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When I talk with people about what my home is worth, people use a lot of different terms. What is the difference between an appraised value, listing price, market value, and assessed value of a house? And why is the assessor’s value of my house so different than actual sale prices I’ve seen in my neighborhood?
“Appraised Value” is a generic term, and refers to the appraiser’s opinion of value of a specific property for a particular assignment. But referring to “appraised value” doesn’t really tell us what kind of value the appraiser solved for. Even though you might think that there is only one “true” value for a property, you correctly pointed out there are actually a variety of types of values. Each written appraisal report identifies the specific type of value being used in that appraisal, based on what is appropriate for the purpose of the appraisal. For most appraisals, the definition of that type of value will be included in the appraisal report so that the user of the report understands what – specifically – the appraiser is solving for.
“Market Value” is the most common type of value opinion for lending appraisals, and basically refers to how much a typical buyer will pay a typical seller if the property is exposed to the open market for a typical length of time. The lender needs to know this value before lending for purchases, refinances, or home equity. Private parties, like attorneys, accountants, realtors, and homeowners, may order appraisals with this type of value conclusion as well. It’s the most common value type used in appraisals, and the most easily understood since it closely mirrors what most people associate with value: what would a person ordinarily pay for my home?
But in cases where an employer has agreed to sell a relocated-employee’s home, the appraiser may be asked to write a relocation company appraisal in which he or she develops an opinion of Anticipated Sales Price (as well as a List Price range which will result in such a sale price). The Anticipated Sales Price can be based on the property being marketed for a shorter-than-typical (or, restricted) length of time. For example, the relocation company may want to sell a property within two months, even though similar properties are typically taking nine months to sell. In this example, the Anticipated Sales Price opinion might be less than the Market Value (Market Value assumes a typical length of time on the market). This value type can be similar to Liquidation Value, which is used by lenders for properties they’ve foreclosed on (and now need to sell); sometimes it is referred to as a “quick-sale” value.
Yet another type of value is the “Assessed Value,” which homeowners typically review when property tax notices are mailed. To determine an Assessed Value, first the Assessor’s Office determines the Actual Value of a property (similar to Market Value), which is most always based on past – not recent – sales. Then, the Actual Value is multiplied by an assessment rate to arrive at the Assessed Value. If a homeowner hires an appraiser to write an appraisal to dispute a property’s value with the Assessor, it is usually an opinion of Market (or Actual) Value that the appraiser develops. Since the Assessed Value, per State law, is based on past sales, the value reported at the Assessor’s office or on property tax notices may be noticeably different than what a person would currently pay for your home. It doesn’t mean the Assessor is wrong – it just means they are using a different definition of value or date of value to develop an opinion of your home’s value.
There are other types and definitions of value, so if you’re ordering an appraisal yourself, always talk to the appraiser about the specifics of the appraisal process for your case.
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A big “Thanks” to Joan Trice and the Allterra Group for holding another great Valuation Expo. This year was the 15-year anniversary and the Expo did not disappoint!
I had the opportunity to speak at the recent Valuation Expo held in Las Vegas. My talk was called “Everyday Compliance Items and Your Appraisal Business” and focused on issues related to federal, state, and client rules, regulations, and expectations. The main thrust was to examine how we can handle all of these so-called “laundry list” of items efficiently and effectively in our day-to-day work.
At one point, I discussed unacceptable “stips” (aka, revision requests) from clients, and shared that I had once been told by a client to “remove time/date adjustments – we do not allow them”. It elicited a groan from the group (we all know a client can’t tell us that!) and I went on to tell them that I persisted and the adjustment remained in my report, by referring the client back to the support, analysis, logic, etc. already in the report and by explaining the multiple sources that supported my including adjustments. Afterward, I did have an appraiser attendee ask me, “Couldn’t the client ask you to remove it if it wasn’t appropriate?” He brought up an important point: of course we shouldn’t include time/date (aka market condition) adjustments if they are not supported, but in this case, I had ample data – which was detailed and analyzed in the report.
It was for time reasons that I didn’t get into all the details during my talk at the Expo, but I did want to share the specifics behind the request, because I suspect I am not the only appraiser who has been asked to make similar changes to reports. Below is the article I wrote a few months ago in the April 2014 edition of Appraisal Today regarding this incident, and how I was able to insist that my report remain as delivered (with the already-included support) and to still retain my client.
Take a look and let me know your thoughts.
