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The Path that Brought Us Here
by Richard Hagar, SRA
A wise man by the name of Jim Irish, former chief appraiser for the Federal Reserve Bank out of Topeka Kansas, once told me something that was very profound: “The government is rarely proactive but always reactive.” Translation: laws, rules, and guidelines are usually developed after a problem smacks us upside the head. Since hearing this, I have found that it also applies to large enterprises.
The requirements that many appraisers are complaining about today are due to past failures and reactions that are changing our appraisal world in ways we don’t like.
In the Beginning
Appraisals originally utilized only the cost approach when valuing property. The thought was that the value of an older house could not exceed the replacement cost of acquiring the land and building a new house, minus depreciation. When it was discovered that appraisers didn’t have valid cost data and there was a new ability to research sales via local multiple listing services, the appraisal world shifted to requiring the use of the sales comparison and cost approaches.
When Fannie Mae and others discovered the cost approaches supplied by many appraisers were still bogus, they reacted by dropping the requirement for the cost approach (although still required under USPAP). Cost approach or not, appraisers are still required to determine the site’s value which many appraisers are currently not doing. Without knowing the site value, you can’t develop a proper highest and best use or site adjustments between the subject and a comparable. The result of not properly determining the land value or supplying a valid cost approach (even when not required)? Belief that the skill level of appraisers continues to erode. So why should they pay for a level of analysis (highest and best use & adjustments) that might not reflect the reality of their work effort?
Banks swore to FNMA that they had “reviewed” X-percent of appraisals, and the appraisal conclusions were accurate. Along came 2007-2012 and the various agencies figured out that the appraisals hadn’t been reviewed and that their value conclusions were, for the most part, a wild guess. The reaction: By law, every appraisal must now be reviewed and to accomplish this massive feat, numerous computer programs were developed, including the Collateral Underwriter (CU) that many appraisers hate. Our failures helped create the need for this CU beast.
Ah, the good old days of good, average, fair, poor…which of these did appraisers use most often? Well, “average” of course, even when a house was unlivable.
As appraisers often stated: “It was ‘average’ as compared to all of the other ugly unfit homes in the area.” How often did an appraiser state that a house was in fair condition? Never! FNMA and others knew of the pressure lenders were putting on us “Don’t call it fair or we can’t do a loan and we’ll never use you again.” The reaction: Develop and require the use of new Quality and Conditions (Q&C) ratings with the same definition applicable in every part of the U.S. This was supposed to allow appraisers and the lending world to reset and use the new standard. The Q & C definitions are a reaction to every appraiser having their own version of “average”. Today with some appraisers indicating C4 when it’s really a C5, there’s going to be a reaction that I’ll explain shortly and you won’t like it.
Condition, Quality and Internal Photographs
Appraisers were supposed to accurately report the quality and condition of a home – many didn’t; everything was again average…even when it wasn’t. The reaction: Require appraisers to include multiple interior photographs. FNMA’s guideline now requires—at a minimum, the report must include photographs of the following:
- the kitchen;
- all bathrooms;
- main living area;
- examples of physical deterioration, if present;
- and examples of recent updates, such as restoration, remodeling, and renovation, if present.
Now armed with photographs, they can check our descriptions and work quality. And from what I’m being told, photographs are indicating that appraisers are not accurately describing properties; for some reason, C5 has become the new C4 or C3.
For years appraisers got away with guessing at what an adjustment was between the subject and comparables. Once it was “discovered” that hundreds of thousands of appraisals had incorrect adjustments resulting in over-valuing homes, the reaction was to develop a whiz-bang computer program called the Collateral Underwriter.
This new system produces a suggested range of adjustments and allows reviewers to reach out and question appraisers regarding how they determined an adjustment, or ask for proof of their adjustments. While many appraisers consider this a nuisance it came about as a reaction to a disbelief in the appraiser’s work.
(story continues below)
Highest and Best Use
Fannie Mae’s form has a line that asks: Highest and best use as improved is________.
OK, that answers their question, but USPAP requires appraisers to state the highest and best use of the site “as if vacant.” That’s a whole second question that requires a response. There’s no line on the appraisal form for the second question, but everybody has been told multiple times that the form isn’t USPAP compliant and requires (USPAP Standard 2) an addendum to answer the second question.
