We’ve discussed why you might order a residential evaluation in the past, but today we’re taking it a step further and covering the details beyond the basics. Let’s start with a review: When is a residential evaluation needed, and what do we mean when we refer to a real estate evaluation? According to the glossary of terms in Appendix D in the revised Interagency Appraisal and Evaluation Guidelines, a residential evaluation is, “A valuation permitted by the Agencies’ appraisal regulations for transactions that qualify for the appraisal threshold exemption, business loan exemption, or subsequent transaction exemption.” Typically, a residential evaluation is ordered for loans under $250,000, and they are also widely used on home equity lines of credit (HELOC). To oversimplify, a residential evaluation is a valuation that a regulated financial institution obtains to complete a transaction.
What are the requirements for who can complete a residential evaluation vs. an appraisal?
A regulated institution is required to obtain an appraisal in connection with mortgage loan originations and other real estate transactions including subsequent transactions like refinances or extensions. Keep in mind, the appraisal they obtain is required to comply with USPAP and be prepared by an appraiser holding an appropriate license or certificate. Like commercial evaluations, residential evaluations are not under these same requirements. However, unlike some appraisal management companies, we believe the best real estate appraisers are the most qualified people to complete an evaluation whether for residential evaluations or commercial ones.
What exemptions should I be familiar with?
Most of you know that your primary federal regulator’s appraisal regulations identify exemptions from formal appraisals and licensing requirements. There are at least 12 of those exemptions, but as far as residential evaluations go, it’s important to note the following three:
- Appraisal threshold
- Real estate-secured business loans
- Renewals, refinancings, and other subsequent transactions.
There is also a general provision that requires formal appraisals for transactions where the bank is taking a substantial risk. Even with the risk issue aside, all exemptions aren’t created equal due to evaluation requirements.
What are the minimum requirements for residential real estate evaluations?
Regulators stress that associated risks should govern the depth and content of the analysis, but these are the minimum requirements every evaluation should meet.
- Be completed by a person that possess the appropriate appraisal or collateral valuation education, expertise, and experience relevant to the type of property being valued.
- Identify the location of the property.
- Provide a description of the property.
- Provide a description of the property’s current and projected use.
- Provide an estimate of the property’s market value as of the effective date of the evaluation.
- Show the estimate of the property’s market value in its actual physical condition and should describe the method(s) the institution used to confirm the property’s actual physical condition and the extent to which an inspection was performed.
- Reflect the current zoning designation.
- Reflect the current use.
- Include any limiting conditions.
- Address the economic and market conditions that affect the estimate of the collateral’s market value.
- Describe the analysis that was performed and the supporting information that was used in valuing the property.
- Describe the supplemental information that was considered when using an analytical method or technological tool.
- Indicate all sources of information used in the analysis to value the property.
- Include information on the preparer when an evaluation is performed.
For even more on this topic, hear from industry experts in our recent webinar. The latest episode, The Reality of Residential Evaluations, covers all things residential evaluations. Stay ahead of the game with top tips for navigating evaluations, and let us know if you have any questions along the way. We are here to help.