appraiser focus NATIONAL ASSOCIATION OF APPRAISERS
Q3 2017
magazine
8 VALUATION
What Business Are You In?
10 VALUATION
The Rounding Game
17 TECH
Navigating the Electronic Appraisal Delivery Portal
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A NOTE FROM THE
NAA PRESIDENT JOHN DINGEMAN, MNAA
john@dingeman.com
THE
TEAM PUBLISHER
Teresa Walker
The NAA today continues to grow, a fact that we are proud of as it offers a strong indication that our mission and our goals align with those of our appraiser members, especially those who work in the field. But as we have grown, we have attracted some criticism from those who say we advocate on behalf of appraisal management companies. We have chosen to take the high road and limit our direct response to the detractors. I am, however, reminded of a quote by John Tudor, who said, “A rumor without a leg to stand on will get around some other way.” And so, with this in mind, we have focused our time and energy on sharing our message and our story, exploring ways to reach more appraisers and state leaders, not only listening to their concerns and suggestions, but also acting on them.
NAA’S MISSION
1 2 3
UNITE
Bring appraisers together to advocate for positive change.
PROMOTE
Encourage continued education and high standards of conduct.
PROVIDE
Offer services designed to benefit our membership.
I have had the privilege of speaking with Joe Mier (Louisiana Real Estate Appraiser Coalition), Lori Noble (West Virginia Coalition of Appraiser Professionals), Becky Jones (New York Coalition of Appraiser Professionals) and Creighton Cross (Tennessee Appraiser Coalition) to solicit feedback from organizations that do not currently participate on the BOG level to find out why. It turns out that many appraisers just do not know what the NAA is, and if they do, then those rumors have legs and they have come to believe them. To me, that means we have failed in some way. Our new spring conference is aimed at solving some of these issues and putting the rumors to rest. The NAA supports our membership no matter where they are in the country, and it also strongly believes in state appraiser organizations, recognizing their role on the front lines at the local level. Standing hand-in-hand with the leadership in those states, bringing a highcaliber conference to their membership and the region, and helping drive their membership to a sustainable level ensures the viability of the appraiser movement that we champion.
SENIOR EDITOR
George Harrison, MNAA NAA PRESIDENT
John Dingeman, MNAA EDITOR-IN-CHIEF
Jessica Guerin CREATIVE DIRECTOR
Traci Knight PRINTER
The Ovid Bell Press ADVERTISING INFORMATION
teresa@naappraisers.org SUBSCRIPTIONS
info@appraiserfocus.com EDITORIAL CONTENT
jessica@appraiserfocus.com
© 2017 Reverse Publishing LLC, All rights reserved. Reproductions or distribution of any materials obtained in the publication without written permission is expressly prohibited. The views, claims and opinions expressed in articles and advertisements herein are not necessarily those of Appraiser Focus, its employees, agents or directors. This publication and any references to products or services are provided “as is” without any expressed or implied warranty or term of any kind. While effort is made to ensure accuracy in the content of the information presented herein, Reverse Publishing LLC is not responsible for any errors, misprints or misinformation. Any legal information contained herein is not to be construed as legal advice and is provided for entertainment or educational purposes only. POSTMASTER: Please send address changes to: National Association of Appraisers 7113 San Pedro Ave., #508, San Antonio, Texas 78216 210.570.4950
CONNECT WITH US ONLINE Be a part of the NAA community!
John Dingman
Join us on Facebook at facebook.com/NAAppraisers and like our page!
August 2017
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appraiser focus
/ AUGUST / 2017
CONTENTS
appraiser focus NATIONAL ASSOCIATION OF APPRAISERS
Q3 2017
magazine
6 News from NAA Read about the association’s latest events and initiatives. 8 Valuation What Business Are You In? A simple question that is key to your long-term success JEF F BRADF ORD
10 Valuation The Rounding Game A guide for appraisers on the hunt for an appropriate value conclusion T IMOT HY C. ANDERSEN, MNAA
8 VALUATION
What Business Are You In?
10 VALUATION
The Rounding Game
17 TECH
Navigating the Electronic Appraisal Delivery Portal
AUGUST 2017
FEATURE 12 The Quest for an Accurate Value Conclusion With new tools changing the rules of the game, today’s appraisers are navigating a new playing field. C R A I G M O RLE Y, MNAA
!
It is very important to take advantage of CU training to understand how to use the CU findings.
Going to the Source
17 Tech Navigating the Electronic Appraisal Delivery Portal Overcoming the challenges presented by HUD’s new portal JOHN DINGEMAN, MNAA
18 An Opinion of Value Possible Versus Probable An appraiser’s job and probable market value DUST IN HARRIS
ACCORDING TO MORLEY
“In an attempt to aid appraisers with better tools in supporting adjustments, all kinds of new analytical tools are being developed by software venders. Many of these tools can be very helpful if used properly. However, use of these tools require appraisers to up their skill set to properly when the results from these tools are not reliable.”
4 | naappraiser.org
W FO RITE RU S! HAVE S OMET HING T O S AY?
WANT T O CONT RIBUT E T O T HE CONVERS ATI O N? W E W EL COME SUBMISSIONS F ROM T HOSE PASS IO N ATE ABOUT T HE APPRAISAL F IEL D.
