Working RE Magazine - Issue 58

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Real Est at e A pprai s ers

Winter/Spring 2022, Volume 58

DISCRIMINATION CLAIMS ON THE RISE

Desktop Appraisals to Become the New Norm Appraising in a “Crazy” Market USPAP v. Everyone Else Driving Comps Survey

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TRAINEE SURVEY

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Winter/Spring 2022, Volume 58

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From the Publisher Readers Respond

6 10

Appraisal Discrimination Claims on the Rise

Desktop Appraisals to Become the New Norm Isaac Peck, Editor

12

Appraising in a “Crazy” Market Isaac Peck, Editor

14

Driving Comps Survey: Appraisers Speak Out Isaac Peck, Editor

18 24

USPAP v. Everyone Else Richard Hagar, SRA

Trainee Survey Results Mike Lay, Appraisal House USA

26

Complying with Reporting Requirements of USPAP Ted Whitmer

32

Disruptive Technology and Appraisers George Dell, SRA, MAI, ASA, CRE

36 37 38

Stairway to Confusion Brent Bowen

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Industry News

Mission

Editor

Working RE is published to help readers build their businesses, reduce their risk of liability and stay informed on important technology and industry issues.

Isaac Peck isaac@orep.org

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www.workingre.com (click subscribe) Subscription included with purchase of E&O insurance from OREP. Comments & letters are welcome! All stories without attribution are written by the editor.

2 Working RE Winter/Spring 2022

Assistant Editor & Designer Ariane Herwig ariane@orep.org

Assistant Editor Kendra Budd kendra@orep.org

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From the Publisher

A Fond Farewell

by David Brauner

To every season...After 30 plus years serving the appraisal industry, I am

handing the reins of OREP and Working RE magazine over to the very capable hands of Isaac Peck. I have mentored Isaac at OREP/WRE for over 10 years.

He has run things pretty much singlehandedly since we all transitioned home in March of 2020. This is when I realized “it’s time.”

Isaac has had an “ownership” mentality almost from his very first day, when he was hired part-time to temporarily fill in for an employee who went on maternity leave. At the time, he was an undergrad at my alma mater, San Diego State University. Isaac does everything I can do and more, and usually faster! The bottom line for me, however, is that Isaac has absorbed the most important lesson of all: our business success is based on treating everyone—all of you—the way we would like to be treated—with honesty, respect and expertise.

If you’re reading this, it probably means you made it through too, despite all the ups and downs.

We—you and I—have been through a lot together over the decades: the transition from film pasted into paper reports to digital cameras and PDFs, the unmasking of lender pressure, the development of AVMs, HVCC, DoddFrank, UCDP and now Appraisal Waivers. If you’re reading this, it probably means you made it through too, despite all the ups and downs. We made it through together.

Now it’s Isaac’s turn to continue furnishing you with honest and accurate reporting in Working RE, and the smartest choice for E&O insurance available through OREP. God bless you all and thank you for the opportunity to serve.

(See Page 38 to read Isaac Peck’s tribute to David Brauner plus his vision for OREP and Working RE’s future.) WRE 4 Working RE Winter/Spring 2022

Readers Respond GSE Buybacks and Remediation Letters USPAP defines an extraordinary assumption and a hypothetical condition. It does not define an assumption. Furthermore, a lender/client/GSE cannot dictate what types of sales an appraiser can use (arm’s length, nonarm’s length), nor can they dictate that an appraiser ignore/not utilize a USPAP defined term/condition (an extraordinary assumption). The appraiser must remain impartial and independent.

The GSEs carefully worded their requirements, but a licensed/certified appraiser must remain impartial and independent, so the appraiser would have to follow USPAP, regardless of Fannie Mae’s requirement. The GSEs tried a similar tactic when the current Fannie Mae forms came out regarding who could rely on the report.

Regardless of the GSE’s guidelines, appraisers had to adhere to USPAP and write who the intended user of the report was and what the intended use was. Fannie ended up having to make a stipulation that appraisers could add commentary regarding certification #23. —Ed Bedinotti Where were the underwriters in this process? If this was not allowed per Fannie guidelines, the appraisals should have been rejected in the review/underwriting process! I guess they just wanted to close loans. Not surprising! —Mary T. Thompson Correct!!! They couldn’t care less about an appraiser than one can imagine, but they are interested in being paid.

Appraisers pay for E&O insurance, and

that is where the money will likely come from if they ‘prove’ the appraiser produced a misleading report. As an added bonus the appraiser will most likely need to answer to their state’s appraisal board, and then the appraiser really does have something to worry about. —Thomas Tipton

 Racial Bias in Real Estate—Is It the Appraiser’s Fault?

Well said, Maureen. Location, location. Does a homeowner complain when you reduce their value for fronting a busy commercial street? No. They are fully aware it has an impact.

Remember who they blamed for the last recession? When homes depreciated by 40–50%? The appraisers. We caused the spike in prices over the prior five years. It’s what the media

said time and time again, so of course, I heard it also from many homeowners. Did the appraisers do it? No. The banking industry would give any loan to any living person if they “said” they could repay it. What happened to the banks? They got free loans from the government. I’ve been at this for 35 years. We are often the punching bag since we have no voice. We are weak as a collective. —Gavin Graham Really? “Studies” to figure out that buyers want a better overall neighborhood and are willing to pay more for it. I could have saved them some time to tell them. Yes, they do! It doesn’t take a rocket scientist to figure that out. After appraising for over 30 years in a very racially diverse area, I have seen this many times where a simple elementary school district can make a big difference. I have pulled comps that initially did not make a lot of sense as to the wide ranges,

until I looked at the school district boundaries. In one particular area that I appraise, which is about 90 percent white, there is one school that everyone wants their children to go to, and it is evident in the sales with race having nothing to do with it. That’s a fun one when I have to explain, which I do in the report, why I did not use a closer comp, but not in that district. I always tell people, I do not appraise your house; your neighbors do! —David Taylor Well written and so true; the safest position for an appraiser who has to deal with the appearance of racial bias is to turn down the appraisal request. It would appear that the government and the book authors want the appraiser to violate USPAP. My license is more valuable to me than that, so, in good conscience, I would have to turn down the request. —Tom WRE

Winter/Spring 2022 Working RE

5

Appraisal Discrimination Claims on the Rise

by Isaac Peck, Editor

If

“While not all HUD complaints will move forward, the most likely scenario for those discrimination claims that do move forward is that they are going to end in federal lawsuits,” says Capilla.

you’ve been paying even passing attention to local, national or appraiserspecific news, you know that the issue of discrimination and race in the real estate industry at large—and in the appraisal profession specifically—is all the rage.

Appraisers are facing a barrage of regulatory, legislative, and civil challenges and threats. Several states have already passed legislation addressing fair housing and discrimination in valuations and mandated anti-discrimination education for appraisers. California has even gone so far as to set up a unique complaint form for members of a “protected class” who believe their appraisal came in “below market value”—effectively streamlining the filing of state board complaints alleging discrimination of any kind. Other states, as well as the U.S. Congress, are still considering legislation that addresses discrimination in appraisals through a variety of means.

However, the emerging threat that looms largest for appraisers on this issue is the filing of “Housing Discrimination Complaints” with the U.S. Department of Housing and Urban Development (HUD).

Dozens of HUD discrimination complaints have already been filed against appraisers and such cases are expected to increase in the coming months.

Here’s an inside look at what’s involved in a HUD discrimination complaint and what appraisers are up against.

Isaac Peck is the Editor of Working RE magazine and the President of OREP, a leading provider of E&O insurance for real estate professionals. OREP serves over 10,000 appraisers with comprehensive E&O coverage, competitive rates, and 14 hours of free CE for OREP Members (CE not approved in IL, MN, GA). Visit www.OREP.org to learn more. Reach Isaac at isaac@orep.org or (888) 347-5273. CA License #4116465.

6 Working RE Winter/Spring 2022

HUD Complaints Galore HUD is the federal agency that handles discrimination complaints.

HUD’s Office of Fair Housing and Equal Opportunity (FHEO) is responsible for enforcing fair housing law and “works to eliminate housing discrimination,” according to HUD’s website.

Consequently, HUD is the federal agency that the consumer public is turning to when suspecting discrimination in their appraisals. The incidents involving appraisers allegedly discriminating against Black homeowners that have made local and national news have, in many cases, included a HUD complaint being filed against the appraiser.

For example, a recent national story involving Cora Robinson, a Black homeowner who tried to refinance and received an appraisal allegedly $400,000 too “low,” saw Robinson file a HUD complaint shortly afterwards. Robinson worked with the Fair Housing Advocates of Northern California (FHANC) to file multiple HUD complaints. “I really hope that this complaint makes appraisers and lenders start to look more carefully at their practices and policies,” said Ms. Robinson.

And so, when an appraiser comes in low, more and more BIPOC homeowners are filing complaints with HUD. Each HUD letter starts the same: We have received a formal complaint alleging that you have engaged in one or more discriminatory housing practices under the Federal Fair housing Law, 42 U.S. C. Sections 3601-3619.

We are required by statute to send you a copy of the complaint. page 88

7page 6

The appraiser is then given a copy of the original complaint that alleges discrimination, and the appraiser is required to reply to the complaint as well as send in a variety of documentation.

Craig Capilla, Partner at Franklin, Greenswag, Channon & Capilla, LLC, says that he has seen the requests for information from HUD vary widely.

“In some cases, HUD will request three or four other reports that you did in the same neighborhood. Or they might request every report you’ve done in that neighborhood in the last 18 months.

There is no set standard they are using.

They are clearly casting a wide net and looking well beyond just the appraisal in question. Presumably what they’re looking for is a pattern of activity. If the appraiser says they always do X, Y, and Z, HUD may want to see if that’s always the case,” says Capilla.

Capilla is actively defending several appraisers who are facing HUD complaints. Because of his extensive experience defending appraisers in civil and regulatory matters, Capilla is on the roster of experienced lawyers that represents those insured with OREP’s primary carrier.

After submitting all documentation that HUD requests, the next step is that HUD will interview both the complainant and the appraiser. “A lot of the complainants aren’t particularly sophisticated in valuation and it is up to the investigator to ask questions, find out what happened and why they felt there was discrimination, etc. Then they will interview the appraiser: tell me your process, what did you do, why did you do it this way. Why did you find comparable sales in this neighborhood and not in that neighborhood?,” reports Capilla.

