Working RE - Issue 60

Read Working RE Online – Keep up with the latest news – workingre.com

Real Est ate A pprai s ers

Fall 2022, Volume 60

NAVIGATING A CHANGING MARKET Killed by Carbon Monoxide: Appraiser Blamed Indemnification Clauses ADUs and What’s In It for You? What Is BIPD?

14 HOURS FREE CE PAGE 37

Working RE

6353 El Cajon Blvd, Suite 124-605 San Diego, CA 92115-2600

Has It Been 16 Years…

Since You Shopped Your E&O Insurance?

If you’ve been asleep at the wheel when it comes to your E&O insurance, you likely aren’t enjoying the best pricing and you may have some serious coverage gaps!

Here are some key coverages you may be missing out on: 1) $100,000 Discrimination Claim Coverage Did You Know: Discrimination is excluded in most Appraiser E&O policies!

OREP includes $100,000 of Discrimination Claim Coverage.

2) $100,000 BIPD Coverage The majority of Appraiser E&O policies do not provide Bodily Injury and Property Damage Coverage (BIPD). OREP covers you for any accidental damage to property or bodily injury (BIPD) at an appraisal inspection.

3) State Board Complaint Coverage Did You Know: Some appraiser policies exclude coverage for disciplinary proceedings?

OREP includes up to $50,000 aggregate coverage for board complaints.

All policies include Prior Acts (Back to your original Prior Acts date)

Trusted by Over 10,000 Appraisers—Serving YOU Over 20 Years

Fast, Easy and a great price.

Not sure why it took me 16 years to try someone new but I’m glad we did.

—Anthony Howell

Plus, You Get More Than Just Great Coverage OREP Members also Enjoy: • 14 Hours of Appraiser CE* ($250 value) • Guaranteed Delivery of Working RE magazine • Pre-Claims Assistance and Risk Management • Expert State Board Complaint Consulting • Corporate Savings ($500 value annually) • Webinar Trainings ($200 value)

Call Today: (888) 347-5273 Or Get a Quote Online in 4 Minutes at OREP.org/appraisers

OREP Insurance Services, LLC Calif. Lic. #0K99465 *Not approved in IL, MN, GA

Premiums Start at $401—You Don’t Have to Choose Between Price and Coverage!

Published by

Serving Real Estate Professionals

E&O Insurance Experts www.orep.org ( ) OREP Insurance Services, LLC. Calif. Lic. #0K99465

Fall 2022, Volume 60

From the Editor Readers Respond

4 5

6

Navigating a Changing Market Isaac Peck, Editor

10 14

Killed by Carbon Monoxide: Appraiser Blamed Kendra Budd, Associate Editor

Questions Appraisers Have on Desktop Appraisals

18 22 24

o J hn Dingeman, Chief Appraiser at Class Valuation

ADUs and What’s In It for You? Richard Hagar, SRA

Long Have Appraisers Been Told Tim Andersen, MAI

Insurance IQ: What Is BIPD?

26

Isaac Peck, Senior Broker at OREP.org

Let’s Confer

Hal Humphreys, Appraiser eLearning

Indemnification Clauses: What Appraisers Should Know Isaac Peck, Senior Broker at OREP.org

Excess or Surplus Land: Which Is It? Philip G. Spool, ASA

VA as a Model for Appraisal Industry Isaac Peck, Editor

Professional Marketplace Industry News

38

37

Mission

Editor

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

Isaac Peck isaac@orep.org

Subscribe to Print and Receive Premium Content

Kendra Budd kendra@orep.org

www.workingre.com (click subscribe) Subscription included with purchase of E&O insurance from OREP. Comments & letters are welcome! All stories without attribution are written by the editor.

2 Working RE Fall 2022

32 36

Marketing and Design Manager Ariane Herwig ariane@orep.org

Associate Editor

28 CHECK OUT: OREP’S LIVE CHAT at OREP.org. 5am-5pm PST, Monday-Friday.

Working RE 6353 El Cajon Blvd, Suite 124-605 San Diego, CA 92115 (888) 347-5273 Fax: (619) 704-0567 subscription@workingre.com www.workingre.com

Graphic Design Maria Cornelia mj@orep.org Working RE is published quarterly and mailed to real estate appraisers, agents and other real estate professionals nationwide.

The ads and specific mention of any proprietary product contained within are a service to readers and do not imply endorsement by Working RE. No claims, representations or guarantees are made or implied by their publication.

The contents of this publication may not be reproduced either in whole or in part without written consent.

WRE Online Opportunity (and News) Await!

Opt In at WorkingRE.com

From the Editor

Between a Rock and a Hard Place

by Isaac Peck, Editor

As I write this, I just finished up a web-

inar on discrimination claims that I did in a podcast style with Craig Capilla, one of the nation’s foremost appraiser defense attorneys. (Visit OREP.org/ CapillaWebinar to listen to the replay.)

Our conversation reminded me that over 2,000 state board complaints are filed against appraisers yearly, according to my friend Tim Andersen, MAI and CEO at TheAppraisersAdvocate.com.

That means roughly three to four percent of all appraisers in the U.S. have a complaint filed against them every year!

Of course, the majority of complaints (and claims) against appraisers come from homebuyers and borrowers. This is a frustrating reality for appraisers—the vast majority of the consumers do not understand the appraiser’s role, methodologies, or standards.

Enter the specter of discrimination accusations and innuendos. With dozens of national news stories publicly accusing appraisers of discrimination, federal

4 Working RE Fall 2022

and state appraiser regulators proposing changes to appraisal standards, and new “Task Forces” being organized—appraisers are now caught firmly between a rock and a hard place.

If a person of color has an appraisal come in low and they can’t buy or sell a house for the contract price (without the buyer bringing additional funds!), or they don’t get the value that they wanted when refinancing—it must be the appraiser’s fault, and it must be because the appraiser is racist!

This is the reasoning that we see playing out across the U.S. Dozens of HUD complaints have been filed against appraisers alleging discrimination and Janette Miller, a California appraiser, is being sued for discrimination. In Miller’s case, and in the majority of the HUD cases, the complainants/plaintiffs were homeowners who were refinancing and, one may assume, didn’t get the value they were hoping for.

While this dynamic is, for the most part, outside of the appraiser’s control— there are still steps you can take to protect yourself. First, be sure that your E&O insurance covers you for discrimination (many policies actually exclude discrimination!). Second, now is the time to step up the quality of your reports and build a defensible workfile that documents what you did and why you did it.

Third, thoroughly review all of your canned commentary and the wording you use in your appraisal and remove any mention of race, national origin, etc., as well as any of the “taboo” words Fannie Mae is warning appraisers against using to describe neighborhoods—like ”desirable,” “superior,” “inferior,” and many more.

Lastly, take extra care to treat everyone you meet in the scope of your business with the utmost care and respect. If you have any questions or need liability advice, please check out OREP Insurance (OREP.org). Stay safe out there! WRE

Readers Respond Grappling with Desktop Appraisals To me, it’s all about the liability. Who can we rely on to provide the site info that is not biased in some way? The Realtor? The homeowner? The lender?

Regarding fees, you claim desktops are, at least now, similar to full 1004s.

But if we will require someone to provide info they have not before, like a Realtor’s floor plan, or a professional onsite walk-through in person, I am sure they will not do this for free.

Coupling their fee with ours, where is the savings? And what happens when they get backed up? Are we really saving time? This also harkens back to our arguments of why we need comp photos. If we trust the Realtor for room counts, photos and list/sale prices for comps, why do we need to drive to the comp sales? If we do a desktop appraisal, are we now trusting the Realtor for the comp photos? Call me old, but this is obviously a push to get rid of that pesky appraisal fee altogether. When it crashes again just like 2008, and it always does, who will you blame? —Nathan I’m sure the homeowner will include a photo of that hole in the sheetrock, which they haven’t repaired. Or note the smell of pet urine. It looks like a good time to retire. —Deborah A.

 Appraising in a “Crazy” Market Well done Isaac, with the astute observation about the inconsistency between the concerns about anchoring versus the concerns about appraisals below the contract price. The criticism about the lack of time adjustments depends entirely upon the comparable

selection. While adjustments tend to be made on a monthly basis, the rapid change in pricing often reflects more of a ‘stair-step’ than a straight line.

If the comparables are very recent, then it may be entirely reasonable to assert that those comparables contracted during similar market conditions and are thus on the same ‘step’ as the market as of the effective date.

There is valid criticism from the perspectives of both anchoring bias in some cases and the lack of market conditions consideration in other cases. It is best to be careful not to paint with a broad brush. —Brent B. Many real estate agents I have spoken with in the past week who have been in the business for 30+ years are stating the market has stopped increasing in most areas and they expect a decline in the coming months. Also, in our current market where buyers are waiving appraisals and contract prices are well over list prices and buyers are paying the difference between appraised value and contract price in cash, are these sales truly fair market value sales? It does not appear to meet the definition. —Joshua R.

 Time Is of the Essence Can anyone tell me why the lender will wait soooo long to order the appraisal when “time is of the essence?” I agree we can define ourselves by what we do or even the process and what we bring to the client, but wouldn’t it help just a little if the lender also paid attention to the contract? Maybe they hope qualifying at a higher rate or charging additional fees to hold a rate is beneficial to them.

Do they operate in their best interests or their clients? —Christopher C.

 VA as a Model for the Industry The article is correct. The VA is the best run of any and they deal in logic; they don’t have stupid requirements and they know about the appraisal practice. I don’t do AMC work unless the market is exceptionally slow because they waste my time and basically drive me crazy with inexperienced so-called reviewers.

The VA uses experienced appraisers and they don’t waste our time. They have their rules and all of them make sense. It’s a straight rotation and is not about fast and cheap. —Billie N. I’d add that the VA supports and respects the appraiser and their opinion.

As long as the report is well written, explained and compliant, as any “good” appraiser typically does, you do not need to respond or comply with some of the checkbox underwriting requests.

The SARs reviewing the work don’t typically ask for these and they are also a large part of the success of the program. —Benjamin B.

 If You Call a Dog’s Tail a Leg It is ludicrous to utilize a measurement system not utilized by the local assessor’s office. In the last 3 months I’ve delivered several reports with the subject 1000+ sq. ft. smaller than all the comps and they’re all model matches. It just means more explanation by the appraiser. I’d like to see a common-sense change in the process developed by appraisers in the field. If I can do a desktop without ANSI, why am I using it in the first place?

If I don’t need original comp photos for one form, why do I need them for any of the forms? —Mike WRE

Fall 2022 Working RE

5

Navigating a Changing Market

by Isaac Peck, Editor

Both real estate appraisers and the real

“I’m constantly changing what I say in my appraisals and I’m very careful of boilerplate and canned statements. A quick change in interest rates has led to a quick change in the market. “

estate market as a whole have been on quite a journey for the last two years.

The median price of a home in the U.S. has risen rapidly in the last two years with an average increase of over 30 percent—but some high-demand markets have seen price growth of 50 to 75 percent or more.

During that same time, appraisers have seen record appraisal volume and most have been busier than ever.

However, since the Federal Reserve (the Fed) began raising rates in 2022, the market has begun to shift. The temperature of the market has slowed substantially because of higher interest rates and the number of appraisals being completed is also declining due to a sharp halt in refinance activity.

The result is a shifting market for appraisers—appraisal volume is declining and price acceleration is stalling—and even showing signs of declining in some select markets.

Here are the details on what appraisers are facing and some tips on how to adapt in this changing market.

Appraisal Volume In late 2020 and 2021, appraisal volumes across the U.S. exploded. The number of full 1004 appraisals performed on both a monthly and yearly basis broke new records in 2021.

After an incredible run, the tide began turning in January 2022 and apIsaac Peck is the Editor of Working RE magazine and the President of OREP, a leading provider of E&O insurance for real estate professionals. OREP serves over 10,000 appraisers with comprehensive E&O coverage, competitive rates, and 14 hours of free CE for OREP Members (CE not approved in IL, MN, GA). Visit www.OREP.org to learn more. Reach Isaac at isaac@orep.org or (888) 347-5273. CA License #4116465.

6 Working RE Fall 2022

praisal volume has been steadily declining since then. (See Figure 1.)

However, the good news for appraisers is that despite this decline, on the whole, appraisal volume still remains substantially higher than the volume seen in 2017—2018. (See Figure 2.)

In other words, while changing market conditions certainly indicate a further decline in appraisal volume, ultimately what appraisers are experiencing can be best described as a return to normal rather than a complete drop-off in appraisal orders.