This article was originally printed in the April 2014 edition of Appraisal Today, “Handling “instructions” to not make time (market conditions) adjustments without losing your client”
by Joshua Walitt
A few months ago, I posted to my blog several sample “instructions” I received from lenders, one of them telling me to remove a time adjustment I had applied to a comp that had sold 6 or 7 months prior to the effective date. (The other sales comps I used had all sold in the prior one or two months and I made no adjustments based on the market studies.)
My blog emphasized remaining professional, polite, and courteous in handling any appraisal issues with clients, as well as solidly knowing the rules, with the goal to save any business relationships worth saving.
Some could argue that a client that “instructs” an appraiser isn’t worth keeping, and I’d tend to agree. But when the client has a long-term and good track record, the fact that one problematic episode arises isn’t, in my opinion, reason to throw the baby out with the bath water and fire the client. As it worked out, I was able to communicate effectively with my client and save the relationship (I’ve received more assignments since the episode). A few appraisers questioned how I could possibly remain strong in insisting that my time/date adjustment (aka, market adjustment) remain in the report, yet still retain the business relationship. (Oh, and I like to think I educated the client at the same time!) This is one type of example I will be using in June when I speak at the Valuation Expo in Las Vegas. My talk will cover compliance-related issues and practical applications to our day-to-day appraisal businesses.
With only minor editing, I’ve included the email exchanges below. While there are many issues related to the discussion, some of the major items I noticed throughout the conversation are included below.
Can a no-time-adjustment policy be an acceptable assignment condition?
No. Adjusting for market conditions is a necessary (and fundamental) part of analyzing sales, in order to bring sales “current” to the effective date. An assignment condition that bars an appraiser from properly applying such adjustments would be unacceptable, and raises USPAP and Appraiser Independence issues for the appraiser and client.
Is it a problem that this assignment condition was added after the assignment engagement (in fact, after
Whether it was presented as part of the original engagement or as an additional condition after acceptance or delivery makes little difference.
At engagement, such a condition would have to be considered an unacceptable assignment condition. In the latter scenario, after engagement or delivery, this type of “instructing” the appraiser in the development or reporting of the appraisal would not be in line with Appraiser Independence regulations.
Does the client evaluate the market, in order to determine when a time adjustment is warranted; or, does
the appraiser do that?
Obviously, it must be the appraiser – the market analyst expert – who evaluates the market. Regulations require that the lender engage a state-certified or state-licensed appraiser to develop and report the appraisal. They need to leave the appraising up to the appraiser.
Is forecasting important when deciding whether to apply time adjustments?
Forecasting may come up in some assignments, but in market value assignments for lenders, typically adjustments to comparable sales are not related to forecasting into the future (beyond the effective date), but to bringing the sales “current”. If a client is concerned that the increase or decrease in a market may not continue into the future, that concern is not directly related to the market adjustments made to the sales.
[Editor’s note: sometimes a “quick sale” value is requested on REO appraisals, such as a 90 day sale when the typical exposure time is much larger. This is, or is very similar to, future value.]
How much market study summary (such as graphs, charts, narrative) is necessary to support a
In my experience, the necessary amount of summary analysis supporting market adjustments may vary, based on the market, the specific data, the variables studied, the availability of specific data, and even the client (the client can compliantly ask for further clarification). Most frequently, the Neighborhood section of standard appraisal forms (even supplemented with the 1004MC form for lending appraisals) does not offer enough space or request enough data for an adequate summary.
For example, simply reviewing the change in median sales prices over 3 periods of time, such as on the 1004MC form, may not provide enough data to determine whether values have increased or decreased, or how much they have changed. There is not enough information provided to a lender to understand how market adjustments were arrived at.
Does it really matter if the appraiser simply takes away the market adjustments?
If the appraiser believed, from market data, that a market condition adjustment was warranted, then removing it because a client instructs him to do so is a problem. And it’s not just a problem for the appraiser, in terms of USPAP and state enforcement.
The lender is required to obtain a USPAP-compliant report and the entire process must meet Appraiser Independence requirements; “instructing” an appraiser and utilizing a non-compliant appraisal does not place the lender in a good position.
The email conversation, between the underwriter and myself, follows:
Request from Underwriter
Due to feedback from investors we cannot accept positive time adjustments on any comps, so please remove the time adjustment on comp 3. In the past we could accept positive time adjustments, but our investors feel differently now. So going forward please do not use positive time adjustments. This will be reassessed as we go along and the market continues to show an increase in values.