Following the interviews will come a request for even more documents.

Conciliation All throughout the “discovery” phase of HUD’s complaint process, Capilla says 8 Working RE Winter/Spring 2022

the HUD investigator is simultaneously encouraging “conciliation” to both the appraiser and the complainant. These are basically settlement agreements, according to Capilla. “The HUD discrimination claim handbook stresses that the investigator should hold a dual role and convey conciliation talks between the parties. So far we have seen HUD conciliation requests for hundreds of thousands of dollars,” says Capilla.

The problem is that even if the conciliation request is reasonable, or even minimal, HUD’s settlement agreements are public in the vast majority of cases. “Whether it’s one dollar or one million dollars, whatever that monetary component is will be reduced to a written template for conciliation unless both parties and HUD agree to make it confidential. On top of that, HUD will almost always request or mandate that some sort of educational remediation will take place. Combined, this makes settling very challenging as appraisers are not going to want to have a public settlement agreement out there that references discrimination,” says Capilla.

Another option is to resolve things with the complainant via private settlement outside of the HUD process. If the appraiser settles with the complainant privately and they withdraw their complaint with HUD, then HUD will not pursue it further and the matter will be resolved.

Headed for Lawsuits The bad news is that HUD’s entire investigation process is (arguably) designed to end in a lawsuit. HUD’s unique position as an enforcer of fair housing laws means that it has the legal authority to sue the appraiser itself, refer the case to the Department of Justice (DOJ), or authorize the complainant to sue the appraiser themselves (essentially creating a private right of action).

Capilla explains that if the parties are unable to reach a resolution in conciliation during the investigatory

process, HUD will conclude the investigation and write up its findings. “HUD will provide a narrative from the investigator that outlines who the investigator spoke to, what documents the investigator reviewed, and based on the facts whether the investigator believes the claim of discrimination IS or IS NOT substantiated,” reports Capilla.

If the investigator decides that there was discrimination, HUD will pick up the claim and call the appraiser into an administrative hearing to stand trial, in a sense. However, there is also a civil process available to appraisers at this point. If the parties decide they want to go the civil route, the case goes from HUD over to the DOJ and the DOJ can file a claim in federal court.

Likewise, if the appraiser doesn’t think they’re going to get a fair shake in front of a HUD hearing officer, the appraiser can take it to court.

“While not all HUD complaints will move forward, the most likely scenario for those discrimination claims that do move forward is that they are going to end in federal lawsuits,” says Capilla.

First Lawsuit Filed On Dec. 2nd, 2021, in the U.S. District Court of Northern California, one of the first discrimination lawsuits was filed against an appraiser. Plaintiffs Tenisha Tate-Austin, Paul Austin, and the Fair Housing Advocates of Northern California (mentioned earlier in this story) filed a lawsuit against Jannette Miller, a white appraiser, and her appraisal firm, Miller and Perotti Real Estate Appraisals, Inc. The lawsuit alleges that Miller undervalued the Austin’s home by nearly $500,000, that race was a motivating factor in her appraisal, and that she committed multiple violations of the Fair Housing Act. The lawsuit also names AMC Links, LLC, the AMC responsible for placing the appraisal order with Miller, since California law requires an AMC to “review the work of all...appraisers

with whom it contracts to ensure that appraisal services are performed in accordance with [USPAP].”

Among the claims that the lawsuit makes is that the use of the sales comparison approach, and Miller’s use of comparables that are restricted to Marin City, the city where the property was located, is evidence of racial bias.

The lawsuit cites this fact as evidence that Miller “believes that Marin City’s demographics make it so much less ‘desirable’ than surrounding areas” and argues that the use of comps strictly in Marin City “perpetuates the effects of discriminatory appraisal practices.”

The lawsuit quickly attracted national attention with dozens of news outlets picking up the story.

Miller is being scrutinized as well, with Newsweek running a story titled “Who is Janette Miller? Appraiser Sued

by Black Couple Who Accuse Her of Lowballing Them.” The Yelp page of Miller’s appraisal firm has also been frozen by Yelp because of an onslaught of negative reviews by members of the public accusing Miller of being a racist appraiser. As the first actual lawsuit of its kind, all industry stakeholders will no doubt be watching it closely. (Be sure you are subscribed at WorkingRE.com to follow this rapidly developing story!)

Appraisers’ Best Defense Given the nature of how these complaints are materializing, there is obviously no one size fits all way for appraisers to avoid trouble on this front.

In fact, in a presentation at the Appraisal Summit in November 2021, Dr. Sam Henderson, NAA reported that his son is a Black appraiser in TX and he received a complaint from a Black homeowner for, you guessed it, racial discrimination.

So for appraisers, it really comes down to being proactive and producing quality work. “The best protection appraisers can offer themselves is the strength of their workfile. The

more you can document, the better.

List all the different sales you looked at, exactly why you selected the ones you did, why you made the adjustments you did, how the market drove your conclusions, and provide as much detail as possible in your workfile,” recommends Capilla.

In addition to the workfile, the appraiser should also include full explanations in the body of their report. “I hate to heap more work on the appraiser but another thing they can do is explain more thoroughly in the body of the report. ‘This is my sales comparison approach, I viewed X type properties with Y characteristics. Because XYZ, I adjusted for this and here is how I arrived at that adjustment. This is how I arrived at those conclusions.’ At the end of the day, you can’t stop someone from asking questions or filing a complaint, the way out of that is to have a defensible appraisal and a robust workfile that shows what you did and why you did it,” advises Capilla.

Insurance Exclusion?

The bad news for appraisers is that when it comes to professional liability (E&O) insurance for most professions, the majority of policies come with an exclusion for discrimination related issues.

Just like you would expect to find a fraud exclusion on your policy, exclusions for discrimination are incredibly common across many different professions— including the appraisal profession.

For example, here is an exclusion found in the policy of one of OREP’s competitors: Discrimination of any kind by the Named Insured, including but not limited to discrimination due to or on the basis of age, sex, race, color, religion, disability, marital status, pregnancy, national origin, HIV or AIDS status, sexual origin, sexual orientation, or sexual preference; In other words, most appraiser policies have exclusions for discrimination.

This is bad news for appraisers.

However, the good news is that OREP has been closely monitoring this

issue and proactively worked with its primary carrier to address it. OREP’s primary appraiser E&O policy, for example, now includes $100,000 in coverage for any claim brought against appraisers alleging discrimination.

Here is the wording straight from OREP’s policy: The Company will pay, as part of the applicable Limit of Liability, up to $100,000 to the Named Insured for Damages and Claims Expenses as a result of all Claims...for discrimination on the basis of race, creed, color, age, gender, national origin, religion, disability, marital status or sexual preference, including resulting Personal Injury.

Including $100,000 of coverage for discrimination claims makes OREP’s primary policy uniquely positioned to keep appraisers protected in today’s litigious climate. Not every OREP policy includes the coverage, so please ask your agent to ensure the coverage is included. (Visit OREP.org/appraisers to learn more)

Increasing Liability The bad news is these types of claims and complaints against appraisers are likely going to get worse. “My overall sense is that it’s going to get worse before it gets better. Everyone is talking about discrimination. Every major publication is talking about it. The more people find out this is going on, the more people with frustrated expectations think this might be what happened to them, that begets another claim or complaint, and so on. I don’t think it’ll be receding anytime soon.

There are going to be consumers who are genuinely concerned they’ve fallen victim to these bad acts—whether justified or not,” says Capilla.

For now all appraisers can do is produce the very best appraisal report, develop a detailed and highly defensible workfile, and make sure they have a policy that offers a minimum of $100,000 of coverage for discrimination coverage.

(Shop OREP.org today to make you’re covered for discrimination claims.) Stay safe out there! WRE Winter/Spring 2022 Working RE

9

Desktop Appraisal to Become the New Norm

by Isaac Peck, Editor

Sandra Thompson, Acting Director at

“This will help each appraiser complete more loans in a day, and also help rural communities more readily obtain a necessary appraisal when the borrower is purchasing a property,” says Thompson.

10 Working RE Winter/Spring 2022

the Federal Housing Finance Agency, indicated that desktop appraisals will become a permanent part of Fannie Mae and Freddie Mac’s (the GSEs) valuation product offering as early as 2022.

A desktop appraisal is a valuation where an appraiser completes the assignment from, you guessed it, their desk— and doesn’t personally inspect the subject property. Desktop appraisals were first introduced into the mainstream mortgage process as part of the COVID19 appraisal flexibilities offered by the GSEs from March 2020 until the early summer of 2021, when the flexibilities were discontinued.

However, at the October 2021 Mortgage Bankers Association Annual Convention and Expo in San Diego, Thompson announced to a room of cheering and applauding lenders that desktop appraisals were going to become a permanent fixture of GSE valuation strategy going forward.

The crowd’s response is indicative of the growing frustration amongst lenders around longer appraisal turn times over the last two years—as appraisers nationwide have struggled to keep up with the exploding transaction volume brought on by record low interest rates.

Thompson acknowledged this frustration in her comments, citing “friction” in the appraisal process that slows down mortgage transactions. By allowing desktop appraisals, FHFA is hoping it will alleviate some of the volume bottlenecking that traditional appraisals are creating by allowing more valuations to be completed by the same number of appraisers. FHFA is also hoping it will provide some relief in rural communities where appraisers can

spend a good part of their day “driving from property to property.”

“This will help each appraiser complete more loans in a day, and also help rural communities more readily obtain a necessary appraisal when the borrower is purchasing a property,” says Thompson.

When the flexibilities were first adopted back in March 2020, many lenders did not integrate either Desktop or Exterior Only “drive-by” appraisal products into their valuation processes.

Or if they did, it was only in cases where it was absolutely necessary, i.e. a borrower who didn’t want to allow an appraiser inside the premises, etc.

Part of this aversion to adopt new appraisal products came, in part, from the lenders uncertainty surrounding how long these “alternative” appraisal products would be accepted by the GSEs. Some lenders were obviously more nimble than others—but for those with large, clumsy, and inflexible IT infrastructure, making a quick switch over to a new valuation process (and then the prospects of switching back at a moment’s notice) was simply not in the cards.

