Working RE Magazine - Issue 54 - Fall 2020

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Real Est at e A pprai s ers

Fall 2020, Volume 54

COVID-19 APPRAISAL RISK MANAGEMENT Making $345,000 as an Appraiser Fannie Mae and Highest and Best Use The Human Being Business When Loans Go Bad Have You Reviewed These Sales?

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Fall 2020 Volume 54

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From the Publisher Readers Respond

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COVID-19 Appraisal Risk Management Isaac Peck, Editor

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Have You Reviewed These Sales? (Part Two) Danielle Lopez

USPAP: A Living (and Changing) Document Philip G. Spool, ASA

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The Human Being Business David Brauner, Senior Broker at OREP

Making $345,000 as an Appraiser Isaac Peck, Editor

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When Loans Go Bad: Preparing for the Next Wave Rachel Massey, SRA, AI-RRS, ASA

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Fannie Mae and Highest and Best Use Lee Lansford and Richard Heyn

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Professional Marketplace

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Industry News

Mission

Publisher

Working RE is published to help readers build their businesses, reduce their risk of liability and stay informed on important technology and industry issues.

David Brauner dbrauner@orep.org

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Editor Isaac Peck isaac@orep.org

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All stories without attribution are written by the editor.

2 Working RE Fall 2020

Working RE is published quarterly and mailed to real estate appraisers, agents and other real estate professionals nationwide.

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From the Publisher

State of War Coronavirus Survey Update

by David Brauner, Senior Broker at OREP.org

M

y father was a bombardier in the Pacific in World War II. He made it through okay. He died when I was two, so I never really knew him but his bombardier jacket hung in the hall closet for my entire childhood growing up. I don’t know what happened to that brown leather jacket, which featured a bomb-riding cowboy with lasso, but I wish I had it today.

I was born in 1958, and our generation grew up fascinated with World War II. The movies, the television shows (remember “Combat”?): it was the defining event of the century that left an imprint on everything. Morality lessons about what man is capable of—good and evil. This has been on my mind lately because this Pandemic we find ourselves in feels like a war—our war. My father’s generation came together, made sacrifices, rose to the occasion and won. You can judge for yourself how we’re doing.

All of this is an acknowledgement that this pandemic is a defining event. Many of us have been in this As a result of this profession most of our working lives. turmoil, I’m more I thought you might be interested optimistic, not less, to know how your brethren are farabout the future and ing six months into the pandemic, so we’ve updated our Coronavirus that lenders will Survey. How are you doing? How’s business, first of all? Are you doing continue to want interior inspections? Most of my trained appraisers friends have put off their retirement involved in the plans: have you? Do you plan to keep working/appraising? As a result process: are you? of this turmoil, I’m more optimistic, not less, about the future and that lenders will continue to want trained appraisers involved in the process: are you? We’ll publish all the results as always. You can find the Appraiser Coronavirus Survey Part 2: What’s Changed? at WorkingRE. com/COVIDSurvey2.

It’s a cliché by now, but we truly are all in this together by virtue of every breath we inhale and exhale. Take care, God bless and see you on the other side of this. WRE

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Readers Respond Appraising During a Pandemic Don’t you find it abhorrent that the lenders said that they understood our decision to not do interior inspections, then continued to push them and find replacement appraisers who would be willing to do interiors, while they locked their own doors and decided to work from home? —David

 When Loans Go Bad—Preparing for the Next Wave Way back in the good ol’ days of appraising, a primary lender was targeted for a repurchase request on an old, historic house that I had appraised in 1996 for a refinance loan. In less than two years the lender was notified of the repurchase request due to the borrower’s default on the mortgage.

Of course, the ONLY good defense the lender could raise was to have me, the appraiser, refute the accusations being raised that it was a bad appraisal, which I was able to do. The major support in my appraisal was the interior photos of all the remodeling and updating done to that old, historic house. This was in the days prior to the lender requirements of interior photos of all rooms, and support for recent updates. The primary lender was supportive of my appraisal because it was in their best interest, and of course it was a good, thorough appraisal report. Nowadays, we must do much, much more to support our appraisals. There should be no question in anyone’s thinking today that we are on the cusp of a tsunami wave of mortgage defaults.

It is coming, and as an appraiser

who does forensic appraisal reviews, it is without question that there are a vast number of appraisals written in the past few years that are woefully insufficient to withstand even a modest review. —Thomas T.

 Reconsiderations of Value and What to Do About Them What I do when I receive one is send an initial return email asking the following questions: (1) What is your reasoning for the request?, (2) What issues are present with current comps that would indicate they are NOT appropriate? (Selling price cannot be the only parameter), and (3) Information source for new comparables? Unless they are a member of our local MLS, it has been ruled that is proprietary information

which cannot be supplied to a nonclient. That includes members of other MLS databases, appraisers, and companies who request it to be included in reports routinely. The non-member has to contact the board, pay a fee per comparable to obtain the info. They generally don’t push for any additional reconsideration after that. —Cassandra V.



NEVER have been considered by the same buyer. All sales were much lower in price as has been typical for these CU sales. And there was your article.

THANK YOU. It gave me the support I needed. Lately underwriters are trying to pull things down! And never does anyone ask: “How much do you charge for the additional work?” —Roseann D.



This was a very timely article for me. I sat down to address yet another request from an underwriter who seemed to just pull three sales from CU on a property that I came in under value on, BUT that was at the higher end for the subdivision. CU came up with three sales that were not at all comparable, but were within mileage and were recently sold— and that was it. These properties would

Appraisers Speak Out: Full Bifurcated Appraisal Results If you treasure your license-certification, why would you jeopardize it by relying on a stranger’s eyesight? It is still YOUR report! No small print in the certification can wish it away. Your adjustments are developed from what he/she saw. These evolve into your value conclusion. —Candy WRE

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COVID-19 Appraisal Risk Management

by Isaac Peck, Editor

F

One of the (many) questions on appraisers’ minds is how to practice good risk management during these unique and somewhat volatile circumstances.

ive months into the Coronavirus pandemic, it’s beginning to feel like this is the new normal. Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (FHFA) have extended their appraisal flexibility guidelines through August 31, suggesting that the new alternative appraisals, such as the desktop and exterior-only assignments, will continue to be accepted as long as COVID-19 remains a significant safety concern in the U.S. Amidst this new appraisal environment and with a very uncertain economic outlook on the horizon, one of the (many) questions on appraisers’ minds is how to practice good risk management during these unique and somewhat volatile circumstances.

Despite what many pundits have predicted, so far residential real estate has not declined nationally, with many local markets experiencing limited inventory and even seeing price increases. But what does the future hold? Consequently, appraisers are wondering what, if any, disclosures and disclaimers should be included in their reports, as well as how best to navigate the risks inherent in appraising during a pandemic.

Here’s what the experts are saying.

Safety Best Practices For starters, appraisers should follow the health protocols in their state/locality

Isaac Peck is the Editor of Working RE magazine and the Vice President of Marketing and Operations at OREP.org, a leading provider of E&O insurance for appraisers, inspectors and other real estate professionals in 50 states. He received his master’s degree in accounting at San Diego State University. He can be contacted at isaac@orep.org or (888) 347-5273.

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to ensure the safety of themselves and those they interact with. This not only protects the appraiser’s own health, but also helps limit their liability as they are following proper safety protocols in line with industry standards.

In California, for example, the California Department of Public Health (CDPH) and Cal/OSHA issued guidelines for real estate transactions that stipulate how real estate agents should operate, including the establishment of a COVID-19 Prevention Plan on all listed properties. The guidelines require the plan to include instructions for all property visitors, including appraisers, to use personal protective equipment (PPE) such as face masks and gloves, carry hand sanitizer, maintain physical distancing and avoid touching surfaces of the shown property.

Because the Cal/OSHA guidelines stipulate that all visitors to a property must confirm their understanding of the rules, the California Association of Realtors (CAR) has developed a Coronavirus Property Entry Advisory and Declaration (PEAD) form that many appraisers are being asked to sign before being allowed access on to the property. The PEAD form advises the appraiser/visitor that visiting properties may be unsafe and it requires the signer to attest that they will maintain social distancing, wear gloves, a face mask and shoe coverings, and that they do not currently have any symptoms or have been in contact with someone who has symptoms of COVID-19. page 88

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Appraiser Liability Some appraisers have been worrying about facing lawsuits alleging that they spread COVID-19 to the property’s inhabitants or to others visiting the property. While positions on this point vary, the North Carolina Association of Realtors® addresses such concerns in a Q&A posted to its website, writing: “A hold harmless agreement protects a party from liability if another party is injured on their property or is injured during an inherently dangerous activity. In the case of a pandemic, where the risks associated are not only widely known but is also widespread, easily transmittable and may not show symptoms for days after exposure, proving causation would be nearly impossible from a legal standpoint.”

David Brauner, Senior Broker at OREP.org, a leading provider of appraiser E&O insurance nationwide, says that “virus spread” claims might be legally possible but from his research, including insurance company guidance, it would be difficult to prove the facts needed to demonstrate direct causation.

“We are looking for certainty at a time when certainty does not exist,” Brauner said. “The best precaution appraisers can take in this regard is to follow the local safety protocol, wear PPE, maintain social distancing, and stay home if you’re not feeling well.”

Given the concerns about virusspread, Brauner reports that many appraisers insured by OREP have asked about whether they should sign the PEAD form or other forms like it. “The recently released PEAD form is now being used widely throughout California following CAR’s strong recommendation of it as well as the guidance issued by CDPH and Cal/ OSHA. We don’t see a problem with our insureds signing it as long as you can sign it in good faith, i.e. you are following the safety standards in your locality and you don’t have any symptoms,” says Brauner.

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However, the state and local laws, as well as the forms appraisers are being asked to sign, can vary widely.

Brauner advises appraisers to be careful when signing any agreement that requires the appraiser to indemnify a bank, Realtor®, or third party in the event a claim were to arise alleging damages due to COVID-19 spread. “It makes sense, and it’s in every appraiser’s interests to meet or exceed their local safety protocols, but you shouldn’t be indemnifying anyone or agreeing to pay their legal claims just to visit a property. E&O typically does not provide third-party coverage. Make sure that you read any agreement you’re asked to sign carefully and be on the lookout for hold-harmless and indemnification language,” advises Brauner.

Market Conditions Another very important question is what kind of disclosure or disclaimer should appraisers include addressing COVID19 and market conditions. Is COVID19 going to crash the real estate market?

When the pandemic first started, appraisers began using canned disclaimers that included statements: “COVID19 is a national pandemic, but the effects of COVID-19 on the real estate market in the area of the subject property are not yet measurable based on reliable data.”

However, now that the country has been in the midst of the pandemic for over six months, such statements are no longer sufficient. COVID-19 has had an effect on the market and the question is, what is that effect?

