The Building of an Appraisal-A Client’s Request and Scope of Work

This is Diana, with ABC-The Appraiser’s Business Companion.  In the building of an appraisal, we recognize that there is an appraisal problem that needs to be solved.  In some circumstances that assignment will lead to a condition known as a “subject to” conclusion.  The value opinion rendered is based on an assumption that a condition or inspection by another professional is assumed to be in place.  That assumption will prompt an action that in many cases will lead back to the appraiser.  For residential appraisers, who do mortgage lending, the communication of the subsequent action impact is most often reported on a 1004D form.  But what if the client has a request for communication that wasn’t part of the original scope of work?

In an assignment where only, the Sales Approach was utilized to conclude the market value there can be conditions that arise which prompt the “subject to”.  One example that comes to my mind is a refinance being sought under a conventional underwritten mortgage.  The subject was a 1,250 sq. ft., 3-bedroom, 2 bath, 12 year old single family.  The property owner communicates their intent to refinance so that a kitchen remodel and a main bathroom expansion/remodel can be achieved.  The appraiser contacts the lender, it was communicated that only an “as is” appraisal is to be performed.  There is to be no consideration of the intent of the loan monies.

Three months later the lender contacts the appraiser asking for an update on the subject’s prior appraisal and requests a Cost Approach with an interior inspection.  The client believes the reporting of this information could be reported on a 1004D.  The question is, can an update be performed that now includes a Cost Approach and is the 1004D an acceptable vehicle in which to communicate the information?

Upon hearing why, the update is being requested the appraiser immediately recognizes the Scope of Work that was involved with the first assignment isn’t going to be the same Scope of Work in the second assignment.  An Update is a business term where the same client is now requesting a second assignment on the same property but the scope of work necessary to produce credible assignment results has changed.  Time to go into “teaching mode”; the client must be understanding this is not only a new assignment, the 1004D only conveys whether or not the value has gone down since the original appraisal.  It seems logical to the client that form will be sufficient for them to make their decision but is it?  When you the appraiser recognize there is a significant change in the assignment elements the new assignment must have assignment results that are communicated in a non-misleading manner.  What is changing?  The change is on the effective date, the physical characteristics of the dwelling and possibly the highest and best use with a potential for a superior or super-adequate improvement.  The question of whether or not the value has declined can be readily understood by the comparison of the first assignment to the second assignment, but it won’t be clearly understood with a 1004D unless there is a lot of addendum.

In this particular case the significant changes and potential changes need to be addressed in a new appraisal report.  A form can still be used but not the 1004D.  In order for clarity the better form the lender would be a 1004.  In the subject section you can mark the box [x] Other and note, Appraisal Update and in the addendum explain the history and changes that prompted the request for an update.  You will also need to report that you previously appraised this property before in the past 3 years.  That is your Ethical requirement under the Uniform Standards of Professional Appraisal Practice (USPAP).  The inclusion of the history will encompass the sequencing of events that lead to this assignment.  For example, “The appraisal update is required by the lender resulting from significant physical changes that have been made to the original improvement.  Although the client seeks to know whether or not the value has declined, there is a need to know more details of the subject’s current physical, economic characteristics and condition on this updated, new effective date.  The new Scope of Work now includes a Cost Approach along with new analyses of the subject’s market, its highest and best use, comparative characteristics, market reaction to the changes in those characteristics, Sales Approach and at the request of the lender a Cost Approach.  Within the body of this updated appraisal the report will communicate changes from the original effective date ________ and the current updated effective date __________.”

With this type of communication all intended users may understand the need for the new assignment.

This is Diana Jacob and you’ve just had a tip from ABC-The Appraiser’s Business Companion.