Smokey Bear
Elite Member
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- Dec 8, 2004
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- Certified Residential Appraiser
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- California
Greg Boyd said:
I love my Grouchy Bear!
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Cost Approach Wording
- Thread starter Joshua Fookes
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I love my Grouchy Bear!
The premise that the client is asking for a meaningless cost approach is false. The client wants the replacement cost for an insurance decision and for that the approach is very meaningful.
That said, doesn't identifying the use and user correctly work to reduce liability the most? Doesn't that help limit it to houses that burn down after foreclosure?
That's good thinking. You study game theory?
That said, doesn't identifying the use and user correctly work to reduce liability the most? Doesn't that help limit it to houses that burn down after foreclosure?
CANative
Elite Member
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- Jun 18, 2003
- Professional Status
- Retired Appraiser
- State
- California
Yes! And here's the game...
The client doesn't get to use data for uses other than what it was intended by the appraiser. If lender clients want RCN for insurance they need to speak up. But don't hold your breath because if they "say it" we will probably charge for it and they know it. Unnecessary cost approaches are... well, unnecessary. My favorite client, a direct lender with high standards tells me not to bother with the cost approach unless I think it is necessary.
Would you condone the use of your income appraoches for use by your client's client in trying to fend off the IRS in a tax evasion matter?
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Untrue. The intent in intended use belongs to the client. The appraiser is supposed to identify what property decisions the client (or other user) intends to make; rather than instruct them (and the rest of the world) what decisions the appraiser will allow them to make.
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The point of identifying the client's intended use (or intended decisions) is so the appraiser can determine what work is necessary to develop credible results for those decisions.
Actually, I edited to slowly.
Actually, I edited to slowly.
Smokey Bear
Elite Member
- Joined
- Dec 8, 2004
- Professional Status
- Certified Residential Appraiser
- State
- California
Steven Santora said:
So the stated purpose of the new Fannie forms stating "The purpose of this summary appraisal report is to provide the lender/client with an accurate, and a (sic) adequately supported opinion of MARKET VALUE (NOT insurable value) of the subject, is incorrect? Or can the lender decide to widen that scope and it's ok?
Cynthia
It seems obvious that there are at least two and possibly three, intended uses (types of decisions) for the client obtaining a mortgage appraisal; hence the appraiser has at least two, and possibly three, purposes.
-to establish whether the real estate is collateral grade (which is the intended use of the as-vacant land value estimate),
-to estimate market value so that the lender can determine the maximum loan the collateral will support, and perhaps.
-to estimate replacement cost new so the lender can insure the collateral by adding the insurance premiums to the monthly mortgage payments.
It doesn’t make sense to argue that the cost estimate for insurance is outside the narrow stated purpose on the form, but to gleefully add the land value that is just as outside the narrow stated purpose.
I’d say incomplete is a better word than incorrect. Appraisers should not be surprised that all forms are incomplete or incorrect. Both the ASB and 2/3 of the state boards published documents citing the insufficiency of the Fannie form.
Of course every lender and every client for that matter is free to barter in the marketplace for the legitimate services they need.
It seems obvious that there are at least two and possibly three, intended uses (types of decisions) for the client obtaining a mortgage appraisal; hence the appraiser has at least two, and possibly three, purposes.
-to establish whether the real estate is collateral grade (which is the intended use of the as-vacant land value estimate),
-to estimate market value so that the lender can determine the maximum loan the collateral will support, and perhaps.
-to estimate replacement cost new so the lender can insure the collateral by adding the insurance premiums to the monthly mortgage payments.
It doesn’t make sense to argue that the cost estimate for insurance is outside the narrow stated purpose on the form, but to gleefully add the land value that is just as outside the narrow stated purpose.
Greg
To the extent that lenders can’t or won’t explain it, derives from two things: globalized business and appraiser obstinacy. Lending is less “localized” because of the tremendous M&A activity in banking the last 15 years. There are so many intermediaries (AMC’s) in the appraiser-client-user relationship rife with desk jockeys whose job is defined by checklist productions schedules – and who may even be calling from New Delhi. Appraisers don’t improve the situation by putting their heads in the sand. Even the ASB ducked the issue in its QA – stating that is OK to include an “unreliable” cost approach that doesn’t get any weight of reliance – but never addressed the fact that insurance decision are the intended use that is driving the demand for the service.
