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Editor’s Note: This is second installment of an informative two-part series focused on USPAP compliance, state requirements and client conditions. (Find Part One at WorkingRE.com; search Common Appraisal Errors.)
Common Appraisal Errors (Part 2)
By Joshua Walitt, SRA, MNAA
As all appraisers know, having a report that complies with USPAP, state, and client conditions is an essential component to every appraiser’s practice. We are the individuals to which the standards directly apply and we are directly in the cross-hairs for state sanctions if deficiencies are discovered. To recap, deficiencies highlighted in Part One include a lack of a summary of the support for adjustments in the sales comparison approach, non-existent support or rationale for the highest and best use conclusion, lack of disclosure of the assignment-specific scope of work, and limited or illogical reconciliations in the sales comparison approach.
With Standards Rules 1 and 2 being only 11 pages long in the current 2018-2019 version of The Uniform Standards of Professional Appraisal Practice (USPAP), the Standards continue to serve as a practical and accessible checklist for the necessary steps in developing and communicating an appraisal. If you are unsure you are meeting the minimum requirements that USPAP imposes, I encourage you to scrutinize several of your own reports, and use the Standards Rules as a literal checklist to ensure your reports are compliant.
The following are several more “appraisal pitfalls,” along with steps appraisers can take to avoid issues and possible sanctions.
Standards Rule 1-3 (a) states: “When necessary for credible assignment results in developing a market value opinion, an appraiser must identify and analyze… economic supply and demand… and market area trends. Comment: an appraiser must avoid making an unsupported assumption or premise about market area trends…” Standards Rule 2-2 (a) (viii) states: “The content of an Appraisal Report must… summarize the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions, and conclusions.” (Note that “Comments” in USPAP carry the same weight as the component they describe.)
There are cases where USPAP is particularly specific, and this is one of those cases, citing specific items for analysis: the appraiser must analyze and communicate the supply, demand and market area trends relevant to the assignment. Additionally, the appraiser must not make an unsupported assumption or premise regarding that trend.
What does this really mean for our day-to-day work? For one example, if the sales in a market study are too few in number for a reliable analysis, you cannot simply state: “There is not enough information in my study to arrive at a reliable trend conclusion” and then merely state “Stable.” Concluding a stable trend by default is not an acceptable practice because it is an “unsupported premise.”
Making a stable-by-default or other unsupported trend conclusion clearly conflicts with USPAP and could lead to problems if your report is ever turned into a state licensing authority. Further, from a practical standpoint, this type of method (or lack of) could affect market-condition (date/ time) adjustments in the sales comparison approach.
So, what can an appraiser do?
• Ensure you have actual data and analysis that support a good understanding of the inventory and trends in the market (including any seasonal influences); and conduct several market studies when necessary.
• Summarize your analysis in your report, so a user understands your market conclusions.
• Include information that is appropriate and relevant, using text areas for overflow or for cases where there is no related field for the specific data.
If you use a template to start your reports, consider including “section headings” that relate to market analysis, to help ensure you summarize your findings within every report. If you attach charts and graphs, ensure those exhibits are relevant.
In the end, be sure your market narrative, attached exhibits and check-boxes and fields do not contradict one another.
Specific to the Neighborhood section of the URAR and the 1004MC form, the Fannie Mae Selling Guide states: “When completing the One-Unit Housing Trends portion of the Neighborhood section of the appraisal report forms, the trends must be reflective of those properties deemed to be competitive to the property being appraised. …The conclusions reported in this portion of the appraisal will be supported by the analysis contained in the Market Conditions Addendum to the Appraisal Report (Form 1004MC). The appraiser should also provide commentary on the other segment(s) of the neighborhood when segmentation is present.”
The Fannie Mae Appraisal and Property FAQ document states: “The data regarding trends to be reported in the One-Unit Housing Trends section must be reflective of those properties deemed to be competitive to the property being appraised. Additional commentary should be provided on the other segment(s) of the neighborhood when segmentation is present to aid in understanding the overall neighborhood dynamics. … The conclusions regarding trends that are obtained from the Form 1004MC must be the same trends reported in the Neighborhood Trends section of the [main appraisal form].”
The creators of the 1004MC form had great intentions: to prompt appraisers to conduct market analysis and have a consistent format for reporting the information and conclusions.
However, of all the pre-printed lending forms, the 1004MC undoubtedly causes the most anxiety among appraisers and clients. But the message is clear from the instructions above: the One-Unit Housing Trends boxes in the Neighborhood section (the nine boxes in the middle of page 1) are meant to reflect properties that are competition to the subject. It is not designed to report trends of all properties – unless, of course, all of the properties in the area are considered competition to the subject.
As I train appraisers, I use the following metaphor: if you are filling in a form field that expects the “Last Name,” would you enter your first name? Of course not, because a user of that form would think your last name was “Bob” or “Jane” and that would be incorrect, misleading, and probably confusing. Yet, some appraisers continue to complete the Neighborhood and 1004MC fields contrary to the instructions that their clients expect be followed.
So, what can an appraiser do? One main take-away from the Fannie Mae form instructions: the 1004MC conclusions and the Neighborhood One-Unit Housing Trend boxes must be consistent with one another. Regardless of what you hear in online discussion groups or how you were once trained, the best advice is the common adage: read the instructions.
Nothing about the forms or the instructions prevents appraisers from conducting the necessary (and sometimes multiple) market studies needed to arrive at reliable and credible market trend conclusions. Complete the form fields as the instructions indicate, but do not let the form limit your analysis or reporting: include additional commentary and clarifying exhibits that you relied upon.
Bottom line: read the guides, handbooks, FAQ documents, and publications related to the particular type of assignment.
