may not result
in
any loss to the lessor.
On the other hand,
it
may result in substantial monetary gain
to
him.
Such would
b
e
the case
if
the lease provided
that
upon
default
of
the
lessee and consequent
forfeiture
of his rights, all improvements
upon the land
w
ould
r
e
vert
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
leas
e
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
cho
s
en.
Th
e
rate
of
capitalization varies in different cases depending upon,
(a)
the rea-
sonableness of the amounts reserved as
r
e
nt, (b) the certainty
that
the
le
s
see 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 en-
hancing
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
capitalizat
i
on
rate
s
applicable
to
th
e
valuation
of
leased fees
to
ran
g
e upwards from about 4%. The
process of capitalization of a
net rental
receivable
in perpetuity
is
simple, merely involving division of
th
e
yearly rental by the capitali-
zation rate.
·
For
example,
if
the ground
rent
is $90 per year net
to
1336 (5)-1336 (7)
UNDERWRITING MANUAL
I
1
]
(
c
)
V
a
lua
t
i
o
n of
l
e
a
s
ehold
est
at
e
$4,
800
TotaL
.
.
-
-----
--
·
--
---------
-
--------------
$6, 000
( b)
E
s
timated
va
lue of
the
leased
f
ee
:
The
l
e
a
s
e is
w
e
ll se-
cured, land value
h
as
increa
s
ed
s
ince the
l
eas
e
wa
s made,
the
distri
c
t
is well protected
w
i
th appropriate
restric-
tions
and
zoning,
a
n
d
has
developed into a uniformly
d
es
irable
re
s
idential area. It
i
s determined
that
a
fair
capitaliz
a
ti
o
n
rat
e
Of
le
ss
or'
s
g
round
rent
i
s
5%
;
there-
fore,
th
e
valuation
of
the
l
e
as
e
d fee is
$60
divided
by
5%
- -
-
---
-
----
~ -
--
-
-----~
-
-------
- -
---~---------
$1,200
the lessor, and
it
is
a
ss
umed
that the
proper capitalization
rate is
4%, the capitalized value of the ground
r
e
nt
payable in perpetuity
is
$90
d
ivided by 4%, or
$2,250.
If,
instead of 4%,
it
were determined
that
the capitalization
r
a
t
e 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
le
s
sor,
ina
s
much as the lessee has
the right
to
renew his lease forever. Therefore, the total value of the leased fee
in the
exampl
e
quoted would be $2,250 or $1,500, depending upon the
rate
of capitalization.
1336
(8).
Val
ua
tio
n of
the Leasehold
Estate
.
Having
taken the steps
outlin
e
d above, the Valuator will have reached a con-
clusion with regard to
:
a
.
The
to
t
al value of
th
e
prop
e
r
ty
in
f
ee simple unencum-
bered by the lease.
b,
The value of the leased fee
(les
s
or's interest).
The
v
aluation
of
the leasehold estate
(
t
he lessee's interest
in the
property) is then determined by deducting the valuation of
.
the
leased fee from the
total
valuation of the
prop
e
rty
in fee simple
unen
c
umbered by the
l
e
ase. The result so obtained is a close ap-
pro
x
imation and is accepted by the Administration as the value of
the
l
e
asehold estate.
Exampl
e No.
1.
.A
ground lease upon a
s
ingle family resi-
dence site having more
than
5
0
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
re
s
id
e
nce 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)
E
s
timated
value of
th
e
prop
e
rty in
fe
e
s
imple
un
e
n-
cumbered--------
-
--------
-
-
---------
-
--------------
$6,000
Distribution
of
tot
a
l
valuatio
n
:
Land---
-
------------
--
-
-
--
--------------
$1,
5
00
Building
s
-
-
-
--
---
----
-
--
-
-
-------
-
-
-----
-
4
,
500
METHODS OF
DWELLING VALUATION
1336
(7)-1336 (8)
j
1336
(9). The laws of some states fix the methods
whereby lessees of
r
e
sidential properties under long-term ground
leases may "redeem" the ground rentals reserved under
their
leases by
purchasing the fee simple
title
from the lessor, thereby destroying
the lessor-lessee relationship.
In
such instances, the appraisal pro-
cedure must be consistent with the legal requirements.
For
exam-
ple, assume
that
under a state law a lessee has the
right
to redeem
the ground rent by paying the lessor a sum
equ
a
l 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
leas
e
d fee would be $60
divided by
6
%
,
or $1,000
rather
than
$1,200,
and the value of the
lessee's estate would be
$5,000
rather
than $4,800. Legal enactments
•
ESTIMATE OP
VALUE
.
-ln
my
~:i~~~
v
S!e
~AJ;?~ro~!rt~~
g
~~~fR
o
~~1:
1
~~ni~g
t
h~-~;;i;~;;pJaf;d-i-;pr!?e'~~g
or new
ecnstruettcn
descr
i
bed iu
ex
hibit.i,,
ir
any
,
iacoompan
yin
g FHA
F
orm
N
o
.
20
0.fa.,
or
8..'ISU
m
iu
g
t
he
r
f':
p
ai
r1:1
o
r
11.
J
terat
io
uB
or
&d
di
t
iom1,
ti
any,
liated
und
~
r item (J5)
hav
e been CGmp)eted,
is
..••
•.....•.
)JJ:).
.~
J)
.. ~).lJtl'Q.§l'.ed.
.
by
..
Leasa
•...
. .
..
•••.•
..
.
,
.,
..
•..
o
•···
·
··
$.n
.
4,..QQQ
u
Difltr
i
but
i
on
of
v
alue
es
timate
:
Land
••.
..
....
....
.•
•
..
.
•
..
..
..
.••
••
•
$
.
.
•
.
• •
•.•..
.
.•••
500
. .
@
$
.
....•
..
.
.•
.,5.QQ
••••••
per
~
lot, O fr
.
ft
.
,
a
sq,
fl.
Maio
Building
·
·······
··
·-
··
··
··
s
.
.
•
.
....
•
.
..
3.,500
.
.
R
emain
i
ng
lea
s
e
te
r
m
55
i6Qrs
Ga.rage
.
.........
...
.........
.
.•..
-
$
.
••.••..•.
•
•• •
•••••
0
•
••
~=
S
~~if
z:«:l
r~~~t
6%
O
t
h
e
r
Impr
ove
m
e
n
ts
$
.•
~
···
······
·
··.._.
.
.
•
..
•
val
ua
ti
.o:%LQf...l.ea
s
e
d
fee
fl,000
-
(c) Valuation of the leasehold
estate
$3, 000
In
the above example the value of the leased fee exceeds the value of
the land. Likewise the leasehold estate is less valuable than the por-
tion of the total valuation ascribed to the improvement.
In
such
case
s
,
the results are entered on the Report of Valuator in the following
manner:
Total $4,000
(
b) Valuation of
the
leased fee,
$60
divided
by
6%--------
$1, 000
•
In
the foregoing example,
it
will be noted
that
the value of the lease-
hold estate exceeds the value of the improvements. This is because
the land has enhanced in 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 depreci-
ated in value, and
it
is found
that
the owner's expendi-
ture
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
f
e
e simple unen-
cumber
e
d-----------
-
--------
-
--
-
---
-
---------
-
--
-
-------
$4,000
Distribution
of
total valuation:
Land----------
-
-------------
-
--
-
---------
$
5
00
Buildings
---------------
-
---
-
---
-
---------
3,
500
1336 (8)-1336 (9)
U:NDERWRITING MANUAL
METHODS OF
DWELLING VALUATION
1336 (9)-1337 (2)
of the type mentioned have the effect of giving lessees options 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 subleasehold estates 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 lease-
holds. 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 involves more risk than the own-
ership of either a leased fee or an unencumbered property.
Further-
more, mortgage investment in leasehold estates is generally more
hazardous than in unencumbered properties. Consequently, valua-
tion 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 valua-
tion unencumbered by lease by (b) the maximum percentage appli-
cable 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
assessments affect 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 services to their owners.
1337
(2). General property taxes are levied yearly and
must be paid yearly or more frequently. Within any given com-
munity the level of taxes is reflected in the market prices which
properties command, and except in cases where the assessed valua-
tions are not properly equalized, appraisal procedure is not affected,
inasmuch as the market price data and rental data used by the Valu-
ators already contain the necessary adjustments. Differences in tax
levels, however, do affect the comparisons which appraisers make and
should be taken into account.
I
I
J
l
•
'
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 allowance for this
cond
i
tion must be made in the valua-
tion process. Properties against which
s
pecial assessment liens exist
are less valuable than they would be
if
these liens did not exist. This
is made apparent by considering the conditions reflected in the several
cases outlined below.
Case No.
1.
A property free of special assessment liens
but
sub-
ject 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
proper
t
y 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
intere
s
t at
6
per cent per annum on the
deferred amounts. Because
0£
the risk created by the pos-
sibility 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 assessment liens: Value, $5,500 or less.
Case No.
4.
The same physical property subject not only to
general property taxes, but
al
s
o
to a special assessment lien
which is a lien upon all
0£
the properties within the special
assessment district and which continues a lien upon all of
these properties until
it
is entirely extinguished. Special
assessment bonds outstanding,
$500,000.
Assessed value of
the special assessment district, $3,000,000. Assessed value
of the property being appraised, $3,000 or 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
1337 (3)
UNDERWRITING MANUAL
the reasons for this.
Value
,
le
s
s than
$5,500,
probably con-
siderably less.
Ca
se
No.
5.
The
sa
me phy
s
i
c
al property and condition as
in
Ca
se
N
o.
4,
ex
c
ept
that
the
as
sessment
distri
c
t
is broken
down into
zon
es,
ea
c
h of which bears a different
per
c
entage
of the
t
o
tal
l
e
vy
a
ga
inst the
e
ntire district. Assume
that
the
asse
ss
ed value of the property is still $3,000 and of the
entire
di
s
trict
$
3,000,000. However, the property is in an
area which is designated Zone A of the
as
s
essment
di
s
trict
,
which zone is required to pay 20% of the total
distri
c
t
li
e
n
($500,000), or
$100
,
000.
It
i
s s
een 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
asse
ss
ment
dist
r
ict pay
th
e
ir
y
e
arly assessment levies,
the
prop
e
rty apprai
s
ed will be charged
Yioo
of $100,000 or
$1,000 plus yearly intere
s
t
charges. The value therefore
wil
,
l be
le
s
s
than
$5,000, and probably considerably
less
:
1337
(4).
In
Case No.
4,
if
all of the property owners
in the special
asse
s
sment district pay
ins
t
allments of principal and
int
e
rest each time they become due, the
o
w
ner of the specific
property
considered will have to pay
1j
1000
of
$500,000,
or
$
500
,
in yearly
installm
e
nts, plus
intere
s
t. Therefore, the minimum reduction
in
value as compared with
C
a
se
No
.
1
would be
$500.
How
e
ver,
if
an
y
of the other property owners in the
di
s
trict
become delinquent in
their
asse
s
sment payment
s
,
the
delinquen
c
y may cause an increase
in
the amounts which will be levied
ag
a
inst the properties in the district
during the following
ye
a
r. This may result
in
an increase in
th
e
amount of delinquency and necessitate a still greater levy for the
next year.
In
this way,
t
he special
as
se
ssment burden may
moun
t
up year by year, falling more and more heavily upon the shoulders
of those
owner
s
able to
p
ay or unwilling
t
o
ab
a
ndon
their
properties.
It
is
poss
i
ble
for
such burdens to reach the point where owners
in
the
di
s
trict
voluntarily
surr
e
nder
their
properties. This possibility
is
mainly responsible
for
the statement above
that
the value probably
would be considerably
l
es
s
than
$5
,5
00.
If
special assessment liens
of the type mentioned in
Cas
es
No. 4 and No.
5
exist,
it
is
es
s
ential
that
information be gathered with
r
e
gard to (a) the amount of delin-
que
n
cy,
if
any,
(b)
the likelihood of foreclosure by the owners of the
lien, and
(
c
)
the likelihood of a pyramiding of the assessment levies.
1337
(5).
In
cas
es
wh
e
re special
asses
s
ment liens exist,
the Valuator must appraise the
properti
es
as they stand, subject to
the assessment liens.
In
no such case is
it
permi
s
sible for him to
base his appraisal upon the
hypoth
e
tical
condi
t
ion of
th
e
a
s
ses
s
ments
METHODS OF
DWELLING VALUATION
1337
(3)-1337 (5)
·-
-
---
·
--
· ··
·
~
•
•
·
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 mini-
mum
that
would probably be assessed in all the future yearly levies
against the specific property under appraisal.
In
determining
this
minimum. he would be influenced by:
a.
The assessment levy 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 assessment lien 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 assessed value 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 assessment districts are sold, the buyer may either assume
the burden of paying the assessments as they come due, or he may
insist upon the immediate payment by the seller of existing special
assessment liens. 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 assessment liens as well as other conditions.
1338
(1).
Valuation of Fragmental Properties.
Valu-
ators 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
to-
be a
partial
release of security. When only a portion of the prop-
erty 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 Valua-
tor's assignment is found to include eligible land which is
in
addition
to the area required to suitably accommodate the buildings involved
in
the case, the Valuator must indicate on his report what portion
of
the property includes the building improvements and what portion is
1337
(5)-1338 (2)
UNDERWRITING MANUAL
excess land. He must value the entire property described and in
addition distribute this valuation between the 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 excess land is the difference between the valuation
0£
the entire land area and the valuation
of
the area required to suitably
accommodate the building improvements. This
latter
area must be
sufficient,
of
course, to constitute a natural, marketable real estate
entity such as
d
es
cribed in Section
5
,
Minimum Eligibility Require-
ments. 1338 (3). Cases arise in which mortgagors and mort-
gagees 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 accomplished by 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. Sometimes
it
appears
that
the value
0£
the property which will remain under the mortgage af-
ter 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 exceed a reasonable val-
uation because
of
such matters as the presence of necessity or ex-
traordinary 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
w
hich is sufficient
to
compensate for 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 con-
junction with the property to which
it
is
to
be joined may be
0£
con-
trolling significance. However, the necessity
0£
the buyer does not
enter into this consideration. The Valuator must also report any
restrictions which he concludes should
be
required
to
be imposed on
the area sought to be released. Restrictions recommended should be
METHODS OF
DWELLING VALUATION
1338 (2)-1338 (3)
•
•
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
int
e
gral factors
in
the appraisal process.
These are:
a.
The estimate of Rental Value
b,
The estimate of Remaining Economic Life of Building
o.
The estimate of the Value of Land by Comparison
d,
The estimate of
R
e
placement Cost of
Property
in New
Condition
1340.
Determination of Rental Value.
In
the risk
rating
system, rental data are used in
r
a
ting the second feature
in the Rating of Mortgage
Pattern.
Estimat
e
s 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
mu
s
t
be given to their estimation. Small differ-
enc
e
s are important and accuracy is attained only by the assem-
blage 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 neighborhoods gradually acquire the characteristics of invest-
ments. They are no longer bought or sold as homes but merely as
financial investments. The net rental returns they will produce
become of primary importance in estimating
their
values.
1341.
All rental estimates
mu
s
t
be on a strictly compar-
able basis. The estimates of monthly rental values reported by the.
Valuator must be estimates
w
hich
r
e
late to the properties on an un-
furnished basis. They are not to relate to properties on either
a
wholly or
partially
furnished
basi
s unless this is the only feasible
basis to use. Usually when single dwellings are rented on an unfur-
nished basis, the landlord agrees to pay only for the mainte-
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
ev
e
nt
the area involved in the re-
lease 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
us
e of the site
a
s an independent site. Thus, though
t
e
n lots
might be valued
at
$7,000 as a unit, one lot for which an immediate
demand for use exists might properly be valued at
$1,000.
1338 (3)-1341
UNDERWRITING MANUAL
nance of the structure and for major repairs made necessary
for
defects in the structure or its equipment, or because of de-
terioration 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
d
e
fined above.
In
comparing rentals
for
dif-
ferent properties, the same conditions of tenancy must apply.
In
other
words, the agreement
betwe
e
n landlord and
t
e
nant as to who
is to pay
for
light, gas, water, or any other expenses must
be
the
same in each case, or necessary adjustments must be made before
comparing the rentals.
1342.
Care should be
exerci
s
ed 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 re-
ported as the monthly rental value. The same restriction also ap-
plies 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 pro-
spective tenant 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 contains more
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 occupies a 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 income
dwelling
.
by the amenity comparison method 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 second or other years, when
several years' estimates are 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, owners withdraw
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-
1341-1345
METHODS OF
DWELLING VALUATION
-
-
--
--
--
-
·
-
--·
·
-
·
--
-
-
-~
~
•
•
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 determines rental levels,
and rental levels and value levels are related and move up or down
sympathetically, there:fore rentals obtainable when the sales market is
frozen become significant aids in valuation. Again, rent-paying
ability usually is influenced little by speculation which creates ar-
tificial and unsustainable sales price levels. There:fore, residential
rental levels are usually excellent aids 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 de-
termining 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 accommodations equally well-located must be
ascertained. Rentals for in:ferior or superior accommodations are
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-occupied premises. The method of comparison
used to estimate land values and available market prices of im-
proved 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 esti-
mate 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 rela-
tionship 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 differences in the ratios of the total amount of the value to the
1345-1348
UNDERWRITING MANUAL
rental value according to the various price ranges.
It
is also import-
ant 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 esti-
mated 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 deter-
mining the Derived Monthly Value. This second estimate of monthly
rental value is required when at the time of appraisal the Valuator
concludes
that 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
conclusion might 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 accommodations and a strong active demand for additional
residential units. A strong demand and inadequate supply would
result in excessive rental values. This condition, however, could not
continue indefinitely inasmuch as new construction would
be
under-
taken 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 circumstances and conditions which are causing the tempo-
rarily excessive rental 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 second or
third
year subsequent to the date of
appraisal, as
it
is believed
it
would be extraordinary to find a rea-
sonable 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
1348
METHODS OF
DWELLING
VALUATION
•
•
another point in the application of the Amenity Comparison Method,.
namely in the selection of Conversion Factors.
1349.
In
forecasting rental 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 connection
it
is appropriate
to
point out
that
frequently new dwellings, especially multi-family
structures, experience marked decreases in 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
Eco-
nomic
Life of Buildings.
Valuators are required to give estimates of
the remaining economic lives and physical lives of buildings. Archi-
tectural 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.
Because buildings are subject
to
physical deteriora-
tion and obsolescence,
their
periods of usefulness are limited.
As they deteriorate or obsolesce,
their
ability
to
serve useful pur-
poses decreases, and eventually disappears. This decline and ulti-
mate disappearance of utility may occur gradually or rapidly.
The total economic life of a structure is the period of time be-
tween 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 economic life,
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 difference between the value of the total serv-
ices or
total
revenues of a property, and the expenses, is the net return.
The flow of returns referred to in the foregoing
paragraph
is net. As
the value of a property arises from its capacity
to
produce net returns,
the characteristics of the
future
net income stream must be forecast
in
valuation. The
future
net income stream has three characteris-
tics, 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
obsolescence will decrease the average amount of net returns from
time to time in the future, thereby decreasing the margin between
1348-1352
UNDERWRITING MANUAL
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 de-
teriorate physically or disintegrate.
Its
earning capacity usually
continues and is,
for
all practical purposes, interminable.
It
gen-
erally varies
in
accordance with the course of future utilization rep-
resenting the highest and best use. However, the services of the
buildings are limited in duration, owing to the fact
that
the build-
fogs will eventually become useless due 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 declines until eventually only land value remains. At
.
such time the building has reached the end of its economic life.
1353.
Economic life can never be greater
than
physical
life. An estimate of the probable remaining physical life of a struc-
ture
fixes the maximum estimate of remaining economic life.
It
also
helps to
d
e
termine the qualities of the building from an engineering
standpoint. The remaining economic life may be, and frequently is,
less than the maximum possible physical life.
In
valuation, estimates
of both physical life and economic life are made. Both are dealt with
and are jointly treated, because the 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 cases the factors
which result in obsolescence seem to operate with greater force than
those which result directly
in
physical deterioration.
In
most in-
:
stances, this results
in
the termination of economic life before the end
of
physical life. This fact causes the distinction which is made be-
tween the probable physical lives of
bu
i
ldings and
their
probable
e
conomic lives.
It
is the probable future economic life of a building,
rather
than its probable future physical life, which is of importance
in valuation.
1354.
In
predicting remaining economic lives, six types
of
factors are considered
:
a.
The economic background of the community or region and
the need
for
accommodations of 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 obsolescence attributable
to new inventions, new materials, and changes in tastes
1352-1354
.
METHODS OF
DWELLING VALUATION
•
•
d.
The trend and rate
of
change of the neighborhood
e
.
Workmanship and durability of construction; the
rapidity
with which
natural
for
ce
s cause physical
deter
i
oration
f. Physical condition and probable cost of maintenance and
repair;
the policy of
own
e
rs and occupants and the use or
abuse to which structures are subjected
1355.
H
an old building is incapable of produ
c
ing an
annual income sufficient to pay the
e
xpen
se
of repairs,
insuranc
e
,
and
taxes, and to produce
return
s
upon the value of the land,
it
s
u
s
eful
li:Ee
h
as
c
ome to an end.
Th
e
improvem
e
nts upon the lot
·
poss
es
s
no
more
v
a
lue
than the amount
w
hi
c
h
c
an be obtained from a
purch
as
er
who will buy them and remove them from the site.
1356.
Another
exampl
e is an old residential property
which produces annual revenue
suffic
i
ent only to pay for
t
a
x
es
,
insur-
ance, maintenance, and an additional amount which is found
to
be
only a proper and sufficient return upon the value of the
sit
e
.
In this
case there is no return which might properly be
attribut
e
d to the
building. The building is producing only enough revenue
to
take.
care of
nece
ss
ary
expendi
t
ures and a
r
e
turn
upon the land
value
.
Th
e
economic life of the
impro
ve
men
ts
h
a
s
therefore come to an end and
it
is found
that
the value of the property is
approximat
e
ly
th
e
s
ame
as
that
of the land alone.
1357.
The future economic lives of
building
s c
annot be
precisely determined, because
it
is impossible
to
foresee the
oc
c
urrence
of events or new discoveries which affect the values of existing struc-
tures by making them obsolete or by hastening and intensifying the
operation of those forces which produce obsolescence. All
that
can
be
exp
e
cted
i
s
that
estimate
s
of future economic life will be of such
character as
w
ill cause them to be
ac
c
epted as plausible by
we
ll-in-
form
e
d and
rea
s
onably
mind
e
d
p
e
o
p
le. While
it
is
impos
s
ible
to
gauge the
ac
c
uracy of economic life
es
timat
e
s
except in a very
gen
eral
way,
it
i
s
p
oss
ible and
ne
cessa
ry for Valuators to be
c
onsist
e
nt
in
makin
g such estimates.
In
ca
s
es
of properties of very
simil
a
r
c
harac-
ter and situation, the
estimat
e
s will also be similar. Poorly built
structures will be ascribed
short
e
r
lives. Better built
structu
r
es will
be
as
c
ribed longer lives.
Pro
sp
ec
ti
v
e
changes in
environm
en
ts may
aff
ec
t
th
e
es
timate in either
dir
ecti
on. Estimates of remaining lives
hav
e
s
i
gn
i
fi
c
ance in terms of
ea
c
h
o
t
h
er
.
That
i
s
,
th
e
estim
a
t
es
ca
n-
not
rep
r
ese
n
t
reliable
det
e
rmin
a
tio
ns of
t
h
e
a
c
tual
li
ve
s but
d
o
indi-
ca
te
prob
a
bl
e
relati
v
e
li
v
es
as
b
etwee
n different
prop
e
rties
.
While
it
i
s
impo
ss
ible to
kno
w
ho
w
l
o
n
g
a
n
y building
w
ill
produ
ce
n
e
t
r
e
turns
,
i
t
ca
n be
indic
a
t
e
d
that
a
give
n building
w
ill
pr
o
bably
h
ave a
lon
ge
r
or shorter
e
c
on
om
i
c
li
fe than other
buildi
ngs
.
1354-1357
UNDERWRITING MANUAL
1
,.....---·~---
-
----
!
1358.
In
making these estimates Valuators should re-
ceive material assistance from analyses of the conditions and rela-
tionships 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 prop-
erties to which they apply.
High
feature ratings
in
the Property
and Location categories will indicate
that
estimates of remaining
economic life should be high when compared to the possible maxi-
mum 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 cate-
gory will indicate
that
the estimate of remaining economic life should
likewise be 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 cate-
gory will not necessarily indicate
that
the estimate of remaining
economic life should also be relatively low. The economic life esti-
mate may be relatively high
if
the Rating of Property is high, al-
though the Rating of Location may simultaneously be low. This
is true because of the opposite effects produced on the economic
life
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 cate-
gory. However, these same forces may operate
to
either extend
or
shorten the remaining economic lives of structures in the areas in-
volved;
For
example,
if
there is any possibility of encroachment
by
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 economic lives
of
residential structures
in
the district. On the other hand,
if
the threatened encroachment in-
volves the introduction of land uses which will"re'Siilt in lowering
the
levels of land value in the neighborhood, the effect will 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 occu-
pancy, 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
(
i
1358-136()
METHODS OF
DWELLING VALUATION
L
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 decrease the percentage of owner occupancy and 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
sufficient to provide a
return
on the buildings. The
infil-
tration
of inharmonious racial groups will produce the same effects
as those which follow the introduction of incongruous land uses, when
the
latter
tend to lower the level of land values and lessen the desira-
bility
of
residential areas.
1361.
Land Valuation
by
Comparison. In
the pre-
scribed methods of valuation, the land value is separately estimated
•
by determining the
fair
price
at
which comparable sites are avail-
able in the same or in competing localities. The Valuator is required
to assemble and 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 acknowledged
that
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 necessities and points of view of par-
ticular
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 enhancement or loss of value
e.
The date of the sale and the general and specific environing
and economic conditions 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 vary-
ing usefulness and 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
1360-1363
UNDERWRITING MANUAL
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
valua-
tion. Thus, after a price decline has set in, developed, and finally
spent its force, as
at
the end of a period of economic distress, 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 comparative stability 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
become equal to the prices and then, for
a
time, exceed them.
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 significance of
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
peri-
ods of comparative stability, or of advancing price levels,
it
is prob-
able
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
1363--1366
METHODS OF
DWELLING VALUATION
)
•
•
L
part
of the
d
a
ta. This places emphasis where
it
belongs, namely, on
the why and
wher
e
fore of the
particular
prices paid in specific trans-
actions,
rather
than upon the prices
them
se
lves.
1367.
Unless information
i
s gathered on sales trans-
actions which occurred close to the time
at
which the Valuator makes
his appraisal, correction may be
neces
s
ary because of changed en-
vironing and
e
conomic conditions.
1368.
When
sale
s
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 influences and
their
prob-
able future effects on
th
e
desirability and value of each property.
The site
und
e
r
appraisal must be
intellig
e
ntly
and correctly graded
in terms of its relative
d
es
irability 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 convinces the appraiser
that
the
sale price was reasonable. A
compari
s
on percentage of 100 is as-
signed to the site being appraised.
Th
e
two properties are compared.
The Valuator notes similarities and differences with respect
to
the
relative stability and permanence of the desirability of
their
respec-
tive 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, meas-
ured 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 comparisons are made between listed prop-
erties 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 them-
selves, indicate the values.
1370.
Replacement
Cost of
Property.
The approxi-
mate upper bracket or limit of
po
s
sible value is the cost of replace-
ment of the property, assuming the building improvements to be in
new condition. Estimates of the cost of replacement of building im-
provements in new condition are made, and are then used by the
Valuator to estimate the
co
s
t
of replacement of the entire
property-
land, buildin
gs
,
and all
mi
sc
ellaneous
costs-in
new condition.
This
latter
estimate becomes the approximate upper limit
o:f
possible value.
1366-1370
UNDERWRITING MANUAL
Whil
e
va
lue
ma
y
po
s
sibly be equal to
thi
s
uppermost limit,
it
is also
pos
s
ibl
e
that it
may be any amount below this
limit
.
~li
J&
_
depeng
s
~:ntirely upon usefulness, not upon the
co
s
t
of construction or replace-
ment. Value
t
e
nds to
c
onform
t
o
cost but this is not to imply
that
it
i
s
a
lways
e
q
uivalent to
c
os
t. The
ex
penditure of money for a
dwelling
stru
ct
ure does not necessarily
c
r
eate value equal to the cost.
Estimates of
replacem
en
t
cost of
proper
ty are not intended as meas-
ures of value, and are not to
b
e
s
o
re
garded. They merely indicate
the
po
s
sibility
that
value may
e
x
ist to an
equival
e
nt
amount.
It
i
s
the
V
a
luator'
s
task to decide whether or not
th
e possibility is an
actuali
t
y in
an
y case.
1371.
Co
s
t
of
con
s
tru
c
tion
a
l
s
o
may
b
e in excess of value
at a given time because under some
circu
m
stances a reduction in
co
s
t
may
b
e
in
pro
s
pect.
If
construction costs decline, value will also
decline
if it
wa
s originally
equ
a
l to
co
s
t
.
Thus,
it
might be assumed
that
a new method of constructing buildings is invented.
At
fir
s
t
the costs of using
it
are great, (a) because of high production costs
attendant upon the
con
s
truction of newly
devi
s
ed
ma
c
hinery required
to
m
a
nufacture 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 devices or methods not
familiar
to them. Obviously, when the pioneering stage has been passed, pro-
duction 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 declines in 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
s
tyle compensates the wearer
:for
the initial'
excessive cost. Although he may quickly discard the article, he feels
that
he has
r
ec
eived
v
a
lue
for
his
mon
e
y.
But
dwellings involve
substantially large expenditures and
th
e
y must
la
s
t for
a long time.
Therefore,
if
a decline in construction
co
s
t
is
in
prospect, the intelli-
gent buyer will consider the value, at
m
ost, to be no higher than
the point to
whi
c
h construction costs will decline. He may believe
that
some
ben
e
fit 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
\.
.
_
...
1370-1371
METHODS OF
DWELLING VALUATION
•
•
come from superior living qualities and lesser operating and mainte-
nance costs, combined with lower construction
co
s
ts than
for
houses
of usual type.
It
follows
that, in
cases involving
n
e
w construction
methods or materials, replacement costs may be of relatively little
significance in valuation analyses, while the costs of replacement of
building improvements of the same design, size, and layout, but built
with orthodox materials and by traditional
methods
,
are likely to
be
of greater
s
ignificance.
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
possibl
e
the application of the substitution theory described
in
paragraph
1321.
As a consequence, the concepts on which the sub-
stitution theory
re
s
ts
con
s
titute
the basic assumption on which the
replacement
co
s
t
estimate must rest. Therefore, the estimate of
replacement cost of
prop
e
rty
should include all items of expense
to
which a typical prospective owner would be
subject
e
d
if
he were
to undertake to replace or reproduce the improvements involved 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
a
s
cribed to the subject site
b.
Co
s
t
of survey
c.
Co
s
t
of preparing site
for
improvement, including cost of
finished grading, terracing, retaining walls, and land-
s
ca
pmg.
d.
The
co
s
t
requir
e
d to replace
bu
i
lding
improv
e
ments in new
condition,
d
ete
rmined in
a
cc
ordance with. the instructions
in Section
16
e.
Appraisal fee of lending institution,
if
customary
f.
Fed
e
ral Housing Administration examination fee
g. Initial
service charge
h,
Co
s
t
of
s
howing
c
ondition of title
i.
Co
s
t
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 construc-
tion period
p.
Pro rata
expenses
for
taxes,
if
any, on building improve-
ments during the construction period
1371-1372
UNDERWRITING MANUAL
I"'".
-
Total Estimated
Cost
of
Replacement
of Property
in
New
Condition
$9,
125
391
$391
Subtotal (Miscellaneous
items>-------------------------
Subtotal (Total cash investment)
$8,
946
Interest
on invested
capital at
6% per yr. for construction
period of 4 mos.
(
$8.946X 6%
X
4/12)
------------------
179
0
0
10 10
Preparation
of note
.
_
Notary
fee---------------------------------------------
Taxes on land during construction period of 4 mos.
(
$30
x
4/121)
------------------------------------------
Taxes on building improvements during construction
period. (No
tax)-----------------------------------
Hazard
insurance
during
construction period
_
$1,350
Price of
site-------------------------------------------
$1,
350
Survey of
site----------------------------------·
25 $25
Grading and landscaping________________________________ 320
Building improvements
(as above)-'---------------------
7,
064
Appraisal fee of lender_________________________________ 10 10
FHA examination fee___________________________________ 21 21
Initial
service charge___________________________________ 70 70
Title insurance-----------------------------------------
49 49
Preparation
of deed
------------------------------------
5 5
Recordation of deed____________________________________ 5
(
3ID
7,064
Estimated
Cost of Replacement
of Property in
New
Condition
Total---------------------------------------------------------
$7,.Q64
Estimated
Cost
of
Replacement
of Building Improvements in
New
Condition
Main building
$6,
447
Garage------------·-----------------·--------------------------------
412
Other
Improvements------------------------------------------------
205
q.
Pro rata
premium expense for fire, windstorm, and other
hazard insurance during the construction period
r.
Interest on invested capital during the construction period
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 emphasizes the distinction
between "land and buildings" and "property". The land and build-
ings are simply material things, while the property which an indi-
vidual 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.
(
1372-1373
METHODS
OF
DWELLING VALUATION
VALUATION CONCEPTS
1377.
Plottage Increment.
Plottage increment is de-
fined as the increase in unit land value produced by combining smaller
ownerships into larger single ownerships. The presence of the plot-
tage increment is
account
e
d
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 assem-
blage of smaller parcels produces a plottage increment only
if
the
smaller parcels by themselves are of such a size and character as to
•
•
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
·
be-
yond the
typ
i
cal 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 mort-
gage insurance is a prepaid expense item and may not be included in
the estimate of replacement cost of property. No allowance is per-
mitted
to
cover commissions
to
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 esti-
mate may not create equivalent value in a particular case.
For
exam-
ple, 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 significance in 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 land-
scaping 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 significance in such cases.
1374-1377
UNDERWRITING MANUAL
--
--
have small
utili
t
y. The maximum effect of plottage obtains
if
the
lot and the improvements
tog
e
ther
con
s
ti
t
ute a naturally marketable
real
e
s
t
a
te entity.
Exce
s
s land is rarely worth as much per unit
of area. As a consequence, land cannot be valued
excep
t
in terms of
th
e
actual
amoun
t
of land in
singl
e
o
w
ner
s
hip.
1378
(1). Marketability and Conformity.
The essence
of
t
he
a
nalysis
u
s
ed to
es
tim
a
te the value of a dwelling property is
found
i
n a consideration of
marketabilit
y
factor
s
.
Mark
e
tability
refers to the state of being salable.
Ea
se
of marketability may result
from fitness and
ad
a
ptability
,
or from demand. Current salability
at
a price is significant, but of relatively
les
s
significance than factors
whi
c
h improve or
detra
c
t
from the continuous
probab
i
lity
of ready
sale
dur
i
ng a long period of time in
th
e
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 in-
crease marketability. The study of the extent to which properties
may be expected to be
marke
t
able should include cognizance of the
lack or existence of, and probable breadth of
mark
e
ts. Any factor
which limits the probable number of possible willing purchasers
becomes a valuation factor and not infrequently
estima
t
es of value
must be deliberately lowered until the estimates reach a level at which
a reasonably general market
i
s
tapped
.
1378
(2). The extent to which the property being ap-
praised is
s
uited to its environment
mu
s
t
be
de
t
ermined 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
adver
s
e
effects, such as the shortening of
economic life, hastening of
obsoles
c
ence, and limiting of marketabil-
ity, thereby affecting value. Regardless of the characteri
s
tics of any
residential
prop
e
rty
,
its value can be utterly
de
s
troyed by influences
external to itself.
1379
(1). Environmental Changes.
A
superfi
c
ial ex-
amination of
re
s
idential areas in any
Ame
r
ican city reveals the fact
that,
with practically no
exc
e
ption, such districts decline in desira-
bility
w
ith the passage of
sub
s
tantial periods of
time
.
It
is
pos
s
ible
that
th
e
rate of such declines will generally be slower in the future
than
it
has been in the past, because the rate
o:f
population growth in
the United States is, and has been, on the decline. This factor, popu-
lation growth, has been one of the main causes of the loss of desira-
bility
w
hich
res
i
dential
distri
c
ts
h
a
ve
experienc
e
d.
It
is obvious
that
as new population comes into a given region, new residential areas
spring up within
communiti
es
that
have already been established.
Th
e
se newer districts present a strong appeal as places of residence, and
/
{
1377-1379 (1)
METHODS OF DWELLING VALUATION
l
·
~··
•
•
people living in the older districts experience the urge to sell or
rent
their old homes and acquire new ones in the newly developing resi-
dential 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
soci
a
l status or standards of living are lower
than those of the families which have vacated the district. This
process of change in occupancy by families of successively lower stand-
ards of living is accompanied by declines in desirability and value.
The value
de
c
line may be arrested in some cases where the
utility
of
the sites in a
particular
di
st
rict
undergoes a transition to more pro-
ductive
u
s
e
s
.
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
th
e
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
becomes obvious.
1379
(3). The phenomenon to which attention is here di-
rected also results from
cau
s
es other
than
population growth. The
development of modern transportation systems, extensions of, and
changes in the routes of transportation lines within individual com-
munities, and the making available of automobiles to families
of
comparatively low
purch
as
ing power, have promoted the develop-
ment 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 indu
s
trial
enter-
prises, and the physical deterioration of
the
buildings in these sections
are other obvious and common causes.
1379
( 4).
It
is very important
that
the Valuator make a
study of the causes of declines in the
de
s
irability and
utility
of resi-
dential districts. Otherwi
se
he will not develop the greatest accuracy
in his valuation estimates and in the ratings which he must make.
1379
(5).
It
is not possible to totally exclude or pre-
vent the growth or operation of value destroying influences,
for it
is
practically inevitable
that
all residential property will eventually
decline in desirability or utility, and therefore in value, even though
it
may require substantial periods of time. This risk
i
s known
a
nd
1379 (1)-1379 (5)
UNDERWRITING
MANUAL
- - ·-
..
_ ·-
·-·------
-----
-
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
tran
s
ition from fine residential use to industrial use, or
from occupancy by people with high annual family incomes to 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 safe-
guards 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 residence through the introduc-
tion of commercial, industrial, or manufacturing enter-
prises, or nuisances or inharmonious uses of any kind
d.
Lack of appropriate and adequate deed restrictions and
effective provisions for the enforcement thereof
e.
Lack of appropriate and adequate zoning regulations
1380
(1). Depreciation, Deterioration, and Obso-
Iesence,
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 obsolescence cause a lessening of
utility and thereby result in depreciation,
that
is, loss in value.
It
)
.
METHODS OF
DWELLING VALUATION
1379
(5)-1380 (1)
··
·
-
--,
•
•
is
e
ss
ential to understand the nature of the.
cau
ses
of
d
e
preciation
,
not
beca
u
s
e of any
neces
s
ity of measuring the amount of
d
e
pre
c
iation
wh
i
ch has occurred since the
compl
e
tion 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
obsolescence operate
continuou
s
ly. They may operate in the future
in
t
he same manner or in
diff
e
rent manner
than
in
th
e
pa
s
t. By
studying
th
e
manner in which they have operated in the past, greater
ac
c
ur
acy in the
e
s
timates as to how they may operate in the future
is
attained
.
1380
(2).
Obsole
sce
n
ce
ha
s
greater
signifi
ca
n
ce
in valua-
tion
than
deterioration.
It
is
cau
s
ed by
:
a.
New inventions and discoveries
b,
Changes in the
prefer
e
n
c
es and tastes of the public, as for
example, with regard to styles of architecture, geograph-
ical locations as places of residence, the extent of plumbing
facilities provided in residences, sizes of rooms, and heights
of ceilings
o.
The encroachment of
incongruou
s
uses
,
a
s
w
h
e
n commercial
and industrial
enterpris
e
s are introduced into
resid
e
ntial
neighborhoods
d.
The infiltration into
residen
t
ial 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
valu
es
w
hich result from changes in the
highest and
be
s
t
uses for which land is suited
1380
(3)
•
.Accrued depreciation is not of primary im-
portance in valuation.
It
is the difference between value and cost
of replacement. To measure
it, it
is necessary
to
make two estimates:
the value as
of
date
of
appraisal, and the cost of replacement in new
condition as
of
the same date. The difference between the two esti-
mat
e
s
is the amount of accrued
d
e
preciation. The determination
of
accrued depreciation is a byproduct of the valuation process
rather
than
an essential step in
it
bec
a
use value always
dep
en
ds on the
amount of future benefits, not upon the deduction of expired benefits
from
t
he benefits
pre
s
umed to be indicated and measured by the
co
s
t
of
repl
a
cement.
Therefor
e
,
the
v
a
luation process
i
s properly
confined
to
the estimation or
fore
c
asting of the probable extent and
nature
o
f
future
benefi
t
s and the
tran
s
lation of such
prediction
s
into
es
tim
a
t
es of present value.
1380 (1)-1380
(3)
UNDERWRITING MANUAL
1380
(4). Attempts to estimate accrued depreciation di-
rectly,
rather than
to
measu
r
e
it after
the value estimate has been
made, are likely to produce grossly inaccurate results. Such at-
tempts usually
start
by estimating the replacement cost of the build-
ing in new condition.
It
is then assumed
that
this cost represents the
value of the building new, an assumption which frequently is incor-
rect. Next,
it
is assumed
that
the amount of accrued depreciation
caused by deterioration and obsolescence can be determined (a) by
ascertaining the time which has
e
lapsed since the building was
com
-
pleted,
(b)
by
consid
e
ring
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
ob
s
olete in architecture, design, and equipment. Then accrued depre-
ciation is presumably determined by (a) assuming some annual per-
centage
rate
of depreciation
'
due to deterioration,
(
b)
multiplying
it
by the replacement cost and the age of the building, and (c) add-
ing an amount equal to the cost of needed repairs and of modern-
izing the structure to off set 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 economic life,
rather than
upon the length of the
past physical
Iife,
and upon probable future benefits,
rather
than
replacement costs. 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 deprecia-
tion 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
im-
portant particulars
.
Its
use requires acceptance of 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
oth
e
r
words,
it
is assumed
that
re-
""
placement cost, less accrued depreciation calculated by some arbi-
trary
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 decline in value
in
equal yearly amounts. While the aver-
/
.;
l
METHODS OF
DWELLING VALUATION
1380 (4)-1380 (5)
L
__
•
•
age
d
e
pre
c
ia
t
ion per
ye
a
r
may be
2
%
,
it
does not follow
that in
10
years the building value will h
av
e
d
e
clined
20
%
,
in
30
years
60
%
,
45
yea
rs
90
%
,
and
so
on.
Th
e
refore, such a procedure is of question-
able merit. Methods of
depre
c
iation
w
hich utilize sinking
fund
com-
putations are subject to the same criticism and have no place
in
real
estate valuation.
1381
(1). Distinction between Cost and Value. Cost
and value
ar
e
s
harply
di
s
tingui
s
h
e
d
.
Value depends on the
ext
e
nt
of
utility in
t
he future,
whil
e
c
o
st
m
ay
d
e
pend on conditions in the
market or on
outl
a
ys for
l
a
bor
a
nd
m
a
terials, and
the
s
e conditions
or
outl
a
y
s do not
nece
ssa
rily
d
ea
l
w
i
t
h factors
whi
c
h
c
r
eat
e
value.
The only
exc
e
ption is the
ca
s
e of a building which
i
s
ne
w and repre-
sents the highest and best
u
s
e for
th
e
s
ite. This
implie
s there must
be a proper relationship between supply and demand and
al
s
o
be-
tween construction costs and oth
e
r
costs
in
general. Costs are re-
lated to value only from the point
0£
view of substitution, the cost
required to replace an equal amount of function.
In
this
s
en
s
e,
cost
of replacement becomes the approximate upper limit of value.
There is a tendency, but no certainty,
t
hat
value of a dwelling
in
new condition will be equivalent to
repl
a
cement cost in new condition.
Since value and
repla
c
ement cost
ca
n be equal, estimates of
replace
-
ment cost in new condition can be used as approximate "ceiling"
estimates of possible value,
th
e
reby acting as controls on
the
judgment of the Valuator.
1381
(2). The distinction between cost and value is bet-
ter
appreciated by a consideration of certain valuation concepts,
including highest and best use, overimprovement, and underimprove-
ment, and improved value.
1381
(3).
High
e
st
an
d
B
e
st
U
s
e.
The
highe
s
t
and best
use of
a
real estate site is
th
a
t
us
e or
succe
s
sion of u
s
es which makes
the land most produ
c
tive.
In
d
e
t
e
rmining highest and
b
es
t
use,
the
test
is to discover which
progr
a
m of
future
utiliz
a
tion is capable
of developing the highest
return
on the land over a substantial
period of time. Highest and
b
e
st
u
s
e does not refer to a building of
the greatest size
that
someone
mi
g
ht
be induced to erect. The con-
cept of highest and best use is without meaning unless the available
uses compared are thought of in terms of buildings having different
functional
d
e
signs.
1381
(
4).
O
ve
rimpr
o
v
ement and
Vnd
e
rimprov
e
ment.
An
ov
e
rimprovement is an improvement so
co
s
tly
or
s
o
..
l
a
rge
a
s to
produce
l
a
nd returns
lo
w
er than
th
os
e
which could
,
hav
e been p
r
o-
du
ce
d on
t
he
s
ame site by a
l
es
s
costly
.
or
s
maller improvement.
An
underimprovement is an improvement which, because of
it
s
size or
1380 (5)-1381 (4)
UNDERWRITING
MANUAL
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 overimprovements or underimprove-
ments 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 provoc-
ative 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 discussed in following
paragraphs are worthy of examination.
1383.
The accuracy of valuations is relative only. V
111u-
ations 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 be-
tween 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 conclusions requires the sub-
ordination of prejudices and preconceived notions, 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
1381
(4)-1385
METHODS OF DWELLING VALUATION
I
--,
•
•
after
integrating a number of
e
s
timates which relate
to
'
individual
.
items. Therefore, valuation
pro
c
edur
e
whi
c
h
progre
sse
s first by the
making of a number of
estimate
s
of individual items and then pro-
gresses to a logical integration of the estimates,
le
a
ds to greater
accuracy
in
the final estimates of value.
,
1386.
Plausibility.
Accuracy is derived only when the
integral and final estimates are characterized by
plaus
i
bility, Valua-
tors should
a
lways set estimates at the most
re
a
sonable, most
fair,
and most likely amounts, as opposed to placing
th
e
m
at
possible
extremes.
1387.
Bracketing.
In
establishing criteria to determine
plausibility and probability,
competen
t
Valuators testithem in
t
e
rms
of possible upper and possible lower limits of items, thereby bracket-
ing 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
alway
s
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 established
will
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 esti-
mates.
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 be-
tween 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.
Av
e
rages.
A word of caution should be given in
connection with 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 composed of quan-
tities
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 specific case.
1385-1389
UNDERWRITING MANUAL
1390.
Normal Relationships.
Ordinarily, the relation-
s
hips
be
tw
een
seve
r
a
l
individu
a
l
es
tim
a
te
s
a
re
r
e
a
s
onably
s
imilar inso-
far
as
ty
p
ical
prope
r
ties are concerned.
It
is well to bear in mind
and use the normal
rela
t
ion
s
hip
s
a
s
che
c
ks and guides in making
estimates.
1391.
Con
s
ist
e
ncy by
Arbitrary
T
re
atm
e
nt.
The gen-
eral valuation problem, from the point of view of estimation, may
be divided into
t
w
o
p
a
rts.
Fir
s
t, there is the desirability of
a
s
cer-
taining the correct general level of values. Secondly, there is the
desir
a
bility of placing
valua
t
ions on a
l
a
rge number of properties
in such a manner
that
they are consistent one with another. As
es
timation problems, the two
phase
s of
v
a
lu
a
tion fall in different
ranges. The first is solved by the application of adequate data and
sound method.
Th
e
second is
s
ecur
e
d
b
y
arbitrary
but reasonable
adjustments which bring about consistency. Consequently, after
th
e
limits within which an
est
imate of
v
alue should fall have
be
e
n
es-
tablished, the actual setting of the precise dollar valuation is and
s
hould
be
done by making the
e
s
timate
consist
e
nt
with other valua-
tions.
1392.
Probability.
Ina
s
much as
prospe
c
tive services of
properties occupy such a dominating position
in
the valuation proc-
ess, the accuracy of results necessarily depends upon the quality of
the forecasts which are made. The Valuator cannot know to a cer-
tainty which future events will
occur
.
Therefore, he bases his pre-
dictions 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 fore-
casts. 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
e
thodical
P
r
ocedure.
The advan-
tage
s
of
methodical procedure in valuation include the :following:
a.
The discovery, isolation, and
identifica
t
ion of individual in-
fluences which combine to 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
appr
a
isers
1390-1393
METHODS OF
DWELLING
VALUATION
I
j
•
•
1
1394.
In
valuation
it
is preferable to resort to analytical
methods
rather than
to depend on unaided judgment. Judgment con-
trols 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 con-
sider 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 experi-
enced 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 accu-
rate 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 esti-
mate 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
:for sale.
In
determining such a warranted price, a buyer will give con-
sideration to both the cost and the value which may be assigned sepa-
rately 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 advan-
tages 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-
1394-1395
UNDERWRITING
MANUAL
ters;
but he will be vitally
intere
s
ted in the ability of the property to
produce a
stre
a
m of
fu
t
ure
benefi
t
s
for him
if
he were to purchase it.
The
characteri
s
tics of this stream of
benefits-its
present size, the
extent of any p
r
obable diminution in its size
in
th
e
future, the cer-
tainty
of the
co
nt
inuation of the flowing stream, and the length of the
period during which the flow may be expected to
continue-will
deter-
mine the price which he is warranted in paying, and, hence, the value
of the property.
1396.
There is no virtue in undervaluation of proper-
ties, and great risk of loss is introduced by overvaluation. Federal
Housing
Admini
s
tration Valuators
mu
s
t
avoid both undervaluation
and overvaluation. Their attention is directed to the fact
that
specu-
lative elements cannot be considered as enhancing the security of
residential loans. On the
contr
a
ry, such elements enhance the risk
of loss to mortg
a
gees who permit them to
c
reep into the valuations of
properties upon which they
ma
k
e
loans. Valuators shall not report
valuations
that
cannot be justified by existing conditions which they
find and of
whi
c
h they are aware, and by
rea
s
onable and plausible
estim
a
tes with regard to the
effe
c
ts of conditions which may reason-
ably be expected to prevail in
th
e
near future subsequent to the date
of valuation.
1397.
The valuation process
require
s the Valuator to
gather, analyze, and interpret a great volume and variety of data.
Because the
ne
c
essary data are
g
athered piecemeal, there is danger
that
he will
as
s
ign greater importance
to
s
ome of the data
t
han they
are rightly entitled to receive, and reach a conclusion which is pre-
mature and unsound. Before reaching his final conclusion,
it
is
essential
that
he place himself
at
a
di
st
ance, figuratively speaking,
from the problem with which he is dealing in order
that
he may
get a broad,
comprehen
s
ive 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
o
f
data which he
mu
s
t
con-
sider
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
s
t
and off
at
a distance
after
analyzing the data, and consider the resultant effect
produced by the multiplicity of influences which operate in every case.
Then
it
is
more
'
likely
that
the conclusions which he
rea
c
hes as a
result of any valuation method or procedure which he may follow,
or comparisons which he may make, will accord with
that
which will
be required of all Federal
Housin
g Administration Valuators, namely,
that their
conclusions in every case shall be fully supported, reason-
able, sound, and sensible.
r
1395-1397
METHODS OF
DWELLING VALUATION
I
J
f
I
1401
Effectiv
e
February
,
1938
F
e
deral Housing
Administr
at
ion
Paragra,
;.
Valu
a
tion
Process---
--
-----
---
---
--
--
---
--
-------------~--
-
----
-
-- 1401-1~
S
e
l
e
cti
o
n
o
f
M
e
thod___
____
__
_
__
__
_
___
_
___
_
_
_
_
_____
__
_
__
___
_
__
1
~
St
e
ps in
Valua
t
ion
Pro
cess_
__
__
_
__
_
_
_
__
_ _
__
___
_
__
_
__ __ __ __
_
___
1
~
The
De
termination of
Deriv
e
d
Capi
ta
l
Valu
e 1406-1~
R
a
ting
s
a
nd Economic Life
----
---
--
--
-- 140S-1409
Monthly Rental
Value
--
-
----
-
--
--
--
--
-
--
--
---
-----
-
--
-
-
-
~
---- 1410-1411
Degree of Owner-Occupancy AppeaL 1412--1413
M
o
nthly
Amenit
y
IncremenL-
-
--
-
--
-
-
-
-
--
--
--
--
----
--
--
·
---
--
- 1414-1417
D
e
termin
ation of
Deri
ve
d Monthly
V
a
lu
e 1418-1420
Conversion
Fact
o
rs----
-
-----
-
-
-
----
--
------
-
-------
----
----
-
-
1421-1424
V
a
luation of
Land-----------
-
--
--
--
-
----
-
·
-------------------- 1425
D
e
termination of
Deri
v
ed
Capit
a
l
Valu
e_
_
_
__ __
_
_ _
____
_
__
_
__
_
___
1426
The
E
s
timate of Available
M
a
rket Price
1427-1432
The Estimate of
Repl
a
cement Cost of
Prop
e
rt
y
.:.
_
1433
Determination of
E
s
timate of Value 1434-1439
J
u
dgment Control of R
es
ults~---
-
------
-
----
-
-
-
-
---
-
--
--------
1431)-,1439
Distribution of Estimate of
Value-
--
-
--
--
--
-
-
---
--
--
-
------
--
------ 1440-1442
Comp
a
rative
Valuations--
-
------------·----
-
-
---
--
-----
-
--
-- 1443-1444
c
CONTENTS
PART
III
SECTION
14
VALUATION OF AMENITY INCOME DWELLINGS
VALUATION PROCESS
1401.
Most single family and certain multi-family prop-
erties, salable to prospective owners interested to some degree in direct
services and amenity income, are best appraised by the amenity com-
parison method of
v
aluation. 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.pli-
able of producing, and then converting them
into
an esti-
mate 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 essence
of
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. Esti-
mates 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
e
stimation 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 remain-
ing after deducting the separately made land valuation.
-,
·
PART
III
SECTION
14
VALUATION OF AMENITY INCOME DWELLINGS
•
•
•
1404.
Selection of Method.
The first step in any valu-
ation 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 serv-
ices 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 capitaliza-
tion method described in Section
15,
Valuation of Rental Income
Dwellings.
H
a measurable degree of appeal is exerted to pur-
chasers 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
Zif
e
of
the building is
made
in
accordance with instructions
in
Section
13.
d.
The
monthly
r
e
ntal. value
of
the property is ascertained in
accordance with instructions in Section
13.
e.
A study is made to determine the degree to which the prop-
erty exerts
owne
r
-occupancy appeal,
that
is, the extent of
its
ability to satisfy fully all the desires which owner-
occupants typically seek from a property. The results of
this study are expressed as a percentage, thus: "Owner-
occupancy appeal 60%." This analysis is described in
paragraphs
1412
and
1413.
1404-1405
UNDERWRITING MANUAL
f.
Selection is made of an
amenity increment percentage
which
reflects the degree to which the monthly value of the serv-
ices 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 de-
scribed 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
para-
graphs
1418
to
1420.
h.
Selection is made of a
conversion factor
reflecting the cer-
tainty, quality, and duration of the derived monthly value.
Conversion factors and the methods used to select them are
described in paragraphs
1421
to
1424.
i.
An
es
timate of the value of the land is made by comparison
in
accordance with the instructions in Section
13.
H
excess
land, as defined in
paragraph
1425,
exists a separate valu-
ation 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
pric
e
of the subject property in accordance with the instruc-
tions in paragraphs
1427
to
1432.
This requires consider-
ation of sales data relating to improved properties of
similar type and characteristics in the same or in com-
peting neighborhoods.
l,
An estimate of the
replacement cost
of
property in new con-
dition
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 comparison leads to the determina-
tion of the
estimate
of
value.
The
latter
figure is the
Valuator's final total valuation. The instructions cover-
ing the making of the comparison and the determination
of the final value estimate are given in paragraphs
1434
to
1439.
1405
VALUATION
OF
AMENITY INCOME DWELLINGS
r
t:
I
I
j
I
•
•
THE DETERMINATION OF DERIVED CAPITAL VALUE
1406.
The
e
s
timate of
d
e
ri
ve
d
c
api
ta
l
va
lu
e
i
s found by
first
determi
n
i
ng
t
he
d
e
riv
e
d monthly
v
a
lue
attribu
ta
bleto
the prop-
erty
for
the
e
n
s
uing
12
mo
n
ths,
mult
i
plying this
am
o
unt by a con-
version
facto
r
,
and then
ad
ding the
valu
e ascribed to
e
xcess
land
,
if
an
y
.
The
d
e
r
iv
ed
mon
t
hl
y value
i
s
d
e
termined from an
analysi
s
of the
rent
o
btain
a
ble from a
t
y
pic
a
l
te
n
a
nt
and an
a
n
a
ly
s
is of
t
he
dire
c
t
ser
v
i
c
e
s
the
prop
e
r
t
y is
cap
a
bl
e
of
rend
e
rin
g an
o
w
n
e
r
occupant
du
ri
ng the
ensui
ng
12
month
s
.
The
validit
y of
the
method
depends, in
p
a
rt,
upon
th
e
assumption
that
expense ratios are quite
similar for amenity
inco
me
d
w
elling
s
o
f
the same
typ
e
,
in the
s
ame
general
loc
a
lit
y
.
The
tr
ans
lation of
d
e
r
iv
ed
mon
t
hl
y
v
alue to
th
e
e
s
timate of
d
erived
capit
a
l
v
alue
b
y
t
h
e
u
s
e of
co
nve
r
s
ion
fa
c
tors
reflecting
th
e
probable
cer
tain
ty,
quality
,
and
durati
on
o
f the
returns
in future
ye
a
r
s
,
is in accord
w
ith
gener
a
l
ca
pitalizatio
n
theory.
It
is
practical to the
e
xtent
th
a
t
d
a
ta
compila
t
ion is
thorou
g
h
,
judgment is
used in the
d
ete
rmination of derived monthly value,
a
nd
con
s
ist
e
nc
y
.
characterizes
th
e
selection of
c
o
n
version
fac
t
o
rs.
1407.
The
us
e
of
estimate
s
of gross
retu
r
n
s
as the
b
asi
s
of valuation is justified
b
ec
ause
expen
s
e ratios in
a
menity income
dwelling
prop
e
rties of the
sa
me
typ
e
,
qu
a
lity, and
p
r
i
ce
group
a
r
e.
rela
t
i
v
ely
co
nsta
n
t
and var
i
a
tions
a
r
e
a
d
e
qu
a
tely
allo
we
d
:for
·
in
th
e
c
o
nversion
fa
ct
ors. The
o
nly items of
expen
s
e
su
bject
to
wid
e
variations in
the
se
prop
er
ti
e
s are
the
expenses
for
repairs, main-
tenance,
repl
a
ce
ments, and taxes.
The
se
expense
it
em
s are factors
which
aff
ec
t the
rating
s
a
s
cribed to
t
he
Proper
ty
and
Loc
a
-
tion
categori
es in the
ri
s
k
r
a
ting
sy
s
t
e
m.
The
s
e
r
a
tin
gs
,
in
turn
,
a
r
e
used as
crit
e
r
ia.
in
the
sel
ec
tion
of
conver
s
ion factors.
Therefo
r
e, the
use of
estimate
s of gross returns is
fea
s
ib
le in the
pro
c
e
ss
.
1408.
Ratings and
Economic Life.
A
f
t
e
r
the Valuator
has
determin
e
d
that
the
a
me
nity
comp
a
ri
s
on method applies to the
ca
se, he
pro
cee
d
s with
th
e
fir
st
ste
p
s
.
Th
e
fir
s
t
thre
e
ste
ps
compri
s
e
the
determin
a
tion of the
R
a
ting
of
Loc
a
tion, the Rating of Prop-
erty, and
th
e
estimate of remaining economic
life.