Thompson acknowledged this concern as well, saying that the permanent integration of desktop appraisals will provide the stability the market needs. “This certainty should allow lenders, borrowers, and appraisers alike to take advantage of the efficiency gains that desktop appraisals can provide,” Thompson says.

Following the announcement, a Senior Executive at Better.com, commented in a LinkedIn post that FHFA’s rule change will likely be “far less exciting” than what people are predicting.

“My guess is a small percent will be eligible. And an even smaller portion will actually be able to take advantage.

Fannie and Freddie need to provide more detail. The devil will be in the details,” wrote the executive.

Sketch vs. Floor Plan One notable requirement that is expected of the Desktop assignments is that they will require a floor plan instead of just a sketch. A floor plan takes the sketch a step further by including interior walls and room labeling, in most cases.

The obvious question is how are appraisers going to get these floor plans?

At the Appraisal Summit in November 2021, some senior industry stakeholders suggested that floor plans will likely be available on most new construction assignments, where the builder could theoretically provide the floor plan to the real estate agents and appraiser to be used for a desktop appraisal assignment. It is also possible that in some jurisdictions, the local tax assessor or other municipal authority may have a floor plan that the appraiser could rely upon, although this is likely to be the exception rather than the rule.

Ultimately, the requirement for a floor plan in the desktop appraisal strongly suggests that appraisers will be required to work with real estate agents and/or the home seller and have them use a third-party tool to walk through the house, take pictures, and use advanced mobile app to generate a floor plan based on the agent or seller walking through the house.

For example, Incenter Appraisal Management has developed RemoteVal, a tool that uniquely allows appraisers to control the inspection using the agent or homeowner’s smartphone.

The appraiser directs the individual around both the exterior and interior, conversing with them while snapping geo-verified, time-stamped photos of

all the rooms. In addition to photos, RemoteVal also has a built-in digital measuring tape that incorporates 3D scanning technology and video recording, which allows the appraiser to get gross living area measurements of the interior the home, produce an exterior sketch, “revisit” and review the layout, and create a floorplan with the builtin tools or their own software—all without ever driving to the property!

Given the GSEs floorplan requirement for desktop appraisals, appraisers interested these assignments will no doubt begin exploring RemoteVal in 2022.

(See Inside Front Cover for details.)

Questions Galore A number of questions remain regarding how the GSEs will establish the eligibility criteria for what types of loans, transactions, and loan-to-value (LTV) ratios will qualify for these desktop valuations. For example, Thompson’s comments that such a move will provide relief on rural appraisals runs contrary to most conventional appraisal experience in the industry where appraisal waivers, hybrid appraisals, and other “alternative” valuation products have primarily been used in cookie-cutter, tract home neighborhoods where model-match comps are more readily available. In fact, over the years many senior executives at the GSEs and at major lending institutions have acknowledged the need for traditional appraisals on rural properties—which are much more likely to have unique features and require more complex analysis.

There is also the question of whether the introduction of desktop appraisals will potentially lead to a broader range of alternative appraisal products into the mix. Given that some senior executives at Fannie Mae were predicting that hybrid appraisals would become mainstream by 2022, it is actually a little surprising that desktop appraisal assignments are the first alternative product to get a permanent

place on the GSE’s valuation roster.

Appraisers will just have to wait to see what the future holds!

Lastly, as part of the COVID-19 appraisal flexibilities introduced by the GSEs, appraisers had a unique set of assumptions and limiting conditions that they were adding to their reports. They were also required to gather information from all available sources, including interviewing the homeowner, in order to produce credible results. Some appraisers ran into trouble with their use of “Extraordinary Assumptions” in lieu of actually conducting interviews of the stakeholders involved (Visit WorkingRE.com, search Fannie Mae Issues Warning Letters).

How this new integration of desktop appraisals will modify or adopt these requirements also remains to be seen.

Desktop appraisals as a new normal is a rapidly evolving issue. Make sure you subscribe to WorkingRE.com for the latest appraisal news and information. (Visit WorkingRE.com to subscribe!). WRE

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Winter/Spring 2022 Working RE 11

Appraising in a “Crazy” Market

by Isaac Peck, Editor

In mid-2021, Freddie Mac published

With closed sale transactions lagging current trends, Reuter advises appraisers to look at all market behavior, not just the behavior reflected by closed sales.

12 Working RE Winter/Spring 2022

an article titled “Appraising in a Rapidly Changing Market,” authored by Scott Reuter, Freddie Mac’s Single-Family Chief Appraisal Officer.

The article piqued my interest for a number of reasons, chief among them being that the article points out that between 2013 through 2019, the “annual average” of appraisals which came in below contract price was between seven and nine percent. In April and May of 2021, the number of appraisals coming in below contract price had risen to 20 percent.

That’s a pretty stark increase. Such a stark increase, in fact, that Freddie Mac thought it was worth publishing an article addressing how appraisers can “keep up with the market.”

The reason this is so interesting to me is that I’ve attended several national conferences, over the last five years especially, where executives from Fannie Mae and Freddie Mac (the GSEs) have openly chided appraisers about “anchoring” and “contract price confirmation bias.” These criticisms are usually voiced over PowerPoint slides depicting bell curves and cute “anchoring” graphics that show how the appraised value changes when the contract price is known to the appraiser.

But today, in a real estate market that is appreciating in an incredibly rapid and unpredictable way, appraisers are coming in below the contract price up to 20 percent of the time.

When contrasted with the previous anchoring criticism leveled against appraisers by the GSEs, could this be a positive indication? A sign that

appraisers are not just rubber stamping values after all—but instead are acting with integrity and thinking for themselves?

To better understand Freddie Mac’s perspective, I sat down with Scott Reuter, the author of the article in question.

Fast, Fast, Fast One of the key points that Reuter makes is that the market has been moving so fast that it makes it difficult for appraisers to capture the market’s rate of growth if they are not paying very close attention to pending sales and making time adjustments, even for time periods as short as 15 or 30 days.

“In many cases, closed sales aren’t keeping up with contract prices because the meeting of the minds that happened on a closed sale might’ve happened one, two or even three months before the sale actually closes. In other words, by the time a sale closes, the market has likely already moved substantially.

This is especially true in a market that is moving 18 to 20 percent per year. 18% in one year equates to 1.5% per month,” says Reuter.

The hope is that this is causing appraisers to see time or market condition adjustments in a whole new light.

In other words, the use of adjustments is now becoming necessary in shorter and shorter periods of time. “A lot of appraisers are still saying that they won’t adjust a comparable if it’s only a few months old. However, with the market changing so rapidly it is clear that closed sales transactions are lagging.

We’ve really been trying to drive that point home in our messaging to appraisers,” reports Reuter.

Reuter says it is noteworthy that only one in four appraisers are actually developing and applying time or market condition adjustments. “To not be considering a time adjustment in today’s market is concerning. We know appraisers are busy; we know there’s a capacity strain on appraisers. Appraisers have to deal with a lot. But there is a strong need to slow down just a bit and make sure we’re really doing the appropriate analysis when we put these appraisals out,” argues Reuter.

Also keeping your bearings in a “crazy” market involves more than just making time adjustments, according to Reuter. “Appraisers also need to look for other indicators—more current indicators—that can help them develop value in a rapidly changing market. One of my family members just bought a house in West Lafayette, Indiana. On their first day in the car to see homes for sale, they went to see four homes, and two of the homes sold while they were driving

to go see them. So appraisers need to look at all property type movements, including what the general inventory supply and price movement is, what are the market conditions, and how fast is the market moving,” Reuter says.

With closed sale transactions lagging current trends, Reuter advises appraisers to look at all market behavior, not just the behavior reflected by closed sales.

These sources of information include: • General market inventory • Trends in listing prices • Contract-to-listing ratio (pending sales) • Contract dates vs closed dates (market change) • Exposure time and marketing time • New construction patterns • Number of available competing properties Trends derived from such sources can provide valuable augmentation to the

closed sales data, according to Reuter.

Another recommendation that Reuter has for appraisers to consider whether market conditions make it more appropriate to reconcile near the top of the indicated value range rather than at the midpoint. “This is another area where our review data shows a common behavior for appraisers to typically reconcile at or near a midpoint value indication, regardless of current market trends,” writes Reuter in his original article.

When asked about a criticism of appraisers anchoring on contract price, Reuter points out that the contract price is a very important data point.

“Many appraisers put a lot of weight on the contract price and rightly so. It is a data point and it should be considered as it represents a meeting of the minds in the marketplace,” says Reuter.

To read Freddie Mac’s original Article, visit WorkingRE.com/rapidmarket/.

Stay safe out there! WRE

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Winter/Spring 2022 Working RE 13

Driving Comps Survey: Appraisers Speak Out

by Isaac Peck, Editor

I

Over 45 percent of appraisers report that driving by comparable sales helps them better understand the local market and “produce more credible appraisal reports.”

14 Working RE Winter/Spring 2022

n early 2021, Working RE launched the 2021 Comp Photo Survey, encouraging appraisers to weigh in on one of the most passionate and spirited debates that’s taken place in the appraisal industry. Should appraisers continue to be required to drive comparable sales (comps) and/or take comp photos?

To kick off the survey, Working RE published two opposing articles on the subject, Original Comp Photos: Dangerous, Unnecessary and Why Comp Photos? (find them both at WorkingRE.com). The stories produced dozens of emotional comments, with appraisers heatedly debating each side.

Now, over 4,400 appraisers have responded to the 2021 Comp Photo Survey with over 2,200 appraisers leaving written comments explaining their thoughts on this important issue.

Based on the survey results, over 83 percent of appraisers have feared for their own safety while driving comparables, with 59 percent of appraisers reporting being threatened with violence while driving comps.

To deal with the sometimes dangerous encounters that can result from driving and photographing comparables, a small minority of appraisers have recommended putting magnets and/or signage on one’s car that identifies you as a Real Estate Appraiser, or at least with your company name. However, it is surprising to see that only 7 percent of appraisers use signage on their vehicle—a fact that no doubt contributes to why appraisers find themselves in sticky situations.

