Tag Archives: evaluations

Reviewer Thoughts & Tips

APPRAISER SELECTION PROCESS

NOVEMBER 26, 2023 – I received the following question from a staff appraiser with a bank. My answer follows his email.
=================================
I am looking for direction/clarification on the regulations that discuss how an appraiser should be selected (specifically for commercial FRT’s). I work in the appraisal department of a bank and I need to prepare some internal policies/procedures/discussions on selecting an appraiser to engage. Many lenders feel they should be provided three choices and allow them or their customers to select the appraiser based on the lowest fee or the quickest turn time for the appraisal. They think that all that should be done is to not disclose the appraiser names and everything will be okay. However, my interpretation is that the appraiser should be selected based on their experience with the property type and the location in which the property is located. The regulations never appear to be direct enough, or all in one document to show how allowing lenders or borrower to participate in the selection would be viewed by bank examiners and regulatory agencies.
=================================

We start with the following requirement from the 2010 Interagency Appraisal and Evaluation Guidelines (IAEG):

An institution’s selection process should ensure that a qualified, competent and
independent person is selected to perform a valuation assignment. An institution should
maintain documentation to demonstrate that the appraiser or person performing an evaluation is competent, independent, and has the relevant experience and knowledge for the market, location, and type of real property being valued. Further, the person who selects or oversees the selection of appraisers or persons providing evaluation services should be independent from the loan production area.

The other pertinent quote follows:

Moreover, the Guidelines stress that an institution should not select a valuation method or tool solely because it provides the highest value, the lowest cost, or the fastest response or
turnaround time.

Besides independence, the next most important item is to select an appraiser (or evaluator) that is competent in regard to the property type and subject market. That much is a given. There is no gray area.

So, the question becomes how can we BOTH select a competent appraiser AND allow the loan officer (and usually the borrower) to select from among several fee quotes?

Financial institutions accomplish this by bidding assignments to a group of competent appraisers. For example, the subject is a basic 5,000 SF, owner-occupied warehouse in a city of 100,000 people. It is likely the financial institution has 3 or 5 or more appraisers on their approved list that are competent to appraise this property in this market. So, we send out an RFP to three appraisers. All are equally competent to perform this assignment. We get the following bids:

Appraiser A – $2,500 / 3 Weeks

Appraiser B – $3,000 / 2 Weeks

Appraiser C – $2,000 / 4 Weeks

Over the past 3 decades, 95%+ of the banks and credit unions I have worked with forward the quotes exactly as shown above to the loan officer. The key is to not disclose the appraiser names. Borrowers and loan officers cannot suggest appraisers to use or not use. But, examiners and regulators are ok with them choosing from the anonymous quotes shown above.

Have we met the requirement of engaging a competent appraiser? Yes.

Have we helped the loan officer (and borrower) have enough information to make a time and price decision? Yes.

Are the examiners and regulators ok with this process? In my 30+ years of being involved in the appraisal process with financial institutions, I have not heard of a single objection.

There are two keys to making this acceptable:

  1. You can show that you only bid the assignment to competent appraisers; and,
  2. You do not disclose the appraiser names when sharing the bid information with the loan officer.

Maybe you are asking what the other 5% of financial institutions do. It may be less than that actually. This small group includes how I did things when I was Chief Appraiser. The appraisal department selected the best bid to go with. When requesting an appraisal to be ordered, the loan officer would let us know if time or cost was more important. This method speeds up the process and also allows us to spread the work around to the approved appraisers. The appraisal time is delayed when the loan officer/borrower make the selection. I have seen delays of weeks or longer. Also, through the blind selection process one appraiser may get too many assignments at once. Some appraisers have a habit of always bidding low and quick, even when swamped with work and knowing they cannot meet their deadlines.

As usual, feel free to send me follow-up questions. Or suggestions to add to this post or clarify something I said. My email is GeorgeRMann@Aol.Com.

The Mann


Reviewer Thoughts & Tips

STATE OF WASHINGTON ALLOWS NON-USPAP EVALUATIONS

JULY 2023 – The following is from the Appraisal Institute’s ‘Washington Report & State News.’ A big welcome to appraisers in Washington finally being able to perform non-USPAP Evaluations.
“Washington Gov. Jay Inslee on May 15 signed HB 1797, legislation that allows real estate appraisers to complete evaluations for federally regulated financial institutions. It was amended to include a “trigger” mechanism whereby the bill will not take effect until the state adopts administrative rules related to fair housing and valuation bias established by the Department of Licensing that require appraisers and appraiser trainees to complete nondiscrimination and fair housing training as dictated by the Appraiser Qualifications Board. “

Reviewer Thoughts & Tips

DATE OF VALUE DIFFERS FOR APPRAISALS AND EVALUATIONS

JANUARY 8, 2021 – It only took the Interagency Appraisal and Evaluation Guidelines (IAEG) document being out for a full 10 years for me to be made aware of the difference in Date of Value for Appraisals versus Evaluations.  As they say, you learn something every day!

