Reliance Letter Minefield an appraiser real-world problem… Solved

by Francis X Finigan

August 2019

Save this letter in your file; it will help protect you from liability and enhance your professional image.

While not typical, there are enough requests for “reliance letters” that they are not uncommon.

A mortgage broker may receive a copy of the appraisal report and want to submit it to a “second mortgage” lender, who is not the original client or an intended user.

The mortgage broker may ask the appraiser to complete a “reliance letter” and re-address the report to the new lender. At this juncture typically there is no discussion of compensation.

The audacity of this mortgage broker is probably your first thought! In their industry, it’s not uncommon for them to ask an environmental consultant for a reliance letter.

Let’s clarify what a reliance letter is. A reliance letter is a letter from one party to another party allowing them to rely on the contents of a report. Reliance letters can be offered by consultants (usually an environmental consultant) in place of a formal collateral warranty to the consultant’s appointment.

With that in mind, realizing the mortgage broker’s lack of USPAP knowledge, you can understand why they might consider asking the appraiser for a reliance letter.

So, what’s the answer? Can an appraiser just re-address the appraisal report? Can the appraiser re-address the appraisal report if they are offered remuneration?

Advisory Opinion 26 provides the following clear and unambiguous answer to these questions.

The answer to the question posed above is… No. Once a report has been prepared for a named client(s) and any other identified intended users and for an identified intended use, the appraiser cannot “readdress” (transfer) the report to another party.

USPAP defines Client as: the party or parties (i.e., individual, group, or entity) who engage an appraiser by employment or contract in a specific assignment, whether directly or through an agent. (USPSP Publication)

Avoid the reliance letter minefield. The next time you are requested to readdress an appraisal, just send them a copy of this Food for Thought. And just say, NO!!

Good luck and do good work,


For more information and on this topic read the following:


Relevant USPAP & Advisory References

• The Confidentiality and Conduct sections of the ETHICS RULE

• Standards Rules such as 1-2(a) and 1-2(b); 7-2(a) and 7-2(b); and 9-2(a) and 9-2(b), which require an appraiser to identify the client, intended users, and intended use

• Standards Rules such as 2-1(a), 8-1(a), 10-1(a), which require an appraiser to clearly and accurately set forth the appraisal in a manner that is not misleading

• SCOPE OF WORK RULE, which requires an appraiser to ascertain whether other laws or regulations apply to the assignment in addition to USPAP

• Advisory Opinion 25, which covers clarification of the client in a federally related transaction• Advisory Opinion 27, which addresses appraising the same property for a new client

• Advisory Opinion 36, Identification and Disclosure of Client, Intended Use, and Intended Users 

(USPAP Publication)

Appraisal Standards Board Considering Creating Standards for Evaluations and ASB to Issue Concept Paper and Hold Public Hearing

The ASB could consider moving forward with a discussion draft or an exposure draft by late 2019.

TAF once a draw a bright line between appraisals and evaluations.


“Federal Deposit Insurance Corporation, the Board of the Federal Reserve System, and the Office of the Comptroller of the Currency issued an advisory to clarify supervisory expectations for using an evaluation for certain real estate-related transactions in response to questions raised during outreach meetings held pursuant to the Economic Growth and Regulatory Paperwork Reduction Act. Many of the questions pertained to when an evaluation is permitted for a real estate-related transaction and how an evaluation can support a market value conclusion when there are few or no recent comparable sales of similar properties.


Part 323 of the FDIC Rules and Regulations permits institutions to use an evaluation in lieu of an appraisal to value real property pledged as collateral for certain real estate-related transactions that are not subject to the appraisal requirements in Part 323. For example, institutions may use evaluations rather than appraisals to estimate the market value of residential or commercial properties securing real estate-related transactions of $250,000 or less except for certain higher-priced mortgage loans under Regulation Z.

The Interagency Appraisal and Evaluation Guidelines do not require evaluations to be based on comparable sales.

In areas with few, if any, recent comparable sales of similar properties in reasonable proximity to the subject property, persons who perform evaluations may consider alternative valuation methods and other supporting information when developing a market value conclusion.

Institutions that demonstrate that a valid correlation exists between tax assessment values and market values may use such information to develop the market value conclusion in an evaluation.”

FDIC FIL-16-2016   Interagency Advisory on Use of Evaluations in Real Estate-Related Financial Transactions –

According to the federal banking regulators’ Interagency Appraisal and Evaluation Guidelines (the “Guidelines”), evaluations are permitted for:

·        Transactions where the “transaction value”5 (generally the loan amount) is $250,000 or less;6

·        Certain renewals, refinances, or other transactions involving existing extensions of credit; and

·        Real estate-secured business loans with a transaction value of $1,000,000 or less and when the sale of, or rental income derived from, real estate is not the primary source of repayment for the loan. 

 Even though the regulations allow evaluations for these types of transactions, the Guidelines state that banks should establish policies and procedures for determining when to obtain appraisals for higher-risk transactions, such as those with combined loan-to-value ratios that exceed supervisory limits, atypical properties, properties outside the bank’s traditional lending market, or high-risk borrowers.

