Appraisers, did you Shoot yourself in the Foot?
There’s a lot of yelling and screaming about bifurcated appraisals. Unfortunately, appraisers may have shot themselves in the foot when it comes to this issue. Allow me to provide an analogy to help explain the issue.
I’m not sure if this happens in other areas of the country but in Seattle there is a strange “left leaning” way they do things: State and Federal governments perform numerous traffic studies, to determine the safe speed limit for various types of streets. The city government sets the speed limit on their streets, posts signs, and police patrol the area. Violators are issued traffic tickets. In traffic court people have all sorts of excuses for exceeding the limit: “I didn’t know that was the speed limit;” “I had to use the bathroom;” “I was running late to my next inspection,” etc. If enough people break the requirement or complain, the city doesn’t enforce the safe limit.. heaven forbid no! They simply raise the limit to match how the people are driving. As you might well guess, the results of this process create an environment of higher speeds, more traffic, more accidents, property damage, as well as fatalities. I bring this screwball, “I’ll-give-you-what-you-want” method up because, the same is happening in residential appraising.
The appraiser is required to certify – swear as true – that they performed certain tasks when providing an appraisal using FNMA’s 1004 form – a few of many requirements are:
- Use current market based data to determine every adjustment;
- Personally inspect and measure the subject;
- Accurately describe the condition of the subject and neighborhood;
- Personally inspect each of the comparables, at least from the street, and;
- Take and use in the appraisal, an original photograph of each comparable.
I have a CE class called Photograph and Inspection Requirements. The class explains the state, federal, USPAP, VA, FHA, and Fannie Mae requirements regarding inspections, measurements, and photographs. When I explain the rules many of the appraisers start complaining:
- “They don’t pay me enough to inspect each comparable for every appraisal;”
- “An MLS photograph depicts the house at the time it sold so it’s more accurate than my photograph would be;”
- “I can write up two appraisals a day if I use MLS photographs and skip driving by the comparables;”
- “If I use the county’s measurements my house will be similar to my comparables, or what Fannie Mae already has,” .
Appraisers read the rules, take classes, and sign a certificate that accompanies every appraisal but then… SOME ignore the requirements by having others inspect the subject or drive-by the comparables or worse yet, use MLS photographs in their appraisals. In other words, they use the Seattle Method (denial and excuses).
As result of failed appraisals occurring prior to 2012, Fannie Mae created an automated review process capable of reviewing 20,000+ appraisals a day. More than 20 million photographs are uploaded to Fannie Mae’s Collateral Underwriter each year and their system has discovered some problems related to information and photographs.
Microsoft, and several other companies developed programs that can “fingerprint” each photograph: PhotoDNA & toothpic. These programs identify and categorize every photograph appraiser’s use in their reports. They know every time an appraiser reuses a photograph from a past report or uses an MLS photograph… every time. They know who is lying to them about inspecting the comparables and the source of the appraiser’s “original” photographs.
Instead of measuring and creating a sketch of the subject many appraisers download a sketch from the county assessor and submit it as their own, often resulting in incorrect square footage.
Instead of enforcing the rules that we all know and disciplining the offending appraiser for lying about inspections and source of photographs, Fannie Mae is planning on using the Seattle Method, simply change the requirements to match the current actions of SOME appraisers. In other words, this bifurcated process is brought on by the ethically challenged appraisers who signed a certification stating one thing but did something else. (Bang!)
Appraisers lying about their scope of work and ignoring appraisal/lending requirements have given banks and Fannie Mae the excuse they needed to change appraisal requirements.
Since many appraisers failed to inspect the comparables and take ORIGINAL photographs, the bifurcated process will no longer trust appraisers… instead some under paid inspector, or UBER driver, will be hired to do that portion of the process.
- Instead of inspecting the subject, the lender or Fannie Mae will send the appraiser photographs from past appraisals, or MLS photographs. The desk bound appraiser will be forced to make quality and condition ratings on what others have viewed.
- Instead of inspecting, walking around, and measuring the house, information might be provided by a past appraiser, the county, or Google Earth. In the lender’s mind, inaccurate information from the county or Google Earth is just as questionable as the information supplied by an appraiser who used the same source.
- Instead of providing current information about the neighborhood, Fannie Mae and banks will rely upon what the government or past appraisals have indicated, even if it’s years old.
- When it comes to adjustments there will be no more “it feels like $X per square foot based on my 20 years of experience.” Computers running algorithms check on the accuracy of adjustments. Now you’ll REALLY need facts to back up every adjustment and the support for the adjustment better be in your appraisal or work files.
None of this sounds like it will help appraisers, but it will make for a quicker delivery to the lender/client (lucky them). I’m trying to help appraisers become better, make more money, and survive this upcoming shift. If you understand the failures and what’s coming, you can learn, adapt, over-come, and maybe even thrive. The appraisal World is about to be divided into two or three groups.
Tier 1: Appraisers who provide a full inspection of the subject and comparables. They will provide accurate and up-to-date information about the neighborhood, subject, and comparables including current photographs. They know how to select comparables, even in areas where sales are limited. There are more than 35+ different methods for determining adjustments, Tier 1 appraisers know at least five of these. These appraisers will receive the highest fees for their higher quality work but not every appraiser will be offered these assignments.
Tier 2 or 3: This will be for the “form fillers” out there; appraisers who will provide desk appraisals via a bifurcated appraisal process. These appraisers will sit at their desk and rely upon questionable information provided by an unknown person of questionable training. The appraiser signs the appraisal not the inspector or supplier of the information. When a buyer becomes upset with the appraisal, guess who they are going to sue… the desk bound appraiser of course. Remember the unlicensed inspector whose work you are inserting into your appraisal report has NO RESPONSIBILITY for its accuracy. Desk bound appraisers are still subject to the same laws and lawsuits when their appraisals contain inaccurate information.
There will be many form fillers and they will compete against each other the only way they know how: He who has the lowest fee gets the job. From the information I have, the appraisal fee appears to be headed down to $125 per bifurcated desk appraisal. Try and live on that while paying higher E&O insurance fees which are based on the increasing number of appraisals each appraiser supplies.
I’m Trying to Help Provide A Choice
Appraisers have a choice. They can step up their game, fully inspect the neighborhood, subject, and each of the comparables; take ORIGINAL photographs of each comparable and provide useful current information… or not. If you want to better understand today’s scope of work requirements I strongly suggest taking the live CE class or the non-CE webinar Photograph and Inspection Requirements.
If you need help in selecting comparables or determining adjustments, I offer classes (Selecting Comparables) that can help improve the quality of your work to Tier 1 status.
The other choice is to continue failing to perform the job correctly (violating the agreed upon Scope of Work) thereby giving banks the excuse they need to change the rules to equal the actions of a few appraisers; this will allow them to eliminate large numbers of appraisers. I recommend taking live classes, learn how to provide valuable services select appropriate comparables, and determine accurate adjustments. The future is in your hands, not mine I’m just trying to keep you safe out there.
By Richard Hagar, SRA. Richard is the owner and senior partner of American Home Appraisals he’s also the lead instructor of the Hagar Institute. Richard started as a real estate agent in 1976 and became an appraiser ten years later. He provides appraisal services involving complex legal appraisal issues and assists in the defense of appraisers involved in State disciplinary actions. He provides compliance training to appraisers and lenders including government fraud investigators.