The Increasing Importance of Appraisal Reviews

Since the bubble burst, appraisals have been under what many would call unfair scrutiny. Appraisers for years have reminded anyone who would listen that they reflect what’s happening in the market; nevertheless, economic uncertainty and a fluctuating real estate market leave more room for concern.

realtor workThough always an important valuation function, review appraisals in the current climate have become even more prominent within the profession and play a vital role in risk management and mitigation.

The Uniform Standards of Professional Appraisal Practice defines an appraisal reviews as “the act or process of developing and communicating an opinion about the quality of another appraiser’s work that was performed as part of an appraisal, appraisal review, or appraisal consulting assignment.”

In their July 2007 research report, “Appraisal Reviews and Their Importance,” James R. MacCrate, MAI, and Noreen Whysel explain that a number of things could cause issues in an appraisal report, often requiring an appraisal review. These include the following:

1. Client Pressure. Perhaps one of the most common issues requiring an appraisal review, clients often apply pressure for an appraiser to reach a specific conclusion. Clients are not just limited to mortgage brokers and lenders, and may also include lawyers, accountants, government, real estate brokers and consumers.

2. Insufficient Information. Certain documents are required to complete an appraisal, but critical information may be withheld from the appraiser, limiting his or her ability to perform a complete analysis.

3. Scope of Work. USPAP states the scope of work must include, “the research and analyses necessary to develop credible assignment results.” However, often clients may limit the scope of work, which leads to improper conclusions.

4. Qualifications of the Appraiser. If an appraiser does not have education, training and experience prerequisites, he or she must disclose this in their report, yet many do not divulge this information. In these cases, the appraiser is unprepared to correctly employ the correct methods and techniques to provide a reliable, credible opinion of value.

5. Legal or Accounting Instructions. In a dispute, clients on both sides may provide different instructions or interpret legal or accounting concepts differently, causing the appraisers to arrive at different value opinions.

6. Date of Valuation. In some cases, such as an as-is sale, an income property or a divorce, appraisals may need to consider current, future or retrospective values, respectively.

7. Market Data and Comparable Sales. Using the Sales Comparison Approach, an appraiser must make adjustments for any differences between the subject property and comparable properties included in the report. Failure to do so is cause for red flags.

8. Income Approach. When using this approach, a meticulous market analysis is required to support the projected gross income. Issues are raised when this is not done thoroughly.

9. Cost Approach. Many common errors can result from this approach, making it difficult even for an experienced appraiser.

Because so many issues can arise during the appraisal, a review appraiser must hold specific qualifications. The Appraisal Institute recently introduced its first new designations in more than 20 years to address this growing and critical need. The Appraisal Institute’s Review Designations Program will provide general and residential review specialists with the necessary knowledge and skills to fulfill due diligence and risk management issues required by clients and employers.

Have you performed appraisal reviews or worked with review appraisers? Please share your experience in the comments below.