Failing to adequately explain in report

[hastalavista]

We’ve been talking about appraisals failing to adequately comment on their analysis and conclusion (failing to adequately comment is a specific term I use, but you get the gist).

Here is an example of what I consider an inadequately explained analysis and value conclusion (which I am reviewing now):

Facts: Subject is new construction, purchased in the latter part last year for approximately $525k. It is located in a new development; this development has a premium amenity (golf course, for example) where being “on” this amenity carries a location premium. The development is 1,000+ homes, and there are several builders within the development. So, there is a range of styles. Prices appear to range from $500k to $750k+.
Three comps are included in the appraisal. Unadjusted range is $575k to $625k. These are similar in GLA, bed/bath count and garage count. No adjustments are made. All ages for the comps are shown as “1-yr”. Comps closed within 1-month (2-comps) and 4 months (1-comp) of effective date of appraisal. Final value is within the adjusted range (close to the mid-point).
Report correctly indicates subject’s previous sale price and notes that all comps are new sales (same builder, although not mentioned in the report).
Report comments are, essentially, equal weight given to all comps, final value is supported.
Report includes statement that the assignment was developed and reported in compliance with SR-1 and SR-2-2.

Review Facts summary:

• This is in a new development; there is no comment if the development is still “open” and what the current sales range is and if there is any builder discounts occurring.
• All sales are builder sales- there is no non-builder sale or re-sales. There is no comment about base price, upgrades, concessions, etc. for these sales; there is no explanation why the builder sells these homes for a $50k difference, but the appraiser considers them all equal.
• There is no reference to verification at the sales office of any kind.
• I searched all the data sources an appraiser would have in this area (1-MLS system, MLS tax, County Recorder, 2-data source providers; my most recent updates for this county are 8/17/06; after the effective date of the appraisal and COE of comps); I found no record of any of the comps when referenced by address, sale price, COE date, APN (I was able to figure out two of them). The report cites a doc# and the county as the data source.
• A review of the market reveals that there are numerous expired sales below the appraised value, current active listings from $525k to $590k, many with “seller must sell; bring any offer”. There is one model match that has been active for 110 days, originally listed below the report’s value opinion, and now listed 5+/-% below the report’s value opinion.
• There are additional inconsistencies.

Now, the report concludes a value for a property in 13% higher than what it sold for within the last year.
All of the comps are builder sales with no comment on their credits/concessions/premiums, etc (if they exist; which, the variance in price may suggest). The two most recent comps, by the way, sale for $25k to $50k lower than the oldest comp.
There is no comment or review of the ongoing listing activity. I can purchase the subject’s match for probably 8% lower than the appraised value; there are other, slightly smaller homes that can be purchased for $80k lower.
The report did not consider any re-sales or any non-builder sales or any sales outside of the development to provide support for the value conclusion.

The common sense question here is if the owner (let alone the lender) put the house up for sale, would their sale price be close to the report’s value? All data outside of the report would indicate a very strong “NO”.



Could the subject be worth what the appraisal concluded? Possibly.

Does the report, as presented, support its value? Only superficially; if one does not research anything else and take the report’s “best comps” comments as fact, one could say “yes”. However, a minimal review of the data raises significant questions.

In order to support the value, should the report have commented on things it apparently didn’t include? Such as, the numerous listings available for purchase below the appraised value, the numerous expired listings at and above the report’s value, and if the developer is currently offering any similar sales, and if so, at what price?
The report should have if it wants to make a credible argument that its value is reasonable. It didn’t. This, to me, is a prime example of where a report fails to adequately explain its analysis and value conclusions so that I, the reader, can follow along.

Anyone want to argue (and Edd, you know who you are:new_smile-l: ), that I, as a review, have over-stepped the original appraiser’s SOW and am asking questions that are inappropriate since the appraiser developed his/her analysis consistent to what he/she thought was appropriate given the fee and turn-time?

(ps- I'll have to come back to this on Sunday; I'm outta town for now!)

 

[xm72mhd]

Yeah, but I was going to clean the toilet first.

However, you must explain yourself more clearly before I begin?

 

[Wendy]

.....The report should have if it wants to make a credible argument that its value is reasonable. It didn’t. This, to me, is a prime example of where a report fails to adequately explain its analysis and value conclusions so that I, the reader, can follow along.....

Uhhh, the original appraiser did not want anyone to follow along. He/She wanted someone to swallow a bad report and ask no questions.

I get asked to write these kind of reports all the time now that the home builders are dumping inventory in 1/2 built subs. They get mad when I don't play along.

 

[Steve Owen]

Anyone want to argue (and Edd, you know who you are:new_smile-l: ), that I, as a review, have over-stepped the original appraiser’s SOW and am asking questions that are inappropriate since the appraiser developed his/her analysis consistent to what he/she thought was appropriate given the fee and turn-time?

No thanks. I'll leave that to Edd.

 

[Ms. Janet]

I see the same scope, Denis; just a poorly developed and inadequate appraisal report.

 

[xm72mhd]

From the description you provide I guess you are looking at a 1004, right? And I assume you are applying USPAP for a minimum SOW for the appraisal, right? You didn't say that, and I know your issue with the appraisal is what it does not include in its development that leads you to the conclusion the appraisal result is not credible and the report is misleading and not meaningful, right? Also, it appears that your review assignment and therefore SOW includes a requirement that if you do not agree with the opinion of value that you develop your own appraisal, right?

I think my response to your question needs clarification of those assumptions. If, I'm not correct in my assumptions, please set me straight.