EMAIL JES S ICA@APPRAIS ERFOCUS .COM FOR MO R E I NF O .
appraiser focus
/ AUGUST / 2017
CONTRIBUTORS
JE FF BRADFORD
8 | What Business Are You In?
Jeff Bradford is the CEO of Bradford Technologies, Inc. He was voted Valuation Visionary in 2014 by the Collateral Risk Network recognized by the Mortgage Bankers Association and was named a Tech All Star for his work in bringing analytics into the appraisal process. Today, Bradford is focused on harnessing the power of big data analytics and deep learning to expand appraisers’ opportunities and support their valuations. He holds Master degrees in engineering and computer science and has an MBA. T IM O THY C. ANDERSE N, M NA A
10 | The Rounding Game
Timothy C. Andersen has been a real estate appraiser and consultant since 1986. He has SRPA and MAI designations and is an AQB Certified USPAP instructor. Andersen is an active member of NAA, an affiliate member of the Association of Texas Appraisers and an adjunct instructor at the Columbia Institute. Previously, he had a real estate brokerage specializing in high-end condominiums. He earned a degree in real estate appraisal from The University of St. Thomas in Minneapolis. CR A IG MORLEY, MN A A
12 | The Quest for an Accurate Value Conclusion
Craig Morley has been a fulltime real estate appraiser for 30 years. He has experience in most types of real property, including residential homes, commercial land and building improvements, various utility easements and condemnation valuation. Morley served on the Utah State Appraisal Licensing board for eight years. With his help, Utah was the first state to approve appraisal legislation on AMCs in 2008. Morley has served as the president of the Washington County Board of Realtors, president of WCBR, VP of the Utah Association of Realtors, VP of the NAA and president of the Utah Association of Appraisers. He is a Utah Certified Education instructor and taught for the Utah Association of Appraisers and the Appraisal Institute. He is the principal partner of Morley & McConkie, a regional valuation firm that provides services in Southern Utah, Southern Nevada and Northern Arizona.
J O H N D I N G EMA N , MN A A
17 | Navigating the Electronic Appraisal Delivery Portal
John Dingeman is the chief appraiser at Landmark Network. He is a Certified Residential Appraiser in a California, Nevada and Arizona, and a registered property tax agent in Arizona. He serves as president of the NAA and was the president of the Coalition of Arizona Appraisers. He has extensive experience in the appraisal of singledwellings; small, income-producing properties; and vacant land. As an FHA appraiser, he specializes in HUD/REO properties. Dingeman has assisted in the development of appraisal Continuing Education course materials and is an instructor in Arizona, California and Texas, teaching appraisal, assessor, mortgage loan origination and real estate sales classes.
LOOKING TO CONNECT WITH THE APPRAISER COMMUNITY?
D U S T I N H A RRI S
18 | Possible Versus Probable Dustin Harris is a successful, self-employed, residential real estate appraiser. He has been appraising for nearly two decades. He is the owner and president of Appraisal Precision and Consulting Group, Inc., and is a popular author, speaker and consultant. He also owns and operates The Appraiser Coach, where he personally advises and mentors other appraisers and helps them run successful appraisal companies and increase their net worth. His free podcast can be listened to on iTunes and Stitcher. He and his wife reside in Idaho with their four children. He is helplessly addicted to Swedish Fish.
ADVERTISE IN APPRAISER FOCUS! INTERESTED IN WRITING FOR APPRAISER FOCUS? REACH OUT TO US ABOUT SHARING YOUR IDEAS IN PRINT. info@appraiserfocus.com
REACH A NATIONAL AUDIENCE OF APPRAISER PROFESSIONALS. CONTACT US FOR MORE INFORMATION. teresa@naappraisers.org August 2017
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November 1-3 at Bally’s Hotel and Casino
Hosted by
The Columbia Institute and the National Association of Appraisers F Earn 14 hours of Continuing Education. F Network with your colleagues in the field. F Meet appraisal service providers, authors and political advisors. F Learn how to maintain your competitiveness. Visit appraisalsummit.net for more information.
6 | naappraiser.org
NEWS FROM NAA Brought to you by the staff of NAA
www.naappraisers.org 8
THE ASSOCIATION’S LATEST NEWS AND HAPPENINGS Stay tuned for further details!
Get your boots ready!
N as h v i l l e , T e n n e s s e e , 2 0 1 8
We’re Headed east! J o i n u s i n N as h v i l l e t h i s S p r i n g . The NAA has long been interested in holding a conference outside of the West Coast to accommodate its members on the other side of the country. At our last Board of Directors meeting, a vote was passed in favor of launching an annual Spring conference. Appraisers will still travel to Washington D.C. and Las Vegas for a variety of reasons, and the NAA is hopeful that it can extend its contract to co-host the Appraisal Summit through 2020. The decision to host a Spring conference was made to support the state organizations and coalitions and their membership by offering them a high-caliber, national conference. Our first conference will take place in the Spring of 2018 in Nashville, Tennessee, in conjunction with the Tennessee Appraiser’s Coalition. The NAA has contractually agreed to co-host the conference with
Appraiser eLearning (appraiserelearning.com) to serve as the education provider. Nashville certainly is a destination location and should attract appraisers from the region and beyond.
Want the NAA to come to your state?
This summer, we will have distributed a simple application to the leadership at each of the state organizations from which we will select the locations for 2019 and 2020. We will plan alternate destinations, hosting on the East Coast or in the South in even years, and the West Coast in odd years. Our Board of Governor members will be given additional consideration.