Waivers and Purchases Another positive sign (in a way), is that appraisal volume has held steady even despite the sharp increase in appraisal waivers over the last two to three years.

While the GSEs have massively expanded the use of appraisal waivers, appraisal volume has actually increased during that same time (See Figures 2 and 3.)

Additionally, since appraisal waivers were primarily being used on no-cashout refinances, waivers have retreated substantially since their high point in 2021 when they reached nearly 50 percent of all GSE mortgage transactions.

With interest rates skyrocketing, GSE no-cash-out refinances have cratered—dropping from over 500,000 transactions per month in 2021 to under 100,000 starting in March 2022. (See Figure 4, pg. 8.)

Use of appraisal waivers have been declining across all types of mortgage transactions with the following product mix average in 2022: (a) 55 percent appraisal waivers used on traditional (no-cash-out) refinances,

400,000

300,000

200,000

100,000

0

Jan ‘22

Feb ‘22

Mar ‘22

Apr ‘22

May ‘22

Jun ‘22

Figure 1: Total Appraisals Avereage / Decline in Appraisal Orders in 2022 (Data from AEI.org) 600,000

400,000

0

Jan ‘17 Mar ‘17 May ’17 Jul ‘17 Sep ’17 Nov ‘17 Jan ’18 Mar ‘18 May ’18 Jul ‘18 Sep ’18 Nov ‘18 Jan ’19 Mar ‘19 May ’19 Jul ‘19 Sep ’19 Nov ‘19 Jan ’20 Mar ‘20 May ’20 Jul ‘20 Sep ’20 Nov ‘20 Jan ’21 Mar ‘21 May ’21 Jul ‘21 Sep ’21 Nov ‘21 Jan ’22 Mar ‘22 May ’22

200,000

Figure 2: Total Appraisals (Blue) versus Total Waivers (Red) - (Data from AEI.org) 50.00%

40.00%

30.00%

20.00%

Mar ‘22

May ’22

Jan ‘22

Nov ‘21

Jul ‘21

Sep ‘21

Mar ‘21

May ‘21

Jan ‘21

Nov ‘20

Jul ‘20

Figure 3: Appraisal Waivers (Data from AEI.org)

Sep ‘20

Mar ‘20

May ‘20

Jan ‘20

Nov ‘19

Jul ‘19

Sep ‘19

Mar ‘19

May ‘19

0.00%

Jan ‘19

10.00%

(b) 30 percent appraisal waivers used on cash-out refinances, and (c) 11 percent appraisal waivers used on purchase transactions.

With traditional refinances drying up, the leading indicator of appraisal volume will now be purchase mortgage transactions. Thankfully, appraisal waivers are remaining (for the most part), around 10 percent of purchases. (See Figure 5, pg. 8.)

As far as what the future holds for purchase transactions, the National Association of Realtors (NAR) predicts purchase transactions will be down 13 percent in 2022 overall, but expects to see a trend reversal in 2023.

Fees and Turn-Times It goes without saying that as appraisal volume declines, the rapid run up in appraisal fees seen during COVID-19 has also seen a small retreat. Appraisers are reporting that many AMCs have returned to their familiar practices of sending appraisal orders out for “bid.”

The practice of “bidding” out appraisal orders is seen by many appraisers as one of the key causes of abnormally long appraisal turn-times and tantamount to an open admission by AMCs that they’re just looking for the cheapest appraisal, not a quality appraisal. “I have just received my fourth request for a bid on the same property. I started bidding on this over one week ago. Today I received the fourth request from a fourth AMC for the same lender,” wrote one appraiser on an Appraiser Facebook group. “I NEVER bid. If everyone would stop answering the emails they would stop sending them & fees would be customary & reasonable. These tactics impact all of us in the long run,” wrote another appraiser.

At the same time, senior leaders at AMCs, lenders and the GSEs have noted that slower appraisal volume will favor those appraisers who can stay in communication with their clients and page 88

Fall 2022 Working RE

7

7page 7

8 Working RE Fall 2022

400,000

Jun ‘22

May ’22

Apr ‘22

Mar ‘22

Feb ’22

Jan ‘22

Dec ’21

Nov ‘21

Oct ’21

Sep ‘21

Aug ’21

Jul ‘21

Jun ’21

May ‘21

Apr ’21

Mar ‘21

0

Feb ‘21

200,000

Jan ‘21

Market Changing: How Appraisers Can Handle Alongside the discussion of appraisal waivers, appraisal fees, turn-times, and overall appraisal volume, another thing that is increasingly on appraisers’ minds is the changing temperature of the real estate market.

Of course, real estate is always local, but it is now undeniable that the real estate market is slowing down nationally. It’s possible that prices may continue to rise modestly in some markets, but the majority of markets are seeing prices begin to stagnate (with a few declining).

All throughout 2021, and even in the first few months of 2022, buyers were routinely offering $20,000 to $50,000 over list price (at least here in California), but today many sellers are lowering their list prices and buyers are making more modest, negotiated offers.

Ryan Lundquist, a Certified Residential Appraiser and avid blogger at SacramentoAppraisalBlog.com—a topranking appraisal blog in the United States, says that in times like these, it is more important than ever for appraisers to cultivate a position of neutrality. “A lot has changed in the last six months with interest rates nearly doubling.

There is so much sensationalism floating around—if you watch a bunch of YouTube videos or read articles about how the market is crashing, it’s easy to get caught up in the hype. But as appraisers we need to actively work to remain objective and remain neutral,” argues Lundquist.

600,000

Figure 4: No-Cash-Out Refinances (Data from AEI.org) 15.00%

10.00%

5.00%

0.00%

Jan ‘20 Feb ’20 Mar ‘20 Apr ’20 May ‘20 Jun ’20 Jul ‘20 Aug ’20 Sep ‘20 Oct ’20 Nov ‘20 Dec ’20 Jan ‘21 Feb ’21 Mar ‘21 Apr ’21 May ‘21 Jun ’21 Jul ‘21 Aug ’21 Sep ‘21 Oct ’21 Nov ‘21 Dec ’21 Jan ‘22 Feb ’22 Mar ‘22 Apr ’22 May ‘22 Jun ’22

provide faster turn times. “During the heyday of 3 percent interest rates, it was acceptable for appraisers to take three to four weeks to complete an appraisal and forget to update the client. Now that volume has declined to normal levels, those appraisers who aren’t providing good customer service may see their businesses suffer,” remarked a senior executive at a major bank.

Figure 5: Appraisal Waivers as Percent of Purchases (Data from AEI.org) Neutrality, Lundquist says, is what sets appraisers apart in tumultuous markets. “It is a battle of narratives for many in the market today—and I really have to fight to stay objective. I don’t want to wear rose-colored glasses and I don’t want to wear doom-andgloom glasses. People are looking to appraisers now more than ever to tell the truth, report the market, and avoid sensationalism and hype. Some people have been promoting a ‘crash’ for so many years, which really means they’ve been misinterpreting market trends all this time. It’s like they keep repackaging the same prediction until one day they’re right. But in the midst of

perpetual prophecies, they’ve lost credibility and shown they don’t really have a pulse on the market,” says Lundquist.

The appraiser’s job, then, is to report what is happening in the market right now as objectively as possible. After all, nobody (or very few) people could’ve predicted that COVID-19 would lead to double digit appreciation in real estate prices—many actually predicted the opposite, Lundquist points out.

But just how can appraisers keep a close eye on the pulse of the market?

Lundquist recommends finding people in your local market who are parsing trends and doing a good job telling the story. “You can find people like that on

YouTube, or perhaps other real estate professionals, and you can even look to the big data companies. Redfin has a great tool where they update stats by the week in a lot of markets across the country. What’s happening with the number of pending contracts? What’s happening with price reductions? Altos Research puts visuals out every single week in most markets across the country. There are a lot of things appraisers can pay attention to,” says Lundquist.

In terms of specific metrics to watch, Lundquist says watching the relationship between listings, sales, and pendings, is a great place to start. “Days on Market, concessions, price reductions, the ratio of listings, to pendings, to sales—all of these are indicators.

Price is often the last thing to change in a market. I am much more interested with the number of sales. What’s happening with pending contracts?

Are pendings going up or going down?

This is indicative of demand. In my market, June pending volume will be down 25 percent compared to last year.

We are seeing a huge difference in the number of buyers that are able to play the game right now because of interest rates,” Lundquist reports.

Another part of it is studying the market to the point where appraisers can understand what is normal and what is not for their local market. “We’ve had a really, really aggressive trend for two years; it’s almost unfathomable that a property will take 30 days or longer to sell. So as the market begins to shift, we are getting back to normal in a sense. That doesn’t necessarily mean the market is crashing. I am often looking at stats from 2016 to 2019.

Almost all of our recent history has been on steroids and I don’t think it’s a good barometer for interpreting the market overall,” Lundquist says.

Another technique that Lundquist uses is he is always in communication with his peers in the real estate community. “I’m constantly asking people: ‘What are you hearing from buyers and sellers right now?’ Join local forums where people are talking about the housing market. You have to sift through the sensationalism, but hearing people’s stories can be really powerful. Collect as much information as you can and then try to see the forest for the trees. There are a lot of properties getting into contract and there are still multiple offers. These are

the trees. But what is going on with the whole forest? What’s happening with the properties that are not getting into contract right away? It’s easy to judge the market based on what’s on my desk if I’m only seeing it through these 10 appraisals I’m working on. But what is the bigger picture?” asks Lundquist.

At the end of the day, Lundquist says his goal is to report what is happening in the market right now—accurately and without sensationalism.

“I’m constantly changing what I say in my appraisals and I’m very careful of boilerplate and canned statements.

A quick change in interest rates has led to a quick change in the market.

My appraisals talk about more stable prices in my area but also about uncertainty regarding the future. Pending volume is softening, available listings are skyrocketing, and it is taking longer to sell—but there are still stats that suggest there is heavy competition for certain homes.

It changes by the week. There’s no easy way to quickly do this, it takes effort. There’s no such thing as being a market expert without putting in the time to be an expert,” argues Lundquist. WRE

STAY INFORMED! Serving Real Estate Professionals

Winter 2020 Volume 52

Keep up-to-date on the latest news and information by subscribing to Working RE’s email newsletter.

Publishing to appraisers for over 20 years, Working RE is the #1 source of news for real estate appraisers across the United States.

Opt In for FREE at WorkingRE.com Fall 2022 Working RE

9

Killed by Carbon Monoxide: Appraiser Blamed

by Kendra Budd, Associate Editor

Editor’s Note: The names, location and details of this case have been changed to protect the privacy of the individuals involved.

For

As an appraiser, you know appraising a home requires careful diligence, time and a keen-eye, even if your client plans on hiring a home inspector.

decades, appraisers have been gently reminded to pay careful attention to smoke alarms and carbon monoxide (CO) detectors—especially noting when they are absent altogether.

Many experts advise that the state and federal standards requiring these important systems exist for a reason.

A recent case in which a young couple died from carbon monoxide poisoning while they slept highlights the life and death importance of these simple alarms—and brings this issue front and center for the real estate appraiser community as a whole.

Here’s what happened.

A Deadly Mistake John and Suzy Smith (names changed for privacy) were a young couple and first-time homeowners, living in their home for just over 18 months. On the night in question, they planned a dinner out with friends and were hurrying to get home, get ready, and head out.

In a rush to get in her husband’s car, Suzy left her car in the garage—key in the ignition and still idling. When the couple returned from dinner, John parked his car outside on the driveway.

They retired for the evening to their

Kendra Budd is the Associate Editor of Working RE magazine and the Marketing Coordinator for OREP, a leading provider of appraiser E&O insurance—trusted by over 10,000 appraisers.

She graduated with a BA in Theatre and English from Western Washington University, and with an MFA in Creative Writing from Full Sail University. She is currently based in Seattle, WA.

10 Working RE Fall 2022

third-floor master bedroom suite and went to bed.

All through the evening and into the night, Suzy’s car sat idling— pumping the garage, and then the home, full of carbon monoxide.

The result was the Smiths, along with their pets, were found dead the very next day. Suzy’s car was still running in the garage when police arrived on the scene. Lab tests confirmed the cause of death for both John and Suzy was “Carbon Monoxide Toxicity.”

After a thorough investigation, detectives found five hard-wired alarms in the ceiling throughout the townhouse but all were actually smoke detectors. Not a single carbon monoxide alarm was found in the home.