In terms of whether comp photos are necessary or not, appraisers seem to be split on the issue. Over 45 percent of appraisers report that driving by comparable sales helps them better understand the local market and “produce

more credible appraisal reports.”

If driving comp photos was not required by Fannie Mae and Freddie Mac, over 43% of appraisers report that they would still “drive comps routinely to stay informed about the local market.”

Even though slightly over 50% of appraisers appear to be against driving comparables, an overwhelming majority of appraisers (74 percent) report that by driving comps, they discover something material to their value equation that “would have been missed if comps had not been driven: (e.g. power lines, sewage plants, train tracks, etc.)”—at least once per year or even more often. This suggests that even though appraisers are split on whether driving comps is necessary or not, nearly 3 out of 4 agree that it continues to add (at least occasional) value to the appraisal process.

Below you’ll find a representative sample of comments left by appraisers. Over 2,200 appraisers left written comments—sharing their perspectives and experiences on driving comparable sales.

To view the full survey results, including all appraiser comments, visit WorkingRE.com/CompSurveyResults.

Many appraisers are more focused on making money, not on doing the job correctly and as a professional. Driving comps is due diligence; the focus needs to be on that, not how many reports you can complete in a week.

Driving comps is crucial to keeping up on the market. If appraisers don’t drive the comps I doubt they will drive the neighborhood to see what is going on. It will be: drive to the subject, then back to the office—and reports are less credible overall. At that point, have the appraiser do the inspection, upload it to an AVM model and pay them for the inspection only if they are not going to analyze

Driving comps is dangerous. Traffic is an issue as well as irate home owners. Removing the requirement while maintaining fee levels would make appraisers more productive and able to handle greater volume thereby eliminating shortages in rural areas. Right now my income is not commensurate with professionals of a similar experience and education level. Eliminating driving comps would help that issue.

Driving comps is simply a good idea for so many of the reasons that have already been mentioned. However I must say I was stunned to read one of the comments that described how you can’t choose your comps until after you’ve seen the subject, and therefore a second trip is required. Is this how folks have been so inefficiently working all these years? What ever happened to briefly

the market. As a reviewer it is obvious

analyzing a pool of POTENTIAL sales

which appraisers are not doing their

in the neighborhood based on what

due diligence; it is always the ones that

you already know about the subject

use MLS photos. One shortcut leads to

prior to the appointment? Then once

another and obvious relevant items are missed. Appraisers used canned commentary stating it’s dangerous because they know that will enable them to get out of driving the comps. They have learned the buzzword to get out of it. If they actually drove the comps it would

As an appraiser, I am very aware of the neighborhoods in the market areas that I serve. This is due to my visiting the subject, not because I have driven the comps. I have been chased down even though I have signage on my vehicle.

I am female and definitely do not feel safe taking pictures of people’s homes.

you see the subject, you can pick the best comps from the area that you already researched...all done in one trip.

C’mon people, work smart...not hard.

Geez! Furthermore, I am somewhere in the middle. Given technology now, it is not always necessary to drive comps,

take 2 seconds to take the photo. The

however, some of the aerial photos are

errors we see that appraisers would

not always current, so unless you are

notice if they really drove the comps are

absolutely sure, it’s a good idea to drive

getting worse all the time. A way to solve some of this is to notify the buyers at purchase that they may see cars in front for the next 6–12 months and explain that these are appraisers, Realtors, etc. who drove by comps for their purchase.

Doing less work will result in less pay and ultimately will help lenders eliminate appraisers altogether in favor of computer generated values.

It must be very new appraisers who see no need to drive the comps. In 40 years I’ve found comps torn down or burned down. It is necessary to compare the neighborhoods, detrimental influences, etc. It would be risky to not drive the sales/listings and it could invite a lawsuit at a later date.

the comps.

Putting the ‘Appraiser’ sign on my car really helps.

I know my area well and drive around for inspections so I am constantly driving by comps in my normal course of business, but not necessarily photographing all the comps. It’s frustrating to have to waste time going back out to photograph when I know I JUST drove by them. If appraisers stay geographically competent this should not be an issue, especially with all the data available to us now. Google Earth, etc.

page 168

Winter/Spring 2022 Working RE 15

7page 15

I was physically attacked during the inspection of the subject by an adjacent property owner. People already complain enough about appraisers, and as a reviewer, I have seen horrible work. Taking away a requirement like viewing the comps, adds more fuel to the dislike for appraisers. I hear enough people complain the appraiser missed something on the subject, so if they can’t get that right, eliminating comp views will only make a bad situation worse. Our industry should strive to provide the client with the best report possible and instill in them a feeling that we did the best job for the money. Being grilled on the witness stand because you chose not to inspect a comp is a great teaching tool. Imagine finding out that the comp you didn’t inspect was nothing like the broker’s piss poor

Physically viewing the sales data is part of the job. I am not sure what all the whining is about. I do not take pictures of property with people outside without their permission. I go back if necessary and use photos from other sources with an explanation if there is a time issue. It isn’t that hard and is not dangerous, if handled correctly.

In South Florida you must drive comparables because neighborhoods are not conforming and I would never risk to estimate market value without driving the whole neighborhood. This is another reason I would never do hybrid appraisals.

FIND THE FULL “DRIVING COMPS” SURVEY RESULTS (Including 2,000 Appraiser Comments) at WorkingRE.com/CompSurveyResults

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USPAP v. Everyone Else

by Richard Hagar, SRA

When

Despite what some have heard or received from someone else, USPAP is an absolute requirement of the VA and the same is true for FHA, Fannie Mae, Freddie Mac, and every mortgage lender and bank in the United States.

I teach appraisal classes I often hear strange comments regarding the requirements of the Department of Veteran Affairs (VA), the Federal Housing Administration, Fannie Mae, an appraisal management company (AMC), or a bank. Here’s an example heard in almost every class: “The VA doesn’t allow the inclusion of a cost approach in our appraisals.” Now before I clarify this “requirement” a little background regarding laws and how beliefs such as these develop, is necessary.

Various governments (State and Federal) pass new laws daily. Once passed, a law can exist unchanged for decades, becoming ingrained in the fabric of life. Often when new laws are passed, old laws are not erased. Both an old version and new version of a law can be “on the books.” However, the new version typically supersedes the old.

When someone starts lamenting about a requirement or law, knowing which version they are referencing is critical.

Let me give you an example.

In 1944, the VA home loan program was created as part of the original Servicemen’s Readjustment Act (GI Bill of Rights). The VA didn’t require “appraisals”; they required a person on their approved list to supply a Certificate of Reasonable Value (CRV) and the CRV had to include certain information and meet the requirements of the VA. There was no requirement for a licensed/certified appraiser to complete the CRV. Then, decades after the

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18 Working RE Winter/Spring 2022

VA was created, a new law was passed called the Financial Institutions Reform and Recovery Act of 1989 (FIRREA). This new law defined appraisers, appraisals, and a host of other terms.

Within the new law an appraisal is defined as follows: APPRAISAL: (noun) the act or process of developing an opinion of value; an opinion of value. (adjective) of or pertaining to appraising and related functions such as appraisal practice or appraisal services.

This definition sounds very similar to the VA’s definition used in a CRV... an opinion of value. When this definition came out the VA kept stating that the people who supplied an opinion of value were not supplying an appraisal.

The VA clung to the old CRV story line. For years they tried to tell people that USPAP didn’t apply to them or their decades old CRV process. It took a lawsuit or two, but eventually the old guard found out that FIRREA was the new law of the land.

Now on top of new laws being passed there are numerous people in various government agencies, banks and appraisal shops who fail to keep abreast of new requirements. These people still answer phones, return email queries, and attempt to train new appraisers.

Unfortunately, the knowledge they dispense isn’t always current which brings me back to the VA and FHA and the information that many attribute to them, even when they don’t contact the VA and check. The VA, FHA, and Fannie Mae get blamed for a lot of things they really don’t say. Just like most of Facebook, one person heard it from another who read it somewhere on the Internet, “So….it has to be true!” Cough, cough, choke! page 228

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7page 18

Client Specific

FHA / FNMA VA / Others

USPAP Figure 1: The USPAP foundation USPAP is the foundation of appraising—whether it is appraising for Fannie Mae, VA, FHA or any bank.

For example, here’s a quote from the VA guidelines: “Every VA appraisal must (1) conform to Uniform Standards of Professional Appraisal Practice (USPAP), and (2) meet the additional requirements (as outlined in this chapter) that VA considers to be supplemental to USPAP.” So, despite what some have heard or received from someone else, USPAP is an absolute requirement of the VA and the same is true for FHA, Fannie Mae, Freddie Mac, and every mortgage lender and bank in the United States. USPAP is the foundation that all of us must follow when providing appraisals. It’s impossible for an appraiser to provide a VA compliant appraisal unless it first complies with USPAP. Fannie Mae or other agencies can yell and threaten you if you don’t follow their guidelines. However, failure to follow USPAP can result in your license being revoked and massive fines assessed by a state licensing department. Even worse, a USPAP failure can be the basis for civil lawsuits and criminal indictments (all of which I see on a regular basis). Fannie Mae, FHA, or the VA do not have the authority to fine or send an appraiser to jail, but the state does. So, with that in mind, you can see who has the greater power and control over the appraisal process.

22 Working RE Winter/Spring 2022

Based on pyramid/flow chart here to the left, there are two basic USPAP requirements (See Figure 1: The USPAP foundation).

Scope of Work Acceptability • An appraiser must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible…

• An appraiser must not allow the intended use of an assignment or a client’s objectives to cause the assignment results to be biased.

So, if a client instructs the appraiser to not do something, such as telling the appraiser that the cost approach isn’t necessary or allowed and the appraiser goes along with that limitation—isn’t that limiting the scope of work or showing bias towards a client’s objectives? Yes. USPAP establishes the required minimum level of work; you can always do more than the minimum. It isn’t hard for an appraisal to meet this lowlevel requirement (once an appraiser understands USPAP). Lenders, AMCs, VA, USPAP, and Fannie Mae have requirements that are on top of the foundation built by USPAP—they are in addition to USPAP, not instead of.

As an example: USPAP does not require an appraiser to personally inspect and photograph a comparable.

