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Comparing Hybrid Appraisals with a 1004 Report
by George Hatch
The hot button topic with appraisers these days are the so-called bifurcated appraisal assignments, also known as hybrid appraisals. These assignments typically involve the use of subject property inspections performed independently of the valuation process, with the appraiser’s role limited to performing the inspection aided desktop appraisal. Meaning, the appraiser is working without ever physically seeing either the subject or any of the comparable sales.
It’s akin to using MLS photos and descriptions for all of the comparables used in the Sales Comparison AND for the subject property itself. You’re relying on someone else’s descriptions.
There are a number of issues with this type of service that will engender a lot of controversy and heated debate among appraisers, and for good reason, but for now let’s just talk about the similarities and the differences between the two appraisal processes.
What You Really Do
First, let’s take a look at the process we normally use in developing and reporting an appraisal using the protocols in the Fannie 1004/2055 and 1025 programs. Feel free to add or subtract or rearrange the sequence of events to reflect your personal process—the point is to highlight what you do so we can compare your process in a regular 1004 protocol versus what you would be doing in a hybrid “did not inspect” assignment.
In order, many appraisers:
1. Research the subject for its public record info, sales history and other information.
2. Decide what the dominant attributes of the property are with respect to its physical, legal and economic attributes, including the market area in which it competes.
3. Use those attributes as filters for searching for sales data that might be comparable to the subject.
4. Drive out to the subject. Here’s where we start getting into some activities that an appraiser will routinely perform but that a third-party inspector probably won’t. A third-party inspector probably will be commuting from point A to point B only, whereas you and I are doing more than that. In addition to driving into the subject neighborhood we are also collecting information about that neighborhood that we will use in our analysis. Starting with the wider neighborhood environment of which the subject is a part.
You may not recognize it in these terms but when you’re experiencing the ingress/egress of the neighborhood and passing by its nearest supporting services, and you’re noticing where the property development patterns are changing and what the composition of the immediate neighborhood looks like—you’re actually collecting very relevant information. Information you use to draw the geographic boundaries for your subject neighborhood and/or the geographic boundaries of the market segment in which it competes.
5. Next you get to the subject site and start analyzing the property, starting with the various physical attributes of the site itself. Even if you aren’t writing it down in your notes or later conveying it in your reports, you are taking mental notes of lot utility issues like the topography, terracing setbacks for the improvements and other factors. For view amenities you are considering type, quality, direction and orientation to the public zones of the house, not just ticking off a checkbox “view-yes” and so on.
Then you’re using a similar process in your inspection of the subject interior. Adding interior walls with floor plans in your diagrams is not done as much today, so many of you may not be doing that in your notes, but you’re still collecting that information mentally. You’ll also routinely make other observations that will eventually contribute to the development of your opinions about quality, condition, functionality and overall appeal.
6. You drive the comparables. You may only present three, four or six sales in your report but if you’re like most appraisers you are routinely driving more sales than you intend to use in your reports, and like your drive to the subject, you are forming opinions on the comparables as you go. You’re taking notes—even if only mentally—of various property attributes in addition to what will show up in an MLS data based picture of the front of the house.
7. Finally comes the report writing, except that the appraisers are doing more here as well. A lot of appraisers have lost sight of the fact, or never realized, that they’re performing SR1 development functions concurrently with performing the SR2 reporting functions. So if you’re like most other appraisers, this is where all the other additional information you collected during your field trip are contributing to the development of your opinion of value.
Hybrid Appraisal Assignments
Now that we’re thinking more about what we actually do, let’s compare it to what your clients expect when they engage you for a hybrid. When a client or data vendor provides you with the outside inspection report on your subject and whatever data they have on comparable sales data, they are not giving you all the information that you normally collect when you physically inspect your subject and drive your own comparables. Moreover, they’re probably only giving you what they typically collect for all such assignments whereas, as an appraiser, you are proactive in following up on aspects that draw your attention or prompt a question.
