Appraisal Review: CSI Style Southern California Chapter Appraisal Institute July 16, 2009 Kathy Coon, SRA Chief Appraiser/Director-Appraisal Appraisal Quality Control FNC, Inc. www.fncinc.com com
When there is no smoking gun The detection of a faulty or fraudulent appraisal involves more than one glaring error or omission there is seldom an obvious smoking gun Therefore, the reviewer must collect the evidence a series of errors, omissions, oversights that collectively collectively-- l will alert the reviewer to a conclusion (value) that is not supported. 2
Is the Appraisal Story Consistent? Top 10 Clues 1. Prior Listings 2. Sales Contract Concessions 3. Neighborhood 4. Inconsistencies 5. Supply/Demand Analysis 6. Proximity & Price of Comparables 7. Date of Sale 8. Selection of Comparables 9. History 10. THE END.Opinion i of Value 3
Clue #1: Prior Listings 4
Prior Listings Prior list price Was it significantly higher than the contract price? Market may be declining? Is it lower than the contract price? RED FLAG: Seller concessions? Review i value closely l 5
Clue #2: Contract - Concessions 6
Seller Concessions Financing Concessions will likely result in an inflated sale price and an inflated value. Financing Concessions DO NOT add value to the property. p The use of concessions cess o s increases during a down market. 7
Seller Concessions Contracts must be reviewed closely by both appraisers and underwriters. New homebuilders offer a variety of concessions and di incentives. Concessions may be included in side deals not disclosed by Realtors or builders. 8
Seller Concessions: more problems There is no database that identifies concessions: Appraisers often cannot get this information Quality control processes cannot verify the information Taxing authorities cannot identify concessions 9
Clue #3: Neighborhood Neighborhood ratings/data not consistent with the comparables and final conclusions. 10
Beginning of Inconsistencies Location Built-upup Property Values Demand/Supply Present Land Use Price Range 11
The Evidence: Inconsistencies Compare to Comparables: p Supply/Demand (top of page 2 of appraisal forms) Proximity it of comps Sale Price of comps Date of Sale of comps Elements of Comparison (location, physical attributes, etc) 12
Neighborhood Neighborhood Boundaries: Compare to location of comparables Look at the maps Market Conditions: Inconsistencies Straddling the fence Ratings boxes vs. narrative comments 13
Clue #5: Supply/Demand Top of page 2 of URAR: 14
Compare Consistent Consistent or not? 15
Supply/Demand: Example There are 15 comparables properties currently offered for sale in the subject neighborhood ranging in price from $175,000 to $200,000. There are 8 comparable sales in the subject neighborhood within the last 12 months ranging in sale price from $160,000 to $250,000. 16
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Supply/Demand: Example There are 7 comparables properties currently offered for sale in the subject neighborhood ranging in price from $107,000 to $139,900. There are 40 comparable sales in the subject neighborhood within the last 12 months ranging in sale price from $93,000 to $140,000. 18
Clue #6: Proximity & Price 19
Proximity & Price Compare the distance/price of comparables with the Neighborhood ratings: Watch for distances increasing Watch for higher priced comps being greater in distance 20
Proximity & Price Example: Location: urban Built-up: up: 100% Property Values: stable Demand/Supply: in balance Present Land Use: One-Unit 100% 21
Proximity: Location: Urban Comp #1: 1.27 miles Comp #2: 0.48 miles Comp #3: 2.52 miles 22
Tools can check appraisal QC Vigilance: Shows subject and comps from the appraisal and also other recent sales. Creates grid for analysis. Produces report on results. 23
Clue #7: Date of Sale In a declining market, appraisers often use older comps with higher sale prices. If recent comps not located within neighborhood: Include if necessary for underwriter requirements Do not emphasize these comps in final value 24
Date of Sale If there are no recent comps within the neighborhood, the subject s value will be more accurate based on older sales, adjusted d for Date of Sale. 25
Clue #8: Selection of Comparables A critical process since it is the basis for the Sales Comparison Approach Source of confusion among clients and even disagreement among appraisers A significant source of concern and focus in mortgage fraud 26
Selection of Comparables A logical process, which truly reflects the market, should be followed This process should not be based on just opinion 27
Selection of Comparables In selecting comps, it is inappropriate to: Target a specific price range Select from outside the subject s neighborhood (market area) if comps exist within 28
Poor Explanations of Comps Selected?? Due to the lack of comparables similar to the subject, it was necessary to extend the neighborhood boundaries. There were no comparables within the neighborhood similar to the subject in size, condition, and quality; therefore it was necessary to select comps from outside the neighborhood. 29
Respecting Boundaries Boundaries are extremely important in selection of comparable properties. It is improper to select comparables first and then create neighborhood h boundaries to include the location of these sales. 30
