Blog #60: “We Don’t Need No Stinking Bifurcates…Do We?”

 QUESTION:  I’ve heard so much lately about hybrid appraisals.  I really don’t understand them.  I guess, though, my biggest question about them is whether they are USPAP compliant.  Some heavy hitters in appraisal have said they are not USPAP compliant, they pollute the industry, they will degrade us appraisers to the point we are no longer necessary.  Some equally heavy hitters have said none of that is true, and that appraisers should be doing them since clients want, to coin a phrase, a painter to paint their house (cheap & fast), not Michelangelo to create an immortal work of art in it (expensive & slow).  Since hybrid appraisals do not require me to inspect the property, how can a hybrid appraisal report be USPAP compliant?  Do I have to list the inspector in the Certification since inspecting the property is significant appraisal assistance?  How are state boards going to look at hybrid appraisals?  I do not know what to think.  Help!

ANSWER:  You’re right.  Hybrid appraisals have created a lot of confusion in the real estate appraisal world.  With the input from some experts, I can answer your questions.  However, remember, these answers are from the standpoint solely of USPAP.  It does not apply to any of the GSEs whose standards are sometimes superior to USPAP’s. 

First of all, the short answer.  USPAP has no requirement that you, the appraiser, inspect the property (the GSEs typically require that, however).  USPAP merely requires that you disclose if you did not inspect the subject[1].  You don’t even need to explain why you didn’t inspect it (although if you wanted to explain why, that would be fine, too).  Therefore, from that standpoint, to inspect or not to inspect is your choice.  There is no property inspection Standard or requirement in USPAP (other than be competent to do so).

Now that the short answer is over, I’ll give you the long answer (although it is to all of your questions, not just this one).

By USPAP definition an appraiser is “…independent, impartial, and objective…”  (ibid).  Only you can decide if, to be independent, impartial, and objective, you need to inspect the property.  That is part of your scope of work.  After proper examination of what it is (or they are) you need to do (or not do) to arrive at credible assignment results, if you think you do not need to inspect the property, then don’t inspect it – just disclose properly that you did not.  If you are professionally uncomfortable by not inspecting it, then inspect it.  If the client does not want you to inspect it, and will not come off that demand, and you just are not professionally comfortable without an inspection, then decline the assignment.

Contrary to what some of these “heavy hitters” have claimed (some of them loudly) it is not unethical not to inspect the subject via a personal, boots-in-the-living-room inspection.  In the Conduct, Management, and Confidentiality sections of the ETHICS RULE, you will find nothing relative to a property inspection.  Therefore, not to inspect the subject is totally ethical under USPAP (assuming you disclose that properly). 

Further, not to inspect the property is a time-honored appraisal protocol, as in a drive-by or desk-top appraisal.  Or, you have your associates and/or trainees do that part of the assignment.  Then, you review and then sign the Certification in the appraisal report, thus making it your appraisal and report (in which you disclose you did not inspect the property and another appraiser provided significant appraisal assistance [see FAQ #255]).  Thus, the senior appraiser not inspecting the property is neither new nor a violation of ethics.  This is the state of the industry, and this protocol has reflected what has been the state-of-the-industry for the past 50 years.

Some of these same appraisers have claimed that not to inspect the subject with boots-in-the-living-room is fraudulent.  The legal elements of fraud are (1) a false statement of a material fact; (2) knowledge on the part of the [appraiser] that the statement(s) is untrue; (3) intent on the part of the [appraiser] to deceive the alleged victim; (4) justifiable reliance by the alleged victim on the statement(s); and, (5) injury to the alleged victim as a result.  Therefore, unless the appraiser’s actions meet these five (5) criteria, by definition, there can be no fraud.   

Others claim that not to inspect the subject via a boots-in-the-living-room inspection is misrepresentation.  The three (3) legal elements of misrepresentation are (1) a party must make a material statement of fact; (2) that material representation of fact must be false and directly affect the contract agreement and [the party’s] agreement to enter into it; and, (3) that material representation, when made, was false.  From these components, it is hard to deduce how an appraiser, who merely does not make a boots-in-the-living-room inspection, so long as s/he properly discloses not inspecting the property, has misrepresented anything to anybody for any reason.    

Others of these appraisers have stated these hybrid or bifurcated appraisal reports, as they come up on the appraiser’s monitor, are not USPAP compliant.  This is correct; they are not.  Nevertheless, no appraisal report form, in and of itself, even our old friend the 1004 form, is USPAP compliant.  USPAP does not govern appraisal-reporting forms, nor the vendors of their software.  USPAP governs appraisers.  To make a form comply with USPAP’s Standard 2 (the reporting standard) is the appraiser’s responsibility, not that of the form.  Therefore, this claim of the form’s non-compliance with USPAP, while true, is irrelevant.

