May 1 update

Let me tell you what I spent most of the day doing.

Besides running the Real Estate Training Academy I have a real estate appraisal practice and today I had a couple loan officers in to explain my view points on a problem that faces loan officers and appraisers.  I developed a power point presentation which we went over and in it I offered a solution to the problem we were discussing which is "value checks".

What is a value check?  It goes by many names, a pre appraisal, a comp check, a guess at the likely value of a house, are just a few.    

Why are value checks a problem?  From the lender point of view they don't want to waiste their time and the clients money on an appraisal that won't support a loan value so why not ask an appraiser for a guestimate.  That makes sense to me as an appraiser, I understand the motivation but the problem is what makes sense here can be illegal for an appraiser and is contrary to the laws and regulations that every appraiser must know and agree to before they can get a license.

There are a couple good reasons why a "value check" is a bad thing if not done properly.

The government got involved heavily in how appraisers do appraisals, how they are licensed and monitored.  The reasaon this came about was the Savings and Loan Crises of the 1980's.  Things got so bad that congress passed FIRREA in 1989 (Financial Institutions Reform Recover & Enforcement Act).  From this legislation came state licensing in 1992 and monitoring of licensed appraisers.  The reason for this was to protect the public from incompetent and unethical appraisers. 

The Uniform Standards of Professional Appraisal Practice (USPAP), you can think of it as the bible for appraisers, was developed and every year since has been modified with the current edition covering 2008-2009.  Every 2 year cycle appraiser are required to take a 7 hour con ed class to brush up on the changes in USPAP and reinforce the importance of this set of rules.  In USPAP things like "comp checks" are discussed in several areas.  The best discussion of the issue is in Advisory Opinion 19 "Unaccceptible Assignment Conditions".

In the classes taken to become an appraiser it is pounded into to the appraisers' head to follow the appraisal process.  There are 7 steps to this process and at the very end of the process is the value conclusion and reporting of the value conclusion.

The sad thing is that good appraisers loose business to the bad appraisers when they follow the rules.  The good appraisers don't put the cart before the hoarse and through out a number to get more business.  I hate to see a system where the cheaters get rewarded and the pro's who do their jobs ethically and competently loose out, but that is often the case.     

What was my suggestion to the loan officers?  The assignment can be called a "value check" or whatever the person asking the value question wants to call it, but the appraiser will do a limited scope appraisal.  Most people in the real estate business have heard of drive-by appraisals.  Some people may even think this is an unsatisfactory way to do an appraisal and in some cases they are correct.  The issue at hand is, if the scope of work can be sufficient to produce a credible result that won't mislead the intended user. 

The limited scope of work appraisal I suggested doesn't even require a drive-by of the subject property.  The scope of work is fully disclosed in the report and the client is aware of what kind of analysis they are getting.  Would an appraiser prefer to inspect the property, sure he or she would, but at least this way the appraisal process and USPAP can be followed.  The appraiser can also inform the loan officer that there is insufficient data to even do a limited scope appraisal if that is the case.  

USPAP and appraisal texts make the distinction between credible and reliable.  An appraiser cannot complete an appraisal for a client that is not credible; keep in mind this is in the context of the scope of work performed.  The greater the scope of work done, for example an inspection of the subject property, the more reliable a report will be compared to a report with a less inclusive scope of work.

If anyone is ineterested in the power point presentation I will email it to them.  If you have comments on this I'd love to hear them too.