Seven Myths About Alternative Appraisal Valuations

Fact-Myth

 

We are hearing more and more about alternative valuation products such as desktop or computer assisted valuations, or “evalutions”.  It seems to be a taboo subject among appraisers, but we needn’t be fearful.  Here are seven common myths surrounding the subject of alternative valuation products:

  1. They are Not USPAP Compliant
    Actually, this is not a myth.  It is a fact.  Alternative valuation products are not USPAP compliant, but neither are 1004s, 2055s, or 1025s.  It is not the product or report’s job to be USPAP compliant, it is the appraiser’s.  Desktop valuations are no different than other appraisal reports.  When a valuation service is performed, it is up to the appraiser to make sure they are doing everything in accordance with state law and USPAP. Often the paperwork provided by the client will need to be supplemented (sometimes heavily) in order for the appraiser to properly show compliance with the standards of ethics and state laws.
  1. There is Too Much Liability
    Some say doing a valuation without an inspection is risky because there are too many unknowns.  Actually, the exact opposite is true. *  I know several appraisers who refuse to do drive by appraisals.  Many bloggers have commented on this and according to a famous blogger, his response is liability.  “What if I drive past the property and it appears from the outside to be in average condition, but is completely trashed on the inside?”  One cannot be held liable for what they do not know.  Fraud is knowing something significant, but choosing not to disclose it.  Incompetency is not knowing when one should have known.  Neither of those things applies here.  Every assignment is going to have things that should be known and reported in the normal course of business and things that cannot be.  Appraisers are only held liable for what they know or should know.  If the scope of work includes obtaining tax records and a three-year old MLS sheet for the subject information, they are not responsible for the recent kitchen updating that they have no way of knowing about.  The valuation is based on the available data sources.  Just be sure to disclose, disclose, disclose and remember, extraordinary assumptions are an appraiser’s best friend.  Furthermore, a majority of lawsuits and/or state board complaints are consumer based and reflect valuation services done for primary mortgage purposes.  Most (not all) of that does not apply with alternative valuations.
  1. A Desktop Valuation is just a BPO
    Whenever an appraiser completes a valuation of a property (under the hat of their appraisal license), they have completed an appraisal.  As such, they are required by state law to adhere to the rules and regulations of USPAP.  A “Broker’s Price Opinion” is a very specific product and its name says it all; it is an ‘opinion’ of ‘price’ done by a ‘broker.’  In other words, by title – unless an appraiser is also a broker and is acting under that hat – an appraiser cannot complete a BPO.
  1. They Do Not Pay Enough
    As appraisers, we are used to quoting fees based on job rather than time.  However, perhaps we ought to look more at our per hour rates.  Say a typical appraisal fee is $400.  Is it worth it to do a full, 1004UAD-MC at $350?  What if the $350 appraisal took five hours to complete, but a $400 appraisal took seven?  Which is the better paying job?  Why would anyone accept a valuation assignment for $125?  Well, if the total job from start to finish takes 1.5 hours, it may be the best paying job done all week!  A full appraisal comes with many extras that one does not get paid any extra for. Extras such as drive time, wear and tear on your vehicle, gas, time spent setting up the appointment, sketching, photos (of both the subject and comps), etc.  Desktop valuations are different.  There is a reason they have a lower fee, but they typically have a higher per hour payoff.  The other issue is the increased requirements placed on appraisers that are not put on other valuation professionals.  By state law, appraisers are required to follow USPAP on all real estate valuations.  That puts a higher scope of work on us that is not put on others who might (and can) complete the same work.  This is something that must change if appraisers are to compete economically in this area.
  1. You Cannot Do an Appraisal in So Little Time
    This myth is closely related to the previous one.  First, a pop quiz: Which of these two are appraisals;
  • Valuation of a 1200 square foot home or
  • Valuation of a 55,000 square foot warehouse?If you said “All of the above,” you are correct!  Which will take longer to complete?  Why?  The scope of work is much different for a house vs. a commercial property.  Yet, they are both appraisals.  It will take far less time to complete a desktop valuation than a 1004 URAR because the scope of work is different.  What has to be decided is whether a credible job can be done in a timely manner and justify the lower fee of a desktop product.
  1. You are Stealing Jobs From Appraisers
    It is true that there are more alternative valuation products being done each year. It is not true that this is caused solely from the lack of appraisers, and the banks’ inability to get an appraisal done.  Lenders are moving away from full appraisal products (due mostly to timing and fee issues) for purposes such as HELOCs, foreclosure, and asset management.  It does not make sense for a lender to order a full, $400 appraisal every six months for every property they own so they can assess their portfolio.  Furthermore, though the lender would probably prefer to use a qualified valuation professional (such as an appraiser), it is not necessary.  They can, and do, get others to perform this type of work.   In other words, refusing to complete alternative valuation products is a personal decision, but it will not likely affect the number of full appraisals ordered in the marketplace.
  1. Alternative Valuations are Alternative
    Though these services have been referred to as “alternative valuation” products throughout this article, they are not alternative at all.  Whenever an appraiser performs a valuation service in the capacity of their title as appraiser, they are performing an appraisal.  These are alternative in the sense that they are not a 1004, but they are still an appraisal.  All USPAP and state laws apply.  Perhaps they are better referred to as “Non-Traditional Appraisal Products.”*