Thank you for your help
Reply from Josh
For me to ignore all of the studies and data that I’ve summarized in the report and not reflect the change in the market for this older transaction would not be consistent with USPAP or sound valuation practice. I can honestly say your organization is the only client, lender, or AMC that has ever instructed me to remove an adjustment. FNMA, VA, FHA, etc. all expect market analysis, and FNMA Selling Guide specifically notes time adjustments can be positive or negative. This was conventional – what set of industry guidelines is this file subject to?
Your hard and fast rule could be called an unacceptable assignment condition because it does not allow the appraiser to follow USPAP. Lack of time adjustments is one example of the problems that led to appraisers being blacklisted and losing State licenses after the bubble a few years ago.
Please hear my comments as they are intended, which is a non-confrontational discussion in order to figure out how we can work through this. I hope these comments do not jeopardize our business with one another.
Reply from Underwriter
I understand your concerns and what you have to understand is that we have to satisfy our investors and you are the only appraiser that I have seen at this time use positive time adjustments. [Editor’s comment: How many times have you heard this? Am I the only one who does what should be done in an appraisal? I doubt it.]
I have had conversations with the investors and yes you are right there are times when it would be appropriate to use time adjustments but because of the short amount of time that we have seen an upward trend, we want to be very cautious because we don’t want to be the only ones out there doing this. We received a lot of flack from the investor on the last appraisal that we sent in that had positive time adjustments and ended up having to have a second appraisal done to support the value and that appraiser did not use time adjustments and was able to come up with a similar value. So for right now until we see more of this happening industry wide and being accepted, then we would like to avoid them if possible. I do not want to ask you to do anything that would be against USPAP but as I said I have not received any other appraisals that have used positive time adjustments so it is hard for me to make a judgment on whether you are right or wrong.
I have had conversations with a couple of other appraisers and investors about positive time adjustments and they felt that there had not been a long enough period of upward growth to determine if positive time adjustments are appropriate. Also for comps less than 6 months old I do not feel there is enough data to support the use of positive time adjustments. On older comps positive time adjustments might be appropriate, but again there has not been enough time to determine if the upward growth will continue or turn around and head back down.
You do good work and I trust your judgment and because you want to discuss something would not jeopardize your standing with us. But in this instance I don’t feel that a time adjustment is warranted and in the future you would be asked to remove positive time adjustments for comps less than 6 months old.
This is not a hard and fast rule but a judgment call by our company for this period of time, and as we know things change and I could be asking you in the future why you did not use a positive time adjustment on an older comp. I appreciate your comments and I am always willing to discuss any issues.
Reply from Josh
Thanks for the response.
The Division of Real Estate has said that if a market has increased (assuming that the summary of those market analyses is in the report and the analyses make sense), then they will expect to see time adjustments. A lender policy is not an acceptable reason for an appraiser leaving off a time adjustment, and the Division considers this type of situation a misleading report, which in the appraisal and compliance world, is a huge deal in terms of violations of USPAP. The Division is the entity that enforces USPAP and issues our licenses. They will “fail” a report that ignores the time adjustment when the market has increased or decreased leading up to the effective date. As they see it, it is black and white.
Other appraisers, your investors, you, etc. acknowledge – according to your email – that the market has increased (at least for some time) leading up to the effective date in this particular assignment. (Of course, it varies by assignment, due to market area, what particular segment, type of property.) You note you don’t want to be the “only ones out there” having time adjustments appear in your files’ reports. I work for a variety of lenders, and looking back through my reports, I see other reports in which I used time adjustments and summarized my research and conclusions (with attachments and narrative) just as I have in several reports I’ve turned into your organization. I haven’t heard “boo” back from them (I rarely get revision requests anyway) and I’ve continued to get work from them which is one indicator to me that the quality (including time adjustments) in my reports is not an issue. Wanting to see “more of this happening industry wide and being accepted” you write below. As I noted above, it is being accepted by other clients, some small some national. However, looking to the larger industry doesn’t seem to be a reliable way to verify if adjustments are necessary or appropriate. I have absolutely no idea if time adjustments are appropriate for segments of the markets in Denver, Philadelphia, LA, or small towns in Florida. What we look at is our local market, and USPAP – according to the Division of Real Estate and reading USPAP – expects us to react certain ways in our reports if the market has changed since a comp sale’s transaction.
