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.

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.

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.

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
  • FHA
  • HUD-REO
  • RD/USDA
  • 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.

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.