Saturday, September 23, 2017

Single Most Misunderstood Problem in Real Estate Appraising

Per USPAP, the Scope of Work is determined by the Real Estate Appraiser, not the Lender. However, am AMC will say you signed that Engagement Agreement and I will cover that in a minute.

When it comes to USPAPs rule for Scope of Work determined by the Appraiser, which is part of the administrative code in Florida, the following is the rule.

The Scope of Work must include the research and analyses that are necessary to develop credible results.

The scope of work is acceptable when it meets or exceeds:

  1. The expectations of parties who are regularly intended users (Note: Not what an AMC wants or a Lender, but the user such as FNMA, FHA, etc.) for similar assignments, AND; (Note: It states AND, not OR. Very Important.)
  2. What an Appraiser's peers' actions would be in performing the same or similar assignment (i.e. whatever leads to the most credible results).

Note: A lender does not get to TELL an Appraiser how many comparable sales to use in the development of a report. In the development of the report, the Appraiser determines the number of comparable sales that will provide the most credible results. A minimum of three is customary, but the Appraiser may decide the report needs more in order to provide superior results. The Certified Appraiser is NOT an order taker and fully controls his or her own work product (i.e. appraisal report).

Having said that, the next part covers an Engagement Letter. Those letters attempt to control what we call assignment conditions. You can read the full article at http://www.workingre.com/late-appraisal-uspap-violation

I will give you the conclusion of what is states. In this example, an assignments due date is part of the contractual obligation.

FAQ 2016-08: Is Turnaround Time an Assignment Condition?

Question: My state’s appraiser regulatory agency sent out a newsletter that says a due date is an assignment condition, and that failing to adhere is a violation of USPAP. Is this true?

Response: “Assignment due dates are contractual obligations, but are not assignment conditions under USPAP. Turnaround times and similar items are business practice issues, and are outside the scope of USPAP”.

Assignment conditions are addressed in the Problem Identification section of the SCOPE OF WORK RULE (Lines 421-425). The Rule states in part


Assignment conditions include assumptions, extraordinary assumptions, hypothetical conditions, laws and regulations, jurisdictional exceptions, and other conditions that affect the scope of work. Laws include constitutions, legislative and court-made law, administrative rules, and ordinances. Regulations include rules or order, having legal force, issued by an administrative agency.


So, USPAP already covers assignment conditions and those Engagement Letters cannot circumvent USPAP because it is part of the Administrative Code. Those engagement letters can only being enforced by filing a lawsuit against the appraiser for some how creating liability by not delivering what was requested in the assignment request. However, the assignment is suppose to rise to the level of what the intended user needs and that is laid out in the FNMA Selling Guide for example as well as the FHA Handbook.

What kind of information should be provided to the Appraiser?

Prepare an "Appraiser's Package" in advance and have it available for the appraiser at the property. The package could include plats, surveys, deeds, covenants, HOA documents, condominium documents, a list of community amenities, floor plans, specifications, inspection reports, neighborhood details, recent similar-quality comparables bracketing square footage and from the subject neighborhood, a detailed list of upgrades with dates, remodel details with costs breakdown and energy efficient green features. Meet the appraiser at the property and answer any questions he might have about the property or neighborhood. Allow the appraiser the necessary space and time to complete the inspection.

AMC & Lender Service Agreements

The issue first arose in Oregon before the Appraisal Board. It initially addressed whether or not late appraisals violated USPAP because that is what many Appraisal Management Companies believed to be true. An argument was made that an Appraiser violated USPAP if he/she turned in a report past the due date and the final ruling basically dropped the hammer on all AMC and Lenders dillusions of the power they think they have. Well, not only did the Appraisal Foundation clear up that issue, they also addressed what is professionally called Assignment Conditions. AMC's have drafted what they call a Service Agreement and make huge efforts to try and control the Appraisal Process and the Appraiser via this document. First off, an Appraiser is an Independent Contractor which means his/her behavior cannot be controlled. So, what did the Appraisal Foundation have to say about all of this?

