How to create an Appraisal Report: Following Instructions

I normally get very few revision requests, and usually for minor items. I’m not saying this to pat myself on the back, but to explain how surprised I was a few weeks ago when I received two revision requests in the same week. And they weren’t just any type of revision request: they were the dreaded “instruction” from an underwriter.


“Appraiser to include a second sale whose unadjusted sale price supports the opinion of value, and resubmit report.”


“Appraiser to remove the time adjustment from comp #3, and resubmit report. Our investor does not allow time adjustments.”


A few months back, I got another memorable instruction: “Appraiser cannot include any comps that exceed per-line, net or gross adjustment percentages of 10%, 15%, 25%. Appraiser to include different sales that do not exceed these requirements.”


I won’t go into details related to these reports, because I want to focus instead on how we can respond to these types of instructions from lenders and AMCs. (And, no, I am not a regulatory expert. I recommend taking a class or webinar on appraisal-related regulations.)


The issue at hand is that TILA, many states’ AMC rules, HUD, Interagency Guidelines, and other entities restrict this type of instruction from lenders and their agents (AMCs) because such conditions may lead to reports that are not based on the appraiser’s independent judgement (or even sound valuation principles). For example, the first request above turns the appraisal process on its head. Normally, the appraiser chooses comps based on similarities to the subject, then develops an opinion of value. Instead, the appraiser is being instructed to develop an opinion of value, then choose comp/s based on that value opinion. In the second, the appraiser is being instructed to ignore or remove a necessary adjustment. Remember learning, in your first-ever appraisal class, that you must adjust for market conditions? (By the way, in this situation, the client agreed with my data and analysis – that the market had increased – but simply didn’t “allow” adjusting an older transaction.)


So, how can we handle these instructions?


First, be polite. Don’t make insulting, belittling or threatening remarks. Simply state facts: facts related to the subject property, the comps, the market, and acceptable appraisal methodology. Consider this an opportunity to teach; whether they learn or not is in their control. If you respond negatively, don’t expect a positive outcome. Show your willingness to work through the situation compliantly and professionally.

be polite

Put it in writing. Submit your information in writing (email, fax, online messaging system), and specifically request a response in kind. This way, you can fall back on exactly what was communicated. And be sure to ask yourself how your message would look if (hypothetically) published in the newspaper or read by a regulator, a colleague or your mother?


Ask for the individual’s name and title who is making the instruction. I’m not suggesting we burn bridges by making it personal. But if they believe they are right in instructing you, let them identify themselves and be accountable. “Please provide the name and title of the individual requesting this, so I have it for my workfile” is simple and to-the-point; in the same message, let them know what action you are taking in the meantime.


legal documents

Don’t be pig-headed. Are they asking you to fix a Mountain photo that you’ve labeled “Interior” instead of “View”? Is that worth arguing over? Be gracious and fix it. But on the other hand, if they are saying “Please change the label from ‘Barn’ to ‘Outbuilding’; we do not allow barns”, then that alteration could be misleading.


Keep your license. Ultimately no one other than you truly cares about your license. If a loan goes south in a few years and the a lender is examining the file, they won’t care who instructed you to do what – but they’ll surely see a misleading report, improper methodology, incorrect information, or other violations. And whose signature will be on that report?

Finally, be certain. Don’t make it up. If you’re not exactly sure of methodology, State interpretation, USPAP, TILA, etc. on a specific issue, then go to those sources before you start “quoting” incorrectly. Call your state’s division of real estate, re-read sections of USPAP, read through the applicable sections of TILA, even look at the FNMA Selling Guide. Don’t make it about how YOU appraise, make it about what is correct, reliable and credible for appraisal work.

Have you received any troublesome instructions from clients?

This article was first published in Appraisal Buzz – click here.

Exterior-only Appraisal: Thinking Outside the House

I do pre-foreclosure and home equity work for several clients, and their assignments include some Exterior-From-Street appraisals. Insurance companies and agents request this type of report as well. Recently, I heard from an appraiser who doesn’t do “drive-by” Exterior-Only assignments. I understand, as part of managing businesses appraisers make different business decisions related to the nature of the work they will and will not accept. And I’m never about to tell another appraiser what work to accept and what work to avoid. (I enjoy a good Full interior-and-exterior inspection and I often hear from homeowners they are impressed that I spent more than 15 minutes at their house – so, I’m not advocating eliminating Full inspections!) But it’s the reasoning I’ve heard over the years, for not performing Exterior assignments, that I don’t always agree with…

Josh Walitt 12-2013 e

“How can I appraise it? I don’t even know what’s inside!”

That’s exactly why extraordinary assumptions are used. The Exterior-Only appraisal scope is specifically based on NOT knowing 100% about the property – that’s the point.


“I’ll do the sales comparison approach, but not the cost approach – after all, I don’t know the quality or condition!”