Alternative valuation (ahem, “Non-Traditional Appraisal”) products are here to stay.  They are not going away.  I have respect for any appraiser who personally decides that this type of work is not for them.  Whatever the reason, appraisers must run their businesses as they feel is best.  However, none of them should make major decisions based on myths.  There is a lot of misinformation about alternative valuation products, but there is good information available as well.  With the prevalence of such services becoming more pervasive, adding such work to one’s overall portfolio may be something to consider.

*Ideas taken from Ernie Durbin as heard on The Appraiser Coach Podcast Episode #075.

 

As originally posted in Appraisal Buzz

26 thoughts on “Seven Myths About Alternative Appraisal Valuations”

  1. Pingback: Seven Myths About Alternative Appraisal Valuations - Appraisal Buzz

  2. Lets cut to the chase, the only real reason why these alternate appraisal valuations are being discussed, is because of money and control. THEY (fill in the blank) want to pay us less and less but want more and more. They’ve raised the entry standards but again want to pay us less. They would be happy to show us customary and reasonable fees of $200 (see Imortgage/Flagstar state of LA $10,000 fine). They want to dumb down the process (UAD) and take control of it by way of forms THEY come up with. Hell, lets have 20 completely different ways to determine market value, 20 different ways to obtain license credentials, 20 different sets of continuing education that must be completed and 20 different variances of the collateral underwriter to defeat. The issue is not ours to figure out, so raise the standards of underwriters, agents, loan officers, etc., to that of an appraiser so that we may discuss things from the same level of understanding. No thanks, as on a national average it only takes 70 hours to become a real estate agent, lets give them an equal voice so the appraisers can spend weeks out of the year completing non-paying value reconsiderations. What say you.

    1. Michael Morris

      How shocking that BJ is the first one crying, whining and BLAH, BLAH, BLAHING about his job.

      Do everyone a favor and QUIT appraising as it is apparent you hate your job……..

      1. Go give some value to that above ground pool you spoke of last blog Michael. Bringing to light the issues of ones profession and offering solutions and detailed thoughts, does not equal hate.

  3. Mr. Ernest Durbin II, SRA, AI-RRS, CRP

    It is apparent that a promotional theme exists is the post to TAC website, which is fine. We are business people trying to make a living. Whether by pushing alternate appraisal valuation, education materials, training, tech products, advertising on websites, etc. All these products are tools to assist in facilitating the RE transaction or to determine a fair value of property for use as collateral. I hope to begin
    ‘coaching’ or doing advisory work myself soon. Keep up the good work!

