Navigating Hybrid Appraisals
By Isaac Peck, Editor
What’s all the fuss about hybrid appraisals? Some believe these “desktop” reports are the future of appraising; others view them as the fast track to the profession’s demise. Here’s what you need to know (for now).
Desktop reports have been around for years—where an appraiser values a property on a short form without inspecting the property. Today, a newer (though not exactly new) product has emerged and is becoming increasingly popular: the hybrid appraisal.
With longer turn-times and a tightening real estate market, lenders and AMCs are turning to hybrid appraisals in select markets. While demand for these products grows among lenders and AMCs, questions are being asked by rankand- file appraisers. Are hybrid appraisals USPAP compliant? Are they just a means of paying the appraiser less? And perhaps more importantly, are hybrid appraisals simply a precursor to the phasing out of real estate appraisers?
What exactly is a hybrid appraisal? A hybrid appraisal is a valuation completed by a Licensed/Certified appraiser that mirrors a desktop appraisal in that it has a shorter appraisal form and is performed by an appraiser who typically never visits the property. However, a hybrid appraisal includes an exterior observation of the property, sometimes including an interior inspection as well, by a third-party vendor, typically a real estate agent, property inspector or even another real estate appraiser.
But not all clients will use the term “hybrid.” Dave Towne, AGA, MNAA, a Certified Residential appraiser in Wash. state, reports that AMCs and lenders often avoid the word “hybrid” when communicating with appraisers. “When they call or email you, they’ll say something like: ‘We have a really fast appraisal for you that you can do on your desktop without leaving your office.’ Or ‘Can you do an exterior appraisal for us?’ Or they might identify it by the name that the client uses for the product,” says Towne.
Uses for Hybrid Appraisals
George Paquette, Strategy Manager at Springhouse, works with desktop and hybrid appraisals on a daily basis. Paquette says that while hybrid and desktop appraisals have been around for years, he is seeing an increasing demand for these types of assignments, particularly hybrid appraisals. The primary market for hybrid appraisals is currently not the traditional purchase or refinance valuation that is often a residential appraiser’s bread and butter. Paquette explains that hybrid appraisals are mostly used for mortgage servicing and default scenarios. “Instead of purchases and refinances, hybrid appraisals are often ordered for portfolio management and servicing purposes, such as updating the value for a loan or assessing how a loan is performing. They are also used if a loan goes into default, foreclosure, or pre-foreclosure so the lender knows where the value is,” says Paquette.
Private investors are also turning to hybrid appraisals. “We also are seeinginterest in the non-traditional financing space; basically anytime the transaction is not a federally related transaction— private lenders, hard money lenders, or transactions that are not going through a federal bank,” reports Paquette.
If banks and hard money lenders have the ability to order full appraisals, why is there a demand for hybrid valuations? The answer lies in two words that appraisers regularly and consistently protest: fast and cheap. “Hybrid appraisals are typically faster and less expensive than a traditional appraisal,” Paquette says. But many argue that they also are more efficient, and actually a better use of an appraiser’s skillset: have someone else inspect the property so the appraiser can focus on higher level work. “The process can be much faster, and the appraiser can do more valuations by remaining at their desk and focusing on the valuation side, compared to having to drive out, measure and take photos. We can quickly get somebody to do the inspection and keep the appraiser focused on higher-level valuation instead of in-the-field work,” explains Paquette.
There was a notable spike in demand for hybrid appraisals, Paquette reports, when the turn-times for appraisals increased substantially during the recent “boom” months. In other words, some clients directly substituted traditional appraisals with hybrids to meet demand. “Once appraisal turn times and fees hit a peak, we saw some clients on the servicing or REO sides, who typically order an appraisal, turn to these products. Some saw the lead times weren’t going to work with their marketing timelines. For example, they wanted to list a property within 30 days, so the hybrid appraisal fit that niche and got things done quickly, while still having an appraiser involved. When turn times and fees peak during hot markets, lenders look for alternatives when possible,” says Paquette.
