Political correctness has certainly found its way into the terminology we use to describe the type of appraisals we order for loans. Twenty-five years ago when I started in this business, they were first called "windshield appraisals." I do not remember the form saying "windshield," but that was the standard industry term for a quick and economical appraisal. For those with a limited imagination and whose appraisal experience has occurred more recently, this would mean that the appraiser drove past the home, eyeballed it through the windshield and drove on. If photos were required, they were usually taken from the same vantage point. If there was a crack or a smudge in the window, then that became part of the official inspection record. Some appraisers were accused of merely slowing down the car for their inspections. That was the extent of the inspection required when a windshield appraisal was prepared. This was not very scientific, but it worked given the times and the lender's perceived needs. Not too long after that, the powers that be began referring to this practical appraisal as a "drive-by appraisal." In this case, the form did say "drive-by," and those using it did not think of the term as humorous or less than professional.
Well, those days are gone. Today, we live in a politically correct environment that makes very few allowances for terms like "windshield appraisal." "Exterior-only appraisal" has made its way into our vocabulary as the proper term to use when an appraisal is prepared without the benefit of a view inside the property. To me, preparing a windshield appraisal was more fun than preparing the exterior-only inspection appraisal. It made me feel a bit more relaxed and I was not as concerned about someone suing me over some small technical misstatement. It made talking shop a bit more interesting over a beer at the neighborhood tavern, and I did not feel like I was walking on eggshells when talking about my work.
On a more serious note, do appraisals with limited inspections adequately serve the needs of the investor evaluating a potential property as collateral intended to secure a loan? Effective later this year, Fannie Mae is changing its appraisal forms yet again. Departing from recent conventional wisdom, Fannie Mae has decided to create an appraisal form that can only be used as an exterior-only form. This indicates that Fannie continues to vacillate about just how detailed an appraisal must be. On the one hand, Fannie seems to be a strict disciplinarian, insisting on perfectly prepared appraisals. On the other hand, it is suggesting that the new forms are designed to be completed more efficiently. From its actions, Fannie seems to be suggesting that more appraisals offering limited inspections should be prepared.
As an appraiser, I would rather do an exterior-only inspection appraisal because they are easier and quicker. I do not have as many details to attend to and my whole job is less stressful. In some cases, I can finish an exterior-only inspection a week faster than an appraisal that requires me to go inside the house. You may wonder how this could be, since it doesn't take more than an hour to inspect the inside of a home. While this is true, sometimes getting into the home is the problem. At our company, we frequently get calls for appraisals that must be done within two or three days. In some cases, the owners of these properties are out of town or on vacation, and cannot give us access to the property for a week or more. If time is of the essence and if a limited inspection is appropriate, then by all means, you should do it. It will save you time in some cases, a lot of time.
Without question, an interior inspection provides a more accurate appraisal. Two cases come to mind where it can make a big difference. The first is the custom home with many fine appointments such as stainless appliances, granite countertops, high ceilings and heavy crown molding. The second is when the property has not been well-maintained inside. This can vary from outdated décor, to pet stains, to outright destruction. I would estimate that in extreme cases variances could range as high as 30 or 40 percent of the value of home. This can be especially problematic if the interior is in poor condition at the time that an appraisal is performed and loan collateral decisions are made.
Let's say what would have otherwise been a $200,000 house is actually a $170,000 house due to the poor interior condition. The appraiser performs an appraisal without the benefit of an interior inspection and provides a value estimate of $200,000. Mr. Homeowner (who, by the way, gets a 30-year, $195,000 loan) lives in the home for three years. During this time he loses his job and falls behind on his payments. The lender exercises patience, but is forced to foreclose after months of telephone contact and broken promises. Realizing that he will be evicted, the homeowner becomes vindictive toward the mortgage company, rips up the carpet, knocks holes in the walls and removes appliances, light fixtures and everything else not tied down. The house is appraised by a different appraiser just prior to foreclosure for $202,000 on another exterior-only inspection appraisal. The lender feels confident about its collateral, proceeds to foreclose and engages a real estate agent to sell the home. Later, the real estate agent produces a broker price opinion indicating a market value of $140,000, as it provides detailed interior photos of the damage and a list of repairs with an estimated cost to cure of $58,000. Needless to say, the lender is not a happy camper and points its finger at both appraisers, crying foul. If you were the judge, where would you place the blame?
Whether you prefer the classic term "windshield appraisal" or the more contemporary "exterior-only inspection appraisal," appraisals with limited inspections can be a double-edged sword. They can save time and money up front, but they can bite you in the end. The prudent lender will approach such appraisals with caution, especially with high loan-to-value products.
Charlie Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889, [email protected] or through the company's Web site at www.appraisalsanywhere.com.