DILEMMA DILEMMA appraiser focus DILEMMA DILEMMA DILEMMA DILEMMA THE INFLUENCE DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA NATIONAL ASSOCIATION OF APPRAISERS
Q3 2020
magazine
When interested parties push their own comps, what is the appraiser’s obligation?
INSIDE THIS ISSUE:
What’s illegal when it comes to zoning compliance? PG10 When adjustments call an appraiser’s decision into question PG11
Insurance IQ: Reading your policy PG12
2
U YES YO CAN
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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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p.7
p.11
VALUATION
VALUATION
A Look at Prior Sales Analysis
Support Versus Proof
Why thorough reporting of a property’s history elevates an appraisal report
When adjustments call an appraiser’s decision into question
Robert Keith, MNAA
Melanie Sellers, MNAA
p.12
p.8 VALUATION When to Count a Room as a Bedroom A look at the attributes needed to make this determination
Craig Morley, MNAA
p.10 VALUATION What’s Illegal When It Comes to Zoning Compliance? Appraisers must carefully consider what the GSEs are really looking for
INSURANCE Insurance IQ: Reading Your Policy Why it’s so important to advocate for yourself and your business
David Brauner
p.18 OPINION OF VALUE An Appraiser’s Limitless Opportunities for Success In this remarkable profession, you can control your destiny
Melissa Bond, MNAA
Laurie Egan, MNAA
n n
Feature
“The law prohibits anybody associated with the mortgage loan process from trying to influence the appraiser in any manner whatsoever..." -Timothy C. Andersen, MNAA
p.14
Read more on pg.14
THE INFLUENCE DILEMMA When interested parties push their own comps, what is the appraiser’s obligation?
Timothy C. Andersen, MNAA
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DILEMMA DILEMMA appraiser focus DILEMMA DILEMMA DILEMMA DILEMMA THE INFLUENCE DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA NATIONAL ASSOCIATION OF APPRAISERS
2020
magazine
JULY 2020
When interested parties push their own comps, what is the appraiser’s obligation?
Meet the Team PUBLISHER
Teresa Walker
INSIDE THIS ISSUE:
What’s illegal when it comes to zoning compliance? PG10 When adjustments call an appraiser’s decision into question PG11
Insurance IQ: Reading your policy PG12
ON THE COVER
SENIOR EDITOR
Laurie Egan, MNAA
Veteran appraiser Tim Andersen, MNAA, explores the appraiser's obligation when an agent presents their own comps.
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A NOTE
appraiser focus
FROM THE PRESIDENT
S
o far, 2020 has been an interesting year for appraisers, as well as for everyone else. Starting the year, we had high hopes that interest rates would remain low and that we might see a modest recession but, nevertheless, that overall market conditions would remain favorable.
Our biggest concern was the lack of inventory and affordable homes. Appraisers were also concerned about technology replacing much of what we do. We had concerns with the introduction of the bifurcated appraisals, something the GSEs advocated, the use of appraisal waivers, and the impact these would have on the valuation profession. But, who could have predicted that a pandemic would launch the world into a recession that would result in some of the highest unemployment rates in nearly 100 years? Who knew a pandemic would shut down the economy and hurl us into an unprecedented recession? Those who once dreaded bifurcated appraisals are now not much concerned with them. Rather, now they are concerned about being exposed to a deadly virus. This fear has brought much of U.S. economic activity to a screeching halt. As we come to mid-year, we have high hopes of an economic recovery. Yet, our country has been rocked by claims of systemic racism, and those issues are bleeding into the appraisal world. Joe Biden, likely the Democrats’ nominee for president, refers to a study completed by the Brookings Institute that claims the value gap in minority communities is a result of appraiser bias. He suggests an overhaul of the appraisal process in minority communities. This idea, in my view, is like blaming bad weather on the weatherman, but I digress. Biden’s claims are silly on their face, and have no basis in fact, evidence, reality, or law. Rest assured NAA has communicated with Biden’s office on this matter to convey that his opinion is not well-formed, thus not worthy of our support. Government Sponsored Enterprises, together with FHA, VA, and the Rural Housing Administration, have all developed so-called “appraisal flexibilities” to try to provide for alternative ways to more safely collect information in performing appraisals. However, the flexibilities have been ever changing, with a good deal of confusion as to when appraisers should implement them. Many of the intended users of these flexibilities report problems in that appraisers are not following the proper protocols. This failure could result in some secondary market lenders subjecting appraisers to buybacks. A significant downside for appraisers is that some lenders may expose appraisers’ work product from these uncertain times to scrutiny, both from lending authorities, as well as state appraisal authorities. During this time of uncertainty, the National Association of Appraisers has been busy providing upto-date information to Washington, D.C., state capitols, and other appraisal authorities on what is going on, as well as suggestions as to how to deal with many of the challenges that appraisers face. To keep our appraisers as safe as possible, we cancelled the August ACTS and moved it to April of 2021. We have provided comments on changes proposed for the latest iteration of USPAP, and we are actively looking for ways to help our membership and the profession as a whole. It is our sincerest wish that all appraisers be safe, use professional judgment in the work they perform, and that we all weather the current storm both with success and with the realization that we will get through the challenges we face. I believe we are much more efficient when we work together. The NAA invites all appraisers to look for ways to serve their communities, as well as their fellows. I extend my personal invitation to each of you to get involved with the NAA. I extend my best wishes to each of you, as well as to all of yours! Sincerely,
Craig Morley, MNAA President, NAA
Connect with me about how to get involved with the NAA. Reach me at valupro@gmail.com. appraiserfocus.org | 5
appraiser focus magazine 2020
INTERESTED IN WRITING FOR APPRAISER FOCUS? REACH OUT TO US ABOUT SHARING YOUR IDEAS IN PRINT. INFO@NAAPPRAISERS.ORG Melanie Sellers, MNAA
Robert Keith, MNAA
Melanie Sellers has been a residential appraisal review officer with Cadence Bank since 2017. She is a certified residential real property appraiser in Texas. Sellers started her career with an appraisal firm in Corpus Christi, Texas, and later certified in Louisiana. She has worked as a review appraiser for ProLend Mortgage, Bank United Texas, done independent fee work in Louisiana and Texas, and spent 10 years as a staff appraiser for Rels Valuation. Sellers is a designated member of the National Association of Appraisers and also an SRA member with the Appraisal Institute.
