Tag Archive for: USPAP

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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Listen, Lenders! Please Stop Doing These Two Things

Bryan Reynolds suggests two changes lenders should make to help appraisal companies operate more efficiently: Let appraisal trainees do inspections and appraisal firms make assignments.

Listen, lenders! No, I’m not talking about the adorable Listen Linda Kid, although he is absolutely fantastic. But I am gonna rip off his best line: Listen, lenders!

In fairness, I give everybody a hard time: appraisers, agents, underwriters. Today it’s the lending community’s turn — you lenders out there, hear me out.

It’s not news to anyone to say that we’re in unprecedented times. Everybody’s waiting for appraisals. Everyone wants to solve the backlog problem with new ideas and products and hybrids. Everyone has “the solution.”

Let’s look at this for a minute. You know why supervisory appraisers are apprehensive about taking on appraiser trainees? It’s because, what value do they add? If I’ve got to go out on every inspection and hold the trainee’s hand, they really don’t add any value to me as a business owner.

USPAP, Fannie Mae, Freddie Mac, your states all allow appraisers to send trainees out on their own, after a certain period and once you feel the trainee is competent . But the lending community continues to push back on this. If the lenders are willing to send an insurance agent out to do inspections, why in the world are they not letting me send my trainee out to do an inspection without me?

Lenders, just listen a minute: A lot of these problems would be solved if you let us appraisers do what USPAP, Fannie Mae, Freddie Mac and our states allow for. Let me teach a trainee the proper methods of observation, and let me send them out. I can hire three trainees! I can expand my book of business!

But if I have to accompany them on every inspection, why would I bring someone on to train at all? Dustin Harris makes the point beautifully on his blog at theappraisercoach.com:

“Our clients (AMCs and Lenders) have made it next to impossible to take on a new recruit. Most of the engagement letters I receive have the following little statement attached, ‘The Certified Appraiser must physically inspect the property, all comparables, and complete the appraisal report. The use of Trainees for this assignment is not allowed.’ So, let me get this straight: I can hire and train a new appraiser, but they cannot do anything to help my business grow until they are fully Certified. Gee, sign me up!” —Dustin Harris, The Appraiser Coach Blog

Well said.

Here’s another thing, lenders (and maybe this goes out to AMCs as well): If I want to hire three certified appraisers, and now I can hire three trainee appraisers for each of them, that’s nine more trainees and three certified appraisers. I have an army now! I’m ready to take on lots of work. But here’s the problem: The lender is going to send the appraisal request to the specific appraiser. Why don’t they send it to the firm? Why don’t they send it to me?

For instance, I have an appraiser. Matt. You send an order to my firm, I could say, that’s outside of Matt’s immediate area. He services that area, but that’s an hour drive. Let me send Kelsey! She’s ten minutes away from that property. So let me assign it based on what makes more business sense. Or maybe Matt’s two weeks behind and Kelsey doesn’t have anything to do. Doesn’t it make sense that I, the business owner, make the assigning decisions, for efficiency purposes?

Listen, lenders. We can solve a lot of problems if you do two things:

1. Let appraisal companies make assignments.

Start assigning the appraisal to the firm, and let the firm decide he best person for the job. Think about it. You send over a fourplex. Kelsey’s only done one in her life. Matt’s done 400 in the last three years! Wouldn’t it make sense for me to assign that multiplex to Matt? I as the business owner know how to delegate those assignments a lot better than you do.

So why don’t we look at approving appraisal firms instead of individual appraisers. If you need to vet them, I understand that. But approve my firm, let me hire more appraisers, and I’ll delegate the assignments out responsibly.

And then finally, listen lenders:

2. Let trainees do inspections.

Let me start using my trainees to their full potential. Trust me to choose them, then let me trust them to do the work I assign. This helps you, it helps me, and it helps the communities we serve.

Most of all, if lenders and AMCs don’t make it less onerous for us to take on and train new appraisers, then how do they expect new appraisers to enter the profession? Our industry is aging. We need excited, sharp young people to take up the trade. Which means we veterans are gonna need to show them the ropes. But we can’t do it out of charity. There need to be incentives for all of us — supervisory appraisers and trainees.

Just listen!

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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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USPAP Compliance and Desktop Appraisals

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Many appraisers are worried that a so-called desktop appraisal will not be USPAP compliant if a third party to inspects and/or photographs the subject property.

USPAP does not make an issue of who inspects the property, nor who photographs it. USPAP does not require the appraiser to inspect the subject property. Nor does USPAP require the appraiser to photograph the subject property or the comparables. USPAP requires the appraiser to disclose the extent of the inspection of the subject property, which includes no inspection at all. Further, USPAP makes no mention of the need to include photographs of the subject as part of the formation of a credible value opinion. Both these requirements are a function of lender requirements, not USPAP.

Fannie Mae requires the appraiser to inspect the subject property, as well as to inspect the comparable property from at least the road in front of the it (assuming that’s possible). However, Fannie Mae has no requirements the appraiser take these photographs. In other words, a contractor the appraiser hires to take photographs could do this and the report would still be fully Fannie Mae, as well as USPAP, compliant.

An individual lender may require the appraiser to take the subject and comparable photographs him- or herself. If the appraiser agrees to this condition, then the appraiser has no choice but to do so. However, the key point here is that the appraiser personally taking the photographs of the subject and/or the comparables is a lender requirement, not a requirement of USPAP, and not necessarily a requirement of Fannie Mae.

Therefore, under certain conditions, an appraiser doing a desktop appraisal is perfectly USPAP compliant.  Providing photos is not significant appraisal assistance. The appraiser is under no ethical obligation to disclose the photographer’s name, nor the extent of his/her assistance.

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