4 1 appraisal and appraisal review forms chapter 4

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Appraisal and Appraisal Review Forms

Chapter 4

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Chapter Objectives

• Upon completion of this chapter, the participant will be able to:– Recognize the key sections of the Uniform

Residential Appraisal Report Form and how these sections should be completed in compliance with USPAP Standards and guidelines, including Subject, Contract, Neighborhood, Site, and Improvements.

– Explain the reviewer’s perspective in analyzing the Sales Comparison Approach section of the URAR form, including all the data categories.

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Chapter Objectives

• Upon completion of this chapter, the participant will be able to:– Recognize the guidelines and requirements of

Fannie Mae, Freddie Mac, FHA, VA and other lending entities and how they may impact the reviewer’s task in a particular review assignment.

– Explain general guidelines and industry requirements related to adjustments within an appraisal review assignment.

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Chapter Objectives

• Upon completion of this chapter, the participant will be able to:– Discuss the reviewer’s perspective in analyzing

the Reconciliation section of the URAR form.– Recognize the reviewer’s perspective in

analyzing the Income and Cost approach sections on the URAR form, when used.

– Discuss the reviewer’s examination of required exhibits for the work under review.

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Chapter Objectives

• Upon completion of this chapter, the participant will be able to:– Understand the reviewer’s perspective in

analyzing the Market Conditions Addendum.– Discuss types of mortgage industry appraisal

review forms that may be used in a review assignment.

– Discuss consequences when an appraiser’s work receives an extremely poor review.

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Mortgage Industry Appraisal Forms

• There are a variety of mortgage lending industry appraisal forms:– Exterior only property inspection– Interior and exterior property inspection– Single-family properties– Multi-unit properties– Condominiums– Manufactured homes

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Uniform Residential Appraisal Report

• The Uniform Residential Appraisal Report (URAR) Form:– Fannie Mae Form 1004– Freddie Mac Form 70

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• Considered to be an Appraisal Report– Designed to report an appraisal of a one-unit

property or a one-unit property with an accessory unit; including a unit in a planned unit development (PUD), based on an interior and exterior inspection of the subject property

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• In an appraisal review assignment (and given the scope of work): – The reviewer must determine if the reporting

meets the minimum standards of USPAP to summarize certain information

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What URAR is NOT

• URAR is NOT designed to report an appraisal of: – Manufactured home – Unit in a condominium – Unit in a cooperative project

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UAD Compliance

• UAD reporting compliance is required for appraisals with an effective date of September 1, 2011 or later, reported on the URAR form – Therefore, work being reviewed may not have

required compliance with UAD requirements unless performed after the required date

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Reviewer’s Perspective

• In an appraisal review assignment, the reviewer must first assess the overall report in compliance with the general use provisions and other requirements provided within this section of the reporting form

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General Use Provisions of URAR

• Pages 4-6 of the form sets forth:– Types of property for which the reporting form

is applicable– Certain aspects of the assignment– Unacceptability of modifications, additions, or

deletions to assignment elements with the exception of scope of work

– Limitations regarding modifications, additions, or deletions to appraiser’s certification

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Scope of Work

• Abbreviated description of the assignment’s scope of work

• Establishes the minimum diligence expected regarding:– Inspection– Research– Verification– Analysis– Reporting

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Scope of Work

• The URAR form does not limit or control the appraisal process

• The appraiser’s analysis should go beyond any limitations of the form and be expanded as needed with additional comments and exhibits to:– Adequately describe the subject property – Document the analysis and valuation process– Support the appraiser’s conclusions

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Scope of Work

• The Scope of Work section of the form identifies several elements of problem identification that serve as the basis for the scope of work in the assignment

• Examples:– Intended Use – For a lender/client to evaluate

the property for a mortgage finance transaction– Intended User – The lender/client

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Scope of Work

• Another element of problem identification is:– Type and definition of value

• Type of value is specified as market value

• The illustration presented illustrates the most commonly used definition

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Scope of Work

• Note:– The discussion continues regarding how

adjustments for financing terms and concessions should be handled

– In the course of an appraisal review assignment, the reviewer must observe if the appraiser, in the work being reviewed, properly handled such transaction conditions appropriately and consistently with the assignment condition

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Statement of Assumptions and Limiting Conditions

• This statement assists the appraiser in establishing limitations of responsibility

• Some portions of this section further emphasize the scope of work performed in the assignment, such as:• Providing a sketch of the improvements• Research of flood information• Other commentary regarding any unfavorable

conditions found or not found

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• In an appraisal review, the reviewer must ascertain if the appraiser in the work being reviewed adequately complied with the assignment conditions

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Appraiser’s Certification

• The Appraiser’s Certification contained within the URAR, and then significantly expands the certification statements to a more specific and greater level than is required by USPAP

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Examples

• Certification statements include:− Specific methodology used in the assignment− Analysis and reporting of offerings and any current

sales agreement of the subject property− Research, verification, analysis, and reporting of

prior sales of the comparable data− Process of selecting and analyzing comparable

sales data− Techniques for adjusting comparable sales− Competency in the assignment

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Additional Certifications

• No content in the certification may be deleted or modified

• To accommodate required certifications mentioned in the general provisions and certain disclosures required by USPAP:− An Additional Certifications page may be added

to the report

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Examples

• Items that may need to be added as Additional Certifications for USPAP compliance include:– Whether the appraiser has, or has not, provided

any services as an appraiser (or in any other capacity) regarding the subject property within the prior three-year period immediately preceding acceptance of the assignment

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Examples

• Items that may need to be added as Additional Certifications for USPAP compliance include:– Specific name(s) of individuals not signing the

certification who provided significant professional assistance in the assignment

– Any fees, commissions, or things of value that were paid by the appraiser in connection with procurement of the assignment

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Subject

• The Subject section is a combination of:– Identifying elements of the subject

property

– Specifics regarding the appraisal assignment

• Much of the information in this section is fairly straightforward and factually stated

