Fundamentals of Appraisal Review Course 105

Instructor: Diana T. Jacob Phone: 225.378.9994

Email: [email protected]

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Introduction to Appraisal Review

• The USPAP defines review as: “the act or

process of developing and communicating an opinion about the quality of another appraiser’s work”

• Intended Use and the Intended Users

are equally as relevant in an appraisal review as it is in any assignment under USPAP

• Knowing the purpose of the review can

identify the task or tasks:

– To judge the quality of another appraiser’s

work and in some instances,

– To form an opinion about the value 2

Introduction to Appraisal Review

•

If the review assignment involves also forming an opinion about the value then there are actually two subjects: 1. The appraisal report, and 2. The real property that is the subject of the report under review In these circumstances where an opinion of value is also required the appraiser can use data contained in the appraisal report that is otherwise unverified data through an extraordinary assumption

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Introduction to Appraisal Review

• The process of reviewing another’s work

does not mean the reviewing appraiser changes the value of the appraisal under review

• The possible differing of an opinion of

value or even the concurrence of a value is a separate opinion, not a shared or joint effort; neither is it an extension of the appraisal assignment under review

• Reviewing an appraisal is a separate

assignment of an independent appraiser

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Introduction to Appraisal Review

• The review of another’s work

requires the appraiser to rely on five common accepted areas of knowledge 1. Intended use/user of the work under review 2. Economic Principles of Value 3. Specific Performance Standards of USPAP 4. Typical Practice 5. Personal professional opinion

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Introduction to Appraisal Review

• Typical practice under USPAP is

measured by two benchmarks 1. The appraiser’s peers (those who have competency in similar assignments) and 2. The users (market participants) of the assignment

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Economic Principles

• •

The characteristics of economic principles used in the appraisal process are interdependent of one another, not separate and independent The application of valuation principles requires the understanding of real estate characteristics 1. Immovable 2. Durable 3. Long Life 4. Heterogeneous (the differing or opposite nature of real estate, i.e. the varying ways land can be used)

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Economic Principles

• Supply and Demand • Highest and Best Use • Balance and Surplus Productivity • Increasing and Decreasing Returns • Contribution • Change • Conformity • Anticipation • Competition 8

Economic Principles

• Essential Elements (components)

of value are:

– D – U – S – T

Demand Utility Scarcity Transferability

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Review of the Approaches to Value

• The Cost Approach is sometimes

referred to as the Summation Approach

• There are three elements of the

Cost Approach 1. Land Value 2. Reproduction/Replacement Cost New of the Improvements 3. Depreciation (the loss to the cost new)

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Sales Approach to Value

• Once the subject has been identified

comparable properties sold prior to the effective date of the appraisal can be selected

• When market value is the opinion being

sought sales are viewed and adjusted for dissimilar characteristics according to the market reaction

• CBS (comparable sale better subtract) • CIA (comparable inferior add) 11

Income Approach to Value

• The Income Approach is used when the

decision to purchase involved the consideration of the income production

• Income can be viewed from its

characteristics of “gross income” and then converted to value through multipliers

• Income can be processed from a gross

to a net operating income and converted into value through a capitalization rate

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Review of USPAP

• Definitions of USPAP – July 1, 2006 definition of appraisal

will no longer contain the terms “complete” or “limited” due to the retirement of the Departure Rule

– The retirement of the Departure Rule

will eliminate the need to differentiate between specific or binding requirements. All requirements are considered performance requirements.

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Review of USPAP

• Rules of USPAP are sequenced as; – Ethics Rule – Competency Rule – Departure Rule (retired on July 1,

2006) replaced with Scope of Work Rule

– Jurisdictional Exception Rule – Supplemental Standards Rule 14

Review of USPAP

• Standard 1 is the development of a

real property appraisal

– SR 1-1 – SR 1-2 – SR 1-3 – SR 1-4 – SR 1-5 – SR 1-6

Competency Pre-requisite Scope of Work/Problem Identification Land Use Approaches to Value Flipping and Fraud Final Reconciliation

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SR 3 Appraisal Review

• The judgment of quality about

another’s work

• Judgment must include: – Completeness – Adequacy – Relevance – Appropriateness, and – Reasonableness of the work under

review applicable to that work

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SR 3-1 Appraisal Review

• Scope of Work is defined in this

development standard

• Intended use of reviewer’s

opinions and conclusions are in the context of the client’s use of the review and include, without limitation,

– Quality control – Audit, – Qualification, or confirmation 17

SR 3-1 Appraisal Review

• The reason/purpose of the review

assignment relates to the reviewer’s objective such as:

– Evaluate compliance with relevant

USPAP requirements, with a

– Client’s requirements, or with – Applicable regulations 18

SR 3-1 Appraisal Review

• The reviewer must ascertain whether

the purpose of the assignment includes the development of their own opinion of value about the subject property of the work under review

• That – – opinion is an appraisal

whether it:

Concurs with the opinion

review

as of the date of value different date of value

; or in the work under in that work

or a Differs from the opinion

that work

as of the date of value or a different date of value

in

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SR 3-2 Appraisal Review

• Reporting Subsection of SR for appraisal

review

• The reviewer must – State the identity of the client, by name or type,

and intended users; the intended use of the assignment results; and the purpose of the assignment

– State the information that must be identified in

accordance with Standards Rule 3-1(b), i.e.