These steps are
included early in the process because they require the Valuator to
become thoroughly
famili
a
r
w
ith
the
d
et
ailed
characteri
s
tics of the
property and
its
e
nvironment.
A
s
finall
y
u
s
ed for valuation pur-
poses, the
t
w
o
ri
s
k
categories
will
ha
ve
signifi
c
anc
e
both
becau
se
n.
Finally
,
the
total
amount of
th
e
estimate of value is dis-
tribut
e
d
to
the
c
omponen
t
p
art
s
o
f
t
he
pro
pe
rty
in
accord
-
an
ce with the
in
st
ru
c
tion
s
in
paragraph
s
1440
to
1442
,
and
t
h
e
results are
e
ntered on
FHA
Form No.
2015.
1405-1408
UNDERWRITING MANUAL
~
-
-
--
-------------------
-
of
the ratings ascribed to individual features
0£
the categories and
because of the total
r
a
tings of the categories as well.
1409.
For
purpose
0£
illu
s
tration
the steps in the amenity
c
omp
a
rison method of valuation are shown by means
0£
an example.
The
conclu
s
ions thus
far
r
e
ached
ma
y be listed as follows:
a.
Tot
a
l
R
a
ting
of
Loc
a
tion 57
b.
"
I'ot
a
l Rating, of
Property
86
c.
Rem
a
inin
g Economic Life of Building
'--
-
----
-
--------
35
years
1410.
Monthly Rental Value.
In
s
tructions regarding
the
e
st
imati
on of monthly rental value
s
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
r
e
ntal values reasonably stable. They also deal with
markets in which the demand factors substantially outweigh supply
factors, resulting in seriously unbalanced
conditions
,
and excessive
a
nd unstable rental
v
alues.
·
Under
su
c
h
circumstance
s the instability
d
fth
e
rent
a
l
valu
e
structur
e cannot be given effect satisfactorily in the
a
menity
compari
s
on method of
v
a
luation
ex
c
ept 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
inflat
e
d rental values are likely to decline when
forces
whi
c
h have produced the
"i
nflated conditions have spent them-
selve
s
.
For
example,
as
s
ume
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
resi-
dential accommodations of
the
type and quality under consideration.
However, the
V
a
luator concludes
that
in a year or two the rental ob-
tainable and rental value will probably drop to
$60
per month.
In
this
c
a
se $60,
rather
than $70,
isthe
monthly rental value to be
usedin
the amenity comparison method. Aside from this modification, the
Valuator proceeds in
accordanc
e with the procedure as
de
s
cribed in
this
S
e
ction.
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
obt
a
inable.
Howev
e
r, no
adjustm
e
nt
is needed.
This is true because the amount by
whi
c
h the currently existing
monthly rental
v
a
lu
e
is
exces
s
ive
r
e
pre
s
ents a premium which prospec-
tive
tenant
s
in the market are willing to or must pay in order to secure
resid
e
ntial
accommod
a
tion
s
of the type and quality
d
e
sired 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
exi
s
ting excessive rental value in the
amenity
compari
s
on method and make an addition thereto of an
VALUATION
OF
AMENITY INCOME DWELLINGS
1408-1410
)
·-
($70) $60
(21)
Monthly rental
value,
unfurnished-----------------------
The example being used in this Section assumes
that
only one esti-
mate of monthly rental value is required. The Valuator's conclusion
is expressed as follows:
a.
Monthly Rental Value---------------------------~-------
$40
1412
(1).
Degree
of Owner-Occupancy Appeal.
The
Valuator next proceeds with step
(
e) to ascertain the degree to which
the property exerts owner-occupancy appeal. 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 owner-
occupancy 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 inhabi-
tants 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 con-
stantly 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-occupant
than
to
a typical tenant-occu-
pant, or the extent to which the returns a typical owner-occupant
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-occupancy could avail himself
of
both a rental
return as an owner-landlord during the period of excessive rental value
levels and an amenity
return
as an owner-occupant
at
the same time.
Obviously this is both impossible and an illogical assumption. The
currently existing high rental value cannot be used because the amenity
comparison method postulates a typical purchaser for owner-occu-
pancy. The point
at
which the prospectively declining
rental
values
are likely to become relatively 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. Declines which rnay occur in more
distant years are taken into account directly when selection is made
of the conversion factor applicable in any given case.
1411.
In
instances where the Valuator is required to make
two estimates of monthly rental value covering different periods of
time
in the
future he records his conclusions in this manner opposite
question (21) on
FHA
Form No. 2015:
1410-1412 (1)
UNDERWRITING MANUAL
would receive may have a monthly value in excess of the monthly:
rental value.
It
is obvious
that
anything pertaining to the prop-
erty or the immediate neighborhood which enhances the owner-
occupancy 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 prospective tenant-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 owner-
occupancy appeal, 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 tenant-
occupant.
1412
(2). Shelter is a universal necessity and is ob-
tained either by renting residential accommodations or 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 satis-
fied 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's inhabitants, fulfillment of these
hopes and wishes is possible to the greatest degree and the owner-
occupancy 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 owner-
occupancy appeal ascribed to properties are merely relative. How-
ever, the standard, in terms of which comparative degrees are ex-
pressed, embraces the 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 completely the hopes and wishes which depend for realiza-
tion on ownership combined with occupancy of a home. A prop-
erty which exerts strong owner-occupancy appeal 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 prop-
erty, and would
attain
to great intensity upon inspection of the
VALUATION
OF
AMENITY
INCOME
DWELLINGS
1412 (1)-1412
(2)
,
,
prope
rty
a
nd
t
he gaining of
knowl
e
d
ge
t
hat
t
he
n
e
ighborhood in-
habitan
ts
w
e
re considered
v
e
r
y
d
esi
r
abl
e from the
st
a
nd
p
oint of the
per
s
on or family inspecting
th
e
pr
op
e
rty. To the extent
t
h
a
t
char-
acte
r
i
st
ic
s
of the approach to the n
e
i
g
hborhood, the
n
e
ighb
o
rhood
itself,
t
he subject property, and the neighborhood
inhabit
an
ts were
less
favor
a
bly regarded, the
i
ntens
it
y
of the desire for
own
e
r
s
hip
combined with occupancy of
th
e
prop
e
rty
would be
re
s
tri
c
t
e
d,
a
nd
owner-occup
a
n
c
y appeal would
lik
ew
is
e
g
rade
downw
a
rds.
1412
(3).
In
dete
rmini
ng
t
h
e e
x
t
ent to
whi
c
h a
p
r
op-
erty
exert
s
o
w
ner
-
o
cc
up
a
n
cy
a
pp
ea
l
,
t
h
e
Va
luat
o
r
m
ay
b
e
guid
e
d
,
in
p
a
rt, by the
e
v
idence
s
in
di
cate
d in
re
c
en
t
sale
s
.
The
f
ac
t
t
hat
bu
y
er
s
h
a
v
e
b
ee
n purcha
s
ing
w
ith
o
cc
upan
c
y in mind
prob
a
bl
y indi-
cates a
d
eg
ree of
owner-occu
pa
n
cy
a
p
p
e
al. However,
s
u
c
h
in
dica
-
tion
s
c
a
n be used as evidence
on
ly by considering
th
e
ac
t
u
ating
motiv
e
s of the
buye
r
s and
num
e
rou
s other
sign
i
ficant
facto
r
s
.
The
real
te
s
t
i
s
:
To what extent
w
oul
d
th
e
existing
conditio
n
w
it
h
ref
-
erenc
e
to any significant factor
und
e
r
c
onsideration
me
e
t
t
h
e maxi-
mum
r
e
qui
re
m
e
nts of an
ex
a
c
t
in
g
a
nd
di
s
criminating
t
y
pi
ca
l
pro
s-
pective
o
wne
r-o
cc
upant
?
Thi
s
c
a
ll
s
for
a contrasting of
t
he
m
a
xi-
mum requir
e
ments
pert
a
ining to
th
e
condition
from
t
h
e
poi
n
t of
view of prospective
typi
c
al
owner
-
occupants with
the
r
e
quir
e
m
e
nts
of
pro
s
pectiv
e
tenant
-
occupant
s
.
The matters listed
b
e
lo
w
a
r
e con-
sidered to be significant
factor
s
in
es
timating the degree of owner-
occup
a
n
c
y appeal.
T
he first four and the
e
i
ghth items relate to
the
nei
ghborhood
an
d the others
r
e
lat
e to the
s
pe
c
i
fic
property being
appraised.
a.
Th
e
appearance of the
i
mm
e
diate neighborhood and of the
a
pproach to
it
as
th
ey
a
ff
ect
o
r
cr
e
ate
o
w
n
e
r-occupan
c
y
a
pp
e
al.
b.
Th
e
life-
s
tage of the
imm
e
di
a
t
e
n
ei
ghborhood
.
R
es
idential
n
e
i
g
hborhoods
u
s
uall
y
enha
n
ce
in
de
s
irability
if
th
ey build
up
s
ufficient
l
y fast. Wh
e
n
bu
ilding stops,
th
e
y
re
main
rela
-
ti
ve
ly
stab
l
e
for a period of time, and then decline. The
tendency is
fo
r
owner
-
occupancy
appea
l to go up, level off,
)--
·:
·
and
then
go
d
own as the life-stage
pro
gr
esses
.
Evid
e
nces
of
the life-stage, so
far
as
ow
n
er-occupancy appeal
i
s
concerned,
m
ay be found in the age of the neighborhood, though
this
m
ay
n
ot be of
m
a
jor
i
mpo
rtance;
t
he
p
r
oportions of owner-
occ
upancy and
te
n
a
n
t
-occu
pa
n
cy
;
t
he
percen
ta
ge
0£
v
ac
ant
r
es
idential units
i
n
th
e n
e
i
g
hborhood;
t
he per
c
entage of
vac
a
nt
lots in
t
he
a
rea
a
nd
th
e rate of absorption of
s
u
c
h lots
into
u
s
e; the rate of
i
nc
r
e
a
se
or
d
e
crease in
popul
a
tion
inthe
n
e
ighborhood; and
th
e
general impression
gain
e
d from an
1412
(2)-1412 (3)
UNDERWRITING MANUAL
r
·
~
'
e.
Owner-Occupan
c
y
AppeaL-------
--
-------,.------~-------~
65%
in
s
pe
c
tion of
t
h
e
area to
asce
rtain if
e
viden
c
es of obsolescence
ar
e
observ
a
bl
e
.
c.
The
degree
·
of prestige associated with the neighborhood as
a place
for
owner-occupancy in contrast with tenant-
o
c
cupancy.
d,
The degree of social and racial compatibility of the inhab-
itants of the neighborhood. The
pre
se
nce of socially or
racially inharmonious groups in a neighborhood tends to
l
e
ssen or destroy
owner-oc
c
upancy appeal.
e.
The extent to
w
hich
th
e
s
ubject property in
its
external
9
tt
as
p
e
cts and
int
e
rior
fini
s
h and appointments are
espe
c
ially
ff
~
'
attractive to the eye and create a
d
e
sire
for
owne
rship as
contrasted with tenancy.
f.
The extent to which the
fun
ctional quality of the property,
t
/
, .
>
.<
as
e
videnced by the
ratin
g
s of the "Function" features in
/..
c
Rating of Property, would be
s
ati
s
fa
c
tory to a
pro
s
pective
owner-occup
a
nt in
contrast with a tenant-occupant.
g.
The
relativ
e newness of the building improvements of
the
s
ubject
prop
e
rty,
consider
e
d from the
st
a
ndpoint as
to
how
t
h
is
conditio
n
a
dds to
t
h
e
d
es
ire to own and occupy
rather
tha
n to mer
e
l
y
oc
c
upy as a
t
e
nant.
h:
The extent
a
n
d effect of
ne
i
ghborhood detractions,
that
is,
of things or conditions not already mentioned which detract
:from appeal
for
owner-o
cc
upancy. A dilapidated or ugly
of
obsol
e
t
e
bu
i
lding would
l
e
ssen the owner-occupancy appeal
of adjoining and nearby
properties
.
Traffic
hazard
s
,
noise;
smoke, and obnoxious
odor
s
also are detractions.
i.
The extent and effect on owner-occupancy appeal of any
inappropriat
e
ness of the
s
ubject property to
its
immediate
n
e
ighborhood
.
The
fir
s
t
sev
e
n
matt
e
rs li
s
ted
ma
y be considered
positively
,
wh
ile the
last two require
consid
e
ration as
neg
a
tive factors;
that
is, they operate
to reduce the degree of owner-occupancy appeal.
1413.
The conclusion takes the form of a percentage
expre
s
si
o
n
w
hich represents the
d
e
gree of appeal
for
owner-occu-
pan
c
y.
If
the
conclus
ion is
that
the owner-occupancy
app
~
al)s
negligible, then the amenity
compa
r
ison method will not be appli-
cable
.
.
In
such cases the capitalization method described in Section
15,
Valuation of Rent
a
l Income Dwellings,
s
hould be used.
It
is
a
ss
umed
for
the
purpo
s
es
of
the
.
e
xample,
th
a
t
the Valµator has
reached a
conclu
s
ion in this step as follows:
VALUATION
OF
AMENITY
INCOME
DWELLINGS
1412 (3)~1413
l
•
1414.
Monthly
Amenity
Increment.
A residential
property which exerts owner-occupancy appeal will produce returns
or
s
e
rvices to typical owner-occupants which are more valuable than
is indicated by the monthly rental value to typical tenants.
For
ex-
ample, owner-occupants of such
proper
t
i
e
s obtain returns which in-
clude independence in 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 re-
turns received by the tenant, the value of the returns realizable by
a
typical owner-occupant is greater. The amount by which
it
is greater
is designated
·
herein as the
monthly
am
e
nity
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 percentages indicate the
ext
e
nt
to which the value of the monthly returns or services of a property
to a typical purchaser
for
owner-occupancy exceeds the monthly
rental value of the property to a typical tenant. The returns to the.
owner-occupant are not received in monetary form but
rather
in the
form of direct services and
satisfactions
.
However,
for
the purposes
of valuation a monetary
v
alue must be
a
s
cribed to these
returns
.
This is accomplished by 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
know
n and available for analysis. The :factors
vary
:for
properties in different value groups and
for
properties
exerting various degrees of owner-occupancy appeal. Thus, within
any one value group, the higher amenity increment percentages are
found
to
relate to
propert
i
es
of higher owner-occupancy appeal.
With regard to properties in different
v
a
lue groups, the higher per-
centages relate to the properties in the higher value groups, assuming
equal degrees of owner-occupancy appeal. Amenity increment per-
centages are
a
ss
embled in
tabular
form
so
that
an appropriate in-
crement may be readily selected
after
clas
s
ification of a property into
the proper value group and
after
a conclusion has been drawn as to
the owner-occupancy appeal percentage.
1417.
Amenity increment
per
c
entages are used to esti-
mate the monthly value, for the
ensuin
g
12
months only, of the
1414-1417
UNDERWRITING MANUAL
~
l
I
1
-~
I
returns to typical
o
w
ner-occup
a
nts. The
c
ertainty,
c
onstancy, and
duration of returns
th
e
reafter do not enter into the
select
i
on of
amenity increment
pe
rc
entages. These
characteri
s
tics of the future
returns are given consideration
a
t
another point in the valuation
process. The value
r
a
nge and
o
w
ner-occupancy appeal percentage
are
th
e criteria
w
hich
di
c
tate
s
el
ec
tion
of
the
s
e increment
per
c
ent
-
ages.
In
the example
it
is
a
ss
umed
that
th
e
amenity increment
percentage selected by the Valuator
i
s
as :follows
:
t.
Am
e
nity increment
percentag
e
for
value
rang
e
$4
,
000 to
$6
,
000
and for
o
wner-occupan
c
y
a
ppeal
65
%~
-
--
--------
-
10
%
1418.
Determination
of Derived Monthly Value.
The
next step requires the Valuator to
d
e
t
e
rmine 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 services and satisfactions
r
e
aliz-
able by a typical purchaser of the property
for
owner-occupancy.
It
is always in excess of the monthly rental
value
,
although
some
ti
mes
the excess may be small as in
ca
se
s
where relatively low
owner-oc
c
u-
pancy appeal per
ce
nt
ag
e
s apply.
1420.
The derived monthly value is
a
scertained by mul-
·
tiplying the monthly
r
e
ntal value by the applicable amenity increment
percentage,
thus:
fl
,
Determination
of
D
e
rived
Monthl
y
V
alue
:
Monthly
R
en
t
a
l
Value
__
__
___
___
__ __ __
___
_
___
_
_____
$40
Amenity
In
c
rement
Percent
age___
____ ____
___
_
___
___
X
10
%
Monthly
Am
en
ity
Increm
en
t_
_
_________
_
___________
$4
Derived Monthly Value
($40+
$
4)-----
-
------------
$44
If
the amenity comparison method
i
s
u
s
ed in
a
ppr
a
ising a
s
mall
multi-family property, the
proces
s
i
s
the same as in the case of a
single-family amenity income dwelling except
that
a slightly differ-
ent treatment is prescribed in determining the derived monthly value.
The monthly rental values of the individual
unit
s are estimated as
in
o
t
her
cases
.
The
owner-occup
a
n
c
y appeal p
e
rcentage will be
lower
than
in the case of the single-family property,
inasmu
c
h as
the
own
e
r
occupant
m
u
st share the premises in certain respects with
tenant occupants and must also
as
s
ume the burdens of operating a
rental business in
conne
c
tion with
hi
s own home accommodations.
The
am
e
nity
increment
percen
t
age
w
ill be applied only to
th
e rental
value of the
unit
likely to be
occupi
e
d by a typical purchaser.
After
this addition has been made, the derived monthly value is deter-
c
VALUATION
OF
AMENITY
INCOME
DWELLINGS
1417-1420
•
•
Derived Monthly Value $84. 00
1421.
Conversion
Factors.
There is a relationship be-
tween 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 conversion factor is used,
it
serves the same purposes as do
capitalization rates and remaining economic life estimates in the cap-
italization 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 estab-
lished. A substantial number
0£
properties should be selected
for
this purpose. The Chief Valuators ascertain then what conversion
:factors will produce the individual derived monthly values previously
estimated
:for
each property. Thus,
if
the total valuation of a prop-
erty is $5,000, and the derived monthly value is $45, the conversion
:factor is
111.
A tabulation should be made
so
as to facilitate study
of the various cases
in
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.
Total-------------------------~-------------
$44.00
Tenant-Occupant's
Unit:
Monthly
Rental
Value_________________________ 40. 00
mined by obtaining the sum of the resulting figure and the monthly
rental value of the accommodations which 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
1420-1422
UNDERWRITING MANUAL
r
h
.
.Applicable Conversion
Factor
103
1425
(1).
Valuation
of Land. The Valuator is next re-
quired· to reach a conclusion as to the value to be ascribed
to
all the
land which comprises an eligible area. This is accomplished in ac-
cordance with instructions contained in Section
13.
In
determining
the extent of an eligible land area, the Valuator is guided by in-
structions in Section
5.
In
the example
it
is assumed
that
the
Valuator's conclusion is 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
1423.
Tabulations should be separately made according
to economic background areas, and should include properties char-
acterized by upper and lower extremes and midway points as
to
factors of major significance, such as remaining economic life esti-
mates, 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
1
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
financial bases.
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 :factors in logical
relation to the differences in 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 economic lives require
the use of lower conversion factors. Intermediate combinations of
these elements, which reflect the quality and duration of future re-
turns, indicate the application of intermediate conversion factors.
In
the example
it
is assumed
that
the Valuator's decision is as
follows:
VALUATION
OF
AMENITY
INCOME
DWELLINGS
1423-1425 (2)
--·------
~----~-~-------~~----.,....-....--
i
I
I
-
-
~
j
••
•
THE ESTIMATE OF AVAILABLE MARKET PRICE
1427.
After
the Valuator has made the estimate of de-
rived 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.
Derived Capital Value
$4,
532
$4,532
Excess
Land-none
--
-----
-
-----------------------
00
unit which is typical in the immediate neighborhood, or an area
in
exce
s
s of
that
which is adequate to suitably
a
c
commodate the build-
ing improvements in the case.
If
the excess land 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 excess land 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 accommodate the building im-
provements.
In
such cases, therefore, three land valuations are.nee-
essary, namely
:
(a) Valuation of the total eligible area; ( b) valua-
tion 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 conclusions might then
be
as follows:
i.
Valuation of
Land
(i. e., the
entir
e 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
.Applic
a
ble Conversion
Factor-----------
-
---------
-
X103
1425
(2):,_;1427
UNDERWRITING MANUAL
1430.
When comparison percentages are used, the prop-
erty 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 per-
centages 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
locations.
1428.
Market price estimation requites the use of sales,
asking prices, and offers, for the purpose of eslimating prices ob-
tainable for properties in the open market
at
the time, or within
ai
reasonable period after the date of appraisal. This necessitates many
comparisons relating to the nature and mutability of the characteris-
tics, 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 acceptable value 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 ac-
crue to an owner, then the final conclusion as to the market price ob-
tainable for any property under appraisal will also be the final conclu-
sion as to a reasonable estimate of the value of the property. Therefore,
after making the comparisons and analyses necessary in market price
estimation, the Valuator must realize
that
the resulting conclusion can-
not 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
VALUATION
OF
AMENITY
INCOlVIE
DWELLINGS
1428-1430
j
•
•
Indicated
Avail
a
ble
Market
Price for
P
r
operty
Under
Appraisal
$4,
762
4, 722
4,947
5,
105
4,
706
L
_
Estim
ate of Available
Mark
e
t Price
$4
,
850
Comparison
Percentages
105%
90%
95%
95
%
85
%
Sales
Prices
$5,000
4,250
4, 700
4,850
4,000
Properties
Compar
e
d
A-------
--
--
----
-----------
----
-
--
-
- -
-
----------
----
-
B-------
---
-
-
-
---
---------
------
--
----
----------
-
--
--
c
_
D----------
-
-
-----
--------
---
--
--
-
-
----
--------
------
E
----
-
-
---
--
--
-
--
--
-
-- --
- - -
-
-
-
-
--
-------
-
---
-
--
k, Estimate of
Availabl
e Market
Pric
e
:
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
avail-
able market price is not determined by averaging the indicated
available
m
a
rket prices, because some of the sales used in the com-
parison 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
diff
e
rentials. By "price
diff
e
rential" is meant
a lump sum addition or deduction :from the price paid, asked, or of-
fered, in order to correct
:for
differences
o: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",
e
x
cept
that
the one under appraisal has one more room.
Assume also
that
the Valuator is justified in concluding
that
the
extra room would
enh
a
nce the ability to command a price in the mar-
ket to the extent
o:f
$7
5
0.
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:
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 environ-
ments in which the several properties are located, the nature, prospects
and the probable effect of any changes which may occur.
After
mak-
ing
the comparisons, he ascribes percentages and applies them to the
purchase prices
o:f
the properties compared with the one under ap-
praisal. He thereby obtains indications
o:f
the available market price
for the property which he is appraising. The illustration below indi-
cates how the comparison computations are made:
1430-1431
UNDERWRITING MANUAL
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 esti-
mate 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 esti-
mates,
it
cannot be accepted as the final estimate of total value.
This is the practical application of the
sub
s
titution theory described
in Section
13.
The final estimate of value may not exceed the re-
placement 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 comparison of the three estimates occurs:
Total Replacement Cost of Property
$5,
100
Total Replacement Cost of Improvements $4, 300
Land valuation------------------------------------ 650
Miscellaneous allowable costs
...:_______
_
__
_
___
150
l,
Replacement Cost of Property
:
Main building
$3,
900
Garag
e
------------------
-
---------
~
---
-
----
_
Other
improvements-------
-
-
----~-----~---- 400
1432.
When the Valuator has made the estimate of avail-
able 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 replacement cost of property in new condition in accordance with
the instructions in Section
13.
In
the example, the conclusions are
as follows:
E
s
timate
of
Avail
a
bl
e
Market Pric
e
$4,8
5
0
Price
Differentials
k:
Estimate of .Available Market Price: Indicated
Available
Mark
e
t
Price for
Property
Under
Appraisal
$4,550
4,600
5,100
5,200
4,750
-$450
+
350
+400
+350
+
750
Sales
Prices
$5,
000
4,
250
4,
700
4,850
4,000
Prop
e
rti
e
s
Compared
A----
---
--
-----
---
-
- -
--
- -
----
-
- -
--
- -
---
----
-----
-
B--
-
--
----
------
--
- -
--
-
-
------
-
--
--
-
-
-------
- -
---
c
:
_
_
D---
----
--------
-
--
-
--
--~
------
- -
-
--
-
-------
--
-
- -
E-
-
---
-
--
-------
-
--
-
- -
- -
------
-
--
-
----------
-
-- --
VALUATION
OF
AMENITY INCOME DWELLINGS
1431--1434
I
~
I
I
J
•
1434-1438
UNDERWRITING MANUAL
m.
Determination
of
Estimate
of
Value:
Estimate
of Derived
C
a
pital Value--------.,--------
$4, 522
Estimate
of
Repl
a
cement Cost of
Property
$5,
100
Estimate
of Available
Mark
e
t
Pric
e
$4,
85()
Estimate
of Value (lowest of
the three)
$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 difference between the
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
I
limits of the three figures. Another exception is stated in para-
graph
1438.
1436.
In
the case of new construction or properties in
early life, the three estimates are frequently reasonably close together;
In a
runway market in which building costs, land prices, and real
estate sales prices are soaring
far
beyond levels which can be sus-
tained for reasonably long periods they would not be close.
1437.
In
the case of existing properties in midlife or
new properties which are overimprovements or 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 $4,100 and $4,600.
In
such a case the
derived capital value of $3,900 is 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 $4,525 and $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
bec
a
use the prices which prop-
erties command in such depressed markets may be unduly low,
the
Valuator is justified in giving consideration to the propriety of sub-
mitting
a figure higher
than the
estimate of available market price.
In
the case cited, he might very properly submit $4,300 as 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 conducive to overvaluation during periods
of reasonable or intense market activity or during short lived periods
of inactivity.
Total
_
Replacement Distribution
Cost of of Estimate
Property of Value
$650
$650
3,
900
3,500
400
375
150
$5,
100
$4,
525
Land
_
Main Building
_
Garage
_
Other
Improvements
_
Miscellaneous Allowable Costs
_
DISTRIBUTION OF ESTIMATE OF VALUE
1440.
After
the Valuator has determined his final esti-
mate 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 valua-
tion 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:
1439.
In
localities where operative-builders erect numer-
ous homes for sale on a volume production 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 pre-
sumption 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 mar-
ket 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 $5,000 figure as his final valuation. The
$500
difference is the profit of the operative builder and land developer.
VALUATION
OF
AMENITY
INCOME
DWELLINGS
1439-1441
)
)
r
•
•
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 be-
tween
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 com-
parable properties are £ound
in the
same immediate neighborhoods
and are made the basis
0£
large numbers
0£
applications £or mort-
gage insurance,
1444.
l£
an operative builder or land developer is en-
gaged in large operations, the valuations
0£
properties will be ad-
vantageously 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;
1442. When the difference between the total valuation
and
the land
valuation is less
than
the cost
0£
replacement
0£
prop-
erty minus the land valuation,
the
difference is the amount
0£
accrued
depreciation as a result
of
overimprovement, underimprovement, de-
terioration, or other causes.
1442-1444
UNDERWRITING MANUAL
--
··-
-
··
-
-
··
---------·
···
·
-
---
E
ffe
c
ti
v
e
F
e
bruary
,
1938
.
Federal
Hou
s
ing
Administration.
Pa
r
agraphs
Valuation
Proce
s
s---------
-
----
---
-----
--
----
--
--
-----
-
-------
-
--
1501-1502
EstiJnates of
Gro
ss
R
e
ve
nu
e
--
-
--
-
-
-
---
-
--~------
-
-
-------
--
---
-
---
1503-1511
Determination of Rental
Valu
es 1505-1506
Total Rental Value of
Space_
___ ___
__ ___
_ _
__
_____
_
__
__
________ 1507
Miscellaneous
Revenue
s
,
1508
Occupancy Percentage 1509_1510
Calculation of
E1l'ective
Gross Revenue__
_
___________
__
________
Hi11
EstiJnates of
Operatin
g Expenses
1512-11
Renting and Administrative
Expen
se
1516--11
Regular Operating
Exp
e
n
s
e___
__
___
__
_________
_
__
_
_______
__
_ _
_
11
Repairs, Maintenance, and
Replacem
e
nts 1520-U
Taxes and
llazard
Insurance-
--
----
--
-~
---
----
-------
-
-------
1524--lt
EstiJnates of Net Earnings
152¬ >>-15
Estimation of Value
b
y
Capitaliz
a
tion 1532-15..v
Steps in
Capitaliz
a
tion
Proce
ss
---
-
-
-
-
----
-
-----
--
--------
-
---
1533-1536
Value
Adju
s
tment
s
-----
-
----------
---
--
-
-----
--
---
--
---------
1537-1538
Completion of
Forms-------
-
---
-
--
-
-----
---
----
-
-----
-
-------
1539
Mathematics of
Capitalization--------------
-
-
-
-----
----
---
----
-
--
1540-1549
Present Value of
an
Amount_
_
__
_
_
___ __ __
_
__
_
__
_
_
__
__
_
__
__
___
1542
Present Value of
a
Declining Annuity 1543-1544
Perpetuitie
s
---
-
----
-
--
-
--
-
---
--
---
-
----
--
-
-
----
-
-
--
----
--
--
--
1545-1546
Interest
'!'ables---------
------
--
------
---
--
-----
-
---------
---
-
1547
Provi
s
ion for
Future
Depreciation 1548-1549
Determination of
Capitaliz
a
tion
R
a
te
s
1550--1555
General
Level of
Capit
a
lization
Rat
e
s--
-
---
---
--
----
-
--------
1550--1553
Selection of
Rates----------
-
----
-
--
-
--
-
----
----
-
------
-
-----
1554-1555
Furnished
Apartment
s
'--------
----
--
----
------
----
----
--
-
---------
1556--1566
CONTENTS
PART
III
SECTION
15
VALUATION OF RENTAL INCOME DWELLINGS
VALUATION PROCESS
1501.
Multi-family dwelling properties and single fam-
ily
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
consists of 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 competent management
b.
The making of estimates of the probable expenses of oper-
ation, under the supervision of ordinary competent man-
agement which would have to be incurred in producing
the effective gross revenues in the amounts estimated
c.
The estimation of the net earning expectancy in both
quantitative and qualitative terms. The amount is deter-
mined 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 conversion of net earning expectancy by
capitalization into an estimate of the value of the
property
1502.
The capitalization process, herein prescribed, es-
tablishes 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 income remaining
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
(
PART
III
SECTION
15
VALUATION OF RENTAL INCOME DWELLINGS
-
<
4
#
.
-&4
=
~
-
-
-
-
-
-
-
-
.
-
-
-
----
-
•
•
1
i
I
!
l
ESTIMATES OF GROSS REVENUE
1503.
Gross revenue at 100% occupancy
is defined as the
estimated total income actually derived from operations derivable
at
100% occupancy before deductions for operating expenses, taxes,
in
-
surance, 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%
occupancy less allowances
for
expected vacancy and collection losses
and allowances for all other contingencies which reduce the amount
of revenue collections.
1504.
Estimates of effective gross revenue are usually
made
for
yearly periods commencing with 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 miscellaneous revenue 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 described below.
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
increase-
or 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 succeeding year, during the years subsequent to the time
of
income dwellings of the type with which the Federal Housing Ad-
ministration 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 differences in the estimate of land value.
1502-1506
UNDERWRITING MANUAL
In
the typical properties with which the Federal Housing Adminis-
tration deals, there are seldom miscellaneous revenues.
1509.
Occupancy
Percentage.
"Occupancy" refers to
performance in relation to the securing of gross revenue. The esti-
mate of gross revenue at 100% occupancy is taken as the standard,
and "occupancy" is expressed as the ratio between actual gross reve-
nues or estimates of effective gross revenues and the standard. The
occupancy percentage is, therefore, an expression of revenue-produc-
ing 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
1st year 2nd year
Total
Yearly
Rental
Value
________________
_
____
_
_____ $3,090 $3, 150
Extra
Garage Spaces, 4
at
$4
.
00
per month
_ _
_____
_
_____ 192 192
Total
Revenue
at
100% Occupancy _____________
$3,282 $3, 342
\
,I
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:
Monthly
Rental
Value 1st Year 2nd Year
ApartIIlent
A-1-----
--
-----------------
-
--------
--
$62. 50 $62. 50
ApartIIlent
A
-
2
______
_
___
_
_______
_
_____
_ _
_
____
_
___
65.00 67. 50
ApartIIlent
B-l
_____
___
__ __
_____
__
_ _
_____
_
________
62.
50 62. 50
Apartment
B-2
______
_
____________
_
____
__
_______
__
67.
50
70.
00
$257. 50 $262. 50
Total
Yearly
Rental
Value
___________
_
___
_
___
$3,090. 00 $3, 150.00
-
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:
VALUATION
OF
RENTAL INCOME DWELLINGS
1506-1509
•
to the average
for
the remaining economic life
after
the initial years
for which specific occupancy predictions are made. This average is
what is herein referred to
a
s
the "long-term average occupancy."
It
is used to embrace all the years subsequent to the initial ones for which
specific estimates are made.
1510.
The Valuator makes an estimate of the
occupan
c
y
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 second year, sometimes in the
third
year following
completion
0£
construction. The occupancy during the first year
may be estimated
at
a lower percentage or
at
the maximum, depend-
ing upon the probable experience indicated by current and prospec-
tive conditions in the rental market. A prediction of future occu-
pancy requires
that
a .study of pertinent data
be
made, embracing not
only the immediate neighborhood but of the entire economic back-
ground area as well. The Valuator assumes ordinary competent
management and considers the probability of attaining various oc-
cupancy percentages. The question of supply and demand is of
paramount importance in the prediction. The economic background
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
informa
-
tion as
to
both probable supply and demand,
it is
possible
to
fore-
cast occupancy year by year until the selected. standard of occu-
pancy is reached. The factor relating to supply-demand relationships
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 subsequent to
appraisal
.
This would be true in cases where
it
was well established
that
a short-
age of accommodations
existed
.
In
these instances, however, the pro-
vision :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 allowance need be made. Vacancies, concessions, and
collection losses are generally computed as a percentage of the rental
value
0£
the property, although sometimes
it
is estimated by assum-
ing
that
the vacancy and collection loss allowance will 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 collec-
tion losses. There are a number of factors which will influence and
1509-1510
UNDERWRITING MANUAL
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 specific changes
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 expect-
ing 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 expected performance 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 income premise applicable to the net returns
attribut-
able to the building improvements and is described in
paragraph
1528.
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
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 considera-
tion; present and prospective relationships between the supply of
rental units of competitive character, and of the present and pros-
pective demand for such units. The desirability of the rental units
under consideration obviously involves consideration of a great num-
ben 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 conclusions with respect to the occupancy per-
centages during early years, they are used to determine the estimates
of effective gross revenue. A typical calculation of this kind follows
:
VALUATION
OF
RENTAL
INCOME
DWELLINGS
1510--1511
.
J
•
•
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 obso-
lescence, 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
manage-
ment. 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 replacements of 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 economic life.
.As
a consequence, the
actual operations of determining the effective gross revenues and the
estimated operating expenses are accomplished simultaneously by
the Valuator.
1513.
In
establishing estimates of operating expenses,
Valuators use three processes to secure the final estimate of total oper-
ating
expenses. These three processes include 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
allowances
for
every type of actual expenditure for which
outlays will have to be made during the economic life 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
expenses by assuming such expenses to be a percentage of
the effective gross revenue
at
maximum or average occu-
pancy. This percentage is defined as the expense
ratio
and is determined by examining data on the operations
of similar properties.
1512-1513
UNDERWRITING MANUAL
a.
Examination of the ratios of the four major classes of ex-
penses, mentioned below, 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 allowance for heating appears high. Then, the Valu-
ator 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
proces
s
es 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 replace-
ments, 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 Administrative
Expense.
The de-
tailed items included may embrace most of the following:
a.
Advertising
b.
Commissions
c.
Alterations for tenants
d.
Offic
e
s
a
laries
e.
Office
expenses
f.
Legal and auditing expenses
g.
Telephone
h.
Expense of collections
i.
Management
j.
Miscellaneous
VALUATION OF
RENTAL
INCOME
DWELLINGS
1513-1516
~
I
j
•
•
1517.
Small rental income dwellings are usually man-
aged 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 man-
agement. 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 mort-
gage 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
recognized
in
the selection of suitable capitalization rates.
1518.
In
some cases, the estimate of Renting and Ad-
ministrative 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.
Commissions include all payments actually to
be
made and com-
missions paid to tenants in the form of concessions. Under the item,
alterations
for
tenants, the charge should be the average amount ex-
pected yearly for this purpose. Alterations for tenants do not include.
papering, painting, decorating, resurfacing floors, and routine main-
tenance. They include only the cost of
ch
a
nges such as moving par-
titions, 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
1517-1519
UNDERWRITING MANUAL
i.
Grounds expense
j.
Cleaning
k. Exterminating
t.
Miscellaneous
The determination of expenses grouped under this heading can be
accomplished easily 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 expe-
rience
in
a sufficient number 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 prop-
erties 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 otherwise be rented. Lighting expense includes
the cost of electricity,
light
bulbs, other electric supplies, fuses, and
similar items. ·whenever possible, the expense
for
electricity, gas, or
other medium used
for
refrigeration should be set up separately, to-
gether 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
VALUATION
OF
RENTAL
INCOME
DWELLINGS
1519-1520
i
I
J
•
I
.
.
Allowances for repairs, maintenance, and replacements should be in-
cluded 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
sufficiently large to be adequate to cover the average expense through-
out the remaining economic life of the building.
For
example,
limited
amount
s
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
cov
e
ring
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, how-
ever, may be illuminating.
For
illustration,
it
may indicate the pre
s
-
ence of structural deficiencies
that
can be corrected, or the proba-
bility of relatively high maintenance
co
s
ts 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
excessive rate. Relatively small items of expense which occur
:fre-
quently are considered as maintenance. Examples are painting,
decorating, minor repairs
to
me
c
hanic
a
l and electrical equipment,
plastering repairs, and pointing of masonry.
1523.
Generally, items having
fairly
long spans of useful
life but less
than
the
es
timated economic life of building improve-
ments 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 accomplished in five steps as follows:
(a) An estimate is made of the replacement cost of each
replaceable item.
(b) An estimate is made of the probable total span of useful
life of the item.
1520-1523
UNDERWRITING
MANUAL
Floor Covering:
Estimated
cost of replacement, $250.
E
s
timated total span
of useful life,
15 years. Number of times replace-
ment required (35+15=2.33)
2. Av-
erage expense
per
year($250X2+35)
_
$14
Linoleum
in the
kitchens
and bath
rooms. Cost of replacement, $150.
Estimated total span
of useful life,
8
y
ears. Number of times replace-
ment
required
(35+8=4.38)
4.
Av
e
rage expense
per
y
e
ar
($150X4
+35)
$17
Replacem
e
nt Items
Roof Covering:
Interior
Decorating
:
Estimated
cost $220.
R
e
quired
e
ve
r
y
4 years. Average expense
per
y
e
ar.,
,
$55
Estimated
cost 16 rooms
at
$12
per
room $192. Required every 3 years.
Average expense
per
year___________ $64
Plumbing system $30,
h
e
ating
system
$30, roof
repair
$20,
r
e
frigerator
re-
pairs $20,
coo
k
ing stove repairs $10,
miscellaneous
$
24. Average
exp
e
nse
per
year $134
Miscellaneous Repairs
and
Minor
Repairs:
Maintenance Items
Exterior Painting:
(
c)
Det
e
rmination
·
is made of the number of times
t
h
e item
will probably have to be replaced during the remaining
economic life of building
improvement
s
by dividing the
estim
a
ted
r
e
maining
e
conomi
c life of
t
he building im-
pro
v
ements by
th
e
e
s
timated total
s
pan of
u
s
eful life
of
t
he item.
If
the result is a whole number,
th
e num-
ber of times
r
e
placem
e
nt
mu
st be provided
for
is one
le
ss
th
an
th
is
numb
e
r
.
If
t
h
e
resu
lt
co
n
t
a
ins a fraction,
th
e
n only
t
he fraction is
dedu
c
ted to obtain the num-
ber of complete
r
e
pl
a
cement
s
.
The
se deductions are
m
a
de
becau
se
r
e
pla
ce
m
e
nt
i
s
n
o
t
nece
ssa
ry
at
the
e
nd of
economic life of building improvements.
( d)
The amount of expense to be charged on account of each
repla
c
ement
it
e
m is
d
e
t
e
rmin
e
d by multiplying the
re
-
sult found in (a) by the result found in (c) and divid-
ing by the estimated remaining economic life of build-
ing improvements.
( e)
The total
expen
s
e item on
a
cco
unt 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 illus-
trating
the method of estimating allowances
for
maintenance and
replacements follows:
1523
VALUATION OF
RENTAL
INCOME DWELLINGS
•
t
*
Special
Ele
c
tri
ca
l Equipment:
Electrical Cooking Stoves:
Plumbing Equipment:
Heating
Syst
e
m:
El
e
ctrical
R
e
fr
ige
ration:
Estimat
e
d
cos
t
of
re
placement, 60
@
$1.00
=$
60
.
E
s
timat
e
d
t
o
tal span
of
useful
li
fe
,
5
year
s
.
Number of
times
r
e
placement
req
u
ir
e
d (35+5=
7
-
1
=
6)
6. Average
e
x
pense
per
year
($60
X
6+35)
-~
__
_
__
$10
E
s
timat
e
d
co
s
t
of
repl
a
ce
m
e
nt,
$360
.
Estimat
e
d
total
s
p
a
n of
us
e
ful
lif
e
,
10
years
.
Number of
t
i
m
es
replac
e
-
ment
r
e
quired
(35+10=3.50)
3.
Av
-
erage
ex
p
e
nse
per year ($360X3+35)
$
31
Estimat
e
d cost of
r
e
plac
e
ment,
$800
.
Estimat
e
d
total span
of
u
s
eful life,
20
y
e
ar
s
.
Numb
e
r
of
tim
e
s replace-
ment
r
eq
uired
(35+20=
1.75)
1.
Av-
erage
ex
p
e
nse
per year($800X 1+35)
_
$23
Estim
a
ted
cost of
repla
ce
ment, $600.
Estim
ated
t
otal
span of
u
se
ful life, 25
y
e
a
rs. Number of times replacement
required
(35+25=
1.40)
1.
Average
expen
se
per
year
($600
X
1+35)_____ $17
Estimated
cost of replacement, $400.
Estimated total
span of
u
se
ful life,
15
years
.
Number of
time
s replacement
required
(35+15=2
.
3
3
)
2. Average
expen
s
e
per
year
($400X2+35)
$23
Ventilating or
exhaust
fan
s $120.
Esti-
mated total
span of
us
e
ful life, 10
years. Number of
time
s replacement
requir
e
d
(
3
5+
10=3.50) 3. Average
e
x
pen
s
e
p
e
r
year
($120
X
3
+
35)
=$10.
Oilburner$180.
E
s
timated total
span
of useful life, 8 years. Number of
times
r
e
placement required
(35+8=
4.38) 4. Average
expen
s
e
per
year
($180X
4+35) =$21------
-
-
----
-
---
$31
Tot
a
l Yearly
Expen
se for Repairs,
Maintenance,
and
R
e
placementa,
$419
1524.
Taxes and Hazard Insurance.
Taxes and
in
s
ur-
ance are ordinarily referred to as
fix
e
d charges,
be
c
ause frequently
the amounts are comparatively
constant
.
As a rule, the allowance
for
taxes is equivalent to the taxes
for
the latest period.
If it
is pos-
sible to for
ec
ast with
c
e
rtainty
an impending change in taxes, the
expense item may be
diff
e
rent from the amount actually devied upon
the property for the last period. The amount should include all
taxes on
th
e
property and recurring assessments,
if
any. A break-
down of
t
h
e
item should be made.
Sp
ec
ial assessments are not to
be
included
a
s the
existen
c
e o
f
a
s
pecial
as
s
e
ss
ment lien
i
s
a
c
counted for
in
R
e
placement
It
e
m
s
Window
Shad
es
:
1523-1524
UNDERWRITING MANUAL
!
1
1527.
Not only the probable amount of the net earning
expectancy, but its qualitative characteri
s
tics must be determined.
This is accomplished by analyzing the factors which indicate the cer-
tainty,
stability
,
possible and probable fluctuation, and duration of
the net income. This analysis is made by examining factors such as
tho
s
e
li
s
ted as
fe
a
tures
in
the risk
rating
category, Rating of
Earning
Expectancy.
In
fact, the Valuator should, at this stage of his work,
actually
c
omplet
e the
Rating
of Earning
Expe
c
tancy.
·
1528.
The estimate of net earnings is not complete until
it
has been made to embrace the entire
r
e
ma
i
ning economic life of the
building improvements. The specific predictions made
for
the en-
.suing
12
months, and sometimes for one or two additional years, are
1st year 2nd year 3rd year
Eff
e
ctive Gross R
e
v
e
nue
_____
_ _
__
_________
_
_ _
$2,297
$
2,674 $3,008
Estimated Total
Exp
e
ns
e
s
_____
~
---
-
---
---
--
--
1,400 1,400 1,400
Estimat
e
d Net
Earnings--------
-
-
---
-- $897 $1,274 $1,608
ESTIMATES OF NET EARNINGS
1526.
The estimate of net
e
a
rnings 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:
a lump sum adjustment as directed in Section
13.
In
new construc-
tion cases,
taxe
s
i
n
clude the estimated tax on the completed improved
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
situ
a
ted, and
for
such
total
coverage as
i
s customary, appropriate, and
a
dequate.
If,
in a given
cas
e,
it
is
c
onclud
e
d
th
a
t
the maximum
r
ec
overable loss from destruc-
tion
by fire
i
s $12,000, the item
for
fire insurance should be
for
the
average annual cost of $12,000 coverage.
If
liability, windstorm, or
other hazard insurance is customarily carried by property owners
in
the locality,
th
e
n the premium expense
for
such insurance is used.
If
the yearly cost is cheaper when policies are bought for a period
of years
in
adva
n
ce,
usually three or five, the item should be
ba
s
ed
upon the lower average yearly expense.
It
is important
to
determine
that
the amount
re
c
orded is the
figur
e
appli
c
able to one year and
not the total amount which would be needed to cover the entire term
of the policy.
VALUATION
OF
RENTAL INCOME DWELLINGS
1524-1528
•
t
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
earning
s are based on several
a
s
sumptions,
as follows:
a.
That the net earnings produced by the property will de-
cline, on the average, during the life of the buildings.
This is equivalent to
a
s
suming
that
the property will
gradually deteriorate and obsolesce in 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 excess of the value
of
the site. This
is equivalent to assuming
that
the building improvements
have a finite or limited economic life. An actual estimate
of
the remaining economic life is made in accordance with
the instructions in Section
13,
Methods
of
Dwelling
Valuation.
a.
That
the net earnings are divisible into two portions
:
(a) the
return on land which is assumed to continue, without sub-
stantial 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
assumed to decrease gradually until
it
is nil
at
the end of
their economic life.
d.
That
the downward trending earnings attributable to
the
building improvements will follow a plausible premise.
In
the prescribed procedure the building returns are as-
sumed to decline in accordance with the following mathe-
.
ma ti 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; th
a
t
the
annual
installments
will
approach
zero in
the last
year of economic life and will
terminate
with
that
year's
installment; that the
successive installments of build-
ing
returns, after the
first
year
of maximum
or
long-term aver-
age occupancy,
will gradually
decline,
the annual
amounts being
proportional to
the
corresponding yearly values of a level
annuity
at
10%
for
a term equal to
the
·
remaining economic life 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
1528
UNDERWRITING
MANUAL
r
Year Net
In-
Year Net
In-
Year Net
In-
come come come
1
____________
$897
16
_____
___
____
1,
510
31
____________
1,070
2
__________
__
1,274
17
_______
__
___
1,496 32
_________
_
__
1,
013
3
____
_
_______
1,608
18
____________
1,481
33
____________
949
4
____________
1,604
19
_____
_
__
_
___
1,
464
34
____________ 879
5
____________
1
,
600 20
_______
_
__
_ _
1,446 35
____________
802
6
____________
1,595
21
_______
_
____
1,425
36
____________ 718
7
___________
_
1,589
22
____________
1,403
37
____________ 625
8------"-----
1,584
23
_____
_
______
1,379
38
____________
523
9
____________
1,577 24
____________
1,352
39
____________ 410
10
_____
_
______ 1,570
25
______
_
_____
1,322
40
____________
286
11
____________
1,562 26
_______
__
___
1,289
41
_________
.
___
150
12
____________
1,554 27
_____
_
______
1
,
254
42
____________
150
13
____
~------- 1,544
28
____________
1,214
43
____________
150
14
____________
1,534 29
_______
_
_
___
1,
171
Yearly there-
}
15
___
_
________ 1,522
30
_______
_
____
1,
123
after
__
--
----
150
t
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 economic life 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 selected land capitalization rate.
1530.
With
these three sets of estimates made, the quan-
titative estimate of net income is complete and ready for use in con-
nection 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 economic life of
the
building is forty years, and
if
the returns attributable to the land are
estimated to be equivalent to $150 per year, then the future net earn-
ings 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 solely to indicate, in figures, what the estimates and assump-
tions mean.
VALUATION
OF
RENTAL
INCOME
DWELLINGS
1528-1530
,
.
-
·
-·
·
----
...
.
-
...
.
.........
""
.
P
.
!"'llllllZP---·•:.-
..
1•1
.
11114!1(11"1
..
Jilll!l!llt•
.
•
-
-
•t•Z..............
.
.
ESTIMATION OF VALUE BY CAPITALIZATION
1532.
Capitalization is the mathematical process of esti-
mating the value of the privilege of owning or of receiving a future
net income.
After
an income has been predicted and a rate of capi-
talization selected, the income is capitalized by discounting
it
at
compound interest
at
the selected rate to secure the value. The esti-
mates of net earning expectancy take several forms and each is sub-
jected to the appropriate mathematical treatment indicated in Para-
graphs
1540
to
1547
on the Mathematics of Capitalization.
1533.
Steps in Capitalization Process. After
the Val-
uator has made the estimates of net earning expectancy, he takes the
following steps to complete the valuation
:
a.
He estimates the value of the land by comparison in accord-
ance with the instructions in Section
13,
Methods of
Dwelling Valuation.
b,
He makes an estimate of the total replacement cost of the
property in new condition in accordance with the instrue-
tions in Section
13.
o.
He selects the land capitalization rate and the building capi-
talization rate in accordance with the principles presented
in
Paragraphs
1550
to
1555.
d,
He determines the returns to land by multiplying his land
valuation by the selected land capitalization rate.
Having made the estimates of net earning expectancy, the next step
in the valuation is the estimation of value by capitalization.
•
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!<E..MISE..
j]W~:
LAND RETURNS,
ALL
FUTURE. VE.AR5, ESTIMATED AT
$150
PER YEAR.
1531.
The following diagram illustrates the net earning
expectancy used in the above example:
1531~1533
UNDERWRITING MANUAL
e.
He determines the building returns during the years from
the date of appraisal
to
and including the first year in
which he anticipates
that
the property will operate at
long-term average occupancy. This is accomplished by
deducting the yearly returns to land from the estimates
of yearly net earnings during early years.
f.
He determines the present value of the building returns
ascribed
for
early years before reaching long-term aver-
age occupancy by discounting the estimates of build-
·
ing returns
at
the selected building capitalization rate.
In
this process he uses discount factors selected from Table
I,
shown in
paragraph
1547.
In
cases where the esti-
mate of net earnings indicates
that
the ensuing year is
the year of long-term average occupancy, this step does
not occur.
g.
He determines the present value,
at
the selected building
capitalization rate,
of
the building returns ascribed to
all future years commencing with and including the first
year
at
maximum or long-term average occupancy. The
returns are presumed to commence with the building re-
turns in the year of maximum occupancy, and decline in
accordance with the Income Premise described in Para-
graph
1528.
This series of net building returns constitutes
a declining annuity which reaches zero in the year follow-
ing the termination of the economic life of the building.
The value of the series, as of the beginning of the year of
maximum occupancy, is found by multiplying
the
esti-
mated building returns for the year of maximum occu-
pancy by a factor selected from Table
II,
shown in
Paragraph
1547.
The value of the series, as of the
appraisal date, is then found by discounting this figure
(the value of the series as of the beginning of
the
year
of
maximum occupancy),
at
the selected building capitaliza-
tion rate, by using a discount factor selected from Table
I,
shown
in Paragraph
1547.
If
the estimate of net earn-
ings indicates
that
the ensuing year is the year of maxi-
mum or long-term average occupancy, this last step does
not occur, because the value of the series as of the year of
maximum occupancy is actually the value of the series as
of the date of appraisal.
h.
The total valuation of the building is then found by adding
the results obtained in
{!)
and (g).
....
.J
1533
VALUATION
OF
RENTAL
INCOME
DWELLINGS
.
-
·-
·
~- ------..,..----
The
third
year is assumed to be the year of maximum or long-term
average
occupan
c
y.
a.
Estimated Value of Land by Comparison_________ $2, 500
b,
Estimate of Total Replacement Cost of the Prop-
erty in New Condition $19, 300
a.
Selected Land Capitalization
Rate___________
_
___
6
%
Sele
ct
ed Building Capitalization Rate____________ 8%
d. Estimated Yearly Land Returns:
Land Valuation,
$2,500
x
L
a
nd Capitalization
Rate,
.06------
--
-----------------------------
$150
e.
The building returns during the years from date of
appraisal
to
the end of the year of maximum or
long-term average occupancy are found as follows:
1
s
t year 2nd year 3rd year
Estimated
Ne
t
Ea
rnings
____
___
_
--
------
---
-
-
$897 $1,274 $1,608
1535.
In
applying the method to cases where the
predi
c
-
tion of net earnings embraces
s
everal early years, all
th
e steps listed
in
Paragraph
1533
are
utiliz
e
d.
In
the following example, the steps
are identified by letters to correspond to
Paragraph
1
5
33.
The
esti
-
mates of
earning
s
are as follows
:
average.
I
i.
The
to
ta
l valuation by
capitali
za
ti
o
n of the
e
n
tire property
i
s
esti
m
a
ted
b
y
a
dding the
lan
d
v
aluati
o
n found in (a)
t
o
t
he
bu
i
lding
va
lu
at
ion
fou
nd in
(
h).
j.
The
e
n
ti
r
e
proc
ess
a
lready
d
esc
ribed is
rep
ea
t
e
d a number
of times using
r
ea
sonable variations in
assu
mptions and
the figures are
adju
s
ted in
a
c
cordance with
t
he principles
pre
se
nt
e
d in
P
aragr
aph
s
15
3
7
t
o
1539
until the
Valuato
r
has
fo
rmed
hi
s
fina
l
c
on
c
lu
s
i
o
n
w
ith
r
es
p
ec
t
to the
t
o
t
a
l
val
uati
on.
1534.
The
:fo
reg
oing method of estimating value
by
capitalization
i
s
illustrated
b
y two
ex
amp
les. The
ex
a
mple given
in
Paragraph
1
5
35
u
s
es a
n
et
ea
rning
ex
p
e
cta
n
c
y
t
y
pi
c
al of
s
ome new
construction
c
a
ses
w
her
e
th
e
a
pprai
sa
l
i
s a
va
luation as
o
f
completion
of
constructio
n
.
It
uses
th
e
s
a
me
incom
e
fi
g
ures as
th
ose which
wer
e
used as examples in the
d
esc
ription of
th
e estimate
o
f
net earnings.
The example given in
Para
g
raph
1536
u
se
s
an earni
n
g
expectan
c
y
typical of
exi
st
ing and of
tho
s
e new
con
st
ruc
t
ion cases
w
here the net
in
c
ome
for
the ensuing
12
months is
exp
e
cted
to
be
at
the long-term
1533-1535
l
UNDERWRITING
MANUAL
g.
The building returns for the period embracing the
third
year
to the end of the economic life of the building improve-
ments are treated as an annuity commencing with
$1,458
at
the end of the
third
year and declining in accordance with
the Income Premise. The estimate of total economic life
is forty years. Hence, the declining annuity, which com-
mences with the
third
year, runs
for
a period of
38
years.
It
is not necessary to make any calculation or table show-
ing the amounts of the building returns for any year beyond
the
third
year. The value of the annuity as of the begin-
ning of the
third
year,
that
is, two years from the date
of appraisal, is found by multiplying the building return
which accrues
at
the end of the
third
year,
$1,458,
by the
factor for
8%, 38
years, in Table
II,
namely
10.77.
The
result is
$15,703.
The value of the annuity, as of the date
of appraisal, is found by discounting this result for two
years. Table
I
indicates
that
an amount of
1
deferred
two
years
at
8% has a present value of
.857.
Hence, the pres-
Ist
year 2nd year
Estimated
Building
Returns
in
Early
Years ______________ $747 $1, 124
Table I
factors _______________________________________
.
926
.
857
Present
Value of Building
Returns
________________ $692 $963
f.
The property is expected to operate
two
years
before
reach-
ing maximum occupancy. The first year's building
return
of
$747
is assumed to accrue
at
the end of the first year.
The second year's building return of
$1,124
is assumed to
accrue
at
the end of the second year. Table
I
indicates
that
an amount of
1
deferred one year at 8% has a pres-
ent value of
.926
and
that
an amount of
1
deferred two
years
at
8% has a present value of
.857.
Hence the
present value of the building returns ascribed for early
years is found as follows
:
1st year 2nd year 3rd year
Estimated Net
Earnings _____________________
$897 $1,274 $1,608
Estimated
Yearly Land
Returns
______________ 150 150 150
Estimated
Building
Returns
in Early
Years ______________________________
$747 $1, 124 $1,458
VALUATIOl'lf OF
RENTAL
INCOME
DWELLINGS
1535
L
Total
Valuation of
PropertY----
--
------
--
-
-----
-
--
--
--------
$17, 612
j.
The
s
ame
pro
c
ess
i
s
th
e
n repeat
e
d several times
u
s
ing other
plausible estimates of earnings, land value, economic life,
and capitalization rates until the Valuator is satisfied
with
th
e
correctn
e
ss
of
th
e
fin
a
l
es
t
imate.
In
all cases the
fina
l
re
s
ults for land, building, and total valuations are
rounded off to the
neare
s
t
$2
5
,
$
5
0,
or
$100
depending on
the price range
a
nd are
r
e
por
t
ed as follows
:
Total
Valuation of
Prop
e
rtY-------------------------------
-
-
$17, 600
Distribution of value
e
stimate:
Land $2,500
M
ain
Build
i
ng
15,
100
Gara
g
es------
-
----
--
-
--
--
----
-
--
-
-
-
--------
_
Other
Impr
o
vements
------
If
the distribution of the total valuation of the improvements is
to
show more
than
the one
figur
e
,
the total is divided between the
building,
gar
ag
e,
or other
it
e
ms
,
approximat
e
ly in proportion to the
estimated
cost
s
of
repl
a
cement of the several
i
tems.
In this
example
the estimated
replacem
e
nt
cost
of
th
e property is
$19
,
300 and exceeds
Total
Valuation of Building
Improvem
e
nts
$
15,
112
i.
The tentative
total
valuation of p
r
operty is
estimat
e
d by
adding the land
v
alu
a
tion found in (a) to the
v
a
luat
i
on of
the building,
thus:
-Total Valuation of
Land----------------
-
-
-
----
-
-----------------
--
-
-
$2,
500
Total Valuation of Building
Improv
e
men
ts
$
15,
112
Present
Value
o
f
Building
Returns
f
or
1
s
t
year____________
_
__
_
__
__
__
$692
Present
Value of Building
Returns for
2nd
year
__
____
_
___
_
___
_
___ ___
__
963
Present
Value of Building
Returns for remaini
n
g 38
yrs_____
_
__
_
______ 13, 457
ent
v
alue
of
the
defe
r
red
a
nnuity is found by multiplying
$15
,
703
by
.
857.
