To Eval or Not to Eval
An evaluation, when performed by an individual acting as an appraiser, is an appraisal…
Recently, a document entitled, The Interagency Advisory on Use of Evaluations in Real Estate-Related Financial Transactions was released. Many in the lending and appraisal professions see this as a federal permission slip for evaluations to be completed by Illinois Certified Appraisers. The document reiterates what we already know about evaluations:
Under the appraisal regulations, the following transaction types do not require an appraisal, but do require an evaluation:
- Transactions in which the “transaction value” (generally the loan amount) is $250,000 or less;
- Certain renewals, refinances, or other transactions involving existing extensions of credit; and
- Real estate-secured business loans with a transaction value of $1,000,000 or less and when the sale of, or rental income derived from, real estate is not the primary source of repayment for the loan.
These items have been unchanged for years.
An evaluation is not required to be completed by a state-licensed or state certified appraiser or to comply with USPAP. Here in Illinois, where we are a mandatory state…every valuation product completed and transmitted by a certified appraiser must be USPAP compliant. In order to be a USPAP compliant document, the document must be labeled one of two things:
- Appraisal Report
- Restricted Appraisal Report
If you want to understand the difference between an evaluation and an appraisal, read AO-13.
Spoiler Alert (page 108 – see line 140 in PDF file below):
“An evaluation, when performed by an individual acting as an appraiser, is an appraisal.”
Contents of an Evaluation Report
The Guidelines provide information regarding the minimum content that should be contained in an evaluation. Unlike an appraisal report that must be written in conformity with the requirements of USPAP, there is no standard format for documenting the information and analysis performed to reach a market value conclusion in an evaluation.
Regardless of the approach or methodology used to estimate the market value of real property, an evaluation should contain sufficient information to allow a reader to understand the analysis that was performed to support the value conclusion and the institution’s decision to engage in the transaction.
Some appraisers in Illinois are wondering how they can get on the evaluation bandwagon. When you read what the contents of what a minimally acceptable evaluation, they seem very similar to an appraisal.
- Identify the location of the property.
- Provide a description of the property and its current and projected use.
- Provide an estimate of the property’s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date that the analysis was completed), with any limiting conditions.
- Describe the method(s) the institution used to confirm the property’s actual physical condition and the extent to which an inspection was performed.
- Describe the analysis that was performed and the supporting information that was used in valuing the property.
- Describe the supplemental information that was considered when using an analytical method or technological tool.
- Indicate all source(s) of information used in the analysis, as applicable, to value the property, including:
- External data sources (such as market sales databases and public tax and land records);
- Property-specific data (such as previous sales data for the subject property, tax assessment data, and comparable sales information);
- Evidence of a property inspection;
- Photos of the property;
- Description of the neighborhood; or
- Local market conditions.
- Include information on the preparer when an evaluation is performed by a person, such as the name and contact information, and signature (electronic or other legally permissible signature) of the preparer.
Still, in Illinois, there seems to be the perception that an evaluation would be a vastly cheaper alternative to an appraisal performed on the same property. Is an evaluator allowed to be misleading? Perhaps. It doesn’t say, does it? Here it is, twenty-plus years later and there is still no true bright line between an appraisal and an evaluation. The agencies would argue that one is an estimate of value and the other is an opinion of value. Wouldn’t an estimate be someone’s opinion? Isn’t someone’s opinion really an estimate?
Some lenders have stated that an evaluation represents a cheaper valuation alternative. Cheaper? Residential and commercial appraisers are complaining more than ever about suppressed fees for standard appraisal assignments. Why is the answer to do a lesser product for even less money? That makes no business sense at all. When you look at the bullet points for what is required, at a minimum, for an evaluation, there isn’t a lot of “less” going on.
The Appraisal Institute’s old Guide Note 13 offered an outline for an USPAP-compliant evaluation. In the middle of the sample document they called it a Restricted Use Appraisal Report. It was supplemented with additional information. By definition…that’s an appraisal. That’s not an evaluation. Appraisers have always been able to compete with evaluations. Always. If a lender wants to ignore the exposure time in an appraisal report; they are free to not read it. I don’t understand how omitting exposure time (as an example), for someone who doesn’t want to see it, merits a discount off of the fee charged for the remainder of the report. The homework is the same whether exposure time is in a report or it isn’t.
Tennessee permits licensed appraisers to perform evaluations. In 2010 the Tennessee Attorney General offered an opinion on the practice in a four page document (Opinion 10- 25). In that document evaluations must contain the language that, the evaluation shall be labeled on its face “this is not an appraisal.” In order for there to be a similar exemption in Illinois, there would need to be a detailed separation between what an appraisal is as opposed to an evaluation.
