Top 3 Mistakes Appraisers Make in Their Appraisal Reports

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After doing more than 2,000 appraisal reviews over the years, Bryan and his team have seen these same errors crop up again and again. Know them and avoid them.

I was an investigator for the state of Tennessee for many years. These days, I primarily help appraisers who find themselves in trouble. Sometimes we’re successful in resolving the issue entirely, or at least reducing the impact. Other times, it becomes a learning moment — we recognize mistakes, take responsibility, and strive to do better.

My team and I have conducted over 2,000 compliance, field, insurance, and litigation support reviews, and we’re noticing some recurring errors among appraisers. So let’s talk about the three most common errors we see appraisers make.

Hopefully, this will help you sharpen your tools and improve your practice.  Let’s get started.

Mistake #1: Omitting a key statement about an extraordinary assumption or hypothetical condition

Appraisers can gain some leeway with the right scope of work, and by properly using extraordinary assumptions and hypothetical conditions. But you must meet minimum reporting requirements.

It never hurts to review the definitions of “extraordinary assumption” and “hypothetical condition” in the USPAP standards. Then, check out Standard Rule 1, which talks about when it’s permissible to use these tools. There are three things you must do in your report if you’re using an extraordinary assumption or hypothetical condition. Most appraisers are doing the first two, but a lot are failing to do the third.

So let’s go over them. (And remember: forms don’t comply with USPAP— you do.)

Here are the three things you must do in your report:

  1. Clearly and conspicuously state when you are using an extraordinary assumption or hypothetical condition. That’s in Standard Rule 2-2(a)(xiii).
  2. State all extraordinary assumptions and hypothetical conditions. You don’t necessarily have to label them as such, but you do have to include them. For example: “I’m appraising this property as if the proposed house already exists, based on plans and specs.” That’s a hypothetical condition, even if you don’t explicitly call it that.
  3. State that the use of the extraordinary assumption or hypothetical condition may have affected the assignment results. This is the one that’s most often missed. It’s Line Item 702, and it’s critical. Even if you hate “can” or “may” statements (and I do), if that’s what it takes to be compliant, put it in there.

We see reports over and over where this final statement is missing. And that’s a problem. Reviewers have to note when they can’t find that language in your report, and that puts you in violation of Standard Rule 2-2(a)(xiii).

Mistake #2: Not summarizing the results of your analysis of the subject property’s prior sales

Let’s move on to the second most common mistake: prior sales. I’m talking about prior sales of the subject property and, depending on your form or client, even prior sales of comps or prior listings. Now, prior sales of comps aren’t a USPAP requirement, and neither are prior listings (unless they’re current), but prior sales of the subject property are a requirement. You’ll find this in Standard Rule 2-2(a)(x)(3). You’re supposed to summarize the results of your analysis of the subject’s prior sales, options, listings, etc.

Saying “the subject sold last year for $150,000” is not analysis. That’s just a statement of fact. What USPAP requires is a summary of your analysis. You’ve got to explain what that sale means in the context of your current appraisal, not just list the data point.

So, analyze the prior sale of the subject, and then in accordance with 2-2(a)(ix), summarize the results of that analysis. Maybe start a sentence by saying, “An analysis of the prior sale revealed…” then fill in the blank. This way, you’re answering the question you’re supposed to answer, and you’re summarizing the results of that prior sale or transfer.

Mistake #3: Including comps that aren’t really comparable

Here’s what landed in third place: including the universe of listings and sales as opposed to listing truly comparable sales.

The 1004 form, or the Uniform Residential Appraisal Report form, is what most appraisers use. This is a form many of you are very familiar with. At the top of page two, it says:

“There are ___ comparable properties currently offered for sale in the subject’s neighborhood, ranging from ___ to ___.”

“There are ___ comparable sales in the subject’s neighborhood within the past 12 months, ranging from ___ to ___.”

Now, if you truly are in an area where all the listings and sales in a neighborhood are in a competitive state for the same properties, then I guess you’d fill that in accordingly. But how often does that happen? I mean, are the two-bedroom homes competing for the same buyers as the four-bedroom homes?

I get it: we’re not searching just on price here. But isn’t that often how the market looks at buying property? They say, “This meets my utility. This fits my desires. This reflects scarcity. This fits my purchasing power.”

So, if you fill in the blanks with a range of prices from $90,000 to $2 million (yes, I’ve seen that), do you really think someone buying a $90,000 home has the purchasing power to buy a $2 million home? And do you think someone buying a $2 million home wants to buy a $90,000 home?

