2055 int/ext considered a limited appraisal?

[bradellis]

Lee Ann,

Look at AO-22. Page 205 has a chart that demonstrates the flow. The commentary in this AO also serves to illustrate how it applies. Then read AO-23.

Everyone has struggled with this. The reason that you heard so much chatter at the AI convention is because the interpretations have been made much clearer to the instructors. And, frankly, most of us were floored.

It's all in the scope- and we are all exited about it, because the ASB got this right.

Brad Ellis, IFA, RAA

 

[Frederick R. Ruffell]

First, you must determine if the Sales Comparison Anaysis can provide a credible result, all by its lonesome.Ben

Ben, I say you are wrong (or not quite right) here. Who says the sales approach is the approach to be used in all appraisals? If it is not applicable (as it can be for certain properties) then it cannot be used. Screw the form it does not dictate the appraisal process. Yes I understand that that is what the client and underwriter want (my dad told me people in hell want ice water too). Yes, I understand that 99.9% of the time when appraising SFR's a limited appraisal can be performed and the 2055 can be used. BUT...First the appraiser must determine which of the three approaches are APPLICABLE. Second the appraiser must determine which of the three approaches are NECESSARY to provide credible results. If one of the three will provide credible results and it just so happens to be the one the client wants to use, that particular approach and none of the others, then departure can be invoked.

You are right I have never predicated a value based on the cost approach alone. I use the cost approach on new construction builder sales when re-sales outside of the project within FNMA guidelines are not comparable. It is the only way to add credibility to builder sales that are used for comparables in these situations.
On my 2-4 unit appraisals I have always used all three approaches but have often wondered about eliminating the cost and income approaches ???

 

[bradellis]

Frederick,

All you said is quite correct, but it did not address the assignment conditions.

We have a client telling us no cost or income approach. You may not depart from binding requirements, of course. Departure applies only to specific requirements.

What we are talking about is what is "necessary" and what is "applicable". Essentially, both are open to interpretation. For example, is it necessary to do a cost approach just because a home is new construction? Could one not, for example, go into a developing subdivision, get 6 model match sales, adjust for upgrades and location as needed and produce a "credible" appraisal?

Is the cost applicable in this assignment? Some would say yes, because it "addresses anaylsis that is typical practice in such an assignment". OR one could say is not applicable because it "addresses analysis that would not provide meaningful results in the given assignment". Why might it not provide meaningful results? Perhaps because of unmeasurable factors that allows one builder to earn 22% entreprenurial profit while another can earn only 17%. A 5% differential in a $500K home is $25 grand. It is a possibility- not a certainty.

That is why USPAP now allows us to mostly tailor our work to the client based upon intended use and intended users.

Finally, if you REALLY are interested in this, I'll be doing a one day USPAP Update course at the NAIFA Ed conference in San Gabriel. Happy to noodle this all out with you and the others who attend.

Brad Ellis, IFA, RAA

 

[Ben Vukicevich SRA]

Fred,

You almost there, again. The topic is the 2055 form. No other reporting format has been mentioned and I have not mentioned any other reporting format. The 2055 can not be used for an income property (2-4) per FNMA guidelines so the Income Approach is out by default. I have not researched if the 2055 can be used for a single family investment property nor do I want to think that hard. So, the only approach left that we have to depart from with the 2055 is the Cost Approach...

Quite frankly, if you can't do a Sales Comparison Analysis....then you can't use a 2055..because FNMA won't take the loan.... end of story. The loan goes to a portfolio lender and you can do all the USPAP stuff needed to produce a credible narrative appraisal.

You stated "If one of the three will provide credible results and it just so happens to be the one the client wants to use that particular approach and none of the others then departure can be invoked. "

Which is correct.

So.......

In this case, the "form" dictates the appraisal process as per your mutual agreement with FNMA (AKA Scope of Work) in the Certification. That's what you accept when you sign the Certification. If you can't fill it in...with comparable sales data, you can't use it.....so the deal's off with FNMA, the Intended User and the supplier of the scope of work which you have reviewed to insure that a credible appraisal has been produced. You don't have to worry about USPAP or nothing after that because there will be no appraisal to sign or to send to anyone.

So to use the 2055 form, your scope of work includes producing a credible value by using the Sales Comparison Analysis, invoking or not invoking Departure-FNMA doesn't care about that.

Ben

 

[Ben Vukicevich SRA]

Brad,

I know the 2055 is a form but it also sets your mutually agreed scope of work as defined in the signed Certification. If you can't meet FNMA's requirements for a credible value by the Sales Comparison Analysis, then the deal's off. You don't use the 2055. The loan doesn't go to FNMA and we basically don't have to worry about it anymore. The workfile goes in the "circular" file.

