Rules and Regulations – Active Appraiser

Can I solicit a listing during my appraisal?

I was recently part of a discussion where an appraiser asked the group:

I am an appraiser as well as a real estate sales agent. After I complete inspecting a property for an appraisal assignment and before leaving the property, can I then solicit the owner about the prospect of being his listing agent or buying agent if he needs one in the future? I have no current interest in the house being appraised. Would this action violate USPAP?

Remember that determining compliance or non-compliance with USPAP would ultimately be determined by your state regulator. Certain states may have position statements, guidelines, or specific instructions on how to handle yourself in these types of dual-license situations. That being said, let me discuss with you several important passages from USPAP which relate to an appraiser soliciting his or her sales services to a homeowner during the appraisal visit.

To start, the Conduct section of the Ethics Rule states that an appraiser “must not misrepresent his or her role when providing valuation services that are outside of appraisal practice”. Part of understanding whether we are “misrepresenting” our role is to consider our interactions from the point of view of the parties involved, in this case the homeowner. In your case, you are clearly performing services as an appraiser, since the homeowner was told an appraiser would visit the property, an appraiser’s office called to set the appointment for the appraisal visit, an appraiser arrived to measure and photograph the house as an appraiser, and so on. If, while you are perceived to be an appraiser, you solicit business related to sales services and later list the house for sale, might the homeowner think you are listing her house as an appraiser? After all, you solicited the homeowner when acting as an appraiser and the homeowner knows you by your appraisal work.

Soliciting for a listing while performing the appraisal as an appraiser can mislead a homeowner in terms of his or her understanding of what service you are providing now and what service you might provide in the future. The Management section of the Ethics Rule states “An appraiser must not advertise for or solicit assignments in a manner that is false, misleading, or exaggerated.”

Keep in mind, too, that the Conduct section of the Ethics Rule states “an appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.” Offering sales services as you described may cast doubt on whether you are truly acting impartially and without accommodating your personal interests.

Further, and perhaps most to the point, your act of soliciting or promoting your services as a listing or sales agent creates a prospective interest in the property or parties. To illustrate, ask yourself: Why are you advertising your sales services to her? Invariably, your intent is to obtain the listing and/or sell a house to her in the future – a prospective interest.

If you have an interest, USPAP then requires two disclosures for appraisal and appraisal review assignments. The Conduct section of the Ethics Rule requires: “If known prior to accepting an assignment, and/or if discovered at any time during the assignment, an appraiser must disclose to the client, and in each subsequent report certification: any current or prospective interest in the subject property or parties involved”. The initial disclosure to your client might take the form of a phone call or email, and the disclosure in the report certification should follow the example of Standards Rule 2-3. (Note that if you are performing appraisal practice that does not result in an appraisal report or appraisal review report, the initial disclosure to your client is still required.)

But disclosure aside, while USPAP allows the appraiser to have an interest in the property and parties, many intended uses prohibit the appraiser from performing the assignment if he or she has any interest. For example, the I.R.S., the GSEs, and federal financial institution regulators have regulations speaking to the appraiser’s interest related to the property or parties. So, while USPAP allows it, you would likely need to decline or withdraw from the assignment if you have a current or prospective interest.

In the scenario in question: by soliciting sales services, you are creating a prospective interest which must be disclosed and likely precludes you from performing the assignment.

To restate the oft-cited “hat” metaphor: bring only and wear only your “appraiser hat” for your appraisal assignments.

Joshua Walitt, SRA, AI-RRS, MNAA, CDEI is a certified residential real estate appraiser, reviewer, and educator. As the Compliance Manager for Property Interlink, he oversees procedures, training, licensing, audit, operations, and review functions. His ongoing goal is to increase accuracy and efficiency through sound reasoning and communication skills, appropriate methodology and technology, and proper oversight.

He writes for industry publications, speaks at national industry events and client conferences, and designs and presents education courses. Prior to joining Property Interlink, he provided fee appraisal and consultation services. He has also been recognized as an expert witness in local and federal court.

Walitt holds the SRA & AI-RRS designations with the Appraisal Institute, is a Board Member of the National Association of Appraisers (MNAA), holds a Certified Distance Education Instructor (CDEI) certificate, is an AQB Certified USPAP Instructor, and currently serves on the Colorado Board of Real Estate Appraisers.

Appraiser Participation: Voicing Change…

In March of this year, I spoke at the Valuation Expo in Orlando. The general topic of my presentation centered on professionalism within the appraisal industry and how individuals can take steps to stand out and rise above the difficulties we see. As a fee appraiser for many years and having recently moved into a compliance manager and review position, I have seen both sides of the struggle to achieve professionalism and excellence in day-to-day appraisal work.

