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Editor’s Note: This is second installment of an informative two-part series focused on USPAP compliance, state requirements and client conditions. (Find Part One at WorkingRE.com; search Common Appraisal Errors.)
Common Appraisal Errors (Part 2)
By Joshua Walitt, SRA, MNAA
As all appraisers know, having a report that complies with USPAP, state, and client conditions is an essential component to every appraiser’s practice. We are the individuals to which the standards directly apply and we are directly in the cross-hairs for state sanctions if deficiencies are discovered. To recap, deficiencies highlighted in Part One include a lack of a summary of the support for adjustments in the sales comparison approach, non-existent support or rationale for the highest and best use conclusion, lack of disclosure of the assignment-specific scope of work, and limited or illogical reconciliations in the sales comparison approach.
With Standards Rules 1 and 2 being only 11 pages long in the current 2018-2019 version of The Uniform Standards of Professional Appraisal Practice (USPAP), the Standards continue to serve as a practical and accessible checklist for the necessary steps in developing and communicating an appraisal. If you are unsure you are meeting the minimum requirements that USPAP imposes, I encourage you to scrutinize several of your own reports, and use the Standards Rules as a literal checklist to ensure your reports are compliant.
The following are several more “appraisal pitfalls,” along with steps appraisers can take to avoid issues and possible sanctions.
Market Analysis
Standards Rule 1-3 (a) states: “When necessary for credible assignment results in developing a market value opinion, an appraiser must identify and analyze… economic supply and demand… and market area trends. Comment: an appraiser must avoid making an unsupported assumption or premise about market area trends…” 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.” (Note that “Comments” in USPAP carry the same weight as the component they describe.)
There are cases where USPAP is particularly specific, and this is one of those cases, citing specific items for analysis: the appraiser must analyze and communicate the supply, demand and market area trends relevant to the assignment. Additionally, the appraiser must not make an unsupported assumption or premise regarding that trend.
What does this really mean for our day-to-day work? For one example, if the sales in a market study are too few in number for a reliable analysis, you cannot simply state: “There is not enough information in my study to arrive at a reliable trend conclusion” and then merely state “Stable.” Concluding a stable trend by default is not an acceptable practice because it is an “unsupported premise.”
Making a stable-by-default or other unsupported trend conclusion clearly conflicts with USPAP and could lead to problems if your report is ever turned into a state licensing authority. Further, from a practical standpoint, this type of method (or lack of) could affect market-condition (date/ time) adjustments in the sales comparison approach.
So, what can an appraiser do?
• Ensure you have actual data and analysis that support a good understanding of the inventory and trends in the market (including any seasonal influences); and conduct several market studies when necessary.
• Summarize your analysis in your report, so a user understands your market conclusions.
• Include information that is appropriate and relevant, using text areas for overflow or for cases where there is no related field for the specific data.
If you use a template to start your reports, consider including “section headings” that relate to market analysis, to help ensure you summarize your findings within every report. If you attach charts and graphs, ensure those exhibits are relevant.
In the end, be sure your market narrative, attached exhibits and check-boxes and fields do not contradict one another.
Form Completion
Specific to the Neighborhood section of the URAR and the 1004MC form, the Fannie Mae Selling Guide states: “When completing the One-Unit Housing Trends portion of the Neighborhood section of the appraisal report forms, the trends must be reflective of those properties deemed to be competitive to the property being appraised. …The conclusions reported in this portion of the appraisal will be supported by the analysis contained in the Market Conditions Addendum to the Appraisal Report (Form 1004MC). The appraiser should also provide commentary on the other segment(s) of the neighborhood when segmentation is present.”
The Fannie Mae Appraisal and Property FAQ document states: “The data regarding trends to be reported in the One-Unit Housing Trends section must be reflective of those properties deemed to be competitive to the property being appraised. Additional commentary should be provided on the other segment(s) of the neighborhood when segmentation is present to aid in understanding the overall neighborhood dynamics. … The conclusions regarding trends that are obtained from the Form 1004MC must be the same trends reported in the Neighborhood Trends section of the [main appraisal form].”
