Why “Bifurcated” Won’t Work

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Why “Bifurcated” Won’t Work
by Richard Hagar, S.R.A

In other words, the appraiser sits in the office never viewing the subject or comparables; another person, usually a third-party that the signing appraiser has never met, visits the subject and comparables and “informs” the appraiser in the office about the quality, condition, view, and other value-influencing components of the subject and comparables.

Companies are selling the new Fannie Mae-directed process as a way to “help” appraisers; a way to “free-up the appraiser so they can do more appraisals in a day by avoiding the time wasted driving to and from the subject.” They continue: “Appraisers should spend their time ‘appraising’ while someone else is trusted to inspect the subject.” Wow, it sounds like they are doing this for “our benefit”…with no expectation of any return for them.

We are hearing about the latest trend called bifurcated appraisals. Within the past year I’ve seen this term used more often in more diverse places than in the prior 20 years combined; it’s almost like some media company has decided that “bifurcated” is the “it” term for 2019. All sorts of people, AMCs, lenders, technology companies, and Fannie Mae are promoting this “spiffy” new process. They are hoping that the rest of us will “get on board” with their new “better” process.

I do not want to “get on board” because it’s headed for a train wreck.

Experiment
We have run two different experiments in our office: one where we have a trainee appraiser go out and inspect the subject property, and another where the lender hired a real estate agent and sent us the inspection report of a subject property (as a test, of course). The primary appraiser stays in the office while this other “person” inspects the neighborhood and the subject and reports back.

As an added measure, we even had the “inspector” drive by comparables that we pre-selected in advance. This is a step further than what Fannie Mae is currently proposing publicly. We’ve heard that Fannie Mae has been testing having inspectors drive-by comparables, and given Fannie’s vast database of photographs and property data, it is conceivable that Fannie could, in fact, share property photos of recently sold homes with appraisers who are attempting to select comparables without actually seeing them.

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Be that as it may, what Fannie has been saying publicly about their proposed 1004P, is that the inspector will not drive by any comparables and the appraiser will have to go strictly off of what is on the MLS when selecting comparables to put into a report.

In our experiment, we had the appraiser pre-select what properties might be comparable and we sent the inspector out to inspect the exterior and interior of the subject, as well as drive-by the comparables.

Results
This process doesn’t lead to better or faster appraisals or to a more accurate value conclusion, just the opposite. The latest property we tested this process with is a 1,600 sq. ft. rambler built in 1965 on a 10,000 sq. ft. site.

The “inspector” inspected the subject and also drove by ten properties I pre-selected which I thought might be good for comparison against the subject. The inspector supplied a sketch, photographs, and a description of the subject, as well as a description, and street side photographs of the comparables. This is when the process started to fall off the tracks.

Properties that, according to the photographs and inspection report, are inferior to the subject adjusted to an even lower value. This didn’t make sense! They should have adjusted upward.

“Comparables” that appeared equal or slightly superior in quality and condition had their adjusted prices much higher than their recorded sales price. Higher? If they are “superior” their value should adjust down, not up. I used matched-pairs and/or regression analyses in determining adjustments for site size, quality, condition, and the house’s square footage, but only a few of the adjustments helped narrow the value range. The adjusted value range was getting wider for some comparables and narrower for others—it didn’t make sense.

Finally, after spending all day reworking the adjustments, cussing, pulling my hair out, and trying to make sense of this, I jumped in the car and drove by the subject and all of the comparables – I did the job that a competent appraiser normally does. (What a concept!)

What I Discovered
Comparable #1: Located only a few blocks from my subject, is the same floor plan built by the same builder as mine (Yea baby! Sometimes we get lucky). While it had one additional covered parking space and looked to be in equal or maybe slightly superior condition, as compared against the subject that I hadn’t seen, it was adjusting even higher. Why? Once I drove by, things became clear. This house was surrounded on three sides and across the street from newer, larger ultra-upscale homes owned by the super-rich. I didn’t know that by looking at the MLS photographs and inspection report. While I was giving this “comparable” massive weight in my appraisal, I shouldn’t have. This house wasn’t being purchased as a place for a family to live in. Its primary value was the land, i.e. a lot suitable for construction of a new home for a newly-minted Amazon millionaire. Even though it looked very, very similar to my subject, the house had no value, zip, nada, nothing. Well no wonder the adjustments for the extra garage space and condition didn’t make sense, they were irrelevant! And even though the site was only a few blocks away, it was located in an area far more desirable than my subject which required a location adjustment.