• Subject of the appraisal review • Effective date of the review • Property and ownership interest appraised • Date of the work under review and effective date of opinion

and conclusions under review and

• Appraiser(s) who completed the work under review unless

that identity was withheld

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SR 3-2 Appraisal Review

• What happens when the identity of

the appraiser(s) who completed the work under review is withheld?

ANSWER: The appraiser must state that fact in the review report!

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SR 3-2 Appraisal Review (continued)

• In reporting the results of an appraisal

review, the reviewer must:

– State the nature, extent, and detail of the

review process undertaken (i.e., the scope of work) identified in accordance with Standards Rule 3-1 (c) (and state the extent of any portion of the work that involved significant assistance including stating the name(s)s of those who provided the assistance in the certification).

• Scope of work highlights of 3-1(c) include; – Identifying precise extent of review process sound

reasoning supporting the scope of work decision evidence of why the review has credibility

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SR 3-2 Appraisal Review (continued)

• Continued highlights of 3-1(c) include the requirement

to report clearly

how the review was conducted in the context of the market conditions as of the effective date

of the work being reviewed

• The reviewer can use information available to the reviewer that was not made available to the appraiser

subsequent to the review but cannot hold the appraiser accountable for information unavailable to the appraiser

• The effective date of the reviewer’s opinion

of value

the same or different from that date of the work may be

under review

• The reviewer does not have to replicate the steps

completed by the original appraiser but must follow the appropriate development standards when developing an opinion that differs from the work under review

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Illustrations of Language WITHOUT an Opinion of Value

– “The value opinion stated in the appraisal

report is (or is not) adequately supported”

– “The value conclusion is (or is not) appropriate

and reasonable given the data and analyses presented”

– “I reject the value conclusion as being

unreliable due to the errors and/or inconsistencies found”

– “The value conclusion is not appropriate due to

a significant math error in the Sales Comparison approach-if calculated properly, the value conclusion would change to $XXX

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Illustrations of Language WITH an Opinion of Value

• “I concur (or do not concur) with

the value”

• “I agree (or disagree) with the

value”

• In my opinion, the value is (the

same)”

• “In my opinion, the value is

incorrect and should be “$XXX”

• “In my opinion, the value is too

high (or too low)”

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Federal Regulations based on Title XI

• 12 CFR Part 34.42 (g) Definition of

Market Value

• 12 CFR Part 34.43 clearly states

that appraisals can be performed by either a state certified or licensed appraiser

• 12 CFR Part 34.44 are the five

points/minimum standards under the Federal Financial Institutions Reform Recovery Act (FIRREA)

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Unacceptable Appraisal Practice

• Unsupported opinions of market value • Improper selection of comparable sales • Creation of comparable sales; • Unsupported adjustments in the sales

comparison approach, inadequate analysis of, and reporting on, the sales history of the subject property and comparable sales;

• Lack of analysis of, and reporting on ,

the listing, offering, or contract sale for the subject property; and

• Misrepresentation of the physical

characteristics of the subject property, improvements, or comparable sales

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Fannie Mae Announcement

• Letter dated December 17, 2002 • The second revision dated March 2005

did not have an accompanying letter

– The consequence is a difference sequence in

the questions found in the sections of the letter detailing how the form should be completed (Note question 1 is really question 9 on the revised form)

– This lack of sequence conformity does not

eliminate the requirements of the March 2005 form to be completed with the same information found within the letter

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Reviewer’s Scope of Work (pg 3 of letter)

• Read the entire appraisal report under review • Inspect the subject property and comparables

described in the appraisal from the street (if the reviewer inspects the interior of the subject they must not such in the appraisal review report)

• Inspect the neighborhood in which the subject

is located;

• Research all appropriate data; • Verify the data in the original appraisal report

using ALL reliable sources; and

• Assume the property condition reported in the

original appraisal report is accurate unless evidence to the contrary

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Revised Form 2000

The revised form defines the role of the review appraiser Addresses the purpose, intended use, and the scope of work for the appraisal field review assignment; •Provides guidance on performing the appraisal review and completing the form •Provides standardized sales comparison analysis adjustment grid supporting the review appraiser’s opinion of value; and •Includes a statement of limiting conditions and appraiser’s certifications 30

Case Study 1

• Items of concern – There is 168% spread between the adjusted

sale price

– The first paragraph states equal weight is

given which lacks evidence of competent judgment

– There is no explanation of how the

adjustments were derived. Superior market condition of sales 1 & 2 or to summarize what type of financing was considered typical

– Second paragraph has outdated language;

term “estimated” was removed in 1999 USPAP

– Appraiser concluded a value of $100,050

which is not typical practice; appraiser should have rounded the value conclusion

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Case Study 2

• Items of Concern – Comments note “city of San Antonio”

location but market area is marked Suburban

– Land Use shows 86% One family but built-

up area shows 25%-75%

– There is no mention of typical site sizes or

design of house styles in neighborhood section

– Dimensions are not stated just shown as

“irregular” and then cited as typical

– Depreciation is noted as average with no

comment as to what “average” is

– Environmental comments indicate no

research into EPA website was made; conclusions limited to on site visit

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Case Study 2 (continued)

• Items of concern – Land ratio of 17% is not cited as being

typical in Cost Approach

– No comments on how Cost Approach

contributed to the final

– There was no discussion on the listing price

to sale price of the subject in the Sales Approach

– Condition is cited as good in Sales Approach

but average on page 1 of the form

– Sale 4 was a dated sale with no time

adjustment

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