Blog #103: “How to Save Mountains of Work and Oceans of Time”

Most appraisers are familiar with USPAP.  It is the governing document, the standard, as it were, to which state boards hold appraisers (well, they hold us to USPAP and state appraisal statutes).  When it comes to deciding whether an appraiser has somehow messed up, then state boards look closely at USPAP’s Standard 1 to determine if the appraiser developed her/his opinion credibly.  Then, those boards look at USPAP’s Standard 2 to determine if the appraiser communicated that opinion(s) in a non-misleading manner.  It needs to be clear, though, that the state will likely not stop its analyses of the appraisal and the report at USPAP.  So, you rightly ask, to what else will the state refer when it comes to judging and appraisal and report?

If the appraisal is going to Fannie Mae (and lots of appraisal reports end up on her desk), then the state may also investigate to determine if the appraiser complied with her guidelines.  Why will the state take this step?  Simple.  When an appraiser accepts a valuation assignment, if that assignment is going to Fannie Mae (which is clear up-front), then that appraiser also agrees contractually to meet her appraisal requirements, as well as to make those requirements an assignment condition(s).  It is that contractual obligation that makes adherence with the requirements in her Selling Guide a condition of the appraisal.  Once the appraiser agrees to abide by them elevates the failure to do so into misrepresentation[1].  To take that step is misrepresentation because (a) the appraiser agreed to abide by the requirements Fannie Mae places on appraisers when they accept the valuation assignment, but then (b) despite this obligation, the appraiser chose to ignore them anyway.

So, no, state boards do not enforce the requirements for appraisers in the Selling Guide (the lender[2] has that responsibility).  Nevertheless, those boards take a dim view of appraisers who obligate themselves contractually to comply with Fannie Mae requirements yet, after-the-fact, chose to abrogate that obligation unilaterally.  Therefore, the wise appraiser, who accepts an assignment going to Fannie Mae, chooses to make compliance with the requirements of the Selling Guide a part of her/his scope of work.

OK, we’ve set the stage, thus now it is time for the play to begin!   Fannie Mae has been kind enough to divide the 1004 form into various components.  All are important to appraisers, but this blog focuses on the Sales Comparison component of the form.  This is not to denigrate the other components.  It is merely to relegate them to another blog. 

Here’s a quote from the Selling Guide, section B4-1.3-07, from the Overview: “The sales comparison approach to value is an analysis of comparable sales, contract sales, and listings of properties that are the most comparable to the subject property” (ibid; emphasis added). Therefore, to include any data other than those comparable to the subject is to fail to abide by the guidelines (as well as do a lot of unnecessary work for which appraisers do not get paid).

Then, in the next paragraph, the Selling Guide shares a secret with the appraiser to make his/her professional life a lot easier: “The appraiser’s analysis of a property must take into consideration all factors that have an effect on value.  The appraiser must analyze all closed sales, contract sales, and offerings or listings of properties that are the most comparable to the subject property in order to identify any significant differences or elements of comparison that could affect his or her opinion of value for the subject property as of the effective date of the appraisal report[3]” (ibid; emphasis added).   

This secret makes the appraiser’s professional life easier since it answers the age-old appraisal question, “How much data must I analyze?”.  The answer is simple: all of them.  That task may sound gargantuan in its scope, but it really is not.  It is not gargantuan because both Fannie Mae and USPAP call for the appraiser to analyze only the sales data, etc. that are comparable to the subject.  Thus, there may have been 100 sales in a neighborhood in the last 12 months (yeah, right!), but if only 10 of these were comparable to the subject, then the appraiser need analyze only those 10. 

Note something subtle here, that is also a help to the appraiser.  On the top of what is typically the second page of the report are two lines of information the appraiser must fill out.  The second one asks the appraiser to fill in three blanks with relevant data.  “There are _______ comparable sales in the subject neighborhood within the past twelve months ranging in sales price from $_______ to $_______” (1004 form [other citations by reference]; emphasis added).  Many appraisers show in that first blank the total number of sales there were in the neighborhood in the last 12 months (as taken from MLS).  But there is a problem with this.

