Upon further review: once used only on niche projects, appraisal reviews have become a standard industry practice.
The appraisal review demystifies the appraisal process and gives the client a better understanding of the valuation and greater confidence in the appraiser's conclusions. Ultimately, the purpose of an appraisal review is to reinforce the client's confidence in the credibility of the appraisal and the conclusions it presents.
To gain insight into the issues and challenges facing reviewers, as well as how the review practice has evolved, Valuation caught up with several Appraisal Institute members from around the country who are involved with reviews. Here, they share their perspectives.
VALUE OF AN APPRAISAL REVIEW
Based on Appraisal Institute data, the estimated number of reviewers in the U.S. is about 11,000 to 14,000; slightly more than half are employed by banks, financial institutions and mortgage lenders, while about one-third are employed by appraisal firms.
Whether an appraisal review is conducted within an appraiser's own firm or by a client, professional association or government entity, the goal is to ensure that credible, sound appraisals are communicated in logical, concise reports. The essence of appraisal review is to investigate, analyze and verify the logic and procedure used in an appraisal and to ensure a sound value opinion.
William Pittenger, MAI, SRA, a former senior vice president of Seacoast National Bank in Stuart, Fla., depends on appraisal reviews to test the validity of an appraisal to make an informed judgment about its reliability. In a banking environment, that means deciding if the data, reasoning and conclusions set forth in the appraisal report form a sound basis for either underwriting new credit or restructuring an existing loan.
"As most commercial real estate loans are collateral-dependent, in the sense that the primary source of loan repayment is the property's ability to produce revenue," Pittenger says, "a reviewer should check to see that characteristics about the security property, as well as its competitive marketplace that might limit its ability to produce revenue to sufficiently operate and service the debt, have been appropriately identified. If a property cannot do both, loan repayment is in jeopardy from the beginning."
THE REVIEW PROCESS
Appraisal review is a highly technical process and requires a thorough understanding of both valuation theory and practice. The primary function of the appraisal reviewer is not to appraise the subject property, but to examine the contents of a report and form an opinion as to its adequacy and appropriateness.
Reviewers are expected to conduct reviews within recognized appraisal principles and practices as outlined in the Uniform Standards of Professional Appraisal Practice. It is important that reviewers remain objective toward the appraisal under review, even if the reviewer has a different opinion than those stated in the report. When a reviewer makes a judgment or forms an opinion concerning an analysis or conclusion in an appraisal prepared by another appraiser, the reviewer's work is subject to Standard 3 of USPAP.
In the most complete and intensive type of appraisal review, the reviewer must carefully examine the work under review and follow the appraiser's reasoning. Dennis Scardilli, MAI, a reviewer who practices as an attorney in Egg Harbor Township, N.J., notes that his "role as a professional ... is to make an assessment of the risk involved in the alternatives to the resolution of a problem brought to us by a client."
Usually, a reviewer identifies and judges the reasoning and logic that underlie the work of another appraiser. According to Robert Brecht, SRA, a national review contractor for Fannie Mae from Boca Raton, Fla., a seasoned reviewer should focus on the significant issues and factual information that have an impact on the appraiser's key assumptions, the credibility of the report and the value conclusion.
To accomplish this, David Riach, MAI, vice president of First American Commercial Real Estate in Irving, Texas, says reviewers should first scan the report to make sure all issues required under Standards 1 and 2 of USPAP have been addressed. Subsequently, the reviewer should go through the report, line by line, to determine if the data is current and appropriate for the property type and if all adjustments fit within reasonable parameters.
When reviewing an appraisal, the reviewer should determine whether the value conclusion fits within the range established by the data. Thorough reviewers should also check to see if the sections in the report are consistent, if adequate descriptions are included, if meaningful analyses have been conducted and if appropriate techniques relevant to the specific assignment have been incorporated.
Overall, Eric Schwartz, MAI, SRA, chief appraiser for CapitalSource Bank in Chevy Chase, Md., says reviewers should focus on "big picture" questions, such as:
* Is a report FIRREA- and USPAP-compliant?
* Can a report stand on its own in the absence of a reviewer report that might clarify any uncertainties?
* Is a report credible? Would an educated person not familiar with the property, property type or the defined problem be able to understand the appraiser's logic and reasoning?
* Has the appraiser valued the correct property rights?
Because each property is unique--creating opportunities for errors to occur in the valuation process--the challenges reviewers face are similar to the most common problems found in appraisal reports. Appraisers often work under tight deadlines and may rush to get work delivered, which may lead to errors. Faulty appraisals may result from the appraiser's lack of familiarity with certain aspects of financing, environmental regulations or governmental policies and legislation. Moreover, mathematical errors may occur because of carelessness or inattention to detail.
