A Closer Look At The Bifurcated Appraisal
They go by various names including hybrid and bifurcated appraisal but they have one thing in common: they are being touted as the next best thing since sliced bread. Why are lenders so excited about them? They’ve been promoted for lowering the cost and shortening the turn around time when compared to traditional appraisals.
I’ve written in the past about how consumers may not even see the cost benefits associated with these types of appraisals so I won’t go into that here. What I will do is explain what they are and how they may not be in the best interests of the public.
A bifurcated appraisal is one that is done by an appraiser where parts of the appraisal assignment are done by various people. A form of this type of assignment has been done in the past and was known as a desktop appraisal.
The big difference with a bifurcated appraisal is that there is an interior inspection but it is not done by the appraiser. This aspect is what should concern anyone involved in this type of assignment.
Listed below are some of the top concerns I see with a bifurcated appraisal. I’d like to know your thoughts as well so leave a comment below.
5 Concerns Of Third Party Inspectors With A Bifurcated Appraisal
1) Do they know how to properly measure a house? If appraisers are going to be relying on third-party inspectors they will need to know how to accurately measure a house (assuming they will provide this information rather than taking it from public records).
Not all areas in a house can be included in the gross living area (GLA), however, if it is, this can overstate 
the square footage leading to an overinflated appraisal. On the opposite end, if they do not include all acceptable areas then the home appraisal could be lower than it should be.
The majority of appraisers follow the ANSI measurement standards, therefore, any third party inspectors should also use this method to ensure consistency in appraisals.
2) Do they know what features they should be looking for? Third party inspectors should know what features of a home that appraisers look at. They should know about the floor plan layout and functional obsolescence.
Appraisers are trained to know and recognize the features that move the needle on value. They should be able to recognize what type of materials are used in flooring, counters, etc. Will they take the time to note everything that a licensed appraiser would if they were looking at the house or will they speed through the observation so they get to the next one knowing that it’s not their neck on the line?
3) Do they know how to recognize items of importance such as needed repairs? Appraisers must
take into consideration the condition of the property because it does influence value. Some repairs may be cosmetic with minimal effect on value. Others are more serious and can impact the home’s value in a big way.
In a conventional appraisal, these repairs don’t necessarily have to be done as a condition of the appraisal but they are factored into the value. In FHA appraisals the reported is conditioned on the items being repaired since HUD does not want the owner to incur future expenses that could affect the ability to repay the loan. The lender also wants to make sure their collateral is in acceptable condition and worth what they loan on it.
4) Will they have proper communication with the owners? When visiting the property appraisers are neutral third parties that must not infer the outcome of a loan before the assignment is completed. Sometimes owners want the appraiser to tell them if everything is going to be okay, however, appraisers cannot comment on that. If a third party inspector happens to tell the owner that there should be no problem with the loan and then the appraisal comes in low, thereby killing the loan, what will happen then? Will this communication create a liability for the lender?
5) Will they report everything they see? An appraisal observation takes time to measure the home and to note everything necessary to provide an accurate and credible report.
Sometimes appraisers are not the most popular people because we have to be honest and report everything we see even if it negatively affects the loan. It is our job to be the eyes and ears of the lender.
If inspectors find out that they are given too much grief for being thorough will they decide to let things slide in order to avoid potential callbacks and/or complaints? Will they decide it’s not worth the trouble considering the small amount they are being paid?
Conclusion
There are a lot of things to consider going forward regarding the bifurcated appraisal. At the current time most appraisal assignments are being completed by professional home appraisers. In the future more and more may be done by multiple individuals.
Will this compromise the integrity and accuracy of the appraisal? This is something that we will have to keep an eye on. If it does this could have a very negative impact on the public’s trust. Do you have anything you would like to add? If so feel free to leave a comment below and as always thanks for reading.
I have considered this opportunity very carefully. I have appraised for 45 years, and expect to have about 10 more years before I can retire – I may continue after that on a limited basis. My read on these bifurcated, hybrid appraisals is this: I have decided to accept any and all assignments in this line for which the client is willing to pay my fee. I consider the remaining income stream I can expect, the cost of attorneys, court costs, settlements and/or penalties. My quoted fee for each individual appraisal is based on these projected costs as well as the headache fee for having to respond to the lawsuits that may eventuate, and the lost income after my State board revokes my license and the E&O insurer abandons me. I figure that about three full price jobs should handle the aggravation, then I can retire early. The fee? Somewhere in the range of $35,000,000 per appraisal, cash in advance. I have a very good opinion of myself and my appraisals, so I deserve the best.
