appraiser focus NATIONAL ASSOCIATION OF APPRAISERS
Q3 2019
magazine
An Appraisal
s u s r Ve An Evaluation What’s the Difference?
Give Your Clients the Power to be Their Own Admins PG. 8
Do Solar Panels Add Value? PG. 10
How to Avoid a Complaint PG. 12
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U YES YO CAN LEARN MORE, EARN MORE.
Contents
Keep up on the latest news affecting the appraisal industry and read about how you can grow your business. Stay connected on Facebook and LinkedIn.
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08 VALUATION
GIVE YOUR CLIENTS THE POWER TO BE THEIR OWN ADMINS How cutting-edge software can take your business to the next level Keith Ellis
09 VALUATION
CAN I SOLICIT A LISTING DURING MY APPRAISAL? What USPAP standards and other regulatory authorities might say about this Joshua Wallit, MNAA
Feature 14
AN APPRAISAL VERSUS AN EVALUATION: WHAT’S THE DIFFERENCE? Evaluations are increasingly popular among lenders. Are they a threat to appraisers? Here’s what you need to know. Timothy C. Andersen, MNAA
DO SOLAR PANELS ADD VALUE? Navigating the challenging and rapidly changing landscapes of green valuation Greg Reynolds
12 VALUATION
HOW TO AVOID A COMPLAINT Sometimes parties involved in an appraisal walk away unsatisfied. Here’s how you can curb the problem Steve Kahane, MNAA
n n
s u s r Ve
10 VALUATION
"Just as all appraisers are free to come to understand the mechanics of evaluations, the appraiser is also free to choose not to engage in them. The problem is right now appraisers, do not have that choice." -Timothy C. Andersen, MNAA Read more on pg. 17
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appraiser focus magazine Q3 2019
Q3 2019
appraiser focus NATIONAL ASSOCIATION OF APPRAISERS
Q3 2019
magazine
An Appraisal
What’s the Difference?
PG. 8
Do Solar Panels Add Value? PG. 10
President
Understanding the nuances between an appraisal and an evaluation
An Evaluation
Give Your Clients the Power to be Their Own Admins
From the
ON THE COVER
Versus
How to Avoid a Complaint PG. 12
Meet the Team
A NOTE FROM CRAIG MORLEY, MNAA
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PUBLISHER
Teresa Walker
CONTACT
SENIOR EDITOR
Laurie Egan, MNAA
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NAA PRESIDENT
Craig Morley, MNAA CREATIVE DIRECTOR
Traci Knight
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he FHFA has tasked the GSEs with modernizing mortgage lending, including the appraisal process. Fannie Mae and Freddie Mac have been on the forefront, looking at implementing changes that would streamline the process. Much of the modernization involves digitizing loan files to improve the transportability of files and improve the underwriting process. The intent is to release the lender potential back of the loan as soon as possible, eliminating some of the lender’s risk in selling the loan to the secondary market. When it comes to appraisals, the GSEs want to obtain detailed information about the property so the loan can be collateralized as early in the process as possible. Hence, the bifurcated appraisal concept. In this concept the “qualified” person would collect 80+ specific data points as outlined by Fannie Mae, including a specific set of photographs. This information would be submitted and a decision tree matrix used to determine if the borrower and the property being used as collateral qualify for an appraisal waiver. If not, the typical appraisal is then determined, either a bifurcated appraisal where the information obtained at the onset is provided to the appraiser and a desktop appraisal is completed, or the appraiser re-inspects the property and completes the typical appraisal.
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Fannie Mae reports that about one half of the purchase transactions that quality for an appraisal waver proceed to get an appraisal, usually because the purchase has an appraisal contingency. It is here that I point out that the buyer is not an intended user of the appraisal and determining the purchase price is not the intended use. Fannie Mae is suggesting that the buyer should get their own appraisal to satisfy appraisal contingencies in the purchase agreement. This may be another way for appraisers to expand the services we provide as demand for appraisals decline in the mortgage lending space. The expectation is that the number of appraisal waivers offered by Fannie Mae and Freddie Mac is likely to increase from the current level and that much of the appraisals where the collateral represents a moderate risk will be completed at the desktop by an appraiser who is provided the subject property information. Fannie Mae and Freddie Mac expect to release the updated UPC for public comment that will affect the way the information is being reported in the appraisal. There will be a comment period during which NAA will be providing input once we see what is proposed. New appraisal report forms are under development, but they won’t be available until after the revisions to the UPC are finalized. My conversations with Lyle Radke of Fannie Mae suggested that the scope of work associated with the bifurcated appraisal has not changed much other than the inspection. There is not an expectation that the total cost of the appraisal will change. However, there needs to be some education to those who order and use the appraisals as they intend to maintain the reliability of the appraisal and worry that the reduced fees may undermine the reliability of the appraisals. We learned several days ago that HR299, a housing bill for veterans, includes a section that allows for bifurcated appraisals apparently at the discretion of the appraiser. I spoke with James Heaslet, MBA chief appraiser for the Department of Veterans Affairs, who was unhappy with the change. The system currently in place is very effective given the VA has the highest LTV and the lowest default rate of any loan guaranty program. I don’t know many practicing appraisers who are happy with the changes taking place. Clearly technology is changing the landscape in which we work. While I am concerned about the proposed changes, I am convinced that technology alone can’t replace the competent, qualified, professional appraiser who can use the technology. However, the work we produce must be better than the results from other valuation services. As appraisal professionals, we need to stay abreast of the technology, leverage it for our benefit and have the courage to require that our compensation reflects the professional services we provide. There seems to be a perception that “appraisal form” is the appraisal and that we should be compensated for the time we spend filling out the
form. Yet many fail to realize the form is simply communication of the assignment results – the work takes place in USPAP Standard 1. There are other costs associated with performing the appraisal that deal with office support regardless if you hire staff or do the work yourself. Knowing what your costs are to produce the appraisal and what your time is worth can help in maintaining a financially viable appraisal practice. I suggest the following: - Be aware of coming changes in the appraisal landscape - Obtain the necessary education to improve our skill set - Diversify the kinds of appraisal services you provide - Get involved with a state appraisal group or coalition - Join a national appraisal organization NAA is committed to the “boots on the ground” appraiser. We aim to keep you informed and do what we can to shape the appraisal landscape favorably for the hard-working professional appraiser.
