Do Third Party Inspectors Violate USPAP

It was recently brought to my attention, by a reputable appraiser I might add, that the use of third-party inspectors may be a violation of USPAP.  Or more specifically, that an appraiser relying on a third-party inspector for information (without knowing their name), may be a violation of USPAP.  For example, there are several (and growing) companies who are providing clients with what are being postulated as “hybrid appraisals” or “hybrid reports.”  The definition, as far as I can discern, is that a third party inspector ‘inspects’ the property (usually an exterior from the street – which is why there are quotation marks) and a desktop valuation is performed by a licensed or certified appraiser based on the data provided from the drive-by information.  It is my contention that the outlined scenario does not violate USPAP – as long as the appraiser takes care not to mislead.  

Let me begin by stating what this article is not.  This is not a discussion on the validity or prudence of this type of product.  The profession is charged with strong opinions on both sides of the spectrum regarding ‘hybrid appraisals,’ ‘alternative valuations,’ ‘evaluations,’ ‘desktop appraisals’ and the like.  I have my opinions on the matter as well, but that is a conversation for another day.  My purpose in this article is to attempt to answer the question, “Does the use of third-party inspectors violate USPAP?”   

As you all know (because we all keep up on USPAP – right?), we are required in Standard 2 to disclose any significant assistance. “When any portion of the work involves significant real property appraisal assistance, the appraiser must describe the extent of that assistance. The signing appraiser must also state the name(s) of those providing the significant real property appraisal assistance in the certification, in accordance with Standards Rule 2-3” (USPAP 2018-19 Lines 707-709).  The questions are “what is significant, how do you disclose it, and where?”  

In order to answer the three questions above, our best resource appears to currently be the non-binding FAQ section under #255 (in the 2018-19 USPAP).  This FAQ makes it clear that significant assistance does not include data-entry and other, non-analytical work.  “An individual who merely collects or provides data for use in the analysis does not provide significant appraisal assistance” (USPAP 2018-19 FAQ 255).  In other words, when my assistant pulls county data on a subject property and types the parcel number and legal description into the report for me, she is not performing ‘significant’ assistance and does not need to be identified in the report.  

What is significant is appraisal-related work (sometimes referred to as “Tier III” activities).  They are outlined in the FAQ referenced above as “the contribution…of substance to the development of the assignment results. In other words, the individual must contribute to the valuation analysis in a noteworthy way” (ibid).  USPAP even goes on to describe the specific work that is considered to be worthy of a statement.  “Examples of contributions made by appraisers that constitute significant real property appraisal assistance include the identification of comparable properties and data, inspection of the subject property and comparables, estimating accrued depreciation, or forecasting income and expenses” (ibid).  Using this definition alone, one would be led to believe that a third-party inspector should be identified in the certifications.  Or, should he/she?  

The waters are further muddied by the fact that USPAP does say “the name(s) of those providing the significant real property appraisal assistance must be stated” (USPAP 2018-19 lines 708-709).  This is where the conclusion was made by my colleague that, because an appraiser often does not know the proper name of the third-party inspector, they cannot be identified in the certifications and, thus we have a violation of USPAP.  However, let us keep reading.  

USPAP is clear that “one misconception is that non-appraisers who provide assistance should be identified in the certification. This is incorrect because the certification requirements in USPAP apply only to appraisers. Thus, only appraisers sign the certification or are identified as providing significant appraisal assistance” (USPAP 2018-19 FAQ 255, emphasis mine).  If it is only appraisers who are to be named in the certification, the antithesis must also be true; non-appraisers do not need to be, nor should they be named in the certification. Indeed, the FAQ goes on to say, “the use of an environmental expert to determine wetland boundaries would not be considered significant real property appraisal assistance” (ibid).  Just as an environmental engineer is not considered an appraiser, nor are they providing ‘appraisal assistance,’ a drive-by of the subject, snapping a few photos, and even making a few comments about observations made can hardly be considered significant appraisal assistance.  Rather, they are providing data to the appraiser who will actually perform Tier III analyzing, comparing, and reconciliation – or in other words, appraisal work!

If we truly are to identify every source of information we rely on in the report by name, shouldn’t we also provide the names of the county clerk who provided us with the deeds, the assistant in the map department who emailed us a copy of the plat, the assessor’s assistant who gave us the owner’s name, parcel number, and legal description, and more?  In other words, I believe the ASB sees the potential ridiculousness that would domino if a requirement to provide the name, title, and assistance given of every person who assisted in the appraisal process.  Keeping it to ‘appraisers’ seems prudent.

