2007 by the Appraisal Institute, an Illinois not-for-profit corporation. All rights reserved.

residEntial appraising

Are Appraisal Reviews a Mainstay of Your Practice or Just a Sideline?

by Mark R. Rattermann, MAI, SRA

his edition of Residential Appraising looks at appraisal review assignments and some of the common pitfalls in this line of work. With the advent of increased scrutiny of investment portfolios, many residential appraisers are finding appraisal review is becoming a larger percentage of their work. Some appraisers have found appraisal review assignments to be their preferred work. In this article, we will look at the types of assignments, how to get appraisal review work, and what are the issues in these assignments. The largest segment of residential appraisal review work is performed for lenders and/or investors that are doing quality control of their mortgage loan portfolios. This means the investors are requiring the lenders (or individually the lenders are choosing) to engage a second party to look at the initial appraisal report to confirm the quality. This is no different than any company that buys a product from another company and then inspects it for quality before using it themselves. The investors can do some of this review work themselves but they usually lack the local market knowledge to be able to make a definitive judgment. They sometimes are also required to hire a disinterested third party to perform the appraisal review.

Comment: The subject of an appraisal review assignment may be all or part of a report, workfile, or a combination of these.1

This definition could apply to an appraiser writing a report about another appraisers appraisal report, but it could also refer to making offhand remarks about another appraisers work (with or without a client). This definition is not very specific, so it could be interpreted to include many facets of an appraisers work. Notice this definition states the subject is not the real estate but the report and/or workfile. Consequently, reviewers need to refer to the subject as the report or if they want to refer to the actual real estate then say something like the subject of the appraisal report under review.

How Do I Get This Type of Work?

How to get appraisal review assignments is a common question for appraisers. The answer to this question depends on whether the potential client is a local institution or a national investor.

Local Institutions
If the review assignment comes from a local institution, this work usually will be assigned based on the same factors as initial appraisal assignments. These factors include the following. Who you know. This is unfortunately a large part of getting business in this and many other professions. This means that competency, effort, fees, and training may take a back seat to something as simple as knowing the right person.

Appraisal Review
Before discussing anything in this arena, it is always best to define the terms. The Uniform Standards of Professional Appraisal Practice (USPAP) offers the following definition of appraisal review:
APPRAISAL REVIEW: the act or process of developing and communicating an opinion about the quality of another appraisers work that was performed as part of an appraisal, appraisal review, or appraisal consulting assignment.

1. Appraisal Standards Board, Uniform Standards of Professional Appraisal Practice, 2006 ed. (Washington, DC: The Appraisal Foundation, 2006), Lines 3236.

188 The Appraisal Journal, Summer 2007

Residential Appraising

What you know. Hiring professionals based on their knowledge and experience is excellent, but unfortunately most clients do not know how much you know until they received the results of your first assignment. In other words, clients do not know your capabilities until after they have hired you, and you have had a chance to perform. How much you charge. The fee charged is a common criterion for hiring appraisers and reviewers. Many appraisers bid on these assignments, accept a client-established fee amount, or sometimes charge by the hour. Sometimes clients hire reviewers based on the lowest fee. In a capitalist society, this will always be true. How fast you can do it. The speed that a review can be completed may be the most significant criteria or may be a secondary issue. The turnaround time may be irrelevant if the loan is already closed, but in other situations a time lag may hold up the closing. There is no substitute for quality, so be sure you build in enough time to ensure you can do the review competently. Your reputation. Your reputation can be a doubleedged sword. Some lenders want the most competent and professional reviewers available, but some may only choose appraisers who are yes men to do the work. The former is a good reason to hire a reviewer; the latter is not. Your other appraisal work for the institution. Many institutions do not want their appraisal review work to be done by appraisers who also perform initial appraisals for the institution. In other words, if you are doing work for that institution now, the institution might be concerned that you may have bias that would interfere with the independence of the review process.

ers who will do review work. Placing your profile in this referral system will help you obtain review assignments,2 and having a significant designation will be an important factor for national investors who do not know anyone else in your market. Being offered an appraisal review assignment is all about getting your phone to ring. Next, we will look at what you need to consider once you have been offered such an assignment.

What Issues Should I Consider Before Doing an Appraisal Review

A number of issues come into play when preparing a fee quote, negotiating a contract, or deciding if an appraisal review assignment can be accepted. Eight key questions will help guide you through the decision-making process.

What Is the Intended Use?

