Real estate agents and homeowners who read an appraisal report prepared on a “1004 UAD” Fannie Mae form will typically look at what is known as the “adjustment grid” and see that the subject property and the comparables used are categorized under quality and condition codes. The codes use a 1-6 scale, where 1 is the best rating and 6 the worst. So, for example, a C1 home would be a home in new condition.
The 1004 Fannie Mae form is used to present appraisal reports for most lending transactions. Millions of these documents have been generated over the years. The UAD version of the 1004 became mandatory for most lending reports back in September of 2011. While Fannie Mae has provided an addendum that defines the codes, a lot of confusion regarding the interpretation of the codes stills exists. Therefore, I thought a good way to explain the meaning of the codes would be to use cars. There are ~260 million automobiles in the United States and everyone is familiar with them. So, let’s use cars to illustrate the UAD quality and condition codes.
A little housekeeping: all analogies gloss over some differences while highlighting areas of similarity. The explanations below are just rules-of-thumb that can help someone quickly parse the various codes. Some explanations may have technical exceptions.
With that out of the way, let’s start with:
C1: new car.
C2: new car driven off lot or virtually new car (or car restored to almost like new condition).
C3: car a few years old but well maintained (good resale or trade-in value).
C4: car with some miles on it. Some minor dents, some scratches, tire tread is a bit worn; some components may soon need to be replaced. Been around the block, but it works. If you bought it you likely wouldn’t spend a fortune fixing it.
C5: car with some serious issues. Transmission may need to be replaced. Alternator is marginal. Doesn’t always start. Bald tires. Interior is not pleasantly aromatic. Bumper or fender may be damaged, etc. You buy this car and it will likely go straight to the shop and cost a bit to repair. A junkyard would pay you parts and scrap value.
C6: junker. Car has so many problems a mechanic tells you to call a junkyard and put it in its final resting place. The junkyard charges you to take it. This represents a car that probably won’t start at all, would be dangerous to operate if it did start, and whose repair costs may equal or far exceed the actual value of the vehicle. Few people would opt to repair.
Q1: extreme high-end luxury car. We’re talking vehicles like a Ferrari LaFerrari, Lamborghini Veneno, or a Mercedes-Benz Maybach Exelero. Highly customized and all aspects of ownership are expensive. If you have to ask “how much?” move on down the scale. These cars are not for you. 😊
Q2: the more “affordable” luxury market. You’ll be in the 6-digits for cars in this class. You’ll see Lamborghinis, Ferraris, Bentleys, and Porsches.
Q3: Mid-higher-end mass market. You got your Lexi, BMWs, Land Rovers, Cadillacs, Audis, and some Teslas squeezing in here. If you drive these cars, assumptions will be made you are in a good socio-economic bracket!
Q4: mid-range mass market. Price is definitely a major factor but not the only concern. Vehicles of this type may have some upgrades. Your Camrys, Accords, Tauruses, and Hyundai Sonatas all live here.
Q5: low-mid range mass market. Price is the overwhelming major concern. Practicality for personal needs a close second. Some of the base models of cars in the Q4 range will show up here with all stock components. You will likely not be bragging about or street racing anything in this bracket.
Q6: very low-end of the car market. The Ford Pinto, were it still around (and not exploding), would feel at home here. A person buys this car for one reason and one reason only: to get from point A to point B. Cars in this range sell new for ~14k. Say hello to the lime-green Ford Fiesta or the Kia Rio.
So, there you have it, a quick-and-dirty interpretation of Fannie Mae’s Q & C codes using automobiles.
Do you have any other analogies you use or emendations to the list above you’d like to suggest? Please share your thoughts in the comments section!
One thought on “How Cars Can Help Explain Fannie Mae’s UAD Quality and Condition Codes”
I love the automobile comparison. It helps non appraisers more easily understand how appraisers look at homes.