Value Nation: The Desk Appraisal Review Under The Microscope
This column is the second of three that I am writing to bring attention to and to extol the virtues of the three most commonly used appraisal review reports as quality control tools: The electronic appraisal review; the desk review; and the field review. They are listed in the order of the least comprehensive to most comprehensive, and this series of columns is designed to assist the reader in making the proper decision as to which review tool is best for their given situation.
The desk review is a very commonly used collateral-assessment, appraisal-review tool. It is used to critique the appraisal of real property, typically on three different occasions. The first is the pre-funding review, which typically takes place immediately prior to the closing of a loan. This is arguably the most critical of the times at which an appraisal will be reviewed. If the review is properly executed, it can prevent the making of a loan on property where the appraisal is flawed. This, by definition, means that the review must be made quickly. This factor works against quality to a degree. The second occasion is the post-funding, quality control sampling review. This is typically done to satisfy bank regulators, mandating that a sampling of all appraisals be reviewed on all closed loans. This is done, not to prevent the making of a particular loan, but to identify a weak risk management system or to put the spotlight on incompetent or unscrupulous appraisers. There is usually ample time to perform the review, so there is little pressure to do a quick or hasty job. The third and last occasion requiring an appraisal review is that of loss mitigation or foreclosure. Admittedly, this is after the horse is out of the barn, but it does provide the lender with information that is helpful in making decisions in managing slow paying accounts and/or delinquent accounts. There is also ample time to perform the review without the pressure of a closing looming over the head of the review appraiser.
The desk review is performed by a human, as opposed to the various electronic applications used today in appraisal review. While it is not always required that the reviewer be a state-certified appraiser, that is the most common way that the review is performed. In some cases, regulations require that the desk review be performed by an appraiser certified in the state where the property is located. Since the desk review is prepared by a human, one may expect a level of logic and reasoning, not found in electronic reviews, to be applied. Given the human element, one may expect a superior product from a desk review over that of the electronic type.
Desk review standards vary in scope. It is important that the lender know how the review is to be performed. Some of the variables of the desk review include whether sales and subject property data is confirmed, whether additional sales data is researched beyond that which is included within the appraisal, whether the reviewer simply offers a pass-fail grade on the appraisal or whether the reviewer offers a different opinion-of-value of the subject, in cases where the reviewer disagrees with the appraisers opinion of value.
When is it appropriate to use the desk review as an appraisal evaluation tool? This question could be somewhat open-ended like the one about how long a man's legs should be. We have all heard that a man's legs should be long enough to reach the ground. The answer, concerning the use of the desk review, may be similar. When the desk review should be used is unique to the situation. It is the middle ground in the review-appraisal toolbox, more comprehensive than an electronic review and less thorough than a field review.
Some lenders use it as a second line of defense, when the electronic review indicates a need for more review of a given appraisal. While this is probably the most used avenue to the desk review, it is, by no means, the only way to come to the conclusion that a desk review should be performed. Institutions subscribing to a higher level of quality control may require a desk review on all appraisals prior to the closing of a loan.
Issues, such as cost, also enter into the mix, concerning if and when an appraisal review should be ordered for a particular transaction. Desk review cost is moderate, typically between $100-$200, perhaps somewhere in the neighborhood of half the cost of an appraisal.
The desk review is covered in Uniform Standards of Professional Practice (USPAP). Under USPAP, the reviewer must, when providing a review without a reviewer’s value opinion, state and/or identify the client, the users, the purpose of the review, the work under review, the date of the work under review, the effective date of the opinions and conclusions, the name of the appraiser performing the appraisal, the effective date of the appraisal review, all extraordinary assumptions and hypothetical conditions, how these assumptions and conditions affect the results, scope of the work, reviewer opinions and conclusions and include a signed certification.
Yes, as with all review tools, the desk review is not without its shortcomings. These include, in some cases, a lack of independence and the possibility of reviewer bias, as well as the absence of a subject property and/or a comparable-sales inspection. These issues, within themselves, do not mean that a credible desk review cannot be performed most of the time, however, consideration must given to these weaknesses in the product when other review tasks are contemplated.
In reflecting upon the benefits offered by the desk review, one would not want to ignore the importance that the human element offers. There is little substitute for logic and reasoning provided by a human over that of an electronic review system. Having said that, the reviewer typically has not actually inspected the subject and comparable properties, as would be the case with a more comprehensive appraisal review. The desk review is a viable option for lenders requiring a middle ground analysis of an appraisal.
It should be further noted that there will be times when the desk review proves to be inadequate. In such cases, a more comprehensive appraisal review will be required. There is no substitute for competent and experienced management overseeing and interpreting the results of a desk review. Institutions not having qualified in-house support for this function should consider the possibility of employing experts in this field or outsourcing this function to a reputable appraisal review firm.
Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889, e-mail firstname.lastname@example.org or visit his company’s Web site, www.appraisalsanywhere.com.
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