What Exactly is an Evaluation

(This is an edited version of a podcast Mike Brunson and I had on the topic of evaluations.  Mike is a state-certified general real estate appraiser in Nevada and Arizona, an SRA who specializes in damages and their impact on real estate values.  He recently received his Masters Degree in Public Administration and is working on a Doctorate. He currently serves on the Chair of the Board of Governors of the National Association of Appraisers, as well as the Chair of its Governmental Affairs Committee and is its liaison with The Appraisal Foundation. He is also a USPAP instructor, as well as ordained chaplain with an active youth ministry.  Mike’s opinions are his own, and do not necessarily reflect those of the NAA or The Appraiser Coach. There is no attempt here to quote the entire podcast, since it is available on the website. Here, we just touch the highpoints).

I asked Mike to explain what an appraiser needs to know about an evaluation since there appears to be some confusion about a desktop appraisal and an evaluation.  A desktop appraisal is just that – an appraisal and, as such, it must comply with USPAP. However, in a desktop appraisal situation the appraiser does not leave the office, and does not inspect either the interior or the exterior of the property.

An evaluation, on the other hand, is not an appraisal (ed. note:  state law may dictate otherwise, so check with your state appraisal statutes on this) and a non-appraiser can conduct an evaluation and still comply with the Interagency Guidelines (where you’ll find the definition of an evaluation), which governs evaluations.  Because appraisers must conform with USPAP Standards One and Two when it comes to forming, and then expressing a value opinion relative to real estate, in most states appraisers can’t do evaluations.  This is simply because if an appraiser expresses a value opinion in an evaluation, it becomes an appraisal, which must conform to USPAP. 

If a qualified non-appraiser expresses a value opinion in an evaluation, it is not an appraisal, so USPAP does not apply.  If USPAP does not apply, then state appraisal boards do not get involved. Note that, under certain circumstances, evaluations are perfectly acceptable as part of a federally related transaction (FRT), so an appraisal is not necessary.

To sum then, a desktop appraisal is an appraisal with its own appropriate scope of work, not an evaluation.  However, an evaluation can be a desktop, a drive-by, or have a complete interior inspection by the evaluator, or a contractor or employee, for that matter. 

Now, don’t conclude that evaluations will replace appraisals, since that is not true.  When it comes to FRTs, there are still circumstances that demand appraisals. However, be aware that, in the past few years, the number of evaluations lenders and federal agencies have commissioned has increased, while the number of appraisals has remained more-or-less constant.  Note also that the dollar volume of evaluations has increased as well. So, while the appraisal of real estate is not dead by any means, evaluations are surging in popularity and applicability with some lenders and federal agencies.

  So, evaluations are becoming more popular, but are they a new phenomenon?  Not really. They were established when FIRREA was established. Indeed, prior to FIRREA, evaluations were being done, but there were absolutely no regulations on them.  Now, with the regulations set out in the Interagency Guidelines, both appraisers and lenders have become more aware of them.  While appraisals are more appropriate for new-money lending, evaluations are appropriate for credit lending, portfolio management, and other such uses when a full-blown appraisal is not necessary. 

However, even with the increase of the popularity of evaluations, appraisers are at a disadvantage when it comes to producing them.  This disadvantage is the fact that if an appraiser does an evaluation, it becomes an appraisal, and that appraisal must comply with USPAP.  On the other hand, if another valuation professional who is not an appraiser, say a real estate broker, does an evaluation, it is not an appraisal.  Therefore, an appraiser, who is really the one most qualified to produce evaluations from the standpoints of education, training, and experience, is prohibited from doing evaluations.  Those who are less qualified to do them are those who are doing them, and are those on whom the US lending industry depends for valuation expertise.  This situation really makes no sense; but those who order evaluations rather than appraisals are aware of the differences, yet order them anyway.

Make no mistake:  appraisers can do evaluations.  However, when appraisers do them, they ascend to appraisals.  At that point, USPAP kicks in, so the appraiser must make the evaluation conform to USPAP, with everything that ascension implies.  For what the typical client is willing to pay for evaluations, it makes no financial sense for appraisers to do them.  This is due to the greater time it takes to do an appraisal rather than evaluation, as well as the greater liability inherent in that appraisal.  Therefore, appraisers are at a real disadvantage when it comes to evaluations. What is that disadvantage? Our competition does not need to rise to the same level of professional standards as do we, thus they can beat us on price and turn times on any evaluation assignment. 

