When its money that's being exchanged, everyone involved in the transaction has a stake in the outcome. The more money, the higher the stakes. This concept is what makes the appraisal of a piece of real estate complicated.
To avoid major conflicts of interests, appraisers and their clients must follow a set of rules to ensure the transaction stays on the up-and-up. But following the rules isn’t always easy. Here are a few challenges regarding appraisal compliance and how to deal with them.
1. Appraisal Independence Requirements (AIR)
Imagine a trial. So long as a court case is ongoing, the jury must stay away from news sources, refrain from speaking to anyone who might influence their decision and form their opinions based only on the facts and evidence presented in court.
In the same way a jury needs to stay away from any outside sources that might sway their decision about a verdict, appraisers must remain independent from outside sources as well.
Appraisals aren’t black and white. They’re simply an opinion of value. But appraisers must arrive at that opinion without the influence of the lender, the seller or the real estate agent. No one should be elbowing them saying, "Don't you think this house is worth more because it has X?"
This is why Appraiser Independence Requirements (AIR) exist — rules that are enforced as both Federal and State laws. AIR applies to loans for one-to-four unit properties that are not guaranteed or insured by a federal agency (like the VA for FHA, for example) and originated after October 2010.
The lender is legally the client who commissions the appraisal, regardless of who is actually paying for it. However, that doesn’t mean they get more say that anyone else. The person who selects the appraiser or appraisal management company (AMC) must be entirely separate from the loan production staff. A lender might have a pre-approved list or go through an AMC. In addition, lenders can’t accept appraisal reports that have any connection with mortgage brokers or real estate agents.
FreddieMac and FannieMae both have detailed FAQ guides about how to ensure AIR are followed closely and tips on how to handle the situation if you think the independence requirements aren't being followed.
All of these details ensure that the house gets a fair trial.
2. Due Diligence of Service Providers
The jury selection process for a trial is rigorous. To narrow the group to 12 competent, impartial jurors, the attorneys and judge must ask questions and use their answers to qualify or disqualify them for jury service. How could you impartially and objectively sort through the facts of a case that hits close to home for you? You couldn’t.
As with a jury, not just anyone can serve as an appraiser either. Certain rules exist. An appraiser must:
- Be licensed or certified in the state in which they’re working;
- Be familiar with the local market;
- And have access to the data sources needed to build the report.
Most of these are pretty standard, but Number 2 can be hard to enforce because there is no distance “too far” that an appraiser can travel from to be qualified or unqualified to value a house. However, to achieve an accurate valuation, an appraiser must be knowledgeable and competent in specific locales. This is what makes due diligence of service providers a compliance issue. The value of a house stretches far beyond just the home’s features — it takes into consideration comparables and other market data, including the surrounding neighborhoods.
This means that a home's valuation could be negatively affected if an appraiser does not have an accurate idea of the neighborhood and the value, or devalue, that it adds to the home. This is all the more reason for service providers to keep this compliance issue front and center.
3. Compliant Delivery to the Borrower
According to The Appraisal Foundation’s Guide to Understand a Residential Appraisal, a credible appraisal will include:
- A clear, accurate description of the subject property
- Sales that are the most recent and most comparable
- Comments that explain important issues in the appraisal
- An opinion of value supported by the analysis of the comparable sales
For a lender to continue to stay compliant, they must present a copy of the appraisal report to the borrower after it’s completed. They can do this by a variety of methods including mail or email, but lenders cannot put it off until the end. They also have to present the appraisal at least three business days prior to closing. The borrower can waive this three-day right but must sign a waiver before the three days to do so.
To ensure this happens, lenders often use online services or use a courier and obtain a delivery receipt.
Compliance isn’t always fun, but it was established for the protection of all the parties involved. Learn more about how DataTree's Appraisal Solutions can provide you with the insight for confident appraisals.