The Elusive C2 Condition Rating
by Mike Armentrout
Applying UAD condition ratings has proven to be more subjective than was intended when Fannie Mae introduced the system in 2011. To be fair, the definitions do offer a fairly complete spectrum of condition options for appraisers to assign. Like most appraisal matters however, there are endless interpretations of when to apply the various ratings to real properties.
One example is the C2 rating. It is a designation that may be under-represented compared to the routinely cited C1, C3 and C4 ratings. C2 does have specific identifiers such as “no deferred maintenance” but “little to no physical depreciation” implies some subjectivity. Even the commentary regarding renovated properties leaves some level of decision making when there are some original components.
It might help us to gain clarity by placing the UAD rating system alongside of the economic life analysis. If a particular property has an estimated economic life of 70 years and is new construction, then an effective age of 0 would be represented by C1. As the property ages, it will naturally be characterized by the next subsequent UAD ratings. Based on the C1 definition, once a property is occupied it would logically move to a C2 rating, assuming no significant physical depreciation has occurred.
The question then becomes, how long does a property stay at the C2 rating before moving to a C3? That of course will depend on the degree of physical depreciation. Again, a consistent effective age benchmark might be a reasonable metric to apply. The C2 definition does use the terms “almost new” and “similar to new construction” which allows some guidance in our determination. If a dwelling has components that are similar to newer construction and have little to no apparent wear, then the C2 rating might apply until newer trends dominate the market. This is typically evidenced in items like flooring, cabinetry, and technological amenities. Exterior finishes and mechanical components often have a shorter life than the overall economic lifespan of the entire dwelling but these can still be factored into our final rating.
It is logical that C2 should be in play a bit longer than we are typically seeing. Properties are commonly going from C1 to C3 without any gradation. A property could conceivably be 10 years old and still maintain a C2 rating assuming minimal physical depreciation. The point is, there is no absolute formula when working through UAD ratings. It's not a bad system, but it also is not perfect. Understanding that the UAD ratings typically correlate to the life cycle of a property provides perspective for us to confidently rate condition as well as support our conclusions. The definitions are there to provide a framework but ultimately, it is our job to apply them based on sound principles.