While an appraisal requires a state-certified or licensed appraiser, the Guidelines state that those who perform evaluations should have “the appropriate appraisal or collateral valuation education, expertise and experience relevant to the type of property being valued.” Examples include appraisers, real estate lending professionals, agricultural extension agents or foresters.

You can even use internal staff to perform evaluations, provided they possess the necessary training and qualifications and you take steps to maintain the independence of your real estate valuation program. Generally, that means a complete separation of the collateral valuation program from the loan production process. Maintaining such a separation may be difficult for smaller banks. According to the Guidelines, if the only person qualified to evaluate real estate collateral is another loan officer, director or bank official, the bank should ensure that person’s independence by requiring him or her to abstain from any vote or approval involving loans for which they ordered, performed, or reviewed an appraisal or evaluation.

For banks lacking the resources to hire and train their own personnel to perform evaluations, the most cost-effective way to address independence issues may be to use a third party for evaluations.

(Washington, DC) August 1, 2019 – The Appraisal Standards Board (ASB), an independent board of The Appraisal Foundation, announced today that it intends to examine the concept of creating standards for evaluations, which are alternatives to appraisals used by financial institutions.

Currently, there are no uniform standards for appraisers to follow when conducting an evaluation, which leads to greater risk to the safety and soundness of the real estate transaction and diminished protection for consumers. The ASB intends to issue a concept paper around Labor Day and will follow up with a public hearing with panels of constituents on October 18, 2019, in Washington, DC. As with all public meetings of the ASB, the public hearing will be broadcast via Livestream.

“This important development by the ASB shows how the Board has their ear to the ground, listening to the concerns of working appraisers in a rapidly evolving marketplace where there is an increasing demand for different valuation products,” said David Bunton, president of the Foundation. “They are balancing that with their responsibility to protect the public trust in valuation by creating uniform standards that are subject to oversight.”

Currently, the Interagency Appraisal and Evaluation Guidelines for federally regulated financial institutions provide guidance on evaluations, but that guidance is directed at lenders, not appraisers. Furthermore, the courts have found such guidance to be unenforceable. “This puts appraisers in a difficult, untenable position,” said John Brenan, vice president of appraisal issues at the Appraisal Foundation. “Appraisers often struggle when asked to perform evaluations, since most are mandated to comply with the Uniform Standards of Professional Appraisal Practice (USPAP). It’s almost a Catch-22 situation.”

Under federal regulations, evaluations may be performed by non-appraisers who have not demonstrated a level of expertise through education, training, and examination. If appraisers are not completing an evaluation, there is no recourse for a lender or consumer to appeal a bad evaluation. With the increased use of evaluations in the marketplace lenders and consumers are being exposed to an unnecessary level of risk not seen since the 1980s when national appraiser qualifications and appraisal standards had not yet been created.

“Appraisers are valuation experts. When hiring a licensed or certified real property appraiser to develop and report market value, the client should expect the work to be performed in accordance with USPAP,” said Wayne Miller, chair of the Appraisal Standards Board. “The Board is eager to receive stakeholder feedback from the planned concept paper and public hearing on the impediments, if any, to appraisers completing evaluations in accordance with USPAP. As always, the Board’s goal is to allow USPAP to evolve in an ever-changing real estate valuation environment while continuing to promote and maintain a high level of public trust in the valuation profession.”

For these reasons, the ASB is considering creating standards for developing and reporting evaluations, which would apply to those appraisers who want to perform evaluations while complying with state laws. The concept is to draw a bright line between evaluations and appraisals in USPAP.

Based on feedback from the concept paper and the public hearing, the ASB could consider moving forward with a discussion draft or an exposure draft by late 2019. The question of when evaluation standards would go into effect is likely to be part of the discussion in the concept paper and at the public meeting.

Dodd-Frank, Natural Disasters, and What You Need to Know about Mold

By: Francis X (Rich) Finigan © Calypso Continuing Education™ 2019

What do you know about mold? Where are the alligators lurking, as flood waters abate? Do you think you have third party liability to borrowers? If you think “no”, think again and keep reading, because there are the alligators, along with their attorneys, lurking in the receding floodwaters!

What do you need to know about mold to produce credible appraisal reports and protect yourself, your clients, and users of your reports from liability? Keep reading to find out.