The following shows these
calculation
s
:
Building Returns, 3rd
y
ea
r--------------------------------
-
------
$1, 458
Table
II
factor
,
at
8
%
,
for
the
p
r
e
s
ent
value of
an
annuity
for
38
ye
ars
which
d
e
clin
es,
accordin
g to
t
he
Incom
e Premise, to
z
e
ro in
the
3
9
th
year--
-
-
-
-----
-
-----------~-------------------
---
-
-
-
------------
10
.
77
Value of
the annuity
as of
the
b
e
ginning of
the
3rd
y
e
ar,
$1,458
x 10.77--
$
15,
703
Table
I
factor,
at
8%
,
for
t
h
e
pr
es
ent
valu
e of
1
def
er
red two
y
ea
rs_____ 0. 857
Present
Value of
the
Building
Returns
i
n
clud
e
d
in the
annuity,
as
of
date of appr
a
i
s
al
,
.
$15
,
703 x
.851------
-
----------------------------
$13
,
45'7
h,
The total valuation
of
the building improvements is found
by adding the present values
of
the building returns for the
fir
s
t
ye
a
r,
the second y
ea
r,
and the remaining
38
years
,
thus:
1535
UNDERWRITING MANUAL
Tentative Total
V
a
lue
of
PropertY---------
-
-------~-
$16, 242
j.
The same process is then repeated several times until the
Valuator is satisfied with the reasonableness of the final
estimate.
Estimated
Building
Returns,
1st
year-
-
------------------
$1, 377
(g) and
(
h). The building returns for the entire period from
the date of appraisal to the end of the economic life of
the
building are treated as an annuity commencing with
$1,377
at
the end of the first year and declining in accord-
ance with the Income Premise. The estimate of
total
remaining
economic life is
35
years. The value of the
annuity, as of the date of appraisal, is found by multiply-
ing the building return which accrues
at
the end of the
first year,
$1,377
,
by the factor
for
8lf2%,
35
years,
in
Table
II,
namely,
9.98.
The following shows this calcu-
lation:
Building
Returns,
end of
1st
year--------------------
~
----
$1,
377
Table
II factor, at
81h%
,
for the
present
.
v
a
lue of
an annuity
for
35
years
which declines according
to the
Income
Pr
e
mise-----------
-
-----------------------------
-
--
-
----- 9.98
Total Valuation
of Building Improvements, $1,377
x:
9.1)8
$13, 742
-i .
Total
Valuation
of Land--------------------------------:---
2,
500
t
he total valuation. The
adju
s
tments to be
made
,
when the valuation
by
capitalization gives a
re
s
ult
in excess of the cost figure, are
described in
Paragraph
1538.
1536.
In
applying the method to cases where the specific
prediction of net
earnin
gs
embr
a
ces only the next
12
months (the
typical existing construction case), all the steps listed
in paragraph
1533
are utilized except
(!)
and the second calculation in
(g).
The
re
s
ult secured in (g) is the result required in
(
h). The estimate
of
net earnings during the year following the date of appraisal is $1,540
and is the estimated
rate
of earnings
at
long-term average occupancy.
a.
E
s
tim
a
ted Value of
Land
by
Compari
s
on_________
_
__
_
____
_
$2,
500
b
.
E
s
tim
a
t
e of
Total Repla
ceme
nt
Cost of
the Property
in New
Conditio
n
-------
-
-------------------
-
---
--
------------
$18, 500
c.
S
e
lect
e
d
L
a
nd
Capitaliza
t
ion
R
a
t
e-
-----
-
----------
-
----
-
-
61h
%
Selected Building
C
a
pitalization
Rate_____
___
______________
81h
%
d.
Estimated
Yearly Land
Returns:
L
a
nd
Valu
a
tion,
$2
,
500
x:
Land
C
a
pitalization
Rate,
.()65_____
$163'
e. The
b
u
ilding
r
e
turns for the first
year
are
found
a
s fol-
lows:
E
s
tim
a
ted Net
Earnings, 1st
year___
_
________________
_
_____ $1,
54()
E
s
tim
a
ted Yearly
Land Returns----------------------------
163
VALUATION
OF
RENTAL
INCOME
DWELLINGS
1535-.1536
L
_
•
1537. Value
Adjustments.
The essence
of
valuation
by capitalization
of
prospective earnings is in the controls and ad-
justments
to
which the valuation is subjected. Therefore, Valuators
make all calculations on work sheets, restudying both individual
estimates and general relationships between estimates before accept-
ing
any figures as final. The control of results is accomplished by
accepting, as final,
that
set of figures and conclusions which contains
the greatest number of plausible detailed estimates and relationships
in combination. Plausibility is indicated by substantial agreement
with the accumulated data on similar properties. The data are used
as the basis for the bracketing of estimates of items and of ratios
between items.
1538.
The examination
of
all the estimates, for the
purpose of making the adjustments, follows a definite routine with a
number of successive steps, as follows:
a.
After
the effective gross revenue estimates, operating ex-
pense estimates, and estimates of net earnings have been
completed in
their initial
form, they are reviewed
for
correctness. Revenue reexaminations are accomplished by
assuming various plausible modifications in rental rates
and occupancy percentages in early years. Reexamina-
tion of operating expenses is handled similarly according
to
the three estimating devices described in
Paragraph
1513.
Finally,
the Valuator calculates
the net
earnings
in each of the early years under the various assumptions
and modifications. This gives him a number of tentative
estimates of net earning expectancy. There may be a
fairly great
difference between the highest and lowest of
the tentative estimates,
but
ordinarily the majority of the
estimates will cluster close
to
some intermediate level of
earnings. The final estimates are then set up
at
approxi-
mately the point of cluster. This may be substantially
higher or lower
than
the mid-point between the maximum
and minimum of the several estimates.
It
is rarely the
arithmetic average
of
all the estimates. The final esti-
mate is selected on the basis of the frequency with which
the tentative estimates come out
at
figures which are
close to it.
b,
After
the estimate of value by capitalization has been com-
pleted in its initial form, the computations are reviewed
for correctness. The reexamination is accomplished by
assuming various plausible modifications in the estimates of
remaining economic life, land valuation, and land and
1537-1538
UNDERWRITING
MANUAL
building capitalization rates. Different assumptions will
result in a set of different tentative total valuations. There
may be a fairly great difference between the highest and
lowest of the tentative total valuations, but ordinarily the
majority of the estimates will cluster close to some inter-
mediate point which is accepted as the final estimate.
Its
selection as final is based on the frequency with which the
tentative estimates come out
at
figures which are close to it.
In
making this adjustment of the initial estimate,
it
is
desirable
to
calculate the so-called over-all rate of
return
and to make certain
that it
comes out
at
a plausible
level. The over-all rate is determined by dividing the esti-
mate of net earnings in the year of maximum occupancy
by
the total valuation.
In
typical cases, the over-all rate will
be higher than both the land and building capitalization
rates.
In
all cases, to be plausible, the over-all rate will
not be less than a figure which is
~
of
1 %
lower than the
building capitalization rate.
c.
After
determining the final estimate of value by capitaliza-
tion, the estimate is compared with the estimate of replace-
ment cost of the property and of available market price.
Almost invariably the three estimates will differ.
If
the
difference is slight, say within 3%, no
further
adjustments
are necessary and the lowest of the three estimates is
adopted as the final
total
valuation of the property.
If
the difference is somewhat greater but still small, say
up
to
5
%
,
and the building ilnprovements are new or almost
new the Valuator makes a somewhat cursory reexamina-
tion of the three estimates, and changes them
if
there are
reasonable grounds
for
doing
so.
In
such cases, reason-
able grounds consist of finding small adjustments which
are well within the limits of
th
e bracketing used in
arriv
-
ing
at
items in the estimates
in
the first place.
If
no
such grounds
for
adjustment are readily found without
straining of figures, the lowest of the three estimates is
adopted as the final total valuation of the property.
If
the difference is substantial, in excess of
5
%, the Valuator
proceeds as follows:
1.
In
cases where
(a)
the estimate of cost of replacement
of the property exceeds the estimate of value by capi-
talization, and
(b)
the building is in mid-life, the
Valuator accepts the estimate of value by capitaliza-
tion as his final valuation unless
it
exceeds his esti-
)
1538
VALUATION OF
RENTAL
INCOME
DWELLINGS
.
I
•
I
mate
o:f
available market
pri
ce,
in which
e
v
ent re-
view
a
nd
adju
s
tment of
th
e
capitalization estimate or
mark
e
t
price estimate, or both,
ar
e
m
a
de until
t
he
form
e
r
do
e
s not
ex
c
eed
t
he
l
a
tter. The
ca
pitalization
estim
a
te
i
s then reported as the value estimate. How-
ever, in temporarily
d
e
pr
ess
ed markets the
c
api
ta
li
-
zation estimate may
ex
c
eed the available market price
estim
a
te
a
nd be selected as the final
e
s
timate of
v
a
lue.
The difference
bet
we
en the
c
a
pitalization and replace-
ment cost
estimate
s is the amount
o:f
accrued
de
p
re
-
ciation as
o:f
the date of
apprai
sa
l.
'13.
In
c
ase
s where (a) the estimate of cost of replacement
of the property
exceed
s
the estimate of value by capi-
talization by more
than
about
5
%
,
and (b) the build-
ing
i
s new construction or in early life, the cost
e
s
tim
a
te and the
c
a
pitalization estimate are carefully
rechecked and adjustments are made,
if
judgment
indicates they
s
hould be. The Valuator then accepts
the lower of
t
he two estimates as his final
v
a
luation
unless
it
exceeds his estimate of available market price,
in which event
revie
w and adjustment of the
c
a
pi
-
talization estimate, or market price estimate, or both,
are made until the former does not exceed the
la
t
ter.
The
c
api
ta
lization
estimat
e is then reported as the
value
estimate
.
However, in temporarily
d
e
pre
s
sed
mark
e
t
s
,
the
ca
pit
a
lization estimate may
ex
c
eed the
available market
pric
e
estimate and
b
e
sel
e
cted as
the final
e
stim
a
te of value. The difference between
the
r
e
pla
c
e
m
e
nt
co
s
t
and
c
apitalization estimates is
defined as accrued depreciation.
In
the case of new
buildings
i
t
i
s
a measure of overimprovement or
underimprovement.
:J.
In
cases where the
e
s
timate of value by
ca
pitaliza
ti
on
exceeds
t
he
estima
t
e of cost of replacement of
the
property, whether new construction or existing con-
struction in early or mid-life, the Valuator
kno
w
s
that
the
c
apitalization estimate would be an over-
valuation.
If
his income
e
st
imates are correct, in
the
,
sense
that t~
rent
a
l rates are immediately available
in the current rental market,
it
is also certain
that
the
di
v
er
g
ence between the capitalization estimate and cost
e
s
timate will invite competitive construction which
will drive rental rates to lower levels. He may con-
1538
UNDERWRITING
MANUAL
MATHEMATICS OF CAPITALIZATION
1540.
In
valuation:
,
by
t
he capitalization process,
\T_alU-
ators utilize compound
interes
t
calculations to compute
.
values
Of
predetermined
i
n
come
expe
c
ta
n
cies. These computations
a:r;e
made
by selecting the pr()per
factorsfrom
interest tables
and
,
rµuJtip!;xing
the income expectancies by the factors. The tables are based on the
assumption
that
inve
s
ted
·
capit~l earns interest
at
a stipulated rate
and
that
such
in
te
rest accrues in the form
o:f
.
a
.
lump-sum addition
at
the end of each year.
It
is also assumed, for
conveni
e
nce,
that
the
in
c
ome
-
for
any
·
give
n year
ac
c
ru
e
s
a
nd
i
s
colle
c
ted in a lump
sum
at
the end of the year.
Interest
.
is converted into capital
yearly; hence, there is a compounding of interest on a yearly basis
when the incomes extend over more than one year.
·
.
·
·
1541.
There are three such types of calculations
u
s
ed in
valuation by capitalizatio
n
:
a.
Pres
e
nt Value
of
an
Amo
u
nt:
Single amounts of future
income are discounted at compound interest by the use
of Table
I,
described below.
b,
Present Value of
a
D
ec
lining
Annuity:
A declining annuity
is a
serie
s of periodic payments in which successive pay-
ments are less and
le
s
s.
As applied
t
o
valuation
,
a declin-
ing annuity is a series of yearly net incomes, accruing at
the end of each
year
,
in which the successive yearly in-
elude
that
he has not properly estimated the risks sur-
rounding the
cas
e
,
and
that
his capitalization estimate
therefore needs revision until
it
is not in excess of the
estimat
e
d
r
e
placement
cos
t
of
propert
y
.
The cost esti-
mate
i
s
also rechecked for possible
ju
s
tified increases.
The final estimate of value may then be equal to
the replacement cost estimate.
1539.
Completion
of
Forms. The following
ind
i
cates
the correct method of filling out
FHA
Form No. 2015a.
It
will be
noticed
that,
aside from
t
he adjustments described in
Paragraphs
1537
and
1538,
no absolute reconciliation need be made between the
the estimate of value by
c
apitalization, the
es
ti
mate of replacement
cost of property in new condition, and the estimate
of
available mar-
ket price.
··
The lower figure is reported as the
valu
a
tion
,
but
when
this figure is equal to the cost
estimate
.
rather than the value found
by
capitalization
,
the figures supporting
t
he
latter
estimate are re-
ported as determined, and are
n
ot modified arbitrarily downward to
give
t
he appearance
of
automatic agreement
w
ith
the cost estimate
or reported available
mark
e
t
price.
VALUATION
OF
·
RENTAL INCOME DWELLINGS
1538-1541
2015a-Supplemtnlar1
Report
of Valuator
Units
A-1 and B-1
o
n
Mr
t
b
side
o
f building
and
g
e
t
v
ery
li
tt
le
e
uaehfne
,
Uni
ts
B
-
l
an
d B-2 on upper
noor.
Rental
demand
very strong
en
d decl
i
ne
in rental
ve.l\le
in third
yeal' and
in
occupancy
r
a
t~o
in
seco
n
d
y
ea
r
a
n
ticipated
due
to
exp
e
cte
d
rate
o
f competitive
building.
Tenant.
pay
for
li
gh
t,
cooking
fuel,
and power
Co~
electric 1'.efrigerators.
Notel on
reven
u
e
and
expenee
i
te
ma:
T
otal
T
ax
es
a
n
d
H
am
rd
In
sura
nce
..•
.
•
..
.
•
.•
$
.
••
•
••.
45
_
9-
.
.
..
•..
.
Re
pai
rs
,
M.r
lintens.n
f;f;
,
and
Rep
la
cem
en
ts
:
Repair
s
to
s
t
ructure
•
.-
-
··
·
·
--·
-
·
··
·
·
·
···
·
-·
·-
$
..
.
:
.
...
..35
.
.
_
Repairs ii>
equipm
~
nt
a.n
d
1\xture
s
-
-··-
·--·
--
•
•••• ••••
el
..
_
Pain
ti
_
n
g
expe
n
s
e
.
..
•-
··
····
·
·-·
-
·
-·
··
--
--
·
-
•
••
.•
.••
.5
.
Q
·
-
·
·
···
Decora
ting
e:!ipe
nae
·
-
··-····
·
·······
·····
-·--·
-
·
·
···
··
·
~
-
-·
-··S
Q
_
Bttuctu
ral repla
ceme
nts ...
·-··
··-
-
·
···
·
-
·
··
··-
··
···
-·
~
.•
•.•.
.
2.0.
.
.
•
_._
E
quipm
e
n
t
repla
ee
menta
..
...
..
......
..
.
.
..
.
.....
..
.
.
..
. ..:..
•
.
•..
1J..
.
_
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i.acella
neo
ua
.
T
oto.
I
Rep
s.i
r
e
,
Ma
inkna.
n
ce,
a
(d R
e
pla
c
e·
m
e
ete
$
.
•
•
•••
..3.3.1
.
Clean
i
ng
expens
e
..
••••
•
•
---·
-
··
·
··
-·
·
·······
·
·······
··
·
·
···
····
·
··
-
-
··
-
-
Exterm
ina
ting
expen
se
•
••
H
··
-···
··
···
---
~--
-·
·
-
··· ··
·
·
-
·-·
·
·
-
·--
·--
MLBce
lla
ne
ou
~-
--
···
·
-···
-
··
-
·
···
·
·-
·
··
·
··
··
·
··-
..-
·
·
·-
-
··
T
ota.I
Regu
l
ar
Operatin
g Expense
.
•••
..
•
•.•
• •
•
$
.•
.•.•
42.7.
..
•
•
-
.
Elr..,ive
Oro
..
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•"'
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- -
---·
·
·
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- --
· ·
s.'U35
..
s.:9
.
'.10.
.
.
s275
.
G.
.
------
---
----
--
----
-
----
u-...,.a....,___ _
_
_ _
_
_
__
.15_ _
W
ater
•.•.•.
• •
·-
··
·
·
·--
···
-
··
·····
···
·
·
··
~
···-
'
···-
,·
·
·
··-
~-
G
as
.
...
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.
.
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dfl.rba
g
e
a
nd
r
u
bb
lsh rem
o
v
e
!
••
• •
.
•
•
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...
.
_
Prot
e
cti
o
n
.
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...
•
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•
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_
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.
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un
ds
e.z:
pense
.
..
.
..
-
--
·
·
··
-
···
··
··
····
.:..·
-·
···
····
··
··
P..
e
gular
O
p
e
rat
ing
E
xpen
~:
H
ea
tin
g
an
d
ve
nti
lating
e
x
pe
nse
·
-·
--
·
··
$
.
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•
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• .Jl.O
._,
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nito
r
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..
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.
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-
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_
Lighting
ex:
pen&e
-
--
-
· ··
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---
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·
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12.
.
.
__
Re
f
r
ig
erating
e11:
pense..--
·
···
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-
·
-
·
·
·
· ·
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·
·
-
·
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h
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llan
e
ous
•
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·
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..
·
-··•
Tot
al
Ren
ting and Adm
inis
tr'ati
ve
E
xpe
nse,
$
.
.
•
..
.
13
.
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.
Ueed.,. ., ... ffTeDH
8al>tota1o..
s.2.75
W.75
...
s.:?..55
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------~---1
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Com
mi
6S
ic
ns .
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erat
io
n
s
for
tena
nts
------
--
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sala
rie
s
.-
.
: .
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ce
ex
p
en
se
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al
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d auditing
e
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ense
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ph
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.
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pens
e
p
f
colle
ctio
ns
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a
n
t!;
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eme
nt
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•
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..
----··
··
·
·
·
··
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··
·····
···
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··
··
··
Tax
es
and
Bua.
rd
I
nsura
nce
:
Tolal lleveoae at
100%
()oeupan<)'
••
•
.:lJ.QQ
_
133.0
.0.
..
s.3.0
.
(<0_
Tuea.
--
---
~-
--
-···
·
····
··
-'·
·
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- ·
··
-·
·
·
·
··
···
·
·
···
··
····
S
..
4
i\
1'
.
. .
.• .
••
Preditted
Oceupuele&..__
95_
%
••
-90
%
.
.. .
90
.
%
i
~
:
:
:
~~=:~~~
=
:=:::~
-:
~
~:
:::~:=
:
=:
:
:::
:
:::
~:
:
::
:::j
~
~
::
:::
:
:
----------;
-;
-M-
@-,~
-
,
-
ra-•"1
-
,•
-•M--11 Renti
rig
an
d
Admi
ni
strativ
e
Expen
so:
A
d
ve
rtis
i
ng
ex
p
e
':lse
----·
· ·
·-
- -
-
----
-·-
··
··
·······
·
····
··
•
-·
··
-
····
·
-·
-
ESTIM
A
TES OF GROSS REVENUE
E
STIMATES
O
F OPERATING li:XPENSES
Rental falue
of
anita
SUPPLEMENTARY REPORT OF
VALU
ATOR
FEDERAi. H<)USING ADMINISTRATION
UNDERWRITING MANUAL
1541
80
1541
CERTIFICATION.-1,
the und.ersigned, do hereby certify
that
r
have DO personal
internt.
present or proapectivc. in the property I
applicaDt, or proceed8 of the mortgage.
Ii
Approved
•• nhmitted.
O
Apprond
as modl8ed
br
me.
ODlsapproved.
Rllau.8Jt8:
n
---~-~-!!~.rr
..
J
__
i3J.ll
__
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)"-------·--
Non,...;.It
b
not
~:v
'°
traoscri5o estlmuWI
IQ.
thb
report to
Items~
to
28,
Inclusive,
~d
to
Estimate~
Valua appearl!lg oa FHA Form No.
2016..
REMARKS:
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&lra or 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
........
-..................
•
..•..... 750.
_
Other lmprovementa.__
·····--2.50
.....
-
•..•
·klmatu
et
Net Earnla111:
'"''"'' u,., 8irnr
~:~::.:.:.~::::;;::::::::::.:::::::::::::::::::::::--·-----
..
il~L:::::::
·:n:-..:..--::::::
·:N~:::=
EoUmated
net
eamlngs.
••
_
••••••••••••••
·--·················--------·----
..l.725.
_
.
.l6l.Q____ .lJ94 ·-·~
Ee&lataUon
of
Val•• br
Capltallaatlon:
Vtluation
or
land by
comparison---··-··-···--·------
s__A,_75fJ
_
Land
caplt.al11ation
rah
·----·-•H••·····-··-6.
%
Eotlmated yoady land
retumo.-------·····-····--··········----····- $
••.
.l65
$
•••
l.65
s
.
..l.6.i
_
Estimated building
returna.-·-···------·-····-----···-··-------··
..l.6.J..O..________
.l.445.----
.l.229 ...
_. __
~==~
==~::a!~i~d~:~·~;~~zat.io~-;~~-~;;~~~~}i~;::ra______________
_
._______
·--~~ J
..
9.!.7J_
__
Value
ol
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..____
...
J!s..7._________
_
..
.85.'1.
__
Present veiuee of building returnil------···-····---------------···-····--·-···-·-···········
$_14.9.l.
•
.:~-- S.l2Jit_~·-··-
S
••
:1l.
1
l4J __
Tots.I valUAtion of building improvementa
····-··-··-·····--·Sd..4.,D.72..
.•
L-
-
-
Estimate ot
Total
Value by Capitalization_
··-···-
$.l.6_,.822.....
•
...,.
Eetimate o! Total Replacement Cost of PropertY--··········---~--------~-···-···--··
S-~~A..6:~---
Est.ime.te of Available Market Price---------------------··------·"········-··-··.··-···--····---
$.l.7_,500
...
-
.•
Expense Ratio
..••.....•.....
---------·---··---·---··-----·-----
-------~9_,
%
Etreetlve
GtoBI
Revenue:
0 lat; 0
2d;
[II
3d year.
$
.•
.2.754.
•..•
(lnaert
Bgure
fOr
laBt:
year
specifically eatima.ted)
'J'olal Operatins Ezpe.a.L-····-·············-··
s.l3.{>/L..
100%
Total
Tues
and Hazard Insurance.................
•
..
J..59
.•.•••
.3A.
%
Total Repairs,
Maintenance
and Replacements.
•••
33.'Z
....
--~
%
11-------- --.- .-.-;;-i0-
11-"'~'-""!;'":"'~:"'·~~o1,.P"'!='n!."'~'"'
..
"'•"'1n:-
---12 3 f-r .J'L
~e~~:c!t~~e
S~~~n15om-
-- - - -
~
_!---1L._
11
~_.,ee;o;'';;:·ti:;;v•~C"io~n•C'""i""i''o'<"i'cn=r
~~~~~I~
Reliability of Rental Market
2
•
11
10
1
11
~11o.:;~;o;:c::m~·,-y-of~E~.-p-.nee-P~
re-
- --- 2 .. G
.x..
iii
_
_.a_
11
_ _,,d•°"·ot,,,io:::•------I--- J t: D:-ii'""
__s_
Rating
of
Property
.x_
-12_
RAting of L'lcation
1~
',
'.
.~
~
:-15_
_
Ex__E.ense
Ratio
'
8
~
111
~·
12
TOTAL RATING OF EARNING EXPECTANCY
Total Renting and Admlniitrative Expense.-.
S.
•.
lJ.7.- ..
.l.0.%
Total
Regulat Operating Expenaea...
•••
·-···-~···
•••
427-- .Jl
%
H.iTURS
BEJBCT
1
9 8
'
IS
RATING
2015
a-SupplemeQlarJ'
Report
of
Valu&lor
VALUATION
OF
RENTAL INCOME DWELLINGS
I
·
~
I
I
To determine the
pre
s
ent
v
alue of
a
n item of
incom
e of $1,000 due
two years from now,
at
8
%
,
the amount, $1,000, is multiplied by the
factor .857
a
nd the
re
s
ult is
$857,
1543.
Present
Value of
a
Declining
Annuity.
The
present value of a
declinin
g annuity,
of
th
e
typ
e which follows the
Income Premise described
i
n
Pa
r
agraph
1 5
28,
may be
con
s
idered as
the sum of the pre
s
ent values of all the installments of
incom
e of
which
it
is composed. Or
it
may be considered as the sum which,
if
invest
e
d today
at
the
sel
ect
e
d rate,
will
accumula
t
e
in such
amanner
that
the income installments in the
ser
i
es may be paid when due, the
last installment exactly
e
x
hausting the remaining portion of the
investment and accumulation. The table giving the present values of
}
.
_
2
_
3
_
4
_
5
_
0.917
.
842
.
772
.
708
.
650
0.
926
.
857
.
794
.
735
.
681
9%
8%
7
%
0.
935
.
873
.
8
16
.
763
.
713
Yea
rs
d
e
f
e
rred
stallments decline
in
accordance with the Income Premise
de
s
cribed in
Par
a
graph
15
28.
The
buildin
g returns
c
om-
mencing with the
y
e
ar
of maximum long-term average
o
c
cupan
c
y and running
to
th
e end of the
e
c
onomic life of
the
buildin
g are presumed to ap
pr
oximate, on the average,
such a declining
annui
t
y. The
initial
values of
s
uch
a
n-
nuitie
s are ascertained by discounting them
at
compound
intere
s
t
by the use of Table
II
,
de
sc
rib
e
d
belo
w
.
c.
P
e
rpetu
i
ties:
A perpetuity is an income which is expected
to continue
ind
e
finit
e
ly into the fu
t
ure.
In
valuation,
land returns are assumed to be a series of equal
y
e
arly
net
in
c
om
es,
a
cc
ruing
a
t
the end
of
each
year
,
and con-
tinuing perpetually.
In
reality, land returns will increase
or
d
e
creas
e
.
The assumption
of
lev
e
l returns
i
s adopted
a
s
th
e most
plaus
i
ble probable expectancy. Tables are not
requir
e
d to
de
t
ermine
t
he present
v
alues of perpetuities.
1542.
Present
Value of
an
Amount. The
pre
s
ent value
of an amount due
at
some given future
t
ime may be
con
s
idered as
being the sum which,
if
invested today
at
the
s
e
lected
int
e
rest rate,
will accumulate
at
compound
intere
s
t
to the amount
at
the future
date. The table giving the present values of
1
due at :future dates is
in the following form
:
1541-1543
UNDERWRITING MANUAL
To determine the present value,
at
9%,
of a declining annuity which
commences one 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 multi-
plied by the factor
10.56
and the result is
$10,560.
To determine the
present value, at
8%,
of a declining annuity which commences one
year from today with an income item 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 in-
stances, 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 an-
nuity
commences in 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 declining
annuity, 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, 11.58 x
$2,000----------------------------------
$23, 160
Table
I factor
for present value,
at
8%, of
1
deferred two years_________
.
857
Present
value of the deferred annuity, .857 x
$23,160--------~---------
$19,
848
0. 94
1.
39
1.
84
2.
72
4.
77
12.
91
12.
99
13. 06
!
_
2
_
3
_
5
_
10
_
48
_
49
_
50
_
0.92
1.
36
1.
79
2.
61
4.
44
10.
47
10.
52
10.
56
0.
93
1.
38
1.
81
2.
66
4.
60
11.
58
11. 64
11.
69
7% 9%
8%
Length of Annuity in years
declining annuities, commencing one year from now with an income
of
1,
is in the following form:
VALUATION
OF
RENTAL INCOME DWELLINGS
1543-1544
L
.
.
•
I
1545.
Perpetuities.
The pre
s
ent value
0£
a
p
e
rpetuity,
su
c
h
a
s
land returns are
a
ss
um
e
d to be, may be considered
a
s being
the sum which,
if
invested
tod
a
y
at
the selected interest rate, will
earn interest in such a manner
that
the income
installm
e
nt
s
in the
series
m
a
y be paid when due
w
i
thout impairment or increase
0£
the
princ
i
pal amount. Tables are not u
se
d. The present
valu
e 0£
a per-
petuity is found by dividing
th
e
amount
0£
the yearly income by the
capitalization rate. To determine the pre
s
ent value, at
6
%,
0£
a
perpe
t
uity
0£
$120 per
y
e
a
r,
in
whic
h
the
fir
s
t
$120
i
s due one
y
e
a
r
from
no
w,
$1
20
is
di
v
ided
b
y
.06
a
nd the result is
$2
,
000.
1546.
Ina
s
much
a
s
t
he valuation
pro
ce
ss
pr
esc
r
ib
ed for
rental
i
n
come d
w
ellings
requir
es the
e
s
tablishment of land value by
a
pro
cess of comparison
rath
e
r
th
a
n by capitalizing
e
s
ti
m
at
e
d land
returns, the foregoing operation, namely, the direct
capitaliz
a
tion of
a
pe
r
pet
ui
ty, is not used. Instead, the Valuator first
det
e
rmines the
land
v
alue, and then computes
th
e
a
mount of yearly income attributa-
ble to the land,
that
is, what
per
pe
tu
i
t
y is required to support the land
value.
In
other words, he
st
ar
t
s
with the $2,000 valuation of the
l
a
nd
by
com
pa
ri
s
on,
a
nd
determ
i
n
es
th
e
land
r
e
turns by multipl
y
ing the
$2,000 by the land
capitaliz
a
tion
r
a
te,
6
%
,
and
se
c
ure
s
th
e figure of
$120 per year. This is to determine what amount must be deducted
from the estimate of total
n
e
t
earn
i
ngs to arrive
at
the amount of the
building returns. Having made the deduction, he is
jus
t
ified in
u
s
ing
the land valuation in the total
v
a
luation.
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
year
s
,
a
t
v
a
rious
rates :from
7
% to 12%. Table
II
g
ives the present values
0£
declin-
ing
annui
ties which run from
10
to
60
years,
at
various rates from
7%
to
12
%
.
1545-1547
UNDERWRITING MANUAL
1547
Yr
s
.
__::__
/
7H
%
l~l
8H
%
9%
10
%
12
%
l
_
- - - - - - - - - - - - - - - - - -
--
- - -
0.
935
~
~
0
.
926
0.922
0
.
917 0. 909 0.
8
9.3
2
_
__
_
_
__
__ __
_ _
_
_
__ _____
_
_
.
873
.
.
85
7
.
850
.
842
.
8
27
.
797
3
_
_
_
__
_
__
_
_
__
_ _
__
___
____
_ .
816
5'
.
7
94
.
783
.
772
.
75
1
.
712
4
----
-
--
--
-----
----
-
-~-
--
.
7
6
3
.
74
9
.
7
35
.
722
.
708
.
68
3
.
63
6
5
_
__
_
__
_ _
__
_
_
___
__ __
_
___
_
.
71
3
.
69
7
.
68
1 .
6
6
5
.
650
.
62
1 .
5
6
7
6
_
___
_
_ _
___
_
_ _
__
_
___
_ _
_ _ _
.
666
.
6
48
.
6
30
.
613
.
596
.
5
65
.
5
07
7
_
___
______
__
____
_ _
__
_
_
__
.
623
.
6
03
.
5
84
.
565
.
547
.
5
13
.
452
8
__
_
_
_
____
_
___
_
__
____
___
_
.
58
2
.
56
1 .
54
0
.
521
.
502
.
467
.
404
9
----
~
----
--
-
-
--
---
-
---
-
-
.
5
4
4
.
522
.
5
00
.
4
8
0
.
460
.
4
24
.
36
1
10
___
_ _
____
_
__
_____
___
___
_
.
508
.
48
5
.
46
3
.
4
42
.
422
.
3
86
.
322
Table
1.-THE
PRE
S
E
N
T
VA
LUE OF
O
N
E
VALUATION
OF
RENTAL INCOME DWELLINGS
$
.
U
.
L
Mij:\!I
id!.$
@JI
.....
~
-·
tq
•
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
2
3
Yrs
.
7
%
7
7~%
8%
8
.Yi
% 9%
10
%
1
2
%
--
-
--
-
1
____
__
______
_
_
__
_ _
0
.94
0.
93
0.
93
0.
92
0
.
9
2
0.
9
1
0
.
8 9
2
_ _
_
_
_____
___
__
___
_
1
.
39
1
.
38
1.
3
8
1.
37
1.
36
1.
3
4
1
.
31
3
__ __
_
___
___
_
__
_
__
_
1.
8 4
1.
8 3
1.
81
1.
8
0
1
.
7
9
1.
96
1.
71
4
___
_ _
_
_____
__
_
__ __
2.
29
2.
27
2.
24
2
.
22
2.
20
2.
1
7
2.0 9
5
_____
_
_ _
___
_
__
_
__
_ 2.
72
2.
69
2.66
2
.
64
2
.
6
1
2.
56
2.
45
6--
--
- -
-
--
-
---
----
-
3
.
1
5
3
.
11
3.
0
7
3
.
0 4 3
.
0
0 2
.
93
2.
8
0
7---
-
--
- -
---
- -
--
C-
-
3
.
57
3.
52
3
.
4
7 3
.
42 3.3
8 3
.
2
9
3.13
8--
--
-
-
-
--
-- --
----
- 3.
98
3.
9 2
3.
86
3
.
80
3.
75 3
.
64
3.
4
4
9
___
___
___
__
_ _
_
___
_
4
.38
4.31
4.
24
4
.
17
4.
10
3.
98
3.
74
o
___ ___
__
_
___
_ _
_ _
__
4
.
77
4
.
68
4.
6
0
4
.
5
2
4
.44
4
.
30
.
~
.
Q2
1
__
___
_
_
__ __
___
___
_
5
.
15
5.0
5
4.
96
4.
8
6 4
.
77
4.
6
0
4.
29
2
____
_
___
_
__
__
___
__
5.
5 2
5.
4
1
5.
30
5.
20
5.
09
4.
9
0
4.
54
3
__
____
_ _
___
__
_
_ _
__
5.
89
5.
7 6
5.
63
5
.
51
5.
40
5
.
18
4.
7 9
4
__
_
__
___
_
___
____
__
6.
24
6
.
10
5.
9
6
5.
8
2
5
.
6
9
5.
45
5
.
0
1
5 __ __ __ __
___
___
_
_
__
6.
58
6.
4
2
6
.
27
6.
1
2
5
.
9
8 5
.
71
5.
2 3
6
___
_
__
_
_____
_
___
__
6.
92
6.
7
4
6.
57
6
.
40
6.
2 5
5
.
95
5.
43
7
_____
_ _
____
_
__
_
__
_ 7.
24
7
.
0 4 6
.
86
6.
68
6
.
5
1
6.
19
5.
62
3
___
_ _
___
____
__
___
_
7
.
55
7.
34
7
.
14
6.
94
6
.
76
6.
4
1 5.
8
0
9
_ _
__ __
_ _
____
____
__
7
.
8 5
7.
62
7
.
40
7
.
2
0
7
.0
0 6
.
6
2
5.
9 7
Q
__
_
_ _
__
_
___
_
__
_
_
__
8.
15
7.
9
0
7
.
6 6
7.
44
7
.
22
6.
8 3
6
.
13
1
____
___
_
___
___
_
_
__
8
.
43
8.
1
6
7.91
7.67
7.
4 4
7.02
6.
2 8
2
__
_
_
_
__
_
___
_
__
_
_
_ _
8
.
70
8.
42
8
.
1
5
7.
8
9
7.
65
7.
2
0
6
.
42
3
___
_
_
____
_____
_
__
_
8.
96
8.
66
8.
37
8
.
10
7
.
85
7.
37
6
.
56
4
__
__
__
_
_
_
___
____
_
_
9
.
22
8
.
90
8
.
59
8.
31
8.
03
7.
54
6.
68
5 ___
___
_
_
____
_
_
_
__
_
9.
46
9.
12
8.
80
8.
5
0
8
.
21 7
.
69
6.
80
6
_
__
__
_
__
____
__
_ _
__
9
.
70
9
.
3
4
9
.
00
8.
68
8.
38
7
.
84
6
.
91
7
_
___
_ _
__
____
__
_
___
9
.
92
9
.
55
9
.
19
8
.
86
8
.
55
7.
97
7
.
01
8
__
_
_
___
_
__
_ _
__
_
_
_
_
10
.
14
9.
7 4 9
.
37
9
.
03
8
.
70
8.
10
7.
10
9
___
__ __
_
_
__ __
_
_
__
_
10.
35
9.
9 3
9.
55
9.
18
8
.
84
8.
23
7
.
19
o
___
_ _
_
__
___
__
____
_
10.
55
10.
11
9.
71
9.
34
8
.
98
8.
34
7.
28
Table
11.-
T
HE
PRE
SENT
VA
L
U
E
S
OF DE
C
LI
N
I
N
G
A
N
NUITIES
1547
UNDERWRITING MANUAL
I
-
4
6
8
0
7
2
7
5
8
2
5
8
5
9
6
Y
ear
s
7
%
772
%
I
8% 872%
9%
10
%
12
%
-
--
31
___
_ _
__
___
_
__
_
_ _
_
_
10
.
74
10.
30
9.
8
7
9.48
9.
11
8
.
4
5
7
.
3
32
_
_
___
_ _
___
___
_
_
_
_
_
10.
92
10.
45
10.
02
9
.
61
9
.
24
8
.
5
5
7.
4
3
33
___
__
_
__
_
__ __
_ _
_
_ _
11
.
09 10. 61
10
.
1
6
9
.
7
4
9
.
35
8
.
65
7
.
4
34
_
___
"--
-
---
--
--
-
-
-
1
1.
2
6
10
.
76
10
.
3
0
9
.
9
6
9.
4
6
8
.
74
7.
5
3
5
_
__
_
___
__
_ _
_
_
_ _
_ _ _
1
1.
4
2 10
.
90
10.
42
9.98
9.
5
7
8
.
83
7
;
61
3
6
____
_ _
__
___
_
____
__
11
.
5
7
11
.
04
10
.
55
10
.
09
9
.
6
7
8.
91
7.
6
3
7
_
__
_
_
__
_
___
__
_
_
_ _
_
11
.
7
2
11.
1
7
10.
69
10
.
19
9.
76 8.
9
8
7
.
7
38
_
__ __
_
_
___
_
___
__
_
_
1
1.
85
11..2
9
10
.
77
10
.
2
9
9
.
84
9
.
0
5
7
.
7
39
_
___
___
_
_
_____
_
_ _ _
11.
9
9
11.
4
1
10
.
8
7
10.
3
8
9.
93
9.
1
2
7.
8
1
40
___
__
__
_ _
__
__
_ _
_
_ _
12.
11
.11.
52
10
.
9
7
10
.
4
7
10.
00
9.
1
8
7
.
8
41---
-----
--
-
-
~
L>
"
~
12
.
23
11.
62 11.
0
6
10.
55
10
.
08 9.
2
4
7
.
9
42
___
_____
_
______
__
_
12.
34 11. 72
11.
1
5
10.
63
10.
14
9.
29
7
.
9
43
______
_ _
_
_
__
_
__
_
_
_
12.
45
11.
81
1
1.
23
10
.
70
10.
21
9.34
7
.
9
44
___
____
_
_
____
__
_
__
12.
55 11. 90
11.
31
10
.
77 10. 27
9.
39 7
.
.
9
45
____
__
_ _
_
_
_____
__
_
1
2;
71 11. 99
11.
38
10.
83 10. 33
9.
43
8.
0
1
4
6
_ _
_
_
___
___
_
_ _
__
__
_
1
2.
74
12.
07 11. 45
10
.
89
10
.
38
9.
47
8
.
0
47
___
_ _
___
_
c
_
_
__
_
__
_
1
2.
83
1
2.
14
1
1.
52
10
.
95
10.
43
9
.
5
1
8
.
0
48
__
_
___
__
_
_ _
c
_
_
___
_
12
.
9
1 1
2
,
21
11.
58
1
1.
00
10
.
47
9
.
55
8
.
0
4
9
_
______
_ _
__
c
_
_
_
__
_
12.
99
1
2
.
28
1
1.
64
11
.
0
5
1
0
.
5
2
9
.
58
8.
2
1
50
___
__
____
_
_
__
_
_
_
__
1
3
.
0
6
12
.
35
11.
69
11
.
10
10
.
5
6
9
.
6
1
8.
1
51---
---
--
---
~-
--
C
-
-
13
.
13 12. 41
1
1.
74
1
1.
14
10
.
60
9.
6
4
----
--
52
___
___
_
_
__
_
_
_
_
__
_
_
13
.
20 12. 46
11.
7
9
1
1.
19
10
.
63
9.66
--
----
53
____
___
___
__
_
_ _
_
_
_
13
.
26
12.
52
1
1.
84
11.
22
10
.
67
9.
69
---
---
54
_____
__
___
_
_ _
_
___
_
13. 32
12.
56
1
1.
88
1
1.
26
10.
73
9.
71
-
-
--.-
-
55
_________
__
___
_
_ _ _
13. 38
12.
61 11.
9
2
1
1.
2
9
10.
75
9.
73
---
-
--
56
_____
__
_ _
__
_
___
_
_ _
13
.
43
12.
66
1
1.
9
6
11.
3
3
10.
78
9.
75
----
--
57
__
__
___
___
_ _
_
___
__
13
.
4
8
12.
70
11.
99
11.
3
6
10.
80
9
.
77
--~
.
-
...
-
58
__
_______
_ _
__
~
-
-
-
-
13.
53
12.
7
4
1
2
.
03
1
1.
3
8
10.
82
9.
79
-
- -
-
--
~9
___
____
_
_
_
____
__
__
13.
5
8
12.
78
1
2.
0
6
11.
41
10.
84
9.
81
-
-
...
-
·
--
60
__
_____
_
__
_
c
_
_
_
__
_
1
3.
6
2
12.
8
1 1
2
.0
9
11.
43
10.
8
6
9.
82
--
-
-
...
-
•
Table
II
.-THE
P
R
ESEN
T
VALUE
S OF
DECLI
N
ING ANNUITIES-Con.
1547
VALUA
T
ION
OF
R
E
NTAL INCOME DWELLINGS
•
I
In
the above
calculation
s
,
the Valuator has estimated the building
returns
in
the first year to be
$1500.
Next he determines the valua-
tion 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
abo
v
e
tabulation is made only to demonstrate
that
the future building re-
turns do provide
for
both the interest
return
and the complete
return
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-
End
of
Y
ea
r
B
u
ildi
n g
In
teres
t
Cap
i
tal
Unreturn
e
d
R
et
urns
at
8
;1%
R
et
urn
e
d
Bal
a nc
e
Building
Valu
a
tion
______
---
-
--------
--
-
---
-
-
-
-
-----
-
---
-
--
$6,
780.
00
l
______
__
_
__
_ _
__
____
_
$
1
,
500.00
$57
6.
30
$923.
70
5,856.30
2
_______
_
___
_
___
_
__
__
1,
404.
39 497
.
79
906.60
4
,
949.
70
3
____
_ _
__
_
__ __
_
______
1,
302.
55
420.
72
881.
83
4,067
.
87
4
_____
____
_
_
_
__
_____
_
1,
189.
44 34
5.
77
843
.
67
3,
224.
20
5
______
__
_
_
__
_
_______
1
,
060.
60 27
4
.06
786
.
54
2,
437
,
66
6
______
___ ___
__
______
923.
36
207.
20
716.
16
1,
721.
50
7
__________
_ _
________
775.
45
146.
33
629.
12
1,092.38
8
_________
___
__
______
606.
88
92.
85
514
.
03
578.35
9
____________________
422
.
16
49
.
16
373
.
00
205.
35
10
____________________
223.
22
17.
46
205.
76
----
-
----
-
--
1548.
Provision
for Future
Deprecia
tio
n.
It
is
e
vi-
dent
th
a
t
whate
ver
v
a
l
ue
i
s
as
cribed to
th
e
buildin
g
improv
e
m
en
ts
m
u
s
t
be
c
on
s
idered as
depr
ec
iable
ov
er
t
he
rem
a
ining
e
c
onomic life
of the buildi
ng
.
The building returns must therefore provide not
only
for
th
e
interest
return
on the value of the building, but also
for
the
return
of the
capi
ta
l investment in building presumed to be
made by a purchaser who
buy
s
the property
at
a price equal to the
valuation.
Future
depreciat
ion is not included in the estimates of
expense. Under the
pres
c
ribed
valua
t
ion
procedur
e
t
he value of the
building is
s
e
t
at the figure representing the capital investment on
which the
p
re
determined building returns can pay interest
at
the
building rate and return the total investment in installments over
the
economi
c
l
i
fe of the building.
1549.
This result is
obtain
e
d automatically by the
u
s
e
of
·
the
declinin
g annuity process. The building returns, under the
Income
Pre
m
i
s
e,
are
just
su
fficient to provide
for
the interest
return
and
for
the
r
e
turn
of the
v
a
lue of the building. This is illustrated by
the following tabulation in which the remaining
ec
onomic life is
10
years. The predicted
bui
lding returns
at
the end of the first year
are
$1,500,
th
e building
cap
i
talization rate is
81f2%.
1548-1549
UNDERWRITING
IU:ANUAL
J
mainder of the building return during the first year, $1500.00 minus
$576.30,
or $923.70, is available as a return of capital.
It
is there-
fore deducted from the original valuation of $6,780.00, leaving
$5,856.30 invested during the second year. This amount must earn
at
the rate of
81/2%,
or $497.79, during the second year. Under the
In-
come Premise the building
return
in the second year is
$1,404.39
and
there remains $906.60 to reduce the outstanding amount of the invest-
ment. This operation continues through the years until, in the last
year, the final installment toward the reduction of investment is
just
sufficient to retire the then remaining balance. During the
10
year
period the building returns have been
just
sufficient to 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 economic life:
of the building.
DETERMINATION OF CAPITALIZATION RATES
1550.
General Level
of Capitalization Rates.
Capi-
talization rates are the percentages of
return
used to convert prede-
termined income expectancies into estimates of value. The determi-
nation of proper capitalization rates requires the utmost care and
is one of the most important steps in the capitalization process be-
cause of the great difference in result produced by seemingly slight
variation in the
rate
used. A proper capitalization rate is one which
is sufficiently high
to
attract
investment of capital and is appropri-
ate
to
balance the advantages and hazards of the risk. The determi-
nation 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 definiteness with which the char-
acteristics of the earning expectancies can 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
par-
ticular 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 compare
the
merits of investments not related by size, amount of
VALUATION OF
RENTAL
INCOME
DWELLINGS
1549-1551
•
I
L
capital required,
market
a
bility,
p
opularity
,
safety, and
o
t
her char-
acteri
s
ti
c
s.
I
n
asmuch as
th
e
r
a
te applicable to a given
ri
sk is a
market phenomenon, an
anal
ys
is of the various
hazard
s
,
a
s
inter-
preted by average investors, is
ne
c
essary.
It
is necessary to select
specific kinds of typical, staple,
real
estate investments to ascertain
the
g
eneral level of applicable
rate
s
.
A limited number of
in
s
tances
of sales does not
suffice
to
establi
s
h proper capitalization
rat
es.
The
proper level of rates is
indicat
e
d only by
the
general
av
e
rage
acc
e
pt-
able rate of
return
sought by a
l
a
r
g
e number
of
investors.
1552.
An
individu
a
l
c
apitalization rate should be consid-
ered to represent an
aver
a
ge of a number of different degr
e
es
of in-
vestment risk. Thus,
inve
s
tment in the
fir
s
t
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
ca
pitaliza-
tion applicable
to
real estate valuation lie between acceptable rates
of
return
on mortgage investments and acceptable rates
of
r
e
turn
on
equity investments. Furthermore, the accepted rate
of
return on in-
vestments in land is lower than the accepted
rate
of return on
inves
t
-
ments in buildings because the land returns are more
ce
r
ta
in and of
indefin
i
te duration, i. e., perpetuities, whereas the returns imputable
to buildings are subject to uncertainty and to total
di
sa
ppearan
c
e
;
In
this
s
ense
it
may
be
said
that
the land returns are considered to be the
'first earned portion of the total net income. This is clearly seen in
cases involving
.
ground leases and leasehold valuations.
Further
justifi
ca
tion
for
ascribing lower
c
a
pitalization rates
to
land than to
buildings
is
found in the
recogn
i
tion
t
hat
land has, in general
,
gr
eater
variety of
po
s
sible uses and
i
s
,
th
e
r
e
fore, a safer investment, and may
have
spe
c
ul
a
ti
v
e
potentialities as well.
1553.
The
curr
e
nt
r
ate of
r
e
turn
is defined
-
a
s
the net
earnings in any year divided by the
va
lue of the property as of
that
year.
In
rental income dwelling
prop
e
rtie
s
,
the over-all rate of
return
is
expe
c
ted to lie between
8
% and
15
%
.
Usually,
it
is from
8
%
to
10
%
if
no unusual conditions
pr
eva
il. The land capitaliz
a
tio
n rate is
usuall
y close to 6%; the
buildin
g 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
pre
s
en
te
d solely to describe the approximate inc
vestment
po
s
ition of this
cla
s
s
of
r
ea
l
e
st
ate and to provide Valuators
with a
crit
e
rion
for
the selection of the general level of capitalization
rates
appli
c
able to valuation of
rent
a
l
income dwellings.
1554.
Selection of
Rates.
The actual
s
ele
c
tion of the
land capitalization
rate
and the building capitalization rate consists
1551-1554
UNDERWRITING MANUAL
,.----------
of considering the factors in the particular case to determine modifi-
cations 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 oc-
cur 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 prob-
able stability of future net incomes require modifications
of the basic rates suggested.
High
expense ratios indi-
cate
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 pre-
dictions based on them are unavailable, the uncertainty
introduced is felt by the market as well as the Valuator
and higher rates are applicable.
·
.
1553
VALUATION OF
RENTAL
INCOME
DWELLINGS
·
-
---
.-,
~---
-
~
-
-
-
-
~
,.
I
•
1556.
In
some localities
it
is
c
ustomary 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 de-
scribed
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 unfur-
nished property, as already described in 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 obtain-
able by the owner from a lessee of 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 lessee opera-
tion of the property, the procedure is identi
c
al 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
FURNISHED APARTMENTS
I
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 capi-
talization 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, capitaliza-
tion rates should be lower
than
the modified basic rates. When the
Rating of
Earning
Expectancy is
at
an intermediate point,
the
modi-
fied basic rates will usually apply without
further
modification.
1555-1558
UNDERWRITING MANUAL
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 furnish-
ings in good repair and to
m
a
ke
nece
ss
ary
replacements
,
d,
E
s
timate the salvage value of the furnishings as of the end
of
their
useful life.
e.
D
e
termine the annual amount to be charged against income
in order to recover the
valu
e
a
s
cribed
to
the furnishings
du
r
ing
their
estimated
remaini
n
g useful life.
estimates will
diff
e
r
under the two
a
ssump
t
ions. The
occup
a
ncy
ratio will be high
e
r
on the basis of
less
ee operation, and the
expen
s
e
estimate lower
a
s
t
here will be fewer items due to the fact the lessee
must pay most of the various expenses of operating and maintaining
the property. Conditions assumed in the hypothetical lease would
largely govern the estimate. The capitalization rates applicable
in
case of
less
e
e-operation should also be a little lower
than
in cases
w
here owner
op
e
r
at
ion is the basic assumption.
1559.
If
the property is to
b
e
v
alued on the basis of
owner
operatio
n
a
nd as a
furni
s
hed
prop
e
rty, additional considera-
tions enter into the Valuator's calculations. Revenue and expense
estimates
ar
e
somew
hat
different. Certain items in the estimates
for
unfurnished properties must be
in
c
reased
if
the operation is
changed to a
fur
n
ished basis. These would include taxes, insurance,
repairs,
repl
a
ce
ments, labor charges, management costs, and ad-
ministrative
expen
s
e.
Some additional items would be introduced.
They are dealt with below.
It
must also be
re
c
ognized
that
opera-
tion of the property
i
s in the nature of a business enterprise in
w
hich the
own
e
r-
.
oper3f r
as
s
umes an additional risk
ov
.
er and
abov
.
e
that
which he would
~
~perience
as an operator of an unfurnished
property or as a
le
s
sor
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 discussed in paragraphs in this Section:
a.
An adequate
return
upon the
v
alue of the furnishings and
on the operating capital.
b,
Re
c
o
v
ery of the amount
as
c
ribed as value of the furnish-
ing
s
,
to be effected out of
ye
a
rly revenues and fully
accomplished during the
es
timat
e
d remaining useful
life
of
the furnishings.
From this
it
is apparent
that
the Valuator must take the following
steps:
VALUATION
OF
RENTAL
INCOME
DWELLINGS
1558-1559
•
c.
Estimated
value of
furnis
J
l
in
c
s
-------
----------------------
-
$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 esti-
mated total and estimated remaining useful lives are treated in
groups and the results added to obtain a grand total for the furnish-
ings 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 specific kind
and quality under appraisal. The character of the use which the
articles will probably experience in the specific property where they
are installed also influences the estimates, as well as the actual physi-
cal 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. Obsolescence also
plays an important
part
because furnishings must be in currently
favored styles
if
rentals are to be maintained
at
profitable levels.
a.
Cost of new
furnishings
of same
kind
and
quality
$9, 400
b.
Ratio
of remaining useful
life
to
total useful
life
(7-+-10)
--
----
.7
I
f.
Determine what is an adequate return upon the value of
the furnishings and operating capital in view
of
risk,
and management
burdens
·
assumed in 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 furnish-
ings 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
i
s
$9,400.
These assumptions indicate
that
all
the articles have been found upon inspection to be in equally
good state of repair. The value ascribed to the entire group would
be
calculated thus
:
1559-1561
UNDERWRITING MANUAL
Remainder---------------------·-------------------
$5, 980
Annual charge
against
income, assuming
7
years
of remain-
ing 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 re-
lating
to each group are added together to get
.the
final figure.
Thus, there might be groups of items each having estimated remain-
ing 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 establish-
ment of the operating furnished apartment enterprise. The
operator
of the enterprise must take the risk of having some of 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 assume the
risk
of
rapid
dissipation of his invested capital through
the
occurrence
of obsolescence through a change of public favor as to
furniture
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 esti-
mates. 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 necessitates an
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 as-
cribed
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., $6, 580
Estimated
salvage value
as
of end of useful
life
$
600
VALUATION OF
RENTAL
INCOME
DWELLINGS
1562-1564
T
o
t
a
L--
---
--
-
--
---
-----
--
--
-
----
--
-----
-
---
--
--
----
$
1
,5
50
Estima
te
d net
earnin
gs of operating furnished
prop
ert
y__
____ $9,
6
3
2
Capital
c
har
g
es on
accou
n
t of
furni
s
h
i
n
gs and
opera
t
i
n
g
c
a
pital
:
Annu
a
l
amor
t
ization
ch
a
rge to
eff
ec
t
reco
v
ery of va
lu
e
ascribed to
furni
s
hing
s
durin
g
t
h
e
ir
remaining
.
u
se
ful
lif
e
-
---------
-
------
-
-------------
-
-------------
-- $854
Annual return on
v
a
lue
ascrib
e
d to furnishings
a
t
10
% ($6,580x
.10
)
658
An
nu
a
l
r
e
turn on
op
e
r
a
ting
capit
a
l
a
t
5%
($750 x
.
0
5
)
_
38
9,860
Estim
a
t
e
d effective
gr
oss revenue $19, 492
Estimat
e
d
expen
s
e of
op
e
r
a
tion:
Rep
a
irs
,
m
a
inten
a
n
ce, and
repl
a
c
em
e
nt
s of
rurnl
s
hin
g
s , $250
All
o
ther items of
ex
pen
s
e
9,
610
•
I
Valu
e
a
s
cri
b
e
d to
furni
s
hings $6, 580
Return
o
n $6,580 at
10
% ($6580x.10)
_:_
_
_
$
658
1565.
Return on Operating Capital.
Some capital may
have to be
av
a
ilable in the form of cash
at
all times to enable con-
tinuous operation and
me
e
ting
of current bills. Since this
capit
a
l
is in the form of cash and can be
e
as
ily
conserv
e
d or withdrawn
from the enterprise, a
rel
a
tively low
r
a
t
e
of return is applicable, say
4% or 5%. Thus,
if
$2,000
of operating capital is necessary, the
charge
again
s
t
i
ncome at
5
%
would amount to
$100.
This deduction
from income
i
s made only in those cases
w
here the required operating
c
apital is substantial in amount.
1566.
To
illu
s
trate
the
add
i
t
i
onal steps necessarily intro-
duced when the valuation relates to a real estate property
whi
c
h
must be treated as an
op
e
rating
furni
s
h
e
d
apartm
e
nt enterprise, the
:following
c
a
lculations are
s
hown
:
Revenue
a
t 100%
occ
u
pa
ncy
$22,1
5
0
A
ss
um
e
d long-term
a
verage
occu
pa
n
cy
________
__
____
_
__
____
88
%
styles, or the refurnishing with new
arti
c
l
es
of other apartment prop-
erties
whi
c
h compete with his
en
t
erpri
s
e.
He
mu
s
t
a
s
sume a burden
of management which is
gr
e
ater
than in
the case of
op
e
rating
on an
unfurnished
basis,
Furth
e
rmore, he must pay all expenses and
charges common to the
op
e
ration of an unfurnished property before
he can credit any returns to himself for his managerial services and
for his
capital
invested in
:furnishing
s
.
Under this combination of
circumstance
s
,
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
:
1564-1566
UNDERWRITING MANUAL
Estimate
of value of
real
estat
e 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
r
e
al
e
s
tate and the furnishings and
th
e
operating
c
a
pital or
$97,526. The Valuator would report the value of the real estate, not
of
the operating furnished
apartm
e
nt house enterprise.
Returns
of building
i!Ilprovements------------
--
--------
-
-
$7,
l~
Valuation of building
returns at
87\io/o,
40
year
remaining
economic life, as per income premise ($7,182 x 10.47)
$75,
100
Land Valuation $15,000
$8,082
900
Esti!Ilated
net
earnings of
real
es
tate
_
Returns
on
land
valuation
at
6% ($15,000 x .06)
_
1566
VALUATION OF RENTAL INCOME DWELLINGS
-
-~
-
-
--
~
'
Effective
February
1938
Federal Housing Administration
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-----------------------------------------
1646---11
Determination of Total Replacement Cost.,
1649-1650
CONTENTS
PART IV
SECTION
16
METHODS OF DWELLING COST ESTIMATION
BA8IS OF THE COST ESTIMATE
1603.
Estimates of the cost required to replace building
improvements in
ne
w condition shall be made by either Architectu-
ral 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
w
ould have to be met by an individual lot owner
who would secure suitable drawings and specifications, obtain
com
-
petitive bids,
a
nd contract with a responsible builder for the
construction of one dwelling only.
1604.
The estimate shall be based upon replacement of
the physical improvements in new condition.
In
a case where alter-
ations or
a
dditions to the improvements are to be made, the cost esti-
mate shall be based on replacement of the improvements in new
condition as
th
e
y would exist with the proposed alterations
or
addi-
tions
incorporat
e
d. However, in the event the buildings include ex-
cessive or wasteful use of materials or details, excessive ceiling heights
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 in-
structions given in Section
13,
Methods
of
Dwelling Valuation. This
estimate constitutes the approximate upper limit of possible valua-
tion. The
tot
a
l cost
of
replacement
of
property is distinguished
from the
estima
te
of
the
co
s
t
of replacement of building improve-
ments. The former includes the latter. Therefore, the estimate of
the
co
s
ts required to replace building improvements in new condi-
tion serves to control, in
part
,
the estimate of value.
1602.
This section and Section
17,
Application of Cost
E
st
imation
Me
t
hods
,
prescribe the methods to be employed in deter-
mining the estimate of cost required
to
replace building improve-
ments.
In
the
se
sections, the words "Cost Estimate" refer to the
estimate of Cost Required to
Repl
a
ce
Building Improvements in New
Condition, not to the estimate of the total cost of replacement of
property.