  4. I totally agree with this article except for one MAJOR difference , AMCs are NOT paying $125 for these!!! They are offering to pay the appraiser $50-$75!!

  5. I totally agree with all 7 points in this article , EXCEPT, the fee OFFERED to the appraiser or firm is and has been substantially less than the $125!! If it were, our firm of 200 plus staff appraisers would welcome these assignments daily!!

  6. The desktop appraisal will save me 1.5 hours in the field, add an additional 0.5 hours in researching the subject and adding all disclosures suggested in the article. Net savings, 1 hour. How does saving 1 hour equate to dropping your fee from 400 to 125, or in reality to 50 / 75?

  7. Why shouldn’t appraisers be allowed to do evaluations WITHOUT having to comply with stupid USPAP? Everyone else (brokers, analysts, bank tellers) does evaluations., why shouldn’t appraisers?

  8. I have never been asked to do a report like that. Maybe it doesn’t works in all areas. Many of the towns in my area do not provide any data on the structure. It is hard to draw a value conclusion when the only information you have is “Singe Family Residence”; no photo, no style of home, no GLA, no bath count, no bedroom count, etc. Unless I’ve appraised the property before, i can’t even do a drive by. I envy appraisers that have at least some data to hand their hat on. I don’t think i’ll be seeing Alternative valuation products in my area any time soon.

  9. Dwight Vinson

    While there is a small amount of truth given to “debuncting” of the so called “Myths”, I find the underlying basis for the article very disturbing. No. 1, the entire article is based on a false assumption that the Appraiser creates a product. This within itself is a Myth. The appraiser creates nothing. Myth no. 1 indicates that the forms are not USPAP compliant, and that is true. All forms and narrative are reports of the findings of the Appraiser when he or she performed the appraisal. The Appraisal Report may be verbal, on a form, or hundreds of pages of narrative. The report is not and cannot be the appraisal. While I agree with number 2 on its overall concept, there is an underlying problem that is part of another myth. No. 3 is correct in technicality only. The desktop valuation is another tool or report devised to accomplish the same purpose as most BPO’s. Most states enacted laws that prohibit a Broker from using terminology Value, Market Value and Fair Market Value. This created a problem for the “lenders” who must have such terminology in their appraisals. They began to search for Appraisers who would give them “stripped down” or restricted reports. Again, we come back to the basis. It’s still an appraisal report. No. 4 is a continuation of the previous “Myths”. If the appraiser meets the entirety of USPAP, the basic tenants of the Profession, the only part of the “job” is the possibility of a shorter period of time writing the report. Since the appraiser is a member of a “Profession”, what they must charge for is their Knowledge. This is not unlike any other professional, such as an Attorney, Physician, Accountant, etc. All of these charge for the knowledge and expertise. None, create a product. Like Appraisers, none of the other Professions are members of Trade Organizations and all members are required to meet or exceed the basic tenants of their Profession. I have never seen an “offer” for a Desktop Valuation that was consistent with the value of an appraisal and required appraisal report. While they may exist, this does appear to be related to other Myths of Unicorn and A.L.F. sightings. No. 5 has been touched on in No. 4. It is true the Appraiser is the only one who can determine the Scope of Work, as it states what the Appraiser has done, past tense, in performing the appraisal and writing the report. With experience, the appraiser may be able to perform the appraisal in a matter of minutes. However, the required record keeping and reporting process is what takes the most “time”. Again, the misnomer is “credible job”. As used in the last sentence of this paragraph, the Appraiser is again categorized as an assembly line production worker or tradesman. I will refer back to earlier statements and again reiterate, the Appraiser does not have a job. They perform Professional services based on intellectual knowledge and therefore have a “Practice”. I would specifically challenge No. 6. I do believe, and have supportable evidence, that in many cases these appraisal reports and the basis from which they are ordered are “stealing” from the Appraiser. What the lenders want and need have no bearing on the required standards of the Appraiser. Lenders have an avenue to value their portfolio and evaluate properties for HELOC. They are allowed to use their own employees. However, when an appraiser is called for, the appraiser “must” meet USPAP and the development and reporting of the appraisal must be left up to the appraiser. There is no such thing as a $400 appraisal, $75.00 appraisal or even $10,000+ appraisal. We can an must do an appraisal and the fee must be determined by the Appraiser. In this so called product, how many times is the Client or the Clients agent the AMC, offering specific “comps” to get the initial Desk Top appraisal secured. Where does this data come from? Many times the evidence shows that it has been mined from previous appraisal assignments. This is stealing “intellectual property” from the original appraiser. In other cases, the Clients and Clients Agents are having realtors or other non-licensed participants to gather sales data and sending it to “Appraisers” in other areas of the country who may or may not be competent to perform an analysis and determine a “value” of a property. How is this not stealing. They are avoiding using duly licensed appraisers in the area, most of whom are geo-competent and are highly capable of performing these appraisals using “restricted” reporting. To further support my statements, most of the banks are charged with supporting the communities in which they do business. For most, it is in their Charters. To send these appraisal assignments to evaluators outside the area is not supporting their local communities. It is sending the fees to other places, leaving the local appraisers less money to spend in the community. They are not only stealing from the Professional, they are stealing from their communities. You did state the reason in the second paragraph of paragraph 6. “Lenders are moving away from full appraisal products. (due most to timing and fee issues)”. The lender/Client and their agents have done a great job at trying to convince us of what and who we are. This sentence captures the point I am making. “Full Appraisal Product”. What is this? We either perform an appraisal or we don’t. Yes, I do understand that what is meant by the Client is that they don’t want a “full appraisal report”. In other words they want a restricted report. They can have it as long as they order direct. Am I willing to give a restricted report? Most definitely, and it will not usually cost as much as a FHA 1004 appraisal report. But the appraiser has to be the one determining what it takes to meet the minimum standard and the cost to provide the service. Paragraph 7 would have been “spot on” if the last sentence, which is a “Myth”, would have been omitted.

