What makes an appraisal credible? How about an evaluation? Any valuation product that flows through your credit department needs to be credible. Don’t cross your fingers and hope for the best. Appraisals and evaluations need to be clear and not misleading regardless if the writer is in the credit department, outside appraiser or third party vendor. Make sure you have the right talent with proper documentation. This is very important from a compliance standpoint and regulatory expectations.
USPAP defines credible as worthy of belief. Credible assignment results require support by relevant evidence and logic, to the degree necessary for the intended use. One would also possess competency in order to achieve those desired credible assignment results for particular property type and market.
Standard 1 gets very specific: in developing a real property appraisal, an appraiser must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete research and analysis necessary to produce a credible appraisal. USPAP Standards Rule 1-4 says in developing a real property appraisal, an appraisal must collect, verify and analyze all information necessary for credible assignment results.
How do you know if everyone on your appraisal vendor panel is competent? State credentialing doesn’t mean someone’s appraisals are worthy of belief just because the state has their fingerprints on file. Is an appraisal credible if the Income Approach was not performed, but maybe should have? Does the appraiser have geographical competency or are they visiting the subject property city for the very first time? Maybe they can reach out to others with local knowledge, but if they have to, it’s probably not best practice.
What about an evaluation in an unknown market? Some appraisers feel it’s okay to perform an evaluation (in states that allow it) with a very narrow scope of work. However, this evaluation would have plenty of clarifying language indicating to the reader the sources of subject property data. Other appraisers don’t want to prepare evaluations at all due to (perceived) liability. Another segment reflects appraisers preparing “evaluations” but really presenting more detailed restricted reports. Third party data companies have also jumped on the evaluation train.
Banking Circular 225 (Rev September 20, 1992) indicates that an evaluation does not need to meet all the requirements of an appraisal; however, your documented file should support the estimate of value and include sufficient information to fully understand the analysis. Documentation should also include the supporting assumptions, basic calculations and some discussion of comparable property values regardless if prepared by an appraiser or non-appraiser. Are your work files worthy of belief?