Your question relative to listing in the Certification any contractors who inspect the property has a two-word answer:  “It depends”.  The first dependence is the answer to the question, “Is the contractor an appraiser?”  If the contractor is an appraiser, the next question is, “Did the appraiser/contractor provide significant appraisal assistance?”  Even if the inspector was an appraiser properly credentialed, to provide you merely with factual data (age, size, physical condition [e.g., there’s a broken window in the bathroom]), number of bedrooms, photos, and so forth) is not significant appraisal assistance.  It is not, since, by definition, merely to provide such factual data is not to appraise.  The definition of an appraisal is, “…the act or process of developing an opinion of value” (ibid, l. 59).  Since providing factual data is not that act, such provision, by definition, is not appraising, thus there is no need to include those who provide factual data as part of the Certification page (see AO-31, ll. 59-61; FAQs #244, #255, #257, and #258). 

If, on the other hand, the appraiser-contractor tells you the subject has four bedrooms, but only one-half bath and therefore, the house has a functional obsolescence factor, if you agree with that conclusion, then that is an opinion, the result of market-analysis, on which you will base your value opinion.  That is significant appraisal assistance because it helped you form your value conclusion, thus you must report it in the Certification (as well as indicate somewhere else in the report what it was the appraiser-contractor did that significantly assisted you in your appraisal [i.e., the formation of your value opinion]). 

If, on the other hand, the contractor(s) is not an appraiser, then USPAP has no requirements you mention the contractor(s) anywhere in the appraisal report (supra) for any reason.  This is because USPAP applies solely to appraisers, but not their non-appraiser contractors.  

Those appraisers who choose to use contractors (appraisal-credentialed or not) must be aware that the Comment to SR1-2(e)(i-iv) makes it clear that

“[t]he information used by an appraiser to identify the [subject] property characteristics must be from sources the appraiser reasonable believes to be reliable…[a]n appraiser may use any combination of a property and documents, such as a physical legal description, address, map reference, copy of a survey or map, property sketch, or photographs, to identify the relevant characteristics of the subject property” (supra, ll. 472 to 485). 

Therefore, if an appraiser chooses not to inspect a property, but to use other sources of data to discover the property’s (physical) characteristics (which is typically the reason for the boots-in-the-living-room inspection), the appraiser has that right under USPAP.  However, that right also carries with it the responsibility the appraiser determine that source(s) of data is reliable.  To fail to take this step is misrepresentation in that, unless the appraiser specifically discloses the information source(s) is not reliable, the client has the reasonable expectation to conclude that it is, thus to depend on it in using the appraisal to answer its question(s). 

You also asked how state boards are going to look at hybrid appraisals.  Please understand this is solely my opinion (since I have no authoritative data to back it up).  Under USPAP, an appraisal is an appraisal is an appraisal.  If there is a Certification in that appraisal report (see, e.g., SR2-3), and if the appraiser signs that Certification as an appraiser (which is what signing the Certification actually accomplishes), then it is an appraisal.  The client can call it a hybrid appraisal, a bifurcated appraisal, or a chicken-salad sandwich; but, if there is a certification in it, that report is an appraisal, thus falls under the jurisdiction of USPAP and your state’s appraisal statute. 

Since it is an appraisal, no matter the nomenclature the client wants to apply, then the appraiser must make sure s/he forms the value opinion credibly, which is in accord with Standard 1.  Then, after forming the value credibly, the appraiser must report it to the client in accord with Standard 2, which is non-misleadingly.  If the client does not want an appraisal & report of this breadth and depth, or does not think compliance to this breadth and depth is necessary, then the appraiser must decline the assignment or withdraw from it.  This is another choice the appraiser has, and is part of the appraiser’s scope of work.

That the appraiser has these choices is clear from the SCOPE of WORK RULE: 

“An appraiser must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use.  Comment: if relevant information is not available because of assignment conditions that limit research opportunities (such as conditions that place limitations on inspection or information gathering), an appraiser must withdraw from the assignment unless the appraiser can…modify the assignment conditions to expand the scope of work top include gathering the information; or…use an extraordinary assumption about such information, if credible assignment can still be developed.  An appraiser must not allow the intended use of an assignment or a client’s objectives to cause the assignment results to be biased[2]” (ibid, ll. 388 to 397; emphasis added).

Therefore, it is likely (but not a foregone conclusion) that a state board, when mulling a complaint against an appraiser, is going to look at a hybrid or bifurcated appraisal and report as it would look at any appraisal and report.  In other words, did the appraiser form the value opinion credibly and did the appraiser communicate that conclusion in a manner that would not mislead?

 As to your question about hybrid and bifurcated appraisals polluting the industry and degrading appraisers, those are tough questions that likely have no universal answer.  Our friends in the lending community cannot pollute our industry.  Rather, they can merely ask us to do it ourselves.  Have we?  Assuming we choose to produce hybrid/bifurcated appraisals in accord with USPAP Standards 1 and 2, then no we have not.  Do appraisers producing bifurcated/hybrid appraisals degrade all appraisers?  Assuming we choose to produce hybrid/bifurcated appraisals in accord with USPAP Standards 1 and 2, then no it does not.  If there are appraisers who choose to violate those standares, then those are the appraisers polluting the industy.