The solution, according to Appraisal Institute Director of Screening Stephanie Coleman, MAI, SRA, AI-GRS, AI-RRS, is to not address the uncertainty of the market using limiting conditions, extraordinary assumptions, or disclaimers, but to instead report what is happening to the market right now. “We come up with not what we think the value of a property is, but what we think the market thinks it is. To figure out what

the market’s opinion of what a property is worth, we start with market analysis.

Market analysis is a lot easier when market participants feel confident they know what’s happening. When there’s a great deal of uncertainty in the market, market participants become confused, and figuring out what ‘typical, reasonable and knowledgeable’ buyers and sellers think, and how they would react, becomes complicated,” writes Coleman.

So what is to be done? “The best we can do is talk to market participants —buyers, sellers, brokers. What’s happening with active escrows? Are buyers backing out? Are sellers holding off on listing properties? Reducing prices?

Offering concessions? What’s happening with days on market? What are brokers hearing? Are tenants renewing leases? Are businesses closing and vacating? Are vacant spaces getting leased? Are developers going ahead with development plans, or have they put them on hold?”, Coleman asks.

In other words, instead of making an extraordinary assumption that the market is stable, or that the market is declining, appraisers should report what is happening in the market today. And this speaks volumes about why the research, experience and ultimately the opinion of an appraiser is so important.

Richard Hagar, SRA and a popular appraisal education instructor, reminds appraisers the most important question is what is happening locally. “Fannie Mae’s form is not asking for national information or even regional, they want to know what’s happening in the NEIGHBORHOOD, right now in the last week or two, if not yesterday. Good MLS systems have this information available. Where I appraise here in western Washington, I can drive down to an individual county, city, MLS area and even a one block area and I can report on what is happening now. If there’s a negative impact on value, it’s up to the appraiser to measure and report it, not

default to a statement that it may impact value,” says Hagar.

In Hagar’s local market of western Washington, he says the market is actually going up. “We have higher prices than we did last year at this time. The listings are dramatically down and it is creating a shortage driven market.

In northwestern Washington, we’ve had 2,200 new listings come on the market in the last week, but over 4,000 homes have changed to ‘Pending’ during that same time period, so homes are going under contract almost twice as fast as they’re being listed. Listings are staying active for an average of four days in some neighborhoods. I was actually very surprised to see prices increase during COVID-19, but my job is to report what the data says, not what I thought was going to happen. I’m not a fortune teller,” reports Hagar.

Brauner echoes that in addition to reporting what is happening in the appraiser’s immediate market, the appraiser should include a statement in their report that they are not predicting the future. “Some of our OREP insureds are concerned about the future of the real estate market and want to include statements that their market may decline or even include an extraordinary assumption that the market will decline. However, on a typical assignment, the appraiser is providing an opinion of value that is a snapshot in time and reflects what is happening in the market as of the effective date. You should absolutely be on the lookout for changing market conditions, but in terms of appraiser risk management, don’t try to predict the future. Make it clear that your appraisal is not a guarantee or prediction of future market conditions, but instead report and analyze the data that is available to you about what is currently happening in the market,” advises Brauner.

The most effective way to limit your liability, according to Brauner, is to provide up-to-date data and analysis in

the appraisal report. “Appraisers should be on the lookout for the effects that COVID-19 is having on their local real estate market. As soon as those effects are measurable, you should report on them, whether it’s positive or negative. Describe what you are seeing in the market,” says Brauner. “If you are unsure about how to do this effectively, there is plenty of online education from OREPEducation.org and other wellrespected providers that will help you manage your liability and make you more valuable to your clients.”

A standard disclosure that OREP has offered its insureds is the following: This appraisal was performed during the COVID-19 pandemic which has begun to have widespread economic and health impacts throughout the United States. The analyses, conclusions and value opinion in this appraisal are based on the data available to the appraiser at the time of the assignment and apply only as of the effective date indicated. No analyses or opinions contained in this appraisal should be construed as predictions of future market conditions or value.

The Appraisal Institute has published additional guidance on how to report on Market Conditions, including Guide Note 10: Appraising in the Aftermath of a Disaster, Guide Note 11: Comparable Selection in a Declining Market and Guide Note 12:Analyzing Market Trends. To find links to these Guide Notes, visit OREP.org/ marketconditions.

Using Data Another potential risk appraisers are facing is the use of third-party data when completing an appraisal report.

Even though the new Fannie Mae forms include statements that the appraiser has “relied on data provided by third parties,” Brauner advises to include an additional statement that reiterates that you did not personally inspect the interior of the subject property. The goal is to describe in clear, plain English what information you received, what you observed, and ultimately what you

did for the assignment. “If you got the data from the real estate agent, or interviewed the property owner, or used a specific type of software to collect the data, be sure to save notes, transcripts, and details of those conversations in your workfile,” Brauner said. Describe the details of what you did and how you did it and most importantly—why you did it, clearly in your report, and save the proof to your workfile. Most claims happen years after a report is completed, so be sure to make detailed notes and save them to your workfile so you don’t have to try to reconstruct what you were thinking years after the fact”.

It should go without saying that if you didn’t personally inspect the interior of the property, don’t say that you did. Fannie Mae, as well as The Appraisal Foundation (TAF), have issued guidance clarifying the point, with TAF writing that: “It would be misleading for an appraiser to indicate that an interior inspection of the subject property was performed, when, in fact, the appraiser only viewed interior photos, video, or other data from technological solutions.”

In a Q&A published in Fannie Mae’s Selling Guide on June 3, 2020, Fannie clarifies that extraordinary assumptions are NOT allowed on any exterior-only or desktop product, indicating that: “If adequate information about the subject property is not available from a credible source, then the desktop or exterior-only inspection appraisal is not acceptable.

Appraisers must have data sources they consider reliable.” However, Fannie adds that the “assumption that data sources are correct is not considered an extraordinary assumption.”

Hagar advises appraisers to accurately disclose what they did and didn’t do. “If you didn’t drive by, don’t say that you did. If you relied on information, then say so. And even though Fannie doesn’t allow extraordinary assumptions, you can still put that you assume that the page 108

Fall 2020 Working RE

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information provided to you is accurate.

But, just like Fannie says, if you don’t think credible information is available, don’t do the assignment,” says Hagar.

Risk and Disclaimers/Disclosures The reality of the current situation, not only for appraisers, but for all Americans across the country, is that the future of the real estate market and the U.S. economy remains uncertain. There are some similarities between the recession of 2008 and what is happening now, such as wide-scale unemployment and turmoil in the financial markets, but there are also stark differences.

Residential real estate has held its own so far and there remain many sectors of the economy that are healthy.

No one has a crystal ball. All appraisers can do is be diligent in their reports, and take the necessary precautions to protect themselves.

According to Brauner, over 50 percent of claims filed against appraisers are from borrowers. Such claims usually involve a degree of buyer’s remorse, but often allege measuring errors, inaccurate or negligent analysis in the appraisal report, incorrect zoning, undisclosed defects in the construction/condition of the home, and so on.

To protect against those claims, appraisers can use the following statement in their reports: The only purpose the appraiser intends for this appraisal report is to communicate a credible opinion of the market value of the subject property, as defined in this report, to the above referenced client. That client is the only user the appraiser intends of this report. The only use the appraiser intends for this appraisal is to assist the client, as its sole intended use, with the client’s internal decisionmaking purposes relative to placing a mortgage on the property. Because the appraiser has not identified any borrower, purchaser, or seller as an intended user of this appraisal, such unnamed parties should not rely on the appraisal for their own purposes, or for any purposes whatsoever. Payment for the appraisal, either directly or indirectly, or receipt of a copy of the 10 Working RE Fall 2020

appraisal report by any other third party does NOT means the party is an intended user of the appraisal. If such parties require an appraisal for their own use, the appraiser advises them to obtain an appraisal from an appraiser of their own choosing. This appraisal report shall not serve as the basis for any appraisal contingency in a purchase agreement relating to the property or any property purchase decision.

Along those same lines, Brauner/ OREP advises appraisers to include a statement in their reports indicating that the appraisal is not a home inspection and the appraiser is not qualified to diagnose or identify defects or hazards present at the home.

Appraisers can include the following two statements in their reports: • This appraisal report is not a home inspection and should not be relied on to disclose faults, defects, or property condition problems present at the subject property. The appraiser is not a home inspector. A formal home inspection for the subject property was not provided to the appraiser. The appraiser does not guarantee or imply that the property is free from defects. A professional home inspection is recommended on all property purchase transactions.

• Due to the limited extent of the appraiser’s observation of the property, it is assumed that all major components of the subject, and comparables, are built to community standards typical of the era when the improvements were built or updated. We do not research building permits, well or sewage disposal information. I/We do not know if building permits were obtained or what building codes were in effect at the time of the improvement’s construction or modification. No verification of building or land use permits is performed. We assume that all hidden components (including but not limited to framing, foundation, plumbing, electrical, insulation, HVAC systems) exist, were built to local standards and are in working order. Typically, crawl spaces and attics are not entered or viewed. It is assumed that there are no structural defects hidden by floor or wall coverings and that all mechanical equipment, appliances, electrical components, and roofing are functional.

If the client has any questions regarding these items, it is the client’s responsibility to order the

appropriate inspections. The appraisal does not serve as a warranty on the complete condition of the property.

Insurance Reminders Brauner reminds that E&O insurance is THE underpinning of any appraiser’s risk management strategy. “You will always hate paying for it until you need it,” says Brauner. “Then when you need it, you’ll be very grateful you have it.

It’s the best sleeping pill there is.”

Because many appraisers are choosing this time to step away from appraising for a bit or to retire early, he advises them to pay some attention to their E&O. “If you take a break from appraising, close up shop and join a larger firm, or retire, you will want to make sure you get Extended Reporting Period (ERP) coverage (also called ‘tail coverage’).” This needs to be done at the time your policy expires, Brauner says. “It protects you into the future for all your previous work completed during the years you were covered and within the policy period.

It’s something that we always remind our insureds of because it’s so important. Call us or your agent if any of this is not clear.”

Some appraisers try to trim expenses during downturns by letting their E&O policy expire. Because all professional (E&O) policies are Claims Made, the risk is that an unreported claim arising from an old appraisal may not be covered if the policy has expired. “The way to stay protected is to maintain continuous E&O coverage or purchase ERP coverage,” Brauner says. “For those OREP insureds are retiring and qualify, you get free lifetime ERP,” reports Brauner. Call OREP or your agent for more. Stay safe out there! WRE Information for this story reproduced from Appraiser Liability and Risk Management (7 hours approved CE) offered through OREPEducation.org. (Available Q2 2021 and available free to OREP insureds/members.)

Have You Reviewed These Sales? (Part Two) Handling ROVs and Alternative Sales Requests

by Danielle Lopez

I

Is it too much to ask to have the requestor indicate why they feel these sales to be better, or at the very least the actual intent and purpose for the additional analysis?

wrote an article earlier this year titled Reconsideration of Value and What to Do About Them (Working RE’s Summer 2020 edition) that generated a great deal of response. Shortly after publication, Working RE (WRE) began receiving numerous emails and calls from appraisers nationwide with questions, including where specifically they could find certain verbiage that was cited in the article.

