When an appraisal crosses your desk for review, do you stop and think about the purpose or scope of work?
- Intended use
- USPAP Compliance
- Supportability of the value conclusion
- Regulatory compliance
… and these are just a few. Your job of reviewing appraisals has a major impact on people’s lives, investments, and regulatory compliance. It’s important to understand every detail of your appraisals and ensure they are thoroughly reviewed because they will be relied on not only during the closing, but also regulatory exams and at maturity. They will indicate whether you should lend on the property in question. If they are not accurate, they could ultimately determine the life or death of someone’s business – someone’s dream. With this in mind, let’s take a look at why and how to review an appraisal report properly.
Purpose of the appraisal review
Minimum Content Standards
One of the obvious components you need to ensure in both commercial and residential appraisals is their compliance with the minimum content standards. These should include the reporting requirements for real property appraisals contained in Standard 2 of the 2016-2017 edition of the Uniform Standards of Professional Appraisal Practice (USPAP). If your review forms have not been updated since January of 2016 you should take a look at the new edition of USPAP and update your review forms. If you have questions along the way, we’re happy to help.
In addition, you should be checking for the minimum standards itemized in the Interagency Appraisal and Evaluation Guidelines, 75 Fed. Reg. 77450 (Dec. 10, 2010), Items VIII, iX, X & Appendix C, promulgated in accordance with Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and each respective agency’s implementing regulations.
Lastly and arguably the most important is whether the value conclusion is reasonable and well supported.
Now that we’ve got the basics out of the way, let’s dissect that appraisal report. We’ll admit that some sections of the report can seem lengthy and sometimes verbose, but they are all very important to ensuring you’re able to do your job accurately. We’ve put together this easy-to-use cheat sheet for decoding your appraisal reports:
While this may seem laughable, but all too often reviewers or appraisal management companies are used to reviewing residential appraisals that are 10’s of pages long. So when faced with a 200+ page commercial report they may skim over the details. Completely reading the appraisal is (obviously) a must. Take pride in the importance of this step.
Scrutinize the adequacy and relevance of the data used. Equally as important, ensure the propriety of any adjustments made.
- Use Sound Methodology: Inspect whether the analyses, opinions or conclusions in the report are reasonable and well supported. If not, develop sound reasons for your disagreement.
- Ensure Minimums: Analyze whether the Appraisal contains the minimum content standards as we referred to earlier in this post.
- Discuss Deficiencies: If necessary, discuss the appraisal with the original appraiser to appropriately resolve any deficiencies. Keep in mind you must have a competent, experienced appraiser reviewing the appraisal to ensure the quality of this important step.
- Eliminate Errors: You must always check any relevant mathematical calculations to make sure they are correct.
Reviewing a commercial appraisal is a critical job. As shown above, the scope of work and key components are important and only as successful as the sound documenting format and experienced reviewer performing the work.
Have you received an appraisal you need to dispute? No problem. You will run into this from time to time but you can feel free to download our dispute resolution form to ease the reassessment process.
If you have questions about your own appraisal reviews or appraisal management process, please let us know. We’d love to help you streamline your processes and enable your lending and credit departments to get back to what they do best. We’re ready when you are.