Appraisers typically report earning an average of $50–$100 per hybrid assignment, which is substantially less than the average fee for a typical appraisal. However, proponents of hybrids say the model is designed so the appraiser can complete the valuation in 30–60 minutes. Paquette echoes these sentiments, saying that hybrid appraisals present an opportunity for appraisers to make as much or even more per hour than what they might earn for a traditional appraisal. “We’ve seen appraisers make more money doing hybrid valuations. Right now there is a smaller number of appraisers doing them but we definitely have appraisers who have learned the product well and can do them quickly,” says Paquette.
Hybrid appraisals can also be a good solution for appraisers who still want to continue appraising into their “golden” years (as many do), but due to health or mobility reasons are no longer able to physically inspect homes. In these cases, hybrid appraisals allow veteran appraisers to continue to leverage their expertise without leaving the house.
Central to the debate over hybrid appraisals is the question of whether such a valuation product is USPAP compliant. The argument for why such reports may not comply with USPAP centers around whether the property inspector engaged for the report is performing Appraisal Practice, as defined by USPAP, and also whether it is a violation of USPAP to have someone other than the licensed appraiser contribute Significant Appraisal Assistance. Some appraisers also contend that reliance on an unknown, potentially unreliable property inspector’s information is both irresponsible and a violation of USPAP.
In his newsletter, Towne argues that: “The person acting as the ‘field inspector’ is actually performing appraisal practice, and without the field inspector’s data, no actual appraisal can be completed by the appraiser. It’s my guess that the majority of ‘field inspectors’ are not licensed appraisers. As such, an appraiser who allows some unidentified person to perform appraisal practice in the preparation of his or her report is in violation of USPAP,” says Towne.
The second point of contention revolves around the definition of Significant Appraisal Assistance. “Having someone besides the licensed appraiser contribute Significant Appraisal Assistance, without identifying that individual in the report, is also a USPAP violation charged back to the appraiser who signed the report,” Towne argues. Towne references a discussion of Significant Appraisal Assistance in FAQ #248 in USPAP 2016- 2017, which states: “Examples of contributions made by appraisers [emphasis added] that constitute significant real property appraisal assistance include the identification of comparable properties and data, inspection of the subject property and comparables, estimating accrued depreciation, or forecasting income and expenses.”
In other words, inspection of the subject property is Significant Appraisal Assistance. However, the word “appraisers” in the sentence is a key point of contention also. What if the contribution is not made by an appraiser? Earlier in FAQ #248 is the following: “An individual who merely collects or provides data for use in the analysis does not provide significant appraisal assistance…One misconception is that non-appraisers who provide assistance should be identified in the certification. This is incorrect because the certification requirements in USPAP apply only to appraisers.”
So which is it? Working RE reached out to John Brenan, Director of Appraisal Issues at The Appraisal Foundation (TAF), who indicated that TAF has received several inquiries on the subject and that the Appraisal Standards Board (ASB) is “currently working on a USPAP Q&A (or two) related to this topic. We do not have an anticipated publication date at this time, but this issue is high on the ASB’s radar,” says Brenan. Outside of this statement, Brenan indicated TAF has no further comment until the ASB guidance is published.
While no official guidance has been issued by TAF, appraisers and AMCs alike have noted a vast difference in the types of hybrid forms being offered to appraisers. Paquette explains that the different companies offering hybrid products, including Springhouse, all have their own language and certifications that appraisers are asked to “Certify” when completing the report. Consequently, appraisers must exercise great care when picking a company to work with. “It’s up to the appraiser to pick the companies and the forms that they are comfortable with,” says Paquette.
To make blanket statements such as “no hybrid appraisals are USPAP compliant” misses the point, according to Paquette. “Appraisers should look within the report to make sure the language needed for the assignment to be USPAP compliant is there, or add it in themselves, if necessary. One hybrid form might be USPAP compliant and one may not be. It depends on the appraiser’s reconciliation and what language and disclosures are in the report,” Paquette explains.