Ask your LEADERSHIP TO COMPLETE AN APPLICATION!
ARE YOU
INTERESTED Do you want to become an NAA Board of Governor member? Contact us at info@naappraisers.org.
August 2017
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FOCUS ON VALUATION
What Business Are You In?
A simple question that is key to your long-term success
JEFF BRADFORD
Bradford Technologies Founder/CEO
“You are in the residential valuation business and you should be ready to adopt any new process or technology that helps you value a property faster, better or cheaper.”
What business are you in? That might seem like a silly question, but it’s not. Knowing what business you’re in is the key to longterm success. For instance, my company Bradford Technologies has been in the business of serving appraisers for 30 years. We’re a software developer that provides appraisal form-filling software to appraisers. What business do you think we are in? The software business? The appraisal software business? The forms business (we have more than 5,000 forms in our library)? The answer is: We are in the publishing business. Yes, the publishing business. We help appraisers publish appraisal reports. So how have we stayed in business for 30 years by being in the publishing business? Very simply: We follow one rule. Any new technology that could help our customers produce and deliver a better appraisal report faster or cheaper, we put into our software. For instance, there was a time when PDF creators were not a part of the appraisal software, so everyone had to buy Adobe Distiller for $300 just to be able to create a PDF of their report.
8 | naappraiser.org
Configuring Adobe Distiller to work was our No. 1 tech support issue. So we took one of the first PDF components and built it into our software. In one quick step, we eliminated our biggest tech support issue and saved our customers money. What guided our decision? Simple. The desire to help appraisers publish their reports better, faster and cheaper. PDF was an emerging publishing technology, so to include it was simply core to our business. It was a win for us and our customers. Over the last 30 years, there are probably thousands of examples of companies that did not know what business they were in. Remember Blockbuster? They thought they were in the business of renting videos. They were really in the entertainment business. Netflix and Blockbuster both provided DVDs to their customers with slightly different models. One did it with a retail store and the other by mail. When Internet streaming technology became viable, Netflix took over by changing the delivery method of the entertainment. Netflix understands it’s in the entertainment business and continues
to expand with their production of original entertainment content. One of my favorite stories is about ice plants (not to be confused with green plants that grow in the ground). Think about how food was kept cool and preserved before refrigerators were developed. It was with ice from the local ice plant. When I was growing up in a tiny town in west Texas, we used to drive to the ice plant and buy 25 pounds of ice to put in our wooden “ice box” to keep our food cold. All that remains of that ice plant today is a decaying, old building. Why did they go out of business? Again, it’s pretty simple. They were in the ice-making business and not the refrigeration business. If they had been in the refrigeration business, when refrigerators were developed, they could have resold them or even created a factory to build them. Instead, they went out of business. Knowing what business you are in is critical to long-term success in a rapidly changing world.
FOCUS ON VALUATION So what business are you in? Are you in the service business, providing services to lenders?
Are you in the inspection business, inspecting homes to properly value them?
Are you in the relationship business, building relationships with lenders or AMCs so you get more work?
Are you in the residential 1004-type appraisal business, focused on producing 1004 appraisal reports?
The answer is: You are in the valuation business. And for most of you, the residential valuation business. Think about that for a second. You are in the residential valuation business and you should be ready to adopt any new process or technology that helps you value a property faster, better or cheaper. For instance, appraisers moved from using pre-printed forms and pin-feed printers to laser printers and now to electronic delivery; from film cameras to digital cameras; from photocopying maps with stick-on labels to digital maps. All these advances made the valuation process and its reporting more efficient. Every appraiser needs to be open to new technologies that can help produce a valuation faster, better and cheaper. For instance, the first generation of mobile inspection apps were oriented toward filling out the 1004 form in the field. It’s possible to fill out the entire 1004 on your iPhone, but did filling out the 1004 in the field make sense? Of course not. This is why I had our team create a unique mobile app that was solely focused on the inspection and on
capturing field data and photos. It was so well received, we were recently recognized by Housing-Wire as a Top 100 Innovator for our app Inspect-a-Lot’s unique design and productivity gains. It’s available in the Apple app store, you can download it for free and evaluate how much more efficient your home inspection will be. Being open to new technologies or processes that will allow you to create a valuation faster, better and cheaper is key to long-term success. Ignoring these advances will eventually render you and your business uncompetitive and unprofitable. So keep your eyes open to changes. Can you think of things that could save you time, remove the tedious parts of the valuation process and help you make more money? I bet you can. These are the things you need to go after and put into practice. Don’t be stuck in the 1004 world. 6
I’m interested in hearing how you think the valuation process can be improved. Email me at jeff@bradfordsoftware.com.
August 2017
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FOCUS ON VALUATION
The Rounding Game
A guide for appraisers on the hunt for an appropriate value conclusion TIMOTHY C. ANDERSEN, MNAA
Real Estate Appraiser, Consultant
Lately, in the appraisal blogosphere, there has been a great deal of talk about the concept of rounding. As you might imagine, there is little consensus on the issue. Unfortunately, there also appears to be a lack of common sense on the issue as well. A word search in USPAP’s Standards One and Two does not uncover the words “round” or “rounding.” Indeed, the word “round” does not appear until Standard Six, which is the mass appraisal standard, thus not relevant to retail mortgage-lending appraisers. In addition, a word search of the Fannie Mae Selling Guide does not reveal either of those words in the context of appraising. Given these two separate indications from two totally separate documents, it is clear that neither authority considers rounding to be a significant part of the process in forming a credible opinion of value. This implies both of these authorities leave the issue to the individual appraiser to explain within the narrative of the report.
