Five Common Errors & Deficiencies in Appraisal Reports
Over the years I’ve reviewed many appraisal reports. The following are common errors I’ve seen made in appraisal reporting, along with some suggestions for avoiding them.
1 – Failure to fully analyze and adjust all comparable data.
The appraisal of real estate requires attention to detail and thorough analysis. Whether haste or poor training is the cause, failing to fully analyze and adjust comparable properties will result in the wrong conclusion of value.
An appraiser needs to be able to discern the cause of variation in sales prices and rents so that appropriate adjustments can be made to the comparable properties. Otherwise a reliable estimate of value will not be obtained. Standards Rule 1-4 of the Uniform Standards of Professional Appraisal Practice states that “In developing a real property appraisal, an appraiser must collect, verify and analyze all information applicable to the appraisal problem.”
2 – Positive or negative features of property not mentioned.
The appraiser is the eyes of the client. Even a homeowner who is the client wants to know what the appraiser thinks about his property. Certainly the lender is relying on the appraiser to provide adequate descriptive information about the property. After all, the lender is looking to the property as security for what is usually a substantial loan, and it is essential for him to have a clear understanding of the strengths and weaknesses, the features and deficiencies of the collateral. One day he may need to liquidate that collateral to recover a loan that is in default. The appraiser should provide sufficient description of the property to assist the lender in underwriting the loan.
3 – Report missing neighborhood data trends of the subject area.
Although an appraisal opinion is linked to a specific date, we understand that nothing remains static or stable. Everything is in a constant state of flux. Change is always occurring. Therefore it is important to know where things are tending. It is the job of an appraiser to study not just one moment in time, but to discern trends in value, in rents and vacancies, and in the local, regional and national economies. In fact, an understanding of these trends, especially in the subject neighborhood, is a factor that should influence the appraiser’s value conclusion.
4 – Lack of clarity or explanation of the appraiser’s reasoning or procedures.
Good communication is important, and clear, logical explanations will help an appraiser gain the favor of his clients. In report writing, short, simple sentences are best. If the appraiser has difficulty presenting his ideas in a logical order, he should seek out training in this area or find someone to proof read his reports for clarity.
There’s also a tendency when reporting one’s analysis, to jump to the conclusion, assuming that the reader understands, when in fact the writing is disconnected. The appraiser needs to take the reader from point A to point Z without losing him along the way. A suggestion for ensuring this has been accomplished is to re-read one’s report after some intervening time has elapsed. A fresh look often reveals need for further revision.
5 – Mathematical errors.
Math errors in an appraisal report are one of the most careless, and therefore inexcusable, mistakes an appraiser can make. That may sound strong, but I have good reason for the statement. First, working with numbers is a basic function of an appraiser. His analysis is expressed in numbers and the result of his computations in the analysis leads directly to the conclusion of value. Obviously, carelessness with the math will result in an incorrect conclusion of value.
A second reason that most math errors are inexcusable is because today’s appraisal software packages perform many of the computations automatically. This means that the appraiser has fewer calculations to check for accuracy – only those that are not performed automatically by the appraisal software. Even a casual editing and review process should uncover any mistakes.
A common math error that can significantly distort a value conclusion is the use of the wrong math symbol. For example, if the appraiser makes a $4,000 adjustment and enters a plus sign when he intended a minus sign, the resulting effect on the indicated value is an $8,000 error.
Because of the importance of mathematics in the performance of an appraisal, extra care is essential in this area.