In 2010, five federal agencies issued "Interagency Appraisal and Evaluation Guidelines" to address the changing face of real estate market valuations and to establish standards for the performance of real estate appraisals. The guidelines provide federally regulated institutions and examiners with appraisal and evaluation policies, procedures and practices and pertain to real estate holdings held by institutions for their own portfolio or as assets held for sale. Such institutions include commercial and residential real estate mortgage operations, capital markets groups, and asset securitization and sales units.
Appraisal or evaluation: What's required?
An appraisal is a written statement by a state licensed or certified appraiser about a property. Details in the statement should include property description, relevant market information and an opinion of market value for a specific date.
An evaluation, on the other hand, is a valuation of a real estate transaction that is exempt from an appraisal requirement. Certain types of real estate-related financial transactions which may utilize evaluations in lieu of appraisals include:
* Transactions valued at $250,000 or less.
* Business loan transactions valued at $1 million or less when sale of or income from the property is not the primary source of repayment.
* Loans which extend credit or new monies so long as there is no material change in market conditions
* Loans which extend new monies solely to fund closing costs.
Under the guidelines, federally regulated institutions are additionally required to develop real estate lending and appraisal best practices and to conform with the Uniform Standards of Professional Appraisal Practices (USPAP). Best practices include implementing an effective real estate appraisal and evaluation program, establishing an independent means for collateral valuation, selecting appraisal service providers who comply with USPAP and selecting evaluation providers who recognize and adhere to the requirements of the guidelines.
USPAP was developed as a result of the savings and loan crises of the 1980s and 1990s and establishes a minimum set of standards for appraisals, appraisal reviews and consulting. The federal government mandates that states enforce compliance with USPAP; compliance includes evaluation of the nature of the property, the basis of value, important assumptions, the interests appraised and the effective date of the valuation.
In the next four years, $1.7 trillion in real estate debt will come due, and banks own half of that debt, roughly $867.5 billion, according to a May 12 article in the New York Times. This market phenomenon will undoubtedly trigger adjustments in commercial and residential real estate market values, holdings and transactions. Under the guidelines, many of these properties will require revised appraisals and evaluations. Institutions will need access to licensed field-agent appraisers and evaluation providers.
Another form of evaluation for residential property is an Automated Valuation Model (AVM). AVMs are computer programs that estimate a property's market value based on market, economic and demographic factors.
Two other more detailed commercial valuation solutions are known as a "Commercial Evaluation" or a "Comparable Sales Report." These reports can be used for all commercial property types and include details about recent and comparable sales, market-value conclusions, photos of the property, location of the property and detailed commentary about the property.
In any valuation scenario, the agencies' regulations require that sound, relevant and market-specific data be included in the evaluation or appraisal and that care be taken to ensure the objectivity of the field agents, the lender, and the underwriter. With the guidelines, federally regulated institutions will have a standard platform for real estate evaluations and may have an upper hand on and a more dynamic view of the commercial and residential real estate markets. In any circumstance, the role of evaluations and appraisals in lending, portfolio management and risk assessment will only continue to expand.
Clyde Prestowitz III is chief technology officer and a founding partner at InsideValuation in Reno. Contact him at CPrestowitz@InsideValuation.com or 828-4044.