Consider the following:

  1. Where there’s water in contact with building materials, there is going to be mold!
  • The NFIP (National Flood Insurance Program) provides federally backed coverage for homeowners and small businesses throughout the country, but NFIP as of 2017 was $20 billion in debt, due to the recent succession of historically severe hurricane seasons and inland floods nationwide.
  • Whether you believe in climate change or not, climatologists predict that these events are only going to get more frequent and worse. When resources begin drying up, insurers and lawyers start looking for another pocket to reach into. Could the appraiser be the next target?
  • Here’s why I’m concerned, before Dodd Frank, and subsequently the Consumer Finance Protection Bureau’s (CFPB) interagency guidelines, our declaration, describing who the intended users are, seemed to provide us with protection against third-party liability associated with our appraisal reports.
  • The Interagency Guideline’s Interim Final Rule[1] requires lenders nationwide to inform mortgage borrower/applicants that they can receive a free copy of whatever appraisals, reviews, computer valuations and other data used in the transaction. Borrowers are entitled to see this material “promptly” after the appraisal report is completed, or three days before their loan closes, whichever is earlier. The lender will have to inform the borrowers/applicants of their rights within three business days after receipt of their mortgage application.
  • Recently, the Arizona Court of Appeals found that where an appraiser knows his/her report will be given to third parties, the appraiser owes the third parties a duty of care. The court decided this despite express language in an appraisal disclaiming the right of third parties to rely on the appraisal report’s conclusions and opinions, because they were not intended users.

Mold can be the stuff that turns an American dream into a nightmare!

As an appraiser, design builder, and environmental expert, I can tell you with great certainty, mold can absolutely have a large impact on the value of a property!

(read more)

Society has used mold to its advantage for thousands of years. Without mold we would have no cheese. Without mold we would have no wine. Heavens, where would we be without a robust blue cheese or a fine Grand Cru? In addition to the hedonistic pleasures it provides, mold has also given us one of the greatest medical achievements – penicillin. Penicillin has saved countless millions of lives.

Mold has also been recognized as a blight since ancient times, where passages from Leviticus (Chapter 14 verses 35 to 53) allude to with homes streaking of red and green on the walls being unfit for habitation. But lifestyle I and required to be torn down and disposed of in an “unclean place outside the village”. Construction technology changes in recent years exacerbate the problems caused by mold.

Americans spend most of their time indoors. In fact, many Americans spend about 90 percent of their time indoors, where they are exposed to a smorgasbord of air pollutants. According to EPA, the concentrations of air pollutants indoors may be hundreds of times greater than concentrations of pollutants in outdoor air.

Major problems with indoor air quality began in the 1970s with the energy crisis. As a way of conserving energy we built our homes as tight as a frog’s…ah, inner eyelid. Issues like inadequate air exchange and drainage and improperly installed synthetic stuccos and flashing can trap moisture in wall cavities, an ideal environment for mold to flourish.

Mold is the next asbestos – with a major difference. It doesn’t have a 30-year gestation period like asbestos. Negative effects from mold can onset within a few hours of exposure and can include skin irritation, upper respiratory congestion, headache, lack of energy and extreme symptoms like pulmonary hemorrhaging and even death. Mold can be present in any home, in any price range, anywhere in the entire country. Mold is ubiquitous!

Understanding Mold

Mold isn’t the problem it is actually a symptom of a problem…uncontrolled water or moisture in a building.

There are several types that have caught the attention of society today like, Stachybotrys (a.k.a. black killer mold) Penicillium, and Aspergillus. These molds grow where there are moisture, warmth, and food. They like to grow on wood or wet cellulose-rich building materials. There is lots of cellulose in the middle of the walls. Mold also like to grow in ductwork when the right conditions present themselves. Don’t think that mold is limited to poorly maintained homes; mold can be present in any home that water has been allowed to penetrate or excessive moisture buildup.

Think of a beautiful multi-million-dollar home where the framing is saturated during a rainstorm and then doesn’t fully dry.  The contractors will often insulate and close up the walls trapping moisture in wall cavities. This scenario is much more common than you would expect. Once mold spores have been incubated by a water source, mold can continue to proliferate from relative humidity of 50% or greater.

Mold wants to reproduce — not an unreasonable expectation for any of God’s creatures. It does so by sending out into the air mold spores that land on surfaces of damp cellulose or wood. The mold “knows” it is competing with other creatures for space so, some molds emit toxic gas, mycotoxins, in order to poison other creatures competing for the same space. These mycotoxins do not affect only select people, like typical allergens. When inhaled, mycotoxins affect everyone to some degree. Those at greatest risk are individuals whose immune systems are compromised, such as infants, the elderly or someone recovering from pneumonia or the flu.

Protecting Yourself from Liability

You don’t have to dress like this to protect yourself from liability!

If you want to protect yourself from liability, be aware of conditions that mold thrives in. Conditions include; negative drainage, leaking foundations, dampness in basements and crawl spaces, leaky plumbing, improper flashing, that can allow water into wall cavities, improperly installed synthetic stucco, excessive moisture in crawl spaces and attics and more. Be sure to have these areas reviewed if they show signs of moisture or water penetration. Last but not least, make accurate disclosures to your client regarding what exists.

To learn more about recognizing conditions that can support mold growth and appropriate ways to disclose your observations, spend three hours of your valuable time taking our “Mold a Growing Concern” course. It’s approved for three hours of continuing education in most states. You’ll be glad you did!

Good luck and do good work,


[1] 12 CFR Part 1002 – Equal Credit Opportunity Act (Regulation B) specifically 1002.14 Rules on Providing Appraisals and Other Valuations.

