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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.
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.
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.
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.
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?
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.
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
Sign Up Now! $119 (7 Hrs)
Insured’s Price: $99
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