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• The primary concern of the reviewer for the Subject section is to observe if the information is adequate and accurate

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Subject

• Information that must be reported includes:− Property Address− Owner of Public Record− Legal Description− Assessor’s Parcel Number− Tax Year/Real Estate Taxes− Neighborhood Name− Census Tract− Occupant

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Subject

• Information that must be reported includes:− Special Assessments− Home Owners Association (HOA) Fees− Assignment Type− Lender/Client (per Fannie Mae, not an AMC

ordering the appraisal)− Current and/or Prior Offering of the Subject

Property

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Subject

• The reviewer should note any special commentary and/or addenda that may be required when:– The seller is not the owner of public record– The legal description of the property is lengthy– The property has been offered for sale in the 12

months prior to the effective date of the appraisal

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Contract

• The Contract section of the URAR requires several responses when a purchase transaction has been indicated in the Subject section as the Assignment Type, which the reviewer must observe for accuracy

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Contract

• The appraiser must first indicate if he did or did not analyze the contract for sale, and then go on to report pertinent specified information regarding the transaction, including:− Analysis of the Contract for the Purchase

Transaction− Contract Price/Date of Contract/Property Seller− Financial Assistance

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• The reviewer must carefully assess if a description of any unique contractual condition is present and has been fully disclosed and discussed such as:– Related parties– Personal property– Items being paid on behalf of the borrower or to

the borrower– Special financing such as seller financing or

seller paid financing costs

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Neighborhood

• The Neighborhood section should reflect the area surrounding the subject property.

• In an appraisal review assignment, much of what is critiqued by the reviewer depends on the scope of work− If the scope of work is only for compliance, the

reviewer observes the reporting for completeness, adequacy, logicalness etc.

− If the scope of work is expanded to determine accuracy of the information, an analysis of market competency on the part of the reviewer is required

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• The Neighborhood section is a common area where shortcomings are identified in the appraisal being reviewed

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Reviewer’s Perspective Example

• The appraiser may indicate that property values are declining while supply and demand is in a state of shortage

• Such a condition, while usually not logical, should be accompanied by a significant commentary supporting such a market state

• Otherwise, the indications appear suspect

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Neighborhood

• The URAR report requires the appraiser to observe neighborhood characteristics and surrounding properties to make informed opinions that are incorporated into the valuation of the subject property

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Neighborhood

• The appraiser must report:− Neighborhood Characteristics− One-Unit Housing Trends− One-Unit Housing Age/Price− Neighborhood Boundaries− Neighborhood Description− Market Conditions

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• Reviewers must observe if there is market resistance to a neighborhood because of the known presence of an environmental hazard− If a property is located in a neighborhood with

vacant or boarded-up properties that affect the value and/or marketability of other properties in the neighborhood, the appraiser should have addressed these conditions in his analysis and appraisal report

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Marketing Time and Exposure Time

• The URAR reporting form requires the reporting of Marketing Time within this category

• USPAP requires, for appraisal reports with an effective date on or after January 1, 2012, the reporting of exposure time for an assignment in which exposure time has been developed

• The market value definition used in the URAR report requires the development and reporting of exposure time

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• The reviewer must check to ensure that the required reporting of exposure time is present in those appraisal reports for which the requirement is applicable

• There is no area of the report specified for this reporting to take place. The discussion would be logical to include in the Market Conditions commentary or in the addenda of the report

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Site

• Most of the information in the Site section is factual in nature

• Depending upon the scope of work, in addition to checking the completeness of the information reported in this section, the reviewer may also need to confirm the accuracy of the information

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Site

• Within the Site section, the appraiser must report:– Dimensions– Area– Shape– View– Specific Zoning Category– Zoning Description– Zoning Compliance

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Site

• Within the Site section, the appraiser must report:– Highest and Best Use– Utilities– Street/Alley– FEMA Information– Utilities and Off-Site Improvements– Adverse Site Conditions or External Conditions

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Additional Commentary

• There are a number of items in this category that may require additional commentary, including:– When the zoning is anything other than “Legal,”

the appraiser must explain– If the current use of the property does not

represent the highest and best use, “No” is indicated

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Additional Commentary

• There are a number of items in this category that may require additional commentary, including:– When a utility is not public, but rather from

another source (Other), the appraiser must provide commentary describing that source

– When the utilities and off-site improvements are not typical for the market area

– If there is a presence of adverse site conditions, the appraiser must describe those conditions

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Photographs

• The photographs found in the appraisal report being reviewed can sometimes “give away” certain locational and view characteristics that should have been discussed and addressed in the valuation methodologies, yet were not mentioned or accounted for

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Photographs: Example

• The street scene may display a non-residential property use adjacent to the subject property that may be considered adverse, but the neighborhood is described as completely residential and all views are rated as favorable

• Or, on the other hand, the report may mention an adverse view factor, but no photograph was included to illustrate the condition

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Highest and Best Use: Example

• The reporting of highest and best use, specified by the form, may fall short of the reporting level for an Appraisal Report in compliance with USPAP

• Therefore, the commentary should be expanded

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Highest and Best Use: Example

• Standards Rule 2-2(a)(ix) and (x) obligates the appraiser to:− State the use of the real estate existing as of the

date of value and the use of the real estate reflected in the appraisal;

− and, when an opinion of highest and best use was developed by the appraiser, summarize the support and rationale for that opinion.

