Alternative valuation among us: The rise of non-traditional appraisal products - by Bill Pastuszek

Bill Pastuszek, Shepherd Associates

Appraisers are creatures of habit. Perhaps excessively so. The world, however, moves on. And while many appraisers complain about inefficient or uncomfortable ways of carrying out appraisal assignments, many resist the changes that come. And no sooner than something new becomes the norm, it gets changed. Thus, nothing stays the same. Ah, there we go, that principle of change again!

One aspect of appraising that is changing rapidly is, what I will call, for lack of a better term, non-standard appraisals. Another name might be alternative valuation products, or, alt-vals. These appraisal products can consist of web-assisted valuations, technologically enabled appraisals, can be desktop or field assignments, and can provide different reporting output. 

Technology has found a fertile field in providing a usable product to financial institutions to produce “Evaluations,” which is a valuation protocol that can be used in banking transactions where an appraisal by a credentialed appraiser is not required. It also allows a licensed or certified appraiser to utilize a Restricted Appraisal Report per USAP that can be prepared to meet evaluation requirements and also conform to USPAP.  

These alt-val products have been developed for both residential and commercial applications. The residential applications tend to resemble, at least superficially, the FNMA 1004 form. The commercial applications also rely on a form template.

The most notable change in these non-traditional formats is that an inspection is performed but not by the appraiser. A third party, often not licensed or possessing appraisal training, undertakes the inspection and provides notes, photographs, and sketches for the appraiser to utilize in the valuation.

This change can be worrisome. It means that the appraiser has to rely on someone else’s expertise. For most appraisers, this is counterintuitive, as most have been trained that the inspection of the subject is, if not the most important act in the appraisal process, pretty close. It’s probably the first thing that most appraisers became aware of early in their training. 

So appraisers get worried about potential liability about the third party inspection person missing something significant and the appraiser taking the fall.  That doesn’t seem logical as appropriate disclosures need to be made consistent with USPAP and common sense. It’s not about eliminating the inspection in these cases but recognizing that the appraiser is relying on someone else’s property visit. There are, of course, those old traditional/non-traditional products where an appraisal is made based on an inspection from the public street.  This is ultimately a Scope of Work issue and USPAP provides guidance with respect to property inspections.

Many appraisers view these alternative products as the ultimate threat to their livelihood. I have to ask: has anyone noticed that there are not enough appraisers to meet demand? The market out there is in the business of making loans and has only so much patience with an appraiser shortage. Further, financial institutions need more flexibility and cost efficiencies in valuing real property for REOs, portfolio monitoring, workouts, and for low risk transactions.

Other appraisers believe that participating in non-traditional appraisal is simply the first step to USPAP violations.  Remember, it’s the appraiser’s responsibility to provide a USPAP compliant report. Reporting forms by themselves are not USPAP compliant.

Why would clients want to use appraisals that rely on technology and third party inspections? Cost, efficiency, and time savings are but a few possible reasons.

Why would appraisers want to perform appraisals that rely on technology and third party inspections? Cost, efficiency, and time savings are but a few possible reasons.

Appraisers get a little uncomfortable with innovation. These products are innovative, but well within the intended user requirements and USPAP. The discomfort likely results from the unknowns: will I make money doing what appears to be less than a “full” appraisal process: will I drive myself and other appraisers out of business; will the familiar appraisal process change in ways that make me feel less in control; will I violate USPAP? And, will it make me uncomfortable to make more money in less time and still produce a compliant result?

The biggest surprise of all might be for commercial appraisers, who may worry that their longstanding semi-monopoly might be threatened by these products. There is little doubt that commercial lenders find the appraisal a most frustrating and costly element. The market has answered those needs as appraisers either could not or would not. While technological solutions have been proposed in the past, it is not until now that technology and data could interact effectively enough to allow appraisers to leverage their skills. 

These alt-val products aren’t going away, but they likely won’t overwhelm the market or displace traditional appraisals either, at least not now. And there are likely to be other solutions arising.

Appraisers will need to gain an understanding of how technology and new products can be effectively adopted and implemented. Not everyone will become comfortable with innovation, but, going forward, adaptation needs to occur. There appears to a sincere effort to make them USPAP compliant and allow for flexibility by the practitioner, and those are good developments.  Ultimately, though, that is the individual appraiser’s decision.

In a technologically savvy world, there is room for artisanal work products, but these artisans have to also know how to compete and complete more efficiently. Same result, but an evolving way to arrive there.

Bill Pastuszek, MAI, ASA, MRA, heads Shepherd Associates, Newton, Mass.