Your statement "The scope is whatever you and your client agree upon is necessary and applicable to the assignment at hand. " is correct.

So the 2055 form does dictate the scope....

Ben

 

[Frederick R. Ruffell]

OK Ben,
Now I understand your reasoning, which I think is circular. You are starting the appraisal process with the format (by default because this thread addresses the 2055 form) and letting the form dictate your scope of work wich is mutually agreed to by both the client and the appraiser by the mere fact that they have been instructed by the FNMA computer to do so. It is not where I would choose to start the appraisal process, at the reporting function, but if you want to, have at it. I would prefer to looK at the subject and the complexity of the assignment before I agreed to accept the assignment, fee and scope of work (as dictated by the form requested by the client, in this case the 2055). Maybe it is because I started in the business 5 short years ago and have always received the majority of my assignments electronically, which allows me to look at the subject and the clients needs before I accept, decline, or request a modifaction. I sometimes forget those calls out of the blue from some broker or processor that can only read what is on the paper in front of them and do no know the difference between a limited or complete appraisal and all they know is "URAR 1004, 2055, interior, driveby"

 

[Steve Owen]

Frederick Ruffel wrote:

Steven, this is not accurate. You invoke departure any time you leave out an appraoach that is "Necessary AND Applicable".

This is wrong. You need to go back and re-read the departure rule. USPAP 2002 lines 433 and 434:

When a specific requirement is necessary to a given assignment, departure is not permitted.

However, your A, B, C, points are correct. (Note that each of the approaches to value is identified as a specific requirement in Standard 1-4.) The specific requirement can be not applicable, in which case no departure is taken. If the specific requirement is applicable, but not necessary then you may take departure. However, if the specific requirement is both applicable and necessary, then departure is not allowed. I'll bet a lot of appraisers are taking departure on some assignments where they should not be. Just because a client wants it that way does not make it so.

bradellis wrote:

So, when your client tells you to do a drive by without income or cost approaches, you would only be departing IF one of those approaches would be necessary to produce credible results.

There seems to be a lot of misunderstanding here, but the USPAP comments under the Departure Rule are not at all misleading (lines 435 - 437):

Departure is premitted from those specific requirements that are applicable to a given assignment but not necessary in order to result in opinions or conclusions that are credible.

Folks, when you leave out a specific requirement (including any of the three approaches to value) you have invoked departure. You are not allowed to depart if the specific requirement is necessary.

 

[Frederick R. Ruffell]

Thank you Steven, that is not what I meant to type/say. If an approach is applicable and necessary then departure is not allowed. I saw a flow chart that helped me see the light on this once, and I think somewhere in this thread someone else mentioned a diagram. But anyway the 2055 form is for the reporting of a limited appraisal by default because of the certifications. Do all appraisers use it correctly within USPAP guidelines, who can say. I am confident in my understanding of the issue and use the form often.

 

[Anonymous]

Read this thread. Interesting, but I have a few comments.

1. Has anyone actually read the requirements for self contained, summary and restricted use? Can a form, especially the 2055 really be considered enough descriptive information to be considered a summary? I know fannie wants it that way, but I dont think so.

2. Alot of comments here on how the cost approach is applicable. I believe it is only applicable to new construction in most SFR cases. This is due to a total lack of understanding on most appraiser's part of depreciation and most cost services total lack of reality on their cost figures. I prefer to develop my own using construction contracts for the 50-100 proposed construction homes I appriase each year. M&S is off by more than 30% in my area compared to what builders actually get. If we are to be measuring market forces and typical buyer reactions, the cost approach becomes even less important on homes of say more than 5 years old. If the typical buyer wanted a new home, that is what they would have bought. Instead, they chose that 30 yo ranch. Do you think they considered what it would cost to build that ranch, its effective age, remaining economic life and how much depreciation it has accured? In reality, I believe formost SFR cases, the market/sales comparison approach is the only applicable approach because that is how the vast majority of homes are purchased by typical buyers. Thus, the 2055 would not be a limited appraisal.

 

[bradellis]

Bill-

Interesting comments. I just would like to point out one thing. Having also been a broker for many years, I have seen how buyers react.

Buyers actually do the cost approach- they just do not know that they are doing it. Apart from that segment that truly does want the older home (like historical property buyers, for example), most run the scenario through their heads.

If you talk to buyers during home visits it will open your eyes. You can actually see them doing an appraisal in their heads. "I like the layout, but the closets are small. Maybe we should look at new homes" and the like.

They know that a "used" home has depreciation. They just do not start putting it down on paper.

Brad Ellis, IFA, RAA