Robert Keith, ASA, IFA, is an AQB-certified USPAP instructor and certified general appraiser. Keith is the former executive director of the Oregon Appraiser Certification and Licensure Board, past president of the Association of Appraiser Regulatory Officials, past chair of The Appraisal Foundation Advisory Council, and past national director of the National Association of Appraisers. He has served as a subject matter expert for two national appraiser exam providers, has over 20 years of experience as a professional appraiser, and is an experienced appraiser educator.
Craig Morley, MNAA
David Brauner
p.7 Prior Sales Analysis and Why It Counts
p.8 When to Count a Room as a Bedroom Craig Morley, NAA president, 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, 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.
Laurie Egan, MNAA
p.10 W hat’s Illegal When It Comes to Zoning
NAA’S MISSION
Compliance?
6
Laurie Egan is a third generation appraiser who began her appraisal career working with her father and grandfather in the Pacific Northwest. She founded her Oregon-based appraisal firm 1988, and in 2011, entered the banking world as senior appraisal consultant for MetLife Home Loans and subsequently as single family regulatory compliance manager for Seattle-based HomeStreet Bank. She returned to her appraisal firm roots in 2018 as VP and general manager of William Fall Group’s Residential Business Unit. Egan is a founding member and past resident of the NAA and presently serves on on the Board of Directors as association manager and chair of the Government Affairs Committee.
1 UNITE
Bring appraisers together to advocate for positive change.
2 PROMOTE
Encourage continued education and high standards of conduct.
3 PROVIDE
Offer services designed to benefit our membership.
p.11 Support Versus Proof
p.10 Insurance IQ: Reading Your Policy David Brauner is the publisher of Working RE magazine and a senior broker at OREP, a leading provider of E&O insurance for appraisers, inspectors and other real estate professionals in 50 states (OREP.org). Brauner has provided E&O insurance to appraisers for over 25 years. dbrauner@orep.org | 888-347-5273
Timothy C. Andersen, MNAA
p.11 The Influence Dilemma
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 master's degree in real estate appraisal from The University of St. Thomas in Minneapolis.
Melissa Bond, MNAA
p.11 A n Appraiser’s Limitless Opportunities for Success Melissa Bond is a certified residential appraiser licensed in Mississippi and Louisiana. Since 1994, she has been the sole proprietor of her thriving real property appraisal practice, which specializes in fee appraising for VA, FHA, Fannie Mae, title companies, attorneys and school districts. Bond is also a state compliance reviewer, performing investigative reviews for USPAP-compliancy adherence. As a Continuing Education provider, Bond has developed CE courses for real property appraisers, tax assessors, lenders, underwriters and Realtors. Bond has served on various boards and committees at the local and state levels for Realtor and appraiser organizations. As an appraiser advocate for licensees, she has assisted numerous appraisers in defending themselves when faced with a consumer complaint before a licensing board.
VALUATION NAA’s Mission UNITE: Bring appraisers together to advocate for positive change.
Melanie Sellers, MNAA Residential appraisal review officer at Cadence Bank
“Prior sales analysis has always been one of my pet peeves…[But] now that I work in a review position, I find that the reporting of the prior sales is excellent.”