The first question an appraiser needs to ask when contacted by a potential client about a review is what is the intended use of the review. Why does the client need the review? Is it quality control only or is the client essentially looking for a second opinion of value? Once the reviewer understands the intended use, he or she can determine the appropriate scope of work for the review assignment. A critical fork-in-the-road has to do with whether the reviewer will opine on value, either by agreeing with the appraisers value or by disagreeing and supplying an alternative. If the reviewer is going to provide an alternative value opinion, the next question is, will the reviewer obtain his/her own data, or rely on the data in the report under review and complete the review based the extraordinary assumption that the data in the appraisal report is the accurate and is the best available. Failing to consider all these various forksin-the-road relating to the reviewers scope of work is why appraisal review work is misunderstood.

National Investors
If the review assignment comes from a national investor, the work usually is not assigned based on who you know or how well you do it, but on national lists or designations. In other words, the national investors quality control units are inclined to hire reviewers based on qualifications and designations rather than just picking a person from a local roster. The Appraisal Institutes Web site is a common place for appraisal review clients to get the names of apprais-

Am I Competent?
The second questionam I competent for this assignment?is the same question that initial appraisers must ask themselves before accepting an appraisal assignment. If the subject property is located in an area where the reviewer lacks the base knowledge of the market or other local issues, should the assignment be accepted? If the reviewer is already competent, the assignment will be much easier than if the reviewer

2. Appraisal Institute members may go to http://www.appraisalinstitute.org/mbr/profileinfo.asp to place a profile on the Appraisal Institutes Web site.

Residential Appraising

The Appraisal Journal, Summer 2007

189

must work hard to become competent. It is much better to ask of few questions or even look over the report before giving a definite answer or fee quote to a client for a review assignment. Keep in mind that competency includes factors such as an appraisers familiarity with the specific property type, the market area, the geographic area, and the methodology. What type and what level of competency is required of the reviewer depend on the reviewers scope of work. A reviewer who is going to opine on value and obtain his or her own data will need to have market area and geographic competency. A reviewer who is simply opining on the correctness of the methodology will not. A common misconception is that if one is not competent to appraise the property, one is not competent to review an appraisal of that property. This is not true.

a portfolio. The amount of work required to review a bad appraisal report is much greater than the amount of work to review a good report. The easiest appraisal review is just saying looks good, but the most difficult, time-consuming one is the review that requires substantial research and confirmation because the appraisal report is poor.

What Is the Difficulty in Obtaining Subject Data?

Some appraisers complain that an exterior-only appraisal review is very difficult because they have to research all the details of the subject. This is a misconception. If the reviewers scope of work does not include a walk-through inspection, the reviewer may accept as true the information in the appraisal report about the interior via an extraordinary assumption. The reviewer does not need to confirm that information in other ways. Some appraisers prefer the exterior-only appraisal review because they do not need an appointment, and these can be done as fill-in assignments when they are in the same area. Again, the scope of work will affect the amount of work necessary to provide an adequate service.

What Is the Scope of Work?

It is a mistake to let the appraisal form drive the scope of work. The reviewer needs to think about the process, not about filling out a form. As appraisers have said for years, Use the form; dont let the form use you. This is also true in review work. Consider whether this is a desktop review, a drive-by review (exterior only), or a walk-through review. This will affect the amount of time required to do an assignment and often the expenses associated with the assignment. The scope of work for a lenders quality control review will be much different than an appraisal review that is prepared for a high-profile court case with significant issues. The scope of work decision is in some ways more critical in an appraisal review assignment than in the initial appraisal assignment because of the large spectrum of scope of work possibilities. In some cases, clients only want the reviewer to confirm the validity of sales data and the subjects historical market activity.3

What Is the Difficulty in Obtaining Comparable Sales Data?

If the scope of work calls for examining comparable sales data, the appraiser should consider the time required to obtain this data. In some markets, the reviewer will find it more difficult to find and confirm the data used in the appraisal report as comparable sales. If the appraisal report states appraisers files as a data source, it may be very hard for the reviewer to confirm the data. Most appraisers think the standard for confirmation of data by the reviewer is higher than for the initial appraiser, especially if the reviewer finds fault in the initial appraisal report. This is another common misconception. Again it is a scope of work issue. If the subject is an unusual property, the data collection for the subject may be a little more difficult; but in most cases it is the data collection for comparable sales that is troublesome. For example, suppose a reviewer was asked to review an appraisal report by a national lender. The reviewer quoted his standard fee and the lender accepted that amount and forwarded the contract. After he accepted the assignment and signed the contract, the reviewer received the report; he then realized

Is There a Suspected Problem or Is This a Random Audit?

