Common Appraisal Errors - Part 1


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Common Appraisal Errors – Part 1
by Joshua Walitt, SRA, MNAA

Having recently moved in to the role of compliance manager for an appraisal management company (AMC) and having a background in fee appraisal, appraisal consulting, and banking, I find myself in a unique position to reflect daily on the overall quality of appraisals and all-too-common appraisal deficiencies.

Having a report that complies with USPAP, state, and client conditions is not simply a client expectation, but an essential component to every appraiser’s practice: appraisers, after all, are the individuals to which the standards directly apply. Consequently, appraisers are directly in the cross-hairs for state sanctions if deficiencies are discovered.

Many appraisers are surprised to discover that Standards 1 and 2, which relate to the bulk of work for most appraisers every day, are only 12 pages long. Even including the Big Five Rules (Ethics, Record Keeping, Competency, Scope of Work, and Jurisdictional Exception), the total is only 21 pages. (Of course, it’s a good idea to be familiar with the entire document!)

Advice I give to all appraisers:

1. Keep a copy of USPAP on your computer, desk, tablet, or phone; and
2. Read USPAP.

USPAP establishes minimum requirements for both the development and the reporting of the appraisal. Of course, appraisal review typically focuses on the reporting, specifically the evidence of meeting USPAP standards found within that report. Without actual evidence in the report, it is very difficult to establish that the appraisal was developed in compliance with USPAP or other assignment conditions. The following errors, regrettably, are common and relate directly to USPAP.

Adjustment Support
Standards Rule 1-1 (a) states “An appraiser must be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.” Standards Rule 1-4 states “In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results.” 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.”

Foremost, simply stating that an adjustment is made is not a summary of the information that was analyzed, nor is it a summary of the methods you employed to derive the adjustment. For example, stating “a $14,000 adjustment was made for garage differences based on market data” tells the user no more information than they already gained from your grid, and clearly conflicts with the USPAP standard.

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“Even beyond USPAP, Fannie Mae’s Selling Guide quite specifically notes, “A statement only recognizing that an adjustment has been made is not acceptable” (Selling Guide B4-1.3-09).

In the above example, “based on market data” at first glance might appear to be a “summary of the method employed.” But in reality, it is simply a boilerplate comment that gives no real information: after all, aren’t all adjustments presumably based on some type of market evidence? The user is left wondering how the adjustment is supported.

Whether for good or bad, lenders are now using automated tools to examine your adjustments, sometimes uncovering significant differences (not necessarily errors) when compared to peer or statistical records. Lenders are not allowed to instruct you to increase, decrease, remove, or add adjustments, but they can request that you provide additional support and clarification regarding your adjustments. By providing some level of summary of your adjustment methods at the start, you are not only complying with USPAP requirements, but you are also reducing the potential for revision requests later.

So, what can an appraiser do? You don’t need to write a book. In fact, most adjustments can be summarized relatively succinctly. Consider the following when summarizing your adjustments:

• What specifically is the difference between the subject and the comp? This is normally apparent for garages and GLA, but may not be as easily discerned for condition or quality. In other words, regarding quality-related components, what specific characteristics make the comp different from the subject?
• Did you use paired sales, a cost-based method, grouped sales comparison, a statistical analysis, or a different technique to derive the adjustment amount? If the adjustment is unusual, large, or somehow complex, consider adding a few extra sentences so your user understands.
• What data or information did you analyze? For one example, regarding date/time adjustments, did you study all sales in the area or only one subdivision, and did those sales span two years or only six months?
• In case your client asks for more detail or support later to help in understanding your adjustments, be sure to retain the full research and support in your workfile.

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Highest and Best Use
Standards Rule 1-3 (b) states “When necessary for credible assignment results in developing a market value opinion, an appraiser must develop an opinion of highest and best use of the real estate. Comment: An appraiser must analyze the relevant legal, physical, and economic factors to the extent necessary to support the appraiser’s highest and best use conclusion(s)”. Standards Rule 2-2 (a) (x) states “The content of an Appraisal Report must… when an opinion of highest and best use was developed by the appraiser, summarize the support and rationale for that opinion.”

Highest and best use analysis, depending on the assignment and property, may be quite complex. But whether simple or complex, the important takeaway is that the appraiser must “summarize” the support and rationale for his or her highest and best use opinion, when writing an Appraisal Report.

Checking the “Yes” box on a standard lending appraisal form is not adequate, regardless of what other appraisers may do or how you were trained. (Do any of us honestly believe that “Yes” could ever be construed as a “summary” in any context?) Remember: it is not the form’s job (or the client’s) to ensure the appraisal is compliant; compliance is always the appraiser’s responsibility, whether using a form or not.