You note that you haven’t had any other appraiser use positive time adjustments. Talking with other appraisers, I know others are (and some are not) depending on the market and the specific segment, but obviously I haven’t looked at reports you specifically receive so can’t really comment on them. With this, I understand you are in a tough spot not knowing if I am “right or wrong”. But in light of your comments that clearly acknowledge the market in some cases (not every segment) has increased leading up to the current time, I am confidently telling you – in terms of compliance with USPAP and enforcement/ interpretation through the Division – that I am right. The bottom line is, if a market has increased, comps with older transactions must be adjusted, unless there is good reason not to. (Again, policy of a lender is not considered a valid reason.)
You mention in several places below in your email something to the affect that the increase hasn’t been going on “long enough”. Market studies and analyses in appraisals are not meant to indicate forecasting or predictions or anything like that (in general, for lending appraisals).
So, I do not understand the significance of the worry of whether “upward growth will continue or turn around and head back down” as you state. I am concerned with (as are HUD, VA, FNMA, Division, AF, AI, etc.) what has happened between the comp transaction and the effective date. While the “health” of a market can be a concern, a time adjustment is not in response to how long an increase has been occurring or if an increase will continue into the future. A time adjustment IS used to reflect the change in the market from the comp’s transaction to the effective date. For example, let’s say a comp sold 6 months ago with studies showing values increasing during that time (6 months ago up to the effective date); a positive time adjustment may be needed to reflect the upward movement of the market since that specific sale. Another example, I make a positive time adjustment following analysis and provide support in my report, and a month later the market tanks; there is nothing that makes the report invalid because any time adjustments used in the report were reflecting the change leading up to the effective date (to bring the comp “current” to the effective date). There is never a guarantee that a market will not “head back down”, and time adjustments made to comp sales have nothing to do with that. The Division does not allow appraisers to avoid time adjustments (or any adjustments for that matter) based on a lender policy/condition. If they see this type of omission, the appraiser will face a fine, required additional education, required review by another appraiser, or worse for a misleading report. As the Division sees it, there are sequences of adjustments that must be adhered to (which is basic appraising 101), one of them being market/time adjustments, so if it is left out, that is not good. One of the top “missing” adjustments found in reviews of reports leading up to the recent “bubble” were time adjustments and/or little-to-no actual market analysis. I need my license to work.
Knowingly meeting a lender’s condition that is against USPAP is risking my license and not smart. No other lender has asked me to remove adjustments, and no other lender has disallowed time adjustments. I want to find a way we can work through this, while still delivering a compliant report.
Is there a way that you/investors allow time adjustments to remain in a report, through additional pieces of data that I can supply to you?
Reply from Underwriter
I am willing to give this a try so we will call it good.
Appraisers have a responsibility to evaluate any requests from clients (lender or otherwise). Whether the issue relates to market (or any) adjustments, the condition of the property, locational influences, the final opinion of value, or a laundry list of other items, appraisers decide. In the end, the appraiser’s judgment and expertise must prevail, in providing the unbiased, credible, and reliable appraisal report he or she is required to deliver.
I talk with real estate agents almost every day. Sometimes I’m asking them questions about a property that sold which I’m considering using as a comp or I’m teaching a class on appraisals to lenders and realtors. Other times they’re calling me asking about various appraisal procedures or if I can do an appraisal for them. The answer is Yes – appraisers can do appraisals for real estate agents.
Pricing a Listing
Let’s say a real estate agent is trying to get a listing from a homeowner that wants to sell. Since they’ll be working on behalf of that homeowner they want to get top dollar for that sale. But they also need to make sure that they don’t over price the home making it undesirable to any potential buyers relative to competitive listings already on the market. In some cases a market analysis done by an agent may be producing significant valuation swings between possible listing prices. In this situation a real estate agent may bring in a certified real estate appraiser to properly value the property, ensuring a reliable list price for a well-timed sale.
Some homeowners don’t want to hear from an agent that there estimate of the home’s current value is overinflated. In these cases to properly list the home at a price that will sell, a real estate agent may call a certified appraiser to develop a second opinion of the market value of the property in hopes of guiding the homeowner to a more realistic asking price. This hard third party evidence may be needed to convince the homeowner that if they want to engage serious buyers they must price their home accordingly.
Complex Area or Property
Occasionally a real estate agent will come across a property that is difficult to price. The home may be located in a mixed use area. It could be an older home that the surrounding zoning has changed significantly over the years. This could present challenges in finding nearby properties of comparable use. Or it could be a high end neighborhood which can be problematic because such developments have a tendency to have few resales – and consequently few recent comparables.