Why is this such a hot button issue for appraisers? Precisely because these types of requests are becoming more and more commonplace in the industry, especially in the current market environment. With inventory currently low in most market areas, amidst an elevated level of demand, appraisers are increasingly facing a barrage of additional sales and reconsideration of value (ROV) requests from AMCs and underwriters. This not only saps the appraiser’s time by having to repeatedly explain and address a laundry list of inapplicable comparable sales, but it also places undue pressure on the appraiser. So let’s take a closer look at what rules are in place to protect appraisers and clarify my first article.

One of the points of confusion regarding the first article is the conflation of VA with Fannie Mae’s guidelines. Let’s clear that up first.

Danielle Lopez is a Certified Residential Appraiser in New Jersey with 16 years’ experience.

She has been recently certified in Green Appraising and working toward her SRA designation and commercial certification.

12 Working RE Fall 2020

The Department of Veteran Affairs (VA) has guidelines for its Tidewater / ROV process that many of us appraisers consider the Gold standard. The VA requires that any lender or AMC submitting an ROV to an appraiser must: 1. Include no more than three sales.

2. Put the alternative sales on a grid and include supported documenta tion / verification such as MLS sheets, maps and tax records.

3. Provide a concise narrative explain ing why the requestor believes the comparables provided in the grid are superior to those selected by the appraiser.

So while the VA has clear guidelines on how to structure these requests when an underwriter, lender, or AMC staff decides to send over a list of comparables to be reviewed by the appraiser, Fannie Mae and the rest of the lending industry are doing things differently.

What Fannie Mae Says While not as detailed as the VA, Fannie Mae does have guidelines on how lenders and AMCs should interact with appraisers when sending additional comparables to analyze, specifically if those comparables are generated by Fannie’s Collateral Underwriter (CU) appraisal review tool. In its CU FAQ published in January 2020, Fannie writes: “Fannie Mae expects lenders to use human due diligence in combination with

the CU findings, and will actively follow up with lenders who ask appraisers to change their reports based on CU findings without any further due diligence by the lender. Fannie Mae encourages lenders to carefully review the appraisal report, including all commentary, before seeking clarification from the appraiser.

Taking messages or alternative sales at face value and simply asking your appraiser to address them is neither effective nor efficient.”

In other words, lenders and AMCs are expected to read the appraisal report, including “all commentary” before forwarding a list of alternative sales for us to review.

Additionally, in its Lender Letter LL-2015-02, Fannie writes: “Before asking the appraiser to consider any alternative sales, it is imperative that the lender analyze the relevance of the sale to determine if the use of such sale would result in any material change to the appraisal report.”

The words “imperative” and “analyze” are two words that stick out the most. In my experience, many of the reconsideration requests I have received do not appear to have been analyzed at all by the AMC staff prior to sending to me. The majority of the time there is a reason I didn’t use that sale i.e.

GLA, age, location, transaction, quality or condition.

Fannie’s Lender Letter goes on: “The lender must not make demands or provide instructions to the appraiser based solely on automated feedback.

Also, the Collateral Underwriter® (CU®) license terms prohibit using it ‘in a manner that interferes with the independent judgment of an appraiser.’

Fannie Mae expects the lender to use human due diligence in combination with the CU feedback and will actively follow up with lenders who are reported to be asking appraisers to change their reports based on CU feedback without any further due diligence.”

Update from Fannie As a result of the overwhelming response to the first story, WRE and I submitted an email to the Collateral Policy team at Fannie Mae, asking for clarification.

We received a very considerate response in which Fannie Mae reiterates its guidance above.

Fannie writes, “It is not acceptable for an appraisal management company (AMC) or lender to forward a list of alternative comparable sales without human due diligence, and a constructive dialogue is expected to resolve specific appraisal questions or concerns. In the five years that CU has been available, we have addressed the use of CU findings in appraiser feedback consistently with our lenders through training and other ongoing communications. When valid concerns are raised by appraisers, we discuss them with our lenders.”

Fannie Mae also shares some sensitivity for the role of AMCs, writing that it “encourages appraisers to operate with a customer service mentality.

Customer questions are a great indicator of how well an appraiser is succeeding at delivering credible reports. Excellent appraisers work with their customers to resolve concerns, as well as learn from past assignments to create better customer experiences in the future.”

I agree with this. Appraisers are in the customer service business and as I mentioned in my first article on this topic, I have missed reliable sales occasionally, sometimes because the real estate agent did not properly geocode in the MLS. When it happens, I am more than happy to review the new data and add it to the report to further support value, or in some cases to reconcile a new value. page 148

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7page 13

But in its email, Fannie also cautions that in cases where appraiser independence is being violated, and it “cannot be resolved through communication with the customer,” then Fannie “encourages appraisers to contact the Appraisal Complaint National Hotline (877-739-0096) or similar hotlines.

Appraisers may [also] use the “Contact Us” link available on our Appraisers page (https://singlefamily.fanniemae. com/originating-underwriting/appraisers) to report deviations from our policy; however, due to our secondary market role and mission, Fannie Mae is limited in how we can respond until a loan closes and is delivered to us.”

In other words, if we as appraisers feel that our independence is being violated or that the lender or AMC is incorrectly using CU per Fannie Mae’s guidelines, we can report that behavior to the national hotline established by the Appraisal Subcommittee (ASC) and to Fannie Mae directly.

The Practice of Appraisal Practice One important point is that Fannie’s guidelines address specifically how lenders and AMCs utilize CU findings and data, with the intent of preventing lender or AMC personnel from just forwarding a list of alternative sales to the appraiser, asking for an explanation, and using that as proof that they’ve performed their “due diligence.”

The problem for appraisers is that most lender and AMC staff are careful not to admit that these alternative sales are generated by the CU system. But nevertheless, the standards apply. And even if the alternative sales are not generated by CU, I believe the requestor should be held to this same standard. Is it too much to ask that AMCs read the report, perform due diligence and analyze the relevance of the alternative sales before they send them to the appraiser? I don’t think so!

14 Working RE Fall 2020

While I appreciate Fannie Mae responding to our inquiry, stricter standards are needed from Fannie Mae and the industry as a whole. Compared to the VA, Fannie Mae’s guidelines are vague. Having more detailed guidelines would help reduce these unnecessary requests and there would be less confusion on what is expected from both appraisers and AMCs. Many AMCs and financial institutions have their own protocols and forms that they expect their staff to complete before submitting. Some of these forms indicate that no more than three sales should be sent to the appraiser. One company I found indicated that sales shouldn’t be larger or smaller in GLA than those found in the report. And also that comparable sales that have been recently renovated versus the non-renovated subject, and new homes versus and older dwellings, should be avoided. However, not all AMCs or lenders have quality control procedures that are this detailed.

So why aren’t they? Is there a difference between who is sending the reconsideration of value and the protocol they should be following? Who is responsible for sending these requests?

If the Fannie Mae letter was written for underwriters in conjunction with CU then who is sending appraisers what appears to be a “farm” list of potentially missed sales within a close proximity?

Is it our job to explain in detail why we didn’t use certain sales or is it our job to select the best comparable sales reported sold and explain in detail why they support the subject and market value? In my own practice, if I see a sale on the same street that is obviously an outlier, I will include a quick sentence of my analysis and findings so the reader knows I didn’t “overlook” or miss a sale.

But let’s be honest, we don’t always have the time to explain why certain sales were not used. Appraisers understand that their reports should be written in a way that is not misleading to the reader.

But, it appears that many companies neglect to understand that most of these appraisals are “Summary” appraisals and not “Narrative” appraisals. Most appraisers already include multi-page addenda to the report explaining in detail the subject condition, location, adjustments, and comparable sales.

If the underwriter performs a quick search that reveals two sales within very close proximity of the subject they often send over a request that expects the appraiser to “comment” on why these sales were not utilized in the report.

Is this considered a reconsideration of value? What is the difference between the underwriter doing their due diligence to ensure that a viable sale was not missed and just another Collateral Underwriting search with possible sales that were excluded in the report?

From the appraiser’s point of view, there is no difference. The appraiser must view this as a reconsideration of value and follow all of the necessary steps even if the sale the underwriter found on the same street sold for $100,000 less than the subject. We must analyze the sale, which if it sold on the same street, we most likely already did and determined it to be an outlier for whatever reason. But, because of this request, we now have to open a separate Word document and in detail explain why we found this particular sale to be an outlier and why it is not a good indicator of value, attach it to the report and resubmit. This is time consuming. If clients now want additional commentary on why some sales in the neighborhood were not used then this should all be stated in the scope of work. This way, the appraiser can set the fees, due date, and ETA accordingly, as this requires additional time to explain.

What can be done to make it clearer about who is submitting the request? Is it the underwriter, the owner, the agent, the loan officer, the borrower, or just an AMC staff? The appraiser is never made aware of the actual sender as it often

states “the client.” Perhaps the AMC can provide more detail and explain the purpose of the reconsideration. Is it to simply state why a property was omitted or is the additional analysis for the purpose of reconsidering value? Is it too much to ask to have the requestor indicate why they feel these sales to be better, or at the very least the actual intent and purpose for the additional analysis? Appraisers understand the client is paying us to research and analyze data, but we already did our job.

Pay Me Additionally, appraisers should be compensated for their time. Appraisers are encouraged to set a fee for each alternative sale that is forwarded for their analysis because time is money. I have only requested an additional fee once, but my pushback was enough to make the client drop the request. If the appraiser overlooks a relevant sale that impacts the opinion of value, the appraiser should waive the fee. If the client is truly doing

their due diligence then they would already know if that particular property would have any material change in the appraisal report. I don’t think that our clients understand the process appraisers take in reviewing, analyzing and verifying each sale, because if they did, I would bet they would appreciate the due diligence that goes into every report.

No Respect Receiving a list of alternative sales that do not pertain to the subject property is insulting to professional appraisers. It means lenders trust AVMs more than they trust the appraiser. This is a problem, especially given the amount of time appraisers spend on becoming Certified in their area of expertise. Each and every appraisal takes a considerable amount of time to research, analyze and verify. We are professionals. Shouldn’t professionals be trusted in their area of expertise? In many professions, there isn’t a problem questioning or even getting a second opinion, but it becomes a

problem when the professional appraiser is trusted less than computer generated data from AVMs and CU. It is also a problem when the person asking the question hasn’t analyzed the information first before seeking advice/explanation from the professional.

