Reviewing a Poor Appraisal

[Dick Hemry GAA]

Doug: I believe you must turn the appraiser into your state reg. agency. You are professionally obligated to do so. Therefore, just do it. Hell, if your state is similar to OH, the appraiser will get a slap on the wrist and told to take a state approved course with no CE credits being allowed.
We yankees are really tough on bad appraisers. Say, I was in Hope, AR recently. Quite a little place brother Bill Clinton came from. He's done well considering his roots.
Dick[/b]

 

[Red Blumenstock]

I just got finished teaching a review seminar and one of the things I always point out there is that we want to be considered as professionals but we won't be considered as such unless we take whatever steps we can to "clean up our own act". Title XI specifically requires a lender to report such appraisals to the appropriate State Board, but they ignore that requlation. That leaves it to us.

The Conduct section of the Ethics Rule in the USPAP also directs that "An appraiser must not use or communicate a misleading or fraudulent report or knowingly permit an employee or other person
to communicate a misleading or fraudulent report".

In my opinion, that makes the course of action fairly clear. I believe that you are required to report such misleading reports to the State Board.

Red Blumenstock

 

[Stephen J. Vertin MAI]

Doug:

I am going off exactly what you said so if there is more it certainly would change my closing. First you say:

"I recently reviewed an appraisal of commercial property and to begin with, the appraiser stated the present owner wrong. There had been 2 transfers in the past three years that were not addressed. The entity stated as present owner in the report had not owned the property for 3 years."

Since you did not provide a date of report and date of value I will assume your review considered transfers from the date of value. I usually like to give the appraiser the benefit of the doubt and assure this information was available from typical sources as of the date of report. I know in Cook County, MLS transfer records (within the tax section) usually are updated monthly. It maybe the information was not available. It may not. I do not know from the information provided. Furthermore, I do not know the scope of the assignment so I am also assuming ownership information is important in the over all scheme. In other words, the transfer with the correct information of ownership establishes a linkage of purposefully misleading the reader into ignoring the transfer completely due to the transfer being important in establishing value. If it is a give me statement, superficial to the purpose and intent, and just and indication of bad research, who is it misleading to? It may establish a series of errors, I do not know. There is not enough information.

You also state:

"The Sales Comparison Approach was not done, stating that there were no sales but there were 2 in 10 miles in the last year."

Again, just taking you literally, 2 sales are not sufficient, IMHO, to complete a meaningful sales comparison approach. Did he say there were no sales? Or there were not sufficient sales? Again, I will assume he said no sales; however, could it be construed to say sufficient sales? I am just trying to establish a true and accurate picture. Furthermore, how comparable are the sales you mentioned? If there are so few within this distance I am assuming you are either in a rural market or the property is unusual? If this is the case are the sales really comparable? Were they actual arm's-length? Was there any funny stuff with financing? Did you talk to anyone involved with the sales?. You sure do not want to be branded a crack-pot by the State. Meaning, if an investigator finds out the sales occurred between bother-in-laws, they may just blow off other important issues within a complaint. Just a thought. But I am sure you take this seriously and would check this out before turning it over to anyone or you would not have posted.

Than you say:

"The Income Capitalization Approach was the only approach relied on and was not supported by market data. Additionally, this approach had an error that inflated the value by 20%. The property has been vacant and for sale for almost a year. The value indicated was "as-is" but was 65% higher than the asking price, with no explanation why. The report was labeled "full commercial narrative report", not complete appraisal summary report or something similar."

Are you saying the income capitalization approach was not supported by the data in the report or additional data you had? Furthermore, what was the error that inflated value by 20 percent? Finally, is the property listed for sale on MLS, is there a sign in front of the building that was there when the appraiser did his inspection? In Chicagoland, many commercial properties are listed with commercial brokers who never put listings on MLS or a sign out front. This is why LoopNet is so popular. Would the appraiser been able to readily access this information within the normal course of appraising the property? I must admit the report's labeling is funny or sad depending on your point of view and is a violation of USPAP. I am not so sure of the others given what you have provided without further clarification.


Steve Vertin

 

[Joker]

Steve,
To answer your questions and further clarify:
The date of the appraisal was approximately one month prior to the date of the review. In doing a review, I cannot consider information that was not available to the appraiser (subsequent events). The transfers were in years prior to the appraisal. The information is readily available in the county courthouse. The review was a desk review but as I am familar with the market, having appraised property on both sides of the subject, having been in the subject on a few occasions, and after recently appraising 2 similar properties in the area, I may have had a little more information than another desk reviewer may have. Of course, these were the reasons the client wanted me to do the review.

The appraiser stated that there were no sales. I appraised a similar property (one of the two sales I mentioned) in the area and used 10 sales. This was in a small to medium sized city, surrounded by otherwise rural areas. However, in neighboring sister cities with similar economic conditions, within 30 miles, there were 3 additional sales. Before using sales of commercial property, I always speak directly with the buyer, seller, or broker. Furthermore in this type of property, the sales price of which is directly linked to the gross income, I get the gross and net income, and other economic indicators associated with this property type. This also provides competing income data, expense ratios, capitalization rates, and multipliers to be used in the income capitalization approach.