The couple was well-known in their small community and news of their death was covered extensively by state and local news alike. The news of such a young couple losing their lives just as they were starting a new life together hit the community hard.

Lawsuit As you might expect, it didn’t take long for both John and Suzy’s parents to hire a law firm and start going after all the real estate professionals involved.

As it turns out, both the appraiser and the home inspector had each independently inspected the home 18 months prior and both mistakenly reported a few of the smoke alarms present at the home, as CO detectors.

Consequently, both the appraiser and home inspector ended up on the receiving end of a “wrongful death” legal claim.

The legal team for the parents of the deceased young adults (plaintiffs) alleged that the appraiser, Darcy Doe (name changed for privacy), had negligently appraised the Smiths’ home and had reported the presence of a CO detector when in fact, none were present. Unfortunately for Doe, she labeled her photograph inaccurately in her own appraisal report to the lender.

The legal demand notes that the appraiser indicated they would note any physical conditions that could affect livability and adverse environmental conditions. Furthermore, the appraiser represented that their photographs were a “true and accurate representation of the subject property” and acknowledged that any intentional or

negligent misrepresentations could result in civil liability.

The plaintiff’s attorneys point to a photograph included in the appraiser’s report of a First Alert smoke detector on the ceiling of the townhouse.

However, the smoke detector was incorrectly labeled as a CO detector rather than a smoke alarm in the appraisal report. The legal demand is quick to assert that the appraiser was negligent, stating: “Given its orientation, next to a ceiling light and adjacent to a staircase, the device depicted appears to be on the second floor near the staircase to the third floor, where the bedrooms are located.

It would not have been properly located even if it was an actual CO alarm.” Their argument is clearly that any well-focused appraiser would have known this fact, and should be able to easily tell the difference between the two.

The plaintiff’s attorney reviewed the matter of potential negligence by interviewing other appraisers, “Apparently, the [lender], as do many other lenders, specifically requires that the appraiser confirm the presence of a statutorily required CO alarm as a condition for approving the loan. One appraiser advised me that he has had to return to a property to provide that confirmation,” the attorney wrote. However, Doe did not properly confirm the presence of a CO alarm.

It was further argued by the legal team that the lender “obviously relied upon [Doe’s] appraisal report in approving the loan. Had there been no CO alarm present, the loan would not have been approved unless and until a CO alarm was provided (which could have been readily accomplished).”

Take Your Appraisal Business to the Next Level with Dustin Harris

“

“

If you’re on the fence about getting some coaching, fence sit no longer! You can’t go wrong with Dustin!

- Blaine Feyen

page 128

The Appraiser Coach

 Increase your efficiency  Double your income  Work fewer hours SINGLE COACHING SESSION

SAVE 10%

TheAppraiserCoach.com/Coaching

COUPON CODE: 10%OFFCOACHING

Fall 2022 Working RE 11

7page 11

The attorneys go as far to argue that the law requiring carbon monoxide detectors in homes was increasingly necessary because “newer motor vehicles run quieter and smoother” and the “technological advances have lessened the required interaction and sensory feedback between operator and vehicle in driving and parking.”

The combination of these items gave the plaintiffs’ attorneys a strong claim against both the appraiser and the home inspector that they had incorrectly reported the presence of a CO detector (which never actually existed), and consequently that this negligent misrepresentation contributed to the wrongful death of the Smiths.

Ultimately, both cases were settled privately out of court.

CO Detector vs Smoke Alarm One important lesson in these cases is that it can be extremely difficult to tell the difference between CO detectors and smoke alarms. This is a reminder to appraisers to take a second look at all CO detectors and smoke alarms—and to test them as well.

Rick Bunzel, home inspector and Washington firefighter was able to give us some tips on how to not only tell the difference between the two detectors, but offers additional safety tips on smoke alarms and carbon monoxide detectors as well.

For starters, the difference between a smoke alarm and a CO detector is quite simple. “The item will be clearly labeled, written on the exterior shell of the device, so you’ll be able to see it easily,” advises Bunzel. However, this can be hard to read because the signage could be the same color as the shell, so it’s incredibly important for you to get close enough to the alarm or CO detector to read it clearly (and test it!).

Bunzel reports that the alarms 12 Working RE Fall 2022

usually have different locations. “Carbon monoxide detectors are usually mounted high or low,” Bunzel says. He also points out that this isn’t a foolproof method because carbon monoxide and oxygen have only one molecule difference, so they have the same density. “In theory you could place a CO detector anywhere but they’re usually out of reach of kids or pets— that’s a good rule of thumb,” says Bunzel. However, it is important not to rely on location alone, as that can lead to the same type of problems encountered by Jones above.

Lessons Learned Bunzel was also able to provide some helpful tips for appraisers as far as how to communicate with their clients about CO detectors. For example, Bunzel says that appraisers and home inspectors should make it clear to their clients that they do not warranty if the device is working, just that it is there. “The test button doesn’t test the workability of a device—only the alarm. Just because it squeaks doesn’t mean it works,” reports Bunzel. This disclaimer language should be included in the appraiser’s report.

Another tip is to check the date of a CO alarm and smoke detector. “It’s amazing how many smoke alarms I find from the ‘80s,” Bunzel says. Carbon monoxide alarms expire after six years, and smoke alarms expire after 10. In fact, The National Fire Protection Association (NFPA) requires smoke alarms to be replaced after 10 years. Appraisers, home inspectors and homeowners should be checking these dates.

However, as an appraiser it is imperative you are making your client aware of the expiration. “We should be calling out if they’re older than 10 years. From a safety perspective we need to be doing that,” Bunzel warns. Especially as a firefighter he

tells us he has seen too many expired alarms. He keeps it simple by stating simply, “Having working alarms that are within their lifespan saves lives.”

This is the code every appraiser and home inspector should be living by, argues Bunzel.

Important Reminder Isaac Peck, President of OREP Insurance, a leading provider of appraiser insurance, says that on most conventional home loans, the lender is typically requiring that the appraiser confirm the presence of a CO alarm as a condition of approving the loan. This opens the appraiser up to liability if they report a CO alarm is present, when in reality that is not the case. “Even in the rare case that an appraiser isn’t required by her scope of work to report the presence of a CO detector, if the appraiser includes a picture of a CO detector in her report—if the CO detector turns out to be a smoke detector, a case is still created for negligence and/or misrepresentation,” reports Peck.

This case serves as an incredibly potent reminder of the deadly consequences that can result when CO detectors either malfunction and/ or are not present. Reporting CO detectors is often a very mundane and routine part of an appraiser’s subject property inspection, but this recent tragedy goes to show how important this issue is for the appraisal industry.

The case also shows how even a very small oversight or mistake can turn into a claim. Peck says that even very experienced appraisers sometimes overlook things. “Nobody is perfect 100 percent of the time.

If your firm is doing 200, 300, or more appraisals a year, what are the chances that you might overlook something on one out of 300 appraisals? Mistakes happen. This goes

to show the importance of having insurance for your business so you’re not risking your entire business or your family’s financial future.

Thankfully, both the appraiser and home inspector were carrying E&O insurance and did not have to face these wrongful death legal claims alone,” reports Peck.

One thing to note is that many appraiser E&O policies actually exclude Carbon Monoxide from their policies! This exclusion is typically a part of a policy’s Pollution exclusion.

Please be sure to check with your OREP agent if you want to ensure you get coverage for this important exposure. (Visit OREP.org to learn more!)

Final Thoughts Looking for carbon monoxide de-

tectors is a very small part of your subject property inspection, but it is of utmost importance. In this case, both the appraiser and the home inspector cut corners, improperly called the smoke alarm a carbon monoxide detector, and as a consequence became entangled in a nasty wrongful death legal claim. As a real estate appraiser, you know appraising a home requires careful diligence, time and a keen-eye—even if your client plans on hiring a home inspector.

Make sure that you’re taking careful note of the alarms and detectors, their dates and location. An accurate report not only saves lives, but spares you the headache of being on the receiving end of a lawsuit.

Stay safe out there! WRE

BUSINESS SLOWING? FIND THE BEST AMC CLIENTS QUICKLY! 2022 AMC GUIDE OVER 180 AMCs LISTED! MONEY BACK GUARANTEE Purchase at WorkingRE.com/AMC

INTRODUCING

Contributory Value

Contributory Value is a NEW podcast hosted

by Mark “Skap” Skapinetz, who stood up against a big AMC and won! It’s a podcast about all things appraisal and real estate.

Skapinetz brings the raw perspective of a boots-on-the-ground appraiser to every episode.

Episodes will feature industry professionals: real estate appraisers, real estate agents, lenders, appraisal management companies, policymakers, everyday consumers, & more.

CONTRIBUTORY

VALUE WITH

Mark “Skap” Skapinetz

Contributory Value is authentic, full of energy, fun and informative—contributing knowledge and value to you, the listener.

LISTEN TODAY

AVAILABLE ON ALL MAJOR PLATFORMS

SKAPTHEAPPRAISER.NET

Fall 2022 Working RE 13

Questions Appraisers Have on Desktop Appraisals

by John Dingeman, Chief Appraiser at Class Valuation

In

early 2022, a permanent change was made to the Selling Guide when both Fannie Mae and Freddie Mac announced desktop appraisals are coming soon and that floor plans are required. The new guidelines took effect in March of this year.

While this change is considered by many to be a positive move for the industry, it has the potential to create questions in the minds of the professional appraiser. In this article, we will highlight the impact the new desktop appraisal guidelines will have on the industry. We’ll also answer some common questions appraisers are asking as they implement the new rules.

Looking at the fine print, other requirements could be less obvious. Floorplan exhibits are one example of a less obvious requirement that could complicate things for appraisers.

Industry Impact The appraisal profession has traditionally been resistant to change and slow to adopt new technology. The modernization of the appraisal process promises to integrate the bestin-class technology readily available to us today and should have a major impact on how the appraisal profession performs. Furthermore, the availability of desktop appraisals has the potential to help accelerate this modernization by opening doors for the use of these technologies.

Unexpected Prevalence Before the announcements from Fannie and Freddie, it was anticipated that desktop appraisals would only be accepted for loans with a maximum of 80 percent

John Dingeman is a Certified Residential Appraiser in 11 states, a Registered Property Tax Agent in Arizona, and a Qualifying and Continuing Education Instructor for multiple course providers. Dingeman is the Past President of the National Association of Appraisers and the Coalition of Arizona Appraisers. He has also served on the Arizona Board of Manufactured Housing and the Phoenix Village Planning Committee.

14 Working RE Fall 2022

loan-to-value ratio (LTV), where buyers were making at least a 20 percent down payment. However, the new guidelines apply to properties with up to 90 percent LTV. For appraisers, this means they’ll have the option to conduct a desktop appraisal much more frequently than they might have thought.

Efficiency With quick and easy access to the information needed to complete a desktop appraisal, appraisers should be able to submit the data and receive reports back in time to meet appraisal deadlines more efficiently.

In the case of rural properties located away from town, desktop appraisals will still allow appraisers to complete an assignment where they have geographic competency, while no longer requiring them to spend additional time and money driving to reach the home for that assignment.

Learning Curve With the introduction of new guidelines, it’s tempting for industry stakeholders to make operational changes before they fully understand the guidelines, as will likely happen with new desktop appraisal guidelines. Resulting mistakes could create short-term challenges and increase cycle-times rather than reduce them.

As for appraisers, the new guidelines also come with new requirements. Fannie Mae outlined several such requirements in order for loans to qualify for a desktop appraisal reported on the 1007/70 Desktop form. The basic requirements include: • A complete subject property address;

• •

The loan must be for a purchase transaction only, and The subject must be a one-unit principal residence.

Floorplan Exhibits Looking at the fine print, other requirements could be less obvious.

Floorplan exhibits are one example of a less obvious requirement that could complicate things for appraisers.

When DU (Desktop Underwriter) issues a desktop appraisal eligibility message, and if a desktop appraisal is selected by the lender, then the appraiser must include a floorplan exhibit that has room-labeled doorways, staircases, points of ingress/ egress, and provide the dimensions of all exterior walls used to calculate the square footage. This is in addition to all other required exhibits listed in the Fannie Mae Selling Guide.

The requirement for floorplan exhibits could create pains in the industry, at least in the short term while appraisers master the new rules and sourcing for reliable and compliant floorplans is established. Floorplan exhibits, ANSI standards, and who is responsible for satisfying those requirements will be covered in more detail later in this article.