  10. There are some excellent points in this article. Our appraisal business is unlike other businesses in many ways however there are also some basis principles that still apply. The most business will go to those that can supply a service or product that meets the need of the customer in a reasonable amount of time at a competitive price. Think about how you make purchasing decisions every day. Appraisers that are not willing to expand their offerings will miss out on opportunities to maintain or increase their income. The quality of appraisal reports varies greatly and poor quality reports are not difficult to find. Poor quality contributes to the quest for alternatives and that quest won’t stop so we need to be part of the solution if we want to thrive. The alternative is to keep selling buggy whips.

  11. I agree with all your points Dustin. Thank you for all the content you provide. I would be willing to do alternative valuation products if I could earn $75 to $100 per hour, I just have not found any products that pay that unless we cut major corners. My problem is that I always error on the side of too much work into my opinions and it hurts me on the dollars per hour, but I also think that the companies offering this type of work typically pay $50 to $75. I have some alternative valuation products that I sell in my non lender only practice to private clients and they start at $250 and I can make a good living on these.

  12. With battles being won on a state level (LA, VA, etc.) (customary and reasonable pay) and fees being determined for the traditional forms (1004, 1073, etc.), its time for the lenders and the AMC’s to switch tactics. Does anybody think this will be allowed to sweep the country (fair fees)? Starting tomorrow they are going to introduce forms 1005 and 1074. These next generations forms will strengthen the industry, streamline the process, protect the unprotected, and of course pay $75 each. Please prove you have a heartbeat by typing a single X in response so we can sign you up.