So, what can an appraiser do? No one expects a dissertation on a subject property’s highest and best use. In fact, for simple properties and simple assignments, much of the summary of the highest and best use may be very similar to the summary in other assignments. For example, you might not need a long drawn-out analysis and summary regarding the highest and best use of a property in a subdivision. However, a more in-depth analysis and write-up might be necessary for a more unique property or for an assignment that is otherwise complex. At a minimum, summarize the results of your consideration of the four tests: legally permissible, physically possible, financially feasible, and most productive.

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Scope of Work
The Scope of Work Rule states that the appraiser must “disclose the scope of work in the report.” Standards Rule 2-2 (a) (vii) states “The content of an Appraisal Report must… summarize the scope of work used to develop the appraisal.”

In order to do this, the appraiser must understand the client’s reasoning for obtaining the appraisal. For one example, consider the following types of lending-related appraisals you may come across.

• VA
• VA liquidation
• VA liquidation exterior
• Conventional full
• Conventional exterior
• Rent study
• REO addendum

Will these types of assignments have differences in the areas listed below? In many cases, they will.

• Types of inspections
• Research processes
• Types of analyses to perform
• Intended uses and users
• Types of value

Remember that the URAR and other common lending appraisal forms do not prohibit the appraiser from adding to the pre-printed scope of work based on the specific assignment. Disclosing your scope of work is not only good for your client but is equally important for the appraiser: it serves as a disclosure – literally – of what you did (and what you didn’t do) in the course of the appraisal process.

Yet, in many cases, the scope of work looks exactly the same, no matter if it is a conventional assignment, HUD-REO assignment, or an assignment with a rent-study. How can this be? Surely, the scope differs between these types of assignments!

So, what can an appraiser do? For an Appraisal Report, summarize what type of research and what type of observations took place. To do this, think of the differences between conventional, VA, FHA, and USDA assignment requirements, and also think of the specific property, because the characteristics of the subject property could affect your scope of work. Also consider the sources of data you have available to you to meet the requirements of the related Handbooks and Guides- the availability and sources of data may impact your research process, and you’ll want to disclose what you are (and are not) doing, relative to the standard requirements for that type of assignment.

Remember, too, that a rent study assignment includes the development of an opinion of market rent – which is an appraisal. Since it is an appraisal and most pre-printed forms do not include a definition of “market rent,” you must provide that definition and the source of that definition within your report. For a “market rent” definition, look in your real estate dictionary, ask a senior colleague in your market, or call your appraisal organization. For more details on developing an opinion of market rent, refer to USPAP’s definition of “appraisal”, Standards 1 and 2, as well as FAQ 161.

If you are an appraiser who uses a template to start reports, consider reviewing your template, to ensure appropriate scope, use, users, and value types are contained in your templates for the varying types of assignments you regularly perform.

As with other issues, disclosing the proper scope of work within the body of the report is an important step in protecting the appraiser. Without a properly-disclosed scope of work, how can you establish that your process was adequate and appropriate?

Reconciliation of the Sales Comparison Approach
Standards Rule 1-6 (a) states “An appraiser must reconcile the quality and quantity of data available and analyzed within the approaches used.” Standards Rule 2-2 (a) (viii) states “The content of an Appraisal Report must… summarize the… reasoning that supports the analyses, opinions, and conclusions. Comment: An Appraisal Report must include sufficient information to indicate that the appraiser complied with the requirements of Standard 1.” (Comments in USPAP carry the same weight as the component they describe.)

Truth be told, reconciliation takes place throughout the entire appraisal process. “Reconciliation,” in general, is the process of taking multiple pieces of information and boiling them down to a smaller more-refined conclusion.

In the context of the sales comparison approach, the reconciliation generally refers to the process of moving from the adjusted prices of the comparable sales and reducing them down to your one value conclusion through logic and reasoning.

The key is that your reconciliation needs to be appraisal-specific, not a boiler-plate standard sentence like “Equal weight given to all comps.” In some cases, it could be believable to give equal weight (or, consideration) to all comps if, for one example, the comps were all equally similar to the subject. However, the issue is that USPAP – and users of appraisal services – expect a summary of the reasoning that goes into your reconciliation process. So, the logical question in response to this statement: “equal weight was given to all comps” is, “Why was equal weight given?” Another example is “The opinion of value comes in at the high-end of the value range,” but there is no explanation for why that is the case. If the reasoning isn’t logical (or simply isn’t present in the report), there could be problems later with your client or the state board.

Another issue with comments like “Equal weight given to all comps” is that the claim doesn’t always correspond to the value conclusion. For example, if your three adjusted values are $100,000, $120,000, and $140,000, and you give them “all equal weight,” then the value conclusion will likely not be $110,000. In this example, the so-called reconciliation appears to have no real connection to the value conclusion whatsoever.

So, what can an appraiser do?