However, most clients do have that requirement written into their engagement letters and required “scope of work.” So, the use of an MLS photograph might meet the USPAP minimum, but it does not meet the additional requirement of most AMCs and banks. Their requirements are in addition to…

And by the way, there is no Jurisdictional Exception Rule that allows the VA or FHA to overrule USPAP—period, zip, nada, none. I hear appraisers telling me that X, Y, & Z have a Jurisdictional Exception. The Jurisdictional Exception applies to a law

that precludes (prevents) following the USPAP requirement and if an appraiser is going to invoke the Jurisdictional Exception, then the appraiser must: 1. identify the law or regulation that precludes compliance with USPAP, 2. comply with that law or regulation [stated in the exception], 3. clearly and conspicuously disclose in the report the part of USPAP that is voided by that law or regulation, and 4. cite in the report the law or regulation requiring this exception to USPAP compliance.

By the way, instructions from a client or attorney do not establish a jurisdictional exception.

Now, in regard to statements like these: “The VA doesn’t allow the inclusion of a cost approach in our appraisals.”

Or “FNMA doesn’t require the inclusion of the cost approach.”

Let’s reference USPAP Standards Rule 1-4: STANDARDS RULE 1-4 In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results. (b) When a cost approach is necessary for credible assignment results, an appraiser must: (i) develop an opinion of site value by an appropriate appraisal method or technique, (ii) analyze such comparable cost data as are available to estimate the cost new of the improvements (if any), and (iii) analyze such comparable data as are available to estimate the difference between the cost new and the present worth of the improvements (depreciation).

Nowhere in the Standards does it state it’s OK to skip over a Standard or value method just because the VA says “X” or FNMA doesn’t require “Y”.

Inclusion or exclusion of an approach is NOT up to some government agency, client, or corporation; it’s up to the appraiser to decide if its inclusion results in a CREDIBLE APPRAISAL. And if an appraiser is challenged on an issue (state or lawsuit), the test will be: What would other competent appraisers include in the appraisal? We include the cost approach in 99 percent of all appraisals.

That is the Standard we use and it is the same for every competent hard-working appraiser I know. So, I guess that is the test. They include it, we include it, and nobody can prevent its inclusion.

I recommend paying attention to USPAP and not what some person wants you to exclude or limit what you do. The result will be a superior appraisal worth more to clients who are willing to pay for it. Do it correctly and receive an appropriate fee as compensation; that’s the goal where everyone wins.

Trying to keep you safe out there.

WRE

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Winter/Spring 2022 Working RE 23

Trainee Survey Results

by Mike Lay, Appraisal House USA

Thanks to all the appraisers who com-

72 percent of respondents said that they train by working side by side on every report. So now we know that the majority of supervisors train this way.

pleted the Trainee Supervisor Survey.

It yielded some results that may be a good basis for all of us in regard to who, how, and why we train. Some of the more interesting results include: • About 20 percent of the respondents said that they didn’t offer any compensation for the first few months of training. While it is possible that some of those trainees may have been family members (children) that were already being compensated with food and shelter, that still makes for a difficult entry to the field.

• 77 percent of respondents who did offer compensation said that first year compensation was under $35,000, with 42 percent—the majority—of respondents stating that first year compensation was under $25,000. Of course, incomes can vary greatly based on the area of the country that you are in, but based on those two results, that first year can be a tough one. Either a barrier to entry to the profession, or a testament to the commitment of those who work through it for the end goal.

• Most respondents stated that typical work hours per week were 30–40, which was somewhat surprising as many of the appraisers I know often work 50+ hours. I remember when I was just starting out that the rule was that you were done for the day when all your work was done—and it was NEVER done. More interest-

Mike Lay is a state certified appraiser and has been appraising since 2003. He is the President and Chief Appraiser of Appraisal House USA, a regional AMC located in Austin, TX.

24 Working RE Winter/Spring 2022

ing is that 19% said that trainees worked less than 20 hours per week.

There may be some tie-in with this to the 20 percent who receive no compensation; possibly they are working a second job to support their appraising aspirations?

• I was happy to see that the majority (37 percent) said that a trainee would need to measure 40+ homes before they would feel comfortable leaving them to do it alone.

And an overwhelming 68% said that they needed to do at least 20 homes. In my opinion this is a great counterargument to the companies that want to engage third parties to measure and inspect properties for bifurcated appraisals. Are they really going to put that much time in to adequately train those people to measure a house? Doubtful.

One of the questions I regularly receive from appraisers considering their first trainee is, “what is the best way to train?” I would have guessed that the results of the two options, “start them by doing research and data entry for a while” or “work side by side on every report from start to finish” would have been about even. But 72 percent of respondents said that they train by working side by side on every report.

So now we know that the majority of supervisors train this way.

Lastly, one of the more encouraging results was that 64 percent of respondents said that their trainees stayed at least a year or two after getting licensed, with 40 percent staying with them at least 3 years.

One of the big fears that many appraisers voice is that they don’t want to put in the effort to train someone, only to see them leave as soon as they get their

license. While it is disappointing to see that this does happen—20 percent left in less than 6 months and 36 percent within 1 year, you still have almost a two out of three chance of retaining them for a reasonable ROI period. The New York Yankees, love them or hate them, have the highest lifetime winning percentage at .570. Michael Jordan’s lifetime field goal percentage was 49.7 percent. So if you train three people in your career and two-thirds stay with you for several years, you are doing better than the Yankees and Michael Jordan. The overall results from this question backed up that positivity, “Was it worth it?”—To which over 50 percent considered it to be well worth the effort, 22 percent somewhere around “it was okay,” and only 23 percent reporting not worth it.

In summary, the survey tells us that most appraisers who bring on trainees: • Have one trainee in process at a time • Get their trainees referred to them (vs friends or family or general job searches) • Think that training a family member worked out well • But also said they were generally satisfied with other (non-family) hires • Paid a basic wage of $1,000–$2,000 per month • Worked their trainees 30–40 hours per week • Provided a computer, office space, MLS access and appraisal software at their expense • Believed that a trainee should measure 40+ homes before being allowed to do it on their own

•

Train by working side by side on each report, start to finish • Kept their trainees for at least a year after the trainee became licensed • Found training to be a positive experience and good for their business overall.

If you are already training, thank you for keeping our profession going and infused with new blood. If you are considering training, please take note of the results of the survey that were generally positive, and make the leap!

Working RE’s 2021 Trainee Survey includes 18 questions that provide great insight into how hundreds of appraisers have trained and compensated their trainees over the years. To read the full survey results, visit WorkingRE.com/ TraineeSurveyResults. WRE

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Winter/Spring 2022 Working RE 25

Complying With Reporting Requirements of USPAP

by Ted Whitmer

The Uniform Standards of Professional

Practice organizes reporting rules in Standard 2 by the order of steps in the Valuation Process. Please see pg. 29 for an outline of these steps.

This article will suggest ordering the reporting requirements by the key word that applies to the requirement such as “state”, “summarize”, “explain”, etc. This does not have to be done at the USPAP level, but it is easier to cross-check compliance by the keywords. Complying with the reporting requirements of USPAP is also complicated because some single rule subparts contain more than one reporting requirement.

The ordering of Standard 1 by the valuation process makes sense. However, keeping the order in the reporting standards is not helpful.

Six Overarching Requirements of Reporting from USPAP Standard 2 There are six overarching requirements from Standard 2. One must address the following to comply with the reporting requirements of USPAP (See Figure 1).

There are problems with the manner the appraiser would use the USPAP document to judge compliance with all the reporting rules.

1. The requirements are not in one place so that it would not be easy to measure if a report complies with all rules. Update Assignment.

2. The order requirements in SR 2-2(a) follow the order of the Valuation Process. Therefore, the key words such as “state” or “summarize” are mixed throughout USPAP. 3. Many of the important terms are

Ted Whitmer, MAI, AI-GRS, CRE, CCIM, and AQB Certified USPAP Instructor and served on the TALCB and was vice chairman of the Board. Ted is a Certified General Appraiser, licensed as a lawyer with the State of Texas and as a Real Estate Broker. He passed the Texas bar in 1988.

26 Working RE Winter/Spring 2022

undefined such as “sufficient”, “consistent”, “appropriate”, “clearly”, and“ accurately.”

4. There is no guidance, and there is no objective measurement, for being appropriate for the intended use.”

5. There is no guidance, and there is no objective measurement, for “containing sufficient information for the intended users.”

Be Appropriate for the Intended Use This should be judged by the client and appraiser. It would be helpful to get a response in writing from the client that the content of the appraisal report was appropriate for the intended use. An objective standard is offered in a matrix following. The following is not from USPAP but is suggested as an objective rating system (See Figure 2).

An appraiser should get with the client and agree on the rating for the intended use. If there is disagreement, the appraiser should consider writing to the greater content amount.

Contain sufficient information to enable the intended users of the appraisal to understand the report properly.

USPAP requires that the intended users have sufficient information. This does not extend to any readers that are not intended users. An appraiser should attempt to get confirmation from the client that an appraisal report does contain sufficient information to understand the report properly. This requirement is mirrored in FIRREA.

Requirement 1. Be appropriate for the intended use.

2. Contain sufficient information to enable the intended users of the appraisal to understand the report properly.

3. Clearly & accurately set for the appraisal in a manner that will not be misleading.

4. Provide sufficient information to indicate that the appraiser complied with the requirements of STANDARD 1.

5. The report must, at a minimum, contain the requirements of SR 2-2(a) & SR 2-3.

Source SR 2-2(a) Line 589 SR 2-1(b) Line 576 SR 2-1(a) Line 575 for intentional or unintentional & Conduct for intentional misleading SR 2-2(a)(x) Line 620 SR 2-2(a) Line 589

Ethics Rule, Competency, Scope of Work Rule & Jurisdictional 6. Comply with reporting and disclosure rules in other parts Exception. In addition, the appraisal report must prominently of USPAP. state the reporting option per SR 2-2 line 582.

Figure 1: Six Overarching Requirements of Reporting from USPAP Standard 2

Rating Intended Use 1

Lending – Low LTV, high credit rating, safe real estate property.

Litigation – Not discoverable by the other side & not admitted into evidence.

Other – Low impact on the use of the appraisal with the intended use and thus minimum writing is necessary.