By the way, I watched an Appraisal Foundation infomercial about hybrids. It was about 14 minutes long. I parsed out the monologue and, dang, the bottom line is: They have no help to give, they do not know, and you’re on your own. It was a very well executed government style pontification in which they wasted 14 minutes of my life to tell me that.
It seems to me the liability issue is a BIG concern. Whose E & O is on the line, and how can that be blended/shared among several vendors. As stated in earlier comments, the precise reason for utilizing experienced local market individuals is what the appraiser really gets paid for…, his/her skill and expertise in that market. Selecting proper comps., and not going over certain geographic lines, that may compromise school districts, and alter entire value markets.How will third parties know or posses that skill. We do rural appraising, where acreage adjustments are sensitive, and geared to terrain, access, view and utility, and need to be adjusted on a sliding scale, in more outlying rural areas. Again, how will third parties know that differentiation? This seems like simple greed by the Lenders, and AMC’s, where no savings is passed onto the consumer, and the appraiser keeps getting socked with more fee compromise.
Patrick, I think you hit the nail on the head. I think it is a money issue. Banks are disguising it as a “modernization” issue but I’m not buying it. Why don’t they just let trainees at the company they’ve hired to do the appraisal do the inspection instead of untrained third parties? I too believe that no cost savings will be passed on to the consumer. As appraisers, we must fight for what is right for our profession. I’m not against using technology to streamline the process but some of the decisions that they have come up with just do not make sense. Thanks for sharing your take.
Various articles show FNMA is the one pushing this product. Here is a link to one. http://www.workingre.com/appraisers-bifurcated-appraising/
Thanks for sharing the resource, Angela.
I completed two such reports for a firm from NY. The first report had comparable solds that I had not chosen. After receiving the data about the subject the comparables were provided in the data. I thought that was odd. I always choose my own comps and make the search parameters quite tight in order to find the best comps. If there are no comps found within my search parameters I go back into the search engine on the MLS and try to see what I would consider a change in one of the search requirements,, even if it takes me outside of my distance requirements. I did not care for the comps that had been chosen on the second assignment and did my own search. The company didn’t seem to like that very much. On the second assignment, the person completing the inspection marked the subject as being a 2 story home. It was a bi-level. I wouldn’t have know that without the photos that had been taken. I lost all confidence in the company completing the report and didn’t accept any additional assignment and do not accept that type of order at this time. I was supposed to get paid $50 an hour and just mark the time on their record page on their website. The second report needed new comps and I spent about 4 hours completing the search and filling in the blanks on their website. I was paid $45 for that assignment. I came to the conclusion that all the company wanted was some certified appraiser to use their signature in order to complete their reports. I notified the fellow who I was assigned to work with if I had questions, so I called him and asked him not to send me any more assignments. Why should I be held responsible for other peoples mistakes when I didn’t even see the property.
Wow, that crazy. I have not heard any positive stories about this type of bifurcated appraisal. I think you made the right decision to quit doing these types of assignments.
I will not do them. I will not put myself or my E&O insurance provider at risk.
I think that is the way most appraisers feel, Bob.
I don’t understand the reasoning for these and have no desire to have someone do the inspection. So many things we as professionals pick up on in an inspection that could be missed. Who takes the comp photos? Will that also mean a trip therefore by the Appraiser who typically sorts those out after seeing the house? After 30 years in this business I can find not one silver lining. I have never liked “drive by” inspections as it is like reading a book and not opening the cover. This is no different as often MLS photos are on line however the true sense of the property is only made with an inspection! We should boycott them however there will always be those in the business who will accept a shortcut which this will be. Sad.
I agree with you, Susy. These have been introduced to lower prices and “streamline” the appraisal process. Most appraisers do not agree with them because they don’t produce accurate value estimates, at least not as accurate as a licensed appraiser visiting the property and observing it themselves. While I don’t think that we can do a whole lot about stopping the direction that mortgage appraisals are going we do have the ability to say no and to develop non-traditional business so that we have the freedom to say no to these types of assignments.