Is this review required because the lender thinks there is a problem or because the lender is doing random audits of appraisal reports they have obtained? This question may not seem significant, but it usually is. If the lender is asking for reviews on the appraisals that are likely to have problems, the amount of work required to explain the problems will be much greater than if the reports are randomly selected from

3. Arguably, that type of an assignment would not be an appraisal review but more like a data confirmation.

190 The Appraisal Journal, Summer 2007

Residential Appraising

the subject real estate was located next to a six-lane freeway that was just being completed. The real estate had been subject to an eminent domain taking and part of the subject parcel was taken. Additionally, the property had been involved in a police shoot-out three years earlier where four people were killed. There was also a gasoline spill from a nearby gas station that reportedly has polluted the ground in this area. The appraisal report under review did not mention any of these issues. Collection of comparable data will be one of the problems here. Will the reviewers standard fee be adequate compensation for this assignment?

What Is the Highest and Best Use and/or Property Type?

In some appraisal reviews, the subject may be more than one residential unit, may have some commercial uses, or even may have commercial potential that will require the appraiser to research multiple data sets. For example, suppose the subject real estate is a two-acre tract improved with a 40-year-old residence. The subject is next to a busy street and is zoned for commercial uses. The real issue may not be what are the best residential comparable sales, but rather is the subject worth more as commercial land than it is as a house. Obviously, this assignment may be much more work. Or, suppose the subject real estate is improved with a structure that was built as a single-unit residence but was later converted to a four-unit residence. It is not clear if the owners obtained a building permit when they converted the residence, so it is not clear if it is a legal use or not. It is also not clear if it is worth more as a single-unit residence or a four-unit residence. Again, this type of review assignment may be much more work.

If a client wants the appraiser to complete a different type of review form or the scope of work is more detailed than the Fannie Mae forms, the reviewer must consider how much work that will entail. If a narrative appraisal review report is needed, be sure to start with an outline that is based on Standards Rule 3-2 of USPAP. This will prevent the reviewer from skipping a vital part of the appraisal review process. Remember, there are specific certification statements that must be included in any review report that is supposed to be in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). If the report is narrative, these must be included.4 Also, keep in mind that reviewers should not sign the original appraisal report unless they want to accept responsibility for the original report. Remember, any appraiser who signs an appraisal report is considered an appraiser, not a reviewer, and takes full responsibility for the appraisal.

Critiquing Reports
As can be seen in USPAP and in the Fannie Mae forms, the reviewer is not charged with trying to find fault with the initial appraisal or report, but is charged with confirming the correctness of the data, the process, and the conclusion. It is not part of an appraisal review assignment to find fault where none exists. Justification of the review is not part of the review assignment, and use of the appraisal review process to get new clients most surely is not part of the assignment. USPAP requires appraisers to be independent, and therefore when reviewers disagree with the conclusion in a report, they are free to give their own opinion of value based on all the data at hand, but reviewers are only allowed to criticize the initial appraisal based on the data that was available at that time. Using subsequent data may be appropriate only if the reviewer is going to provide a more current opinion of valuean updatein the review. For example, suppose a reviewer was given an assignment to review an appraisal report of a residential property that was improved with a geodesic dome residence. The residence was unusual but not unique in this area. The initial appraiser stated there were no sales of properties with similar improvements found in the last two years. The initial appraiser made an adjustment for design based on his personal

What Kind of Report Is Required?

In most cases, if the review report is for a lender, a Fannie Mae Form 2000 or 2000a will be required and will be sufficient. This means the reviewer is asked specific questions and there will be check boxes or fillin areas for the specific answers. If the appraisal report is substantially correct, this form will not require much narration, and the report part of the process will be comparatively easy. The appraisal review forms are substantially in compliance with USPAP, and most reviewers need not supplement the forms.

4. See Standards Rule 3-3. The Appraisal Institute has sample certifications for appraisal, appraisal consulting, and appraisal review reports on its Web site. These are available as downloadable Word documents.

Residential Appraising

The Appraisal Journal, Summer 2007

191

opinion, but with no supporting sales data. The reviewer was hired a year later to look at this report. She found the initial appraiser correctly stated there were no recent sales of similar homes, but she did find a more recent sale that was listed and sold after the first appraisal was done. This sale showed a much larger discount in the market for design. The reviewer should not use this more recent sale as a basis for criticism of the first appraisal, but could use this data in support of the reviewers opinion of value. It is common for reviewers to be over critical of the work under review. It is also common for appraisers to say this is wrong because it is not the way I do it. When reviewing the work of another practitioner, the reviewer must always maintain an open mind to the practices of others and not criticize them simply for being different. In fact, many reviewers comment that the best part about appraisal review work is that it allows them to learn about other practitioners techniques. Reviewers must be aware that there may be a reasonable explanation for a statement in the appraisal report even though it may not be apparent to them. If the reviewer says something is wrong, he or she better make sure it is wrong or the reviewer will look worse than the initial appraiser. It is embarrassing for a reviewer to say, the appraisal report under review says the subject is .89 acres, but the tax assessor says it is only .445 acres; the initial appraiser overstated the lot size by 100%, when the truth is the subject includes two parcels and the reviewer did not catch that fact. Do not be unfairly critical of another appraisers workit will come back to haunt you.

