Have you ever heard of the term geographic competency? It’s something that an appraiser must posses. But what does it really mean and when must an appraiser have it?
WHAT GEOGRAPHIC COMPETENCY MEANS
I have both experienced and heard accounts of real estate agents questioning an appraisers ‘geographic competency’ due to the appraiser’s office being a 30 minute drive from the subject property. It seems that some, and I emphasize some, agents are of the mindset that if the appraiser’s office is not in relatively close proximity to the property being appraised, or if the appraiser doesn’t live in a nearby area, that they do not possess geographic competency. And they may be right.
However, the appraiser’s office location or where they live, in relation to the property being appraised, has little if anything to do with geographic competency!
To be geographically competent simply means that the appraiser has the skills and resources needed in order to competently complete the assignment, in harmony with the Uniform Standard of Professional Appraisal Practice (USPAP).One of the major resources typically necessary for an appraiser to be geographically competent is access to the local MLS (Multiple Listing Service). Why? The MLS is the primary way that most appraisers locate comparable sales, analyze listings and extract market data. This information is used to make an analysis of real estate trends and for extracting adjustments. Granted, not all areas have an MLS system. In that case, an appraiser must have other reliable sources in order to obtain the data needed to complete an appraisal report competently.
An appraiser must also be aware of anything in the subject neighborhood or surrounding areas that might have a positive or negative influence on the values and marketability of homes in the area. There are many resources that can be used to help the appraisal make these determinations in a relatively short time period.
AT WHAT POINT DOES AN APPRAISER NEED TO BE GEOGRAPHICALLY COMPETENT?
This may sound like a trick question. Doesn’t the appraiser need to be geographically competent at the time that the appraisal assignment is accepted? Actually, no. USPAP does have a Competency Rule. Here is what USPAP has to say about the matter:
“The COMPETENCY RULE requires an appraiser who lacks the knowledge and experience to complete an assignment competently to (1) disclose the lack of knowledge and/or experience to the client before accepting the assignment, or (2) disclose the lack of knowledge and/or experience to the client during the assignment if discovered by the appraiser during the assignment. In either instance, the appraiser must then take all steps necessary to appropriately complete the assignment competently and document the steps in the appraisal report. An appraiser may gain the knowledge and experience with required through any or all of the following: personal study by the appraiser, association with an appraiser reasonably believed to have the necessary knowledge or experience; or, retention of others who possess the required knowledge or experience.”
If an appraiser is not geographically competent in an area, they can gain the needed competency through research and analysis, while in the process of completing the assignment. Admittedly, there have been appraisers who have not take the proper steps necessary to become geographically competent. And in these cases, I completely understand why an agent or other parties involved would be upset at the appraiser. This can add a great deal of complication to the process and unnecessary stress for all of the parties involved in the transaction. A lack of competency is not a pretty sight in any profession!
While that is the case, before the appraisal takes place, there is no way a real estate agent, home owner or anyone else can really determine whether or not an appraiser is geographically competent or not. Remember that even if the appraiser was not initially geographically competent, in many cases they can gain the necessary competency through the process.By the way, if the appraiser does not posses geographic competency at the time that the appraisal assignment is accepted, or they find out they are not yet competent to complete the assignment without further research and/or education, did you notice who they have an obligation to notify? It’s not the agent. It’s not the home owner. It’s the appraiser’s client. Therefore, the appraiser does not have an obligation to make the agent aware of their not having geographic competency. This is a matter that is between the appraiser and their client.
It is not lost on me that there have been some appraisals completed by appraisers who did not do what was necessary to become geographically competent. Those situations can make a purchase transaction very difficult for everyone involved, including the agents, as already stated.
Here’s the thing. Before the appraisal is completed, there is no way to know if the appraiser is either geographically competent or will take the steps to become so. So, it really doesn’t make much sense to interrogate the appraiser about their geographic competency, or lack thereof, before the appraisal is completed. However, once the appraisal is completed, it will provide evidence regarding the appraiser’s competency, geographically and otherwise.