A related question is rightfully raised as to if an appraiser assists another appraiser on an assignment in another state (one they are not licensed in).  For example, what if I called on my friend Tim, MAI from Florida (not licensed in Idaho), to assist me with a market study of the Victor/Driggs area that I later use in an appraisal report?  USPAP also makes this interesting statement, “it is important to realize that USPAP does not define an ‘appraiser’ in terms of state licensing or certification requirements. USPAP defines an appraiser as one who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective” (USPAP 2018-9 lines 20-22).  Now, this portion of the document is specifically talking about the relationship between licensed appraiser and their non-licensed trainees, but could it also apply to appraisers from other states?    

So, what about non-appraisers helping out with Tier III responsibilities?  By that, I mean appraisal-type-stuff; like market studies, pulling comps, making adjustments, reconciling and the like; you know, things that require analyzation skills.  Again, this is not the place to debate the business sense of such a decision, but how should you handle it if that is your choice?  I do not think USPAP is clear on the subject.  As one of my Appraiser Dream Team Mastermind members pointed out, “it sounds like USPAP is assuming that anyone who provides significant appraisal assistance is an appraiser” (hat tip to Shawn Moore).  That obviously is not the case.  USPAP is written in such a way that it assumes everyone doing appraisal-type work is an appraiser. I know more than one appraiser who employs ex-appraisers, ‘trainees’ without official license, or other experts to assist with appraisal related duties.  Naturally, the liability falls squarely on the shoulders of the signing appraiser in these cases, but how do you handle disclosure? If this describes you, here is how I suggest you handle it, based on FAQ 255.  If a non-licensed appraiser were to assist you in any Tier III work, I would put their names and what they did on the report (perhaps in the addendum) and leave it off the certification (remember, USPAP is clear that the certification is ONLY for appraisers).  It seems to me that this fulfills both the responsibility to disclose and also to not be misleading.  Speaking specifically of trainees (who I guess are considered ‘appraisers’), USPAP states, “the name of the trainee appraiser who provided significant assistance, but does not sign the certification, must be stated in the certification. It is not required that the description of the assistance appear in the certification, but the extent of the assistance must be set forth in the report as required in STANDARDS 2, 4, 6, 8 and 10. The degree of this description is identified by the applicable reporting option for the assignment. For example, in an Appraisal Report the extent of the significant assistance must be summarized (USPAP 2018-19 lines 109-113).  The most recent Fannie Mae Selling Guide does not seem to dispute this. “As noted in the License and Certification section in this topic, Fannie Mae allows an unlicensed or uncertified appraiser, or trainee (or other similar classification) that works as an employee or subcontractor of a licensed or certified appraiser, to perform a significant amount of the appraisal (or the entire appraisal if he or she is qualified to do so), as long as the appraisal report is signed by a licensed or certified supervisory or review appraiser and is acceptable under state law” (p. 519).

Does that mean an appraiser should not say anything about the third-party inspector, if his/her data was relied upon?  I don’t believe that is a good appraisal practice either.  USPAP is clear that an appraiser should not be misleading.  Therefore, it would be best, in my opinion, to indicate where the data came from and make an assumption that it is true and correct; just don’t do it on the certification page.  A simple statement like the following might suffice:

“This appraisal report is based on information obtained from a third-party inspector who completed a drive-by and took photos from the public road.  I am relying on this information (in addition to other data as outlined) to discern information about the subject property for such features as quality, condition, and any amenities that may be revealed from this third-party inspector.  I am making an assumption that my conclusions from this data are true and correct.”  

Why do I care?  I have spent the better part of the last half decade trying to help appraisers to think more like business owners and less like simple technicians.  Many have chosen, rightly or wrongly, to not do any type of desktop or ‘hybrid’ appraisal work.  I respect that business decision.  However, for those who have chosen to incorporate this type of work into their business model, I believe it is important to understand what USPAP says (and doesn’t say) about it.  In the end, it is not the report that is USPAP compatible or not; it is the appraiser!  You, and you alone, are responsible for making sure you are fully understanding and complying with your state laws and the Uniform Standards of Professional Appraisal Practice.

21 Comments on “Do Third Party Inspectors Violate USPAP”

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  2. No, third party inspections in and of themselves do not violate USPAP. However there are some debatable considerations for certain assignment types.

    The first is of course whether or not the assignment results are credible in the context of the intended use. This is one of those USPAP grey areas, where the credibility of the results are measured in the context of the intended use, which implies by logic the client would have a say on whether the results are credible or not. However, USPAP also says it is up to the appraiser to determine if the scope of work is adequate or not. ?

    The second is a bit beyond anything I have verified or even looked into and I present it as an argument I have heard others make only. Which is that USPAP says we must be familiar with the laws that affect appraisals as part of the competency rule. Now this next part I do not know enough about, so will just explain it as it was explained to me. Within the federal laws of lending over-sight, a lender must make sure the subject property can be adequately identified and verified by the appraiser, including the physical condition of the property. Because it would be ridiculous for an appraiser to not employ an EA when it comes to physical condition on a property they have not even inspected from the street, let alone one they have not viewed from the inside (which we all know makes all the difference in the world), a third party inspection would fall short of meeting the requirement. Circling back to the competency rule that says an appraiser must be aware of the laws applicable to appraisals, one could conclude that accepting and developing these types of assignments does not meet USPAP. Again, this is food for more discovery and thought, not something I would be ready to hang my hat on. However, it does get me thinking we aren’t paid half as much as we should be if we are expected to be lawyers too.