(Bold and underline added for emphasis)

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Improvements

• The Improvements section is lengthy and hits upon numerous areas of the property improvements

• Due to the detail of the area, the reviewer may spend a significant amount of time going through the information:− The reviewer, at a minimum, must check the

completeness of the information. − The reviewer’s scope of work may also include

confirming the accuracy of the information

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• Much of the information in this section is fairly direct and factual in nature

• Other information requires sound judgment and logic on the part of the appraiser, and likewise, the reviewer

• This is one area where the competency of the reviewer is especially important

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• If the reviewer’s scope of work does not include a property inspection, much of the information must either be confirmed through third party sources, or an extraordinary assumption may be employed by the reviewer about the information

• If not, the reviewer may need to expand the scope of work to include the necessary level of inspection, or decline or withdraw from the assignment

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General Description

• Most of the information reported under this subcategory should be fairly specific and obvious

• Along with particular design characteristics, the appraiser must report the name of the design style that is applicable within the local market area

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• The reviewer should pay particular attention to the appraiser’s estimate of effective age, making certain that the estimate is consistent with the condition levels reported, and also keeping in mind other external and functional elements that play a role in estimating effective age:− The reasoning and logic for the appraiser’s

estimated effective age should be explained within the commentary

− The reviewer should carefully determine if the explanation supports the estimate and that the reasoning is clear

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Attic

• Located directly below the General Description, the report requires a specific response for the access to the attic and whether the area is heated or unheated

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Foundation

• Direct responses required in this field include the type of foundation and if there is a basement

• Basement is then further defined as “full” or “part,” the basement area (square feet), and percent of finish

• Access and presence of adverse conditions is then reported

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• Consistency is important to reporting in the basement area, as contradictions are often found in this area

• For example, inconsistency occurs if the appraiser indicates that the basement is full, yet states the basement contains 600 square feet, when the footprint of the first floor area is 950 square feet

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Heating/Cooling

• Located directly below the Foundation section, the appraiser must indicate the applicable heating and cooling provisions of the residence

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Exterior Description

• The exterior description is fairly brief

• The appraiser must: − State the material type of several common

exterior components along with the condition of the exterior components

− Rate the condition of the improvements (e.g., fair, average, good)

− Discuss any adverse or atypical condition in later comment areas or in the report

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• The reviewer must pay particular attention to consistency:– If the condition of a particular component is poor

or fair, the rating should be consistent with the estimated effective age and commentary should be provided by the appraiser in the original work being reviewed

• Pictures should be provided of the deteriorated or obsolete component

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• Sometimes, pictures provided by the appraiser in the report may evidence an adverse issue that is stated to the contrary in the report• For example, a frequently found issue is peeling

and chipping paint, which is evident in the subject photographs with no mention of the deterioration in the report; and the appraiser’s condition rating of exterior walls was reported as “Good”

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Amenities

• Located directly below the Exterior Description section, the appraiser must indicate the various amenities present in the improvements

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Interior

• The appraiser must report the finish materials as well as the condition of the finishes (e.g., fair, average, good)− Responses in this section may be mixed with

some properties (e.g., some bath floors are tile while others are sheet vinyl). In such cases, additional commentary should be provided by the appraiser

− Also, the type of materials should be defined, if possible, such as the type of tile or wallboard

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Car Storage

• Directly below the Interior section, the appraiser must indicate whether the subject property has a driveway, garage, and/or carport, or has no car storage− If the subject property has a driveway, garage,

and/or carport, the appraiser must enter the number of spaces for each type of car storage

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Appliances

• The appraiser should note if the appliances are built-in or considered personal property, but included in the real property appraisal

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Finished Area

• The appraiser must enter the total number of finished rooms and bedrooms above grade numerically

• The appraiser must enter the total square footage of the above grade living area numerically to five digits in whole numbers

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Baths

• For baths, the appraiser must enter the total number of full baths and partial baths above grade numerically to two decimal places

• The full bath count is represented to the left of the period. The half bath count is represented to the right of the period

• Example: 3.2 indicates three full baths and two half baths above grade.

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Narrative Commentary Areas for Improvements

• List additional features of the property• Describe the condition of the property• Are there any physical deficiencies or

adverse conditions that affect the livability, soundness, or structural integrity of the property?

• Does the property generally conform to the neighborhood (functional utility, style, condition, use, construction, etc.)?

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• The reviewer needs to pay particular attention to this narrative commentary

• A significant number of civil actions, disciplinary actions, and adverse review findings are related to inadequate, misleading, or even fraudulent statements in this reporting area

• The reviewer should find the commentary to be thorough and present a clear picture of the true characteristics that are the topic of the discussion

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Condition of the Property

• The commentary should include a frank and honest assessment that is consistent with the conditions ratings found in other areas of the report, as well as the appraiser’s estimated effective age

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UAD Requirements

• For appraisals performed under UAD requirements as an assignment condition:

− The appraiser must rate the condition of the property using a C1 through C6 rating. In such an assignment, commentary is required regarding if there has or has not been any material work done to the kitchen or bathroom(s) in the prior 15 years along with the timeframes in which the work was completed (i.e., one to five years ago)

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• Reviewers performing appraisal reviews of appraisals performed with UAD requirements need to be competent to recognize the compliance obligations associated with the assignment in the work being reviewed

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• Photographs included in the appraisal report being reviewed are an important element for the reviewer to carefully examine. Questions to ask include: − Do the photographs show a deck, patio, or

other feature that is not indicated in the report?

− Have photos of features lending significant contributory value to the property been included?

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Sales Comparison Approach

• Fannie Mae, as well as other major lending entities such as Freddie Mac, FHA, VA and others whose requirements mostly mirror those of Fannie Mae, consider the sales comparison approach to be the most reliable and applicable valuation method of the three approaches to value in a single-family residential appraisal assignment

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Sales Comparison Approach

• The guidelines and requirements imposed as assignment conditions and recognized by the majority of the lending industry extend well beyond the minimum requirements of USPAP

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• Reviewers must be clearly aware of these guidelines and requirements applicable to an assignment

• The expected diligence and procedure for which the appraiser, in work being reviewed, should have performed in the development and reporting process can vary greatly, depending upon assignment conditions

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General Guidelines: Fannie Mae

• In general, Fannie Mae requires that the appraiser at a minimum:1. Perform a complete visual inspection of the interior and

exterior areas of the subject property (except for exterior-only appraisals)

2. Inspect the neighborhood

3. Inspect the comparable sales from, at least, the street

4. Research, verify, and analyze data from reliable public and/or private sources

5. Report the analysis, opinions, and conclusions in the appraisal report

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Exterior Inspection – Drive By

• One major difference, specific to Fannie Mae, from what the appraiser may typically do, is the requirement to inspect from the exterior (or to drive by) the comparable properties used in the sales comparison analysis

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General Guidelines

• Although neighborhood comparables are preferred, comparable sales that are located in competing neighborhoods may be used, as they may be the best comparable sales available and appropriate

• The use of comparable sales from competing neighborhoods must be noted and any locational differences must be addressed

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General Guidelines

• When the subject property is located in an area in which there is a shortage of comparable sales, the appraiser may need to use comparable sales from competing neighborhoods

• The appraiser must provide an explanation of the sales that were necessary to use.