The creators of the 1004MC form had great intentions: to prompt appraisers to conduct market analysis and have a consistent format for reporting the information and conclusions.
However, of all the pre-printed lending forms, the 1004MC undoubtedly causes the most anxiety among appraisers and clients. But the message is clear from the instructions above: the One-Unit Housing Trends boxes in the Neighborhood section (the nine boxes in the middle of page 1) are meant to reflect properties that are competition to the subject. It is not designed to report trends of all properties – unless, of course, all of the properties in the area are considered competition to the subject.
As I train appraisers, I use the following metaphor: if you are filling in a form field that expects the “Last Name,” would you enter your first name? Of course not, because a user of that form would think your last name was “Bob” or “Jane” and that would be incorrect, misleading, and probably confusing. Yet, some appraisers continue to complete the Neighborhood and 1004MC fields contrary to the instructions that their clients expect be followed.
So, what can an appraiser do? One main take-away from the Fannie Mae form instructions: the 1004MC conclusions and the Neighborhood One-Unit Housing Trend boxes must be consistent with one another. Regardless of what you hear in online discussion groups or how you were once trained, the best advice is the common adage: read the instructions.
Nothing about the forms or the instructions prevents appraisers from conducting the necessary (and sometimes multiple) market studies needed to arrive at reliable and credible market trend conclusions. Complete the form fields as the instructions indicate, but do not let the form limit your analysis or reporting: include additional commentary and clarifying exhibits that you relied upon.
Bottom line: read the guides, handbooks, FAQ documents, and publications related to the particular type of assignment.
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Templates
Templates are a great way to ensure you are delivering an organized and thorough report for each and every assignment. Unfortunately, using templates can backfire in serious ways, which could lead to state sanctions in some circumstances.
Organize your content. Use logical headings so that “like content” is organized together. You will write and edit your report quicker; likewise, your user will locate content easily.
Streamline. Unnecessary repetition of information is not only irritating but can lead to content errors. For example, if your three-year service certification is stated in two different locations in your report, you then have to remember to change it twice (e.g., if you have performed services), to avoid confusing the client. To avoid inconsistencies, read your template to be sure you are not repeating related information in multiple areas of the report. Above all, edit where necessary: ask yourself, “Do I need to include this information?”
Avoid boilerplate. Let’s be honest: sometimes “stock” statements are appropriate and unavoidable. For example, there aren’t many ways you can state that “Septic systems are typical for the area and acceptable to the market.” Making such a statement might be appropriate in many of your appraisals, and there might be no reason to reword it for each report. However, overuse of boilerplate can lead to statements that are inapplicable or meaningless to the particular assignment, like including a septic-related statement in a report that only includes properties with sewers. Bottom line: read your final draft to ensure that content is appropriate, relevant, and meaningful to that particular assignment.
Outdated terms. Believe it or not, it has been over ten years since the Departure Rule departed in 2006. Yet, there are still reports (presumably due to the tenacious use of old templates) that label the report a “Complete Appraisal.” Terms like “Departure Rule,” “Limited Appraisal,” “Complete Appraisal,” “Binding Requirements” and “Specific Requirements” no longer carry meaning in the context of USPAP. Even seemingly benign items can lead to confusion. For one example, stating that today’s report meets the requirements of an “Appraisal Report under the 2014-2015 USPAP,” technically may be true, but it may confuse your user and lead them to wonder “but does it meet the current USPAP?” Appraisers are required to comply with the USPAP that is in effect as of the report date, so complying with an old USPAP is not terribly meaningful. Not all errors are harmless: referring to “USPAP Standards Rule 2-2(b)” doesn’t mean the same thing it did back in 2013. (Consequently, if you are still referring to SR 2-2(b) in your template today, you are identifying your report as a Restricted Appraisal Report.) As you periodically review your templates, be sure your terms and references are up-to-date with the latest industry documents.
Revision Requests
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…. Comment: …The appraiser must provide sufficient information to enable the client and intended users to understand the rationale for the opinions and conclusions.”
Revision requests are a part of life for many appraisers. The number of revision requests an appraiser receives varies greatly depending on the quality of work, and from client to client depending on their review process and the type of assignment.
