At a Portland appraisal home viewing last week, the owner had two little dogs that would not stop barking as a result of my visit. Each time the dogs barked, the owner gave them a small treat. The barking would stop for a moment, but then the dogs would start again and so would the treat process. The owner was inadvertently rewarding wrongful behavior, thereby perpetuating the process. This made me think, unintentional reward of improper behavior is something that also happens regularly in appraisals contracted by mortgage financing, lending, and appraisal management companies (AMCs).
Home appraisals for lenders or AMCs typically pass through several layers of quality review. Often, the examinations involve a checklist of things that generally characterize a well-supported or lower risk appraisal opinion. Rightfully so, lenders want to know that the appraisal can be confidently used for evaluating collateral and avoid the dreaded forced loan buyback. If a lender’s checklist items are missing, the appraisal becomes flagged as higher risk and often goes back to the appraiser multiple times for additional clarification, comments, or comparable data. Appraisers with fewer red flag issues will often be rewarded with more work, first choice of assignments, and fewer requests for revision or clarification.
Appraisers can usually receive more work and fewer revision requests from lenders simply by working harder, explaining issues, and supporting adjustments. However, often appraisers who work longer hours (for the same pay per assignment) will still receive red flags because the reports are not read thoroughly by the client or because the properties are complex with few comparable sales data. Some appraisers learn quickly that there are shortcuts to receiving more work and fewer clarification requests.
Real estate appraisers are highly trained and regulated professionals who are required by law to be independent, unbiased, and to not mislead. Most appraisers work very hard to maintain high ethical standards. However, an incentive based system exists in residential finance that rewards appraisers who mislead by making an appraisal look stronger than actual. From experience I know that this happens all the time. Here are some ways that appraisers may mislead a lender’s quality checker into thinking an appraisal value opinion is stronger than it is.
1. Recent and close proximity comparable sales make an appraisal look strong, but the most recent and closest comparable sales are sometimes not the strongest nor most like the subject (particularly on a unique property). An appraiser looking to reduce questions from a lender might use recent and close sales over the most similar sales.
2. Fewer and smaller comparable sale adjustments can make an appraisal look stronger than it is. For example, an appraiser might take a comparable sale that requires a large positive adjustment for living space but a large negative adjustment for view and just make a smaller adjustment for each. In this case, the indicated value will be the same, but the comparable sale looks really strong to a reviewer because it has few adjustments. (Here is an article that explains more about how appraisers can use different adjustments and come to the same value conclusion.) Fannie Mae, the nation’s largest buyer of loans, has recognized small adjustments as an appraisal issue and is fighting back with big data and automated review of appraisals. Click this link to read a Fannie Mae announcement that explains more and shows evidence that the majority of appraisers were adjusting too low for gross living area (GLA). Also, view a video here showing how an appraiser might support a GLA adjustment that is not artificially low.
3. Omitting or downplaying issues like a busy road or a necessary repair can reduce red flags. If an appraiser can conceal an issue or convince a lender that it is not a big deal, then the report will likely receive less scrutiny unless the deception is uncovered. This is a particularly dangerous tactic that can cause an appraiser to be sued or placed in serious trouble with their licensing agency.
The takeaway from this is that appraisers who work for lenders are often conditioned, sometimes unknowingly, into softly misleading practice that is only uncovered with more thorough appraisal review processes. Here are my recommendations for lenders and AMCs to avoid encouraging misleading appraisals.
1. Lenders and AMCs should be very careful to select and hire the best appraisers.
2. Lenders and AMCs should make sure that appraisers are paid a sufficient fee so that they are able to take the time necessary to do the assignment correctly without cutting corners.
3. Lenders and AMCs should judge appraisers using well trained individuals and make sure that appraiser grading and subsequent job assignment is not tied to appraisal red flags, something that might also relate to property complexity, not just appraisal quality.
Here are my recommendations for appraisers who do work for lenders.
1. Appraisers should be cautious about working with the type of lenders and AMCs who regularly reject well documented and explained appraisal reports just because the subject properties are unique.
2. Appraisers should be extremely careful not to compromise their work quality just to avoid the headache that often comes when appraisers tell it like it is.
3. Appraisers should seek out working for clients that have well trained appraisal review departments. In my experience, these tend to be the smaller local or regional banks and credit unions; not the nationwide lenders.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
If you find this information interesting or useful, please subscribe to this blog and like A Quality Appraisal, LLC on Facebook. Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos. If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book us to speak at your next event. We will do everything we can to assist you.