  13. I completed my first desktop appraisal a couple of weeks ago for a fee of $65. I had turned these down in the past due to what seemed like low fees, but after reading much discussion in appraiser forums on this type of product, I accepted this one to test the waters. I can now agree with many of the other replies above that the $65 fee was about half of what I would need to complete these in the future.

  14. The only reason lenders use Certified Appraisers;
    LIABILITY.
    They no longer consider the appraiser of any value in the lending process. We are an obstacle to be removed.

    1. Michael Morris

      “We are an obstacle to be removed.”

      Correct.

      In about 75-80% of residential property lending a good AVM (such as Corelogiv RealAVM) will provide a reasonable collateral value for the lenders for about $50. That saves the lender (and their client) at least $350 per transaction.

      1. When the value is off by 25% that $350 savings per transaction will be nothing when they are forced to take back the loans and write off $350,000 in losses. You get what you pay for, or if your the lender, the borrower pays and you get what they paid for.

      2. Michael would you please define what a “reasonable collateral value” is for me; the effective date of that value definition and the source? Heck, for that matter define only “collateral value”? Does it have any remote relationship with the traditional definition(s) of Market Value by FNMA (or other recognized sources)?

  15. Steve Capistrant

    Dustin, excellent article and great points by Sam Bates.

    Let me tell you about my own experience with this.
    I started my own “Alternative Valuation Product” many years
    ago when I set up my website. This is available on my website for $149
    and is marketed towards home owners who are interested in refinancing, selling and
    tax assessment challenges etc. I was new to appraising and looking for any business.

    What I soon discovered that by offering this along with a concentrated effort to improve my SEO
    ranking on the internet, it has boosted me to the top of the ranking. Like right below the paid Google ads
    on the first page.

    What is even more interesting is that of all the calls I receive for the service I get very few takers,
    Most all of the calls “upgrade” to a full a appraisal after they explain what their needs are.
    If they are hesitant when they call I tell them look “you can start out with the desktop version and I will
    credit the $149 towards the full appraisal price of $400 later if need to. Since I will be using the same comps and research for the full appraisal anyway it’s not like starting over.

    I use it like the loss leader concept at the grocery store. Just because milk is $1.99 a gallon doesn’t mean
    they come in for a gallon of milk and leave, nope they always buy more. Everything is positioned in a supermarket store for a reason and not by chance.

    It’s been great for the non lender side of business. I can count on two hands the number of desktop
    evaluations I have done in the last 4 to 5 years. They almost always go for the full appraisal.
    Thanks

  16. Dustin, you should sell Kool-Aid on your site as most of the commenters fall right in line with the herd mentality. Appraising is like having a high end clothing company (forms 1004, 1073, 2000, 2006, etc.) but secretly they are trying to appeal to the masses by undercutting their own products with inferior offerings (alternative value options). This will only speed up the demise of the company (our profession). With the big picture and most appraisal assignments coming from residential lending, our clients are inclined to discount our traditional fees based on these alternate offerings. If a desk review was $200+ 10 years ago, but has been discounted by way of AMC split to $100 today, than the logic applies for the lenders to want alternate assignments for $45 (no thanks Wells Fargo). Last week the state of VA established minimum customary and reasonable fees are to be set at the current VA rate of $450, however they also passed in part regulation to prevent scope creep. The VA does not require the cost approach, ANY active or pending listings, and will accept 3 comps ONLY, etc. The regulation will require the lenders to PAY for these additional items (EXTRAS) that are NOT required by the VA. IF your offering a complete opinion for $45, $65, or $150 by some alternate method, then your undercutting your fees for those EXTRAS that lenders will be paying for in the state of VA. If lender AAA currently demands 4 closed sales and 2 active or pending listings (6 total), then what are the appraisers going to demand in fees for the EXTRA 3 comps? If lenders can get your ENTIRE opinion for so cheap by way of some other valuation, then they WILL severely discount what they pay for these EXTRAS. YOU ARE UNDERCUTTING YOUR WORTH AND ACCELERATING THE DESTRUCTION OF OUR INDUSTRY. Appraisers in the state of VA will be mandated to provide a la carte pricing for these EXTRAS, and those who complete these alternate valuations on the cheap, will contribute greatly to the demise of our fees and profession. I look forward to intelligent thoughts (sorry Michael).

