The CU (Collateral Underwriter) is obviously a hot topic right now and there are many excellent blog posts written by fellow appraisers that point of many of its flaws (see the bottom of the page for links to those posts). On a recent positive note, Fannie Mae recently sent a letter to its lender clients that included the statement, “Before asking the appraiser to consider any alternative sales, it is imperative that the lender analyze the relevance of the sale and determine if the use of such a sale would result in any material change to the appraisal report. If the lender determines that there would be no material change, then they should not ask the appraiser to make revisions.”
But what I want to touch on in this post is that the existence of the CU will more than likely change the approach of many appraisers (in a good way). Why would this change an appraiser’s approach? One of the answers lies in the definition of market value as defined by Fannie Mae. Sometimes as appraisers, we may need to be reminded of one of the most important parts of this definition. Fannie Mae’s definition is as follows:
Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
- buyer and seller are typically motivated;
- both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
- a reasonable time is allowed for exposure in the open market;
- payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
- the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
The key part of this definition that I am focusing on is “the most probable price”. Not the highest possible price, the most probable.
As was recently pointed out on the Voice of Appraisal with Phil Crawford recently, “Possibilities and probabilities are two totally different things”. Prior to the HVCC, it was not uncommon for appraisers to be asked by loan officers, “What is the highest value you can appraise this property for?”. The HVCC eliminated much of that by adding a layer of protection (and in-consequently taking a chainsaw to our standard fees). However, there were still appraisers that would search the neighborhood and cherry pick a few of the highest sales in an effort to support the purchase price. However with the CU, if only the 3 comparable sales with the highest sales prices are used, the CU will most likely bring that to the attention of the lender, who could in turn bring it to the attention of the appraiser. If you are appraising a home that has 10 similar sales in the neighborhood and you use the three highest, the appraiser better have support and be prepared to explain why their value is at the upper end of the range. That is not to say that in certain circumstances it should not be at the upper end of the range (superior condition, superior quality of construction, larger lot size, superior view, larger GLA, etc). But if the subject is in the middle of the range when compared to the comparable sales in terms of many of the factors that affect value (GLA, condition, quality of construction, bed and bath count, view, location, basement area and finished basement area, lot size, etc), then the final opinion of value should not be at the extreme high or low end of the range. Again, our job is to determine the most PROBABLE price the property would sell for, not the highest POSSIBLE price. This should also help keep artificially inflated appraisals out of the refinance and home equity markets.
How this plays out over the long term remains to be seen. I know most appraisers have much bigger concerns with CU and how it will impact our profession in the short and long term, as do I. It’s just that these issues have have all been written about by other appraisers. I just thought I would suggest a revisiting of the definition of market value. The “most probable and not highest possible” portion of the definition is also something that appraisers can point out to educate your clients and even real estate agents when your opinion of value is below a contract price.
Links to additional articles on the CU:
- NAR – http://www.realtor.org/articles/fannie-mae-s-new-appraisal-risk-assessment-tool-collateral-underwriter-cu
- Ryan Lundquist – http://sacramentoappraisalblog.com/2015/01/20/what-you-need-to-know-about-fannie-maes-collateral-underwriter/
- Frank and Brian at the National Real Estate Post – http://thenationalrealestatepost.com/fannie-speaks-out-on-new-cu-appraisal-software/
- Anne O’Rourke – http://appraisaltodayblog.com/author/annorourke/
- Mike Turner – http://turnersappraisals.com/blog/
- Rowe Appraisal Group specializes in real estate appraisals for divorce, estates, pre-listings and more throughout the Chicagoland area. If you have any real estate appraisal questions, please feel free to call us at (847) 863-5776 or email firstname.lastname@example.org.