Common Appraiser Questions Here are some of the most common questions valuation professionals might have as they navigate the new rules governing desktop appraisals.

1. Will the GSEs (governmentsponsored enterprises such as Fannie Mae and Freddie Mac) continue to use Submission Summary Reports (SSR scores) to verify the validity and quality of the appraisal?

Yes, the GSEs will continue to use SSRs to score appraisals, just as they would with a traditional 1004. This also means that the same data and SSR scores will be required by the GSEs to

support their due diligence. Appraisers should not expect differences in the way desktop appraisals are evaluated.

Lenders will be reviewing SSR scores and collateral underwriter findings just as they always have, seeking clarification where necessary.

2. Will the American National Standards Institute (ANSI) apply when Realtors® supply the floorplan?

As of this writing, ANSI does not technically apply to desktop appraisals.

However, even though it’s not expressly required, many appraisers are wisely using ANSI standards in their measurements to ensure accuracy and consistency. As the use of desktop appraisals evolves and takes hold, it is likely that ANSI standards will become required in floorplan submissions. Appraisers are urged to adhere to ANSI standards now, to save themselves hassle in the future when they will likely be a requirement.

3. From an Appraisal Management Company (AMC) perspective, will a desktop appraisal be the same as a 1004 appraisal?

While the desktop appraisal is recognized by an AMC as a different product in terms of how the analysis is conducted, desktop appraisals are required to pass through the same quality control standards as a traditional appraisal. Desktop and 1004 appraisals result in the same data being submitted; the data is just collected by different means. Rather than an appraiser walking through the home with a camera and clipboard as they would with a traditional appraisal, the data for a desktop appraisal is gathered digitally.

Whether desktop or traditional, the industry standard remains: to submit a complete and accurate appraisal without the use of extraordinary assumptions. Therefore, a desktop appraisal cannot be any less comprehensive than a traditional one.

4. Will the introduction of desk-

top appraisals have any impact on the number of appraisal waivers offered by DU or Loan Product Advisor (LPA)?

For a GSE like Fannie Mae, the benefit of systems like DU and LPA is that they allow them some control over the flow of appraisals. By fine tuning the data, the GSE can influence the number of appraisals that are waived versus those that require a traditional, hybrid, or desktop appraisal.

There could be some overlap in the data parameters that place loans into different appraisal categories. For example, some loans may qualify for either a desktop appraisal or a traditional 1004, and as such be pushed by the GSE toward a 1004. Others may qualify for a waiver but based on the data could breach into the desktop appraisal category. The GSE would have the ability to push those toward a desktop appraisal.

Because of the potential for overlap and the control a GSE has, there could be a decrease in the number or percentage of appraisal waivers that are granted.

There has also been a significant spike in waivers granted over the last two years, which may prompt GSEs and the Federal Housing Finance Agency (FHFA) to push more loans out of waiver territory where possible.

This could be a factor in the decision to create an actual policy around desktop appraisals as part of DU. 5. In light of the new desktop appraisal rules, who will be responsible for satisfying floorplan requirements?

While the appraiser is not responsible for procuring a floorplan, they are, ultimately, required to determine and submit the most reliable floorplan measurements. Appraisers should make sure they understand what floorplan measurement tools or data will be provided by the AMC or lender before accepting an appraisal assignment.

Depending on the circumstances, an appraiser may be required to find the detailed floorplan or procure inpage 168

Fall 2022 Working RE 15

7page 15

terior photos. Gathering the data to complete a proper desktop appraisal can be complex. This is why it’s important for an appraiser to understand the breadth of what they are committing to when accepting an assignment.

6. How will desktop appraisal disputes work?

Disputes over desktop appraisals will work the same way they do now.

The difference is that all parties will look at the same hard data set. In a traditional appraisal, the appraiser experiences the property personally, collecting photos or sketches and writing notes which creates data, but also has the potential to create subjective impressions.

In a desktop appraisal, there are no subjective impressions—just a set of black and white objective data.

In theory, this factor alone could reduce the number of disputes and revision requests.

16 Working RE Fall 2022

Any disputes that do arise on a desktop appraisal will be solved by taking a closer look at the data, which will not be colored by any subjective opinions formed during a personal inspection. This could make resolving those disputes more clear-cut.

7. What if I am missing an important piece of information?

If an appraiser is able to complete the desktop appraisal, then it’s an expected assumption that all the necessary data is there. If necessary, should data be missing or cannot be located, the appraiser must communicate to the lender or AMC that there is insufficient data to credibly complete the appraisal. In these cases, upgrading the casefile for traditional appraisal is always an option.

8. Where will I get comp photos?

With desktop appraisals, the scope of work has changed so that an ap-

praiser does not have to view a comparable property from the street or submit an original photo. Instead, appraisers are allowed to use any reputable and readily available online source for the comparable photographs, such as Zillow, Redfin, or Google.

New guidelines governing desktop appraisals will undoubtedly raise questions for a lot of valuation professionals. As rules and requirements evolve, having tools and technology at their disposal will prove incredibly valuable to helping appraisers keep their businesses profitable.

One of those tools is Class Valuation’s digital desktop, which features AI-enabled quality assurance, easier data extraction, and 3-D property scans for accurate, ANSI-compliant floorplans.

More information and demos can be found at https://www.classvaluation. com/digital-appraisals/. WRE

ADUs and What’s In It for You?

by Richard Hagar, SRA

Acronyms on top of acronyms—just wait until you see Fannie Mae and Freddie Mac’s upcoming appraisal form regarding these initials.

The more we appraised these properties, it became obvious that these are complex appraisals requiring geographic competency and extensive, highest and best use analysis.

ADU/DADU Accessory Dwelling Unit (ADU), Detatched Accessory Dwelling Unit (DADU), Mother-in-Law Apartment (MIL), plus a dozen other names and initials—no matter what you call them, they are becoming more commonplace and likely part of the future appraisal assignment. The new proposed “1004” form goes so far as to include a multi-line section with more than twenty questions devoted to describing, measuring, and valuing these accessory units, including a requirement for multiple interior and exterior photographs. And you won’t believe their impact on value and the size of adjustments.

When I first started appraising and ran across an ADU…I may have not given these units much consideration or value—boy, was I wrong. In the past, many counties and cities across the country prohibited ADUs; however, as housing and land values have skyrocketed the need for more lower cost housing units has also increased. As demand rises, the prohibitions and scarcity of the past fade away. The need to understand these units has become more important to lenders and appraisers. If you can fully understand, measure, describe, and value a house with an ADU, the more likely you are to earn higher fees…that’s WIIFY (What’s in it for you).

Richard Hagar, SRA, is an educator, author and owner of a busy appraisal office in the state of Washington. Hagar now offers his legendary adjustments course for CE credit in over 45 states through OREPEducation.org. The 7-hour online CE course “How to Support and Prove Your Adjustments” shows appraisers proven methods for supporting adjustments.

Learn how to improve the quality of your reports and defend your adjustments! OREP members save on this approved coursework. Sign up today at OREPEducation.org.

18 Working RE Fall 2022

Conflict and Confusion There’s a lot of confusion regarding ADUs—some cities limit their size to 1,200 square feet, others require a minimum of 200 square feet, but some require their square footage to be no more than 50 percent of the main house.

Then there’s the cities that require them to be separate from the main house, but then others require them to be part of the main house. One city may require additional on-site parking space, while another prohibits additional parking.

Some cities require special permits, while the State of California goes as far as to pass a law that if ADU permits aren’t issued within 60 days the units are automatically approved (SB2, SB13, AB881, AB68). Some cities limit a site to only one ADU while others (like Seattle) allot for 2, or (like some areas of California) allow for 4. The lines between multi-family housing and Single Family Residence (SFR) with an ADU are blurred, putting more pressure on analyzing the highest and best use as if vacant and improved.

Adding more twists to all of this, FHA, VA, FNMA, and FHLMaC have slightly different definitions and requirements. Two of these agencies require the owner to live onsite while FNMA remains indifferent. The City of Seattle allows two ADUs on a property; however, FNMA will not buy a loan if there are two ADUs on the site. When FNMA won’t buy a loan there can be an impact on the property’s value (was that factored into your last appraisal?). VA doesn’t care if an ADU is only accessible from within the main house but, FNMA requires separate access. Due to all these confusing and conflicting requirements and definitions, I had to create a “Decision Grid” for my office for appraising.

Duplex or SFR with ADU? The line between a duplex and an SFR with an ADU is blurry, and appraisers must understand the difference and complexity before quoting a fee. Fortunately, the difference is usually based on zoning (except in Seattle, Oregon, and California) which makes it critical for appraisers to research zoning definitions and determine the highest and best use of the land, as if vacant and the property as improved. Appraising a property with an ADU takes more time, is complex and likely precludes licensed appraisers from providing the appraisal (it needs to be completed by a certified appraiser). If there’s a chance your subject property has an ADU, expect to spend, at a minimum, 25 percent more time on the appraisal and always make sure to check its zoning and legality before you quote a fee.

ANSI ANSI and now FNMA, have special requirements on how these units are measured and reported on the 1004 form. Depending on its location and access, the square footage may be part of the living area, below grade area, or separated in the cost and sales comparison sections. ANSI also has special text that must be included in the appraisal addendum. I bet you’re just thrilled with all of these new considerations. There is no way around the new requirements and complaining won’t help, because nobody is listening. There’s no easy explanation for this, so the best recommendation is to take the Working RE webinar: ANSI: New Requirements for Appraisers. In the webinar we will cover these issues in much greater detail.

Value and Adjustments You won’t believe how valuable these things are. Way back when, I thought these were a minor contributor to value (requiring a small adjustment).

NEW WEBINAR–ON DEMAND!

How to Handle ADUs, Casitas and Mother-In-Law Units

How Do You Value an ADU? Serving Real Estate Professionals

Winter 2020 Volume 52

Accessory Dwelling Units (ADUs) are a new wave starting in the West and moving all across the United States.

Like it or not, they are already in most major cities. Valuing these units is complex!

This Two-Part webinar will help Serving Real Estate Professionals appraisers understand when and where ADUs are allowed, the difference between an ADU and a duplex, how and where to place the information on the form (and which forms should be used), and much more!

Winter 2020 Volume 52

Sign up today at WorkingRE.com/webinars However, after applying proper analysis, using various adjustment methods (matched—pair, regression, etc.) we’ve determined that they can have a major impact on a property’s market value. The contribution to value and the size of the adjustments have blown us away. One study in Portland indicated a contributory value of more than $75,000. In a separate study we completed for a legal case, there was solid evidence that the property’s value was increased by 20–25 percent or more. What is an ADU worth in your market? Well, that’s up to you to figure out and why we get “paid the big bucks.” I recently reviewed an appraisal of a property that had an ADU—the appraiser clearly undervalued the property by tens of thousands of dollars. The value was off so much that the client had to order a second appraisal and turn the first appraiser into the state appraisal board (due to a USPAP failure likely to impact the value conclusion). Pay attention when appraising these properties.

You don’t want this to happen to you.

Solution Get educated. Take a class on appraising ADUs, and do it soon! If you haven’t

taken a class regarding the ANSI system…do it now!

When we started appraising properties with ADUs I thought it was just another component, similar to a swimming pool or second garage.

However, the more we appraised these properties, it became obvious that these are complex appraisals requiring geographic competency and extensive, highest and best use analysis. Plus more time measuring, describing, and valuing. I went so far as to create a special required 4-hour class: How to Handle ADUs and MILs, for everybody working in my appraisal office. The webinar version is available at WorkingRE.com/webinars.

WIIFY—What’s in it For You Appraisers can make themselves more valuable by appraising houses with ADUs, something that computers (AVM) and desktop appraisals can’t properly handle. By learning about ADUs you will be able to provide superior appraisals that have more accurate value conclusions and garner higher fees… that’s WIIFY. Trying to keep you safe out there. WRE Fall 2022 Working RE 19

COME FIND OUT WHY

Over 10,000 Appraisers Choose

OREP E&O INSURANCE

Serving Appraisers for 20 Years The Experience, Expertise, and Support You Deserve OREP Members Enjoy All This (and More!):

14 Hours of Continuing Education in 46 states* ($250 value) Pre-Claims Assistance and Risk Management Expert State Board Complaint Consulting Guaranteed Delivery of Working RE magazine

Coverage Highlights:

Premises Coverage Included: Bodily Injury/Property Damage $100,000 of Coverage for Discrimination Claims Up to $50,000 Aggregate State Board Defense Coverage Zero Deductible; Mold Coverage Available Minimum Premium: $401

COMPREHENSIVE APPRAISER INSURANCE APPLY ONLINE in 4 Minutes at OREP.org 20 Years, Over 100,000 Policies Issued OREP INSURANCE SERVICES, LLC. Calif. Lic. #0K99465 *(Not approved in GA, IL, MN—OREP Members only)

“Fast, easy and a great price.