A Look at Prior Sales Analysis Why thorough reporting of a property’s history elevates an appraisal report
Prior sales analysis has always been one of my pet peeves. It started way back in January 2003 as a USPAP requirement. When it took effect, I was working as a fee appraiser and this requirement didn’t make sense, as at the same time lenders were pressuring the use of comparables that sold within the past 90 days. I used to ask myself, “Why did it matter if something sold three years ago, when my comparables were mostly within the past 90 days?” The requirement, of course, was to help reveal any “flipping.” Now that I work in a review position, I find that the reporting of the prior sales is excellent. However, it is the “analysis” part that is left out nearly 50% of the time. Apparently, the prior sales issue was not a concern just for me as the current 2020-2021 USPAP in Advisory Opinion 1 (AO-1) discusses the issue in three full pages with several
illustrations. I highly recommend appraisers review those pages 6567 of the 2020-2021 USPAP. I am not going to reiterate their content here, but help explain the need for the analysis and offer a summary of that analysis. Let’s say, for example, that the current purchase price is $210,000 and the value is $210,000 with current contract dates and effective dates in February 2020. But down below in the prior sales grid it is noted that the subject sold for $150,000 in November 2019. That is quite a jump – 40%, to be exact – in three months. Now, in reviewing the report in full, I can see comments that the kitchen and baths were updated in the past year in UAD-required format. However, a year ago is 12 months ago, not three months ago. As a reviewer, I have to assume that the house was updated within
the past three months to explain the increase and not maybe four to 12 months ago. I would rather not assume and have the appraiser state that, as after all the 1004 Form itself does say “analysis of the prior sale or transfer history." Other reasons for a variance, of course, might be market appreciation or prior foreclosure circumstances. Here’s another example: Let’s say the purchase price and effective date are the same as above – $210,000. However, on the prior sale grid, it is noted that the subject sold for $150,000 in November 2010. That is 10 years ago. Frankly, I don’t see why that is relevant. In looking at the form, the check boxes are for “DID/ DID NOT research the prior sales history or transfers of the subject for the three years prior to the effective date of the report.” Therefore, over three years would not be noted in the boxes below as a result of that research. Now, if an appraiser thinks a prior sale over three years is worth mentioning, then by all means comment below, but I would advise not to put in the grid boxes in this area as it is confusing to the reviewer/reader. In conclusion, to satisfy USPAP Standards Rule 1-5(a) and (b), there must be analysis of the prior sales within three years of the effective date and, per Standards Rules 2-2(a) (x)(3) and (b)(x)(3), a summary of the results of those analyses is needed. A good summary of that analysis would provide greater confidence in the report being reviewed. n appraiserfocus.org | 7
appraiser focus magazine Q3 2020
VALUATION SOMETHING ON YOUR MIND? Need to get something off your chest? Hate something we do? Love something we do? Letters to the editor may be emailed to INFO@NAAPPRAISERS.ORG
Craig Morley, MNAA NAA president, principal partner at Morley & McConkie
“Many myths persist about what allows a room to be classified as a bedroom. So I have decided to dig in, collecting guidance from various sources in the hopes of helping the industry find a consensus on the matter.”
When to Count a Room as a Bedroom A look at the attributes needed to make this determination
I recently received a call from an agent who was trying to get clarification on what constitutes a bedroom. He told me he had an appraisal completed in which the appraiser would not classify a room as a bedroom because it did not have a closet. We agreed that many myths persist about what allows a room to be classified as a bedroom. So I have decided to dig in, collecting guidance from various sources in the hopes of helping the industry find a consensus on the matter. Here are some tidbits that I have unearthed regarding the attributes needed for a room to qualify as a bedroom: • I t must be at least 70 square feet. (IRC 2015) • The ceilings must be at least seven feet high. (IRC 2015) •T here must be a window that provides an emergency exit to the outside, and it must provide an opening that it as least 5.7 feet. (IRC 2015) •T here must be natural light and ventilation. (NAR) • Hallway access can be tandem or captive. Per NAR, direct hallway access is more valuable than tandem access. •A smoke alarm must be installed in the room, unless it was built after a certain year. (IRC 2015) 8
• A carbon monoxide detector must be installed adjacent to the room. (IRC 2015) Note there is no mention of a closet in any of these guidelines. Intrigued, I continued to dig, contacting a number of city and county offices in the Utah area with authority on the matter. Here’s what I found:
FROM THE WASHINGTON COUNTY, UTAH, ASSESSOR’S OFFICE:
Ryan Hatch, residential appraisal manager for the county, said, “The bedroom counts [on the County Assessor’s website] are based on the apparent use of each room at time of construction. Probably based on the last time we were ‘in’ the home. We do review MLS info and photos as well.” Hatch said that, to them, room count is not important in their system, meaning their method does not give value to the number of rooms. Instead, the Total Gross Living Area is the most important. If there is a large enough home with a low number of rooms, then they make some adjustments. Hatch also said the closet comes into play only because it is the easiest way for them to identify a bedroom.
F O C U S O N V A L U AT I O N
Therefore, if they see on the floor plan a room with what looks like a closet, they may count it as a bedroom.
FROM THE CITY OF SAINT GEORGE PLANNING, ZONING, AND DEVELOPMENT DEPARTMENT: According to Brett Bingham, joint utility coordinator and plan review, the city and the state are still using the 2015 International Residential Code (IRC) to identify a bedroom. Based on these guidelines, a room does not need to have a closet in order to be considered a bedroom. The only sections that Bingham said they adhere to statewide are 304.1, 310.1, & R314.1. These relate to egress, room size, emergency exits and smoke detectors.