As I closed my talk at the Expo, I shared with the conference the good news that, after years of prohibiting trainees from signing appraisal reports, the Colorado Division of Real Estate had issued guidance on finally allowing trainees to sign as the “appraiser”; the Division’s guidance aligned very well with Fannie Mae’s recent reminder that the GSE has allowed trainees to sign reports for years. My point in the talk was not to boast (although I was overjoyed!) that Colorado trainees and supervisors now had more flexibility in managing their appraisal firms from a training perspective. Rather, my point in sharing the good news was that years of actions by me and other individuals, groups, and companies had finally brought about important CHANGE in our state, which was a main premise of my talk.

As I’ve written before, the Power Of One (one person taking action) is a formidable force – especially when coupled with many other individuals taking action towards the same end. During the question period after my talk, the following day at the conference, and in the months since, appraisers have asked me “What can I do to make necessary changes in my state?” So, let me reiterate several of the main points I presented in March:

Every state is different. Some states’ policies may stem from the law itself, in which case the solution would likely require legislative changes. In other states, the problem may be related to the rules that the real estate division or board have adopted; changes to rules can take time, but are often simpler than changing laws. As I told one participant from the podium, “There is no 10-step process that works in every state to bring change.” Remember, whatever steps are needed to alter your state’s rules or laws will not take days or weeks, but likely months and years.

Reach out to organizations. State coalitions, the National Association of Appraisers, the Appraisal Institute, and other appraiser organizations may have local chapters and contacts who can shed more light on the issue and help to direct your efforts for maximum effectiveness. In my case, the NAA contacted appraisers, management companies, and lenders who wrote letters and emails explaining the need for trainees to participate more fully in the appraisal industry in Colorado; when I approached the State, I was able to share these documents to show it was not simply one appraiser who was concerned about the issue, but rather the larger industry. I owe a big Thank You to the NAA!

Attend state Board meetings. Don’t expect someone else to tell the Appraiser Board or the real estate division that there is a problem. Call, email, and visit the state yourself. In my case, I called and emailed the Board and Division numerous times over a period of over a year, before being encouraged to attend a Board meeting at which time productive discussion took place, including future steps for the state. At one point in the process, I found out about a Board meeting at the last minute, so joined by phone – but only after pulling off the interstate and parking in a hotel parking lot (I was driving to an appraisal appointment at the time). Bottom line, commit at least some time to getting personally involved, and get to know the employees and Board members in your state.

Join a professional organization. Ask fellow appraisers about their experiences with specific appraiser organizations. Costs of membership vary from one organization to another, so research the cost. Contact the local, regional, and national leaders of the organization or coalition. Determine what the organization has done to affect the appraisal industry positively. Truly, supporting appraiser groups ensures that appraisers’ interests are being bolstered behind the scenes on a continuing basis, even as you go about your daily work.

Ask questions and network. As you attend conferences and other events – whether locally, regionally, or nationally – get to know people. Seek out your state regulators and Board members, long-time experienced appraisers, representatives from agencies and the GSEs, current and former Board members, individuals who participate in appraisal organizations, and other knowledgeable participants in related industries such as bankers, real estate agents, and lenders. Who better to hear the rationale behind current policies than many of the people on the front lines? Communication with others – and encouraging the continued distribution of accurate information – helps to strengthen you and your peers’ knowledge base.

I was certainly not the only person responsible for “victory” in allowing trainees to sign reports in Colorado. However, it was through the steps above that I ensured my years-long activities were united with many other individuals’ and organizations’ efforts to bring about the change our state needed. As I shared at the Valuation Expo: “If you want a voice, you need to make sure you’re saying something. So… what are you saying?”

Joshua Walitt, SRA, MNAA is the Compliance Manager for Property Interlink, an appraisal firm and management company. He oversees procedures, training, licensing, audit, appraiser independence, and review functions. He is currently a Director on the Board for the National Association of Appraisers (www.naappraisers.org). Prior to joining Property Interlink, he provided fee appraisal and consultation services to lenders, attorneys, management companies, and private parties. In 2013, he was the appraiser member of Colorado’s AMC Rulemaking Taskforce. Walitt designed the Market Machine in 2015, a market analysis and regression modeling tool used by appraisers throughout the U.S.. He also provides valuation consulting for international applications. He writes for industry publications, designs and presents education courses, served as a valuation hearing officer, and speaks at regional, national, and client conferences. Contact: linkedin.com/in/joshuawalitt

Common Appraisal Errors – Part 1

Having a report that complies with USPAP, state, and client conditions is not simply a client expectation, but an essential component to every appraiser’s practice: appraisers, after all, are the individuals to which the standards directly apply. Consequently, appraisers are directly in the cross-hairs for state sanctions if deficiencies are discovered.