Then, on the same page, the book defines rounding as,
Time to consider another authoritative source. In the 14th edition of The Appraisal of Real Estate this advice appears:
From these authorities it is clear that rounding is an important and integral part of the appraisal process. However, because neither USPAP nor the Fannie Mae Selling Guide makes a specific issue of it, the details of when and how an appraiser rounds remain totally within the purview of the appraiser. Let’s take a look at an example of rounding, as well as the logic and rationale behind it.
“A point estimate should be rounded to reflect the degree of precision the appraiser can associate with a particular opinion of value. Often the matter in which the figure is rounded is a matter of convention—e. g., to two or three significant digits. For example, if the final value estimate is a six-digit number, the figure will likely be rounded to the nearest ten thousand or hundred thousand dollars. If it is a seven-digit number, it will likely be rounded to the nearest hundred thousand dollars.”
10 | naappraiser.org
“Expressing an amount as an approximate number—i.e., exact only to a specified decimal place. An appraisal conclusion may be rounded to reflect the level of precision associated with the appraiser’s analysis.” Another authoritative source, the Fourth Edition of Appraising Residential Properties says:
“The [final value opinion] should be rounded to reflect market norms and the appraiser’s confidence in its accuracy.”
Have something to say? Tell us what you think: jessica@appraiserfocus.com |
FOCUS ON VALUATION FIGURE 1
FINAL ADJUSTED VALUE (no rounding)
WEIGHT (%)
$783,250 $795,983 $845,617 $731,589
30% 40% 10% 20%
INDICATED VALUE
100%
ROUNDED:
WEIGHTED FINAL ADJUSTED VALUE
$234,975 $318,393 $84,562 $146,318 $784,248 ?????
Consider the hypothetical data in Figure 1. There are four sales, post-adjustment as shown (with no rounding). You chose to weight these four sales as shown. This analysis of the data indicates a value to the subject of $784,248. The question now is how to round this total (assuming it needs to be rounded at all). It is quite logical, as well as mathematically correct, to leave this at $784,248. However, to do so implies the appraiser is able to “read” the market so well and precisely that a value opinion to the nearest $1 is reasonable. Most appraisers are not that good nor would they be comfortable with that level of precision. So is there another choice? OPTION ONE
Round to the nearest $100 $784,248 g $784,200
One option would be to round to $784,200, which is rounding to the nearest $100. Again, this is narrowly precise, but if you are comfortable with that, if this is how the market speaks to you, if you can justify this while under oath in a deposition or courtroom situation, then go with it. If not, there are other choices available. OPTION TWO
Round to the nearest $1,000 $784,248 g $784,000
A second option would be to round this to $784,000. This is rounding to the nearest $1,000, which is something market participants typically anticipate, as well as accept. It is sufficiently on-target to reflect the market’s thinking, but is not so spot-on as to imply a precision the market does not recognize. (However, in an increasing market, it might be difficult to justify rounding downward). OPTION THREE
Round to the nearest $10,000 $784,248 g $780,000
the subject. Are the last two numerals in the asking price zeros? If so, the market is looking at multiples of $100. In the listing price, is the first numeral after the comma a five? If so, the market is rounding to the nearest $500. Are all of the numerals zeros after the comma in the listing price? If so, the market is rounding to the nearest $1,000. All of these are an indication of the precision the market accepts. The appraiser’s final value opinion should not be any more or less precise than this. Now back to the example above. In a slow or declining market, it might be wise to round downward to $780,000. This would be rounding to the nearest $10,000, which is perfectly acceptable when dealing with six-figure sales prices. In an increasing market, it would make sense to round the weighted average total to $800,000, which is rounding to the nearest $100,000. However rounding to $800,000 makes sense only because $784,248 is already more or less close to this higher number. Notice that, no matter the rounding, all of the rounded numbers are within the indicated adjusted range on Figure 1. If there is a rule of thumb to follow here, it would be to round within this indicated range, which is a function of the individual weight you apply to any individual sale. Clearly, this is a judgment call. Ten appraisers appraising the same house with the same comparable sales data would likely come up with 11 different value opinions. Again, the final value is not all that important. What is important is that the report contain a complete explanation and a logical rationale for the final value opinion, the quantity of rounding notwithstanding. The common sense that appraisers look to apply in this point of the appraisal process is that of avoiding a final value conclusion that has a level of precision the market does not support. Typically, the market does not round to the nearest $1, $10 or $100. It may round to the nearest $500. It is acceptable to round to the nearest $1,000. Rounding to the nearest $10,000 is common. Rounding to the nearest $100,000 is acceptable, assuming the number from which it is rounded is already close to the nearest $100,000, either up or down. There are no hard and fast rules to follow here. The authoritative texts suggest rounding should be reasonable and market-oriented, but give no specific rules to follow. Therefore, common sense must rule the day. This must be leavened with a pinch of what the market indicates. The answer to the question, “How would the market round it?” will determine how you should round the post-adjustment sales into a final value opinion. Remember that appraisers deal in market-supported opinions. Both USPAP and Fannie Mae require that our opinions have full market support. However, neither of these publications, nor the authoritative texts this article cites, require those opinions to be unnaturally or irregularly precise. 6
What quantity of precision does the market recognize? Look at the offering prices of current listings in a market comparable to that of August 2017
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By Craig Morley, MNAA, GAA