The third-party “property inspector” who is driving to your subject isn’t doing everything that you would do during that drive either. They’re probably not engaged and certainly not to the level you are. They’re just driving to the property and performing the site inspection to the extent it takes to fill out the form. I would bet that their drive adds little or nothing to the process. They’re not “seeing” because they’re not looking, and they’re not looking because unlike an appraiser, they have no reason to look. The information about the subject neighborhood that you need to collect in order to perform your analysis isn’t germane to what they’re doing, which is limited to simply “inspecting” the subject and possibly photographing potential comparables.
Likewise, if they measure and diagram a structure, they probably are not making observations about floor plans and other subtle but important details that you would normally collect. They aren’t self directed in seeking out the information to be used in the analysis; they’re simply answering a limited number of questions on a one-size-fits-all checklist. This isn’t due to laziness or misconduct on their part but instead because nobody expects them to do anything beyond the form.
So what does this mean to you in a hybrid assignment? Well, if all you use in your SR1 development is the information in an inspection report, that’s going to be a much more limited amount of information than what you normally use. Take the floor plan for instance: when a client uses one of your no-detail diagrams in their decision making, it is considered and taken together with your judgement and opinions. That’s distinctly different from what an appraiser might use a diagram for, to actually identify the property attributes in order to develop their judgement and opinions. An appraiser working on a hybrid assignment must depend on those diagrams and interior pics far more closely than the average reader of an appraisal report would. Ideally we should want a much more detailed site sketch and floor plans than what appraisers normally provide in their appraisal reports today.
The point is that the use of one of these inspection reports as the basis for an appraisal will prompt a conscientious appraiser to either perform the additional research and analyses on both the subject and comparables as well as their respective neighborhoods or disclose the additional assumptions they are compelled to use in lieu of performing that additional research and analyses. Additional assumptions will normally lead to additional limiting conditions.
If the appraiser is attempting to emulate in a hybrid assignment all of the research and analyses they normally perform for a 1004 assignment, then it will require them to spend much more time/ effort during the desktop portion of the assignment. So for many, you might be saving 100 percent of the time normally spent on a physical inspection field trip but adding time in other places. If an appraiser is going to substitute assumptions on these additional elements in lieu of actually developing them, then that’s a reportable event, with respect to both their scope of work and their other disclosures. If a hybrid assignment omits certain elements that are normally included in a conventional 1004 assignment then we wouldn’t want any readers to make an unsupported assumption that the development process is the same or similar or equivalent to that used in the conventional 1004. If neither the appraiser nor the inspector performed any of those additional elements, then the appraiser should say so as a means of providing their users with the context it takes to understand what the appraiser did and didn’t do in that assignment.
Your normal process for a 1004 assignment will typically include a number of elements that you observed and considered but which are not codified in your reports. Nevertheless, these elements contribute to your opinions and conclusions. Appraisers need to acknowledge all that goes into what we do and refrain from minimizing the extent and effect the subtleties have on our value conclusions, whether the elements are contained in our reports or not.
If your assignment conditions for a “did not inspect” appraisal process include an expectation by the intended users that this process will include ALL of the analyses you normally perform in your 1004 assignments, then the work performed at the desktop level for the hybrid will require much more time/effort than the desktop work being spent on a 1004. This goes back to the difference between what a single task “inspector” does versus what a licensed real estate appraiser is doing.
If your assignment conditions for the “did not inspect” appraisal process are more streamlined and do not require the same amount of development and reporting that is normally expected for your 1004 assignments, then those issues warrant a prominent disclosure. You want to clearly communicate the additional assumptions and limitations you used when compared to a conventional 1004 assignment.
Appraisers should not enable their readers to labor under the mistaken assumption that a hybrid assignment, where the appraiser doesn’t consider certain elements, is of the same value as a conventional 1004. In no case should we let go unchallenged the assumption that an 80 percent work product is equal to a 100 percent work product.
Be specific about your scope of work (SOW) decisions, what you actually did and didn’t do. Not just in these hybrid assignments but in every assignment you do. Don’t rely solely on anyone else’s SOW disclosure unless it fits in with what you think you’re actually doing. The main reason so many users are unaware of everything appraisers do in their assignments is because appraisers have been relying too much on the vague, generic and inadequate SOW disclosures in the Fannie forms. Stop doing that. Take control of what you’re telling your readers.
About the Author
George Hatch is a Certified General Appraiser in San Diego.
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
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