Dumping Workfiles

Visitors to my basement at one time were treated to the sight of dozens of file storage boxes stacked there. The majority of those appraisal workfiles dated from my tenure as a staff appraiser from 2003 - 2004. USPAP requires that a copy of the appraisal and the workfile be retained for 5 years from the effective date of the valuation. After that the files can be discarded, but the rules governing client confidentiality have to be followed. As a result, when the files reach their fifth birthday, I use them to heat the house.

While going through the boxes (yes, I do glance at the reports to make sure I do not inadvertently destroy something which should be retained) I found the following peer review done by a third appraiser regarding my appraisal of a home and the value opinion provided by another appraiser retained by a litigious borrower:

"November 4, 2004

I have been asked to review two appraisal reports that were completed on this property. The first report was completed by James Hrubik based on an interior viewing of the home on February 12, 2004 and the indicated opinion of value was stated as $33,000. A second report was completed for a different client by Appraiser X based on an interior viewing of the home on August 18, 2004 and the indicated opinion of value is stated as $70,000. For this review I viewed the exterior of the subject property and all comparable sales used and have attached photos of these properties and a location map to this review. Please note that approximately six months have transpired between the effective dates of these reports and I am therefore unable to confirm if the condition of the home had changed in this period of time.

For this review, I surveyed the Akron Area MLS and public record information. The MLS describes this neighborhood as Southwest Akron and is Area SUM34. Per the MLS there had been a total of 93 sales of single family homes of all property ages and styles in the twelve months preceding the effective date of Mr. Hrubik’s report. The price range was $3,000 to $134,900 with nearly 2/3 of all sales ranging between $3,000 to $30,000, and many were described as being ‘Bank Owned’. The median price was $21,500 and virtually every sale between $71,900 to $134,900 was described as being a ‘New’ home.

The report completed by Mr. Hrubik provides a neighborhood description that states this is an urban neighborhood with property price ranges between $10,000 and $125,000 with a predominant price of $40,000. The age range is described as being from New to 100+ years with a predominant age of 80 years, which is reasonable and consistent with MLS data. Mr. Hrubik selected three sales for his analysis that were offered in the MLS and I was able to verify the sale price and property features as reported based on the MLS descriptions and public record information as follows:

Comparable #1: 643 W. Thornton sold in 9-2003 at $30,000 after being listed at $32,000 for 54 days. The property descriptions are consistent though Mr. Hrubik fails to report that this home was reported to have a finished basement rec room with wet bar and a negative adjustment could have been included. There was no prior sale or listing of this home in the previous 36 months.

Comparable #2: 987 Laurel Avenue sold in 10-2003 at $29,500 after being listed at $32,900 for 119 days. The property descriptions are consistent with the data sources noted. Though there was no prior sale of this home in the 36 months prior to the date of value, the home had been offered for sale in the MLS on two previous occasions, once at $49,900 for 184 days until the listing expired on 2-14-2002 and again at $39,900 for 92 days until the listing expired on 7-31-2002.

Comparable #3: 994 Celina Avenue sold in 10-2003 at $33,530 after being listed at $34,900 for 122 days. The property descriptions are consistent with the data sources noted. There was no prior sale or listing of this home in the 36 months prior to the date of value.

All three sales are in close proximity, similar in age and living area, and were within six months of the effective date of value and are therefore considered relevant and reasonable. Each was listed for sale with a professional Realtor and had adequate market exposure in the MLS.

As noted, I was also provided an appraisal report completed by Appraiser X for a different client and have found a number of significant deficiencies with the report. The neighborhood is described as being ‘Suburban’ rather than ‘Urban’. The neighborhood price range is stated as $50,000 to $90,000+ with a predominant price of $60-75,000 which clearly contradicts MLS data for this neighborhood. In addition the age range is 60 to 100 years which does not include a significant number of homes in this market that are much less than 60 years old. Appraiser X fails to provide the FEMA flood zone information which leads me to question if she had adequate data sources for this community. The land value estimate of $15,000 is not reasonable for a site of 32’ x 132’ in this urban setting as this is more than 50% of the total sale price of nearly 2/3 of the reported sales in the MLS as noted above. Finally, Appraiser X provided three sales in the market analysis that were non-MLS transactions. The data source stated (Auditor’s Office/Exterior Inspection) does not provide information regarding any terms of sale, property condition, or if the transaction was at market and arm’s length. Other concerns regarding these sales are as follows:

Comparable #1: 817 Raymond is reported to have sold in 4-2004 at $72,000 per public record information. Appraiser X states that there was no prior sale of this home in the preceding 36 months. However, this home was offered in the MLS at $20,000 in 1-2004 and transferred to SMB & A LLC in 1-2004 at $14,000. The home then was sold in 4-2004 at $72,000 with terms and conditions of the transaction not known nor is there verification that the home had been restored for this purchase. Appraiser X’s failure to disclose the previous recent sale is a violation of USPAP and leads me to question if this was actually a ‘flip’ transaction.

Comparable #2: 1006 Nathan is reported to have sold in 11-2003 at $67,000 per public record and seller. Appraiser X fails to disclose that the [n.b. - I deleted this buyer-seller relationship disclosure for retention of confidentiality] and is likely biased toward the transaction. Failure to disclose this relevant information regarding the seller is considered misleading as a typical reader would assume this was a verified and unbiased transaction. There was no prior sale or listing of this home in the 36 months prior to the effective date of value.

Comparable #3: 640 W. Thornton is reported to have sold in 2-2004 at $75,000 per public record, The data source can not be used to verify the terms and conditions of this transaction nor the condition of the home at the time of its sale. However, upon my exterior viewing on November 3, 2004 this home appears to have been vacated and at least one window is broken which again leads me to question the reliability of this sale. No other sale or listing in the preceding 36 months was found in data sources for this property.

It is highly unusual for a qualified appraiser to not utilize the MLS as a primary data source for this established urban neighborhood in the city of Akron, which leads me to question if Appraiser X had adequate experience or resources to have accepted this appraisal request.

For the purposes of this review, I also surveyed the MLS for active listings in the subject’s neighborhood to help establish a reasonable upper limit of value for homes of similar vintage.

Currently, a property at 388 Raasch Avenue is offered for sale at $45,000. This home is described in the MLS as being completely renovated including newer drywall, carpet, furnace, A/C, windows, roof, kitchen with oak cabinets, newer bathroom. The home is reported to have been built in 1925 and offers 1128 sq ft living area, which would be competitive with the subject. As noted, this home has yet to sell and has been on the market for over 200 days. It is my opinion that this active listing provides some helpful insight into this neighborhood for homes that are renovated to this degree.

For these reasons I am of the opinion that the value as reported by Appraiser X is without merit or support. The neighborhood description does not accurately reflect the reality of the predominant sales activity in this market area. The use of questionable or unreliable sales data without utilizing the MLS in this market, or seeking assistance from someone with access to the MLS, leads the reader of the report to unreasonable conclusions and for this reason the report is misleading."

I remember that incident well, as I was required to sit beside my client's attorney as we faced the borrower and his counsel. That is how I managed to get a copy of the review. Also, because the report was involved in litigation, it and all pertinent files need to be retained an additional five years beyond the settlement of the dispute.

The rest of the story? The borrower (who wanted to borrow about $60,000) claimed my client would have made the loan had the borrower been a member of a protected group. Appraiser X, whose office was 60 miles away, was brought in to make the case that I had significantly undervalued the home and that my client had utilized it in an attempt to prevent the loan. It is of interest that I was not named in the suit; there was nothing in my report which could have been interpreted as bias. I just had not come up with the correct number, and my client trusted my judgment.

No mention was made anywhere in the proceedings that the tax appraised value of the home was only $30,750. My client settled out of court by agreeing to hire a fourth appraiser who managed to appraise the subject property for about $45,000, thereby allowing the client to loan the borrower the tax appraisal amount and still stay within Federal guidelines.

To my knowledge the second appraisal was never submitted to the Ohio Division of Real Estate for review; protection of Appraiser X was possibly a part of the settlement. Now you may have a bit more insight into why the banking industry was in need of a stimulus in 2008.