FROM THE CITY OF SAINT GEORGE MUNICIPAL CODE:
Based on our municipal code, the city has adopted the National Manufactured Housing Construction code and International Code Council Guidelines for its building requirements. In further evaluation of those both those codes, no mention of a closet requirement was found.
THE SOUTHERN UTAH BUILDERS ASSOCIATION:
The SUBHA told me to contact the city inspectors, since they are the ones who determine if all requirements have been met. I learned that Bingham, who I spoke with earlier, is the person who interprets the code for inspectors.
beauty, is in the eye of the beholder. My research makes it clear that the mere presence of a closet does not, in and of itself, convert a room into a bedroom. If that were true, then every house with a guest closet in the foyer would enable one to classify a foyer as a bedroom. How about a kitchen with a broom closet or pantry? Would that turn the kitchen into a bedroom? How about a hallway with a linen closet? Does placing a bed in a room constitute a bedroom? In many parts of the U.S., it is common to put a bed on a screened patio for sleeping when weather permits. Does that placement make it a bedroom? Does the presence of a Murphy Bed mean that, during the day, a room is just a room, but at night, when the Murphy Bed is down, it is transformed into a bedroom? Since there is no definitive answer to what constitutes a bedroom, then the appraiser’s decision not to count a room as a bedroom is entirely the appraiser’s judgment call, as well as one entirely within that appraiser’s scope of work. A homeowner may call a room a bedroom, a den, an office, a gym, a playroom, or a junk room. But as this research shows, merely what is in the room, as well as merely what is not, does not necessarily convert it into a bedroom, nor necessarily change it into something else. n
While these four sources should suffice to cover the city/county/state requirements in Utah for builders and appraisals, I dug further to learn what I could in regard to bedroom interpretation guidelines for real estate agents.
WASHINGTON COUNTY, UTAH, MULTIPLE LISTING SERVICE:
I spoke to the director of the MLS. The MLS committee would be responsible for ensuring that Realtors are categorizing homes correctly in the MLS (including bedrooms). He explained that a few years back, a closet was important in identifying a bedroom; however, new guidance no longer requires it. According to him, other than city ordinances, there are no additional MLS guidelines.
THE NATIONAL ASSOCIATION OF REALTORS AND THE LENDING INDUSTRY: I reviewed NAR’s guidelines for its Pricing Strategy Advisor Certification. These guidelines outline the size, egress, ventilation, and hallway access requirements, but there is no mention of a closet.
HUD/FHA:
Nether entity specifies the need for a closet for a room to be classified as a bedroom. So, what does all of this mean? A bedroom, much like appraiserfocus.org | 9
appraiser focus magazine Q3 2020
VALUATION
Laurie Egan, MNAA VP, general manager at William Fall Group
“The question being asked is: Do the improvements constitute a legal use of the land?”
What’s Illegal When It Comes to Zoning Compliance?
Appraisers must carefully consider what the GSEs are really looking for converting a garage into a commercial storefront in a neighborhood zoned single family residential (SFR) probably constitutes an “illegal” use. Converting a single-family residence into a four-plex with SFR zoning probably is, too. But what about these true-life examples? SCENARIO 1: Subject property is a typical single-family residence with typical residential zoning. The property is tenant-occupied, but zoning allows for only four “unrelated” individuals to occupy the property. Appraiser notes there are five adults residing in the home, so marks the box "illegal" in the site section of the appraisal form.
As appraisers, we sometimes overthink or overcomplicate the question of zoning compliance when reporting appraisals on GSE forms. Is there a difference between an “illegal use” and “using illegally?” To answer this question, let’s look at the Fannie Mae Selling Guide to determine what question is being asked: Fannie Mae only purchases…loans on properties if the improvements constitute a legal…use of the land. (Emphasis added) I think we can all agree that
SCENARIO 2: Property is an SFR with a legal accessory dwelling unit (ADU.) Zoning requires the primary residence to be owner-occupied in order to rent the ADU. Appraiser notes both units are tenantoccupied, so marks the box "illegal" in the site section of the appraisal form. SCENARIO 3: Typical SFR. City ordinance does not allow for disabled vehicles to be visible from the street. At the time of inspection, the owner was restoring a cherry-red ’69 Camaro for his daughter in the driveway, but the rebuilt 327 small-
block hasn't been dropped in yet. Appraiser marks the box “illegal.” SCENARIO 4: Typical SFR. Zoning allows for chickens (female) to be on site, but not roosters (male) because boy chickens are noisy. Appraiser notes the presence of a rooster in the chicken coop, so marks the box “illegal.” It’s often said that appraisers are the eyes and ears of their clients, and a lender would undoubtedly want to know about any tenancy issues, such as those in scenarios one and two, particularly when it comes to qualifying rental income. That said, the occupancy of the improvements is not the question being asked in the site section of a GSE form. Neither is the existence of disabled cars or roosters. The question being asked is: Do the improvements constitute a legal use of the land? There is a fundamental difference between improvements being a legal use of land under present zoning versus any “illegality” as the result of the actions of any individuals or occupants. It is imperative that, as appraisers, we report what we see; however, it is equally important to accurately report on GSE forms the answer to the question that is being asked. n
Be a part of the conversation. Share your ideas with your colleagues on how we can advance the appraiser profession. REACH OUT T O US AT INFO@NAAPPRAIS ERS .ORG. 10
VALUATION
Robert Keith AQB-certified USPAP instructor, certified general appraiser
“We would be well served to remember that appraisers are in the opinion and judgment business, and that judgment is the result of the appraiser’s analysis of data.”