CRAIG MORLEY, MNAA - PRESIDENT, NAA Connect with me about how you can participate. Reach me at valupro@gmail.com.
NAA’S MISSION
1
UNITE
2
PROMOTE
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PROVIDE
Bring appraisers together to advocate for positive change.
Encourage continued education and high standards of conduct.
Offer services designed to benefit our membership.
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#JOINTHEFUTURE
Our industry is changing. Are you ready for what’s coming? Join us to be a part of the future of valuation innovationTM. Email jointhefuture@classvaluation.com to find out more
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KEITH ELLIS
STEVE KAHANE, MNAA
08 | Give Your Clients the Power to be Their Own Admins
12 | How to Avoid a Complaint
Keith Ellis is chief Operating officer of Anow, a developer of software that simplifies the way real estate appraisers work. His career as a mentor and leader of innovative tech companies spans more than 20 years and encompasses executive roles at International Data Corporation, CGI Group and Information Architecture Group. Ellis serves on the board of the global certification body International Institute of Business Analysis. He has a bachelor’s degree in business from Wilfrid Laurier University in Canada and earned his Master’s degree in computer science from Lancaster University in England. JOSHUA WALLIT, MNAA 09 | Can I Solicit a Listing During My Appraisal? Joshua Walitt, MNAA, is a certified residential real estate appraiser, reviewer and educator. As VP of Operations and Compliance for Property Interlink, he oversees procedures, training, licensing, audit, operations, and review functions. Walitt holds the SRA & AI-RRS designations with the Appraisal Institute, is a board member of the NAA, holds a Certified Distance Education Instructor certificate, is an AQB Certified USPAP Instructor, and currently serves on the Colorado Board of Real Estate Appraisers. GREG REYNOLDS 10 | Do Solar Panels Add Value? Greg Reynolds is vice president and chief appraiser at First Choice Loan Services Inc. He has over 30 years of experience as a residential appraiser and has been an adjunct instructor at multiple colleges in the fields of economics and real estate. Reynolds is a nationally recognized public speaker, an AQB-certified USPAP instructor, and a mentor for the TALCB. He holds an Master’s in economics, a private pilot license and a black belt in Tae Kwon Do. greg.reynolds@fcloans.com
Steve Kahane is a certified residential real estate appraiser outside of Houston, Texas. He transitioned from commercial properties to residential after moving from Chicago to Texas 16 years ago and has appraised properties ranging from $1 to over $100 million. Kahane is a member of the NAA and the Association of Texas Appraisers, and was the recipient of ATA’s 2015 Outstanding Service Award for the Houston region. He has advocated on behalf of appraisers to the Appraisal Foundation, Appraiser Qualifications Board and Texas Appraisal Licensing and Certification Board. He has presented seminars to hundreds of Houston Realtors about appraising real estate and authored numerous articles about appraising for trade publications. He specializes in litigation consulting and residential mortgage valuations.
JOIN THE NAA! The NAA needs you—and you need the NAA.
TIMOTHY C. ANDERSEN, MNAA 14 | An Appraisal Versus an Evaluation: What’s the Difference? 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 the 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.
DID YOU KNOW
that 60 to 70 percent of appraisers are not affiliated with any professional association? Join the National Association of Appraisers and
CRAIG M. CAPILLA 18 | Belonging: Being active is being better Craig M. Capilla is a trial lawyer at the Franklin Law Group. He worked previously as a prosecutor in the real estate division of the Illinois Department of Financial and Professional Regulation. He often appears on behalf of clients before state regulators and in state and federal courts. Capilla frequently speaks for associations like the NAA, Illinois Coalition of Appraisal Professionals, NAIFA, the American Society of Appraisers and the Chicago Chapter of the Appraisal Institute. He is a graduate of the University of Michigan and DePaul University College of Law. Ccapilla@charlesfranklinlaw.com
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appraiser focus magazine Q3 2019
Valuation
Keith Ellis Chief Operating Officer at Anow
NAA’s Mission UNITE: Bring appraisers together to advocate for positive change.
"We are on the cusp of great change in the next two years...This world is getting to be more about efficiency and communication quality."
Give Your Clients the Power to be Their Own Admins
How cutting-edge software can take your business to the next level
direct business volume. These orders typically come in at a much higher rate than AMC work, and they are all driven by the ability to offer a superior customer service experience.
