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Defining the Elements of a Solid Appraisal: A Roundtable Discussion

July 23, 2007

Industry experts explain the good, the bad, and the risky

What makes a good appraisal? Is it the completeness of the report itself? Is it the diligence of the appraiser? Is it the extras—the pictures and commentary?

FNC asked valuation experts to weigh in on the key elements that make a so-called good appraisal better than a bad appraisal. Our authorities also point out the red flags that should be caught by a lending institution’s appraisal review process.

Why is this important? By quantifying what’s good and what’s bad in an appraisal report, we get closer to the new Holy Grail of mortgage lending—a comprehensive Collateral Score on the property.

The Experts:

• Bob Dunning is director of Asset Liquidity at Wachovia.
• Todd Baur is the managing director of Countrywide Home Loans and the president and chief operating officer of LandSafe Appraisal.
• Danny Wiley, SRA, is owner of the Wiley Group, which specializes in residential appraisals. He is a member of the Appraisal Standards Board, and served as chair from 2002-2004.
• Gwen Magrisso, project manager at FNC, helped develop a rule system for reviewing appraisals that led to FNC’s Appraisal Score. Prior to FNC, she served as vice president for Appraisal Operations at a nationwide lender for 15 years.

1. How do you define a “good” appraisal? What are the key components?

Bob Dunning: A “good” appraisal accurately discloses the materials, condition, utility, and location of the subject property and provides a reasonable and supported opinion of market value through the use of recent, proximate and similar comparable sales.

Todd Baur: Bracketing is, by far, the most important component in a good appraisal. Recent, proximate, and similar sales that provide a realistic bracketed range within which the appraiser can report are crucial to the completion of an excellent appraisal.

Danny Wiley: Unlike most appraisers and users of appraisal services, as a certified USPAP nerd, I distinguish between the appraisal and the appraisal report.

A good appraisal is one that is based on sound analysis of relevant data.

A good appraisal report is one that leads the identified intended users through the appraiser’s analysis in a meaningful way. It offers discussion of factors specifically relevant to the subject property. It not only communicates the value opinion, it convinces the intended users that the appraiser’s analysis was credible in all respects.

It is possible to have a poor report of a good appraisal. It is not possible to have a good report of a poor appraisal.

Gwen Magrisso: A good appraisal is well supported and documented. It meets banking regulations, Fannie Mae, Freddie Mac, and USPAP guidelines and requirements. The reader of the report should be able to follow the thought process of the appraiser. The report should contain an accurate description of the subject property and its market or neighborhood. Is the appraiser truly using the best comparable sales? Is the appraiser researching and confirming his or her sales? Is the appraiser reporting and properly handling any sales comparables? The reader should be able to confirm that the appraiser’s value conclusion makes sense.

2. How do you define a “bad” appraisal?

Bob Dunning: A “bad” appraisal misrepresents the subject’s materials, condition, utility, or location and/or provides an unreasonable or unsupported opinion of market value based on comparable sales that are not recent, proximate, or similar.

Todd Baur: When comps are “cherry-picked” on the basis of their value or where the only criteria used is the sales price or target value. Any appraisal where all of the comparables are adjusted up or down without proper bracketing, or without a real, verifiable basis for the value opinion.

Danny Wiley: A bad appraisal is one in which the appraiser was unethical and/or incompetent in some aspect of the development. Manifestations of this include picking sales solely to support a target number (bias) rather than picking them based on actual comparability to the subject.

Bad reports do not communicate in a meaningful way or they communicate in a misleading way. Residential report forms are too often populated with meaningless boilerplate. For example, some appraisers seem to take pride in developing a single neighborhood description that they use in every single report. They rely on generic comments that aren’t really meaningful to the appraisal problem at hand.

Other examples include not explaining the analysis or failing to disclose relevant characteristics (poor location, poor physical condition, etc.).

Gwen Magrisso: A bad appraisal would be sloppy and full of inconsistencies, would not support the value, and would provide weak supports for adjustments. It would also show that the appraiser went outside the market for comparable sales and that he or she overlooked true comparables to make a value. It might show that the appraiser is unfamiliar with the market or did not accurately report the physical characteristics of the subject property.

3. Does your institution have a group of tried and true appraisers whom you trust?

Bob Dunning: No.

Todd Baur: Yes, with one million orders being processed on average each year, we rely on both employees and fee panel providers with whom we’ve built trusting relationships.