It is clear from all the feedback WRE received after the first story that ROVs and being sent alternative sales for review are problems for appraisers on a national level. It’s time for AMCs and lenders to take their jobs seriously and approach appraisers after doing their professional due diligence. If you are going to question an appraiser’s work, be sure that you’ve actually spent the time to analyze what they did and provide an explanation as to why a sale might be superior to their selected comparables. And it’s time for appraisers to start pushing back against AMCs and lenders who are not performing due diligence or providing any analysis when forwarding comparables for our review. WRE

Fall 2020 Working RE 15

USPAP: A Living (and Changing) Document

by Phillip G. Spool, ASA

In doing reviews I occasionally still

My goal is to summarize the evolution and the significant changes made to USPAP from its inception through the USPAP of today.

see appraisal reports referred to as either a Self-Contained Appraisal Report or a Summary Appraisal Report. Evidently, the appraiser was not aware that this description ended with the 2014 Uniform Standards of Professional Appraisal Practice (USPAP). I then start to wonder what other changes appraisers are not realizing despite taking the required seven-hour USPAP update course every other year. Consequently, my goal with this article is to summarize the evolution and the significant changes made to USPAP from its inception through the USPAP of today.

This article includes multiple references to “significant” changes in USPAP, which I define as changes that affect the way the appraisal report is developed (Standards Rule 1) and reported (Standards Rule 2). Excluded in this article are any changes or additions to the Advisory Opinions. While they are important, they are not considered part of USPAP as stated in the second paragraph in the foreword to the USPAP advisory opinions: “Advisory Opinions are not part of USPAP.”

Origins of USPAP Prior to the conception of USPAP as we know it today, the Federal Home Loan Bank Board (FHLBB) issued Memorandum R41b sometime between 1985 and 1986. While not a

Philip G. Spool, ASA, is a State-Certified General in Florida, appraising over 36 years.

Formerly the Chief Appraisal of Flagler Federal Savings and Loan Association, he has been self-employed for the past 18 years. In addition to appraising, he is an instructor with Miami-Dade College, teaching beginning and advanced residential appraisal classes as well as continuing education. He can be reached at pgspool@bellsouth.net.

16 Working RE Fall 2020

regulation, R41b contained guidelines used by FHLBB examiners in determining appraisal services. Primary users included savings and loans institutions, which provided residential loans, and commercial banks, which provided loans on commercial properties. Memorandum R41b did not include specific provisions concerning appraisal independence, hence the subsequent creation of The Appraisal Foundation (TAF), which created the Appraisal Standards Board (which oversees USPAP) and the Appraisal Qualifications Board (which oversees licensing requirements).

The original USPAP was developed in 1986-1987. The effective date of USPAP was April 27, 1987.

Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 required each agency to prescribe appropriate standards for the performance of real estate appraisals in connection with federally related transactions. All years prior and up to 2006 had new USPAP editions.

The 2006 edition was effective July 1, 2006 and ever since then, the USPAP edition was effective for two years and is published every other even year. The current USPAP edition is from January 1, 2020 through December 31, 2021. The Appraisal Foundation’s Appraisal Standards Board (ASB) meets periodically and requests public comment for possible changes to the current USPAP. Typically, the ASB finalizes the immediate future USPAP by the end of March 31st of the odd year. page 188

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1992 USPAP

1995 USPAP (Major Revision)

Rules as we know them today, which follow the Preamble and Definitions, were known as Provisions, such as the Ethics Provision, Competency Provision, Departure Provision, Jurisdictional Exception and Supplemental Standards.

Eventually they were replaced with the Ethics Rule, Records Keeping Rule, Competency Rule, Scope of Work Rule and the Jurisdictional Exception Rule.

1995 was the first year that USPAP indicated any particular wording for types of appraisal reports, which were Self-Contained Appraisal Report, Summary Appraisal Report, or Restricted Appraisal Report. It should be noted that Self-Contained Appraisal Report, Summary Appraisal Report and Restricted Appraisal Report labels for reports ended December 31, 2013.

The Departure Provision also added the following: “(3) The client has agreed that the performance of a limited appraisal or consulting service would be appropriate.”

No significant changes in 1996, 1997 and 1998.

The Departure Provision allowed limited departure from sections of USPAP that were classified as specific guidelines rather than binding requirements. Any Standard that did not state: “Departure from this binding requirement is not permitted,” allowed the appraiser to limit his assignment to be performed.

The Departure Provision stated that prior to entering into an agreement: (1) the appraiser has determined that the appraisal or consulting process to be performed is not so limited that the resulting assignment would tend to mislead or confuse the client or the intended users of the report; and (2) the appraiser has advised the client that the assignment calls for something less than, or different from, the work required by the specific guidelines and that the report will clearly identify and explain the departure(s).

What is interesting is that rather than the Departure Provision indicating the appraiser performed an “appraisal report,” it was referred to as an “assignment” or an “assignment to be performed.” The burden of proof was on the appraiser to decide before accepting a limited assignment that the result will not confuse or mislead. The burden of disclosure was also on the appraiser to report any limitations. This remained the same for the 1993 and 1994 USPAP.

It should be noted that the Departure Provision was the precursor to the current Scope of Work Rule in that the Departure Provision stated what was not performed.

18 Working RE Fall 2020

1999 USPAP The word “Provision” was changed to “Rule.” Restricted Appraisal Report was changed to Restricted Use Appraisal Report. Intended Use and Intended User were also added.

Total revamp of Standard Rule 1-2 SR 1-2 (a) incorporated the words “Intended Use” and SR 1-2 (b) incorporated the words “Intended User”; also the word “opinion” replaced the word “estimate” when defining the value. Also added was: “identify the effective date of the appraiser’s opinions and conclusions,” which was not mentioned before.

2000 USPAP The Confidentiality section of the Ethics Rule replaced the wording from “Confidential factual data” to “Confidential information.” The Competency Rule added additional competency requirements other than geographical. The change was “an appraiser’s familiarity with a specific type of property, a market, a geographic area, or an analytical method.” Standards Rule 1-2 (f) was modified to identify more specifically the parties associated with the appraiser’s scope of work obligations and

therefore, the phrase “third party” was replaced with “the client, an intended user, or the appraiser’s peers in the same or a similar assignment.”

2001 USPAP Standards Rule 2-3 in the comments section added “An appraiser who signs any part of the appraisal report, including a letter of transmittal, must also sign this certification.”

2002 USPAP Prior to 2002, the definition of Supplemental Standards was “an assignment performance requirement that adds to the requirements in USPAP.” In the 2002 USPAP, the definition of Supplemental Standards (since retired December 31, 2017) was modified to indicate that Supplemental Standards are “requirements issued by government agencies, government sponsored enterprises, or other entities that establish public policy, which add to the purpose, intent and content of the requirements in USPAP, that have a material effect on the development and reporting of assignment results.”

However, of utmost importance was the added comment “Contractual agreements that are unique to the contracting entity and which apply specifically to a particular property or assignment are not supplemental standards.” What this meant was that any requirements by your client that are not published in regulations, rules or policies were not considered Supplemental Standards and therefore, requirements by your client did not necessarily mean they were a USPAP requirement. In 2002, USPAP did not have a Scope of Work Rule which laid out the requirements that an appraiser must abide by in USPAP.

2003 USPAP Standards Rule 1-5 modified the time period when the appraiser analyzes prior sales of the property. Up through

2002, the time period was one year for one-to-four family residential properties and three years for all other property types. Effective in 2003, all sales of the subject property that occurred within the three years prior to the effective date of the appraisal must be analyzed (not just stated) in the report, regardless if it is a one-to-four family residential property or other type of property. The three-year reporting is based on the prior three years to the effective date of the appraisal. The last portion of the 2002 USPAP Standards Rule 1-5 was made into a separate new Standards Rule 1-6 in 2003, which states the appraiser must reconcile the quality and quantity of data available and to reconcile the applicability or suitability of the approaches used to arrive at the value conclusion. This Standards Rule contains binding requirements from which departure is not permitted.

2004 USPAP The 2004 USPAP was the last year that the Standards Rule 1-3 (b) comments section indicated that land should be valued as if vacant and available for development in accordance with its highest and best use. This portion was removed from SR 1-3 (b) in the 2005 USPAP edition as it was considered methodology and not a part of standards.

2005 USPAP The 2005 USPAP was the last year of the Departure Rule along with the defined terms Complete Appraisal, Limited Appraisal, Binding Requirements and Specific Requirements. A Compete Appraisal is now referred to as an “Appraisal Report” and a Limited Appraisal is now referred to as a “Restricted Appraisal Report.”

Supplemental Standards was important in the 2005 USPAP edition. It stated: “Supplemental standards applicable to assignments prepared for specific purposes or property types may be issued (i.e. published) by government

agencies, government sponsored enterprises or other entities that establish public policy. An appraiser and client must ascertain whether any such published supplemental standards in addition to USPAP apply to the assignment being considered”. Keep in mind that USPAP never described any appraisal report as a “full appraisal.” Lenders use that term so that the appraiser includes the cost approach to value.

2006 USPAP The 2006 USPAP became effective July 1, 2006 and it remained in effect for only six months, through December 31, 2007. Ever since then, USPAP was printed every other even year. The 2006 USPAP edition was the last year the Supplemental Standards Rule existed. The Departure Rule was removed along with the defined terms Complete Appraisal, Limited Appraisal, Binding Requirements and Specific Requirements.

New to the Rules section was the Scope of Work Rule. For the most part, the new Scope of Work Rule replaced the Departure Rule but with different features and meaning. The new Scope of Work Rule maintained the scope of work (type and extent of research and analyses) and continues to be the driving force to produce credible assignment results. The scope of work that was discussed in detail in the 2005 USPAP Standards Rule 1-2 (f) is now only one sentence from the 2006 USPAP to currently in 2020/2021 USPAP as Standards Rule 1-2 (h): “Determine the scope of work necessary to produce credible assignment results in accordance with the Scope of Work Rule.”

The Departure Rule (2005 USPAP) only applied to portions of the development process governed by Specific Requirements. The Departure Rule would have overlapped the Scope of Work Rule and thus was eliminated in order to avoid confusion.

2008-2009 USPAP The 2008-2009 USPAP deleted the Supplemental Standards Rule. The Scope of Work Rule replaced the term “supplemental standards” with “law and regulations” (last paragraph of the Problem Identification portion of the Scope of Work Rule). Ever since this change was made, the exact words in the last paragraph in the Problem Identification section within the Scope of Work Rule has not changed. The following is the paragraph: Assignment conditions include assumptions, extraordinary assumptions, hypothetical conditions, laws and regulations, jurisdictional exceptions, and other conditions that affect the scope of work. Laws include constitutions, legislative and court-made laws, administrative rules, and ordinances. Regulations include rules or orders, having legal force, issued by an administrative agency.

This is important because there was confusion whether the requirements on the Fannie Mae (FNMA) or Freddie Mac (FHLMC) forms did not apply to USPAP. The Fannie Mae guidelines refer to appraisals prepared on a Fannie Mae or Freddie Mac form and the FHA and VA forms have their own requirements. Therefore, the laws and regulations apply to appraisal reports prepared by any government agency or government sponsored enterprise.

Keep in mind that the General Purpose (GP) form or narratives do not have their own guidelines and the appraiser only adheres to USPAP.