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General Guidelines

• USPAP requires that the appraiser analyze only such comparable data as is available

• The Fannie Mae requirement offers guidance on how the data is classified and any limitations, necessary commentary, or disclosures required when the data is from outside the subject’s defined neighborhood:− When the appraiser uses comparable sales data

provided by a party that has a financial interest in either the sale or financing of the subject property, the appraiser must verify the data with a party that does not have a financial interest in the transaction

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Adjustments

• If time (date of sale) adjustments are required, the adjustments must reflect the difference in market conditions between the date of sale of the comparable and the effective date of appraisal

• Fannie Mae is quite specific that adjustments are expected and how they should be considered

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Adjustments

• According to Fannie Mae, the appraiser deems when and if a market condition adjustment is warranted:− A minimum of three closed comparable sales

must be used− Additional comparable sales, land contract

purchase data, pending sales, and active listings may be used beyond the first three comparables as support of the appraiser’s value opinion

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Adjustments

• According to Fannie Mae, the appraiser deems when and if a market condition adjustment is warranted:– A Fannie Mae allows the prior sale of the subject

property to be used as a comparable sale for additional support, but not as one of the first three closed comparable sales

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Adjustments

• According to Fannie Mae, the appraiser deems when and if a market condition adjustment is warranted:– Comparable sales should have closed within the

last 12 months. Older sales can be used if appropriate for the situation and are the best indicator of value

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Adjustments

• According to Fannie Mae, the appraiser deems when and if a market condition adjustment is warranted:– The appraiser must explain the reasoning for the

use of any comparable sale that is more than six months old

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Adjustments

• It is generally accepted as good practice that the more data the appraiser analyzes and the more recent that the data is, the more credible the results− USPAP does not reference the number of

comparable sales the appraiser must analyze in the sales comparison approach or limit how old comparable data can be.

− Fannie Mae has requirements that extend beyond the minimum requirements established by USPAP regarding those issues

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Adjustments

• Fannie Mae requires the application of quantitative (dollar) adjustments for any differences between the subject property and the comparable sales

• The adjustments must be based on supported market reaction to the difference and not be subjective

• Fannie Mae has no specific guideline for an individual line-item adjustment; however, if an adjustment is excessive, the appraiser should comment on the reasoning

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Adjustments

• Net adjustments should not exceed 15% and gross adjustments should not exceed 25%. This is only a guideline and is used as a general indicator of whether the comparable sale should be used or not − Net adjustments exceeding 15% and gross

adjustments exceeding 25% require commentary as to why the excessive adjustment was necessary and the relevance of the comparable sale to the subject

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Adjustments

• Every difference does not necessarily always warrant an adjustment

• Every difference for which the market evidence supports a reaction in dollars adjustment must be adjusted− The appraisal report should certainly discuss

why an adjustment was, or was not, necessary− USPAP does not specifically address the

quantity or amount of adjustments in the sales comparison approach

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Adjustments

• With some property types, and in some markets where there is an ample supply of similar data, adjustments exceeding Fannie Mae’s preferred guidelines may not be an issue

• In markets where excessive adjustments are not a common occurrence, their presence in an appraisal may be much more closely observed

• Market competence on the part of the reviewer is necessary for making that distinction

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Adjustments

• In some markets, or for some properties, adjustments exceeding the 15% / 25% guideline may be less avoidable and more common− In this case, the appraiser’s commentary should support

the use of the comparable data and the application of the adjustment

• Fannie Mae has no specific guideline for what is an acceptable range of value resulting from the sales comparison approach− If there is a large discrepancy among the indicated

values, commentary should be provided in the appraisal report for explanation

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Example

• If three comparable sales were adjusted to result in a range of value of $150,000 to $160,000, that range would be considered, by most interpretations, fairly narrow and acceptable. However, if the resulting adjusted value range were $150,000 to $180,000, that would represent a significantly large spread in the indicated value range and, in such case; the appraiser should discuss in the commentary why the results are so broad

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Comparable Sales

• In addition to the requirement to analyze the sales history of the subject property for the three-year period prior to the effective date of the appraisal, as required by USPAP, Fannie Mae has requirements for comparable sales as well:− Prior sales (transfers) of each comparable sale used

in the sales comparison approach must be reported for the 12 months prior to the effective date of the appraisal

(

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Comparable Sales

• The requirement to perform this analysis is an assignment condition that exceeds the requirement of USPAP − USPAP does not address analysis of the sales

history of the comparable sales data used in the sales comparison approach

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Sales Comparison Review

• The fields within the Sales Comparison section of the URAR report form must be completed in compliance with the UAD reporting requirements, when applicable

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• A systematic approach to this section is typically best to avoid any oversight by the reviewer‒ A good suggestion for the reviewer is to first

focus on the grid section of the form, for the comparable sales analysis, and examine the reported data for the subject property

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• It may not always be part of the scope of work in the review assignment, but, in many cases, the reviewer may first be looking at the comparables sales to confirm that they have been reported correctly

• The reviewer’s scope of work may also include the reviewer determining if the comparable sales used in the analysis by the appraiser are the most relevant