Does an evaluation differ from a restricted appraisal report?  Clearly, yes, since a restricted appraisal report is still an appraisal.  It still must comply with all of the Standards Rules in Standard One, the appraisal development standard.  The difference is in the reporting function. SR2-2(b) sets out what must be in a restricted appraisal report.  It is the same information as in an appraisal report. However, in a restricted appraisal report, the appraiser typically states a conclusion without support, rather than summarizing the analyses and support behind it.  However, that support and reasoning must be in the workfile.

So, to prepare a restricted appraisal report, the appraiser complies in full with Standard One, so there is no real time savings on that side.  However, compliance with Standard Two is less onerous since the appraiser must simply state a conclusion, rather than summarize and support in the report’s narrative.  Indeed, there are some time savings when preparing a restricted appraisal report. But not all that much, frankly (see AO-11 for more data on this). In addition, as a further caveat, remember that if you prepare a restricted appraisal report, at least for now, you have to disclaim it as such.

Earlier, we mentioned that appraisers had to be aware if their individual state appraisal statutes permitted appraisers to do evaluations, yet not have to comply with USPAP.  There are a few states that permit this. In other words, in state X an appraiser can do an evaluation, yet it does not have to ascend to USPAP standards, nor will the appraiser’s competency be judged in light of USPAP.  Thus, in these states, appraisers can do evaluations since state law, which trumps USPAP, makes that okay. However, right now there may be four states in the US that have this exemption. So, if you’re an appraiser and want to de evaluations, please check with your state appraisal authorities first to determine if this exemption exists (or if state statute makes no issue at all of appraisers doing evaluations).

Now, let’s consider some myths and facts on appraisals and evaluations.  Is an evaluation an appraisal? If a non-appraiser does an evaluation is it not an appraisal.  If an appraiser does an evaluation, it is an appraisal (unless state law provides an exemption), thus must conform to USPAP and state appraisal statutes. 

Another myth is that appraisers should not perform evaluations since appraisers are professionals and evaluations are “not professional”.  An appraiser is under no coercion at all to provide evaluations. If they choose to do so, that is a business decision, not an ethical decision.  In reality, USPAP and state law should allow an appraiser that leeway. Who better to provide an opinion of the value of real property than a trained, educated, and experienced real property appraiser? 

Is it a myth that clients do not want appraisals, but evaluations, since evaluations, all other things being equal, are cheaper than appraisals?  When someone raises this question, I have to object to it because of the form of the question. The reason appraisers should be doing evaluations is that appraisers are generally more qualified than non-appraisers to form value opinions.  Unfortunately, appraisers cannot compete financially with those other providers of evaluations since the others are generally willing to do them faster and cheaper than can an appraiser. However, if an appraiser were able to compete on a level playing field, this difference might disappear.

How about this:  if appraisers merely choose not to do evaluations, clients will eventually come around and order a full appraisal.  Really? By what logic? What is “full price”? If there were only one appraiser in every state, that may be true. But that is not true.  Appraisers are willing to compete with each other on the basis of price. Besides, the law allows lenders to order evaluations under certain circumstances, which they will do because evaluations are generally less expensive.  So, even if a lender must create an “in-house” employee to do evaluations, they will do so, and then order them when circumstances permit them to do so. So the concept of “Appraisers , unite against evaluations!” sounds good, but is totally impractical and shortsighted.

Is it a myth or fact that evaluations will eventually replace appraisers?  Right now, the way US banking law works, there is no way the appraiser will entirely disappear.  Safe and sound banking practices require appraisals in some instances. Whereas in others, evaluations will do just fine, thank you.  And, let’s face it, many consumers still want the reassurance that they are not overpaying for a property, which is what an appraisal can provide them.  So, will evaluations replace appraisals? No. They will make inroads, to be sure. However, they will not replace appraisals, nor will evaluators replace appraisers.