"I can't tell you how many reports we've reviewed where we've found mathematical and typographical errors, table of contents which reference the wrong pages, or (that) list documents in the addenda which are not present," Schwartz says.
Brecht says some of the most common areas where appraisal deficiencies are found include "failure to adequately analyze and report current contract of sale, option, offering or listing of the subject property, as well as the prior sales of the subject property and the comparable sales.
"Failure to comment on negative factors with respect to the subject neighborhood, subject property or proximity of the subject property to adverse influences," he adds, "are other areas of concern."
Brecht also cites the following as common appraisal errors:
* Selection and use of inappropriate comparable sales;
* Misrepresentation of the physical characteristics of the subject property, improvements or comparable sales; and
* Development of an opinion of market value that is not supported by market data or that is misleading.
Competence also can be a problem, particularly when an inexperienced appraiser is given a complex appraisal assignment and does not receive appropriate guidance or training. "There is a mentality in some firms that staff appraisers are there to grind, churn and bill out reports with insufficient attention to quality or USPAP compliance," Schwartz notes. "(However), nondesignated staff appraisers for large firms need to remember that regardless of the training or reporting constraints enforced by their employers, if they are working toward an Appraisal Institute designation, they will be held accountable for their work product."
Schwartz says he sometimes calls an appraisal firm's senior appraiser to discuss a given report and gauge whether he or she has actually reviewed the work of the junior appraiser who completed the report. "More often than not, I'm passed off to the junior appraiser," he says. "I've even had senior appraisers tell me they were not familiar with the property."
HIGHEST AND BEST USE
Schwartz says his biggest concern as a reviewer is with highest and best use analysis.
"The industry has allowed ... the HBU section to evolve into a summary reporting of the facts and opinions of the appraiser to the detriment of analysis," says Schwartz. "My experience has taught me that the most credible highest and best use analyses are written by well-trained appraisers who work in those few metropolitan areas which lack zoning, such as Houston," he added.
Schwartz says very few appraisal firms and their appraisers pay attention to the HBU as vacant, financial feasibility and maximally productive use. "Yet this section of a report is the linchpin which holds the report, and ultimately its credibility, together," he says.
The boilerplate HBU sections that are common today should never be accepted, Schwartz adds, because a large number of HBU sections on financial feasibility lack any way to test that feasibility. Reviewers, he says, should send the report back for revisions if the HBU does not include the level of analysis and detailed reporting as required in SR 1-4 and SR 2-2. "A Self-Contained report must analyze the relevant legal, physical and economic factors to the extent necessary to support the appraiser's highest and best use conclusion(s) and not simply state the appraiser's opinions," Schwartz concludes. "Gross deficiencies occur when the analysis is lacking or flawed."
Schwartz recommends that review and field appraisers reread chapters nine and 12 of "The Appraisal of Real Estate," 13th edition, or take the "Market Analysis and Highest and Best Use" course.
SCOPE OF WORK
Scope of work is one of the most important aspects of any appraisal assignment, as it defines the appraiser's responsibilities for an assignment. Depending on the requirements of the client and the complexity of the subject property, the scope of work of an appraisal review can vary widely, from simply checking math to developing an independent opinion of value.
Prior to performing an appraisal review, it is critical that the reviewer discuss the assignment's scope of work with the client. When determining the assignment's parameters, the scope of work must be intensive enough to produce credible conclusions. Important questions to address when developing an assignment's scope of work include: * Will the reviewer develop his or her own opinion of value?
* Will the reviewer visit the property, and if so, what level of property inspection will be undertaken?
* Will the reviewer rely on information in the appraisal under review in developing his or her own value opinion, or will the reviewer do his or her own primary research?
According to George Mann, MAI, SRA, of Cincinnati, "(The) Scope of Work (Rule) has made the reviewer spell out what he or she has and has not done. This has helped clients better understand what was involved in the review they ordered. Reviewers are recognizing there can be a wide range of work involved and thus fees can vary significantly depending on what the client needs."
Riach suggests that the Scope of Work Rule has made the job of the reviewer both easier and more difficult: "easier because the appraiser has to lay out the scope of how he/she will solve the appraisal problem. If they don't follow their own scope in the appraisal, that becomes an issue. I think it becomes more difficult because some of the reports submitted can be very abbreviated."
CHALLENGES, TRENDS AND DEVELOPMENTS
Although appraisal regulations have not changed significantly over the past few years, regulators' intensity for enforcing them has. Because of this, Mann points out that clients are placing significant weight on reviewers to ensure that appraisal reports conform to the required standards and that value conclusions are reasonable.