Diversification is a very good thing right now. It’s time to step away from spreadsheets to manage your business and show your customers the kind of technology you deploy as part of serving their needs. Look into the future
8
Imagine having tools that enable your clients to order and track the progress of their appraisals from you online 24 hours, 7 days a week. Sounds like a dream, right? With the features of Anow Connect, this dream can easily be your reality, like it is for TJ McCarthy, president and owner of Accurity T. J. McCarthy & Associates. “It’s really knocked down the amount of phone calls that my staff has to deal with because it puts the status and control back in the hands of the lender,” McCarthy said. The innovative Anow Connect platform
has also launched independent appraiser Mark Skapinetz into the future of automated lender-direct ordering. “I wish I could get every single AMC I work with to dump their ordering systems and just strictly use Anow Connect to get me my orders,” Skapinetz said. “There is nothing like this out there and it keeps getting better.” The entire process is seamless – from ordering, status updates and sharing notes to receiving the final report, your clients can step into an automated world with simplicity. So why is all this so important? Frankly, it’s about building both non-lender and lender-
We are on the cusp of great change in the next two years, change that is perhaps even greater than what happened during and after the financial meltdown. This world is getting to be more about efficiency and communication quality – take a look at what customers expect of service quality! Amazon, Uber, Facebook, Google Maps – it’s immediate, it’s at your fingertips, it’s all the information you need to accomplish a task. Now examine the service experience many appraisers bring – has the experience substantially changed in the last 20 years? Not really. Customer experience is not just about being receptive to customers on the phone. In today’s world, it’s largely about the tools and technologies appraisers can bring to their customers. Consider Uber. It’s not just about having someone show up and give you a ride. It’s the technology of ordering and getting something instantaneous, it’s a payment system, it’s realtime status! It’s the technology that delivers the experience. And that’s what Anow Connect can bring to the appraiser world. It’s ordering and getting something instantaneous, it’s a payment system, it’s real-time status for your customers – all those crucial things an appraiser needs to deliver a different, and exceptional, customer experience. n
naappraisers.org
Valuation
Joshua Wallit, MNAA VP of Operations and Compliance at Property Interlink
"Soliciting for a listing while performing the appraisal as an appraiser can mislead a homeowner in terms of his or her understanding of what service you are providing now and what service you might provide in the future."
Can I Solicit a Listing During My Appraisal? What USPAP standards and other regulatory authorities might say about this Recently, in a group discussion of appraisers, one appraiser asked: “I am an appraiser as well as a real estate sales agent. After I complete inspecting a property for an appraisal assignment and before leaving the property, can I then solicit the owner about the prospect of being his listing agent or buying agent if he needs one in the future? I have no current interest in the house being appraised. Would this action violate USPAP?” Keep in mind: Determining compliance or non-compliance with the Uniform Standards of Professional Appraisal Practice (would ultimately be determined by your state regulator. Certain states may have position statements, guidelines, or specific instructions on how to handle yourself in these types of dual-license situations. That being said, let me discuss with you several important passages from USPAP that relate to an appraiser soliciting his or her sales services to a homeowner during the appraisal visit. To start, the Conduct section of the Ethics Rule states that an appraiser “must not misrepresent his or her role when providing valuation services that are outside of appraisal practice.” Part of understanding whether we are “misrepresenting” our role is to consider our interactions from the point of view of the parties involved, in this case the homeowner. In your case, you are clearly performing services as an appraiser, since the homeowner was told an appraiser would visit
the property, an appraiser’s office called to set the appointment for the appraisal visit, an appraiser arrived to measure and photograph the house as an appraiser, and so on. If, while you are perceived to be an appraiser, you solicit business related to sales services and later list the house for sale, might the homeowner think you are listing her house as an appraiser? After all, you solicited the homeowner when acting as an appraiser and the homeowner knows you by your appraisal work. Soliciting for a listing while performing the appraisal as an appraiser can mislead a homeowner in terms of his or her understanding of what service you are providing now and what service you might provide in the future. The Management section of the Ethics Rule states that “an appraiser must not advertise for or solicit assignments in a manner that is false, misleading, or exaggerated.” Keep in mind, too, that the Conduct section of the Ethics Rule states that “an appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.” Offering sales services as you described may cast doubt on whether you are truly acting impartially and without accommodating your personal interests. Further, and perhaps most to the point, your act of soliciting or promoting your services as a listing or sales agent creates a prospective interest in the property or parties. To illustrate, ask yourself: Why are you advertising your sales services to her? Invariably, your intent is to obtain the listing and/or sell a house to her in the future – a prospective interest. If you have an interest, USPAP then
requires two disclosures for appraisal and appraisal review assignments. The Conduct section of the Ethics Rule requires this: “If known prior to accepting an assignment, and/or if discovered at any time during the assignment, an appraiser must disclose to the client, and in each subsequent report certification: any current or prospective interest in the subject property or parties involved.” The initial disclosure to your client might take the form of a phone call or email, and the disclosure in the report certification should follow the example of Standards Rule 2-3. (Note that if you are performing appraisal practice that does not result in an appraisal report or appraisal review report, the initial disclosure to your client is still required.) But disclosure aside, while USPAP allows the appraiser to have an interest in the property and parties, many intended uses prohibit the appraiser from performing the assignment if he or she has any interest. For example, the IRS, the GSEs, and federal financial institution regulators have regulations speaking to the appraiser’s interest related to the property or parties. So, while USPAP allows it, you would likely need to decline or withdraw from the assignment if you have a current or prospective interest. In regard to the scenario in question: By soliciting sales services, you are creating a prospective interest that must be disclosed and likely precludes you from performing the assignment. To restate the oft-cited “hat” metaphor: Bring only and wear only your “appraiser hat” for your appraisal assignments. n
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appraiser focus magazine Q3 2019
Valuation
Greg Reynolds Vice president and chief appraiser at First Choice Loan Services Inc
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"Appraisers are...well advised to equip themselves with sufficient knowledge and experience, be it through gaining expertise with a knowledgeable appraiser, or through additional coursework, to tackle the problem of estimating contributory value of PV systems."
Do Solar Panels Add Value?