Not sure why it took 16 years to try someone new but I’m glad we did.”

–Anthony Howell

“I am learning so much that is helping me improve in my appraisal practice and increase the quality of my reports and workfile, thus reducing my exposure to lawsuits.

The webinars and education are a great complement to your insurance business. I will be back at renewal time.” –Bruce K.

“I switched my E&O insurance to OREP last month and saved $349 bucks.”

–Dave M.

“I have been using OREP for several years and signing up is very easy.

They respond immediately with no hassles.” –Vickey Carly

“I found OREP to be significantly cheaper, and provide better coverage than other companies. The savings are real.” –Greg Zieba

“It literally took only one minute to renew. I had my new insurance info later that day. Thanks OREP—Keep up the great service.” –Jeff Wood

“Went with them for the price. Giving 5 stars for service. Same agent since day one. Fast response time and excellent follow through.” –Troy Patterson

WE ANSWER THE PHONE! (888) 347-5273 Expanded Hours: Open 12 hours a day to serve you better!

Monday-Friday 8 am - 8 pm EST (5 am - 5 pm PST)

Long Have Appraisers Been Told

by Tim Andersen, MAI

Long have appraisers heard the advice,

While the analyses and protocols that went into authoring this article are far from scientific, it is interesting to note just how seriously the state of Mississippi takes the importance of the workfile.

“a thick workfile is your best defense!”

By extension, therefore, a poor workfile, a thin workfile (or, even worse, no workfile at all!) is the prosecution’s best tool against the appraiser. In our case, the prosecution is the state appraisal board and their attorney who presents the case to the board. On the police shows, you’ve heard the arresting officer state solemnly, “Whatever you say can and will be used against you in a court of law!” In our case, what we say (in the report), as well as what we do not say (as in a thin workfile) can and will be used against us. Let’s see how.

Mississippi’s appraisal board keeps a website (visit WorkingRE.com/MScomplaints) to show its disciplinary actions since 2014. For those nine years, the MAB disciplined twenty-nine (29) appraisers for various infractions of USPAP and/or state statutes. Of these, fully 21 (74%) of them specifically mention the appraiser not having a proper workfile, thus not being able to support adjustments, statements of fact, value opinions, and so forth.

In fact, the general language in all these decisions is: “[r]espondent does not have verified documentation or analysis to support the information used in the [appraisal] in the appraisal report, in violation of [state statute], [USPAP’s} Record Keeping Rule, Scope of Work Rule (Problem Identification, Scope of Work Acceptability and Disclosure Obligations) and [various] Stan-

Tim Andersen, MAI, MSc, USPAP instructor and CEO of TheAppraisersAdvocate.com, is the instructor of of How to Raise Appraisal Quality and Minimize Risk (7 Hours CE) at OREPEducation.org (OREP Members enjoy the course at no cost. Andersen has been in real estate and consulting since 1975 and is an AQB-certified USPAP instructor, USPAP consultant, author, instructor and expert witness. Andersen can be reached at tim@theappraisersadvocate.com.

22 Working RE Fall 2022

dards Rules…[and] Respondent did not provide verified documentation or analysis in the workfile for various information stated in the Appraisal Report. [Respondent] provi[ded] a limited workfile and does not have verified documentation necessary to sufficiently analyze the information for the three (3) approaches stated in the appraisal report.”

While the analyses and protocols that went into authoring this article are far from scientific, it is interesting to note just how seriously the state of Mississippi takes the importance of the workfile.

Here is another quote from one of the Board’s decisions: “Respondent did not provide verified documentation or analysis in the workfile for certain information stated in the Appraisal Report. The work file contains very limited verified documentation.

No cost approach documentation is contained in the workfile to show cost approach analysis or conclusions. There is no apparent explanation for the difference in market value concluded… vs. the concluded value for the cost approach… an unexplained…difference in the two values for the respective approaches. There was no verified documentation reflecting the analysis upon which the appraiser concluded site value.”

This statement from the decision, “[respondent] did not provide…analysis in the workfile” is telling. It makes clear that appraisers are to supply not only documentation, but analyses of their verified data to show the process of how and why they arrived at their conclusions and opinions. In other words, just like in high school algebra, the State of Mississippi demands the appraisers in that state to show their work.

One way to support your conclusions, as well as to fortify your workfile,

is what our engineering friends call iterations. In simple English, the term iteration means doing something over and over again, usually with one minor change in the process each iteration— until you’re happy with the results of your efforts. One example of this is the time adjustment. To show proper due diligence, you really should have your time adjustment from two independent sources (if not more). This could be the FHFA website and/or your local MLS. Your iterations would be to change your inputs for each source/iteration until they both begin to center on a small range of results. It is important to understand how vital it is to support each of these iterations in the workfile. It is

by keeping them in the workfile that we show not only that we have followed the appraisal requirements of USPAP’s Standard 1, but it also shows that we have not engaged in bias in collecting, verifying, and analyzing the data supporting the final value conclusion. The various iterations the workfile show that we considered all scenarios before reaching a conclusion.

This concept, that of considering all scenarios, shows that there was no bias in the selection of the data, verification of the data, nor in the conclusions we drew from the data.

This is not the place to show how to adjust the comparable sales, nor how to verify the other data. All that

information is available elsewhere. It is, however, the place to emphasize, again, that a thick workfile is the appraiser’s best defense. Therefore, an anemic workfile is the prosecution’s best tool to expose a weak appraiser, a non-credible appraisal, and a misleading appraisal report. When it comes to workfiles and what to keep in them, as Josh Walitt, SRA, has said many times, “If you see it as part of your appraisal, save it in your workfile!”

And as one final thought, it is a common question to hear how long should and appraiser keep their workfile. The easy answer is forever. Store it digitally and it costs nothing. This makes it very easy to keep the files forever. WRE

APPRAISERS:

Lower Your Business Expenses!

Appraisers need ways to lower their business expenses.

What’s better than saving over $250 on your Appraiser CE? OREP Members enjoy 14 hours of appraiser continuing education at no extra charge.

Shop

PICK TWO VIDEO-BASED CE COURSES: More than just another insurance agency.

Calif. Lic. #0K99465

∞ How to Raise Appraisal Quality and Minimize Risk (7 Hrs) ∞ FHA Appraisal Standards (7 Hrs) ∞ Non-Lending Appraisal Assignments (7 Hrs) CE not approved in GA, MN, and IL

Appraiser E&O and Benefits at OREP.org or call (888) 347-5273 Fall 2022 Working RE 23

Insurance IQ: What Is BIPD?

by Isaac Peck, Senior Broker at OREP.org

In my role at OREP, I frequently have

I’d estimate that 97 percent (or more) appraisers are only carrying E&O insurance and do not purchase a separate GL policy every year.

24 Working RE Fall 2022

the opportunity to speak to appraisers about their risk management practices and answer questions that appraisers have about their insurance coverage.

I love talking to the boots-on-theground appraisers who are doing the work in the trenches—plus it helps me keep a finger on the pulse of the industry so I can continue writing relevant stories for you as Editor of Working RE. One of the things that comes up repeatedly in my conversations with appraisers is what is the difference between E&O (Errors and Omissions) insurance and General Liability (GL),and along those lines: what is BIPD coverage?

First, here’s a quick definition of the first two: • E&O Insurance: this is what most appraisers carry because lenders require it. E&O is malpractice insurance against errors or omissions made in reporting/professional services, such as using the wrong zoning, failing to report an easement or unpermitted improvements, measuring square footage incorrectly, or making other mistakes or in your reports.

• General Liability Insurance: few appraisers carry this coverage.

GL is carried by most retail establishments, as well as more “physical” professions such as contractors, plumbers, etc. The coverage can vary but it can cover your tools and it typically protects a business against “slip and fall” lawsuits by providing Bodily Injury and Property Damage (BIPD) coverage.

Now keep in mind that these are two very large, but distinct categories of

insurance. Many businesses only cover their business with one of these policies, while some carry both types of policies.

I don’t have any hard numbers, but if I had to guess I’d estimate that 97 percent (or more) appraisers are only carrying E&O insurance and do not purchase a separate GL policy every year.

This means most appraisers do not have BIPD coverage unless it is specifically endorsed onto their E&O policy (more on this later).

That brings us full circle to our question: what is BIPD? BIPD stands for Bodily Injury and Property Damage, and in the case of real estate appraisers, BIPD protects them for what E&O does not cover: accidental damage to property or persons (bodily injury) which you may cause while providing your professional services at an appraisal inspection.

One example is if you knock over a valuable vase (Grandma’s favorite 100-year-old vase, for instance) causing property damage—or if you were to drop a flashlight (from the attic) breaking a homeowner’s toe (bodily injury).

These types of claims are not very common but they do happen.

Some of the real-life examples of BIPD-related claims that we’ve seen here at OREP include: • Insured exits the rear sliding door to measure the home but steps into newly poured cement that was just finished by the contractor several hours prior.

• Insured flushes the toilet and it overflows causing water damage to expensive flooring.

• Insured opens an attic hatch and (allegedly) causes damage to popcorn ceiling.

•

Insured steps through a ceiling during an attic inspection.

With FHA appraisals now requiring more and more from appraisers, including testing appliances, flushing toilets, and inspecting attics and crawl spaces, awareness about the need for BIPD coverage is increasing.

For this reason, more and more appraisers are purchasing General Liability (GL) policies, in addition to their E&O, that includes coverage for BIPD at the subject property. GL policies, which also can cover an appraiser’s own office in addition to coverage for inspection site, can range in cost from between $300–$500.

Good News One bit of good news on this subject is that OREP’s flagship E&O program includes (at no additional cost) $100,000 of BIPD premises liability coverage (bodily injury/property dam-

age). OREP members, in most states, now enjoy this valuable coverage at no charge when renewing their E&O insurance with OREP. This allows us to meet the needs of our OREP members while saving them money. Of course, if you have an office and want the additional coverage a GL policy can provide, we offer that too.

Most OREP appraisers also enjoy a zero deductible. In addition, OREP offers 14 hours of free online continuing education (CE) to all of its members (Approved in 46 states), which includes two valuable courses: FHA Appraisal Standards (7 Hours) and How to Raise Appraisal Quality and Minimize Risk (7 Hours). These courses are designed to improve your professional skills, lower your liability and help you protect your business. The benefit for our members is twofold—it makes them more careful, more successful appraisers and lets them keep a little more hard-earned money in

DON’T PUT ALL YOUR EGGS IN ONE BASKET

their pockets, saving them over $250 in education costs.

Visit OREP.org for more and don’t forget to ask your agent about BIPD coverage. Stay safe out there. WRE

ENJOY 14 HOURS

OF APPROVED EDUCATION for OREP Members (over $250 in value)

How to Raise Appraisal Quality and Minimize Risk (7 Hours CE) FHA Appraisal Standards (7 Hours CE) Shop OREP.org today and Enjoy 14 Hours CE + E&O Coverage Call (888) 347-5273 to learn more.

CE Not approved in GA, IL, and MN Calif. Lic. #0K99465

EXPAND YOUR APPRAISAL PRACTICE AND EARN MORE MONEY

NON-LENDING APPRAISAL ASSIGNMENTS

BY JOSHUA WALITT, SRA, AI-RRS, MNAA, CDEI

$126 / 7 Hours Online CE • OREP Member Price: FREE

Lessen your reliance on one sector or type of client.

Learn the necessary understanding of forms, narrative, and technical aspects of Non-Lending work:

[

SIGN UP TODAY AT: at OREPEducation.org

[

• Tax Rebuttal • Pre-purchase • Pre-listing

• Divorce • Estate • IRS-related work

Approved in 46 states (See OREPEducation.org).

Fall 2022 Working RE 25

Let’s Confer

by Hal Humphreys, Appraiser eLearning

The

You get out of a conference what you put into it.

Spend the weekend wallflowering at the back of the room and you’ll likely not meet new people.

mind-numbing slide deck, with 250 words per slide, as if the presenter copied the text from a book and created a 20-foot-tall PowerPoint of unreadable ‘content.’ There’s not a chance anyone on the back row could make out anything other than a vague shape of a paragraph.

