Tag Archive for: appraisal report

Top 3 Mistakes Appraisers Make in Their Appraisal Reports

, ,

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.

 

 

/by

What is a comp?

What’s a comparable property? Or a “comp,” as we say more informally?

Let me give you an example of an appraisal report I saw recently, which is why I’m asking this question: There are 65 comparable properties currently offered for sale in the subject’s neighborhood, ranging from a price of $330,000 to $5,400,000. The report also states that there are 44 comparable sales in the subject’s neighborhood within the past 12 months, ranging from $152,000 to $2.2 million. That’s a big range. Are you comfortable putting that in your report?

What does the term “comparables” even mean? Let’s go to the authoritative sources. Here’s one: The Dictionary of Real Estate Appraisal, published by the Appraisal Institute. It defines comparables as “a shortened term for similar property sales, rentals, or operating expenses used in the comparison in the valuation process and best usage. The thing being compared should be specified.” In other words, are you looking at comparable sales, comparable rentals, or comparable listings?

The next one I’ll read is from The Language of Real Estate: “[Comparables are] properties that have been recently sold or leased and are similar to the subject property sale. Prices of these properties are used to estimate a value for the subject property. Comparable properties need not be identical to the subject but should be similar and relatively easy to adjust for those differences in order to arrive at an indicated value for the subject. Also called ‘comparable sales,’ ‘comparable properties.’”

We refer to them as “comps” a lot.

Here’s a definition from an older book, Real Estate Appraisal Terminology, by the American Institute of Real Estate Appraisers: “An abbreviation for comparable property sales, rentals, incomes, etc., used for purposes of comparison in the appraisal process.” Here’s one from Barron’s Dictionary of Real Estate Terms: “Comparable sales — properties that are similar to the one being sold or appraised. Here’s an example. A subject property is a detached three-bedroom house that’s 30 years old and will be bought with an FHA loan. Comparables would be recently sold houses with similar style, age, location, and financing. Slight variations in characteristics may be taken into account when making the analysis.”

Lastly, I’m going to pull up the Encyclopedia of Real Estate Appraising. It’s a great big book, and it has a whole section on this. I highlighted one part of it because I like it: “What is a comparable property? It is one that would be a reasonable alternative for most prospective buyers who would be interested in the subject property.”

What is a comparable property? It is one that would be a reasonable alternative for most prospective buyers who would be interested in the subject property.” —Encyclopedia of Real Estate Appraising

That’s very simple, and it invokes some good, common sense.

So let’s think about what produces value: Scarcity. Utility. Desire. Purchasing Power. And let’s think about all that from the point of view of a typical buyer: Imagine you’ve found the perfect house. It has the number of bedrooms and bathrooms you want, the location and acreage you want. It’s charming, and there’s nothing else quite like it: you love it, and you could probably afford it. You’ve got utility, scarcity, desire, and buying power. So you knock on the door and ask the owner if she’d be willing to sell. She says no.

As a typical buyer, what would you consider as a reasonable substitute for that property? That is a comparable.

So let me ask you a question. Do you think a typical buyer interested in a $330,000 house, if it was no longer available, would go down the street and consider a $5,400,000 property as a substitute?

That’s a hard pill for this old Kentucky boy to swallow. Because I don’t think the typical buyer of that $330,000 house would have the purchasing power to buy a 5.4 million dollar property. And if we flip that equation, what about the typical buyer of a 5.4 million dollar property? Should it suddenly become unavailable, would they consider the $330,000 home instead? They can certainly afford it, but it probably doesn’t meet their utility. It’s probably not as big. They probably don’t desire it. I guess it’s possible, but it’s highly improbable.

When you’re doing your appraisal and using a form, it asks you: how many comparables are in the area in the last 12 months? How many are listings? They use that word comparable. So they’re not asking for the universe of sales, they’re not asking for the universe of listings. They’re asking for comparables. And if you truly believe in your heart and with your analysis that the two properties I described are comps, and you’re like “Hey, this is a quirky market, and you know, somebody that can buy a 5.4 million dollar house very well may you take the $330,000 dollar house as a substitute property,” okay — but be prepared to have support for that opinion.

Good judgement is your sharpest tool.

This article was adapted from the 2.4.24 episode of “The Appraisal Update” podcast, with Bryan Reynolds. Click below to watch it.

 

/by