• The reviewer may need to replace data or make an extraordinary assumption about the data

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• Assuming the comparable sales data used in the analysis by the appraiser is affirmed to be the best available, the reviewer may want to note whether or not the information reported for the subject is consistent with the reporting and discussion in the Site, Improvement, and other sections of the form

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• Typically, for form reports, information inserted in other areas automatically auto-populates many of the fields for the subject data in the sales comparison approach grid by function of the appraisal software. But, there is always the possibility there may be discrepancies• The reviewer may want to scan the ratings for

Condition, Quality, Functional Utility, and other reporting fields to determine if they are consistent with the ratings and discussion found on Page 1 of the URAR report form

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• The reviewer should broadly examine the comparable sales used in the analysis

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• The reviewer would typically note (at a minimum) the:– Proximity of the comparable sales to the subject

property‒ Overall similarities and dissimilarities of the

comparable sales to the subject property‒ Date of each comparable sale‒ Number and amount of adjustments to each

comparable sale‒ Consistency of adjustments

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• The reviewer would typically note (at a minimum) the:‒ Net and gross adjustment totals and

percentages‒ Adjusted sale prices of the comparable sales

and whether the indicated value of the sales. comparison approach for the subject property is bracketed within the adjusted value range of the comparable sales

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• Use of distant, aging, dissimilar or highly adjusted data does not necessarily indicate that the data is faulty or not the most relevant available

• Likewise, a value indication by the appraiser that is extrapolated outside the adjusted value range of the comparable sales does not automatically invalidate that value opinion. Sometimes it happens and simply cannot be avoided

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• Another issue that is sometimes identified in a review is differences that are not addressed by an adjustment or adjustments that are inconsistent

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Example

• Consider the circumstance of a subject property that has a full basement and a comparable property has a partial basement, yet no adjustment was applied. Or, it may be that the subject has three bedrooms while two of the comparables have four bedrooms. One comparable was adjusted downward $2,000 and the other comparable was adjusted downward $1,000

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• Such observations, as discussed, do signal that there should be compelling and credible commentary discussing the rationale and logic for use of the data included in the report and adjustments that were applied, or not applied

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• Likely, the next step for the reviewer is to read the Summary of the Sales Comparison Approach section below the grid to assure that sufficient discussion is included

• The commentary should be clear, concise, and satisfy any question that the user (or reviewer) may have regarding the information reported (or not reported) in the comparable sales grid

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• Also included in the commentary should be market support for individual adjustments. The reviewer should ask the following questions: ‒ Is there a reference to analysis that was

performed to derive adjustments, or the appraiser’s data bank, or the workfile?

‒ Is there discussion to support the adjustment?

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• Not as frequently observed is double-counting during the application of adjustments‒ For example, if the heating system of the

property is not operational and requires replacement, an adjustment should not be applied as a line item for “Condition” and then also applied as a “Functional Utility” adjustment, due to lack of an operational heating system, without justifiable reasoning that is explained in the commentary

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• A good practice for the reviewer is to examine each comparable sale individually for math errors

• One thing that appraisal software typically does not do is a logic check. An issue that is found during an appraisal review more often than it should be is: Adjustments that are applied in the wrong direction

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• In most every appraisal review assignment, the reviewer must confirm the validity of the comparable sale transaction

• Often the confirmation is made with public records that usually also are linked to property data

• Reviewing this data can be telling of property features and other characteristics of the comparable

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• Of course the scope of work in the appraisal review assignment dictates the level of this research. But, at a minimum, the reviewer should view the comparable photographs in the appraisal report to see if there is anything obvious that was not addressed in the sales comparison analysis

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Example

• Does the photograph of the comparable property show a large porch that is not mentioned in the sales comparison grid?

• In some assignments, the reviewer may inspect the comparable sale from the street, giving the reviewer the opportunity to make notes regarding features observed, etc.; or, actually make a direct comparison with the appraisal report being reviewed and the comparable property that is before him

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Example

• Obviously, one drawback to this, where the reviewer must use particular care, may be when there has been significant work or improvements performed since the date of the transaction

• Again, the reviewer’s diligence in verifying the comparable data may be different, depending upon the scope of work

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• Finally, an element of commentary often found to be lacking in the reporting is the reconciliation of the sales comparison approach

• This is one area where “canned” or boilerplate commentary is frequently found

continued

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Example

• Consider the story of an appraiser who was engaged to perform an appraisal review of every appraisal report performed in the prior three months for each of the four appraisers employed by a particular appraisal firm. While reviewing the reports of one of those appraisers, the reviewer noted that the sales comparison reconciliation in every report being reviewed stated: “The comparable sales reflect a reasonable range of value that supports the indication of value produced by the sales comparison approach.” In some reports, the value conclusion was at the high end of that range, while in others, the conclusion was at the midpoint or the low end of the adjusted range. There was no explanation of how the conclusion was made

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Reconciliation

• The Reconciliation section of the URAR immediately follows the reporting of the sales comparison approach. This section of the report not only restates the indicated value of the valuation approaches that were developed, but also provides for a statement regarding whether the appraisal was made “as-is,” or “subject to…”

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• If any of the ‘subject to’ checkboxes are selected, the reviewer should examine the description of what the “subject to” is for clarity and appropriateness

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Reconciliation

• In the commentary for the final reconciliation, the reviewer should affirm that the appraiser in the work being reviewed, if applicable:– Reconciled the reasonableness and reliability of

each applicable approach to value– Reconciled the reasonableness and validity of

the indicated values– Reconciled the reasonableness of available data– Selected and reported the approach or

approaches that were given the most weight

continued

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Reconciliation

• Commentary in this section should elaborate on the logic used and relevance of the data, as well as the approaches developed.