Navigating the challenging and rapidly changing landscapes of green valuation
10
It seems that the landscape for appraisers is in a constant state of flux. Regulations, reporting requirements, technology – all seem to change at rates that make it increasingly more challenging for appraisers keep themselves current. And in this environment of flux, one of the more challenging, and rapidly changing, landscapes is that of green valuation. Specifically, the issue of valuing solar photovoltaic, or solar PV, systems is a
challenge that appraisers should familiarize themselves with. Until recently, the combined issues of aesthetic appeal, cost, efficiency, and lack of quantifiable data have made estimating the contributory value of PV systems an exercise in futility, resulting in an environment where appraisers were reluctant to even consider any attempt at putting a dollar value on this amenity. That, however, has changed. Due to dramatic reductions in the cost of PV
systems, the much-improved aesthetic appeal, and the marked improvements in the efficiency of the systems, residential PV systems are quickly becoming commonplace. In addition, the rising cost of electricity in some markets has made PV systems much more attractive as a means of offsetting some of the increased cost. And finally, there is now considerable pressure, both from conscientious homeowners and green advocacy groups, to expand resources devoted to renewable energy.
naappraisers.org
F O C U S O N V A L U AT I O N
All of this has resulted not only in the demand for appraisers to recognize the importance of becoming familiar with their contributory value, but also in affording the appraiser more quantifiable data with which to do so. A recent study by the Lawrence Berkeley National Lab that analyzed 23,000 home transactions from eight states between 20022013 concluded that homeowners were, on average, willing to pay an additional $4/W (or $15,000 for an average-sized 3.6-kW system) for homes with solar systems installed. There is, however, a caveat to this – only homes with “owned” systems are eligible for the additional value. In a bulletin disseminated by Fannie Mae as part of its current selling guide, guidance regarding the valuation of PV systems is offered to appraisers. From Section B2-3-04: Special Property Eligibility Considerations, Fannie has outlined a terse requirement that only “owned” systems may be given contributory value – yet has offered no guidance to appraisers on how to estimate that value. As with so many other vague, or unique, valuation problems, the appraiser is left with the requirement of valuing “owned” systems by “correctly employing recognized methods and techniques” (USPAP Standards Rule 1-1(a)). Just which “recognized methods and techniques,” however, apply to the valuation of owned PV systems? According to The Appraisal of Real Estate, some options available to appraisers include paired data, statistical models, cost analysis, income capitalization, qualitative analysis and trend
analysis. And, even as prolific as PV systems have become, it seems that not all of these techniques would produce “credible” results as pertains to the valuation of said systems. Statistical modeling requires an adequate number of observations to be reliable, and while that might work on a macro level, it most likely will not work at the neighborhood level. Qualitative analysis – or to use the more modern term “sensitivity analysis” – could work, but it seems the weight of a PV system adjustment would be excessive for this type of analysis. Cost analysis could be used as well, but as the old adage goes, cost does not equal value. The appraiser is left, then, with two approaches to valuing the monetary contribution of PV systems – namely that of paired data and income capitalization – both quantitative, and both supportable via market data. Of the two approaches that seem to bear the most merit, paired data is the one most familiar to appraisers, and the one most easily recognizable and understandable to (most) intended users. As all appraisers should know, this approach utilizes two or more sales “ceteris paribus” and elicits the value difference between the sale with the PV systems and the sales without. Income capitalization is a bit less straight-forward, but can – if used properly – elicit credible results as well. Also known in finance circles as the time value of money approach, this method requires the appraiser to solve for the unknown (PV, or present value) given the known (time, discount rate, initial and terminal values) and periodic payments
"PV system valuation will continue to gain momentum, the data will continue to proliferate, and appraisers will be forced to adapt to this green challenge."
income streams). There is valid argument that initial and terminal values are not necessary for this approach based on the fact that, once the initial investment is sunk, subsequent owners will not be concerned with what the original owner paid for the system, they will only be concerned with the periodic income streams and rate of depreciation (or how long the system will last). So then, in order for an appraiser to be able to estimate the contribution of a PV system under the income capitalization approach, he or she would need a supportable estimate of the periodic income streams (usually expressed either as a monthly savings or payment), an estimate of the remaining life expectancy of the system, and an appropriate discount rate. The rest is simply inputting the data into the appraiser's trusty HP12C, and thus extracting an estimate of contributory value for the system. In addition to the relatively higher subjectivity of this approach (as compared with paired data), another potential issue with this approach is that it will sometimes create an across-the-board adjustment, and while there is nothing inherently wrong with this type of adjustment, it can be more challenging for appraisers to get this past their intended users. In sum, PV system valuation will continue to gain momentum, the data will continue to proliferate, and appraisers will be forced to adapt to this green challenge. Appraisers are, then, well advised to equip themselves with sufficient knowledge and experience, be it through gaining expertise with a knowledgeable appraiser, or through additional coursework, to tackle the problem of estimating contributory value of PV systems. n
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appraiser focus magazine Q3 2019
Valuation
Steve Kahane, MNAA Certified residential real estate appraiser
"First and foremost: Be a professional. Talk like a professional, dress like a professional and complete a professional product."
How to Avoid a Complaint
Sometimes parties involved in an appraisal walk away unsatisfied. Here’s how you can curb the problem.
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naappraisers.org
F O C U S O N V A L U AT I O N
If you want to avoid a complaint made to your state agency, the first thing you should know is that the majority of complaints are filed by unintended users. Most complaints are not filed by lenders, AMCs, Fannie Mae or FHA, but by angry buyers, sellers or their agents. While none of these unintended users is our client, they are able and more likely to file complaints. With that in mind, below are some tips to avoid a complaint. Just remember PILE.
