The appraisal industry is rapidly changing, and these changes usher in challenges as well as solutions. A declining appraiser pool can sometimes lead to appraisal delays and contribute to industry frustration. A more lengthy appraisal process can also create a disconnect between the borrower and the lender. This concern is significant in the commercial lending space as well as the residential.
To counter this dynamic, viable substitutes to traditional appraisals continue to emerge within the marketplace for qualifying situations. These substitutes are most often referred to as Evaluations. Evaluations are typically administered by real estate brokers and agents and follow practices set forth by the FDIC’s Interagency Guideline (IAG). They are most suitable for small loan balances as well as due diligence, portfolio monitoring, loan modifications, default services and extensions of credit. Lenders may also use evaluations for origination purposes when valuing a commercial property under a $250,000 loan threshold.
So, what are the key differences?
The evaluation process is governed by the Interagency Guidelines and offers an abbreviated set of standards to accommodate qualifying transactions, while the traditional appraisal process is governed by USPAP which outlines a comprehensive set of standards by which to operate. Prices for evaluations are often less than the price of appraisals. Commercial evaluations generally cost under $1,000, while commercial appraisals can cost anywhere from $2,000 to $4,000 for similar properties. The time required to complete an evaluation is also reduced. Evaluations are generally completed in ten business days or less, while commercial appraisals generally require three to four weeks.
The commercial evaluation form contains several approaches to value which includes land values, a comparable analysis (three comparable listings; three comparable rentals; three comparable sales); line item adjustments; local market trends, including vacancy rates and the subject’s neighborhood; income approach; subject property transaction history; capitalization rate; operating expenses; current subject photos; and commentary. Field agents perform interior site inspections as requested. The reports address current zoning, site utility, construction quality, assessment information and highest and best use.
Because the standards are not as extensive for evaluations, it is critical for lenders to understand the processes their vendors use including the use of technology, data resources and manual review.
Lenders that understand the differences in the products offered by the market and the appropriate application of each can, in many cases, lower costs and expedite the production of credible values.