We are hearing more and more about alternative valuation products such as desktop or computer assisted valuations, or “evalutions”. It seems to be a taboo subject among appraisers, but we needn’t be fearful. Here are seven common myths surrounding the subject of alternative valuation products:
- They are Not USPAP Compliant
Actually, this is not a myth. It is a fact. Alternative valuation products are not USPAP compliant, but neither are 1004s, 2055s, or 1025s. It is not the product or report’s job to be USPAP compliant, it is the appraiser’s. Desktop valuations are no different than other appraisal reports. When a valuation service is performed, it is up to the appraiser to make sure they are doing everything in accordance with state law and USPAP. Often the paperwork provided by the client will need to be supplemented (sometimes heavily) in order for the appraiser to properly show compliance with the standards of ethics and state laws.
- There is Too Much Liability
Some say doing a valuation without an inspection is risky because there are too many unknowns. Actually, the exact opposite is true. * I know several appraisers who refuse to do drive by appraisals. Many bloggers have commented on this and according to a famous blogger, his response is liability. “What if I drive past the property and it appears from the outside to be in average condition, but is completely trashed on the inside?” One cannot be held liable for what they do not know. Fraud is knowing something significant, but choosing not to disclose it. Incompetency is not knowing when one should have known. Neither of those things applies here. Every assignment is going to have things that should be known and reported in the normal course of business and things that cannot be. Appraisers are only held liable for what they know or should know. If the scope of work includes obtaining tax records and a three-year old MLS sheet for the subject information, they are not responsible for the recent kitchen updating that they have no way of knowing about. The valuation is based on the available data sources. Just be sure to disclose, disclose, disclose and remember, extraordinary assumptions are an appraiser’s best friend. Furthermore, a majority of lawsuits and/or state board complaints are consumer based and reflect valuation services done for primary mortgage purposes. Most (not all) of that does not apply with alternative valuations.
- A Desktop Valuation is just a BPO
Whenever an appraiser completes a valuation of a property (under the hat of their appraisal license), they have completed an appraisal. As such, they are required by state law to adhere to the rules and regulations of USPAP. A “Broker’s Price Opinion” is a very specific product and its name says it all; it is an ‘opinion’ of ‘price’ done by a ‘broker.’ In other words, by title – unless an appraiser is also a broker and is acting under that hat – an appraiser cannot complete a BPO.
- They Do Not Pay Enough
As appraisers, we are used to quoting fees based on job rather than time. However, perhaps we ought to look more at our per hour rates. Say a typical appraisal fee is $400. Is it worth it to do a full, 1004UAD-MC at $350? What if the $350 appraisal took five hours to complete, but a $400 appraisal took seven? Which is the better paying job? Why would anyone accept a valuation assignment for $125? Well, if the total job from start to finish takes 1.5 hours, it may be the best paying job done all week! A full appraisal comes with many extras that one does not get paid any extra for. Extras such as drive time, wear and tear on your vehicle, gas, time spent setting up the appointment, sketching, photos (of both the subject and comps), etc. Desktop valuations are different. There is a reason they have a lower fee, but they typically have a higher per hour payoff. The other issue is the increased requirements placed on appraisers that are not put on other valuation professionals. By state law, appraisers are required to follow USPAP on all real estate valuations. That puts a higher scope of work on us that is not put on others who might (and can) complete the same work. This is something that must change if appraisers are to compete economically in this area.
- You Cannot Do an Appraisal in So Little Time
This myth is closely related to the previous one. First, a pop quiz: Which of these two are appraisals;
- Valuation of a 1200 square foot home or
- Valuation of a 55,000 square foot warehouse?If you said “All of the above,” you are correct! Which will take longer to complete? Why? The scope of work is much different for a house vs. a commercial property. Yet, they are both appraisals. It will take far less time to complete a desktop valuation than a 1004 URAR because the scope of work is different. What has to be decided is whether a credible job can be done in a timely manner and justify the lower fee of a desktop product.
- You are Stealing Jobs From Appraisers
It is true that there are more alternative valuation products being done each year. It is not true that this is caused solely from the lack of appraisers, and the banks’ inability to get an appraisal done. Lenders are moving away from full appraisal products (due mostly to timing and fee issues) for purposes such as HELOCs, foreclosure, and asset management. It does not make sense for a lender to order a full, $400 appraisal every six months for every property they own so they can assess their portfolio. Furthermore, though the lender would probably prefer to use a qualified valuation professional (such as an appraiser), it is not necessary. They can, and do, get others to perform this type of work. In other words, refusing to complete alternative valuation products is a personal decision, but it will not likely affect the number of full appraisals ordered in the marketplace.
- Alternative Valuations are Alternative
Though these services have been referred to as “alternative valuation” products throughout this article, they are not alternative at all. Whenever an appraiser performs a valuation service in the capacity of their title as appraiser, they are performing an appraisal. These are alternative in the sense that they are not a 1004, but they are still an appraisal. All USPAP and state laws apply. Perhaps they are better referred to as “Non-Traditional Appraisal Products.”*
Alternative valuation (ahem, “Non-Traditional Appraisal”) products are here to stay. They are not going away. I have respect for any appraiser who personally decides that this type of work is not for them. Whatever the reason, appraisers must run their businesses as they feel is best. However, none of them should make major decisions based on myths. There is a lot of misinformation about alternative valuation products, but there is good information available as well. With the prevalence of such services becoming more pervasive, adding such work to one’s overall portfolio may be something to consider.
*Ideas taken from Ernie Durbin as heard on The Appraiser Coach Podcast Episode #075.
As originally posted in Appraisal Buzz
For more information on this subject, please listen to The Appraiser Coach Podcast Episode:
Alternative Valuation Products - the Product of the Future? with Ernie Durbin