For Appraisals, the IAEG states:

The estimate of market value should consider the real property’s actual physical condition, use, and zoning as of the effective date of the appraiser’s opinion of value.  (emphasis added)

In my 35 years of doing appraisals and appraisal reviews, the ‘Date of Value’ has always been the last date the appraiser(s) inspected the subject.  Usually, there is only one inspection and that is the Date of Value.  Of course, this is for Market Value and Market Value ‘As Is.’  We are not talking about prospective values.

For Evaluations, the IAEG states:

Provide an estimate of the property’s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date that the analysis was completed), with any limiting conditions.  (emphasis added)

‘The date that the analysis was completed’ is what us valuers call the Date of Report.  The Date of Report can be the same as the Date of Value, but that rarely occurs.  For appraisals, nearly 100% of the time the Date of Report comes after the Date of Value.

In conclusion, the IAEG wording indicates that the Date of Value for an Appraisal is what it has always been.  However, the Date of Value for an Evaluation is the Date of Report.

For Evaluations, I have always assumed the Date of Report was also my Date of Value.  I am not sure why.  I just felt that my analysis did indeed go thru the day I was finishing the Evaluation.  So, that was my Date of Value.  Blind luck I guess.

As an aside, it has been suggested that Evaluators add an Extraordinary Assumption to their Evaluation Report that assumes no material changes have occurred between the date the subject was inspected and the Date of Report.  Probably not a bad idea.  I won’t digress into my rant that I don’t like including Appraisal/USPAP items (e.g. Certification, Hypothetical Conditions, Extraordinary Assumptions, et al) in Evaluations.  It’s your Evaluation, do what you want to CYA.

Lastly, I have checked with the Regulators and sure enough this is a difference that was overlooked.  Hopefully, in the next revision this will be addressed.

Happy New Year!

The Mann

 

Reviewer Thoughts & Tips

GEORGIA CLARIFIES LAW ON EVALUATIONS

SEPTEMBER 26, 2020 – The following is from the Appraisal Institute’s Washington Report:

The Georgia Real Estate Commission & Appraisers Board on July 30 adopted a rule change that “eliminates language that has caused confusion in the industry concerning when Georgia appraisers can conduct evaluations.” The change addresses the reporting format for evaluations that are prepared by appraisers for financial institutions that are not regulated by a federal financial institution’s regulatory agency.
The previous rule stated that evaluations are allowed to be “prepared in any reporting format, such as, but not limited to, a self-contained appraisal report, a summary appraisal report and a restricted use appraisal report if the reporting format meets the requirements of the nonfederal financial institution.”
The updated rule, which took effect Aug. 19, removes specific references to the transactions for which an appraiser may provide an evaluation, stating instead that appraisers can provide evaluations “for any transaction that qualifies to be performed as an evaluation under the Interagency Appraisal and Evaluation Guidelines.”
The rule also eliminates enumeration of an evaluation’s required content in favor of language that states, “at a minimum, the development and content of an Evaluation Appraisal shall comply with the guidelines set forth in the Interagency Appraisal and Evaluation Guidelines.”
Reviewer Thoughts & Tips

WELCOME SOUTH DAKOTA TO THE EVALUATION WORLD

JUNE 29, 2020 – South Dakota has become the 11th state to allow licensed/certified appraisers to perform non-USPAP Evaluations.  We have 39 more to go:)  When we get back to in-person classes, if you are in a state that allows non-USPAP Evaluations, I have a 7-hour seminar on Evaluations and Validations that I will gladly come and teach.  I don’t teach over the web.  I can only share my 28 years of experience with Evaluations in person.  The Appraisal institute’s news item on this follows:

South Dakota Passes Legislation Allowing Appraisers to Perform Evaluations

South Dakota Gov. Kristi Noem on March 4 signed HB 1127, legislation that allows appraisers to provide real property evaluations to federally regulated financial institutions. When the law takes effect July 1, the state will join at least 10 others that allow appraisers to provide evaluation services. Several other states are considering similar laws.
Evaluations provided by appraisers must conform to Interagency Appraisal and Evaluation Guidelines. South Dakota’s secretary of the Department of Labor and Regulation will be authorized to promulgate rules relating to “exemptions and standards allowing appraisers to perform an evaluation for a federally insured depository institution.”
==========================================
Everyone stay safe.
The Mann
Reviewer Thoughts & Tips