Hi Tom. The bifurcated appraisal process is something I’ve not heard of. What appraisers in my neck of the woods here in Central New Hampshire are complaining and concerned about is the increasing reliance on AVM’s to verify appraisal accuracy. AVM’s are no doubt improving and their use is growing among lenders and loan purchasers. I’ve read that studies have shown that property appraisals tend to be biased upwards, and over 90 percent of the time, either confirm or exceed the associated contract price. In rural areas, such as Central and Northern New Hampshire , where there are fewer comparable sales and greater diversity in housing stock, the upward bias, I’ve read, is even greater, with as much 25% of all purchase-money-mortgage-related appraisals exceeding 5% of contract price. This may not be so harmful when markets are rising, but a lot of people are hurt when they tumble. As a real estate agent, I naturally want my sellers’ homes to appraise and I’m always grateful when appraisers agree. The question is, I suppose, are your colleagues truly appraising, or justifying prices that buyers and sellers have agreed to pay? Automation is having an impact on both our professions as the real estate lending industry seeks ever better ways to analyze credit risk.
Randy, I have seen this concern about AVM’s from appraisers all across the country. AVM’s can be helpful in certain situations but in others, they can be very detrimental. If an AVM’s is used in the wrong situation it can give a wrong indication of value and if what you say is true then it is probably going to be on the upper end and the value is going to be overstated. If this happens enough, these sales will become “comparables” that will be used in future appraisals. This can create a false upward trend in overall property values. The problem will be compounded more as time goes by which will create false appreciation. As you mention, we probably will not see this in an increasing market, however, when things fall, and they will, we will see a situation similar to what we had 10 years ago. Property value appreciation has to be based on true and accurate information which is typically based on traditional appraisals when they are the best choice. An AVM is best used within neighborhoods that are very homogeneous with homes that are one level because the county records for these homes are the most accurate, at least in my area. When a home has a second level and basement the county records is less accurate and the AVM starts producing inaccurate vale indications. To answer your question about appraising or justifying prices I will say that our job is to appraise, and I believe that is what most of the appraisers I come across do. Thanks for sharing your perspective as an agent.
And the next time that we have another wave of foreclosures in the future you will see investors in mortgage securities go after the errors and omissions insurance of the appraiser since it is highly unlikely that the “inspectors” have insurance. I personally won’t go near hybrids with a ten foot pole.
Also, no one has ever said that the savings in appraisal fees will be passed through to the consumer. It most likely will go the lender’s bottom line.
That is a good point, Tom. I believe that the “model” for an inspection company probably will not be any better for our industry than the AMC model has been. In both situations, you have mostly untrained individuals trying to influence how we do our job.
I work in a metro market in North Carolina. So far I have only had one lender in this market approach me about this type of appraisal. They sent out an email about three weeks ago asking for interested appraisers to go to their website and signup. I heard from one of their compliance officers that as of the first of this week they had gotten no response. I don’t plan on doing any of these “appraisals”. If we all just say no, the appraiser participation component goes away and they have to come up with a new plan to deceive the public. I question how widely these will be used anyway. In my experience very few buyers have any skin in the game because the borrow all they can as long as they can. They don’t have any money. I know with the changes going on in Washington we are heading back to the days of making home ownership possible for everyone regardless of credit or income. If lenders are comfortable with making 97% loans to iffy borrowers with these limited appraisals the next market collapse is going to make the last one look mild. I’ve stopped using the phrase “they can’t be that stupid” because I think some of them are taking it as a challenge.
I’m sure that scenario is probably similar in most other areas where they are trying to implement these types of products. Going forward it will be interesting to see if they try to force these types of appraisals on the public or if they will listen to appraisers, which I doubt they will. I really hate that they are taking your question as a challenge because we will probably have to pay for their bad decisions. 🙁
Here’s my 3 cents…
Let’s talk about walk through inspections, measuring homes, and completing all aspects of an appraisal assignment we put our signatures on. We can all see the ever growing wave of Hybrid Appraisal products. So, let’s talk about the one number at the start of every valuation. We live in a price-per-square-foot world. These numbers the new inspectors collect will be at the heart of every appraisal. We can’t use a Licensed Trainee, that we know and have trained, but we should trust this unlicensed and barely trained person for the information which we will ultimately base our value and then sign? No matter how many disclaimers and disclosures we write, at some point any valuation problems will come back on the appraisers.