Appraisal Institute Response: "Assignment due dates are contractual obligations, but are not assignment conditions under USPAP. Turnaround times and similar items are business practice issues, and are outside the scope of USPAP".

They went on to address the following: "Assignment conditions are addressed in the Problem Identification section of the SCOPE OF WORK RULE (Lines 421-425). The rule states in part: Assignment conditions include assumptions, extraordinary assumptions, hypothetical conditions, laws and regulations, jurisdictional exceptions, and other conditions that affect the scope of work. Laws include constitutions, legislative and court-made law, administrative rules, and ordinances. Regulations include rules or order, have legal force, issued by an adminstrative agency".

Conclusion: The only recourse an AMC or Lender has to deal with an Appraiser that does not adhere to that Service Agreement is to potentially seek civil penalties. That means taking the Appraiser to Court and for what? The AMC or Lender would have to be damaged in some way by the actions of the Appraiser to win any sort of judgment. And once again, remember the Appraiser is an Independent Contractor. So, it would not go very well for AMC's and/or Lenders if they started taking Appraisers to court. Many appraisers we know have started signing those service agreements just to get on a panel and then ignore them since they are worthless anyway. The fact is this, the Appraiser is in control of the entire process and the AMC or Lender has zero power or influence.

Photos and Exterior Inspection Explained

There seems to have been years of misunderstanding as to the usage of MLS photos by Appraisers. Below is the Appraisal Definition of Inspection, which is the only definition that is relevant, the Fannie Mae requirement per the Selling Guide and the FHA requirement per the FHA Handbook.

The Dictionary of Real Estate Appraiser Fifth Edition definition of Inspection

  • Personal observation of the exterior and/or interior of the real property that is the subject of an assignment. The purpose of an appraiser's inspection is to identify the property characteristics that are relevant to the assignment, such as amenities, general physical condition, and functional utility.

Fannie Mae Requirement

  • Inspect the exterior of the property

Definition of the word observation

  • The action or process of observing something or someone carefully or in order to gain information.

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No where does it state that an Appraiser must stand in front of a comparable sale and use his/her own eyes to observe the property as a means of inspection within a certain time-frame per the effective date of the report. There can be a Direct or an Indirect observation. The requirement is met as long as the assigned Appraiser performs that visual exterior inspection and uses his/her skill sets in the development of the report. In the day of so much digital information, a personal observation can be accomplished via photos and/or the myriad of Internet tools available to a Real Estate Appraiser. Therefore, the usage of MLS photos are not excluded. In addition, per the Appraisal definition, the whole point of the inspection is to identify the property characteristics that are relevant to the assignment, such as amenities, general physical condition, and functional utility. Therefore, MLS photos are the best representation of the comparable during the time of the sale and most accurately depicts those requirements the inspection requirement is attempting to accomplish. Current visual inspection might provide misleading results. Therefore, it is in the Appraisers best interest to perform a personal exterior inspection via MLS photos to get that accurate picture those characteristics outlined in the definition for the Appraiser to be able to observe.

Fannie Mae states the following in the Selling Guide:

Therefore, Fannie Mae has stated in their Selling Guide that MLS photos are acceptable.

FHA, however, has a different requirement when it comes to comparable sale photos and has stated the following:

Thefore, FHA requires the Appraiser to include their own photograph. There is no mention in the FHA Handbook as to providing a photo of the gate if the comparable sale is in a gated community. Simply stating the reason the Appraiser did not include their own photograph is sufficient. This photo requirement will cause the fee for FHA appraisals to be higher than the others due to the additional time required to acquire those photos. Especially a refinance since the Appraiser cannot view the condition of the subject property via current MLS photos. We charge a minimum of $50 more for that additional time. If the Appraiser has to go back out into the market in order to acquire those comparable photographs, an additional trip fee would be warranted. This would be applicable when the Appriaser does not know the condition of the subject and cannot gather comparable data before going out to inspect the subject property. Appraisers have been reluctant to charge that fee. However, that will change in time as the number of Appriasers dwindles and the demand for their services increases. Its only a matter of time before appraisals become much more expensive. If fact, it is projected that the State of Florida population will increase by 6 million people by 2030 and the number of Appraisers will decrease due to the new requirements to become a Certified Appraiser.