2010-2011 USPAP The only major change in the 2010-2011 USPAP edition was within the Conduct Section of the Ethics Rule. It now states that prior to accepting an assignment, and if discovered at any time during the assignment, an appraiser must disclose to the client and in the report certification: “any services regarding the subject property performed by the appraiser within page 228

Fall 2020 Working RE 19

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7page 19

the prior three years, as an appraiser or in any other capacity.” While this statement is within the Conduct Section of the Ethics Rule, it was not stated in the certification of the report until the 20122013 USPAP edition.

2012-2013 USPAP USPAP created a new Records Keeping Rule. Prior to this edition of USPAP, the Ethics Rule contained a section devoted to Record Keeping. Self-Contained Appraisal Report, Summary Appraisal Report, or Restricted Use appraisal reports ended December 31, 2013.

As stated in the 2010-2011 USPAP comments above, the statement “any services regarding the subject property performed by the appraiser within the prior three years, as an appraiser or in any other capacity” is now included in the signed certification of the report.

2014-2015 USPAP Report options changed whereby appraisal reports were either known as an Appraisal Report or a Restricted Appraisal Report. An Appraisal Report must summarize the appraiser’s analysis and the rationale for the conclusions.

A Restricted Appraisal Report might not include sufficient information for the client to understand either the appraiser’s analyses or rationale for the appraiser’s conclusions.

2016-2017 USPAP The only significant change is that when a client’s name is withheld from the report, the appraiser must retain the client’s name in the workfile and state in the report that the client’s name was withheld based on a request by the client.

2018-2019 USPAP The definition of Extraordinary Assumption was revised in 2018-2019 to read: “an assignment-specific assumption as of the effective date regarding uncertain 22 Working RE Fall 2020

information used in an analysis which, if found to be false, could alter the appraiser’s opinions or conclusions.”

The most significant change was the changes made to Standards Rule 3, 4, 5 and 6.

Standards Rule 3 & 4 became SR3: “Appraisal Review, Development” and SR4: “Appraisal Review, Reporting.” “Real Property Appraisal Consulting, Development & Reporting” was eliminated. Standards Rule 5, became “Mass Appraisal, Development,” and Standards Rule 6 became “Mass Appraisal, Reporting.”

2020-2021 USPAP Prior to January 1, 2020, an Intended User of the Restricted Appraisal Report can only be the client. This has changed so that additional intended users are permitted as long as the other intended users are named in the report.

Standards Rule 1-1 comments section below SR 1-1 (a), (b) and (c) removed the beginning of the statement that stated “Perfection is impossible to attain” and relocated it to the Competency Rule as the Competency Rule applies to both development and reporting in all disciplines, not just Real Property.

Key changes in the 2020-2021 USPAP edition are new definitions added: Assignment Elements, Effective Date, Misleading, Personal Inspection, Physical Characteristics and Relevant Characteristics. The most important added definitions includes: Effective Date—the date to which an appraiser’s analyses, opinions and conclusions apply; also referred to as date of value.

Misleading—Intentionally or unintentionally misrepresenting, misstating, or concealing relevant facts or conclusion.

The part that is concerning to me is “unintentionally” misrepresenting relevant facts or conclusions. As this is a new definition in USPAP, no case law has yet determined what exactly is

considered “unintentional” rather than an unintentional mistake.

Personal Inspection—a physical observation performed to assist in identifying relevant property characteristics in a valuation service.

The Comment section regarding Personal Inspection states: “An appraiser’s inspection is typically limited to those things readily observable without the use of a special testing or equipment.” It further states: “An inspection by an appraiser is not the equivalent of an inspection by an inspection professional.”

Physical Characteristics—attributes of a property that are observable or measurable as a matter of fact, as distinguished from opinions and conclusions, which are the result of some level of analysis or judgment.

Relevant Characteristics—features that may affect a property’s value or marketability such as legal, economic, or physical characteristics.

I hope this article helps summarize the significant changes that have been made to our USPAP professional standards over the years. WRE

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The Human Being Business

by David Brauner, Senior Broker at OREP

Y

When I talk about “humility” as being an important attribute I mean putting the interests of the client before our egos and keeping an open mind about being able to do better.

ou’ve probably heard the expression that “no matter what business you’re in, you’re in the customer service business.”

Well, after 25 years of customer service I’ll go one further to say that if you’re in business, you’re in the human being business. Here’s what I mean.

Listening, being empathetic, giving your client the benefit of the doubt, understanding that you are the expert and not your client, are key, and it is your responsibility to both deliver the technical aspects of your job as well as to communicate it clearly in your report.

If you want to be exceptional, you also need to do more: you need to anticipate what your customers may not know to ask. Why? Because if you fail to answer all the questions for your client, even the ones they don’t ask, you are likely to wind up with a dissatisfied customer, or worse, with a liability headache to deal with later.

Nuts and Bolts of Customer Service This happened to me recently. We were doing a small remodel project around our house. The arrangement we have with our contractor is that we supply the materials. Now I don’t know much about construction or building products. My wife handed me a request scrawled on a piece of paper with the dimensions for 24 boards for a backyard staircase.

Face masks in place, as prescribed by local guidelines during this COVID

Lock-down selfie (week four).

David Brauner is Publisher of Working RE magazine and Senior Broker at OREP, a leading provider of E&O Insurance for appraisers, inspectors and other real estate professionals in 50 states (OREP.org). He has provided E&O insurance to appraisers for over 25 years.

He can be contacted at dbrauner@orep.org or (888) 347-5273. California Insurance License #0C89873. Visit OREP.org today for comprehensive coverage at competitive rates.

24 Working RE Fall 2020

pandemic, my wife and I went down to a “big box” home improvement store to pick up the wood, along with some other materials. I went to “Lumber” and handed the “specialist” the order, thinking that would be that. He looked at me like, “what are you stupid pal?”

Well, maybe I am but instead of helping the “idiot” (me), they directed me to what was a long, slow customer service line. After waiting at a distance of six feet, when it was my turn, the person staffing the desk said they had the lumber in stock but that it would take a day to be “pulled.” I said I’d wait, but they said to come back the next day at the same time and the order would be ready. Now keep in mind that there is some urgency for these boards, as the contractor’s strong suit is not planning any aspect of the project ahead of time—he needed the wood yesterday.

The next day I called the big box to see if the order was ready before heading down. No, it was not, they said. The next day I called again— nope, the order was still not ready.

Really, I said? I was promised one day and now it is two days; could they check? Later that day, I did get a call: to come pick up my order? No such luck. No, the lumber was out of stock and they didn’t know when they would have more. Yes, they understood that when I ordered it two days ago it was in stock...sorry, they said.

As an aside, during the visit when I ordered the lumber, my wife had looked for some very specific screws for the project to reaffix a metal railing into concrete. One of the customer service folks said they didn’t carry them.

The prospect of shopping store to store during a pandemic (or any time) didn’t thrill me, so before I left I thought I would try to find the screws myself. I went to the fastener aisle and asked for the “expert.” He found the screws in a minute or two. I thought, how much did the first customer service person who “helped” my wife really care?

Anyway, back to the needed lumber. I went home and called a small lumberyard in my town that I have driven by dozens of times but never patronized. There are other, competing big box stores near me that I’ve frequented over the years but for some reason, this local lumberyard came to mind. First, when I called, a human being answered the phone. They did not put me on hold or transfer me multiple times before I got an answer either. I started out by saying I didn’t know what I was doing and he took it from there.

I told him the dimensions of the boards. He said, “You have three questions you need to ask your contractor.”

You see, he understood that I didn’t know what I didn’t know—but he did. By being proactive, he reduced the chance of a wrong or incomplete order, extra expense for his lumberyard and a frustrated client (me). In your case, being proactive can mean gathering the information needed to get the job done correctly the first time and a happy, repeat client. More importantly, it reduces the chance of an unfortunate result that can lead to a dissatisfied client, and an increased chance of a state board complaint or worse.

Do I need Pine or Doug Fir? Do I want the boards smooth or rough; pressure treated or not? Looking back, it would have been an absolute miracle if I had gotten what I needed at the big box store because they never asked any of these questions, and neither did my contractor specify. The representative at the lumberyard gave me an order number before I hung up. I got the answers from my contractor and called back. A

different person answered. They looked up my order in about three seconds. I told him the missing information and he said it would be ready in about 30 minutes...oh, and what is my contractor’s name in case he would picking up the order. He was picking it up. And the wood was less expensive than the big box.

It went so smoothly I was nearly breathless! I needed more wood about a week later. Guess where I went?

The local lumberyard is staffed by experts who asked me the questions I did not know to ask. That is a concept I try to instill in OREP staff. We are the experts, not the insured. The result was a correct and complete lumber order, a happy client and a return customer (me). In your business, it may mean a complete report that answers all the pertinent questions and serves its purpose. The CSR at the lumberyard really knew his stuff but did not make me feel dumb for not knowing mine. That’s another issue. There is no advantage to making someone else feel stupid or their life harder, especially a client.

I don’t know about you but when I’m the expert in these situations— when the shoe is on the other foot—I get a great deal of satisfaction when my client is happy and their “problem” is solved efficiently. That is the best part of my job and always has been. In my case, it is when the insurance you all need is placed as smoothly and efficiently as possible. In your case, it may be the creation of a complete report which leaves no questions unanswered and serves its purpose to protect the interests of your client.

Another thing to note about my lumberyard experience is that a human being answered the phone and they could help. I was not left on hold or routed through an endless phone tree or made to explain to three different people before I got to the one person who could help. At OREP we call this “first call resolution,” and we strive for it every time. We are fully automated

online to quote and bind, but we also answer the phone when someone needs a person to resolve their issue.

Most times (not every time, but most times), the person who first answers can help without having to direct you to your agent (who most likely is on the phone). You’re busy in the field and if the first person who answers your call can solve your problem, you don’t have to sit on hold or leave a voicemail and wait for a return call. If you’re like me, you want your issue resolved ASAP. And OREP enjoys efficiencies as well by not having to call you back, possibly missing you, and having to call you again. And on and on. OREP is happy and you are happy because we could answer your questions quickly the first time.

Patience, Grace & Snoring I’m not discussing your technical prowess as a professional. You need that for sure, but it’s not enough. You need to know how to handle, or more accurately, how to treat people. If you feel uncomfortable or inept or clumsy at dealing with people, just treat them the way you would like to be treated and you will never go wrong.

One more story. I use a CPAP machine for my sleep apnea, which by the way, eliminated my snoring. This was necessary if I did not want to sleep alone for the rest of my life. The CPAP machine requires distilled water, which isn’t so easy to come by in retail stores (and again, I’m writing this in the midst of the COVID-19 lockdown). I don’t like to shop even in the best of times.

So for convenience, I have the distilled water delivered along with our bottled drinking water. Our water dispenser broke and we needed a new one. I called and ordered it. I was running low on distilled water so when I ordered the dispenser I made certain more distilled water would be delivered too. When the truck arrived, they had the dispenser page 268

Fall 2020 Working RE 25

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but no distilled water. Now I KNOW I ordered the distilled water and was assured it would be delivered. No delivery would mean driving or calling around to various retail stores because I would soon run out. I could feel my blood pressure rising!

