2055 int/ext considered a limited appraisal?

[Ben Vukicevich SRA]

George,

Forms rule.

You can't do a 2-4 on a 2055 for FNMA. Dead deal. You must upgrade to a 2-4 form to make the Intended User (FNMA) happy. You as the appraiser must know that-it's that scope of work thing. If it knows, the DTU will not order a 2-4 on a 2055. The property type must go on the appropriate form dictated by the Intended User.

Why would I add the Cost or Income Approaches? First, I don't get paid to upgrade to a Complete Appraisal. While it is nice to do so (and I'll admit I did it in the past) the Intended User is happy with a Limited. And a limited is what they shall get from me. To use the 2055 you must be able to develop a credible value by the Sales Comparison Analysis, period. Actually to use a URAR, the same reasoning applies. That is your primary instruction from the Intended User. If you can't comply, the deal's done. Fred Ruffell mentioned he upgrades to a URAR. Well, if you can't fill-out the basic, Limited 2055's Sales Comparison Analysis, how do you upgrade to a URAR? Are there magical credible sales that now appear because you're using a URAR? If you add the super accurate Cost Approach or Income Approach on the URAR is FNMA going to accept the loan? No. You just told them by not completing or partially completing the Sales Comparison Analysis that there is no market for their subject. Dead deal.

To be USPAP compliant, you must know your Intended Use and then the Intended Users appraisal guidelines. We make FHA VC conditions supplemental USPAP requirements, so the use of the proper FNMA form, to me, is a supplemental USPAP requirement, once you know the Intended Use which is mortgage underwriting for a residential loan to be sold to FNMA/FHLMC. I will repeat, FNMA will not accept an appraisal with the value based on the Cost Approach. Why do it? Why be liable for it? I read your post about the proper use of the MS manual and the depreciation schedule-Nice stuff, but tell that to the guy who was sanctioned by the NCAB appraisal board because he used MS, documented everything and they still didn't agree with his depreciation estimate. I'm sure David Johnson will remember that because he posted the story about it. Scary stuff happens when you're trying to do more than is expected from you.

Regarding the Income Approach scenario, you still have a 65% owner-occupied neighborhood to develop a credible Sales Comparison Analysis. Lose the Income Approach-Depart.

Cost Approach? Bye, Bye. Depart. I don't want to be liable for land/site value, depreciation, etc. If you give me the option to depart, depart , I will. I will repeat, there are very few appraisers that can complete a cost new on a property. We are recognized experts at applying depreciation and obsolescence but NOT cost new. If you ever did a demo for the SREA in the old days, the appraiser always had the cost new completed by a local contractor. The contractor is the recognized expert at cost new not the appraiser. When you stumble into that foyer in an upscale home-- is that ceramic, marble or porcelain on the floor? Most appraiser's won't know, ask or even measure up the square footage of the stuff. Without it, and a host of other such component specifications you can't complete an accurate cost new to apply your land/site value and depreciation estimates to.....

Am I taking the path of least resistance...hmm... I prefer to call it the path of least liability. Face it, USPAP is written for the benefit of the lenders. We allow departure for them and their intended uses in the guise of benefitting the consumer with lower appraisal fees. Take advantage of it. I sure do.

If it's a 2055, I always complete them as a Limited Appraisal Summary Report. If the appraiser feels the need to make the 2055 a Complete Appraisal by adding lots of unneeded stuff/approaches and they want to assume the liabilty for them, go for it. And after they do all that unncessary stuff, 99% of the time the final value will be the same as the Sales Comparison Analysis. I sure don't have time to spin my wheels to get to where I started from--the Sales Comparison Analysis.

In the residential appraisal world, forms rule. They are supplemental USPAP requirements. Fill them out...then look to see how you make them 2002 USPAP compliant by invoking departure or not.

Ben

 

[Mike Garrett RAA]

Excedrin isn't strong enough these days...now need three (3) 500mg Tylenol to stop the madness!

 

[John Hassler]

Lee Ann

We have digressed from the original post and I will start a new thread on physical depreciation in the cost approach soon. In the meantime, please discard the physical depreciation table from the back of your M&S guide as it is moot if you use market derived data for PD.

John Hassler

 

[George Hatch]

John,

John's response:

Measuring the market's reaction to condition should be reserved for your adjustments in the Market Approach. Base your phisical depreciation in the cost approach on the actual physical depreciation. Remember, you are measuring cost, which may or may not be value!