PART IV
SECTION
16
METHODS OF DWELLING COST ESTIMATION
i
l
-
•
•
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. 2014 or
2015.
1605.
The required cost estimates differ in few particu-
lars from those ordinarily made by contractors bidding
for
work.
The differences result solely from
differen
c
es in the purposes for which
the estimates are made. Contractors' cost estimates are usually made
by determining the quantities of materials, equipment, labor, and
superintendence required, and then
pr
i
cing these quantities
at
prede-
termined current
price
s modified for anticipated changes in condi-
tions. The
co
s
t
estimates
mad
e for the purposes of the Federal
Hous
-
ing Administration are
simila
r
in this
resp
e
ct, except
that
the profi-
ciency 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 quanti-
ties are measured in combinations which permit a reasonably accurate
estimate to be made without
particular
regard to the sequence fol-
lowed by
.
the various trades in the construction operation. Con-
tractors take probable weather conditions into consideration
in their
estimates. The
Admini
s
tration
makes no
particular
modification of
estimates because of probable weather conditions.
1606. The items included in contractors' estimates
di:ff
er
somewhat from the items included in the
F
e
deral Housing
Ad
m
inis-
tration's
estimates. Contractors' bids embrace only the cost of the
work the contractor proposes to
und
e
rtake. His
e
stimate
repre
se
nts
the amount which he is willing to
a
ccept in payment
for
the con-
struction 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
servic
e and frequently
do
e
s not
include walks and drives, special equipment, and various other items.
The cost estimate used by the Federal Housing Administration must
include those items
nece
s
sary to complete the physical improvements
as indicated in paragraphs
1608
to
1612.
1607.
The
e
s
timate is invariably predicated upon the
ability and experience of the estimator and is not entirely the result
of a mathematical computation. Cost
est
i
mates are
usually
.
based
upon past building operations under conditions which may differ
1604-1607
UNDERWRITING
MANUAL
r:
,_
-·-
--
·
·
-·-
--
-·
---
·
---
--
-
-
·
-
METHODS OF
DWELLING
COST
ESTIMATION
.
-
~
-
--
11
1
1607-1609
greatly from
th
o
se under
w
hich the
subj
e
ct building will be con-
structed.
It
follows
that
the
e
s
timator must call upon his experience
j
in
prac
t
ic
a
l
building operations to recognize the 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 service entering 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 accessory buildings
c.
Walks, drives, and terraces not supported on foundation
walls
d.
Private sewage disposal, water supply, and electric generat-
ing
plants
The allowance
for
builder
'
s overhead and profit is the customary
local and current
c
harge
for
the type and class of building under
consideration. Suitable
allow
a
nc
e
s
s
hall
be
mad
e for workmen's
compensation, social security, and liability insurance where these
items
a
r
e
a part
of the cost of the building construction. The allow-
ance
for
architectural
s
er
v
ic
e
shall
b
e
c
a
lculated on the basis of
the
.
percentage customarily
char
ged in the locality
for
this type of work
at
the tim
e
the
e
stima
t
e
is made.
If
the building is of the type for.
which
pla
n
s are
ordi
n
arily
purchas
e
d outright, no more
than the
purchase
pri
c
e
ordinar
i
ly
char
g
ed
for
such plans shall be included.
1609.
The
estimat
e shall not include the following:
a.
Savings due to quantity production of buildings or unusual
efficiency of
build
e
r
or
wo
r
kmen
b,
Deductions
for
accrued
d
e
terio
r
atio
n
,
obsoles
c
ence, and
depre
c
iation
c.
Carrying charges during construction and
cos
t of
financing
d.
Structures of
.
temporary character or structures not per-
manently affixed to the ground
e.
Landscaping,
in
c
luding shrubs, trees,
.
grass,retaining
walls,
and finish grading of site
f.
Chattels,
that
is
,
equipm
e
nt
and accessories which arc not,
legally;
part
of the
realty
In
i:iiterpreting the
m
e
aning of
(1;
above, when the main building is
one of a number of
row
houses separated only
by
pit
fi
y
walls, the
proportionate cost attributable to the
subj
e
ct
building' as a
part
of
an operation embracing several
houses
·
i
s
'u.8ed
as the
'
basis of esti-
mation. Items
l
i
sted under
e
above,
while
:
not
:,
'}ncluded
inth~
Esti
-:
r-
!
l
J
•
I
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. Determi-
nation as to whether certain equipment or accessories are chattels or
parts
of
the realty depends oh local custom and state laws. To
assist the Chief Architectural Supervisors who must make this de-
cision, the Underwriting Division, "Washington, D. C., has supplied
Underwriting staffs with opinions :from the Legal Division concern-
ing 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 Ob-
solesenee,
Certain items
of
equipment and accessories may be sub-
ject to rapid deterioration and obsolescence as a result of the wear-
ing out of moving parts, changes in design, and anticipated reduc-
tions 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 treat-
ment 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. Oc-
casionally properties incorporating unusual :features, but of conven-
tional construction, will be offered for consideration. These prop-
erties 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 build-
ing construction
b,
Excessive development of service features in proportion to
habitable area of house
c.
Excessive provision for hobbies, such as laboratories, con-
servatories, private
art
galleries, and swimming pools
d,
Construction materials of unusual or unjustifiable perms-
nence and excessive cost, 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 gen-
erally used in dwellings may
be
subject to wide fluctuations in cost
1609-1613
UNDERWRITING
MANUAL
1
I
i
I
i
PRESCRIBED METHODS OF COST ESTIMATION
1615.
Selection of Method. The cost estimate shall be
obtained by
on
e
of the
t
w
o
prescribed
me
t
hods. A majority of the
ca
s
es
presented for consideration are handled by the Integrated
Square Foot Method. The remaining cases are handled by the
In-
place
Unit
Method. The basis for selection of method is the com-
plexity of the problem presented. Typical properties for which
suitable
co
s
t
data have
be
e
n compiled are estimated by the
In-
tegrated 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 Ad-
ministration
offices,
and for statistical purposes. No methods except
the prescribed Integrated Square Foot andx Inplace
Unit
Methods
shall be
us
e
d 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
over comparatively short periods of time. To meet this conditionthe
co
s
t
of the
s
ubje
ct building
s
h
a
ll be
es
t
imated according to the draw-
ing
s
and
s
pecifications,
exc
e
pt that
conventional
materials and
m
e
thods
0£
construction shall be
as
s
umed for the new materials and
m
e
thod
s
of
constru
c
tion.
Th
e
substituted
c
onventional materials and
m
e
thods
0£
con
s
tru
c
tion shall offer the
s
a
me structural soundness,
rel
a
ti
v
e
res
i
stan
ce
to
fir
e
,
to
u
se
,
a
nd to the elements, the same insula-
tion value, and maintenance costs as the units they replace.
In
the
e
ve
nt
this
s
ubs
t
itution
in
c
re
a
ses the thickness of the
w
alls or
p
a
rti
-
tions, the
s
ize
0£
th
e
building shall be correspondingly increased so
th
a
t
the house
will cont
a
in the same finished area as the building
it
replac
es
.
This cost
establish
e
s
th
e
M
a
ximum Allowable Estimate of
Cost Required to Replace Building Improvements in New Condition.
Where
it
is obvious
that
the cost of
t
he actual,
exi
s
ting, or contem-
plated improvements will exceed this estimate, the cost of the actual
improvements need not be determined. The words "Maximum Allow-
abl
e
" are
insert
e
d before "Estimate of Cost Required ," on
J1"'HA
Form No.
2014.
1614.
Some new
con
s
truction methods may permit econ-
omies which will
re
s
ult
in
c
o
ntract
prices lower than the Estimate
of Maximum Allowable Cost Required to Replace Building Improve-
ments in New Condition as
d
e
scribed 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
char
-
acter.
1613-1616
METHODS OF
DWELLING
COST
ESTIMATION
H.
DETERMINE COST OF
GARAGE
K.
I.
DETERMINE COST OF
OTHER
L
,
IMPROVEMENTS
J
.
DETERMINE ALLOWANCE
FOR
M.
ARCHITECTURAL SERVICE
AQO
MAIN BUILDING, GARAGE, OTHER
K.
IMPROVEMENTS
AND
ARCHITECTURAL
N.
SERVICE TO OBTAIN
TOTAL REPLACEMENT COST
MULTIPLY FINAL SQUARE FOOT COST
G
,
BY
CALCULATED AREA TO
OBTAIN
.
J
.
COST OF
MAIN
BUILDING
F.
MAKE NECESSARY LOCALITY ADJUSTMENT l
.
TO OBTAIN SQUARE
FOOT
COST
•
E
.
MAKE NECESSARY QUALITY ADJUSTMENT
H
.
•
DIVIDE TOTAL OBTAINED IN
F
BY
CALCULATEO AREA TO
OOTA\N
SQUARE FOOT COST
ADD
AN ALLOWANCE FOR
OVERHEAD AND PROFIT
ADD COSTS OF 27 COMPONENTS
TO OBTAIN TOTAL WITHOUT
OVERHEAD AND PROFIT
MULTIPLY THE SELECTED INPLACE
UNIT PRICES
BY
THE NUMBER
OF
UNITS IN EACH COMPONENT TO
D.
OBTAIN COST PER COMPONENT
I
SELECT APPLICABLE INPLACE
UNIT PRICES FROM COST
DATA HANDBOOK,PART 2
,
DETERMINE THE
NUMBER
OF
INPLACE
a
UNITS IN EACH COMPONENT
MAKE NECESSARY MATERIALS
ANO
SIZE ADJUSTMENTS
TO
OBTAIN SQUARE FOOT COST
SELECT APPLICABLE BASiC
SQUARE FOOT COST FROM
COST DATA HANDBOOK, PART l
DETERMINE
CALCULATED AREA
DETERMINE
WHICH
METHOD IS APPLICABLE
INPLACE
UNIT
METHOD
~
I
INTEGRA~ED
SQUARE
FOOT
METHOD
STEPS IN COST ESTIMATION
UNDERWRITING
MANUAL
1616
,...
·
--
·
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(Msifi-
cation.
of
buudings
and is identified according to classifi-
cation criteria as falling in one of the established classi-
fications. The classification of buildings and the classifi-
cation 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
comes under the estab-
lished 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.
In-
structions 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
adju
s
tments comprise additions to and deductions
from the Basic Square Foot Cost to take account of dif-
ferences
in
materials, size, and shape of the subject build-
ing as compared with the basic specifications used
in the
Classification of Buildings. After the Materials and
S
i
ze
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
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:
1616-1617
METHODS OF
DWELLING
COST
ESTIMATION
•
I
f.
The
n
e
xt step is to make a
further
m
odification to take into
accou
n
t
the differences in cost of erecting buildings in
differ
en
t
localiti
es.
This process is called the
local
i
ty
ad-
ju
s
t
me
nt
and is
a
c
complished by applying a Locality Ad-
justment Percentage to the Square Foot Cost already
adju
s
t
e
d
for
qu
a
lity.
g.
After
the
Qu
ali
ty
Adjustm
e
nt
and the Locality .Adjust-
ment have been made, the resulting
fi
g
ure is the
fonal
squar
e
foot
co
s
t
applicable to
th
e
subject building. The
Final
Square Foot
Co
s
t
i
s
mul
t
iplied by the number of
squar
e
feet in the Calculated
.A.r
e
a to secure the cost of
main. building
h.
The cost of repl
ac
ement of
garag
e
is then determined
i.
The
nex
t
st
ep
i
s to
de
te
r
m
ine
th
e cost of
other improve-
ment
s
such as walks, driveways, accessory buildings, and
items of
spe
c
ial equipment not reflected in the
Final
Square Foot Cost
j.
The sum of the
c
osts obtained in
g,
Ii,
and
i
ordinarily
constitutes
th
e basis on which architectural service,
if
any
,
is
comput
e
d.
Th
e
refore
th
e next step is to deter-
mine the allowance
for
archit
ect
ural service
k.
The estimated costs of Main Building, Garage, Other Im-
provements, and Architectural Service
ar
e
then totalled
to obtain the
es
timate
of
cost
r
e
qu
i
red to
re
plac
e
building
impro
vements in new condition.
This figure is the total
cost estimate
u
se
d
for
Federal Housing
Admini
s
tration
purpo
ses
,
and
c
orrect entries
a
re made on FHA. Form
No.
2014
or FHA. Form No.
2015
1618.
In
some cases involving
e
xisting construction,
it
will
be
found
t
h
a
t
the replacement cost
of
building
impro
ve
ments
is considerably higher than
that
portion of the valuation ascribed
to the building
improvem
e
nts. This occurs most frequently in cases
involving building
improv
e
ments
,
the value of which has been
greatly affected by 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 selected
bas
ic square foot cost as the
Final
Square Foot
Co
s
t
without adjustment or modification. When this
procedure is employed, the Valuator is required to make an appro-
priate
statement on FHA. Form No.
201
5
,
Report of Valuator,
explaining the absence of
FHA
Form No.
2052.
1617-1618
UNDERWRITING
MANUAL
1619.
Steps in lnplace Unit Method.
This
m
e
thod
proce
e
ds
in
th
e
order of the following
li
s
ted
s
teps:
a.
The
o
aloulated;
are
a 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
es
timated. Components are those
int
eg
ral
as
s
embl
e
d
p
a
rts
of a
build
i
ng which are
sus
c
epti-
ble to
s
e
parate
e
x
amination with respect to costs,
su
c
h
as
exc
a
vation, exterior
w
alls, or
plumbing
.
An inplace
unit
is
u
s
ed as a basis of
mea
s
urement and refers to the com-
pleted and finished
a
s
pect of a
co
m
ponent or element of
a component. As a
consequ
e
nce
,
many inplace units
embrace assemblies of diverse things
c.
1
npla
ce
unit
p
ri
c
e
s
applicable to the components of the sub-
ject building are
sel
ec
ted from
Part
2 of the Cost
Data
Handbook
d,
The Jnplace
Unit
Pri
ce
s are multiplied by the correspond-
ing number of units of each component to obtain the costs
of the individual components.
e.
The costs of
componen
t
s are added to obtain the total cost
of
components, not including overhead or profit.
f.
An allowance for
o
v
erhead 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
Squ
a
re Foot Cost is then modified to take account
of the differences in cost due to quality variations be-
tween the subject building and the quality assumed
in
establishing the inplace
unit
prices. This process is called
the quality
adjus
t
ment and is made by applying a Quality
Adjustment
Perc
e
ntage 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 ad-
justment
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
1619
METHODS OF
DWELLING
COST
ESTIMATION
.
:
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 components com-
prise the parts of the building which are separately subject
to
vari-
ations 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 refer-
ence numbers set before the components of
the
building
in this
paragraph
shall be maintained
throughout
.
the
cost estimating pro-
cedure
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 components or 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 associated elements, are as follows
:
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 improve-
ments,
such as walks, driveways, accessory buildings, 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
es
t
imated costs of Main
Bu
i
ld
i
ng, Garage, Other Im-
provements, 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
1619-1621
UNDERWRITING MANUAL
1.
Excavation:
Basement
Trench walls
Pier
Grading of unexcavated portions under first floor con-
struction
2.
Foundations:
a
.
With
Ba
se
ment:
Wall footings, basement walls, including damp-
p roofing
Basement floor
Basement stairs, windows, doors, columns or piers
including
footing
s
,
girders,
are
a
s, tile drains, coal
bin partition and coal chute
b
.
Without Basement:
Wall footings, trench
wall
s
,
curtain walls, piers
including footings, and girders
3.
Chimney:
Single flue with required enclosing masonry and founda-
tion
4.
Fireplace:
Fir
e
place
includin
g
complete foundation,
ma
s
onry, flue,
he
a
rth,
lining, damper, facing, and mantel
5.
Exterior Walls:
All
it
e
ms of
constr
u
ction and exterior finish of the
e
x
terior
walls including interior dampproofing or
fu
r
ring
w
here
used, but not including plaster base or
pl
as
ter or
o
t
her
int
e
rior wall finish materials
6.
Floor
Framing:
Structural floor framing, but not including subflooring,
fini
s
h
flooring
,
or pla
s
ter
ba
s
e
and pla
s
t
e
r
or other
ceiling finish.
Concr
e
te
sl
a
bs, self-supporting, sup-
ported on joist
framing
,
or those laid on the ground
in structur
es without
ba
s
em
en
ts 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
1621
METHODS
OF
DWELLING
COST
ESTIMATION
--
---
--
~
•
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, in-
cluding all flashings, valleys, hip and ridge coverings
13.
Gutters and Downspouts:
Gutters and downspouts, including shoes, splash blocks,
dry wells, or connections to 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, in-
cluding finish
Clo
s
et 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 fin-
ish. All added exterior architectural treatment, includ-
1621
UNDERWRITING MANUAL
\
1
l I
I
1621
ing additional entrance steps, exceptional chimney, half-
timbering, 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, in-
cluding 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 equip-
ment; 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
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 com-
ponents,
su
c
h
as screens, storm-sash, caulking, weather-
stripping,
bas
e
ment garage, finished rooms in base-
ment, finished rooms in
atti
c
,
t
e
rmite shields, wood
preservation, and special basement waterproofing
r
'
·
METHODS OF
DWELLING
COST
ESTIMATION
···
---
-
-
--
~
-
----~_.....,.----------.....
f
r
l
'
l
•
I
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 determina-
tion
of Calculated Area are as follows
:
a.
To
be
Included and Calculated in
Full
:
The square foot area of finished floors above
the
basement,
including bays, oriels, dormers,
light
shafts and stair-
wells,
utility
rooms, vestibules, enclosed porches, open
porches within the main wall line, and built-in garages.
In
computing these areas, measurements shall be taken
to the outside surfaces of exterior walls or
partitions
enclosing the areas and no deductions shall be made £or
stair-wells or
light
shafts.
In
structures without base-
ments, 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 interpreta-
tion 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 compara-
ble in quality with the main house, and :forms an integral
part
of the architectural design, the garage may be con-
sidered as "built-in"
1622-1623
UNDERWRITING MANUAL
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 de-
termine 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 compen-
sates
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 exca-
vation. The cost of excess quantities, obtained by measuring half-
story 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
form-
ing
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
1
the
~verage
'
depth
below
natural
grade.
MEASUREMENT OF COMPONENTS
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
1623-1624
METHODS OF
DWELLING
COST
ESTIMATION
·
-
---
.
-,
·
-
'
2.
Foundations:
a.
Foo
ti
ngs:
M
ea
sured
i
n
line
a
l
f
e
et,
eq
u
als the
t
o
tal
of
t
he
e
xte
r
i
o
r
dimen
s
i
o
n
s
of
th
e
w
alls or
pier
s having
footings.
b,
B
ase
ment
Walls:
M
e
asured
i
n square
f
e
et, equals the
ar
ea of
th
e
outsid
e
s
urface of the
wall
s
from
th
e top
of the footings to
th
e
und
e
r
s
ide of
fir
s
t
flo
o
r
con-
struction. This element includes
b
e
nch walls but
do
es not include
non-bearin
g partitions.
No
n-
bear-
ing
partition
s
ar
e
included under Component No.
27.
c.
Tr
enc
h
Wall
s
:
Measur
e
d in square feet,
e
quals the area
of the
out
s
ide
surfa
c
e
of
th
e walls, from the top
of
the footing to the
u
n
der
s
ide of
fir
s
t
floor construction.
This
elem
e
nt
incl
ud
es
curt
a
in walls and piers where
they occur.
d.
B
aseme
nt
Flo
o
r:
M
eas
ured in
s
quare feet to the out-
side
s
urf
ace
s
of
ba
se
ment
w
a
ll
s
.
e.
Bas
e
ment
Es
se
ntials:
Estimat
e
d as a lump sum amount
to include
ba
s
ement stair,
b
as
ement
sa
sh and doors,
floor
gird
e
r
s
,
lally
column
s
or piers, coal bins or
similar
it
e
m
s
not otherwise
li
s
ted.
3.
Chimney:
Mea
s
ur
e
d in lineal feet from underside of footing to
top of chimney. No
deducti
o
n is made for any por-
tion common to 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:
Mea
s
ured in
s
quare
fe
e
t, equals the area of the outside
surface
of
th
e
wall
s
,
from underside of first floor
construction to the intersection with roof
s
urfaces.
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 dimensions taken to outside
of exterior
w
all
s or to
out
s
ide edges where walls do
not occur.
1624
UNDERWRITING MANUAL
BA8IS OF THE COST ESTIMATE
1603.
Estimates of the cost required to replace building
improvements in
ne
w condition shall be made by either Architectu-
ral 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
w
ould have to be met by an individual lot owner
who would secure suitable drawings and specifications, obtain
com
-
petitive bids,
a
nd contract with a responsible builder for the
construction of one dwelling only.
1604.
The estimate shall be based upon replacement of
the physical improvements in new condition.
In
a case where alter-
ations or
a
dditions to the improvements are to be made, the cost esti-
mate shall be based on replacement of the improvements in new
condition as
th
e
y would exist with the proposed alterations
or
addi-
tions
incorporat
e
d. However, in the event the buildings include ex-
cessive or wasteful use of materials or details, excessive ceiling heights
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 in-
structions given in Section
13,
Methods
of
Dwelling Valuation. This
estimate constitutes the approximate upper limit of possible valua-
tion. The
tot
a
l cost
of
replacement
of
property is distinguished
from the
estima
te
of
the
co
s
t
of replacement of building improve-
ments. The former includes the latter. Therefore, the estimate of
the
co
s
ts required to replace building improvements in new condi-
tion serves to control, in
part
,
the estimate of value.
1602.
This section and Section
17,
Application of Cost
E
st
imation
Me
t
hods
,
prescribe the methods to be employed in deter-
mining the estimate of cost required
to
replace building improve-
ments.
In
the
se
sections, the words "Cost Estimate" refer to the
estimate of Cost Required to
Repl
a
ce
Building Improvements in New
Condition, not to the estimate of the total cost of replacement of
property.
PART IV
SECTION
16
METHODS OF DWELLING COST ESTIMATION
i
l
-
•
•
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. 2014 or
2015.
1605.
The required cost estimates differ in few particu-
lars from those ordinarily made by contractors bidding
for
work.
The differences result solely from
differen
c
es in the purposes for which
the estimates are made. Contractors' cost estimates are usually made
by determining the quantities of materials, equipment, labor, and
superintendence required, and then
pr
i
cing these quantities
at
prede-
termined current
price
s modified for anticipated changes in condi-
tions. The
co
s
t
estimates
mad
e for the purposes of the Federal
Hous
-
ing Administration are
simila
r
in this
resp
e
ct, except
that
the profi-
ciency 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 quanti-
ties are measured in combinations which permit a reasonably accurate
estimate to be made without
particular
regard to the sequence fol-
lowed by
.
the various trades in the construction operation. Con-
tractors take probable weather conditions into consideration
in their
estimates. The
Admini
s
tration
makes no
particular
modification of
estimates because of probable weather conditions.
1606. The items included in contractors' estimates
di:ff
er
somewhat from the items included in the
F
e
deral Housing
Ad
m
inis-
tration's
estimates. Contractors' bids embrace only the cost of the
work the contractor proposes to
und
e
rtake. His
e
stimate
repre
se
nts
the amount which he is willing to
a
ccept in payment
for
the con-
struction 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
servic
e and frequently
do
e
s not
include walks and drives, special equipment, and various other items.
The cost estimate used by the Federal Housing Administration must
include those items
nece
s
sary to complete the physical improvements
as indicated in paragraphs
1608
to
1612.
1607.
The
e
s
timate is invariably predicated upon the
ability and experience of the estimator and is not entirely the result
of a mathematical computation. Cost
est
i
mates are
usually
.
based
upon past building operations under conditions which may differ
1604-1607
UNDERWRITING
MANUAL
r:
,_
-·-
--
·
·
-·-
--
-·
---
·
---
--
-
-
·
-
METHODS OF
DWELLING
COST
ESTIMATION
.
-
~
-
--
11
1
1607-1609
greatly from
th
o
se under
w
hich the
subj
e
ct building will be con-
structed.
It
follows
that
the
e
s
timator must call upon his experience
j
in
prac
t
ic
a
l
building operations to recognize the 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 service entering 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 accessory buildings
c.
Walks, drives, and terraces not supported on foundation
walls
d.
Private sewage disposal, water supply, and electric generat-
ing
plants
The allowance
for
builder
'
s overhead and profit is the customary
local and current
c
harge
for
the type and class of building under
consideration. Suitable
allow
a
nc
e
s
s
hall
be
mad
e for workmen's
compensation, social security, and liability insurance where these
items
a
r
e
a part
of the cost of the building construction. The allow-
ance
for
architectural
s
er
v
ic
e
shall
b
e
c
a
lculated on the basis of
the
.
percentage customarily
char
ged in the locality
for
this type of work
at
the tim
e
the
e
stima
t
e
is made.
If
the building is of the type for.
which
pla
n
s are
ordi
n
arily
purchas
e
d outright, no more
than the
purchase
pri
c
e
ordinar
i
ly
char
g
ed
for
such plans shall be included.
1609.
The
estimat
e shall not include the following:
a.
Savings due to quantity production of buildings or unusual
efficiency of
build
e
r
or
wo
r
kmen
b,
Deductions
for
accrued
d
e
terio
r
atio
n
,
obsoles
c
ence, and
depre
c
iation
c.
Carrying charges during construction and
cos
t of
financing
d.
Structures of
.
temporary character or structures not per-
manently affixed to the ground
e.
Landscaping,
in
c
luding shrubs, trees,
.
grass,retaining
walls,
and finish grading of site
f.
Chattels,
that
is
,
equipm
e
nt
and accessories which arc not,
legally;
part
of the
realty
In
i:iiterpreting the
m
e
aning of
(1;
above, when the main building is
one of a number of
row
houses separated only
by
pit
fi
y
walls, the
proportionate cost attributable to the
subj
e
ct
building' as a
part
of
an operation embracing several
houses
·
i
s
'u.8ed
as the
'
basis of esti-
mation. Items
l
i
sted under
e
above,
while
:
not
:,
'}ncluded
inth~
Esti
-:
r-
!
l
J
•
I
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. Determi-
nation as to whether certain equipment or accessories are chattels or
parts
of
the realty depends oh local custom and state laws. To
assist the Chief Architectural Supervisors who must make this de-
cision, the Underwriting Division, "Washington, D. C., has supplied
Underwriting staffs with opinions :from the Legal Division concern-
ing 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 Ob-
solesenee,
Certain items
of
equipment and accessories may be sub-
ject to rapid deterioration and obsolescence as a result of the wear-
ing out of moving parts, changes in design, and anticipated reduc-
tions 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 treat-
ment 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. Oc-
casionally properties incorporating unusual :features, but of conven-
tional construction, will be offered for consideration. These prop-
erties 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 build-
ing construction
b,
Excessive development of service features in proportion to
habitable area of house
c.
Excessive provision for hobbies, such as laboratories, con-
servatories, private
art
galleries, and swimming pools
d,
Construction materials of unusual or unjustifiable perms-
nence and excessive cost, 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 gen-
erally used in dwellings may
be
subject to wide fluctuations in cost
1609-1613
UNDERWRITING
MANUAL
1
I
i
I
i
PRESCRIBED METHODS OF COST ESTIMATION
1615.
Selection of Method. The cost estimate shall be
obtained by
on
e
of the
t
w
o
prescribed
me
t
hods. A majority of the
ca
s
es
presented for consideration are handled by the Integrated
Square Foot Method. The remaining cases are handled by the
In-
place
Unit
Method. The basis for selection of method is the com-
plexity of the problem presented. Typical properties for which
suitable
co
s
t
data have
be
e
n compiled are estimated by the
In-
tegrated 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 Ad-
ministration
offices,
and for statistical purposes. No methods except
the prescribed Integrated Square Foot andx Inplace
Unit
Methods
shall be
us
e
d 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
over comparatively short periods of time. To meet this conditionthe
co
s
t
of the
s
ubje
ct building
s
h
a
ll be
es
t
imated according to the draw-
ing
s
and
s
pecifications,
exc
e
pt that
conventional
materials and
m
e
thods
0£
construction shall be
as
s
umed for the new materials and
m
e
thod
s
of
constru
c
tion.
Th
e
substituted
c
onventional materials and
m
e
thods
0£
con
s
tru
c
tion shall offer the
s
a
me structural soundness,
rel
a
ti
v
e
res
i
stan
ce
to
fir
e
,
to
u
se
,
a
nd to the elements, the same insula-
tion value, and maintenance costs as the units they replace.
In
the
e
ve
nt
this
s
ubs
t
itution
in
c
re
a
ses the thickness of the
w
alls or
p
a
rti
-
tions, the
s
ize
0£
th
e
building shall be correspondingly increased so
th
a
t
the house
will cont
a
in the same finished area as the building
it
replac
es
.
This cost
establish
e
s
th
e
M
a
ximum Allowable Estimate of
Cost Required to Replace Building Improvements in New Condition.
Where
it
is obvious
that
the cost of
t
he actual,
exi
s
ting, or contem-
plated improvements will exceed this estimate, the cost of the actual
improvements need not be determined. The words "Maximum Allow-
abl
e
" are
insert
e
d before "Estimate of Cost Required ," on
J1"'HA
Form No.
2014.
1614.
Some new
con
s
truction methods may permit econ-
omies which will
re
s
ult
in
c
o
ntract
prices lower than the Estimate
of Maximum Allowable Cost Required to Replace Building Improve-
ments in New Condition as
d
e
scribed 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
char
-
acter.
1613-1616
METHODS OF
DWELLING
COST
ESTIMATION
H.
DETERMINE COST OF
GARAGE
K.
I.
DETERMINE COST OF
OTHER
L
,
IMPROVEMENTS
J
.
DETERMINE ALLOWANCE
FOR
M.
ARCHITECTURAL SERVICE
AQO
MAIN BUILDING, GARAGE, OTHER
K.
IMPROVEMENTS
AND
ARCHITECTURAL
N.
SERVICE TO OBTAIN
TOTAL REPLACEMENT COST
MULTIPLY FINAL SQUARE FOOT COST
G
,
BY
CALCULATED AREA TO
OBTAIN
.
J
.
COST OF
MAIN
BUILDING
F.
MAKE NECESSARY LOCALITY ADJUSTMENT l
.
TO OBTAIN SQUARE
FOOT
COST
•
E
.
MAKE NECESSARY QUALITY ADJUSTMENT
H
.
•
DIVIDE TOTAL OBTAINED IN
F
BY
CALCULATEO AREA TO
OOTA\N
SQUARE FOOT COST
ADD
AN ALLOWANCE FOR
OVERHEAD AND PROFIT
ADD COSTS OF 27 COMPONENTS
TO OBTAIN TOTAL WITHOUT
OVERHEAD AND PROFIT
MULTIPLY THE SELECTED INPLACE
UNIT PRICES
BY
THE NUMBER
OF
UNITS IN EACH COMPONENT TO
D.
OBTAIN COST PER COMPONENT
I
SELECT APPLICABLE INPLACE
UNIT PRICES FROM COST
DATA HANDBOOK,PART 2
,
DETERMINE THE
NUMBER
OF
INPLACE
a
UNITS IN EACH COMPONENT
MAKE NECESSARY MATERIALS
ANO
SIZE ADJUSTMENTS
TO
OBTAIN SQUARE FOOT COST
SELECT APPLICABLE BASiC
SQUARE FOOT COST FROM
COST DATA HANDBOOK, PART l
DETERMINE
CALCULATED AREA
DETERMINE
WHICH
METHOD IS APPLICABLE
INPLACE
UNIT
METHOD
~
I
INTEGRA~ED
SQUARE
FOOT
METHOD
STEPS IN COST ESTIMATION
UNDERWRITING
MANUAL
1616
,...
·
--
·
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(Msifi-
cation.
of
buudings
and is identified according to classifi-
cation criteria as falling in one of the established classi-
fications. The classification of buildings and the classifi-
cation 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
comes under the estab-
lished 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.
In-
structions 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
adju
s
tments comprise additions to and deductions
from the Basic Square Foot Cost to take account of dif-
ferences
in
materials, size, and shape of the subject build-
ing as compared with the basic specifications used
in the
Classification of Buildings. After the Materials and
S
i
ze
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
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:
1616-1617
METHODS OF
DWELLING
COST
ESTIMATION
•
I
f.
The
n
e
xt step is to make a
further
m
odification to take into
accou
n
t
the differences in cost of erecting buildings in
differ
en
t
localiti
es.
This process is called the
local
i
ty
ad-
ju
s
t
me
nt
and is
a
c
complished by applying a Locality Ad-
justment Percentage to the Square Foot Cost already
adju
s
t
e
d
for
qu
a
lity.
g.
After
the
Qu
ali
ty
Adjustm
e
nt
and the Locality .Adjust-
ment have been made, the resulting
fi
g
ure is the
fonal
squar
e
foot
co
s
t
applicable to
th
e
subject building. The
Final
Square Foot
Co
s
t
i
s
mul
t
iplied by the number of
squar
e
feet in the Calculated
.A.r
e
a to secure the cost of
main. building
h.
The cost of repl
ac
ement of
garag
e
is then determined
i.
The
nex
t
st
ep
i
s to
de
te
r
m
ine
th
e cost of
other improve-
ment
s
such as walks, driveways, accessory buildings, and
items of
spe
c
ial equipment not reflected in the
Final
Square Foot Cost
j.
The sum of the
c
osts obtained in
g,
Ii,
and
i
ordinarily
constitutes
th
e basis on which architectural service,
if
any
,
is
comput
e
d.
Th
e
refore
th
e next step is to deter-
mine the allowance
for
archit
ect
ural service
k.
The estimated costs of Main Building, Garage, Other Im-
provements, and Architectural Service
ar
e
then totalled
to obtain the
es
timate
of
cost
r
e
qu
i
red to
re
plac
e
building
impro
vements in new condition.
This figure is the total
cost estimate
u
se
d
for
Federal Housing
Admini
s
tration
purpo
ses
,
and
c
orrect entries
a
re made on FHA. Form
No.
2014
or FHA. Form No.
2015
1618.
In
some cases involving
e
xisting construction,
it
will
be
found
t
h
a
t
the replacement cost
of
building
impro
ve
ments
is considerably higher than
that
portion of the valuation ascribed
to the building
improvem
e
nts. This occurs most frequently in cases
involving building
improv
e
ments
,
the value of which has been
greatly affected by 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 selected
bas
ic square foot cost as the
Final
Square Foot
Co
s
t
without adjustment or modification. When this
procedure is employed, the Valuator is required to make an appro-
priate
statement on FHA. Form No.
201
5
,
Report of Valuator,
explaining the absence of
FHA
Form No.
2052.
1617-1618
UNDERWRITING
MANUAL
1619.
Steps in lnplace Unit Method.
This
m
e
thod
proce
e
ds
in
th
e
order of the following
li
s
ted
s
teps:
a.
The
o
aloulated;
are
a 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
es
timated. Components are those
int
eg
ral
as
s
embl
e
d
p
a
rts
of a
build
i
ng which are
sus
c
epti-
ble to
s
e
parate
e
x
amination with respect to costs,
su
c
h
as
exc
a
vation, exterior
w
alls, or
plumbing
.
An inplace
unit
is
u
s
ed as a basis of
mea
s
urement and refers to the com-
pleted and finished
a
s
pect of a
co
m
ponent or element of
a component. As a
consequ
e
nce
,
many inplace units
embrace assemblies of diverse things
c.
1
npla
ce
unit
p
ri
c
e
s
applicable to the components of the sub-
ject building are
sel
ec
ted from
Part
2 of the Cost
Data
Handbook
d,
The Jnplace
Unit
Pri
ce
s are multiplied by the correspond-
ing number of units of each component to obtain the costs
of the individual components.
e.
The costs of
componen
t
s are added to obtain the total cost
of
components, not including overhead or profit.
f.
An allowance for
o
v
erhead 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
Squ
a
re Foot Cost is then modified to take account
of the differences in cost due to quality variations be-
tween the subject building and the quality assumed
in
establishing the inplace
unit
prices. This process is called
the quality
adjus
t
ment and is made by applying a Quality
Adjustment
Perc
e
ntage 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 ad-
justment
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
1619
METHODS OF
DWELLING
COST
ESTIMATION
.
:
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 components com-
prise the parts of the building which are separately subject
to
vari-
ations 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 refer-
ence numbers set before the components of
the
building
in this
paragraph
shall be maintained
throughout
.
the
cost estimating pro-
cedure
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 components or 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 associated elements, are as follows
:
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 improve-
ments,
such as walks, driveways, accessory buildings, 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
es
t
imated costs of Main
Bu
i
ld
i
ng, Garage, Other Im-
provements, 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
1619-1621
UNDERWRITING MANUAL
1.
Excavation:
Basement
Trench walls
Pier
Grading of unexcavated portions under first floor con-
struction
2.
Foundations:
a
.
With
Ba
se
ment:
Wall footings, basement walls, including damp-
p roofing
Basement floor
Basement stairs, windows, doors, columns or piers
including
footing
s
,
girders,
are
a
s, tile drains, coal
bin partition and coal chute
b
.
Without Basement:
Wall footings, trench
wall
s
,
curtain walls, piers
including footings, and girders
3.
Chimney:
Single flue with required enclosing masonry and founda-
tion
4.
Fireplace:
Fir
e
place
includin
g
complete foundation,
ma
s
onry, flue,
he
a
rth,
lining, damper, facing, and mantel
5.
Exterior Walls:
All
it
e
ms of
constr
u
ction and exterior finish of the
e
x
terior
walls including interior dampproofing or
fu
r
ring
w
here
used, but not including plaster base or
pl
as
ter or
o
t
her
int
e
rior wall finish materials
6.
Floor
Framing:
Structural floor framing, but not including subflooring,
fini
s
h
flooring
,
or pla
s
ter
ba
s
e
and pla
s
t
e
r
or other
ceiling finish.
Concr
e
te
sl
a
bs, self-supporting, sup-
ported on joist
framing
,
or those laid on the ground
in structur
es without
ba
s
em
en
ts 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
1621
METHODS
OF
DWELLING
COST
ESTIMATION
--
---
--
~
•
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, in-
cluding all flashings, valleys, hip and ridge coverings
13.
Gutters and Downspouts:
Gutters and downspouts, including shoes, splash blocks,
dry wells, or connections to 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, in-
cluding finish
Clo
s
et 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 fin-
ish. All added exterior architectural treatment, includ-
1621
UNDERWRITING MANUAL
\
1
l I
I
1621
ing additional entrance steps, exceptional chimney, half-
timbering, 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, in-
cluding 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 equip-
ment; 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
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 com-
ponents,
su
c
h
as screens, storm-sash, caulking, weather-
stripping,
bas
e
ment garage, finished rooms in base-
ment, finished rooms in
atti
c
,
t
e
rmite shields, wood
preservation, and special basement waterproofing
r
'
·
METHODS OF
DWELLING
COST
ESTIMATION
···
---
-
-
--
~
-
----~_.....,.----------.....
f
r
l
'
l
•
I
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 determina-
tion
of Calculated Area are as follows
:
a.
To
be
Included and Calculated in
Full
:
The square foot area of finished floors above
the
basement,
including bays, oriels, dormers,
light
shafts and stair-
wells,
utility
rooms, vestibules, enclosed porches, open
porches within the main wall line, and built-in garages.
In
computing these areas, measurements shall be taken
to the outside surfaces of exterior walls or
partitions
enclosing the areas and no deductions shall be made £or
stair-wells or
light
shafts.
In
structures without base-
ments, 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 interpreta-
tion 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 compara-
ble in quality with the main house, and :forms an integral
part
of the architectural design, the garage may be con-
sidered as "built-in"
1622-1623
UNDERWRITING MANUAL
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 de-
termine 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 compen-
sates
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 exca-
vation. The cost of excess quantities, obtained by measuring half-
story 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
form-
ing
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
1
the
~verage
'
depth
below
natural
grade.
MEASUREMENT OF COMPONENTS
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
1623-1624
METHODS OF
DWELLING
COST
ESTIMATION
·
-
---
.
-,
·
-
'
2.
Foundations:
a.
Foo
ti
ngs:
M
ea
sured
i
n
line
a
l
f
e
et,
eq
u
als the
t
o
tal
of
t
he
e
xte
r
i
o
r
dimen
s
i
o
n
s
of
th
e
w
alls or
pier
s having
footings.
b,
B
ase
ment
Walls:
M
e
asured
i
n square
f
e
et, equals the
ar
ea of
th
e
outsid
e
s
urface of the
wall
s
from
th
e top
of the footings to
th
e
und
e
r
s
ide of
fir
s
t
flo
o
r
con-
struction. This element includes
b
e
nch walls but
do
es not include
non-bearin
g partitions.
No
n-
bear-
ing
partition
s
ar
e
included under Component No.
27.
c.
Tr
enc
h
Wall
s
:
Measur
e
d in square feet,
e
quals the area
of the
out
s
ide
surfa
c
e
of
th
e walls, from the top
of
the footing to the
u
n
der
s
ide of
fir
s
t
floor construction.
This
elem
e
nt
incl
ud
es
curt
a
in walls and piers where
they occur.
d.
B
aseme
nt
Flo
o
r:
M
eas
ured in
s
quare feet to the out-
side
s
urf
ace
s
of
ba
se
ment
w
a
ll
s
.
e.
Bas
e
ment
Es
se
ntials:
Estimat
e
d as a lump sum amount
to include
ba
s
ement stair,
b
as
ement
sa
sh and doors,
floor
gird
e
r
s
,
lally
column
s
or piers, coal bins or
similar
it
e
m
s
not otherwise
li
s
ted.
3.
Chimney:
Mea
s
ur
e
d in lineal feet from underside of footing to
top of chimney. No
deducti
o
n is made for any por-
tion common to 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:
Mea
s
ured in
s
quare
fe
e
t, equals the area of the outside
surface
of
th
e
wall
s
,
from underside of first floor
construction to the intersection with roof
s
urfaces.
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 dimensions taken to outside
of exterior
w
all
s or to
out
s
ide edges where walls do
not occur.
1624
UNDERWRITING MANUAL
7.
Subftooring:
Measured in square
:feet
with dimensions taken
t
o outside
o:f
exteri
o
r
walls or partitions enclosing the areas.
8.
Finish Flooring
:
Measured in
s
quare
f
e
et, with dimensions taken to out-
side of
e
xt
e
rior
wall
s
or
partition
s
e
nclo
s
ing the
area
s
.
Wher
e
no wall or partition occurs the meas-
urement
i
s
taken to outside edge.
9.
Partition Framing:
Mea
s
ured in square feet, with a height from the finish
floor to the finish ceiling and a total length measured
through all intersecting
p
a
rtitions to the
outsid
e
o:f
exte
r
ior walls or cross partitions. No reduction in
height is made
for
enclosing partitions under sloping
portions of
roo:f.
10.
Ceiling
Framing:
Measured in
s
quare feet to
th
e
outside
of
exterior walls
or enclosing
partition
s under sloping
roo:f.
No de-
duction is made for sloping portions under rafters.
Where no
w
a
ll or
partition
occurs the
mea
s
urement
is taken to outside edge.
11.
Roof
Framing:
Measured in square
f
e
et
of
roof area
to
include
t
he over-
hang at eaves and gable ends. Areas of dormer roofs
and the triangular parts
of
connecting roofs are not
a
dded, nor are the openings occasioned by the dormers
deducted.
12.
Roofing:
Mea
s
ured in square
f
e
et, equals the total
area
.
of the roof
framing. When more than one type
o:f
roof covering
occurs, each type is
mea
s
ured separately in the same
manner as described for roof framing. Flashings
and counter-flashings, valleys, saddles and ridge caps
are not measured
s
eparately, as their cost is included
in the unit
co
s
t
of the roofing.
13.
Gutters and Downspouts:
Measured in
lin
e
al
f
e
et, each separate run being meas-
ured to the nearest foot. Shoes, splash blocks, dry
wells, or
conne
c
tions to drains are estimated as indi-
vidual items and expressed as a lump sum amount.
1624
METHODS
OF
DWELLING
COST
ESTIMATION
l
•
I
1624
l
~
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, between floor and ceiling
level
s
of each finished
story and
half
-story
;
(
b
)
twice the area of the par-
tition framing
wh
e
re finished on both sides;
(
c) area
of
the
.
enclosing partition framing under sloping
portions of. roof; and
(
d) area of all
ceiling
s
.
15.
Decorating:
Measured in square feet, equals
th
e
decorated area of walls
and ceilings.
16.
Interior
Doors and Trim:
a.
Interior
Doo
re
:
Mea
s
ured as a number of units com-
plete with standing trim, hardware and finish.
Units are
bas
e
d on average size and type.
b, Oased
Openings: Measured as a number of units of
standing
trim
with
fini
s
h.
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
:fin-
ished 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 de-
duction is made for door
op
e
nings.
d
:
Oloset
Shelv
i
ng: 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 ex-
pressed as a lump sum
a
mount, to include such items
as entrance steps,
add
e
d architectural :features, ex·
ceptfoD.ar chimney, half-timbering, unusual
cornice
and porch detail,
louver
s and shutters.
·
'
fo
.
.
C~hine.ts
'
and
Jnt~rior D~t~il:
'
,
,,
Estimated as individual items and expressed as a lump
sum amount to include such items as kitchen cabinets,
UNDERWRITI:N"G
MANUAL
-
-
-
---
·
----------
medi
c
in
e c
a
binets, bookcases, china closets, ward-
robes and other special
c
a
binet work, including glass,
hardware and finish.
20.
Stairs:
Estimated as a lump sum amount including all stairs
above
fir
s
t
floor, complete with
balu
s
trades and finish.
21.
Special Floors and Wainscot:
Estimated
a
s individual items and expressed as separate
lump sum
amount
s equal to the difference between the
co
s
t
of the
spe
c
i
a
l
materi
a
ls
a
nd
.
the cost of the
fini
s
h
flooring
or
wall material
that
is replaced. This ap-
plies to various special materials
us
e
d for flooring and
·
wain
sc
oting for
kitch
e
ns.
.
bathrooms,
lavatorie
s
,
s
hower stalls and other spaces.
22.
Plumbing:
Estimated as individual items and
e
xpressed as lump
sum amounts
for:
a.
Fixtures for one bath, kitchen and laundry com-
plete with all piping
for
water, soil, waste and
vent lines, gas piping, hot water equipment,
sewer and water-supply connections up to public
utilities or to private equipment. Private sew-
age
di
s
posal or water supply plants are not in-
cluded in this element.
b.
Fixtures for additional bathroom including tub,
lavatory and water closet with connections car-
ri
e
d to the basic plumbing.
c.
Stall shower complete with all fixtures, accessories
and connections to the basic plumbing.
d.
Lavatory,
in
c
luding lavatory fixture and water
closet, with connections to the basic
plumbin
g
.
e
.
Other plumbing fixtures complete with connections
to the
ba
s
ic
plumbing
.
23.
Heating:
Estimated
a
s a lump sum amount for complete heating
equipment of
c
ustoma
ry
t
y
pe. This sum includes ap-
purten
a
nces, but shall not include the cost of
.
un-
usual fu
e
l
burn
e
r
or cooling equipment
of
the
ch
a
r-
a
cter
r
e
ferred to
in paragr
a
ph
1611.
24.
Electric Wiring:
M
e
a
s
ured
a
s
a
numb
e
r
of outlets
for
lighting
fixture
s
,
s
w
i
tc
h
es
a
nd
c
on
v
enien
ce
recep
t
acles
.
Service p
a
n
e
l,
1624
METHODS OF
DWELLING
COST
ESTIMATION
•
I
DETERMINATION OF SQUARE FOOT COST IN THE INTEGRATED
SQUARE FOOT METHOD
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 classification criteria as fall-
ing 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
n
o
deviations from basic specifications occur, no adjust-
ments are necessary.
1626.
Classification
of
Building. The classification
of
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
sufficiently
typi
ca
l to be comparable to a reasonably large
numb
e
r
of similar buildings, and, as a
consequ
e
nc
e
,
to be
c
a
pable of estima-
tion by the
Int
e
grated Square Foot Method. The use
0£
the Inte-
grated Square Foot Method is :feasible only when the cost data have
been derived from buildings of the same classification as the build-
ing to be
estim
a
ted.
1627.
In
order to secure accuracy in estimation and to
provide a basis for cost comparison, buildings are classified on a uni-
form 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
power outlets and bell wiring are
estim
a
ted as sepa-
rate lump sum amounts.
25.
Lighting Fixtures:
Estimated as a lump sum amount.
26.
Insulation:
Measured in square feet,
separat
e
ly for
wall
s
and ceilings
where insulation is additional to sheathing or plaster
base.
27.
Miscellaneous:
Estimated as separate lump sum amounts for items such
as screens,
s
torm sash, caulking, weatherstripping,
basement garage, finished rooms in basement, finished
rooms in attic, termite shields, wood preservation and
special basement waterproofing.
1624-1627
UNDERWRITING MANUAL
In
general, no
further
subdivision of classifications is 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
ea
c
h particular classification of building and consequently does
not, in general, make
further
subdivision of classifications necessary.
Customary practice in a locality likewise determines the presence or
absence of
bas
e
ments 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 defi-
nition. 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
s
tory
is one in which the finish floor extends to the ex-
terior 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
un-
der 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 defini-
tion is conditioned on the fullest use of the area
for
fin-
ished rooms.
If
less area is utilized, the space becomes an
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
unfini
s
hed space immediately beneath the roof
which is not utilized or is only
partially
utilized for
finished rooms.
d,
Bas
e
ment
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
i
portion of a dwelling designed primarily for the use
of
.
1
1
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'
\
.
1627-1628
METHODS
OF
DWELLING
COST
ESTIMATION
•
I
g. Semi-detached building
is one of two adjoining buildings
standing
independ
e
ntly of others and having a common
party
wall.
h.
A
row house
is one of four or more buildings
in
which two
walls are common to 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
hou
s
es in the group by virtue of its location.
Where only three houses occur
in
a row, separate classi-
fications 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 classifications and
for
usual exterior wall constructions
in
each classification. The applicable Basic Square Foot Cost is
selected from these tabulations under the proper classification and in
the column indicated by the calculated area of the subject build-
ing. The figure thus selected is the Basic Square Foot Cost to be
used for the subject building. The basic square foot cost of a build-
ing is the integrated
cost
,
per square foot of livable floor area, of all
components of the main building but not including porches or at-
tached 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 ter-
races are not considered in Basic Specifications or in the Classifica-
tion 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 typi-
cal building and its basic specifications,
it
is
ne
c
essary to make adjust-
ments to the Basic Square Foot
Cos
t
to account
for
deviations in the
character
,
sizes, or
g
rade
s of materials and in the shape or
s
ize of the
structure. These adjustments comprise additions to and deductions
from the Basic Square
Foo
t
Co
s
t
and are jointly described as
Materials and Size Adjustments.
1631.
Ordinarily a
s
ubject building deviates from the
selected typical building in only a few items, but those deviations
1628-1631
UNDERWRITING MANUAL
whi
c
h do occur
m
a
y relate to any of the 27 components of the build-
ing and may occur in
a
n
y of
th
e
follo
w
ing items:
a.
Alternate
mat
e
rials and equipment
b,
Alternate
grad
e
s of
m
a
terial
s and
e
quipment
c.
Added
e
xterior and interior detail
d.
Added
mi
s
cellaneou
s items
e.
Added
mechani
c
al and electrical equipment
f.
Basement garage and finished rooms in basement or attic
g.
Insulation
h,
Addition or omission of basement
i.
Depth of
ex
c
ava
t
ion
j.
Height of exterior walls
k.
Perimeter of building
In
general, the adjustm
e
nts for the last three items will be used only
in unusual
cases
.
If
such adjustments occur frequently enough,
sep
a
rate
classifi
c
ations
a
re
d
e
veloped. Such
exc
e
ptional cases will
frequently warrant estimation by the architectural section.
1632.
Adjustments of Basic Square Foot Cost to com-
pensate
for
deviations of a subject building from the selected typical
building
a
n
d its basic specifications are computed according to pre-
scribed 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
Adju
s
tments, as
de
s
cribed in
Paragraph
1636
d.
Exterior Wall Height
Adjustmen
t
s, as described in
Para-
graph
1637
The first two types
of
adjustment are most frequently used. The
adjustments listed under
o
and
d
are used only occasionally
in
cases
wher
e
sub
st
antial deviations from the selected typical building occur
in
conne
c
tion with the height of exterior walls and perimeter of
building.
1633.
Component
Unit
Adjustment
i
s defined as the dif-
ference in cost, per square foot of calculated area, due to a deviation
from the
b
a
sic
s
p
e
cifications for a component
part
of the building.
The
s
e
adju
s
tment
s
,
whi
c
h are
for
commonly encountered deviations,
are available in
c
onjunction with Basic Square Foot Costs
in Part
1
of the
Co
s
t
D
a
ta
Handbook. These adju
s
tments
a
re tabulated sepa-
rat
e
ly
for
each
i
n
crement of area on each classification sheet. Com-
ponent
Unit
Adjustm
e
nts
ar
e
used to compensate
for
deviations
in
th
e
follo
w
ing items:
(
a)
alt
ern
ate
m
a
teri
a
l
s
,
(
b)
alternate
grad
es
of
mat
e
rials
a
nd equipment,
(
c) addition or omission of
ba
s
ement
,
and
(
d
)
insulat
i
on
.
When
a
n
a
l
te
rnate
m
a
teri
a
l is
enc
o
untered for
onl
y
1631-1633
METHODS
OF
DWELLING
COST
ESTIMATION
•
•
I
a
part
of a component or element, the adjustment is computed as a
fractional
part
of the Component
Unit
Adju
s
tment for the alternate
material as tabulated in
Part
1
of the handbook.
The fraction used is equal to the
mea
s
urement
o:f
the alternate
material divided by the total measurement
o:f
the component.
1634.
When a Component
Unit
Adjustment is not avail-
able in the handbook for a particular deviation :from basic specifi-
cations, 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 differ-
ence in cost,
expre
s
sed in dollars, between a subject
c
omponent and
the corresponding basic component.
For
commonly encountered de-
viations, 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 Lump-
sum 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
t
o
be computed as lump
sum amounts equal to the difference in
co
s
t
of such items above or
below any allowances included in the
Ba
s
ic Square Foot Cost ac-
cording
to
basic specifications. Lump-sum Adjustments are used to
compensate
for
deviations in items such as the following: (a) added
exterior and
int
e
rior detail, (b) alternate equipment or grades of
equipment,
(
c
)
added mechanical or
el
ec
trical equipment,
(
d) base-
ment garage and finished rooms in basement or attic, and
(
e) added
miscellaneous items designated as
elem
e
nts 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
a
s
a lump-sum amount equal to
the product of the deviation in perimeter, measured in lineal feet,
and the cost
p
e
r
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
Ba
s
ic Square Foot Cost.
1633-1636
UNDERWRITING MANUAL
,'
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 compu-
tations. This is accomplished by considering each component
part
of the building as an integral assembly of associated elements erected
in place.
In
general, components are measured in units of surface
or length. Certain components and elements not conveniently re-
duced to such units are measured in units of assembled items. In-
place unit prices applicable to the units used in measuring the com-
ponents are multiplied by the corresponding number of units in each
component to obtain the assembled cost of the individual compo-
nents. This requires the actual measurement of the components in
the subject building. Inplace unit prices include the cost of materials
with allowances for 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 com-
ponent
part
of the building are measured, inplace unit prices appli-
cable 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
components are 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 terri-
tory. Included in overhead and profit are allowances for fire, tor-
nado, 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
1637.
Wall height adjustment is necessary where the
height of the exterior walls of the subject building is substantially
in excess of the exterior wall height of basic building. This adjust-
ment is computed as a lump-sum amount equal
to
the product of
excess surface of wall, measured in square feet, and a
unit
cost of the
particular exterior wall construction. The excess wall surface is
equal
to
the excess height multiplied by the subject perimeter.
1638.
When the Materials and Size Adjustments de-
scribed above have been made, the resulting figure is the Square Foot
Cost used
to
d
e
termine the Final Square Foot Cost.
1637-1641
METHODS
OF
DWELLING
COST
ESTIMATION
l
•
I
I-
DETERMINATION OF FINAL SQUARE FOOT COST
1642.
Aft
e
r
th
e Square Foot
Co
s
t
has been determined
in either the
I
n
tegrated Square Foot Method or in the Inplace
Unit
Method, the
n
e
xt step
i
s to
determin
e
the
Fin
a
l Square Foot Cost by
making the Quality and
Lo
c
ality Adjustment
s
.
1643.
Quality Adjustment. -
Quality Adjustment,
where
ne
c
essa
r
y
,
i
s
made by applying a
per
ce
nta
g
e
d
es
cribed as the
Quality
Adju
st
ment
P
e
rcentag
e
to the Square Foot Cost. Recom-
mend limits
ar
e
tabulated
i
n
Par
t
1
of
t
h
e
Co
st Data
H
a
ndbook.
1644.
The quality adjustment percentage represents the
difference
in
t
he quality of
constru
c
tion in the
s
ubj
ec
t
building as
compared with the quality of
constru
c
tion to which the Basic
S
q
uare
Foot Costs
ar
e
applicable. The quality
adju
s
tment recognizes vary-
ing
d
e
gre
es of workmanship under identical specifications and
that
careful workmanship may cost more than inferior
but
acceptable
workmanship.
1645.
The quality
adju
s
tment
p
e
rcen
t
age is determined
by comparing the quality of the subject construction with the quality
of construction to
w
hi
c
h the
Ba
s
ic Square Foot
Cost
s are applicable
and selecting a percentage to make the adjustment.
1646.
Locality Adjustment.-All
Inplace
Unit
Prices
and Basic Square Foot
Co
s
ts are
ba
s
ed upon
pri
c
es
and costs in a
c
ity
se
lect
e
d
a
s
th
e
base
at
the time the basic
c
ost data are
e
stablished
and
c
ompiled in the
co
s
t
d
a
t
a
handbook
s
.
Final
Square Foot
Co
s
ts
for other
citi
e
s or economic
ba
c
kgr
o
und
are
a
s are
obtain
e
d by the
a
ppli
ca
tion of
Lo
c
ali
ty
Adju
s
tmen
t
Per
ce
nt
ag
es to
th
e
Square Foot
C
osts
alre
a
dy
adju
s
ted for quality. Locality
Adju
s
tment Percentages
for all import
a
nt
local
i
ties in the
territory
ar
e tabulated in
Part
1
of
the Cost Data Handbook.
1647.
The locality adjustment
p
e
rce
n
tage expresses the
r
e
lationship
b
etwee
n the
c
os
t
of a building
con
s
tructed in
t
h
e
se
-
l
e
cted
ba
s
e city and the cost of an id
e
nti
ca
l building constructed
in another
cit
y
wi
t
hin the cost data territory. The use
of
the local-
ity adju
st
men
t
per
c
en
tag
es
obvi
a
tes the
n
e
ce
ss
ity for providing com-
plete
ind
e
pendent basic cost
d
a
ta
for each city or economic back.
ground
a
r
e
a
w
ithin
t
h
e
t
e
rritory.
De
t
ailed in
st
ruc
t
ions
for
deter-
mination of these
perc
e
ntages
ar
e
co
ntained in
S
e
ction
19.
1648.
Major
c
han
g
es
i
n
co
s
t
le
ve
l
a
r
e
p
r
ovi
de
d
for
by
revi
s
ion
s of
b
a
sic
c
o
s
t
da
ta
,
Minor
c
h
a
ng
es
ar
e
pro
v
id
e
d
for
by
Square Foot Cost in the
Inpla
ce Method
i
s directly comparable to
the Square Foot Cost obtained in the Integrated Square Foot method
and
i
s
used in exactly the same manner to
dete
r
mine the
Final
Square
Foot Cost.
1641-1648
UNDERWRITING MANUAL
-
-
-
·
·--
-
--
·
-
--------
-
DETERMINATION OF TOTAL REPLACEMENT COST
1649.
After
both the Quality Adjustment and Locality
Adjustment have
be
e
n applied to the
Squ
a
re Foot Cost obtained
either in the
Integrat
e
d
Squ
a
re Foot Method or in the Inplace
Unit
Method, the
r
e
sulting figure is the
Final
Square Foot Cost applicable
to the subject building. The
Final
Square Foot Cost is multiplied
by the number of
squ
a
re
:feet
in the Calculated Area to obtain the cost
of main
building
.