Revision requests have a negative – and sometimes nasty – connotation. In my experience as a fee appraiser, however, I see revision requests as an opportunity to learn what level of detail and report content is appropriate for a particular type of intended user. In other words, what do lenders – or divorce attorneys or other types of users – need to know from my report?
For example, in appraisal review assignments for divorce intended uses, I might write a 35-page review report but my client may still ask me, “What are the most significant issues you found?” I learned this type of user needs an “Executive Summary” in the review, which has cut down on client questions.
The same concept is true for lender clients. It’s logical to think, “Oh my goodness, these lenders always ask me about the finish in the converted garage and whether septic is common!” Recognize the opportunity that if a particular type of user is repeatedly asking for certain explanations, it might be fitting to include the content in the report initially, to avoid a revision request.
Another reality of today’s lending industry is that revision requests are often semi-automated: data is being compared to the appraiser’s own prior work and to peer and statistical data, often focusing on adjustments, quality and condition ratings, view and location ratings, and comp selection.
So, what can an appraiser do? Pay attention to what your intended user needs to know. Obviously, an appraiser can’t “mind read” their peers or a computer model but an appraiser can type a summary of his own methods and support. So, if a lender/users are repeatedly asking for an explanation for particular items and issues, including a summary of those items is not only a step toward USPAP compliance but is also a step toward reducing revision requests. Overall, by recognizing and acting on the needs of the intended user, the appraiser may be “bullet-proofing” the report against criticism down the road.
Mandatory Reporting
The Truth in Lending Act (12 CFR Part 1026.42) states that a lender “that reasonably believes an appraiser has not complied with the USPAP or ethical or professional requirements for appraisers under applicable state or Federal statutes or regulations shall refer the matter to the appropriate state agency if the failure to comply is material. … A failure to comply is material if it is likely to significantly affect the value assigned to the consumer’s principal dwelling.”
In addition to the above federal rule, some states have stricter mandatory reporting requirements for appraisal management companies, such as requiring that USPAP or ethical conflicts be reported to the state, regardless of whether or not the failure affects value and regardless of the type of property. Further, Fannie Mae and HUD have their own reporting requirements for lenders.
Avoiding Problems
Read and understand USPAP and keep your copy handy. Utilize at least Standard 2 as a checklist for meeting minimum report content requirements. Refer to the Fannie Mae Selling Guide, Handbook 4000.1, or other industry documents that are applicable to the assignment type. And summarize the information that was analyzed and the methods that were used, in support of the opinions and conclusions made throughout the appraisal report. There is no guaranteed recipe to avoid a state complaint or lawsuit. However, we can all take steps to continually improve our appraisal practice.
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About the Author
Joshua Walitt, SRA, MNAA is 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 and is a noted speaker at appraisal conferences. In addition, he designs and presents continuing education courses and webinars.
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by Beth Hamrick
On the 1004MC are commentary possibilities. I find them useful to explain my criteria in choosing the market for my subject property and to elaborate on my thinking with regard to the box fill-ins. Thank you for the errors article.
-by Maya -
unfortunately, in New York that 1004mc is so misleading and rarely reflective of the market, since there are so many inconsistencies with sales – you can have 4 houses that appear the same, and each one can sell at different sale prices between $100,000 up to $500,000 – all due to condition, sales with no brokers or friendly (not recorded) and unfortunately, many buyers want to avoid that millionaires tax and pay under the table! so how can you take 1004mc data and apply it to the first page? so many times one does not match the other, so i write my own market analysis in every report. I check with all my sources on line as often as i can. In some markets, that 1004mc is more misleading than giving an accurate picture. How many times i see a decline in the prices, when i know that is not accurate, or read about appreciations when i know there is a current softening in the prices through decline in the asking prices not yet showing up in the sales. I personally have never accepted that 1004mc as a good source for New York city market trends, always preferring my own analysis and comments
-by Rachel Massey
Good article Josh, markets are almost always moving to some degree or another, and there are so many different submarkets within a market, it is really important to study the market in which the property being appraised is competing.