Support Versus Proof When adjustments call an appraiser’s decision into question As time goes by, the appraisal profession is subject to the latest notions or fads. One such notion of current controversy is appraiser support for adjustments. There are many ways to support adjustments, such as paired sales, depreciated cost, statistical/regression analysis and market participant survey, to name a few. Recently, it seems lenders, their investors and state appraiser regulatory boards have been placing more emphasis on the appraiser’s support for adjustments in the sales comparison approach. In response, there have been a number of statistical/regression tools designed to help support adjustments that have hit the market. Unfortunately, “support” for adjustments is morphing into “proof” for adjustments, and more and more state boards are leaning toward the latter. The current edition of USPAP states, “When a sales comparison approach is necessary for credible assignment results, an appraiser must analyze such comparable sales data as are available to indicate a value conclusion” (SR 1-4(a)) and that an appraiser, “must at a minimum…[summarize] the information analyzed…and the reasoning that supports the analysis.” (SR 2-2(a)(x)(5)) Note that USPAP does not say appraisers must “prove” their adjustments. We would be well served to remember that appraisers are in
the opinion and judgment business, and that judgment is the result of the appraiser’s analysis of data. The Oxford Dictionary defines judgment as, “the ability to make considered decisions or come to sensible conclusions.” The same dictionary defines “to analyze” as, “to examine methodically and in detail the constitution or structure of (something, especially information), typically for purposes of explanation and interpretation.” Neither of these definitions contain an element of “proof.” USPAP’s Standard Rule 1-1(a) states, “In developing a real property appraisal, an appraiser must be aware of, understand and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.” One of the most widely recognized and respected appraisal textbooks in the country is the Appraisal Institute’s The Appraisal of Real Estate. In a past edition, this text stated the following: Sales adjustment processes require a sufficient number of sales from which to extract the adjustments. Often there may not be enough sales to provide a basis for all adjustment calculations. The appraiser should recognize and explain in the appraisal report that a lack of supporting data may either reduce the validity of the adjustments made or eliminate the possibility of applying any direct sales adjustment process. When these conditions exist, the appraiser
distinguishes any adjustments that are made as explanatory or judgment factors from those that are drawn from market data. In such situations appraisers commonly look to a broader array of market sales for bracketing and indirect market support. To summarize the paragraph above, there are clearly occasions when an appraiser cannot “provide a basis” for all adjustments, that there may be a “lack of supporting data” or that there is no “possibility of applying any direct sales adjustment process” and relying on “judgment factors” is sometimes necessary. Just as clear is the fact that appraisers cannot be expected to prove all of their adjustments in an appraisal report. Accordingly, why couldn’t a competent, ethical appraiser rely on his or her judgment when making some adjustments, which is the product of their accumulated professional appraisal education, experience and knowledge? In doing so, however, the appraiser should heed the AI’s advice and “recognize and explain in the appraisal report that a lack of supporting data may reduce the validity of the adjustments.” n appraiserfocus.org | 11
appraiser focus magazine Q3 2020
INSURANCE NAA’s Mission PROMOTE: Encourage continued education and high standards of conduct.
David Brauner Senior broker at OREP
“Let me give you a couple of real-life reasons why reviewing your policy is important, no matter who your agent is.”
Insurance IQ: Reading Your Policy
Why it’s so important to advocate for yourself and your business
Why is reviewing your E&O insurance policy important? Isn’t that my job as your agent? Yes, it’s OREP’s job to review your policy and Declarations Page for accuracy as your insurance agent, and we do, but you can help yourself, too. Let me give you a couple of real-life reasons why reviewing your policy is important, no matter who your agent is.