My next question is always, “Then how are you developing a sales comparison approach without knowing the quality or condition?” The extraordinary assumption enables you to “know” subject characteristics for purposes of the appraisal.


“How can I make an extraordinary assumption? I don’t know what’s in the property!”


Right. That’s what an extraordinary assumption is.


“But it’s a manufactured house and the form needs the HUD tag for me to appraise it!”


A lender might need the HUD information for lending policies, but certainly an appraiser can opine value without knowing that HUD information. And since when is a form in charge of the appraisal process?


Now, I know that there are sometimes good reasons for NOT performing an Exterior-Only, and we need to consider the availability of information, the intended use, the complexity of a property, conflicting available information, etc.. For example, I was recently asked to appraise a property from the exterior for a refinance, but county records indicated it had two single-family detached houses and a detached garage with what appeared to be sq.ft. above it. In this situation, I messaged the lender that I believed the appropriate scope of work for this assignment would be an interior-and-exterior Full inspection of the property and I insisted on an “upgrade” to that scope of work. After I quoted my fee and turn-time, they agreed, and I’m going next week.

Residential Appraisal

On the other hand, an agent recently talked to me about her current listing which has had few showings and no “bites”. She has a prior appraisal (sketch, etc.), a virtual tour and MLS information and photos, and of course these sources are available to me. For this listing-related assignment, it may be possible to have a desktop scope, using data from the county, the sketch, the tour, the MLS and other sources to establish the characteristics of the subject through extraordinary assumptions, for the intended use of this assignment.


When an appraiser automatically refuses to do any Exterior-Only work, I sometimes ask, “So, does the property not have a value if you can’t see inside?” I realize they’re not really claiming that (and my response is a bit tongue-in-cheek), but for partially- or fully-destroyed properties, hostile occupants, pre-foreclosure, portfolio or retrospective work, it may not even be possible to gain access. So I maintain my point does stand: the property still has a value even if you can’t get inside, and a client may need an opinion of that value.


The question is, Can you develop a credible report by making reasonable extraordinary assumptions for the intended use of the appraisal?

WATCH Property Inspection Video

Originally printed in Appraisal Buzz. Click here .


Paired Sales Are a Joke …

“Paired Sales are a joke” …So some folks say.


Okay, I agree that paired sales are not the be-all and end-all of adjustments, and that there are other methods for supporting adjustments, but the paired sales method really can be valuable.


Yes, paired sales are much more accurate in a textbook or in a state board’s newsletter than in an actual real-world environment. It’s wonderful if you can say “these two properties are exactly alike, except this one has a three-car garage, and that one has a two-car garage – so that means a third bay is worth $10,000”. The drawback, of course, is that it’s often difficult to find two properties similar enough (let alone, exact!) to even begin to isolate just one single characteristic for establishing adjustments. So, should we just give up on paired sales?


I think there are a few misunderstandings surrounding paired sales. Paired sales are not designed to arrive at an exact rate of adjustment to be used for each and every property you come across in each and every assignment. Simply because you calculate a $43.7982 per sq.ft. adjustment rate based on two sales doesn’t mean you’re going to use that exact rate for every assignment. Perhaps that support is only valid in a certain subdivision, or to new construction, or in a certain market area, or for certain age properties. If you determine a third garage bay is worth $15,000 for a certain segment of properties, will it also be worth $15,000 in so-called higher-end houses? Maybe, maybe not. Perhaps the $15,000 represents a percentage, not a flat dollar amount. Just like anything else, paired sales require analysis, not just calculations.


numbers and finance

And we won’t ever find the perfect textbook example of identical-except-for-one-characteristic paired sales. But is this reason to abandon the process? Paired sales will undoubtedly require adjustments in order to isolate a single characteristic. For example, maybe one is on a larger site, but you can reasonably adjust for site size differences, and then isolate the sq.ft. rate. Or, perhaps one property has slightly different GLA, so you qualitatively know that the difference in sale prices isn’t entirely attributed to the two-versus-three bay garages, but you can still draw a conclusion regarding if and how much value a third garage bay adds still taking into account that their GLA vary slightly.


Additionally, one paired sale is not the end of the process. Over time, we should be collecting, analyzing and storing the studies so that we can develop ranges of market-supported adjustments. Maybe our data indicates a garage bay is worth between 5% and 15% of the value for a particular property type in a particular area. So, where in that range does the appropriate adjustment fall for a specific assignment? …You are the human market expert qualified to develop the reasoning to support the specific adjustment you use in a report, which will most likely be based on the range your research indicates.


Paired sales will not show an exact number or percentage. So, what do they do? What use are they? First, they establish that there is (or is not) a value contribution associated with a specific characteristic. Second, they provide a basis for the adjustments that we end up making. A basis does not mean “a number to blindly follow without thinking about it”! A basis means our adjustments are logically grounded in real analysis, and not simply pulled out of thin air.