Maybe transitions—hey presto—bounce each word-heavy slide across the screen, or words drop into place, or appear as if being typewritten across a screen. The speaker who obviously didn’t prepare— in any way. No outline. No slides. Just war stories in a disjointed stream-of-consciousness-Jack-Kerouac-without-thepoetry ramble. Yeah, sometimes conferences are a bore.

The chance encounter in a hallway.

The shared experience of learning. That exhibitor you’ve always wanted to meet.

The company with which you’d love to work. The presenter who entertains and engages with elegant slides and a wellcrafted narrative. That cocktail you share with a new friend after a long day of listening to people speak, some amazing, some, as noted above, not so much.

Taking the time and spending the money to attend a conference can be, if you think of it in the wrong way, a drain.

The more accurate way to consider the investment in time and money, is just that—an investment.

Here’s what you need to know about conferences: First, not all conferences are equal.

You’ll be able to suss out pretty quickly if a conference is worth your time by doing a hint of research ahead of time.

Check out the conference website. If there is no website. If the landing page

Hal Humphreys is a career-long real estate appraiser. He grew up measuring houses with his father, an appraiser. In the past 30 years, Mr. Humphreys has appraised property across the country, served as a hearing officer for the Davidson County Board of Equalization, and a contract investigator/reviewer for the State of Tennessee Department of Commerce and Insurance. He also assists attorneys who represent citizens accused of crimes. Mr. Humphreys is a founding partner of Appraiser eLearning and is the director of education for StoryboardEMP, llc, an education media company. Reach Hal at hal@storyboardemp.com.

26 Working RE Fall 2022

has the feel of Myspace, circa 1994, maybe skip it. If, on the other hand, the website is clean and professional, check it out.

Who’s sponsoring the event? Are vendors you want to learn about sponsoring the event? Is there a database or software provider that you’ve been curious about going to be there? Spend a little time researching what companies are planning to be in attendance. If a sponsor you’ve always wanted to connect with is going to be there, check it out.

Who’s speaking? Is that one lady, the expert in that one thing, speaking?

Is that one guy you’ve always stalked online speaking? There’s a good chance that you will be able to meet the speakers. Spend a little time researching the speakers and see if there’s a topic or person about which you really want to learn more? If so, check it out.

I’ve been to small conferences, with less than 150 attendees, that were amazing. I’ve visited much larger conferences with 3,000 plus attendees that were equally amazing. The sweet spot for me is somewhere between 200 and 1,000 attendees. Too big, and the chance of meeting that one speaker you’re interested in diminishes. Too small, and you’re likely to run across the war-story-ramble speaker and not get much out of it. That said, I’ve met some of my favorite people at a 3,000 plus conference. I’ve also made some of the best contacts in my entire professional career at a conference with barely 100 people.

Here’s the thing: You get out of a conference what you put into it. Spend the weekend wall-flowering at the back of the room and you’ll likely not meet new people. Spend the weekend in your room, eating room service and checking email, and you’ll likely not meet new people.

If you’re going to spend the time

and money to go to a conference, you might as well get out and meet people. Spend a little time researching the sponsors, speakers, and attendees and make your choice. Then be ready to dive in and participate.

What are the benefits of attending a conference? Well, there’s the educational aspect. You’ll likely go home with some much-needed continuing education credits. I mean, we all need CE to maintain our licenses, right? I would suggest that the CE is a valid benefit, but way down low on the list of gains.

Networking is on the top. If you’re going take the time to travel, miss out on work, spend the money on conference fees, airfare, and hotels, I beg you, get out and meet people. At breaks, make it a point to meet one new person.

During your strolls through the exhibit hall, spend some time chatting with the sponsors. Get to know the people. After a full day of lanyard-wearing-handshaking-conferencing, you’ll have a good feel for which of those new people you might like to know better. Ask them

OREP Insurance Services, LLC

out for a drink, or to a dinner. Get out and meet people.

Seriously, the real and enduring benefit of attending a conference is connection. Sometimes you’ll make strictly professional connections. Other times you’ll make lifelong friendships. Many times, both.

I attended a conference in California this summer. I only had one day to dedicate to the event, but during that one day, I made several good connections. I’ve already worked with three of them. That’s just from one day of conferencing.

There are a number of conferences coming up from which you can choose.

There are local chapter/regional meetings (usually on the smaller side) that may appeal to you. I recently made the trip out to Palm Springs, CA for a two-day regional conference (note: I do not live anywhere near California, but I have an interest in some of the speakers and sponsors). Open your options and pick a locale you’ve always wanted to visit where speakers/sponsors you’ve

always wanted to meet are going to be convening for a few days.

There are some bigger conferences coming up in the not-too-distant future that may fit your needs. Like I said, larger conferences offer more sponsors, more speakers, and more attendees (all potential connections). In August I’ll be speaking at a small conference in Austin, TX (Association of Texas Appraisers).

In September, I’ll be involved in two shows (speaking at Valuation Expo and co-hosting the Appraisal Summit), both in Las Vegas. I’m very much looking forward to meeting some of you there.

I get it. We work in an industry of small shops, many of us one-person or two-person offices. It’s hard to make the commitment of time and money (fees, airfare, hotel, meals, drinks, etc.) to attend a conference. However, if you find a conference that interests you, give it a whirl. Block out the time. Spend the money. Go and make connections. I’d strongly suggest you come out to the Appraisal Summit and find me. I’d love to meet you. WRE

WITH OREP, YOU HAVE AN EXPERT IN YOUR CORNER IF YOU FACE A STATE BOARD COMPLAINT.

OREP Members receive a FREE consultation with Bob Keith, MNAA, IFA, and Former Director of the Oregon Appraiser Board and 25% off any consulting services if needed. You also receive a free webinar, Fighting I spoke at length this Appraisal Board Complaints: An Expert’s Advice, presented by Keith. afternoon with Bob Keith. We discussed the complaint, the items in my workfile, and the appropriate response. I feel much more confident now.

This is a tremendous benefit as an OREP insured. Thank you for your direction and guidance.—James S.

ENJOY UNRIVALED PROFESSIONAL SUPPORT WITH OREP. Visit OREP.org Today

Calif. Lic. #0K99465

Fall 2022 Working RE 27

Indemnification Clauses: What Appraisers Should Know

by Isaac Peck, Senior Broker at OREP.org

It’s a tale as old as time.

Any business that is working with subcontractors, should be asking those subcontractors to sign an agreement with an indemnification clause.

28 Working RE Fall 2022

When adding an appraiser to their appraisal panel, a lender or an appraisal management company (AMC) will present the appraiser a five, 10, or 15 page long “Appraisal Services Agreement” or “Appraiser Engagement Agreement” for the appraiser’s signature.

Inside these AMC service agreements is an often discussed and disparaged clause: the indemnification clause.

These indemnification clauses are not new, but were popularized in the years that followed the 2007/2008 real estate crash as AMCs took over market share after the passage of HVCC and the Dodd-Frank Act. Today, the vast majority of lenders and AMCs are asking appraisers to sign an agreement that contains an indemnification clause.

OREP helps over 10,000 appraisers with their E&O insurance every year— and a question that many appraisers routinely ask is: “Do I need to be worried about this indemnification clause?”

What Appraisers Should Know Here is a sample indemnification clause: Appraiser shall indemnify, defend and hold harmless AMC from and against any and all claims or legal actions which arise out of or relate to the following: (a) any negligent act or omission or willful misconduct by Appraiser; or (b) any breach in a representation, covenant or obligation of appraiser contained in this Agreement.

To unpack this, let’s start with what it means to “indemnify” someone.

The Merriam-Webster Dictionary defines “indemnify” as: • To secure against hurt, loss, or damage; • To make compensation to for incurred hurt, loss, or damage.

In other words, the appraiser is agreeing to defend the AMC (or lender) and make them “whole” in the event the AMC is sued or held liable for mistakes that the appraiser makes.

The good news for appraisers is that most of these clauses are simply restatements of common law indemnification principles, i.e. that when one party (in this case the AMC) is harmed by the actions of another (the appraiser), there is an implied obligation on the part of the wrongdoer to reimburse the harmed party.

These types of clauses are now incredibly common amongst the construction trades, real estate professionals, wedding services, financial services, and more. For example, if you are a general contractor hired by a wealthy patron to build a house—you likely are going to hire a framing company to frame the house, an electrician to run the electrical, and so on. In each case, a smart risk management practice would be to have these subcontractors sign indemnification clauses where they agree to take responsibility for any property damage, mistakes, or errors that they make. After all, even though you are the general contractor, if your subcontractors make mistakes, you want them to take responsibility and pay for it, not you.

Practical Example Here’s a story from an adjacent industry that highlights why these clauses are so important. OREP also serves mortgage field professionals with insurance and risk management. These professionals help banks and other large property managers manage their inventory of bank-owned properties (REOs) and their page 30 8

7page 28

services include boarding up windows, mowing lawns, property maintenance and even property clean-outs—where a firm will go into a home and empty it of all furniture, belongings, and trash.

The relationship between these professionals is structured in a similar way as the appraisal industry: typically, there are larger vendors that service big contracts with a lender. They then “sub” out the jobs to smaller firms across the country. Just like with appraisals, lenders try to avoid administering their own panel of thousands of vendors across the United States.

In one claim OREP has seen, a local mortgage field firm was hired by a larger vendor to perform a “clean out” on a particular property that had been foreclosed on. However, the smaller firm pulled up to the incorrect property address, kicked in the front door, and cleaned out the wrong house—putting all of the current homeowner’s valuable belongings out on the front lawn!

As you can imagine, this resulted in a BIG claim. However, the problem for the larger vendor was that they didn’t have an indemnification clause in their service agreement and had difficulty forcing the liability onto the smaller subcontractor who was the one who made the mistake. As a result, the larger vendor ended up defending and settling a serious claim.

The problem here, for the larger company, is that their insurance covers them for claims that they face, but doesn’t pay for any recovery efforts that they might want to engage in to sue the smaller subcontractor for their own damages (this is standard). Furthermore, even if the smaller subcontractor was carrying their own insurance, without a clear indemnification clause in the agreement signed between the parties, the result is that the larger vendor and the smaller subcontractor’s insurance companies end up arguing about who is responsible for the claim!

After taking on several claims 30 Working RE Fall 2022

because of the volume of their business and their faulty contracts, the larger vendor ended up in a precarious position facing mid-six-figure insurance premiums and having very few carriers willing to even quote their business. In fact, the only insurance carrier that was willing to quote their business DEMANDED that they start including indemnification clauses in all their service agreements as a condition of coverage.

I tell this story to appraisers and AMCs alike when they ask me about indemnification clauses. Common law indemnification theory dictates that the party responsible for the mistake should pay for it, but from a practical standpoint (especially when it comes to insurance), indemnification clauses make all the difference.

In other words, from a risk management perspective, any business that is working with subcontractors, or even businesses that allow subcontractors onto their properties (like builders or wedding venues, for example), should be asking those subcontractors to sign an agreement with an indemnification clause. This is true for AMCs and appraisers as well. It is common sense and it is now a widely adopted practice across many industries.

What to Watch Out For While indemnification clauses that have the appraiser take responsibility for errors that the appraiser commits are now industry standard; there are still things for appraisers to look out for when evaluating an engagement letter or services agreement.

Specifically, you never want to sign any agreement where you agree to indemnify any third-party for their mistakes or errors.

After HVCC and the Dodd-Frank Act were passed in 2010 and 2011, AMCs had disproportionate bargaining power and often tried to force appraisers into signing one-sided indemnification

agreements where the appraiser actually agrees to indemnify the AMC for the AMC’s own errors and mistakes!

The popularity of such one-sided indemnification clauses has since waned, as several states have passed AMC laws and regulations that specifically prohibit this practice. Here is an excerpt of the AMC regulation passed in Massachusetts listing AMCs’ “prohibited activities:” Require an appraiser to sign an indemnification agreement that would require the appraiser to defend and hold harmless the appraisal management company or any of its agents, employees or independent contractors for any liability, damages, losses or claims arising out of the services performed by the appraisal management company or its agents, employees or independent contractors and not the services performed by the appraiser; Thankfully, many other states have adopted similar language and this issue is much less of a concern today. However, it is still something that appraisers should be on the lookout for when evaluating a new service agreement.

How Can I Help?

