Well, we did it! We made it to the end of a year-long series called the Loan Officer’s Guide to Appraisals! If you’ve read each post, or listened to each accompanying podcast over at The Appraisal Cast, thank you! If you’ve just come upon this blog for the first time, thank you as well for stopping by. We’ve covered lots of ground this year, and have provided loan officers with tons of useful tips for successfully navigating the appraisal process. But, there are just a few things left I’d like to share.
Over the years, I’ve been asked hundreds of questions relating to appraisals. This post includes some of the questions I’ve heard repeatedly and I have a feeling you’ve probably asked a few yourself.
For guidance, I’ve consulted the appraiser’s code of ethics, called the Uniform Standards of Professional Appraisal Practice (USPAP). I’ve even included reference to specific guidance, when appropriate.
- Can an appraiser accept an assignment contingent upon the home appraising for a specific amount?
For more information, see USPAP FAQ #10.
I know that our readers include new loan officers as well as veterans of the industry. Maybe you’ve made a comment like the one following, or heard someone make a similar comment to an appraiser. “Hi Mr. Appraiser. Here’s a new order to appraise a home at 1200 E. 25th Street, but if you can’t appraise it for $195,000, please don’t accept the assignment.” Regardless how long you’ve been in the business, you can probably already tell that this is a no-no, so what’s the appraiser to do?
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USPAP states that this request would be seen as an attempt to violate the appraiser’s independence, and the request itself may be illegal.
Part of the Ethics Rule in USPAP states that:
An appraiser must not agree to perform an assignment, or have a compensation arrangement for an assignment, that is contingent on any of the following:
- the reporting of a predetermined result (e.g., opinion of value);
- a direction in assignment results that favors the cause of the client;
- the amount of a value opinion;
So in this case, the appraiser could simply respond by saying something along these lines: “This is a violation of our ethics standards, and I cannot comply with this request. I can complete this assignment once your stipulation has been removed.” Easy! In order to stay out of hot water, though, I’d recommend never making this request in the first place.
- Should an appraiser always ‘hit’ the contract price?
For more information, see USPAP FAQ #28.
How often do you think the appraiser’s value conclusion equals the contract price? If you said a lot, you’d be right. In fact, most of the time when appraising a home for a purchase transaction, the value conclusion equals the contract price. Why is that? Well, there are a couple reasons. First, the home may be priced correctly; second, the appraiser is just rubber-stamping the deal and hitting the number. We’ll discuss both of these options.
USPAP talks about those ‘rubber stamper’ appraisers who consistently conclude that the market value of any property they appraise is equal to the contract sale price. USPAP rightly points out that in doing so, the deal gets done, and their client is happy. I say ‘rightly’ because it’s a no-brainer that in almost every single case, if a home is under contract to sell at $300,000 and it appraises for $300,000, everyone is happy. It’s when it appraises for $290,000 that all the wheels fall off. So is this ok? Is it a violation of USPAP for an appraiser to always ‘hit the value’?
USPAP states that the contract price can sometimes be a good indicator of value, and that it might be reasonable for the appraiser’s value opinion to be equal to that of the contract price. As I mentioned above, you may have a willing buyer & seller, both acting in their own best interest, both are informed parties, and they’re buying/selling a home marketed for sale. They agree on a price. Everyone’s done their homework and it appraises at contract price. Not uncommon. Not unreasonable. However, many times a contract price might be higher or lower than what is typical in the market. Perhaps the buyer is under duress because the house is the only one for sale in their desired neighborhood and in order to purchase it, they have to offer a 10% premium. Or maybe the seller is just dumping a home because they’ve already purchased another one out of state. In any case, the contract price is a valuable piece of information for the appraiser to analyze, but should never be the target to hit.
To quote USPAP, If an appraiser consistently concludes that the contract sale price of every appraised property equals market value, particularly when a competent analysis of credible market data indicates otherwise, the appraiser’s impartiality, objectivity and independence appear to have been compromised. And that’s never good.
USPAP also states that An appraiser who selects only data that complements a contract sale price or analyzes data in a manner to purposefully support a contract sale price violates the Ethics Rule.
In case you’re wondering just how an appraiser always ‘hits the number’, the key is in the above paragraph. “An appraiser who selects only data that complements a contract price…” That’s how it’s done! Just look at that contract price, and then go out and find sales that make that number work! Congratulations, Mr. Appraiser! You’ve just made your client happy! And, you’ve just violated USPAP.
- Is it Acceptable to Readdress or Transfer a Completed Appraisal Report?
For more information, see USPAP FAQ 133.
Here’s an all-too-often scenario. An appraiser completed an appraisal report on a home located at 123 Main Street, for Lender A. The borrower decides – after the appraisal is complete – that they want to switch from Lender A to Lender B. The following conversation then takes place:
Lender B: “Hello Mr. Appraiser. Mr. & Mrs. Borrower are now going through our bank for their home loan. You just completed an appraisal for Lender A, and we’d like you to change the client name to our name, please. Just make that change and email us back the report. Thank you.”
Good? No good? Can an appraiser honor this request?
And USPAP says…
No. Once a report has been prepared for a named client or clients, the appraiser cannot readdress or transfer the report to another party. Simply changing the client name on the report cannot change or replace the original appraiser-client relationship. Therefore, this action is misleading.
I wrote at length about this topic here, so for more information, please read that post. For now, just know that if you’re the new lender, you do have options, but they all include a new assignment with a new appraiser-client relationship. Many times, this can be done at a reduced cost, so that the borrower isn’t paying for two full-priced appraisals back-to-back.
- Can an appraiser make changes to the contract price after the effective date of the appraisal?
For more information, see USPAP FAQ #153
Let’s look at an example of what happens quite often, especially in strong seller’s markets. The subject property in this example went under contract at $295,000, but the appraisal came back less – at $280,000. The following week, the buyer & seller agreed to lower the contract price to the appraised value, or $280,000. The lender then sent the appraiser a revised purchase agreement, asking the appraiser to simply replace the old sale price with the new sale price. Is this acceptable?
USPAP states that “the appraiser may not simply replace the pending sale price information in the appraisal report and resubmit the report to the client, as this would be misleading.”
Why? Why can’t the appraiser make this seemingly insignificant change, and why would it be misleading? Because an appraiser is to analyze all purchase agreements (in addition to listing agreements, leases, etc) as of the effective date of the appraisal.
If the effective date of the appraisal was September 20, and the revised purchase agreement was signed & dated September 26, then it is simply a matter of fact that the new contract price was not in place as of the effective date. So to have an effective date of September 26 with a purchase price of $280,000 would be misleading.
So what’s the best course of action for the appraiser?
It’s a two step process. First, on a typical appraisal form where the contract price and date are listed on page one, the best practice is for the appraiser to leave that alone. The price, date, and any other terms that were in place as of the effective date shouldn’t change. Next, in an addendum, the appraiser should note that the revised purchase agreement was provided after the effective date, and list the new date/price/terms or whatever has changed.
Well, as they say, “That’s all folks!” If you’ve been with us through the entire series, thank you!! This wraps up our 12-part series called The Loan Officer’s Guide to Appraisals. I hope this series has helped shed some light on the appraisal process, and how appraisers can help loan officers assist homeowners in the home buying and mortgage refinancing process.
If you have any questions, or feedback for us, we’d love to hear from you! You can email us at firstname.lastname@example.org.
Committed to helping you understand your home’s market value,
Ryan Bays, SRA, AI-RRS