Exterior-Only Inspections

[Camp1]

I received a call from a regualr client on Friday wanting to know what I charge for exterior-only inspection appraisals. I basically informed them that it was not something I typically did.

Later, I got another call asking I address the use of exterior-only only inspections with their head of lending. It seems they have been loaning for HELOC loans on a tax card alone. They have decided to require appraisals, but want to save on loan fees. I told them I would be glad to offer my opinion.

This is my first draft:

Dear zzz head of lending,

Regarding our conversation Friday about the use of exterior inspection appraisals for lending on home equity loans, I am following up with my personal opinion about their use.

You will find that appraisers in general have quite differing opinions on the use of the exterior only inspection and their reliability in estimating the market value of a particular property. The Uniform Standards of Professional Appraisal Practice (USPAP) does not specifically prohibit the use of exterior only inspections, but essentially says that it is the appraiser’s responsibility to determine if such a scope of work can lead to credible results.

It is my experience in the (this) County market that the interior of house or dwelling must be inspected to produce a report that would not be considered misleading. An interior inspection allows me to verify the actual condition of the property and not assume the condition is similar to the exterior. It also allows me to determine if the floor plan suffers from any type of obsolescence and get an actual count of rooms and bedrooms. Public Records of property characteristics often include estimations of both heated and non-heated areas, especially in homes having finished areas on second floors and/or lower levels. County property inspectors typically do not gain interior access, therefore are left to guess as to areas not on the main floor of the property. This leaves the appraiser to utilize secondary data that is often inaccurate when performing an exterior only inspection.

USPAP states, “Diligence is required to identify and analyze the factors, conditions, data, and other information that would have a significant effect on the credibility of assignment results... An appraiser must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use.” (Page F-50 USPAP, 2008 Addition)

The argument for the use of an interior inspection typically comes from the lending institution in cases where there is a low loan to value ratio, a precise estimated value is not needed, and a desire to save the borrower some money in loan related fees.

The conditions of the loan typically are not relevant to an appraiser, and they should not be. The appraiser has a responsibility to accurately estimate the market value and can not use the client’s limited scope of work as justification for not producing credible assignment results. Some appraisers do charge a reduced fee for an exterior-only inspection. It is my experience that most borrowers having to pay for an appraisal would just assume pay a small percentage more to know that they are getting the most accurate estimated value on their homes. It would also seem that in this day and age the lender should desire the same.

Please let me know if I can be of any further assistance.


So, would you add or subtract anything. Is the second to last sentence too much?

Any other suggestions?

 

[TJSum]

You may wish to emphasize the point that the fee charged by most appraisers for the exterior drive-by is not vastly different than a full appraisal.

You may also wish to add some positives toward the value if a full interior inspection is completed instead of just the "negatives". You can not give credit for upgrades/updates, basement finishing, etc., unless you can confirm them. If you convince them it is a benefit to everyone involved you would make a stronger argument. Good Luck

 

[Marcia Langley]

camp1,

I like the letter but a couple of things:

An interior inspection allows me to verify the actual condition of the property and not assume the condition is similar to the exterior.

You could take this opportunity to explain how the new forms do not allow extra assumption like the above. On the old forms, it would be OK.

The argument for the use of an interior inspection typically comes from the lending institution in cases where there is a low loan to value ratio, a precise estimated value is not needed, and a desire to save the borrower some money in loan related fees.

typo above

The conditions of the loan typically are not relevant to an appraiser, and they should not be. The appraiser has a responsibility to accurately estimate the market value and can not use the client’s limited scope of work as justification for not producing credible assignment results.

I really like the above.

Some appraisers do charge a reduced fee for an exterior-only inspection.

Maybe a good opportunity to explain that the amount of work is not less due to the extra research required on the unseen portions.

Overall a good job!

 

[Mike Boyd]

You may wish to emphasize the point that the fee charged by most appraisers for the exterior drive-by is not vastly different than a full appraisal.

You may also wish to add some positives toward the value if a full interior inspection is completed instead of just the "negatives". You can not give credit for upgrades/updates, basement finishing, etc., unless you can confirm them. If you convince them it is a benefit to everyone involved you would make a stronger argument. Good Luck

Also, the borrower might be a little miffed if you did not include the new kitchen with granite tops, a new A/C unit, maybe even a swimming pool.

The little bit of savings is not worth sacrificing customer relations.

 

[NC Old Guy]

What may have been missed is the lender is making a major step upward by moving from tax cards to actually getting a "drive by". This may be the type of client that would jump all over the old 2055. Get the SOW agreed to up front. There may be a large number of requests that have been in MLS over the last few years. If the records are really so bad that just by using them you provide a misleading report as stated in the 2nd paragraph, perhaps a compromise would be use MLS info were available & then full for the remainder.

We did few of the old 2055s and none of the new 2055s because of the Catch 22 issues in the certs. As you explained it however, I think the old 2055 would fit the lender's goal.

Now, you still need to explain that you won't know about the new kitchen with granite countertops, etc so perhaps you can sell an upgrade. At least you are giving them options.

Only other thing. You really don't establish/estimate market value but are instead providing an OPINION of market value, at least in my opinion.

Then, "... appraisal would just assume pay a" I don't think you mean assume. Other than that, the comments of the others.

 

[Webbed Feet]

<snip>.....................
The conditions of the loan typically are not relevant to an appraiser, and they should not be. The appraiser has a responsibility to accurately (You mean "Credibly," not accurately.) estimate (provide an opinion of) the market value and can not (cannot) use the client’s limited scope of work as justification for not producing credible assignment results. Some appraisers do charge a reduced fee for an exterior-only inspection. It is my experience that most borrowers having to pay for an appraisal would just assume pay a small percentage more to know that they are getting the most accurate estimated value on their homes. It would also seem that in this day and age the lender should desire the same.