Highflying Appraisal Practices!

New gear, yahoo!!!! Who doesn’t want new toys, especially one that can make you better at your profession! Drones, whether you love them or want to shoot them out of the sky, appear to be here to stay.

The real estate industry has been quick to dive into this new and innovative technology and appraisers are no exception. With the use of drones increasing The Appraisal Foundation found it important to produce an FAQ (FAQ 214) to answer some of the questions surrounding the use of aerial viewing and its relationship to credible appraisal results.

The main advantage to using a drone, in appraisal practice, is making hard to reach places easily accessible.

Here are a couple of examples of how drone use can reduce your liability and create a more credible appraisal report. In regions where drive-by inspections are not uncommon, the addition of a drone can turn a drive-by into a flyby. You could potentially uncover conditions at the subject property that would’ve otherwise been missed from the street, producing a more credible appraisal result.

How about making rugged or wet terrain more accessible and being able to capture a birds-eye view.

I’ve even heard from one appraiser, in Colorado, who used it to demonstrate the view from the third floor of a proposed construction, thereby being able to document the benefit of the view.

The uses are virtually endless, but they are not unregulated.

Here are a few facts that you need to be aware of before you start using a drone in your appraisal practice.

Drones are flown by either remote control or by an onboard computer. In technical terms, aerial drones are referred to as UAVs or unmanned aerial vehicles. Appraisers would use small drones, less than 55 pounds. Small drones are also referred to as sUAS (small Unmanned Aircraft Systems).

In August 2016, the commercialization of drone use was enacted by the Federal Aviation Administration.

The FAA’s final rule has revolutionized commercial operations of small drones. The rule replaced its previous commercial sUAS regime requiring individual, case-by-case adjudications and establishing a broad authority for pilots to operate within certain parameters.

Commercial operators, which would include appraisers using them for site inspections, of sUAS weighing 55 lbs or less will no longer need to petition for a Section 333 exemption if the operation falls under the new rule (also known as Part 107). Part 107 requires remote pilots-in-command (RPIC) to maintain visual line of sight with the sUAS at all times and to operate at a maximum altitude of 400 feet, at a maximum speed of 100 mph, during daytime hours, and not above non-participants. The RPIC will need to pass an initial aeronautical knowledge test, be at least 16 years old, and be vetted by the Transportation Security Administration. The first test was administered on August 29, 2016, at FAA-approved knowledge testing centers.

Small drones used for recreational, commercial, governmental or other purposes must be registered with the FAA. The registration only cost five dollars and is valid for a period of three years.  Here is a link to the FAA Drone Registration page.

Prices of camera drones have come down. You can buy an entry-level camera drone for less than $350 USD. For close to $1,500 USD you can purchase a drone with professional image quality and performance. My recommendation is to buy an $89 drone without a camera to practice around your own property and drive your family crazy! Choose a drone that features an auto return to home when the battery runs low, for obvious reasons.

In the future, we will be releasing a seven-hour accredited continuing Ed course that will include a simulator to help you get started. It will include forms and phrases to help you integrate this highflying technology into your everyday practice.

Proposed legislation would raise appraisal fees

North Carolina proposes legislation to establish fair “customary and reasonable” fees for appraisers. Prompting the FTC (Federal Trade Commission) to go to bat for the AMCs.

While the state North Carolina is trying to ensure that the public receives quality appraisal services and pay fees that are “customary and reasonable” using data from the Veterans Association studies, etc., it looks like the FTC has chosen to protect the AMCs.

In North Carolina there is currently proposed legislation designed to establish what customary and reasonable fees are in specific regions. The legislation would establish that AMC fees are not always considered “customary and reasonable” and are precluded from being part of any average.

The state of North Carolina is not fixing fees, but establishing what “customary and reasonable” fees are for specific regions in that state. For instance, it costs an appraiser more money in the rural, mountainous, less populated regions of North Carolina to develop a credible appraisal than it does an appraiser in the city of Raleigh, North Carolina.

For the second time in the last two months, the FTC is accusing a state of pursuing appraisal fee laws that could restrict price competition and violate federal antitrust laws.

The FTC would be better served to look closer at the AMCs that charge the lending institution servicing fees that are sometimes greater than the amount of the appraisal itself.  Ultimately, those fees are paid for by the consumer, they are just not called an appraisal fee.

May 2017, the FTC filed a complaint against the Louisiana Real Estate Appraisal Board, accusing the Board of “unreasonably restraining price competition for appraisal services in Louisiana” by stipulating that appraisal management companies must follow the state’s established policies for the fees that AMCs pay to appraisers. The FTC suggests that the bill “may have the effect of displacing competition for the setting of appraisal fees and ultimately harming consumers in the form of higher prices.”