Maybe they’re pretty similar, but the $2 million property has a $1.9 million view — and the buyers are willing to pay for that — while the $90,000 property doesn’t. There can be all kinds of caveats, of course. But in general, when you put 720 comps in there, ranging from $90,000 to $2 million, it makes the reader scratch their head and wonder: are all of those truly “comparable”? Or are those just all the sales in a particular market area in the last 12 months?

Here’s a good rule of thumb: if you don’t feel like the sale would fit in one of these top positions — Comp 1, Comp 2, Comp 3, Comp 4, Comp 5, etc. — then it doesn’t belong up here in this equation.

And then, at least for Fannie Mae, keep in mind that where it says “Housing Trends” is actually comparable properties. The rest of it drives me crazy because, in bold capital letters, it says “Neighborhood” right here. So shouldn’t all this be relative to the neighborhood?

Yes. Say yes.

But that’s not what Fannie Mae says. Fannie says — and you can go to their Selling Guide to find this — that this one little box, “One-Unit Housing Trends,” should be comparable properties.

So, if all the properties in the neighborhood compete for the same buyers, then it would be one and the same. But if your subject property has certain comparables within that neighborhood that interchange with your subject property — and then there are others in the area that are not comparable — then this one little box, “One-Unit Housing Trends,” should just be comparable properties. (See B4 of the Fannie Mae Selling Guide on their website.)

Conclusion

I know we have lots of rules, regulations, requirements, lender overlays to deal with. I get a headache just thinking about it all. But stay in the loop. Educate yourself. And guys, get very familiar with USPAP, because it is your minimum requirement. Not a suggestion.

If you have a team, I’d encourage you to have regular meetings and talk about these things. And even if you’re a solo appraiser, find a way to collaborate with folks in the appraisal community. Join an association. Certainly, you can self-study and hone your skills, but the best way to stay sharp is to bounce ideas, suggestions, and techniques off one another.

Here’s a story I heard recently: Two lumberjacks arrived at 8:00 a.m. and chopped wood until 5:00 p.m. One lumberjack disappeared for an hour every day at noon. The other lumberjack did not. He might take a quick water break or something, but he was never gone for a whole hour.

The amazing thing? The lumberjack who disappeared for an hour always chopped more wood by the end of the day.

One day, the other lumberjack said, “We both come to work at 8:00 a.m. and work until 5:00 p.m. You disappear for an hour during the day, yet you always seem to be able to chop more wood than I do. What do you do during this hour that you disappear?”

And the first lumberjack said, “I go home, and I sharpen my axe.”

Sharpen your axe. You’ll be glad you did.

 

 

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Thinking Upstream

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Bryan shares a story about how a little extra forethought might head off major headaches down the road.

The Trainee

Recently, my trainee Kelsey told me she had an appraisal ready for me to review. I asked her about the two busy roads that abutted the property. “Did you make an adjustment for that?” I said.

“No, I didn’t,” she said.

“I wouldn’t have either,” I said. “But did you make a comment about it?” She did not.

And then I suggested that we probably should. “And now I’m going to tell you why.”

And so I told her a story about one of the very first appraisers I helped who had a complaint filed against her.

The Complaint

This is the story: I had an appraiser contact me, and she’d had a complaint filed. The reviewer alleged that she did not analyze and report that the subject property’s area, the whole subdivision really, backed up to a railroad track. And she called me and told me about it. And I said, “Stop talking. Let me talk.”

“If you missed it,” I said, “if you didn’t realize that the property backed up to a railroad, and you didn’t analyze that it could impact the marketability, you need to raise your hand and say, ‘I missed it. I made a mistake.’ You need to ‘fess up to that and accept the consequences, if there are any, and use it as a learning experience, and move on.”

That’s what we need to do. We need to be honest. And we need to tell what we did or didn’t do. When we make a mistake, we need to have the courage and the honor in saying, “I made a mistake. I’m human.” Because we all make mistakes. No one’s perfect. Practice makes better. There’s no such thing as perfection. Practice doesn’t make perfect.

On the other hand, if you did know that rail was there, if you did analyze that, if you did opine that there was no adverse condition as a consequence of that subject’s proximity to that rail, I don’t think you did anything wrong.

The Argument

Keep in mind that all of her comparable sales were in the immediate area. So if the subject suffered from some negative influence because of the nearby railroad track, all of her comps would have suffered a similar influence. Her value would be unchanged. She wouldn’t have made any adjustment. So really, we’re just talking about a reporting issue.

Now, maybe I would have handled it differently. Maybe the members of the regulatory commission would have handled it differently. Maybe the investigator would have handled it differently. However, we’re not here today to discuss whether this individual used best practices. We’re here to discuss whether the person met the minimum requirements of USPAP.