And in these inspections, what about little things like functional utility (which most agents have never heard of), and will they understand the importance of things like room counts and above and below grade? How will they know which sun rooms should be included in the GLA? What about detached spaces? If you look through MLS you can find lots of interesting spaces listed as total finished square footage, and these are the people we are going to rely on to bring us accurate data?
If the inspectors get it wrong, who will it really hurt? Who do hybrids really help? Lots of opinions on those questions. We are being force fed a blind faith in big data that big banks think we can’t understand, the public can’t understand, and they can manipulate any way they want with no one the wiser. Hybrids ultimately give lenders more power and appraisers less. It gives consumers and mortgage investors more risk; unnecessary risk.
When most appraisers take pre-licensing classes, they learn the very basics of measuring square footage. Agent courses teach far less than appraisal courses and the topic of square footage is barely mentioned. In a business that focuses on price-per-square-foot, they don’t consider how to calculate a square foot a very important topic. I’m always amazed at the agent classes, even the advanced CMA classes, they hardly mention the topic of square footage. It’s as though they have accepted the myth that Public Records provides the “Official Record” for square footage. Absolutely wrong! AVMs rely heavily on this data knowing it is filled with errors.
Learning to calculate living area is a learned skill. It only comes with experience and knowledge. Should I really trust a real estate agent who knows very little about square footage to provide me with a number I use to determine a value, and to which I will place my signature? Sure, I used to do some 2055 reports and used the sqft from tax records, and I cringed every time I sent one out. But, if a large margin of error was acceptable to the lender, then why should I not do the work? At that time, I charged $50.00 less to do a 2055 verses a 1004. Think about that. Time is money, right. Are appraisers being turned into an hourly paid service that anyone can do, or are we professionals with valued opinions? It certainly depend on who you ask these days.
I have studied tax records, MLS systems, and the influence of sqft errors on home values for over 15 years now. I can tell you with absolute confidence that inaccurate sqft details harm home values and consumers. Just look at Zestimates® and every real estate professional having to explain why they are not reliable these days.
Are there times when a bank doesn’t need a full appraisal? Absolutely. If a 30-50K margin of error on the appraisal is okay then I say by all means allow lenders to use Hybrids or AVMs. However, if I am buying a home, regardless of whether it is $100,000 or $800,000, I deserve to know the fair value. If banks actually were required to service the loans they write, would they be more concerned with accurate values? Of course. A mortgage investor, just like a home buyer, deserves to know the real value and no computer can provide that. Its just the facts of the real estate business. It is NOT a data perfect business where a computer program can calculate precise values. Never has been and never will be.
At the end of all discussions, Hyrbid appraisals can never perform the same level of quality as a traditional appraiser. But, if that’s what lenders want, lets give it to them. So yes, please send your inspector out and provide me all the data you want. My opinion of value is worth a minimum of $350. To $400.00. I’ll be happy to reduce my fee. Computers have certainly stream lined the banking business, and every other business associated with a real estate closing, but I don’t see them reducing any fees. For my knowledge and skill, I deserve a fair fee, just like the attorney and title insurance company, among others. For less than that, I say hire someone who has not worked to earn and keep an appraisal license.
We could also have national AMC rules that every assignment must be placed within 24 hours. They want appraisers to do everything fast, but they don’t have to do the same. If they want to speed up the process, maybe there should be some new rules for someone outside the appraisal industry for a change.
In home valuations, we live in a price-per-square-foot world and in every residential transaction, size does matter. Having a untrained person (after not allowing a licensed trainee) to inspect a home and measure square footage is not the answer to any appraisal problem.
Why do we as appraisers always think we are the best? I’ve seen plenty of reports by appraisers that are clueless and cant measure a double wide right. We have a lot of AMCs out doing it wrong with these hybrids and inspections. But I know one that does it right and I’m eating the money up. $75 an inspection for 30 minutes usually. Do about 10 a week usually in 2-3 days.
And doing the appraisal side I’ve seen realtors do 1000 times better job compared to appraisers. We all need to realize we(maybe not us but others) are the reason for the hybrid. I saw an appraiser say how he gave a 2 week due date but did the inspection portion the next day. And said how he was going to not turn it in until the due date for no reason other than that’s when he said it would be done. That’s bad customer service and is happening nationwide. We are the reason for hybrids due to bad service and communication. Mechanic says it will take two weeks but you find out the parts came in next day. You ask if it can be done sooner and they say no. Do that enough and….