• The last line of this section indicates the effective date is the same as the date of inspection in this assignment

continued

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Reconciliation

• It may seem a rather odd placement for the Reconciliation section of the URAR form to appear prior to the reporting of the cost and income approaches

• That is likely due to Fannie Mae and other major lending entities, which have adopted use of the form, not requiring the development and reporting of the cost or income approaches, except in rare cases

continued

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Reconciliation

• For most appraisals, the value indication produced by sales comparison is the final value analysis prior to the reconciliation‒ This is often the case because the cost and income

approaches were not developed in the original assignment and there must be some citation of the reasoning that these methodologies were truly not applicable

‒ However, if the cost and/or income approaches are developed in the original assignment and deemed applicable by the appraiser, completion of this section would be put on hold until indications have been produced by those methods

continued

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Income Approach

• The Income Approach on the URAR form for single-family properties is reported using the gross rent multiplier (GRM) method and only when the approach is necessary for credible results• Fannie Mae and other entities do not accept

appraisals that rely singularly on the income approach as an indicator of market value

• This is an important point for the appraiser when considering the final reconciliation of value

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Cost Approach

• There are limited circumstances for which the cost approach is applicable in an appraisal assignment of a small residential income property − One of the common instances is when the

subject property is a new or proposed construction

• Fannie Mae and other entities do not require development or reporting of the cost approach for this form

continued

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Cost Approach

• Many clients request or require the cost approach be completed If this is the case, the appraiser should comply with the request

• The final reconciliation of value should include comments regarding the development and reporting of the cost approach, at the request of the client, along with the methodology’s applicability and relevance as an indicator of value

continued

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Cost Approach

• When the cost approach is developed and reported in the appraisal being reviewed, the reviewer must look at several reporting items specific to the form, including:‒ Support for the estimated site value (should not

be boilerplate)‒ Whether the estimated cost new is

“reproduction” or “replacement.‒ Source of cost data

continued

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Cost Approach

• When the cost approach is developed and reported in the appraisal being reviewed, the reviewer must look at several reporting items specific to the form, including:‒ Quality rating and effective date of cost data‒ Comments regarding the gross living

calculations and depreciation (should not be boilerplate)

continued

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Cost Approach

• The reviewer should also compare the effective age and the remaining economic life to observe whether the estimated depreciation makes sense

continued

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Examples

1. If the effective age is 25 years and the remaining economic life is 35 years, the estimated depreciation should be 41.7% (25 ÷ 60 [25 + 35]). If the appraiser has used 30% depreciation, an inconsistency exists

2. If the appraiser discussed some form of external obsolescence on Page 1 of the report, but then did not apply any external depreciation in the cost approach (This certainly leaves a question as to why)

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• The reviewer should look for any other inconsistencies in other areas of depreciation

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Estimated Remaining Economic Life

• If the appraisal being reviewed was performed for FHA or VA, the Estimated Remaining Economic Life field must be completed, regardless of whether or not the cost approach was developed

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Estimated Remaining Economic Life

• The reviewer should check for the inclusion of Estimated Remaining Economic Life in assignments

continued

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Estimated Site Value

• The estimated site value should be accompanied by commentary discussing how the site value was estimated, or in some assignments, a reference to the workfile

• Also included should be a statement that the scope of work, preprinted in the form, has been expanded to accommodate this request

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Required Exhibits

• There are several exhibits that are required by Fannie Mae (and most other major lending entities) to be attached to the URAR form

• The reviewer should carefully examine these

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Required Exhibits

• An exterior building sketch that indicates the dimensions

• If the floor plan is atypical or functionally obsolete, thus limiting the market appeal for the property in comparison to competitive properties in the neighborhood, a floor plan sketch is required

• Calculations demonstrating how the estimate for gross living area is derived

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Required Exhibits

• The subject and all comparables must be appropriately identified

• Acceptable photographs include clear, descriptive, original images from photographs or electronic images, copies of photographs from an MLS, or copies from the appraiser’s files

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Required Exhibits

• Any other pertinent information related to the property

• Any other data—as an attachment or addendum to the appraisal report form—that are necessary to provide an adequately supported opinion of market value

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Market Conditions Addendum

• The Market Conditions Addendum is required to accompany the URAR form for all appraisals used by Fannie Mae, Freddie Mac, FHA, and VA‒ Fannie Mae Form 1004MC and Freddie Mac

Form 71

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• While the reporting format may exceed the level common in many residential appraisal assignments, the analysis required to develop the appraiser’s opinions should not be entirely new

• Correctly analyzing most of these factors is embedded in the appraiser’s obligation in compliance with Standards Rule 1-3

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• Except for those occasions when the reviewer is only developing an opinion of the completeness of the form, market competency on the part of the reviewer is required in most assignments to adequately develop a review opinion that expresses the reviewer’s opinions regarding the analysis

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Guidelines

• The Market Conditions Addendum form is intended to provide the lender with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood

• The form provides the appraiser with a structured format to report the data and to more easily identify current market trends and conditions

• The appraiser’s conclusions are to be reported in the Neighborhood section of the appraisal report

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• Reviewers must be mindful of these potential limitations and variables when the scope of the appraisal review assignment includes the review of the Market Conditions Addendum

• The reviewer must be careful not to admonish the original appraiser who faced such limitations in the assignment as long as the reasoning of the appraiser is appropriately discussed

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Inventory Analysis Section

• The Inventory Analysis section assists the appraiser in analyzing important supply and demand factors in order to reach a conclusion regarding housing trends and market conditions ‒ The reviewer should affirm that the appraiser

included comparable data that reflects the total pool of comparable properties from which a buyer may select a property in order to analyze the sales activity and the local housing supply

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Absorption Rate

• One of the tools used to monitor these trends is the absorption rate – a point that should be closely examined by the reviewer

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Absorption Rate

• The absorption rate is the rate at which properties for sale have been or can be sold (marketed) within a given area

• To determine the absorption rate, the appraiser divides the total number of settled sales by the timeframe being analyzed. The months of housing supply is based on the total listings for the applicable period divided by the absorption rate

continued

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Example

• Step 1: Calculate the absorption rate. If there were 60 sales during a six-month period (e.g., “Prior 7 – 12 Months” column), the absorption rate is 10 sales per month (60 ÷ 6)