Then estimates are made of the separate costs
required to replace improvements other than the main building, such
as garage, accessory
building
s
,
walks, and
driveway
s
.
An
allowance
is determined
:for
special equipment such as described in
paragraph
1611
which is not reflected in the
Final
Square Foot Cost. An allow-
ance is also determined for items of unreasonable or excessive cost
such as
d
e
scribed in
paragraph
1612
which are not reflected in the
Final
Square Foot Cost.
1650.
The
total
of the costs of main building, garage, ac-
cessory buildings, walks, driveways, and the items described in para-
graphs
1611
and
1612,
ordinarily constitutes the basis on which archi-
tectural service,
if
any, is computed. The allowance
for
architec-
tural
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 Condi-
tion. 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.
i
I
revisions of the locality adjustment percentages. Temporary or
seasonal fluctuations are disregarded.
1648-1650
METHODS
OF
DWELLING
COST
ESTIMATION
\
_
•
__
•
_
_
.
_
_
,
_
:
_
,
I
.-
Effective
February
1938
Federal Housing Administration
Par
ag
raphs
D
esc
ription
o
f
Ex
a
mple
s
1701-1703
Des
c
ription and
U
se of
E
s
timat
e
Forms
1704-1709
Application of
Int
eg
rated Squar
e Foot
M
e
thod
--
-----
--
-
--
---
-
~
--
-
1710-1724
C
l
ass
ifi
ca
ti
o
n of
Subj
ec
t
Buil
ding__
___
___________
_
_
__
____
_
___
1710
C
ost
D
a
ta
II
a
ndbook
--
------
-
------------
--
--
~
--
--
-
------
-
--
-
1711-1717
Selecti
o
n of
B
asi
c
Squ
a
re
Foot
Cost_
_
_____
___
_
_
__ __
_ _
____
__
__
_
1718
Ma
teria
l
s
and
Si
ze Adju
s
tm
e
nts
______
____
_
___
_
___
_
_
_
__
____
___
1719
Determination
of
Squ
a
r
e
Foo
t
CosL-------
-
-
--
---
---
----
----~ 17~
Determ
in
ation of
Fin
a
l
Squ
a
r
e
Foot
Cost;
1721-1722
Determin
a
ti
on
o
f
T
ota
l
Repl
ace
ment
Cos
t.,
17
23-
1724
Application of
Inp
la
ce
Un
i
t
Meth
o
d
1725-1732
Measur
e
ment
o
f
Inpl
ace
Unit
s
__
__________
_
_
___
____
_
__
___
_____
1726
Selection of
Inpl
a
ce Unit
Pr
ices
---
-----
--
----
----
---
~
---
--
-
--
1727
Determination
o
f
Squ
a
re Foot
Cos
L
-----
-
----
------
-----
-'
---
1728
Determination
of
Final
Squar
e
Foot
CosL
1729-1730
D
et
ermination
of Tot
a
l
Repl
ace
me
n
t
Cos
t.,
1731-1732
(
CONTENTS
PART IV
SECTION
17
APPLICATION OF COST ESTIMATION METHODS
1704.
T
w
o
fo
rms
a
re
p
r
o
v
id
e
d
for
making
co
s
t
estimates,
FHA
Form No. 2052, Cost
Estimate-Int
e
grated Square Foot
M
e
thod,
a
nd
FHA
·
Form 2053,
Oo
s
tE
s
tim
a
te=-Inplac
e
Unit
Method.
DESCRIPTION AND USE OF ESTIMATE FORMS
DESCRIPTION OF EXAMPLES
1701.
This section of
t
h
e Manual illustrates in detail the
process of
m
a
king
es
timat
e
s
of
repl
a
cement
costs
,
in accordance
w
i
t
h
the instructions contained in Section
16.
For
this purpose,
illustr
a
-
tive drawings
a
nd
s
pecifi
cat
ion
s
are used. The
ma
te
rial
and
'
e
rection
costs used in the
ex
a
mpl
e
s
thr
o
ughout this
se
c
tion are
assum
e
d, and
are not
ac
tual
co
sts
.
These
e
xampl
es are more complicated
than
cas
e
s
ordinaril
y
pr
es
ented for mort
g
age insurance.
1702.
The building which
i
s used as an
ex
a
mple in this
sect
i
on may
b
e
con
si
dered as
e
i
ther a proposed or an existing struc-
tu
re
.
In
the
cas
e of
a
n
e
xi
s
ti
n
g
bu
i
ldin
g
,
the
dim
e
n
s
ions shown on
the drawings would be obtained by actual
m
ea
surement
at
the site.
Lik
ew
i
se
,
the mat
eri
als
a
nd
equipm
e
nt
d
esc
rib
e
d in
th
es
e specifica-
tions would
b
e
noted from
actu
a
l
ob
se
rvation. Therefore, the follow-
ing
example
s
apply equally
t
o
dr
a
win
gs and
s
p
ec
ifications for
a
proposed building
a
nd to an
e
x
isti
ng
structure
.
The
ex
a
mpl
e
s and
tex
t
whi
c
h
follo
w
mak
e
r
e
fer
en
c
e only to
th
e
d
raw
ing
s and
spe
c
ifications.
,
1703.
B
e
fore
und
e
rtaki
n
g
a
n
estim
a
te
,
i
t
is
nece
ssa
ry to
det
e
rmin
e
whi
c
h
m
e
thod is applicable and best
suit
e
d to the subject
building.
Thi
s is
a
cc
ompli
s
hed by an in
s
pec
t
ion of
t
he
s
ubject draw-
ing
s or
existin
g
stru
c
ture to determine
wh
e
ther
the Basic
Squar
e
Foot
Co
s
ts
ar
e
ap
p
li
c
abl
e
.
If
so,
t
he
I
n
t
e
gr
at
ed Square
Foot
Method
i
s
used, and the
e
s
tim
a
te is
mad
e on
FHA
Form No.
2052.
If
n
o
t, the
Inplace
Unit
M
et
ho
d is
u
se
d,
an
d the
e
st
imate
i
s
mad
e on
FHA
Form
No
.
2053.
PART IV
SECTION
17
APPLICATION OF COST ESTIMATION METHODS
Str
8'1'0T4L S
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r
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uil
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Garage
_
.
..
...
..
.
....
...........
........................
.......
S
q
.
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.
@
-----
Ot
h
er
i
mprovem
en
t.a:
Ac
cesso
ry
b
uildings •••••••••.
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Sq
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rt
.
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-
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W
alko
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...............
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--
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Drivewa
y
s
..
.....
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.
.
.
....
..
.
.
.......
Sq
:
ft
.
@
--
---
A
ddi
tiona1
meelum
i
eal
eqQ.
i
pment _
4
I
l
~n
d ro'll(
Sem1
..d
etached
Deta<'h
ed
2
I I
I
SUMMARY
OF
REPLACEMENT COST
Sq
.
r~
I
I
•
l
l!
I
Row
I
I
I
I
T
orn
I
CALCULATBD
AUA
I
(Sta~
MODlflCATION
OF
SOUARE-FOOT COST
Squa
re fooi
~--
-
- -
--
- -
---
---
--
-
·--
---
---
- -
----
- --
S-
---
-
Qua
ll
t
y
ad
juet.
m
en
t
•
.
•
•
•
-
------
-
--
-
--
%
-----
-
Loealit
;~~
=~
-F
~-
-
(;~
·
---
--~
-
-
---
-
--
-
--
-~
s
I,__
_.
COMPUTATION OF
CALCULATED
AREA
;
.
.
!
City)
COST
ESTIMATE-INTEGRATED
SQUARE
FOOT
METHOD
FEDERAL
HouslNG
Al>MINISl'RATION
UNDERWRITING MANUAL
1704
...
,._.,.,
T
OTA
L
Lv
111
P
Bu
lll
I
TEMS
TOT
.
4.L
A
DDITI
O
NS
AND
D
ED
l1Cl'l
O
N8
Nz
r
_
ADDJTioN
ca
D
p
u
t'Tlox
s
~
::
:!:
~
c!,
·~
0
~11----1
27.
MiiroeUaneo1.1s
Ceil
ing
2&.
Insula
tio
n
25. Lighting
1irl
1J.re.<1
24..
Ele
c
tric
wi
ring
W
alb
23
.
H
eati
ng
To
ilet;
Stall
&bo
wer
A
dditi
onal bathroom
22
.
Plu
m
bing
Kitchen
Ba
t
h warn.cot
21
.
Speci
al floors
an
d wainacot
20.
Stain
Ba
th
floor
1
9
.
Cab
i
nets and interior
d
e
t
ai
l
1
8. Entrarioo
and
exterior
det.&i
l
1
7
.
W
i
ndows
1
6.
Inter
io
r
d
oors
and tri
m
JS
.
D
eoor&t.in
g
1
4
.
Plaster
b
ase
and plaster
13.
G
ut
ters
an
d
do
w
nspo
u
ts
U
.
Roof
f
rami
ng
JO
.
Ceilirlg
framing
9. Parti
tfo
n
f
ram
in
g
8.
Fin
ish
8.
ooring·
7
.
Su
bdoorlng
6. Floo
r
f
raming
Perim
e
ter
adj
ustm
e
nt
H
eigh
t
adjustm
e
nt
6..
Exterior
w
alls
a.
Chim
ney
Add(+
)
Ded.
(-)
2.
Fou
n
de.
ti
o
ns
1.
El:ca.
v
ation
Type
of
nteri
or
wall
C
.
u.ctrLA.TED Au..t. Sq.
It
.
1704
APPLICATION
OF COST
ESTIMATION METHODS
20li3-Cost Estimate-lnplace Unit
Melhocl·
ESTIMATED BT
StH:l'tOT.11.L
4rcn1ie~tur&I
18J'Vioe
••.••••..•.•••.•••.•.••.•• .. .•. ..•.••. ..•.•.
.•••.
.. .••.•.••.•••••••..
.
..•.......•...•..•
Es1'1.11ATB
OJI'
Co&T
RsQUIUD
TO
REPLACE BtnLDlNO. IKPBOVEMEHTS lN NEW CoNDJ't,ON
ltema
of
eseeeerve coat.
••
·
.
Sewage diepoeal
·
.•.••••••...•••••••••••••••••••••••••••• ; .
Water supply
H··-·············
Other improvement.a:
Accessory buildiuga •••••••••••.
-----
Sq.
ft,
@
-----
Walks_.............................
Sq.
ft
@
-----
Driveways
••.••••••••••.•.•..••.••.
, Sq.
ft.
@
-----
Additional mechanical equipment
_
------Sq. ft,
@
-----
------Sq. ft ®-----
MaiQ
liuUdiog .
...............................................................
SUMMARY OF
REPLACEMENT
COST
Sq.
ft.
C.nctJLAT&D
Awu.
I
9
I
I~
I
•
t
I
C.1.1.cuw..'1'110 Amu.
.......
l'.UW.1'
°"""
Detached
I
I
1
Setui-deteched
I
.I
Row
I
I
End row
I
4
I
MODIFICATION OF SQUARE.FOOT
COST
Square foot
COBL.·--·-·----··················--•-----
Qua.lity
adjustment-
••.
.-........... %------
Localit~~::;·;~-~
-·················-~
$
ri
----.,
,,
..
I
COMPUTATION
OF
CALCULATED
AREA
..
..
I
(State)
(City)
(PrcportyBddms:s)
COST
ESTIMATE-INPLACE
UNIT
METHOD
FEDERAL HOUSING ADMINISTRATION
1704
UNDERWRITING MANUAL
.,._,_
__
,
......
Tor.AL
Con u
Colll'oDJ1'19
'GonBAC'l'OB'a
OvnnAD-
D» Pawn
TOT.U.
Scav.1.u:roaroW
Ceiling
Walt
26. Inaulation:
26.
Lighting fbtures
·
Service
panel
2'-
Electric
wiring
23.
Heating
Toilet
i.vatory
Exira
bathroom
22. Plumbing:
21
.: Special ft00l'8
20.
8tainl
Interior
detail
lQ.
Cabinets:
Extm-Or
detail
18..
Entrance
17.
Windows
Running
trim
18. Interior doora
1&.
Decorating
Downspout.
13.
Gutters
11. Roof
framing
10.
Celling
framing
9. Partition fra.tniug
8.
Finish ftooring
.
7. Bubftooring
6. Floor
framing
5.
EneriOt
walls
a
Chimney
Basement
floor
Walls
1.,
Eseavation
2. Foundations:
1704
2053-Cost l!stimate-Jnplaee llnit Method
APPLICATION
OF COST
ESTIMATION METHODS
~
-
-
~
-
-
---4-
·
•
I
The above computation
o:f
the Calculated
Ar
e
a
o:f
the subject building
is made
in
accordanc
e
with the instructions contained in
S
e
ction
16.
The fractions, expressed in decimal form and entered in the "Frac-
tion" column, apply to those areas
whi
c
h
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.
-
-
....
-·
....
..
,
......
,,..
"'De
i'it'OR
t>A'~-QllY
-'.:\(\1.:-&;:11
..
"
"
0.AY
3~0· x
6
1
"'6
11
19
0
POR""'
8'-6"
\2
1
-0"
10.2
.s
5
I
STOOPS
t4-o•xs-o,.ta~o"X4'-o"> 36
.as
9
~PAA .. ft
<'L.noR
16'-6"
x
30'-6'
5
0
3
R"AR nQRM"R
3'- 3"
x
·
2s•
.:.
n•
8
·
i;
,,-RnNT
nnRMERS
3'-~"
x
3' - N' 10 9
2
0
Ca
:
u
:
vw.'l'U)
AnA
I
4 4
.
3
MODIFICA TIOH OF SQUARE-FOOT COST
~
Tm<
I
P.ui:n.y
Ulftfl
INu11
...
or&rOllrSI
COMPUTATION
OF
CALCULATED
AREA
The face
side
s
of these forms
ar
e
a
r
ranged identic
a
lly
for
entries
of
certain
cas
e data,
an
d
for
d
e
termin
i
ng the
E
s
tim
a
te
of Cost
Requir
e
d
t
o
Repl
ac
e
Building
Improv
e
men
t
s in New Condition.
FHA
Form No. 2052
i
s
used
in
th
e
In
t
e
g
rat
e
d
S
q
uare Foot Method,
as shown and described in
paragraphs
1710 to 1724, and
th
e reverse
side is ruled especially
for
the adjustment of a
s
e
lected Basic
Squar
e
Foot Cost.
FHA
Form No.
20
5
3
is
u
se
d
in
t
h
e
Inplace
Unit
Method,
as shown and
des
c
rib
e
d in
p
a
ragraphs
172
5
to
17
3
2.
Th
e re
ver
s
e
side is ruled
e
spe
c
ially
for
the
compu
ta
tion
of
Component Costs
and to obtain the
Sq
uare Foot
Cost,
Space is
prov
i
ded on the fac
e
side of both
form
s
for
applying Quality
a
nd
Lo
c
ali
t
y
Adju
s
tm
e
nt
s
.
Space is provided also on the face
si
d
e
of
both
form
s
for
computing
the costs
of
M
ai
n
Building,
Gara
g
e,
Oth
e
r
Improvements and Archi-
tectural
S
e
rvi
c
e
,
and to
obt
a
in
t
he
E
s
timat
e of
C
os
t
Required
to
Replac
e Building Improvements
in
New Condition.
1705. Inasmuch as both
e
s
timate forms are arranged
identically on the face side, the
entri
e
s and computations on
th
e face
side are
treated in the
same manner
for
both methods of cost esti-
mation. Nevertheless,
it
is necessary
fir
s
t
to select the proper form
according
to
the method to be used.
1706. Space is provided on the
fa
c
e
side of the forms
for the following entries
:
(a) serial number,
(
b) property address,
(
c) diagram or rough
s
ketch,
(
d) computation of calculated area,
(
e
)
classification of
build
i
ng,
(f)
quality and
lo
c
ality
adjustments
,
(g)
name of contractor,
(h)
summary of
repla
c
em
e
nt
cost,
(i)
date
of
estimate, and
(j)
signature.
1707.
An
illu
s
tration
of the computation of Calculated
Area follows
:
1704-1707
UNDERWRITING MANUAL
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. 2053 is used for entering the measure-
ments 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 deter-
mined 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
deter-
mine the estimated costs of the main building, garage, other improve-
ments 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
1710.
Classification of Subject Building.
The subject
building is identified with one of the classifications listed in
Part
1
of the handbook. This identification reveals
that
the subject build-
ing is classified as detached, one-family,
11h
story, 1,400 to
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
Component
Unit
Adjustments
Miscellaneous Costs
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 specifications are 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 specifications are arranged in the same order as the numbered com-
ponents of a building, and the descriptions of customary materials
are grouped under the components to 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-
•
t
APPLICATION
OF COST
ESTIMATION METHODS
1708-1713
I
~
J
I
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
common
Y.
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 second floor.
Roofing.
!!-10#
asphalt
composition shingles,
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 equiva-
lent
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 auto-
matic hot
water heater.
Heating. Automatic, forced warm-air furnace, oil burner.
Accessories. Medicine cabinet
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"
gyp-
sum block
partitions,
painted walls, ceilings
and floor.
1713
UNDERWRITING MANUAL
1713
BASEMENT PLAN
P
L
ASTER
WA
L
LS AND
CEILING
, CEMENT
fL
.
J
O
IST
2"K
t
o"-
1
e•
O
.
C
.
....
--
1
I
1
...
3(
l
-
6
11
FRONT ELEVATION
U•
r-
1J
Q
l
~
:
8ASl!.M
NT
FL
.
i
u
1
1
tl----
--i
l
I
~-----
11
I
1
1----i
U--1
I
.,t""--=--=--=--=-
-=-=
=-=--=--
-===
-
-=----==--=--======-:==---=-
~--
-
-- ---
-
-
---
-------
-
--------t
I
ST
F
lll
OR
D
.
S
.
D
.
S
.
UID
F
OO
R
C
Ei
t.
iN
G
~-----~--
~
ASPHACf
S
HI
NGLES
I
GRADE
APPLICATION
OF COST
ESTIMATION
METHODS
•
I
SECOND
FLOOR
PLAN
SHINGLE&
ASPHALT
FIRST
FLOOR
PLAN
1713
UNDERWRITING MANUAL
WALL
SECTION
GRA
O
IE
IST
.
t
,
2NO
n.
C
EI
L
I
N G
PLOT PLAN
LOT'
50'
X
125
°
S
ID
E
ELE
V
ATION
1713
APPLICATION
OF COST
ESTIMATION
METHODS
•
I
eral, two or more sheets are required
for
each classification to pro-
vide
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 established for each classification is 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 ele-
ments
for
which cost
data
has not been otherwise tabulated. These
miscellaneous costs include contractors' overhead and profit, and are
either lump sum amounts or
unit
costs of the elements erected in place,
complete. 1716.
Quality
Adjustment
Percentaqes
are confined
within the limits tabulated as the recommended upper and lower
limits of Quality Adjustment Percentage. These limits are estab-
lished
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 ac-
companying illustration shows the tabulation of Basic Square Foot
Costs
for
detached, one-family,
11h
story buildings. The column
headed 1,400 to 1,500 is chosen because
it
corresponds to the calculated
area of the subject building, which is
1,443
square feet.
In
this column,
opposite "Face Brick Veneer", is found the Basic Square Foot Cost,
$3.64, applicable to the subject building.
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. Necessary adjust-
ments to the basic square foot cost are next made according to instruc-
tions in the following paragraphs.
1719.
Materials and
Size
Adjustments.
As the next
step, the subject drawings and specifications are 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
1713-1719
UNDERWRITING MANUAL
FEDERAL
'
H
O U
SING
.AD.IINISTRATION
'"',,..,.. ..
'li'T"'llf!
T
t\U
Type
lldi!:Qilg
Metronoliten
C
i
!:z
Insuring
'
Of'fice Family ii
S
tor
i
es
Area
in
.
Souare Feet
Ext
e
r
i
or
W8l.l
Con
s
tru
ctio
n
900 1000
1100
i~
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Asn
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Foo
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chen
Cabine
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Fl
oor Sa.
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t,
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"
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B
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ta
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hed
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Fl
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a
r
B
.
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c
h
ed
b
oo.
oo
Ex
t
r
a
~lO
Rot
f'n-bln
.•
t
'
"" 1n
n
n
I
~•
c
oncrete walks -
s
n
uA,.e
f'o
o
t
•
1<!
C
on
n
er
nini
n" - ner fi
>rt.n-
-
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_,
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-
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22.
L
a
un
drv
T
rav
s
?
n nn
Wea
t
he
r
~tri
n
ni
n
a
-
"'e
r
dnn
r
t.
nn
!K
i
t.chen «:.
:
M
nn
W
ea
t
her
•
trinni
n" - ...
,.
....i
-dn
w
?
.,
~
Sta
ndard
Lin
oleum on
Pine
Floo
r
.
11
40#
T
i
n Roonng -
S<luer
a
~·oot.
.
2R
s
e
lected to
include
.
a variety
of
deviations
f
rom
b
asic specifications
for
the
pu
rpose
of
illustr
atio
n.
In
order
t
o
ob
vi
ate
pos
sib
le over-
sight, the necessary
M
a
terials
a
n
d Size Adjustments are
ma
de in a
sequ
e
n
ce
co
rre
s
pond
i
n
g to the
numbe
ring of
t
h
e
c
omponen
ts of a
buildin
g.
1719
APPLICATION
OF COST
ESTIMATION
METHODS
•
I
26.
Insulation.
None.
2.
Foundations.
Frame Construction-8"
concrete block wall.
Brick
Veneer-10"
concrete block wall.
3.
Chimney. Complete with flue lining.
4. Fireplace. Single flue complete
with
flue lining,
hearth,
damper,
stock mantle.
5.
Exterior
Walls. Refer to
Exterior
Wall Construction on basic
square foot cost sheet.
6.
Floor Framing. No. 2
Y.
P. 2
x
8 and
2
x
10-16" 0.
C.,
depend-
ing on floor
area.
7.
Sub-Flooring. No. 2
Y.
P.
1
x
6,
laid
diagonally.
8.
Finish Flooring.
lo/J.
6
x
21\i
select Red or White Oak.
Paper-
Sand-Fill-2
coats
shellac-wax.
11. Roof Framing. No. 2
Y.
P. 2 x 6 and 2 x
8,
depending on span.
12.
Roof Covering. 16" Clear Red Cedar Shingles. Edge Grain.
13.
Gutters
and Downspouts. 26 gauge
G.
I.
14.
Plaster
Base and
Plaster.
Wood or gypsum
lath; standard
two
coat work.
15.
Decorating. Walls
and
ceilings painted.
16.
Interior
Doors and Trim. Stock white pine, doors
1%".
17.
Windows. Stock D.
H.-Wood.
19.
Cabinets and
Interior
Detail'. Kitchen
cabinets-Wall type-32
feet
;
floor
type-25
feet.
Med-
icine cabinets.
21. Special Floor and Wainscot.
Standard
ceramic tile floor and
wainscot in bathroom.
22.
Plumbing. Double shell recess tub, pedestal lavatory, closet com-
.bination. D. D.
B.
Apron
front
sink,
laundry trays,
range
boiler-gas
fired.
Iron
Piping.
23. Heating. Gravity warm-air furnace, hand fired.
24.
Electric
Wiring. BX Cable; Average number of outlets.
25.
Lighting
Fixtures.
$35.00 to $80.00 allowance, depending on floor
area.
BASIC SPECIFICATIONS
1719
UNDERWRITING MANUAL
Total-
----
-~-
--
-----------
$43.15
The
re
s
ult
of this computation,
to
the nearest dollar,
is entered in the "lump-sum" column on the line
opposite Component
#2
and a description of the tile
drain is noted under "Explanation."
c.
Subject specifications
for
other elements of the base-
ment are substantially
th
e
same as basic
specific
a-
tions, and no
further
adjustments are necessary
for
Component
#2.
The
e
x
tra
cost of the
stair
s
at-
tributable to the finished room in basement
i
s included
under
Compon
e
nt #27.
3.
Ohirnn
e
y.
No adjustment
i
s
neces
s
ary.
4.
Fi
re
pla
ce
.
Since basic
spe
c
ifi
c
ation
s do not include a fire-
place, this component is additional. The handbook shows
a component
unit
adjustment of $140
for
a fireplace as
described. This adjustment is entered in the "Lump-
sum" column.
The methods of making the adjustments are described
in
the same
sequence, as follows:
1.
Eecaoation.
No adjustment is necessary.
2.
F
ouaidation»,
a.
Subj
e
ct specifications call for
10"
poured concrete base-
m
e
nt
walls, and the appli
ca
ble basic specifications in-
d
ic
ate
12"
concrete block
walls
,
The handbook shows
the Component
Unit
Adju
s
tment
for
10"
poured con-
crete walls as:
$0.04.
This adjustment being addi-
tional is entered in the
"plu
s
" column opposite
C
omponent
#2,
and a notation is entered under
"E
x
planation."
.
b,
Subj
e
ct specifications call
for
a tile drain, around the
fo
undations, connected to the sewer. This element is
not included in the applicable basic specification as
it is additional. The handbook designates the basic
perimeter as equal to
110
lineal
:feet,
and the hand-
book shows a cost of
$
0.065
per lineal foot
for 4"
t
il
e
drain installed complete with crushed stone. The
p
l
o
t
plan indicates
that
the distance from the house
to the sewer is 40 feet, and the handbook shows a cost
of
$0.90 per lineal foot
for
a
4"
cemented glazed tile
drain connection to sewer, including excavation and
ba
c
kfilling of trench. The adjustment is computed
as follows:
Tile
drain:
110 lin.
ft.
@
$0
.
065
=
$7.15
Sewer conn:
4
0 "
@
0
.
00
=
36. 00
)
1719
APPLICATION
OF COST
ESTIMATION
METHODS
•
The handbook designates the following Basic Square
Foot Costs for exterior walls: Face Brick Veneer,
$3.64,
Frame
and Siding,
$3.29.
The difference,
$3.64-$3.29=$0.35,
is equal to the. difference between
the
costs of the. two types of wall. The adjustment
is computed
thus:
634
$0.35
x
1,
783
=
$0.12
The fraction used is the area of alternate exterior
wall divided by the
total
area of exterior wall. The
computed adjustment, being a deduction, is entered in
the "minus" column opposite Component
:f:/:5,
and a
notation is made
under "Explanation."
b,
The subject building shows a height of
exterior
wall as
11'
4",
and the handbook designates
the
basic wall
height applicable to the classification as 10'
4".
The
height of exterior wall is measured from the under-
side of first floor construction to the. intersection of the
outside surface. of the wall with
the
roof surface.
Total area
of
exterior
walls: 1,149
+
634
=
1,783 sq.
ft.
The gable wall of porch is disregarded in this calcula-
tion as
it
is not included in
the
basic square foot cost.
Area of face
brick
veneer______________ 1,149 sq.
ft.
346 sq.
ft.
257
"
512
"
34
"
Front
30'
6"
X 11'
4"
Rear
22'
8"
X 11'
4"
Ends
24'
9"
X 10'
4"
X 2
=
Bay
11'
3"
X
3'
O"
I
634 sq.
ft.
Area of wood siding
_
"
61
297 sq.
ft.
195
"
81
"
Length II
eight
Gables 24'
9"
X
6'
O" X
2
=
Rear dormer
35'
6"
X 5'
6"
Front
dormers______
9'
O" X
4' 6"
X 2
=
Bay 11' O" X 5'
6"
1719
UNDERWRITING MANUAL
5. Eosterior lV alls.
a.
The Basic Square
Foot
Cost was selected
for
"Face
Brick Veneer" as called
for in
subject specifications.
An inspection of the subject drawings reveals
that
the gable and dormer walls are of wood siding and
not face brick veneer. The areas of wood siding
and brick veneer are estimated as follows:
706 sq.
ft.-shingles
=
258 sq.
ft.-tin
Rear Dormer
c , , 9' 9"
X
26'
6
11
Front
.,
____
_
____
16'
6"
X 31' O" 512 sq.
ft.
Rear
___
________
16'
6"
x
2' 6" X2=
83
"
Rear
____
_______
2'
9"
X 26' O" 72
"
Rear
;
__________
1'
6"
X 26' O" 39
"
Th
e
computed adjustm
e
nt, being additional, is en-
tered in the lump sum column and a notation is made
under "Explanation."
o.
Inasmuch as the subject building is rectangular
in
shape and is of usual outline,
its
perimeter is not in
ex
ce
ss
of the basic perimeter and no adjustment is
n
ece
ss
ary.
6.
Floor Framinq, No
adjustment is necessary.
7.
S
u
bftooring.
No adju
s
tment is necessary.
8
.
Fini
s
h Flooring.
Subject specifications call
for
clear white
oak flooring except
in
kitchen and bathroom, and
basic specifications provide
for
select red oak
throughout except
in
bathroom. The handbook shows
t
h
e
component
unit
adjustment for clear white oak
flooring as $0.02. The adjustment, being additional,
is entered
in
the "plus" column, with a notation made
under "Explanation." The adjustment
for
linoleum
and yellow pine floor in kitchen is made under Com-
ponent
#21.
9.
Partition Frarning.
No adjustment is necessary.
10.
Ceiling Frarning.
No adjustment is necessary.
11.
Roof
Framinq.
No adjustment is necessary.
12. Roofing.
The subject building shows 210 lb. asphalt
shingles on sloping roofs, and
tin
over flat dormer roof.
Basic specifications call
for
edge
grain
red cedar shingles
throughout. The handbook designates the following costs
per square foot
for
roofing: 210 lb. asphalt shingles, $0.11;
edge grain cedar shingles, $0.07; and tin, $0.28. The
adjustments are computed as follows:
$0.59 X
111
=
$6
5
A9
The excess height is
l'O".
The excess wall surface
is equal to
l'O"
X 110'6"
=
111
sq.
ft.,
the dimen-
sion 110'6" being the perimeter of the wall. The
handbook shows a cost per square foot
for
exterior
walls of "Face Brick Veneer" as $0.59 and the adjust-
ment is
compu
t
ed
a
s follows:
1719
APPL'1CATION
OF COST
ESTIMATION METHODS
I
l
•
'
The area
0£
roof over bay is not significant and is there-
fore disregarded. The additional cost of 210 lb. asphalt
shingles over wood shingles
is:
$0.11-$0.07=$0.04.
The
additional cost of
tin
over wood shingles
is:
$0.28-$0.07
=
$0.21.
The adjustments are computed as follows:
Asphalt shingles
$0.04 X 706=$28. 24
Tin--------------------------------------- 0.21X258=
54.18
These computed adjustments, being additional, are en-
tered as lump sum amounts opposite Component
#12,
.and notations are made under "Explanation."
13.
Gutters and Downspouts. Copper is specified for sheet
metal work, whereas galvanized iron is called for
in the
basic specifications. The handbook designates a Com-
ponent Unit Adjustment of
$0.04
per
square foot of
calculated area, in the "add" column,
for
copper gutters
and downspouts. The adjustment is entered in the "plus"
column of the estimate form, with a notation entered un-
der "Explanation." No
further
adjustment is necessary
inasmuch as both subject drawings and basic specifications
call
for
splash blocks.
14. Plaster Base and Plaster. Subject specifications call
for
2.3
lb.
paper
backed metal lath, and basic specifications
designate
%"
gypsum
lath
as a plaster base. The hand-
book shows a Component
Unit
Adjustment of $0.09.
The adjustment is entered in the "plus" column, and a
notation is made under "Explanation."
15.
Deoorotinq,
No adjustment is necessary inasmuch as both
the subject and basic specifications call for the same treat-
ment of all interior walls and ceilings. Finishes specified
for woodwork and floors, and exterior painting are not
considered under this component.
16.
Interior Doors and Trim. No adjustment is necessary
inasmuch as only minor deviations from the basic speci-
fications are indicated
for
the
trim,
hardware, and finish.
17.
Windows. No adjustment is necessary.
18.
Entrance and Exterior
Detail.-The
subject building indi-
cates shutters on the
front
and side windows of the first
story. This element is additional to the requirements
of
the basic specifications for this classification. The cost
of this additional item is computed as follows:
Shutters
5
pairs
@
$5.50=$27.50
The
unit
cost is selected from the handbook and the res.ult
of the computation, taken to the nearest dollar, is entered
1719
UNDERWRITING MANUAL
The result is taken to the nearest dollar,
$17.00,
and
entered in the "lump sum" column. Appropriate
notation is made under "Explanation." The amount
of this adjustment
-
may
be estimated directly
ori
the
basis of experience and
in
such event, the computa-
tions may not be necessary.
b,
The subject specifications
c
all
for
a cabinet in the base-
ment which is additional to basic specifications. The
cost of the cabinet,
$35.00,
is selected from the hand-
.
book and entered in the "lump sum" column. A de-
scription is noted under "Explanation."
TotaL
__
_
$17.35
The handbook shows the following costs per surface
square foot of kitchen cabinets installed complete with
glass
,
finish and hardware: Wall type
12"
deep,
$1.20
and floor type
20"
deep,
$1.55.
These
unit
costs are
applied to the additional areas, thus
:
8
sq.
ft.
@
$1.20
=
$9
.
60
5 "
@
$1.55
=
7.75
Additional Area
=
5
sq.
ft.
Floor type,
20"
deep: 2'
6"
X
12'
O"
=
30
sq.
ft.
Basic
Area
=
25
"
Additional Area
=
8
sq.
ft.
Width
Heigth
Wall
type,
12" deep:
3'
6
11
X 11'
6"
=
40
sq.
ft.
Basic Area
=
32
"
in the "lump sum" column
-
.
A tlesoriptive notation is
made under "Explanation."
19. (Iabinet« and Interior Detail.
a.
The subject drawings show a greater quantity of cabi-
net
s in the kitchen
than
is called for by the basic
specifications. The number of surface square feet of
cabinets of each type shown in
the
.
kitchen of the
subject building is determined, and the numbers
of surface square feet designated in basic speci-
fications
for
each type is deducted to obtain the net
additional area of each type on which- the adjustment
is computed. The computation
for
this adjustment
follows:
171f)
APPLICATION
OF COST
ESTIMATION
METHODS
•
Cost of
lav
a
to
r
y
co
mplete
$72.
00
Copper
water
piping
for
7
fixtures
@
$2.00
$14
.
00
The unit
costs are
select
e
d from the handbook. The
additional cost of copper piping, $14.00, is
e
ntered in the
"lump
s
um" column
opposi
te Component
#22.
The addi-
ditional cost of
lav
a
to
ry plumbing is
enter
e
d
in
t
he "lump
sum" column
oppo
s
it
e
"La
v
a
t
ory.
"
De
s
cription
s
of both
items are noted under "Explanation."
~.
Heating.
The
subje
c
t
building indicates an automatic,
forced circulation, warm air heating system
with
an oil
burner.
In
the absence of detailed specifications, a
unit
cost corresponding to the type of heating equipment
assumed is selected from the handbook. The
unit
co
s
t
of
the customary type of heating equipment is also selected
from the handbook.
Th
e
difference between the
t
w
o
costs
is the
co
s
t
of
add
i
tiona
l mechanical equipment which is
computed as
follow
s
:
a.
Automatic, forced
cir
c
ulation, warm air,
oil
burning unit,
including 275 gallon
fu
e
l tank, and
supply
and
r
e
turn
ducts--------
-
---------------------------------------
$835.00
I
20.
Sta
ir
s.
No
adju
s
tment is
neces
s
ary.
21.
Special Floors
omd
Wa
insc
ot.
.
a.
No adjustment is
n
e
ces
s
ary for the
bath
floor or
bath
wainscot, inasmuch as both the subject and basic speci-
fication call for tile.
'b,
Linoleum over pine flooring is specified
for the
kitchen
and this item is
addit
i
onal to the basic
s
pecifications.
The area covered by linol
e
um is computed
a
s
9'0" X
13'4"
plus
2
'
6"
X
5'0",
w
hich equals
133
s
q
.
ft. The
handbook
d
e
signate
s
t
h
e
additional cost of linoleum
and pine flooring, of a quality assumed in the absence
of exact description, as $0.11 per sq. ft. The adjust-
ment is
compu
te
d,
thu
s
:
133
sq.
ft.
@
$0.11=$14.63.
This amount
i
s entered in the "lump sum" column
as $15.00, with
a
n
appropriate
notation under
"Explanation."
22.
Plumbing.
The subject drawings indicate a
lavator
y
in
the
basement and
th
e
s
ubje
c
t
s
pecifications call
for
c
opper
wat
e
r
piping
,
both of
w
hich are additional
to
t
he basic
spe
c
ification
s
.
The
a
dditional
co
s
ts of these
it
e
m
s are
computed as follo
w
s
:
1
Vitreous china
t
an
k
and
clo
s
et combination
_~-
-
--
-
--
-
$
40. 00
1
Enameled
iron apron
fr
o
nt,
corner
lavatory_
__
__
__
_
__
__ 3
2.
00
1719
UNDERWRITING MANUAL
c.
Cost of
additional
h
e
ating equipment;
$552. 00
The cost of the
sp
e
cified heating equipment, as assumed in
(a)
a
bov
e
,
is
t
he total cost of the equipment called for,
but no entry for this amount is made. The cost of
u
s
ual
h
e
ating
e
quipme
n
t,
$283.00,
in
(b)
abo
v
e,
is already re-
flected in the
basi
c
square foot cost, and no adjustment is
mad
e
on the
rever
se
side of the form. However, the cost
of additional heating
e
quipment,
$552
.
00,
in
(
c
)
a
bove
,
i
s
entered directly in the Summary of Replacement
Co
s
t
on
the face side of
FHA
Form No. 2052 on the line opposite
"Additional
mech
a
nical equipment."
2
4.
Electric Wiring.
The subject drawings indicate power out-
lets
for
the range, oil-burner, and laundry machines.
Thes
e
are additional to the basic specifications. Unit
costs are selected from the handbook and the
adjustmen
t
i
s
c
omputed
thu
s
:
3
outlets
@
$10.50=$31.50
.
This
a
mount taken to the
nea
r
est dollar, is entered in the
"
lump sum"
c
o
lumn opposite Component
#24
with a nota-
t
ion under "Explanation."
25
.
Lighting
Fix
t
ures.
The subject specifications call for an
allowance of
$50.00
for lighting fixtures and the allowance
provided for
i
n
th
e
ba
s
ic specifications is
$40.00.
The ad-
justment is computed as the difference between the two
a
llowances, thus:
$50.00-$40.00=$10.00.
This amount
i
s
entered in the "lump sum" column and a notation is
made under "Explanation."
26.
Insulation
.
Subje
c
t
sp
e
cifications call
for
the insulation of
w
all
s
and
ceiling
,
w
hi
c
h
is additional to
,
the
basi
c specifi-
cations. The handbook designates the following Com-
ponent
Unit
A
djustm
e
nts for in
s
ulation
:
Wall
s
,
$0.10
and
Ceiling,
$0.03
.
These adjustments are entered in the "plus"
column on the lines opposite "Walls" and "Ceiling" under
Component
#26,
and descriptions of the types of insula-
tion are entered under
"Explan
a
tion."
27.
Mi
sc
e
llan
e
ous.
Inasmu
c
h
a
s
the
adjus
t
ments necessary
under this component include those required
for
elements
"not otherwise readily
class
i
fied under other components",
the subject drawings and specifications are carefully re-
viewed for necessary adjustments not previously made.
Observation reveals the following items which are addi-
tional to the basic
s
pe
c
ifications; parcel receiver, kitchen
i
I
b,
Gra
v
ity
wa
rm
a
i
r
,
h
a
nd-fired
,
c
oa
l
burni
n
g
unit,
In
c
ludlng
supply
a
nd
r
e
turn
duct
s $283. 00
1719
APPLICATION
OF COST
ESTIMATION METHODS
Carried forward
93. 91
373 sq,
ft.
@
$.078
=
$29. 09
Plaster and waterproof
bond
coat
on
exterior
walls:
63'
6"
X
7' 3" =
460
sq.
ft.
@
$.053
=
24. 38
Plaster
on gypsum block
partitions:
66'
O" X
7' 3" =
479
sq.
ft.
@ $.046
=
22. 03
2"
gypsum block
partitions:
41' O" X 7'
3" =
297
sq.
ft.
@
$.062
=
18.
41
•
Total
$62.00
The computed cost of
this
element, $62.00, is entered
in the "lump sum" column
under
Component
:f:/:27,
with a descriptive notation.
d.
The additional cost of the recreation room is estimated
as
the total
of the costs of individual elements.
Indi-
vidual costs are computed as separate products of
measured quantities of the elements and
unit
costs
selected from the handbook. The
total
additional
cost is computed as follows:
Metal lath and plaster
on ceiling:
13'
0"
X
23'
O"
=
299
sq.
ft.
3' O" X 5' O"
=
15
"
5'
6"
x
7'
6
11
=
41
"
3' 6"
x
5' 0" =
18 "
I
ventilating fan, mechanical
refrigerator,
weatherstrips
for
all window and door openings· above the basement,
and a recreation room in the basement. These miscellane-
ous items are handled in the following manner
:
a.
The cost of parcel receiver, designated in the handbook
as $8.00, is entered in the "lump sum" column under
Component
:f:/:27,
with an explanatory notation.
b,
The cost of the kitchen
ventilating fan
is selected from
the handbook, and is entered directly in the Summary
of Replacement Cost on the face side of·
FHA
Form
No. 2052, on the line opposite "Additional mechanical
equipment." The cost of the mechanical
refriger-
ator
is not included in
this
estimate, inasmuch as
it
is
assumed here to be a chattel.
o.
The cost of weatherstripping is computed from the
number of openings so equipped as shown on the
drawings, and the
unit
costs designated in
the
hand-
book, as follows
:
16 windows
@
$2. 75
=
$44.
00
3
doors
@
6.00
=
18.
00
UNDERWRITING MANUAL
1719
The additional
cost
,
$431.00, is entered in the "lump
sum" column on a line under Component
#27,
and a
notation is
m
a
de under
"
Explanation."
After
several
detailed estimates of costs of
finish
e
d rooms
in
base-
ments have been made,
it
will be possible to estimate
such
cost
s
dir
e
ctly as lump sum amounts.
1720.
Determination of Square Foot Cost.
After
all
necessary
adju
s
tme
n
ts have been
comput
e
d and
e
ntered on
the
·
re-
verse side of
FHA
Form
No
.
20
5
2,
they are combined into a single
square
foo
t
cost adjustment as follows:
a.
All
amount
s
in the "lump sum"
c
olumn are totalled, taking
into
a
ccoun
t
any
deduction
s
that
are indicated. The
cal
-
culated area computed on the face side of the estimate
form
i
s e
nter
e
d in the
s
p
ace provided in the
upper right
han
d corner of
th
e reverse side. The total of the lump
sum items
i
s
divided by the number of square feet of
Additional cost of
recr
e
ation
room $431. 04
65. 50
80. 00
14.
00
$
107.50-$42.00
(Estimat
e
d)
1
4
sq
.
f
t
.
@
$1. 00
Additio
n
al
cost of
bas
e
-
ment
wind
o
ws;
Ba
s
ement
ar
e
aways:
Iron
g
ra
tings
over
areas
:
373
s
q.
ft
.
@
$
.
04
=
14.
92
2
@
$17. 50
=
35. 00
130
lin.
ft.
@
$
.
16
=
20
.
80
17
@
$1.75
=
29
.
75
Int
e
rior
doors:
Floor base:
El
e
ctric
outlets, addi-
tional
:
Additional cost
of
clos
e
d
stairs
ov
er
customar
y
basement stairs:
13
risers
@
(
$
3.50-$1.40)
27
.
30
299 sq.
ft.
15
"
41
"
18
"
Flo
o
r painting,
2
co
a
ts:
13'
O" X
23'
O" =
3' O" X 5' O"
=
5'
6"
x
7'
6"
=
3' 6"
X
5'
O"
=
1,312 sq.
ft.
@
$.038
=
49.86
Brought
forward
_
------
$93. 91
Decorating,
1
coat
s
i
ze
and
2
c
oats flat paint:
13' O" X
23'
O"
=
299 sq.
ft.
3'
O" X
5'
O"
=
1
5
"
5'
6"
x
7'
6" =
41
"
129
' 6"
x
7'
3" =
939
"
3'
6"
X 5' O"
=
18
"
APPLICATION
OF COST
ESTIMATION
METHODS
1719-1720
··---
~·
•
I
Sq
ft
A
14 4 3·
c
A.LCULATED
.....
Type of
erlerlor
wall .EMt BRICK VENE!i;R BA.Ste
8QuAU
FOOT CosT
3.64
AD10STMENTS
LvJa
SUK PU
SQvABa FOOT
c
......... EDU».liloX Add(+) Ded.(-)
1.
Euantlon
2. Foundations
10"
POUREO CONCRETE .04
4"
F"OOTING DRAIN
43.00
3. Chimney
..
Fireplace 140.00
5.
Exterior walls
WOOD
SIDIN"
• 2
NO
STORY .12
Height
adjustment
1
'·0"
ADDITIONAL
65.00
Perimeter adjustment
6. Floor
framing
7. Subflooring
S.
Finish tlooring
r•
••R
WHITE OAK
.02
9.
Partition framing
10.
Ceiling
framing
11. Roof
framing
12. Roofing
210#
ASPHALT SHINGL"
28.00
TIN REAR DORMER
54.00
13.
Gutters and downspouts COPPER
.04
14.
Plaater
base
and plaster
METAL LATH
09
15. Decorating
16. Interior doors
and trim
17.
Windows
18.
Er.trance
and
exterior detail SHUTTERS
28.00
19.
Ca.binetli
and interior detail
EXTRA KITCHEN CABINETS 17.00
RJISEMENT CABINETS
35.00
20.
Stairs
21. Special Boors
and
wainscot
Bath
floor
Bath
wainscot
Kitchen LINOLEUM·
PIN"
FLOOR 15.00
22.
Plumbing
COPPER WATER
P1pillif.:
14.00
Additional bathroom
Stall shower
Lavatory
Toilet BASEMENT
72.00
23.
Heating
24..
Electric
wiring
3
POWF"R
OUTLETS
32.00
25.
Lighting fixtures
ALLOWANCE
~50.00
10.00
26.
IMulation
Walls MINERAL WOOi BATS .io
t---
Ceiling
.
"
.
.n>.
27. Miscellaneous
OAOrC"
R<"r.F"IV"R
a nn
WEATHERSTRIPPING 16WINDOWS 3 DOORS
62.00
RECREATION ROOM
IN BASEMENT
4•1.nn
TOTAL
LtrMP
Suu lTEm
1054.00
.73
TOT.u.
ADQJTJONS AND
D:tl>VCTIONB
I.OS
.12
Nrr
ADnmoN
oa
DE?Vc:rroN
kDn(+)~ .93
8QtrARll
Fom
Cosr
A.,.,.
calculated area, to convert the total into a square foot
cost adjustment which is entered in the "plus" column.
2052~Co8t Estimate-Integrated Square Foot Method
1720
UNDERWRITING MANUAL
SUMMAR'i'
OF
REPLACEMENT
COST
Endmw
f
Row
I
Seml-delacbed
I
Delaobed
I
x
MODIFICATION
Of
SOUAllUOOT
COST
Square1ootu1sL
~.
--·-·-····-
··
·
··
-' 4.57
QuaUl7
adJUBlmenl
,
.••••••
-
..
9 8
%
4 .48
.
97
1
'
0
""
1
a;..,.~":;"~-;~ '
·t;;;
_ _
~,I
4. 35
l
~,
iC
I
·
1
...
I
.
111
ix
·
a
I
2
I
4
I I
1443
8q.
ft.
C.u.cvw.TSD
Au,. l
r
,
,.
I
r
.
.
-
1
I
r
The computation is made as follows:
$1,054.00 $0
73
1,443
.
b,
All adjustments in the "plus" column, including the con-
verted 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 oppo-
site "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 combined with
the
selected
Basic Square Foot Cost and the result is the Square Foot
Cost. This result, $4.57, is transferred to the space pro-
vided for "Modification of Square Foot Cost" on the face
side of
FHA
Form No.
2052.
1721.
Determination of Final Square Foot Cost.
The
character and grades of materials specified for the subject building
are reflected in the Square Foot Cost. However, for the purpose
of
this example,
it
is assumed
that
the quality of construction found
or likely to be found in the completed structure would represent a
saving of 2% in cost, due to less costly construction
than
was as-
sumed in the development of the Basic Square Foot Cost. There-
fore, 98% is selected as the applicable Quality Adjustment Per-
centage,
it
being within the
recomm
e
nded limits designated in the
handbook. The selected percentage is entered in the space pro-
vided
for
"Modification of Square Foot Cost" on the face side of
FHA
Form No. 2052, and the Square Foot Cost is modified accord-
ingly. The result is entered in the space opposite the Quality
Adjustment
Perc
e
ntage.
APPLICATION
OF COST
ESTIMATION METHODS
1720-1721
2052-Cost Estimate;-Integrated Square
FO'!I
Me~
EwnHATZD BT
DATE-----
<Xhe:r
improvements:
.... .,.b !Id· ..
r.t.l'.!!!AC.E
18 Sq.ft.®
.2s
20.00
w&11ag'.)!g!')..1:.(2'..~.!~'L
89
Sq.
r~
@
.I 8
16.00
Drlvewayot°l:X62">.±UO)H8')
614
Sq.
rt.
@
.2 2
135
00
Additional mecbsnica1 equipment KITCHEN FAN
($ 22.00)
AUTOMATIC
FORCED
WARM
AIR
AND
OIL
Main_
Luilding
-·············-···--····--····················
0.,...
lQ .. ~.gQ
..
BURNER
(
$
552.00) 574.00
Items
of esceeetve
Cost
.~
••••••
~----·-······---~-----··········-··-·----------··----·~---
Sewage,
disposal ···················----··········--······································
$
----
Water supply .•••••
,,
•••••••.•••••• ~---·······················---.-----···················
$
_
--------------- '----
SUBTOTAL
$
-+-1-'~-.+-"-~+g"-+'g'-
McMteo\u,al eeevtee
!,,!M!J.E:.R
.
.$J;:_l\\1!.C.E:.
~.......
S ;=l;;;;;;!;:=t:;;t=:!::=;!::::;
EBTIMAU
OF
COST RBQUI8.Jl:D
TO
REPLACE BUILDING lKPBOVEMENTS llf NEW CONDITION
$
2
O
0
1443 Sq.ft. ®---=4=35~
6
2
1 1
0 0
2
0 0
Sq.
ft.
@
1.25
' 2 5 0 0 0
I
SUMMARY OF
REPLACEMENT
COST
•
1443
Sq.
I~
•
I
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 selected as the Locality Adjustment Percentage. The
selected percentage is entered in the space provided for "Modifica-
tion 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. 2052 are arranged in the following order:
a.
Main building
b.
Garage, other than built-in
c.
Other improvements, including accessory buildings, 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
1722-1723
UNDERWRITING MANUAL
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 specifications
for
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
spec
i
fi-
cations, the measurements of the number of Inplace Units are made
1724.
In
order
to
complete the
es
timate of total
r
e
place-
ment
cos
t
,
it
i
s
nece
s
sary to
m
a
ke the following
c
o
mputations 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 entri
e
s
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
addition
a
l amounts for items specified for the
subject building, in excess of allowances included in the
Basic Square Foot Cost. The additional amounts have
been computed as
des
c
ribed in paragraph
1719
under Com-
ponents
#23
a
n
d
#27,
and their
combin
e
d total has been
entered in the total column.
e.
Th
e
allowance for Architectural service is determined ac-
cording to the instructions contained in Section
16.
It
is
assumed for this example
that
limited architectural serv-
ice is usually obtained
for
similar houses
in
the particular
locality, and
that
the customary charg
e
for such service in
the locality is
$150.
Thi
s amount is entered
in
the "Total"
column on the line opposite "Architectural service", and a
qualifying notation
i
s made.
f.
The total of all
co
s
ts included in the summary of replace-
ment cost is the Estimate of Cost Required to Replace
Building Improvements
in
New Condition.
APPLICATION OF OOST ESTIMATION METHODS
1724-1726
~
\
Total;
144 lin.
ft.
This measurement is entered in the "Quantity" col-
umn 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.
"
"
23
11
29
Rear
19'
6"
+
3' 6"
Bay (1' O") X 2
+
(2'
9")
X 2
+
3'
8"
Porch , , 8' 6"
+
12'
0"
+
8' 6"
31
lin.
ft.
50 "
•
TotaL------------
-
-----------------
166 cu.
ft.
166 cu.
ft.
X 1/27
=
6 cu. yds.
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 , ,
30'
6"
Sides
24' 9"
X 2
125
cu.
ft.
11
"
30 "
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,
5,428
cu.
ft.
5,428 cu.
ft.
X
1/27
=
201 cu.
yds.
b. Trench
Wall:
Main
_
Bay
_
Areas
_
"
I
=
4,908
cu.
ft.
127
"
38 "
63
,,
85
"
207
"
Width
Le
ng
th Depth
24'
9"
x
30'
6"
x
6' 6"
3' O" X 6'
6"
X 6'
6
11
1'
6"
X 5' O" X 2'
6"
X
2
=
2'
6"
X 5' O" X 2'
6"
X
2
=
2'
6
11
X 4' O" X 4'
3"
X
2
=
2'
6"
x
19'
6"
x
4'
3"
"
in a sequence corresponding to the numbering
0£
components
0£
a
building. The
re
v
erse side of
FHA
Form No. 2053, Cost
E
s
timate-
Inplace
Unit
Method, is
u
s
ed to record the
mea
s
urements 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
m
a
king the measurements in accordance with in
s
truc-
tions contained in Section
16,
Methods
0£
Dwelling Cost Estimation,
is
describ
e
d
as follows:
1.
Eecaoation:
a.
Ba
se
me
n
t:
1726
UNDERWRITING
MANUAL
This
measurem
e
nt
i
s entered
in
the
"Quantity"
column
opposite "Basement Floor", and a description is noted
under "Explanation".
e.
Basem
e
nt
E
s
sentials
:
Th
is element is
measur
e
d as a lump-sum amount equal
to
the
total
of the
sep
ar
ate
c
osts of the individual items.
The cost of
ea
c
h
it
e
m
i
s
computed as the product of
TotaL 775
sq.
ft.
24' 9" X 30' 6" = 755
sq
.
ft.
3' 0"
x
6' 6" =
20
"
The
measurem
e
nts for
6"
thick and
9"
thick trench
w
alls are entered separat
e
ly in the "Quantity" column
opp
o
site "Walls", and descriptions are noted under
"Explanation".
d.
Basement Floor
:
=
87
sq.
~t.
9" thick
wall
s
:
Porch
(
8
'
6"
+
12'
0"
+
8' 6")
X
3' 0"
318
sq
.
ft
.
6
'' thick
wall
s
:
Len
g
th
H
e
i
g
ht
Are
as
(1
' 6"
+
5'
O"
+
1'
6")
X
2' 6"
X 2
=
4
0
sq
.
ft.
"
(2'
6"
+
5'
O"
+
2' 6")
X
2'
6"
X 2
=
50
"
"
(
2'
6"
+
4'
O"
+
2'
6")
X
4'
3"
X
2
= 77
"
"
(2'
6"
+
3' 9"
+
6
'
O"
+
3' 9"
+
3
'
6"
+
3'
0"
)
x
4'
3"
96
"
Stoop 4'
O"
x
3
' 6"
x
2
=
28
u:
"
3'
0"
x
3' 6"
11
"
3'
O"
x
5
' 3"
1
6
"
The
len
gt
h
u
se
d above
i
s
th
e total of the
m
e
asure-
me
nts
u
sed in
com
put
ing footings
un
der
(a),
exclud-
ing the
l
e
ngth
of
po
rch
fo
oti
n
gs. The
m
ea
s
u
r
ement
for
b
a
sem
e
nt
w
alls is
en
t
ered in
th
e
"Qu
a
ntity"
col-
um
n
op
pos
ite
"
Walls",
a
nd a
de
sc
ription
i
s
noted
und
er
"E
x
planation". No
measurement
s
a
re
m
a
de
at
t
his time
o
f
th
e
chi
m
ney,
whi
c
h is
part
of Component
#3
,
or
for interior
partition
s
,
which are
p
a
rt
of
Co
m
pon
e
nt #9.
o.
Tre
n
ch
W
a
lls:
L
ength
H
eig
ht
114' O" X 7'
3"
=
827
sq.
ft.
b.
Base
m
ent Wall
s
:
1726
APPLIC
AT
ION
OF COST
ESTIMATION METHODS
•
I
TotaL
---
---------------
1,149 sq.
ft.
346
sq. ft.
257
512
"
34
"
Len
g
t
h Height
Front ,
30
'
6"
X 11'
4
"
Rear ,
22'
8
"
X 11'
4"
End
s
2
4'
9
"
X
10'
4"
X 2
Ba
y
11
'
3'
' X 3' O"
This amount is
enter
e
d as $205.00, in the column
headed "Cost" opposite Basement Essentials, and a
brief description of the element is noted under
"Explanation".
3
.
Chimney:
Mea
s
urement is taken from the underside of footings to
top of chimney.
For
the subject building,
the
meas-
urement is 31'
l".
This measurement, taken to the
nearest foot, is entered in the "Quantity" column. No
description is necessary under "Explanation",
b
e
cause
this component includes only the chimney
con
s
truc-
tion necessary
for
the heating plant.
4.
Fireplace:
This component
i
s estimated as a lump sum amount for
the
firepla
c
e, including complete foundation, ma-
sonry, flue,
he
a
rth,
lining, damper, facing, and man-
t
e
l.
Regardl
e
ss of
t
h
e
fa
c
t
t
hat the
subject
dr
aw
ings
call for a
combined
,
t
w
o
flue
c
himney, the cost of this
component
i
s
ca
lcul
at
ed on the basis of a separate
chimney
for
fir
e
pl
ace only. The cost of the fireplace,
amounting to $125.00
i
s
selected from the handbook
and is entered in
th
e
"Cost" column.
5.
Exterior Walls:
a.
Brick Veneer
:
TotaL_
_
_
_
_ _
_ _ _ _
_
_ _ _
_ _
_ _
_
_
_
__
_ _
_
_
_
_
_
$204.92
a
mea
s
ured
qu
an
tity
a
nd an inpla
c
e
unit price selected
from
Part
2
of the Cost Data Handbook, as
follow
s
:
Closed
stair.pin
e
t
re
ads
ds
riscrs,
13 risers
@
$3.25
=
$42.25
Steel
sash-3
light_____
_
_
_
___
5
units
@
6.40
=
32.00
" "-6 " -----------
5
"
@ 13.15
=
65.75
6" X 10" gird
e
r
20 lin.
ft.
@
.2
8
=
5.60
6"
x
8" "
-
-
--
--
----
--
- 14
"
@
.23
=
3.22
Lally column
&
footin
g
_
__
___
_
1
unit
@
4.90
=
4
.
90
Tile
drain llO
Jin.
ft.
@
.06
=
6
.
60
Drain
conn.
to
s
ew
er 40
"
@
.
8
0
=
32.00
Ar
e
a
grating
s
(
I'
O" X
4
'
0
"
)
X 2
+
(
2
'
0"
X
3'0
"
)
14
sq
.
ft.
@
.
9
0
=
12.60
UNDERWRITING MANUAL
I
l
1726
TotaL
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
755 sq. ft.
20
"
503 "
85 ,,
20
"
First
floor
,
_
_
_
_
_
_
_
_
_
24' 9" X 30' 6"
Bay________________ 3' O" X 6'
6"
Second floor
16'
6" X 30' 6"
Rear dormer________ 3' 3" X 26' O"
Front dormers______ 3' 3" X 3' O" X 2 =
Total
138
sq. ft.
The totals of the measurements of wood joist con-
struction and concrete slabs are entered separately in
the "Quantity" column, and descriptive notations are
made under "Explanation".
7.
Subfiooring:
b.
Concrete slabs:
Porch 8' 6"
X
12'
O"
= 102 sq. ft.
Front stoop 4'
O" X
6'
O"
= 24 "
Rear stoop 3' 0"
X 4' O"
= 12 "
No deductions are made for stairwell or chimney
openmgs.
Total; 1,530 sq. ft.
24' 9"
X
30' 6"
X
2 = 1,510 sq. ft.
3'
O" X 6'
6"
20
"
TotaL
664
sq. ft.
