Do Third-Party Inspectors Violate USPAP
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It was recently brought to my attention, by a reputable appraiser I might add, that the use of third-party inspectors may be a violation of USPAP. Or more specifically, that an appraiser relying on a third-party inspector for information (without knowing their name), may be a violation of USPAP. For example, there are several (and growing) companies who are providing clients with what are being postulated as “hybrid appraisals” or “hybrid reports.” The definition, as far as I can discern, is that a third-party inspector ‘inspects’ the property (usually an exterior from the street – which is why there are quotation marks) and a desktop valuation is performed by a licensed or certified appraiser based on the data provided from the drive-by information. It is my contention that the outlined scenario does not violate USPAP – as long as the appraiser takes care not to mislead.
Let me begin by stating what this article is not. This is not a discussion on the validity or prudence of this type of product. The profession is charged with strong opinions on both sides of the spectrum regarding ‘hybrid appraisals,’ ‘alternative valuations,’ ‘evaluations,’ ‘desktop appraisals’ and the like. I have my opinions on the matter as well, but that is a conversation for another day. My purpose in this article is to attempt to answer the question, “Does the use of third-party inspectors violate USPAP?”
As you all know (because we all keep up on USPAP – right?), we are required in Standard 2 to disclose any significant assistance. “When any portion of the work involves significant real property appraisal assistance, the appraiser must describe the extent of that assistance. The signing appraiser must also state the name(s) of those providing the significant real property appraisal assistance in the certification, in accordance with Standards Rule 2-3” (USPAP 2018-19 Lines 707-709). The questions are “what is significant, how do you disclose it, and where?”
In order to answer the three questions above, our best resource appears to currently be the non-binding FAQ section under #255 (in the 2018-19 USPAP). This FAQ makes it clear that significant assistance does not include data-entry and other, non-analytical work. “An individual who merely collects or provides data for use in the analysis does not provide significant appraisal assistance” (USPAP 2018-19 FAQ 255). In other words, when my assistant pulls county data on a subject property and types the parcel number and legal description into the report for me, she is not performing ‘significant’ assistance and does not need to be identified in the report.
What is significant is appraisal-related work (sometimes referred to as “Tier III” activities). They are outlined in the FAQ referenced above as “the contribution… of substance to the development of the assignment results.In other words, the individual must contribute to the valuation analysis in a noteworthy way” (ibid). USPAP even goes on to describe the specific work that is considered to be worthy of a statement. “Examples of contributions made by appraisers that constitute significant real property appraisal assistance include the identification of comparable properties and data, inspection of the subject property and comparables, estimating accrued depreciation, or forecasting income and expenses” (ibid). Using this definition alone, one would be led to believe that a third-party inspector should be identified in the certifications. Or, should he/she?
The waters are further muddied by the fact that USPAP does say “the name(s) of those providing the significant real property appraisal assistance must be stated” (USPAP 2018-19 lines 708-709). This is where the conclusion was made by my colleague that, because an appraiser often does not know the proper name of the third-party inspector, they cannot be identified in the certifications and, thus we have a violation of USPAP. However, let us keep reading.
USPAP is clear that “one misconception is that non-appraisers who provide assistance should be identified in the certification. This is incorrect because the certification requirements in USPAP apply only to appraisers. Thus, only appraisers sign the certification or are identified as providing significant appraisal assistance” (USPAP 2018-19 FAQ 255, emphasis mine). If it is only appraisers who are to be named in the certification, the antithesis must also be true; non-appraisers do not need to be, nor should they be named in the certification. Indeed, the FAQ goes on to say, “the use of an environmental expert to determine wetland boundaries would not be considered significant real property appraisal assistance” (ibid). Just as an environmental engineer is not considered an appraiser, nor are they providing ‘appraisal assistance,’ a drive-by of the subject, snapping a few photos, and even making a few comments about observations made can hardly be considered significant appraisal assistance. Rather, they are providing data to the appraiser who will actually perform Tier III analyzing, comparing, and reconciliation – or in other words, appraisal work!
If we truly are to identify every source of information we rely on in the report by name, shouldn’t we also provide the names of the county clerk who provided us with the deeds, the assistant in the map department who emailed us a copy of the plat, the assessor’s assistant who gave us the owner’s name, parcel number, and legal description, and more? In other words, I believe the ASB sees the potential ridiculousness that would domino if a requirement to provide the name, title, and assistance given of every person who assisted in the appraisal process. Keeping it to ‘appraisers’ seems prudent.
A related question is rightfully raised as to if an appraiser assists another appraiser on an assignment in another state (one they are not licensed in). For example, what if I called on my friend Tim, MAI from Florida (not licensed in Idaho), to assist me with a market study of the Victor/Driggs area that I later use in an appraisal report? USPAP also makes this interesting statement, “it is important to realize that USPAP does not define an ‘appraiser’ in terms of state licensing or certification requirements. USPAP defines an appraiser as one who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective” (USPAP 2018-9 lines 20-22). Now, this portion of the document is specifically talking about the relationship between licensed appraiser and their non-licensed trainees, but could it also apply to appraisers from other states?