I'm sure you're aware that the depreciation charts in M&S are not labeled "Physical Depreciation" and do not only measure the effects of time on the structure. Further, M&S does not use a straight age-life approach in calculating loss. Instead, they use what they refer to as the "extended-life theory of loss" which is based on the premise that "a proven ability to exist leads to continued existence". And no, I'm not making this up. Anyways, properly used, these theories and their correct application in M&S demonstrate how a 100-year old house can have a remaining economic life of 20 years in some neighborhoods and how a 10-year old Las Vegas hotel can have a remaining economic life of zero.

The cool thing about the depreciation theories that M&S use is they don't limit themselves just to physical factors but also include some consideration for functional and external factors as well. It does this by comparing the subject to other properties in their neighborhood/market area. I'll let you read up on the specifics, but suffice it to say that when using the depreciation section in M&S, the appraiser is not asked to estimate effective age (which would limit the factors only to physical elements), but instead is asked to estimate remaining economic life with the effective age coming out as a residual. The difference is profound.

Like I said, I'm not making this up and there isn't any original thinking going on here. I'm just parroting what is in the M&S manuals. Using their figures and tables without knowing the principles that they are based on will absolutely lead to flawed results. I would suggest that any appraiser who is using M&S take the time to actually read this section of it because there is a little more to the process than just using the tables.

Also, not to be snippy, but we no longer use the term "Market Approach" and haven't for some time. The current term is "Sales Comparison Approach", or "Direct Sales Comparison Approach". One of the main reasons behind this semantic change several years back is that all approaches to value are market approaches. We're supposed to use market data for our analyses. So there is nothing wrong with using elements from the Sales Comparison Approach in measuring and quantifying adjustments to the Cost Approach. After all, we use elements from the Cost Approach and the Income Approach as at least a starting pouint for some of our adjustments in the Sales Comparison Approach on a regular basis. The top half of the adjustment grid reflects differences in physical attributes, at least some of which can be quantified using cost figures. Not to say that cost = value, but can be a starting point.

Take functional obsolescence. One of the primary methods for quantifying functional obs is to take the adjustment from the Sales Comparison. I'm sure you catch my meaning here. So I still stand by the concept of using comparable sales to demonstrate and quantify the difference in value between older and newer homes.


George Hatch

 

[George Hatch]

Ben,

With all due respect, sir, Appraisers Rule. The forms are there for our convenience and they work for us, not the other way around. We shouldn't be training appraisers in "how to fill out a form properly", we should be training them on appraisal theory and practice, with supplemental standards, like FHA/VA and FNMA being presented as supplementals, which is what they are. I understand the concept that the client is king and should get everything they are asking for and not one whit more nor one whit less. However, it isn't their license that's on the line. Sure, give them what they want, so long as you can do so without opening yourself up to unnecessary risks. And excluding information that some readers might find relevant should be interpreted as an unnecessary risk.

I should also point out that I am not implying that misusing an appraisal form should be an acceptable or common practice; only that from a conceptual standpoint it is technically possible to use a form for property types that they are not intended for, and to do so in compliance with minimum standards. Possible? Yes. Recommended? Certainly not. For the record, I do not try to write appraisal reports on napkins.

You want to do the bare minimums so as to reduce your exposure, go right ahead. Just do yourself a favor and call it what it is. You don't want to do it because the client didn't order it that way or because you can't charge more for it? That's a business decision, not an appraisal decision. The Accounting profession is going through hell right now because some individuals did what they were effectively allowed to in their firms and then tried to say it was acceptable. Maybe their internal guidebooks said these were acceptable practices, but their actions are now being called to account by a higher authority. So it may very well end up with FHA/VA and FNMA. I wouldn't want to be on the wrong end of that dispute.

I would agree that the Sales Comparison is the big dog in residential appraising, and rightfully so. However, when the data is there, the addition of the other approaches to value can add to the reliability of the one big approach and make for a stronger opinion of value. I find it very ironic that we teach three approaches to value, yet we train our appraisers to focus on the one approach to the exclusion of all else.

Sure, most of the time the one approach will give an adequate representation of the market. But there are always circumstances where the one approach can use a little help. And those cases are going to end up representing a larger portion of our collective practices long after the computers have wiped out tract home appraising. I would suggest that any SFR appraiser start delving deeper into the basic theories and build their skills because only the strong are going to survive in the long run. The form fillers are going to end up going the way of the dot-matrix printer. Sure, they work, but who needs 'em?


George Hatch

 

[Ben Vukicevich SRA]

George,

Ha, evidently you haven't been to the store in awhile to see that dot matrix printers are still alive and well........just got a receipt from Pep Boys tonight for my oil change and it was printed on a dot matrix.....they also monkeyed/franked my check with a dot matrix...

