The Inspection Debate - Part 1

I spend a lot of time working with data and services about real estate, valuation and collateral risk.   Current, accurate information about the property, particularly its condition has never been more important than in fledgling market recovery conditions, particularly with volume of distressed properties that are still looming in many markets.  I will be looking at some of the key topics related to property condition, valuation, data and technology for appraisers, lenders and consumers over the coming weeks and will share my findings and observations here.

To kick things off, let’s set the stage with two key components regarding property condition that were introduced as a result of the financial crisis and Dodd-Frank. 

Interagency Appraisal & Evaluation Guidelines – notes the need to document how  the condition of the property was determine, which is also a key criterion when an Evaluation is used in a lending context.

Federal Housing Finance Agency (FHFA) Uniform Mortgage Data Program/Uniform Appraisal Dataset, required by Fannie Mae and Freddie Mac, introduced standardized responses in the reporting of the appraisal including condition, quality of construction and status of remodeling or updating of the property.
 

The Uniform Appraisal Dataset (UAD) introduced standardized ratings for property condition that must be established by the Appraiser.  The standard ratings, C1 through C6, each contain a description of the criteria the Appraiser should consider.  And, the Appraiser is to establish the rating for both the Subject Property and the Comparable Properties in an absolute fashion (not relative).  If the appraiser then uses the rated properties in other assignments, the rating should not change.  At least not until there is another transaction on that property that “resets” the condition meter. 

This seems like a simple concept, condition affects value and marketability.  The process to assess condition, however, is increasingly being debated across the industry.  The controversy is top of mind for professional home inspectors.  The American Society of Home Inspectors are concerned that the UAD mandate for appraisers to assess condition but those appraiser in violation of state laws that govern what constitutes an inspection and who is qualified to conduct an inspection. 

Appraisers are bound by the Uniform Standards of Professional Appraisal Practice (USPAP).  In USPAP, Advisory Opinion 2 (AO-2) clarifies the purpose for inspecting property in the context of developing an appraisal as follows:  The primary reason for inspection of a property is to gather information about the characteristics of the property that are relevant to its value. 

According to Bill King, Director of Valuation Services at Veros, and a veteran appraiser out of Seattle, WA, the topic gets fuzzier because AO-2 use the expression “personal observations” of the appraiser in lieu of “ inspection”  in describing  the primary source of information regarding the subject property.   Bill has recently submitted a request to the Appraisal Foundation to amend USPAP to include a robust definition for inspection in the context of an appraisal assignment.

“There are many good reasons for defining “appraisal inspection” and a specific definition for “Appraisal Inspection” would serve appraisers and users of appraisal services alike by providing a meaningful distinction between what an appraiser does in the property visit and data gathering process compared with the more general definitions of inspection, as well as distinguish the appraiser’s inspection process from other specialized inspection types such as structural inspections, code compliance inspections, termite inspections and so forth” continued King.

Bravo Bill King for taking action on this topic and getting clarity regarding the appraiser’s role is an important first step in this multi-faceted and complex issue!   Later this year, the second wave of UAD “hard stop edits” on UCDP go in to effect and include:

• Condition rating (subject and comparable properties)

• Quality of construction rating (subject and comparable properties)

• Location rating (subject and comparable properties)

• View rating (subject and comparable properties)

• Subject and comparable address (including unit number for condominiums)

• Subject contract date and comparable property date of sale/time

In my next blog, I will explore inspection technology and data considerations, important for appraisers, lenders and consumers.