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Templates are a great way to ensure you are delivering an organized and thorough report for each and every assignment. Unfortunately, using templates can backfire in serious ways, which could lead to state sanctions in some circumstances.
Organize your content. Use logical headings so that “like content” is organized together. You will write and edit your report quicker; likewise, your user will locate content easily.
Streamline. Unnecessary repetition of information is not only irritating but can lead to content errors. For example, if your three-year service certification is stated in two different locations in your report, you then have to remember to change it twice (e.g., if you have performed services), to avoid confusing the client. To avoid inconsistencies, read your template to be sure you are not repeating related information in multiple areas of the report. Above all, edit where necessary: ask yourself, “Do I need to include this information?”
Avoid boilerplate. Let’s be honest: sometimes “stock” statements are appropriate and unavoidable. For example, there aren’t many ways you can state that “Septic systems are typical for the area and acceptable to the market.” Making such a statement might be appropriate in many of your appraisals, and there might be no reason to reword it for each report. However, overuse of boilerplate can lead to statements that are inapplicable or meaningless to the particular assignment, like including a septic-related statement in a report that only includes properties with sewers. Bottom line: read your final draft to ensure that content is appropriate, relevant, and meaningful to that particular assignment.
Outdated terms. Believe it or not, it has been over ten years since the Departure Rule departed in 2006. Yet, there are still reports (presumably due to the tenacious use of old templates) that label the report a “Complete Appraisal.” Terms like “Departure Rule,” “Limited Appraisal,” “Complete Appraisal,” “Binding Requirements” and “Specific Requirements” no longer carry meaning in the context of USPAP. Even seemingly benign items can lead to confusion. For one example, stating that today’s report meets the requirements of an “Appraisal Report under the 2014-2015 USPAP,” technically may be true, but it may confuse your user and lead them to wonder “but does it meet the current USPAP?” Appraisers are required to comply with the USPAP that is in effect as of the report date, so complying with an old USPAP is not terribly meaningful. Not all errors are harmless: referring to “USPAP Standards Rule 2-2(b)” doesn’t mean the same thing it did back in 2013. (Consequently, if you are still referring to SR 2-2(b) in your template today, you are identifying your report as a Restricted Appraisal Report.) As you periodically review your templates, be sure your terms and references are up-to-date with the latest industry documents.
Standards Rule 2-2 (a) (viii) states: “The content of an Appraisal Report must… summarize the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions, and conclusions…. Comment: …The appraiser must provide sufficient information to enable the client and intended users to understand the rationale for the opinions and conclusions.”
Revision requests are a part of life for many appraisers. The number of revision requests an appraiser receives varies greatly depending on the quality of work, and from client to client depending on their review process and the type of assignment.
Revision requests have a negative – and sometimes nasty – connotation. In my experience as a fee appraiser, however, I see revision requests as an opportunity to learn what level of detail and report content is appropriate for a particular type of intended user. In other words, what do lenders – or divorce attorneys or other types of users – need to know from my report?
For example, in appraisal review assignments for divorce intended uses, I might write a 35-page review report but my client may still ask me, “What are the most significant issues you found?” I learned this type of user needs an “Executive Summary” in the review, which has cut down on client questions.
The same concept is true for lender clients. It’s logical to think, “Oh my goodness, these lenders always ask me about the finish in the converted garage and whether septic is common!” Recognize the opportunity that if a particular type of user is repeatedly asking for certain explanations, it might be fitting to include the content in the report initially, to avoid a revision request.
Another reality of today’s lending industry is that revision requests are often semi-automated: data is being compared to the appraiser’s own prior work and to peer and statistical data, often focusing on adjustments, quality and condition ratings, view and location ratings, and comp selection.
So, what can an appraiser do? Pay attention to what your intended user needs to know. Obviously, an appraiser can’t “mind read” their peers or a computer model but an appraiser can type a summary of his own methods and support. So, if a lender/users are repeatedly asking for an explanation for particular items and issues, including a summary of those items is not only a step toward USPAP compliance but is also a step toward reducing revision requests. Overall, by recognizing and acting on the needs of the intended user, the appraiser may be “bullet-proofing” the report against criticism down the road.
The Truth in Lending Act (12 CFR Part 1026.42) states that a lender “that reasonably believes an appraiser has not complied with the USPAP or ethical or professional requirements for appraisers under applicable state or Federal statutes or regulations shall refer the matter to the appropriate state agency if the failure to comply is material. … A failure to comply is material if it is likely to significantly affect the value assigned to the consumer’s principal dwelling.”
In addition to the above federal rule, some states have stricter mandatory reporting requirements for appraisal management companies, such as requiring that USPAP or ethical conflicts be reported to the state, regardless of whether or not the failure affects value and regardless of the type of property. Further, Fannie Mae and HUD have their own reporting requirements for lenders.
Read and understand USPAP and keep your copy handy. Utilize at least Standard 2 as a checklist for meeting minimum report content requirements. Refer to the Fannie Mae Selling Guide, Handbook 4000.1, or other industry documents that are applicable to the assignment type. And summarize the information that was analyzed and the methods that were used, in support of the opinions and conclusions made throughout the appraisal report. There is no guaranteed recipe to avoid a state complaint or lawsuit. However, we can all take steps to continually improve our appraisal practice.
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About the Author
Joshua Walitt, SRA, MNAA is Compliance Manager for Property Interlink, a national appraisal management company. He oversees procedures, training, licensing, audit, appraiser independence, and review functions. Prior to joining Property Interlink, he provided fee appraisal and consultation services. In 2013, he was the appraiser member of Colorado’s AMC Rulemaking Taskforce and is a noted speaker at appraisal conferences. In addition, he designs and presents continuing education courses and webinars.
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