You see, if we talk about the pre-printed form, under the site section, it says, “Are there any adverse conditions or external factors, yes or no?” Well, in her heart, if she didn’t believe that had any impact on the subject, if she analyzed that and said there was no issue, she doesn’t have any obligation to report anything. The obligation is to report if it does have an adverse effect.

One of the things I argued on behalf of this client was, if you think she’s trying to hide that this property backed up to a rail, why didn’t she white out the railroad on her location map? The map clearly showed a railroad there. She wasn’t trying to hide it. She just didn’t think it had a negative impact.

Her case was dismissed. What I told her was that in the future, she could avoid this problem very easily. All she would have to do is say, “Hey, client. The subject property, the subdivision, backs up to a railroad track. I’ve analyzed this, and in my professional opinion, I don’t think there’s any negative impact.” That way, she tells the world, the client, that she didn’t miss it. She knows it’s there, she just doesn’t think it has an impact.

The Moral

The moral of this story is, if you think ahead, you can put this fire out before it begins. If she had said, “Hey, everybody, there’s a railroad track back there, but it’s not impacting the marketability,” then no one could have pointed at her and said, “She missed it.”

Now, you can argue about whether or not the railroad affected value. That’s a matter of opinion.

So what I suggested to Kelsey was this, in an effort to head off any problems, why don’t we say that the subject property backs to Carter Road, side to Southtown? Both of which are somewhat well-traveled, but an analysis of this revealed no negative impact. Because there’s areas of Carter Road that do affect marketability but up here, not so much. At least, that’s our opinion.

I was going to buy a house one time, and I thought, “I’ll get a good deal because it backs up to a bypass.” The bypass sat back a ways, and I thought, “That’s the Owensboro Beltline! That’s got to have a negative impact. I’ll be able to negotiate a good price on this.” No. It didn’t appear to impact the price at all. I wasn’t able to buy that house.

I get it. This is a case-by-case issue. You’ve got to look at your market, that segment of the market, and analyze your data to see whether there’s a market reaction or not.

The Dead?

What if your house backs up to a cemetery? (And by the way, what’s the difference between a cemetery and a graveyard? What does “Saved by the Bell” mean? To get the answers, you’ll have to listen to the episode!)

Either way, acknowledge the cemetery and analyze whether it has a negative impact. I certainly wouldn’t mind the quiet neighbors, but other people might be creeped out and might not want to buy that house.

The Fix

Just a thought: Let your client know, “I’m aware that the property is adjacent to a cemetery, or a well-traveled road, or a railroad track. And here is my analysis of whether or not that thing affects the value.” That way, nobody can point a finger and say that you missed it. That way, you can say you noticed it and then offer your opinion about the impact of its proximity.

External obsolescence — a loss of value caused by something outside of the property lines — isn’t something you can fix. All you can do is acknowledge it and analyze its impact on the property.

Be transparent about your thinking and your analysis, and you’ll head off a lot of problems before they ever arise.

Want more like this?

Check out Bryan’s webinar (below) about covering your appraisal (CYA) and his Cover Your Appraisal course at Appraiser eLearning.

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Appraising During Covid – What You Need to Know | Webinar Overview

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The Client Accommodation Trap

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Appraisers try to accommodate their client’s interests. There is nothing wrong with this per se.  Appraisers commonly write, “at the client’s instruction…” or “per the client’s request…”, then the appraiser describes what the client instructed or what the client requested, as well as what the appraiser did to comply with the instruction or request.

This language, however, implies the appraiser is trying to do the appraisal, or write the appraisal report, in a manner that pleases the client, a potential USPAP violation. By definition, a real estate appraiser must be independent, impartial, and objective. Such accommodating language not only calls into question whether the appraiser has complied with these three qualifications but also smacks of advocacy.

Omit the offending language.  For example, appraisers commonly omit the analyses of the Cost approach. However, certain clients may request the inclusion of these analyses as part of the appraiser’s value conclusion. Instead of saying, “at the client’s request, the appraiser has included the protocols of the cost approach…”, please consider saying, “the appraiser included the protocols of the cost approach as both applicable and necessary to the formation of a credible value conclusion”, never mentioning the client’s request.

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I spent $25,000, and my pool is worth how much!?

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Sometime back a Realtor acquaintance called to ask how much to adjust for a swimming pool. The question implied that we appraisers have access to some kind of secret “book” in which we maintain the dollar amounts of our various adjustments. Would that this were true! I explained to the Realtor© we had to extract our adjustments from market data. The parting comment was something along the lines of, “Well, that would take too long!” And our conversation ended. So, let’s talk about that.