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Example

• Step 2: Calculate the months of housing supply. If there are 240 active listings, there is a 24-month supply of homes on the market (240 active sales ÷ 10 sales per month). This may support the appraiser’s conclusion that there is an over-supply of homes on the market. Anomalies in the data, such as seasonal markets, new construction, or other factors, must be addressed in the form

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Median Sale & List Price, DOM, List/Sale Ratio

• The reviewer must examine that the appraiser properly analyzed additional trends, including the changes in median prices and days on the market (DOM) for both sales and listings, as well as a change in list-to-sales price ratios

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Example

• If the median comparable sale prices are $300,000, $295,000, and $305,000 for their respective time periods, the overall trend for the prior 12 months is relatively “stable”

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Overall Trend Section

• The Overall Trend section is designed to reflect potential positive trends, neutral trends, or negative trends in inventory, median sale and list price, days on market, list-to-sale price ratio, and seller concessions

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Example

• An increase in the absorption rate is generally viewed as a positive trend, whereas a decrease in the absorption rate may be viewed as a negative trend. Furthermore, a decrease in the number of days on the market, either sales or listings, more than likely represents an overall positive trend

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Seller Concessions

• The Market Conditions Addendum provides a section for comments on the prevalence of seller concessions and the trend in seller concessions for the past 12 months

• The change in seller concessions within the market provides the lender with additional insight into current market conditions

• The appraiser should consider and report on seller-paid (or third party) costs

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Example

• These items include, but are not limited to, mortgage payments, points and fees, and in condominium or cooperative projects, items such as homeowners’ association fees and guaranteed rental programs

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• The reviewer must closely observe this section to examine if seller concessions are excessive, as this can often lead to inflated property values

• The analysis in this section of the Market Conditions Addendum should be contrasted, by the reviewer, with statements made in the URAR form regarding the commonality in the market for payment of such concessions

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Foreclosure Sales and Summary

• The presence and extent of foreclosure/REO sales are worthy of comment when analyzing market data and must be reported on the form

• The form also allows for the appraiser to summarize the data and provide other data analysis or additional information, such as analysis of pending sales, which over time can show a market trend

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• The reviewer should examine the appraiser’s commentary for accuracy, relevance, and logic

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Mortgage Industry Appraisal Review Forms

• The One-Unit Residential Appraisal Field Review Report ‒ Fannie Mae Form 2000/Freddie Mac Form 1032

• The Two- to Four -Unit Residential Appraisal Field Review Report ‒ Fannie Mae Form 2000A/Freddie Mac Form

1072

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One-Unit Residential Appraisal Field Report

• Consists of four pages

• Is also used for reviewing appraisals of one-unit condos, PUDs, cooperatives, and manufactured homes

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General Provisions

• Pages 2 and 3 of the One-Unit Residential Appraisal Field Review Report form contain the general provisions of the review assignment, including:– Scope of Work– Intended Use– Intended User– Guidance for Completing (the form)– Statement of Assumptions and Limiting Conditions– Review Appraiser’s Certification

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Scope of Work

• The Scope of Work section contains the basic elements of the scope of work‒ As discussed earlier with an appraisal, the

scope of work may need to be expanded

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Intended Use

• The intended use of this appraisal field review report is for the lender/client to evaluate the accuracy and adequacy of support of the appraisal report under review

(Bold added for emphasis)

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Intended User

• The intended user of this appraisal field review report is the lender/client

(Bold added for emphasis.)

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• Guidance for Completing the One-Unit Residential Appraisal Field Review Report

• A review appraiser should be especially cognizant of this section of the form, as there are significant assignment conditions contained in this section applicable to the appraisal review assignment

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Statement of Assumptions and Limiting Conditions

• The Statement of Assumptions and Limiting Conditions for the most part mirrors that found in other industry appraisal forms

• See Illustration

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Review Appraiser’s Certification

• The reviewer must supplement the certification with certain elements required by USPAP:‒ Whether the appraiser has, or has not, provided

any services as an appraiser, or in any other capacity, regarding the subject property within the prior three-year period immediately proceeding acceptance of the assignment

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Review Appraiser’s Certification

• The reviewer must supplement the certification with certain elements required by USPAP:‒ Specific name(s) of individuals not signing the

certification who provided significant professional appraisal review assistance in the assignment

‒ Any fees, commissions, or things of value that were paid by the reviewer in connection with procurement of the appraisal review assignment

continued

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Review Analysis and Reporting

• The first page of the form contains the general information regarding the assignment and the property that is the subject of the appraisal review assignment

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• After completing the information at the top, including the effective date of the original appraisal under review, the reviewer assesses the quality of the work being reviewed by filling out Section I on the first page of the review appraisal form

continued

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• Section I must be completed for all assignments and requires the reviewer to respond to questions

• See Illustration

• Reminder: USPAP requires disclosure that use of extraordinary assumptions may have affected the assignment results!

continued

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• Section II, Direction 3, requires the reviewer to provide a new opinion of value as of the effective date of the appraisal report under review using a sales comparison analysis grid more or less similar to the grid found in the URAR form

continued

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• In the Summary of Value Conclusion, following the grid, the reviewer is required to include detailed support for the opinion of value and reasons why the new comparable sales are better that the sales used in the appraisal report under review

continued

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Required Exhibits

• The exhibits required to be attached to the appraisal review form are similar to those required with most form exterior only appraisal reports, including but not limited to:– A street map– Clear descriptive photographs of subject

property– Clear descriptive photographs of comparables

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Things Can Get Ugly

• Fannie Mae, which is arguably the largest mortgage lending participant, acknowledges in their Selling Guide that, depending upon the results of a review:– “Fannie Mae may refer unacceptable appraisal

reports to state appraiser licensing or regulatory boards for investigation and action considered appropriate”