Professionalism
Years ago, I ran into a school classmate. He envied my career choice because I could wear flip-flops, shorts and a t-shirt and make $300 or $400 for 20 minutes of work at a house. This had apparently been his experience when he refinanced his home. That really made me appreciate how we are perceived. We know appraising is much more involved and time consuming than just the inspection, but many intended and unintended users do not. So first and foremost: Be a professional. Talk like a professional, dress like a professional and complete a professional product. When you act like a professional you are more likely to be treated as one.
Impression
First impressions are important. Whether it’s the call to set up the appointment or when you meet the agent or homeowner at the property, be courteous. Remember that to them you are a stranger. While entering and walking through homes has become routine for you, it may be a first for some people. From their perspective, they are letting someone they do not know into their house to walk around at will and take pictures. This is one more reason to dress for success. Introduce yourself and explain what you are going to do. Give an estimate of how long it will take. I usually take off my shoes,
particularly when I see that is the custom in that home. I don’t always present a business card, but I carry them in case they are requested. If asked for a value or how everything looks, I use the opportunity to tell them that I’m not even half finished with the appraisal, that I’m still gathering data. I explain that the property observation is a small part of the process and that most of the work takes place in the office. This lets them know that our fee goes to more than just the inspection.
Listen
After the appraisal has been submitted, I have received calls from disgruntled buyers, sellers and agents. While they are not our clients (for mortgage appraisals) they can still file complaints, so I try to let them vent. I let them talk a while saying little if anything myself. Sometimes that’s enough. They will thank me for listening and apologize for taking up my time. When it’s not enough, I explain.
Explain
For mortgage assignments, buyers, sellers and agents are unintended users. They are not our clients. So even if one of them paid for the appraisal, USPAP prohibits us from disclosing any assignment results. That also means they are not authorized to request reconsiderations of value (ROVs), changes to the appraisal or any further work on the assignment.
However, it doesn’t mean we cannot talk to them. I have had appraisers tell me that they say they are not allowed to speak to them and hang up the phone. How do you suppose that is received by someone who is already angry enough to call? We don’t have to talk to unintended users, but as long as we don’t communicate any assignment results (value, market or property conditions, comp selection, etc.) we can talk to them, and it might help them understand what we do and why. The first things I explain are who my client is and that I am bound by confidentiality. While we can’t discuss specifics, we can explain the generic sales comparison approach process, how we choose and reconcile comparables and why our valuation might vary from a contract price or a comparative market analysis prepared by a Realtor. I explain the ROV process to them. In doing so I am offering them options while showing some humility. Not everyone goes away happy or in agreement with me, but they are all thankful and recognize me as a professional. You cannot stop people from filing complaints. There is always somebody mad about something. However, if you act like a Professional, make a good first Impression, Listen to their grievances and Explain the appraisal process, you will greatly improve your odds. n
Be a part of the conversation. Share your ideas with your colleagues on how we can advance the appraisal profession. Reach out to us at info@naappraisers.org.
13
An Appraisal
s u s Ver An Evaluation 14
What’s the Difference?
Evaluations are increasingly popular among lenders. Are they a threat to appraisers? Here’s what you need to know.
The emergence of evaluations as a viable tool to measure the market value of real estate mortgage collateral is something we see right now, and it’s not likely to go away. So appraisers would be wise to use this tool when the opportunity is appropriate, although embracing this method may come down to a voluntary business decision the appraiser answers individually.
By Timothy C. Andersen, MNAA
WHAT’S THE DIFFERENCE?
When it comes to evaluations, in some states an evaluation is not an appraisal, while in other states it is an appraisal. Some states don’t address the issue at all. USPAP says an evaluation is an appraisal, but state law trumps USPAP, so check your own state statutes on the matter. There is no mention of the term evaluation in Standard 1 or Standard 2. USPAP does not mention evaluation, although Advisory Opinion 13 does. From this, it’s safe to conclude USPAP does not address evaluations. Since USPAP contemplates neither the development of an evaluation, nor the communication of the results of that evaluation to a client, AO-13 merely assumes that if an appraiser is going to write an evaluation, it must conform to USPAP. In that case, per USPAP, an evaluation becomes an appraisal, subject to Standards 1 and 2 in USPAP, as well as the state appraisal board. But, again, state statute trumps.
INTERAGENCY GUIDELINES WEIGH IN
The Interagency Appraisal and Evaluation Guidelines (IGs) define an evaluation as a “valuation permitted by the Agencies' appraisal regulations for transactions that qualify for the appraisal threshold exemption, business loan exemption, or subsequent transaction exemption.” Note that the IGs definition puts evaluations under the agencies’ appraisal regulations, not the States' appraisal statutes or The Appraisal Foundation's USPAP regulations. It makes clear the need for an appraisal kicks in only after a mortgage loan request exceeds the threshold exemption, which is a loan in excess of $250,000. Therefore, any mortgage less than $250,000 is subject to an evaluation rather than appraisal (although the lender is still free to choose an appraisal, as many choose to do). Further, the IGs declare that USPAP "identifies the minimum set of standards that apply in all appraisal, appraisal review and appraisal consulting assignments,” but USPAP has nothing to add on the development and communication of evaluations. Since, by definition, an evaluation is not an appraisal (except insofar as USPAP and some state appraisal boards are concerned) this description makes it clear that appraisals and evaluations are two completely different animals with different purposes and functions.
USPAP AND EVALUATIONS: A SUMMARY OF DIFFERENCES
Here are the major differences between an appraisal and an evaluation: l A n appraisal requires both an analysis of the property's highest and best use, as well as a summary of the logic and rationale behind that analysis within the report. There is no such requirement in an evaluation. l A n appraisal requires an analysis of reasonable exposure time, as well as its statement within the report, but not in an evaluation. l C urrently, an appraisal can present in only one of two formats, an Appraisal Report, or a Restricted Appraisal Report. An evaluation has no such requirement. l A n appraisal requires a signed certification (in format more or less as it is found in SR2-3) as part of every written appraisal report (and it must be in the work file in the case of an oral report). An evaluation has no such requirement. l I n an appraisal, there are numerous I's to dot and T's to cross.