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This article was published on Working RE magazine. See the full article here… http://www.workingre.com/common-appraisal-errors-part-1/

TRID v Customary and Reasonable Fees

This past week, I had the opportunity to discuss TRID with appraisers, lenders, and AMCs when I attended and spoke at the Appraisal Summit and Expo (http://www.appraisalsummit.net). Clearly, there are misunderstandings of this lender disclosure rule.

A few basics about the TRID rule (TILA RESPA Integrated Disclosure):

The lender must disclose the appraisal fee to the borrower, and cannot collect more than the disclosed amount from the borrower at closing. This is a “Zero Tolerance” disclosure item.
After the amount is quoted to the borrower, if the lender learns of a previously-unknown complexity related to the appraisal, that event may qualify as a “Changed Circumstance”, which may give the lender the option to re-disclose the higher fee amount to the borrower.
If the lender already knew of the complexity (or reasonably should have known), then the lender cannot re-disclose (nor collect) a higher fee to the borrower. (Additionally, the lender always has the option to simply not re-disclose the higher fee to the borrower, but then cannot collect the higher fee at closing.)

Did you notice…? None of the above actions involve the appraiser!

TRID is a rule that governs activity and disclosure between the lender and the borrower – not the appraiser. In contrast, Customary and Reasonable Compensation (C & R) rules govern activity and payment between the lender and the appraiser.

The lender cannot pick and choose: it must comply with both sets of rules – TRID with the borrower, and C & R with the appraiser. Let’s look at an example…

The lender takes in an application for a single-family property with no known complexities. The lender engages an appraiser who agrees to perform the specific assignment for $X, and the lender discloses that fee to the borrower.

After the inspection, though, the appraiser notifies the lender that, since the property actually has an accessory unit, he/she will require a fee of $Y (higher) due to that complexity. What are the lender’s options in handling this situation?

The lender may agree to pay the higher $Y fee to the appraiser, so that the fee reflects the complexity in compliance with C & R. In terms of complying with TRID, the lender has a few options, depending on the specific situation and the lender’s interpretation of “changed circumstance”:

the lender may choose to re-disclose the higher $Y fee to the borrower so that it can collect that fee from the borrower at closing, if the lender believes the scenario meets the definition of “changed circumstance”; or,
the lender may choose to not re-disclose the higher fee to the borrower, and simply absorb the difference itself when it pays the appraiser.

Regardless of the lender’s handling of “changed circumstance” or TRID disclosures, the lender is still subject to the C & R appraisal fee rules.

Appraisers are reporting that some lenders have stated the following in newsletters, blast emails, or other announcements:

The lender will not ever increase the appraiser’s fee even upon discovering complexities; and or
The lender will pay only a set fee to an appraiser (such as based on county or state) regardless of the complexity of the property or assignment.

The above-two lender policies are just that: lender decisions. Nowhere does TRID suggest that lenders should ignore complexities in an appraisal assignment when determining a C & R fee to pay an appraiser. In fact, the above policies may prove to be problematic for lenders, due to AIR violations (appraiser independence rules) resulting from non-compliance with C & R rules.

After all, how could a lender produce a believable argument that the C & R appraisal fee for a property – now known to be complex – would be the same amount as when the property was originally believed to be non-complex?

Here are a few tips for appraisers:

Conduct basic research about a subject property and quote the appropriate fee.
When requesting fee increases, always cite the reasoning.
“TRID” is not a compliant excuse for paying a non-C & R fee to an appraiser. TRID regulates disclosure between the lender and the borrower, and does not release the lender from its regulatory responsibility to pay C & R fees, including when a property is complex.

As with most government rules, lenders may end up having procedures that look slightly different from one lender to another. However, TRID-related lender policies should never distract from, be confused with, or “trump” compliance with the payment of customary and reasonable fees to appraisers when faced with complex properties or assignments. Complying with one rule at the expense of another, is never an acceptable approach to compliance.

Appraisal Issues: Handling Unacceptable Instructions from Your Client

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
delivery)?
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
time adjustment?
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.

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The email conversation, between the underwriter and myself, follows:

Request from Underwriter
Hello Josh,

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

Underwriter

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Reply from Josh
Underwriter,

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.

Best regards,

Joshua Walitt
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Reply from Underwriter

Josh,

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.

Underwriter
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Reply from Josh

Underwriter,

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?

Josh

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Reply from Underwriter

Josh,
I am willing to give this a try so we will call it good.

Underwriter.

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Final comments

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.