by Joshua Walitt
There’s been a good deal of interest lately about Evaluations: who is writing them, and more importantly, who is not writing them and missing out on potential valuation business. Evaluations are those valuation reports that banks can use, under the Interagency Guidelines and in certain lending situations, which don’t require but do allow the engagement of appraisers. Here’s how to tap this “new” source of business.
Strictly speaking, the minimum requirements for completing an Evaluation do not meet federal requirements for completing an appraisal, as laid out in the Uniform Standards of Professional Appraisal Practice (USPAP). If appraisers are required to meet USPAP, can they prepare Evaluations? If appraisers can prepare USPAP-compliant evaluations, what are the reporting requirements, and given what is required, does it even make sense to add Evaluations to your list of services? Answers to follow!
Evaluations: Yes You Can
There should be no confusion: appraisers CAN write Evaluations today. USPAP does not prevent appraisers from preparing Evaluations, no matter what you’ve read or heard.
The issue is that most appraisers (except in North Carolina, Virginia, and Tennessee) are held to USPAP requirements when producing Evaluations. In other words, an appraiser producing an Evaluation report must meet two different sets of requirements; the report must not only meet the Federal requirements for an Evaluation, but also the requirements of USPAP. Consequently, each appraiser has to weigh whether doing Evaluations is worth the time and effort.
Interestingly, the gap between the reporting requirements of an Appraisal and an Evaluation has decreased due to the 2010 revision of the Interagency Guidelines. The revision brought expanded requirements for the content of an Evaluation. Evaluations, often regarded as the “lower-quality” cousin of an appraisal, now must contain descriptions of the inspection, analyses and supporting information used in valuing the property. Compare it to a Restricted-Use Appraisal, where the appraiser can briefly state the appraisal methods, techniques and conclusions – providing fewer details in the report itself.
How many banks in your community order Broker Price Opinions (BPOs) or have minimally-trained individuals completing Evaluations? With the banks needing to raise the bar for Evaluations, appraisers are well-suited to produce reports that meet the new expanded requirements. Why? It is logical to assume that the quality of work will be higher when prepared by appraisers (as compared to real estate agents or bank employees), in general, because appraisers are non-biased, trained valuation experts with no interest in the transaction.
Opponents might claim this legislative approach lowers the bar for the lending industry’s collateral valuation protocols, at a time when we should be raising it. As noted, however, the 2010 Interagency Guidelines require more of an Evaluation than they did in the past, including more written support and detail than even some portions of a USPAP Restricted-Use Appraisal. So the question is not whether appraisers can do Evaluations, but whether they make sense from a business perspective.
Appraisals vs Evaluations
To know whether Evaluations make sense for your practice, you must first understand what you’re required to do. The core components that we would generally expect to find in any reliable valuation report are required for both an Evaluation and a Restricted Use Appraisal. For example, we find the mutual elements of the identification of the property, the estimate of value, the value date, and the inclusion of information regarding analyses, support and other data in both types of reports. But these overlapping components only go so far.
An Evaluation’s requirements lack several items including an estimate of exposure time, citation of the source of the market value definition, Statement of Use and User Restrictions, identification of the report type, and inclusion of specific signed certifications – all of which must be included for the report to be called an Appraisal.
Conversely, a Restricted-Use Appraisal allows brief statements regarding certain information, analyses, and property characteristics, whereas an Evaluation requires a more-thorough account of those items.
Think of it like this: an Evaluation is a cup of coffee with sugar required; a Restricted-Use Appraisal is a coffee with cream required. The key is to make your cup of coffee with cream and sugar included – so both sets of requirements are satisfied.
Giving the Client What They Want
The banks, per the Interagency Guidelines, need at least an Evaluation. The appraiser, per USPAP, must prepare at least an Appraisal. The focus isn’t on what label you put at the top of the page – in the end, the content will reveal the type of report. (But, yes, USPAP does require a formal identification of the report type.)
So, the question shouldn’t be can you provide Evaluations to banks because you surely can. Instead, we should ask ourselves, “Do I understand the requirements for developing and writing these reports?”; “For what properties will I write Evaluations?” and “What Scope of Work choices do I have?”