 

[hastalavista]

From the description you provide I guess you are looking at a 1004, right? Yes.
And I assume you are applying USPAP for a minimum SOW for the appraisal, right? Yes.
You didn't say that, and I know your issue with the appraisal is what it does not include in its development that leads you to the conclusion the appraisal result is not credible and the report is misleading and not meaningful, right? See below.
Also, it appears that your review assignment and therefore SOW includes a requirement that if you do not agree with the opinion of value that you develop your own appraisal, right? If possible; see below.

You didn't say that, and I know your issue with the appraisal is what it does not include in its development that leads you to the conclusion the appraisal result is not credible and the report is misleading and not meaningful, right?

Since you are asking for specific clarification, I'll do my best to answer you about this question:
I'm not necessarily looking for the the report to include its step-by-step analysis and process, similar to a "chain-of-evidence" trail, so I can follow exactly how the report went from finding the comps to using the comps.
What I am looking to find is why the report's value is supported in light of the data in the market.
If it used all builder sales, where did it get that info?
Did it check with the sales office to find out what the base prices, credits, etc. were? These are being offered regularly in this market.
Why shouldn't re-sales be considered? And, why shouldn't the model match listed at a price well below the final value (and, the closed range of the comps) be discussed?

There may be good reasons for this; the report doesn't provide them. I cannot discern them from the market data. So, to your question, Do I have an issue with the lack of the report's development comments? The answer is "yes" in the context I explained.

As to your second question, providing an independent opinion of value, that may not be possible in this case. If I do so, however, my SOW is different from the original appraisers, as I can give my client an alternative value based on the evidence I have. Now, I'm thinking you are going to jump on this and say,
"How can a reviewer use a different SOW than the original to come up with a value that is used as a substitute for the original? This is unfair; why can't the original appraiser use the a different SOW?"

I'll answer it simply: The original appraisal, if it had done its job correctly and provided a credible analysis and valuation, would be accepted. There would be no question. The question arises because it didn't do what it is required to do (at least, it hasn't yet). Only then does the review SOW kick-in to conclude an alternative/independent value (if possible). The lender, who understands this process and the whys/wherefores of it, can then evaluate the original report, the review and the review's value. The lender will typically go back to its client, the Mortgage Broker, and ask the broker if the original appraiser can provide additional support for her/his original value because, if not, they will use the reviewer's value as a basis for making the loan decision.

My and my client's mindset is this: The original appraisal is in the best position to provide an opinion of market value for the subject. If, after review, the original report remains the best valuation tool if it can address the issues posed in the review. If it cannot, then it is considered deficient, and the review's valuation is considered the next best indicator. The origination broker always has the opportunity to:
1. Present rebuttal data to the review or additional support for the original appraisal.
2. Obtain another appraisal and re-submit.

Remember, Edd, it is the Mortgage Broker who presents a loan package to the lender. The lender reviews this package; one of the items that is reviewed is the appraisal. If the appraisal does not meet the minimum criteria for lender acceptable, then it is rejected. If the original appraisal can correct or supplement itself, perhaps it will become acceptable; that is the best outcome from all parties concerned.

The worst thing that a lender can do is to "kill a deal" because of a bad review (poor quality review); reviewers who are rebutted on a regular basis for unfounded items don't last long as a reviewer.

The next worst thing a lender can do is kill a deal without giving the original report an opportunity to support itself, if it can.

After those two, the worst thing a lender can do is make a loan based on a non-credible valuation analysis.

If you assume that the reviewer is competent (not always the case), then the review questions are legitimate. Next step is to provide the original appraisal an opportunity to address these questions. If answered, so that those answers provide the necessary support for the value, end of discussion. If they are not, then the lender has a choice to accept the appraisal with its poor review, offer the broker the deal using the review valuation, or reject the loan package in total. Many times the review value is significantly lower than what the mortgage broker "wants" or "needs" so that the deal is not financially feasible for the borrower.

I think that gives you a complete answer, no?

 

[xm72mhd]

Possibly, until I get to the next question, right? Let me run with it. I got some prelim done, but let me see if'n I'm tracking right or left of where I'm supposed to be.

 

[Tim Hicks (Texas)]

Just finished a review.

The appraiser states "the subject is a highly upgraded new home," but does not describe any upgrades whatsoever. In the flooring line it says "carpet,tile." Every description line is typical construction for tract or spec home. Now, all the comparable sales have distressed hard wood floors, 10 ft ceilings, crown moldings, marble and granite counters, custom painting, plantation shutters, media rooms, etc. Nowhere in the appraisal does it say the subject has any of these things. I am sure the subject must have some of these things, but how would I as a reviewer know? Failure to adequately comment is an understatement.

So Edd, SOW issue or reviewer witch/hunter. Oh, none of the sales from the subdivision were considered and the subject was listed for $80,000 less that contract price with no comments.

 

[George Hatch]

A line I frequently use in reviews (when appropriate):

"The written summaries in the appraisal report and the prior MLS listing both depict a home that is typical in quality and finish for it's subdivision (or neighborhood)."

That's it. I don't need to comment any further on what is or isn't included. If the details in the appraisal report don't support the quality or condition rating used to justify comp selection then I have no reason to assume the rating is justified in the first place. They have a problem of some sort and they get to choose which type of failure it is: either they have a reporting problem because they didn't adequately explain, or they have a development problem because their rating isn't supported by the facts.

Besides, it's only relevant as a value issue because of comp selection and adjustment. If they chose the most similar comps and used reasonable adjustments then quality isn't an issue at all, and condition is only an issue if it involves substandard collateral issues for the lender's program.