But, back to the post

Lord, I hope the appraiser has some training in appraisal theory and practice before they are even licensed and attempt to appraise, let alone fill in a form.....I was trained primarily in narratives, then forceably downgraded to forms, cause that's all they take these days

Seriously, appraisers do not rule. The forms rule in a tango via perceived risk by the GSE's. If they can get away with no form and a funding fee, they will. If they can get away with an AVM and a 2075, they will. If they can, they will use a 2065 or a 2055 with the URAR the last resort for manual underwriting of a loan. DTU will never order a URAR so the base appraisal for FNMA single family automated underwriting is always a Limited. I'm anxiously waiting for the day when they get really smart and by-pass the value and USPAP altogether and develop a Loan to Sale Price Ratio form. Yep, Mr/Ms. Appraiser, the requested loan amount for the subject is $xx,zzz. Based on several sales in the neighborhood, what is your opinion of the loan to sale price ratio for the subject-similar to the process for developing a GRM. By-pass the market value completely and give them a direct indication of their risk.

But I digress and dream,

You have been asked by DTU to deliver a Limited, not a Complete. They only ask you to mark it as Complete, if it becomes one by default not if it becomes Complete by adding approaches. Don't add approaches. They don't want them or they wouldn't ask you for a Limited to begin with. In short, isn't departure excluding information that some readers/peers might find relevant?? Yep. And as long as you can develop a credible opinion of value with the Sales Comparison Analysis, you're good to go cause USPAP says so. As you said, the big dog rules in residential appraising and if it doesn't, well the form isn't filled out and there's nothing to worry about. It is ironic that we teach 3 approaches when, if we can't get by the Sales Comparison Analysis hurdle for the very large percentage of our work completed for the GSE's, there is no need to proceed further, or even know about, the other two. Just try to hand in a 2-4 form or a URAR form without a Sales Comparison Analysis and see how far that goes. Thus, the use of 2 additional approaches hang on the successful application of one for the GSE's. Always has.

As far as FNMA/FHLMC/FHA and VA being called to account by a higher authority, we can all dream on. I could see maybe FNMA and FHLMC taking some flak on the AVM's but not on reports completed by appraisers as the appraisal, complete or limited, must be USPAP compliant. FHA and VA are really out of this discussion because they require a Complete Appraisal and will not accept a 2055 (Limited) so naturally the appraiser will include all necessary and applicable approaches to deliver a Complete.

The accounting profession is not a good comparison. That was fraud. They knew what they were doing was wrong and they chose to ignore/hide it. You are not being asked to commit fraud using the 2055. You are simply being asked to develop a credible opinion of value via one approach. If you can't, the deal's off. If you can, you proceed. Very simple. Very USPAP compliant.

I agree with the first sentence in the last paragraph of your post and that's when you use the 2055. If you can't, then there is no 2055 because you have a "problem child" that needs the attention of a portfolio lender cause no GSE is going to touch it and the portfolio lender is not going to accept a 2055 form for a complex property appraisal. Now do you see why forms rule? And as long as there is a federal government and the GSE's are around, we can be sure there will be forms. Don't throw that dot matrix away just yet... Manny, Moe and Jack haven't and they're making tons of money.

Yep, I do the bare minimum to provide a credible value opinion and thus minimize my liability. I'm not in business to accept additional liability via USPAP when USPAP allows me an escape clause (departure). When DTU gives me a choice of a 2065 or a 2055, it's a no-brainer. They get the +,-,= "dinky" 2065 form. Give them what they want. Do you really think they will turn you in to the state board for eliminating an approach to value when their system ordered the appraisal/reporting format?? Nah..They got exactly what they requested via their perceived risk of the borrower.

Fill-in the 2055 form, make it 2002 USPAP compliant with a stupid addendum and be done with it.

Ben

 

[Steve Owen]

John, I don't know where you got your ideas about depreciation, but it sure didn't come from USPAP.

John Hassler said:

The market may pay more of less than $5,000 for this depreciated roof but that figure is irrelevant in the Cost Approach There is, however, likely but not necessarily a high degree of correlation between the two. Functional and external obsolescence are a different matter, those are market derived.

USPAP says:

Standards Rule 1-4(b) When a cost approach is applicable, and appraiser must:

line 646:

analyze such comparable data as are available to estimate the difference between the cost new and the present worth of the improvements (accrued depreciation.).

USPAP does not distinguish between the types of depreciation in the cost approach. It is up to the appraiser to do that. Total accured depreciation, however, most accurately and correctly comes from the market, regardless of what approach you are using. You can use anyone's tables you want to, but if you don't analyze the market (assuming data is available) you have taken departure from the specific requirement in SR1-4(b)(iii).