2

Lending – Low to typical LTV, high to medium credit rating, some risk real estate property, typical property.

Litigation – Discoverable by the other side & not admitted into evidence.

Other – Low to medium impact on the use of the appraisal and thus minimum to typical writing is necessary.

3

Lending – Typical LTV, medium credit rating, medium risk real estate property.

Litigation – Discoverable by the other side & possibly admitted into evidence or reviewed by many non-client, non-intended users to possibly settle.

Other – Medium impact on the use of the appraisal and thus minimum writing is necessary.

4

Lending – High to typical LTV, low to medium credit rating, medium to high-risk real estate property, special use property.

Litigation – Discoverable by the other side & possibly admitted into evidence or seen by mediator or arbitrator.

Other – Medium to high impact on the use of the appraisal and thus minimum writing is necessary.

5

Lending – High LTV, low to medium credit rating or non-recourse loan, significant risk real estate property, atypical loan.

Litigation – Discoverable by the other side & many intended users.

Other – High impact on the use of the appraisal.

Figure 2: Suggested objective rating system (not from USPAP)

Clearly & accurately set forth the appraisal in a manner that will not be misleading.

The target of any report is the intended users. Any other reader can be misled.

Any reviewer that is not an intended user should only set forth an appraisal as misleading with proof.

Provide sufficient information to indicate that the appraiser complied with the requirements of STANDARD 1.

This was embodied in a Comment in previous USPAP editions. The following is the requirement in the 2020-2021 USPAP (See Figure 3, page 28).

Summarizing the appraisal methods and techniques employed This does not say summarize the “approaches” used. An appraiser should summarize the appraisal methods

and techniques used. For example, the specific method or technique of qualitative or quantitative analysis in the sales comparison approach, the direct capitalization or yield capitalization method used in the income approach or the reproduction/replacement cost, depreciation method and land valuation method used in the cost approach should be summarized. page 288

Winter/Spring 2022 Working RE 27

7page 27 (x) provide sufficient information to indicate that the appraiser complied with the requirements of STANDARD 1 by: (1)

summarizing the appraisal methods and techniques employed;

(2)

stating the reasons for excluding the sales comparison, cost, or income approach(es) if any have not been developed;

(3)

summarizing the results of analyzing the subject sales, agreements of sale, opinions, and listings in accordance with Standards Rule 1-5.

Comment: If such information is unobtainable, a statement on the efforts undertaken by the appraiser

to obtain the information is required. If such information is irrelevant, a statement acknowledging the

existence of the information and citing its lack of relevance is required.

(4) stating the value opinion(s) and conclusion(s); and (5) summarizing the information analyzed and the reasoning that supports the analyses, opinions, and conclusions, including reconciliation of the data and approaches;

Figure 3: Comment embodied in previous USPAP editions and a requirement of 2020-2021 USPAP

Stating the reasons for excluding any approach not developed There is not a great difference between stating reasons and summarizing the reasons. The difference is that the appraiser is not “summarizing the results”, but is listing the reasons the approaches were not used. If you “state” a “reason,” the reason may be a lengthy discussion.

Be careful “stating” reasons. A reviewer may be looking for more than a list.

When excluding the sales comparison approach, the appraiser should focus on excluding the approach because there were no comparables and/or the adjustments could not be ascertained.

When excluding the income approach, the reasons could be that properties like the subject are not leased, no comparable rents could be found, occupancy could not be ascertained from the market, expenses were not available, and/or rates of return or multipliers could not be developed from the market.

When the cost approach is excluded, the reasons should be that either cost, depreciation and/or land value could not be mesured from the market.

In other words, the appraiser should focus on the inputs to the approaches and state the reasons that the approach was excluded because of the inability to measure the inputs required in the approach. There are nine major inputs 28 Working RE Winter/Spring 2022

into the three approaches…

1. Land value, 2. Cost, 3. Depreciation, 4. Rents, 5. Vacancy, 6. Expenses, 7. Capitalization rate, 8. Comparables, and 9. Adjustments.

Discuss the exclusion of an approach because you could not measure those inputs. Otherwise, the exclusion could be based upon the value definition used and/or the interests appraised and the inability to conduct an approach based upon the objective lack of ability to employ the approach.

Suggestion to the Appraisal Foundation Standards Board A clearer ordering of the Standard 2 requirements can be found on WorkingRE.com by keyword and moves away from ordering the rules by the valuation process. As previously stated, the ordering of Standard 1 by the valuation process makes sense. However, keeping the order in the reporting standards is not helpful. The following is by phrases and would need to include more language that is currently contained in USPAP. Standard 2-2 The report content and level of information requirements in this Standards

Rule are minimums for each type of report. An appraiser must supplement a report form, when necessary, to ensure that any intended user of the appraisal is not misled and that the report complies with the applicable content requirements. (a) The content of an Appraisal Report must be appropriate for the intended use of the appraisal and, at a minimum: (i) a.

b.

c.

d. e. f.

State That the report is an “appraisal report” (Prominently state) Identity of the client, or… state the client’s identity is withheld and in the workfile.

Identity of any other intended users by name or type Intended use of the appraisal Real property interest appraised Definition of value i. Cite the source of the defini tion of value ii. Whether the opinion of value is in terms of cash or financing terms equivalent to cash iii. Or, based on non-market financing iv. Reasonable exposure time if developed g. Effective date of value h. Effective date of the report i. reasons for excluding the income, cost or sales compar ison approach j. the value opinions k. the conclusions l. the use of the real estate exist ing as of the effective date m. The use of the real estate ref lected in the appraisal n. The opinion of highest and best use, if an opinion was developed by the appraiser o. State all extraordinary assumpt tions (clearly & conspicuously) p. State all hypothetical condi tions (clearly & conspicuously)

Outline of Steps in the Valuation Process Identify client and intended users

Identification of the Problem Identify the purpose of Identify the the assignment effective (type and definition date of the of value) opinion

Identify the intended use

Identify the relevant characteristics of the property

Assignment conditions

Scope of Work Determination

Market Area Data

Data Collection and Property Description Subject Property Data

General characteristics of region, city, and neighborhood

Subject characteristics of land use and improvements, personal property, business assets, etc.

Comparable Property Data Sales, listings, offerings vacancies, cost and depreciation, income and expenses, capitalization rates, etc.

Data Analysis Market Area Data

Highest and Best Use Analysis

Demand studies Supply studies Marketability studies

Land as though vacant ideal improvement Property as improved

Land Value Opinion

Application of the Approaches to Value Sales Comparison Approach

Income Capitalization Approach

Cost Approach

Reconciliation of Value Indications and Final Opinion of Value

Report of Defined Value q. State that the use of an extra ordinary assumption or hypothetical condition may have affected the assignment results (if used) (ii) Summarize a. Scope of work used to develop the appraisal (See also “suffi cient”) b. The extent of professional appraisal assistance

c. The appraisal methods and techniques employed d. If an opinion of value is based

on non-market financing terms or financing with unusual con ditions or incentives, sum marize the terms of the financ ing and explain any influences on value. e. The results of analyzing the subject sales, agreements of

sales, options, and listings i. If such information is unobtainable, a statement on the efforts undertaken by the appraiser to obtain the information is required. ii. If such information is irrelevant, a statement acknowledging the existence of the information and citing its lack of relevance is required. page 308

Winter/Spring 2022 Working RE 29

7page 29

f. Information analyzed g. The reasons that support the analyses h. The reasons that support opinions i. The reasons that support conclusions j. Reconciliation of the data k. Reconciliation of the approaches l. Support and rationale for the highest and best use (iii) Describe a. In Competency Rule, if you don’t have the necessary com petency you must describe in the report the lack of knowl edge and/or experience and the steps taken to complete the assignment competently (iv) Sufficient a. Information, documents, and/ or exhibits to identify the real estate involved in the appraisal, b. including the physical, legal, and economic property char-

30 Working RE Winter/Spring 2022

acteristics relevant to the assignment c. information to enable the intended users of the appraisal to understand the report prop erly (SR 2-1(b)) d. The report must contain suf ficient information to allow the client and any other inten ded users to understand the scope of work performed.

The information must be appropriate for the intended use of the assignment results (v) Clearly and accurately set forth a. The appraisal (and communi cate the appraisal) in a manner that is not misleading (SR 2-1(a)) b. Disclose all assumptions, extra ordinary assumptions, hypo thetical conditions, and limit ing conditions used in the assignment. (SR 2-1(c)) c. If there is a Jurisdictional

Exception, disclose in the report the part of USPAP voided by that law or regu lation and cite the law or regu lation requiring the excep tion to USPAP (vi) Include a. A signed certification (See SR 2-3) I created several comprehensive tables that list the Reporting Requirements for USPAP’s Ethics, Scope of Work, Jurisdictional Exception, and Standard 2. To view these tables, visit WorkingRE.com/USPAPTables. WRE Serving Real Estate Professionals

Winter 2020 Volume 52

Purchase Working RE magazine to Ensure Delivery Annual Subscription - $60 year www.workingre.com (click subscribe)

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Disruptive Technology and Appraisers

by George Dell, SRA, MAI, ASA, CRE

Technology can mess things up. Or it

can create opportunity. So how is valuation affected? What are the changed technologies? And what can be done?

You may want to ask—what should I do?

The current system is redundant, superfluous, and counter to consumers, taxpayers, and overall public trust; it is so convoluted and fragmented that a dramatic shift is required.

Changes Data, hardware, memory, monitors, transmission, analytic software, and visualization software—all have changed— dramatically. Yet, it is easy not to notice the impact when you live in it. It is even easy to avoid the change and so miss the opportunity!

I started appraising with pencil on paper on one page. Then we started typing forms, (more “professional,” they told us!) And then a polaroid picture of the front AND the street—can you imagine! And then, and then, they wanted pictures of all three comps. We felt distrusted. We had ethics, you know!

Then things got worse! Along came the “green hornet” form. Not one, but TWO full pages on legal (8½ x 14) paper! What a chore. All to do for a peanuts fee. But there were some pleasures.

I loved local mortgage broker clients with door mail slots. I could work till midnight, then my reward for the day was to put the report envelope through the door ($ cha-ching $). My great joy.

