The Appraisal Problem
Gone are the days of hiring a professional appraiser to solve the appraisal problem.
For decades lenders have taken on the responsibility of shaping the appraisal process and dictating the solutions to the appraisal problem.
Savvy appraisers push back in a positive fashion to try and enable the lender to receive a report that not only meets USPAP, FIRREA, Fannie Mae, or HUD/FHA/VA an UAD reporting guidelines, but also provides the client with a report that is clear, concise, accurate and not misleading.
An appraisal report can be on time, have all the boxes checked, no inconsistencies, meet all the guidelines and yet be purposefully fraudulent or accidentally misleading or just plain wrong. The review process will not catch these reports in the due diligence process because the system is built on the idea that a perfect report is one that meets all the guidelines. In fact the opposite is true. With the rare exception, when a reviewer receives a “perfect report” that is when red flags should go off. Markets are not perfect market participants are not always consistent in decisions of buying and selling and not all characteristics, features or influences can be scientifically quantified.
Of course with a detailed correlative analysis appraisers can and do establish the predominant trend of reaction and from these reactions market adjustments are in fact derived.
But to say a report must be adjusted within a certain range or that a sale is not comparable if the sale requires adjustment greater than 15% net or 25% gross is simply wrong.
Appraiser should not only always seek and utilize those sales which require the least possible adjustment, but also those which enable the intended user to understand how the subject relates to its marketplace.
Honest appraisers try and meet the reporting guidelines but when this is not possible it is always better to honestly present the actual case rather than reaching out to other markets to find the data that meets the reporting expectations of the ivory towers.
For a residential appraisal, It is all about first determining site value and the actual highest and best use and the developing a cost approach to determine and establish the remaining economic life of the structure.
With this information established then determining the actual comparable sales is much easier and the final estimate is one that will stand the tests and audits that reviewers and market pressures will unleash onto this appraisal.
Seek first to be accurate, to use the correct methods and techniques for the appraisal problem at hand and not try to develop a “one format fits all” because the appraisal solutions need to be appropriate and reliable so the the intended user receives information that will enable them to make an informed decision rather then presenting a report that is only geared and present to get past the first line audit.
In LL2015-02, page 7, FNMA said, “Fannie Mae does not have specific limitations or guidelines associated with net or gross adjustments.” They also said, “Another point of clarification is that Fannie Mae currently does not have, and has never had, a limitation on a single-line item adjustment.” Some of the lenders must have missed the memo. Also, whoever is in charge of FNMAs computer generated reviews. In one review it said that I exceeded the guidelines for net and/or gross adjustments. So, which one is it? FNMAs left hand does not know what the right hand is doing. AGAIN!
Some of the people from FHA are no better. I was in a class with two of the FHA review appraisers from the regional office a few years back. They were tacking the same class but were not instructors. When I would ask them questions, they would look at each other and gave different answers. Funny thing is they were both wrong on every question. At lunch I told the instructor that if these guys did not know the basic guidelines, they should not be reviewing other people’s work. He agreed but did not want to put them on the spot. So, he requested that we refrain from asking them anymore questions because they were giving out incorrect information.
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FHA reviewers not knowing what they are talking about? No way…
They are just bureaucrats justifying their jobs by sending out unnecessary ‘deficiency letters’.
I was sent one years ago and called the HUD/FHA reviewer out for not reading the explanations clearly written in the addendum.
Their inconsistent hammering of appraisers for HUD handbook violations is laughable.
Uncle Zev,
If your article is about FannieMae type of appraisals, I believe most appraisers do not proceed with a cost approach first and then work backward into a value estimate.
In fact, most of the GSE’s are not interested in a cost approach when receiving appraisals. But, no matter. The appraiser of course does a highest and best-use analysis but not for the purpose of backing into the value. The appraiser looks for sales that are similar to the property in terms of location, site value, gross living area, zoning, etc., and hopefully recent sales.
A few pages from the author, FYI. Thank you.
https://appraisersblogs.com/?s=unclezev
https://fflop.wordpress.com/
I heard mention of the water cooler. Tried to stop by the AF the other day but did not even bother to log in. This site should be attracting so many of the AF regulars for several key reasons. Primarily how this site allows bot crawlers and at times has substantial visibility and traffic. Nothing is behind the wall.
Thank you, you are correct about the cost approach. We should never back into the value in that is as bad as having a predetermined value. to work for. How many times have you found the cost approach to be right on? It is the market that determines the value not the cost approach.
That’s a longstanding argument. Many are still convinced this is the best method to first determine land value. The trick to getting reports past underwriting and still being defensible is to scale up the land value estimate, if your local assessor has reliable land to home value proportions. Fill the cost approach only with land value, because lenders rely on that when issuing home insurance. Otherwise, most knowledgeable lenders don’t actually insist appraisers complete a cost approach, even if that’s stated in sow. The only benefit the cost approach ever brought to me was to identify that most manufactured homes are grossly over valued and over priced, as there is clear current market evidence one could buy the exact same thing if not better, brand new, for a lower price, right off the shelf. The notion that land in a trailer park community is worth exponentially more than lands with stick built properties nearby, logical fault. But that’s the market, driven primarily by affordability not actual cost to build relationships.
I believe the cost approach is the addition of the improvements to the land. The significance of the land value is to determine highest and best use. Simply put, if the land value is greater than the value of the property, than the highest and best use is not the current use. However, if you are completing a URAR UAD report, you get a great big red mark on the form and a call back for the review. So most say the present use is the highest and best use. The proper job, is do the 4 parts of the highest and best use, and land value is part of the financially feasible section.
Great article. Accurate. Insightful. Unfortunately the majority of appraisers miss the point. As they’re constantly misled by tech people and special interest groups whom just want a bigger piece of the pie. Amc middle management, tech software, tech order management, outsourced report typing, outsourced inspector, reduced effort hybrid, comps sharing programs, instant accept software, a never ending stream of reduced effort forms meant to replace the 1004, all of that. Now add on ansi group, cloud based data brokers, the cellular industry and lidar tech, it never ends.
CJK, yes on those points. You know why one hand fails to communicate with the other, an excessive rule set. For most matters pertaining to legislation and law, the consistent rule of thumb is a simple rule cleanly written is easier to understand and follow. Where as a bureaucratic system will present itself through complex hard to understand rules. It’s the difference between a 1 page law and a 20 page one. Appraisers are subject to the same pressures and over bearing regulatory structure. Then tech people whom are not licensed come in and really make a mess of everything. They’re just general surfing basic material from the internet to code in system peramiters, on top of that they’re not experts in appraisal nor do they care to be. So we end up with inaccurate applications, cliches and stereotypes about the service, as well as a slue of technical tools which assist the worst least attentive appraisers in gaining unfair competitive advantage over their peers. “Checkbox review” indeed. Underwriters no longer review a handful of reports a day, they’re often tasked with quotas of 40 or more a day, amc’s took and demand the volume approach too, UAD mismo tools allow some to ‘process’ hundreds at a time, that sort of thing. As the majority of appraisers were misled from the top down and from all sides of our material support networks, this changed the proverbial industry standard. Greed rules the day.