12 | naappraiser.org
AFTER THE MORTGAGE MELTDOWN OF 2007, FANNIE MAE FOUND THAT THEY HAD A PROBLEM:
Term to Know
Even though they had the largest accumulation of appraisal data, there was no way to effectively use or manage the data being provided, nor did it seem that there was any standardization in the way the appraisal reports were being delivered to the secondary markets. In 2011, Fannie Mae’s solution was to launch several reporting formats to MISMO to mine the wealth of data being provided by the appraisal reports. Thus, the appraisal world was introduced to the Uniform Appraisal Dataset and Collateral Underwriter tools. UNIFORM APPRAISAL DATASET
The purpose of the Uniform Appraisal Dataset (UAD) was to standardize the appraisal data in the residential appraisal report. It required all appraisals being sold to Fannie Mae to adhere to the newly instituted Absolute Ratings. Absolute Ratings is a program within the UAD introduced to rate various property characteristics, mainly the ratings of neighborhoods, views, quality and condition, with quality and condition ratings based on a numeric value of one to five. This new reporting standard required absolute ratings that, once established by the appraiser for a particular property, should not be changed when said property was used as a comparable in another appraisal. This concept sounds good in theory, but in practice, there are limitations. There are a number of restrictions with the rating system established by Fannie Mae. Properties rarely fit nicely into the categories of location, view, quality and condition. The other is that most seasoned appraisers were taught to rate properties relative to each other. The underlying principles of the Sales Comparison Approach is that of substitution, which is based on the concept of
comparing similar homes in the market to that of the home being appraised and accounting for relative differences. Applying absolute ratings and description to a process of making relative comparisons has some practical problems. Appraisers began to find that most properties were falling between the lines in the quality and condition ratings. At what point does a house move from “average” to “good,” and how do I maintain a consistent rating system with the other appraisers in my market area? Marshall & Swift’s definitions for quality rating is reported to have been used by Fannie Mae. However, looking at Marshall & Swift’s Cost Data shows that there are very large differences in cost from similar-sized properties from one quality class to another. These conflicting definitions caused many appraisers to question how to rate a property that is not clearly an “average” or a “good” quality house, but seems to fall in between those categories, and how to consistently account for the differences from one property to the next. As part of Fannie Mae’s data collection, they found more weaknesses in the analysis of the appraisals obtained. It seemed that
DEFINITION
there was little correlation in the age and size adjustments made to comparable sales, regardless of the property type or price. This was not a new revelation to any practicing review appraiser. Data revealed that many appraisers were adjusting comparable sales based on antidotal data, at best. For instance, one case found that appraisals completed by the same appraiser on vastly different properties ranging from manufactured homes to large, custom homes applied the same age adjustment of $1,000 per year and $35 per square foot. The properties in question were selling at $50 per square foot in one report and well over $200 per square foot in another. Fannie Mae found that, across the country, similar adjustments were being applied, regardless of price per square foot. Fannie Mae’s solution to this problem was to require the appraiser to better support the adjustments being made to the comparable sales by the appraiser. Thus, “bracketing” has become a watch word for loan underwriters country-wide. As typically applied by most lenders, a subject with 4
The Uniform Appraisal Dataset (UAD) is a component of the Uniform Mortgage Data Program, jointly established by Fannie Mae and Freddie Mac under the direction of the Federal Housing Finance Agency, to provide common requirements for appraisal and loan delivery data.
Applying absolute ratings and description to a process of making relative comparisons has some practical problems. Appraisers began to find that most properties were falling between the lines in the quality and condition ratings. At what point does a house move from ‘average’ to ‘good,’ and how do I maintain a consistent rating system with the other appraisers in my market area?
August 2017
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a physical characteristic must present at least one comparable with the same physical characteristic. In other words, if the subject has a swimming pool, then at least one (preferably two) comparable sales used should have swimming pools as well. Problems arise, however, when a comparable sale cannot be located with a similar feature, then the contribution value of that feature is called into question. This is particularly a problem with underwriters who unrealistically expect every physical feature of the property to be bracketed, including features with adjustments that are very small and reflect a preference for that feature in the market, but that have a minimal impact on the value conclusion. For instance, not bracketing the Gross Living Area (GLA) of a house and relying on sales with adjustments of 5 to 10 percent of the sale price is much more problematic than using sales that do not bracket the site size of the subject where the adjustment rates may be 1 to 3 percent of the total sale price. To ask an appraiser to bracket the site size of the subject by including an otherwise dissimilar sale is not necessary, but asking the appraiser to bracket the GLA of the house where large across-the-board adjustments have been applied would most likely result in better support for the value opinion. Alternatively, common sense would suggest that a feature or characteristic (such as a swimming pool) is desirable and most buyers in that market would pay something extra for that feature, but homes near the property with similar features cannot be located. This leaves the appraiser with the conundrum of either making the adjustment per market conditions, or stating that the feature makes no contribution to value because it cannot be bracketed.