The measurements for 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:
= 297
sq. ft.
= 195 "
81
"
=
61
"
= 30 "
Length Height
Gables 24' 9" X 6' O" X 2
Rear dormer 35' 6"
X
5' 6"
Front dormer 9'
O" X
4' 6"
X 2
Bay 11'
3"
X 5'
6"
Porch Gable 12' O" X 5' O" X ~
b.
Wood siding:
1726
APPLICATION
OF COST
ESTIMATION METHODS
The partitions enclosing the
fini
s
hed room in base-
ment are measured without deduction
for
openings.
The measurements derived in
(
c)
and
(
d)
above are
entered
s
eparately
in
the
"Quantit
y
" column, and de-
scriptive notations are made under "Explanation".
41'
0"X7' 3" =
297
sq.
f
t.
•
The enclosing partitions of the
s
e
cond story, which
are
fini
s
h
e
d on one side
onl
y, are taken at
full
ceiling
height,
a
nd
the total
len
gt
h
includ
es
the
l
en
gths of
sides of dormers. The
l
e
ngths of dormer fronts
ar
e
not included
becau
s
e
the area of
the
enclosing parti-
tions located there approximately balance the
exc
ess
areas included along dormer sides.
c.
The total of wood stud
partition
framing
i
s taken
a
s
t
he sum of
(a)
and
(b)
abo
v
e
,
1344
+
365
=
1709
sq. ft.
d.
2"
gyp
s
um block
:
48' 8" X 7' 6" = 365 sq. ft.
Total;
1,
344 sq.
ft
.
No
deduction
s
ar
e
m
a
d
e
for the
a
reas of
c
himney,
firepla
ce
and door
openi
n
g
s
.
b,
Wood stud
framin
g
,
plaster
e
d on one
s
ide:
Le
ngth
He
i
g
ht
F
irst
s
tory
80
' 6" X 8' O" = 644
sq
.
f
t
.
Second
"
----
-
--
---
--
---
93'
4"
X 7'
6" =
700
"
I
deduction is made for
th
e
stairwell opening or
for
th
e
unfini
s
hed
ar
ea in
ba
c
k of the
e
nclosing partition
a
t
stair
w
ell.
8
.
Fini
s
h Floorin
g
:
The measurement of
this
com
p
onent is identical
in this
exampl
e
w
ith th
e
mea
s
u
r
em
e
nt
for Component
#7,
"Subflooring",
.
in
as
much as subflooring is indicated
for both floors and the
sam
e
finish flooring is specified
throughout. Therefore, the measurement is
t
a
ken as
1383
sq
.
ft. and entered in the "Quantity" column
opposit
e
Compon
e
nt #8.
A description of the finish
floorin
g
i
s
enter
e
d under
"
Explan
a
tion". The lino-
l
e
um
o
ve
r
y
e
llo
w pine,
s
p
ec
ified
for
the
ki
tc
hen, and
the tile
a
s
specified for bathroom, are measured and
describ
e
d under
Compon
e
n
t #21.
9.
Pa
rti
ti
on
F
raming
:
a.
Wood
s
t
ud
framin
g
,
plaster
e
d on two
s
ides
:
1726
UNDERWRITING MANUAL
834
sq
.
ft. -
210# Asphalt
shingles
;
Ar
e
a of roof over
reardorm
e
r
__ __
258 sq.
ft. -
tin.
1092 sq.
ft.
Total;
1,
112 sq.
ft.
The
measu
rem
e
nt for
r
ear dormer is taken from
its
inter
sect
ion 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
comput
e
d
a
s the product of
half
the slope
dimension and the perimeter of the bay.
b.
Roof sheathing:
The
me
as
urement for this element is taken equal to
.
the area of the
rafter
framing,
1112
sq. ft.
These measurements are entered
s
eparately in the
"Qu
a
ntity"
column and descriptive notations are
made under
"
Explanation".
12.
Roofing:
The total
m
e
asurement of roofing
i
s
identical with the
mea
s
ur
e
ment of roof framing. Three classes of roof
covering are specified and the separate quantities of
each class are computed as follows:
Total
ar
e
a of all roofing 1112 sq. ft.
Ar
e
a of roof over
bay_____
_
_____ 20 sq.
ft. -
copper.
Rear
d
or
mer
_
Bay
_
Porch
_
"
512 sq.
ft
.
83
"
72
"
39
"
258
"
20
"
128 .,
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
=
"
Front
_
Rear
_
TotaL
730 sq.
ft.
This measurement is
en
te
red in the "Quantity" col-
umn, and a notation is made under "Explanation".
11.
Roof
Framin
g
:
a.
Rafter
framing
:
10.
C
e
iling Framing:
Second floor 16'
6"
X 30'
6"
=
503 sq.
ft.
Rear
d
o
rmer___
___
____
3' 3"
X 26' O" 85
"
Front
dormers
3
1
3"
X
3
.
'
.
0"
X 2 = 20
"
Bay
3'
O
"
X
6' 6" =
20
"
Porch__
_
______
_
______
8' 6"
X 12' O"
=
102
"
1726
APPLICATION
.
OF COST
ESTIMATION METHODS
··
·
-
-
· ·
·--
·
-
--,
TotaL
_
~
-
-
__
-
_
_
6189 sq.
ft.
"
Le
ng
th Height
Basement
c
e
iling___
13' O" X
23'
O"
=
299
3
' O" X 5' O"
=
15
5'
6"
x
7' 6" =
41
3'
6"
X 5' O"
=
18
=
373
5816
"
1383
"
365
"
x
2
=
26
8
8
•
240
"
"
79
240
"
821
sq.
ft.
Exterior
walls:
Length Height
First story
102'
8"
X
8'
O"
Bay_
_
___
_
__
_
__
_
_
11' 3"- X 7' O"
Gable
s
___
_
____
_ _
16' O" X 7'
6
"
X 2
=
Dorm
e
r fronts
_ _
(26' O"
+
3'
O"
+
3' O") X 7'
6
"
Partitions
pla
ste
r
e
d
on
t
w
o
sid
es 1344
sq
.
ft
.
Partitions
pl
as
t
e
red
o
n
one~de
_
Ceilings of
first
a
n
d
s
ec
-
ond stories ---
-
_
------
-
-
--
--
I
(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
measuremen
ts
a
re entered separately in the
"Quantity" column, and notations regard
i
ng sizes,
shapes, and
mat
e
rial
s
are made under "Explanation".
c.
Splash blocks
:
Four
@
$0.7
5
=
$3
.00
This amount
$
3,00 is
en
t
ered m the column headed
"Cost"
14.
Plaster Base and
Pl
as
t
e
r:
a.
Metal lath and
pl
a
ster:
I-
The areas for
roof
s over bay and rear dormer are
taken equal to
corr
es
ponding areas of roof framing
under Component #11. These measurements are
entered separately in the "Quantity" column, and
descriptive notations are made under "Explanation".
No
measurement
s
a
re made of flashings, counter-
flashings,
vall
e
ys, ridges and saddles.
13.
G
u
tt
e
rs and
Downspou
ts
:
a.
Gutters
:
UNDERWRITING MANUAL
1726
1726
---i
!
Tot
aL
373
s
q.
ft.
These measurements are entered separately in the
"Quantity" column, and descriptions are noted under
"Explanation".
13' O" X
2
3' O"
=
299 sq.
ft.
3' O" X
5
' O"
=
15
"
5'
6"
x
7'
6" =
41
,
,
3'
6"
X
5
' O"
=
18
"
Total,
7,128
sq.
ft.
b.
Painting
basem
e
nt
concrete floor:
Ar
ea of
metal lath and plaster
6,189
sq.
ft.
Ar
ea of
plaster
on
g
y
p
sum
block
___
__
_
_________
479
u
Ar
e
a
of
plaster and
waterproof bond coat_______ 460
"
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
measurem
e
nt
is taken equal to
the total area of the plastered surfaces computed for
elements
(a),
(b),
and
(c),
of Component
#14, thus:
8'
6"
X 12' O"
=
102
sq
.
ft.
d.
Porch ceiling, wood, painted:
(18'
6"
+
23' O"
+
22' O") X 7'
3" =
460 sq.
ft.
o.
Plaster and waterproof bond coat
:
Length Height
(23' O"
+
17' O"
+
26
' O") X
7'
O"
=
479 sq.
ft.
The lengths of first story walls and bay are taken
from the dimensions used for element
(a)
of Com-
ponent
#
5.
The
are
a
s of partitions are taken from
mea
s
urements of
el
e
ments (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
dimen
s
ions for
t
he
ga
bles, dormer fronts, and base-
ment
c
eiling
ar
e
tak
e
n :from the drawings.
b,
Plaster on gypsum block:
APPLICATION
OF COST
ESTIMATION
METHODS
•
I
Tot
a
L
_ _
_
_
_ _ _ _ _
_
_
__
_ _
_
__
_
_
_
_
__
_
_
_
__
__
_
42 lin.
ft.
These measurements are entered separately in the
"Quantity" column, and descriptive notations are
made under "Explanation".
First story
(3' O" X 5)
+
2'
O"
= 17lin. ft.
Second
story 5'
O"
+
(3'
0"
X
2)
+
(2' O" X 7)
=
25
"
TotaL
598 lin.
ft.
The lengths of the first story exterior walls are taken
:from the dimensions used for element (a) of com-
ponent
#5.
The lengths of the finished basement wall
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
:
"
Deduction
for door
openings__________ (3' O" X 2 X 17)
+
(5' O" X 2)
+
(3' O" X 2)
=
118
716 lin.
ft
"
"
"
"
..
First story exterior
walls
114'
0"
+
11'
3
11
=
125
Second
story
gables
..
;
16' O" X 2
=
32
Dormer
fronts_c_____
26'
0
11
+ (3'0"
X 2)
.
;:,,,
32
Partitions
finished on
two
sides
.
__
(80'
6"
+
93'
4")
X 2
=
348
Partitions
finished on
one side_______________________________ = 49
;.,,
130
lin.
ft.
Basement
rooms_____
66' O"
+
63'
6"
o,
Running
Trim:
TotaL
2
Living room
1-(4' 9" X 7'
O")
Dining
"
_
_
_
_
_
_
1-(2' 8"
X
7'
O")
TotaL
17
b.
Cased openings
:
Basement_________
2
First
story________
5
Second
story,
_ _
_
_
_
10
16.
Interior Doors and Trim:
a.
Interior
doors
:
1726
UNDERWRITING MANUAL
Total------------------------------
-
----------
$126.85
Tot
a
L
~
--
--
- $120.40
Applicable inplace unit pric
es,
selected from
Part
2
of the handbook, are multiplied by the above num-
be
r
s
of
units to obtain the
c
ost of each. The total
amount
r
e
sulting from adding together all the indi-
vidual
c
o
st
s
is entered as a lump sum in the column
h
e
aded
"Co
s
t"
opposite
"Ext
e
rior Detail."
19.
Cabin
ets and Interior Detail:
Ki
tc
hen
Ca
b
i
nets
:
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 Cabi
ne
t___
_____
__
__
_____
__
_ _
___
_
_
_
__
9.
75
Cabinet located in
basement___
_
__
_
____
____
__
___
_____
_
___
30. 00
Tot
a
l---
--
------
--
-------
~
'
--
--
--
-
$97.
25
This element embraces completely installed items for
which inplace unit prices are selected from
Part
2
of the handbook. Therefore, no detailed measure-
ments are
mad
e
.
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 nota-
t
i
on is
m
a
de under "Explanation."
b,
Exterior detail
:
Entrance
steps
(6' O" X
2'
O")
+
4' O"
=
16
lin.
ft.
@ $0.55
=
$8
.
80
Porch columns
, , 6"
X
6"
8
units
@
6.20
=
49.60
" " 4"
x
6"
2
"
@
5
.
60
=
11.20
Por
c
h beam
8"
X 10"
(9' O" X
2)
+
12' O"
=
30 lin.
ft.
@ .50
=
15.00
Shutters_______
_
5 prs. @ 5.00
=
25.00
(
-
Iron
railings
_
____ 3' O" X 2
=
6 lin. ft.
@
1.80
=
10.80
1
M
a
in
entrance
;..
$53.
20
1
Porch
door-
--
-----
~
---
---
24.
55
1
:Re
a
r entry
door
19.50
Tot
a
l
-
----
--
~
---
-
---
-
----
-
----
-
---
-
-----
16
The total number of windows is entered in
the
"Quantity"
column, and a description of
the
.
type is noted under
"Explanation."
18.
Entrance
a
n
d Exterior
d
e
tail:
a.
Entrances:
17.
Windows:
First
storY------
--------------
~-
------
-
------
9
Second
storY--
-
------
--
-----'----
-
--~"'"""'""'----
--
7
1726
APPLICATION
OF
C'OST
·
ESTIMATION
·
METHODS
•
I
f
Carried
forw
a
rd
-
-----------------------------
213. 00
TotaL----
133 sq.
ft.
of linoleum
The
unit
prices selected for the above special floors
and wainscoting, are the differences between the
unit
prices of the special materials and the
unit
prices of
the materials which are replaced. These measure-
ments are entered separately in the "Quantity" col-
umn, and the
clas
s
es
of materials specified are 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
p
e
de
s
t
a
l
lavatory,
27 X
22"
--
------
43. 00
1
Vitreous china tank
a
nd closet
combination__________ 45. 00
1
Enameled iron sink with apron front,
60 X
22" ----
53. 00
TotaL
86
sq.
ft
.
of glazed
tile
o.
Kitchen floor:
9'
0"
X
13'
4" =
120 sq.
ft.
2'6"
x
5'0"=
13 "
Applicable inplace unit prices :from the handbook
are multiplied by the above estimated quantities to
obtain individual costs. The total of these costs, fig-
ured to the nearest whole dollar, is entered as a lump
sum amount in the
'
1
Cost" column opposite Com-
ponent
#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:
4'
O" X
5'
O"
=
20
sq.
ft.
of
ceramic tile
b.
Bath wainscot
:
11'
0"
x
3' 6" =
39
sq.
ft.
10'
0"
x
4' 8" =
47
1726
UNDERWRITING MANUAL
r-·····
c
.
Co
s
t
of
addition
a
l
h
ea
tin
g
equlpm
e
nt.,
$
552.
0
0
Th
e
inpla
ce
unit pric
e
of the
sp
e
cifi
e
d heating equip-
m
e
nt
,
as assumed in (a) above, is the contractor's
D
i
ffer
en
ce
-----
-
---
-
---
-
---
--
--
-
---
-
-------
-
---
$
5
02.
00
Allow
a
nce
for contractor'
s
o
v
erh
e
ad
a
nd proflt.,.,
50
.
00
a
.
Au
t
omatic,
forc
e
d
c
i
r
cul
a
tion warm
air,
oil burn-
ing unit,
includin
g 275
gall
o
n fuel tank, and sup-
p
ly
a
nd
return
duct
s
$7
60
.
00
b.
Gr
a
vity warm
a
ir, band-fired,
co
a
l
burning unit,
includin
g supply and
return
ducts_____
_
______
2
5
8
.
00
Applicable inplace
unit
prices are selected from the hand-
book and the total costs are entered as
s
e
parate lump sum
amounts in the column
head
e
d "Cost". Descriptive nota-
tions are made under "Explanation''.
~3.
Heating:
The subject building indicates an automatic, oil fired,
forced circulation, warm
air
heating system.
In
the
ab
s
en
ce
of detailed specifications, an inplace unit
price
corr
es
ponding to the type of heating equipment
assum
e
d is
s
e
lec
t
ed from the handbook. The
unit
price for the customary type of
h
e
ating
e
quipment
is also
s
e
lect
e
d from
th
e
h
a
ndbook. The
diff
erence
betwe
e
n these two
inpla
c
e unit prices is the cost of
additional
m
e
chanical equipment, and
it
is computed
as
follow
s
:
=
$63.00
1
Automatic
h
e
ater, 30
gaL----
-
--------------------
-
$60
.
00
Gas
conne
c
tion
for water
beater____________________ 3. 00
o.
Water heater:
'
I
$62.00
1
·
Vi
t
reous china
tank and
closet combination
$35
.
00
1
Enameled iron,
lavatorY--
-
---
-'
--------------------
27.
00
b.
Lavatory:
$279.00
Bro
u
ght
forward-----------------------------
$213.
00
1
pair
of
ceme
nt
laundr
y
trays
_
_____
_
____
_
__
__
______
12
.
00
Extra for
c
opper piping,
7
fixt.
@
$1.75_
_
___________
12.
00
Water
s
ervice 40 lin. ft.
@
.
30
-
---
--
-------
12
.
00
S
e
wer
c
onnection 40
lin
.
ft.
@
.75_____________
30.
00
1726
APPLICATION
OF COST ESTilV[A.TION METHODS
TotaL
-
_ _ _ _
3 power outlets
1
outlet
for electric range
1
"
" oil
burner
" laundry
machine
"
1
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 pur-
pose of this measurement, each outlet for lighting
fixtures, switches, and convenience receptacles is con-
sidered
one
outlet.
b.
Power wiring:
•
I
Basement:
Sidewall Reesp-
Celling Switch tacles
Recreation
room~---~--
4 4
Lavatory
________
_
____
1
1
Stairs
______________
_ _
1 1
Laundry
______________
2
First
Story:
Living room
__
_
_______
2
8
4
Porch
___
c __
-
·
- _
~
_
_____
1
Stairs
__
c _____________
1
4
Stoop
___
__
___
c-------
2
Dining room
__
____
----
1 1
2
Kitchen ______________
2
1
2
Second Story:
Reeep"
Ceiling Switch
Sidew
a
ll tacles
Master bed room ______
1
1
3
Hall
___
__
__
--
---
_____
1
2
Bedroom
__
-----
______
1 1
2
Bath
_
__
c _____________
1
1
1
Bedroom
___
_
_________
1 1
2
12
·
16 16
20
Total
=
64 outlets
cost of the equipment called for and no entry of this
amount is made. However, the inplace unit price of
the customary heating equipment, $258.00 from (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:
1726
UNDERWRITING MANUAL
628
sq
.
ft.
The dimensions used above are the same as those
used in
compu
t
ing the area of ceiling framing under
Component
#10,
except
that
the area of porch ceiling
is not included.
The
m
e
asurements for wall and
ceil
i
ng insulation are
entered separately in the "Quantity" column, and
descriptions of the
m
a
terials
ar
e
noted under "Ex-
planation". The
insu
l
ation materials
measured
·
un-
der this
c
omponent are restricted to those which are
S
e
cond
flo
o
r
1
6
'
6"
X 30'
6" =
503
sq
.
ft.
R
e
ar
dorm
e
r_
_
__
_
_
_
__ __
3'
3"
X 26' O" 85
"
Front
dormers
3' 3"
X 3' O" X 2
=
20
"
Bay
.
3'
O
'
'
X
6' 6"
=
20
"
2,
148
sq.
!t.
The lengths of exterior walls,
s
hown above, are taken
from the dimensions used to compute areas of exterior
walls under Component
#5.
The dimensions
for
enclosing partitions of second story are those used
for
element
(b)
of Component
#9.
b.
Ceilings:
346
sq.
ft.
257
"
511
"
96
"
297
"
195
"
81
"
365
"
Length
Heigh
t
Front--
--
--~
-
--
-
---
--
30'
6"
X
ll' 4"
Rear 22'
8"
X 11'
4"
End 24'
9"
X 10'
4"
X 2
=
Bay
ll' 3"
X
8
' 6"
Gables 24'
9
"
X 6'
0"
X 2
=
Rear dorner 35'
6"
X 5'
6"
Front
d
o
rmers
_
_
~
__
_
__
9' O" X 4'
6"
X 2
=
Enclosing partitions
__
-48'
8"
X 7'
6"
The number of power outlets is entered in the "Quan-
tity"
column.
o.
Service Panel:
This
item
is entered in the "Quantity" column as
"1
panel" and a
de
sc
ription is noted under "Expla-
nation".
es.
Lighting Fietures:
An allowance of
$50.00
i
s specified
for
.
the
.
lighting
fix-
tur
e
s
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.
Insulat
i
on:
a.
Walls:
APPLICATION
OF COST
ESTIMATION
METHODS
•
I
$56.20
The computed
co
s
t
of this element, amounting to
$56.00,
is entered in the "Cost" column
opposit
e Com-
ponent
#27,
and an
a
ppropriate notation
i
s
made
under "Explana
t
ion.
"
1727.
Selection of
Inplace
Unit
Prices.
Aft
e
r
a
ll of
the
compon
e
nts
h
a
ve been
meas
ur
e
d
,
the
appli
c
able
Inpl
ace
Unit
Pric
e
s
,
to three
de
ci
mal
pl
aces
,
a
r
e
se
l
e
ct
e
d from
Part
2
of the Cost
Data
H
a
ndbook and entered in
th
e
"U
nit
Price" column opposite
16
windo
ws
@
$2. 50
=
$40. 00
3
doors
@
5.
40
=
16. 20
installed exclusively for the purpo
s
e of
insul
a
tion.
Insulation
m
a
teri
a
ls used primarily as a
ba
s
e for
plaster or as an interior wall or ceiling surface are
not measured under this component inasmuch as they
are considered
part
of and included in Component
#14
"Plaster Base and Plaster".
tJ7.
Miscellaneous:
The subject drawings and specifications are carefully re-
viewed to
disclos
e
any
elem
e
nts or items which have
not been measured previously. This review indicates
the following items which have not been included
under other components: parcel receiver, kitchen
ventilating fan, mechanical refrigerator, and weather-
stripping for all openings above basement. These
miscellaneous
elem
e
nts are treated in the following
manner:
a.
The inplace unit price of parcel receiver selected from
the handbook is entered in the "Cost" column and a
description of
it
is noted under "Explanation".
b
,
The inplace
unit
price of kitchen ventilating
fan
is
selected from the
h
a
ndbook and
it
is
enter
e
d directly
in the Summary of Cost Estimate on the
fa
c
e side of
FHA
Form No. 2053 on the line opposite "Addi-
tional mechanical equipment", as illustrated.
c.
The cost of the
mechan
i
cal refrigerator is not included
in
this
estimate inasmuch as
it
is assumed here to be
a chattel.
d,
The cost of weatherstripping is computed from the
number of openings
so
equipped and the
inpl
ac
e
unit
prices designated in
P
a
r
t
2
of the handbook, as
follows:
1726-1727
UNDERWRITING MANUAL
SUMMARY
OF
REPLACEMENT
COST
Sq.ft.
1443
•
I
I
End
row
2
I
I
t
Row
I
IX
IX I
I
I
I
IK
IX
Semi-detached
NVUU
Cll'
ltromid
IVl()DIRCATION OF •SQUARE-FOOT
cosr
Square
foot
rot:t·------·-------·----------S 4.58
gu.tityadju.tinent~
..•.••
-···- 98
%
4: 49
Looallt~!~~·F;;.;·c~
--··----~-~----~-~$I
4. 36
I
o
<
'
I
I
I
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 com-
ponents or elements of the components. The individual costs so
obtained are entered in th~ "Cost" column. The costs of some com-
ponents or elements of components for which no measurements occur
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 components or 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 "Modification of 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 specified for the subject building
are reflected by 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 as-
sumed in the development of the Inplace
Unit
Prices. 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
"l\fodifi-
cation 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.
APPLICATION
OF COST
ESTIMATION
METHODS
1727-1729
•
I
Sq
ft.
1443
A
c
ALCULA-
.....
"-
ElPUW.1.ftOW
QUAtmn' mm Ulm...,. CQft'
OJ' COJlroJIUT
1.
Excavation
6~6" DEED 201
C~D
.550 111
2. Foundations:
TR'"'nH
6 .900 5
Footings
8"Xl8"
CONCRETE 144
L.FT.
.27 39
wan.
1n
1
1ft4'1H''H~ft
CON';;R"TE 827
S.FT.
.324 '>68
6"
"
318
"
.25
80
,..
"
"
87
'
.307 27
-·Boor
,.
,.,...,,, MONO. FINISH
775
.120 93
s..men&-.itials 20"
a.
Chimney
31
·
~T
"·6"
Al>
4.
l'heplMe
'""
&.
E::derior
walls
fi'CE
BRICl< VENEER 1149
S.FT.
.541
622
~RAM."
all•
SIDIN'-'
664
.
287
IQI
6.
Floor
bming 2X10-11i"Q.Q., #I
.Y.P.
153n
.
1?4
IQn
4"CONCRETE·· MONO. FINISH. 138
.•
140 19
••
Oubftooring
l"v"" '#'>
Y.P. DIAGONAL
1~8"
-~
.067
Q3
8.
Finisb flooring
Ob"X21'4""' ,,..,
WMITI' OAK 1383
.
.189
'>H
9.
Partition
fr&ID.ing
i>
X
4 -16"n,r.
.,.., Y.P. 170Q
"
.n7'.'I
'""
'>"
r.yp~UM
"L"""
!>Q7
.
"""
17
10. Ceiling framing
2
X6-l6"0.C:tr1
Y.P.
'730
"
.n53 ~9
11.
Roof
framing
2 XS -16"0.C
•.
'li'I
Y.P. 1112
.
.060 67
Sheathing
~!i\U
Y.P.
II 12
.
:m-
,__ID~--'-
12. Roofing
0 A~HALT SHINGLES 8~~
;:
8~
,2:fo.i
PPER
ncn
"
""'
ta
Gutters
5" MOULDED COPPER
16
oz.
118
L.FT.
,55 65
Do\VWlpouts
3"X4
COPPER
16
OZ.
73
s.rr
~60
__
Pi~-
14.
Plaster
beee and plut.er
-2.3
• ~APmrM>~Jrfl~TAI.: 64~&- ~~
8-
-r,
CO.fi
S
•
!!,,.,_.,,.
;;;Cl<n•-
'16"
.
~~!~
15.
Deoontlng
'"""".s'""
~-~TC:~
..
-.
..."°
.
.
nu
18.
Interior
doon ~'c:Tnn"
W,D
2'·8"
x •'-8" 17
....
~
11
.. ,an
<>7n
Running trim
STOCK W.P. 598 L.FT. .145
87
"°"So"T
SH~LVI
Nti
...
e
"
~n
....
17. WindOW8
D.H.STOCK W.P.
12
LIGHTS
16
tlNIT!'
16.80
269
SPLASH BLOf:KS 3
18. Entrance
I
ENTRAN,;,.:
I
POR"H
I R~R
-
-
-
a7
Exterior detail
-
- -
120
3 "'-"PINE CEILIN" 10? l.,i:T. 1n7
II
19. Cabinets
41
$.FT.WALL-
so c "T. "LnnR
-
- -
'"7
Interior
detail
CASED
OPENINGS 2 e
6"
I
7
20.St.airs
OAK
TREADS PINE RISERS
15
RIS
e,
on 7"
21. Special
floors
'iiATu
~"RAMt"r. WHIT"
ru "
<>n
e-r
7n
14
Special
wainscot
~
4'X4
'GLAZED"
.
86
"
.90 77
t<ITCHEN
FLOOR
LINOLEUM
+PINE
FOOR
f'I~
"
.r
o
13
22. Plumbing:
COPPER
WATER
PIPING
- - 279
Extra. bathroom
Stall shower
Lav&tory
62
Toilet
WATER HEATER AUTOMATIC
30
GAL.
GAS
63
23. Heating GRftVlTY
WARM
AIR
a
Dur:Ts
noa
:M.
Electric
wiring
BX CABLE
64
OUT• 1.1':0
0
02
Service panel
PANEL~'ii 15.00 POWER
our•
ET"
3
9.50
44
25. Lighting fixtures
SPECIFIE~ii
ALLOWANC~ ~n
26. Insule.tion:
Wall
MINERAL W~,OL B~TTS 2148
S.FT.
.062
133
Ceiling
628 .062
39
~. Miscellaneous
PARCEL RECEIVER
A
WEATHERSTRIPS
16
w1Nnows
"
eooas
""
2
COATS
nN ·.,,N, c.-M. FLnnR
37"
"
"'17
14
TOTAL Ccee
OF
CoruoNENTS
6013
CONTRACTOR'S OVElUDlAD
.A.NJ>
P~FI'l' 600
To•uL 6613
SQUAU: FoOT Co&T s 4.58
2053-Coat Eslimate-lnplaee Unit Method
1729
UNDERWRITING MANUAL
n
.....
s
20.00
$
16
.oo
s_135.00
lolainlluildh1a
•.•
--····························'···········
--''=4-'14-"-3_ llq.rt.@ 4.36
°"'"""·························-'Q ..
ll..?.Q..................
200 Sq.Ii.
@
_
_,_1.._..2""5-
c»her Improvement&:
AwJb-..,J:~-~-f!!<!!: 78 Sq.rt.@
025
Walks_C,~.l\..2!)..:t.titl
..
ll..1.ll)
89
Sq.
rt.
@
•
I
8
Driveway1,~.7..K~_g2JB!.Q~_l8)
6
4
Sq.
rt.
@
·
•
2 2
Addi•ionai rnecrumlcat equipment KITCHEN FAN
($ 22.00)
AUTOMATIC FORCED
WARM
AIR AND
011..
SUMMARY OF
REPLACEMENT COST
1443
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
terri-
tory. Where necessary,
they
are tabulated separately
for
differ-
ent 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 predom-
inantly
brick veneer, 97% is selected as the Locality Adjustment Per-
centage. The selected percentage is entered in the space provided for
"Modification of Square Foot Cost" on the face side of
FHA
Form No.
2053.
The square foot cost already adjusted
for
quality is then modi-
fied 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 accessory buildings, 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
APPLICATION
OF COST
ESTIMATION
METHODS
1730-1731
•
I
1732.
In
order to complete the estimate of
total
replace-
ment 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
co
s
t
obtained from the handbook.
c.
Costs of accessory buildings, walks, terraces, and driveways
are computed separately from
es
timated
area
s
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 specified
for
the
subject building in excess of allowances included in the
Square Foot Cost. The additional amounts have been
computed as described in
paragraph
1726
under Com-
ponents
#23
and
#27,
and their combined total has been
entered
·
in the total column.
e.
The allowance
for
Architectural service is determined ac-
cording to the instructions contained in Section
16.
It
is
assumed for this example
that
limited architectural serv-
ice is usually obtained
for
similar projects 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 replace-
ment cost is the Estimate of Cost Required to Replace
Building Improvements in New Condition.
1732
UNDERWRITING MANUAL
Effective
February
,
1938
Federal Housing Administration
Par
a
g
r
aphs
Gen
e
ral
In
s
truction
s
--------------
---
------
--
----
-
--
-
----
--
----
-
-
'-
1801-1806
Economic
Ba
ckgrou
n
d
Data
1807-1844
Economic
Back
g
round
R
a
ting
F
o
rm-----
-
----
-
-
-
---
-
--
-
-----
-
-
-
1811-1842
File of
E
c
onomi
c
Back
gr
ound
Rating
s
a
nd
Summari
e
s
1843-1844
Valuation
a
n
d Location
Rating
Dat
a-
------------
---
------,------
-
--
1845-1868
File of
E
s
t
a
bli
s
hed
Ra
t
in
gs of
L
oc
ation
s
-
--
----
-
--
-
1849-1851
Fil
e of
Va
luati
o
n and
Lo
c
ation Record
C
ard
s
1852-1855
Subdivi
s
ion
Fil
e
------
-
-------------
--
--------
-
------------
--
-
1856-1857
R
ea
l
E
s
t
a
te
Mark
e
t
Dat
a
File------
-
----------------------
-
---
1858-1859
File of
M
a
ps
and
Plat
s
--
-
------
-
------
-
-
-----------------
-
--
-
-
1860-1861
File of
Data
on Legal
S
tatus of
Property
1862-1863
File of Population
Stati
s
tics----------
-
---------------------
-
--
1864-1865
F
ile of
R
e
ntal
Income
Property
Valu
a
tion
Dat
a
1866-1868
Prop
e
rty Rating
Data-----
-
------
-
-
--------
-
-------------
--
----
-
--
1869-1878
File of
E
s
tabli
s
h
e
d
Ratin
g
s of Physical Security
1871-1872
File of
E
s
tabli
s
h
e
d
Standard
s and Requirements
1873-1874
File
of
T
e
chnical and Advisory
Data----
-
----
-
----------------
-
1871>-1876
File of
Catalogue
s of
Con
s
truction
Mat
e
rial
and Equlpment.,
1877-1878
Borr
o
W"
e
r Rating
D
a
ta----
--
----~-------
-
---------
-
-----
-----
--
-
-
1879-1883
Mortgage
Insurance
Allotment Record
File_____
__
___
____
___
_
___
1880-1881
Credit
D
a
ta
Fil
e
--
-
------------
-
------
--
-
--
-
---
--
------
-
--
--
--
1882-1883
Con
s
truction Cost
Data-------------
--
----
-
-----
-
--------
---
------
1884
\
CONTENTS
SECTION
18
COMPILATION AND RECORDATION OF DATA
PART V
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
a
re an established
part
of the routine of
under
-
writing activity and are essential in the
int
e
rests of uniformity,
con
-
si
s
tency, and
acc
ur
ac
y. The
follo
w
ing
in
s
tructions deal with the
s
our
c
es of informa
t
ion, the procedures
to
b
e u
se
d
in
compiling data,
the
an
a
ly
s
is and
int
e
rpretation of
da
t
a, and the recordation of data
in forms
sui
t
able
for
u
s
e.
They do not
de
a
l with the application of
the data to
v
a
lu
a
tion and
rating
probl
e
ms. The use of data is pre-
scribed and
de
sc
rib
e
d in other sections of
t
hi
s Manual.
1802.
Sound underwriting
p
r
a
ct
ice depends on adequate
data facilitie
s
.
The quality of data
d
e
t
erm
ines the limits of the
zones within which estimates of all kind
s
w
ill fall. These zones
must be narrowed to practical limits
whi
c
h are sufficiently close to-
gether
t
o
give
r
eas
on
a
ble certainty to
c
onclusions and decisions.
1803.
Data compilation
mu
s
t
embra
c
e a recognition of
the many
qu
a
liti
e
s of
d
a
ta. The
s
ignifi
cance of any compilation is
modified by
t
he probable accuracy of
th
e
i
n
formation which
it
con-
tains. The quality of data may be
jud
g
ed in
part
by the sources
from which
th
e
y come, and in
part
by the
n
a
ture of the material itself.
1804.
The sources of
informat
i
on are usually local. Lit-
tle of the inform
a
tion is secured by actual surveys made by the
Underwriting Staff. Most of the data
a
r
e
a
s
se
mbled from secondary
sources.
Su
g
g
es
t
e
d sources are outlined
b
e
low in connection with
the several kinds of data to be
se
c
ured.
Oth
e
r data
are supplied by
ce
rtain
divi
s
ion
s
o
f
Wa
s
hing
t
on
Headqu
a
rt
e
rs
,
s
u
c
h
as the Technical
Division and the Di
v
ision of Economics and Statistics.
1805.
The following items are contained in the typical
Insuring
Office
d
a
t
a recordation system
:
a.
Fil
e
of Economic Background Ratings and. Summaries,
FHA
Forms No. 2096 and 2096a.
The Chief Valuator is
PART V
SECTION
18
COMPILATION AND RECORDATION OF DATA
)
•
I
r
es
pon
s
ibl
e :for
thi
s file
w
hich contains the results of ex-
aminations of Economic
Bac
kground .Areas.
b,
File of Established Ratings of Locations,
FHA
Form No.
f3
0
893
.
Th
e
Chie:f Valuator is
respon
s
ible
for
this file
which
cont
a
ins the results of examinations and studies of
selected
location
s in outlined neighborhoods to
e
s
tabli
s
h
comparison
criteria for
Iocation
rating
activities.
o.
File of
Val
u
a
t
ion
a
nd
Lo
c
ation Record. Cards,
FHA
Form
No.
1!073
.
The Chief Valuator is responsible
for
this file
which contains
on
e card for each case processed.
d.
Subdi
v
ision File,
FHA
Form
s
No.
'£0
8
4 and
'E
084a.
Thi
s
file contains the
result
s of
examin
a
tions of subdivision
proje
c
ts and the Chief Valuator is responsible
for
it
s
maintenance.
e.
Real Estate
Mark
e
t Data File.
This file contains
data
on
rentals, sales,
oc
c
upancy,
con
st
ruction and other aspects
of residential propertie
s
,
also
s
ignificant community and
neighborhood
characteri
s
tics including trends and transi-
tions. The Chief Valuator is responsible :for its main-
tenance.
f.
File of Maps and Plats.
Maps of cities, city plans, zoning
plans, and plats of subdivisions are the responsibility
of the
Chi
e
f
Valuator and are displayed on racks, stored
in
case
s
,
or appropriately filed in folders.
g. File
of
Data on
L
e
gal Status
of
Property.
The Chief
Valuator
i
s
respon
s
ible for
thi
s file which contains data
pertaining to
titl
e and other
leg
a
l
asp
e
cts of ownership and
tenancy, distinctions between chattels and real property,
and legislative
ena
c
tments or
policie
s
affecting the
re
a
l
estate market.
h. File of Population
Stat
is
ti
c
s.
The Chief
V
a
luator is
r
e
-
sponsible for this file which contains population statistics
suitable for use in making
mark
e
t
analyses,
e
c
onomic back-
ground
ra
t
ings,
economi
c
life
e
s
timat
es
,
valuations, neigh-
borhood analyses and location ratings.
i.
F
i
le
of
Rental
In
c
om
e
Prop
e
rty
Valu
a
ti
on Data.
This file
is maintained by the Chief Valuator and contains infor-
mation and experience data of use in making estimates
of
revenu
e
s and
oper
a
ting expenses of rental income
properties.
j.
File of
Establi
sh
e
d
Rating
s
of Physical Security.
This file
is prepared and maintained under the
dire
c
tion of the
Chief .Architectural Supervisor and
s
e
rves both the .Archi-
te
c
tural
Section and the Valuation Section
a
s
criteria data
1805
UNDERWRITING MANUAL
in connection with the establishment of correct ratings of
properties.
k:
File of
Eetobtished
Standards and Requirements.
These
are files of the Property Standards, Minimum Construc-
tion Requirements, and rulings on new methods of
construction established by the Technical Division, Wash-
ington Headquarters. The Chief Architectural Super-
visor 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 Archi-
tectural Supervisor and contains advisory data on the
utility, durability, strength and other qualities of ma-
terials.
m, File
of
Catalogues of Construction Material and Equip-
ment.
Manufacturers' catalogues, building material ad-
vertising 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 con-
nection with the estimation of the replacement cost of
buildings.
o.
Mortgage Insuranoe Allotment Record File.
The Chief
Mortgage Risk Examiner is responsible for this file which
reflects the current status of formal commitments issued
with respect to a borrower for whom more than one com-
mitment 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 recur-
ring consideration. The Chief Mortgage Risk Exam-
iner 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 effective use of the data by the staff.
In
addition to the items listed above, each Insuring
Office
should estab-
lish a
General Subject File and Library
in which miscellaneous pub-
lications, reports, surveys, newspaper articles, and other items of
value are made available to the staff. Economic trends and busi-
1805-1806
COMPILATION AND RECORDATION
OF
DATA
I
j
•
I
ECONOMIC
BACKGROU
N
D DATA
1807.
Econo
m
ic Background Data
co
n
si
s
t
of
compl
e
ted
Economic
Ba
c
kground
R
a
tings,
FHA
Forms
No
.
2096 and
20
9
6
a
.
These
data
b
e
ar great
s
i
g
nifi
ca
n
c
e
b
eca
u
se they
refl
e
ct the income,
employment, and other
fa
c
tors
whi
c
h
cr
e
ate
citi
es and
influenc
e the
extent, char
ac
ter, and
di
rec
tion of
cit
y growth.
1808.
Underl
y
ing economic factors within an
Econo
m
ic
Background Area will be revealed through the Economic
B
a
ck-
ground
Rating
Form
w
hi
c
h
i
s
compil
e
d from (a)
s
tatistics dealing
with the
vo
l
ume, trend,
a
nd
compo
s
i
t
ion of
popul
a
t
ion, (b)
c
om-
pilations
r
e
l
a
ting
to the
c
yclical
flu
c
tuations, trends, and diversifi-
cations of
industrial
em
p
loyment, and the cyclical fluctuations and
trends of
c
ommercial
a
n
d specialty
e
mployment,
(
o
)
informatio
n
pertaining to
n
a
tural
r
es
our
ce
s,
so
c
ial
a
nd cultural
advantage
s
,
bu
s
i-
ness
conditi
o
ns, and
le
g
i
s
lative
poli
c
i
es
,
and
(
d)
fa
c
t
s
con
c
erning
geographical,
meteorolo
g
ical and
to
p
o
g
raphical
ch
a
racteristics of
the area.
1809.
Infor
m
a
t
ion and
st
ati
s
tics
u
s
ed to compile
E
c
o-
nomic
Back
g
round
Dat
a should be
v
ery carefully
w
eighed and
s
e-
lected. A
l
arg
e
portion of them
w
ill be drawn from other data files
of the
Insuring
Office,
n
a
mely: Real
E
s
tate Market Data File, File
of Maps and
Plats,
File of
Data
on
L
e
gal Status of
Property,
and
File of Population
Stati
st
i
c
s.
The
r
e
m
a
inder will
be
drawn from
sources tabulated in
P
a
ra
g
raph
1844.
1810.
0
omp
i
lation
a
n
d
Rec
ordation of
Ec
onomi
c
Ba
c
k
-
ground Data.
Chief Valuators are
d
i
r
ec
ted to
t
a
ke
the
follow
i
ng
steps
in
establishing
Eco
n
omic
Backgro
u
nd Ratings:
a.
One Valuator
i
s
designated,
w
henever
po
s
sible, to
m
a
ke
a
nd to
revie
w
periodic
a
ll
y
Economi
c
B
ac
kground
R
a
t-
ings. This work is under the direct supervision of the
ness
condition
s
may
b
e
ob
s
erved thro
u
gh the mediums of
tr
a
de
journals and financial publications. Economic studies and the pub-
lications of mortgage
l
e
nding
in
s
titution
s
provide a background for
the work of Mortgage
Ri
s
k Examiners. The Chief Mortgage
Ri
s
k
Examiner should mark material of
p
a
rticular
value and require
it to
be read by the members of the staff of the Mortgage Risk
Section. The same
materi
a
l will
fre
q
uently be of
i
n
terest to other
sections. All
data
compiled are
the
p
r
op
e
rty
of the Federal Hous-
ing
Admin
is
tration
and should
alway
s be available to the Director
and
member
s of the Underwriting Staff. They should not be kept
in desks or locked files as this may
cau
se
g
reat
inco
nv
enience
during
the absence of certain
m
e
mbers of the
s
taff from
t
h
e
office.
1806--1810
UNDERWRITING MANUAL
Chief Valuator, who is held responsible
for
its proper
continuance.
It
is highly
d
es
irable
that
the area being
rated be visited, although
it
is not always necessary.
b,
Are
a
s
for
rating
are selected on the basis
of
the volume of
bu
s
iness, in order
that
the
r
a
tings will be properly com-
pleted
at
an earlier date in
tho
se areas where current
busi
ne
ss is the greatest.
o.
E
c
onomi
c
B
ac
kground
Ra
t
in
gs
s
h
a
ll be made
in
accord
-
a
n
ce
w
ith
the
s
e
instruc
t
ion
s
for all areas from which
10
or
mor
e
mortgage
insuran
ce
a
ppli
ca
tions have been re-
ce
i
v
ed. Other areas may
b
e
rat
e
d on a comparative
basi
s
.
d.
Two
E
c
onomic Background
Rati
n
g
·
Record Cards,
FHA
Form No. 2096a, are prep
a
r
e
d
for
each
rating
made. To
facilitate frequent
referenc
e
,
a
c
a
rd for each area rated
s
hould be filed alphabeti
c
ally in the Valuation and Loca-
tion
R
ec
ord file.
e.
Immedi
ate
l
y upon
ra
t
ing an
ar
e
a and completing
FHA
Form No.
2096
a
,
three
r
e
por
t
s
are transmitted to the
Underwriting Division,
Wash
i
n
g
ton, D. C., as follows:
1.
A
s
ummary report on
th
e
E
c
onomic Background of the
are
a
,
paralleling those
r
e
p
orts supplied
Insuring
Offices
by Washington
H
ea
dquarters
2.
C
om
pleted Economic Background Rating Form,
FHA
Fo
r
m No.
2096
3
.
O
n
e
completed Economic
B
ac
kground Rating Record
Ca
rd,
FHA
Form No.
2096
a
1811.
Economic
Background Rating
Form.
The Eco-
nomic Background Rating Form
provide
s three categories:
a.
111.d
us
try
(Manufacturing,
As
se
mbling, Fabricating and
R
e
fining)
b,
Specialty
(Embracing
activitie
s
not specifically covered
under
Industry
and Trade,
su
c
h
as exploitation of
natural
resources, tourist resorts,
education
a
l centers, and political
capitals.)
c.
Trad
e
(Trade, Finance, and
Tran
s
portation)
1812.
The initial
s
tep is
t
he
g
a
thering of information
pertinent to the
e
c
onomic structure of the area under consideration.
This material embraces, (a) the nature and history of the principal
economic activities prevalent in the
are
a under consideration,
(b)
the nature, size and stability of industrial and commercial activities
within the area,
(
c
)
population trends, including rate of growth and
1810-1812
COMPILATION
AND RECORDATION OF
DATA
•
I
racial, age, and :family distribution,
(
d)
natural
resources, and
(
e)
miscellaneous items such as type of tenure prevalent in the commu-
nity, distribution of incomes, taxation policies and schools and cul-
tural
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 impor-
tant
guides to judgment and should be fully considered.
1813.
The next step is to analyze the material to de-
termine which categories apply 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 economic background
being considered,
it
is omitted.
This
determination is made by ascer-
taining whether 5% or more of the persons employed in the Eco-
nomic Background Area are employed directly in the activities cov-
ered 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 em-
ployed in
Industry
and Specialty activities cannot be determined
from statistics, reasonable estimates should be made. The percent-
age of the total number employed in each
of
the applicable cate-
gories except Trade is multiplied by two to determine the weight.
This calculation is necessary under the assumption
that
for each per-
son employed in the activities embraced in the category there is
another employed in 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 em-
ployed in the activities embraced
in
one category, the resulting cate-
gory weight exceeds 100%.
In
such cases
it
is to be assumed
that
1812-1815
UNDERWRITING MANUAL
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 activi-
ties, 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 ap-
plicable categories on the Economic Background
Rating
Form
in
accordance with 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 cap-
tioned 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 accomplished by multiplying the sum
of the category ratings by the applicable Scope of 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 weakness
in
the Economic Background Area is indicated.
1818.
The Economic Background Rating is an expres-
sion of a portion of the hazard to which mortgage funds are sub-
jected and is strongly influenced by 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 affected by the action of economic forces, which
are extraneous to any given property and which operate over a wide
area.
It
is usually assumed
that
an increase
in
employment will be
accompanied by the maintenance of the level of the earned incomes
of employed persons. Therefore consideration is given to the volume
and
trend
of employment
rather than
to payroll amounts. Since the
risks involved in mortgage investments lie in the future, the Eco-
nomic Background
Rating
should reflect the probable
future
trends
of employment. Such forecast should embrace
at
least a ten to
twenty year period.
1815-1818
COMPILATION AND RECORDATION
OF
DATA
•
I
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
included
in the Industry
category. The
Industry
category is divided
into three features, (a) Predicted Employment Trend, (b) Diversifi-
cation, and
(
c) Cyclical Fluctuations.
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 cy-
clical fluctuations which are independently rated in the
third
fea-
ture.
In
making
the
forecast of the
trend
of employment, care
should be exercised to determine the long time trend. Short time
movements are usually those which act in sympathy with temporary
nation-wide fluctuations. Limited significance is attached to a de-
cline
in
local employment during a temporary period of nation-wide
decline such as occurred from
1929
to
1933,
but
a downward long
time
trend
is evidenced
if
over-all local employment runs counter to
expanding industrial employment such as occurred in the United
States during the period from
1921
to
1929.
There are many com-
binations 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
mentioned here.
1821.
The permanence of 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 indi-
cated by the determination of whether the goods produced are neces-
sities or luxuries, because there are many conventional products 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 com-
modity 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 considered with respect to the stability
1819-1822
UNDERWRITING MANUAL
,
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 manu-
facturers in a given area may be unable to compete with manufactur-
ers 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 pro-
duction 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 haz-
ardous. The industrial advantages of most large metropolitan areas
are such
that if
some industries 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
af-
forded
that
is vital in establishing the
rating
of the feature Predicted
Employment Trend. Increases in employment offered by one large
industry may offset decreases
in
many smaller ones.
It
is the num-
ber gainfully employed and the accompanying
trend that
indicate
demand
for
housing. The effect of seasonal employment fluctuation,
insofar as
it
affects the continuity of incomes, must also enter
into
consideration in
rating
this feature. Certain areas may have excel-
lent 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
considering these factors
it
must be remembered
that
a serious weakness in any one may have a pronounced effect on
the rating. Even
if
the general demand for a product is exception-
ally good,
if
the plants
in
the city cannot produce
it
in competition
with plants in other cities, this competitive weakness may be decisive.
Or,
if
the plants in a city can produce a product
at
exceptionally low
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 employment
in
the area
is the fundamental consideration and he should carefully weigh
all
1822-1824
COMPILATION AND RECORDATION
OF
DATA
•
I
t
he
element
s
th
a
t
may
aff
ec
t it
favorably or unfavorably. Of the
Industry
cate
g
ory
feature
s,
Predicted Employment Trend
is
con-
sidered the
mo
st
import
a
nt
a
n
d is given a
w
eight of
70
%
.
1825.
Divers
i
fic
a
tion
of
I
n
du
s
try.
Diver
s
ification of in-
dustry is a favorable factor.
In
a general economic depression,
employment
in
some industries
usuall
y
d
e
clines
far
t
h
e
r
and faster
than
in
other
s
,
w
ith
the
re
s
ult
that
the net decline is generally less
in
those
area
s
e
njoying the
g
r
ea
te
s
t
di
ve
r
s
ifi
c
ation.
If
there is ample
diversification of industry, the cyclical
fluc
t
uations of different indus-
tries tend
to
counterbalanc
e
each other,
r
e
sulting in greater stability
of
employment.
If
50
%
or over of all
th
e industrially employed in
a
city are
emplo
y
ed in the plants of a
s
ingle industry, the
lowe
s
t
rating
is given this
fe
a
tur
e
.
If
les
s than
10
% of
a
ll the industrially
employed are in a single industry, the highest
rating
is given.
1826.
Cyclical Fluctuation
s
.
Economic Background
Areas
that
show extreme
flu
c
tuations in employment from prosperity
to depression do not
pos
s
e
s
s
the
s
tability of areas
subje
c
t
to less fluctu-
ation
.
Statistics can be
obtain
e
d
showin
g
t
he
percent
ag
e
of minimum
employment to maximum employment for the period
1921
to
1933
in
metropolitan areas having populations in excess of
25,000.
Areas are
considered most stable
wher
e there has
b
e
en a decline of 10% or less
in
employment from the peak year to the
p
e
riod of
depre
s
sion.
Thos
e
where the
de
c
line
ha
s
b
ee
n
5
0% or
mor
e
are considered
lea
s
t
stable.
In
smaller
are
a
s for which adequate statistics cannot be obtained, the
Valuator should ask local
b
a
nkers or other reliable, well informed
sources about the extreme fluctuations in employment and the
dat
e
of
their
occurr
e
n
c
e in order
t
o
secure a
ba
s
i
s
for
ratin
g this feature.
1827.
S
pe
cia
lty Oategory
R
atin
g
.
In
the Specialty cate-
gory, employment resulting from activities not
spe
c
ifically covered
under
Industry
and Trade is considered.
It
may also apply to an
activity typical only to a
p
a
rticular
s
ection. Agriculture will not
be
considered under the Specialty
cate
g
ory
.
1828.
Pred
ic
t
ed
Employm
e
nt
T
r
end.
Of
pr
i
mary
con
-
sideration is
th
e
trend of employment
w
hich can be anticipated to
result from
th
e
activities during the
for
ec
ast period. As in industry,
only the predominant trend is to be considered. Two facts, the life
of the
mer
c
ha
n
table supply and the
cos
t
of production, must always
be weighed
w
h
e
n
considerin
g
a
ctivitie
s
cl
ass
ified
a
s
e
x
ploitation of
natural
resou
r
ce
s
,
such
a
s
mining, lumbering, fishing, and oil
extraction.
1829.
Either
short life of the supply, excessive cost of
production, or
la
c
k of
co
n
tinued demand will indicate instability of
employment. A low
co
s
t
of production
i
s of no
adv
a
nta
g
e
if
the mer-
chantable supply will be exhausted in a
s
hort
period of time. Simi-
1824-1829
UNDERWRITING MANUAL
larly,
it
matt
e
rs 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
r
e
sult
of new
technique
s
or higher market
pric
e
s,
but such a speculative
pos
-
sibility should not be considered in
ratin
g this category. The highest
rating
in
th
e category is given to areas with the
·
largest supply of
these
resour
ces and the lowest
co
s
t
of
op
e
ration, coupled with a strong
demand for
th
e product and
eviden
c
e of
in
c
reasing
employm
e
nt.
1830.
When
rating
touri
s
t
re
so
rts, educational centers,
and political capital
s
,
it
is important to consider employment given
to the area as the result of persons bringing money to
it
from out-
side 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
taxpayer
s
,
or
re
s
idents whose
incom
es
ar
e received from outside
the Economic
Ba
ckg
round Area.
In rating
this feature, the attrac-
tiveness of the
ar
e
a as a
particul
a
r typ
e of center,
its
continued
drawing
pow
e
r
,
its
in
c
ome and
socia
l
c
h
a
racteristics, and the wealth
of the region supporting it, must be
wei
g
hed.
1831.
Generally, because of the instability and uncer-
tainty
of
touri
s
t
re
s
orts, the
rating
of
thi
s category for an area pre-
dominantly 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 demonstrated marked stability
may be rated fairly favorably. Accurate statistics for employment
resulting from tourist activities are
gen
e
rally not available. The
Valuator estimates as accurately as possible,
after
investigation,
the
number of
per
s
ons employed in such
a
c
tivities.
1832.
Political capitals may be considered in most cases
as immovable. Contractions and
expan
s
ions of state or county
functions
de
c
rease or increase the volume
o
f
governmental employ-
ment. The relative wealth of the state or county, and the legisla-
tive 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 consequent reduction in employment. The same effect would.
result from
d
ec
entralization of
the
se
fun
c
tions.
1833.
Educational centers are usually established to a
degree which precludes likelihood of
r
e
du
c
ed employment resulting
from the removal of educational
in
s
titutions. Consideration should
be given,
how
e
ver, to the difference in the rate of growth of the
larger universities and the resulting effect upon employment trends
in their
respective centers.
1829-1833
COMPILATION
AND
RECORDATION OF DATA
•
I
1834.
Cy
c
li
ca
l
Fl
uctu
at
i
o
ns
.
If
more than one
a
ct
ivity
i
s involved,
it
i
s
necessar
y to
m
e
as
u
re the effect
0£
the fluctuation
in
its relation to all the employment
es
timated for the category.
In the
event only one activity
i
s
b
e
ing considered, the fluctuation
is
more easily measured, and therefore more readily ratable.
H
data
for
accurate determination are not
a
va
ilable, reasonable estimates may
be
used.
1835.
Trade Cat
e
go
r
y
R
a
ting.
In
the Trade
categor
y
,
trade, finance, and transportation
a
r
e
c
on
s
idered. The term, Trade,
includes retail,
whole
s
ale
,
jobbin
g
,
a
nd other
distributin
g
a
c
tiviti
e
s
with the region outside the
E
c
onomi
c Background Area under con-
sideration
.
It
does not
includ
e
t
ra
de with those who
r
es
ide in the
Economi
c Background Area,
ina
s
mu
c
h
as
that
is
consid
e
r
e
d in as-
signing the multiplier
.2
for
servi
c
in
g activities heretofore
m
e
ntioned.
In
some cities trade factors
ar
e
of
paramount importance, in others
they are
r
e
latively minor
elem
e
nt
s
.
1836.
Predicted
Empl
o
y
mem
t
Trend.
The
ratin
g
of
this
feature
invol
v
e
s an
analysi
s
of the
t
ra
de region, taking into
c
on-
s
ideration
its
population, natural
r
es
ources, and purchasing power.
A
se
riou
s decline in the
purcha
s
in
g power of the
tradin
g
region
would reduce the number employed in trade
in
the Economic
Back
-
ground Area. The purcha
s
in
g power of the
trading
region may
decline
b
e
cause of a number of
c
o
n
ditions, such as the growth of
competitive cities, loss of soil
f
e
rtility,
exhaustion of mineral re-
sources, loss of
manufacturin
g
p
la
n
t
s
,
decline
in
population, de-
crease in incomes or inherited
weal
t
h of the region, or
a
combina-
tion of
the
s
e factors. On the other hand, the
trading
region may
increase in purchasing power
be
c
au
se
of an increase in its
popul
a
-
tion or
inc
om
e
,
di
s
covery of
n
ew
re
s
our
ce
s,
more
inten
s
ive culti-
vation of the adjacent
ar
e
as, or
b
eca
u
s
e
of additional
l
a
nd being
placed under
c
ultivation.
1837.
Diversific
a
tion of employment within the Eco-
nomic Ba
c
kground Area
afford
e
d by the activities
classifi
e
d under
the Trade category, as well as the diversification of types of
trading
activity with the region outside the Economic Background Area, is
to be considered because these
f
act
ors definitely affect employment
trends.
l£
a community is
dep
e
n
d
ent entirely upon
trad
e
wi
t
h the
outside region which lacks
diver
s
ifi
c
atio
n
of activity, an
unde
s
irable
condition may be indicated. An example of this is the
plight
of a
community
en
t
irely
depend
e
nt
upon
trade
from
its
s
urrounding one-
crop
agri
c
ultural area,
w
hen
l
e
ft
w
i
t
h little more
than
subsistence
support
durin
g periods of
c
rop failure.
1834-1837
UNDERWRITING MANUAL
,
1838.
Cyclical Fluctuations.
If
dep
e
ndable statistics
a
r
e
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
ca
s
es the percentage of minimum
to
maxi-
mum employment in trade from
1921
to
1933
will parallel the
cyclical fluctuation of the principal category indicated in the Eco-
nomic Background Rating.
1839.
Adj
us
tment
for
Scope
of
th
e
Market.
The Scope
of the Market refers to the degree of marketability of residential
properti
e
s
at
curr
e
nt
value levels in the Economic Background Area.
1840.
The Scope of the Market is a reflection of the
ability of financially capable purchasers to absorb the housing avail-
able
to
the market
at
current value levels.
It
embraces a considera-
tion of
m
a
ny factors
a
nd is affected by (a)
th
e
in
c
ome characteristics
of the population
con
t
ra
s
ted 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
pur
c
haser
at
curr
e
nt
value levels.
1841.
The Scope of the Market adju
s
tment feature has
five columns to reflect the various degrees of
m
a
rketability, namely,
(1)
Poor, (2) Limited, (3)
Mod
e
rate,
(4)
S
a
t
i
sfactory, and (5)
Good.
It
may prove
d
es
ir
a
ble, in
s
ome
case
s
,
to use an
"in
between"
weight,
s
u
c
h
a
s
22 or
37,
as
t
he applicable
S
c
ope of the Market
factor. The use of this factor is largely a matter of judgment and
the soundness of its application will, to a
measur
a
ble degree, deter-
mine the soundness of the Economic
Backgro
u
nd Ratings estab-
lished.
·
1842.
The accompanying Economic
Ba
c
kground Rating
Form
ha
s been executed in a manner to demonstrate the mechanics
of rating. The name of the city
i
s fictitious and hypothetical sta-
tistics
ar
e
employed for the purposes of this illustration.
1843.
File
of Economic Background
Ratings and
Summaries.
Comple
t
ed Economic Background Rating Form
s
,
FHA
Form No. 2096, and
s
ummaries,
to
ge
ther with the data used in
their
compilation, should
b
e
filed in
fold
e
rs, using a separate folder for
each area
ra
ted.
Th
e
r
a
tings are
r
ec
o
rded on Economic
Back
g
round
Rating
R
ec
ord cards,
FHA
Form No.
