A Real Estate Appraisal Checklist: A Better Understanding of an Appraisal's Details Ensures More Meaningful Appraisal Reviews and Compliance with Heightened Regulatory Requirements. This Article Offers a Checklist and Discusses the Requirements for the Items on It
Zoeller, Mark, The RMA Journal
An appraisal is an assemblage of data, assumptions, calculations, discussions, analyses, opinions, presentation formats, and requirements that should result in the appraiser's credible opinion of market value. The credibility of that market value increases when both banker and appraiser follow best practices, which begin with federal appraisal regulations that also require adherence to the Uniform Standards of Professional Appraisal Practice (USPAP). (1)
A banker recently asked me if I had a checklist that loan officers could use to review appraisals quickly. I do not, because I believe it's more important to review appraisals meaningfully. Although several sections of USPAP do not apply to real estate, the 2004 edition consisted of 229 pages of small type. Regulations and the USPAP are both lengthy. So, while my checklist may not be as speedy as some may like, it does distill the regulations while capturing their essence.
Examples that I have seen of questionable appraisal credibility include the following:
* The bank accepts an appraisal ordered by the borrower (the bank does not have the legal authority to accept it).
* The appraiser describes the wrong property.
* The appraiser uses stale, comparable-sales data without showing why the stale data is meaningful.
* The appraiser makes a significant mathematical error in calculating a capitalization rate.
Recently, I came across an appraisal reviewed by a second appraiser. The originating appraiser stated that a party other than the borrower owned the real estate. He appraised the borrower's ownership interest, though, as fee simple. When I asked the loan officer about this seeming discrepancy, he said that the originating appraiser had obtained the ownership information from a legal service and not from title documents. By reviewing the preliminary title report, the bank found that the borrower had held title for several years. Neither the originating nor the reviewing appraiser had recognized this discrepancy between the statement of ownership and the appraised ownership interest.
I uncovered another credibility issue in May 2006 while reviewing a partially completed tract home project. The appraisal stated that the project would be completed and sold out by December 2005 and that it would have no models. In fact, however, not only was the project incomplete, but it had 10 models. The loan officer knew this, but neither the appraiser nor the review appraiser did, and the loan officer himself did not review the appraisal. Because the loan officer placed all responsibility for the review onto someone not as familiar with the project, the bank was using an appraisal with questionable credibility.
I have worked with more than a hundred banks and thousands of loan officers since the passage of FIRREA (Federal Institutions Reform, Recovery and Enforcement Act of 1989) prompted appraisal regulations. I have seen several appraisal-review checklists filled out to show that appraisals conform to regulations and to USPAP when, in fact, they do not. Some of these lenders did not have the training to review an appraisal for credibility.
Both regulations and USPAP have had recent major changes or interpretations.
* In September 2005, the federal banking regulators published the Interagency Frequently Asked Questions on Residential Tract Development Lending. This is a major interpretation and statement of the requirements for appraisals of residential tracts.
* On July 1, 2006, USPAP changed significantly--the biggest change in several years. The changes brought the scope of work requirement out of Standards Rule 1, expanded it, and created a separate Standards of Work Rule (SWR). It also moved other requirements around and deleted others. One bank's internal appraiser told me that he was disheartened by the USPAP changes. His external appraisers had only recently seemed to fully understand what he wanted, which was, most of the time, a complete-summary appraisal. …