Hybrid Appraisals and Risk Management


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Editor’s Note:
This story is excerpted from OREP’s May 2018 presentation on Hybrid Appraisals and Risk Management to a joint meeting of the Northern Chapter of the Appraisal Institute (AI) and the Real Estate Appraisers Association (REAA) in Fairfield, CA. Presenters were OREP Senior Broker David Brauner and Working RE Editor Isaac Peck.         


Hybrid Appraisals and Risk Management

By Isaac Peck, Editor

As hybrid appraisals are discussed among appraisers across the country, one of the main concerns for appraisers is the level of risk and liability these types of assignments involve.

While desktop appraisals have been around for over a decade, hybrid appraisals, where a third-party inspector does an external or interior inspection on which the appraiser relies, are relatively new to the valuation scene.

The nascency of hybrid appraisals means that appraisers and risk management professionals do not yet have legal or state board precedents to analyze or refer to because there have been no lawsuits or public state board complaints regarding hybrids to-date. While legal sources tell WRE that there have been hybrid-related state board complaints filed against appraisers, so far none have been made public.

It’s also important to note that when discussing “hybrid” appraisals, there are actually a myriad of assignment types, forms, etc. There are a number of companies offering hybrid valuation products, each of which has its own form, statement of assumptions and limiting conditions, certifications, and unique brand of additional information that is provided to the appraiser and/or included in the report. Some hybrid appraisals have an exterior only inspection, while others include an interior inspection.

Because of the wide variety of products being brought to market, appraisers considering hybrid assignments should review each form and the statements included carefully. Just because an appraiser is comfortable with one does not mean that they will be comfortable with all. In short, not all hybrid forms/products are created equal.

While the body of knowledge about hybrid reports in terms of risk management is still developing, here is what we know so far and some tips for staying out of trouble.

At the top of every appraiser’s mind is: are they covered? Does my E&O insurance cover me for hybrid appraisals? The good news is that there are no specific exclusions in the E&O insurance policies that OREP handles, according to David Brauner, Senior Broker at E&O provider OREP. “You should ask your agent if your policy excludes hybrid appraisals,” says Brauner. “None of the policies OREP handles specifically exclude hybrid appraisals currently. This isn’t to say there isn’t greater liability or risk. It does mean that we would expect the policy to respond, though each set of circumstances is unique. In the policies we offer, there is broad coverage which extends to professional services related to real estate appraisal with no exclusion for hybrids. But when discussing coverage, of course, everything is case by case,” Brauner said. “Please ask your OREP agent for specifics.”

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Third-Party Data
One of the main differences between a traditional desktop appraisal and a hybrid appraisal is that the hybrid includes property inspection data (either interior or exterior) provided by a third-party inspector. However, some hybrids also include market data, charts, graphs, and/or market analysis within the appraisal form. Many of the more prominent hybrid companies tout their unique algorithms and data-crunching capabilities as a benefit of their hybrid products.

While it varies by state, traditionally anything that ultimately goes to value has been the responsibility of the appraiser. In mandatory licensing states, you must be licensed to engage in those particular activities.

Besides compliance with the Uniform Standards of Professional Appraisal Practice (USPAP) and state law, having third-party market data and analysis inserted into the report presents other potential issues for appraisers. Namely, is the information credible? The attestations that the appraiser signs will usually include an extraordinary assumption that the information provided is reliable, but this begs the question to what extent the appraiser is responsible for information included in the report.

Attestations, Conditions, and Assumptions
These assignments come with their own set of assumptions and limiting conditions built into the forms. Appraisers should read the statements carefully. Appraisers often have a comfort level with Fannie Mae forms, such as the Uniform Residential Appraisal Report (Form 1004), knowing the form and the Certifications well. Appraisers should be careful not to carry this same level of comfort over to the hybrid assignments and should take care to understand what is being asked of them, what statements they are signing their name to, and be ready to add additional statements to the final Attestations and Certifications as needed.

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Here is a sample attestation from a hybrid product OREP reviewed recently:
Information, estimates and opinions furnished to the appraiser and contained in the additional data resources provided were obtained from sources considered reliable and believed to be true and correct, unless otherwise stated. However, no responsibility for the accuracy of such items furnished to the appraiser can be assumed by the appraiser.

Let’s analyze what this statement means. The appraiser has been provided “information, estimates, and opinions,” which include but are not limited to the third-party inspection data, and the appraiser is signing that they believe that data to be reliable, true and correct. However, in the very next sentence the appraiser seems to be simultaneously disavowing responsibility for such information. This presents some ambiguity.