The driver’s reaction was patient and kind. He stood his ground that the water was not included in his delivery order, but he didn’t respond to my heightened emotion by matching it.

Rather, he diffused the situation with his low-key, friendly demeanor. He listened. And that made me listen and think. In a moment or two, I realized that maybe the water I ordered was coming but in a different delivery, later in the week with the water delivery.

Sure enough, the delivery today was for the dispenser only. I realized that I misunderstood or assumed incorrectly.

Now maybe it should have been clarified and underlined ahead of time by the agent who took my order over the phone—that my water was coming at a later date with my regular delivery.

Maybe it was communicated to me but I wasn’t listening (boy, does that happen!). I’m not sure, but I apologized to the driver and thanked him. My water was coming without me having to shop for it and I was grateful.

Humble and Kind So when I talk about this aspect of customer service, I’m talking about what can only be described as humility. To me, it means not automatically assuming you’re right and the other person is wrong; it means being aware of when you’re getting defensive and more concerned with being right instead of solving the problem. As the “expert” you carry more than 50 percent of the responsibility for clear and complete communication. It’s your job to have the technical expertise to do the job and also to communicate your results to your clients so they understand. As a side note, our personal lives are not 26 Working RE Fall 2020

so different. One of my octogenarian choir buddies, married 65 years, shared with me his take on why his marriage has lasted so long: “To make it work, you both have to give 65 percent,” he said. I was confused by the math at first, but I’ve matured since.

In the professional world, it means fixing a client’s problem, not defending yourself. To be honest, one of our exagents was not so good at this. They were a competent insurance agent and clients generally loved them—they had a big, fun personality. But when a “conflict” arose, it often escalated because this agent cared more about being right or appearing smarter, than about the person they were supposed to help. I was often called in to resolve the issue.

While the customer was seldom totally right, they were almost never totally wrong. There was almost always something we could have done better. Maybe returning a phone call a little more promptly (this agent was not great at that either) or taking the time to figure out what the client was really asking for or really needed instead of just giving them the easy answer. Over the years, when I tried to debrief the agent about what I learned so that they could do better next time, it was obvious they had no interest in improving—just in being right. And wasn’t I a jerk for taking the customer’s side? As I say, they no longer work at OREP. Their insurance intelligence grew over time but their emotional intelligence never did, despite the example I tried to set. It was more important to be “right” than it was to solve a client’s problem—and that’s not right; it’s wrong.

When I talk about “humility” as being an important attribute I mean putting the interests of the client before our egos and keeping an open mind about being able to do better. I suggest looking for any and every opportunity to improve professionally and personally. If you make a mistake, most people understand and are happy to help you—just

admit it. But if you are condescending or insulting to them? Whew! Better look for another line of work.

I used to hear a lot of complaints from appraisers about the lack of knowledge on the part of the AMC staffers. Many of the AMC staff were not appraisers—entry level admins in some instances, who were given authority to correct veteran appraisers about their work. Many appraisers couldn’t stand it and left the profession or abandoned AMC work. Many, however, learned to adapt and flourish. They chose to try to educate the AMC staffers when possible, and in so doing, probably earned themselves loyal clients, as well commanding higher fees and avoiding time-consuming “call backs” to fix things that were not the way the lender wanted them. Satisfying the client, within ethical boundaries of course, offers another benefit: it will vastly reduce your liability.

In conclusion, I would respectfully suggest that you not assume that your clients know more than they do and/or are not very smart. That’s a tricky balance—so here’s what I mean: 1) Think about my lumberyard story: focus on solving the entirety of your client’s problem and not just what they ask for. Don’t assume they know more than they do. They need your help. And like me, your clients appreciate it and reward you with more business. And your job satisfaction will grow along with your bottom line.

2) At the same time, when a problem arises with a client, don’t assume your professional status means that you’re always right and they are always “dumb.” If you think that way, it will be evident no matter how hard you try to hide it. Think about the water delivery guy. He was right and I was wrong and his patience and calm gave me the space to realize it. When something goes wrong, I suggest examining it with a mirror first, instead of a microscope. After all, we’re in the human being business. WRE

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Making $345,000 as a Real Estate Appraiser

by Isaac Peck, Editor

B eing

Bilodeau is only 36 and has been appraising just over nine years.

an appraiser isn’t all bad.

Just ask Terrence Bilodeau, a Certified Residential appraiser in Dallas, Texas.

Bilodeau began his real estate career as an appraiser trainee in 2011 and has slowly built his business and his revenue, year over year, to the point where he grossed over $345,000 in appraisal fees in 2019. He also holds a real estate license and received over $25,000 in commissions from a few sales transactions, bringing his total earnings as an appraiser/agent to $370,000 in last year alone.

So far, Bilodeau says he hasn’t slowed down in 2020 either, despite COVID19, and should bill over $350,000 in appraisal work this year.

Bilodeau is only 36 and has been appraising just over nine years. Here’s his story.

Day to Day As you might expect, Bilodeau rarely takes time off. He works seven days a week, but says he maxes out around 65–75 hours per week. He completes most simple appraisal assignments in two-three hours and shoots to complete 15–20 appraisals per week. He also tries to schedule the majority of his inspections on the weekends because there is less traffic and he can get from one property to another faster that way. “To me, it doesn’t feel like work, so when I’m driving around on a Sunday with no traffic, it is fun for me. It’s usually sunny too. I typically only work 9 a.m. to 4 p.m. on weekends so I still have breakfast and dinner at home and don’t feel like I’m missing too much,” says Bilodeau.

28 Working RE Fall 2020

To save time, Bilodeau schedules inspection assignments that are close-to each other, and loves to do new construction assignments for that reason.

“Sometimes you get real lucky and will get three assignments in the same subdivision on the same street, so you can look at all of them at the same time. This happens often with new construction. I don’t even have to schedule anything; I can just go and I’ve already got the comps if they have any off-MLS comps. I’ve had cases where I get three new construction houses all on the same street with a similar floor plan,” says Bilodeau.

One of the other reasons Bilodeau likes new construction is the fees. “I get up to $700 for doing new construction assignments as I’ve got some clients I’ve been working with for years now,” he reports.

Bilodeau is also a big fan of local lenders who hire appraisers directly because the fees are higher. He says what he makes varies but can earn up to $500+ per assignment from many of his local clients. He was able to build up some of his relationships with local banks in the process of getting loans to purchase rental properties after his appraisal business got off the ground. “I would always ask to get onto the panel whenever I was getting a loan from a local bank, so they’d tell me here’s the person to contact, and that’s how I got on to their panels. I stayed committed to my first loan officer and she actually moved around to different banks and connected me to the appraisal desk at those different lenders. I also call local banks directly and am always trying to get more direct lender work,” says Bilodeau. page 308

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Technology Bilodeau credits technology as a key reason he is able to be so productive. He uses technology to make his appraisal process more efficient, using mobile appraising software, a laser measurer, analytics software and an adjustment analysis program, as well as a separate software program to import comparables directly into his reports. “I use a lot of technology to help me be more efficient and it makes me more accurate as well. I don’t feel like the work I’m producing is inadequate; I’ve seen appraisers who have been appraising for decades who produce really crappy work. I don’t know how long it takes them to produce it but just because it takes a long time to produce something doesn’t mean it’s done well. A lot of veteran appraisers might be more resistant to technology.

I use a laser and my phone to complete sketches and take photos, and then I upload from my phone to my software, so I’m not transferring photos from camera to desktop,” Bilodeau says.

Beginnings Bilodeau worked in customer service at TD Ameritrade when he first got turned on to the appraiser profession. A friend was an appraiser and took him along on a few assignments. He quickly realized that he liked the process of appraising.

“As an appraiser, I am following a recipe and arriving at a different number each time. I get to work independently and use my analytical skills, so I feel like it really fits my personality,” says Bilodeau.

Bilodeau was studying business at the University of Texas at Arlington and graduated with a degree in Marketing in 2010, when the U.S. economy was still coming out of a recession. Being unable to find a job in marketing, he figured that appraising would be a good opportunity. “Living in the Dallas-Fort Worth (DFW) area, I knew that the population was slated to grow a lot and I saw appraisal as a pretty good bet,” says Bilodeau.

30 Working RE Fall 2020

By 2012, Bilodeau got his appraisal license and started working on his own.

He says he didn’t have a lot of business at first and only billed $1,500 in his first month. Putting his marketing degree to work, Bilodeau poured all of his extra time into marketing his new business and connecting with potential clients.

It took him a while to learn the ropes of how to go about marketing an appraisal business though. “At first, I thought I had to go to banks and talk to them directly. I would go around to local banks and bring them doughnuts, but I figured out quickly that it didn’t work.

Then I started calling specific banks that were local. I would talk to the people in charge of the appraisal panel and tell them about myself and who trained me.

If the person who trained me happened to be on the same panel, then they were more likely to add me.”

One of the challenges that new appraisers face is that many banks and appraisal management companies (AMCs) require everyone on their panel to have three-five years of experience. However, because of how busy the DFW area was, Bilodeau says he got onto lists that he normally wouldn’t have been allowed on. “I was only charging $350 for an appraisal in the beginning, which was much too low. But as I got more experience and more clients, I began raising my fees,” says Bilodeau.

One of the ways Bilodeau got in a position to raise his fees was by consistently adding clients. “In the beginning, I worked really hard to get on as many local lender and AMC panels as I could.

The more clients you have, the more you can be selective on the fees and the locations you want to appraise. So over time I was able to focus on higher paying clients and get better assignments,” Bilodeau says.

Learning and Growing Starting out as a new appraiser, there was a lot for Bilodeau to learn and he

had to be creative about building his appraisal skills. After getting his license in 2012, Bilodeau almost immediately started his own business and struck out on his own. “My mentor didn’t want to keep me under his thumb and supervise, so once I got licensed he told me to go find my own way. But thankfully he would always answer my calls and give me advice if I had questions. I quickly started taking more continuing education courses and working towards becoming Certified to make sure I was learning and improving. I would also ask questions of the Chief Appraiser at the AMCs and lenders and they would show me how to consider valuation issues,” says Bilodeau.

This approach helped Bilodeau develop from a green appraiser into a skilled professional. In terms of advice for other appraisers starting out, Bilodeau recommends keeping in contact with the person who trained you.

Since becoming Certified, Bilodeau says that he’s trained three other appraisers and then let them all go out on their own. “I don’t feel like you really understand the whole appraisal process until you’ve trained someone else, so teaching others definitely helped me get better at what I do. A part of it was that I was curious to see if I could grow a business by adding appraisers and part of it was just wanting to help out my friends or people I met who I thought deserved an opportunity. But it was really difficult to organize multiple appraisers under one client, organize workflow, and so on. I was spending more of my time doing administrative work instead of appraising, so I gave it up.”