It isn’t always about the area – sometimes it is the home itself; a home may be significantly over- or under-improved for the neighborhood. One example would be a homeowner who builds a custom “dream house” that is substantially bigger with numerous high-end amenities – far greater than what is typically found in its neighborhood. The problem is there may be no comparables in the immediate area. Here a real estate agent may call an appraiser to establish a value for the home.
Legal: Tax Issues, Trust, and Divorce
Sometimes lawyers, trustees and executors are calling realtors to help sell or value properties, but they may initially call a realtor for a referral to an appraiser. Oftentimes, an appraisal – not a BPO or a CMA – is required for legal proceedings. A tax attorney may need to value (or advise a sale) of a property in order to use the proceeds from the sale to payoff state or federal tax liens. A trustee or an executor of a will may need to liquidate the real property of a trust or an estate.
Divorce attorneys contact real estate agents to sell marital homes as part of the divorce settlement. In many of these cases, the agents may be asked to recommend a certified real estate appraiser to establish a market value to satisfy the demands of the legal proceedings.
In all of these types of situations, I am relied upon to develop an accurate value opinion in a timely manner to help facilitate the client’s next step.
See my video here.
The proposed AMC Rules from the Agencies are out in draft form. Coalitions, industry organizations, and groups of appraisers are examining these and other Rules. There is discussion amongst appraiser groups and other industry participants like never before. It’s a great time to make your voice heard and to hear what others have to say!
When I helped put together a petition to the CFPB a few weeks ago (related to correcting the Customary and Reasonable Fee Rules which allows circumventing the intent of Dodd-Frank), I never imagined the amount of responses I would receive. With so much change going on in the industry, I encourage every appraiser to be involved:
What is your Appraiser Coalition doing?
How can you be involved in the local chapters of AI and other appraisal organizations?
Have you read your State’s Appraiser and AMC rules?
Have you read the Appraiser Independence rules established by CFPB, HUD, the Agencies, and other entities?
Who do you contact if you have questions regarding State laws and rules?
Have you contacted the CFPB regarding enforcement of Appraiser Independence or Customary and Reasonable Fees?
Have you completed any and all available fee surveys related to establishing your area’s typical (aka Customary and Reasonable) fees?
When was the last time you met with other appraisers in your area?
Have you signed and shared the Petition to the CFPB?
Are you part of online discussion groups that are positive and share useful information?
Obviously, we all need time to do our work, but issues related to our independence and our fees are part of the foundation of that work itself, so we need to make time to be engaged in the industry discussion. My talk at Valuation Expo this June will touch on related fee issues, with the overall topic being compliance-related issues and their practical applications to our everyday work.
One argument against the Rule-based solution is the assumption that consumers, in the end, really don’t care how much an appraiser is paid. (So is this really a consumer issue? the argument goes.) While consumers may not care about an appraiser’s paycheck per se, let’s not fool ourselves: consumers do care 1) how much they are paying, and 2) what they are paying for. I would argue that consumers DO care how much the appraiser is receiving – since it may differ from what they are charged on the settlement sheet (which may reflect a higher fee than is necessary).
If a loan settlement document shows the consumer is being charged $600 for the Appraisal Fee, I think that consumer would find it surprising – and confusing – to learn the appraiser was actually paid $300 (this is an illustration). Even real estate agents and loan officers tell me they are confused over this issue: Why does the appraisal report say the fee is $300, but the borrower is being charged $600?
The CFPB allows lenders to separate the two fees on the settlement document. But in situations where the lender chooses to comingle the fees on the settlement document, the consumer may not realize they are being required to pay an AMC fee – which is an optional service.
To help alleviate this confusion, many states now require appraisers to post their fees in the reports. HUD also gives this authority to the appraiser for FHA appraisals. (Some AMCs expect the appraiser to post the breakdown of fees within the body of the report.) I have posted my fee in appraisal reports for years.
But be sure to include a disclosure explaining why the Appraisal Fee on settlement documents may differ from the fee you’ve typed in your report, so there is a clear explanation of any “additional” or “different” fees. Take a look at a sample here.
In the end, Appraiser Independence and Fee issues are complex and there is no easy one-route solution. We must proceed with caution.
My two points today:
CFPB Rules related to C & R Fees do not allow for any real enforcement of Dodd-Frank, and need correction.
Post the Appraiser Fee in the body of the appraisal report with a clear and understandable explanation to avoid consumers misundertanding settlement documents.
Take a look at the Petition, and please sign and share it. But don’t stop there: Know your industry, Get involved, Take action.