And then that too was taken from me. They wanted electronic delivery— no more real blue ink on green rectangle

George Dell is an Asset Analyst, a Expert Witness, an Educator, and a Thought Leader.

Academic and practice qualifications in Evidence Based Valuations (c). SRA, MAI, ASA, CRE designations. Appraisal Foundation certified USPAP instructor. Developer of data science based asset assay and risk analytics curriculum and dashboard interface. Follow him at www.GeorgeDell.com.

32 Working RE Winter/Spring 2022

forms with black typed fill-ins. More fun stuff was taken away...then even better.

A dot-matrix printer replaced the typewriter. It produced a soothing sound once you could line up the print line with the form boxes. (Not always an easy thing to rush at 11 at night!)

Then the magic of the black and white laser printer...And just printing the pictures therein, instead of doublesided tape or glue sticks. COLOR! Pretty colors! No more rub-on little arrows and worms.

But I still loved the variety of work.

Some people connections. Some beancounting form filling. Some detective work. And some driving around seeing the town. Still some fun left.

But still, they wanted three or four comps, carefully selected with my excellent, careful judgment. It became easy to pick a handful of easy ones, and discard the others. (We had no need and no methods to analyze the complete market). USPAP told us to use all “sales comparables data as are available.” But it also told us to do what peers do, and what clients expect. And peers and clients expected a handful of comps, and no more! And while we were not watching...

Along came AVMs. They took part of our market share. Then other “cheaper, faster” methods came along.

BPOs, Evaluations, and other exceptions. All without the burdensome fees, education (qualifying and continuing), and licensing, AMC dealings, and fees to states, passed along to feds, passed along to other researchers and publishers.

Competitors (cheaper, faster) with little or no regulation, fees and taxes, nor real ethical rules—competed efficiently with our appraisals which had heavy bureaucratic overhead. This was kinda like taxing motor cars—replacing tax-free horses. (I once heard that some cities did try to collect horse-poop collection fees!)

Then even more technology. Statistical software to calculate averages and deviances of anything you wanted. But there was no training in that hypermodern stuff.

Schooled, But Not Relevant So our organizations jumped right in, and started teaching statistics.

And everyone knew there were two types of statistics descriptive and inferential. Descriptive was the easy stuff.

Third-grade stuff. Average, median, range. Pie-charts and bars and historicals and plots. But we were professional grown-ups. So we had to call it advanced analytics—the inferential statistics, the random-sample statistics.

Confidence intervals, hypothesis tests, Type II errors, p-values, t-scores, Chisquareds. Really sophisticated stuff.

But we forgot something. We (appraisers) do not take random samples.

Never. We do exactly the opposite: we very carefully pick good comps using our best judgment.

We learned some things, but it mostly helped us get our license or designation. Clever, but not really helpful.

Inferential statistics is not useful for real estate valuation. Random selection of sales is not good practice for appraisal.

Sophisticated, but not useful. (The one benefit of “advanced” quantitative methods is that appraisers were at least re-exposed to the concepts of descriptive numericals).

What happened then, is that as data got easy, we got easy. We tried to force-fit old solutions to new possibilities. And failed. Competitors filled the market needs for valuation with

cheaper, faster. Like AVMs. Appraisers, at times in great demand, can live down to cheaper, faster work. A few succeed.

Some don’t. Others retire.

Our organizations turn more to selfpreservation and churning for dollars.

Appraisal organizations and publishers rely on rehashing the accepted boring old stuff. Our standards enforce believability, not reliability. Our very clients, needing real measures of risk and micro-forecasting, have no motive to demand more. Nor are many even aware of the possibility of better, broader services, services that attend to collateral risk, economic risk, and regular real-time risk revaluation.

Technology makes public trust possible. Technology can protect consumers, taxpayers, and ameliorate issues of bias, even racial bias. New simplified regulations may be the only real possibility. The current system is redundant, superfluous, and counter to consumers, taxpayers, and overall public trust; it is so convoluted and fragmented that a dramatic shift is required. This entails motivating the “invisible hand” of personal initiative, while guarding against monopolistic tendencies in today’s market ubiquity.

The controlling systems control.

• The law is inherently slow to change. Those who make laws are similarly subject to prior knowledge, beliefs, and expectations of the relevant field (appraisal or bank regulations).

• Standards continue to enforce beliefbased tests—both appraisers and review appraisers. Standards are fully discretionary in nature, not analytic in substance. They ignore issues of measurable reliability, risk, and forecasting of risk.

• Regulation is so dispersed and disparate (states, jurisdictions, and various federal agencies), that consistency is rendered impossible.

• Groupthink and habit contribute to inertia. It is difficult to go against

the tide, especially when the standards insist you “correctly employ those recognized methods and techniques.”

It is human nature to stick to the “tried and true”especially where those reviewing and judging your work are also held to the same peers’ actions, and admonition to apply recognized, belief-based methods.

Groupthink...

Bias Appraisers are not biased. It says so in the standards. “Independent, impartial, and objective.” Current discussion seems to ignore the two types of bias which may arise.

• Analytic bias, which stems from bad analysis or model selection, or algorithmic assumptions.

• Personal bias, which may be intentional or unintentional.

• Intentional conscious bias can occur subtly, like the desire meet a user’s price expectations.

• Unintentional unconscious bias can occur simply because we are human, tribal in nature.

Conundrum Appraisals, AVMs (Automated Valuation Models). BPOs (Broker Price Opinions), “Desktop” appraisals, evaluations and other “exemption” carve-outs—have one thing in common: they all do the same thing. All valuations of any kind require the same basic four steps: 1. Get the right data; 2. Analyze/adjust the data; 3. Predict/estimate from the data; 4. Deliver the point prediction of value.

The only difference is who makes the decisions and when!

Appraisers collect data with the immediate goal of a handful of comparable sales. Adjustments are made, based on experience, or whether the estimate is “supported.” Believability— not reliability—is the goal. page 34 8

Winter/Spring 2022 Working RE 33

7page 33

AVM designers work with programmers to collect data, with a larger collection of “comparable” sales. Adjustment algorithms are also programmed by designers (some of which emulate appraisers). A calculation delivers a number. Accuracy is the goal. And it may be measured. However, both the value algorithm and the test algorithm (fsd or forecast standard deviation) are both proprietary secrets. AVMs achieve longterm accuracy results simply by refusing to deliver (a no-hit) when uncertainty is high. (Kinda like not counting the times you miss the mark badly).

BPOs or evaluations may entail no inspection, lesser standards or ethics requirements, and result in varying levels of analysis with varying

levels of valuer expertise. In any case, process standards are not required, or different.

Desktop or “third-party” inspection appraisals are subject to USPAP for the desk operator, but may or may not apply to the property inspector.

This inspector qualification level has not yet been clearly defined, and may require yet another level of licensing, regulation, and experience testing. As yet, issues of bias, even racial bias by unlicensed inspectors does not seem to have been addressed. The valuation model is the same. The only difference is how well the process is done, and how competent is the person performing the duty—even if it is programmer algorithm determined.

Conclusion Valuation inherently requires some judgment at each point. Whether it is pre-programmed, concurrent, or interactive. The process is the same: data, adjust, predict, deliver. No matter what!

The only question is: how much risk/reliability does the user and public trust desire? The battleship and its fleet of tenders and destroyers cannot change direction without directions to do so.

So long as regulations, habit, and groupthink say “half-speed ahead,” we will be half-speed, in the same direction—until another iceberg shows up.

Moving the deck chairs on the Titanic is comfy, but will harm the public good yet again. Again. WRE

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Stairway to Confusion

by C. Brent Bowen

There has been considerable discussion

It is not merely consistency with oneself, or even with other appraisers, which is key: it is consistency with your data which is most important.

over the years about gross living area (GLA) measurement standards. The ANSI Z765 standard gets the lion’s share of the attention, and is the most widely referenced standard in the industry by far. It can also be the most difficult to interpret, particularly when it comes to stairs. Here’s why: It is primarily important to recognize two very important facts: 1) a standard is nothing more than the definition of a unit of comparison and 2) it is the appraiser’s responsibility to be consistent with that definition.

First, what do I mean when I say that a standard is nothing more than the definition of the unit of comparison? The unit of comparison for something is critical to the understanding of that thing.

If I go to London and buy a souvenir, and the cashier says the price is 15, I need to know what unit of comparison we are talking about. Is that 15 Pounds Sterling or 15 Euros? Did the cashier happen to notice my accent and give me the price in US Dollars? The unit of comparison in this example is the currency. Knowing the currency is critical to my evaluation of that price. The same applies to GLA. The standard defines what unit of comparison we are using.

In other words, when I use the term “gross living area,” what do I actually mean? The standard that I’m using is what gives meaning to that term.

Brent Bowen is the President of Texas Valuation Professionals, Inc in Plano, Texas and has been appraising residential real estate in north Texas for 23 years. He graduated from Baylor University with an enthusiasm for both economics and real estate, which made real estate appraisal a perfect fit. Brent is always looking for ways to innovate the appraisal process, and enjoys sharing those ideas with his staff as well as others in the appraisal community.

36 Working RE Winter/Spring 2022

Second, as an appraiser, consistency with the definition is actually more important than which definition is chosen. It is not merely consistency with oneself, or even with other appraisers, which is key: it is consistency with your data which is most important. If you believe that your standard of GLA is best, but those who are reporting comparable sales data are utilizing a completely different standard, it is your responsibility to either change your standard, or convert the data to match your standard.

Maybe this example will provide some clarity on this issue: Properties A, B, and C are the same floor plan as the subject property and have sold recently.

The builder’s architect has reported the GLA of that floor plan to be 2,800 square feet using their standard for calculation of GLA. An appraiser measures the subject property using a different standard and arrives at a GLA calculation of 3,000 square feet. Before the appraiser utilizes properties A, B, and C as comparables, it is imperative that the appraiser recognizes that their standard is inconsistent with the standard which is reported in the market. Addressing the inconsistency is far more important than whether or not the appraiser’s measurements are “right” or “better.”