If you ever have any questions about liability or risk management in your appraisal business, please reach out to me directly at isaac@orep.org or give OREP’s office a call: (888) 347-5273.

We are now open 12 hours a day to better serve appraisers across the country!

(8 a.m. ET—8 p.m. ET.) Stay safe out there! WRE Serving Real Estate Professionals

Winter 2020 Volume 52

Purchase Working RE magazine to Ensure Delivery Annual Subscription - $60 year www.workingre.com (click subscribe) Subscription included with purchase of E&O insurance from OREP.

Excess or Surplus Land: Which Is It?

by Philip G. Spool, ASA

I can’t tell you how many times I either

Whether there is excess or surplus land, choosing the correct type of land (excess or surplus), would have an effect on the final value as excess land is typically a higher price per square foot than surplus land.

read an appraisal report or hear an appraiser mention that a property is oversized with excess land, when in fact the additional land is not excess land but surplus land. To the average person, calling it excess land would be acceptable, but for an appraiser, it isn’t. A distinction should be made as to whether the property has “excess” or “surplus” land. While the determination that a property has excess land or surplus land, one needs to understand the difference. For this, the definitions for excess and surplus land can be found in The Dictionary of Real Estate Appraisal, Seventh Edition published in 2022.

Excess land is defined as “land that is not needed to serve or support the existing use. The highest and best use of the excess land may or may not be the same as the highest and best use of the improved parcel. Excess land has the potential to be sold separately and is valued separately”.

Surplus land is defined as “land that is not currently needed to support the existing use but cannot be separated from the property and sold off for another use. Surplus land does not have an independent highest and best use and may or may not contribute value to the improved parcel”.

The definitions of excess and surplus land applies to both residential properties and commercial properties and their application. While residential and commercial properties are analyzed differently, there are more similarities in

Philip G. Spool, ASA, is a State-Certified General Real Estate Appraiser in Florida, appraising since 1973. Formerly the Chief Appraiser of Flagler Federal Savings and Loan Association, he has been self-employed for the past 30 years. In addition to appraising, he is an instructor with Miami Dade College, teaching continuing education classes. He is also the Vice President and Chairman of real estate programs with the Greater Miami Chapter and the South Florida Atlantic Chapter of the American Society of Appraisers. He can be reached at pgspool@bellsouth.net.

32 Working RE Fall 2022

their analysis. Prior to determining if the land is excess or surplus land, information about the land (site) must be noted, whether a residential or a commercial property. They include the zoning (including minimum lot size and setback requirements), highest and best use, types of immediate surrounding properties, location of existing improvements on the site and supply & demand of land and proposed improvements.

Analysis of Excess and Surplus Land Most residential appraisers either utilize the FNMA 1004 form or the General Purpose (GP) form for valuing single family residences. Narrative appraisal reports offer more latitude in explaining your analysis. Typically, the residential appraiser indicates the total lot size of the subject and each of the comparable sales and then makes a dollar per square foot adjustment for their lot size difference and this is done without consideration if the difference is reflected as excess or surplus land. The residential appraiser usually does not differentiate the land as either excess land or surplus land and just applies a dollar amount per square foot to the lot size difference and the adjustment is somewhat less per square foot than what the amount per square foot would be as reflected in the Cost Approach as Site Value.

The dollar amount per square foot is supposed to reflect a supported amount per square foot, yet, I have not seen a residential appraiser supporting the land adjustment, particularly in a paired sales analysis. Most appraisers use a rule of thumb of applying somewhere around 50 percent of the full site value, going as low as one-third to as high as two-thirds.

I am not advocating this but in real life, this is what is typically done. The reasoning is that the appraiser rightfully believes that a buyer will only pay for an incremental amount of value towards additional land that is above and beyond what the typical lot size is for the subject property and surrounding properties. However, what is not taken into consideration and should be, is if the additional land creates a premium or if the additional land is not as beneficial for the typical lot size in the neighborhood. A good example of this is if the lot size of the subject is 7,500 square feet with a 2,500 square foot house on the site. If this is typical of the properties in the subject’s neighborhood or immediate area, how much is a person willing to pay for any additional land? In this case, an incremental size more than the 7,500 square feet. The answer might depend if the additional land is for the backyard, side setbacks from the houses on both sides or perhaps the front yard.

The appraiser must also consider a typical owner or buyer’s preference. Ideally, a paired sales analysis between a house with a typical lot versus a house on an oversized lot could be performed. This would be an ideal analysis but in reality, there are many factors that are taken into consideration in the purchase price of a house above and beyond just the lot size. This is why a residential appraiser does not spend too much time trying to figure out a more precise amount of an adjustment that needs to be made for additional land, i.e. surplus land.

Surplus or Excess?

As stated previously, for a single family residence, the appraiser must consider the following: zoning (including minimum lot size and setback requirements), highest and best use, types of immediate surrounding properties, location of existing improvements on the site and supply & demand of land and proposed improvements. An important question the appraiser must answer is

if the subject site is adequate or oversized to support the current use of the improvements. For a duplex, triplex or a fourplex, which are residential properties that are allowed to be appraised by a state-certified residential appraiser, the analysis is the same but the zoning aspect (density—number of units that can be built on the property) is more important as well as if the land is large enough to add on additional units.

The following are issues that have to be taken into consideration in order to determine if the land is excess land.

This list is not all that might have to be considered and also is not in any particular order, but must be considered.

Zoning: Of most importance is what the minimum lot size for the existing structure and for the additional land that might be considered to be sold off separately.

Location of existing improvements on the site: Is there enough land to build a separate house? Does the location of the existing house sit on a good portion of the land whereby it prevents construction of an additional house and therefore be considered surplus land and not excess land?

Shape of the lot: The shape of the lot must consider if the additional land has enough area for a house to be built that would be acceptable for a property owner.

Highest and Best Use: Is there enough demand for an additional house to be built? This would be important if the area has more supply of houses than demand.

In a rising market, there is more demand than supply. Conversely, if there is an oversupply of houses for sale, maybe the additional land would be excess land that could build on sometime in the future.

Legal issues: Check with the building and zoning department of the municipality the subject is located. Is there just one tax folio

number or is the property located on more than one tax folio number and can be split into two or more parcels? If so, then inquire if the property has a Unity of Title, preventing the property to be split into separate, buildable sites.

The amount of time spent on the analysis is perhaps more than what the residential appraiser might want to tackle. That is why most residential appraisers don’t even analyze the property to see if there is excess or surplus land.

Land-to-Building Ratio Regarding an analysis of excess and surplus land in commercial properties, besides the five aforementioned considerations, there are additional situations to be considered.

Commercial properties have additional considerations that affect the land value and would determine if the additional land over and above what is needed for the existing structure is considered either excess or surplus land.

For an industrial property, not only is the land-to-building ratio important but what type of industrial property exists.

If the building is a distribution warehouse building, are the trucks typically 18 wheelers? If so, then extra land is needed for loading and unloading of merchandise and a higher land-tobuilding ratio is necessary.

For retail and office buildings, if the land-to-building ratio is greater than the typical ratio, the determination as to whether the additional land is excess or surplus land would be based on the location of the additional land.

Would the additional land have access and exposure from the street or would the additional land be located behind the existing building, thus limiting accessibility of an additional building.

If the accessibility to the additional land hinders construction of a new building, that would indicate surplus land. page 34 8

Fall 2022 Working RE 33

7page 33

The same applies if the additional land is best suited for additional parking or expansion of the existing building.

Parking requirements are also an issue. Besides minimum parking spaces and handicap parking spaces, some stores have a higher traffic count and this should be taken into consideration.

Valuing Surplus Land The most common approach in valuing surplus land for commercial properties, especially warehouses, is the use of the land-to-building ratio. It is also the most misunderstood when valuing the additional land as many appraisers call the additional land excess land instead of surplus land. Before calling it surplus or excess land, look at the survey and see where the building is located in

relationship to the entire site. Consider required parking, turning areas needed for delivery trucks, setback requirements and demand for additional buildings and/or expansion to the existing building. More than likely, the additional land will be surplus land instead of excess land. If so, the surplus land will be valued as a contributory value which is a lower value per square foot than if the land was a buildable site as reflected in excess land.

Valuing Excess Land As excess land may be sold off separately, the property now becomes two properties, maybe more. The excess land will now have its own highest and best use, based on its legal, physical, financially feasible and maximally productive use.

Also, the excess land will have its own set of comparables and in essence, valued separately. The value of the excess land, if analyzed on a price per square foot basis, may or may not equal the value of the main parcel (exclusive of the excess land), again depending on its highest and best use.

In conclusion, whether there is excess or surplus land, choosing the correct type of land (excess or surplus), would have an effect on the final value as excess land is typically a higher price per square foot than surplus land. The appraiser should document the rationale and reasons in choosing one over the other. Just follow the stated guidelines in arriving at your choice of the property having excess or surplus land. WRE

FHA eBook and Checklist Work Faster and More Efficiently

The 2022 Edition of the FHA eBook and Checklist used successfully by thousands of appraisers now includes the most up-to-date information on FHA appraising, with NEW Q&A, explanations, pictures, and links. · Easy to Use, Streamlined Checklist saves you time Clario · Interactive eBook - Searchable

by Topic for fast look-up · Valuable New Resources with Web Links for fast and easy access to additional information · FHA Contacts at your fingertips. Check Competencies and Get Help Fast!

34 Working RE Fall 2022

Only $49

OREP Members Save $10

FHA eBook

Purchase eBook at WorkingRE.com/FHA and Download Immediately

& Checklist

2022

Take some time for yourself Build Your Appraisal Skills and Advance Your Career with Cutting Edge Continuing Education.

If you only take one class this year, make it this one.

Appraisal Adjustments II: Solving Complex Problems

7 Hours of CE - $126 - (OREP Members: Save 10 percent)

By Richard Hagar, SRA Appraisal Adjustments II dives deeper into regression analysis, matched-pair, and “big data” approaches to value. Richard Hagar shows you how to solve complex adjustment issues using proven, real-world techniques.

• USPAP and Lender Requirements for supported adjustments and how classifying and bracketing the subject’s important components can lead to superior appraisals.

Additional Coursework (7 Hours CE): • How to Support and Prove Your Adjustments • Non-Lending Appraisal Assignments • How to Raise Appraisal Quality and Minimize Risk • Identifying and Correcting Appraisal Failures • FHA Appraisal Standards

• Mathematical terms that are applicable to the adjustment process and measuring the market’s response to various market components.

• How to measure the quality of the output derived by the process.

• How the order in which adjustments are made impacts adjustments and the final value conclusion.

• Matched-pair analysis even when properties are less than the “perfect” pair for comparison.

Online courses that never expire, take at your convenience!

Sign Up Today at

OREPEducation.org

(619) 546-5702

VA as a Model for the Industry

by Isaac Peck, Editor

At the national Appraisal Summit con-

“It is a big deal when you get one organization really trying to help appraisers, it also helps homebuyers, sellers, agents.”

ference in November 2021, there was an exchange between a number of appraisers, Rick Langdon, Chief Residential Appraiser, and Jarrett Scarpiello, Executive Director of Valuation at Chase.

In the exchange, one of the appraisers Gerald (Jerry) Rocha, commented that it seemed that the Department of Veteran Affairs (VA) had solved every one of the major pain points in appraisal and questioned these two industry giants why more lenders and AMCs weren’t following the VA’s lead.

This suggestion undeniably piqued the interest of many other appraisers in the room and consequently, seems worth exploring.

Working RE sat down with Rocha, a Certified Residential appraiser from Humboldt County in California, to hear more about what he thinks the VA gets right—and what following their lead might do for the industry.

Step Above the Rest It’s not a secret that being on the VA appraiser roster is a coveted position for most residential appraisers. So, what exactly makes the VA so special?

Rocha says the VA is a step above the rest primarily because of the following criteria.

1. VA wants a good quality panel 2. VA pays higher appraisal fees 3. VA delivers fast turn times to veterans 4. VA doesn’t use Appraisal Management Companies (AMCs) 5. VA has a program that encourages the use of trainees 6. VA’s Tidewater Program is fair to all sides

Fees, Turn Time, and Quality The first four criteria are certainly related and are worth examining together.

For starters, the fact that the VA does not use AMCs allows them to pay more directly to the appraiser, according to Rocha. “Instead of AMCs, the VA has a Portal which is really streamlined and easy for stakeholders to use. We can communicate in that Portal and it sends it out to all parties and keeps everyone in close communication,” says Rocha.

