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.