  17. Henry T. Casado, MAI, SRA, AI-GRS, AI-RRS

    Comments on Fact/Myth 2: I agree, plus an extraordinary assumption should cover the premised condition; yet beware of frivolous suits handled by some law firms purchasing non-performing loans. They will take you to court even if the appraiser correctly deliver an appraisal and the purchasing loan entity is neither their client nor original intended user. The experience and cost can not only cause monetary harm but also reputation. And then, there is the question on related panel applications, have a claim ever been filed against you?
    Comments on Fact/Myth 3: I think anyone can fill a BPO. Is there any veracity? A BPO in most cases is just a formality for some investor’s requirement(s). I look at BPO’s nationally to avoid saying I review them, and leads me to think, why this document is used for monitoring purposes. It should only have one purpose and one intended user, a buyer or a seller, on a quickie subjective opinion. I will stop opining about BPO’s at this point.
    Comments on Fact/Myth 4: as an extension to what is already written, so we can measure the time it will take to complete an assignment and establish an hourly fee. I will also be concerned with related expenses to complement the hourly fee; for instance, MLS cost, utilities, software, etc.
    Comments on Fact/Myth 5: Time betrays the quality of the work delivered. I am mostly concerned with credibility of the report.
    Comments on Fact/Myths 6 and 7: In regards to the other points, I in general agree with the notion. These alternative methods is in better hands of appraisers, and perhaps it is a way to re-take everything regarding the profession.

    1. Henry, respectfully disagree that anyone can fill out a BPO (assuming filling it out also entails signing it). It is misleading for anyone that is not a broker to complete it unless they disclose that. In my state (California) if I am hired due to the fact that I am an appraiser, then I must comply with USPAP.

      Could I MAKE a BPO compliant? Probably, but not for $50 or $100. Take a look at the “ACI/First American Whatever the hell they are themselves today” PACE PRO product and tell me how long EACH report would take to make USPAP compliant; and even more importantly a document that does not mislead in any way. Worth the $75 proposed as the fee? The form itself is DESIGNED to mislead!

  18. I think this is a great article and I have enjoyed the responses. I was doing some of these types of assignments and stopped because I realized the compliance to USPAP was questionable and there appeared to be no solution I could facilitate.

    My experience was that I was doing reports within a system where I did not have enough control over the final content. The fact I did not have total control was not in itself the issue, just that when I realized I needed to expand the content to comply with USPAP, there was no way of doing so. My complaints to the client went no where which was unfortunate, because the fees were acceptable. If the client could have changed their ways a bit, I would still be doing them now and asking for more.

    Specifically, my issue was one of credibility in the context of the intended user. Limited valuation products, as I like to call them, are limited. There really is nothing wrong with them, so long as the client/user understands exactly what the limitations are and agrees to the credibility of the report in the context of said limitations. While the reports I was doing did in fact have some language that addressed this issue (which is why I did a few of them in the first place), I came to realize the language did not go far enough. Truly all that was needed was an expanded statement of what the limitations were, that the client was aware of the limitations and that the client did not expect the credibility of the report to exceed the limitations. Simply stating the report was not a “full appraisal” and was limited to the available data did not cut it in my eyes; the report and/or work file was missing a disclosure from the client stating they accepted the limitations and were not expecting something more credible.

    1. Agreed. The PROBLEM is that the ‘client’ INTENDS TO COMMIT fraud with these products! They do not want meaningful disclosures that would tell end users that the ‘assurances of value’ for the loan portfolio are essentially meaningless when applied to specific properties within the portfolio; or to the value of the whole portfolio itself.

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