It has already been determined that the Automated Valuation Model does not work. Therefore, the demand for Appraisers is solid moving forward. On another note, an exterior only appraisal takes almost as much time as a full appraisal. As a result, our fee for an exterior inspection only appraisal is almost as much as a full appraisal. Banks continually try and figure out ways to lower appraisal fees and they are fighting a losing battle.

No one can perform appraisal services except for a Certified General or Residential Real Estate Appraiser. What this means is anyone can open an Appraisal Management Company (AMC), but only certain people can perform the actual Appraisal. The Appraiser is in charge of their work product by controlling the Scope of Work and are protected by the Appraisal Independence Requirements (AIR) in addition to other laws. Hence, the Appraiser is the boss when it comes to the development of the appraisal report. All an AMC does is assign reports to a Certified Appraiser based on a rotation and check the final report for factual errors. That is their function and nothing more.

Responsibility of Listing Agent to give Appraiser Access

For some reason in Orlando the responsibility of the Listing Agent to perform all of the duties for their Seller to move the property through the real estate cycle has gotten lost. For some reason these Listing Agents have taken on the mind set their job has basically ended once a Purchase and Sale Agreement is accepted. The job of a Listing Agent is NOT just as a marketing professional. The job actually really starts once an offer is accepted. Why? Because now the Agent is responsoble for driving the home through the process for the homeowner to succesfully arrive at a legal closing. Therefore, it IS the Listing Agents responsibility to meet all parties such as the Appraiser for example at the property to let them in. In truth, the Appraiser would rather the Listing Agent not be there so at least providing access via a manual lock box is sufficient. As long as the Listing Agent gives the Appraiser access then they have done their job. In addition, it is not the Appraisers job to come to the Agents office to get keys nor is an Appraiser required to have an e-Key. In fact, now witih the new Thompson Broker membership with the MFRMLS it is  not required to join ORRA to run a full brokerage. In fact, the Correia Corporation has a residential brokerage and does not plan on using an e-Key. We will use manual lock boxes.

So, what gives the Listing Agent the responsibility to provide the Appraiser access? The listing agreement does and it states the following on page three:

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So, what does that mean? Remember the Seller is expecting the Listing Agent to handle the transaction for them. The Listing Agents responsibilities are with the Seller. The Buyers Agents responsibilities are with the Buyer. Another thing people don't realize and Agents should know is the buyer is not the owner of the appraisal nor are they the client of the Appraiser. The bank owns the appraisal even if the buyer pays for it. The Listing Agent is the driver of the transaction and also controls access to the Sellers property because of paragraph 10. 

The main points are use skill, care, and diligence in the transaction. Use skill is obvious, use care also means protect their home when other parties enter the property meaning you should be there when someone gains access to their home and the key one is diligence. So what does diligence mean?

 

 

 

 

Remember, the Buyers Agent did not enter into a listing agreement. So, they are not responsible to the Seller for diligence. Part of the definition is "persistent application" and also "steady effort". So, the Listing Agents job really GETS STARTED once an offer to purchase is accepted. Part of the process to get the transaction to closing is let the Appraiser in the home buy being diligent. So, as Appraisers we are very TIRED of Listing Agents wanting to put the responsibility off on the Buyers side thinking that it is not their job. Here is the cold hard fact and we don't care what has become standard and acceptable in the Orlando MSA. The fact is this, IT IS YOUR RESPONSIBILITY.

If you Listing Agents don't get the point and start doing your job, it is not unethical for an Appraiser to let your Seller know you are not performing your duties required per the Listing Agreement. It is also an area we don't mind reporting Agents to the Division of Real Estate for violating your agreements with Sellers. We also have a Brokerage and drive the transaction all the way to closing cause that is the job.