Comparable #2: The MLS reported a view but included no view photos. To me, that’s an indicator that the view is very limited (or only from the bathroom window). There were photographs of the interior and they appeared to indicate that the home was remodeled and superior to the subject. Is this reality? Upon entering the driveway and getting close to the house… well what do you know, this house has a nice view looking out at the lake. In this area, that view contributed hundreds of thousands to the value. I didn’t know that from the MLS photographs OR the inspector’s photographs and notes. At this point, and I’ve only viewed comparables 1 and 2, I’m cussing out the inspector who didn’t take time to drive all the way up the driveway and “discover” the view. And while the house appeared superior in the photographs, by the time I drove by, the contractors had been there for weeks ripping out the interior. Oh now I get it! It’s a fixer! None of these items were properly reported by the inspector and only upon my more “hands-on” inspection was I able to perform a better comparison. For this one sale, I was missing more than $400,000 in adjustments!

A third comparable was located up a gravel driveway and behind a home in terrible condition; previously I didn’t know that fact. And while driving the neighborhood I discovered two new homes under construction. I took note, researched, and used their recent sales for establishing land value. (Sweeeeet!)

The Subject: it is located in a plat with no restrictions…build whatever you want—big or small, nice or basic. However, less than 200′ to the South, the same street crosses into a subdivision with extensive restrictions; it has a requirement for the home to be more than 3,000 sq. ft. and the design must be approved by the architectural control committee. Even though the subject is on the same street as the nice homes, it’s located on the “wrong side of the tracks” where values are much less. This is additional valuable information that would have been unknown unless I personally visited the neighborhood.

Once I drove by the subject and comparables, I discovered I wasn’t adjusting correctly for the components that had major impact on value. The next day, back at the office, I began the whole description and adjustment process all over again and this time things started to come together—the right way.

What I describe above is not isolated; they are examples that I have experienced in most, not all, but most, of the bifurcated appraisals that we have performed in this office over the past few years. While some lender’s “spiffy” new system might work in newer subdivisions of Phoenix or San Diego, where you have numerous similar home styles, it does not work in most of America where there are widely varying neighborhoods and houses.

I learned so much more than I got with the MLS or inspector’s photographs.

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Local Expert
If you haven’t visited the neighborhood how do you know what remodeling or new construction is taking place, if any? New construction can be researched and used to establish land value for the subject but you won’t spot new construction unless you drive the neighborhood.

• Are neighboring properties being properly maintained or is a loud local motorcycle gang living next door and causing neighbors to flee?

• Is the neighborhood being updated or driven to abandonment? For instance, the city of Baltimore has 17,000 abandoned homes and is planning on tearing down more than 2,000 of these by the summer of 2020. Are some of the abandoned homes next to the subject? How about down the street, or next to the comparables? FHA and VA strongly suggest (if not require) photographs of anything that might impact the value of the subject…like an abandoned factory in a residential neighborhood of Cleveland. Will Fannie Mae’s neighborhood report, that’s spoon fed to us…or the inspector we are forced to “trust,” inform the appraiser of the issue? No!

• Part of the appraisal process is reporting on conditions within the market area and neighborhood. Appraisers won’t have an up-to-date-clue unless they inspect the neighborhood.

• How do you value or compare different view amenities –based on what someone else “sees” or “feels” about the subject or comparable’s view? How do you verbally, or via a lender’s check-list, convey a view amenity? Is there a 180 degree lake view or is it filtered through trees or limited by a roof across the street—for the subject, or the comparables?

• Was the inspector looking north or south when they took a photograph? And don’t expect more than “a” photograph from them, it wastes their time. Was the view from the deck, bedroom, living room, or bathroom?

• Is that a high bank bluff waterfront or gentle slope? Don’t you dare trust Google Earth 3-D to get it right. How does that compare with the comparables?

• Does the subject’s granite countertop smoothly blend the slabs together or are there big ridges showing inferior workmanship?

• Is the sheetrock triple coated smooth Venetian Plaster or are they thick stucco covering the flaws?

• Do you feel a gentle slope to the floors indicating possible foundation problems or maybe a big bump under the carpet suggesting that the seller is hiding something? Does the seller or the agent “let you in on a little secret about…….?” Don’t expect the inspector to stand still long enough to listen, they don’t care; they are paid $50 per inspection.

• Are you really going to trust what some fast moving property inspector says about the neighborhood and subject?

Won’t Work
This system absolutely will not work for properties with view, acreage, waterfront, outbuildings, unusual style homes, or in neighborhoods where widespread remodeling is taking place. Part of the appraisal process is comparing the subject to the potential comparables. How do you properly “compare” when you have no basis, or starting point, for a comparison? Is this one better or is that one inferior? Why, and by how much, and for what reasons, right? Because you have to “prove” your adjustments; you can’t pull them out of the air based “on my 30 years in the business” attitude.

