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Comparing Hybrid Appraisals with a 1004 Report
by George Hatch
The hot button topic with appraisers these days are the so-called bifurcated appraisal assignments, also known as hybrid appraisals. These assignments typically involve the use of subject property inspections performed independently of the valuation process, with the appraiser’s role limited to performing the inspection aided desktop appraisal. Meaning, the appraiser is working without ever physically seeing either the subject or any of the comparable sales.
It’s akin to using MLS photos and descriptions for all of the comparables used in the Sales Comparison AND for the subject property itself. You’re relying on someone else’s descriptions.
There are a number of issues with this type of service that will engender a lot of controversy and heated debate among appraisers, and for good reason, but for now let’s just talk about the similarities and the differences between the two appraisal processes.
What You Really Do
First, let’s take a look at the process we normally use in developing and reporting an appraisal using the protocols in the Fannie 1004/2055 and 1025 programs. Feel free to add or subtract or rearrange the sequence of events to reflect your personal process—the point is to highlight what you do so we can compare your process in a regular 1004 protocol versus what you would be doing in a hybrid “did not inspect” assignment.
In order, many appraisers:
1. Research the subject for its public record info, sales history and other information.
2. Decide what the dominant attributes of the property are with respect to its physical, legal and economic attributes, including the market area in which it competes.
3. Use those attributes as filters for searching for sales data that might be comparable to the subject.
4. Drive out to the subject. Here’s where we start getting into some activities that an appraiser will routinely perform but that a third-party inspector probably won’t. A third-party inspector probably will be commuting from point A to point B only, whereas you and I are doing more than that. In addition to driving into the subject neighborhood we are also collecting information about that neighborhood that we will use in our analysis. Starting with the wider neighborhood environment of which the subject is a part.
You may not recognize it in these terms but when you’re experiencing the ingress/egress of the neighborhood and passing by its nearest supporting services, and you’re noticing where the property development patterns are changing and what the composition of the immediate neighborhood looks like—you’re actually collecting very relevant information. Information you use to draw the geographic boundaries for your subject neighborhood and/or the geographic boundaries of the market segment in which it competes.
5. Next you get to the subject site and start analyzing the property, starting with the various physical attributes of the site itself. Even if you aren’t writing it down in your notes or later conveying it in your reports, you are taking mental notes of lot utility issues like the topography, terracing setbacks for the improvements and other factors. For view amenities you are considering type, quality, direction and orientation to the public zones of the house, not just ticking off a checkbox “view-yes” and so on.
Then you’re using a similar process in your inspection of the subject interior. Adding interior walls with floor plans in your diagrams is not done as much today, so many of you may not be doing that in your notes, but you’re still collecting that information mentally. You’ll also routinely make other observations that will eventually contribute to the development of your opinions about quality, condition, functionality and overall appeal.
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6. You drive the comparables. You may only present three, four or six sales in your report but if you’re like most appraisers you are routinely driving more sales than you intend to use in your reports, and like your drive to the subject, you are forming opinions on the comparables as you go. You’re taking notes—even if only mentally—of various property attributes in addition to what will show up in an MLS data based picture of the front of the house.
7. Finally comes the report writing, except that the appraisers are doing more here as well. A lot of appraisers have lost sight of the fact, or never realized, that they’re performing SR1 development functions concurrently with performing the SR2 reporting functions. So if you’re like most other appraisers, this is where all the other additional information you collected during your field trip are contributing to the development of your opinion of value.
Hybrid Appraisal Assignments
Now that we’re thinking more about what we actually do, let’s compare it to what your clients expect when they engage you for a hybrid. When a client or data vendor provides you with the outside inspection report on your subject and whatever data they have on comparable sales data, they are not giving you all the information that you normally collect when you physically inspect your subject and drive your own comparables. Moreover, they’re probably only giving you what they typically collect for all such assignments whereas, as an appraiser, you are proactive in following up on aspects that draw your attention or prompt a question.
The third-party “property inspector” who is driving to your subject isn’t doing everything that you would do during that drive either. They’re probably not engaged and certainly not to the level you are. They’re just driving to the property and performing the site inspection to the extent it takes to fill out the form. I would bet that their drive adds little or nothing to the process. They’re not “seeing” because they’re not looking, and they’re not looking because unlike an appraiser, they have no reason to look. The information about the subject neighborhood that you need to collect in order to perform your analysis isn’t germane to what they’re doing, which is limited to simply “inspecting” the subject and possibly photographing potential comparables.