Many appraisers have failed to include this critical information in their addendums which means that their appraisals are not USPAP compliant. The reaction: The new form will have separate lines for highest and best use “as if vacant” and another for highest and best “as improved” (Standard Rule 2-2 and Advisory Opinion (AO-11)).
For decades FNMA, FHLMC, VA, FHA and the Farm Home Administration have required a sketch showing the perimeter of the structure, exterior doors, measurements, and total square footage. They also required an interior floor plan if the home has any functional obsolescence (6 bedrooms and 1 bath, walking through one bedroom to access another, narrow hallways, etc.). Some appraisers didn’t want to spend the time measuring accurately, so they rounded their measurements to the nearest foot or two—resulting in inaccurate square footage.
Different appraisers measuring the same house might round to the nearest inch (like me), others the nearest 6 inches or foot. The total square footage was all over the map. Others decided to skip measuring altogether and simply use what the county assessor indicated. Of course, the county records likely don’t indicate the new square footage addition a homeowner added or that the builder didn’t build what was submitted for in the original permits.
Appraisers figured that it’ll do, besides, it saves time and effort. However, when square footage doesn’t reflect reality the cost approach and value conclusions are going to be off. Often appraisers came up with all sorts of excuses for not measuring accurately or using the county square footage (again, a violation of the required scope of work stated in the certification).
The reaction: Now FNMA requires the use of the ANSI Standard and measurements to the inch. All over the internet appraisers are blowing up and complaining about being forced to provide current, accurate information about a house. Lenders and the GSEs have required and paid for accurate information and when they didn’t get it…they instituted more requirements and serious reprisals.
When completing a certificate of reasonable value (CRV) for the VA, appraisers were required to inspect the subject. This was to learn the facts concerning the subject, like the size, condition, and any notable external obsolescence. When it was discovered that appraisers were not inspecting the subject but simply using tax information in their reports, the VA reacted by requiring the appraiser to take a Polaroid of the house and pin it to their report (The photograph requirements started with the VA).
Appraisers continued to tell lenders that they drove by each of the comparables used in the report. Years later, when lenders, Fannie Mae, Freddie Mac, FHA and the VA spot-checked reports, they found out that the condition or location of many comparables didn’t match what was reported. So, the reactive response was to require the appraiser to affirm, under penalty of perjury (which stands to this day) and provide original photographs of each comparable. However even today many appraisers have all sorts of excuses as to why they believe using an MLS photograph from the past is “the best thing for the appraisal” or “represents the house when it sold”; all hogwash, of course. Failure to inspect triggered client engagement letters stating the absolute requirement to personally inspect each of the comparables, provide original photographs and create a system that inspects the photographs and can tell when a photograph is used twice or sourced from the MLS or county—clients know who’s lying to them and fees are lower because of it.
One of the upcoming changes on FNMA’s new form is the land section; there are going to be five separate lines specific to the site. Appraisers will need to supply separate information for the neighborhood, site size, topography, influences, & view and then determine separate adjustments for each. Ouch! Why? Because appraisers were not properly describing or adjusting for the various influences. And just wait until you see all of the new information and adjustments they will require on the form; it’s a beast.
Appraisers were supposed to provide accurate descriptions of the subject, drive by each of the comparables, and take original photographs. Many didn’t but still they charged the client as if they did. I’m aware of an appraiser in Phoenix who was producing five or more “full inspection” 1004 appraisals a day. Five!
Have you seen the size of this city and its traffic? Inspecting that many subjects and comparables is physically impossible short of tele-transportation. Once clients and FNMA started questioning his output, he went to work as a manager for an AMC; and guess what his job is…pressuring appraisers to deliver more, faster. The reaction by FNMA for actions like these and what I’ve described above: Desktop appraisals.
Now no one has to lie or visit the subject or drive by the comparables. Lower fees are going to align with the work some appraisers said they did…but didn’t. Some appraisers complained about all of the trouble they had to endure inspecting the comps, so you get your wish—no inspection. The result: appraisers will be paid a lower fee based on the service that they really provide. Was that in your plan?
Proactive vs. Reactive
The government and major institutions are reactive and are reacting to the failures of the bad appraisers among us. The appraisers who have tried to do it the right way are being punished by the acts of the lazy or under-educated. If you don’t like where we are today, blame the appraisers who didn’t do it right and took us down this path. Newton’s third law of motion states that for every action there is an equal and opposite reaction. Knowing there will be more reactions, protect yourself—get educated and learn how to do it right. In a following article, I’ll provide some pointers on how to profit from these upcoming “reactions.”