Given that an evaluation is a less formal document, there are fewer I's and T's. l U SPAP requires an appraisal to be credible. The IGs require an evaluation to be reliable. However, the IGs do not define reliable, while USPAP defines credible as worthy of belief. The two terms are not synonymous.
WHO IS QUALIFIED TO PERFORM EVALUATIONS?
Section VI of the IGs carries the title “Selection of Appraisers or Persons Who Perform Evaluations.” According to the qualifications listed as necessary for persons to do appraisals or evaluations under the IGs, the work performed must be periodically reviewed by the client institution. The person selected must also: l P ossesses the requisite education, expertise, and experience to competently complete the assignment l Be capable of rendering an unbiased opinion. l B e independent and have no direct, indirect, or prospective interest, financial or otherwise, in the property or transaction l H old the appropriate state certifications or license at the time of the assignment, if they are an appraiser. Persons who perform evaluations should possess the appropriate appraisal or collateral valuation education, expertise and experience relevant to the type of property being valued. Then, in footnote #31, the IGs state, "Although not required, an institution may use state certified or licensed appraisers to perform evaluations. Institutions should refer to USPAP Advisory Opinion 13 for guidance on appraisers performing evaluations of real property collateral.” AO-13 teaches that an “evaluation, per the [IGs], provides an estimate of market value. When that estimate of market value is the opinion of an individual who is required to comply with USAP, that opinion (i.e., the evaluation) is, per USPAP, an appraisal. Therefore, an appraiser who is required to comply with USPAP must meet both the [IGs'] requirements for an evaluation, and the requirements of Standards 1 and 2 and other applicable parts of USPAP." In some states, statutes allow appraisers to produce evaluations. Since state law trumps USPAP, in those states appraisers can perform evaluations yet not be held to USPAP standards. Some states' appraisal statutes are silent on the matter. Thus, in those states, USPAP holds sway. Therefore, if an appraiser does an evaluation, that evaluation, in those states, is an appraisal per USPAP. The performing appraiser is subject to USPAP's Standards 1 and 2 (whereas an evaluator is not).
IS THERE ANY REASON FOR APPRAISERS NOT TO LIKE EVALUATIONS?
Is it bad for the residential lending industry? Many appraisers have expressed the opinion that evaluations are somehow bad for the profession. Some claim that the use of evaluations (i.e., a decrease in the number of appraisals) will lead to another recession. This is not likely since there were lots of appraisals performed before the last crash, yet the performance of those appraisals did nothing to stop that crash. Other parties were to blame for that. Is there a lack of consumer protection? Some claim the appraisal lets the buyers know if they are paying too much for the house. Ironically, there are numerous studies available demonstrating that the vast majority of lender-ordered real estate appraisals come in at or above the contract purchase price. Given this statistic, it is difficult to determine how an appraisal protects
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the buyer from paying too much for a property, since this statistic gives credence to appraisers supporting the lender's position in the lending process, not the borrower’s. Is the appraiser tasked with protecting the consumer? Further, it is not the appraiser's job to protect the public or anybody. USPAP's Preamble states that the “purpose of [USPAP] is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers." If it did require the appraiser to protect something, it might also describe from what the appraiser was obligated to protect the public and its trust. Therefore, it requires a rather spectacular leap of logic to take USPAP's purpose to promote and maintain the public trust, and then extend that mandate to include the appraiser protecting the public from other parties to the purchase and sale transaction. Appraisers do not function as advocates. An appraiser, by definition, is independent, impartial and objective – a disinterested third-party observer whose job it is to provide an unbiased opinion of value. Therefore, if a party to the purchase and sale transaction wants to appoint the appraiser as "protector," that is a mantle the appraiser does not seek and should not accept. If a consumer wants to know the value of a property, the consumer should hire an appraiser to tell him or her just that. On the other hand, while the consumer has no right to depend on the appraisal and report the lender commissioned the appraiser to complete, they may use it that way. So, even though the appraiser has no responsibility or liability to an unintended user, common sense behooves the appraiser to prepare the appraisal and report to withstand the scrutiny to which an unintended user may subject it.
WILL EVALUATIONS TAKE APPRAISERS' JOBS?
Real estate appraisers also oppose evaluations because they claim evaluations will take appraisers' jobs. This claim, too, does not hold up to scrutiny. In all 55 states and jurisdictions, only licensed or certified appraisers can perform appraisals for such lenders as Fannie Mae. Therefore, evaluators cannot assume this position. What just might cause appraisers to lose market share, however, is not that evaluators will begin to do appraisals since, as this essay shows, they cannot legally do so (unless the loan is below the de minimis, although even then lenders tend to want appraisals from licensed or certified appraisers). However, this potential loss in market share will likely stem from lenders choosing more evaluations over appraisals. Thus, the actions of lenders will take jobs from appraisers, not merely the presence of more evaluators.
WHEN ARE EVALUATIONS USED OR NEEDED?
