This is the fifth in a series on the URAR from the course "Inside & Outside the Boxes: Developing and Communicating the URAR. Each week I'll be covering different topics related to residential appraisal development and reporting. - Patrick Egger
Top-down perspective - The first in the "Outside the Boxes" series was "Definition of the Problem." There was a reason for that. Do we think about "definition of the problem" from the client's perspective? What do clients need (beyond value to do the deal) and what can we provide to satisfy that need?
While appraisal forms present the basics on the subject and neighborhood, they are woefully inadequate for anything other than a basic house in a balanced market. Difficult properties, fluctuating market conditions and FNMA guidelines require the appraiser, to go beyond any limitations of the forms, with additional comments and exhibits being used if they are needed to adequately describe the subject property, document the analysis and valuation process, or support the appraiser's conclusions."
To supplement the form, we often include page after page of stats, facts, overviews and narrative on the market, economy, etc.
Is that what the reader needs, ten additional pages to read and somehow figure out what it means and how it applies to the subject property?
Certainly various issues require expanded comments, however imagine a processor or underwriter, with limited or no appraisal training, attempting to scan the report and validate that all requirements of the secondary market, especially those for difficult housing markets, have been addressed.
While we're trying to cover the bases, are we leading the reader to the same conclusions we came to or are we actually making it more difficult for the reader? Should we be addressing the client's needs in a different way?
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Data, data everywhere, but no one stopped to think
USPAP Standard 2 requires that appraisal reports "contain sufficient information to enable the intended users to understand the report properly." Do pages of stats, facts, complex graphs and narrative accomplish this goal or would a standard form better serve the needs of both the appraiser and the client?
The URAR was developed to standardize appraisal content, layout, "questions" and "answers" necessary for the user to measure and evaluate risk. The form replaced the residential narrative and it's time now to replace "unstructured narrative addenda" in much the same way and for the same reasons.
Addendums are necessary because the URAR lacks sufficient space to document, analyze and comment on the factors inside or outside of the neighborhood that impact value. The URAR standardized the residential appraisal report. What's missing is similar standardization for addendums and guidelines that would make it easy to meet the requirements of the secondary market and clearly communicate the appraiser's findings. Something that in my opinion, is long overdue.
Unfortunately, no one has stepped forth to define what is and isn't required, nor have tangible directives surfaced from FNMA, FHLMC, HUD or others, outside of a recent memo from Wachovia's Appraisal Department. USPAP is just as vague and the Appraisal of Real Estate, while comprehensive on what to consider, doesn't provide a structured format to tackle this fundamental issue.
What logically belongs in a well documented "housing market analysis" addendum and how can data and observations be presented to effectively communicate the market's direction and impact on the subject property?
Taking the top down
To get to the bottom (the subject property) you have to start at the top (the community or regional level) to understand the local economy and housing market. When referring to the top, I'm not talking about the national market, although you should be aware of it, I'm thinking more about activity and events at the community or regional level that influence the subject property.
For example, in my market (Las Vegas, NV), I track economic and housing data at the MSA or county level along with gaming and tourism statistics, because we're a tourism-based economy. In another market such as LA, you may need to economic and housing data for several counties because they are inter-dependent as employment centers in one county service residents from adjacent counties.
What should be included and what would it look like? (click to enlarge)
While the addendum should have the look and feel of a form, there's no way to address hundreds of unique communities and housing markets with data fields and check boxes alone. 2 to 3 pages of tables, graphs and comment areas would be adequate to consider most issues and make the answers and observations easier for the client to locate.
I'd start with a good overview of the area, summarizing the dynamics of the community to set-up other data and analysis that naturally follow.
Including a brief overview on what drives the local economy will set the stage for the next section of the analysis (the Economic Indicator Matrix) as you relate the economy of the community to market conditions and trends, supply and demand, at the community, neighborhood and subject property levels. Top-down perspective.
In the next segment, I'll continue to address the housing market addendum and look at the "Economic Indicator Matrix".
About the author: Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. He can be reached at [email protected]
Other articles in this series:
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