RETRO DATE
At the very least, make sure your retroactive date is correct. This concerns how many years back your coverage goes, which is important for an appraiser because claims can happen many years after the date of the report. About three years after opening OREP I was renewing my own E&O policy, which I need to operate my business just like many of you. At that time, I had three years of continuous coverage, meaning my Retroactive Date (retro date), also referred to as a Prior Acts date, should have gone back three years, meaning my coverage should have gone back three years for all the work I did over that time. 12
But when I reviewed my own Declarations Page that year after receiving my policy, I noticed the retro date was gone! Meaning that to the carrier, I had no back coverage. I remember verifying at the time that I had filled out my application correctly, including my Prior Acts date. The agent made the error. I had to resend (fax in those days) the previous Declarations Page to prove my case. If I had missed their error and a claim had arisen from those prior years, it would have been a mess for me to prove I had coverage without an accurate Declarations Page. This is one reason why it pays to check your retro date when you receive your policy. We get questions from appraisers switching to us from other agents, more often than you’d imagine, that go something like this: “I’ve been with [the other agency] for 10 years; I have prior acts going back that far.” But when we review their Declarations Page, it may go back only three or four years. What? Somewhere along the line, these appraisers let their policy lapse, or maybe they didn’t renew in time and they lost their Prior Acts. When
FOCUS ON INSURANCE
"At the very least, make sure your retroactive date is correct. This concerns how many years back your coverage goes, which is important for an appraiser because claims can happen many years after the date of the report." they “renewed” late (after letting their policy lapse), maybe the previous agent didn’t catch it or chose not to poke a hornet’s nest. At OREP, we take your Prior Acts coverage very seriously, issuing many reminders via email and phone as your insurance expiration date approaches, to the point of annoyance for some of our insureds, I’m afraid to say (sorry). We remind our insureds frequently to renew on time if they intend to continue appraising or risk losing their Prior Acts. This is job one at OREP. You can switch to another agent/program and keep your Prior Acts as long as 1) you bind your new policy before the policy expiration date and 2) the new policy includes Prior Acts for free, like at OREP.
OVERCOMMUNICATE
With insurance, if not in life, it’s best to overcommunicate (right?). Many of us renew our E&O without ever speaking to our agent. Many times, there is no reason to. At OREP, you submit a slot-rated application online and in five minutes, you’re done for another year. Even if the application is not slot rated and requires some underwriting, if you answer all the questions completely, the next you hear from us is the quote. Frictionless as they say, but… Here is another real-life scenario: An insured completed CONTRIBUTORS an application intending toWANTED get combination coverage for appraising and real estate sales. This is like two policies for the price of one—a money-saving option for OREP insureds. However, because they indicated no previous or estimated future sales revenue, they got no coverage for sales. This particular application (created by the carrier) has a glitch in my view, because it had no checkbox to clearly indicate a desire for sales coverage. One of our agents caught the mistake at renewal. When I called the insured to follow up, they indicated they had wanted coverage for both appraising and sales, just in case they did one or two sales transactions during the year. They thought they had coverage for sales, but a year later we realized they did not. They filled the sales revenue column with zeros and had failed to communicate their wishes to the agent. And, of course, the application was deficient because it lacked a clear “yes” or “no.” Luckily for our client, they had done no sales that year so there was nothing to worry about. We fixed the application. But this underlines why it’s a good idea to overcommunicate with any agent you transact with.
READING YOUR POLICY
The Exclusion Portion of the policy in question reads as follows: Services performed for others in the Insured’s capacity as a(n): Real estate agent or broker; Leasing agent or Property manager; Auctioneer of real property; Real estate consultant or counselor; Short term escrow agent, or referral agent. So there it is in black and white. If the insured had read the “Exclusions” portion of the policy (what’s not covered) they would have realized right away that it wasn’t the coverage they wanted. Agents can ask the right questions; we can anticipate your needs, but we can’t read your mind. This is not a complete list of everything to review in your policy, of course. If your name/company name is wrong, or if your coverage amount (“Limit”) or deductible is not correct, that’s important too. Getting insurance at OREP can take as little as five minutes, so you have time. Review your policy when you get it, especially the Exclusions section, and verify your Retroactive Date at a minimum. If you have a special coverage request, let it be known up front. Thanks for reading, and don’t forget that OREP provides its members with 14 hours of free risk management and approved Continuing Education. n
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appraiserfocus.org | 13
DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA THE INFLUENCE DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA DILEMMA
When interested parties push their own comps, what is the appraiser’s obligation?
Timothy C. Andersen, MNAA 14
Recently, a fellow appraiser came to me with a problem.