We have two options. We join good companies like the one I do these for and make them successful or pay a good fee. Or we let bad companys that pay $10/hr destroy this product. FNMA and others will simple go to AVMs and put us all out of business. Like it or not the hybrid is here to stay aka the 1004p everyone is talking about.
Fast, cheap, accurate: pick any two. This old saw has made the overhead on countless continuing appraisal ed classes but it is still true.
The economics of their model is problematic over the long term. They pay $50 an hour for the appraiser, they do provide some data but it is not the local MLS or appraiser data group stuff, and on the surface it doesn’t sound entirely unreasonable; there have been appraisals I did not gross $50 an hour on. Thankfully, not too many of them, but they are out there and when they happen you gotta bite the bullet anyway. As a W-2 employee, the appraiser doesn’t bite that bullet, the company does. From what I read on message boards among former inspection employees of some of these outfits, they have high turnover and limited pay (maybe ten bucks an hour driving their own cars), and if the appraiser wants more data, the inspector has to go back out again and again until the information necessary to satisfy the appraiser is obtained, and they work on a per-job basis. Now, as the appraiser, I have to be satisfied with what I have in terms of being able to produce a credible result. What’s going to happen when my time on the job starts to cost them more than they are going to collect? Well, I’m going to go the way of the dodo bird and they are going to have to move down the chain to appraisers without experience who work for less or appraisers who are willing to slap something together in the name of profitability, or the company is going to take a hit. They may take a hit on all their appraisers to begin with in hopes that eventually they can average an hour or two on their portion and the added layers of administration can somehow scrape out a profit. And to be fair, in some circumstances where all the cards fall right, this process can probably produce a credible result. But the pitfalls of where they may not are many and varied. I cannot listen to a house and I cannot smell a house from twenty miles away. Last week, I picked up on a persistent basement leak by odor; the floor had been scrubbed clean by a seller hoping that I would not pick up on it. Did I mention, an early market segment one vendor is targeting is FNMA REOs? We’ll see how that works out.
I was interested in how this works, what the local product will look like, the quality and quantity and sourcing of their data, really, just how the whole process will work. After a couple of calls from a chief appraiser, I agreed to give it a trial whirl, out of curiosity if anything else. I’ve done an hour online with one of their trainers (and I got paid for it), and have another webinar I will get paid to watch, but so far, no actual work. The only way this thing would have real staying power with the experienced appraisers is if our work volume is so reduced that we figure making bank on what translates to about a nine-hour appraisal is worthwhile. I know, I save on gas and can maybe work more efficiently in a sense of the word, but there are still a lot of expenses in our business and that $50 an hour is not what it looks like to a lay person. But hey, if I am slack and can pick up a couple of hundred bucks a month here and there and learn about the products being offered in the marketplace, I’ll go along, but only so long as I believe, personally, that I can produce a credible result within the confines of this process and where it is profitable to me.
Frankly, I don’t see it having staying power beyond a niche in the markets you and I work in, Tom. Besides, taking the inspection out of the process for me is removing a substantial part of the fun of the job, and I don’t go through all the hassles of running my own business to hate my job.
Good points, Tim. As in every other area of life rarely is there a clear cut black and white answer to anything. With that being said I can see where this could be the start of the end for the integrity of appraisals done for lending. It’s interesting to hear about the turnover rate of inspectors and the hourly rate and use your own car situation. All of that sounds like uber drivers and food delivery services. I’m sure that model works for them but to have some hourly employee with no skin in the game come in and try to make some money on the volume of property inspections they can do won’t bode well for the reliability of the information that we as professional appraisers require to do our job. That is why I am slowly transitioning my business to all private work. I would be interested in hearing from you the more you learn about these types of jobs and the more you do to see how they turn out.
Oh, it’s not a good development overall. It’s an area where offloading duties to a third party may meet USPAP but I don’t think in many cases it is the best thing for the appraisal, the appraiser, or end user. If one of the purposes of USPAP is to promote public trust, the use of reports which inherently have a greater likelihood of incomplete knowledge _where it is not necessary_ goes against that purpose. Yet, here we are. I understand the need for flexibility, but outside of a few specific circumstances, this type of product is one that warrants close monitoring. I will indeed keep you and your blog in mind if and/or when I get a closer look at this thing.