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Things Can Get Ugly

• The discussion in the Fannie Mae Selling Guide goes on to state that: – “In such cases, Fannie Mae provides the state

board with a copy of the appraisal field review report and the original appraisal report “

continued

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Things Can Get Ugly

• Fannie Mae’s objectives in referring appraisal reports to state appraiser licensing or regulatory boards are: ‒ to emphasize continuing efforts to maintain the

quality of appraisals‒ to protect Fannie Mae’s interest‒ to improve the quality of mortgages delivered to

Fannie Mae by identifying appraisers who have performed appraisals of a sufficiently poor quality as to impair the security interests

continued

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Things Can Get Ugly

• Fannie Mae’s objectives in referring appraisal reports to state appraiser licensing or regulatory boards are: ‒ to help the industry enhance the quality of

appraisals by identifying and referring individual appraisers who appear to be unethical and/or incompetent to the state appraiser licensing or regulatory boards for review

‒ to help enforce professional standards

continued

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Things Can Get Ugly

• Since review reports, like appraisal reports, may be read and scrutinized by others, appraisers and reviewers should exercise extreme care in completing them, as these reports may be provided to others who may form some career changing conclusions regarding the report‒ For example, Fannie Mae and other similar

entities reserve the right to reject an appraiser’s (or reviewer’s) services in the future

continued

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Things Can Get Ugly

• Reviewers (and appraisers) are placed in a position of great trust by the client

• Poor reports may prevent another assignment from a client, or may end up in the hands of someone who may reject future opportunities

continued

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Things Can Get Ugly

• It is always good to review every appraisal report and appraisal review report one last time before submitting it to the client in order to consider whether the report contains the appropriate content and level of detail; and, as much as possible, is free of flaws

continued

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Things Can Get Ugly

• It is undoubtedly embarrassing for the reviewer to be guilty of committing the same flaws in a review assignment that are being called out in the appraiser’s work by the reviewer

continued

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Chapter 4 Quiz

1. The Uniform Residential Appraisal Report form

a. is considered an Appraisal Report.

b. is limited to the use for loans through Fannie Mae.

c. may be used for condominiums and manufactured homes.

d. was developed by the Appraisal Foundation to comply with USPAP.

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Chapter 4 Quiz

2. Which topic could cause the appraiser’s certification within the URAR to be expanded requiring additional certification statements to be in compliance with USPAP?

a. change in scope of work from that originally planned

b. lack of geographic competency

c. prior services performed by the appraiser in past three years

d. specific techniques for adjusting comparable sales

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Chapter 4 Quiz

3. If a dwelling has two full baths and two half baths, how is the bathroom count reported in the URAR form?

a. 2.2

b. 2.25

c. 2.50

d. 2.50 x 2

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Chapter 4 Quiz

4. To satisfy UAD requirements, an appraiser must indicate if there has been any material work done to the kitchen or baths within ____ years prior to the effective date of the appraisal.a. 5

b. 10

c. 15

d. 20

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Chapter 4 Quiz

5. Which is NOT a specific required photo exhibit that always must accompany the URAR form?

a. bathrooms

b. electrical service

c. kitchen

d. physical deterioration

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Chapter 4 Quiz

6. For the Market Conditions Addendum form, if the absorption rate is 12 sales per month and there is currently an inventory of 60 active listings, how many months supply is present in the market?a. 3

b. 5

c. 7

d. 9

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Chapter 4 Quiz

7. When discussing financing terms and seller paid concessions, which should also be addresseda. affect on the transaction

b. compliance with fair lending laws

c. financial limitations of the buyer

d. relationship of the parties

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Chapter 4 Quiz

8. As the URAR reporting form is initially presented, without additional commentary, which reporting element may fall short of the specific USPAP minimum reporting requirement to summarize the support and rationale for the appraiser’s conclusion of that element?

a. assignment conditions

b. effective date

c. highest and best use opinion

d. intended use

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Chapter 4 Quiz

9. In compliance with UAD requirements, property condition must be rated as ____________in the appraisal report.

a. A through F

b. acceptable or unacceptable

c. C1 through C6

d. either average or good

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Chapter 4 Quiz

10. As a best practice, when the review is examining photographs of the rear scene of a subject property that displays an outbuilding, the reviewer should always

a. assume the building is personal property and not given any contributory value.

b. expect to find a sketch of the building in the addenda.

c. look at the report to see if an outbuilding was reported and addressed.

d. notify the building authority of a potential non-compliant structure.

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Chapter 4 Quiz

11. The One-Unit Field Review Report can also be used to review an appraisal of aa. building with two apartment units and one

common address.

b. condominium or manufactured home.

c. land parcel for a one-unit building.

d. single-user non-residential structure.

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Chapter 4 Quiz

12. According to the Guidance for Completing the One-Unit Appraisal Field Review Report, the reviewer must assume that the ________________ of the property is accurate in the report being reviewed, unless there is evidence to the contrary.

a. condition

b. highest and best use

c. remaining economic life

d. zoning

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Chapter 4 Quiz

13. When a reviewer provides new comparable sales in developing his own value opinion for the property being reviewed that was NOT available to the original appraiser on the effective date, that information should be reported as being

a. non-relevant.

b. NOT analyzed.

c. proprietary.

d. supplemental.

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Chapter 4 Quiz

14. While USPAP provides flexibility when the reviewer has developed his own value opinion in an appraisal review, the Guidance for Completing the One-Unit Appraisal Field Review Report requires the effective date of the value opinion by the reviewer to be ___________ the effective date found in the work being reviewed.

a. after

b. prior to

c. the same as

d. the same or different than

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Chapter 4 Quiz

15. Which is NOT a required exhibit for the One-Unit Appraisal Field Review Report?

a. kitchen and bath photos of the subject property

b. photo of rear of the subject property

c. photos of the comparable sales

d. street map showing the subject and the comparables

4 1 appraisal and appraisal review forms chapter 4

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