Not all clients appreciate a correctly performed appraisal but the ones that do are willing to pay for it. Show your clients you know how to do it right, then when they get hooked on your work quality, increase your fees and get paid for your time and effort.
I’m trying to keep you safe out there.
Webinar: Introducing ANSI—New Requirements for Appraisers
Fannie Mae will start requiring appraisers to measure and calculate square footage using the ANSI system on April 1st, 2022—or appraisals will be rejected. Come learn quick and solid information that you need to do right away. Click here to purchase and replay the webinar that aired live on March 29th, 2022.
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 40 states through OREPEducation.org. The 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.
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Send your story submission/idea to the Editor:
by Jamie Owen
Richard, as usual, you are exactly correct! I’ve witnessed these changes occur over time, and to a large degree, we have made our own mess. It makes me sad and more cranky every time I see a poorly developed report where it was obvious that the appraiser did not do even the simple things we must in the development and reporting of our appraisals. Thanks for writing frankly on these matters. Reading your articles is like appraisal therapy for me, because at least I know someone else feels the way I do. Thanks for all you do! I appreciate you!-
by Steve Owen
Richard has the path that brought us here down to a tee. Back in the day, mortgage brokers pressured appraisers for predetermined value. It was hard to compete because so many did it, but the honest ones signed petitions asking for relief. The result was HVCC. The moral is be careful what you wish for. Do appraisers say they do things that they don’t? The evidence is seen in the stuff they post online. I’ve been using ANSI since about 1997, but still hear appraisers say that it can’t be done. The gripes about driving the comps are continual. USPAP doesn’t require you to see the comps, it requires you to do what you agreed to do, which is usually to drive the comps. The response to this article is telling.-
by Joseph Stachow Jr
I think that appraisers (I am one) have gotten a bad rap the past few years. Everyone except us is saying we add too much cost to the deal, we kill deals, we hold up deals, we are the bad guys who discover zoning & code violations, we have been a bull’s eye target for a while now, except this time I think FannieMae & FreddieMac are on to a way of success in getting rid of us, even though they say they want more diversity in the profession, blah, blah, blah…those two GSE’s don’t want us around anymore than realtors want us around, remember we cost too much and kill deals. Without an impartial player in the mortgage game we are headed for another real estate crash like in 2008, and when you look at it nobody cares except us. The GSE’s just pass the losses on to the taxpayer, the taxpayer has no voice in the matter, the local, state and federal representatives who should care have bigger fish to fry, they can’t be bothered by what appraiser are sounding alarms about. If the “new” desktop reports take hold and I believe they will, in less than 5 years the appraisers who are left standing will be scrambling around for the few crumbs offered by the GSE’s. Me personally I’m starting to transition into local lender work, non lender work, attorney & trust work as I can see the handwriting on the wall. We as appraisers have NO ONE to stand up for us.-
by Jim Scholl
I believe the author had said in an earlier piece that he has been measuring using ANSI for 20 years. I left a question on his Facebook page asking where he gets the second floor ceiling heights for comparable sales when the subject’s second floor ceiling height was under 7 feet. No answer. I do not believe the information exists. How can anyone say they follow ANSI without this information? He may not be in a position to throw stones at others.-
I was born and raised in the town I do appraisals. I’ve been on these streets thousands of times. Why must I continue to get a “current” photo of that house on Green St when I just went by it last month?-
by Terry Rohrer
Somebody needs a current version of USPAP!-
by C. Brent Bowen
This author paints with a very broad brush and sets up quite a few straw-man arguments. I’ve done enough reviews in my career to have seen quite a bit of the low quality work that the author laments, but the conclusions one draws from that experience should not be to denigrate a large swath of the profession. There are legitimate arguments to be made for various different scopes of work in the context of the intended use. Let’s keep those discussions civil and respectful, and not demean those who may have a different perspective.-
Really?? You think the “real” appraisers out there are going to be willing to complete the new “beast” 1004, taking more time and adding more data for lower fees? Not happening friend. My fees have more than doubled and lenders are happy to pay and quite happy with my work and I turn down more orders than I accept. And yes 4-5 1004’s in a day (14-16 hrs) is quite possible if they are track-housing, closely spaced properties. Different world here I guess………………-