Why appraisers struggle with engagement letters

Bank: “Why don’t my appraisers read the entire engagement letter?” Appraisers: “It’s hard to find bank specific requirements in lengthy engagement letters.”

Both side are correct. Appraisers should read the entire engagement letter. However, they struggle trying to find requirements that aren’t the “typical” stuff every appraisal needs. Improving the engagement letter format would significantly reduce back-and-forth of reviews for simple checkbox mistakes. Otherwise, it slows down the appraisal process.

Let’s get on the same page

Commercial fee appraisers are overworked. Those responsible for valuation in appraisal departments are overworked. Given the stressful environment, both would love to streamline the process and reduce mistakes.

“Many engagement letters intersperse specific bank and subject information with general regulatory and policy.” 

Veteran appraisers often make the mistake of scanning engagement letters looking for unique subject data or bank specific requirements. A good example would be having to Control-F search (in Word) for “insurable value” in a lengthy, poorly formatted engagement letter.

Wall of words

So, is the length of the engagement letter the problem? Most engagement letters for banks are generally around 500 – 700 words. On the other hand, I’ve seen an AMC with a 6,977 word appraisal request form, a 485 word assignment acceptance confirmation, and a 1,715 word nondisclosure agreement. That’s a total of 9,177 words! That said, I understand attorneys get paid by the word pound.

Spanish versus Portuguese

Another topic are varying valuation concepts such as, leased fee interest and fee simple interest. A particular bank might have their own take on these concepts.

Here’s an actual bank RFP. “The appraisal needs to include an additional value based on a hypothetical condition that assumes the property is a non-credit occupied property owned in fee simple that is leased at market rents. The appraisal should address the demand for the property in the most likely alternative tenant type in the hypothetical event the current tenant vacates. This includes discussion and analysis for the vacancy estimate, whether any buildout costs or concessions are required and if there are any lost rents over the lease up.”

Nothing to see here

Seeing the words “TitleX1”, “FIRREA”, “USPAP”, “Market Value definition” and “competency” is like appraiser Xanax. It lulls appraisers into skimming through the engagement letter. The problem is engagement letters must include regulatory compliance and bank policy.

Crayons can help

One idea, make engagement letters like a summary of salient facts style presentation. Summarize the usual suspects that get missed: value premise, intended users (including SBA), subject property contact, who to address the appraisal to, appraisal fee, due date, interest appraised, approaches you would like/except to see and insurable value.

You may dive deeper into bank specific requirements that are not “typical” like a minimum of three actual leases (versus asking rents). It might include a summarized Covid requirement relative to inspection expectations and its valuation impact on the subject. 

Capture subject data

Consider YouConnect as your appraisal and environmental workflow platform, providing customizable and well formatted engagement letters. It will help you capture specific subject data from your lenders, greatly reducing mistakes.

Identify the typical appraiser mistakes and make sure the letter is well organized with “salient facts” at the TOP. Don’t mix it with regulatory appraisal standards and instructions. This simple formatting suggestion may go a long way to improving the process. 

I know fee appraisers will appreciate it. Your lenders, reviewers and overall appraisal department will appreciate it.