Allow me to be very blunt: anyone who promotes or suggests this is a “better way” to provide residential appraisals: A) has never properly appraised a residential property, B) doesn’t know what they are talking about and/or, C) has a financial incentive to rip apart the appraisal process.

Does all of this really sound like a valid appraisal process?

The pressure has begun…all they need to do is convince a few over-eager appraisers that this bifurcated system complies will all state laws (it doesn’t), all federal laws (it doesn’t), and USPAP (maybe). So to convince appraisers to “get on board” they use the bifurcated term often, touting it as the “newest thing” at appraisal trade shows. Remember it is your Certification that’s on the line here. Don’t trust them to tell you what is legal—they are just telling you their fantasy of how they want it to be.

Fannie Mae, Freddie Mac and others think technology is a solution. If their spiffy computers and algorithms failed to predict the crash of 2008 I bet they won’t predict the next one, until a year after it happens. Can you hear that? Do you feel the rumble? It’s a train going 80 mph toward a 25 mph curve.

About the Author
  Richard Hagar, SRA, is an educator, author and owner of a busy appraisal office in the state of Washington. Hagar now offers his legendary adjustments course for CE credit in over 30 states through OREPEducation.org. The new 7-hour online CE course How to Support and Prove Your Adjustments shows appraisers proven methods for supporting adjustments. Learn how to improve the quality of your reports and defend your adjustments! OREP insureds save on this approved coursework. Sign up today at www.OREPEducation.org.


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Richard Hagar, SRA, is an educator, author and owner of a busy appraisal office in the state of Washington. Hagar now offers his legendary adjustments course for CE credit in over
40 states through OREPEducation.org. The new 7-hour online CE course Identifying and Correcting Persistent Appraisal Failures shows appraisers how to avoid CU’s red flags, minimize callbacks, save time, and earn more! Learn how to improve the quality of your reports and build defensible reports! OREP insureds save on this approved coursework. Sign up today at
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Comments (27)

  1. I agree with the article and comments regarding the bifurcated appraisal compared to the traditional 1004. However, there is little question that it will “work”, just no where near as accurately for now. What I don’t see in the article or comments is any discussion as to the purpose of the new products.
    The reason the bifurcated report is being created is not to save any money in fees or shorten turn times; after all, the fees paid now are not high in terms of labor hours, and since the borrower pays, lenders are not impacted.
    The reason is to create a work force of inspectors that can rate properties according to location, condition, view, etc. , then those ratings will be added into an algorithm that completes the appraisal using big data.
    For years Fannie and the lenders (and appraisers who review) have noted and complained about the wide range of appraisal quality and the inherent subjectivity of residential property appraising. With today’s fervent adoration of everything digital, big data manipulation would be seen as the answer to appraising residential real estate, if it wasn’t for that pesky buyer preference for those intangible things that affect quality of life.
    The solution is to reduce the intangibles to a rating scale, and while that still requires a physical inspection, the inspector does not have to spend the time to produce an opinion of value; that will be done digitally. The bifurcated appraisal is a logical first step to creating the property inspectors that later on will be able to qualify the components of residential value that big data can’t see.

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  2. Richard, would you please share with us the list of ten potentially “comparable” properties you provided the inspector? Maybe just post the addresses, sale prices, and identify which comparable was one, two, or three that you referenced above. You can post them in this thread.

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  3. Precisely why these products are junk. Thanks for the article and getting the word out about how irresponsible these products are and no one should be accepting these requests

    - Reply
  4. by Chad Atwood, SRA

    One thing that I argue is if the appraiser is not driving the neighborhood how are they to know if the income approach is applicable or not? If we see several for rent signs in a neighborhood we would make a note to check applicability of the income approach, an inspector is not going to notice this or care. They will need to get to their next appointment. The conversation I was a part of with an AMC revealed that these inspectors are trained by and work for the AMC. So this is not some scenario where the GSEs develop, offer, and monitor the inspector process. Your comments about an appraiser can do more appraisals in a day this is correct, we were told the same thing. My question then still remains. If I as an appraiser can complete two full appraisals in a day make say $400 a piece, and be 100% responsible. Why would they subject themselves to doing 6 bifurcated reviews in a day at say $150 a piece, with the same 100% responsibility and liability without knowing who inspected it and having no knowledge of the inside. It makes no sense for an appraiser to needlessly increase their risk for marginal increase in revenue.