Thanks for reading,
Wow, can you believe that 2015 is over? For most Portland appraisers, it has been so busy that we can hardly remember the year. This is true for A Quality Appraisal as well.
In preparation for this blog post, I went back and skimmed all 45 of my blog posts for 2015. Like reading old appraisals, some are not as great as others in retrospect. However, here are the five that I consider to be my top appraisal blog posts of 2015.
1. Significance of R Squared in Real Estate Appraisal Linear Regression Now that statistics are becoming a normal part of real estate appraisal there are some persistent myths. One such misconception is that the R squared statistic can tell you how accurate the regression model is at predicting an adjustment. This blog post is a simplified example of why this logic is incorrect. A statistics instructor called me and asked if he could use this article in his class.
2. Value of Prior Sales in Real Estate Appraisal Sometimes it is easy to think that an older prior sale of the subject is irrelevant in a current appraisal value. However, prior sales of the subject property are historical evidence of how the market reacts to features, particularly useful if the subject is quite unique. This article shows one way that appraisers can use a dated prior sale to add support for a current value.
3. Why Appraisers Using Different Adjustments Can Reach the Same Value Opinion This blog post shows examples of how appraisers use qualitative analysis in the appraisal process and how that process can help lead them to the most reasonable value conclusion, even if the adjustments differ from other appraisers or are incorrect. This article also demonstrates how qualitative analysis can provide a less detailed appraisal product that appraisers sell to clients who do not need a full analysis or who do not require a preliminary number.
4. There may be no Comparable Sales but there could be Value This blog post is an attempt to dispel the myth that if there are no comparable sales, then there is no value or that appraisers cannot estimate a value. The example used in this post is PV solar, something that appraisers will be dealing with more and more in the future.
5. Portland Appraiser Upgrades to Motion R12 Computer I am one of a growing number of appraisers who uses a Windows tablet in the field rather than an Android or Apple device. Upgrading my Motion J3500 computer to the Motion R12 this past year was expensive, but also a great decision to keep current after five years with the J3500. This article explains features on the Motion R12 that make it a good choice for appraisers in comparison to the more popular and less expensive Surface Pro (also a great choice for some appraisers).
If you find this information interesting or useful, please subscribe to this blog and like A Quality Appraisal, LLC on Facebook. Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos. If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book us to speak at your next event. We will do everything possible to assist you.
Here is fun blog post to say, “Merry Christmas from Portland’s Appraisal Blog.” The singer in the video is comedian David Cassel in character as the Ukulele Bandito. I hope this song gives appraisers a smile and makes the stack of appraisals on their desk feel a little smaller.
Do you have a better idea for one of the song lines? I tried to keep the song clean and industry positive, but I would love to hear your ideas. Let me know in the comments below (and yes, they are working now).
Gary F. Kristensen, SRA, IFA, AGA
Real estate appraisers who are following lender guidelines often make home appraisal reports “subject to” or “call out” repairs of certain issues. I recently wrote about how there are often gray areas when appraisers call out these repairs. For this article, I will focus on what happens when an appraiser calls for the repair and later must sign off that it has been completed.
An appraisal that is made subject to inspection by another professional is different than calling for a repair. After a subject to inspection, the appraiser is usually finished with the process. An example is that the appraiser is unsure if the roof has sufficient life left and chooses to complete the appraisal subject to inspection, assuming that the roof is satisfactory. The lender will then hire a roofer or the appropriate professional to provide an opinion on the roof’s adequacy before proceeding with the loan.
When an appraisal is made subject to repair, the appraiser will normally need to return and verify that the remedy has been completed before the bank will proceed with the loan. In this case, and for most types of loans, the appraiser uses the Fannie Mae Form 1004D Certification of Completion. With this form, an appraiser returns to the property and verifies that the conditions in the appraisal have been met.
Often, lender clients or real estate agents will call appraisers and ask, “Can I send you a picture of the repair and have you sign a 1004D that it has been completed?” Lenders make this request to save time and money. The problem is that when an appraiser signs the Form 1004D, they are signing that they “…performed a visual inspection of the subject property to determine if the conditions or requirements stated in the original appraisal have been satisfied.”
In my opinion, this leaves us with bit of a professional conundrum. Given that appraisers cannot edit preprinted forms, I believe that by signing the 1004D, an appraiser certifies that he or she has personally viewed the repair. While it can be argued that seeing a photo or video could also be considered as “viewing,” I am not willing to risk my professional standing by being perceived as misleading (at best) or in violation of licensing requirements (at worst). What do you think? Does anyone know of a definitive ruling on this issue by Fannie Mae? Please share your views in the comments below.