VALIDATIONS

MAY 29, 2020 – Validations are the little known and little used product that get overlooked in the world of Appraisals and Evaluations.  The December 2010 Interagency Appraisals and Evaluations Guidelines (IAEG) document has the following section that addresses Validations:

XIV. Validity of Appraisals and Evaluations
The Agencies allow an institution to use an existing appraisal or evaluation to support a subsequent transaction in certain circumstances. Therefore, an institution should establish criteria for assessing whether an existing appraisal or evaluation continues to reflect the market value of the property (that is, remains valid). Such criteria will vary depending upon the condition of the property and the marketplace, and the nature of the transaction. The documentation in the credit file should provide the facts and analysis to support the institution’s conclusion that the existing appraisal or evaluation may be used in the subsequent transaction. A new appraisal or evaluation is necessary if the originally reported market value has changed due to factors such as:
 Passage of time.
 Volatility of the local market.
 Changes in terms and availability of financing.
 Natural disasters.
 Limited or over supply of competing properties.
 Improvements to the subject property or competing properties.
 Lack of maintenance of the subject or competing properties.
 Changes in underlying economic and market assumptions, such as capitalization rates and lease terms.
 Changes in zoning, building materials, or technology.
 Environmental contamination.

Validations answer one simple question – is the value of the real estate collateral equal to or greater than the value in a prior Appraisal or Evaluation?  If so, then that value can be brought up to today.  If not, then a new Appraisal or Evaluation is needed.

Validations are useful in level to rising markets.  They are not very useful in the current market conditions.

However, not all property types have experienced a value decline this year.  In general, industrial properties and national tenant leased properties where the tenant has a bond rating A and above, are still candidates for Validations.  Apartments might be depending on the age of the prior Appraisal or Evaluation and the property location.

I have updated the Validation Report that I originally developed in 1994.  This report is intended to be used by internal bank employees.  It is not for use by fee appraisers, as it does not comply with USPAP.  If you are a bank employee and want a copy of my report template, just email me at GeorgeRMann@Aol.Com.  I will send it to you for free:)

It took me 25 years to finally get Evaluations to be mainstream.  Validations are next.  They are under utilized.  Albeit, today’s market is not ideal for them.  But, we will get back to market conditions where they are useful again.  My plan is to design a Restricted Appraisal Report (RAR) specific to the Validations need for fee appraisers to use.  But, at this time, this is not needed for the most part.

Again, bank staff please contact me if you want a copy of my template.

Everyone stay safe.

The Mann

Reviewer Thoughts & Tips

Facilitating Real Estate-Related Transactions Affected by COVID-19

Summary

The Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System (collectively, the agencies) issued an interim final rule (IFR) that allows institutions supervised by the agencies to defer obtaining an appraisal or evaluation for up to 120 days after the closing of certain residential and commercial real estate loans. The agencies, with the National Credit Union Administration and the Consumer Financial Protection Bureau, in consultation with the state financial regulators, also issued an Interagency Statement on Appraisals and Evaluations for Real Estate Related Financial Transactions Affected by the Coronavirus (Statement). The Statement outlines existing flexibilities provided by industry appraisal standards and the agencies’ appraisal regulations and highlights temporary changes to Fannie Mae and Freddie Mac appraisal standards to facilitate real estate transactions.

Statement of Applicability to Institutions under $1 Billion in Total Assets:

This Financial Institution Letter (FIL) applies to all FDIC-supervised institutions.

Suggested Distribution

FDIC-Supervised Banks

Highlights:

The agencies recognize that the National Emergency declared in connection with coronavirus disease 2019 (COVID-19) presents challenges for individuals performing appraisals and evaluations to perform inspections and complete valuation assignments in a timely manner.

  • The IFR:
    • Defers the requirement to obtain an appraisal or evaluation for up to 120 days following the closing of a transaction for certain residential and commercial real estate transactions, excluding transactions for acquisition, development, and construction of real estate
    • States that the agencies are providing this relief to allow regulated institutions to expeditiously extend liquidity to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of COVID-19.
    • Indicates regulated institutions should make best efforts to obtain a credible valuation of real property collateral before the loan closing, and otherwise underwrite loans consistent with the principles in the agencies’ Standards for Safety and Soundness and Real Estate Lending Standards.
    • States that this temporary change to the appraisal rules expires on December 31, 2020.
  • The Statement:
    • Outlines existing flexibilities in the Uniform Standards of Professional Appraisal Practice and the agencies’ appraisal regulations.
    • Advises that there are temporary changes to Fannie Mae and Freddie Mac appraisal standards that can assist lenders during this challenging time.