    I think the largest problem with third party inspections will be if they become too prevalent. For starters the need for labor will decrease to levels where we will be eating each other alive even more than we are now. Though more importantly, appraisers really ought to be familiar with what they are appraising and if we are not going into the houses anymore, I don’t see how that is going to be a good thing for anyone.

  3. I do not do “drive-bys” for the simple reason that I do not have the opportunity to see the condition of the interior. An appraiser can write all the appropriate CYA comments in the appraisal, but that doesn’t make it a credible appraisal in my opinion. I recently received a notice from an AMC about a new “product” where all an appraiser has to do is sit in front of the computer and never leave the office again. I sent the following note to the chief appraiser of that company, asking this individual twice to answer my questions, but never heard back.

    I just watched the 30 minute webinar on your new product. In the beginning you mention the issue of an appraiser shortage. I think that there is one significant reason for that, and that is fees. I’ve been going to a monthly appraiser breakfast for many years, and one of the main topics is fees. When AMCs first came on to the scene, we’d all get e-mails with an assignment request for let’s say a fee range of $200 to $250 when we had been used to getting $350 and up. I’ve been told that there has been an increase in the fees that are being paid, but they are not always commensurate with the time and energy that good appraisers put in to their work. There has been pressure to use regression analysis, and all major appraisal software companies are offering regression analysis plug-ins. If your product becomes the wave of the future, where does regression analysis come in? Will it even be relevant?

    Quite a few appraisers I know have become licensed as brokers because the money is certainly much better. On closing statements it is not unusual to see an appraisal fee as high as $650. My observation is that appraisals have been much more expensive for the consumer. Additionally, the closing statement does not break out the appraisal and AMC fees.

    Up until now, an appraiser is responsible for all his or her work. If a loan goes south, the appraisal will be scrutinized. Now, more people will be involved, and interior inspections will no longer be a part of the process. Who will be responsible for errors? How will Errors and Omissions insurance firms handle claims?

    I have a feeling that good, responsible appraisers will have to spend more than 1 hour to produce this new desktop appraisal because a lot of the work that will no longer be in the appraisal report will now have to be in the work file.

    Given the additonial educational requirements that appraisers have to have these days, I wonder if this profession will still remain attractive to newcomers.

    I enjoy getting out of the office, measuring homes and meeting the owners,and getting to better know all the neighborhoods in which I work.

    What are the fees that will be paid to the folks taking the photos and looking at the property from the street? If all the other costs are added togethere, plus the AMC fee, what will be the total cost?

    It seems to me that the general direction is to have valuation work done in the shortest time period possible for as little money as possible. Most appraisers I know have more than one assignment going on at the same time because accepting only one at a time is not a good business model. If anyone accepts only one at a time, then they’ll miss out on other assignments, and no one can run a successful business doing that. A 48 hour turn around time which many AMCs require is not realistic.

    It will be interesting to see where all of this ends up. Time will tell. Thank you for your time

  4. AMC’s suck, they are blood suckers and appraiser’s are allowing them to run their business in many cases.

  5. Totally incorrect. You go wrong when you say that because only appraisers sign the certification, that only appraisers need to be mentioned in the certification. This is incorrect.
    Yes, only an appraiser would SIGN the certification, but ANYONE providing professional assistance (which explicitly includes inspecting) needs to be disclosed in the certification (by name and with a description of the work).

    1. That quote was not from me, Brian.

      “one misconception is that non-appraisers who provide assistance should be identified in the certification. This is incorrect because the certification requirements in USPAP apply only to appraisers. Thus, only appraisers sign the certification or are identified as providing significant appraisal assistance” (USPAP 2018-19 FAQ 255, emphasis mine).

      1. Furthermore, if you read on, I clearly state my opinion that the appraiser should disclose who gathered the information from the street.

  6. Is this situation really that much of an issue? In nearly every case for the clients I work with, they require that I personally inspect the property as well as the comparables. This of course is not only to evaluate the subject, (which would be visible in a photo) but also the street and neighborhood as well as that of the comparables. In other words, although USPAP may allow it, my clients will not. Is this not generally true for all of us?

    1. These are for “hybrid” products which will increasingly be more a part of the valuation world. For 1004 work, you are right, William.