Of course, there are other methods of supporting adjustments: regression, market interviews and similar, which can be especially helpful in rural and non-homogeneous markets. Yes, only in textbooks are paired sales perfect. But to simply write them off because they are imperfect in the real world ignores the real evidence and support they can provide.


– Let me know what your experience is!

This article was first published from here.

Market Trend Analysis: Playing a Good Game

Both of my children play soccer, just as my father and I did. And as with any game, you have good games and bad games. But what is a “good game” really? What does it mean to “play well”, and do we mean as a team or as an individual player? If I say I “had a good season”, some folks might assume my team won most of its games, others might think we at least finished off the season strong, and others may even believe that I mean I improved my performance compared to the previous season. A seemingly-simple phrase or word can be interpreted numerous ways and really isn’t terribly meaningful on its own.


Business people planning


So, let’s step into appraising… “Declining”, “Increasing”, “Stable” and “Unstable” are wonderful places to start in the reporting of a market analysis, but they are certainly not good places to stop: more information is needed to report an understandable report. What will our Users believe we mean by “Increasing”, “Stable” or other trend-related words?


Many times (notably in mortgage-related work) we are not using these terms to forecast or to predict future market conditions. To avoid our Users’ believing we’re making predictions, we need to explain that we are using these terms to describe the market leading up to the effective date, and that those trend conclusions help to direct our time/date-of-sale adjustments (and possibly other areas of our analysis). Of course, in some assignments such as relocation-related work, we may in fact be developing forecasts.

3d- bar increasing


For our User’s sake, we need to define what exactly we mean by these types of terms. Just like we include a definition of Market Value and UAD codes and abbreviations, why not do the same with market conditions? Are we explaining what terms like “Decreasing”, “Increasing”, “Stable” and “Unstable” mean within the context of our report, what indicators and measurements we’ve analyzed to come to those conclusions, and how those conclusions impact other portions of our report? Without such explanation, we risk our User thinking “Increasing” means the market is going to continue increasing, that median sale prices have increased consistently over the past 12 months, or other interpretations that we possibly aren’t intending to make.


From reviewing appraisals, we can see these types of explanations are not always included in appraisal reports. So set yourself apart and include your own reliable explanations of these terms, citing available resources related to market conditions and trend analyses. For a start, take a look at HUD Mortgagee Letter 2009-09, which briefly defines a declining market. The Appraisal Foundation’s 2012 Valuation Advisory 3 provides a good list of indicators which can be analyzed for market trend analysis.


Then, take the next step: take the statistics and analyses for your particular assignment and relate them back to your definitions and specifically to the development of your appraisal.


This article was first published from here.

Listings: To Grid or Not To Grid…

Have you ever gotten into a disagreement over whether including listings in the sales comparison approach is inappropriate – or even misleading? I’d like to say I’m torn over the issue and just present my opinion as some middle-of-the-road approach; however, I really do see the benefits of including listings as part of summarizing my appraisal process in my written report.

confused face

First, some will say that the pre-printed URAR form states “Sale” at the top of the comparison grid, so it is a misleading report if a listing is included there. I disagree. It is a pre-printed word on the form, and if the appraiser states “Listing”, “Active”, “Under-Contract”, “Comp #4 is a listing not a sale”, etc. in the report (and even in the grid itself), then that report is only “misleading” if the User does not bother to read the whole report. The measure of “misleading” cannot be dependent upon a User ignoring portions of the report.

Others say that listings cannot be gridded, but can be included in the narrative portion of the report. The latter is a fine reporting style, and we need to remember that to write a USPAP compliant report, a grid has nothing to do with it. If you include a listing in your report, you’ve included it in your report – whether you’re gridding it or not. Your reconciliation will outline how much weight is given to the listing. Additionally, AI, FHA and other organizations have issued guidance in support of analyzing listings. (Perhaps some of your clients require it in engagement letters.)

A common definition of market value requires that the participants be “prudent”, “knowledgeable”, and “well-informed”. Would not the subject’s competition (ie, listings) be a part of this knowledge base for buyers and sellers to make educated decisions? If we are analyzing the market, are we not taking a look at supply-and-demand, inventory, and other items involving the current activity? And don’t those components of market analysis include listings and then, in turn, effect values?


For most lending-related appraisals, we’re asked to opine how much a typical buyer would pay today (basically). So for example, if the market has moved down and listings are lower than sales, we may be committing an error if listings are not playing a role in our determination of what a typical buyer would pay today. If he/she could buy a competing property today for $x, why would he/she pay more? “I look at the sales, because they are ‘real’ closed transactions” is a good start and is the entire basis of the comparison approach, but may not be a good place to stop if we truly want to summarize a thorough market analysis.

Listings are part of the market analysis that we should be conducting in our appraisal process. Some of the questions each of us must consider: “Do we grid them?” “Do we summarize our market and listing research in the report?” and “Are they given any weight in the reconciliation?”

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