In line with this, many appraisers report they have received solicitations from AMCs and/or other contractors to “…join the team!…” and get in on the hybrid/bifurcated appraisal bandwagon.  Those promoting this step promise our fellows fees of $100 per report (or some other non-negotiated fee) and the ability to complete the appraisal in one hour or less (or some variation on this timetable) thus implying a fee of $100 per hour.  As enticing as this approach sounds to our appraiser-ears, there is nothing ethically or morally wrong with the lender or AMC offering it.  These folks have the right (and indeed, the responsibility to their investors and/or shareholders) to purchase their goods-to-be-sold at the lowest possible price.

We, as those who sell to these folks those goods-to-be-sold, have the right and responsibility to sell those goods to them as dearly as possible.  Part of that responsibility is to listen to the offer, but then analyze it critically to determine if it is one we want to accept, reject, or open up to negotiation.  Whether we accept, reject, or negotiate is entirely up to us, as is how critically we analyze the proposal. Remember, that we, as professionals, are supposed to know/understand our worth, and then charge accordingly.

$100 per hour is certainly attractive.  Nevertheless, how reasonable/reliable is that promise?  To bill $100 per hour is to bill $200,000 per year (assuming a 2,000-hour year).  Yet this makes some assumptions that, prima fasciae, are questionable:

• Assuming 2-weeks of vacation per year (not a lot), some mental-health days, some car-problem days, some kid-problem days, some horrible-weather days, some CE-days, and a few bad-hair days, etc how reasonable is a 2,000-hour year for an appraiser? Some likely put in even more!
• That the real estate business is cyclical is just a given. Yet, the above assumption contemplates a steady amount of work each year.  Is that a reasonable and historically-based assumption?
• $100 per report and $200,000 per year means you’d have to send out 2,000 reports per year. Assuming you worked five (5) days per week, fifty (50) weeks per year, that’s 250-work days per year, which is eight (8) reports per day.  Assuming you occasionally want to eat lunch, need to put out some fires every so often, handle irate homeowners every so often, take silly calls from lenders & their AMCs every so often, have a life, and so forth, how reasonable is a quota of eight (8) USPAP-compliant appraisal reports per day (even on a bifurcated basis)? 

So, when we put some critical thought into the proposition, the potential blandishments the team-leader waves in front of us are not quite so warm-and-fuzzy as that leader would tempt us to believe. 

Then, an issue you did not raise, there is the issue of liability.  Right now, for a fee of, say, $450, you have full liability for every appraisal and report that goes out your door.  Since a bifurcated/hybrid appraisal is still an appraisal (which must comply with Standard 1), and since an appraisal report (no matter how “short” the AMC/lender whispers in your ear such a report is), it still must meet the requirements of Standard 2. 

Therefore, if an appraisal and report (their nomenclature notwithstanding) must still meet the requirements of Standards 1 and 2, and you’re getting $450 for a report now, why would you possibly want to carry out the same assignment, while maintaining the same responsibilities/liability, for a fee of $100, a 75% discount?  Only you can decide if that is a step you want to take.

And, finally, to your comment about fast and cheap.  Yes, that’s what lenders want, therefore that’s what AMCs want, too.  While technology, such as form-filling software, has been a real time-saver for appraisers, lenders have taken an Amazon^® point-of-view of appraisals:  they want to order it now, and then get it tomorrow.  This works well for shoes and patio furniture; it is an impossibility for real estate appraisals.

It is an impossibility since appraisals and their reports are not canned.  Appraisers cannot manufacture them en masse, then store them on a shelf.  That is because an appraisal, while it has technical aspects the appraiser repeats from report to report, it is primarily a mental exercise requiring critical thinking, analysis, and synthesis, but are not entirely physical or technical. 

While we appraisers have likely been remiss in timely adopting tools such as regression analysis, data science, and so forth, we have to remember those tools are merely a means to an end; they are not the end itself.  They also assume the appraiser has a large quantity of homogeneous data to analyze as part of forming a value opinion.  There are many examples of when this quanta of data are simply not available.  Therefore, on any given assignment, such technology may not assist the appraiser in any meaningful, reliable, or credible way.  Yet the appraiser must understand all of the tools, as well as how to use them, before they can decide whether a particular tool is or is not useful.

Bottom line, then.  So long as USPAP tells us hybrid/bifurcated appraisals are, indeed, appraisals, we must develop and report them to USPAP’s standards, the client’s desires notwithstanding.  We are as liable for the $100 appraisal and report as we are for the $10,000 appraisal and report.  I do not know what else to tell you.   

Questions?  Contact me at tim@theappraisersadvocate.com.  Thanks!

 

 

[1] This also means making sure there is no other language in the report mentioning your inspection of the property, the subject’s neighborhood, and so forth.

[2] USPAP defines bias as, “…a preference or inclination that precludes an appraiser’s impartiality, independence, or objectivity in an assignment” (l. 97)