  7. I am in agreement with Mr. Mulder. Appraisal fees are higher for those of us who will not work for the low fees paid by most banks and AMC’s.
    USPAP rules will change with the climate. (When did our profession start doing that?) I think Fannie Mae was the entity that told the Lenders they no longer need appraisals on many of the tract built homes, if the borrower meets certain other criteria.

    Appraisal schools take our money, and teach the rules of the time. The Appraisal schools DO NOT change or make USPAP rules, only write them into the new course work. Appraisal schools are only in business to educate they do not fight for the Appraisal Profession as we saw with HVCC and the mandatory use of AMC’s. Fannie Mae takes our work product, deposits the data into a huge data system, even though it is outdated right after we do it. Nothing like getting paid so little for a work product, only for it to be stolen and turned into a mass compilation of Data, to end your career. FHA demands that an appraiser inspects the attic, the crawl spaces, appliances, and Carbon Monoxide detectors etc: All not our area of expertise. The appraisal schools teach the updates, make us pay for the classes to do more work, and then most, do it for free. Why do we do it at all? In one paragraph I can find a couple things that should have hiked our fees to over $600.

    Advertisements for Virtual offices also make me wonder. We are sharing data with folks all over the world while they are typing our reports. They can type while we sleep. We are giving folks in other countries borrowers personal information when they are typing and placing photos into the report. That just doesn’t feel right to me.

    As work becomes even more limited, more of our assignmenst will be pieced out for less money and eventually there will be just a few appraisers to do only the difficult work. Or just General Licenses. USPAP will be adapted to allow all of these changes as it has in the past. Thats Technology Folks!
    .

  8. What does it mean to have performed “a complete visual inspection” (from the URAR) of the subject property? Can an appraiser complete a virtual visual inspection at their desk while some grunt walks through the property with a body cam attached? What about a recording of a walk through?

  9. USPAP is a wonderful document that provides appraisers with rules and guidelines to complete a credible appraisal. But there is a lot of misunderstanding within our industry about what it is and what it is not. USPAP is not designed to stifle an appraiser’s ability to complete a variety of assignments for our clients. In fact, it provides a tremendous amount of latitude to do just that. My fear is that some appraisers use the document as an excuse to keep doing things “the same old way”. No industry is immune to change, including the appraisal industry, and somewhere along the way we seem to have forgotten that we provide a service to a client. If that service is no longer needed, we no longer have an industry. The changes we are seeing are not the fault of AMC’s or USPAP. They are the result of changes in technology and expectations. Either we rise to the challenge of meeting those changes head-on, or we disappear. It’s really as simple as that.

  10. Well done sir!! How about the desktop products we’re being asked to provide now where the “third party” makes an interior inspection? I realize your answers may be the same, and I mostly agree. My decision was to remove myself from the rosters of the folks who order these things. I’m simply not comfortable putting my business and livelihood on the line for this product. Too many unknowns.

    But let’s carry this discussion one step farther; FNMA requires that I “view” the comparable sales from the street (nothing about taking pictures). So, can I ride around the “neighborhood” thoroughly during my subject inspection, then use MLS photos as my comparable pictures? I think we need to open a nationwide discussion about the ridiculous requirement that professional appraisers spend countless hours not to mention fuel, etc. making photos that basically are available on the internet. This doesn’t address the FHA requirement that the appraiser make a picture of the comp, again a ridiculous requirement. Most comps in my market are at least 3-9 months old and a photo taken that long after the closing may be misleading at best. I believe it’s a USPAP violation to include a photo of a property (sale) that is not representative of the property as it existed at the time the buyer and seller were making their decisions. Thanks again for keeping these issues up in the air.

    1. The problem with your comp photo argument is that MLS photos aren’t taken on the day of sale either. But your argument is being heard loud and clear by Fannie, in the near future the bifurcated process will be rolled out nationally and you won’t have to worry about “the ridiculous requirement” anymore. The unintended consequences of all of the moaning and groaning? Don’t expect $450 a pop sitting behind a desk.

  11. My state licensing board will not allow anyone to take pictures for me the appraiser unless they are also licensed and mentioned in the report. Very annoying.

  12. It’s all about SOW. When an appraiser is presented plans and a budget for proposed construction should the architect and author of the budget be named in the report as providing significant assistance? It’s the same principal with third party inspections; the appraiser is presented the data and SOW is agreed upon by the appraiser and client. It would be a USPAP problem if the appraiser engaged a third party because that’s not part of the agreed upon SOW, but there is absolutely nothing wrong with reports based on third patty data if that’s the agreed upon SOW.

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  14. Great article and very timely. I believe that these desktop assignments have a place in the appraisers business model. USPAP needs to be a guidepost and not a barbwire fence around the assignment. SOW description and full disclosure are critical to the report. In many ways the info provided by the 3rd party inspector is not too different from the MLS data we rely on for our comps. Sometimes a grain of salt needs to be taken and disclosed.

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