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  5. Richard, 100% agree with all of this. I wrote a newsletter on this topic a few weeks ago to all concerned parties and the real joke is that they think they are saving time and money with this new reporting process. They are not trying to help Appraisers! Since when have they cared about us? This process will take way more time because the Appraiser is going to have to spend so much of it clarifying what the “inspector” did or saw, etc. Not to mention if they measured the home correctly. Sounds like they also don’t understand the CBS and CIA basics of “adjustments”: Comparable Better Subtract, Comparable Inferior Add :). We as Appraisers drive around neighborhoods and walk around the inside and outside of a home with so many things instinctively running through our heads analyzing the entire time. This is what we are trained to do. These inspectors as you state are being paid low dollars and they are going to BANG them out with no concern about how much information is really helpful to the Appraiser. BOTTOM LINE IS JUST SAY NO TO BIFURCATED/HYBRID APPRAISALS. THAT IS ALL IT TAKES FOR THEM END THIS NONSENSE…THIS NEW APPRAISAL PROCESS IS BAD FOR ALL PARTIES INVOLVED: SELLERS, BUYERS, REALTORS AND APPRAISERS.

    Thanks for sharing!

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  6. Great article and so true! But to keep it real simple, appraisers don’t want to sit at the desk behind the computer all day doing analysis. Appraisers like to be out in the field! If we wanted a desk job we wouldn’t be appraisers.

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    • by Truett Neathery

      Will not make ANYTHING better, will only expose the Bifur guy to added liability, may look like an opportinity but maybe it’s not !!.Here’s a quote from a Joan Mitchell song : “Some peope thnk they have found a paradise, others just come to harm”. (Amelia)!!!

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  7. Thanks Rich. Last time, they thought it was too onerous to verify income & employment, and wouldn’t it help expand homeownership to qualify borrowers at the teaser rate of adjustable mortgages. Now it’s too onerous to have to have an appraiser visit the subject property… This is another, self inflicted disaster that anyone who has been in the business for any length of time, should be able to see coming a mile away.

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  8. Great article! Mr. Hagar brings up many valid points regarding the faults in the bifurcated product. When performing bifurcated appraisals, I’ve had several issues with the “inspector’s” inspection notes. There are too many subtle nuances in the market for the untrained eye. Maybe…MAYBE, these inspectors will get better as time passes. But what damage will have been done during that time? Once “inspectors” get better, they’ll demand higher compensation for their time and expertise. We’ll be right back where we started. Fannie & Freddie need to suck it up, be patient, and let us do our jobs properly before 2007-08 happens again.

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  9. by Michael S. Elliott, SRA, AI-RRS

    I agree with Mr. Hagar’s analysis completely however I think the main issue is being minimized here . We as appraisers understand that it’s not property DATA collection (as Fannie calls it) but rather that property ANALYSIS goes on in the field, not just at the desktop. The idea that a licensed, UNBIASED third party is looking at all parts of the process to alleviate fraud is the biggest issue and the one that should resonate the most with the general public that has no understanding of adjustments, comparables, etc. The scope of a bifurcated appraisal will inevitably make appraisers party to fraud. Lenders get to have to both ways – they get to help along the fraud while still maintaining a facade that an unbiased appraiser was involved in the process. We all know the first time a $50 property inspector kills a deal by pointing out a real issue they are gone and easily replaced- their replacement doesn’t require years of training, state exams, etc. That is the most insidious part of this issue. A lender can push whatever they want, plop it down in front of an appraiser and say “here, sign this” – if we have no other work, they figure we have no choice and our licenses are meaningless. It’s being helped along by the Appraisal Foundation who’s “running scared” regulatory approach is based on an idea of “some appraisers are better than none” (per comments from Mr. Bunton) and thus their full-on acceptance of bifurcated in the 2020-21 USPAP.

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  10. The Illinois Dept of Financial Regulation published a statement that anyone in Illinois completing an inspection for a Bi-Fur Appraisal must be licensed as either a home inspector or appraiser. Anyone who performs the Bi-Fur inspection that is not, will be brought up on charges of illegal, unlicensed practice of home inspection by IDFPR.. Further, any AMC who provides an inspection by a non licensed person to an appraiser as part of an assignment will be deemed to have violated the State of Illinois AMC act and will face punishment and possible loss of their AMC license in Illinois… strong stuff

    IDFPR Appraisal newsletter Feb, 2019, Director – Brian Weaver

    link to IDFPR statement: https://www.idfpr.com/Forms/DRE/RENews/IDFPR%20Monthly%20Newsletter%20-%20February%202019.pdf