What safeguards exist for lending institutions who are on the receiving end of a bad appraisal in Illinois? Easy. They turn in the report to us at the Division of Real Estate. What happens if they receive a bad evaluation? I have no idea. All I know is, they can’t turn it in to us. Is that worth the risk?
By Brian Weaver, Coordinator Editor of IllinoisAppraiser, Appraisal Management Company Coordinator for the Illinois Department of Financial and Professional Regulation (IDFPR)
Source Illinois Appraiser Newsletters – Volume 9, Issue 1 – June 2016
- Hybrid Assignments, the Consequences - February 7, 2019
- Bankers Concerned About Appraisals - October 18, 2017
- Third Party Blues - July 19, 2017
A new twist to evals! Risky to lenders and appraisers alike. Don’t come crying to Brian if the eval is not up to speed. Just because it was ordered from an appraiser, does not mean it’s backed by a licensed appraiser. This is like really complicated.
This just in; I’m no longer accepting quote fee requests by phone call or email. But they keep calling. These guys are calling me ringing me and I have never even signed up with them in the first place! I put them in the spam box, and their emails appear back in my inbox the next day. It’s 90’s style telemarketing all over again, the amc’s are the telemarketers, and I’m the succer who keeps answering the phone.
Brian, any advice from a regulatory standpoint? Amc fee quoting is like institutional harassment, it’s shockingly unethical and I don’t know, should there be a rule?
Just another way to cheat us out of money!
Liability is too high for the low fees!
Georgia recently adopted Rules for Evaluation Appraisals
According to FIRREA, and evaluation may NOT be called an appraisal.
Amazing!
By the way excellent article and excellent comments above.
Here is the real problem: No two states treat how evaluations may be prepared the same. For example.
When USPAP first was adopted and state laws were implemented, I did NOT have to comply with USPAP and OREA (now BREA) had no clear cut jurisdiction for non federally regulated transactions. A LOT of non USPAP compliant alternative forms were designed by ACI and Ala Mode as well as others.
That was subsequently ‘corrected’ to “If I am perceived by the People of the State of California as acting in the capacity of an appraiser, then OREA HAS jurisdiction AND (at that time) I MUST comply with USPAP whether in a federally regulated transaction or not.” This was oddly enough in Business and Professions Code regulations rather than specific appraisal regulations found in checking OREAs site.
Recently I heard a State regulator state that non regulated transactions are (again) exempt from USPAP compliance…though presumably not state law which incorporated USPAP! For my part, it is easier to try to make sure everything complies with USPAP through a careful scope of work statement. OREA/Now BREA may have differing views.
The solution is NOT parsing evaluation estimates and appraisal opinions which I refuse to do. Nor is it in 50 individual states plus DC and our territories coming up with 57 (?) different interpretations.
The solution is for Congress to decide what the standard of care is that they expect for regulated institutions and to rewrite FIRREA accordingly. It should also offer guidance to states as to what types of exceptions can be permitted.
THEN it should include a requirement for every single lender or AMC or automated AMC service that orders ANY product other than a fully USPAP compliant appraisal to identify the specific States authorizing legislation that they believe that product to be permitted under.
There are a lot of other corrections and modifications that need to be addressed as well. It has been 27 years since FIRREA was passed. Dodd Frank modified it as a knee jerk stop gap “fix” that in many respects was worse than before they passed it. It created as much confusion and lack of clarity as it purported to fix.
When the new Congress convenes we need BIPARTISAN cooperation to analyze the needs of consumers; lenders and investors as well as the professionals involved in our housing finance processes.
IF all they want or need is an appraiser assisted AVM, for $100 Im fine with that AS LONG AS THEY DO NOT HAVE THE FORMS AND SOFTWARE DISIGNERS TRY TO MAKE THE PRODUCT LOOK LIKE SOMETHING MORE THAN THE UNRELIABLE, LIMITED APPLICATION product that it is. Its an unreliable “comp check” that may or may not accurately reflect “market value” as PRESUMED but not defined.
A step above Zillow. Marginally more reliable, but still limited and poorly suited to most loan purposes..
This just in:
Hey there! Didn’t Ocwen run with those guys? Figures. And what’s new? Would not be surprising to find they were eval guys. When I see Deutche, I often associate that with reo or junk.
And that’s the heart of the matter, evals are just more smoke and mirrors.
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