Has The Appraisal Been Hijacked By The Report?
I’ve reviewed a lot of appraisal reports over my nearly four decades in practice. What I’m increasingly aware of over the years is that the appraisal report has taken over the valuation process – the cart before the horse, so to speak.
The Uniform Standards of Professional Appraisal Practice (USPAP) has two standards that govern the appraisal of real property – Standard 1 pertains to appraisal development, and Standard 2 relates to communication of the appraisal. The idea is that the appraiser uses Scope of Work to identify the problem, and what research and analyses are necessary to solve the problem. How the report is communicated is a separate issue, and shouldn’t govern the valuation process. Unfortunately, however, it often does. And lest anyone think this a criticism of residential appraisal forms (it is), it happens in the valuation of income properties as well.
The residential appraisal form originated in the 1960’s, the “Green Hornet” initially developed for the savings & loan industry, which used to dominate residential mortgage lending. It’s important to note that this was a time when good data was often scarce, and analytic tools for residential appraisers consisted of adding machines and hand-held calculators; appraisals were either handwritten or typed.
During the mid-1980’s, a collaborative effort between the dominant appraisal organizations (AIREA and SREA) and several government agencies (including FNMA, FHLMC, FHA and VA) produced the Uniform Residential Appraisal Report (FNMA 1004), an evolution of the Green Hornet. This coincided with widespread availability of the personal computer, and subsequent development of software for the URAR and related forms (FNMA 1073 for condominium units and FNMA 1025 for 2-4 units). Other technological advances replaced 35 mm film with digital images, MLS books gave way to web-based platforms, and appraisal reports that used to be mailed or hand-delivered could be sent via e-mail or cloud services.
But the residential appraisal form hasn’t really changed that much over the past 50+ years, still paying homage to limited data and archaic analytics (I actually went back through my Memorabilia file and looked at my first handwritten SFR appraisal report back in June 1981). This is the case even though appraisers now have access to large quantities of sales data on the Internet, and superior analytical tools, including graphics and statistical modeling. The form still has room for three comparable sales, or maybe a few more via Addenda, and eight lines for analysis, plus another half page above the cost approach. Anything more requires pages of addenda, making the report cumbersome, even if the appraiser is motivated to include more information. The use of an adjustment grid with dollar adjustments is virtually unchanged from decades ago; while software does relieve the appraiser from the burden of doing math calculations, it doesn’t require analytical support for adjustments.
For many appraisers, filling out the form IS the process. Large quantities of data are easily accessible and amenable to statistical modeling, but this information is rarely analyzed because the form doesn’t accommodate it. It shouldn’t be surprising that the lending industry has been gravitating to automated valuation models (AVM’s) and similar products, which provide sophisticated (but typically black box) modeling, including performance metrics, almost always cheaper and faster than a conventional appraisal. The GSE’s have also been on a mission to revise the residential appraisal forms, likely resulting in radical changes to both process and format.
Appraisals of income-producing properties were historically done in a narrative format, allowing the appraisal process to happen without interference from the reporting process, although forms were typically utilized for smaller apartment properties (FHLMC 71A and 71B). But even for income properties, there has been a relentless push to automate the reporting process, which inevitably leads to automation of the valuation process.
I’m certainly not advocating for reinvention of the wheel with every appraisal assignment, and I totally understand the utility of forms and templates for efficiently creating an appraisal report. My litigation work doesn’t mesh particularly well with the restrictions and rigidity imposed by forms software, so my views might be somewhat outside the mainstream. Nonetheless, I think appraisers need to think more about the problem to be solved, and the research/analyses necessary to solve the problem; and less about simply populating a form or template. When Scope of Work is defined by the form, format or style of the appraisal report, there is a good chance the client won’t get an accurate or complete solution to the appraisal problem.