14 | naappraiser.org
The Absolute Ratings system and the expectation to have every physical feature bracketed has caused an increase in revision requests from underwriters. With multiple correction requests from underwriters per report, many appraisers have adjusted their reporting behavior to reduce the number of revision requests. Unfortunately, many of the underwriters requesting the revisions have little or no property valuation training and are simply going through a checklist. As a
result, the following trends have been observed by reviewing appraisals: If the appraiser rates everything the same with no or few adjustments, the appraiser has far less revision requests. Many appraisers are reluctant to take on appraisal assignments in rural areas or accept appraisal assignments for non-traditional properties.
Where there are relative differences between the subject and the comparable sale, no adjustments are made. In an attempt to aid appraisers with better tools in supporting adjustments, all kinds of new analytical tools are being developed by software venders. Many of these tools can be very helpful if used properly. However, use of these tools require appraisers to up their skill set to properly when the results from these tools are not reliable. I am aware of appraisers who have been disciplined by state licensing boards for using regression tools incorrectly. In one interview with a seller, the property being appraised had an updated kitchen with granite counters and tile floors. The appraiser had used comparable sales with laminate counters and vinyl floors with no adjustments made. When asked
why no adjustment was made, the appraiser explained that those things don’t make any difference in the value. The appraisal was below the purchase price and there were some very happy people involved. Unfortunately for the appraiser, the seller also happened to be an appraiser. Several appraisers in Utah got a hold of a regression application that seemed like a very useful tool, providing attractive outputs in graphs and tables. One of the appraisers shared this new find with some associates without getting any training on the use of these tools, which resulted in disciplinary for those involved by the Appraisal Board for USPAP violations. COLLATERAL UNDERWRITER
Collateral Underwriter (CU) introduces a new layer for appraisers, most of which are completely unaware of how it works. In fact, Fannie Mae is likely the only entity that actually knows how the rating system works and they don’t seem willing to share. CU is an underwriting tool used by Fannie Mae that provides a 1 to 5 risk rating for a property based on the appraisal, with 1 being low and 5 being high. A CU score is not supposed to rate the appraiser, only the risk associated with a property. Appraisals that come back with a risk rating for the property of a 4 or 5 put the originating lender at risk of a potential buy-back request by Fannie Mae. Most lenders do not want to repurchase a loan once it has been sold to Fannie Mae. The result is that appraisers doing work in areas with limited data or diverse property types often end up producing appraisals that have a higher risk rating (no fault of the appraiser, just the nature of the property being appraised). Apparently CU has data from all the appraisals being completed
Going to the Source
ACCORDING TO FANNIE MAE
“CU allows lenders to segment appraisals by risk profile, facilitating efficient workflow management and resource allocation. CU also helps lenders reduce time spent on appraisal review, leading to fewer, but better-informed, requests to appraisers. The dynamic and interactive functionality in CU provides access to comparable sales data, mapping with aerial imagery, market trends, public records, local market conditions, and more—all in one free application. Appraisal feedback at the point of submission enables lenders to proactively address potential issues and improve the overall quality of loans delivered to Fannie Mae.”
Important points about using CU ACCORDING TO FANNIE MAE Users must understand the limitations of automated analysis and be aware of potential property or neighborhood nuances.
Lenders are not expected to utilize the full CU functionality and information available in the CU user interface on every appraisal.
CU is effectively predictive of appraisal defects, but not all influences on value can be modeled. Well-informed human judgment should take precedence over automated results.
The various CU tools can be used to validate or dismiss potential red flags.
Fannie Mae does not instruct or suggest to lenders that they ask the appraiser to address all or any of the 20 comparables that are provided by CU for most appraisals.
The risk analysis performed by CU is for use by the lender in that lender’s analysis of the appraisal report; information may be shared with the appraisers in proper context upon completion of the lender’s due diligence review.
Users should carefully review the appraisal report before seeking additional clarification from the appraiser based on CU findings.
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It is very important to take advantage of CU training to understand how to use the CU findings.
and sent to Fannie Mae together with public record data. CU takes the information from the appraisal, develops a model and evaluate sales that it predicts are most similar to the subject. When sales selected by the appraiser are not consistent with the sales predicted by the model, an appraiser may be required to explain why certain sales were not used. I recently completed an appraisal for a newer home in a tract development where they had only built a few two-story homes over a walkout basement. In an effort to locate homes that were most physically similar to the subject, the sales selected were located several miles from the subject in competing areas where predominant values were similar and the neighborhoods were considered to be interchangeable for most market participants. The CU score came back at a 5. The only feedback was that one of the comparable sales I used had three and a half baths, but apparently my peers showed something different. There
was one comparable sale behind a small neighborhood park with a small beneficial view, and apparently my peers did not rate the view the same. In the overall scheme of things, these differences may have had an impact of less than 2 percent. We completed an usual house in a rural area that we were sure was going to come back with a high-risk rating. The lender said the CU came back at 1—go figure. Fannie Mae has not disclosed how the CU scores are developed. We have had some lenders suggest that CU scores are increased when the appraiser uses sales that are not predicted by the CU model. We have been told that where the appraisal has lots of differences between the subject and the comparable sales that result in zero, that it increases the CU score. For example the more times that appraiser inputs a zero where there is a difference in the description, the higher the CU score is. For example: An appraiser rates a view for the subject as
CU is an underwriting tool used by Fannie Mae that provides a 1 to 5 risk rating for a property based on the appraisal, with 1 being low and 5 being high. A CU score is not supposed to rate the appraiser, only the risk associated with a property. Appraisals that come back with a risk rating for the property of a 4 or 5 put the originating lender at risk of a potential buy-back request by Fannie Mae.