Please let me know if I can be of any further assistance.


So, would you add or subtract anything. Is the second to last sentence too much?

Any other suggestions?

Camp1

Yes, get rid of the word "accurate." Next, try to stop killing every bit of the flexibility written into USPAP in an effort to prove only interior inspection based appraisal analyses are the only credible resulting type of work available to real estate appraisers.

The real issues are not that exterior only inspections cannot be credible when based on an appropriately layed out SOW and reporting format for a client. The issues are preprinted language in Fannie's forms and lack of clear engagement parameters for a well defined SOW with clients by appraisers. You are falling into the trap of taking it on yourself to be a one man show in defining what it is "Credible" means within the context of USPAP. Only we can't do it that way.

Credible has to be defined not just within the context of USPAP, but within the context of the agreed upon SOW as well. Therefore, a SOW calling for an exterior only inspection, a well drafted EA regarding the interior assumptions as agreed to by the client, and appropriate reporting format, is just as "Credible" as any other real estate appraisal in relation to its SOW. Failing to reach a well thought out, written SOW with the client that proves the client agreed to it prior to accepting the assignment, appropriate for the reporting formats preprinted language and certifications, is the real failure of real estate appraisers in our industry. Not exterior only property viewing.

So don't confuse "credible," when relative to a defined SOW that is allowed to contain an EA, with responsibility to always cram the full meal deal down the throats of clients if they desire it or not. Like you said, condition(s) of the loan are not the appraiser(s) responsibility. For me your client needs to understand they just cannot toss out "appraisal orders" at appraisers without dealing with this thing called "Scope of WorK" while also completely failing to understand its meaning under the rules appraisers have to play by.

Webbed.

 

[Lawrence R.]

I received a call from a regualr client on Friday wanting to know what I charge for exterior-only inspection appraisals. I basically informed them that it was not something I typically did.

Later, I got another call asking I address the use of exterior-only only inspections with their head of lending. It seems they have been loaning for HELOC loans on a tax card alone. They have decided to require appraisals, but want to save on loan fees. I told them I would be glad to offer my opinion.

This is my first draft:

Dear zzz head of lending,

Regarding our conversation Friday about the use of exterior inspection appraisals for lending on home equity loans, I am following up with my personal opinion about their use.

You will find that appraisers in general have quite differing opinions on the use of the exterior only inspection and their reliability in estimating the market value of a particular property. The Uniform Standards of Professional Appraisal Practice (USPAP) does not specifically prohibit the use of exterior only inspections, but essentially says that it is the appraiser’s responsibility to determine if such a scope of work can lead to credible results.

It is my experience in the (this) County market that the interior of house or dwelling must be inspected to produce a report that would not be considered misleading. An interior inspection allows me to verify the actual condition of the property and not assume the condition is similar to the exterior. It also allows me to determine if the floor plan suffers from any type of obsolescence and get an actual count of rooms and bedrooms. Public Records of property characteristics often include estimations of both heated and non-heated areas, especially in homes having finished areas on second floors and/or lower levels. County property inspectors typically do not gain interior access, therefore are left to guess as to areas not on the main floor of the property. This leaves the appraiser to utilize secondary data that is often inaccurate when performing an exterior only inspection.

USPAP states, “Diligence is required to identify and analyze the factors, conditions, data, and other information that would have a significant effect on the credibility of assignment results... An appraiser must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use.” (Page F-50 USPAP, 2008 Addition)

The argument for the use of an interior inspection typically comes from the lending institution in cases where there is a low loan to value ratio, a precise estimated value is not needed, and a desire to save the borrower some money in loan related fees.

The conditions of the loan typically are not relevant to an appraiser, and they should not be. The appraiser has a responsibility to accurately estimate the market value and can not use the client’s limited scope of work as justification for not producing credible assignment results. Some appraisers do charge a reduced fee for an exterior-only inspection. It is my experience that most borrowers having to pay for an appraisal would just assume (Did you mean just as soon?)pay a small percentage more to know that they are getting the most accurate estimated value on their homes. It would also seem that in this day and age the lender should desire the same.

Please let me know if I can be of any further assistance.


So, would you add or subtract anything. Is the second to last sentence too much?

Any other suggestions?

Also, replace the word ME with "the appraiser" or an appraiser. Me is not a good choice of words in expository writing.

 

[CindyR]

You know, there are a whole lot of reasons why a client might order a 2055. I tried to turn down an order a couple years ago for a very difficult property in a very difficult area and gave the client all the reasons why they needed an interior inspection. But the bank did not want the owner to know they were doing an appraisal. So, given the client requirements and the scope of work for the assignment there was no problem completing the report. They paid more than they would have paid for a 1004 because I had to document so many extraordinary assumptions but I met their business need and produced a credible and USPAP compliant report. Let's not forget to consider the intended use and intended user on a case by case basis.

 

[Marcia Langley]

You might also include anecdotal examples of exterior only appraisals that have been peformed on gutted houses with no rear walls. There have been some FBI pics posted here of some extreme examples.

 

[KenRossman]

Use the GP 2055

With the now widely available multi-purpose aka general purpose aka non-lender 3/05 style 2055 forms with all the "problem verbiage" removed, their is no longer any "EA" issue...

I do plenty of such work, loaded with lot's of juicy EA's disclaiming what I was able to see and/or not see as well as enumerate on what info I had and where I got it and point out the effect upon value IF the information available was over or under stated.

I haven't had a single client refuse to accept same since I began offering them.