When making business decisions, "clients have limited resources and thus have to depend on the reviewer to ensure the appraisals are reliable," Mann says. "A growing trend in the banking industry is bank examiners reviewing the appraisal reviews. Thus, appraisal reviews must be highly professional and avoid any errors."
Mann notes that because of staffing reductions at banks and government agencies, more reviews are being outsourced. Moreover, he says, bank and government clients are requiring more detailed reviews as the appraisals they order must meet federal guidelines. Because of this, it is important for reviewers to stay abreast of federal appraisal requirements.
Schwartz adds that increased activity within certain areas of the lending industry is creating a greater demand for reviewers. "With secondary lenders executing repurchases and mortgage fraud investigations increasing, appraisal review or forensic appraisal analysis has likely experienced a great deal of growth in recent months," he says. "Not only are appraisal reviews popular, but reviews of those reviews, or appraisal rebuttals, have also reportedly increased. Services such as these require experience and competency levels not found in every appraiser."
With more than 35 percent of his workload consisting of review assignments, James Henderson, SRA, of Bakersfield, Calif., has noticed an upswing in the volume of appraisal review assignments he receives, including an increase in assignments from insurance companies. Henderson suggests that reviews have become more in demand not only because mortgage fraud has increased within the past few years, but also because there has been a surge of inexperienced appraisers opening their own offices after only minimal training.
According to Brecht, reviewers are beginning to see a substantial volume of forensic review assignments because of the current wave of foreclosures hitting the market. "Forensic reviews are ordered by lenders, mortgage insurance companies and the (government sponsored enterprises). Generally speaking, when there is a foreclosure, there will be a full audit of the loan file that will include some level of appraisal review," he says.
TRANSITIONING INTO APPRAISAL REVIEW
For appraisers who are interested in transitioning into appraisal review, Appraisal Institute Senior Manager of Ethics and Standards Counseling Stephanie Coleman, MAI, SRA, suggests that the first step is to become a solid appraiser and understand exactly what it takes to perform an effective appraisal. Qualities that skilled reviewers share include a background in appraisal theory, principles and standards, as well as strong writing and interpersonal communication skills, Coleman says.
"The reviewer must be competent in the property types under review," Schwartz adds. "A reviewer should never review an appraisal report of a property type he or she is not competent to appraise."
Pittenger agrees with Coleman and Schwartz: "First, have a sound appraisal background and appropriate experience. Recognize that just because an appraiser says it differently than you (do) does not mean it is wrong. Many novice reviewers naively believe they haven't done the job unless they can find fault. If you have selected the right appraiser and matched his or her experience to the specific assignment, errors should be few."
Before diving into the review side of appraising, Brecht suggests testing the waters first by contacting either a lender client or appraisal management company that regularly orders appraisal reviews. "Review work is not for everybody, and many appraisers don't feel comfortable reviewing other appraisers' work," Brecht says. "However, it can be a rewarding specialty within the appraisal profession."
Henderson warns that reviewers need to have a thick skin and advises that new reviewers look at an appraisal review as any other appraisal assignment (see "Call Him Sherlock Homes" on previous page). "As far as gauging if (appraisal review) is right for you, one of the main factors--aside from providing a good work product--is can you stand to take the heat," Henderson says. "There has been more than (one occasion when) I have been accused by other appraisers of all sorts of things."
When giving career advice, Scardilli emphasizes the importance of professional growth and continual learning. "If you like real estate appraisal, want to learn new ways of looking at appraisal issues that you thought you knew but don't, and you believe that an assignment as a (reviewer) is right for this season of your life, then by all means, go for it," Scardilli says.
The ability to communicate well with other appraisers is also key, according to Schwartz. CapitalSource Bank's appraisal management unit consists of an administrative assistant and three reviewers. The reviewers all hold the MAI designation and have a combined 75 years of appraisal and appraisal review experience.
"I set up the unit to manage the appraisal process 'from soup to nuts,'" Schwartz says, indicating that his team processes an appraisal request, sends out requests for proposals, engages appraisers and assigns a report to a reviewer. "At that point in time, initiating contact and maintaining contact with the appraiser is a key responsibility of the individual reviewer," he continues. "Establishing that relationship early in the process facilitates continued communication throughout the assignment."
However, Schwartz stipulates, "In my opinion, reviewers should not use the interaction with the appraiser as a time to educate the appraiser."
Mann suggests that appraisers interested in transitioning into the reviewer field should take the seminar "Appraisal Review: General" and buy the Appraisal Institute's appraisal review book, "Appraising the Appraisal: The Art of Appraisal Review," second edition, by Richard C. Sorenson, MAI. Mann requires that every reviewer he hires read the book. "It was worth me buying the book for them as this made them a better reviewer from day one," Mann says.
