This is part three of a three part series on appraisal review – Read parts one and two. When interacting with executive managers, I am often posed with the following question “How do you know when you are looking at a “good” appraisal?” The reality is there is no universal acceptance of a single method of measurement to differentiate “good” from “bad.” After many years of reading appraisal reports, my response is “One that leaves the reader with few unanswered questions, allows the data to tell the story, keeps appraiser interventions to a minimum and is able to present a case for what a property is worth, as well as what it is not worth.”
Appraisers know there are multiple story lines to be told in an appraisal, story lines driven by facts and story lines driven by judgment and expertise as practicing professionals. All story lines are to be handled with competency and to a Uniform Standard.
The Recent History of Appraisal Revisions
Ten years ago, I was working with a lender that had a Revision Rate of 35%, meaning more than one in three times the review staff went back to the appraiser requesting a revised appraisal. Fresh out of the Great Recession, there were many myths out there on what was acceptable and what was not acceptable content in an appraisal report. There was also a breakdown in communication between lenders and their appraisal partners. It took several years to re-establish effective and meaningful communication between appraisers and their lending partners. Communication took on many forms, including development of written documents stating client reporting requirements, utilizing technology platforms to increase transparency throughout the appraisal process, and developing feedback to the appraiser on appraisal submissions.
Complexity in Process and Properties
Real Estate valuation can be a complex exercise in problem solving. Real estate offers a diverse landscape of property types, styles and influences that are required to be analyzed and measured. Opportunities for uniformity are infrequent, and market preferences change over time. The lack of uniformity presents challenges to many market participants and requires a level of expertise for the service provider to bring forward services that add value to the equation. Whether you are an appraiser, tax assessor, sales agent, attorney, construction manager, architect or engineer, you are required to have a level of professional expertise, at the local level, that exceeds the average person that does not practice in the area of real estate.
Parties to the transaction, the purchaser of services, and the provider of services, have a relationship based on the desire for mutual benefit. The value of the service provider is increased when it stands up to the challenge and scrutiny of the purchaser of the service, or in appraisal terms, the intended user. Users will re-engage the appraiser once they attain a level of confidence in that professional’s ability. Along the way, as parties successfully navigate through problems and attain solutions, partnerships are forged.
When it comes to lending activity, appraisal revisions have always been a part of the appraisal process. Revisions are often generated from three sources: 1) information discovered by the lender not made available to the appraiser at the time or order 2) questions arising from the review process ( correct deficiencies or to seek further analysis or explanations) , or 3) to have the appraisal conform to a loan product requirement or a specific secondary market investor (not all lenders and secondary market investors treat collateral-specific conditions equally due to their own policy requirements and risk tolerances, particularly when it comes to deferred maintenance, functional utility, or uses/renovations completed without proper permitting etc.).
Progress in Revision Rates
Today, while there still remains some stickiness to the QC revision process, a recent survey completed by The STRATMOR Group commissioned by appraisal management technology company Reggora, indicates 25% of appraisal reports require some form of revision. While that number may seem high to some, in the context of lending and property complexities, that is a 54% improvement in performance cited earlier in this article. Is there room for more improvement? Of course, there is always room for process improvement, but on the face of it, some process improvements appear to be yielding results.
The exact reasoning behind the drop in rates is unknown, they may just be two separate observation points at separate points in time. However, this author is optimistic that process changes from each of the root causes for revisions have had some level of contribution to the decline. Lenders are utilizing more technology for their appraisal processes, with increased usage of modern order management platforms improving communications between lender appraisal desks and appraisers and incorporating both automated and manual processes in their underwriting of appraisals.
Consistent application of both quality control and quality assurance processes for appraisal review may also be in part a reason for improvement, as appraisers have a better understanding of what is needed by their client. Additionally, the tools available to both appraisers and appraisal reviewers have undergone iterative process changes and users have advanced further up the learning curve. Lastly, many lenders have progressed beyond the initial risk identification stage, or the “gotcha stage” to a holistic and strategic approach that accepts risk into their business objectives. Today lenders and stakeholders have the ability to gain risk insight beyond the initial transaction stage and utilize pattern and trend identification.
Case in point, the policy requirement by Fannie Mae to require the ANSI measurement standard. Fannie Mae leaders have been upfront with the appraisal community of their observations regarding Gross Living Area calculations. Patterns have been detected showing differing measurements of Gross Living Area on the same house. While some of this may be due to complexity of the features of the improvements, they have cited differing treatment of ceiling heights, foyer space and stairwells by appraisers. Adoption of the policy requirement for the ANSI standard is designed to mitigate the risk associated with obtaining critical property-specific data, as it is widely manually developed by the appraiser.
Technologies are moving fast. As scanning technologies advance to produce floor plan renderings to an acceptable market standard, the measurement of property improvements and calculations of Gross Living Area will become automated, eliminating the current risk of having appraisers develop key improvement measurements. Machine learning to view and analyze photographs have also made advances. This technology is anticipated to reduce the amount of time an appraisal is spent in the underwriting process.
Those technologies that provide benefits to both the appraiser and the lender will be the ones to rise to the top.
Appraisal modernization is at the forefront of discussions today. While an appraisal today can be effective today using older technologies and processes, the mortgage industry in the US is adopting digitization and modernization on many fronts. Many argue that in order to sustain this country’s approach to mortgage financing, and to keep up, the appraisal processes in place today, including how they are prepared and how decisions are made on their acceptability, need to get faster and better.
The more all parties look for opportunities that lead to alignment of their respective needs and benefits, the closer we will be to an optimized approach to appraisal and valuation.