2
0
96a, and filed in the Valua-
tion and Location
R
ec
ord Card
fil
e
immediat
e
ly behind the guides
representing the
re
s
p
ec
tive cities
r
a
ted. Some of the data used in
1838-1843
COMPILATION AND RECORDATION
OF
DATA
30
•
•
I
2
2
%
16
%
62
%
100
%
W£
tO
HT
E
D
RA
T
I
NO
l
,
t
.i.
st the
citi
es
,
towns
,
villages,
an
d
com
m
unitie
s
in
c
lu
d
ed in this economic
backgrou
nd are
a
.
6
18
12
?
o~m
:;J
_..!!_
Dechn
e
of
_..E,_
Decline
o
f
_...!!..
I
nc
r
ease
68 I
n
c
r
ease _1!_
P
r~je
d
E
m
p
l
oy
men
t
o
v
er
1%to9
%
~
~
a::
i~
{
9~
5
%
t
o
X
~d
~~e
~
Ciclical
F
l
uctuati
on
s
N
r
.
Less
t
h
a
n
3 ·
~
s
!~%
to
g
7
0% to -rf
8<l
%
to
::!£
_..§S_
M~~~u!'
~~\:~::
en~
50
% 59% 69%
7
9% X
1
00
%
1921
to
19
33 Categ
ory
W
e
ight
22
%X
~g
~
..18
%
,_
"
A
-0.-·~·
.
l
...
SCOPE OF
TH
E
MA
R
KEi
I
'
1
'
I
.
I
I
RATI
N
G
-
P
ee
r
1~
L
1m1tOO
1~
M
orl
en
~
.
te
1~
Sat1i.;fac
-
1
~1
G
ood
I
_!!.
Degree
ot
M
arketabi
li
t
y
t
c
e
y
X
E
CO
NOMIC
BA
CKGROUND RATING
(
Sum
o
r
Appli
cable
C
ategory
R
ati
n
gs
X
Scope
o
r
M
a
rket
Fact
or)
-··
····
··········
--
~--
-
-·-
....•
..•.
.30
,
RA
TIN
G
T
RADE
CATEGO
RY
(
T
r
a
de,
Fi
nance, and
T
r
a
nspor
t
at
io
n)
Categ
ory
Weight
1
6%X
60
Id
%
Predicte
d
E
m
p
l
oymen
t
~
~
in:;J
2..
P%
c
~
~~~
__.!_ ~%cl
~
~ei
~
~
~
!
~5r%
a
~
____!!._
!fcrt0
%
_.!!_
Tre
nd
ov
er
crease
of X
9
%
a
nd
o
ver
Cyclical
Fluc
t
ua
t
ion
s
P
e
r
.
L
esa than
'
5
0% to
12
!
';%
t
o
1
8
7
0%
t
o
Zi
80
%
t
o
111
;
~
eente
ge of
Minimum
"to
50
%
5
9%
69
%
7
9%
100
%
Maxim
u
m
Emp
l
o
ymen
t.
X
~to
~ u
J\A
'l':
lN
O
Di
v
ersific
at
io
n
Predic
ted
Ein
ployment
Tre
nd
Declineof
__,!!_
Declln
e
of
~
.Declineof
4
J
In
cre
ase ~
Inc
r
ease
-.!!..
10%
an
d
1
%to
9
%
0
%
to
in- of 5%
to
o
f
10
%
-
--
-
4%ase of
_
~
~
an d
over 56
__
-
-------
1
~50~')1~,
-.,-
1
-
~3
30
%
to __!_ 20% to _9._
1
0
%
to
____!!_
L
ess
than _.!!_
over
e
m·
49
%
em
- 29% em
-
1
9
% em
-
10% em-
f~~year~~
r~
~
y
e
a
t~~
r~~y~
r
~~
x
f~~year
~~
rl
~
y
e
~r
~~
eet
I
n
dus
-
est
I
nd
us- es
t
I
ndu
s-
e
s
t
iudus
- e
st Indus-
~ ~ ~ ~ ~
9
~c
~
,
,
~
u
-
,
a1
~
F
~
Iu
-
,,
-
u
-
.
t-
io
-
na
~.
-
"
-
.
·
r.
i-~t"
h
-
•n
-
--2..
50"
%
~
6
60
%
to '
7
0
%
t
o
1
2
80%tO
-!!.-
--
c
e
ntage
of M
i
nim
u
m to
50
%
5
9%
69
%
7
9%
10
0%
Max
i
m1'.m
Emplo
y
m
e
nt
.
J.
~1•'-'2
-'"
1
~
to
~1~
•3
~
3
----
~
--~
~
--
-~
~
---
~~
---~
c"a"'
te'::
g
=:o.-y:::-.wrr:
,o:;•
"•ti-z$
"
2%"',"x
"'?.it-=-
«
%
S
PECIALTY
CATE
GORY
(Sta
le
TypeofAedrid
ea)
Zeni\ll
'OlliY•reiv
.
PoUUoal ($'6W ClmUal)
RA
TI
N
O
INDU
S
T
RY
C
A
T
E
G
O
RY
(
Man
u
f
a
d
uri
ng,
A
ssem
b
ling
,
Fabric
a
t
ing
,
a
nd
R
efin
ing)
Trade
100
% m
iJ\IJS
su
m
o
f other
categ
o
ry
w
e
i
ghts hr
l
as
t
colum
n
3,200
Spec
!Al
t
y
8
%
31
%
12,310
I
n
dustry
1
00%
Total 39 720
CATEGOR
Y
WUOB'TS
P
E
RCEN
T
O
F
T
O
TAL
C
AT
EGORI
E
S
N
UMHER
EMPL
O
YE
D
(Stllti~ti('&i '"
es
U
lf'
;i
l
ed)
X
2
=
ECO
N
OMI
C
B
AC
KGROUND
RAT
ING FORM
Ec
o
nomic
bac
kground area
• •
...
znt ~.
1
~f
.
~
·
-
···-··· --··
·
·-·······
-
~~1'
!!9
{ll!~
-
~"
-··
·
··· ··-
Ra
ting
.
.
~Q.
.
• •
P
o
pulation-1920
.
..
7.
~
.
•
®0
.
.
..
...........
.
.
1
930
...
.
.
85~9
.
00...
...
.
...
....
.
193
6
.
.
82~!KIO
..
....
.
..
.
...
.....
.•...
(Esti
mated)
Pate
of
ra
ting ..
Jlft
~
.
,•t1'
..
lli
..
..
lll
3
'.
L
..
.
•
.
made
by
.....
J.itllll
..
Slal.\ll,
.
J!Ml!CYl!l
'Ql
Q.1
1"
.
..
..
.
....
.•...
......
.
.•.
.
•
.
.•.
.
.
(
Namt)
8EL
E
CTJO
N
A
N
D
W
E
I
G
H
TING
O
F
CATEGOR
I
ES
FED
E
RAL HOUSING
AD
M
INISTRATIO
N
Jl'RA
'f'orm No.
2096
(
Rev
.
Dec
.
15,
1937 )
1
843
UNDERWRITING MANUAL
VALUATION AND LOCATION RATING DATA
1845.
Exhaustive analyses, reliable forecasts, and de-
pendable conclusions with respect to neighborhood influences must
be founded upon the intelligent use of accurately compiled and con-
veniently recorded valuation and location
rating
data. Experienced
appraisers frequently make
fair
approximations of location charac-
teristics from appearances only, because they have acquired consid-
erable knowledge of the visible or surface factors which affect loca-
tions
.
Such conclusions are unreliable because
they
.
are assumptions
predicated upon random generalities instead of carefully compiled
factual and informative data. The data program is not a
second
-
ary function of an
Insuring
Office.
It
is a fundamental aspect of
the primary function
of
insuring economically sound mortgages.
1846.
Valuation and location
rating data
include various
types
of
neighborhood data. The distinction between economic back-
ground data and neighborhood data is
that
the former comprise
factors which have some degree of influence on all locations within
an Economic Background Area, while, the
latter
consist
of
factors
whose influences are more circumscribed and frequently more direct
and forceful.
compiling the Economic Background Rating Form will be secured
from other files
established
.
under these instructions.
It
is not neces-
sary to separate such data from
their
parent files and file them with
the Economic Background Rating Form.
1844. Sources
of
Economic Background Data.
a.
Chambers of commerce
b.
Real estate boards
c.
Industrial
bureaus
d.
Industrial
corporations
e.
Employment agencies
f.
Financial institutions
g.
Utility
companies
h,
Clearing house associations
i.
Educational institutions
j.
Labor organizations
k. Agricultural agents
l,
Publications of
U.
S. Chamber of Commerce
m.
Publications of city, county and state governments
n.
Bureaus of vital statistics
o.
Reference to other
Insuring
Office
Data Files, especially the
File of Population Statistics
1843-1846
COMPILATION AND RECORDATION
OF
DATA
•
'
1847.
The Chief Valuator is responsible £or the
intro
-
duction and maintenance
0£
the following files which are required
for
valuation and location
rating
data
:
a.
File
0£
Established Ratings of Locations
b,
File
0£
Valuation and Location Record Cards
c.
Subdivision File
d.
Real Estate Market Data File
e.
File
0£
Maps and
Plats
f.
File of Data on Legal Status of
Property
g.
File
of Population Statistics
1848.
Following is a detailed description of each of the
required data files listed above. The Chief Valuator will deviate
from these instructions only when
it
is clearly evident
that
the adop-
tion of some alternate method
0£
filing is essential to the proper
functioning of the Valuation Section.
1849.
File of Established
Ratings
of Locations.
Completed Established Ratings of Locations,
FHA Form
No.
2082,
should be filed in
ring
binders according to the following sequence
:
a.
The forms are first divided into groups and the groups
alphabetically arranged according to Economic Back-
ground Areas.
b,
The forms in each Economic Background Area are then
arranged numerically.
1850.
Each Established
Rating
0£
Location will be
numbered in accordance with a symbol consisting of the following:
a.
AsS'igned Nwmber.
In
each Economic Background Area
the assigned numbers will begin with "1" and run con-
secutively.
b,
Racial Occupancy Deeiqnation.
This will
be
a letter in-
dicating predominating racial characteristics, as follows
:
W-White
M-Mixed
F-Foreign
N-Negro
o.
Price Range Syrnbol.
This consists of the first digits of the,
lowest and the highest amounts listed in the price range.
d. Typical Property Value Syrnbol.
This will consist of the
first digit, or digits, in the amount listed as the value of
the typical property.
For
example, Outlined Neighbor·
hood Nu.
28
is found to be predominantly of white racial
1847-1850
UNDERWRITING MANUAL
occupancy, with properties ranging in price from $7,000 to
$12,000 and the typical property having a price of $9,000.
The Outlined Neighborhood and the corresponding Estab-
lished Rating of Location will therefore be assigned the
following number:
28W7-12-9.
If
it is desirable to pro-
vide
for
more than one Established Rating of Location in
the
s
ame Outlined Neighborhood for other significant
pric
e ranges, such additional ratings shall be designated
by adding the letter A, B or C to the assigned number,
thus:
28A, W7-12-9.
Additional copies of Established
Ratings of Locations
for
the use of Valuators as pre-
scribed in Section
9,
Rating of Location, shall be filed in
the same manner as described above. Outlined Neighbor-
hoods will be numbered on Outlined Neighborhood Maps
in accordance with the above prescribed method. These
maps are used in conjunction with Established Ratings of
Locations but shall be filed in the File of Maps and Plats
described below.
'
1851.
Sources
of
Establieh
e
d Location
Rating
Data.
The only data included in this file are the completed Established Rat-
ings of Locations,
FHA
Form No.
2082.
Useful information in
the
completion of these forms should be available in the Economic Back-
ground Data
File
previously described and
in
the six data files de-
scribed below.
1852.
File of Valuation and Location Record Cards.
These cards,
FHA
Form No. 2073, should be filed according to
the
following sequence:
a
.
The cards are first divided into groups according to Eco-
nomic Background Areas and the groups alphabetically;
arranged.
b,
Each Economic Background Area is then subdivided ac-
cording to Outlined Neighborhood Areas which are to be
arranged numerically.
o.
The cards in each Outlined Neighborhood Area shall be ar-
ranged alphabetically by streets and numerically by house
numbers on respective streets.
1858.
Valuation and Location Record cards should
be
used to record the following information
:
a.
Occupation of Applicant
b,
Business of Employer
o.
Total Annual Income
d.
Photograph of Property
1850-1853
COMPILATION AND RECORDATION
OF
DATA
'-
~
I
•
I
1854.
To facilitate analyses of rental areas or over-
supply, undersupply and conformity of structures by use-types,
the
s
e
cards are furnished in the :following four color classifications:
a.
White: all one family structures, both new and existing con-
struction, except when blue is used.
b,
Buff: all two or three family structures, both new and exist-
ing construction,
exc
e
pt
when blue is used.
o,
Yellow: all four family structures, both new and
e
xisting
construction, except when blue is used.
d.
Blue: all cases rejected
be
c
ause of Rating of Property or
Rating of Location.
To facilitate frequent reference use, this file shall also
contain the Economic Background Rating Record cards,
FHA
Form No. 2096a. These shall be filed immediately
behind the guides representing their respective Economic
Background Areas.
1855.
Sources
of
Valuation and Location Record Oard
Data.
The only data included in this group are the completed
Valuation and Location Record Cards. Information required in the
completion of these forms will
be
drawn from Report of Architec-
tural
Inspector,
FHA
Form No.
2014,
and Report
o:f
Valuator,
FHA
Form No.
2015.
1856.
Subdivision File. The data in this file consist of
the following completed forms and required exhibits:
a.
Subdivision Information Form,
FHA
Form No.
2084.
It
is
contemplated
that
the sponsor will present the completed
form with exhibits in duplicate.
b.
Chief Underwriter's Subdivision Report,
FHA
Form No.
2084a. This form calls for the conclusions of the
In
s
uring
Office
as
contra
s
ted to the Subdivision Information Form,
which calls
for
factual answers.
o.
Copies of constructive suggestions transmitted
to
sponsor or
of rulings contained in commitments previouly issued.
Individual :folders should be used for filing the data per-
taining to each subdivision. These should be indexed by
the names of subdivision tracts and arranged alphabeti-
cally according to counties. The folders should carry an
as
s
igned number which is also used to indicate the location
of the subdivision on county maps suitable for this purpose.
1857.
Sourc
e
s
of
Subdivision Data.
The only data in-
cluded in this file are the completed subdivision forms above referred
to
with attached exhibits. Information in the compilation of these
1854-1857
UNDERWRITING MANUAL
forms should be available from subdivision sponsors, previous deci-
sion
s
,
and from other data files
o:f
the Valuation Section
.
1858.
Real
Estate Market Data
File. This file
should
.
contain data with respect
to
offerings, rentals,
sale
s
,
mortgage incum-
brances
,
occupancy
pe
r
centages, demolitions, condemnations, and con-
struct
i
on
o:f
residential properties.
It
should also contain charts,
graphs, pamphlets, tables, and memoranda
o:f
significant community
and neighborhood
characteri
s
ti
c
s including trends and transitions.
This information may come in the :form
o:f
publi
s
hed reports, news
items, classified
adverti
se
ments, and trade
public
a
tion articles, and
should be properly dated upon filing.
B
e
cau
s
e
o:f
the irregularity
o:f
the style in which
it
is found, either or both of the following filing
methods may be employed.
a
.
New
s
paper clippings,
cl
a
ss
ified
a
dvertisements, and similar
ma
te
rial may be
pa
s
ted or transcribed to 4 x
6
cards and
filed in the File
o:f
Valuation and Location Record Cards
behind the
r
a
ting cards and
a
c
cording to Outlined Neigh-
borhoods.
b, Such material approximately
8lf2
x
11
in size may be placed
in
ring binders.
Mat
e
rial of
s
maller size may be pasted or
tran
s
cribed to
sheet
s
:for
filing in ring binders.
In
all
case
s
,
the data are to be filed by Outlined Neighborhoods
unl
e
ss they are not susceptible to such division.
1859.
Sou
rces of
R
e
al
Estat
e
Ma
r
k
e
t
Da
t
a.
a.
Market analyses prepared by Division
o:f
Economics and
Stati
s
tics, Federal Housing Administration
b.
Real
e
state boards
o.
Real estate brokers
d.
Lending institutions
a
n
d agen
c
ies
e.
Housing
auth
o
rities
f.
Newspapers
g.
Real estate rental and
s
ale offering sheets
h,
Offici
a
l records
i.
Ca
s
e
binder
s
j.
University
res
e
arch studies
k
.
Stat
e
banking departments
l;
Lo
c
al
in:form
e
d
per
s
o
ns
m.
Federal
Hou
s
ing Administration block maps
n.
Real property inventories
o.
Telephone company re
s
earch
bure
a
us
p.
Chambers of commerce
q. Boards of education
1857-1859
COMPILATION AND RECORDATION OF DATA
I
~
•
I
r,
Utiliti
e
s and p
a
rk
co
mmi
ssi
ons
s.
Transportation companies
t.
Zoning
a
nd planning commissions
u
-
.
Refer
e
n
ce
to
o
t
her
In
s
urin
g
Offi
ce data files
1860.
File of
Maps
and Plats.
Ma
ny of the functions
of
an Insuring
Office
require frequent
ref
e
rence
t
o
appropri
a
te
map
s
and plats. They should be carefully filed to expedite required use
and to avoid
unnece
ss
ary wear and tear. Continual unfolding and
folding
of
maps
t
end to
de
s
troy
th
e
m. Therefore, maps and
plat
s
most frequently used should
b
e
filed open
a
n
d flat upon suitable map
racks or upon individual
pi
eces
of
t
hin
wa
ll
bo
a
rd. A large
s
crap
-
book approximately
18
x 25,
of
the type
ge
ne
rally
u
s
ed by advertising
agencies to pre
s
erve full
pa
g
e
display
ad
s
,
is an excellent file for
maps of appropriate
s
ize. Other maps infrequently used may be
filed in folders. The three
method
s of filing maps and plats and
their
re
s
pe
c
tive
u
s
es
ar
e
ther
e
fore as
follo
ws
:
a.
Freque
n
tly
u
s
ed maps and plats
s
hould be filed open and
flat on suitable map
rack
s
or
thin
pieces of wall
board
.
Map
s
in
thi
s
group
consis
t
of
State or District map show-
ing Economic Background
Area
s,
railro
a
ds and highways;
map
s
of
a
c
ti
v
e
E
c
onomic Background Areas showing out-
lined
neighborhood
s
,
tr
a
nsport
a
tion lines, parks, play-
ground
s,
schools,
c
e
meterie
s
a
nd railroads
;
a
nd zoning
maps.
b,
Less frequently used maps and
pl
a
ts, such as those of in-
acti
v
e
Economic Background
Ar
eas, geological survey
maps and maps
of
min
in
g
op
er
ation
s
,
may be kept in
large scrapbooks. These
s
hould be
se
curely fastened to
the
l
ea
ves of the book to avoid
unneces
s
ary
w
e
ar and
tear
.
c.
Infrequently
u
s
ed
m
a
ps and
plat
s
may be filed in folders.
Unl
ess
frequ
e
ntly
u
s
ed
,
it
i
s
pr
e
ferabl
e
to k
ee
p
subdivi
-
sion maps
in
their
resp
e
ctive
subdivi
s
ion folders.
1861.
Sou
rce
s
of
D
a
t
a
f
or
Fil
e
o
f
JJ
;f
a
p
e
a
nd Plats.
a.
City engineers'
offices
b.
M
a
p
m
a
k
e
rs
a
nd publishers
o.
Bookstores
d.
Local draftsmen and
engin
ee
rs
e.
U. S.
D
e
partment
of Interior
(G
e
ologi
c
al
Sur
ve
ys)
f.
State mining
bureau
s
g.
E
x
tracti
v
e
tr
a
de
s
a
ss
ociation
s
h,
Mining
opera
t
ing
compani
e
s
i,
U.S.
Po
s
t
Offi
ce
Department
1859-1861
UNDERWRITING MANUAL
1862
1862.
File of Data on Legal Status of Property.
These data
fall
into three general classifications, namely, (a)
Title
and Other Legal Aspects of Ownership and Tenancy,
(b)
Distinc-
tions between Chattels and Real Property, and
(a)
Legislative Enact-
ments or Policies Affecting the Real Estate Market.
Individual
pieces contributing to these data will show considerable variance in
s
ize, style and form, and therefore do not lend themselves to a simple
and precise method of filing. Ring binders and folders are prob-
ably the most acceptable filing mediums
for
this material. Bound
volumes,
if
any, should be kept together
in
a convenient place. The
liberal use of memoranda to record known conditions with respect
to all
phase
s
of these data is strongly recommended. Three gen-
eral classifications of material, filed in binders or folders, are
recommended, as follows
:
a.
Title and Other Legal Aspects of Ownership and Tenancy.
This group should include data pertaining to
the
,
nature
and characteristics of titles and the
nature
of and dis-
tinctions between estates in real property; restrictions,
easements, tenants' rights, leases, conveyancing,
rights
of
way, and reservations. Copies of deed restrictions should
be retained in the Subdivision File.
b.
Distinctions between Ohattel
s
and Real Property.
This
group should include opinions of the Legal Division sup-
plied to the
Insuring
Office
with respect to the items to be
construed as
parts
of the realty or as chattels; also mem-
oranda setting
forth
the public customs as to what items
of equipment and accessories are considered as
part
of
the real property.
o,
L
e
gislativ
e Enactments or Policies
Aff
eoting the Real Es-
tate
]}f
arket,
This group falls into three
logic
a
l classifi-
cations. The first
i
s
Zoning Ordinances and
Planning
R
e
gulations. These are
u
s
ually in book form with accom-
p
a
nying maps. Zoning maps of active areas should be
filed as directed above under File of Maps and Plats. The
second classification is Taxes and Special Assessments.
It
should contain data on the subjects of taxation policies,
taxation rates, nature and duration of special assessments
in each Economic Background Area within the jurisdic-
tion of the Insuring
Office.
The last of the three classi-
fications is Building Codes and
Fire
and Police Protection
and Regulations. Information on these matters is usually
obtainable in booklet or circular form from the municipal
building
insp
e
ctor, boards of health, and the fire and
police departments.
COMPILATION AND RECORDATION
OF
DATA
l
L
I
~
•
I
1863.
Sour
c
e
s
of
Data on Legal
Status of
Property.
a.
Recording
offices
b.
State
l
e
gislative reference
bureau
s
c.
Real estate boards
d.
Abstract and
title
offices
e.
Subdivision
d
ev
elopers
f.
Deeds
contain
i
ng restrictive
coven
a
nts
g.
Insuring
Offic
e
applications
h.
Legal Division of the Federal
Hou
si
ng Administration
i.
State
st
a
tutes
j.
Municip
a
l building
in
s
pection
bur
e
aus
k,
Apartm
e
nt
or tenem
e
nt
hou
se
commissions
l,
Boards of health
m.
Housin
g
authoritie
s
n.
Municipal fire and police
d
e
partments
o.
City
a
ssess
m
e
n
t
bur
ea
us
p. City
engineer
s
'
offices
1864.
File of Population
Statistics.
Th
e
se data are
used chiefly in conjunction with
mater
i
al in the File
of
Economic
B
a
ck-
ground Ratings and Summaries and with outlined neighborhoods in
the
Valu
at
ion
a
nd
Lo
cat
ion
R
ec
ord
C
a
rd
F
i
le.
They are
al
s
o
u
s
ed
with material from the Real
E
s
tate Market Data File and the Subdi-
vision
Fil
e
.
Be
ca
u
s
e
of the
v
a
ried
u
ses of
p
opula
t
ion
st
a
tistic
s
,
it
is
de
s
irable to
hav
e
s
uch
da
t
a remain
a
ss
embl
e
d,
for
r
e
feren
c
e
purpo
s
es,
rather than
to attempt a
divi
s
ion of them
a
ccording to
their
s
ome-
wh
a
t
overl
a
ppin
g
u
ses
.
This file should
con
t
ain
,
u
s
ually in book or
pamphlet form,
s
uch population
stati
s
tics as embrace number, race,
color, age, family size,
t
e
nant
and owner status, changes in number or
otherwise,
incom
es and occupations, and
su
c
h
oth
e
r
class
i
fications as
will
further
aid in making market
analy
se
s,
economic background
ratings, economic life
es
tim
a
te
s
,
v
a
lu
a
tion
s
,
neighborhood analyses,
and location ratings.
1865.
Sour
ces
of
Pop
u
l
a
t
i
on
D
at
a.
a.
Bureau of
Ce
nsus publications
b,
Current population
es
timat
es
of
Bu
r
eau of Census
c.
Publications of
t
he U. S. Chamber
of
Commerce
d.
Bureaus of vital statistics
e.
City
directorie
s
f.
Univer
s
ity
re
s
earch bureaus
g.
Real property inventories
li.
Feder
a
l
Hou
s
ing
Admini
st
ration block maps
i.
Telephone company research
bure
a
us
1863-1865
UNDERWRITING
MANUAL
j.
Hou
si
ng authorities
k.
Loc
a
l
i
nformed persons
l.
Case binders
1866~
File of Rental Income Dwelling Valuation
Data.
The
dat
a in this file consist of historical analyses of revenues
and expensesof
r
e
nt
a
l income dwelling properties. The analysis of
each property
s
hould include data on as much of the past
10
years'
experience
a
s
i
s
obtainable
,
and such data should show a logical
classification of the income and
expen
se
items. To each analysis
should be
atta
c
hed a photograph,
addres
s
and
de
s
cription of the prop~
erty, and,
if
po
s
sible, a plot plan and floor plan. The classification of
revenue and
exp
e
nse items for each year covered by the analysis
should include the following:
a.
Revenu
e
s
1.
Apartment units
2
.
Ba
s
ement space
3.
Garages
4.
Mi
s
ce
llaneou
s
revenues
5
.
Total
R
e
v
e
nue Collections
b.
Expens
e
s
1.
Advertising
2.
Commissions
3.
Al
te
rations
for
tenants
4.
()ffi
c
e salaries
5.
Offi ce
expense
6
.
L
e
gal and auditing expense
7.
T
e
l
e
phone
8.
E
x
p
e
nse of collections
9.
M
a
nagement fees
10.
Mi
sce
llaneous
11
.
To
t
al Renting and
Adm
inis
trative Eepense
113.
Heating and ventilating
13.
Janitor
14.
Li
g
hting
15.
R
e
frigerating
16.
W
a
t
e
r
1
7
.
G
as
.
1
8
.
G
a
rbag
e and rubbi
s
h
r
e
mo
v
al
19.
Prote
ct
ion
20.
Grou
n
ds expense
21.
Cl
e
aning
132.
Extermination
1865-1866
COMPILATION AND RECORDATION OF DATA
•
I
23.
Miscellaneous
24. Total
R
e
gular
Opera
t
ing Eepense
25.
Repairs to structure
26.
Repairs to equipment and fixtures
27.
Painting
28.
Decorating
29.
Structural
replacements
30. Equipment replacements
31.
Miscell
a
neous
32. Total
R
e
pairs,
Maint
e
nanc
e
,
and
R
e
placement
E
x
pense
33.
Taxes
34.
Hazard
insur
a
nce
35.
Miscellaneous
36. Total Tames
a
n
d
H
az
ard Insurance
37. Total Operating Eospense;
Item
s b-11, b-24, b-u~,
and
b
-3
6
38.
Ratio of Total Operating Expenses (b-37) to Total
Revenue Collections
(
a-5)
39.
Ratio of Total Operating Expenses to Total Revenue
Collections, both adjusted to 90% occupancy, or other
suitabl
e
s
tand
a
rdiz
e
d
perc
e
n
ta
ge used for comparisons.
40.
Ratio
o
f
item
b-11
to item
b-
3
7
41.
R
a
tio of item
b-
2
4
to
i
t
em
b-37
42.
Ratio of item
b
-32
to item
b-
3
7
43.
R
a
tio of item
b-36
to item
b-37
Most of the
abo
v
e
it
e
ms should
s
how the income or
expen
s
e
per
room, per family unit, per cubic foot, or per square foot.
1867.
R
e
n
t
al income
dwellin
g
valu
at
ion data, on each
building for
whi
c
h
information is
recorded
,
should include informa-
tion
with
resp
ec
t
to
th
e
occupancy percent
a
ge experience, the char-
acter of
servi
ces
rend
e
red,
a
nd
w
hether family units are rented
furnished or unfurnished. The
followin
g method should be em-
ployed :for
filin
g
Rent
a
l Income
D
we
lling
Valu
at
ion
D
a
ta.
F
o
lders
shall be
ca
ptioned for
e
ach type and siz~
o
f
rental income dwelling.
The description,
plan
s,
photo
g
raph
s, and record of
e
a
rning
s
and
expenses in
e
ac
h
anal
ys
is
s
h
a
ll
b
e
s
uitabl
y
f
ast
ened together and
filed in the proper
cl
a
ssification folder. The income and expense
items, and the accompanying ratios, of each
property
analyzed
should be tabulated on a large columnar sheet :for comparison study.
Separate
column
a
r
sh
ee
ts should be used
for
ea
c
h
of the types and
sizes of properties.
1866-1867
UNDERWRITING MANUAL
PROPERTY RATING DATA
1869.
The total
rating
of property can
be
more reason-
ably determined when founded upon adequate and reliable property
data. The compilation and recordation of such data are the primary
and :fundamental steps in property
rating
and
it
should be clearly
understood
that
they are indispensable in the process of determining
the risks attributable to the physical security. The compilation and
recordation of property
rating
data
i
s
a continuing :function. Data,
to
b
e
dependable, must be current. Moreover, information used in
establishing appropriate data must emanate from reliable sources
and when possible, be checked against other information of a some-
what similar character to
further
confirm its accuracy.
1870.
Efficient methods of recordation and filing of prop-
erty data are essential to their effective use. The Chief Architectural
Supervisor is responsible for the introduction and maintenance of
the following files which are required for property
rating
data.
a.
File of Established Ratings of Physical Security
b,
File of Established Standards and Requirements
o.
File of Technical and Advisory Data
d.
File of Catalogues of Construction Material and Equipment
1871.
File
of
Established Ratings
of
Physical
Se-
curity.
This file consists of all Establish
e
d Ratings of Physical
Security which have been compiled for
r
e
ference and review pur-
poses by the Architectural Section. The originals should be retained
in the
office
and kept available for
c
omparison and review of cur-
rent
case
s
.
The file should contain duplicate sets of Established
Ratings of Physical Security which may be used by Architectural
1868.
Sources
of Rental
Income Dwelling Valuation
Data.
The principal sources
of
rental income dwelling valuation
data include the following
:
a.
Multi-family property owners
b,
Real estate boards
c.
Real estate and property management brokers
d.
O
w
ners' and managers' associations
e.
Housing authorities
f.
Case binders
g.
Financial institutions
h,
Research
·
organizations
i.
Other data
file
s
1868-1871
COMPIL:A.TION
AND RECORDATION
OF
DATA
•
I
Inspectors and Valuators for reference and feature comparisons
when
rating
current cases. Established Ratings of Physical Se-
curity will be maintained in binders and suitably classified according
to types, sizes, and construction characteristics of the properties.
1872.
Sources
of
Data
for
Eetabliehed.
Ratings of Physi-
cuJ,
Security.
The only data included in this file are the completed
Established Ratings of Physical Security. Useful information in the
compilation of these established ratings will be available in the
Construction Cost
Data
File, case binders, and other data files.
1873.
File
of
Established Standards and
Require-
ments. Contained in this file are regulatory data governing con-
struction and use of property. These data indicate the line of de-
marcation between substandard properties and those which barely
meet the eligibility requirements. They include the Property Stand-
ards, Minimum Construction Requirements, and rulings on methods
of construction established by the Technical Division, Federal Hous-
ing Administration. The national electric code, the code of the Na-
tional Board of
Fire
Underwriters, and similar material will also be
contained in this file. Rulings on methods of construction, issued by
the Technical Division, are kept in
ring
binders. The remainder of
these data are filed in binders or folders. Building codes constitute
a
part
of the File of Data on Legal Status of Property, but due to
the frequent use of these codes by the Architectural Section, they are
kept with the material in this
file.
1874.
Sources
of
Data on
Established Standards
and Re-
quirements.
The principal sources of data
for
this file are:
a.
Federal Housing Administration
b,
National Board of
Fire
Underwriters
c.
File of data on legal status of property
1875.
File
of Technical
and
Advisory
Data.
This file
embraces advisory data prepared by recognized authorities and
it
serves to provide authentic information concerning the utility, dura-
bility, strength, and other qualities of various materials.
It
also
includes technical bulletins dealing with recent developments on
dwelling construction, principles of planning small houses, mechani-
cal equipment for homes, contract documents for small house con-
struction, modern design, and other similar subjects.
In
addition
to the above, the file will contain such technical bulletins and papers
received by the Insuring
Office
which deal with frame house construc-
tion, masonry construction, thermal insulation of buildings, heating
and ventilating, Federal specifications for materials and equipment,
and similar topics. The file will be constructed in the following man-
ner. Bound volumes and thick, paper back bulletins will be kept to-
1871-1875
UNDERWRITING MANUAL
BORROWER RATING DATA
1879.
Case binders
constitu
t
e
the file
for
most of the data
normally used in
rating
borrower
s
.
Types of data which are filed
in case
binder
s are factual data reports,
.
bank account certifications,
bank reference letters, salary and employment
record
s
,
records
of
mortgag
e
status and
mortga
g
ee experience, credit references, and
general reference data.
In
addition to the above, the Chief Mort-
ga
g
e
Ri
s
k Examiner is
respon
s
ible for the compilation and mainte-
nan
ce
of data pertaining' to
mort
g
age
in
s
urance allotments. These
data afford an accurate record of the amount of liability outstand-
gether in a convenient and suitable place. Other technical bulletins,
reports
,
a
nd
paper
s
will
be filed in binders or
folder
s to provide
the
most convenient means of reference.
1876.
Sourc
es
of
T
e
chni
ca
l and
Adv
is
ory Data.
The
sources of
the
se
dat
a include:
a.
Fede
r
al Housing
Admini
s
tra
t
ion
.
b,
Superintendent of
Docum
e
nts, Government Pri.nting
Office
c.
U.
S
.
Bur
e
au of
St
a
ndards
d.
American Institute of Architects
e
.
Ame
r
i
c
an Society of Heating and
Ventilatin
g Engineers
f.
U.
S.
Departme
n
t
of Commerce
g.
Tr
a
d
e
A
ss
ocia
t
ions
1877.
File
of
Catalogues
of
Construction Material
and
Equipment. This file
c
onsist
s
pri
n
cipally of catalogues
and
pamphlets which comprise data with respect to the equipment and
construc
t
ion materials which are either immediately or potentially
availabl
e
and desirable to the market. The file shall be constructed
as follows:
a.
Bound volumes will be kept
tog
e
ther
in the most convenient
and suitable place.
b.
Pamphlets will be filed in folders under suitable captions
and classified to an
ext
e
nt
consistent with
th
e volume of
such material.
1878.
Sourc
e
s
of
Data 01n Construction Material and
Equipm
ent.
Many of
the
se
data will be received by
offices
without
specific
reque
s
t.
In
such cases they should be routed to the Archi-.
tectural
S
e
ction for proper filing and u
s
e.
Other sources include:
a.
Manufacturers,
distributor
s
,
and developers
b,
Newspapers and magazines
c.
Sweet's Catalogue
S
e
rvice
1875-1879
COMPILATION AND RECORDATION OF DATA
10')(\ 101\(\
,,
.
!
CONSTRUCTION COST DATA
1884.
The data program of the Federal Housing
Administration includes comprehensive compilation and orderly
recordation of construction cost data. This function is set :forth
independently in Section
19.
•
•
I
ing and credit allotted to each mortgagor in whose favor more
than
one firm commitment has been
i
s
sued.
1880.
Mortgage Insurance Allotment Record
File.
This Form,
FHA
Form No. 2211, which is adaptable to the indi-
vidual borrower and the commercial borrower, reflects the
current
status
of
formal commitments issued with respect to a borrower
for
whom more
than
one commitment has been previously issued. The file
is constructed as follows
:
a.
Mortgage Insurance Allotment Record Cards shall be di-
vided into two
classifi
c
ations, namely:
1.
Operative Builder Borrowers
2. Non-Operative Builder Borrowers
b,
The cards in each of the above classifications shall he ar-
ranged alphabetically.
1881.
Sources
of
Data
for
Mortgage Insurance Allot-
ment Record File.
Data
for this
file are drawn from
Insuring
Office
case binders.
1882.
Credit Data File.
This file shall contain current
financial statements, itemized statements of contingent liabilities,
operating statements of borrowers, commercial reports, factual data
.
reports, and all memoranda compiled in connection with analyses
of
requests for the establishment
of
lines of credit with respect to those
borrowers requiring recurring consideration such as operative builder
borrowers, and other commercial borrowers. Such data will be placed
in separate folders for each borrower and filed alphabetically.
1883.
Sources of Data
for
Credit Data File.
The
sources of data for this file are
:
a.
Information from the borrower
b,
Credit reporting agencies
c.
Commercial reports
d.
Borrower's banking institution
e.
Borrower's employer
f.
Mortgagees, creditors, general reference sources
1879-1884
UNDERWRITING MANUAL
16-67
2
9
2014---Report of Architectural
Inspector
·
Cost
(1
2)
Est
ima
ted
a
nn
u
a
l cost of fuel for
h
eat
ing
$
_
(
1
3)
E
stimate
d
av
e
r
ag
e
a
n
nua
l
co
s
t
o
f
ordi
nary
m
a
i
n
t
e
nanc
e
$
--
-
--
-
-
-
---
--
(
14)
Est
ima
ted
r
emai
ning
ph
ysi
cal
lif
e of
buildin
g with ordinary
m
a
in
tenance
---
---
-
-
--
-
-
-
--
yea
r
s
.
(15)
Th
e
follo
w
i
ng
re
p
a
ir
s,
a
l
te
r
a
ti
ons,
ad
d
i
tio
ns
,
or
ch
anges in
dr
awin
g
s
and
s
p
ec
ification
s
,
es
tim
a
t
ed by me
to
co
s
t
$
..
~-- --
-
-
-----
----
-
--
---
-
--
are D
req
u
ired
to a
v
oid rejection; D
n
one
requir
ed.
It
e
m
(9
)
Is
t
here any
e
vid
e
nce of
t
e
rmites, dampness,
d
ry rot,
or undue
se
ttl
emen
t
?
D
Y
e
s.
D
N
o.
Expla
in under
"R
e
mark
s.
"
(
10
)
D
oes
pro
p
e
r
ty
c
o
mpl
y
wit
h
P
r
op
e
r
ty
Stand
a
r
ds,
r
e
g
ula
ti
o
n
s
,
and
ordin
ances
?
D
Y
es
.
D No.
Expl
ain under
"R
em
ark
s
."
(
11
)
D
esc
ribe
su
bs
t
anda
rd
m
a
t
e
ri
a
ls or
w
or
kman
s
hi
p
,
if
any---
--
-
-
---
Poo
r
Fair Good
C
ondi
t
i
on
PHYSICAL
SECURITY FEATURES
REJECT 1
2
3
4
5
R
A
TI
N
G
-5
- IO I5 20 25
--
-
l>,
St
ructur
a
l
S
ou
ndn
ess
...,
;::<
2 4
-6
-
8
- IO ---
:.s
~
R
esis
tanc
e to
E
l
e
ment
s
::I
-1- 2- 3- 4-
-
5
-
A
R
es
istanc
e
t
o Use
Li
va
bilit
y and
Fun
ctiona
l
4-
8
- 12 16 20
---
i:::
Pl
an
0
:;:>
M
e
chani
ca
l
an
d
C
onv
e
n
-
---
2
-
4
-
6
- 8- IO
-
--
"'
ience
E
qu
i
p
ment
i:::
::I
N
atural
Lig
ht and
V
enti
-
-
--
2
- 4- -6- 8 IO ---
~
l
at
ion
-4
-
8
- 12 16 20 ---
Archi
t
e
ctural
A
t
t
r
a
ct
i
v
en
e
ss
TOTAL RATING OF
PHYSI
CA
L
SECURITY
·
Rating of
Phy
s
ical Security
(A
ssum
ing proposed or required repairs or
a
lteratio
ns
h
av
e been mad
e
)
Ext
e
ri
o
r
wall
s
-
----
--
---
---
-
-
-
---
-
-
---
-------
-
--
_
------
--
-
-
-
·---
------
-
-
---
-
---
-----
-
--
--
-----
__
--
-
---
--
-
-
-----
-
-
--
---
--
-
------
----
· -
----
-
-
--
---
--
-- --
-
- -
- -·
--
-
---
--
Ba
seme
n
t
wa
ll
s
{
12
0
:
:
conc
r
et
e
-
----
-
8
"
co
ncr
et
e
__
_
_
_
____
_
Con
crete
b
lo
c
k
-
--
·
·--
-
-----------
--
-
----
-
., _
·
1
c
onc
r
ete_
__
_
__
_ __ __
_
_ _ _
St
o
ne___
_
_ _
_
_
_
____
______
Br
ick ------
----
-
--
----
-
-
---
.
-
--
---
--
-
--
-
---
--
---
-
--
---
-
--
---
-
--
Ba
se
m
en
t
colu
mns
,
Ste
e
l
o
r
ir
o
n_
_ _
__
___
__
Brick or
masonry
__
_
Wo
od
--
--
---
---
----
---
·-
---
---
-- --
---
- -
---
--
- -
-
---
---
--
-
!
Slat
e
_
____
_
_______
___
_
__
W
oo
d
shi
ngles_
_____
_
Asph
alt
sh.
(lg
t.)
-
-----
----
-
--
--
----
--
----
---
---
-
---·-
-
Ro
o
fi
ng.
,
--
---
-
---
----
-
AT1
s
.l
bee
..
s
_
t
_
o
._
s
-
-s·h--1
_-
n--g
·
l
-
e
~s
-
_~-_-_
·
-
__
-_--
__
-_-
AA
ss
pphh
.
.
ss
hh
..
((mh
Ve)d
-
. .
))
-_-_
-
_
_
-
_
-
-_
·
Ro
lL
.
.
c
cc ------
--
--
----
-
-----
--
-------
-
---
--
--
--
B
uilt
-
up
-
-
--
----
--
-
---
-
--
-------
--
- --
-- --
-
-
----
-
---
- -
--
-
---
She
e
t
nie
taL__
___
_
__
Copp
e
r
--
---
-
Ga
lvaniz
e
d
iro
n____
__
_____
Non
e
--
---
---
----
---
----
----
---
-
--·
-
-- --
----
-
--·
-
-
-
----
-
Flo
o
r
s_
___
____
__
___
_
_
_ _
Oa
k
(be
s
t)_____
_
__
_ _
___
___
__
Oak
(
m
e
d
ium)
---
•
-
-
Pin
e or fir
-----
--
--
---
--
-
--·
---
-
----
- -
----
-
----
--
---
--
"
------
B
at
hr
oom
flo
or
s.
c.
.
Tile_
_ _
___
___
____
____
_
_
___
__
_ _ _
L
i
noleum__
__
_
__
___
__
___
_
__
_
_
Wood
-
---
-- --
--
---
-
-
-----
-
-
·
··-
-
-----
- -
-
--
-
-
-
--
-
--
-
--
---
-----
~
Bathr
m.
w
ain
scot.
.
Til
e_
___
_
_
__
__
___
__ __
_
____
_
___
_
Ceme
nt
pla
s
t
e
r
--
-
--
-
No
ne
--
---
-
---
-
---
--
------
--
-
--
---
----
-
--
-
--
--
---
- --
-
-
--
--
----
Kitch
en
floors_
__
_ _
__
Til
e__
__
____
______
_
___
_
__
Lino
l
e
um
_
_ _
_
__
___
___
__
Wo
od
----
----
--------
-
-
-
--
------
-
--
-
-
- -
----
-
--
-·-- -
----
-
Kit
c
h
e
n
wa
in
scot..
T
il
e__
___
_____
_
___ ___
____
_
__
___
C
e
ment
p
l
a
s
te
r
.
c
.
c
.;
None
--
-
--
----
--
--
-
--
--
-
----
---
-
-
----
-
-
-
---
-
--
----
--
--
--
{
Pl
ast
e
r,
meta
l
l
at
h
Pla
s
te
r, wood
lath
__
W
a
ll
board
--
----
-
-
--
-
--
-
--
--
--
-
-
-
---
-
--
---
----
----
---
--
-
-
--
Typic
a
l wall
fini
s
h
.
-
--
-
--
-
--
Plast
er
,
sheet
l
ath
-
--
--
--
--------
--
-
-
-
-
------
--
------
--
-
--
-
------
----
--
-
---
---
--
--------------
-----
--
---
- -
----
-
-
--
·--
-
----
-
Trim
__
_ _
______________
_
Oa
k or
b
ir
ch_____
_ _
__
Gum
_
__
_ _
__
___ ___
_ _
____
Pin
e or fir
----
--
-
-
-
--
-
-
--
--
--
----
----
-----
- -
---
-
-
-
---
--
-
--
---
--
-
--
-
Doors
___
_
___
__
____
___
__
O
ak
o
r
birc
h
__
___
___
_
Gum_
__ __
___
___
___
__
_
__
_
_
_
___
Pin
e
o
r fir
--
-
----
---
----
---
-
---
--
-
---
-
---
--
---
---
---
--
-
---
---
Electr
i
cal
wlrlng
.,
.
.
Cond
u
i
t
_
______
___
_____
B
.
X____
__
____
_
____
___
_
Kno
b
an
d
tub
e
-
--
-
-
--------
---
-
-
---------
----
-- -
---
-- --
-
---
-
-----
Electri
ca
l
outl
e
t
a
.,
,
Ade
quate
_
____
__
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REPORT OF ARCHITECTURAL INSPECTOR
(
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1
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(8
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CO
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Li
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CK
SCHED
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Number
o
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Numb
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r
of
Non
re
s
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Buil
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dent
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W
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o
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"M
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r
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Ar
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--
---
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(S
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REPORT OF
VALUATOR
0
Propose
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ti
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0
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0
E
xis
ting
con
str
u
ct
ion.
FEDERAL HOUSING
ADMINISTRA
TION
FHA Form No.
2015
(R
evised
Fe
bruary
19 3
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16-6742
2015a-Supplementary Report of Valuator
Total
Taxes
and Hazard
Insurance___________
$
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Insurance
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Taxes
and Hazard Insurance:
Taxes________________________________________________________
$---------------------
Repairs to equipment and
fixtures
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Painting
expense
_
Decorating
expense
---------------------
Structural replacements
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Miscellaneous
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Total Repairs, Maintenance, and
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--- ---
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Miscellaneous
_
Total Regular Operating
Expense_____________
$
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Jani
tor-----------
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Water------------------------------------------------
_
Gas
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for
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--
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Total Renting and Administrative
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$
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Renting and Administrative
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Advertising
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$
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ESTIMATES OF OPERATING EXPENSES
Effective Gross
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$ $ $
_
Notes
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revenue and
expense items:
Predicted
Occupancies,
% % %
Total Revenue at
100% Occupancy
__
$ $
$
_
------------------------------------------------1----
----1-----11
Miscellaneous
Revenues
-------------
_
Total Yearly Rental
Value
$ $ $
_
$
_
Subtotals___________________________
$______
__
$
_
Effective gross revenue
---------------------------------------
---------1---- -----1-----11
------------------------------------ ---------- -- $ ---
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$
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During
3d year
Rental units During
2d year
Monthly
rental values
During
1st year
ESTIMATES OF GROSS REVENUE
Rental value of units
Property
address -------------------------------------------------------------------
City
---------------------------------------
State
------------------------------
(Serial number)
SUPPLEMENTARY REPORT OF VALUATOR
FEDERAL HOUSING ADMINISTRATION
r:
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16-6772
201&-Report of Mortgage Risk Examiner
(INDIVIDUAL BORROWER)
(Signed)
------
-
---------------------------------------------------------
-
----------
·
Chief Mortgage Risk Examiner.
DATE
------
----
-------------------------
-
----
-
----
CERTIFICATION.-!, the undersigned, do hereby certify that I have no personal interest, present or prospective, in the property,
applicant, or proceeds of the mortgage.
D Approved as submitted.
o
Approved as modified by me.
D
Disapproved.
REMARKS:
(Signed)
-------------"----------------------------------
-
-----------------
---------
Mortgage Risk Examiner.
DATE
-----------
--
-
-
--------------
-
-----
-
---------
CERTIFICATION.-!, the und
e
rsigned, have
re
a
d Section 512 (a) of the National Housing Act, as amended, and do hereby certify
that, to the
be
s
t of my knowledge and belief, the statements made in this Report of Mortgage
Ri
s
k Examiner are correct; that I have
no personal interest,
pre
s
ent or
pro
s
pective, in the
pr
o
perty, applicant, or proceeds of the mortgage; that, in my opinion, the findings
and
deci
s
ions set forth above are justified; and that I know of no reason why they should be
alter
e
d or modified.
REMARKS:
FEATURE
REJECT
1
2
3
4
5
RATING
.,
-
3--
-6-
-
-
9-- _
1_2
__
-15
_
__
"
Social and Economic Characteristics
""
i
5
-10-- -15-- -20--
25
-<
Motivation in Relation to Transaction
-
-4-- -8-- -12--
_1_6
__
20
10'
Employability and Earning Stability
p..
.s
3
-6--
-
9--
_1_2
__
-
1
5--
.t'
Relation of Obligations to Transaction
:=I
5
_1_0
__ -15-- -20--
_2_5
__
:a
-q
Relation of Income to Transaction
TOTAL RATING OF BORROWER
Rating of Borrower
-
1
-
.
Borrower is
n
occupant,
:
o
landlord
;
b
other-------
-
- -
----
-
---------
--
---~---- --
---------------~------------------
~
-
-
------------
-
-------
-
-
-
------
2.
-
Occupation of principal borrower
~~:;
_
:
_
::::
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:
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:.
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c
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·
3.
Employer
'
s business
~------
~
---
:
~-------
--
-------
-
-
-~
.:
--
-"
4.
Occupation
of
secondary
borrower
----
-
----
--
--
------
---
-
.
-
-
--
--
----
l).
Employer's
business -----------"~-----------------------
6.
Total
.income
of principal borrower: Annually,
$---~----------------
,-
---;
monthly,
$
~
:.
_
7.
Total
income
of secondary borrower: Annually,
$c
;
monthly,
$
_
8.
My best estimate of the borrowers' net worth is
$.
_
1
~:
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t
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~
~
=
=
==
============
~~
=
~=
===
=
====
=
=
=
=====
=
==============
=
=================-$
===
=====================
11
:
Prospective monthly housing expense:
.
-
Heating
••
$
_
Main ten an ce
~
•
----
--
--
- -
-
- --
-
-- --
$
_
-
--
- -
- -
-
---
-
---
-
--
-
-
-
--
Total monthly mortgage
payment.,
~----
-
------------------
-
--
-
----
--
-
$
c
_
Tot
_
al expense
--
-
--
-
-
$
_
-
- - -
--- --
-
-- ------
_
--
__
12.
Current fixed charges against income
~
---------------------------
---
-
-- --
----------------
--
-----------
--
$
_
13.
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-
---
--------
----
-
---
--
---
----------------
$
_
------
-
-
-- -- --
15.
Assets
avail
a
ble for
settlement--------------
-
---
---
-----------
-
-----------------
-
---
-
-------------------
-
-
-
-
--
------------
---
---
-
---
-
---
$
_
16.
Valuation:
$
_
__________________________
17.
Ratio value of property to annual income
--
-----------
-
--
-
-
- -
-----------------
%.
18.
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
--
---------
--
----
----
---------
--
-
%
---------
--
-
----
-----------
----
-- -
%
D New mortgage on unencumbered property.
D
Purchase.
D
Proposed construction on owned lot.
-
Type of transaction:
D
Refinancing mortgage.
D
Refinancing sales contract.
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
-------
-
----------
(Serial number)
REPORT OF MORTGAGE RISK EXAMINER
Individual
Borrower
FEDERAL HOUSING ADMINISTRATION
-
·
-'
'\ /
.:»
FHA.
Form No.
2016
(Revised
February
1938)
(mI.M.otnma 1VilCIIAiaND
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lJS!'H:
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JO
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16-6773
2016a-Report
of Mortgage Risk Examiner
(COMMERCIAL BORROWER)
(Signed) ------------------------------------------------------------
Chief
Mortgage
Risk Examiner.
DATE ------------------------------------
CERTIFICATION.-1, the
undersigned, do hereby
certify that I have
no personal
interest, present
or prospective, in
the property,
applicant,
or proceeds of
the
mortgage.
D Disapproved. D Approved
as
modified by me.
D Approved
as submitted. REMARKS:
(Signed) ------------------------------------------------------------
M
<Yl'tgage
Risk Examiner.
CERTIFICATION.-1, 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.
REMARKS:
FEATURE REJECT
1
2 3
4
5
RATING
3--- 6--- 9---
12
-15--
Organization and
Competence of
Management
4
8--- -12--
16
20
Motivation
in
Relation to Transaction Q--- -12-- -18-- 2-4-- 3-0--
Financial Condition
7
-14-- -21-- 2-8--
35
Prospective Earning Capacity and Stability
I
TOTAL RATING OF COMMERCIAL BORROWER
,
-·
Rating of Commercial Borrower:
1.
Nature
of business ----------------- ------------- ------------ ---------------------
_
2.
Amount
of
insured mortgage liability other than subject property
-----------------------------------------
$
_
3.
Apparent motive
for borrowing -----------------------------------------------------------------------------------------------------------
4
.
Capital
in v es
tmen t,
$
-------------------------------------------------------------------------- ------------------------
5.
Annual
income: Gross,
$____________________________________
Net, $---------------------------------------------------------------------
6.
Current
assets,
$_____________________
7.
Current
liabilities,
$______________________________
8.
Ratio
----------------------------
9.
Estimated net worth,
$_____________________________
10.
Total direct
liabilities,
$_____________________
11.
Ratio
------------
12.
Amount
of
contingent liability, $----------------------------------------------------------------------------------------------------------
13.
Estimated amount
of
contingent liability
likely
to
become
direct liability,
$
_
14.
Number
of unsold
properties: Vacant
------------------------------------------ Occupied -----------------------------------------
15.
Estimated number
of
properties built during past
12
months
--------------------------------------------------------------------
16.
Estimated number
of
properties
sold
during past
12
months
---------------------------------------------------------------------
17.
Number
of
properties in this project
----------------------------------------------------------------------------------------------------
18.
Estimated
costs, now
unpaid, for entire immediate project,
$
_
19.
Required
cash
outlay other than construction
loans,
$
_
20. Cash
required
for
settlement:
21. 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____________________________________
$ -----
To
T
AL____________________________________________
$
_
22. Assets available for
settlement, subject
propertY-------------------------------------------------------------------
$
_
2
3
.
Valuation:
$
-
- -
-- --
_
----
__
---
-
-- --
- -
24.
This
borrower has been
rated
on_____________________________
D
Basis of
application. D
Basis of
this
schedule.
Mortgage
principal_________________________________________
$
------------
$
-----------------
Life of
the mortgage
---------------------------- years. ----------------------------- years.
Ratio
of loan
to valuation
----------------------------------
% -----------------------------------
%
Total monthly payment
for
first
year_________________
$
per month.
$
per month.
D
New
mortgage
on
unencumbered property.
D Purchase.
D Proposed construction
on owned
lot.
Type
of
transaction:
D
Refinancing
mortgage.
D
Refinancing sales
contract.
Mortgagor
is:
D individual; D partnership; D corporation;-D operative builder; D other.
Property
address ------------------------------------------------------
City
---------------------------------------
State
------------------,
Name
of mortgagor---------------------------- --------------------------------------
_
Address of
mortgagor
_
_
City
---------------------------------------
State
_
(Serial
number)
REPORT OF MORTGAGE RISK EXAMINER
Commercial
Borrower
FEDERAL HOUSING
ADMINISTRATION
FHA Form. No. 2016a
(Revised
February
1938)
(mIA\OR'HOff 'IVI3H~]i\IWO:l)
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...
(OVER)
2017 a-s-Report of Chief Underwriter
16-6760
(Signed)
----------
-
-----------------
-
--
----------------------
-
------------------------------
Director.
'
DATE
-----
-
----
·
------------------------
-
------
-
------
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
.
N
OTE
.
-In
case of
disapproval,
omit signature
and state
reasons for
disapproval, together with Director's
recommendation, in
an
attached memorandum
.
Then
imm
e
diat
e
ly forward complete Case Binder, with
application
and all
r
e
ports,
togeth
e
r
with
a
memorandum
by the Chief
Underwrit
e
r,
to
the Federal Housing Administration, Washington, D. C. No
Commitm
e
nt
for
In
s
uranc
e
or Notice of Rejection
shall
th
e
n be issued, or
other
action
tak
e
n,
until an
Administrative decision has been made by
the Deputy
Administrator,
Title
11,
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.
(Signed)
-
------------
-
-------- -------
--
--
--
----------- ------ ---
-
--- ------ ----------------
Chief Underwriter.
DATE
-------------
-----
-
----
-------
---
---
- -
-
---------
CERTIFICATION
.-
!,
the
unders
i
gned, have
r
ea
d 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 mad
e
in this
Report
of Chief Underwriter are correct;
that I
have no
personal interest,
pres
e
nt
or prospective, in
the propertv, applicant,
or proceeds of
the
mortgage;
that,
in my opinion,
the
findings
and
decisions
set forth
abov
e
are justified;
and that I
know of no reason why
they
should be altered or modified.
CHIEF
UNDERWRITER'S FINDINGS
AND DECISIONS
I have
carefully
consid
e
red all
data relative to the
mortgage described in
the application
identified by
the
serial
number
above,
and
find
that the
mortgage described in
th
e said
application
is economically sound in the
amount
of
---------------------
-
-------------------
-
--------------
dollars
($
),
for
an amortization
p
e
riod of -----------
y
e
ars, bearing
interest at
----------
%
per annum, with mortgage insurance
premium of ---------
%
p
e
r annum,
and
payable in
---
------
---------
monthly installments
of
$
,
provided
that the
requirem
e
nts, if any, listed on
revers
e
side hereof shall
b
e met. A Commitment for Insurance in accordance with
thes
e
conditions
and terms
should be issued
und
e
r
th
e
provisions of Section 203, b,
2:
D A; D B; D C of
the National
Housing Act, as
amended
.
I
FEATURE REJECT
1
2 3 4
5
RATING
--- ---
-
--
6
9
12
1_6
__
_
20
Ratio
of Loan
to
Value
--------- %
O
ver Legal Limit
·
~ 70-74
6
5-
6
9
6<Hl4
Un
de
r
60
2
4---
6
--- 8---
10
Ratio
of
Total Payment to Rental
Value
---------
%
O
v
er 130
11
1
-
1
30 93-110
16-
92
6
0-75 ~
1
2--
- 3---
-4-
-
5
Ratio
of Life of Mortgage
to
Economic Life of Building
---------
%
Over 100
R
0-
10
0
66-79
5
7-S"i
.
50-56
Un
der
50
7---
1_2
___
17
22
27
Lowest Category
Rating
(
.
_
___
_
___
_
_______________
__
)
--------- pts,
Und
e
r
50
pta.
5
0-
54 55-"'9
60-69
70-7'1
8
0-100
6-
--
10
1-4-- -18--
22
Intermediate Category Rating
(_
_
--
-
-
-------------------
--
)
_________
pts,
U
nd
er
5
0 pta
.
50-5( 55-59
6<Hl9
70-79
-
8
0-
1
00
4
7---
-10
___
13
16
Highest Category
Rating
(
__
_
_
__
____
_
___________
_
____
)
__
_______
pts.
Un
der
5
0 nte
.
50-
i 'i
4
55-59
80-6
9
70-79
8
0-100
TOTAL RATING OF MORTGAGE PATTERN
RATING OF MORTGAGE PATTERN
FHA VALUATION
FHA VALUATION is hereby fixed
at
-
-
--
-
--------------------
-
--------------------------------------------------------------
$-------------------------
-
----------------
Distribution
of
total
valuation:
Land_______
____
__ __
_______________
$
@
$
per O lot, O
front
foot,
0
square foot.