    -tony bamert, appraiser
    champaign, IL

    - Reply
  11. I am total agreement. This is not Good for the appraisal process and it definitely NOT good for the Public. Public Trust is a driving force in USPAP. Many Lenders will not accept a report when work is completed by a Trainee. A trainee that has completed some Appraisal Classes, has registered and license with their state, and works under the Supervision of an experienced Appraiser. The 1004p would be using a non trainee to provide crucial information to complete a Real Estate transaction. The appraiser not knowing anything about the experience, competency, or work ethics of the individual. What Standard will they be held accountable? Whom will regulate them? or hire them…. The Lender?
    The Real Estate Industry in 2018 Contributed $1.15 trillion to the Gross Domestic Product of the USA.
    No good for the industry, the Economy, or the Public will come from this type of appraisal. There is NO shortage of appraisers, there is only a shortage of appraisers that are willing to work for fee that does not meet market condition in compensation for the amount of knowledge the appraiser has , the risk, market study and time to complete the assignment.
    The people pushing for this type of appraisal have their own agenda that is self serving and short sided. It is not for the good of the industry, the long term economics of our country, and especially the public and their trust.

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  12. Hello Richard, one of these days I need to take a class from you. Your article was well stated. This new product reminds me of the field reviews completed by appraisers from different locations. I saw all type of insanity during my forensic review under a federal court case. I saw things that turned my mind inside out and these folks were looking at someone’s appraisal work. How can we do the same thing under a bifurcated product. None of this makes sense other than the wolf has the key to the chicken coop and the wolf wants everyone to look away. Why do they always come up with craziness at or near the peak of the market. Thank you great article.

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  13. by Victor F. Andrews

    I fully agree with Richard Hagar, S.R.A. on his views of “Bifurcated Appraisals”, but for entirely different reasons. As a 36 year veteran of appraisal profession in my market area, I can confidently use MLS subject and comparable photos and/or videos in my reports for better understanding of characteristics. I know my market and I’m confident what happened to Richard won’t happen to my appraiser’s in my firm, but only in my local market, where we have years of experience and knowledge. The reason I agree that Bifurcated Appraisals will not work, is this: Being in an appraisal company with multiple appraiser’s, at times we find ourselves running behind and not able to meet deadlines. To alleviate this, another appraiser in the office (other than the inspecting appraiser) has often tried to pick up the slack by taking a particular assignment to the finish line. I can say, these can be the toughest assignments to finish, because even in our own office with appraiser’s we know well, our interpretations of the subjective characteristics of a neighborhood, a subject residence’s quality, condition or effective age, are just plain different! This ‘sharing’ of the work load, even in the same office, will for the most part, cause more issues than it solves, let alone with an ‘inspector’ and an appraiser that do not know each other or do not talk! There is NO way that a Bifurcated Appraisal can work given the tremendously varying opinions and interpretations of real estate professionals in the market. We all recognize that two different appraiser’s inspecting the same property, will often and do come up with similar conclusions with conventional appraisal inspections. Unfortunately, it seems, the only driver here for FNMA has to be time or money! And, because the old saying is true: ‘time is money’, the reality is that the one key driver to this bone-headed move to ‘Bifurcated Appraisals” must be time and money!

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  14. Well Richard, I agree with you. The powers to be keep wanting to speed up the process, and for what. If it’s a purchase, it is 6-8 weeks before closing. If it’s a refinance, there still should not be any rush. They should let the experts, the certified appraisers do their job. Personally I have fired all lenders who do not want to give me the time I need to do an accurate, concise appraisal. And I am as busy as ever. The appraisers who will do these are the bottom feeders who can’t get business any other way, because they do a lousy appraisal. All you good appraisers keep up the good work.

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  15. Delegating the inspection to another party, not under the control of the appraiser (not a licensed trainee) is totally absurd. Your relying on the word of someone you never met or know. What about wells, septics, cisterns, springs, negative externalities, etc. Many AMCs are falsely telling appraisers that they have hundreds appraisers signed up to do these in the hopes of scaring you to join. Don’t fall for this! Stand your ground.

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  16. Thank you. This is precisely what I’ve been arguing with those that support this nonsensical approach to appraising. The key argument being that if a substantial error is committed, and you are called to task, your State disciplinary board is not going to accept “I didn’t even look at the property! (or) That’s what the client asked for!” as a legitimate defense. The appraiser determines the appropriate scope of work. Period. No exceptions.

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  17. Fantastic article Richard! I have felt the same way ever since these types of products have come on the scene. Thanks for an excellent article! Your article touches on many of the reasons why I do not perform these types of appraisals.

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