The North Carolina General Assembly is currently considering a bill that seems to be aimed squarely at the AMCs, because it would establish a single resource for determining what is customary and reasonable when it comes to fees in specific regions. Legislature includes a method for determining how the state’s appraisers are paid based on “academic studies, government fee surveys (Veterans Administration studies), and independent private sector surveys,” rather than allowing the fees to be set by market competition.

The North Carolina Assistant Attorney General requested the FTC issue a comment regarding its opposition to the North Carolina bill.

According to the FTC, North Carolina’s proposed legislation has some of the same issues as the proposed Louisiana legislation.  In its comment, the FTC states that the bill’s method for establishing appraisal fees “is not mandated by – and, in fact, may be inconsistent with – federal law.”

Authors note: Something can be inconsistent without violating the law!

The FTC claims that North Carolina’s proposed legislation goes beyond the rules established in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank requires appraisal management companies to pay “a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.”

The FTC states in its comment that it believes federal law does not require states to impose standards for customary and reasonable fees beyond what federal law provides, or to set customary and reasonable fees at any particular level.  FTC claims that North Carolina’s proposed legislation establishes a specific price schedule for appraisal fees that is not representative of the market place.

According to the FTC, the North Carolina legislation establishes the following rules for paying appraisers (from the FTC comments requested by NC AG Ouellette):


  • The bill states that “Compensation and offers of compensation provided to an appraiser shall be presumed reasonable” if the amounts are “reasonably related to recent rates paid by the consumer for comparable appraisal services performed in the geographic market of the property being appraised.”
  • The bill then states that “Recent rates paid shall not include those amounts paid by appraisal management companies.”
  • The bill further states that “Customary and reasonable rates shall be based on objective third-party information, such as academic studies, government fee surveys, and independent private sector surveys.”
  • Finally, the bill requires the Board to “adopt rules necessary to enforce this subsection.”

Those rules carry a number of issues, the FTC said in its comment.

The bill, as structured, could “effectively preclude AMCs from negotiating market-based fees with appraisers,” the FTC said. “We are concerned that this approach restricts free-market determination of appraisal fees and therefore may ultimately result in higher prices for consumers.”

Additionally, one piece of the North Carolina legislation’s language could lead to appraisers being paid the full amount that buyers are charged for the appraisal, rather than AMCs taking a portion for their services.

“The bill also expands this definition to include ‘recent rates paid by the consumer.’ We question whether it is appropriate for appraisers to receive the full rate that the consumer pays,” the FTC said.

“Typically, the consumer pays for additional services beyond the appraisal (e.g., other services provided by the AMC), the costs of which might be recovered by the lender as a lump-sum fee for the loan,” the FTC continues. “Thus, this provision also might have the effect of inflating the prices paid by AMCs for appraisal services, above the levels that would otherwise exist in a competitive market.”

The FTC also states that if North Carolina begins dictating that AMCs use a fee survey as the basis for how they pay appraisers, the free market will be removed from any role in determining the price of appraisal services, and might inflate appraisal fees above competitive levels.

“In other states that have commissioned fee surveys, methodology issues have resulted in a report of appraisal fees that may not accurately reflect market rates, and may have been significantly higher than market rates,” the FTC states.

“These fees, when paid by AMCs, are then passed on to consumers,” the FTC continues. “Where surveys report only median or average fees, rather than a range, the surveys fail to account for the variability of appraisal circumstances and fluctuations in the real estate market.”

The FTC concludes its comment with a bit of a warning for North Carolina.

“We urge the North Carolina General Assembly to consider whether HB-829 will promote competition and benefit consumers,” the FTC states.

“We are concerned that, if HB-829 were enacted, real estate appraisal fees in North Carolina might not be based on competitively set market rates, and that AMCs – and, ultimately, consumers – might face higher prices for real estate appraisal services,” the FTC concludes. “As evidenced by the recent filing of the FTC Board Louisiana Complaint, we will continue to investigate and, where appropriate, recommend that the Commission challenge potentially anticompetitive actions by real estate appraisal boards.”

Whomever is spearheading this at the FTC should consider taking a closer look at the fees AMCs are charging on top of the appraisal fee, which ultimately costs the consumer much more money than paying appraisers customary and reasonable fees.  They should consider whether these fees are not “other service”, but an extension of the appraisal cost and not the FTC doubletalk (above).

Let’s hope that the state of North Carolina prevails and their legislation passes creating an example that might be followed by other states throughout America.

Here’s a novel idea, real estate appraisers organizing and developing appraiser owned co-ops that would displace the AMCs and pay appraisers fair and reasonable fees. Co-ops would make money the appraisers would make more money (than they currently do), and the lending institutions would pay less money. Meanwhile, greater fees being paid appraisers would promote and stimulate the continued evolution of appraisal reports that is required by today’s higher standards.

Are you Feeding the Monster?  

AVMs run on data, your data. Has Freddie or Fannie paid for your data lately? Maybe indirectly. Don’t feed the beast!

There are a lot of discussions these days about AVMs displacing appraisers. Is this a tempest in a teapot, a kerfuffle over nothing, or is there a real threat to the appraisal profession? The answers to that compound question are, no, no, and maybe. Freddie Mac refers to their AVM as an Automated Collateral Evaluation or ACE.