Likewise, if they measure and diagram a structure, they probably are not making observations about floor plans and other subtle but important details that you would normally collect. They aren’t self directed in seeking out the information to be used in the analysis; they’re simply answering a limited number of questions on a one-size-fits-all checklist. This isn’t due to laziness or misconduct on their part but instead because nobody expects them to do anything beyond the form.
So what does this mean to you in a hybrid assignment? Well, if all you use in your SR1 development is the information in an inspection report, that’s going to be a much more limited amount of information than what you normally use. Take the floor plan for instance: when a client uses one of your no-detail diagrams in their decision making, it is considered and taken together with your judgement and opinions. That’s distinctly different from what an appraiser might use a diagram for, to actually identify the property attributes in order to develop their judgement and opinions. An appraiser working on a hybrid assignment must depend on those diagrams and interior pics far more closely than the average reader of an appraisal report would. Ideally we should want a much more detailed site sketch and floor plans than what appraisers normally provide in their appraisal reports today.
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The point is that the use of one of these inspection reports as the basis for an appraisal will prompt a conscientious appraiser to either perform the additional research and analyses on both the subject and comparables as well as their respective neighborhoods or disclose the additional assumptions they are compelled to use in lieu of performing that additional research and analyses. Additional assumptions will normally lead to additional limiting conditions.
If the appraiser is attempting to emulate in a hybrid assignment all of the research and analyses they normally perform for a 1004 assignment, then it will require them to spend much more time/ effort during the desktop portion of the assignment. So for many, you might be saving 100 percent of the time normally spent on a physical inspection field trip but adding time in other places. If an appraiser is going to substitute assumptions on these additional elements in lieu of actually developing them, then that’s a reportable event, with respect to both their scope of work and their other disclosures. If a hybrid assignment omits certain elements that are normally included in a conventional 1004 assignment then we wouldn’t want any readers to make an unsupported assumption that the development process is the same or similar or equivalent to that used in the conventional 1004. If neither the appraiser nor the inspector performed any of those additional elements, then the appraiser should say so as a means of providing their users with the context it takes to understand what the appraiser did and didn’t do in that assignment.
Conclusion
Your normal process for a 1004 assignment will typically include a number of elements that you observed and considered but which are not codified in your reports. Nevertheless, these elements contribute to your opinions and conclusions. Appraisers need to acknowledge all that goes into what we do and refrain from minimizing the extent and effect the subtleties have on our value conclusions, whether the elements are contained in our reports or not.
If your assignment conditions for a “did not inspect” appraisal process include an expectation by the intended users that this process will include ALL of the analyses you normally perform in your 1004 assignments, then the work performed at the desktop level for the hybrid will require much more time/effort than the desktop work being spent on a 1004. This goes back to the difference between what a single task “inspector” does versus what a licensed real estate appraiser is doing.
If your assignment conditions for the “did not inspect” appraisal process are more streamlined and do not require the same amount of development and reporting that is normally expected for your 1004 assignments, then those issues warrant a prominent disclosure. You want to clearly communicate the additional assumptions and limitations you used when compared to a conventional 1004 assignment.
Appraisers should not enable their readers to labor under the mistaken assumption that a hybrid assignment, where the appraiser doesn’t consider certain elements, is of the same value as a conventional 1004. In no case should we let go unchallenged the assumption that an 80 percent work product is equal to a 100 percent work product.
Be specific about your scope of work (SOW) decisions, what you actually did and didn’t do. Not just in these hybrid assignments but in every assignment you do. Don’t rely solely on anyone else’s SOW disclosure unless it fits in with what you think you’re actually doing. The main reason so many users are unaware of everything appraisers do in their assignments is because appraisers have been relying too much on the vague, generic and inadequate SOW disclosures in the Fannie forms. Stop doing that. Take control of what you’re telling your readers.
About the Author
George Hatch is a Certified General Appraiser in San Diego.
