I’m not usually the type of person to read the last chapter of a novel first. I usually prefer the suspense of allowing the story to play out on the pages as the author intended. That doesn’t apply at all to the story of the new URAR. So, when the initial publication of the Uniform Appraisal Dataset (UAD) specifications for the URAR were published on March 29th, I went straight to the last chapter (in this case Appendix C-1, Appendix D-1, and Appendix F-1). Of course, in this case the last chapter isn’t quite complete, but it is close enough that the major plot points are pretty clear.
To Be Or Not To Be (a form), That Is The Question
The first thing to notice is that the ‘form’ isn’t really a form anymore. It is more of a complex decision tree or flow chart, where ‘yes/no’ questions trigger new sections and required data and supplements. For instance, answering ‘yes’ to a question about noted deficiencies will create a new section where details are needed regarding the deficiency which include further questions about whether or not repair is required and if so, the estimated costs of those repairs and section to provide a photo of the deficiency. All of that is integrated into the URAR itself. It is through the use of this decision tree model that the GSEs are able to use the same ‘form’ for almost any residential property type conceivable.
The War of the (Words)
I also noticed that this format appears to be designed with underwriters and reviewers in mind. It is clear that every effort was made to eliminate narrative in favor of discrete fields of data. As an active field appraiser, I am divided on this. On one hand, I applaud the effort to create a format that doesn’t result in a reviewer searching the document for a keyword or phrase and then asking for a revision when they don’t find it worded how they anticipated it would be. After all, the addenda are there for a reason, to be read and understood, not to be mined for bits of information (bits which are intended to be taken in the context of an overall narrative). On the other hand, I’ve heard for years that reviewers want the appraiser to ‘tell the story’ and to ‘walk the reader through to the conclusion’. This format seems to be a step in the opposite direction. It remains to be seen if underwriters and reviewers will be satisfied with limited information in discrete fields or if there will be requests to ‘tell the story’ elsewhere, thereby creating a scenario where the appraiser is telling the story twice: once in the form of ‘mineable’ data and another in a narrative for a human reviewer.
Of (computer) Mice and Men
Another note of the design is that it seems apparent that the developers envisioned many of the fields being filled out in real-time during the inspection on an iPad or similar device. While many appraisers already employ mobile technology, others will likely need to get comfortable with that technology sooner rather than later. The same goes for measurement technology. It will be necessary to report ceiling height, which is easy with a laser, but almost impossible if you are still using a tape or wheel.
The Never-ending Story
It is also apparent that the report will be far longer than its predecessor. Appendix D-1 contains a sample URAR of a simple single family residence with no site value, cost approach, or income approach, with only 3 sales and very limited commentary and no additional addenda (with photos, maps, and graphs integrated into the URAR). The report was 21 pages, and would still be at least double the length of the current URAR without the integrated photos, map, and graphs. That in and of itself isn’t necessarily a problem. After all, my typical reports are more than 40 pages long. It’s not the length of the report which is of ultimate importance, it is the time necessary to develop the appraisal that is key. My sense so far is that there will be some additional time necessary (beyond the expected additional time necessary to become proficient with the new format and associated technology).
Although we could compare and contrast all day long on the differences detailed in the 341-page Appendix F-1 alone, let me summarize a few quick elements:
- The site value can be a stand-alone section or as a part of the cost approach. In either case you must commit to a primary method of developing the opinion of site value. There is built-in disincentive to report the sales comparison as your primary method, as doing so triggers a land sale grid for development of that approach. For those of us that have developed spreadsheets to speed up analysis of land sales, an extra step will be required to translate that information into the URAR required format.
- The highest and best use analysis is taken a little more seriously within the bounds of the URAR, which is a definite improvement. (I’m sure state boards will applaud this move, since the lack of a highest and best use analysis is a common deficiency.)
- Certification 18 says that we have taken into consideration the factors that have an impact on value with respect to the subject neighborhood…”, although there is no longer a neighborhood section. There is now a section more seriously devoted to market analysis. The market section has a defined market boundary, which is in a general sense more useful than the neighborhood boundary, but in another sense is quite vague. The market boundary is going to be much less specific than the neighborhood boundary. Every buyer will view what they consider a competing market differently. For some buyers, this might include an entire school district. For others, it might include an area proximate to their employment. Anyone who has ever shown homes to a buyer can tell you that buyers often have a very wide area that they would consider. It’s not uncommon for homes in several different cities to directly compete against each other for a particular buyer. With that said, there is a caveat for that entire section that it is still ‘under review’.
- The income approach is now very extensive, with rental comparables integrated within this section as well as comparables from which the GRM was extracted. It should be noted that the rental comparables are now quasi-qualitative with only one adjustment for the overall differences between the subject and comparables. It should also be noted that there is not really a significant analysis of the GRM extraction. There is the ability to estimate the rental rates for the GRM comparables, so it would appear that a pro forma GRM extraction is possible.
- The improvements section is much expanded. If you don’t regularly measure porch and patio areas now, that will be something to get used to. Along with other measurements including the height of the front door above grade and the ceiling height which I mentioned before. If you didn’t like quality and condition ratings before, you will be disappointed to find that you will be providing separate ratings for the exterior and interior as well as ratings for specific elements of both. The URAR will also require ratings to be assigned to specific elements of the comparables in order to support your overall quality and condition ratings for the comparables.
- Alas, the certification which requires the appraiser to personally inspect the exterior of every comparable is absent, as expected. Although many of the differences that I’ve pointed out will undoubtedly increase the time to produce a URAR, this one change will save appraisers untold hours of unnecessarily photographing comparables.
The Importance of Being Earnest
Although my commentary has skewed toward the critical, that was not my intention when I set out to write this article. The combination of the URAR and the UAD has been a Frankenstein-esque marriage from the beginning, and I’m glad that the GSEs have put some real thought into this redesign. Rather than putting lipstick on the pig that is the existing URAR, they have deconstructed the entire process. It is clear that they prioritized the information that they wanted to see (and extract for future use), and gave less thought to the appraiser’s efficiency. To be fully transparent, some of my critical skew is from genuine surprise. After years of criticism that appraisals are too expensive and appraisers are too slow, I was shocked to see a URAR that will undoubtedly take longer and be more expensive to produce (with the notable exception of the comparable photos mentioned before).
Far from proclaiming doom and gloom, I think there is a lot of good that comes from this change. I believe that quality will increase. Some sections of the URAR are going to require appraisers to take a closer look at some elements of comparison that they might have glossed over previously. The appraiser’s workflow will likely change for the better. When you know that you have to take comparable photos while you are out at the property, it forces you to choose comparables before you have ever inspected the subject. This is, and has always been, one of the worst incentives to quality imaginable. Many appraisers will be forced to embrace new technologies that will actually improve their speed and quality.
If the current excess of appraisers persists, this will likely create enough incentive for some appraisers to move either to retirement or to other professions. Market disruption can be good. Frightening, but good. While part of me is prone to resist change, another part of me is excited about the opportunities. Can I increase my market share by being the first to perfect this new system? Can I help others to build efficient systems and be successful in the transition? What can I be learning now to help me thrive during a market disruption?
During my time in the industry, I’ve seen quite a few changes. Although there has been considerable angst, quality appraisers have always risen above the challenges. Although pessimism often needs a voice, don’t let it discourage or control you. Take courage and remember what you’ve overcome already.