In a perfect, or at least better world, organizations would take the leadership role they purport to have in the publications. I think the Appraisal Foundation should take the lead in contacting policy-makers at lending institutions. That way, they could issue advisory opinions that are meaningful (for a change) because they address important questions (for a change). The professional organizations could, perhaps under the banner of making such inquiry on behalf of their dues-paying members, take a leadership role. In lieu of that, individual appraiser may ultimate have to send their own registered letters of inquiry.
On the liability front, there are two things you should always want to have in case you have to defend yourself in court – clean hands. You can’t have clean hands with these willfully-blind, intended-use statements that try to deny that the intended use of the cost estimate is insurance decisions. The USPAP two-step of competency and ethics did not arise by random chance. The ASB recognized what due process has already established. Those intended use statements either indicate that you lacked to the competence to understand the intended use; or that you understood it and tried to obfuscate it. Both of those positions are untenable.
The easiest way to have clean hands is to be able to show that you followed sound practice, acted in good faith, and used appropriate diligence. The first step is to get the borrower off your back by recognizing it as the lender’s domain. The purpose of your analysis is for the lender use in determining how they want to insure their investment. This may well vary from the degree a borrower might want to insure things. The next step is to recognize the lenders have traditionally based their insurance calculations on the percentage of MS-RCN, refer to your attempts to have this clarified and the degree to which you got responses. You can even recognize it as an assumption, or what will almost certainly be called an extraordinary assumption that the lender (who didn’t respond) is willing to use MS-RCN.
Whether it’s a judge, jury, mediator or arbitrator then can all smell any lack of complete transparency a mile away. How can anyone think these – not for insurance – use restrictions can possibly limit liability. Due process can so easily reveal that whoever wrote them either knew or should have know the statement is false. The see-no, hear-no approach might work, if the other side doesn't know or expend enough effort to find out the use-restriction statements are not credible.
That’s a valid question – and it should be put to the client. Isn’t that what the SOWR, etc., say?
To the extent that lenders can’t or won’t explain it, derives from two things: globalized business and appraiser obstinacy. Lending is less “localized” because of the tremendous M&A activity in banking the last 15 years. There are so many intermediaries (AMC’s) in the appraiser-client-user relationship rife with desk jockeys whose job is defined by checklist productions schedules – and who may even be calling from New Delhi. Appraisers don’t improve the situation by putting their heads in the sand. Even the ASB ducked the issue in its QA – stating that is OK to include an “unreliable” cost approach that doesn’t get any weight of reliance – but never addressed the fact that insurance decision are the intended use that is driving the demand for the service.
In a perfect, or at least better world, organizations would take the leadership role they purport to have in the publications. I think the Appraisal Foundation should take the lead in contacting policy-makers at lending institutions. That way, they could issue advisory opinions that are meaningful (for a change) because they address important questions (for a change). The professional organizations could, perhaps under the banner of making such inquiry on behalf of their dues-paying members, take a leadership role. In lieu of that, individual appraiser may ultimate have to send their own registered letters of inquiry.
On the liability front, there are two things you should always want to have in case you have to defend yourself in court – clean hands. You can’t have clean hands with these willfully-blind, intended-use statements that try to deny that the intended use of the cost estimate is insurance decisions. The USPAP two-step of competency and ethics did not arise by random chance. The ASB recognized what due process has already established. Those intended use statements either indicate that you lacked to the competence to understand the intended use; or that you understood it and tried to obfuscate it. Both of those positions are untenable.
The easiest way to have clean hands is to be able to show that you followed sound practice, acted in good faith, and used appropriate diligence. The first step is to get the borrower off your back by recognizing it as the lender’s domain. The purpose of your analysis is for the lender use in determining how they want to insure their investment. This may well vary from the degree a borrower might want to insure things. The next step is to recognize the lenders have traditionally based their insurance calculations on the percentage of MS-RCN, refer to your attempts to have this clarified and the degree to which you got responses. You can even recognize it as an assumption, or what will almost certainly be called an extraordinary assumption that the lender (who didn’t respond) is willing to use MS-RCN.
Whether it’s a judge, jury, mediator or arbitrator then can all smell any lack of complete transparency a mile away. How can anyone think these – not for insurance – use restrictions can possibly limit liability. Due process can so easily reveal that whoever wrote them either knew or should have know the statement is false. The see-no, hear-no approach might work, if the other side doesn't know or expend enough effort to find out the use-restriction statements are not credible.
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