Residential Appraisal protocols were significantly changed with the implementation of the Home Valuation Code of Conduct (HVCC). Regardless of whether you are seeking an appraisal for a Conventional Loan, a Federal Housing Administration (FHA) Loan, or a Veterans Administration (VA) Loan, our Government has made it clear that separation between the Lender and the Appraiser is necessary to produce a non-biased appraisal report.
Prior to HVCC, there were several report incidents of alleged collusion between Lenders and Appraisers, to include:
- Positive Reinforcement – Example: “If you can ‘bring in’ the value of the property high enough for the deal to work, I (the Lender) will give you (the Appraiser)…” (this could have been the promise of more referrals, monetary incentives, and/or other)
- Negative Reinforcement – Example: “If you do NOT ‘bring in’ the value of the property high enough for the deal to work, I (the Lender) will NOT give you (the Appraiser)…” (this could be the threat of no more future referrals, “blacklisting” the Appraiser, and/or other)
To effectively implement this separation, the HVCC created a 3rd Party Appraisal Management Company (AMC) to handle communications between the Lender who originates the appraisal order, and the Appraiser to evaluates the property.
How Appraisals are ordered:
With the above in mind, the standard method of ordering and obtaining Residential Appraisals is typically as follows:
- Lender orders the appraisal report through the 3rd Party AMC
- Borrower (typically) pays the AMC directly for the amount owed to complete the appraisal
- As with all 3rd Party Non-Recurring Closing Costs, the Lender is NOT permitted to “mark-up” the cost of the appraisal
- NOTE: appraisal fees vary by county, size/value of property, and/or other characteristics
- Upon receipt of Borrower payment, AMC assigns the Appraiser via the “next up” approach based on an Approved Appraiser List for a given geographical location near the Subject Property
- Upon receipt of the order from the AMC, the Appraiser reaches out to the point-of-contact necessary to gain access to the Subject Property (the Appraiser must have access to the interior of the property to perform the appraisal)
- For “Purchase” Loans, the typical point-of-contact is the Listing Agent (although the Buyer’s Agent may request to be the point-of-contact “in addition to” or “in lieu of” the Listing Agent)
- For “Refinance” Loans, the Homeowner is typically the point of contact
- Upon completion of the report, the Appraiser sends the appraisal to the AMC for an audit
- Upon completion of the audit, the AMC send the finished appraisal report to the Lender
- It is typically at that point where the Lender discovers who the actual Appraiser was on this report
- By only discovering the identity of the Appraiser this late in the process, the Lender has no influence on the Appraiser to determine value (as value as already been determined)
- Lender sends a copy of the appraisal directly to the:
- Buyer & Buyer’s Agent (Purchase Loans)
- Homeowner (Refinance Loans)
Reconsideration of Value (ROV):
Periodically, there are occurrences where the “final value” of the appraisal report is disputed by the interested party/parties of the transaction involving the appraisal. Per HVCC, there is a standard protocol for disputing the value, which is as follows:
- Lender must send in a completed Reconsideration of Value (ROV) report to the AMC
- The basis of dispute is limited to 2 categories
- Errors or Omissions in the data reported by the Appraiser
- Comparable Properties (“Comps”) which should have and/or should not have been used in the report
- In the example below, the form is filled out as follows:
- Yellow highlighted fields – completed by the Lender
- Green highlighted fields – completed by the Appraiser
- Blue highlighted field – completed by the AMC
Appraisals are ultimately an “opinion of value” by a Licensed Residential Appraiser and may sometimes be disagreed upon by other parties. Protocols outlined above via the HVCC make best efforts to render a value that is acceptable for all parties involved. There will inevitably be occasions where all parties are not in agreement, thus the ROV process.
Tips and Best Practices:
- Appraisers are typically very busy and need to time budget accordingly. Therefore, do not expect them to have lengthy conversations while at the property.
- If there have been upgrades to the Subject Property, it is advisable to make copies of work orders, permits, etc. and present them to the Appraiser (with no intention of getting these copies back). If the improvements and/or additions warrant value consideration, the Appraiser will appreciate having the written documentation (as opposed to your verbal assurances). Proper dissemination of this information may be useful in swaying the Appraiser to find the “higher range of value consideration” when determining the final value of the property.
- Appraisers are not Interior Designers. They are not evaluating the property based on the color of the curtains or other cosmetic characteristics. Instead, they are looking at the condition of the property when compared to the “comps” used in the appraisal.
- With the above in mind, the Appraiser is hyper-focused on “health & safety” related issues, and must “call out” any that exist. Examples of “health & safety” issues are (but not limited to):
- Violations of Code:
- There must be at least 1 Smoke Detector (with Carbon Monoxide Detector) for each level of the Subject Property (i.e. 2 story property needs a Detector on each of the 2 stories)
- Water Heater must be “double strapped in a workmanlike manner”
- Unfinished upgrades, such as an upstairs outdoor deck with no bordering safety rails
- Stairs which are wobbly, broken, and/or unfinished (which are obvious safety hazards)
- Broken windows, and too many other examples to list in this article
- Visual Observations of Concern
- Potential “pest infestation” present
- Potential concerns over the condition of the “roof” of the property
- Possible “mold” present
- NOTE: The Appraiser is not an expert at Pest Control, nor is he/she a Roofing and/or Mold expert. If these (or other) concerns are present, the Appraiser will defer to an expert to file a report and/or remedy these concerns prior to completion of the escrow.
- If the Appraiser must “call out” any health & safety issues, the appraisal will be deemed to have “Subject To” repairs
- All “Subject To” Repairs must be signed off subsequently by the Appraiser via a “Notice of Completion” (Form 442), which requires the Appraiser to revisit the property to observe and sign-off accordingly
- This subsequent visit often comes with a fee of +/- $150.00
- It is advisable that any forecasted “Subject To” conditions be addressed prior to the Appraiser visiting the Subject Property in order to reduce the probability of the need for a 2nd visit, additional fees, etc.
For more information about understanding Residential Appraisal protocols and HVCC, please feel free to contact me.