Update My Appraisal for Me, Please?

From executive vice presidents to credit analysts just starting their careers, we’re all familiar with the colloquialisms that permeate banking. As we’ve previously discussed, considerations involving the client and intended user can be more complicated than first meets the eye. Knowing what the client is truly asking for is key to managing their expectations, but words matter. Using the right words ensure all remain compliant with federal banking laws, intra-agency guidelines, USPAP, appraisal best standards and practices, industry association ethics requirements, and simple good business practices.

when the feds come a knockin’ you answer that door!

Once an appraisal report is issued, it is memorialized as a final work product. However, after the final report leaves our office, it is not uncommon for us to receive requests from the banks’ client (the borrower or our client’s client), from an unrelated party who has come into possession of our report, or from a new bank not originally included as an intended user on the engagement letter to provide services related to the appraisal that was issued as a final report. In all these instances a new appraiser-client/intended user relationship must be formally established and any work product will be a new appraisal assignment. If the new work is for federally regulated transactions, the standards are even higher. The FDIC defines federally related/regulated transaction as follows:

“Any real estate-related financial transaction entered into on or after August 9, 1990, that any regulated institution engages in or contracts for requires the services of an appraiser.”

When an appraisal is written for a lending institution, the appraiser must follow standards for federally regulated transactions as mandated by FIRREA & Dodd-Frank. FIRREA, passed in 1989, established rules and regulations to hold appraisers to a professional set of ethical standards. Dodd-Frank, passed in 2010, further established and codified how appraisers were to act to ensure the integrity lending system.

The standards associated with federally regulated transactions ensure a clear record of involved parties is maintained as well as transparency to the appraisal process when the FDIC audits lending institutions. “It’s very important that appraisers be able to demonstrate a clear chain of custody for the assignment from start to finish, and importantly for the bank, that the work product they have is legitimately held and that they are authorized users of our work product,” explained Vice President, Alexander Argianas. “We must be able to explain how any additional intended user to a report was added or why there are multiple versions of a report in circulation.”

banish the words “update”, “re-assign”, “recertify” and “Reliance letter”

Appraisals are legal documents and must be written in compliance. The Confidentiality Section of the Ethics Rule of USPAP and the Appraisal Institute Code of Professional Ethics direct what information an appraiser can and cannot share. “It is not that we are simply refusing to make the changes requested of us when we receive a call from a new client, rather it is that we cannot,” explained Argianas & Associates President Charles Argianas. “The practical purposes not only protect the appraiser but the intended user as well,” he added.

These prohibitions include the following:

1. • “Readdressing” an appraisal breaks the confidential requirements appraisers are bound by, as well as the identification requirements in Standard 1 of USPAP codified at engagement.
   • “Re-assigning” is a word that may mean different things to different people. In all cases the use of “re-assign” is wrong.
   • A change to the name, client and intended user of the original report does not change the first appraiser-client relationship. An appraiser-client relationship, in which the appraiser serves as a fiduciary to their client and intended user, once established, cannot be modified or updated. A report written for one intended user may not be sufficient for a new intended user and therefore would break USPAP Standards Rule 2-1(b) or a review report USPAP Standards Rule 3-4(b).
   • A request for recertification is often a request for a new appraisal although the client refers to the certification page required by USPAP Standards Rule 2-2. However, the certification for which an appraiser signs is not necessarily associated with the reliance, intended user, or use of the report.
   • A request for a reliance letter would, in effect, add the requesting party as an intended user after the completion of an appraisal and would violate confidentiality.

so, you need a new appraisal

We’ve established why a new client requires a new assignment and a new appraisal report. A new appraisal/work product allows for the appraiser to ensure that the appraisal meets the needs of the new client. Is a change in scope of work needed? Will the effective value date need to be changed? Have improvements or changes been made to the property? Is the space newly leased and/or in the process of any zoning, eminent domain? Perhaps the report is to be used for estate planning or settlement? Scope matters. Words matter. In some instances, there will be a conflict and the appraisal firm will not be able to complete the work requested.

Additional intended users, included on a federally regulated transaction with a lender, may have specific requirements that the previous report did not meet. For certain intended users, like the SBA or SomerCor, an appraisal used for lender financing must demonstrate that the remaining economic life of the property is greater than or equal to 25 years (the length of the loan), be dated within 12 months of the application date, include the SBA and SomerCor as additional intended users, and have at least two valuation methodologies.

In all cases, a discussion of why the request is being made ensures that the work product meets the intended use for the client/intended user.

will we throw our measuring wheel at you if you ask us to revise an appraisal?

No measuring wheels will be thrown, but we might give you some side-eye if we haven’t had our morning coffee. There are, however, certain justifications for using the word revised. Instances when a typo may have been found, the borrower has updated information that was not previously provided to the appraiser (updated costs schedules, newly signed leases with modified language, updated building plans, etc.). Revised reports will feature a revision statement in the letter of transmittal outlining what was changed, why, and if there was any impact to value. These reports are also often issued with the same effective value date and the current date of issuance.

getting off to the right start

Commercial Real Estate Valuation does not occur in a vacuum. Details regarding a loan change throughout the credit underwriting process are not uncommon and new co-lenders are sometimes added as lending participants. For many reasons, appraisal users should share all details in advance with the appraiser. This will result in a clear record of the engagement process and issuance of the appraisal.  Advance details prevent additional costs and delays associated with appraisal revisions and new appraisal requests.

Has all this talk of compliance left you wanting more? Lend us your ear and you’ll hear ‘A new client is a new assignment resulting in a new report.’ You can call us at 630.390.0113 or email us at [email protected] or fill out this form.