In the future, will the appraiser’s job change significantly?  There is no way to determine this, yet it would be a myth to imagine a scenario in which there will be no changes from the present status.  I think one of the biggest changes we will see, as well as one that we will see relatively quickly, is that appraisers will not inspect as many properties, but will depend on third-party professional “inspectors” to carry out this function.  This will free the appraiser to appraise more, which is what appraisers are trained to do. I’m not saying this will be a peaceful, painless transition. Nevertheless, it is one I think is coming. In light of the competition we face (and will be facing in the future), I don’t understand how this transition (as well as others) can not take place. 

Let’s recap:

  •         Evaluations, by definition, are not appraisals;
  •         Appraisals, by definition, are not evaluations;
  •         Non-appraisers can do evaluations, which is perfectly acceptable to the Interagency Guidelines;
  •         Appraisers can do evaluations.  However, if they do them, the evaluation ascends to an appraisal, thus must meet USPAP as well as state appraisal statutes (unless state law says otherwise);
  •         Non-appraisers are not held to USPAP Standards when doing evaluations;
  •         The market for evaluations is large and growing.  Nevertheless, for the reasons cited herein, appraisers cannot take advantage of this growth industry;
  •         Evaluations will not replace appraisals, nor will evaluators replace appraisers;
  •         Changes are coming to the real estate appraisal industry, some of which we might foresee (see above), others of which we will not.

We need to stay on the top of our game.  We do this thru constant education and attending the appraisal conventions to meet and challenge our industry’s thought leaders.

For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode: 244 Evaluations; What They Are And What They Are Not

6 Comments on “What Exactly is an Evaluation”

  1. Thank you Dustin, for continually adding knowledge. People listen and respect you! I have been doing evaluations outside of USPAP my entire Career, as Tennessee was the only state that has allowed Evaluations by licensed/Certified Appraisers since they were created, as a thing! I have taught classes on evaluations and have spoken to multiple audiences on this topic. I am blown away by how many people do not understand. The Appraisal and “Evaluation” guidelines are clear. This is a product that in most states cannot be completed by Appraisers, but 10 states as of August have adopted laws allowing licensed appraisers to perform this product outside of USPAP. If we are not allowed to do these, then the client will go elsewhere…and regardless of licensing laws, we as “Valuers” are the best and most competent people to do these. These do not ever take away from the Appraisal Profession, but simply add another layer of services, that were frankly being done by lenders, and other real estate professionals, other than appraisers. When an evaluation is allowed, it means an Appraisal is not necessary. Tens of millions of these are done each year for lending, loan renewal, purchases, collateral updates, etc…mostly by non-appraisals. This is great business folks and we need to learn more to provide the services our clients need! Also, the last thing we need is for the TAF/ASB to get involved and try to add regulations above and beyond FIRREA/Interagency guidelines already. The standards for Evaluations are already in place. There is no place for that in the Evaluation space from the Appraisal regulatory agency. These are NOT APPRAISALS. It would further regulate licensed and certified appraisers and completely remove the appraiser from the playing field.

  2. Prior to becoming an appraiser I worked as an REO/Workout Manager for a Mortgage Loan Servicing Company. We ordered $10,000 – $30,000 of evaluations per month. All for occupied properties with delinquent loans. We would often order a new evaluation for the same property each month for years. We would have preferred to ordered these evaluations through an appraisal firm, but could not. I have always believed the evaluation business is larger than the appraisal business. Evaluations could be the answer for how to train and pay for the training of appraiser trainees. Appraisal firms should be able to provide evaluations with non-appraisers or trainees doing the work as a means of developing valuation experience as a path to becoming an appraiser.

  3. Pingback: What Exactly is an Evaluation - Appraisal Buzz

  4. Dustin,

    I am a certified residential appraiser in New York State.

    New York is not a mandatory licensing state. As such, anyone can complete an appraisal in New York. The only time a licensed/certified appraiser is required to do the appraisal is when it is required by law or when the client requires it.

    The NY Department of State is the governing agency that oversees appraisers.

    At our last NYS Association of Realtors Appraisal Board Meeting it was explained that the Department of State was asked if licensed/certified appraisers can do evaluations as consultants outside of USPAP, and we were informed that the legal opinion from the DOS was yes. Meaning, we have to make it clear to clients that we are not accepting or completing the evaluation assignment as an appraiser, we are being hired and completing the assignment as a consultant and we will sign the report with our name only and not as an appraiser. By doing so we only have to adhere to the Inter Agency Appraisal Guidelines.

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