Complaints from brokers over not getting paid for broker price opinions have some appraisers saying, "I told you so." That's because brokers agree to do broker price opinions so that they might get the listing from asset managers and their banks who prefer to pay less for a market opinion than a limited appraisal from an appraiser would cost. But, warns some appraisers, the practice may brew trouble for the housing industry.

Why does it matter who does the appraisal? Appraisals are regulated by the state; broker price opinions don't have to follow the rules as outlined under the Uniform Standards of Professional Appraisal Practice (USPAP.)

Says Texas appraiser Bob Burnitt, "There are only two kinds of appraisals under USPAP: complete appraisals and limited appraisals. I am oversimplifying but, really, an appraiser is supposed to do a complete appraisal every chance he gets. Many of the powers-that-be in the appraisal regulation biz discourage appraisers from performing limited appraisals for anyone but ‘lending professionals’.

He goes on to explain that there are three reporting options, Self-Contained Report, Summary Report, and Restricted Report. Since the interest is in residential real estate, the appraisals you see most often in residential real estate are going to be ‘form reports’ or a Complete / Summary report. You will also see some Limited / Summary Reports (again a ‘form report’).

"The Complete appraisal reports are known by various nicknames," says Burnitt. "The Complete / Summary Report is often referred to as a “full appraisal”, a “SFR”, a “URAR” or a “1004” (ten-oh-four)."

"The Limited Appraisal / Summary Reports have their nicknames as well: “2055” (twenty-fifty-five), “drive by”, “exterior only” , “2055 interior” and even a “drive by – walk through.”

To be considered a complete appraisal, three approaches to value must be considered, says Burnitt. "That does not necessarily mean they must be utilized," he says, "but they must be considered."

The three approaches to value are:

• The Cost Approach: This is the cost to replace the improvements, minus depreciation, plus value of the site = value of the subject property per the Cost Approach.
• The Income Approach: A value will be estimated on the basis of an anticipated income stream. Various techniques are utilized to accomplish this task.
• The Sales Comparison Approach: Sales of similar properties are compared to the subject property. These comparable properties’ sales prices are ‘adjusted’ toward the subject for differences they have as compared to the subject. The subject is never adjusted.

"When we are talking about a ‘typical’ residential appraisal being a Limited Appraisal, we are talking about an appraisal done on a Fannie Mae form 2055, which has no provision for the Cost Approach or the Income Approach. Only the Sales Comparison Approach is utilized," says Burnitt. "Sometimes, clients (lenders) will order a “2055-exterior inspection only”, that is what’s known as a 'drive-by.' The appraiser ‘drives by’ the subject property and uses tax records, MLS records, information from agents, etc. to determine the specifics regarding the property that is the subject of the appraisal.The appraiser then inspects the “comps” just like any other appraisal."

A BPO, on the other hand, does not have to conform to USPAP. And that is the loophole that allows real estate brokers and, in some cases, agents to provide price opinions to banks.

Colorado Realtor and appraiser Mike Garrett says, "I have been a real estate broker since 1968 and have a full membership in the local board of REALTORS®. What I object to is brokers acting as appraisers without being licensed and regulated by USPAP."

He explains, "You and I both know lenders are using this as "an appraisal" and are paying the brokers a fee well below what it would cost for an appraisal. If brokers want to be appraisers, let them get licensed and be bound by the rules. I am not actively engaged in listing and selling real estate other than handling my own transactions and helping some of my old established clients. Last year I listed one property only because I was representing the seller of that property in the purchase of a new home.

"The lending establishment abused the loan process to the extend of billions of tax payer dollars in the 1980s," continues Garrett. "What was the response? It was blamed on the appraiser. Legislation was passed requiring the appraiser to be licensed and regulated. Now the lenders are saying, "to hell with all that, lets use real estate brokers to provide us with values because they are not regulated and will do it for less."

Garrett doesn't feel brokers are as much to blame as the lenders.

"The broker sees a way to pick up a few bucks, most don't even realize they are violating appraisal license laws in their states," he warns. "What I do see is that when the lenders have found a way to remove the appraiser from the transaction the next step will be to remove the real estate broker too. They already are pushing to own the title and home owner's insurance companies. Ever look at what if costs for home owners insurance through the lender? No bargain there for the buyer."

Explains Burnitt, "As you know, different transactions have different levels of risks that are based on a multitude of factors. So the lending industry asks for different levels of valuation services supposedly to save a few bucks. Or at least that is supposed to be the motive.

"Sometimes the motive for ordering lower levels of valuation services is more sinister. It is my opinion that, since these notes are going to be sold on the secondary market anyway, some of the people that originate or broker these loans don’t want anybody looking too hard at these properties in the first place. The result is drive-by appraisals and BPO’s."

"The lenders were at fault in the 1980s, and will be at fault again, this time in the 2000s," predicts Garrett.

Published: February 4, 2003

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