My recommendation to agents who suspect that the appraiser is not competent to complete the appraisal, is to wait until the report is completed. If you suspect that the appraiser does not posses geographic competency before the appraisal is completed, and you make it your mission to have the bank replace that appraiser with another one, you may inadvertently be removing an appraiser who posses the needed competency, or that that would have taken the steps to become geographically competent, with one who is not. Remember, you are not going to know for sure whether the appraiser was competent or gained the needed competency until after the appraisal is completed.
A word of warning about competency. If the appraised value is the same or higher than the contract price, that in itself is not an indication of competency. Conversely, if the appraised value is lower than the contract price, that is also not necessarily an indication of a lack of competency.
WHO ELSE NEEDS TO BE COMPETENT?
I recently ran a search on-line for “geographic competency”. The only articles that I saw were related to appraisers. That makes sense because, as already discussed, appraisers have to be geographically competent.
Is the appraiser the only real estate professional that needs to have geographic competency?
Real estate agents also need to have geographic competency in the area that they are selling in. In my experience, most agents do because they research trends, comparable sales and what is taking place in the neighborhood of the home they are selling.
However, at times, the same agents who put the appraiser through the third degree regarding geographic competency, are the same agents may demonstrate that they actually need to obtain geographic competency themselves.
For instance, there are times when my opinion of value is lower than the purchase price. Some agents will rebut my appraisal by giving the lender sales that they feel I should have used. However, the sales provided are often in different neighborhoods or are superior to the subject. Does it demonstrate geographic competency, on the part of the real estate agent, when they provide an appraiser with so-called comparable sales when those sales are located in completely different neighborhoods? Especially when there are comparable sales within the subject’s neighborhood.
Another area in which I see some lack of geographic competency is when it comes to specific neighborhood trends. I think that some may look at overall city or county trends and try to apply those numbers to the comparable sales. The problem is that often the trends for an entire city or county are very different from the trends that are specific to sales that are truly comparable to the subject. Last year, an agent complained to the bank that I didn’t make time adjustments. The sales I used had sold within six months and the rate of appreciation for comparable sales was less than half of one percent per year. Inflation was outpacing the incredibly minor appreciation of comparable sales. The agent was looking at sales trends from data that was not reflective of the comparable sales. My data was based upon the sales trends of comparable sales in the neighborhood. And there were ample comparable sales available in order to estimate a reliable trend.
Sometimes appraiser’s work is discounted by others. Usually this is the case when the appraiser’s research and analysis support lessor value than what is desired by the parties involved. While that’s the case, appraisers are the only real estate professionals who are burdened with having to support our work. That’s what we do! And it’s much more difficult than many realize.
I should clarify that this article is focusing on USPAP requirements. An appraiser needs to understand the requirements of their clients. For instance, if an appraiser is performing an appraisal under Fannie Mae requirements, they are required to posses geographic competency before accepting the assignment. Rachel Massey, who is a well-known and well-respected appraiser in our profession, wrote a great article addressing this entitled “Wow, My Market Area is Slow”. Click on the title for a link to that article.
Whether the appraisal is being completed based upon Fannie Mae standards or not, the next time you assume that the appraiser is not competent to complete the appraisal, give them a chance. They probably are. You might be pleasantly surprised!
Here are some other articles and videos I enjoyed recently! I hope you will also…
Sometimes We Don’t See Signs Of Housing Trends Until They Hit Us – Housing Notes by Jonathan Miller
At least read this part of the appraisal – Sacramento Appraisal Blog
What Is A Quality Home Appraisal? – Birmingham Appraisal Blog
Don’t Fall Off The Cliff – The Real Value Podcast!
A Response to: Mortgage Industry Expert Wants to “Eliminate Appraisers”- Appraiserblogs.com by Abdur Abdur-Malik
Judgement = A Required Part of Good Science – George Dell’s Analogue Blog
Ready or Not – It’s Another Year – DW Slater Company, Real Estate Appraisal Blog