So, what about non-appraisers helping out with Tier III responsibilities? By that, I mean appraisal-type-stuff; like market studies, pulling comps, making adjustments, reconciling and the like; you know, things that require analyzation skills. Again, this is not the place to debate the business sense of such a decision, but how should you handle it if that is your choice? I do not think USPAP is clear on the subject. As one of my Appraiser Dream Team Mastermind members pointed out, “it sounds like USPAP is assuming that anyone who provides significant appraisal assistance is an appraiser” (hat tip to Shawn Moore). That obviously is not the case. USPAP is written in such a way that it assumes everyone doing appraisal-type work is an appraiser. I know more than one appraiser who employs ex-appraisers, ‘trainees’ without official license, or other experts to assist with appraisal related duties. Naturally, the liability falls squarely on the shoulders of the signing appraiser in these cases, but how do you handle disclosure? If this describes you, here is how I suggest you handle it, based on FAQ 255. If a non-licensed appraiser were to assist you in any Tier III work, I would put their names and what they did on the report (perhaps in the addendum) and leave it off the certification (remember, USPAP is clear that the certification is ONLY for appraisers). It seems to me that this fulfills both the responsibility to disclose and also to not be misleading. Speaking specifically of trainees (who I guess are considered ‘appraisers’), USPAP states, “the name of the trainee appraiser who provided significant assistance, but does not sign the certification, must be stated in the certification. It is not required that the description of the assistance appear in the certification, but the extent of the assistance must be set forth in the report as required in STANDARDS 2, 4, 6, 8 and 10. The degree of this description is identified by the applicable reporting option for the assignment. For example, in an Appraisal Report the extent of the significant assistance must be summarized (USPAP 2018-19 lines 109-113). The most recent Fannie Mae Selling Guide does not seem to dispute this. “As noted in the License and Certification section in this topic, Fannie Mae allows an unlicensed or uncertified appraiser, or trainee (or other similar classification) that works as an employee or subcontractor of a licensed or certified appraiser, to perform a significant amount of the appraisal (or the entire appraisal if he or she is qualified to do so), as long as the appraisal report is signed by a licensed or certified supervisory or review appraiser and is acceptable under state law” (p. 519).
Does that mean an appraiser should not say anything about the third-party inspector, if his/her data was relied upon? I don’t believe that is a good appraisal practice either. USPAP is clear that an appraiser should not be misleading. Therefore, it would be best, in my opinion, to indicate where the data came from and make an assumption that it is true and correct; just don’t do it on the certification page. A simple statement like the following might suffice:
“This appraisal report is based on information obtained from a third-party inspector who completed a drive-by and took photos from the public road. I am relying on this information (in addition to other data as outlined) to discern information about the subject property for such features as quality, condition, and any amenities that may be revealed from this third-party inspector. I am making an assumption that my conclusions from this data are true and correct.”
Why do I care? I have spent the better part of the last half decade trying to help appraisers to think more like business owners and less like simple technicians. Many have chosen, rightly or wrongly, to not do any type of desktop or ‘hybrid’ appraisal work. I respect that business decision. However, for those who have chosen to incorporate this type of work into their business model, I believe it is important to understand what USPAP says (and doesn’t say) about it. In the end, it is not the report that is USPAP compatible or not; it is the appraiser! You, and you alone, are responsible for making sure you are fully understanding and complying with your state laws and the Uniform Standards of Professional Appraisal Practice.
It is the spirit of ethic that matters most, credibility and professionalism. If the assigning company is unable or refuses to disclose the business and individual names of the ‘inspector’, that’s not the ethical high ground. The appraiser should demand to know who’s helping them. You don’t just hire a random day laborer to assist with tier 3 work, you qualify the competency of the help first. Under the above stretched out presumptions, one could consider the google drive by photo service an inspection. To presume just anyone can provide meaningful inspection services is to presume appraisers do not have any additional specialty which provides meaningful contribution to the process. It takes someone with experience to know when something is right and something is wrong. Who exactly is providing the inspection services? Until that question is answered the approach should be deemed ethically inadequate.
Totally agree with Baggins. Looked at doing one of these hybrids. Went to check the photos that were sent to me. They were taken in such a way that the HUGE school ground buildings in the back yard were not visible. Intentional or not, this proved to be a big deal in the valuation. If my name is on the report and my license is at stake, there is no amount of verbiage that can eradicate lazy and incompetence in a courtroom or a licensing board. And all for a cheaper PRODUCT!