According to Scott Rueter, Freddie Mac’s chief appraiser and director of evaluation, “An appraiser is part of a risk decision. If there is a subset of loans where we can make that risk decision without an appraisal by leveraging responsible innovation, then we should do that. Our charter calls on us to provide liquidity; it doesn’t say order an appraisal on every single property. While the ACE is something that goes counter to my appraiser DNA, I understand it, and for a small subset of the safest loans, Freddie’s goal is to better serve the public.” You might say that Freddie Mac’s ACE up their sleeves, for better serving the public, is an AVM. What could go wrong?

Rueter went on to say, “We will overwhelmingly still need to order, grade, score, and consume appraisals. Our data systems are modeled from appraisal data, so it won’t work without appraisals. That doesn’t mean we will need appraisals on 100% of loans.”  So, there it is, are your appraisals feeding the machine? Did you give Freddie Mac permission to use your appraisals beyond the initial loan contemplated by the assignment?

What if every appraiser in America added a simple phrase to their appraisal report. Something like the following, “The data, conclusions, and opinions collected and rendered in this appraisal report are the intellectual property of the appraiser and provided to the client and users of the report for the exclusive use relating directly to the sale transaction contemplated by this assignment.” So, the lender, Freddie Mac, and Fannie Mae get to use the data for that loan, as anticipated.  Would Freddie and Fannie just use the data for their AVM (ACE) without telling you, or perhaps without even realizing the use is unauthorized?

An interesting thought, but of course it would take organization to motivate the vast number of appraisers across America to work in unison to prevent the unauthorized use of their data in an AVM.

Other things appraisers might consider doing, if they feel they may lose some of their work to AVMs, is diversifying their careers. Consider adding certified business appraisals and/or building and home inspection services to your professional offerings.

We will explore some of your options later in a Food for Thought we call, “Diversify, Diversify, Diversify” as a way to ensure your financial future, and have greater control over your schedule.

Before I sign off, if you can take a minute and let us know what courses you would like to see developed, we will be more than happy to consider them and try to make them a reality.

Good luck and do good work, Rich

Is Freddie Mac’s AVM Eating Your Lunch?

Is Freddie Mac planning to eat your lunch or have they already started? Are they planning to stay for dinner?  What can we do?

Will AVMs displace appraisers? AVMs have been making steady inroads for years, but as they do so, are they meeting their claim of greater accuracy and savings to the consumer? I personally believe the answer is no. While AVMs may be a terrific way to back check an appraisal provided by a licensed professional, broad usage puts the public at risk.

According to Freddie Mac, “Home Value Explorer® (HVE®) is a Freddie Mac automated valuation model (AVM) that generates an estimate of property value in seconds. HVE simplifies the mortgage process by streamlining the collateral valuation cycle. For more than 20 years, Freddie Mac has effectively employed AVMs internally for its own risk and portfolio management. Lenders and real estate professionals who need fast, accurate value estimates can benefit from the proprietary data, modeling expertise, industry knowledge and long-standing reputation that Freddie Mac and HVE bring to the market.”

Wow, touting the accuracy of their AVMs over the last 20 years, am I missing something?! Nine years ago, Congress effectively appointed FHFA as conservator (receiver) of Fannie Mae, Freddie Mac. On September 6, 2008, FHFA placed Fannie Mae and Freddie Mac into conservatorships. Subsequently, Fannie Mae and Freddie Mac, together, received $187.5 billion from taxpayers. So much for the effectiveness employed by Freddie Mac’s AVMs internally, for their own risk and portfolio management.

The Appraisal Foundation made this statement regarding AVMs “An Automated Valuation Model (AVM) is a computer-generated estimate of a property’s value that a lender might use in some circumstances to assist in evaluating the collateral for a mortgage. The output of an AVM is heavily dependent on the quantity and quality of the data input. With proper use, an AVM can help support the findings of an appraisal, but when used alone its output may not be credible.”

Freddie Mac is marketing their AVM to lending institutions around the country claiming the following advantages:

  • “Automated collateral evaluation, an option to waive an appraisal for certain mortgages. Increases efficiency and reduces costs in the origination process for lenders and homebuyers, while also providing immediate certainty with respect to the appraisal.
  • Automated income and asset validation, quickens borrower qualifications saving you and your borrowers time
  • Expanded homeownership opportunities for borrowers with no credit score, the ability to evaluate borrowers without a credit score.
  • Immediate certainty for collateral rep and warranty relief gives you confidence in the loans you sell to us. You’ll receive notification of eligibility through an indicator in Loan Product Advisor.
  • Improved feedback and layout of results, allows you to quickly and easily find and execute clear underwriting feedback for faster processing.
  • Intuitive and easy to navigate.
  • Take full advantage of the entire Freddie Mac credit box and suite of loan programs to originate more loans.
  • Source more correspondent business with an improved overall experience, including enhanced Loan Product Advisor workflow and ease-of-use through a loan origination system vendor.”