Here is an extraordinary assumption (EA):
An extraordinary assumption is made that the CMA (comparative market analysis) provides credible factual information for the subject property, all comparables, and any market data contained within the report, including inspection information provided. The appraiser…assumes that the inspection information reported within the CMA provided as well as the aerial images supplied and reviewed by the appraiser are accurate as of the effective date, unless otherwise stated. Should the information found in the CMA be inaccurate, these assumptions could significantly alter the opinions and conclusions contained within this report.

This EA tells us a few things. The first is that the hybrid appraisal includes a Comparative Market Analysis addendum that was not completed by the appraiser, but instead prepared by a real estate agent (presumably the same one who did the inspection). The appraisal also includes aerial images and inspection photos and comments which were provided to the appraiser. The appraiser then makes the assumption that all of these items are true and correct, with the caveat that if they are found to be untrue and incorrect, the opinion of value will be skewed.

Explaining What, Why, and How
As appraisers consider performing these new types of assignments, it’s important to understand that no amount of legalese, disclosures or disclaimers will absolve them if they fail to comply with USPAP or the federal and state laws that pertain to their practice of appraisal. For instance, appraisers cannot knowingly provide misleading information. From a legal standpoint, sometimes “knowingly” can also mean “should have known,” if a case goes to trial.

This represents a salient point in terms of completing hybrid appraisals because appraisers need to think carefully about what information they are being provided, be it market data, inspection data, and more, and need to be sure to detail how and to what extent the data was verified. Does the appraiser have a reasonable basis for relying on that third-party data? In the normal course of the appraiser’s job, could they have easily determined the accuracy of the information provided but didn’t bother to verify it? These are likely the questions that will be asked if the report is scrutinized in a legal environment or by a state appraisal board.

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Also important is understanding exactly what problem the appraiser is being asked to solve, also known as Scope of Work (SOW). Proponents of hybrid appraisals point out that these are just appraisal assignments with a limited SOW. Consequently, appraisers should fully understand the problem to be solved in the assignment and ensure that their assignment results are not misleading within that context. A recently published USPAP Q&A (Jan. 23, 2018) about hybrid assignments indicates that an appraiser “must not allow assignment conditions to limit the SOW to such a degree that the assignment results are not credible in the context of the intended use.” It goes on to say that if an appraiser believes that the only way to produce a credible results is to inspect the property themselves, then they must either “discuss changing the scope of work with the client, or withdraw from the assignment.”

This highlights the responsibility of the appraiser in determining the extent to which a hybrid assignment can produce credible assignment results for a given property. While it might be a fairly safe way to value a tract home in the suburbs of a large city, it might be the wrong tool to use for a more rural or complex property. Ultimately, the appraiser is responsible for the decision to rely on the work of others, and a subsequent USPAP Q&A (March 23, 2018) indicates that appraisers may use an extraordinary assumption about such information (as we’ve seen above), but only “if credible assignment results can still be developed.” In other words, the appraiser can include all the necessary disclaimers and disclosures, but they are still responsible for producing credible assignment results.

Maintaining Control
At OREP, a few of our insureds are experimenting with these assignments and have encountered several companies where the hybrid form is online, hosted by the providing company. In these assignments, the appraiser simply fills out the online forms and submits their conclusions through the hybrid provider’s portal and online forms. However, appraisers should be very careful to maintain control over their report and avoid assignments where that control may be compromised.

An important question to ask is, if you realize an error was made within the report after it is submitted, or a critical piece of information is missing, do you have the ability to reopen the appraisal report, make the change, and re-submit the report? Appraisers should maintain control over the report. Without control over the report or access to it, you cannot comply with USPAP. Additionally, the appraiser should be careful to save a copy of the final report for every assignment, as well as all information required to be in the workfile.

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Lastly, the appraiser must be certain that they maintain control over what their report is going to conclude. Is somebody else putting that report together? Is the report changing at all after the appraiser signs it and sends it off?

The proponents of hybrid appraisals aptly point out that these assignments are not significantly different from a desktop appraisal, or even a Exterior-Only Inspection Appraisal Report (Form 2055), with the noted difference being that the property is being inspected by a third-party who is providing data to the appraiser.

OREP suggests the following risk management recommendations as a starting point:
• Maintain control of the report.
• Verify the information using the normal tools (public records, MLS).
• Disclose what sources were used to verify data and to what degree they are verified.
• Keep USPAP open next to you as you evaluate a “hybrid” assignment.
• Withdraw from the assignment if you believe credible assignment results cannot be developed.

For more information on risk management and staying out of trouble, visit OREP.org or call 888-347-5273. OREP has served appraisers for over 16 years and specializes in appraiser risk management and Appraiser E&O insurance.

Learn new techniques, up your game, and protect yourself today with new, approved coursework at OREPEducation.org, including How to Support and Prove Your Adjustments (7 Hrs), Identifying and Correcting Persistent Appraisal Failures (7 Hrs), How to Raise Appraisal Quality and Minimize Risk (7 Hrs), and more!


