Fundamentals of Appraisal Review Course 105

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Fundamentals of Appraisal Review Course 105

• Instructor Diana T. Jacob
• Phone [phone]
• Email dtjacob_at_bellsouth.net

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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 appraisers 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 appraisers work
  and in some instances,
• To form an opinion about the value

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Introduction to Appraisal Review

• If the review assignment involves also forming an
  opinion about the value then there are actually
  two subjects
• The appraisal report, and
• 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 anothers 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 anothers work requires the
  appraiser to rely on five common accepted areas
  of knowledge
• Intended use/user of the work under review
• Economic Principles of Value
• Specific Performance Standards of USPAP
• Typical Practice
• Personal professional opinion

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Introduction to Appraisal Review

• Typical practice under USPAP is measured by two
  benchmarks
• The appraisers peers (those who have competency
  in similar assignments) and
• 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
• Immovable
• Durable
• Long Life
• 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

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Economic Principles

• Essential Elements (components) of value are
• D Demand
• U Utility
• S Scarcity
• T 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
• Land Value
• Reproduction/Replacement Cost New of the
  Improvements
• 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)

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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

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Review of USPAP

• Standard 1 is the development of a real property
  appraisal
• SR 1-1 Competency Pre-requisite
• SR 1-2 Scope of Work/Problem Identification
• SR 1-3 Land Use
• SR 1-4 Approaches to Value
• SR 1-5 Flipping and Fraud
• SR 1-6 Final Reconciliation

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SR 3 Appraisal Review

• The judgment of quality about anothers 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 reviewers opinions and
  conclusions are in the context of the clients
  use of the review and include, without
  limitation,
• Quality control
• Audit,
• Qualification, or confirmation

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SR 3-1 Appraisal Review

• The reason/purpose of the review assignment
  relates to the reviewers objective such as
• Evaluate compliance with relevant USPAP
  requirements, with a
• Clients requirements, or with
• Applicable regulations

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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 in the work under review
  as of the date of value in that work or a
  different date of value or
• Differs from the opinion as of the date of value
  in that work or a different date of value

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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 reviewers opinion of
  value may be the same or different from that date
  of the work 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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Reviewers 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 appraisers
  opinion of value and
• Includes a statement of limiting conditions and
  appraisers certifications

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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