 

Mann Overboard, Reviewer Thoughts & Tips

NCUA RAISED DE MINIMUS TO $1,000,000

July 19, 2019 – See the link below for more info about the NCUA’s decision to one up banks and raise the commercial appraisal threshold from $250,000 to $1,000,000.  Banks recently had their threshold for this loan category raised to $500,000.  The obvious question is will banks be able to get their regulators to follow what the NCUA did….we shall see.

For those who are jumping on my Evaluation bandwagon after 25+ years, this only means more work for you.  If your State does not allow licensed/certified appraisers to perform non-USPAP Evaluations, you need to get them moving on this.  Can you hear me North and South Carolina:)

The Mann

https://www.ncua.gov/newsroom/press-release/2019/appraisal-rule-will-help-boost-economic-activity-job-creation-communities

Mann Overboard, Reviewer Thoughts & Tips

NEW INTERAGENCY GUIDANCE ISSUED

October 16, 2018 – The Federal Agencies have issued an updated guidance titled ‘Frequently Asked Questions on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines.’  This rescinds a similar document issued in 2005.

You can download this 14-page document at the following URL:

https://www.fdic.gov/news/news/financial/2018/fil18062a.pdf

Please pass this document along to your in-house appraisal staff and other bankers.

Reportedly, there are no significant changes.  Simply, an update of a 13-year old document with some needed clarification.

Reviewer Thoughts & Tips

THE ‘ERROR’ IN THE 2010 INTERAGENCY APPRAISAL GUIDELINES

July 30, 2018 – The following wording from the December 2010 IAEG suggests that property value be used to determine if an appraisal or evaluation is needed.  Obviously, this is not possible since property value is not known at the time a decision is made.

The text appears next followed by a reply from G. Kevin Lawton with the OCC.  Mr. Lawton was kind enough to provide the response and allow it to be credited to him.

Text from Item 1 in Appendix A:

1. Appraisal Threshold
For transactions with a transaction value equal to or less than $250,000, the Agencies’ appraisal regulations, at a minimum, require an evaluation consistent with safe and sound banking practices.54 If an institution enters into a transaction that is secured by several individual properties that are not part of a tract development, the estimate of value of each individual property should determine whether an appraisal or evaluation would be required for that property. For example, an institution makes a loan secured by seven commercial properties in different markets with two properties valued in excess of the appraisal threshold and five properties valued less than the appraisal threshold. An institution would need to obtain an appraisal on the two properties valued in excess of the appraisal threshold and evaluations on the five properties below the appraisal threshold, even though the aggregate loan commitment exceeds the appraisal threshold.

Mr. Lawton’s response:

This is one of those areas in the Guidelines where the wording, which mixes the concept of “value” and “transaction value,” can create a problem that is confusing and not consistent with the regulation, and I have had banks and examiners complain about the inconsistency.

The solution is to have banks allocate “transaction value” among the individual properties rather than “property value.”  The bank should allocate the entire aggregate commitment among properties.  Doing this allocation of “transaction value” rather than expected “property value,” sticks to the spirit of the regulation itself.  There is another, bigger advantage of using transaction value as the driver: it avoids the Catch‐22 problem that some banks have brought up: “what if I allocate property value to one property of $200,000, obtain an evaluation, and the evaluation result shows a market value (property value) of $260,000, do I then need to go get an appraisal?”  In other words, “I estimated the property value to be $200,000 and I was wrong. The property value is $260,000 and since, using the “property value” as the driver for what is needed, I now need an appraisal because the property value is above the threshold. This, in itself, is an area where the Guidelines are not consistent with the regulation, since the Guidelines talk about property values “less than the appraisal threshold” (Appendix A, Section 1). That sentence, and the following sentence in the Guidelines mix the concept of “property value” and “transaction value” (last two sentences in Section 1).

The “appraisal threshold” deals with transaction value, not property value.  So, back to the example above, if the banker estimates (allocates) $200,000 of the transaction value to the property (rather than “guessing” a $200,000 property value) then an evaluation is allowable and if the evaluation result shows a property value of $260,000 there is no Catch‐22.  It does not matter what the property value result is because property value does not drive what is needed.  So when a bank addresses “property value” as the driver of what product (appraisal or evaluation) is the minimum product required under the regulation they may need an evaluation (based on a guess of property value of $200,000) followed by an appraisal (because the evaluation shows a property value of $260,000). This is not what the Guidelines intended.

One could probably argue this several ways, but the “allocation of transaction value” among the individual properties, accomplishes the following:  1) it is consistent with the intent of the regulation, 2) doesn’t jumble the concepts of property value and transaction value, 3) avoids the “what if’s” when property value is the driver, 4) is understandable, and, 5) is a practical solution for our bankers.

Hope this provides some clarity to this issue.

The Mann