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About the Author
Isaac Peck is the Editor of Working RE magazine and the Director of Marketing at OREP, a leading provider of E&O insurance for home inspectors, appraisers, and other real estate professionals in all 50 states and D.C. He received his master’s degree in accounting at San Diego State University. He can be contacted at isaac@orep.org or (888) 347-5273.



Send your story submission/idea to the Editor: isaac@orep.org

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Comments (6)

  1. The AMC business model is the cheapest appraiser is the best appraiser. The majority of qualified appraisers refuse to work for AMCs. The AMCs have developed many false narratives regarding appraiser shortages and the need for appraisal hybrid products. To my fellow appraisers please say no to the use of hybrid appraisals! Do not accept these orders!!!!! Consumer please demand that you receive a full appraisal completed by a certified appraiser. Do not accept a hybrid appraisal. If you are paying any money to an AMC I strongly advise any consumer to to question how much of your appraisal fee actually goes to the appraiser. There is no added benifit to you as a consumer to give over 50% of your fee to the AMC. We appraisers are being robbed by the AMCs and clearly the appraisal foundation could care less! Hybrid appraisals rely on the use of untrained individuals with zero Real Estate background or training.The appraiser’s completing these hybrid products are in many cases licensed in many states and few have ever stepped foot in the states they cover. There is no shortage of qualified appraisers in all markets across the country to warrant the use of flawed hybrid appraisals. The implementation of Hybrid appraisals is being pushed by the appraisal management companies (AMC). The AMC business model has always been the cheapest appraiser is the best appraiser. In most cases the majority of appraisers are unwilling to work for AMCs due to the below market rate of compensation. The AMC (greed) business model has NO added benefit for the consumer, client or investor however they have managed to steal over 50% of the appraiser’s fee? The Hybrid appraisal scam being pushed by the AMCs is another attempt at robbing the appraiser out of their own profession. I think it is disgusting that the Appraisal foundation is willing to stand by and aid these AMCs. The AMCs have lowered the bar so low that it will go beyond damaging the consumer and the investor. Consumers your home is your biggest investment I urge you not to allow your home to be value by some flawed hybrid product. To the Appraisal Foundation you have lost all credibility! If this scenario was being played out against Mortgage brokers or Real Estate Agents I assure you the out cry and fall out would be much worse. Unfortunately the appraiser has no voice!

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  2. by Jerry Robinson

    I see this as a “slippery slope”–no doubt the AMC’s see it as a winfall of profit for themselves. Unfortunately, we have too many appraisers who are not as concerned with USPAP and producing a credible work product as they are with obtaining fees–they will drag profession downwards.

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  3. by Steven Northouse

    These companies that are developing their own proprietary forms, hybrid appraisals and the like with the inspection performed by a “professional” or recently the information from a notary? Their fee to these ‘professionals’ are around $60. The bottom line from these companies is to obtain an opinion of value from a professional appraiser for a low price and turn time, i.e. a $100 per report with a two day turn time. Clarification on the appraisal process to include all inspections would alleviate this loop hole. The only professional to evaluate and inspect a subject property is a state licensed/certified appraiser. Their unbiased experience in determining all aspects of the ‘inspection process’, i.e. condition, curable items, square feet measurements, determination of finished and unfinished usable living area, i.e. basements, usable square feet for attics, i.e. height, what determines a bedroom (closet, dimensions, location, egress, etc.) and the list goes on. An example of bias is reading listings from Realtors that vary across the professional spectrum, i.e. partially finished basements/attics counted as usable square footage, describing multiple amenities as “potential” as a value, etc. etc..

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  4. This is a bomb waiting to go off. “Does the appraiser have a reasonable basis for relying on that third-party data?” Who are these third parties? Who hires them? Does that entity have a dog in the race and could likely influence someone who is not subject to rules of impartiality? “In the normal course of the appraiser’s job, could they have easily determined the accuracy of the information provided but didn’t bother to verify it? ” So if I do my job properly and attempt to verify data only to find it to be inaccurate, now what? After accepting the assignment and doing that much legwork, I would then tell them I must withdraw due to the unreliability of the data provided, or expand the scope of work to include gathering and verifying my own data. What are the chances they would agree to pay me for that? This is so wrong. What happened to protecting the public trust? I will refuse to accept these assignments.

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  5. Hybrid Appraisals = Next Housing Crisis. All in the name of saving a few bucks. Go ahead, let the software engineers make the money. When it hits the fan again, I’ll bet they still blame the appraisers. Go figure.

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    • Yep you can bet we will still be to blame. We are to blame now for why appraisals take so long when in fact regulators are to blame as well as frivolous revision requests from AMC companies.

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