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by Susan Foster
I have completed some of these hybrid appraisals, just to see what they were and how efficient they could be. These are disaster. The inspectors are not trained to measure the property or describe the condition accurately. Not one inspector described the recent updates and all marked no updates to the kitchen and bathroom in the last 15 years. I had prior or current MLS listings of the properties that described them as remodeled. One property had half the siding missing on the back side of the house with no comment from the inspector. Measurements were off from assessment records or prior MLS listings and one inspector was 800 square feet larger than assessment records or a prior MLS listings which noted appraiser measured. When I mentioned this to the AMC, they insisted the inspectors measurements were correct and asked “what do you want the square footage to be?” I replied “Accurate”. After numerous conversations, the AMC sent someone else out to measure and the square footage came back the exact same square footage as the appraiser measured MLS listing. Coincidence? I don’t know. I decided to quit that AMC.
-by Michael Ford, AGA, SCGREA, GAA, RAA, Realtor®
Mr. Hatch, respectfully disagree to it being ‘akin to relying on mls photos and some third party inspection’. MLS at least includes a licensed agents or brokers perspective. Not always the most reliable, but with SOME basis or training. Even with puffery or hyperbole and poetic license in describing the property, appraisers could suss out what was being described OR call the agents and ask. We could and would often drive out and check specifically when a question from a trainees report arose.
Additionally, a 1004 (report type) is assumed to be of a complete appraisal by a professional real estate appraiser who has personally checked every aspect of the property including adverse or beneficial neighborhood or alternative competitive market areas; externalities, functional inadequacies and a host of things only real estate professions know to check for.
I’m with you on steps 1-7
I disagree that 80% is still being done by the appraiser and only 20% by the trained monkey. With the fees associated with these products, there is a built-in need for volume and speed. We have already seen it. 20% will be done by the monkey, and if we are lucky perhaps 50% by the low ball appraiser-gambling that the missing 30% won’t ever be caught – for example, highest and best use as vacant anyone? Dealing with excess or surplus land properly? Identifying private road or shared driveway issues? Encroachments? Presence or absence of sewers/ septic and distances to wells?
AMCs will NOT be hiring a conscientious appraiser that conforms to USPAP regardless of fee once they take on an assignment. AMCs will NOT be hiring trainee appraisers with a commitment to integrity and properly learning a process they know will be carefully reviewed by their mentors. No. AMCs will hire off of internet ads-looking for part-time students (as they do now); give them 1/2 a day class or perhaps as many as 3 days of ride alongs (Mueller) & will then specifically DIRECT them to refer to Zillow for reporting considerable data.
I have written testimonials from former hybrid inspectors to this process; and have seen the pre 1004P proprietary frauds, er hybrids such as the original Pace Pro and ClearVal style reports.
Hybrids, like PIWs are ONLY to cover bad loans and inadequate property collateral risk considerations with much cheaper plausible deniability. They are a test to assure high volume loan production a d origination passing through the FNMA pipeline to securities investors BACKED BY US Taxpayers (FDIC only requires 1.6% cash reserves for loans outstanding).
There is no need for any hybrid. Not ever. Period. To use them eliminates a perfect entry-level appraiser training opportunity. For years we used to train by sending competently trained and INdirectly supervised appraisers out and then third-degree them when they got back to the office. Often resulting in them going BACK to a property to reinforce a lesson. In the end, a product was produced which BOTH appraisers were comfortable signing.
It was FNMA, TAF, and AMCs that decided DIRECT supervision was required (accompany trainees into the field for far longer than was needed). It was TAF that decided we should be limited to how many trainees we can have at any one time, directly negatively affecting our ability to load our staff with variable skill and experience trainees. We had to treat all the same and hold all hands the entire process. A good trainee mix is a newby; a 90-180 experienced trainee and one ready to jump to their own full license. TO handle volume fluctuation, illnesses etc. double this amount was often required with the supervising appraiser inspecting all the newbies work; spot-checking the mid-level and randomly checking the near ready appraiser (to both train and to let them know integrity checking is also a part of the process-best to nip bad habits in the bud.
Want to permanently end the “hybrid” (synonymous wit bad appraisal)? Just authorize experienced appraisers to use trainees to perform property inspections for full appraisals and let US determine when they are ready to be let off on their own. WE are the ones signing! Stop micromanaging experienced licensed and certified appraiser.