 

[Steve Owen]

George, as usual you do an excellent job of summing up the main points in this thread. I think it is really pretty simple, appraisers should take departure, when appropriate, but should not do so on a whim just because the client ordered a 2055.

When I first posted into this thread, I made some pretty bold statements in the hope of getting some discussion and comment going. I was saddened and somewhat dismayed, by some of the statements that were made by appraisers I have usually agreed with and admired.

I would have been willing to come off of some of the content in my first post to this thread and was hoping to see some reasoned argument to that effect. Particularly, I said that if there is adequate data and you don't do an approach, you have taken departure.

While I believe USPAP is not particularly ambiguous, as the quotes I have used in this thread tend to support, there is one thing about it that is very ambiguous. That is the use of peer language in determination of whether an approach is applicable. In other words, if all your peers stop doing the cost approach in the appraisal of SFR's, then it may be true that the approach is not applicable any longer. Even the USPAP book now uses language like (line 3329):

a cost approach may be applicable.

The point is this. Because appraisal is a peer driven business, we should pay attention to what our peers are doing, try to chage that when we feel it is in the interest of the profession to do so, and change our own practice when it is necessary to conform.

However, if all our peers start routinely doing SFR's without income approach or cost approach it is at least possible that at some point it will become the standard practice so that such may be done without taking departure. I don't believe that day is here yet, and I think it will be a very sad day for the proffession if it ever arrives. At that point in time, an appraisal of an SFR by an appraiser, will be only slightly better than one done by an AVM.

I do 2055's from time to time. I always do them as a limited appraisal and make lots of comments about that fact on the form. However, I have no hesitation to refuse to do one in any instance when I think it is not appropriate. Those instances include situations where not enough data exist, where the property is in any way unusual, and where inclusion of either a cost approach or income approach is considered necessary to arrive at a credible opinon of value. I suggest that the appraisal profession would be well served if my peers follow this same kind of logic.

 

[John Hassler]

To Steve:
You apparently mistook my aside in a previous post. No inference to USPAP was intended with regard to depreciation. I will conceed that using market extraction to determine phisical depreciation in the cost aporach may be an acceptable way among peers but personally at that point it appears you are doing a market influenced cost approach which, to me, makes it moot if you also include a sales comparison analysis. You do it your way and I'll do it mine.

To: George
My last M&S is the commercial/residential version from the late-1990's and the table is listed as "Depreciation - Residential Properties". They apparently have changed their ways and I will make a point to look at someones newer version.

John Hassler

 

[Ben Vukicevich SRA]

Steve,

I agree with most of your post but I feel like I'm banging my head against the wall here in this thread. We have to remember, I'm talking only about the 2055 form in this thread nothing else, not upgrading to a URAR, whatever. The 2055 is a "go" or "no-go" form. Plain and simple.

The client is asking us to depart and to write a Limited Appraisal by default, there is no whim involved. Produce a credible value by one approach. If not, no deal/appraisal. There is no USPAP to be worried about at that point because you have no value to state on the form. No need to upgrade by adding additional necessary/applicable approaches for the purposes of FNMA because you didn't successfully pass the first hurdle/test in their underwriting process.

Here's the deal. They don't underwrite on a value deriven from the most excellent Cost Approach ever done by man. 2055's aren't allowed for 2-4's so there is no Income Approach to worry about. The appraiser has told them by not filling out the Sales Comparison Analysis that there is no market for this property. So now the appraiser dreams about upgrading the report format because he/she needs an additional approach to produce a credible value but there are probably no land sales either if there is no market activity so there is no credible Cost Approach to add, unless you're going to mess with a less reliable method to produce a site value-then is it reliable??? Back to square one. No credible market data. If we can't fill in the grid FIRST with info to develop a credible value, there is no 2055. The form rules because it encompasses the scope of work and the underwriting process of the client.

So in conclusion, no 2055, no loan to FNMA. Now it's time for a portfolio lender and for the appraiser to then move up from the form world, applying all of George's wisely recommended appraisal theory and techniques, to understand the client's appraisal guidelines and to issue an appraisal that is satisfactory to USPAP and the client. You are now freed from the default Limited Appraisal and can include whatever approaches you desire to produce a final value opinion. Enter the dreaded narrative report..on a complex property which may then be out of bounds, via USPAP, for a typical licensed residential appraiser.

I know we can complete an appraisal on a napkin that is USPAP compliant but it is the appraiser's responsibility via Competency to be aware of the client's needs, even if that need is the use of a client approved appraisal form.

So we scope-out their form first, look to USPAP for guidance, fill-out the form complying with USPAP and that's it.

Ben