An appraiser answers to no one with regard to his opinion of value. It is his opinion, and his alone. He is answerable, however, for the process of arriving at that opinion. The rules of engagement are laid down in Federal law (USPAP) and state requirements. Supplemental Standards to USPAP which have been drawn by the GSEs like FNMA and FHLMC (Fannie Mae and Freddie Mac) must also be followed when those entities are involved in insuring the mortgage. Since there are few lenders who actually hold the mortgages in their portfolios, nearly all appraisals done for mortgage lending must adhere to what the industry refers to as "Fannie Mae Guidelines".
The "Fannie Mae Guidelines" are spelled out in the Fannie Mae Selling Guide, a copy of which should be on every appraiser's desk along with the current edition of USPAP. It is also available on-line at eFannieMae.com. The selling guide is to be referred to by appraisers and underwriters and spells out the ideal criteria for an appraisal report to be submitted for a FNMA insured loan. Because the requirements in the selling guide are Supplemental Standards to USPAP, an appraiser's failure to adhere to them is a violation of Federal law. It is at that point that confusion strikes.
Most appraisers are aware that FNMA requires that adjustments on a single line of the grid not exceed 10% of the sales price, and that net and gross adjustments to the comparable not exceed 15% and 25% of the sales price, respectively. They are also aware that the sales should not be more than twelve months old, and that they should be located in the same neighborhood as the subject, preferably not more than one mile away. Many appraisers blindly stick to the specific guidelines, even warping their adjustments (sometimes nonsensically) to make them conform, in order to escape scrutiny by the underwriters. Many underwriters, fearing the property could be rejected for the loan if the appraisal does not expressly fit the specific guidelines, pressure the appraiser to use "better" comparables.
So how does one compare an apple to a rutabaga? Neither USPAP nor FNMA prohibit the use of comparables that differ substantially from the subject. In some instances, such as rural locations, or uniquely designed homes, or in a very slow market, it may seem that the guidelines cannot be met. FNMA gets around this, not by prohibiting use of the odd ducks, but by requiring that an adequate explanation accompany any adjustment that does not meet the specific guidelines. If the subject is a geodesic dome house in the middle of Podunk Township, and only two other homes ( a two-story, 150 year old farmhouse and a five-year-old split-level) have sold in Podunk Township in the last year, the appraiser must still be able to find at least three closed sales to compare and analyze in order to support his opinion of market value. If the third sale is a post-WW2 Cape Cod 20 miles away with a two year old sale date, it may be the only available option.
In theory, it is possible to use any sales as comparables, as long as the adjustments to them are based on the market. Ideally, the resulting adjusted sales prices should, in theory, all be equal. In fact, when the data is relatively good (sales within six months and one mile, all comps of about the same age, design, and size) a range of adjusted sales prices that is wider than 10% is a sure tip-off that not all factors were adequately analyzed. When widely disparate comps are used because of local market conditions, the adjustments will typically exceed the specific FNMA percentage requirements.
It is critical that the appraiser be familiar with the nuances of his market, and with the characteristics of different housing designs and their impact on marketability. Few appraisers are aware of the foibles of geodesic domes (this one is, because he studied and built several) such as their unique ventilation problems, or the fact that domes shingled with asphalt shingles have shorter than normal roofing lifetimes. An informed buyer will be aware of these characteristics, and they will have an impact on the marketability of such a home design.
What many appraisers and underwriters ignore is the fact that it is a FNMA requirement that when the specific time or distance or percentage requirements cannot be met, the appraiser must describe his reasoning for using the comparable that does not seem to fit. The actual data used to support the reasoning does not have to be included in the summary report, but it must be accessible from the workfile for the report, in the event that litigation or review by licensing authorities occurs.
USPAP Standard 2-2 (a), (b), and (c) all state, as a minimum requirement, that an appraisal report, whether Self-Contained, Summary, or Restricted Use:
(viii) "clearly and conspicuously:
- state all extraordinary assumptions and hypothetical conditions; and
- state that their use might have affected the assignment results;
(ix) state the appraisal procedures followed, state the value opinion(s) and conclusion(s) reached, and reference the workfile;"
Thus the FNMA requirements fit neatly within Standard 2. The appraiser can use any data necessary to comply with Standard 1-1 (a), which requires that an appraiser must "be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal;". The subject may be a lemon, and the comps may be fruits of different kinds. As long as the appraiser can demonstrate the market basis for making his adjustments and has not been careless or negligent in his procedure, his explanation will meet the industry guidelines even if his adjustments may need to be frequent and/or large.
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