Rocha says he works almost exclusively for the VA and local lenders. The good news is that his local lenders have already taken a page from the VA’s playbook by not using AMCs as well. “My local lender clients also use different options instead of AMCs in order to meet Dodd-Frank’s rules. Industry programs like Mercury are a good solution. One of my credit union clients has their accounting department order appraisals. This makes a big difference as the VA and local lenders can pay higher appraisal fees, and consequently get better appraisers to work for them,” argues Rocha.

It goes without saying that if the VA (or a local or national lender) can order appraisals directly from appraisers, either with the use of an online Portal, or by having the orders placed by a different department, then ultimately a higher fee can be passed on to the appraiser.

Rocha is quick to point out that AMCs are starting to pay more than in the past and notes that “there are some good AMC’s out there.”

The result of paying higher fees translates into three clear net benefits for appraisers, for consumers, and for lenders themselves. page 408

36 Working RE Fall 2022

Professional MARKETPLACE info@orep.org (888) 347-5273 Calif. Lic. #0K99465

Like us on Facebook Coverage for AMCs: Many national AMCs are finding the comprehensive and affordable E&O coverage they need at OREP. Call OREP for more: (888) 347-5273.

Zero Deductible, BIPD Included Appraiser E&O Insurance: Save with OREP

California OREP Members—Group Medical $10,000 Life Insurance Included

If you’ve been with the same E&O provider for years (and years) expecting that you still enjoy the best rates and coverages available, you may not. Don’t wonder—find out NOW in five minutes at OREP.org! Many appraisers do save money on their insurance—sometimes $100 or more. And every appraiser will save on the cost of continuing education—while lowering risk and increasing their professional competency through free education from industry leaders.

OREP offers 14 hours of free continuing education to all of its members, a savings of over $250 (not approved in GA, IL, and MN).

OREP members in California enjoy group access to several medical plans, including certain Kaiser Permanente and Blue Anthem plans. The group plans provide benefits not available to individuals and at no extra cost. Those who purchase their medical coverage through the OREP group plan, also enjoy a $10,000 life insurance policy included at no extra cost.

The policy, written through Mutual of Omaha, is guaranteed-issue without any exclusion for medical conditions and pays double in the event of an accidental death and dismemberment (AD&D).

Also included is the New Dental Choice Special Discount Plan that gives you significant discounts of 15–60 percent for dental services.

There is no cost above the medical plan itself for these services, including expert help navigating Covered California. If you are a California resident and an OREP member please email info@orep.org for more information. WRE

Valuable Support: OREP members enjoy Working RE magazine, over 15 hours of free training webinars, discounts on the FHA Checklist and eBook, the 2022 AMC Guide, the Expert’s Guide to a Defensible Workfile, and more! Each is designed to help you grow your business and sharpen your skills.

Combine E&O: Appraiser and RE Sales One low premium covers both your appraising & sales/brokering work. Pay for one policy instead of two. Visit OREP.org for details or call (888) 347-5273. WRE

OREP Offers Free Risk Management Continuing Education for 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 members, designed to help them improve their professional skills, lower their liability risk and protect their businesses (not approved in GA, IL, and MN). OREP members now enjoy the following online courses FREE:

How to Raise Appraisal Quality and Minimize Risk (7 Hours CE) Presented by: Tim Andersen, MAI Learn the common charges brought against appraisers, with real-world examples of specific civil and regulatory cases. Andersen shows you how to avoid potentially risky situations with time-tested steps to “bulletproof” your appraisal reports and workfiles. Learn proven techniques to protect yourself from state regulators and plaintiffs, while reducing your liability and exposure.

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 handling complex assignments and the forms to use for unusual situations.

OREP has always been committed to providing 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 Isaac Peck, President at OREP. “We chose veteran appraisers and renowned authors and educators to share with members their proven and effective strategies on how to limit liability, follow appraisal standards and protect themselves. The benefit for our 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 $250 in education costs.”

Details The classes are online, allowing you to take the coursework safely at your own convenience. Current members, please email info@orep.org for enrollment details. WRE Fall 2022 Working RE 37

Industry NEWS South Dakota Governor’s Daughter Got Preferential Treatment by Appraisal Board

by Kendra Budd, Associate Editor

In May, a report conducted by

a legislative panel unanimously ruled Kassidy Peters, the daughter of South Dakota Governor Kristi Noem, received preferential treatment in her real estate appraiser licensing program.

According to: Kristi Noem’s daughter got preferential treatment in real estate appraiser program, by Joe Sneve, “the panel spent months vetting allegations of abuse of power against the Republican governor and bottlenecks in the South Dakota Department of Labor Appraiser Certification Program.” The full report not only outlined a series of findings of facts, but a formal testimony from Labor Secretary Marcia Hultman as well as one from Sherry Bren, the former director of the appraiser program.

In Spring 2020, Peters had been struggling to obtain her certification to the point she would need “additional training work necessary for her to obtain her appraiser’s license,” writes Sneve. Noem’s cabinet then began involving themselves by helping Peters receive her certification. How was this achieved? Well, according the report, “Hultman changed the disposition agreement and removed the requirement for additional course training.”

However, a pending denial notice was still sent to Peters in July of 2020.

A week later, “Bren was ordered to attend the meeting at the Governor’s Mansion and to bring with her examples of specific errors found in Peters’ work product, criteria used to determine the errors,” Sneve reports. Instead of having Peters wait the required six months to reapply for the level, an agreement between DLR and Peters was reached less than two weeks after the meeting. According to the report, the agreement, “gave Kassidy Peters a third chance to pass the level or certification she was trying to attain.”

However, this agreement soon backfired.

Bren was forced out of her job after 30 years as an employee of the state, and Peters is no longer a certified real estate appraiser in South Dakota.

A subsequent investigation into the allegation of abuse of power and nepotism by the Government Accountability Board is still pending. However, despite the findings in the report, Noem still holds the position that she has done nothing wrong, claiming other appraisers have received the same treatment. WRE 38 Working RE Fall 2022

Good News: Mold Coverage for Appraisers Now Included with E&O Fear of liability due to mold is a persistent worry for many service professionals—including real estate appraisers. Most appraiser E&O insurance policies exclude mold claims, according to Isaac Peck, President at OREP. org. “For most of my career, appraiser policies excluded all mold and fungi claims. Even though mold claims are rare, the fear of mold was real for many appraisers,” Peck said.

According to Peck, the issue is further complicated because with many mold claims it can be difficult to distinguish between water damage, which would likely be covered, and the resulting mold, which would likely be excluded.

The good news for appraisers is that OREP’s new program offers an alternative policy that includes up to $500,000 in mold/fungi coverage, at no extra charge. The coverage protects appraisers against allegations surrounding the failure to disclose the existence or presence of any type or form of: “fungus, including mold or mildew and any mycotoxins, spores, scents or byproducts.” “The alternative appraiser policy includes all the same coverages of our flagship appraiser policy, plus the mold, and at around the same premiums for most appraisers. But the alternate policy requires more underwriting and a more lengthy application, so if you want mold coverage, you should ask for it specifically,” Peck said. Visit OREP.org or call 888-347-5273 to learn more. WRE

“A SMALL MISTAKE THAT COST AN APPRAISER $10,000”

A

few months ago, we received a call from an appraiser who was distraught! He’d just had a state board complaint filed against him and now he needed professional help to defend himself.

The problem?

He was NOT insured with OREP and was SHOCKED to discover that his current policy had NO disciplinary proceeding (state board complaint) coverage!

Don’t let this happen to you.

Insurance brokers that don’t understand the risks appraisers face (or just don’t care!) may sell you a policy that is missing absolutely

$ KEY coverages that you need as an appraiser. No state board complaint coverage, no Prior Acts, no coverage for discrimination claims…the list goes on.

OREP was able to help the appraiser with a policy that includes $10,000 of Disciplinary Proceedings coverage. In fact, ALL of OREP’s primary individual appraiser policies include $10,000 of coverage for state

board complaints. This means if the state comes calling, you don’t have to go it alone. (P.S. We also match your Prior Acts, include $100,000 of discrimination coverage, include $100,000 of bodily injury and property damage coverage, and more!)

The Best Part: At OREP, you

don’t have to CHOOSE between Price and Coverage. Premiums start at just $401.

Putting Appraisers First for over 20 Years

Visit OREP.org Or Call (888) 347-5273

Calif. Lic. #0K99465

7page 36

Higher fees: • Allow the lender to find the best appraisers that produce higher quality work • Allow the lender to get faster turn times from appraisers • Appraisers get a cushion to bring on trainees and grow their businesses The result is a win-win-win for appraisers, consumers, and banks. In Rocha’s area, for example, the VA is paying $850 for a standard 1004 in Humboldt county and $950 per appraisal in Del Norte county.

“The VA wants a good quality appraiser panel and they have raised the fees to where it’s a sweet spot. Any time a county’s turn times start creeping up, VA will look at it and may raise fees. This is a different model than what you see in any other part of country.

The borrower is actually the one paying for the appraisal and the VA passes the entire fee charged to the borrower on to the appraiser,” says Rocha.

Trainees Another big advantage of working for the VA is that the VA is very trainee friendly. Rocha reports that he has three (yes, three!) non license trainees and hopes to have them all as licensed trainees in 2022 and that will only be possible because (1) the VA pays healthy fees that leave him room to compensate his trainees, and (2) the VA’s own Assisted Appraisal Processing Program that make it easier for a supervising appraiser to integrate trainees into their business.

The AAPP program actually dates back to the passage of the Blue Water Navy Vietnam Veterans Act of 2019 which mandated that the VA allow a bifurcated appraisal process. The Bill read: “The Secretary shall permit an appraiser on a list developed and maintained under subsection (a)(3) to make an appraisal for the purposes of this chapter based solely on information gathered by a person with whom the 40 Working RE Fall 2022

appraiser has entered into an agreement for such services.”

The VA responded to this by implementing guidelines that mandated the following: • The VA panel appraiser must contract directly with the individual performing the property inspection, as part of any bifurcated appraisal.

• Any person the VA appraiser contracts with to gather information is considered to be acting as an agent for that VA appraiser, with the VA appraiser responsible for paying that individual’s fees.

• The outside individual contracted by the VA panel appraiser to gather information be another licensed appraiser or appraiser trainee.

The result is more flexibility for the VA’s appraisal panel as well as more flexibility for appraisers to work with other appraisers and to bring on trainees, according to Heaslet.

“Working within the Congressional mandate, we’ve made it much easier for VA appraisers to bring on trainees and integrate them into their business model. We are allowing trainees to actually inspect the properties and sign on the report, with the VA supervisor accepting the responsibility,” Heaslet says.

Lenders do have the option to opt out of the AAPP process, so it is still up to each lender whether they want to allow trainees or not.

However, Rocha says that at least half of his clients will accept trainees, which is enough for him to bring on the trainees that he has. “How are we supposed to add new appraisers to our ranks and keep the profession healthy if banks do not allow trainees to inspect or sign on the left side of the report?” asks Rocha.

One of the reasons the lender might be more comfortable allowing trainees on the VA loans is because the VA is backing the loan, Rocha

wonders. “Maybe investors are not willing to accept the risk. Behind the scenes there are more dynamics than we are aware of. The VA insures these loans and maybe that gives lenders more confidence,” says Rocha.

Tidewater Lastly, the VAs Tidewater procedures allow for all parties to be heard when an appraisal is coming in under the contract price, which makes the process better, according to Rocha.

The way that Tidewater works is if the appraiser believes the appraisal is going to come in below the contract price, they are to alert the VA that they need more information to support the purchase price. “This gives all parties involved are given the opportunity to look at market data and produce additional comparable sales that maybe the appraiser isn’t seeing. This reduces Reconsiderations of Value (ROVs) incredibly and it leaves all parties pretty comfortable that whatever happens after Tidewater is going to be fine. Other clients don’t necessarily allow that or have a program in place to allow that,” says Rocha.

Conclusion One thing is for certain, Rocha is a big fan of the VA, believing that they have solved many of the most significant problems in the appraisal industry—at least so far. “That’s why I’m bragging about the VA. I’ve never seen an organization try to solve most major problems in the appraisal industry. It is a big deal when you get one organization really trying to help appraisers; it also helps homebuyers, sellers, and agents. Etc. The appraisal industry faces a number of challenges: turn-times, quality, fees, and the number of appraisers in the industry—I think stakeholders that are interested in finding solutions in this industry should look to the VA,” Rocha argues. WRE