Appraisers are usually able to disclose quite a lot about their methods and the information they’ve used—and it’s best to be prepared to share that information promptly, especially if the appraisal is not what was hoped for. Transparency and communication in appraisals is essential.
How can appraisers best communicate with lenders (and incidentally borrowers, sellers, and brokers) in a way that will sweeten the pill if the appraisal is disappointing, or explain information that might be confusing or controversial? How can the appraiser assure the other parties that the appraisal is backed by the soundest possible information? What advice, if any, can an appraiser give?
Transparency is essential. Appraisers are usually able to disclose quite a lot about their methods and the information they’ve used—and it’s best to be prepared to share that information promptly, especially if the appraisal is not what was hoped for.
“Appraisers should anticipate questions and be proactive about addressing them in the appraisal report,” advises Ryan Lundquist, a Certified Residential Appraiser based in Sacramento. “If I think someone might challenge me on a certain point, I’d rather talk about that point up front, so I can explain it in a way that makes sense to the reader. Providing a more visual appraisal, with neighborhood-specific graphs, can be very compelling for users of the report. If a lender, agent, or owner can see where similar sales have trended in recent years, it can sometimes help them see when a contract price is simply too high.”
Lundquist offers several guidelines for arriving at the most accurate numbers, and communicating their findings effectively. He tells appraisers to consider seasonal changes in the market. If an upward or downward cycle is beginning, the most recent sales may not yet reflect the change. However, the most recent sales—those that went into contract no more than 60 days ago—probably come closest to reflecting current market conditions. Thus, appraisers should consider making a “date of sale” adjustment.
He also reminds the appraiser to be neutral, despite any pressures to arrive at a certain number to make the deal work. The appraiser’s job, he says, isn’t to meet the contract price, but to be a neutral party to the transaction.
“Your lender wants the appraisal to come in as high as possible because they want to make the loan,” concurs Karen J. Mann, president and chief appraiser of Mann & Associates in Discovery Bay, California. “You have to provide dialogue and explain that you’ve made market conditions adjustments. For example, if a home is in a neighborhood that’s in demand because it has a good school, or is in a district where the school is not preferred.”
Future events can influence current values
An appraisal provides a snapshot of the property’s value on the day it was appraised, but it’s permissible to bring other information to the lender’s attention, such as how future events might affect home values.
Today, for example, Mann notes, the market is holding its breath while waiting to see what the new U.S. president and cabinet might do. A rise in interest rates could lower home values and create a downturn. It might be worth mentioning the possibility of significant alteration of Dodd-Frank Act, or the privatization of Fannie Mae and Freddie Mac—although these contingencies will not affect the immediate appraisal.
Working together to maintain transparency and communication in appraisals
David S. Bunton, Washington, D.C.–based president of the Appraisal Foundation, says it’s critical for real estate professionals and appraisers to work together and communicate. He says many real estate professionals are under the mistaken impression that it’s illegal or unethical to have much communication with the appraiser.
“Appraisers welcome any information that helps them do their job,” he says. “We at the Appraisal Foundation encourage brokers to communicate with appraisers. Real estate professionals should feel empowered to supply relevant materials, including the terms of the sale, applicable comps, and any evidence of renovations that might affect the home’s value. Additional useful data could include records that categorize maintenance and upkeep done to a home, such as regular inspections or replacements of major appliances.”
However, Bunton warns, real estate professionals cannot legally improperly communicate with an appraiser with the intention of influencing the outcome of the appraisal. Examples of this include asking an appraiser to provide a valuation that matches a home’s asking price, or threatening the loss of future assignments if the appraisal doesn’t facilitate a transaction.
“A broker can submit additional comparable sales through the lending institution for the appraiser to consider,” he says. “A broker can request that the appraiser correct any errors in the report, or provide additional detail as to how certain conclusions were arrived at and the ultimate opinion of value. It’s the appraiser’s duty to provide credible opinions of value for homes, and any information that assists an appraiser in that objective is welcomed.”
“You appraise the value of the property on the day you’re there,” says Martin Wagar of Wagar & Associates in Kalamazoo, Michigan. “A day later, the value could be entirely different. You might say in the appraisal that there’s an application pending for a variance to permit gravel mining near the property. This won’t affect your appraisal, but it’s worth bringing to the lender’s attention.
“Buyers are going to pay a price at which they won’t be outbid. You have to make it clear that you’re reporting what the market is doing.”
The importance of comparables in pointing out trends
It’s also a good idea, Wagar suggests, to present enough comps that a curve or trend is observable so if one of the comps is well outside the curve, that can be pointed out.
Daniel Bradley, chief appraisal officer at McKissock, agrees that the comps are fundamental. He also notes that different lenders may have different unofficial guidelines for what they consider suitable comps regarding how recently a property must have closed or how near it must be to the property in question.
“Comps should be selected based on their similarity to the subject,” he insists. “Appraisers should ask themselves, ‘If this property and the subject property were currently on the market, would they be competing for the same buyers?’ It’s also a good idea to consider which of those properties a typical buyer would prefer.”
The appraiser needs to then explain in the report why the comps were chosen and how they were weighted in arriving at a value indication.
“A well-crafted reconciliation statement sells the conclusions of the sales comparison approach to the intended users,” Bradley says. “An appraiser should not use boilerplate reconciliation statements that don’t impart information or reasoning. The reconciliation statement should be custom-written for each appraisal report.”
How do you practice transparency and communication in appraisals? Describe your experience in the comments below. Keep up with the latest appraisal industry news by subscribing to our blog.
Article by Joseph Dobrian. Joseph Dobrian has been writing about commercial and residential real estate, and real estate-related finance, for more than 30 years. His by-line has appeared in The Wall Street Journal, The New York Times, The New Yorker, Real Estate Forum, Journal of Property Management, and many other publications. He is also a noted novelist, essayist, and translator. His website is www.josephdobrian.com, and he can be contacted at [email protected]