What every appraiser should know

[rijman]

As a reviewer and prior manager of a regional office for an appraisal review company I have always been amazed at many appraiser's lack of knowledge regarding the review process their appraisal will be subjected to. I am sure that gymnasts and ice skaters, for example, are very aware of what the judges are looking for when they perform in a competition. Shouldn't all appraisers, especially those competent enough to be on their own, be aware of how their appraisal is going to be reviewed? This is not to suggest that all reviewers have the same knowledge and experience while following the same thought process. However, there are a couple of basic red flag issues that every good residential appraisal reviewer looks for that many appraisers appear to be completely ignorant of as follows:

1) A recent prior sale of the subject property well below the current appraisal value. Even rookie UW's are trained to look for this. This is a major red flag that every appraiser should know will set off all the alarms and red flashing lights. In most cases there is a very reasonable explanation for the value increase from the prior sale to the current appraised value (refi or sale) such as the property was purchased as a fixer and has been significantly updated. The appraisal report just needs to fully explain this in detail including the total cost of improvements if possible.

2) Bracketing of major features and appraisal value, within reason. I don't subscribe to the theory of bracketing at all cost. If the subject is 1,500 sf and the largest comp has 1,475 sf, that is close enough. If the appraised value is $285,000 and the highest closed sale is $275,000 using all the best available comps, that is close enough for me. However, all to often I see a subject property with a lot size of 11,000 sf and every comp has 1.0-1.5 acres all with large downward site adjustments or the reverse where the adjustments are all upward. Occassionally I see an appraisal with a value of $800,000 and the highest closed sale is $675,000. Where do the straight-line unsupported adjustments come from? I wouild guess the sky but a guess much closer to the ground on the appraisers backside is closer to the truth. The bottom line is the most recent similar sales must be used and strict bracketing requirements just to meet Fannie and Freddie guidelines are unreasonable. However, every appraiser should be aware that bracketing is a major red flag in the appraisal review process. Bracketing may be necessary to support adjustments, which is just good appraisal practice.

These are just two of the main issues I see on a consistent basis where some appraisers are totally unaware of appraisal review standards and red flags. Most appraisers don't know that large review companies stand to lose as much if not more than the appraiser if the appraisal value is later proved inaccurate when the investor suffers a loss on the loan. The large appraisal review firm I worked for was often made to cover the lenders loss, by prior agreement with an indemnity clause in their contract, for their losses due to over valuations while the appraiser was never contacted or required to pay for their part in the process.

Appraisers should understand how their work is being reviewed just as an ice skater should understand how their performance is being judged. I have often felt that all appraisers could learn a tremendous amount about their industry by performing appraisal reviews for at least one month. Maybe a mandatory class on appraisal review?

 

[Doug Ellwood]

Thanks a great idea David, it is so often overlooked. The only thing that could come from a class like that would be to become a better appraiser. In school, I always believed you start at 100% and work down from there. 8)

 

[Austin]