-by Hans G. Schaetzke II
I have had this very conversation with myself while driving to my inspections. I have pointed out to myself everything that I do and a 3rd party inspector would not do. I’m glad you covered those points for everyone in this forum because I could have put out comments on social media that would just disappear. “Do not allow your clients to labor under the assumption that an 80% job is the same as a 100% job”. That is the point! But, because the Lender writes the proprietory Hybrid form, THEY are defining your SOW. They are telling the appraiser what to do and the appraiser is assuming they are safe to do just that and only that. Well, what will happen when the Borrower gets that report? How will this affect the Public Trust in the appraisal profession? Deteriorating the Public Trust in the appraisal profession is a USPAP violation and in most states carries the penalties of Law. USPAP is adopted as the standard across all fronts, your clients, your E&O, and your State License. Is anyone ever going to sue on the basis of the Public Trust? Appraisers that do Hybrid reports had better hope no one ever does because, if they win, the flood gates will open for everyone to sue you. I am taking notes. I will never do a Bifurcated report because I want to be the guy that sues everyone for destroying my profession. I apologize if I sound like a jerk. But, I can live without ever doing a $50 appraisal and I plan to.
-by John Welter
Thank you for your excellent observations on this topic. I personally am at the end of my 38 year career and will not perform bifurcated appraisals., the liability will be exacerbated to the appraiser. The quality is bound to suffer- one hand doesn’t know what the other is doing, too much ambiguity between the inspector’s opinion of what a C3 condition is versus the appraiser’s opinion. , by the way, what ever happened to appraisers drawing walls in their floor plans? How do you know whether you have a captured bedroom or whether the floor plan suffers from some other type of functional obsolescence! The industry is being watered down so much that it has become a form filling task with no finesse whatsoever.
-by Gary
Please send me a copy of your most recent sketch. That way we can all know how best to perform to the best standards. Today there is programs that literally duplicate what is there from the inside of the house. Albeit not exterior measurements. Im sure this will be the future standard as it is much more exact to what is there. As for functional obsolescence -a REPORTING requirement. The walls alone do not show: ceiling height and access to other rooms through one another etc,,. This MUST BE SPELLED OUT WITH PHOTOS AND SUPPORTING COMMENTS.
-by Rachel Massey
Very cogent description of the process. We definitely are constantly forming our opinions as we observe the subject neighborhood and the comparable sales, even if just from the road. I really appreciate how you laid this out George. Thank you.
-by Tom Taylor
I’m old school. I still draw out floor plans with the interior walls because my memory is not so good and I find it valuable when making adjustments in the appraisal. It certainly adds to the photos that we take. One other thing I do is that when I get close to my subject neighborhood I turn off my car radio. I find I can concentrate better as I look around. I don’t accept assignments on hybrid appraisals at the moment. Maybe later, I don’t know.
-by Candy
A good surgeon reads his own X-rays & MRI’s. No surgeon that’s values his reputation
-would rely on a nurse to tell him how to perform at the operating table. These hybrids raise a lot of questions for appraisers who value their reputations.
by Anthony Bamert
The Illinois Department of Financial Regulation -IDFPR, has indicated that anyone inspecting the property and preparing data to provide to the lender and/or appraiser must hold and Illinois Home Inspector License. Anyone other than an appraiser completing a site visit and submitting data as part of bi-fic report will be prosecuted for unlicensed practice of home inspection. If the data is submitted via an AMC, they may also be liable. For more information contact IDFPR – Appraisal Division.
-by Hans G. Schaetzke II
Right on Illinois!
-by Lawrence Fontana
Great Article
-by Rick Lifferth SRA, MAI, President DataMaster
Wise observations Mr. Hatch. Thank you for the time you spent writing the article. I am not sure who is driving these hybrid appraisals. Takes approximately the same number of man hours but increases the risk to the appraiser. I wonder what the law suits will claim two or three years from now when the market experiences a downturn and lenders are looking for someone’s E&O insurance to bail them out of their losses?
-by Michael Ford, AGA, SCGREA, GAA, RAA, Realtor®
Rick, no disrespect meant but one driver of hybrids is the Big Data provider!
-by Edd Gillespie
Well done George Hatch! All I would add is if you are concerned about professional and thorough results for your client as opposed to cheaper and faster- why accept a hybrid appraisal assignment? The appraiser has the same expectations and liabilities placed upon him/her as are present in a 1004 or a narrative. USPAP still obtains and you are certifying that all the work done, analyzation completed and facts collected are accurate and relevant. Remember, no misrepresentation or misleading stuff is permitted.
Listen to George and decide if you want this junk in your business.
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