For example, suppose the subject real estate is a single-unit residential property that was the major marital asset in a pending divorce. One of the partners obtained an appraisal report showing a value of $400,000, but the other partner had an appraisal report prepared showing the value to be $300,000. Each party was sure their appraisal was correct and the other one is wrong, so they agreed to get both reports reviewed by a third party. They included the names of five appraisers that were acceptable to them and suggested the other side pick one of them. They agreed that both sides would pay one-half of the fee and the reviewer would be engaged during a conference call that included both attorneys. The reviewer concluded the value of the real estate was much closer to $300,000 than $400,000 because the high appraisal used comparables from much superior locations. Since both sides and the judge received the review report, the other side agreed to use the $300,000 value. This approach is viewed as better than getting more and more appraisal reports because the reviewer is charged with helping the court decide where the problems are. This approach can also be done with the judge engaging the reviewer.

Review of Reviews
A review-of-reviews type assignment is sometimes done to check the quality control process. This means the reviewer is checking a prior review of another appraisal report. This is needed in some markets where an investor may not trust the initial appraiser or the reviewer. Again, the scope of work is going to be a big component in bidding or accepting this type of assignment.

Other Types of Assignments

Appraisal review clients go beyond lenders, and there are many other situations that call for appraisal reviews. The following discusses a number of other situations where clients may seek out an appraisal review.

Review of Condemnation Appraisals

Reviews of condemnation appraisals are commonly done in eminent domain cases since these are usually controversial. In many markets, a review of the initial appraisal is done immediately after it is completed. Again, keep in mind that if you sign the report of the first appraiser, you are considered an appraiser, not a reviewer, and are taking full responsibility for the appraisal.

Review for Litigation

In litigation involving real estate, often each side presents an appraisal. When one appraisal shows a much higher value than the appraisal prepared for the other side, the parties, or maybe the judge, will have a thirdparty review both reports in order to determine which is more credible. It is important that the reviewer is unbiased, so in some cases the judge might select the reviewer, or both sides might agree on the reviewer after the initial appraisals are completed.

Review of Assessment Appraisals

In some markets, an assessor may ask an appraiser to review the appraisal report presented for support of an appeal. In other words, the assessor assesses the property, the owner presents an appraisal report of the

192 The Appraisal Journal, Summer 2007

Residential Appraising

property for appeal purposes, and the assessor hires a reviewer to look over the appraisal report presented by the appellant property owner.

Appraisal Reviews for the State Licensing Agency

In some states, the licensing agency for appraisers may hire reviewers in conjunction with prosecution or dismissal of a complaint against an appraiser. In these cases, the Fannie Mae review form is usually not sufficient, and some sort of narrative review format is required. A narrative format should include a review of USPAP standards to ensure compliance.

results. Many appraisers would rather do the review work than the initial appraisal if they can be paid for their time. The important thing to remember is that appraisal review results are as important as the initial appraisal and must always be done in the most competent way possible.

Reviews of Appraisal Consulting Assignments

Another type of review assignment involves review of consulting reports. In this type of review assignment, the work under review is not an appraisal report but is an appraisal consulting report. Appraisal consulting reports will involve valuation issues, but the objective in an appraisal consulting assignment is something other than value.

Conclusion
Many appraisers that would not have considered doing review work in the past are now embracing it because it offers diversification of clientele, provides a longer window to complete the assignment, and usually frees the appraiser of pressure for specific

Mark R. Rattermann, MAI, SRA, is a senior partner with REsource, LLC, a real estate appraisal firm in Indianapolis. He is active in the Appraisal Institute education program, as both an instructor and course developer, and he has served as a member of the Appraisal Institutes Education Committee and as chair of the Seminar Committee. Rattermann also teaches at various real estate schools, trade associations, and community colleges in Indiana. He was the recipient of the Appraisal Journal Editorial Boards Swango Award in 2005, and is the author of a number of books, including Valuation by Comparison: Residential Analysis and Logic, and The Student Handbook to The Appraisal of Real Estate. Contact: Education REsource,
LLC, 9247 N. Meridian Street, Suite 325, Indianapolis, IN, 46260; T 317-581-0557; F 317-816-9449; E-mail: rattermann@mibor.net

Residential Appraising

The Appraisal Journal, Summer 2007

193