a N;Res; (Neutral Residential) and a view on a comparable sale as a N;Mtn; (Neutral Mountain). If there is no difference in value, the appraiser should put a zero, reflecting that the difference has no value difference. The same applies for differences in design, where one home is rated as a Rambler and the other is a Ranch. A zero would be provided to reflect that there is no value difference. Where there is any difference in porches, patios, landscaping, etc., the more zeros that show up on the report, the higher the CU score. In many cases, there are not hard and fast definitions for design or view, but the way the appraiser presents and adjusts the data may potentially increase the CU score. Lenders want to use appraisers with a history of lower CU scores. This presents a problem for appraisers doing work in rural areas where the risk associated with the properties is understandably higher due to the nature of the market area. The properties in these areas have poor market data and a limited pool of comparable sales with significant property differences. With lenders looking for lower CU score appraisers and the inevitability of rural properties to produce high CU scores, not only does it limit the number of appraisers willing to do the work, but has also created concern that lending for properties in rural areas will be drastically limited. 4
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this loan over any loan program that requires an appraisal, as it is faster, less expensive and has virtually no risk of loan repurchase. The irony is that the Automated Valuation Model used is typically a less reliable valuation product, but with lower risk to the lender… remember 2006? In Fannie Mae’s defense, the program is reported only to apply to a very small number of properties that fit certain criteria. However, with increasing appraisal fees and difficulty in finding appraisers in some areas, the program is very attractive for lenders. Will the program guidelines be expanded? One thing is certain: There is pressure in the
With lenders looking for lower CU score appraisers and the inevitability of rural properties to produce high CU scores, not only does it limit the number of appraisers willing to do the work, but has also created concern that lending for properties in rural areas will be drastically limited.
Fannie Mae recently introduced a new refinance option for lenders: Day-One Certainty. This loan program allows a lender to refinance a property without an appraisal and the low fee of $75 to use as a proprietary valuation model to guarantee that the lender will not have to repurchase the loan as a result of the appraisal or valuation. It would seem that any lender would prefer to use
While there are concerns about the changing nature of the industry, I am confident that the appraisal profession can be both a profitable and rewarding career for those who are forward-thinking and can embrace new tools so they can succeed in the quest for the right value conclusion. 6
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What To Do
WHILE WE MAY FEEL HELPLESS TO REACT TO THE EVER-CHANGING ENVIRONMENT AROUND US, THERE ARE THINGS WE CAN DO THAT CAN MAKE A DIFFERENCE.
1
Join an appraisal organization that will represent your interests as an appraiser. The NAA is a grassroots, boots-on-the ground organization that is affordable. However, there are a number of good appraisal organizations that are effective in representing the appraisal industry.
Diversify your appraisal practice. There is a wide range of valuation services that can be provided. I have gotten involved the Realtor associations, taught classes, spoke at lunch meetings and provided useful information to brokers, agents and lenders. I have found that there is a lot of non-lender work that I can find through referrals for a wide range of uses beyond the appraisal for a loan.
2
Get involved in your state association. You would be surprised what you can achieve by writing letters to the appraisal foundation, getting involved with state legislators and providing input in developing reasonable appraisal policy.
3
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market to find lower-cost valuation solutions and as appraisers, we need to be aware of those needs and be part of the solution!
Up your skill set. If appraisers are to remain relevant in an ever-changing technological word, we need to learn to use tools, understand the needs of our clients and find ways to meet those needs. The quality of our services needs to be better than AVMs or other tech-driven valuation solutions. There will always be demand for a competent, qualified appraiser as long as the work we produce is more reliable than any other alternative.
5
Project a professional image. Upgrade you Web presence, use business cards and be nice to people—even when you don’t want to. I can’t tell you how many people are frustrated with appraisers who won’t talk to the homeowner, won’t return calls and are offended when someone questions the value conclusion. One state investigator told me that about half of the complaints they received were because the licensee was rude to the consumer. We have standards we must adhere to, though most consumers don’t know what they are. Kindly explaining what you can and can’t do go along the way can improve your professionalism. We have explained more than a few times how to properly get a reconsideration of value for an appraisal that we did the work on. I want to be as correct as I can be, and if there is relevant data I missed in performing the appraisal, I will reconsider my conclusions if appropriate.
FOCUS ON TECHNOLOGY
Navigating the Electronic Appraisal Delivery Portal Overcoming the challenges presented by HUD’s new portal
HERE ARE SOME THINGS TO LOOK OUT FOR: ONE The appraisal report must be in the proper MISMO XML format, and this includes the 1004D Appraisal Update and Completion Report. JOHN DINGEMAN, MNAA
Landmark Network Chief Appraiser
HUD has refined its process with the release of its new Electronic Appraisal Delivery (EAD) Portal. The EAD is now live and some mortgagees and AMCs have been testing it for the last several months. With this new system in place, all appraisals for new originations must be submitted to FHA through the EAD portal for all FHA case numbers assigned on or after June 27, 2016.
common appraisal data errors.
For those mortgagees that also work in the forward space and submit to the FNMA/FHLM Uniform Collateral Data Port (UCDP), the process will be familiar, as the portals are nearly identical and are hosted by the same vendor.