This lack of consistency is being a big problem and a big business. There are many appraisers who market their measurement services to agents with the specific understanding that their interpretation of ANSI will likely result in a larger GLA than what is reported. Why is this a problem? Ethics. If I am knowingly using a method of arriving at GLA which is substantially different from the page 408

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How to Raise Appraisal Quality and Minimize Risk (7 Hours CE) Presented by: Tim Andersen, MAI Learn the common charges brought against appraisers, with real-world examples of specific civil and regulatory cases. Andersen shows you how to avoid potentially risky situations with time-tested steps to “bulletproof” your appraisal reports and workfiles. Learn proven techniques to protect yourself from state regulators and plaintiffs, while reducing your liability and exposure.

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“OREP has always been committed to providing members with the latest news, information and risk management education via Working RE, so offering free continuing education is a natural next step for us,” said Isaac Peck, President at OREP. “We chose veteran appraisers and renowned authors and educators to share with members their proven and effective strategies on how to limit liability, follow appraisal standards and protect themselves.

The benefit for our members is twofold—it makes them more careful, more successful appraisers and lets them keep a little more hard-earned money in their pockets, saving them over $200 in education costs.”

Details The classes are online, allowing you to take the coursework safely at your own convenience. Current members, please email info@orep.org for enrollment details. WRE Winter/Spring 2022 Working RE 37

Industry NEWS A Tribute to David Brauner, former Publisher of Working RE

by Isaac Peck, Editor

(See Page 4 for David Brauner’s Farewell Message) The motto at OREP / Working RE has always been “Business by the Golden Rule.” Which literally means: “Treat others as you would like to be treated.”

Having worked alongside David Brauner for the last 10 years, I got to see him live it every day. And it is not just about giving customers a great experience or providing service with a smile. It’s a way of dealing with employees, vendors, business partners, AND customers.

Honesty, patience, kindness, fairness and integrity—these are the values that have made OREP what it is today.

In an industry that is ever-changing, OREP’s lodestar will remain constant— people and values first. I am incredibly grateful and proud to lead OREP into its next chapter.

Looking to the future, I’m excited to continue to report unbiased, timely news for this vital industry in the pages of Working RE. For OREP members, we are bringing you more “value-add” business-building benefits, including more coursework, services, and savings to help your business thrive in the years ahead.

If you’re currently insured with OREP, you know that our focus is on YOU. From expanding our business hours to 12 hours a day with licensed insurance agents, streamlining the insurance application so that it’s even faster to complete, and offering 14 hours of free Appraiser Continuing Education for OREP Members—we work hard to deliver for YOU. And if you’re not currently insured with OREP...

Well, what are you waiting for? Get a quote from us in less than 5 minutes at OREP.org. —Isaac Peck WRE

38 Working RE Winter/Spring 2022

Good News: Mold Coverage for Appraisers Now Included with E&O Fear of liability due to mold is a persistent worry for many service professionals—including real estate appraisers. Most appraiser E&O insurance policies exclude mold claims, according to Isaac Peck, President at OREP. org. “For most of my career, appraiser policies excluded all mold and fungi claims. Even though mold claims are rare, the fear of mold was real for many appraisers,” Peck said.

According to Peck, the issue is further complicated because with many mold claims it can be difficult to distinguish between water damage, which would likely be covered, and the resulting mold, which would likely be excluded.

The good news for appraisers is that OREP’s new program offers an alternative policy that includes up to $500,000 in mold/fungi coverage, at no extra charge. The coverage protects appraisers against allegations surrounding the failure to disclose the existence or presence of any type or form of: “fungus, including mold or mildew and any mycotoxins, spores, scents or byproducts.” “The alternative appraiser policy includes all the same coverages of our flagship appraiser policy, plus the mold, and at around the same premiums for most appraisers. But the alternate policy requires more underwriting and a more lengthy application, so if you want mold coverage, you should ask for it specifically,” Peck said. Visit OREP.org or call 888-347-5273 to learn more. WRE

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OREP Endorsed by National Association of Appraisers (NAA) OREP, a leading provider of appraiser E&O insurance nationwide, has been endorsed by the National Association of Appraisers (NAA) as the preferred provider of E&O insurance for NAA members. OREP is the proud publisher of Working RE magazine and has served real estate appraisers’ insurance needs for over 20 years. The NAA is an appraiser organization with over 2,000 members dedicated to uniting appraisers for the purpose of exerting a beneficial influence upon the profession and advocating for appraiser interests. “I feel very comfortable with our first alliance of this kind because the focus of both organizations is the same—supporting and helping appraisers,” said OREP/ Working RE President and Editor, Isaac Peck. Craig Morley, 2020 President of the NAA, says, “We are pleased to have OREP working with NAA to provide information, education and professional liability insurance (E&O) to our membership. NAA is an association that is intended to be a low-cost professional association that likewise provides information to its members and representing our membership at both a state and national level in an effort to benefit the typical appraiser.” WRE

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If You’re NOT Saying Something Like This to Your Insurance Agent, You’re probably NOT with OREP!

for the speedy service. You guys are top notch!

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888-347-5273 • OREP.org • info@OREP.org CA Insurance License #0K99465 Winter/Spring 2022 Working RE 39

7page 36

methods employed by most architects, builders, and tax assessors, then the assignment results are knowingly misleading. If I know that on average my method of measurement produces a GLA 5 percent higher than what is typically reported of my comparables, then choosing that method without dealing with the inconsistency is unethical and a violation of the Uniform Standards of Professional Appraisal Practice (USPAP).

Consistency So how do you deal with the inconsistency? There are two solutions. The first is simply to adopt the standard (or the interpretation of the standard) which is prevalent in my market. The second solution is to revise the GLA of my comparable data by extrapolating what the GLA of the comparable data would be under the methodology utilized by the appraiser. While this solution is theoretically ethical and USPAP compliant, it comes with some obvious flaws in practice. How do you know what the GLA of that comparable would be if it were calculated using your preferred method?

This brings us back to the confusion regarding ANSI and stairs. While the recent update to the standard (ANSI Z765-2021) provided some additional clarification in some areas, there remains some significant room for interpretation when it comes to the stairs. This is particularly true when the subject lacks a basement.

Two-story homes are very common in my market but basements are not. A common floor plan includes a switchback staircase to the second floor with a closet underneath which extends several feet under the staircase with a sloping ceiling in the closet. The question is where do you count the stairs? On the first floor, on the second floor, on both floors?

Increasingly, I am finding that appraisers are interpreting the standard to include the entire staircase on 40 Working RE Winter/Spring 2022

both levels. I’ll be the first to admit that this interpretation has some basis, although it does create some inconsistencies with other parts of the standard, and seems to be at odds with the methods of architects, builders, and assessors (at least in my market). This interpretation relies most heavily upon the illustrations.

The published standard includes several illustrations which are intended to clarify several elements of the standard, however, the illustrations alone can be confusing, especially if you don’t read the full standard itself. The illustrations depict a home with three levels: first floor, second floor, and a basement. The floorplan depicts a staircase descending from the second floor to the first floor, and then down to the basement. If you just look at the illustration, it indicates that the staircase is included in the GLA on both the first and second floors. However, it is important to read the standard to understand why. The standard states that “the area of both stair treads and landings proceeding to the floor below is included in the finished area of the floor from which the stairs descend...”

(ANSI Z765-2021, page 6, emphasis added). The Annex to the Standard, which provides additional commentary, states that “stairs that descend to an unfinished basement are included in the finished square footage of the first level…” The parts of the standard which indicate that ceiling height under the stairs doesn’t matter, all appear to be in the context of stairs on the basement level. Therefore, if there is no basement, then there are no stairs which descend into the basement which should be counted on the first floor. The GLA above grade (ie, the area under the stairs which does not descend into a basement) appears to be treated differently.

My primary evidence is that of the strict adherence to the minimum height requirements in the same example. In

their example, the area which slopes below a ceiling height of 5’ is not included in the GLA calculation.

Therefore it would be contradictory to exclude such a space in one part of the house and then include space which may have a much lower ceiling or even be entirely inaccessible. In other words, why would an area which has a ceiling height less than 5’ under a staircase be counted toward GLA, while an area with the same ceiling height in a living room be excluded? My conclusion is that it is not intended to be treated differently.

With all of that said, the evidence within the standard for my interpretation is not actually the reason for my methodology. My interpretation closely matches the methods utilized by builders, architects, and assessors in my market, thus providing a consistent unit of comparison which results in credible assignment results.

I must reiterate that whether or not you agree or disagree with my interpretation is not the point.

If your data suggests an alternate interpretation, then utilizing the method that I just described may not only be the wrong choice, it might even be unethical. WRE

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See pg. 37 for details. Not approved in GA, IL, and MN.

Call OREP at 888-347-5273 to learn more.

20 Years…Walking Side by Side with Appraisers This January, OREP Insurance and Working RE magazine mark 20 years serving YOU —the appraiser. From 2002 to today (2022), we’re proud to have walked side by side with appraisers through the many twists and turns.

We’ve been through a lot together over the last two decades. From PDFs to XML to the UAD, the boom and bust of the real estate market, Dodd-Frank, hybrid appraisals, desktops, drive-bys, COVID-19, and the list goes on!

Much has changed and continues to change—the real estate market, the technology we use, the Scope of Work, and even how we interact with both our vendors and customers!

Remote appraisals are going to change the industry. Stay a step ahead with RemoteVal™. To learn more and request a demo, ask your Incenter Appraisal Management representative or visit incenteram.com/remoteval.

But our “why” hasn’t changed. OREP’s mission of “Business by the Golden Rule” is still the same.

Doing right by appraisers.

Nobody does more to keep appraisers happy and productive than Incenter Appraisal Management: • • •

We’ve built our business putting appraisers first—aiming to deliver timely, unbiased 24-hournews pay model to this important profession in the pages of Working RE, as well as provide industry No portal or technology fees for appraisers with OREP Insurance (OREP.org). Everything we do leading E&O coverage Great support and communication puts YOU—our readers and our customers—at center stage.

We also offer available benefits like free road hazard insurance, discounts on office supplies and prescriptions—all free for the appraisers who work with us.

And doing the right thing pays off. That’s why over 10,000 appraisers trust OREP with their E&O insurance.

Serving Real Estate Professionals

Winter 2020 Volume 52

Here’s to another 20 years with appraisers. Let us know how we can help!

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Winter 2020 Volume 52

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