Thanks Dale. The detailed legal argument is very interesting and Mr Harris makes important contributions to the analysis. I’m just like what if. What if the ‘inspector’ really is a day laborer or some ex con who can only get a driving taking photos job? I don’t think it’s a logical parallel to mix up unlicensed people whom an appraiser may have personally qualified or approved, vs unlicensed ‘inspectors’. We all know what lengths some companies go to regarding driving appraiser sourcing costs down. It’s fair to presume there will be even more pressure for these ancillary types of services. Appraisal is a personal engagement where the appraiser professional takes on the position of a trusted valuation advisor, and delivers on exactly that. If the hybrid ‘inspector’ is legitimate, why can’t we know exactly who they are and the terms of their engagement? And why can’t I hire that person myself instead, I’d prefer to stay in control of ‘credible valuation results’ as much as possible. That’s in the book too…
Now that was a fair and balanced, as well as rather informative. Thanks Dustin.
After nearly two decades of owning a large shop, I sold my business and went to work in corporate America.
Today, the majority of my appraisal practice consists of doing review work.
But I also do desktop appraisals and, when doing so, the third-party inspector is always disclosed.
In fact, last month I earned $9,930 doing desktop valuations without leaving my home… dressed casually in in jeans, “t” shirts and sneakers (but I am considering getting some of those “bunny slippers”… I ‘ve been reading about lately…lol).
As a veteran Appraiser who performed his first appraisal in 1982, I am surprised that more “mature ” Appraisers don’t do desktop valuations-it’s a great way to earn a living, or do in retirement…once you know what you are doing.
Well thought out and presented article Dustin.
My state (California) does not require a trainee to have a license. I was told not long ago by BREA’s “Cynthia” (They frequently do not give out last names anymore) that BREA is even telling trainees NOT to get their licenses until they already have all their experience requirements. The reason? Because if the trainee screw up the BREA has ZERO jurisdiction over them as long as they aren’t actually signing FRT reports.
By disclosure, they can get their work credit in reports that they do not sign. While it is MY decision to decide whether a trainee (licensed or unlicensed) is qualified enough to inspect without my assistance, I am still 100% responsible for the results.
I don’t see how use of a third party stranger (broker, agent, teen kid of either; handyman or neighborhood wino) is any different…aside from the fact that I don’t get to qualify, or select them. I still have 100% responsibility.
In a BEST CASE scenario, with all the appropriate disclosures, expanded limiting conditions and use restrictions; extraordinary assumptions and a whole lot of good luck I might be ok.
Right up until someone that is not a client; wasn’t even an authorized or intended user and doesn’t like the results files a complaint with the state alleging lack of competency; that any report was misleading (due to possibly disputed value) and that the assignment conditions were too limiting to produce a credible appraisal and report. Say someone in Maryland that was a seller that accepted a revised low offer after appraisal and later wants to sue the appraiser for their loss. The complaint filing is merely to buttress their allegation in civil court.
In many ‘normal’ states this would be a minor inconvenience. You send your work file and explanation and assuming you did what your report indicates you did, you’d probably be ok. THEY would look at it in the USPAP required context of the intended use suitability.
In California, where state investigators don’t know the difference between a FNMA guideline and USPAP, or where dishonesty and outright perjury are accepted practices at BREA under its current leadership, you would be screwed. Minnesota, Maryland and Oregon are also pretty ‘iffy’.
Now, that’s a best case scenario. The fact is that every single form I’ve seen for these things tried to make them look like something that they are not. ie: a real appraisal. Want an example? How about neighborhood trends and conditions for an area you have not seen? An overly broad but essentially meaningless published study will be used to show ‘trend’ information. Doubt me? Look at current boilerplate models for narrative reports (pure fluff and filler); or any UAD form report-description could fit any neighborhood in the country (“All services within acceptable distances for the market” or similar nonsense.)
I hate to keep referring to First American’s PACE PRO product, but its one of the few that the promoter was dumb enough to post online. It was the form itself that was riddled with pre printed text reporting conditions that could not remotely have been verified by the appraiser.
There is a reason so many of the new hybrid con jobs want you to fill out reports using their proprietary online report systems; and online ‘work files’.
Its not the concept of hybrids or desk top appraisals (evaluations, or whatever other euphemisms they prefer) that is the problem.
The problem is the deliberate and intentional deception being perpetrated by their promoters. (Shortage of appraisers; cost & time benefit to consumers, Vets, ‘almost as reliable”, verified with Super-Doodle Data & leveraged with love and integrity, etc.).
If it were not for their desire to preserve the illusion of professional appraisals being performed and to foist risk on the backs of appraisers, ALL any of these hybrid promoters would need is a 3 x 5 post card ‘comp check/’appraisal’ that ONLY has the address and value on it.
Charge $100 and most of the time (50%+1) they will be within 70% of assumed market value.
I used to wonder why federal regulators tolerated these things, but after reading how big the FNMA dividend just paid to Treasury was it’s pretty clear to me. NO bureaucrat is going to suggest anything that would reduce or eliminate billions in current revenue to the feds just because it may lead to a ten fold (or worse) loss later on.