You raise some good points about bracketing. I use a regression analysis model to do the sales comparison approach, which encompasses the cost approach, and from this process have learned some interesting things about the appraisal process. Bracketing generally refers to gross living area, but it applies equally to all value influencing factors. For example, if the subject property has an attached double garage and a second detached double car garage but no comps are available to support the possible value contribution, you really don’t know what this second garage contributes. You can’t just add your estimate of the depreciated cost of the garage as most people do. In my opinion, the only way to deal with this problem is to just say, the estimated price is zzz$’s but the subject has a second garage that may contribute up to zzz$’s but no data is available with which to support a number.
Also, another tool reviewers could use from regression is to graph the GLA vs. the actual price and then after the adjustments were completed, do it again. If the adjustments were made correctly the first graph should form a trend line with a positive slope and after the adjustments were made the trend line should be flat. I use a programmed marketing grid and every time I make an adjustment I can see the effect on the trend line. I adjust for physical components first, then for size, and then stop to see how the trend line is at that stage. Very rarely do I see any justifiable adjustments beyond this point and I know when it is time to stop adjusting. If the trend line is flat, the game is over.
Another complaint about the existing marketing grid method is that it can be used to say that cost equals price. If you take a subject property that is fully loaded with finished basement rooms, porches, garages, detached buildings, pools decks, etc., and then pick comparable sales they are more basic, and then make adjustments to the comparable sales by adding for all of these extras, you can really create an illusion. This is called bracketing in the aggregate. Regression handles this nicely.
My all time favorite complaint about the present system is that in my opinion the sequence of adjustments is totally off the wall. The sales comparison approach should mimic the cost approach but in reverse. You cannot know if any other factor influences price until all physical factors are accounted for. Many adjustments on the marketing grid are totally redundant like quality of construction, gross living area, and design and appeal. These are inseparable covariant variables and cannot be dealt with in this manner. They have to be dealt with in the sales comparison approach in the same manner as they are dealt with in the cost approach. You can’t have a cost approach based on one theory and a sales comparison approach based on a totally different and contradictory theory. I could go on for pages, but you get my drift. The future of appraising is in regression modeling. PS: Regression and AVM and not the same thing!

 

[Bill S]

One of the best CE classes I've taken was called "adjustments and the underwriter". I agree that review courses or work should be mandatory.

 

[wade3333]

I would like to go to a class that was taught by an underwriter, always willing to learn. Wade

 

[Dave Smith]

After over twenty years at this game I have learned to spend a lot of time with the Fannie Mae and Freddie Mac guidelines. If I know the guiedlines as well or better than the underwriter I have a good start on providing them with the product the want and need. There are several good web sites.

One of the best is:

http://adfweb1.adfinet.com/cgi-bin/web_regs

You have to register to use the site but its easy to do and very well worth it. I have referred several of my LO's to it so answer questions their underwriters were asking. I even go the the site, find the answer and email it to the LO so they can read it and pass it on.

As the Music Man said "You gotta (sorry Joan Trice) know the territory." The same goes for the guidelines.

'nuf

 

[Will Granger]

There's somethin' up in River City. Man I'm on thin ice. I do so little mortgage work that I'm depending on this forum to get me up to speed skating. I guess I could do school figures on ice and cut some brackets with my blades.
Good forum on reviews. I have learned how to appraise to keep the call backs and phone calls to a minimum, but not 100%.

 

[Stephen J. Vertin MAI]

P. David Rij:

Good advice.

Steve Vertin

 

[Dee Dee]

rijman,
Thank you for your input. Although the 'red flags' that you pointed out would seem to be kindergarten knowledge for any rookie appraiser, I always run across appraisals that completely ignore the basic principles. It's beyond me how they ever made it through the underwriter.
I certainly wish you would continue to add more posts concerning the review process. I get at least one request a week to review other appraisers work in my area, but so far I've been turning them down.

Dee Dee

 

[Carnivore]

P. David Rij

Good post. To add just a little bit. I currently have an interesting review assignment. You can tell the appraiser was straining to hold the value down to the sale price. What is not so funny is that the appraiser has told the readers that Values are increasing in this particular market. Nothing could be further from the truth. The appraisers own sales are anecdotal to this fact combined with other sales clearly show a decline. The simple solution was for the appraiser to have recognized the decline, picked the low end of the indicated range and explain it.

Another review I have is similar. This time the appraisers is straining to get the value higher. Its so obvious in his report. He even is using positive time adjustments. Its funny because his own sales(5) indicate a decline.

Thats my pet peeve. They say one thing in the report and then two paragraphs later say something that contradicts themselves.

My other pet peeve is the totally stupid report. One where no one can figure out how they got from 'A' to 'B'. If you call the guy he can't even 'BS' his way through it.

I am glad that I decided to take on considerable review work. Its actually quite a challenge to maintain a objective position. Sometimes I feel like calling the guy up and telling him that he is 2 cents short of being a moron. Review work also helps you in your own appraising.