Freddie Mac claims their AVM contains 81 Million properties; where did all this data come from? Appraisers? As a community we need to begin thinking about intended use by intended users. We will explore this more in future ‘Food for thoughts.’

Dave Denson, appraiser and owner of Quick Turn Appraisals in California, wrote the following regarding the disadvantages of an AVMs:

“1.        Whether the house is really there – A computer can’t drive by a house to see if it’s actually located where it’s supposed to be, has four walls and a roof, and really is a four bedroom split level and not a one bedroom shack.

2.         Whether unique features of a property might add to or detract from market value – So a computer returns an estimated value of $150,000. Did it account for the sewage treatment station next door? The railroad tracks nearby with trains that blow their whistles every night? The school district? The desirability of its tree-lined street versus the next street over?

3.         How long ago the property was assessed – Many AVMs and free online services rely on public assessment records. In many states, for example, assessments may only be required every three years — the value may be nearly three years old in that case. Some states mandate that an assessed value not increase beyond a certain percentage, even if sales activity indicates the property has appreciated far more. When you use an AVM or free online service, you risk a lower value than reality.

4.         What makes the comparables comparable – A computer might compare your subject property to another property with similar square footage sold three months ago a quarter of a mile away. Even if that “comparable” property is in a different, less desirable school district, fronts a four-lane, 55 M.P.H. street, and is flood-prone. Or even if the property was sold under duress, such as in a divorce situation, or not at arm’s length, such as to a family member. A computer simply does not know all the adjustments that might need to be made to a “comparable” property’s sales price.

5.         Whether a market is declining – Automated valuations use data from recent, nearby sales. If those sales were completed at the peak of a local housing market, the computer will think the trend is going up. Even if a professional appraiser knows that the overall neighborhood is beginning to experience a downturn. As a lender, don’t get stuck with a property that’s been overvalued by a computer.

6.         Whether there is a conflict of interest –

7.         What qualifications, designations, experience and education the preparer of the value has – When you work with an appraiser, you can be confident we’re highly qualified, ethical and prepared to complete your assignment professionally and with good judgment. Most of the time, you don’t know the qualifications of whoever is behind those free online values, and they couldn’t compare to an appraiser’s if you did. And if you’re relying on an automated valuation, you’re cheating yourself out of an appraiser’s education, experience and expertise.”

Basically, what Dave is saying is there is no replacement for boots on the ground, and I couldn’t agree more. Beware of HAL! (lit.ref. Space Odyssey)

What can the appraisal community do to protect their future and the future of many American dreams? Let us know what your thoughts are.

On another topic, please let us know what type and topic you would like to see as a continuing education course. We are in the process of releasing our Concept to Completion Seminar on the heels of our Appraising Energy Efficient Residential Properties, and cherish your input.

Good luck and do good work,


Is Zillow Providing Appraisals?

A homeowner, Barbara Andersen, who is also a real estate attorney, has filed suit against online realty giant Zillow, claiming the company’s controversial “Zestimate” tool repeatedly undervalued her house, creating a “tremendous road block” to its sale.

Zillow’s Zestimate feature is the cornerstone of its business model. Through it, Zillow attracts millions of home shoppers, allowing the company to sell advertising space to realty agents. Zillow generates significant capital resources with the help of its Zestimate model: In the first quarter of this year (2017), it reported $245.8 million in revenues, including $175 million in payments from “premier” agents, who pay for advertising.

Ms. Andersen must feel a little bit like David and Goliath as she goes to the mat with Zillow.

In the suit, Andersen said that she has been trying to sell her townhouse, which overlooks a golf course and is in a prime location, for $626,000 — roughly what she paid for it in 2009. Houses directly across the street, but with greater square footage sell for $100,000 or more, according to her court filing.  Zillow’s AVM has apparently used sales from a different and less costly part of town as comparables in valuing her townhouse without appropriate adjustments, she says. The most recent Zestimate for Ms. Andersen’s home is for $562,000. Andersen is seeking an injunction against Zillow.

Barbara Andersen, a real estate lawyer in Glenview, Ill., claims in the lawsuit filed in Cook County Circuit Court that Zillow’s Zestimate is making it difficult to sell her home. She isn’t seeking any financial compensation but is asking the court for an injunction that would require Zillow to either remove or modify the Zestimate of her property.

According to Courthouse News, in her complaint, the attorney states, “Since the recession, Andersen has been attempting to sell her home on different occasions. However, a tremendous roadblock to same has been the fact that Zillow posts a ‘Zestimate’ of person’s homes without their permission, consent and/or any license to do so,” “An estimate is effectively a sloppy computer-driven appraisal of the home.”

Andersen says Zillow is in violation of Illinois state law, which forbids people or businesses from issuing appraisals without the proper license. Zillow vehemently rejects the notion that its Zestimate is an appraisal.