Know that I am a full-fee appraiser. I charge fees that fairly compensate me for the time and effort necessary to produce a quality report –I don’t accept the mini-fees that some companies offer. So I don’t expect to get all the Evaluation business in my area, nor do I expect that I will accept every Evaluation assignment offered. I have produced Evaluations and know it is unlikely they will make up the bulk of my work. (I perform rent studies too, and they also do not make up the bulk of my business but they do round out the range of products I offer.)
The fact that some banks are already engaging appraisers for this type of assignment dismisses the argument suggesting appraisers will never be asked to provide Evaluations. But an appraiser is guaranteed to receive no Evaluation assignments if they don’t offer the product or never ask for the business.
Doing it By the Book (USPAP)
As you prepare to produce Evaluations, don’t look to any article – including this one – for an exhaustive list of requirements. Go to the sources yourself: read the 2010 Interagency Guidelines and USPAP Standards 1 and 2. Don’t rely on a class, an existing pre-printed form, or the work samples of others to instruct you. Instead, produce your own thorough list of the necessary elements and then make sure your process and form are sufficient. The Appraisal Institute’s Guide Note 13 is a good outline, but don’t simply cut-and-paste it – confidently understand if the process that you design is adequate or not.
A good reminder, applicable to so many appraisal issues, often comes up at our office’s monthly meetings: “We’re all independent appraisers– so we all need to make our own decisions.”
Do you accept every assignment that is offered to you? Probably not, and it will be no different with Evaluation assignments. With the somewhat more-abridged nature of the Evaluation (compared to a Summary Appraisal used in the industry), you might find an Evaluation is not appropriate (or cost effective) for complex assignments.
For example, will you accept Evaluation assignments for properties having log construction, four acres, one bedroom, fully-below-grade, an atypical design, or in a market area that has limited recent sales? In many markets, these characteristics can indicate a complex property, where the necessary scope of work to produce a reliable report will need fuller – and probably more time-consuming – development and reporting.
Also, be aware that you’re not the only party needing to make important decisions. Within the Guidelines, banks are specifically instructed that:
BPOs and AVMs in and of themselves are not acceptable as Evaluations
Selection of the valuation method (Evaluation or Appraisal) should not be based on the lowest fee, and atypical, or complex, properties may require an upgrade from an Evaluation to an Appraisal.
So, how will you determine and communicate your own “accept/decline parameters” to your client, regarding assignments they offer you? What product upgrade will you offer your client in cases of complex properties which are not suited for the Evaluation product? The Interagency Guidelines instruct the bank that upgrades from Evaluations to Appraisals will likely need to meet Summary Appraisal report requirements. Not only does this decision making process protect the bank, it also provides a fail-safe for your time and your fee.
Fees are influenced by a variety of factors, and invariably some fees will be inadequate for the amount of work required for a particular product. On a regular basis already, many appraisers are countering or declining mini-fee assignments, and Evaluations will be no different. Appraisers are good at valuing properties, but are they all good at valuing their own work.
We’ve all heard someone claim that USPAP is too restrictive, but in general, the Standards are actually quite broad in their allowances. So, when you approach new and existing clients regarding the Evaluation product you offer, you’re going to have scope questions to answer, including the following:
What type of subject inspection will you make?
a desk inspection using a prior appraisal or MLS, within a certain timeframe,
a from-street personal inspection,
an inspection performed by someone else,
or another type of inspection?
What will the reporting of the value be?
a single-point dollar figure,
or a relative figure?
Will the sales grid have adjustments that are-
What type of inspection will you complete for the comps?
personal from the street,
or the MLS and public data only?
As always, in the end, the final scope of work choices are yours, to ensure you are producing a reliable report for the bank’s use.
Making Things Happen
An article in the current edition of Working RE magazine suggests a permanent solution to the Appraisal vs. Evaluation question is to enact legislation which authorizes appraisers to write Evaluations by exempting them from meeting USPAP requirements on these reports (Appraiser Evaluations-Why Not?, pg. 16). While it’s true this solution would end the debate, appraisers in the 47 states without such legislation don’t have to wait to go after this business. USPAP does not prohibit appraisers from producing Evaluations but appraisers do have to decide if it is worth their time and effort. Choose to offer Evaluations to your clients today and run the numbers to see if it is the right fit for your business.
Editor’s Question: What are your experiences doing Evaluations?
This article was originally posted at Working RE.