One of the reasons appraisers don’t bring on trainees is the old adage: “Why would I want to train my competition?”

Bilodeau says he relates to that as one of his friends who was his trainee immediately went out and called every client he had and tried to get on every panel Bilodeau was on right after leaving to start his own business. “When I started,

I got a lot of my own clients, but this guy went out of his way to get onto every panel that I was on. After that experience, I’m less likely to train more people,” reports Bilodeau.

Looking to the Future While many appraisers are depressed about the outlook for their industry, Bilodeau says he hasn’t experienced any slowdown from automation so far.

“I am making more than I ever thought I would make and my income has only gone up every year. Yes, Fannie Mae is issuing a lot of Property Inspection Waivers (PIW), but I’m also doing a lot of new construction assignments and there is no PIW for new construction so I’m protected a bit from that. In any event, I do see a future for appraisers.

Even if automation becomes increasingly popular, appraisals will still be needed for things like divorce, retrospective appraisals, and lots of the complex work.”

However, Bilodeau acknowledges that the appraisal business has an uncertain future. “There is definitely a potential for a decline in business and I wouldn’t tell everybody to rush

to this industry. I wouldn’t get into it thinking that there’s no risk, but that is a risk every individual has to evaluate. On the other hand, appraisers acquire a lot of skills that are relevant to other jobs in the future. I am way more marketable as an employee if I went back to the corporate world.

The skills I’ve acquired running my own business and being an appraiser, including selling myself and the sales aspect of the job, are very valuable,” Bilodeau argues.

His experience as an appraiser and real estate agent has also helped Bilodeau invest in real estate. He now owns his own home as well as 10 rental properties and a vacant lot. He saves the majority of his income and is planning towards an early retirement. “I only plan to be an appraiser for another five years. So I don’t have to rely on appraisal income forever. I don’t want that to be my only source of income, which is why I’m a real estate agent,” says Bilodeau.

But even though he’s cautious, Bilodeau says that as technology advances, it will also help appraisers.

“Technology may reduce demand for

appraisal services to some degree but they’re still going to need the human element—for someone to be the eyes and ears of the bank. Maybe we’ll just measure and take pictures, maybe we will make more qualitative adjustments while the computer handles quantitative adjustments. But they’ll still need full-form appraisals as well,” he says.

In terms of advice for appraisers starting or even other appraisers who want to be more successful, Bilodeau says that it’s important to take care of your health and to stay motivated and inspired. “I try to spend time with successful people. I give them direction and they give me direction. But definitely taking care of my health and losing weight were the keys to my current life. I would never be where I am today if I hadn’t lost weight and started exercising. Your health is more important than having a lot of money. You’ve got to be in good condition to enjoy your life or what’s the point of having a nice lifestyle,” says Bilodeau. WRE

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Insulating Your Practice When Loans Go Bad —Preparing for the Next Wave

by Rachel Massey

Most of my 30-year career has been

Given past repurchase demands, and the likelihood that there will be foreclosures due to job losses, it only makes sense to revisit some of the issues of the past and help protect ourselves in the future.

as a fee appraiser, but in the crash of 2008 and for quite a while after, I worked as a reviewer in “forensics,” deep-diving into different issues related to when loans go bad. Here’s some of what I learned and how it can be applied to what may be coming.

When a loan went bad the appraisal was not typically the cause, but it could be the focus of the powers that be anyway, particularly during the foreclosure crisis. Investors took a hard look at the appraisal reports and pushed back on the lenders who sold the loan, for anything that they found wrong with the appraisal report. While the appraisal did not cause the default, there were often some loose strings, easy to tug on, that would make the appraiser an easy target.

Repurchase demands tended to focus on the “unacceptable appraisal practices” outlined in Fannie Mae’s Selling Guide.

I have written a couple articles about these if interested (Visit WorkingRE.com, search “Repurchase Demands.”), but some of the most common issues that were pushed back on are: 1) Calling the market stable or increasing when it was clearly declining at the time. This could be supported by the complainant providing comparable sales that were close to the effective date of the report that were lower than older sales that were included in the report.

2) Not adequately addressing the condition of the subject or comparable

Rachel Massey, SRA, AI-RRS, ASA, is an AQB Certified USPAP instructor and has been appraising full-time since 1989. She is a Certified Residential Appraiser in Michigan, specializing in relocation work for various clients, and generally helping solve her client’s valuation needs. Please visit https://annarborappraisals.com for more information.

32 Working RE Fall 2020

sales, such as using houses that were materially superior to the subject property without acknowledgement and adjustment. Often the comparable property had significant remodeling, while the subject property was a throwback to the 1970s with no updating, yet quality and condition were referenced as the same.

3) Using sales in areas with higher prices while more proximate and similar properties were available. Map search functions in most MLSs can easily show price differences between areas, and the market data gathered by the GSEs related to different areas is robust, and an easy push-back.

4) Failing to address factors that negatively impacted the subject property, such as proximity to highways, toxic waste dumps, etc. Many appraisal reports simply didn’t acknowledge when a property was adjacent to an externality.

Any (and all) of the unacceptable appraisal practices were fair game to elicit a buyback. The selling lender either had to defend the appraisal report, if it were possible, or admit the complaint was correct and end up repurchasing the loan. If the appraisal was found to have several “unacceptable appraisal practices” cited, and the lender could defend some or most of them, they could still be subject to a repurchase if something significant could not be defended.

Times Are Changing The repurchases were very costly to the party who had to absorb the loss.

Repurchase demands hit big and small lenders alike, as well as mortgage insurance companies and the servicers of page 348

Fall 2020 Working RE 33

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loans. Fortunately, they have largely become a thing of the past, in particular with Fannie Mae’s Collateral Underwriter and Day One Certainty providing assurance on the appraisal for that the loan.

That said, even these programs have claw-back language related to description of the property and the accuracy and completeness of all data in the appraisal that pertains to the property, other than the value. This includes the subject’s condition and quality ratings.

So even with the advent of Day One Certainty, lenders still have risk involved if there are incorrect statements within the appraisal report. If the lender has risk, so does the appraiser.

Due to the extraordinary times we are in, with COVID-19 and significant job losses, or even the simple disruption of our daily lives, lending is changing and adapting, as it should. Desktop work or exterior only observations have become common, relying on homeowners, agents and others for information related to their properties. This is reasonable given the circumstances; however, we appraisers still must do our due diligence to try and obtain sufficient information to adequately and appropriately address our subject property and the market in which it competes.

Insulating Your Practice Given past repurchase demands, and

the likelihood that there will be foreclosures due to job losses, it only makes sense to revisit some of the issues of the past and help protect ourselves in the future. What does this mean to us in the field?

It means being very careful about addressing the market. We are several months into the pandemic, and some markets have increased, due in large part to pent up demand and lack of inventory. Interest rates are at historic lows, making mortgage payments more affordable, and after months of working from home, buyers have identified pain points in their homes and may be looking to move. Some markets are starting to see weakness, while others are strong. We need to pay close attention to what is happening in our markets with listings, contracts and closings, and interview market participants as to what they are seeing as well. We have to do this with each appraisal we have, and each report we communicate. We have to continue to revisit the unacceptable appraisal practices within the selling guide to make sure we do not knowingly violate any of the practices, and describe the subject and comparable sales to the best of our ability given the information we have.

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34 Working RE Fall 2020

which they electronically complete that we can include in our workfile, if not in the report itself. We need to examine GIS maps, Google Earth and other sources to make sure we don’t miss something that would have been glaringly obvious if we had been at the property. We need to do our due diligence on a ramped-up scale in my opinion. Some software vendors have introduced virtual walk-through tools we might want to explore.

If you are able and comfortable completing interior observations during the pandemic, you will still need to focus effort on market analysis.

Some markets may be humming along nicely, while others could be compromised and declining. It is imperative that we continue to research our markets with whatever tools we can cobble together. Study the macro market as well as the competitive market segment and keep your analysis in the work file or include the data in the report for posterity.

Now is not the time to relax our guard if we are not able to see the interior of a property or if we are so busy that we can barely keep up. We still are responsible for our analysis and conclusions, and we still have to do the hard work, which is much harder than it was a few months ago before our world changed. Stay safe everyone! WRE

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Fannie Mae’s New Highest and Best Use

by Lee Lansford and Richard Heyn

F

Fannie Mae seems to have a problem with excess land.

Or, perhaps more accurately, Fannie Mae seems to have a problem with appraisals that involve excess land.

annie Mae seems to have a problem with excess land. Or, perhaps more accurately, Fannie Mae seems to have a problem with appraisals that involve excess land, and the appraiser’s characterization of Highest and Best Use (HBU).

Before we proceed with this discussion, let’s make sure everybody is on the same page by defining two terms: “surplus” land versus “excess” land.

Surplus land is land beyond what is necessary to support the highest and best use but cannot be sold off separately. To simplify things, think in terms of a house that sits on two lots in a subdivision. The house “straddles the line” between the two lots so neither lot can be sold off separately and the highest and best use is a continuation of the existing use.

“Excess” land is land that is not needed to support the existing improvement and can be sold separately. In this case, think of a house and two lots where the house is located on one lot, leaving the excess lot free to be sold.

If it helps you to remember the difference, excess land is “excellent” and surplus land “stinks.”

On the Fannie Mae/Freddie Mac appraisal forms, the question—“Is the highest and best use of the subject property as improved (or as proposed per plans and specifications) the

Lee Lansford, ASA & IFA, is a Certified Residential Appraiser with 30+ years of experience. He holds an MBA (R.E. Finance & Urban Development) from DePaul U. (Chicago) and is an AQB Certified USPAP Instructor. He served for nine years as a member of the State of IL Appraisal Board where for two years he was chairman.

Richard Heyn, SRA, has over 40 years of experience in real estate appraisal, consulting, seminar development and teaching. Rich is an AQB certified USPAP instructor and has authored dozens of continuing education seminars for appraisers, REALTORS® and lenders. His seminars have been attended by literally tens of thousands of appraisers from every State.

36 Working RE Fall 2020

present use?”—is followed by “Yes” and “No” checkboxes. If the subject property clearly has excess land, as in the case of the house on two lots described above, the correct answer to this question is usually “No,” followed by an explanation that the highest and best use involves treating the improved and unimproved lots as separate entities in the valuation process. The fallout from this is that Fannie Mae will not purchase loans involving appraisal reports if the “No” box has been checked.

Apparently, Fannie Mae has been looking for a workaround to this situation. In their “Appraiser Update” newsletter of December 2019, Fannie Mae advised appraisers that “Excess land is considered ‘value in use’ for the purpose of the appraisal, so the land should be described and its contributory value included in the grid.” That comment left numerous appraisers scratching their heads. The concept of “value in use” does not mesh with the definition of “market value” printed on the form, and thus did not resolve the issue of checking the “No” box regarding highest and best use.