Evaluations are very common in the appraisal of commercial properties, and one of the reasons is because commercial loans are short-term. While they carry a 20- to 30-year amortization, the lender can call them in five, 10 or 15 years. Thus, commercial mortgage loans are "less risky" in this aspect than are traditional 30-year self-amortizing residential mortgage loans. Because commercial loans are shorter than residential loans, there is more need/demand for them, thus commercial appraisers are more disposed to make them part of their arsenal. In addition, since the requirements of the contents of a commercial property appraisal/ evaluation are far less cut-and-dried than are those of a residential
appraisal and report, commercial appraisers are more willing to perform evaluations than are their residential counterparts. Finally, while there may be some validity to the claim that the residential first-mortgage appraisal offers the consumer some protection against overpaying for a property, this is not the case in the commercial lending space. This is because commercial lenders consider commercial mortgagors to be more sophisticated than the typical residential mortgagor, thus not in need of any "protection." This is not to say, however, commercial evaluations will replace commercial appraisals. They won't.
CAN THE APPRAISER SWITCH ROLES AND BECOME AND EVALUATOR?
Does USPAP allow the appraiser to take off his appraiser hat to put on his evaluator hat? Yes, USPAP is clear that an appraiser is an appraiser only when acting as an appraiser. Given this, then there are times when an appraiser can legitimately doff the appraiser hat and become a CPA, general contractor, firefighter, franchisee, lawyer, investor and so forth. So, why can't the appraiser merely doff the appraiser's hat and then don the evaluator's chapeau? The appraiser can. However, many state boards do not understand or appreciate this flexibility. These boards take the position that an appraiser is an appraiser is an appraiser. Thus, while USPAP allows this flexibility, some state boards do not understand USPAP to this depth, thus do not allow appraisers to doff and don separate professional hats as the situations present themselves to do so. Therefore, switching between roles, while possible under both USPAP and the IGs, may not be practical.
WHEN CAN A LENDER ORDER AN EVALUATION RATHER THAN AN APPRAISAL?
The IGs permit a lender to order an evaluation rather than an appraisal under certain circumstances. l Th e transaction value is equal to or less than the appraisal threshold of $250,000 l I t Involves an existing extension of credit at the lending institution, provided that: l Th ere has been no obvious and material change in market conditions or physical aspects of the property that threaten the adequacy of the institution's real estate collateral protection after the transaction, even with the advancement of new monies l Th ere is no advancement of new monies other than funds necessary to cover reasonable closing costs l Th e loans have a combined loan-to-value ratios in excess of the supervisory loan-to-value limits l Atypical properties l Properties outside of the institution's traditional lending market l T ransactions involving existing extensions of credit with significant risks to the institution l Borrowers with high-risk characteristics
EVALUATIONS: REQUIRED CONTENT
So, what should an evaluation contain? Per the IGs, an “evaluation should contain sufficient information detailing the analysis, assumptions, and conclusions to support a credit decision. The IGs state that an evaluation should, at a minimum: l Identify the location of the property
l P rovide an estimate of the property's market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date the analysis was completed), with any limiting conditions l D escribe the method(s) the institution used to confirm the property's actual physical condition and the extent to which an inspection was performed l D escribe the analysis that was performed and the supporting information that was used in valuing the property l D escribe the supplemental information that was considered when using an analytical method or technological tool l I ndicate all source(s) of information used in the analysis, as applicable, to value the property l I nclude information on the preparer when an evaluation is performed by a person, such as the name and contact information, and signature (electronic or other legally permissible signature) of the preparer
SHOULD APPRAISERS BE ABLE TO PERFORM EVALUATIONS?
It might appear that appraisers should stay away from evaluations. Maybe they should. That is not the point of these arguments. If appraisers were able to perform evaluations (as are non-appraisers), then they could compete with non-appraisers for this work. They could also choose not to compete with them by limiting their professional efforts solely to real estate appraisals. Right now, however, appraisers do not have that choice. This is a function more of state statutes, rather than USPAP limitations.
WILL EVALUATIONS TAKE APPRAISERS OUT OF THE MORTGAGE-LENDING CONTINUUM?
It is no secret the mortgage lending industry wants to eliminate appraisers. Per the mortgage lending industry, appraisals are too expensive, too time consuming and too hard to accomplish in rural areas due to a "shortage" of appraisers. That others have refuted these arguments successfully is reason not to do so again here. That the mortgage lending industry is working to carry out this plan has evidence in the movement to increase the de minimis to $400,000. While this move, in and of itself, will not eliminate the appraiser, it will give lenders more latitude to let consumers choose between appraisals and evaluations.
HOW ABOUT AVMS?
There are no perfect AVMs. But lenders are open to using AVMs to evaluate/appraise their real estate collateral because they are quick, inexpensive and mathematically accurate (and can likely be performed in-house). While AVMs have some practical limitations relative to appraisals, appraisers need to understand lenders that use AVMs can budget for typical losses (say to foreclosure or plain misadventure) and insure extraordinary losses. Note the IGs recognize AVMs as a tool in evaluations, but they specifically prohibit evaluating the collateral for a loan based solely on the output of an AVM. There must also be corroborating data and analysis. Thus, AVMs alone are not going to remove appraisers from the mortgage-lending continuum.
WHO WILL ENFORCE EVALUATIONS AS STATE APPRAISAL BOARDS ENFORCE USPAP?
Since federal banking regulators do not consider evaluations to be appraisals, there is the question of who will enforce evaluations as state appraisal boards enforce USPAP Standards. Putting this question to those
who are in the positions to know revealed that nobody has an answer to the question. Because, in those states that have taken a stand on the matter, evaluations are not appraisals, therefore state appraisal boards cannot enforce them. The IGs, while apparently setting up the rules for evaluations, contain no enforcement or disciplinary language or mechanics. And besides, if they did, who would enforce them, and by what authority? So, right now, if somebody bungles an evaluation, there is no disciplinary authority by which to sanction that somebody. This silence raises the question of, without any enforcement authority, who shall decide when an evaluation (especially one done in-house) trips across that line between impartiality, independence, and objectivity and advocacy on behalf of the lender?