The Income Capitalization Approach was supported neither by the data in the report or with information that I had. An example (not actual numbers) of the error I eluded to is as follows: portion of the property was estimated to bring in $2000 per month ($24,000 per annum). Instead of arriving at $24,000 for the PGI, the PGI was then stated at $240,000. After applying the appraiser's vacancy rate and expense ratio, and using the given capitalization rate, the resulting error was 20% variance.

The property has a HUGE sign that says "FOR SALE". The current asking price was listed in the addenda, but not reconciled in the report. No explantion as to why the variance in the appraised value and the asking price. Furthermore, the appraiser mentioned that the property was under contract but did not state the contract price or date, instead stated that the information was unavailable. I was able to obtain it by simply asking the listing agent.

You know, I envy you guys who can rely on MLS data. Around here, MLS is not that popular and many properties are not listed in MLS. Therefore, any MLS data is incomplete. Likewise, PACE is not available in several counties. In many places, we have to do it the old fashioned way---LEG WORK. Looking at conveyance forms in court houses, actually calling brokers, buyers, and sellers to not only discover information about the sale, but sometimes just to find out WHERE in the heck the property is! Perhaps the appraiser in this case was such an appraiser who is not familar with how to do the leg work. The courthouse data is not available on the internet, and sales are discovered by searching the conveyance forms. Even so, laziness is not an excuse for poor performance.

 

[Stephen J. Vertin MAI]

Doug:

Thanks for the clarification. I agree laziness is no excuse for poor performance. If all that you have said is correct, then I am in agreement with most other appraisers within this string, turn the report in to the State and/or if the person is designated, turn it into his organization. Red put it very well. You are obligated.

Steve Vertin

 

[David C. Johnson]

<span style='color:darkblue'>Doug,

It is a little slack of me to be asking the following question without going back and carefully rereading the thread to see if I may have missed or forgotten something, but, you write the following:

"Furthermore, the appraiser mentioned that the property
was under contract but did not state the contract price or
date, instead stated that the information was unavailable.
I was able to obtain it by simply asking the listing agent."

You had mentioned that it is difficult to be too hard on an older appraiser who may not remain in appraising much longer, and the reluctance to financially damage another appraiser. Yes, I understand that. However:

The fact that the property was not only listed but was actually under contract is huge. If the pending sale of the property is not judged to be non-market (or otherwise "impacted"), and the appraised value is considerably different, this has to be a major problem. The fact that it was not adequately researched and discussed is also a significant problem. Is there a significant difference in the appraised value and its upcoming sale price?



Thanks,

David C. Johnson</span>

 

[George Hatch]

I don't imagine most state boards are going to get too excited about labeling problems in a report. But sales history and income projections are another matter.

There's a difference between smearing a peer and following through on your responsibilities as a reviewer. You didn't go out looking for dirt so that you could hurt someone's business; instead, an assignment of dubious quality came to you.

I think that it is better that your client make the complaint, seeing as how they might actually be considered the victim or potential victim of faulty appraisal work. A state board will take a complaint from a consumer much more seriously than one from a reviewer. See if your client will forward a copy of the original report and your review (for contrast and to lay out the specific 'errors'). After that, the state can decide for themselves whether or not to investigate. If your client won't turn it in, then you can decide whether you want to be a passive participant in allowing the faulty work to continue, possibly harming your client or other appraisal users and our industry in the future. If you have knowledge of wrongdoing, your silence implies consent.

You never know, the appraiser whose name is on the report may not have submitted it that way. His/her appraisal may have been altered or his signature may have been forged by an underling or outside party. By getting the report into the state, you might be instrumental in breaking up a forgery ring or con game and helping that appraiser to clear his name. Or, the state might help that appraiser to realign their appraisal practice with the minimum standards, either through enforced education or disclipline.

You aren't reviewing the appraiser; you're reviewing an appraisal report. Your review should be confined and directed toward the work in question, without regard for the individual whose name is on the report. It is not your job to decide whether or not the appraiser should be discliplined. The state board can make up their own minds as to whether any discipline should be assessed. But they can't do that if you or your client doesn't give them the information to make that decision.

George Hatch

 

[bobburnitt]

Right on George!!!!!!!!!!

BB in Texas

 

[Francois K. Gregoire]

I think that it is better that your client make the complaint, seeing as how they might actually be considered the victim or potential victim of faulty appraisal work. A state board will take a complaint from a consumer much more seriously than one from a reviewer.

Hi George,

All good comments and good advice.

With respect to the quote above, it may vary from state to state, but in some, the source of the complaint has little to do with the determination of its validity. What is important is the complaint allege a violation of the state law regulating license and certified appraisers.

 

[George Hatch]

Frank,

With respect to the quote above, it may vary from state to state, but in some, the source of the complaint has little to do with the determination of its validity. What is important is the complaint allege a violation of the state law regulating license and certified appraisers.

I can certainly agree with the very admirable principle of this, but can think of some instances where knowing the source of a complaint could be of some use to an investigating agency in putting some complaints into perspective. For instance, I am not necessarily in favor of investigations initiated based on anonymous complaints. What's your opinion on this?


George Hatch