Evaluations

Okay, let’s start today’s post with some background.
After tax laws were revised in 1986, largely eliminating the ability of investors to shelter other sources of income with losses in Real Estate, many investors opted out of real estate investment and the crash of
the overbuilt market was exacerbated.

A scapegoat was needed. Lawmakers concluded that appraisers had an outsized contribution to this
crash and decided that a mechanism to establish minimum appraisal standards had to be implemented.
Hence, in 1989, the Appraisal Foundation was created and soon thereafter, the Uniform Standards of
Appraisal Practice were developed. USPAP was meant to define those minimum standards. It soon
became clear that establishing minimum standards for the many activities that make up “Real Estate
Appraisal” was elusive. What applies in the appraisal of homes vs. the appraisal of hotels is quite
different. Appraising for mortgage purposes is quite different than appraising for tax appeal or eminent
domain. Hence, every two years, a newer, better USPAP is published with more examples and opinions.
The document has grown – Original USPAP – ( + A-114 + F-152 + I-8 = 361 pages).

Rather than concede to the futility of regulating all these activities in a single document, the Foundation
pressed on, developing guidelines that would be the basis for the establishment of laws by the States
and the basic curriculum that would determine minimal competency. The states revved up their
regulatory capabilities – using the same structures used to regulate other activities, like cosmetology.

The appraisal profession gave up its status as a self-regulating profession and devolved into a trade – a
heavily State regulated, highly competitive trade. Banks and other frequent users of appraisals could
now fall back on the State defined minimum level of competency. Instead of having to seek out the
services of a designated member of a respected, self-regulating, trade organization, they could simply
use anybody who successfully completed State requirements.

But not everybody was happy with the need for every valuation product to meet these standards. Even
as USPAP was being finalized, regulatory agencies were already defining situations when a lesser
product could be accepted – which they termed “evaluation”. In December, 2010, a number of banking
agencies and financial organizations got together and issued their own additional rules – commonly
referred to as the Interagency Guidance (FIL-92-2010). In fairness, the Guidance is not purely regulation
of the appraiser, but rather of the whole process of appraising, obtaining appraisals and reviewing
appraisals.

Further, they expanded guidelines for the use of “evaluations” in some instances. They define evaluation as: “A valuation permitted by the Agencies’ appraisal regulations for transactions that qualify for the appraisal threshold exemption, business loan exemption, or subsequent transaction exemption.” The threshold exemption is $250,000, the business loan exemption (owner user) increases that to $1MM and the subsequent transaction exemption applies in instances where a refinance/loan restructure involves no extension of new credit – no new money. Of course all of this regulation has led to burdensome expense to business.

Despite the fact that actual appraisal fees have fallen, despite the fact that the typical appraisal report now provides more information about a property and its neighborhood and market than ever before, and despite the fact that actual appraisal turn times are shorter than they were in say 1985, in recent years, the burden of the appraisal expense has precipitated the expanded use of the latest “cheaper valuation product” – the evaluation.

What is an evaluation? The widely trumpeted 14th edition of The Appraisal of Real Estate, which serves
as the “bible” of the appraisal body of knowledge, does not even have the word “evaluation” listed in its
Index.

Our sparkling new USPAP 2014-15 defines an evaluation as part of Appraisal Practice on page U-1. “The
use of other nomenclature for an appraisal or appraisal review assignment (e.g., analysis, counseling,
evaluation, study, submission, or valuation) does not exempt an appraiser from adherence to the
Uniform Standards of Professional Appraisal Practice.” (italics added). In addition, in the Advisory
Opinion Section (AO-13, pg. A-29), USPAP 2014-15 states that “…appraisers who are bound by USPAP
must recognize than an evaluation meets the USPAP definition of appraisal and appraisers must comply
with USPAP when providing such a service.” In theory, non-appraisers who perform the same services
are not. Hence, we have a playing field that is not level. Those who have made a commitment to the
appraisal profession, who have made the investment in time and money to comply with government
regulation are placed at an economic disadvantage despite the fact that they are clearly the portion of
the population with the best education and experience credentials to perform the service.

So let’s summarize.

Appraisers did a bad job regulating themselves so Congress stepped in to ensure minimum standards
would be clearly defined and the Appraisal Foundation and USPAP were born. Both have evolved and
grown – at alarming rates.

Under regulation appraisals became too expensive (though they actually cost less and provide more
than they use to) so a new product that is not subject to USPAP was created – evaluations.
So now, a great deal of valuation work (particularly in the “kicking the can down the road” part of the
business – the “subsequent transaction” exception cited above – essentially expiring loans that need to
be extended or renewed) can now be done by individuals who are not subject to minimum competency
and standards other than those set by individual institutions (both public and private).
This saves users of appraisal products some money – particularly in those non-fee producing
“subsequent transaction” situations. In a recent blog post advocating State statutory changes that
would allow appraisers to do evaluations, George Mann points to statistics he has assembled indicating
that appraisal fees average about $2,100 and evaluations are about $700.

That’s great from the user’s perspective, how about from the providers? Not so great. First off, it is difficult for the operator who has invested in the infrastructure and licensing required for USPAP
compliance to compete with the non-licensed provider. For instance, I just spent $$ attending my sixth or seventh USPAP update course. And I came away confused. Although it was recognized by the instructor that evaluations can be done as appraisals by appraisers (i.e., we can do reports that conform to USPAP and sell them in the market where our competitors are selling product that doesn’t conform), he indicated that we might do this using Restricted Appraisal Report formats. But that left me befuddled. USPAP is very clear that Restricted Appraisal Reports can only be used when there is a single intended report user. In my experience, no report done for a regulated bank can be reasonably expected to have only one user. Any report
submitted to a bank is likely to be read and relied upon by the owner and/or any of a myriad of
regulators.  So there we are…

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