• Answer the question within your report; why is most consideration or weight given to comps X and Y, or why is the value conclusion reconciled to the high, mid, or low end of the adjusted range?
• Ask yourself if the value conclusion actually makes sense with how you’ve summarized your reasoning.

With any of these common errors, be careful to not simply “go through the motions,” but actually type report-specific summaries related to your opinions and conclusions. If you start your files from a template that has a boilerplate outline, be sure to read through the entire content on each report, to be sure you are including appropriate commentary that does not contain contradictory statements.

Part 2 will take a look at common errors and best practices related to market analysis, as well as template pitfalls, dealing with revision requests, and understanding mandatory reporting.


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About the Author
Joshua Walitt, SRA, MNAA is the 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. In 2015, Walitt designed the Market Machine, a market analysis and regression modeling tool used by appraisers throughout the U.S.. He also provides valuation consulting for international applications, most recently for analytical software. He writes for industry publications, and has spoken at events including the Appraisal Summit and Expo, the Appraisal Institute’s Annual Conference, the Valuation Expo, and client conferences. In addition, he designs and presents continuing education courses and webinars.

This article is not an education course, the content does not represent any company’s policies or procedures, and the information provided in the article is not a guarantee of compliance.

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Comments (15)

  1. by Michael S. Elliott, SRA

    Unfortunately this author has been to too many “talk down to residential appraisers” reviewer seminars. Tell me, Mr. Walitt, does the URAR ‘checkbox’ in zoning for legal compliance not answer the “legally permissible” question in HBU? Does the site area, an attached plat map and the existence of a single-family home on the site not answer the “physically possible” question? And does a good sales comparison question not answer the financially feasible and maximally productive questions? USPAP does not require summarization in a defined, specific “section”. For decades that was considered a reasonable summary, however about 10-12 years ago a group of reviewers got together and decided that, in their own “new” interpretation of this part of USPAP – which hasn’t changed (summarization of HBU has always been required for a Summary Appraisal Report (prior) or an Appraisal Report) – and started passing this new idea around while talking down to “dumb” residential appraisers at classes and articles like this- “Look ! We found something wrong with the form! you must summarize HBU – add a section to your addenda or else!” This exact USPAP requirement was available in 2005. Why wasn’t this issue brought up when the Fannie test forms (the draft forms used for a short time prior to the 3/2005 URAR) were developed? No one raised the alarm – “oh no! the HBU section isn’t ever compliant, even for simple assignment!” Why? Exactly as I said – groups of reviewers (of which I used to be one at a bank) – start over-thinking things and pass around these “compliance” ideas which are re-interpretations of existing text because they see enough “inferior” residential appraisals that they start to get an intellectual superiority complex. It’s the same reason that the Foundation, after 20+ years of having 2-3’s “signed certification” requirement has suddenly, in 2018, “reinterpreted” the exact same text to mean that you must have a signature below EVERY additional certification. It’s nonsense, never been accepted before, but if enough “superior” people start talking down to us all about it we’re supposed to bend over like idiots and just accept it as fact. Now, the author is going to want to respond to me with the same tired reviewer tropes – “forms can’t be USPAP compliant” – “complex assignments mean you have to add things in an addenda” – all things most residential appraisers know. So dispense with that and look at the “normal”, and “typical” sections. Because what reviewers never want to think about (since they’re not running a business) is how templates ARE important. While we’d all like to write “demo” reports for every assignment, sometimes a refi of a 1000 sf ranch with 3 comps within a block does NOT take a dissertation. It take efficiency. Those are the assignments that allow us to take the time to write 3 extra pages of narrative on the complex or rural assignment that requires something more in-depth. I know the author will also want to go with the defense all morally-superior reviewers start with- “but I was a REAL working appraiser for years…” Great. But you aren’t now and thus your perspective IS skewed no matter how much prior field experience you have. Just imagine friends – due to the AQB changes soon we will have reviewers like this that have NEVER been in the field but have their license.

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  2. Can an appraiser request a buyers home inspection(even though its confidential) and then put it in the appraisal on a conventional loan?

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    • Jenny, if the document is confidential, then it might be difficult for the appraiser to get a copy of it. But if the appraiser learns information about the subject property, whether it is from MLS details, county records, discussion with the seller or other parties, inspection reports, etc, then the appraiser needs to consider (and describe in the appraisal report) the known relevant characteristics of the subject property. The appraiser can’t “unknow” the information.

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  3. In my market you can throw that all in the dream world pile. Small old houses often sell for more than big new houses on larger lots. Lake houses are like diamonds and the adjustments impossible to arrive at using science. Is our profession an art or a science? AMC’s hate the art part.

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    • Scott, thanks for the comment. I also have experience in areas with custom and varied property types, value from views and locations, and rural/ remote properties. I haven’t seen these types of issues being pushed aside to the “dream world”. On the contrary, I’ve found these items to be more important in complex appraisal reports, and can really help the lender understand the appraiser’s reasoning and conclusions, which can in turn help reduce requests for more information from the underwriter.