Trying to marry a desktop appraisal, which may have utility from a QC or portfolio management perspective so long as all parties are aware of its limitations, with something resembling a standard product that is not expected to have those expectations is a bit Frankenstein-ish to me. And like I say, I just don’t see the economics of it working as a general rule.
Tom,
Most likely to sue an appraiser is a borrower so you have more risk when a hybrid appraisal is used for lending.
I did about 10-15 of those for a lender/AMC last year. He got the same guy to just go out and take pictures, and he would then make a call on the condition. He called every one the same – average. Well the last one I did for them , I reversed his call and called it poor condition since the blue tarp was waving on the roof, wood was obviously rotting on the exterior, with faded and chipping paint everywhere. They called and told me to change the condition back to average since that is what the inspector called it – I explained my reasoning to the AMC and they agreed with me, and said just keep it poor condition. Have not gotten another order from them since.
Wow, your first-hand account of this is telling. I wonder how many other similar situations like this occur every day? If this is how lending is going to start heading who knows what will happen should another recession occur? Thanks for sharing your story.
Amen Tom, I will share this. I have real issues with these “appraisals”. I have already had Suntrust ask me about these types of appraisals for areas that we may not have all the data available via courthouse records. This is even more scary to me! How are we to just blindly take what the other people are telling us regarding the square footage, condition, quality factors (also a big issue that they could miss or just not care about). Suntrust said we can set our fees. Yeah right, I am sure they want down and dirty cheap on these “desk top” appraisals. We would have to cover our you know what big time with disclaimers and I am not even sure if this would be a USPAP violation, because we are taking in information to produce a report that we are not even sure will be credible.
I don’t think that lenders will like us stating in the report that we have no liability or responsibility for any information NOT obtained by us personally. The CYA language would have to be quite detailed to say the least. Speaking of Liability, not so sure our E & O insurance carriers would like this very much!
I am very concerned about this. Bottom line is it still takes lenders several weeks to close a loan, we only take 1 week or less if they order it from us when they should. As for cost, give me a break please….Buyers should not be lead down a rosy path into thinking that these appraisals are real, they are being protected and they are saving money. What is a couple hundred dollars in the large scheme of things? I agree public trust would be greatly compromised if they knew the whole truth.
Thanks for putting this out there. Many lenders have made up their minds on this and all they care about is closing loans and making more money and yet the one person (The Appraiser) who can save us all from another financial crisis is being degraded down into low paid desk top reporters.
I’m with you, Mary, and you may some excellent points. It makes me think of the old saying that those who do not remember the past are doomed to repeat it. I hope this is not the case though.
If I was purchasing a home, wouldn’t I want an accurate appraised value of the property? Wouldn’t I sleep better knowing I didn’t overpay? All these shortcuts will only result in problems and dissatisfied customers. The banking industry is sliding down into another dark hole. Those that ignore history are doomed to repeat it.
Ye, Bob, you are correct. As a buyer, you would want verification that you are not paying too much but the type of valuation the bank is moving towards is one for portfolio management and may not be appropriate for what a buyer needs. This is why I highly suggest buyers order their own appraisal and make the contract contingent on the outcome of that appraisal rather than the bank valuation. The bank is only concerned with their financial well being. This also true when banks waive the appraisal altogether. Buyers should still get their own appraisal.
Thanks Tom. I share your concerns. I think your points are valid. It’s sometimes really hard to get a sense of a property without seeing it in person too. Photos can be very deceptive. There is something about seeing a property in person, walking the layout, and getting a sense of how everything ties together….
You I agree, Ryan. While this can be learned by third party inspectors you have to ask yourself how well will they be trained since I don’t think lenders are planning to pay them much because the lenders main goal is to lower the cost of the loan process.
Good points Tom. Peter Christensen from LIA spoke about hybrid appraisals tonight at our meeting. He warned us that hybrid appraisals have a lot of risk for appraisers when lending is the intended use. Portfolio valuation, less so.
That’s interesting, Joe. I assume that is the case because those for lending purposes may be more closely reviewed?