Main
Building_
_
_
_
_______________
$
_
Garage_______
___
__________________
$
_
Other
Improv
e
ments__________
$
_
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
$
_
Amenity
increment
-----------------------------
-
---
---
--
--
---------
%
Derived monthly
value__________________
_
___
__
____________
$
_
Remaining economic
life________________
_
_________________
--
-
---
-
-------- years
Conversion
factor
--
-
- -
-----•------------
Derived capital
value_____
_
______________
_
___
_
__
___
_______
_
$
_
Replacement cost of
property_________
____
_
_____________
$
_
Available
market
price
_
_ _
______________
_
__________________
$
_
Neighborhood price
range.c.,
$
to
$
_
SUMMARY OF DATA
Monthly
rental
value
$______
_
______________
Typical family
annual
income
$
_
Borrower is
0
owner; D landlord; D
other; and
is
rated
as D
individual;
O commercial enterprise.
O Mortgaging unencumbered
property
O
Propo
s
ed
construction
on owned lot
O
Purcha
s
e
Type
of
transaction:
O Refinancing mortgage
O Refinancing
sale
s
contract
Under
construction
or
to
be
constructed
.
Use
FHA
Form No. 2008.
Con
s
truction
completed within
la
s
t
12
month
s
.}
U
s
e FHA Form No. 2007.
Date
completed Mo.
------------
-
-
Yr. -----------
All
other
cases. Year
built-------
----
--
-
----------- Use
FHA
Form No. 2007.
Now constru cti
on.c,
-j
~
Existing
construction__________________
____
_ _
____
_____________
__
_
____
___
D
O Rewrite of Section 203 insured mortgage
O Release from Section 207 insured mortgage
O Release from Section 210 insured mortgage
D Other
--
----
--------------
--
-
-
----------------
-
--
--
---
O 90-day conditional commitment
D Wholesale conditional commitment
Property
address ---------------------------------------------------
City
----------------------------
--
------
County
------------------------
State
---------------
Name of mortgagee
----------
-
-
--
---
----
--
----------------
--
-----------------------------------------
---
----
-
------------
-
-
-
---
-
--
-
-----------------
-
--------------
-
-------------
Address of mortgagee: City
--------------------------------
,
-------------------
-
----------------------------------C---------------------------
-
----
-
State
---------------
Name of mortgagor
(
s)
---~-
-----------
--------
--
--
---
---
-
----------------- ------ ---------
--
-
--------
Source of application: (Check one of
the
following)
D No previous conditional commitment or insured mortgage
O 180-day
condit
i
onal commitment
(County-city code)
REPORT OF CHIEF UNDERWRITER
(Serial number)
FEDERAL HOUSING ADMINISTRATION
Eligible Amenity
Income Case
FHA Forni No. 2017a
(Revised
February
1938)
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...
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(OVER)
2017b-Report
of Chief Underwriter
1
6
-
6
7
59
(S
ign
ed)
-
-
---
---
--
-
---
-
-
----
--
-----
--
--
---
------
--
-
-
-
--
--
-
----
---
-
--
-
-
-
------------
D
irector
.
D
A
TE
--
------
--
--
- -
--
---
--
--
---
--
----
---
--
-
-
1.
I
ap
pro
ve
t
h
e
"Rep
o
rt
o
f
Ch
ie
f
Un
derwr
i
t
e
r
."
2
.
I a
uthor
i
z
e iss
uanc
e
o
f
Commi
tmen
t
for
I
ns
urance
i
n
a
ccord
ance with
t
he
c
onditi
ons
and
t
e
r
ms
stated
a
b
o
ve.
NoT
E
.
-ln
ca
se
o
f
di
sapprov
al,
om
i
t
sig
n
a
tur
e
a
nd
s
t
a
t
e
r
eas
on
s for
di
sa
ppr
ova
l
,
tog
eth
er
wit
h
Dir
e
c
t
o
r's
r
e
c
om
m
e
nd
a
t
io
n
,
in
a
n
attac
hed
mem
o
r
an
dum.
T
he
n
i
mm
ediately
for
ward
c
omplete
Ca
s
e
B
i
nde
r
,
with
a
pp
lic
at
ion
a
n
d
a
ll
r
e
po
rt
s,
t
o
get
h
e
r
wit
h a
m
emo
r
a
n
du
m
b
y
t
h
e
Chief
U
nder
writ
e
r
,
t
o
the
F
ede
ral
H
ousi
n
g
Adm
ini
s
tration,
Was
hin
gton, D. C. No
C
ommi
tment
for
In
s
u
rance or
No
t
ice of
R
e
j
ec
tion
s
hall
t
hen be
is
sued, or
oth
e
r
action
t
ake
n,
un
til
a
n
Ad
minis
trativ
e
d
e
cision
h
a
s
been
ma
de by
t
he
Deputy
Administr
a
tor,
Titl
e
II
,
and
t
ran
sm
i
tte
d
to
th
e
In
s
u
ri
ng Office.
D
a
t
e
appli
cat
i
on
rec
eive
d
--
-
-
--
---
--
-
--
---
--
-
--
--
--
----
-
--
---
Date
c
ase
a
p
pro
ve
d
b
y
Pr
elim
in
ar
y
E
xa
m
i
n
e
r
--
-
-
---
-
-
-------
--
--
-
-
-
-
---
-
-----
-
-
Pro
cess
ing
t
ime from
app
lication to
c
ommit
me
nt
---
-
---
----
-
day
s
;
from
Pr
eli
minary
E
xa
minatio
n
to
comm
i
tment
---
--
-
-
-----
day
s.
DIRECTOR'S
APPROVAL
(Sig
ned)
-
-----
--
-
--
-----
-----
--
-
---
----
--
---
-
---
--------
--
--
----
--
----
--
----
--
-
----
0
h
ie
f
Under
writer.
D
ATE
--
-----
--
-
-
-
--
--
---
---
--
-
-----
---
-
-·-
--
-
--
---
-
CE
R
T
IFI
CA
T
ION
.
-
!
,
the
u
nde
r
signe
d
,
hav
e
r
ea
d
Sect
i
on
51
2
(a)
o
f
t
h
e
N
a
tiona
l
H
o
u
s
i
ng
A
ct
,
as
a
m
e
nd
ed,
and
do hereby certify
tha
t,
to the
b
e
st of my
kn
ow
ledg
e
an
d
beli
e
f
,
the
statem
ents
mad
e
i
n
t
his
Report
of
Ch
i
e
f
Under
wri
t
e
r
ar
e
correc
t;
t
ha
t I
h
a
ve no
pers
on
al
inter
e
s
t,
present
o
r
pros
pec
t
ive
,
in
t
he
p
roper
ty
,
a
pplic
ant,
o
r
pro
ceed
s
o
f
th
e
mo
rtgag
e
;
tha
t,
in my
o
pinio
n,
t
h
e
find
ings
and
de
ci
s
ions set
forth
a
bove
a
r
e
j
ust
ifi
ed
;
a
nd
th
a
t I
kn
o
w
o
f
n
o
re
ason why
they
s
h
o
ul
d be
a
lt
ered
o
r
mod
ifie
d.
C
HIEF
U
N
DER
W
RITER'S
FI
N
DINGS
AN
D
DE
C
I
S
IONS
I
have carefully
consid
ered all
d
a
t
a
r
e
lati
ve to
t
he
m
o
r
tgag
e
descr
i
be
d in
t
h
e
appli
ca
t
ion
ide
ntifie
d by
t
he
se
rial
nu
mbe
r
abo
ve,
and
find
th
a
t
t
h
e
m
ortgage
d
escribe
d in
th
e
sa
id
ap
plica
tion is
eco
nomi
cally
s
ound in
the
amoun
t
of
-
--
--
----
-
----------
------------
-
----------
-
-----------
do
ll
a
r
s
($
)
,
fo
r an
amo
r
tizatio
n
p
e
rio
d of
yea
r
s
,
bea
ri
ng
inte
r
e
s
t at
%
pe
r
a
nnu
m
,
wit
h
mortgag
e
in
s
ura
n
ce
premiu
m
o
f
----
--
---
%
per
annu
m,
and
payab
l
e
i
n
--
--------
--
--
----
m
ont
hl
y
i
n
stallmen
t
s
o
f
$
,
p
ro
v
ided
t
hat the
requir
emen
ts, if
any
,
list
e
d on
rever
se
si
de
h
ereof shall be met. A
Commit
me
nt
for
I
nsur
ance in
ac
corda
nce
w
ith
t
hese
c
ondit
io
n
s
and
t
e
rm
s
shou
ld
b
e
is
s
ue
d
u
n
d
er
the
pr
ov
i
s
ions of
S
e
ctio
n
20
3
,
b,
2
:
D A
;
D
B
;
D
C of
th
e
Nat
ional
Hous
ing
A
ct, as
amende
d
.
FEATURE REJECT
1
2
3 4 5
RA
T
ING
_
6
__
_
9
-
12
__
_
-
1
6
_
__ 20-
Rati
o of
L
o
an
to
Va
lue
--
-
--
-
--
-
%
O
v
e
r Legal
Limi
t
75
-L
imit
70-74
6
5-89 6CHl4
U
n
d
e
r
60
4-
--
_
8
_
__
-
1
2
__
_
-16
__
_
20
Rati
o of
D
e
bt
S
e
rvic
e
t
o
N
et
Inc
ome
- -
-----
- -
%
Over 83%
78
-
83
70-
77
60-69 50-59
Un
der
5
0
1
2
--
-
3
--
- 4---
5
R
a
t
io of Life
o
f
Mortgag
e to
Ec
on
omic
L
ife of
B
ui
ld
i
n
g
--
-
---
--
-
%
O
v
e
r
100%
8
0
-
100
~
57
-65
50-
56
Under
50
8
-
--
16
2
_4
__
_
3
_
2
___
40
Rat
ing
o
f
Ea
rning
E
x
p
ec
t
ancy
___
_
_
_
pt
s
,
U
n
de
r
5
0
p
t
a
.
50-
54
~
6
CHl
9
7
0-
7
\}
80-
10
0
3
---
6
9--
-
-
1
2
___
1
5
Ra
t
i
n
g
of
B
o
r
rower
-
-
----
pts,
U
n
der
5
0
p
te
.
50-54
55-
5
9
60
-
6
9
70-79
80
-
10
0
TOTAL RATING OF MORTGAGE PATTERN
R
A
TING OF
MORTG
A
GE
PATT
E
RN
(
R
e
nt
a
l
In
co
me
Dwelling
)
SUMMARY OF DATA
Rat
i
n
g of
Pr
ope
r
ty
pts
.
Rati
n
g
o
f
L
ocat
i
on
pts
.
Capita
li
zat
i
o
n
e
stimate
---
----
--
-
-
--
-
--
--
----
---
--
-
-----
-
-
$
_
R
e
ma
ining
e
con
omic
li
fe
----
-
-
--
----
------
-
-
---
--
-
----
-
--
---
---
--
--
--
-
ye
ar
s
.
R
e
plac
em
e
nt
co
s
t
o
f
propert
y
_
___
_
_ _
__
___
__
__
_
_ _
____
_ _
__
$
_
Monthl
y
re
ntal
range of
u
ni
t
s
$
t
o
$__
_ _
__
_
_
____
__
_ _
Av
ailabl
e
ma
rket
price
$
_
Pre
d
i
ct
e
d
o
c
c
up
a
nc
y
___
_
__
__
_
___
_
____
--
--
--
---------
--
-yea
r
-
-- --
--
---
--
-
%
E
s
t
im
ate
d
tota
l
monthly
p
aym
e
n
t
fir
st
y
e
a
r
$
_
Exp
ense
ra
tio__
_
_
__
_
______
___ ___
_
_
__
__ __
___
___
_ _
__ __
____
__
_
__
_ _
__
_
-
--
-
-
-
-
-
-
--
--
%
Ass
et
s
availa
ble for
sett
le
men
t
_
__
_
__
___
__
___
_
__
_
__
__
____
$
_
Estim
ate
d yearly
ne
t earnin
ga.,.,
_
y
ea
r
$____
_
___
_
_____
__
Cash
r
equir
e
d for
se
ttl
e
ment
_ _
_
__
_ _
_ _
____
_
__
_
__
_______
__
_
$
_
Ca
pi
taliz
a
t
i
o
n
r
at
e
s
:
la
nd
%;
b
uild
ing
_
_
_ _
_
_
--
-
-
---
--
-
----
%
App
lic
ation
te
rm
;
amoun
t
$
_
FHA
VA
LU
A
TION
FHA
VA
LUAT
IO
N
i
s
her
eby
fix
ed
aL
--
--
-----
--
-
---
--
----------
----
-----
---
----
---------
--
-
-
-
-
---
--
-----
------
-----
-
--
--
$
_
D
istr
i
b
utio
n
o
f
to
tal
valuat
ion:
Lan
d
$
@
$
p
e
r
O
l
ot
O
fro
n
t
foo
t
O
sq
u
a
r
e
foot
.
M
a
in
B
uildin
g____
___
__
_ _
__
___
__
$
_
Garag
e_
___
_
___
_
________
__
_ _
_
__
___
_
$
_
Othe
r
I
mpro
v
ement
s___
____
_
_
_
$
_
Borro
we
r
is D owner; D
l
andlor
d; D
other;
a
nd is
rate
d as D
in
di
vidua
l
;
D
c
ommer
ci
a
l
ente
rpri
se
.
D
Mortgagi
ng
u
nencu
m
be
r
ed
p
r
o
p
e
r
ty
D
Prop
ose
d
con
struc
tion
o
n
o
w
ned
l
o
t
D
P
u
r
c
h
ase
T
y
pe of
transa
c
tion:
D
R
e
fi
nanci
ng
m
ortga
ge
D
Refina
n
cing sales
c
on
t
rac
t
U
s
e
F
HA
F
o
rm
No
.
2
007.
Use
FH
A
F
o
rm
N
o.
2
007.
Use
F
HA
F
o
rm
No.
200
8
.
l
D
Und
e
r
c
o
nst
ru
ctio
n or
to
b
e
const
ru
cted
.
N
ew
c
onstru
ctio
n_
__
___
__ __
___
_ _
_
_
__
___
__
_ _
__
__ __
_
___
__
_
_
___
____
_
___
___
_
D
C
o
nstruct
i
on
comp
l
ete
d
withi
n
la
st
12
mo
n
t
h
s
.
}
Da
te
co
mplet
e
d
Mo.-
---
--
-
-
----
----
Y
r
"
_
E
x
i
st
i
ng
cons
tr
uction
_·
----------
---
---
-
---
-------
------
----
--
-----
-
--
-
-
D
A
ll other
cases
.
Yea
r
bu
il
t
-
--
-----
---
-
-
-
----
--
-
---
---
---
D
R
ewrite of
S
ection 203
i
nsur
ed
m
ortgage
D
R
e
l
e
as
e from
S
ec
tio
n
2
07
insu
r
e
d mortgage
D
R
el
e
ase from
S
e
c
ti
o
n 210
in
s
u
red
mortgag
e
D
Oth
er
-----
--
---
--
--
--
--
----
-
---
--
-
---
---
---
--
--
-
---
--
Sourc
e of
ap
pli
cation:
(C
heck one of
follow
in
g)
D
N
o
p
reviou
s
co
nditi
ona
l
comm
itme
nt
or
i
nsu
r
e
d
mor
tgag
e
D
1
8
0
-day
cond
i
tio
n
a
l
comm
i
tment
D
90
-
da
y
c
onditiona
l
commit
m
ent
D
W
ho
lesal
e
con
dition
al
co
mmit
m
e
nt
Pr
o
p
erty
address
---
-
----
-
------
-
--
-
-
--
----
--
--
-
-
---
-----
---
-
--
----
-
--
--
--- City
-
--
----
-
-------
----
-
-
--
--
--
---
Co
un
ty
-
-
---
-
---
-
--
-
----
-
--
--
-
-
State
---
-
-
--
------
-
-
Na
m
e of
mo
rtg
ag
ee
--
----
--
-
-
--
-
---
--
-----
----
--
-
----
-----
--
-
-
--
---------
-
----
--
--
---------
------
--
--
--
---
--
-----
--
-
---
-
------
---
--
-----
--
---
--
--
-
----
--
--
----
---
----
--
--
----
---
-
Addr
ess of
mort
gagee
:
Cit
y
-
---
----
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REPORT OF CHIEF UNDERWRITER
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E
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Inco
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FEDERAL HOUSING
ADMIN
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FHA
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(
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0
R
AT
ING
OF
MORTGAG
E
PATTERN
(8)
0
RATIN
G
OF
EAR
N
IN
G
EXP
EC TANCY
(1)
D
WITHDRAW
N
CODING OF REASONS FOR REJECTION
C
HIEF
U
N
D
E
R
W
RI
T
ER'S
FI
NDINGS AND
D
EC
ISIONS
I have
c
ar
efully
conside
r
e
d
a
ll
d
ata
re
l
ative to the
m
ortgage
descr
i
bed in
the
appli
cation
i
den
tified by
th
e
se
r
i
al
nu
mber
a
bove
,
and I
find
th
a
t
i
t
is
nec
essary
to
r
ej
e
c
t the
a
pp
lication
for
the
foll
owing
rea
s
o
ns:
RA
TING
OF
PR
OPE
RTY
-
--
-
-----
pts.
RAT
ING
O
F
LO
CATIO
N---
--
-
--
-
p
ts.
FE
A
TURE
REJECT
1
2
3 4 5
RAT
I
NG
---
-
6
- 9- 12 16 20
--
-
Ra
tio
of
L
oa
n
to
V
a
l
ue
--- -
-
%
-
-- ---
Ratio
of
D
ebt
Se
r
vice
to Net
4
- 8 12 16 20
In
come
------
%
Ratio
of
Li
fe of
M
tge. to
E
co-
--
-
-
1
-
-
2-
3
-
4
-
5- ---
nomi
c
L
i
fe of Bldg.
____
__
%
--
- 24 ---
Ra
ti
ng of
Ea
rnin
g
Expec
t
ancy
8- 16 32 4c)
___
___
pts
,
--
-
-
--
3
-
6
-
9
- 12 15
Ratin
g
of
B
orrow
er
__
_
__
_
pt
s
,
---
TOT
A
L
RAT
I
NG
OF
MORTGAGE
PAT
TE
R
N
FE
A
TUR
E
REJE
C
T
1
2
3 4 5
RATING
--
-
-
6-
9
12 16 20 ---
Rat
io of
L
oa
n
t
o
Va
lu
e
__
__
%
--
- -
--
-
R
at
i
o
of
To
ta
l
Pay
m
en
t to
-
2-
4
6
-
8
-
10
R
ental
Va
l
ue
--
--
--%
Rati
o
o
f Life of
Mt
ge
.
to
E
co
-
-
-- 3- 4
--
-
1
2
5
no
mic Life of
Bldg
.
___
__
_
%
--
-
--
-
Lowe
s
t
Categ
or
y
Rat
in
g
7
12 i7 32
27
<-
-----
-
--
---
-----
-----
-)
______
pt
s.
---
--
-
Int
ermedia
te
Cat
e
gory
R
ati
n
g
6
10 14 18 32
<----
--
-
---
-
-
--
---
--
--
-
-)
_
____
_
pts,
--
-
Hi
gh
e
st
Ca
t
egory
Rat
in
g
I
4
-
-
7-
w 13 16
(
_ _
___ ___
_ _
_
_____
_
__
_
_
__
)
______
pt
s
.
TOT
A
L
RATIN
G
OF
MOR
TG
AGE
P
A
T
TE
RN
I
RATING OF MORTGAGE PATTERN
(
Rental-Income
Dw
e
lling)
RATING OF MORTGAGE PATTERN
F
HA VALUATION
F
HA
V
AL U A
TI 0
N
i
s
her
eby
fix
ed
a
t
--
-
--
----
-
------
--
-------
-
---
-
--
-
----
-
---
----
-
-
----
-----
-
-
---
-
--
-
----
--
-
--~--
--
---
- -
.
. .
$-
----
----
--
-
-
--
--
-------
-
----
-
D
ist
r
i
buti
o
n of
t
ota
l
va
l
uat
i
on
:
L
a
nd__
_
______________
_____
_
_
_
_
_____
$
@
$
p
e
r
D
lot
D
fr
on
t
foot D
s
quare
fo
o
t.
Main
Buil
di
ng______
_
___
___
_____
$
_
Garage______
_
____
_
_
_
_________
_
____
$
_
O
the
r
I
mp
r
ov
em
e
n
ts
.
c.
c
.L
;
$
_
Proper
ty
a
ddres
s
--
---
---------
-----
-
---------
--
-
-
----
--
----
--
--
--
-
--
City
-
----
--
----
-----
------
-
--
-
-
Cou
nty
--
------
--
--
----
-----
-
---
-
-
Stat
e
--
-
---
---
-
--
---
-
---
--
N
a
m
e
o
f
mo
rtg
agee
---
-----
---
-----
-
- -
----
---
----
--
---
-
_
Add
r
ess of
m
or
t
gagee:
Ci
ty
--------
--
-
--
---
-
-----
--
-
-
--
-------
---
--
- - -
----
----
--
--
--------
-
- - -
---
--
-
----
--
---
-
---
-
Sta
t
e
---
----
--
-
-
----
-
-
-
---
Name
o
f
mo
rtg
a
g
or (s)
_
_
---
--
--
-
- -
_
T
e
rm
o
f
applicati
on
--
----
-
----
---
--
---
-
---
---
--
-
---
--
------
-
--
yea
r
s
.
Amo
unt
of
app
li
c
ati
on
------
--
-
----
-
-
--
--
--
--
-
--
-
-
----
$
_
Und
e
r
c
on
st
ru
c
tio
n or
t
o
be
con
s
tru
c
t
e
d.
C
on
s
t
r
uction
c
ompl
ete
d within
l
as
t
12
months.
D
a
te
com
ple
ted
Mo."
Yr.---
---
------
All
oth
e
r
cases
.
Y
ea
r
b
uilt
- - -- - -
----
---
---
---
---
-
---
New
co
ns
tructi
on
-
----
- -
{
8
Exis
tin
g
c
o
ns
tru
ctio
n D
(County
-city code)
REPORT OF CHIEF UNDERWRITER
(Se
r
ial number)
Nam
e
d
Borro
we
r
Ineligible
Cas
e
FEDERAL HOUSING ADMINISTRATION
FHAForm.No.2017c
(Revised
F
e
bruary
19
38 )
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(pau1l!S)
E
ffective
February
1938
F
e
d
e
ral Housing Administration
Paragraph
Cost
lnforlllation----------------------
--
--
--
--
-
---
-
--------------
1901-1906
Cost
l)ata
II
a
ndbooks 1901-1902
Compilation and
Tabulation
of Cost
D
a
t
a
..;.
1903-1905
Determination
of
lnplace Unit Prices
1906-1913
Factor~
..;.
1911-1913
Determination
a
nd
U
se of
Quantity
Ratio
s 1914-1916
Determination
of
B
as
i
c
Square
Foot
Cos
t
s-
-
--
---
--
---
-
--
--
----,--
·
--
1917-1922
Ba
s
ic
Specific
ation
s
-
--
-
----------
-
---
--
--
-
---
--
-
-
---
---------
1918-1900
Component
Un
it
C
o
s
t
s
---------
---
----
---
--
---
-
---
--
---------
-
1921
Basic
S
q
u
a
r
e
Foot
Co
s
t
s
_:
__
__
_ _
____
__
_
__
_
__
________ 1922
.
Derrvation
of
Com
pone
nt Unit
Adjustment
s
--
-------
-
----
---,------
1923
Determination
o
f
Qu
a
lity Adjustment
Perc
e
nt
a
g
es
-
-
--
-
-
---
---~----
1924-1926
Determination
o
f
L
oca
lity Adjustment
Percent
a
g
es
1927-100
2
Verification
and
R
evi
s
ion of Cost
l)ata-----
~
--
--
--
--
--
-
-
---------
1933-1936
\.
CONTENTS
PART V
SECTION
19
CONSTRUCTION COST DATA
\
COST INFORMATION
1901.
Cost
Data
Handbooks. Cost information in the
form of basic unit prices is furnished to the architectural and
.
valua-
tion sections in the form of Cost Data Handbooks. These books are
'
divided into two
parts
for convenient use.
Part
1
contains basic cost
data necessary
to
make an estimate by the Integrated Square Foot
Method.
Part
2 of the handbook contains inplace unit prices required
to make an estimate by the Inplace Unit Method.
1902.
Ord
i
narily, the valuation sections are supplied
with
Part
1
only. The architectural sections are supplied with both
Part
1
and
Part
2 of the handbook. All cost data shall be consid-
ered as being strictly confidential and distributed only
to
authorized
members of the Underwriting Staffs requiring the use of such infor-
mation. Adherence to the following instructions is required
:
a.
All handbooks shall be numbered serially and a record shall
be maintained indicating the number of copies issued,
number of pages
per
copy and the
..
name of the persons
to
whom issued.
b,
A memo receipt indicating the serial number and
title
of
the copy issued shall be obtained from each authorized
recipient.
a.
All copies must contain the following in the Foreword:
"This copy and the information contained herein is the
property of
the
Federal Housing Administration and
for
the confidential use of authorized members of the Under-
writing Staff. Distribution to, or use of, by others is
strictly prohibited."
.
1903.
Compilation
and Tabulation
of Cost
Data.
Basic square foot costs, inplace unit prices, component
unit
adjust-
ments, quality adjustment percentages, and locality adjustment per-
centages are prepared by a Cost Analyst and assembled
in
tables
.
which form the contents of the Cost Data Handbook.
I
\
PART V
SECTION
19
CONSTRUCTION COST DATA
DETERMINATION OF INPLACE UNIT PRICES
1906.
Trade prices prevalent in the
territory
to which
the Cost Analyst is assigned are assembled and formally tabulated
for use
in
the development of basic cost data. These
trade
prices
should be obtained
from
all available sources. An analysis is made
of
all prices obtained, and these prices are systematically tabulated
and recorded by
the
Cost Analyst. Only the typical prevailing
Iabor
and material prices from dependable sources are selected for
use
in
developing cost data.
1907.
Material and labor prices
thus
obtained are first
assembled
for the
selected base city, and next
for
those cities and
localities within the
territory
from which a substantial number of
applications· for mortgage insurance have been or are likely to be
received. The prices are usually converted into inplace
unit
prices
for
the base city before the material and labor prices are obtained
for
the other cities in the territory. The city selected as the base
city
for
cost data purposes is usually one of the
Insuring
Office cities
within the cost data
territory, but it
may be any large city in which
construction costs are found to be reasonably stable and :fairly repre-
sentative of the
territory
served. The base city or locality is the
city :for which complete cost data is developed, and
it
serves as a base
for comparison of costs.
•
1904. The Cost
Data
Handbook is indexed in the
fol-
lowing manner in order to provide uniformity throughout all
offices.
Part
1
Foreword
Classification schedule
Basic Specifications
Basic Square Foot Costs
Component
Unit
Adjustments
Miscellaneous Costs
Quality Adjustment Percentages
Locality Adjustment Percentages
Items of
rapid
deterioration and obsolescence
Part
2
Table of Established Trade Prices
Inplace
Unit
Prices
One section for each component
1905.
The Cost Analyst is responsible
:for
gathering in-
formation and converting this information into basic data which are
tabulated in the handbook. The methods used by the Cost Analyst
are described in the following paragraphs.
1904-1907
UNDERWRITING
MANUAL
a. Masonry Walls:
Co
n
cr
e
te Concrete Block Brick
4"
thi
c
k
.
33 cu.
ft.
1.
1
blocks 7
bricks
8"
"
.
67
" "
1.
1
"
13
.
"
12"
"
1.
0
"
"
1.
1
"
19. 5
"
b. Floor Framing: 16"
o.
c.
20"
o.
c.
2"
x
6"
2"
x
8"
1.
8
1.
6
2"
x
10"
2.
2
1.
9
2"
x
12"
2
.
6
2.
2
c.
Sheathing and Subfloor
i
nq: Right Angle Diagonal
1
x 6s &
ss~s2s
1.
2
i..a
1
x 6s
&
S
s
-T&G
1.
3
1.
4
d.
F
in
is
he
d Wood
Floor
:
2X" Face SX" Face
Tongue
&
Groove
1.
4
1.
3
1908.
An analysis is made to determine the average time
required by the various trades for the individual assembly operations,
and labor prices are converted into erection costs for each element of
a component of a building.
1909.
A
s
tudy is made of all usual types of building
construction within the
territory
to determine the in-place
unit
prices
required for construction likely to be encountered. This study usually
proceeds in the following order: A number of cases
of
proposed and
existing construction are selected from the case files. The number
selected is determined by the number of cases processed per month,
and should include not l
e
ss
than
200 cases..
In
areas where there
is a wide diversity of types of construction, the number of cases
analyzed is increased accordingly. These cases are analyzed as
to
date of completion, locality distribution, classification, exterior wall
con
s
truction, type
of
heating equipment, type or size of basements,
type of foundation, type of roof covering and other pertinent char-
acteristics which will be later used in the development of basic speci-
fications and tabulation of necessary data.
1910.
Material and erection costs for individual elements
are added together,
a
nd the
sum
s
are multiplied by factors estab-
lished for
component
s
or elements of components to develop Inplace
Unit Prices.
1911.
Factors.
A factor or material allowance
coeffi-
cient is a number which indicates the quantity of a particular mate-
rial, including waste and
allowance
s
for incidental items, which is re-
quired in one surface square foot of construction or finish.
Its
amount
depends on the character of construction and the sizes of its members.
1912.
The following are factors which apply to usual
dwelling construction:
190~1912
CONSTRUCTION COST
DATA
•
ANALYZE
200
OR
MORE
MEASURE COMPONENTS
OF
A.
CASES TO DETERMINE BASIC SELECTED TYPICAL BUILDINGS
A.
TYPES AND BASIC AND
FOR
EACH AREA INCREMENT
ALTERNATE MATERIALS IN EACH CLASSIFICATION
l
.,,
COMPUTE QUANTITY RATIOS
FOR EACH TYPE IN EACH
8.
8.
ESTABLISH BASIC CLASSIFICATION ANO AREA
OUTLINE SPECIFICATIONS
"'
!
£,STABLISH RATIOS FOR
EACH
TYPE IN EACH CLASSIFICATION
C.
ANO AREA
C.
COLLECT MATERIAL, EQUIPMENT
ANO LABOR PRICES
.,,
l
ADO
OVERHEAD
ANO
PROFIT
~
TO
INPLACE UNIT PRICES
o.
TO
OBTAIN UNIT COSTS
SELECT PRICES TO BE USED
"'
0.
IN CALCULATION OF
INPLACE UNIT PRICES MULTIPLY UNIT COSTS BY
l
QUANTITY RATIOS TO
OBTAIN
E
COMPONENT UNIT COSTS
-l
E.
CALCULATE
INPLACE UNIT PRICES
ADO
COMPONENT UNIT COSTS
OF
BASIC ITEMS
TO
OBTAIN
F.
l
BASIC SQUARE
FOOT
COSTS
-1
TABULATE INPLACE UNIT TABULATE 'BASIC SQUARE
F.
PRICES IN PART 2 OF FOOT COSTS
IN
PART
I
OF
G.
COST DATA HANDBOOK COST DATA HANDBOOK
,._j_
o-1
con
DATA
cosrliATA
liANDBoo~
HANollOoK
PARTz.
PAl<T1
---....:_,...
---
INTEGRATED SQUARE FOOT COSlS INPLACE UNIT PRICES
STEPS
IN
DEVELOPMENT
OF
COST
DATA
1912
UNDERWRITING MANUAL
DETERMINATION AND USE OF QUANTITY RATIOS
1914.
An
examination of a sufficiently large number
0£
plans reveals certain consistent or reasonably consistent relationships
between the quantities of certain components of the building, such as
walls and roof, and the number of square feet of livable floor area.
These relationships are reasonably constant in buildings estimated
by the Federal Housing Administration because
of
the type
of
buildings
encountered,
Minimum room sizes are limited by Prop-
erty Standards and building codes. Maximum sizes are limited by
the
available area or cost of the structure. Ceiling heights are be-
coming standardized through the demand for economy
in
.
initial
cost and in
th
e operating expense of heating and cooling equipment.
Halls and stairways in typical buildings are usually the. minimum
width or length necessary
to
permit easy passage. Plumbing and
kitchen equipment have been developed to such
a
degree
that
sizes
of
bathrooms or kitchens are largely governed by the number of
fixtures used. The relationship between the minimum area of win-
dows and floor area is limited by
Property
Standards and governed
by climatic conditions of the territory. Because of the consistency
of the
relationships between walls, floors, roofs, items of equipment
1913.
Inpla
ce
unit prices
0£
associated elements are com-
bined to form inpla
c
e
unit
prices for the usual combinations of
elements
that
comprise the individual components. Inplace
unit
prices
for
component
s
and elements
of
components are then tabulated
and indexed in
Part
2
of the Cost Data Handbook.
1.
1
i.
Wallboard
:
16
11
o.
c,
1.
3
1.
4
1.
4
1.
3
"
8"
10''
h.
Siding:
6
11
Drop
6
11
Bevel
16"
o.
c,
1.
4
2. 0
g. Partition Framing:
Studs
2
11 x
4"
Studs
2"
x
6"
20"
o.
c.
.
8
1
.
0
1.
2
16
11
0
.
c.
1.
0
1.
2
1.
5
f.
Ceiling Framing:
2
11
x
6
11
2" x 8"
2"
x
10"
20
11
o
:
e.
.
•
9
1.
1
1.
4
16
11
o
.
c.
1.
0
1.
4
1.
7
e.
Roof Framing:
2"
x
6
11
2"
x
8"
2
11
x
10"
1912-.-1914
CONSTRUCTION COST DATA.
Ii
I
I
•
~
~
-
-
·
-
·
and the number of square feet in the livable floor area,
it
is possible
to compute ratios of quantities for each of the
components
.
of a
building. These ratios are determined for each component and each
range of floor area, and are termed,
quantity ratios.
Quantity ratios
are used to avoid laborious calculations in building up basic
unit
costs
of
a large number of types and areas.
1915.
A quantity ratio is a number which expresses the
relation between the measurement of a component
part
of a building
and
the
measurement of the livable floor area of
that
building. The
ratio is obtained by dividing the
total
number of units in the com-
ponent by the number of square feet of
liv
a
ble area. The quantity
ratio expresses the number of units of a component per square foot
of livable floor area.
For
example:
a.
The number of square feet of exterior wall of a typical
house, similar to the one illustrated in Section
17,
is
1715
and the livable floor area of
that
house is
1363
squar
e feet.
The number of square feet of exterior wall is divided by
the number of square feet of livable floor area
thus:
1715
1363=1.
26
The result,
1.26,
is the quantity ratio for "Exterior Walls",
and
it
indicates
that
this
particular
structure has
1.26
square feet of exterior wall for each square foot of livable
floor area.
b,
The derivation of the quantity ratio
for
electric wiring is
illustrated as follows
:
47
outlets
1363
sq.ft.
·
035
The result indicates
that
the building has
.035
wmng
outlets per square foot of livable floor area.
The application of quantity ratios to the
c
alculation of component
unit costs is illustrated in the following example:
$0.595
X
l.26=$0.75
In
the above computation,
$0.595
is the
unit
cost of
e
xterior wall, and
1.26 is the applicable quantity ratio. The result,
$0.75,
is the Com-
ponent
Unit
Cost for
"Exterior
Walls". The
unit
cost used is
the
inplace
unit
price plus an
allowanc
e
for contractor's overhead and
profit. The following example illustrates the mathematical accu-
racy of the use of quantity ratios and
al
s
o
indicates the laborious
computations eliminated through its use.
1914-1915
UNDERWRITING
.
MANUAL
$0.595
X
1.26=
$
0.75
Th
e
fra
c
tion
,
1715
/
1363
,
is
equ
a
l to 1.26, the
quantity
ratio
derived in
(a)
abo
v
e.
Its
use
obv
ia
t
es
th
e
neces
s
ity
of com pu
t
-
ing
th
e
total
dollar cost of the
co
mponent and
subsequ
e
ntl
y
dividing $1020.43 by the livable floor area.
The
quantit
y ratio is
just
as accurate
a
s
the
total
measurement from
which
it
r
es
u
lt
s.
However,
ratios
to three significant figures
a
r
e
more
conve
nie
nt for
examination and
r
ec
ordation.
Furthermor
e
,
quantity
r
a
ti
os
o
n
ce established, remain fixed although prices may
change.
Revi
s
ion
s
in
component
unit
co
s
ts are therefore computed
with new un
i
t
price
s
a
pplied to
establi
s
h
e
d
quantity
ratios.
1916.
Quantity
ratio
s
,
t
o
thr
ee d
ec
imal
pla
c
es,
ar
e com-
puted for
most of the
twenty-
s
even
c
ompon
e
nts or
their
elements.
For
tho
s
e
co
mponent
s
which are
e
s
tim
a
ted in lump sum amounts,
quantity
r
a
tios
ar
e
expressed as a
fr
ac
tion having a denominator
equal
to
th
e
avera
g
e
of
the
increment of floor area to which they
are
applicable.
Quantity
ratios
for
compon
e
nts Nos.
1,
4, 18,
19,
20,
22, 23, 25,
a
n
d 27 are expressed as
fra
c
tio
n
s,
and therefore, are n
o
t
tabulated. The quantities of the
var
i
ous components are
mea
s
ured
from a sufficient number of plans to
d
et
ermine applicable
quantity
ratios.
In
general,
for
.
a
given
classific
a
tion, eight
to ten
ca
s
es
per
a
r
e
a-in
c
rem
e
nt
ma
y suffice.
R
a
tios
th
a
t
ar
e
not
rea
s
onably
consi
s
t
e
nt
with
oth
e
r
s
in
the
s
ame
area-incr
e
m
e
nt ar
e
di
sc
a
rded, and an
add
i
-
tional number of
plan
s
are measured.
Th
e
illu
s
tration
on
th
e
follo
w
-
ing page
s
hows an example of
quantity
ra
t
io
s
for
a one and one-half
story
buildin
g
.
(
'
or
$0.595X1715 sq. ft.
$0.
75
1363 sq. ft.
The above may be indicated without changing
its
value
thus:
1715
$0.595X
1363
=$0.75
Assuming 1715 square feet of exterior wall, in the building re-
ferred
to in
(a)
above, to have a
unit
c
os
t
of $0.595 per square foot,
the following computations would
ordinarily
be necessary to calcu-
late the component
unit
cost of exterior walls:
$0.595X1715 sq.
ft
.
=$1020.43
$1020.43
=$0
75
1363 sq. ft.
·
·
These
computation
s
c
ombined into a
sin
g
le
oper
a
tion are shown
a
s
follows:
1915-1916
CONSTRUCTION COST
DATA
•
C.l
as
sif1cat
1o
n
FEDERAL HOUSING
AININISTRATION
Typ
e
OFTA"""n
METROPOLITAN CITY
Insur
ing
Offic
e
Family
ONE
I~~
stor
ie
s
D
nant
i
tv
Ra
td.o s
Area
in
Sous
.
re ~--•
No. Component
90
0
10
0 0
110
0
Hgg
H
gg
H~
~
t
~g
t~gg
1
000
1
1o n
r
zoo
1. ~ .. F ....
•
••
-.&..Inn
~
·
2.
Found
a
ti
ons
FootinE?s
.095
.
092 .089
.
087 .085 .083
.082
.
081
Walls
.718
.
678 .648
.
620
.
597 .577
.561
.548
Basement
Flo
o
r
.
580 .579
.
577
.
574
.
570
.
567
.
563
.
557
B
asem
ent
Esse
nt
ia
l
s
s.
C
h
imn
ev
.
036
\
03
2
.
029
.
026
.
024
.
022
.021
.
020
4,
Fir
e
place
*
5,
E
x
terior
W
al
l
s
1.23 1.24 1.25
1.
25 1.26 1.26 1.27 1.28
6.
Flo
o
r
Fram
inE?
I.I
I
I.I
I
I
.
I
I
1
.
11
I.I
I
I.
I
I
1
.
.
11
I.
I I
7.
S
ub
fl
oo
ri
ng
I.I
I
.
I.I
I
I.II
I.
I I
I.I
I
I.II
I.I
I
I.
II
8.
F
i
n
i
sh
Fl
oori
n~
1.00 1.00 1.00 1.00
1.00
1
.
00
1.00
1.00
9.
P
a
rtition
Fr
am
i
nE?
1.34
1.31
1.29 1.27 1.25
1.23
1.21
1.2<>
10. C
e
iling
Fr
aming
.
47
.46 .45 .45 .44
.44
.43 .43
11.
Dn
n
f
"'-"-'
"" .889
.
885 .882
.
879
.
877
.
875
.
875 .874
12.
Ro
o
fin11
.
889
.
885
.
882
.
879
.
877 .875
.
875
.
874
13,
Gutt
er
s
.109
.
106
.IOI
.
096 .090
.
085
.
079
.
073
Downsnou
ts
.048
.042 .037
.
033 .030
.
027 .025 .024
14.
Pla
s
ter
Bas
e &
Plaster
4.235 4.125
4.050
3
.
990
3.950
3
.
920 3.900 3.888
15.
Dec
o
r
a
ti
ng
4.235
4
.
125
4
.
050 3.990
3.950 3.920
3
.
900 3888
16.
In
te
r
io
r
tlnn-
• fl,
"'
-'
-
.
011
.
011
.
011
.
01
1
.011
.
011 .011
.
0
1 1
17.
Wi
ndow
s
.
.
150
.
150
.150
.
.1
50
.150
.
150 .150
.
150
18.
E
ntrance
&
E
x
t
e
rinr
])e•-<1-11!
19.
C
a
b
i
nets
&
Jn
te
ri or
ne•
-
"
Iii
20.
"•
o
i
-
Q
*
21.
S
n
e
c
i
a
l
Fl.o
o
r-s
fl,
mr
0
•-
~
-
-
•
B
a.
th
Fl
oor
.
.
o.:i2
.U41
.
047
.
053
.
058
.
063
.068
.
072
B
a
th
Wa
inscot
.093
.082
.072 .065
.058
.052 .047 .043
2
2.
Plumb
i
nE?
~
2
~
H ..
a
f
.i
n.,.
*
2
1'
,.., __ ,.._.,,.,
m.;....;
.,..
,..
.038
.
037 .036 .035
"
.035
.034
.
033
.
032
?~
T.<
ah+inl' lN
*
26.
Insulation
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.
1916
UNDERWRITING MANUAL
DETERMINATION OF BASIC SQUARE FOOT COSTS
1917.
A
sel
e
ction of typical buildings to form a
ba
s
is
for the tabulation of Basic
Squ
a
re Foot
Cost
s
i
s made from
th
o
se
:
types of buldings which have
been
,
or are likely to be frequently
offered as security for insured mortgages. A field survey is made and
case files are examined in order to
sele
c
t
the types
for
which Basie
Cost
Dat
a should be first
dev
e
loped.
1918.
Basic
Specifications,
The
s
elected
typ
es
.
of con-
struction are
cla
ss
ifi
e
d
in
accordan
c
e with instructions contained in
Section
16
under
·
th
e
h
ea
ding
,
"Cl
ass
ifi
c
ation of Buildings." Ba
s
ic
specifications are
est
a
bli
s
hed for the selected
type
s
.
The materials
and equipment
fr
e
qu
e
ntl
y used
a
s alternates to the basic specifications
ar
e
n
e
xt
list
e
d in the order of
their
pre
va
l
e
n
c
e.
1919.
B
as
ic square foot
co
s
ts
for
each classification of
buildings are
det
e
rmined
for
an area range,
starting at
the lowest
probable area and
progres
s
ing
to
the
larg
es
t
probabl
e
a
re
a.
Ea
c
h
area range
i
s
di
v
ided into
incr
e
men
t
s of one hundred square feet.
Columns are provided for several
a
rea
s on
ea
c
h
of the sheets used
for tabulation of
co
s
t
data.
E
a
ch of
t
hese columns
repr
es
ents one
di
v
i
s
ion of
a
reas and is
u
s
ed
for
a
ll
a
rea
s
b
e
t
w
ee
n the
t
w
o limits
indicated. The cost data tabulated in these
colum
n
s
are based upon
the average of the two
li
m
iti
n
g
area
s
.
1920.
Ordin
a
ril
y
,
one
se
t
of
b
as
ic
s
pe
c
ifi
ca
ti
o
ns is
re
-
quired
for
ea
c
h
c
l
a
s
s
ific
at
ion
.
As an
ex
a
mple,
for
detached, single-
family,
one-s
t
ory
dwelli
ngs, one set of basic specifications may suf-
fice.
It
is not
neces
s
ary to
indi
c
ate the sizes of the
v
a
rious struc-
tural
members,
qual
i
ty
o
f
plumbin
g equipment, and
oth
e
r
simil
a
r
el
e
ments,
sin
c
e the sizes of structural members and quality of mate-
rials are increased in proportion to the
incr
e
as
e
d areas of
dw
e
llin
g
s
and
th
e
se
differ
e
nces
a
re included in the
ba
s
i
c square foot costs.
For
example,
in
e
s
tablishing
ba
s
ic
s
quare foot costs
for
a six hundred
foot area
dw
e
lling, the costs include plumbing
equipm
e
nt
of a pass-
able quality, while in a fourteen
hu
n
dr
e
d
foo
t
area dwelling,
bet
te
r
equipment of a quality in keeping with the size of the structure
·
is
included.
1921.
Component
Unit
Costs. Inplace
unit
prices
for
separate
e
lement
s to
whi
c
h are added allowances
for
overhead and
profit
,
are multiplied by applicable Quantity Ratios to obtain com-
ponent
unit
costs.
1922.
Basic
Square Foot
Costs. The component
unit
co
s
ts of all of the 27
c
o
mpon
e
nts selected
ac
c
ording to the basic
specification
a
re added together to form Basic Square Foot Costs.
These basic square foot costs are computed
for
each range of Calcu-
lated Area
for
ea
c
h
type and are tabulated
in Part
1
of the handbook.
1917-1922
CONSTRUCTION
COST
DATA
BASIC
SQUARE FOOT COST
3.64
- 40.00 .03
27.
Miscellaneous
Ceilinirn
26.
Insulation
25.
Lighting Fixtures
Walls
1.59 1.75 .035
.06
24.
Electric Wiring
.063
.06
.015 .01
258.00
283;:x
.2.1
327.00
360.UI .2
6
.900
1.00
.730
.80
23.
Heating
22.
Plumbing
Bath
Wainscot
Kitchen
Floor
-
.06
75.00
83.00
21.
Soecial
Floors
&
Wainscot
20.
stkirs
Bath
Floor
- .06
-
.06
.012
.23
80.00 88.00
72.00 80.00
16.80 18.50
19.
Cabinets
& Int.
Detail
18.
Entrance
& Ext.
Detail
17.
Windows
.5
I
16.
Interior
Doors
&
Trim
424 .16
4.24
.2.4
.035
.038
.051
.056
15.
Decorating
14.
Pl.ester
!lase
&
Plaster
.065
.03
.707
.05
.707
.05
.707 .05
.200
.22
.060 .066
.066
.073
.060 .066
13.
Gutters
&
Downsoouts
12.
Roofing
11.
Roof
Framing
Roof
Sheathing
.520 .03 .053
.058
10.
Ceiling
Framine:
1.25
.10
.166
.183 1.00
.18
9.
Partition
1·raming
8.
Finish
Floorilll!
.067 .073
1.00
.07
.073 [)80
.124
.136
I.I
I
.15
7.
Subflooring
b.
Floor
Framirur
.541 .595 1.26 .75
5.
Exterior Walls.
4.
Fireolace
.023 tJ7 2.65 2.90.
3.
Chimnev
•
,553
.07
.553 .07
.587
.17
.082.
.02
.120 .13
.120 .13
.270
.297
Basement
Essentials
Basement
Floor
Foundation
Walls
2.
Foundations
Footilll!e
.5 50
.60
.180 .07
.264
.29
Illlls:e
Un'.1
Ou
C
~ice
Cost
~~otu.8~~i
1.
Excavation
No.
Component
Basic
oouare
Foot
Cost
-iype
OFTllCHED
Family
ONE
Stories
-""1 :.r-V?>2---
Sq.Ft
.Ares
1400 -1500
Classification
__
M_E_T_R_O_P_O_L_l_T_A_~_~C_IT_V
Iueuring
Office
FEDERAL
HOUSING
ADMINISTRATION
1922
UNDERWRITING MANUAL
FEDE
R.AL
HOUS
IN
G
AIJ.II
NI
STRATION
-
..
'""""
"
Type
Di:as:llil'1.
M
etr
o
~
o
litan Ci~ Insuring Office
Fmnily
~i
Stori
es
Area
in
Saua
r
e
Feet
Exter
i
or
Wall
Co
n
struc
tio
n
,m
fm
p~
~
H
~ fm
H
~
t.~~f~
'Dn
..;,,.
.. _
.
........ Tot~_:.._
,..
_
•
..L-
F,.nmA
"
"'n"
l
a..l
n
Y'
"
'
"a"
•
5.1
7
1
.
l.
6
.,
,.,
.,
ig
,
_,~
, ...
2
ls.
")Q
7
.
26
,
.
;:
'>
'T:O----
~..1-~--
-
,.....,.
Ua+1111
T
-.a..1..
~
.,.,
i
~
.,
0
on
., l~
.,
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:iquare
Foot.
.28
. .
.
1922
CONSTRUCTION COST
DATA
I-
•
SELECT AND RECORD USUAL DETERMINE DEGREES
.
OF QUALITY
OF
CONSTRUCTION ENCOUNTERED
A.
ALTERNATE MATERIALS AND IN BUILDINGS RECENTLY COMPLE~D A.
EQUIPMENT OR UNDER CONSTRUCTION
,&.
,&.
'
ADD OVERHEAD AND PROFIT TO ESTABLISH RECOMMENDED QUALl"N
INPLACE UNIT PRICES OF USUAL ADJUSTMENT PERCENTAGES BASED
8.
ALTERNATE MATERIALS ANO
ON
LOWEST AND HIGHEST QUALITY
B.
EQUIPMENT
TO
OBTAIN UNIT
COSTS OF
CONSTRUCTION FOR EACH
CITY
OR
LOCALITY
·~ '
.
MULTIPLY UNIT COSTS BY TABULATE RECOMMENDED QUALITY
C.
APPLICABLE QUANTITY RATIOS TO PERCENTAGES
IN
PART
l
OF c,
OBTAIN COMPONENT UNIT COSTS COST DATA HANDBOOK
,&.
I
COMPUTE DIFFERENCES BETWEEN
COMPONENT UNIT COSTS OF
BA.SIC
LOCALITY ADJUSTMENTS
D.
MATERIALS
OR
EQUIPMENT AND
COMPONENT UNIT COSTS OF SECURE MATERIAL AND ERECTION
ALTERNATE MATERIALS
OR
EQUIPMENT
PRICES FOR LOCALITIES OTHER
A.
~
THAN BASE CITY WITHIN THE
TABULATE THE DIFFERENCES COST
DA.TA
TERR\TOR't
COMPUTED IN STEP 0 ABOVE AS
.&.
E.
COMPONENT UNIT ADJUSTMElllTS
IN PART
I
OF
COST
DATA
HANDBOOK DETERMINE
I
NPLACE UNIT
PRl
.
CES
FOR EACH
OF
THE ABOVE
e.
LOCALITIES
"
SELECT A TYPICAL BUILDING AND
COMPARE ITS COST IN EACH
LOCALITY WITH THE
C
.
OST IN THE
e,
..--~
BASE CITY BY THE
cos;;
4
TA
INPLACE' METHOD
'
li4NDBooK
DETERMINE LOCALITY ADJUSTMENT
PART
I
.
PERCENTAGES
TO COMPENSATE
FOR
DIFFERENCES BETWEEN COSTS
OF
D.
,..__i.
THE BUILDING IN VARIOUS
LOCALITIES ANO THE BASE CITY·
..j,
TABULATE LOCALITY ADJUSTMENT
PERCENTAGES ACCORDING TO E.
NAMES OF LOCALITIES
QUALITY ADJUSTMENTS
COMPONENT
UNIT ADJUSTMENTS
DERlVATlON OF ADJUSTMENTS
1922
UNDERWRITING MANUAL
1923-1926
DERIVATION OF COMPONENT UNIT ADJUSTMENTS
1923.
Component
Unit
Adjustmen
ts are
d
e
rived from
component
unit
costs as follows
:
a.
The various
materi
a
ls and combinations
o:f
materials which
ar
e
commonly used in the territory are listed in the order
o:f
the
27
components and are arranged
s
o
that
the elements
o:f
each component
a
re grouped together.
b,
Component
unit
co
s
ts for each
materia
l or element am com-
puted
:for
each tabulated area and are recorded in the
proper column
:for
ea
c
h
classified type.
o.
Component
u
ni
t
co
s
t
s
o:f
materi
a
ls which are selected
aspart
o:f
the
basi
c specifications are
comp
a
red with
altern
a
te
materials, and their differences are tabulated as component
unit
adjus
t
ments.
The
s
e adjustments are derived sepa-
rately for
e
ach increment
o:f
area in each classification.
Adjustments
:for
certain components are
o:f
such character
that
a
singl
e
adju
st
ment is
applicabl
e to the entire area
ran
g
e on a
gi
ven cla
s
sification sheet.
DETERMINATION OF QUALITY ADJUSTMENT PERCENTAGES
1924.
Th
e quality
a
djustment
provide
s
:for
the differences
in workmanship and
material
s
,
as well as
detail
s
o:f
con
s
truction be-
twe
e
n the quality
o:f
c
o
nstruction
reflect
e
d by the square
:foot
cost in
ei
t
her method, and
th
e
quality of the
a
c
tual construction, assuming
the
s
ame
sp
ec
ification
s
.
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 Qu
a
lity
Adju
s
tment. These quality
adju
s
tment percentages
are indexes
o:f
comparative quality, expressed as a percentage
o:f
the
quality
o:f
con
s
truction reflected in the square
:foot
costs.
1925.
A
c
a
r
e
:ful
field examination
o:f
buildings involved
in
r
e
cently 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 cus-
tom
a
ry 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.
Re
c
ommended limits are set
:for
the lowest quality
o:f
construction which is acceptable, and the highest quality which is
encountered. The
e:ff
ect 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.
(
CONSTRUCTION COST
.
DATA
•
FEDERAL
HOUSING
AlllIRISTRATIOR
Metro~olitan
Citl
Insuring
Office
Recom111ended
Quality
Adjustment
Percentages
Localitv
Low
Hi"h
"·~-o-A
1
,..·-
Citv
(Base)
a~~
11'\~<i
Forest
Valley
91.
101.
Ranid
River
q~
101
n-
.
~1---.:J
T~~--.L~"''"
.
eo
1()1'\
Lakevi
e
w
93
101
•H1l'h-
-
-'· Qt\ 11¥l
Ea.,le
Landin"
q2
102
n<i+n-
q1
101
Cent
e
rville
<!2
,,,,.,
"'
"'ci"'
-•
r..;+""'
so
inn
Brownsville
q1
101
.
Elm Citv
q~
10~·
'
:
.
, .
. .
1926
UNDERWRITING MANUAL
FEDERAL
HOUSUIG
ADUilUSTRATION
Metropoli
um
Ci!l Insuring
Ot'f'ice
Locality
Adjustment
Percentages
Locality
Wood
Frame
ire~~;~
Metropolitan City
(Base)
100% 100%
Forest Valley
90
104
Raoid
River
98
98
Railroad Junction
99 95
Lakeview
100 100
111
.
llbrook
97
·102
Eade
Landine:
104
110
Oil
Town
102 102
Center
v
ille
91
9 3
Desert City
96
89
Browneville
100
102
Elm Cit'V
90
lOJ
1926
CONSTRUCTION COST DATA
t
DETERMINATION OF LOCALITY ADJUSTMENT PERCENTAGES
1927. Locality Adjustment Percentages, as tabulated in
Part
1
of the Cost Data Handbook, provide a means whereby the
basic square foot costs and inplace unit prices compiled
for
a base city
may be used in other cities or localities without the necessity of com-
piling separate basic costs for all types and variations in each
locality.
1928.
The accuracy of the estimate is dependent upon
the accuracy of the Locality Adjustment Percentage used. There-
f
ore, unusual care is necessary in the preparation of these percentages.
1929.
One or more typical buildings most applicable for
the entire cost data
territory
are selected for the purpose of deter-
mining locality adjustment percentages. Selected typical buildings
must be of a type and construction common to all of the cities and
localities other
than
the base city,
but
not necessarily typical of the
base city.
1930.
Inplace
unit
prices are then developed for the ma-
terials which enter into the construction of the typical building
for
each city and locality other
than
the base city
for
which inplace unit
prices have already been prepared. The same methods are used and
the same care is exercised in the development of the inplace prices
for
the other localities as was used in the base city. The inplace
unit
prices determined for the other cities do not become a
part
of
the Cost Data Handbook,
but
are recorded on standard sized sheets
:for reference by the Cost Analyst.
1931. Necessary measurements are made and quantities
are recorded for each component of the selected typical buildings.
Estimates are made using these quantities and the inplace
unit
prices
applicable to each locality. A comparison of the totals of each of
these estimates is made, and the comparison is expressed in percent-
ages, taking the base city estimate as 100%. These percentages are
tabulated in
Part
1
of the Cost Data Handbook according to the
names of the cities.
1932.
If
more
than
one type of building construction is
common
to
the territory, and there appear to be different relative costs
for different types in each locality,
it
may be necessary to determine
more than one percentage for each locality.
1927-1932
UNDERWRITING
MANUAL
f
\
\
I
1936.
If
current material or labor prices have
ch
a
nged
to such an extent
that
the total effect upon the estimated cost is
10
%
or more, then
i
t
is
nece
s
sary to make a
t
e
mporary adjustment to
th
e
locality
p
e
rcentage
s
to
c
omp
e
nsa
t
e
for
th
e
cha
n
ge
s
.
These temporary
a
djustmen
ts are used only until all basic inplace unit prices and
basi
c
\
·
.
s
quare foot
cost
s
,
together
w
ith
c
omponent unit
adjustment
s
,
are com-
pletely revised to
c
omply with the new price levels. Major changes
in material and construction
p
r
ice
s due to artificial conditions such
. ,
as manipulation,
t
e
mporar
y material or labor shortages and other
~
.
factors of this charact
e
r
are not
conside
r
ed a basis
for
cost
revision
.
Sea
s
onal
c
hanges in
co
s
t
s
w
ithin
twelve month periods are not con-
s
idered as a basis for revision.
1933. V erificaiion,
A periodic review or inspection of
cost estimates
sele
c
ted
a
t
r
a
ndom from cases in
proce
s
s, or
t
hose re-
ce
ntly processed, is made by the Cost Analyst to discover the :following:
VERIFICATION AND REVISION OF
COST
'
DATA
J
a.
The most common
e
rro
r
s involved in the application of the
1
'
.
·
two
pres
c
ribed methods of cost estimation
.
b,
Those individuals who are
i
n need of
further training
.
1934.
The Cost Analyst makes a periodic verification of
·
,
co
s
t
estimate
s
:for
s
ele
c
ted
case
s
.
First,
he determines
wheth
e
r
an
j
e
s
timate
i
s
correct.
Second
,
he compares the verified estimate
f
·
the actual cost of the
build
i
ng
s
aft
e
r
completion,
whic
h actual
t
he obtains from reliable sources.
,
~
...
1935.
Revision
s
of Basic Costs.
Current trade
Pr\
of both mater
i
als and labor are gathered
at
regular intervals and
~
"'
analyzed to determine the cause, extent and probable permanence
c,
changes which may be taking place. These materials and labor
price:l
a
re obtained
at
in
t
erv:als of six m~nths or
le
ss to
a
s
certain
w~e~her1·
.
there has been ~ufficient
.
cha_nge
m level to make cost revisions
i
~
nece
s
sary.
If
this
analysi
s
di
s
closes
change
s
of a permanent char-
·;
p
ac
ter which will
ha
v
e
a total effect of less than
10
%
upon the total esti-
mated cost of
construct
i
on, major changes in basic
d
a
ta may be un
-
n
e
ce
ss
ary.
In
such
in
s
tan
c
es the locality
percentage
s
for the cities
conc
e
rned are increased or decreased to compensate
for
these changes.
This may likewise
a
pply to
t
he base city.
1933-1936
CONSTRUCTION
COST
DATA