Eight Most Common Appraisal Mistakes
by Phil Spool, ASA

This article is about common mistakes in appraisal reports, whether the appraisal is for a mortgage transaction or other intended use. Most mistakes are not violations of USPAP but errors caused by a lack of common sense, trying to satisfy a client or not following Fannie Mae guidelines.

After reviewing countless appraisal reports, I noticed a pattern of common mistakes. The most include:

1. Market Area/Time Adjustment Inconsistency. In a residential appraisal report form, within the Market Area Description section, if you check the box that indicates property values are declining, then a negative time adjustment is in order for your comparable sales. Awhile back residential appraisers were hesitant to indicate that property values were declining as lenders or mortgage brokers were letting appraisers know that if they checked the “declining” box, the loan would not get approved. 

The bottom line is that an appraiser is held responsible for what they write in their report and should not be persuaded by anyone telling them what to write.  Therefore, if you check the box that indicates property values are declining, then truly consider using a negative time adjustment for the comparable sales. Conversely, if property values are increasing and if that box is checked, the appraiser should consider using a positive time adjustment for the comparable sales.

2. Improperly Describing Neighborhood Boundaries.  As sales become more scarce and similar type properties are located further away, in comparison to when sales were plentiful and nearby, appraisers have a tendency to expand the neighborhood boundaries in order to accommodate the utilization of sales in adjoining neighborhoods. This is wrong.  If a comparable sale is located in an adjoining or nearby neighborhood, the appraiser should simply state that the comparable sale is in a substitute neighborhood.

This is explained in the Fannie Mae Selling Guide, Part XI, Section 406.02: Selection of Comparable Sales, where it states: “As a reminder, although it is preferable for the appraiser to provide comparables from the subject’s neighborhood, Fannie Mae does allow for the use of comparable sales that are located in competing neighborhoods, as these may simply be the best comparables available and the most appropriate for the appraiser’s analysis.  If this situation arises, the appraiser must not expand the neighborhood boundaries just to encompass the comparables selected.  The appraiser must indicate the comparables are from a competing neighborhood and address any differences that exist”. 

While this is a Fannie Mae guideline (Announcement 08-30 dated November 14, 2008), it is also considered appropriate for non-lender appraisals. If you are interested in more details of Fannie Mae appraisal-related policy changes and clarifications, go to efanniemae.com. At this site you will also find information on the 1004MC form and the Home Valuation Code of Conduct (HVCC).

3. Misunderstanding the Difference between Data and Verification Sources. The most common data sources include public records, Multiple Listing Service, HUD 1 statements and deeds. Verification is picking up the phone and speaking to either the buyer, seller, listing agent, selling agent, attorney involved in the transaction or the title company that handled the closing.  The most common verification source is the listing agent, followed by the selling agent.  Verification would include confirming the sales price, any sales concessions, condition and renovation of the property, etc. The key word is confirming.

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