The problem with listing every sale in the neighborhood, not merely the comparable sales, is that, given the language of both Fannie Mae and USPAP, to say there were 100 comparable sales in the neighborhood in the last 12 months (when only 10 of them were really comparable) is to imply the appraiser has analyzed every one of those 100 sales (since, per the appraiser, they are comparable and both Fannie Mae and USPAP tell us to analyze all of the comparable sales).   Further, via the same logic, the state could therefore ask to see all 100 of those analyses (which should be available in the workfile since the appraiser has said, in effect, s/he engaged in those analyses. Per the Record Keeping Rule, those analyses should be in the workfile). 

Then, to imply those analyses are in the workfile yet, in reality they are not, (because the appraiser really did not engage in them) is to raise the specter of misrepresentation. This is something the appraiser pro-actively wants to avoid relative to the state appraisal board (or a reviewer, for that matter).   

Therefore, in that first blank in the above sentence, the appraiser should show only the number of comparable sales there were in the subject’s delineated neighborhood in the past 12 months.  Then, in the second and third blanks, the appraiser shows the low to high price range of those comparable sales. 

It is this issue of internal inconsistency on which hang many complaints from appraisal consumers.  Too, it is the hook on which hang many charges by state boards. Yet the presence of internal consistency is so easy to overcome.  In this instance, it is easy to overcome by reading the pre-printed language on the form.  Already on the form (at the top of p. 2) are the two words comparable sales. Therefore, the appraiser enters here solely the data on the neighborhood’s comparable sales.   Then, congruent with this instruction, the appraiser chronicles in the workfile the analyses of those comparable sales. 

If there is a take-away from this blog, it is that familiarity with both USPAP and the Fannie Mae guidelines as the Selling Guide sets them forth (at least when the report is going to Fannie Mae) helps the appraiser.  This help comes in the form of keeping appraisers abreast of what is not necessary to arrive at credible assignment results.  It is not necessary, at the top of page two, to list every sale in the neighborhood in the last twelve months.  Indeed, it is necessary to list merely those sales that are comparable to the subject. To list every sale as a comparable implies the appraiser has analyzed all of them to determine their comparability.  That implies all of these analyses are in the workfile.  That saves you a mountain of unnecessary work and an ocean of unnecessary time!  Thank you, Fannie Mae!  So, limit the number of comparable sales to those sales that are really comparable, but not every sale that took place.    

Sometimes, an appraisal and report can have just too many moving parts.  One appraiser cannot keep track of all of them at times, yet has that onerous responsibility.  When you need to consult with someone who can help you overcome that burden, feel free to reach out to me at tim@theappraisersadvocate.com.  It will be an honor to work with you!  

---

[1] Note the 2020-2021 USPAP has a definition of misrepresentation.  Note as well the appraiser’s intentions are not a mitigating circumstance.

[2] Some appraisers insist the Selling Guide is for lenders only, thus its requirements do not apply to appraisers.  In the narrowest sense, this is true. However, the Selling Guide makes the lender responsible to Fannie Mae to make sure the appraisal and report meet her guidelines for that part of the mortgage lending process.  If the appraisal, appraisal report, or any of the latter’s components, does not meet them, then Fannie Mae’s only recourse is against the lender.  Since the barnyard ground cover flows downhill, that means this odoriferous mess ends up on the appraiser’s plate if there are issues with the appraisal and/or report.  Therefore, to avoid such an excremental repast, sage is the appraiser who recognizes the pro-active need to comply with the FNMA requirements an appraisal and report must meet.  Therefore, an appraiser’s scope of work should include such compliance.

[3] Ignore the fact that, from a standpoint of its architecture, this sentence not only sucks (it’s way too long), but is wrong, too.  We do not analyze all of that stuff as of the effective date of the appraisal report; we analyze all of it as of the effective date of the appraisal.  But that’s not the point.  The point is Fannie Mae’s use of the word all.  We have to analyze “…all closed sales…that are the most comparable to the subject…”, not merely the most convenient three.  This mirrors almost exactly USPAP’s SR1-4 which makes it clear the “…appraiser must collect, verify, and analyze all information necessary for credible assignment results” (2020-2021 USPAP; emphasis added).