Appraisals for mortgage finance transactions are subject to many levels of scrutiny and review. Post submission of an appraisal report ordered by an AMC for lending purposes, a quality control check of the report will be completed. Once the AMC deems the report satisfactory, it is forwarded to their client, the lender. The lender will run the report through automated underwriting and may have a QC process of their own. Fannie Mae requires lenders to conduct Quality Control reviews on a random sample of their appraisals. There may be some confusion among appraisers regarding if their reports are being reviewed or not. At some point during any loan’s life, there is likely to be a review (or reviews) of the appraisal report. Whether the review is for pre-funding, post-closing, secondary market purchase or analysis of a lender’s portfolio; it is safe to assume that your report is going to be reviewed to some degree.
A discussion among review appraisers has revealed some common pitfalls of appraisal reports. The five most common issues found in appraisal reports are as follows:
Failure to Disclose External Obsolescence
Don’t think that the Reviewer does not look at Google Maps and cannot see that your subject backs to the Long Island Railroad or an eight-lane highway. They do! If your property is in an adverse location, try to find another sale that also has an adverse location. This will go a long way to bolster the reliability of your report.
Reporting and Analyzing Prior Sales History of Subject and Comparables
The Fannie Mae forms require an appraiser to research and report on the transfer history for the subject property and comparables. News Alert: Fannie also requires an Analysis of Prior Sale or Transfer History of the subject property and Comparable Sales. When a property sells twice within a year, report and analyze both of those. If the value goes up by 10-20% make a comment that explains why that may have happened. (Market increase, complete gut remodel). A majority of appraisers report the prior transfers but fail to analyze them.
Comp Selection, Insufficient & Excessive Adjustments
Why are appraisers ignoring the comps within a few blocks and going miles away? To hit the purchase price, that’s why! What would happen on purchase transactions if the Purchase Contract were not provided to the appraiser? Could that contract be construed as an influence on value? Reviewers report that they see a lot of fancy footwork to get to the contract price in increasing markets. Reviewers prefer proximate, similar, recent sales to distant, dated sales of properties twice as large as the subject. Reviewers also prefer appraisers to value properties at what can be supported, not at what the property sold for. That makes their job easier, they don’t have to cut the value.
Adjustments pulled from thin air, or from the adjustment sheet provided by your mentor in 1999. That $500 fireplaces and $1 per sq ft site size adjustments don’t work like they did 20 years ago. Suggestion: Update or trash that adjustment sheet and dig into your market to extract adjustments. Manufacturing random adjustments with no market support wont slip past the goalie, or a savvy reviewer.
Weak or No Reconciliation
If you are spending time researching and adjusting comps, why not reconcile them too? I would like to introduce you to that last section on the 1004 Form at the bottom, that’s called the Reconciliation section. This is your chance to shine. Tell the reader which comps you like best and why; they cannot read your mind. If applicable, comment on the Cost and Income approaches. You would be surprised at how often that section is left blank.
The market analysis from the Financial Crisis of 2008 is no longer relevant, please remove that and comment on what is happening in your market as of the effective date of the report. (If you do retrospective reports, you may need to jump into the Wayback machine, or do some historical research). The amount and trend of short sales and foreclosures are not as relevant today as they were when you created your template in 2009. Reviewers would like you to update your template a little more often.
The Covid-19 Statement. We are two years into Covid. Stating an inability to determine Covid’s effect on market because it is too early and there is not enough data available yet is no longer valid. Two years is about a year more than most appraisers rely on to determine opinions.
It is important to create a report that is reliable, credible and will stand up to scrutiny. Your reports ARE being reviewed. Write them like you would want an appraisal on your own property to be written. Take a little more time on your reports. Slow down. Read and spell check the report before you send it. The appraisal police are out there and watching you. We cannot afford for any appraisers to get popped for speeding through the process, our numbers are dwindling. Keep up the good work, remain grateful and we will survive.
Published in Appraisal Buzz March 14, 2022