It’s not particularly difficult to calculate a swimming pool adjustment. This can be done by paired-sales analysis or by regression analysis. While I prefer regression analysis, both produce perfectly acceptable results. The results are acceptable not because one or the other is “right” or “correct”. Rather, they are acceptable because the adjustment comes from the market, which must be the source of all of an appraiser’s adjustments. So let’s consider a hypothetical paired-sales analysis to extract a swimming pool adjustment from the market.

Take 10 sales more-or-less comparable with the subject that have swimming pools, and then compare those with 10 sales more-or-less comparable with the subject that do not have swimming pools. You’ll probably end up with 10 indications of the contributory value of a swimming pool. Next, arrange the differences from low to high. Take a look at this range. If there are one or two numbers that are obviously outliers, delete them. Now consider this range to determine if there is a central tendency. For example, is there a contributory value indication that repeats itself? This would be a modal value. Is there a range of contributory values that repeats itself? If so, somewhere within this range is the likely contributory value of the swimming pool.

Look at the average and median differences as well. Frankly, you probably want to avoid the average contributory value because of the inherent differences there are in swimming pools. An average weights all of the numbers in the array the same. Since the market likely does not do this, it’s best to avoid it. The median value represents the absolute middle of the range, but is not affected by extremes or outliers.

You started out with a rather wide range of contributory values, but via the above analyses you have likely narrowed it. This narrowing process is exactly what you’re looking for from paired-sales analysis.

Suppose that your analyses indicated a reasonable range from $10,000-$15,000. Out of this range you are going to choose your adjustment (even though a range is far more indicative of the market’s thinking). Also suppose that the swimming pool at your subject is relatively “plain vanilla”. For this reason, you would probably go with the low end of the range, say $10,000. On the other hand, were your subject swimming pool rather ornate, large, and/or came with an overly large patio and pool deck area, you would probably go with the higher end of the range (although, that would be your judgment call).

The point here is that you did not “guess” at the contributory value of that pool, etc. You did not try to cost out a pool as if new and then apply a depreciation factor. You did not apply a “rule-of-thumb” to determine your adjustment. Rather, you went to the market and, via analyses of the available sales within a market comparable to that of the subject, teased out of it a reasonable approximation of the contributory value of the swimming pool.

Please understand that the best you can do is approximate the contributory value of the swimming pool. This is because individual buyers and sellers react to such an amenity differently. As a result, your adjustment of, say, $10,000 does not mean the market sees the contributory value of a pool to be merely $10,000. Via your analyses, you demonstrated that the market sees a range of contributory values. From that range you, the appraisal expert, concluded that an adjustment of $10,000 approximated the contributory value of the swimming pool at your subject.

In other words, you supported your conclusion. This is all a client can ask for. Your client may not agree with your conclusion. However, your client must agree that your adjustment is based on logic, reasoning, and market evidence. That’s really the best you can do.

So, the point here is, while you may not be able to prove exactly how much a swimming pool contributes to the market value of a specific property, you can show the range of that value. Then, from it, you choose an individual number, even though that range makes more sense in the market. It’s your opinion that the swimming pool at the subject contributed $10,000 to overall value. You base your opinion on market data, therefore your opinion is well-formed. As such, you have formed an independent, impartial, objective, and credible opinion of the contributory value of that particular amenity. That’s what appraisers do.

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Complexities

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Complexities in appraisal work come up periodically, depending on the market you work in and the types of properties that are common to the area. I office in Colorado and have had the opportunity to appraise in rural and extremely remote areas. In the case of one particular market area, the trip one-way takes over two hours and is over 1,500 square miles; in this particular market, you’re lucky to have 30 sales over any two-year period – and that’s counting all residential properties, whether on a lot in town or a large-acreage parcel, a 90-year-old small house or a custom log house. You can bet there are complex assignments in this area. However, it doesn’t take a remote area to result in complex appraisal assignments.

Typically, complexities originate from two sources:

  1. Physical or locational characteristics of the subject property itself, and/or
  2. Limited sales or uniqueness in the area.

Complexities are a double-edged sword. If you only have two dozen sales in the entire area over a multi-year search period for selecting comps, and your subject is not located in a subdivision, you have to decide whether the glass is half-full or half-empty. Likely, there is no “model match” to your subject; however, you don’t have too many sales to sift through to choose which will give the best perspective in evaluating the subject’s value.

An appraiser doesn’t need to cover rural markets to experience similar dilemmas. All it might take is that 3,000 square foot GLA over-improved house in a subdivision of 1,500 square foot GLA houses, or the house with an indoor pool in the area with only starter houses, to appreciate that complex assignments area a test of our appraisal abilities.

But complexities are not an automatic reason to decline an assignment. Let’s be sure we’re prepared!

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