Category: Education

Appraisals vs Evaluations – Tapping “New” Source of Business

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?”

Pricing

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.”

Accept/Decline Parameters

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.

Scope Choices

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,
a range,
or a relative figure?
Will the sales grid have adjustments that are-

quantitative,
or qualitative?
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.

Making First Contact

As I talk with appraisers across the country, I’ve heard there is a slow-down in some areas now (although others report they are as busy as ever). We can choose to think negatively about a slow time, or we can see the slow time as an opportunity to market, market, market.

contract

Many times, we’re tempted to sit back and wait for the next assignment, taking for granted that business will simply come through the door on its own. But we can’t always assume business will come our way – sometimes we need to drive business to us! What are you doing to actively promote and expand your business in Appraisal Services in Colorado? Let me share a few ideas related to marketing, which can be useful in the short-term and long-term.

 

  • Visit realtor groups and speak on a variety of topics: de-coding appraisals, market analysis, inspection items, appraisal methods 101, etc..

  • Send postcards to agents with listings that have been on the market longer than typical. Or email them. Do they need a second opinion?

  • Drop in to attorneys’ and accountants’ offices and leave a resume. Follow up with a phone call.

  • Be sure that your current clients know the full extent of your various services. Would a friendly email remind them that you also perform appraisal reviews?

  • Go to local networking events, like those put on by chambers of commerce.

  • Send follow-up cards or emails to new contacts.

  • Meet with local bankers and give them a market overview, demonstrate the technology you use, and have a question-and-answer session.

  • Provide a free email newsletter that contacts can opt to receive.

  • Start or update your social sites, like a blog, website, facebook, linkedin, youtube. Network and introduce yourself to second-degree contacts.

  • Join online discussion groups and present yourself in a professional manner.

  • Meet realtors one-on-one and offer to measure a house for them. They may be a homeowner’s contact in estate, trust, divorce or other life change situations.

  • Work with a county’s appeal board for property value disputes.

  • Volunteer for state and local boards. Write a column for your local newspaper.

  • Contact and update your current clients regarding your updated resume, license expiration date, new services, etc.. Are there new contacts at their company?

  • …the list could go on and on…

 

The bottom line is to be the local expert (and be sure you can deliver). Some argue that it doesn’t really matter nowadays if you know a local bank officer or a realtor. But in my experience, these folks invariably know people who need appraisals. And nothing in USPAP or appraisal independence rules bar us from marketing ourselves – we are running a business.

As with any marketing endeavor, you’ll get a lot of “no”s before you get a “yes”. That’s okay. First Contact is nerve-racking and scary. But making contact with new (and don’t forget the existing) clients means you’ve reminded them of your name, voice, face, and services.

Shake_hand

Back in 2006, I visited a small local lender, via an “in” from a loan officer I had known for several years. I met the manager and she told me they already had a small list of appraisers they used, but she took my letter and card. In 2008, long after our meeting had been pushed to the back of my memory, she called and explained that an appraiser was retiring, and they wanted to add me to the list. It works – sometimes later than sooner!

What have you done lately to market your business? I’d love to hear your ideas!

This article was first published from 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 .

 

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.

Business Management: Part 2, Managing Clients

Last week, I discussed fee and turn-time management in running an appraisal business (“Business Management: Part 1 Fee and Turn-Time Management”). Today, I wanted to further explore how to actively manage our businesses: through managing our clients.

Client Management

This summer at Valuation Expo, one of the last topics related to “scope creep”. Scope creep is the tendency for lenders and AMCs to continually increase requirements, correction requests, stips and additional information requests in appraisal reports. First, let’s look at what scope creep is not. Scope creep is not a client’s expectation that your appraisal meet USPAP requirements. Scope creep – for purposes of this discussion – is not a client’s expectation that you meet requirements that you agreed to in their engagement letter (although, yes, scope creep can result from longer and longer requirements lists). Scope creep is not a client’s expectation that you correct factual errors, provide additional detail to support your value opinion, or consider additional appropriate information such as additional sales (but, wow, I could spent a lot of time on this one).

The biggest step to battling what you perceive to be scope creep is to first be honest with yourself: are you really writing a good report? Are you reading – and then fulfilling – the engagement letter, to the extent it is possible? Is just one client bombarding you with stips, or are most (or all) of your clients regularly sending you stips? Have you come to expect that you’ll get stips on each order you turn in, no matter who the client is? Sometimes these types of requests from lenders and AMCs aren’t scope creep at all, but rather feedback indicating that something necessary is lacking in a report.

honesty

 

“It’s Not Me, It’s You”

After you evaluate the quality of your own reports, perhaps you need to take a close look at your clients, by tracking the revision requests. If you work for several lending clients, but only one of them is regularly returning reports to you for revisions, we can assume they have higher expectations than other clients who are also engaging appraisers for the same intended use. These “higher expectations” might be scope creep and aren’t necessarily “bad” or “wrong”… but may be costing you extra time. “How high are the ceilings”, “Remove photo with cat”, “Add a photo showing the house number”, “Explain why these three sales were not included”, “Include photos of light fixtures”, “Change photo label to read Kitchen” and the list goes on for “requirements” that were never outlined in the engagement letter and are not expected by most other similar clients. Even quick or trivial requests can add up over time – and how many of us have extra time?

So, why do we continue working for these clients? I’m not at all suggesting that we “fire” clients the moment they ask for reasonable clarifications, point out an honest error or typo, etc.. But, just like some of us never ask for the higher fee or the adequate turn-time, some of us also never bother to seek out the quality non-abusive clients. Have we taken steps to market ourselves to local banks, attorneys, accountants, agents, and the non-predatory AMCs and national banks? What are our criteria for an Approved Client list?

Criteria

Let’s say a plumber fixes a sink, and a week later the homeowner calls to say he needs to come back and fix the washer for no additional charge (even though the owner didn’t initially ask for this and it isn’t typically part of a fix-the-sink job). But the plumber returns to fix the washer anyway. The next week, the owner needs the water heater fixed, again for free. At some point, the plumber will learn that it’s not worth accepting work from this particular client, and he’ll look to get other clients. Well, I know we’re not plumbers, but business is business. And if we don’t manage our clients – by looking for the best clients who want good quality appraisal work – then, we’re not truly managing our businesses.

Source: Appraisal Buzz