"TIM,"
“Every time I go to an inspection, somebody tries to influence me and my opinion. Lenders, real estate brokers, sellers and buyers – there is always someone trying to press their opinions on me as fact. But by law, I am to remain unbiased, free from their influence. Don't these people understand that, under USPAP, it’s illegal even to talk to me?” (Spoiler alert: It is not illegal to talk to you). Unfortunately, this is a problem that many appraisers continually face. But the issue is also not so black and white. Under the former Home Valuation Code of Conduct, or HVCC, and now, under the Dodd-Frank Act, the law prohibits anybody associated with the mortgage loan process from trying to influence the appraiser in any manner whatsoever. The prohibition specifically applies to lenders (or their representatives) withholding payment (or threatening to withhold future work) if the appraiser does not appraise the property at a level pleasing to that party. Importantly, it does not specify the illegality of a broker or other interested party providing an appraiser with what they consider to be “comparable” sales. Herein lies a key point of confusion for many appraisers. The fact is, providing an appraiser with current and recent sales and listings is not among what clauses D-F specify as prohibited influence. Nor does it spell out as illegal the act of asking an appraiser legitimate questions relative to the derivation of the value conclusion, data used or not used, derivation and interpretations of trends, derivations of adjustments, and so forth. These are all legitimate questions for which the lender (i.e., the client) is responsible to the GSEs under their respective selling guides. Thus, the appraiser is responsible to answer to the client. Another area of confusion is that some appraisers do not understand that USPAP applies solely to appraisers, not to any other party to the mortgage loan transaction. There is nothing in USPAP to deter a broker from giving an appraiser a list of current listings or recent “comparable”
sales (since USPAP does not apply to brokers). USPAP's SR1-4 requires the appraiser to “collect, verify, and analyze all information necessary for credible assignment results” (emphasis added). Therefore, if the broker provides a sale to the appraiser, the appraiser has the ethical obligation to verify it. If it is legitimately an arm’s-length transaction, then the appraiser has the ethical obligation to analyze it to determine if it is relevant to the conclusion of a credible value opinion. However, if it is not an arm’s-length transaction, if it is irrelevant to the formation of a credible value conclusion, the appraiser is under no obligation whatsoever to use it. Note this requirement is an extension of the Ethics Rule, which requires the appraiser to “perform assignments with impartiality, objectivity, and independence” and to avoid bias. A refusal to analyze the sale a broker provides you is potentially to violate the requirement that you “analyze all information necessary for a credible value opinion.” So, it is therefore necessary that an appraiser analyze the data a broker may to determine if they are indeed applicable and necessary to the formation of a credible value opinion. If the appraiser failed to analyze the information merely because it came from a broker, it could be said the appraiser failed to analyze all of the information necessary. This failure could be an indication of bias; it could also be open to interpretation as advocacy. A value conclusion formed with bias is one open to question since it lacks independence, thus credibility. Bias of any sort is a USPAP violation. Bias in an appraisal is misleading, which USPAP (thus state boards) considers to be intolerable. It is right to ask at this point, “How can an appraiser be independent (supra) if the appraiser is dependent on the broker (clearly a biased participant in the mortgage loan transaction) to provide comparable sales data? The
"Herein lies a key point of confusion for many appraisers. The fact is, providing an appraiser with current and recent sales and listings is not among what clauses D-F specify as prohibited influence." appraiserfocus.org | 15
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IN SUM: • USPAP applies solely to appraisers (not brokers, not lenders, not AMCs). • Other than the appraiser, the parties to a purchase and sale transaction are not subject to USPAP. broker is going to provide sales data that support the purchase and sales contract, even if the sales are not really comparable!” This is likely true. However, remember the broker is an advocate, thus must function as one. Appraisers are not advocates, thus do not function in that way. Further, how can the appraiser determine if the broker's sales are or are not comps without subjecting them to the independent, impartial, and objective analysis USPAP requires? It is the appraiser's responsibility to choose comps. Therefore, the source of the comp, whether it be the MLS (composed of brokers!), the appraiser's own files, a developer's sales office, and so forth, is irrelevant. What makes it relevant? A sale becomes a relevant comp when the appraiser subjects it to an independent, impartial, and objective analysis, and then concludes that it is comparable – not until and not before. (Remember, the definition of a comparable sale is “one that has the same highest and best use as the subject.” Oh, the ramification of that statement!) It is the appraiser's verification of data, and his or her conclusion that the sale met the definition of market value, etc., that makes (or does not make) it a comparable sale. This comparability (or lack of it) has nothing to do with the source of the data. It is this impartial, independent, and objective analysis that removes the broker's influence (i.e., bias and or advocacy) from the data. In other words, the market shows (or fails to show) the broker's data is truly comparable with the subject. The appraiser does not blindly accept or reject the broker's word on the subject. Instead, the appraiser verifies the data to determine if it is, indeed, comparable to the subject.
• Brokers are advocates, thus are free to ask the appraiser to take actions that, for an appraiser, would constitute advocacy, thus also constitute a USPAP violation. • Appraisers, subject to USPAP, are free to ignore the influence of other parties to the purchase and sale transaction, thus, to also be independent, impartial, and objective in forming a value opinion. • Appraisers, subject to USPAP, are free to accept comparable data from real estate brokers (who violate no laws in offering them). Appraisers are also free to analyze that data to determine which, if any, the market deems to constitute a comparable sale. • The appraiser chooses the comps. The client does not. The brokers do not. The reviewer does not. The appraiser chooses the comps as part of his or her scope of work. Since the appraiser chooses the comps, and then verifies them (to meet the definition of market value and comply with SR1-4), the source of those comps is irrelevant.
In sum, then, there is nothing wrong, unethical, illegal, criminal, or immoral with the fact that a broker offers the appraiser data with which to form a value conclusion. The same is true relative to the appraiser accepting that data. Then, the appraiser verifies and analyzes that data independently, impartially, and objectively to determine its relevance to the appraisal question. So, don’t be afraid of the data brokers provide. The mantra here is trust but verify. n
"It is the appraiser's responsibility to choose comps. Therefore, the source of the comp, whether it be the MLS (composed of brokers!), the appraiser's own files, a developer's sales office, and so forth, is irrelevant." appraiserfocus.org | 17
appraiser focus magazine Q3 2020
OPINION OF VALUE NAA’s Mission PROVIDE: Offer services designed to benefit our membership.