In terms of what to look for, appraisers should read the certifications in the report carefully, as well as demand adequate information when needed. “An appraiser should be cautious in terms of what information they are getting. If you have an assignment with very vague or limited information, don’t guess. A savvy appraiser may need to go back to the AMC or client to ask for more information, or to even decline the assignment. In these kinds of scenarios, appraisers who want to stay out of trouble shouldn’t guess or leave information to chance,” says Paquette.
Dustin Harris, The Appraiser Coach and the head appraiser of a busy appraisal office in Idaho, reports that his firm occasionally does hybrid appraisals. “I do hybrid appraisals, but I am very careful about it because of USPAP compliance issues. I interview clients indepth before I do any work with them and I always start work on a trial basis to make sure I’m comfortable with their forms, engagement letter, and scope of work,” says Harris.
It is the responsibility of the appraiser to comply with USPAP, Harris argues. “One of the key questions that I ask clients who want me to do hybrid appraisals is: ‘Do you allow me to put my own language in the form?’ I have yet to see a product that I feel comfortable with as-is, so I always have to add an addendum to the report to be comfortable that I am complying with USPAP,” says Harris.
Craig Capilla, a trial lawyer with the Franklin Law Group who specializes in real estate appraiser cases, says that the single most significant issue that appraisers face when performing hybrid appraisals is the reliance on third party data, subject property inspection or otherwise. “An appraiser must have a reasonable expectation for relying on information that he or she has not personally observed. This is not a new requirement. It is something the appraiser must remember when developing any opinion of value. However, the risk with hybrid reports is that the appraiser gets too comfortable and fails to adequately address this issue,” says Capilla.
Appraisers have already begun to face trouble with their state boards over hybrid assignments, according to Capilla. “We have started to see licensing complaints related to hybrid appraisal products in Illinois and I am certain there will be complaints in other states as more of these assignments are performed. Similarly, we have not seen a civil suit specific to these hybrid reports yet, but that typically follows the licensing complaints as it often takes more time to prepare those claims for litigation. We expect these lawsuits to arise in the near future,” reports Capilla.
The majority of the complaints and lawsuits that Capilla foresees will originate from the homeowner/borrower. “Most clients are sophisticated enough to know if the appraiser’s product is sufficient for their needs, or if they need to get a different report. However, the homeowner/borrower does not typically have the same level of understanding about real estate and asset value, and so it is often this confusion that leads to litigation,” Capilla says.
According to David Brauner, Senior Broker at E&O provider OREP, you should ask your insurance agent whether your policy covers these appraisals— not all may. “We’ve checked on behalf of our insureds and so far, there are no specific exclusions for hybrid or desktop appraisals at OREP. Coverage extends to professional services related to real estate appraisal, but when discussing coverage, everything is case by case,” Brauner said. Here is some guidance from an OREP underwriter:
• Verify the information using the normal tools (public records, MLS).
• Disclose what sources the information was verified with and to what degree.
• State that the appraisal relies on the third party inspection report and if that report contains an error, the results of the assignment may be affected.
• Make sure the entire report is USPAP compliant.
• Consider a disclaimer that the appraiser is not liable for errors on the part of the inspector.
Regardless of inclusion of disclosures and disclaimers, Brauner notes that disclaimers do not always hold up in court.
Case Against Hybrids
As the debate over hybrid appraisals intensifies, some appraisers are adamantly opposed to the idea, arguing that anything short of a traditional appraisal is a ploy to replace appraisers, a race to the bottom on appraisal fees, and an attempt to nullify the valuation process.