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  4. Most of my experience has been as a fee appraiser for lenders, AMCs, attorneys, and other clients. What I’m describing is not a special “complete quality report”. Having a summary of what method was used to support an adjustment is not unreasonable – otherwise it is a restricted appraisal report. Same for a logical reconciliation: typically several sentences are adequate – not a book, but enough to summarize the rationale behind your thinking.

    Good point on models… the downside of models is the computer can’t explain its logic or reasoning – but appraisers can, and that’s our edge.

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  5. Very good and thoughtful article.He works for a AMC and he most likely has ordered appraisals to done for a fee of $250 and a 3 day turn time.The time it takes to prepared a appraisal,inspect and do research would take many hours.Lets say the time it takes to prepare a appraisal is 20 hrs. $250 divided by 20 hrs =12.50 per hour plus car expense .Fast food workers want $15.00 per hour

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    • Kenneth Smith, your fee comment is off base.

      My fee appraisal experience taught me what my time and expertise are worth, and I never short-changed myself. You stated that I “most likely” offer a specific fee, but you are wrong in your assumption. You have no basis for your assumption, but you lay it out there nonetheless. Did you ever discuss a fee assignment with me? With the company? I invite you to look us up and call a coordinator, or ask for me.

      To work (or not) with a company is a business decision. But implying or presuming something that you have no basis for, and sharing that misinformation on a public forum, is not reasonable, productive, or professional.

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      • Very good response to Kenneith, Joshua. His comments are unprofessional and petty. I thought your article was insightful and a good reminder to us all that we must remember our audience when completing a report. I especially like hearing from reviewers, it keeps me on point. Thank you!

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      • My apologies to Mr Walitt. Perhaps I was off base. Just prior to reading his article I had a appraisal order come in with no fee attached. I asked for $450 due to the extra driving needed to do the report. One minute later the client cancelled the order and said it was being reassigned.

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  6. While the author correctly addresses the issues of USPAP compliance, the larger issue is that clients, AMC’s in particular, do not Allow Enough Time or Fee to cover the costs of doing what we are asked to Certify Compliance with.

    AMC’s seek the fastest and cheapest appraisals. They nave no right to complain about quality because they force even the best appraisrs on their list {which may not be the best in the industry} to work too fast, and at inadequate pay to go through the due diligence steps of Verifying Market Data for Transactional influences in included it the Sales Price, let-alone, doing the research, pairings or statistical analysis to support Adjustments.

    I do appraisals on houses where all of the above is required. Our average fee is $4,000, not $400. And, it takes more than a week to complete one report with all of the research, verification and analysis.

    This is like the Elephant In The Room, or the Kings Golden Clothes, everyone knows that this is the problem, no one speaks of it, not the AF or the AI or any other professional organization.

    It is insane to press appraisers to work too fast to begin to comply, and then rail against them for not complying. Especially when ll they really want is a copy of their E&O insurance so they can sue them for non-compliance later as a Loss Recover Vehicle.

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  7. I have seen the same type of articles for 34 years. When an industry offers $300 to $400 for a SFR valuation you pay for what you get. No one cares about research or taking the time for analysis when they can’t save for retirement or pay for health care. Soon AVM’s will take over the residential industry anyways and making corrections is so common it is part of the business model. In my area it would be barely viable to complete a real SFR appraisal for $750. Litigation work is the only viable way to make a living. A bank will pay $1,500 for a 15 million dollar home valuation and in Litigation it is $8,500 plus $400 an hour. We lost really good appraisers because of low fees and what is left are bottom feeders barely surviving and it will get worse. Really good data research is the key to having few adjustments and issues but no one has time (Cost Benefit) to take 2 days for research and call all the brokers and buyers.

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  8. What the author is describing is a complete MAI quality report. two problems that I see the first is that lenders wont pay for that kind of detail and it amazes me that a garage adjustment is not self explanatory. Lenders and underwriters cannot see a statement and look at the attached photos and reach a logical conclusion.

    The second is that if the industry (Review modules) has such a deluxe and “accurate ” base for adjustments, why not share it? This would insure a better result for the lender. I sense the truth is that the “Models” are not specific enough to get definitive answers — especially in smaller markets. Perhaps they could or would like – to replace appraisers LOL

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    • Bill Schaaf:

      You are exactly correct. I have tried several times to get the data from the lender or underwriter who questions my data, and have been refused this information. Why not give it to the appraiser to look at.

      Point 2; If the subject has been bracketed on a feature, the actual adjustment figure is not that important. If you add on one line, subtract on another, and have no adjustment on the third, trust me, the adjusted amount will be the same. Try it.
      To much is being made of the actual adjustment amounts in many cases.

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