BLOG VIEW: Real estate appraisals represent an important part of residential mortgage underwriting. A well-supported and developed appraisal, prepared by a qualified and competent appraiser, supports informed underwriting decisions. Alternatively, a poorly developed and supported appraisal can result in delays, misinformation, frustration and costly consequences.
There are many organizations, people and processes that rely on appraisals in mortgage lending transactions. As a result, there are varied opinions about appraisals – many of which are influenced by the function and experience of the opinion holder. In talking with people throughout the chain of reliance (on appraisals), I have documented a few common questions and solutions below. These questions are presented from the standpoint of residential mortgage lending.
Q: How do I deal with motivated sellers?
Problem: A ‘motivated’ seller is commonly defined as a property owner that is motivated to sell a property quickly and/or for a price that may be less than market value due to some compelling circumstance. Such sellers may accept a below-market offer or agree to atypical seller concessions. When this happens, people fear that appraisers and prospective buyers will be influenced by this sale, thus negatively impacting future sales and mortgage loans. Essentially, this below-market sale becomes a new ‘comp.’
Solution: An appraiser is expected to verify their comparable sales. Such verification includes understanding the conditions of sale. When an appraiser or real estate agent notices an unusually low (or high) sale price, verification of sale conditions would be necessary before utilizing the sale as a ‘comp.’ Verification can be obtained through a variety of means, such as talking to transaction participants to discover information about the specifics of the sale, the terms of sale, and the motivations of the seller and buyer. Questions may include: Why are they selling? What is their time frame? What are the proceeds going to? Also, the adage ‘one sale does not a market make’ should provide some comfort.
While a residential appraiser will typically consider many sales in their analysis, they include a minimum of three sales within the appraisal report itself. In a nutshell, an outlier should be treated with caution by the appraiser and, before using in the appraisal analysis, subjected to the appropriate level of verification necessary to verify the sale conditions.
If you have a question about the appraiser's use of a particular comp (and it was not already answered in the appraisal report), it is okay to ask an appraiser to justify, explain and support their conclusions.
Q: How can I best screen for a quality appraisal management company?
Problem: By some accounts, there are more than 500 appraisal management companies (AMCs) operating in the U.S. It is common for AMCs to market quick turn-times, experienced appraisal panels, appraisers local to the property appraised, and quality appraisals that are compliant and complete. While there are certainly some that uphold these commitments, there are others that have not.
Given that the AMC is being compensated to provide a service, the specifics of the service must be clearly established. While there are some minimum AMC standards in existence, much of the AMC performance expectations are negotiated by agreement between the lender and the AMC.
Because the lender is ultimately responsible for the appraisal, regardless of whether an AMC is utilized, it is important that lenders vet the AMCs properly and routinely monitor their performance and controls. Ultimately, a poor-performing AMC can contribute to lost customers, internal inefficiencies, negative audit results, penalties and other financial losses. I refer to these AMCs as ‘Corvettes with no motors’ because they are more about flash than substance. It's up to you to look underneath the hood.
Solution: A mortgage lender should carefully and methodically qualify and monitor AMCs. Such qualification involves looking beyond the AMC's glossy marketing materials and requires an in-depth review of its capabilities. Examples of questions that you might ask when screening an AMC are as follows:
- Does the AMC have strong governance, controllership, and documented policies and procedures?
- Is the AMC licensed in the appropriate states?
- Does it have appropriate appraisal technical knowledge and resources, such as a chief appraiser and licensed staff appraisers to perform quality assurance on appraisals and handle technical questions from field appraisers?
- Does the AMC appropriately train staff members who interact with appraisers and lenders so that appraiser independence is guarded?
- Is the AMC auditing its processes, decisions and compliance?
- Do you have a means and willingness to measure that the AMC is actually doing what it says it will do?
Q: What are some common appraisal defects, and how do I deal with them?
Problem: Appraisers vary significantly in their experience, competence and commitment to professionalism. While fraud certainly exists, it has been my experience that a vast majority of appraisal defects are not deliberate. Instead, they are often the result of ineffective training, incompetence, carelessness and sometimes pride. Common defects involve things similar to the following:
- Failing to identify and/or analyze the impact of adjacent commercial land uses;
- Utilizing inappropriate comparable sales;
- Insufficient market support for adjustments (or lack of adjustment);
- Misreporting market trends;
- Failing to verify sales (including conditions of sale – as noted earlier); and
- Improper use of trainee appraisers.
Solution: If, after reading the appraisal report, you have important unanswered questions about the appraiser's methodology/reasoning/data, the appraiser can be contacted for clarification, explanation, justification and support. While it is important to be mindful of appraiser independence requirements, we must also maintain appropriate communication with the appraiser to ensure that the appraisals that we depend on are supported and reliable. At the end of the day, it is okay to ask questions. Alternatively, you should avoid drawing a conclusion and demanding that the appraiser comply with your conclusion.
It's important to smoothly and compliantly manage the back-and-forth component of your lender-appraiser relationship. The appraiser will undoubtedly react negatively if you try to dictate their specific methodology, particularly regarding their comparable sales evaluation process. As previously noted, it is acceptable to ask the appraiser to explain the rationale or process behind the opinions and conclusions in the appraisal report. In many cases, an appraiser's responses will assist in separating competent appraisers from those that are not. Showing a dedication to quality can, in many cases, strengthen your lender-appraiser relationship (or clarify whether you need a new appraiser), unlocking the more streamlined, efficient and fruitful process you've been searching for.
Adam Johnston is chief appraiser and director of investigations for Genworth Financial's U.S. mortgage insurance business.
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