This isn’t the first time that the accuracy of Zillow’s Zestimate has been publicly called into question. In an article in the Washington Post June 2014 David Howell Executive Vice President and Chief Information Officer for McEnearney Associates was quoted extensively regarding the inaccuracies of Zillow’s Zestimate AVM. “No algorithm, however sophisticated, can quantify the value of a kitchen that was remodeled just before a home was put on the market or a yard that is poorly maintained. It simply isn’t possible for any AVM to predict the value of a home with a level of accuracy sufficient to make a housing decision.” It’s a good point that I think most appraisers will agree with.

Zillow published a response in an online magazine and described Howell’s comments as “wildly inaccurate and inconsistent, without much context as to how that level of accuracy compares to other opinions of value.”

For now, to wrap up; the following commentary by the author:

If it looks like a duck, and quacks like a duck, and flies like a duck, where I come from….it’s probably a duck!!  Zillow, in their own words have described what Zestimate provides as an estimate of market value whose accuracy compares to other opinions of value…. Wow. Why did I ever bother getting a license to be an appraiser in the first place?

Is Zillow illegally providing real estate appraisals? Should they be licensed? Should there be some sort of oversight of AVMs like this?

If you have answers or thoughts please get back to us with them. We really enjoy and value the many opinions that come from our appraisal community.

Thanks for reading this Food for Thought, and stay tuned for more as this unfolds.

Good luck and do good work,

No Comps… No Problem… Appraising Energy-Efficient Homes

CalypsoEdu Food for Thought:   No Comps… No Problem… Appraising Energy-Efficient Homes          By: Francis X. (Rich) Finigan


Major stumbling block in the proliferation of energy-efficient homes in America is not the additional cost associated with construction or improvements, but the Realty world trifecta, which is composed of three disparate, but intrinsically linked professions:

  • The lack of qualified real estate sales professionals who are capable of identifying and relaying to customers the intrinsic greater value in an energy-efficient home. Relating directly to this is, lack of information that is easy to obtain, retain, and disseminate in a compelling enough way for Realtors® to capture and share. The sharing of that information includes completing MLS documentation for access by the real estate appraisal community and other documentation.
  • The lack of qualified real estate appraisers available to complete credible valuation assignments on energy-efficient homes. Currently when an appraisers’ assignment is an energy-efficient home, and they don’t have comparable sales, they might identify the improvements as “super adequacies”. Is this an appraiser competency issue? (See USPAP COMPETENCY RULE).
  • Lending institutions, especially underwriters, lack the requisite knowledge to review an appraisal on energy-efficient homes. Just because a home is in energy-efficient home doesn’t necessarily mean it has a special FHA energy efficient mortgage. There is no reason that energy-efficient homes cannot be financed through conventional secondary mortgage lending. Unless you think not having comparable sales is a reason. Well… It’s not.

In the Freddie Mac Single Family Requirements, the secondary mortgage market clearly identifies that when comparable sales are not available, it is not only acceptable, but a requirement that two other credible methods to value be utilized to support the value opinion.

I wonder what those two other methods might be! (Just a tongue-in-cheek, which, for those of you who know me, know I can’t resist) The cost-approach and the income-approach. Don’t panic, it’s a lot easier than you think. For instance, the secondary mortgage market prefers that you don’t use regression-analysis, discounted-cash-flow, but use gross-rent-multipliers in presenting the income approach.

In Appraising Energy-Efficient Residential Properties we supply a step-by-step refresher on how to perform the cost-approach and income-approach for residential properties. We also identify pricing considerations when the assignment is for energy-efficient homes. The course includes a set of forms to incorporate with your appraisal to capture relevant data and support your conclusions.

Stay tuned for one of our Food For Thought articles where we will further explore dramatic changes in the appraisal profession, including those upcoming changes to USPAP.

Good luck and do good work,



AQB Proposal Streamlines Appraiser Trainee Field Experience Requirement

AQBs proposal in the March 15, 2017 Third Exposure Draft of Proposed Changes to the Real Property Appraiser Qualification Criteria suggests allowing trainees to gain their field experience hours by attending classes designed to simulate that experience.

For the last two years, the Appraiser Qualifications Board (AQB) has been examining potential areas of change to the Real Property Appraiser Qualification Criteria. It has become more and more difficult for trainees to find supervisors to work under even after they have successfully completed all current educational requirements.

The idea of using a classroom setting and pre-identified criteria for practice inspections is not new in the appraisal industry; the Appraisal Institute (AI) is been using this model in the MAI program for years. And one could argue, with a great amount of success.

While this concept is receiving mixed reviews; it is also clear that the appraisal community isn’t getting any younger, and there needs to be a way to perpetuate the profession.

One issue deals with licensed residential appraisers with years of experience who are unable to upgrade their certification.

If the AQB proposals described above are promulgated they will pave the way for trainees to receive some or all necessary training from a training program versus being mentored one on one by an appraiser in the field.


If you have thoughts regarding this proposal please share them with the AQB.


Stay tuned to our next food for thought.

Good luck and do good work.  Rich