Appraisal Scoop: You Can Write an Appraisal on a Napkin..... But you probably just didn't

November 08, 2011

You Can Write an Appraisal on a Napkin..... But you probably just didn't

Guest Author: Ken Shure, Certified Residential Appraiser in the Los Angeles, California area. Contact: kbshure@Yahoo.com

We've all heard the phrase - "You can write an appraisal on a napkin if you want to". And yes, USPAP does give a wide berth in terms of reporting format but it is important to recognize that other than expanding upon the scope of work in order to accommodate the appraisal process, this does not provide appraisers with the authority to deviate from an agreed upon and expected scope of work or violate the sometimes extended list of certifications that are present on many of the pre-printed appraisal forms.

The most common reporting formats for appraisals are found within the lending arena and those typically used are the forms issued by Fannie Mae. These forms have a designated intended use, a specific minimum scope of work, a set of assumptions and limiting conditions, and certifications. If the appraisal process or specific client mandated assignment conditions cannot be properly completed when following and staying true to those items then it is much better to request a different reporting format, perhaps a napkin would be one alternative, or decline to proceed with the assignment. Proceeding within the framework of the forms despite it being contrary to producing a credible report or misusing the form in a manner that could be construed as misleading could have negative consequences for the appraiser and the appraiser's client.

Appraisers need to remember that Fannie Mae and other agencies delegate the responsibility of appraisal credibility and compliance to lenders. They rely on this delegation and receive documents signed by state licensed professionals that outline a minimum scope of work and have a set of certifications. Based on this it is clear that the agencies conceivably do not have to review every aspect of the appraisal reports they receive but can limit their review to key parts that indicate the appropriateness of the collateral for the loan being applied for. The basis for making this determination could depend on any number of factors including but not limited to the opinion of market value, conformity of the subject to the neighborhood, and zoning compliance to name a few examples.

One notable and critical area of the report that would always be necessary for any user to review would be the reconciliation section of the forms where it is clearly indicated via checkbox if the appraisal is made "as is" or if it relies either on an extraordinary assumption or hypothetical condition in order to reach its conclusions. A report that indicated "as is" within this section but did in fact rely on an extraordinary assumption or hypothetical condition, even when these are written out somewhere in the body of the report, could be viewed as misleading. Appraisers that indicate otherwise within the reconciliation section but still rely on extraordinary assumptions or hypothetical conditions outlined elsewhere in the report are in danger of being accused of trying to "slip one by" the agencies and the agencies would be well within their right to claim damages in the event of a loss.

The zoning compliance box is also a very important factor that should be taken seriously by anyone that completes one of these forms. In many jurisdictions with complex zoning codes it is arguably beyond the skill level and scope of work of the appraiser to absolutely ensure that all aspects of the property are in compliance with zoning however a certain level of due diligence would absolutely be expected. Properties that have significant and readily observable discrepancies from available public records should give cause for pause to an appraiser assigned the responsibility of checking that box. An appraiser that checked "legal" with regard to a property that in fact had substantial and readily observable elements that were built without permits or had an illegally converted garage, in violation of many zoning ordinances, could be held to task if the agencies were relying on the report to determine the zoning compliance status of the property. Adding in a cost to cure or an extraordinary assumption can easily be viewed as a misleading tactic in these cases where both the "legal" and "as is" boxes are checked.

Appraisers hold the ultimate responsibility towards determining the appropriate scope of work needed for producing a credible result. Despite this, appraisers are not free to pick and choose which portions of the lending forms they will abide by when this is the format that has been agreed upon. If these forms are modified by agreement with the client then it is best to avoid any chance of confusion and remove all reference to the publisher of the form and the form number. Should an altered form used to complete a report end up being utilized by the agencies (whether by accident or by design), the mere presence of the form number on the report gives ample cause for the final user to claim certain expectations with regard to the minimum scope of work and other items typically associated with the completion of, for example, a 1004.

Making use of the lending forms is a common and often necessary practice. It is important for appraisers that utilize these forms to be aware of the minimum scope of work they have agreed to follow and the certifications that they are signing. In addition it is important to be aware of the mechanisms within the forms designed to ensure that the agencies are making appropriate funding decisions and to make sure that these mechanisms are not bypassed, contradicted, or ignored. Inappropriate actions in this regard could result in large consequences being directed where the agencies have been sure to delegate appraisal related responsibility - on the lenders. In these cases there is little doubt as to whom the lenders would turn towards to direct their concern over the issue at hand and little doubt that it would not matter if the directive to complete the assignment in the manner in question came from the lender itself or its hired agent (AMC). While those parties would certainly have concerns and potential liability, in these cases as in all cases the appraiser would own the ultimate responsibility to the intended users and those parties able to rely on the report (per Certification #23) as to how the report was completed.