At the last crash, the GSEs were all over the “stable” market checkbox when the market was in freefall in some areas. I think this is a good reminder of what to address, and what to watch. As flawed as the MC can be, it is a way to at least get one thinking about what is going on.
-by Joshua Walitt
Thanks, Rachel!
-by David
First of all when the MC addendum first came out as a reporting requirement, it was defined as different from “overall” neighborhood data and therefore would have different trends & results. I disagree with the editor, that identifying trends different from the MC addendum in the 1st page neighborhood section is a violation of USPAP and or misleading. In fact I believe the opposite because the first page neighborhood section defines overall data for the neighborhood so the conclusions & trends should be reflective of that data. If a typical reader (underwriter, loan officer, purchaser) sees neighborhood data reflected on the first page then they would expect the trends & conclusions to be from that data, not some data somewhere else in the report.
-Since this has become a topic of confusion, I personally decided to develop a MC data for the overall neighborhood data (report the conclusions next to that data on the first page) and the competitive data & conclusions on the MC addendum.
by Joshua Walitt
David, thank you for the interaction.
Indicating your “overall” data conclusions in the 9 boxes of the “One-Unit Housing Trends” section on page 1 of the URAR is not correct, according to the form instructions cited within this article. Rather, the instructions indicate that those 9 boxes should reflect the trends of competitive properties. Sources for the instructions (which were cited above) are the “Fannie Mae Selling Guide” and the “Fannie Mae Appraisal and Property FAQ”, which are publicly available online.
-by Michael S. Elliott, SRA
I wish Mr. Walitt would have been more specific in his analysis of the 1004MC versus neighborhood section ‘consistency’ requirement as this is going to confuse people. While the Selling Guide tells us that the “trends” checkboxes (i.e. stable, declining, etc. – that section) must be consistent with the 1004MC, the price and age trends/predominant boxes are to reflect the ENTIRE neighborhood, not just those competitive with the subject (per the selling guide – “The appraiser must indicate the price range and predominant price of properties in the subject neighborhood. “)
-by Joshua Walitt
Thanks for the comment. You’re exactly right, Michael. The nine trend boxes (One-Unit Housing Trends) should match the 1004MC.
Since my focus was on the 1004MC, I did not bring up the Age and Price range boxes, which do not directly relate to the 1004MC. However, as you point out correctly, Fannie Mae instructions indicate the Age and Price range boxes should reflect the larger neighborhood.
-by Pierce Blitch III IFAS
Over the last 12-24 months, in many cases, I have found the 1004 MC to be misleading as to Neighborhood Trends in my area. If the number of sales in the most recent period has declined over the previous two periods, the form requires me to state declining; however, my research indicates that there are currently very few listings (low supply) but there are several pending sales of similar properties that will most likely close in the next 1-30 days which would actually indicate an increase in sales. Also, in this same case, the “median” sales price appears to be declining based on the limited number of sales when it is actually found that overall values in the area for similar properties in the area are increasing month over month based on current and prior sales data plus the several pending sales. In addition, when the
-median DOM of the sales appears to be increasing in the most recent period, most MLS systems report “total” DOM and not DOM since the last price reduction. In many cases, agents price properties too high at the begining of a listing at the urging of the owner only to reduce at a later date. In this case, the number of DOM can also be misleading. If the comments section of the 1004MC are not read and only the check boxes at the top of the page are considered, the “reader” will make an unformed conclusion. I find this to be the case in many “revision or correction” cases.
by Joshua Walitt
Good scenario, Pierce!
I think the key with the 1004MC is that the appraiser’s conclusions are communicated (at least in part) through the use of the check-boxes. Simply because the numbers appear to go down, up, or keep stable, the form does not “require” you to check any specific box. Choose the best box based on the entirety of your research. If you’ve explained your further research that supports the conclusion that you reported in the check-boxes, but you get a revision request, refer them to your narrative and/or attachment/exhibit.
I’ve had this happen in rural areas quite a bit, where there are very few sales and my “Increasing”, “Decreasing”, or “Stable” conclusions are supported by research other than what shows in the grid. At a glance my check-box conclusions may seem contradictory to the limited 12-month span of data in the grid, so I include supplemental information.
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