Gwen Magrisso: When I worked at a lending institution, we looked for appraisers with solid local market knowledge. They also had to have up-to-date data sources, including MLS, where it is available. They had to provide well-supported and documented appraisals. We also stressed professionalism with our appraisers when they interacted with bank staff, borrowers, and realtors. Quick turnaround time, a sense of urgency, and a willingness to address any follow-up questions were important, as well.

4. How do you catch bad appraisals? What characteristics or patterns do you look for?

Bob Dunning: We use a combination of manual and automated risk scoring tools as well as human review. We look for comparable sales with significant amenity or utility differences, excessively distant from the subject or across obvious neighborhood boundaries, and inconsistent adjustments for differences.

Todd Baur: There are a number of methods we use to catch “bad” appraisals. We have a Governance group that handles post-closing quality control audits in a number of categories and they are continually reviewing hundreds of reports. We also have pre-delivery technological solutions that are proprietary to Countrywide that enable us to sequester or highlight suspicious appraisals before they reach the customer, and our reviewers get involved to access any issues.

Danny Wiley: As a fee reviewer, I do not make the initial decision about whether or not a report should be reviewed. However, when I conduct reviews I do look for clues in a report. Sloppy and rushed reporting often, though not always, indicates sloppy analysis. Heavy reliance on boilerplate, comparable sales that are an extended distance away when the subject property is in a subdivision, failure to really analyze the history of the property—these are all red flags.

Gwen Magrisso: We checked out our data sources to make sure that the description of the subject and comparables could be verified. We also checked for the listing and sales histories of the comparables whenever possible to check for flips. We looked for inconsistencies in the appraisals. We looked for weak technical skills, sloppiness, and comments that raised more questions then they addressed. When in doubt, we would order a review from a local appraiser. Sometimes we even ordered a whole new appraisal.

5. How much time does your institution spend, on average, on appraisal review?

Bob Dunning: We estimate an average of 10-15 minutes per appraisal report. The majority of reports are exposed to a cursory review (five minutes or less) while the more questionable report reviews can exceed 60 minutes.

Todd Baur: We have a department staffed with nearly 100 people who ensure that the quality of our appraisals is exceptional. This is their sole mission: appraisal quality.

Danny Wiley: A typical appraisal review assignment takes about the same amount of time it would take to actually appraise the property. In the case of a poor appraisal or a very poorly written report the review can take much longer than it would take to appraise the property.

Gwen Magrisso: An administrative review took 20 minutes. A technical review took 45 minutes, which was still not enough time to catch everything.

6. What percentage of appraisals processed are subject to above-average scrutiny?

Bob Dunning: 15 percent.

Todd Baur: That’s difficult to say. We look at both appraisal and loan characteristics and scrutinize many variables that create a high-risk appraisal or transaction.

7. Do you think, across the industry, that appraisal review is pretty standard, or does every institution put its personal stamp on the process?

Bob Dunning:The industry is moving toward more standardization in appraisal review, but varying business models and risk appetites will continue to drive customization of the process to meet specific needs.

Todd Baur: Unfortunately, there are many organizations that only do what they have to do. I can only speak for LandSafe, of course, and LandSafe is dedicated to producing high quality appraisal reports and has built technologies and processes to support that objective.

Danny Wiley: My experience has been that clients have very different parameters for reviewing appraisal reports.

Gwen Magrisso: Yes and no. Some institutions use Certified/Licensed Appraisers for the review function. Some institutions use underwriters or other employees for the review function. Some have a combination. Some institutions make loans nationwide, so they require a different model for their review process vs. institutions that are community banks or regional in focus. Some institutions use VMCs for their review process. Also, whether your channels are wholesale, correspondent, or retail make a difference.

8. What’s your reaction been to new automated appraisal review technologies? Are they trusted?

Bob Dunning: Our institution is open to developing technologies, but has taken a calculated and methodical approach around testing, validation, and implementation.

Todd Baur: Automated appraisal review technologies have their place. They fit very well in their place, but like any technological solution, they have limitations and we are careful to build our processes around their strengths and their weaknesses.

Danny Wiley: I would not rate my personal experience with automated reviews as especially bad or especially good. Automated reviews are like automated valuations. They can be a good tool, but they are often misused. Relying solely on an automated review is no different than relying solely on an administrative staff member with a checklist. Proper review, just like proper appraisal, requires the application of judgment. Through the use of elaborate decision trees automated reviews can duplicate some, but not all, of that process.

Gwen Magrisso: At my institution, we had mixed responses. We found some employees embrace it while others are skeptical. Overall, automated tools added to our review process in a positive way. For example, online access to data was key to the review process.