Comps vs. Sales There is no shortage of sales ; this does not mean they are all valid comps for the subject property. Using sales as opposed to comps is the primary way to inflate property values. 31
Comps outside neighborhood 32
Comps outside of neighborhood 33
Comp Selection The Market Decides! Below is the order of features that have the most impact on the value of a property: Location Site influence (if applicable) Room Count (# of Bedrooms; # of Baths) Style/Design Quality, Age, Condition, Amenities, Other Square Footage (GLA-GrossGross Living Area) 34
Comp Selection The Market Decides! NOTE: With the exception of LOCATION, any of these elements of comparison may change in order of importance, depending on the market. 35
The Myth of Square Footage GLA (square footage) is not the #1 element of comparison: Often the cause of overvaluation Analyze all elements of comparison Explain for underwriter s concerns 36
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Subject Property 40
Comp 4 41
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Clue #9: History 47
History Analyze This! 48
History Is the Opinion of Value higher than a prior sale reported? What does this mean? Is the Opinion of Value lower than a prior sale reported? What does this mean? Is the current Sale Price of any comparable higher than a prior sale reported? What does this mean? Is the current Sale Price of any comparable lower than a prior sale reported? What does this mean? 49
History NOTE: The proper reporting and analyzing of the property History is not an option for the appraiser or the lender. 50
Clue #10: Opinion of Value: The End of the Story Adequate Support?: Is the Opinion of Value bracketed**? Unadjusted Sale Prices of Comps? Adjusted Sale Prices of Comps? Are Comps located within the neighborhood? **Going outside the neighborhood just to accomplish bracketing is pointless 51
Are all significant adjustments explained by the appraiser? Is the information provided in all sections of the appraisal report consistent? Is the story the same throughout? 52
To Review: Example of Inconsistency 53
To Review: Example of Inconsistency There are 7 comparables properties currently offered for sale in the subject neighborhood ranging in price from $107,000 to $139,900. There are 40 comparable sales in the subject neighborhood within the last 12 months ranging in sale price from $93,000 to $140,000. 54
To Review: Example of Inconsistency In this example, The Opinion of Market Value: $47,000 55
USPAP It is a violation of USPAP to intentionally overvalue a property It is also a violation to intentionally undervalue a property 56
Underwriting: Guidelines Reality Check! There is a misconception that underwriting guidelines are rules that the appraiser must follow. Some guidelines may inadvertently oppose proper appraisal procedures. Appraisers must (if possible) comply with underwriting guidelines; but cannot compromise USPAP. 57
Is the Appraised Value Just an Opinion? i USPAP: Appraisal: The act or process of developing an opinion of value; an opinion of value of or pertaining to appraising and related functions such as appraisal practice or appraisal services 58
Value: (defined in USPAP) Value expresses an economic concept. As such, it is never a fact but always an opinion of the worth of a property at a given time in accordance with a specific definition of value. In appraisal practice, value must always be qualified. 59
USPAP. unwound Appraisal reports: Must be credible Must include all relevant information Must have support Must contain sufficient information Cannot be misleading 60
Helpful Appraiser Tools Be on the lookout for properties that have issues : Locational influences Quality, design, etc. Remodeled in the revitalized areas Research and these sales and maintain a database for future reference. Continually build internal databases for atypical properties. 61
Helpful Appraiser Tools Continually build internal databases for properties that have external obsolescence. Always be on the lookout for properties that are listed and/or sell with external factors such as fronting to busy streets, commercial facilities abutting the site, schools abutting the site, etc. Research and follow these sales and maintain a database. 62
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Nontraditional Houses What is Adequate Support? Underwriters often just request a comp of another dwelling of the same type. Appraisers should attempt to use comparables to support the market effect of a nontraditional dwelling. It is not sufficient support to merely provide another sale of a house of the same atypical style/design. 81
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Market Support for Atypical Designs Find a sale of an atypical house in a comparable neighborhood Select sales of other dwellings to use in a paired sales ** analysis. Adjust for elements of comparison other than design. 83
Market Support for Atypical Designs Extract the adjustment for design (based on paired sales analysis). Apply this adjustment to the subject s s market grid to reflect a market-derived adjustment for design. Include the sale above as an additional comp and adjust for location and/or lot size, etc. 84
FNC, Inc www.fncinc.com com Kathy Coon, SRA kathy@fncinc.com Cell: 281-381 381-0791 85