What Makes an Appraisal Supportable?

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While driving around performing appraisals, I see many runners. Some runners look like they have no real technique.

Others appear to have a regimented technique to their running style. The truth is, the goal of both is simply to move from point A to point B. Right? One just appears more professional.

While in running, just getting from point A to point B is the goal, What about in appraising? Is the goal to simply come up with an accurate number or is more involved than the final opinion of value?

DIFFERENCES IN APPRAISAL STYLES

Years ago, I did a lot more review work, including forensic reviews. I saw a lot of different appraisals. Some used a lot of commentary, while others were more succinct. Some typed in all caps while others did not. Some had terrible spelling while others did not. Some took fantastic pictures, some not so much. Some sketches were elaborate even including the placement of doors, fireplaces and other amenities, while others were hand drawn and not professional in appearance.

These differences can have an impact on how professional our reports appear. That in turn can lead to respect, or lack thereof, and perceived credibility. These things alone are not always indicative of whether the report is a supportable or not. Sometimes, even the ugliest looking reports have all of the information needed to provide a supportable value estimate. They followed USPAP (Uniform Standards of Professional Appraisal Practice) guidelines and all of the information was complete, accurate and their analyzes supportable.

On the contrary, I’ve also seen some professional looking appraisals in which comparable sales were made up, along with other information. Sometimes, unethical appraisers have mastered making their reports look good. They know what will pass underwriting. They know what might look like a red flag. So instead of reporting the facts, they doctor the report with false information that will not raise a red flag. So, at a glance, their report might look supportable.

How can a person tell if a report is supportable or not? Usually, the only way is by having a qualified appraiser perform an appraisal review. Even private individuals can hire appraisers to perform reviews. Although, usually if an appraisal is in question, a second appraisal is ordered, instead of a review.

CAN THE VALUE BE ACCURATE BUT THE REPORT NOT BE SUPPORTABLE?

Imagine the following scenario. A person who is not an appraiser makes a guess that their home’s market value is somewhere between $330-$340K. An appraisal is then completed by a certified residential appraiser. The appraiser estimates the market value to be $335K. That appraisal is reviewed and is found to have numerous serious USPAP violations. The report used sales that were questionable and adjustments that were clearly not derived from the market. So, a second appraisal is ordered from the bank. The second appraisal estimates the market value to be $332K. The second appraisal has no USPAP violations. It used very comparable sales and its adjustments were derived from the market using reliable techniques.

In this situation, all three individuals had seemingly accurate value conclusions, so what’s the big deal? Does it really matter as long as the appraiser gets the value right? If a home owner is a good guesser, why get an appraisal anyway?

WHAT MAKES AN APPRAISAL SUPPORTABLE?

When it comes to performing an appraisal, here are just some of the things that USPAP guidelines state are necessary for an appraisal to be supportable:

1. An accurate analysis of market conditions including accurate neighborhood market trends for both overall sales as well as trends of comparable sales.

2. Develop and summarize an accurate Highest & Best Use analysis.

3. Selecting truly comparable sales.

4. Deriving supportable adjustments in a credible manner.

5. A complete and comprehensive reconciliation.

6. Maintaining a work file that contains all of the information necessary to reproduce the original report.

Why are these steps necessary? Following these steps will make it more likely that appraisals are consistently supportable. If the appraisal is supportable, chances are good that the value estimate will be accurate. When shortcuts are taken, while an appraiser might get some values accurately some of the time, chances are, they will not the majority of the time. Likewise, a home owner might be a good guesser. While that might be the case, I wouldn’t want to bet tens of thousands of dollars based in whether or not someone is a good guesser.

If an appraiser is not following USPAP standards, they might get the value right, but likely not in a supportable way. There are times when I perform reviews on appraisals that are poorly supported, and still agree with their value estimate. Frankly, it really irks me when this happens. It’s because it’s the journey to how we derived the value that is what makes the appraisal supportable and valuable! When I see a poor appraisal (and it is more rare these days), I feel like this fact is lost on some.

When followed, the guidelines in USPAP give value to the our appraisals and to the real estate appraisal profession. Without it, there might be some appraisers that are happy just being good guesser. That would ultimately lead to a lack of credibility in the appraisal profession and a lack of public trust. And yes, that will have a negative affect on the housing market!

The Uniform Standards of Professional Appraisal Practice were put into place in 1986-1987 to build public trust in the appraisal process and profession. It provides a minimum set of quality control standards for how an appraisal should be completed. If an appraisal does not conform to this minimum set of standards, how likely is it that the appraisal will lead to a supportable opinion of value?  USPAP doesn’t restrict appraisers, it protects us. Sadly, this fact is lost on some who order appraisals, and even worse, by some appraisers. Some appraisers feel like USPAP is the instrument that can hang them. While that can be true, this is usually only the case for those who blatantly disregard it. The fact is that the guidelines in USPAP protect appraisers and frees us to complete many different types of valuations, from the simple to the complex, in credible ways. USPAP is not perfect. Otherwise it would not have to be revised every couple of years. But it is a solid set of standards, at least in my opinion.

Can you imagine what it would be like if the medical or legal profession had no written standards to follow? That would be scary and would ultimately hurt the public. The same is true with standards for appraisers.

THE APPRAISAL JOURNEY IS IMPORTANT

I’ve never heard of an appraiser getting into trouble with the state because their value estimate was inaccurate. Appraisers get into trouble when their value estimate is not supportable. Usually, this is happens when there are multiple USPAP violations. These violations usually happen when appraisers deliberately taking short cuts and ignore appraisal principles and the requirements set forth in USPAP. Of course, as noted earlier, that usually leads to value issues anyway.

Imagine removing a load bearing wall in a structure. It weakens the entire structure. Remove enough of the pillars and there will be a catastrophic collapse at some point. The same is true with the guidelines in USPAP. Any time we ignore something in USPAP, it’s like removing a load bearing wall. Do that enough, (and sometimes just once depending on the size of the wall) will lead to certain trouble.

The point is that a good appraiser is not a good guesser. We don’t guesstimate or Zestimate values. We develop them! And we have solid guidelines that help us to do so in a supportable way, namely USPAP.

How many walls in this picture can be removed before there is a structural problem?

Most people who order appraisals don’t really don’t care about the development of the appraisal. They just want an accurate value estimate. That’s why they will hire a licensed or certified appraiser. Most have never even heard of USPAP. They just know that if the state recognizes an appraiser as a credible valuation expert, than they can.

I believe that most appraisers today, including every appraiser that I know, are working hard to provide supportable value estimates.

Just remember that the appraisal is a lot more to a supportable appraisal than just the value estimate at the end of the report. It’s the journey to how we get there that is equally, if not more important, because that is what makes our values supportable!

I hope that this was not too deep of a topic since many are enjoying a little down time.  Enjoy your time off and have a great weekend! Thanks for reading my article. I appreciate you being here!

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I was recently on Dustin Harris’ show, The Appraiser Coach, discussing this article. Here it is if you would like to hear it. A big thank you to Dustin for having me on his show! It was a privilege!

 

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