If the retrieved SSR denotes that the transmission of the report is not successful, the appraisal will not be logged into FHA Connection. The issue will have to be solved and doing so can be a challenge. Consider Hard Stop FHA500, for example: “FHA Case Number is missing or provided in an invalid format.” You open the appraisal report and see the FHA case number, so it is not missing. It is 1234567890; so it is formatted correctly and is the correct number. Well, the system may think it is missing
HUD recommends that mortgagees and appraisers familiarize themselves with the EAD by visiting its website for details. There you will find a host of information on data formats and forms, hard stop checks and warning messages, and
While HUD has done its best to provide clear guidelines to help users navigate the EAD, there will likely be some challenges for submitting entities (lenders or the lender agents if the AMC is submitting on your behalf ), especially when it comes to solving an issue with a transmission deemed unsuccessful.
because it is not in the appropriate XML location for that data field. You have no way to identify where that is and no idea where to instruct an appraiser to place it. My recommendation for lenders is to become familiar with the EAD as much as you can and to work with your AMC and the appraiser in solving these hard stops and messages. Be aware that appraisers do not have access to the EAD or the SSRs and the changes in data formatting requirements may be equally frustrating for them. The EAD portal, FHA’s new Handbook 4000.1, are intended to streamline the FHA appraisal and origination process. Both mortgagees and appraisers must let go of old and outdated requirements and comply with the new ones. Through a collaborative and unified effort, we can overcome this change and prepare for the next. 6
TWO The FHA case number must be at the upper right corner and must correspond with the respective XML label for that field. Appraisers should confirm with their software provider where that is. -The FHA case number may appear in a similar place on other pages, but its inclusion and placement is not a strict requirement. -Case numbers must be formatted as ##########. No missing or additional hyphens or spaces and no Automated Data Processing (ADP) codes.
THREE The property address, city, state and ZIP code must conform to USPS postal addressing standards. This is a UAD requirement and it is important to note that this does not mean the address matches the address found in USPS. FOUR The site size (even for manufactured homes) must meet UAD requirements. FIVE Monetary data fields should not include a dollar sign. SIX File sizes of the reports should be less than 4MB. -For those of you who expect crystal-clear photos, or tons of them, be aware that this may present some problems. HUD says these images “need to be legible, but not at the highest resolution.” So find ways to lower the resolution settings on your camera or scanner.
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A OPINION OF VALUE
Possible Versus Probable
An appraiser’s job and probable market value
DUSTIN HARRIS
Appraisal Precision and Consulting Group, Inc President and Owner The Appraisal Coach Owner
Recently, there was a news story out of Atlanta, highlighting an appraiser who had refused to “rubber-stamp” a purchase price with an appraised value to match. What followed was a mission to find another appraiser who would, an increasingly disturbing trend. According to the story (which was full of holes and unknowns), the second appraiser ignored comps in the subject’s neighborhood and found sales in a superior location to help support the purchase price. This situation was talked about on social media and a man who identified himself as a real estate agent commented, “The value is what the buyer is willing to pay. The appraiser gets the contract and it is their job to find data to support whatever the buyer agreed to pay.” Hmmm. Why hire an appraiser in the first place then? If this agent is correct (which he is obviously not), a buyer should be able to show the
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purchase contract to the bank and a loan should be issued on the spot. Although the agent’s shortsighted comment was blatant (frankly, I question the authenticity as it just seems so completely nuts to me), this kind of thinking is not isolated to a few individuals. It is often played out as I speak with agents and homeowners, and it is not confined to purchases. Many people mistakenly believe that value of a property is based on what an individual is willing to pay for it. Market value, rather, is defined in part by the Fannie Mae Selling Guide as, “The most probable price which a property should bring in a competitive and open market.” In other words, an appraiser is looking at value from the standpoint of what the average buyer would most likely pay given current market conditions—not what a single or even a select few are willing to pay.
What is possible is not always what is probable. A good way to look at this is not from the perspective of how high a price a property might sell for, but how low. If you were a potential buyer, would you be willing to purchase the current house you live in for $1? Of course you would. Does that mean it is only worth a $1? Of course not, as you would be unwilling, as the owner, to sell for that price. Likewise, you would likely be willing to sell your current residence for $10 million, but good luck finding a willing buyer at that price. Value is not based on what a single person is willing to pay, but rather what is most likely given the law of substitution (a buyer’s agency to pick another, competitive property). This principle also plays out, not just with total property values, but with smaller components as well. I work in a fairly rural area. It is not uncommon to
have a homeowner ask me, “I am thinking of building a shop on my property. Will that bring my value up?” Well, in most cases the answer to that question is yes. However, it is very unlikely that the value gained by the shop will exceed the cost to build it. That fact does not always dissuade them from forking out the cash to build their shop, however, because the utility to them is high, but the typical buyer will not pay a dollar-for-dollar value increase because the average buyer will fall somewhere in the continuum between the person who loves shops more than the house itself and one who despises shops and wishes they were all burned to the ground. Appraising is all about market conditions. Market conditions are all about probabilities and not necessarily possibilities. So no, it is not the appraiser’s job to find the comps to support whatever a single buyer is willing to pay. 6
“Many people mistakenly believe that value of a property is based on what an individual is willing to pay for it.”
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