A SECRET?
This is no secret: The GSEs, to their own underwriting satisfaction via their own internal alchemy, already know what the property is worth before the appraiser sends in the appraisal report. The appraiser's data feed the GSE's alchemy-beast, so appraisers have been reduced to data providers rather than valuation experts. This is why the GSEs need us – to feed their beast, but not to provide them with value opinions. As a result, the GSEs want to feed this beast as cheaply as possible, which is one reason they want lower-cost evaluations over appraisals. The second non-secret (but less well-known) is that lenders prefer evaluations over appraisals. Bank examiners do not look at evaluations very critically, but scrutinize appraisals for every possible error, omission, lapse in logic, USPAP inconsistency, and so forth. So, if you were a lender, which would you rather have in your files: an evaluation or an appraisal?
A PEEK INTO THE FUTURE
The only constant in any business (and life!) is change. Trying to stop change is just as futile as trying to stop a tsunami with a whiskbroom and trashcan. Because of the mortgage-lending community’s desire to eliminate the appraiser, because of the potential increase in the de minimis, because of the advent and availability of Big Data (and the technology to utilize it), because of the net decrease in the number of appraisers over time, appraisers are going to have to change, or face the inevitability of that wall of water. Nevertheless, there is no reason to conclude this change is a negative. Just as all appraisers are free to come to understand the mechanics of evaluations, the appraiser is also free to choose not to engage in them. The problem is right now appraisers, do not have that choice. Unless the ASB chooses to redefine an evaluation as not an appraisal (not likely), or until states' appraisal statutes allow appraisers the latitude to choose to do or not do evaluations (more likely), appraisers do not have the freedom to perform them. Those who are likely less qualified, however, have that opportunity. Currently, appraisers are free to get into areas of appraising that are not at the whim of the mortgage industry. These include such areas as relocation work, litigation support/expert witness work, estate work, ad valorem tax appeal work, pre-listing work, feasibility analyses, providing contracting services to other appraisers, and so forth. Therefore, appraisers should have to opportunity to choose to perform or not perform evaluations, just as they are free to perform or not perform any of the above valuation services. One of the differences right now between an appraisal and an evaluation is an appraiser does not have the freedom to perform evaluations despite the fact that those less qualified to do so now provide those services. How much sense does that make? n
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appraiser focus magazine Q3 2019
Opinion
Craig M. Capilla Trial Lawyer, Franklin Law Group
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Being Active Is Being Better
Why being a part of a professional organization really matters
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I recently had the privilege of presening at the second annual Appraiser Conference and Trade Show (ACTS), hosted by the NAA and Appraiser eLearning. Meeting so many professionals at the conference gave me an opportunity to reflect on the importance of belonging to professional organizations and being active. Just about every organization will tell you why you should belong to that specific group and how it would benefit you in some way. I’m going to tell you that I don’t know that any one group is going to make a difference. The key is, you need to belong to something, and you need to take an active role in your profession. As a state board prosecutor for several years during the mortgage crisis, I saw a high volume of license complaints come through our doors. To separate the wheat from the chaff, we had to identify the sorts of information that we could distill quickly
to establish a foundation in a particular case. In essence, we needed to create a series of filters to better inform us about the licensees we found sitting before us in a hearing or settlement conference. Over a period of time, we developed a basic set of introductory questions that all respondents would be asked before we turned to any substantive questions about the complaint. As it turns out, when I’m examining a witness today, I still turn to the same questions to lay a foundation. Without question, the one that always caught the attention of the state board members and the hearing officer was, “Do you belong to any professional organizations?” When trying to get to the root of whether an appraiser (or some other licensee) is competent to practice, the basic background questions just don’t cut it. Where a person lives, where they went to school, even how long they’ve been in practice doesn’t offer much in the way of guidance on how that person might perform on an assignment-toassignment basis. And you have to remember that most people in a lawsuit find themselves there because the assignment in question was
one of their worst days in the business, not one of their best. But those individuals who are members of professional organizations tended to have a better grasp of their practice and, therefore, a better outcome to their situations. The improved outcomes for those who are members stems from the possibility that they will be exposed to more information, and challenged in their beliefs and reasoning more frequently, than those who go it alone. Those challenges allow for a more rapid and complete improvement to one’s performance in any profession. They also mitigate the risks of committing errors that others could have prevented, either by observation of their practices or discussion. I’m here to tell you that being a member of an organization is simply not enough. The appraisal profession is changing too quickly to just let knowledge try to find you. You must seek that knowledge and look for improvement. And the best way to do so is to actively participate in an organization. Attend a meeting. Write an article or a blog. Join a committee. Interact with others and open yourself up to being challenged. Chances are, if you’re reading this article, you’re already a member of an organization. Appraisers who are members of an organization often tend to be members of more than one. Those who aren’t a member of anything are the hardest group to reach. Even now, I counsel my clients to belong to organizations and to be involved. That act by the individual does more to reduce risk and improve outcomes when something does go wrong than anything I could possibly do for him or her. Being a part of something professionally matters to the regulators. It matters to the judge. And if you’re being honest with yourself as a professional, you know it matters to you, too. So get out there and join an organization that you know will help you be better tomorrow than you are today. Find someone else and get them into your group so they can be better too. And, while you’re at it, figure out how you can apply your unique skills to make that organization better than it was when you joined. You and all your peers will be better off for it. n
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Appraiser Focus is always looking for dedicated appraisers who care about the future of this profession. We are on the hunt for hard-working, forwardthinking professionals who are interested in contributing to our magazine’s coverage of the appraisal world.
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