The Art of Deciphering Appraisal Reports
There are two types of real estate appraisal reports which I review; FNMA or lender reports and market value or non-lender reports. For this article I will focus on the 7 most common issues and errors with market value appraisals. All errors are violation of the requirements set forth in an ever-changing set of quality control standards called the Uniform Standards of Professional Appraisal Practice (USPAP) to which all appraisers are bound.
The 7 Most Common Issues and Errors with Market Value Real Estate Appraisals
- Using the wrong appraisal form
- Missing highest and best use analysis
- Excluding an approach to value with no explanation
- No reconciliation between various value approaches
- Lacking time adjustments
- Incorrect date of value
- Factual errors
Using the wrong appraisal form
Sometimes I see forms that were designed by FNMA for use with federally insured loans being used for divorce, probate, pre-listing, tax or other non-lending appraisals. So how does this cause a problem? These lending forms have pre-printed scopes of work, certifications and intended uses and intended users that are not appropriate for non-lender assignments.
Missing highest and best use analysis
Highest and best use is always that use which would produce the highest value for a property, regardless of its actual current use. It is necessary for the appraiser to develop an opinion of the properties highest and best use and then to report a summary of the analysis within the appraisal report.
No reconciliation between various value approaches
There are three approaches to value; the cost approach, the income approach and the sales comparison approach. When an appraiser uses more than one approach usually they won’t lead to exactly the same value. So how does an appraiser arrive at one final opinion of value? the process is called the reconciliation between value approaches.
Excluding an approach to value with no explanation
An appraiser does not have to develop all three of the approaches to value as long as the resulting conclusion is not compromised and can be relied upon for its intended use. However, the appraiser is required to explain why any of the three approaches was excluded.
Lacking time adjustments
When the real estate market has increased (or decreased) since the time a comparable was sold a date of sale adjustment will help to bring the old comp up to date with the current market. The lack of an adjustment in this case is likely to affect the final valuation.
Incorrect date of value
Each appraisal has an effective date of value. It can be current, retroactive (past) or prospective (future). I primarily see this error with tax abatement appraisals. When homes are assessed for 2014 taxes the values were based on the fair market value of the home as of January 1st 2013. In that case the appraiser must complete a retrospective appraisal using only sales that closed before January 1st 2013, the effective date of value.
Most appraisals tend to rely on the sales comparison approach to value. This means that fact checking comparable sales is perhaps the most important parts of the appraisal process. The MLS data is entered by individual brokers and not policed by MLS or anybody else. As a result it is full of errors. As the saying goes “garbage in, garbage out” meaning that the use of inaccurate data will lead an appraiser to arrive at an inaccurate valuation.
If you have any questions or think your firm would benefit from a presentation on any appraisal issues please feel free to contact me. If you found this article helpful or informative, I would be grateful if you would like and share it with others.