Many mistakenly view the appraisal as a commodity. True, there are several traditional methods that every appraiser must go through when determining the value of a home that may make the appraisal seem commoditized, including researching the market, analyzing comparables, inspecting the property and making appropriate adjustments to the comparable sales. But those methods are exactly why the appraisal is NOT a commodity. In reality, it is a myth that all appraisals are more or less the same, even though it may seem so at first glance.
The main consideration for a residential appraisal is the value it provides in terms of risk management. Unfortunately, not every appraiser understands how important their role is in the effort to manage risk. In today's highly regulated industry environment, lenders are fully aware of the value an accurate appraisal provides not only for underwriting purposes, but also in establishing a solid record of accurate property valuation. Lenders are keen to have proven sources for appraisals that deliver precise valuations that can withstand third-party scrutiny. Appraisers who can provide accurate and timely property valuations certainly distinguish themselves from competitors.
Proper risk management can be grouped into three key elements: properly analyzing the market, having a complete working knowledge of state and federal requirements and providing thorough explanations within each appraisal report. By incorporating these three elements, the appraiser should meet the minimum requirements of an appraisal and help establish them as a knowledgeable resource.
It is crucial for appraisers to not only familiarize themselves with the market they are to research, but thoroughly analyze the area and understand its intricacies. It is not sufficient to rely on one or two evaluation tools. Rather, they must combine them with as many alternative methods as possible to ensure complete accuracy. When appraisers review and study multiple resources all pointing to the same conclusion, they know they will have the most accurate report.
These resources are available through a variety of channels. There are a number of valuation technologies to help analyze the market, such as Collateral Valuation Reports (CVRs), Automated Valuation Models (AVMs) and Residential Evaluation Reports (RERs). However, these tools should only be used as a supplement - not as a substitute - for an opinion of value. Also, public records are readily available for appraisers to use in their research. Online data sources like MLS, RealQuest, Zillow and Trulia provide a decent snapshot of the area, but must be reconciled. Equally important to familiarizing oneself with the right market is to identify the proper market segment for which the subject property falls within. Comparable properties may seem similar on paper but are vastly different when it comes to quality and features; therefore, accurate comp selection is a primary risk management factor. It is extremely important for the appraiser to "know" the area. That means having a solid, working knowledge of the area in order to select the correct comps that justify value.
A full understanding and application of state and federal regulations is another way to assure the accuracy of the appraisal. Not having this knowledge jeopardizes the success of the appraiser's business and puts the lender at risk of fines, penalties and failed loans. Having an expert familiarity with the Uniform Standards of Professional Appraisal Practice (USPAP), Consumer Financial Protection Board (CFPB) regulations, Appraiser Independence Requirements (AIR) and individual state laws is a prerequisite in order to properly perform the job. It is not good enough to know one set of laws, but to fully understand all the requirements associated with appraisals. If appraisers are found to be out of compliance, they risk severe penalty fines and can be shunned by the industry on future assignments. Appraisal management companies are now required by the Dodd-Frank Law to report to the appropriate board appraisers who are breaching such rules, and at that point the appraiser's license may be pulled. They also put the lender at risk of penalties and fines.
The third method of comprehensive risk management is to be able to provide more details within each appraisal report, such as a clearer explanation of each and every anomaly. Any time there is a lack of data relating to how the subject property compares to a neighboring property, that deficiency must be spelled out in the appraiser's report. Good appraisers try to preempt any possible question from the underwriter by disclosing upfront the information they used to determine their conclusions. In the current lending environment, underwriters are much more conservative and are quite specific in their program guidelines. Therefore, appraisers must consistently provide more detailed commentary to describe their rationale for any and all anomalies. This will accelerate the process by reducing errors and kickbacks from the underwriter.
It is inevitable that at some point an appraiser will have comps that are either all superior or all inferior to the subject, and he or she must make an adjustment and explain why. In such cases, the commentary in the report would explain that the appraiser failed to find better comparable sales by expanding the search in distance and time. An additional explanation for the rationale of the adjustments is needed as well in these cases, utilizing either a historical analysis of the market data and applying that to the current environment or conversations with local real estate professionals in the area.
The appraiser can offer no more important service than having a real, working knowledge of the properties he or she is appraising. That means driving around the neighborhoods, exploring the areas and understanding the particular nuances of the locales they are servicing. That is the real differentiator and added value between an appraiser and an automated model.
The best appraisals are not commodities. Those appraisers who understand this and enhance the process by incorporating risk management will be more successful by providing high quality, well documented valuations that expedite the mortgage process.
Roger Beane is CEO of LRES, a national provider of commercial and residential valuations and asset management for the mortgage, banking, credit union and real estate industries. For more information, visit http://www.lres.com
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