Pat Turner, IFA, President of Virginia Coalition of Appraisal Professionals, says that hybrid appraisals are bad for the appraisal industry and the public at large. “I think these products create a lot of liability for appraisers and are just another way for AMCs and lenders to make excessive profits at the expense of the consumer. We have AMCs in Virginia that are charging a borrower $700 for an appraisal that they’re paying the appraiser $350 for. Do you think they are going to properly disclose what exactly a hybrid appraisal is to the consumer? The consumer is going to be told that they’re having an appraisal done but what they get will be much, much less than that,” argues Turner.
The key part that Turner objects to is the framing of this product as a full “appraisal,” which, he says, glosses over the fact that the appraiser is relying heavily on a third-party inspector. “I am not against desktop appraisals. I would much rather do a desktop appraisal, where I can clearly state that I have only relied upon public records for the description of the property. Whether those public records are right or wrong, I have disclosed what I have relied upon. The reader of the report understands that the interior of the property hasn’t been inspected,” Turner says.
However, with a third-party inspector, Turner says that the risks and potential for error will multiply exponentially. “The idea is to have real estate agents or other inspectors visit the property and document information about it. But if you look at the Broker Price Opinion (BPO) market, who do you think is doing most of the BPOs? It is real estate agents with the least experience, i.e. the ones who have just gotten into the business. So appraisers will have these same individuals going and inspecting the homes and reporting on the condition of the properties. How can appraisers reasonably rely on this information? How am I going to assign all these responsibilities to somebody I don’t know, then rely on that information and come up with an estimate of value?,” says Turner.
Ultimately, Turner says that the result will be a product that is misleading and inaccurate. “If you have unreliable and incomplete data, then the result will be misleading. Imagine all the things that might be missed or intentionally omitted by an inexperienced or unethical inspector: rear decks, rear stamped concrete patios, extravagant outdoor kitchens, not to mention all of the potential defects that might be overlooked or underreported by the so-called inspector. Imagine the omission of powerlines right behind the property, a collapsed roof on a detached garage behind the property, or other important information about the surrounding structures or neighborhood. I’m not going to trust a real estate agent who is willing to go by the house for $25 to tell me what condition the house is in. All of this is in the name of a cheaper product. It cheapens our profession and provides inaccurate and misleading information to the consumer,” says Turner.
Case for Hybrids
While some appraisers view hybrid appraisals as a threat to the industry, Paquette argues that hybrid appraisals are actually a way for appraisers to take back market share in the valuation space. “I think a lot of appraisers look at hybrid appraisals as a threat to standard appraisals, but we are actually seeing investors choose these over BPOs, AVMs, and evaluations because they’re done by a licensed/Certified real estate appraiser. So private investors and lenders are choosing these over alternative products,” says Paquette.
In other words, instead of a threat, Paquette sees hybrid appraisals as an opportunity. “While there are still many uses and strong demand for BPOs and broker pricing of properties, I think that if the appraisal industry had hybrid valuations when BPOs first came out, appraisers would have been a lot busier than they were in those slower times. This product basically allows appraisers to compete against the lower-priced products that can be done quicker, while still getting paid well for their expertise,” argues Paquette.
For his part, Harris, who includes some hybrid valuations in this practice, says that it comes down to a business decision by appraisers. “We have to look at ourselves like valuation professionals. We need to stop looking at appraisals in terms of fee, and more in terms of hourly rate, just like any other professional does. As professionals and business people, we look at all types of products and understand the Scope of Work involved, and then select the type of work we want to do based on how we want to run our business. As a professional, I have to make business decisions based on what I think is moral, ethical, legal and financially feasible. It is a fact of life that the valuation profession is changing. It is up to each appraiser to decide how they are going to operate their businesses going forward,” says Harris.
About the Author
David Brauner is Publisher of Working RE magazine and Senior Broker at OREP, a leading provider of E&O Insurance for appraisers, inspectors and other real estate professionals in 50 states (OREP.org). He has provided E&O insurance to appraisers for over 20 years. He can be contacted at email@example.com or (888) 347-5273. Calif. Insurance Lic. #0C89873. Visit OREP.org today for comprehensive coverage at competitive rates.