In March of 2020, Fannie Mae issued another “Appraiser Update” and again discussed excess land. This newsletter began by quoting a line out of USPAP that states: “An appraiser must analyze the relevant legal, physical, and economic factors ... to support the appraiser’s highest and best use conclusion(s).” The newsletter then stated that “Fannie Mae’s policy requires that the mortgaged premises must be the highest and best use of page 408

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OREP Offers Free Risk Management Continuing Education for Insureds/Members (14 Hrs./most states) OREP, a leading provider of appraiser insurance nationwide, announces two free continuing education courses (14 hours of approved CE) for OREP insureds/members, designed to help them improve their professional skills, lower their liability risk and protect their businesses. OREP insureds/members now enjoy the following online courses FREE:

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FHA Appraisal Standards (7 Hours CE) Presented by: Lore DeAstra, MBA, MRICS, SRA, CDEI Lore DeAstra unpacks the LATEST 4000.1 FHA Standards and shows you what to look for on an FHA appraisal, including how to handle complex assignments and the forms to use for unusual situations.

“OREP has always been committed to providing insureds/members with the latest news, information and risk management education via Working RE, so offering free continuing education is a natural next step for us,” said David Brauner, Senior Broker at OREP. “We chose veteran appraisers and renowned authors and educators to share with insureds their proven and effective strategies on how to limit liability, follow appraisal standards and protect themselves.

The benefit for our insureds/members is twofold—it makes them more careful, more successful appraisers and lets them keep a little more hard-earned money in their pockets, saving them over $200 in education costs.”

Details The classes are online, allowing you to take the coursework safely at your own convenience. Current insureds/members, please email info@orep.org for enrollment details. WRE Fall 2020 Working RE 37

Industry NEWS Fannie Mae Provides Update on Appraisal Flexibilities

NEW Appraiser Coronavirus Survey: What’s Changed?

One thing about this pandemic, things change quickly. The purpose of Part 2 of OREP/WRE’s Coronavirus national appraiser survey is to learn and share with the industry how appraisers nationwide are coping now—over six months into the virus.

Below please find the updated questions and link to the new survey. Find results of the first OREP/WRE Coronavirus Survey at WorkingRE. com/COVIDsurvey1. There is also space to leave your comments.

New Survey Questions

1. How is your business revenue as comp ared to this time last year?

2. Are you performing interior appraisal inspections?

3. Are the majority of your lender clients

allowing Desktop or Exterior Appraisals in

lieu of traditional (interior appraisals?)

4. Are lenders or AMCs offering you lower

fees when assigning the new GSE’s alter native formats, i.e. drive-by and desktop

appraisals? (Yes, but I don’t accept them;

Yes, I am accepting alternative reports at

lower fees; No I am not accepting.)

5. What trends are you noticing in your local

market area since the start of the pandemic?

6. How many more years do you plan

to continue appraising (part or full time)?

7. Did the pandemic delay your retirement?

8. Do you mostly enjoy appraising?

9. Are you optimistic about your ability to

make a living as an appraiser in the future?

10. Are you concerned for your health and safety and the safety of your family in

terms of performing interior inspections?

11. Have you or an appraiser you know

personally been diagnosed with COVID-19?

Share your experience and feedback by taking the survey today! Visit WorkingRE.com/ COVIDsurvey2 to take the survey. WRE

38 Working RE Fall 2020

Appraisal reports that include an interior inspection are still the vast majority of all valuations being performed, according to data from Fannie Mae. In its June 2020 Appraiser Newsletter, Fannie Mae reported that only 15% of appraisals completed through May 2020 and sent through its Uniform Collateral Data Portal® (UCDP®) used the flexibilities of either desktop or exterior-only interior inspections. Fannie clarifies that circumstances vary widely across the country and writes that the “highest percentages of appraisals using the flexibilities are around 40% in some northeastern states, while the lowest percentages are around 10% in some of the less impacted states.” Fannie goes on to give appraisers a pat on the back, saying that despite the rapid rollout of its Flexibilities Program and the many challenges faced by appraisers, they “have done an outstanding job of executing in order to keep the U.S. housing market moving. We found that appraisers have used the flexibilities correctly about 90% of the time. Appraisers have done a great job identifying external obsolescence for desktops and exterior-only appraisals, as well as leveraging their local knowledge, maps, aerial photos, and other data sources.” Fannie also writes that the supporting comments in the nontraditional reports “have been even better on average than those in traditional reports.” WRE

ANSI Standards Changing?

The American National Standards Institute (ANSI) home measurement standards are changing.

ANSI develops standards for a broad range of professions and practices and while appraisers are not required by USPAP to comply with ANSI, ANSI Z765 is the standard for calculating a property’s square footage. Many appraisers argue that ANSI should be viewed as “best practices” for how appraisers should measure properties.

Many of the proposed changes for ANSI Z7652020 are minor, but one that caught the eye of appraiser Hamp Thomas is how to measure rooms with sloped ceilings. Thomas says the debate has always been “do we add the width for both exterior walls, or do we add for none?” In his letter to ANSI, Thomas argues that ANSI should just stick to one or the other, and recommends that ANSI clarify its standard to say: “add fivetenths or six-inches for both exterior walls” when it comes to rooms with sloped ceilings. Thomas,

who is an expert in ANSI standards and author of a continuing education course on it, believes that the potential inconsistencies in the way ANSI can be interpreted is one of the reasons only one state in the U.S. has adopted ANSI standards as the law of the land. Thomas says: “In my opinion, the proposed change, which provides for the addition of the width of one exterior wall, would only create mass confusion among practitioners who are already confused by this measurement and only serve to increase the debate over this measurement.” According to David Brauner, Senior Broker at OREP E&O insurance, mismeasurement is one of the leading causes of claims against appraisers, and one of the easiest to prove. To read the proposed ANSI changes, visit WorkingRE.com/ANSI2020. To read the feedback submitted to ANSI’s changes, visit Working RE.com/ANSIfeedback. WRE

Fannie Mae One Mile Myth Fannie Mae addresses the often repeated “one mile myth” in its June 2020 Appraiser Newsletter, specifically the idea that comparables must be within one mile of the subject property. Somewhat humorously, Fannie writes: “Once upon a time there was a story told that all properties on the comparable grid in an appraisal report had to be within one mile. This story was told and retold until many thought it was a rule: If a sold property was within a mile, it was a defendable comparable sale. No one knows where this originated, but the myth continues even today.” However, Fannie Mae stresses that its requirements are focused around a neighborhood, which it says is defined as a “geographical area in which properties are influenced in a similar way by the forces affecting value and marketability.” Fannie says that while many times the best comparables are much closer than one mile, in other cases, like in rural areas or with unique properties, it may make sense to use comparable sales much farther than one mile. “Adept appraisers use data, not fiction, to determine the most appropriate comparable sales,” writes Fannie. The moral of the story according to Fannie? “Rely on data, not myths about rules, to choose the best comparable sales for your appraisal. Clear explanations of why those comparables were chosen—as well as clear explanations of the market area—help ensure that appraisers provide credible results,” writes Fannie. WRE

AMC Fined $2.8 Million In April 2020, appraisal management company (AMC) Fast Connection USA, Inc. and its President, Towhindul Hussain, were found guilty of hundreds of violations of Texas law and regulations by the Texas Appraisal Licensing and Certification Board (TALCB). TALCB issued a monetary fine of $2,801,500 against Fast Connection USA for contracting 274 appraisals in Texas without proper registration. These violations have a mandatory fine of $10,000 each. The AMC also failed to pay appraisers within 60 days as required under Texas law, with some appraisers never receiving payment at all. Neither Fast Connection USA nor its owner, Towhindul Hussain, responded to TALCB. At the time of this writing, the AMC’s website, www.fastconnectionusa.com, was still live and described itself as a “nationwide residential and commercial real estate AMC.” Instances of AMCs going bankrupt and not paying appraisers are becoming less frequent as the AMC industry has consolidated to some degree over the last few years, but it is clear reminder to appraisers that there are still rogue AMC operators who are fast and loose with the law. Appraisers are reminded when taking on a new client to make sure the AMC is licensed in their state as well as to be careful to make sure they don’t let their accounts receivable build up too much for any single client. Be careful out there! WRE

Quality Coursework Wanted OREP Education is conducting a national search for quality education coursework to add to its roster. The course should be current, top–notch and designed for online delivery. Please email Isaac Peck at Isaac@orep.org or call 888-347-5273. WRE

+ OREP Endorsed by National Association of Appraisers (NAA) OREP, a leading provider of appraiser E&O insurance nationwide, has been endorsed by the National Association of Appraisers (NAA) as the preferred provider of E&O insurance for NAA members. OREP is the proud publisher of Working RE magazine and has served real estate appraisers’ insurance needs for over 18 years. The NAA is an appraiser organization with over 2,000 members dedicated to uniting appraisers for the purpose of exerting a beneficial influence upon the profession and advocating for appraiser interests. “I feel very comfortable with our first alliance of this kind because the focus of both organizations is the same—supporting and helping appraisers,” said OREP/Working RE founder and Senior Broker, David Brauner. Craig Morley, 2019 President of the NAA, says, “We are pleased to have OREP working with NAA to provide information, education and professional liability insurance (E&O) to our membership. NAA is an association that is intended to be a low-cost professional association that likewise provides information to its members and representing our membership at both a state and national level in an effort to benefit the typical appraiser.” WRE

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7page 36

the property as improved (or as proposed per plans and specifications).”

So far, so good. But here comes the fun stuff.

The article goes on to say that when applying the legal HBU test to multiple parcels, the Fannie Mae Selling Guide requires that the mortgage must cover each parcel, and consequently, excess land “is not a possible outcome of the HBU analysis because the parcels cannot be separated without mortgagee consent.”

This amounts to a new, fifth test of highest and best use: Is the property encumbered with a mortgage?

What’s interesting about this new test is that the overwhelming majority of appraisals reported on Fannie/Freddie forms have the “Fee Simple” box checked under “Property Rights Appraised.” By definition, “fee simple” means absolute ownership unencumbered by any other

interest and subject only to taxation, eminent domain, police power and escheat. In other words, if an appraiser’s opinion of market value is developed within the context of “fee simple,” the appraiser ignores any mortgage. Another way of looking at this is that if a person owns a house and two lots free and clear (one of which is excess land), and then decides to mortgage the property, the highest and best use does not change overnight.

So, we have gone from a confusing position in the December 2019 newsletter to a dangerous position in the March 2020 newsletter. As one industry observer noted, “they should have quit while they were behind.” The reason the latter position is dangerous to appraisers it that it appears to put them at odds with USPAP and their State Regulatory Agency.

Standards Rule 1-1(a) calls for appraisers to “be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal;” yet in no recognized source with which the authors are familiar does highest and best use depend on whether the property is encumbered with a mortgage. So for now, when dealing with excess land and Fannie Mae policy, appraisers should ask themselves if the risks are worth it, or if these assignments are best turned down. In that light, we’ll close this discussion with a final quote from USPAP: “An appraiser must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use.” WRE

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