Since the Appraisal Institute published "Appraising the Appraisal" in 1998, computerization has increased exponentially within the appraisal industry, professional standards have been clarified and revised, reviewer terminology has evolved and government regulations have intensified. In light of these changes, the Appraisal Institute published an updated edition of the book in April.
Unlike the first edition, according to Sorenson, the overall focus of the second edition is less on "how to appraise" than "how to review an appraisal."
Major updates to the second edition include a detailed discussion on scope of work, which provides guidance on how to approach an assignment when dealing with a client. Also, with an increase in appraisal-related cases entering the courtroom, a section on reviewing for litigation-support assignments has been added as well.
Moreover, to help clarify recent revisions made to the 2010-11 edition of USPAP, the book includes an easy-to-follow guide on how to remain in compliance with Standard 3. Additional updates include an expanded section on Internet resources, updated example review forms and an expanded section on complex review assignments. (For more information, see "We Wrote the Book" below.)
Appraisal review has grown from a small subspecialty to a recognized, important part of the appraisal profession. An appraisal review is a prudent business practice for any user of appraisal services, and according to Scardilli, the reviewer is a pivotal person who passes the ball smoothly between the appraiser and the client.
The appraisal review process can raise the level of professionalism among appraisers, encouraging them to consistently produce high-quality reports. Many appraisers embrace the challenge of a thorough review because it gives them valuable input about how their work measures up to that of their peers.
RELATED ARTICLE: CALL HIM SHERLOCK HOMES
When James Henderson, SRA, of J.L. Henderson & Co. in Bakersfield, Calif., performs a review, he approaches it just as he would a typical appraisal assignment, leaving no corner unturned while maintaining an objective position. While this is beyond what most reviewers do, and are expected or required to do to ascertain the quality of the appraisal report, Henderson's approach suits his clients' needs the best.
Prior to examining the original appraiser's final opinion of value, as well as the methods and data used to reach it, Henderson initially looks at the report only to ascertain the physical characteristics of the property under review.
At that stage, many reviewers also look at the comparable sales and value conclusion. But before doing so, Henderson performs extra due diligence to ensure an unbiased value conclusion of his own.
He next performs an appraisal of the property based on an exterior inspection and, if possible, a full interior inspection as well. He then searches for the most reliable comparable sales data before determining an independent opinion of value. Only after Henderson reaches a final opinion of value will he look at the original comparable sales and value conclusion. Once he reaches his opinion of value, Henderson says he is then able to determine whether the original comparables were optimal and if the adjustments made were reasonable.
In some cases, Henderson's opinion of value is within a few dollars from the original appraiser's opinion, with both reports frequently containing identical comparable sales data. In many cases, however, there are vast differences between the two, but at least Henderson feels confident that he approached the assignment without any preconceived opinions.
RELATED ARTICLE: WE WROTE THE BOOK
A new book published in April by the Appraisal Institute provides practical instruction on the appraisal review process and helps promote greater understanding between reviewers and appraisers.
"Appraising the Appraisal: The Art of Appraisal Review," second edition, is written by Richard C. Sorenson, MAI. He describes common deficiencies in appraisal reports and offers tips for preparing careful and constructive appraisal reviews that can be applied by appraisers, lenders and other professionals.
The guide includes updated information on scope of work and data verification, real-world examples that highlight the qualities of both effective and ineffective appraisal reports, a new case study, handy checklists and sample review forms.
Sorenson is the principal of Appraisal Management Consultants, a firm that assists financial institutions with appraisal review, real estate valuation management and training. Sorenson, the 1995 national president of the Appraisal Institute, was previously with First Chicago Bank (1958-1996)--which became Bank One before merging with Chase in 2004--in various appraisal and management positions. He teaches appraisal courses and commercial and residential review seminars and has published numerous articles in appraisal and banking journals.
The 255-page, illustrated soft-cover book (ISBN: 978-1-935328-08-7) costs $40 for Appraisal Institute members ($50 for nonmembers) plus shipping and handling. To order, go to www.appraisalinstitute.org/store/p-202-appraising-the-appraisal-the-art-of-appraisal-review.aspx.
James Sobiesczyk is a communications specialist at the Appraisal Institute and is a staff writer for Valuation and Appraiser News Online. He can be reached at email@example.com.
By James Sobiesczyk, Appraisal Institute communications specialist
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|Publication:||Valuation Insights & Perspectives|
|Date:||Mar 22, 2010|
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