Melissa Bond, MNAA Certified residential appraiser
“Professional growth is a necessary component of my practice. Consider being a student throughout the lifespan of your practice.”
An Appraiser’s Limitless Opportunities for Success In this remarkable profession, you can control your destiny
My profession was chosen for me. As a mother of four highly active, mischievous, and rambunctious children, my younger days were filled with laughing, teaching, sharing, feeding, arbitrating, correcting, hugging, mentoring, feeding again, cleaning, cleaning, and yet more cleaning. Then, at night, falling into bed totally exhausted hoping to enjoy six blissful hours of semiuninterrupted sleep. And the next day, well you guessed it: Lather, rinse, and repeat for the next 20 18
years or so! My husband was a hard-working, dedicated residential building contractor. One day, during his “quiet time,” he happened to be reading the newspaper. (Yes, during his quiet time – not mine – mother’s aren’t really afforded quiet time until that last-born child walks across a stage or two with a diploma in hand.) During this oh-so-coveted leisure time of his, he saw an advertisement from a local bank that was seeking
real estate appraisers. At this point, he and I began discussing how beneficial it would be to his contracting business if we had our very own real estate appraiser on speed dial to keep us apprised of market trends or on what specific housing components had the greatest impact on value. As we continued to discuss this topic that we both knew so very little about, he suggested that I research exactly what the educational requirements were for becoming an appraiser. He turned to me and said, and I quote, “You could just do appraising in your spare time.” “Really?” I thought. “Could I? Was this possible? Hmmm, maybe I don’t truly need to sleep all six of those hours each night… Maybe, just maybe, I could squeeze it in.” It was then that I made the decision – I’ll do it! Thus, my appraisal career began 27-plus years ago, and I was off and running. Professional growth is a necessary component of my practice. Consider being a student throughout the lifespan of your practice. Seek out quality Continuing Education providers, not just someone who will help you to obtain the 28 hours needed to satisfy your license requirement. Commit yourself to research and carve out some time to study new (or newly refined) methods, strategies and techniques. Establish goals and set a timeframe for achieving those goals.
FOCUS ON OPINION
Form an appraiser roundtable Ferret out the right opportunity for make it happen. Peers have asked group in your area; I did this several your professional growth, not just how I could possibly only work five years ago. Our roundtable meets any opportunity set before you. days a week and accomplish all that for lunch and we exchange ideas Join a national organization. needed to be done. My answer was and information. It is informal and Aligning yourself with a national this: Work diligently and focus. Set attendance is not required – only organization puts you in an arena aside a designated time to return encouraged. calls and emails. At all costs, avoid Now that I’m no being stagnant and longer raising a "Join a national organization. Aligning yourself with a strive to expand your family, I still only skillset and your work weekdays. national organization puts you in an arena of progressive knowledge base each I have, however, thinkers and policy makers. By doing this, you will be day. extended those work serving side-by-side with those who develop standards Be intentional hours; now I’m in the of practice and those who uphold professionalism in our and deliberate in office from 6 a.m. to 6 planning your own p.m. industry. Now that is controlling your own destiny." destiny. Where do How about the you expect to be ability to control our in three years, five business destiny and years, etc.? Do you have a business of progressive thinkers and policy continue to have a harmonious work plan or are you just floating along makers. By doing this, you will be environment to do it in? Try doing and hoping retirement takes care of serving side-by-side with those who that as an employee; let me know itself? Or maybe you’ll just appraise develop standards of practice and how it works for you. Self-employed until they sink you below the sod those who uphold professionalism fee appraising is freedom – pure and level. in our industry. Now that is simple. It’s the freedom to choose How about pursuing a controlling your own destiny. your clients and the freedom to designation? Now may be the time to Now we come to flexibility. I release problematic clients when head down that path. But, before you have formed my business to fit my necessary. Exercise the right to do, carefully consider the benefits of personality and my lifestyle. As a rid your business of questionable that designation and make certain mother, I was determined to attend clients who simply drain the life out it will meet your objectives. How every function that my children were of your very being. There are far too will this change your practice and involved in. I love appraising but I many good clients out there for us translate into new opportunities? love my children more. So I to pour untold amounts of energy worked from the time into holding on to black-hole clients. they were dropped Release them! off at school to the Recognize the open window time I sat in the of opportunity for real estate long carpool investments. We literally have our line to pick finger on the pulse of the housing them up. market trends. We know when to My children buy and when to sell these bigwere considered ticket items that we call real estate an “appointment” holdings. That puts us on the front on my calendar. burner for detecting when to make a Site visits were move and when to ride out a wave. not scheduled on I’d say it has been an awesome, school holidays, truly awesome, 27-plus years for me nor after 3:30 p.m. – and it’s not over yet. Let’s all take on weekdays, the time to savor exactly what our and never on license really means to us. May we weekends. all count these many blessings that This takes we have and be thankful to be a part determination to of this remarkable valuation world. n appraiserfocus.org | 19