As a buyer, seller, or real estate agent involved in a sales transaction it’s important to be aware of changes in how things are done that may affect you. One of these changes is the use of the hybrid appraisal by lenders.
What Is A Hybrid Appraisal?
A hybrid appraisal is one that is done by involving more participants than just the appraiser. Rather than involve the appraiser in the data collection part of the appraisal process this part is done by someone else.
The reason behind this is that the appraiser should only be concerned with the process that he or she is best qualified to do and that is the analysis of the data to arrive at an appraisal value.
The data collection is done by a third-party data collector, who could be a real estate agent or someone else. These data collectors are typically hired by the lender or appraisal management company.
Currently, these data collectors have no standardized training or license requirements. I have read where gig-type workers could be utilized to do these assignments.
A phone app would be utilized to post assignments and anyone willing to take on the assignment would grab it and complete the inspection. This information would then be uploaded to the lender so they can provide it to the appraiser.
An example that I have read about that is the basis for this new appraisal inspection process and framework is that of the medical assistant. A doctor’s time is more valuable so they do not bother with the mundane chore of collecting patient information and checking vital statistics so they use an assistant.
The difference I see between this example and the appraisal profession is that the medical assistant requires extensive training and education through an accredited training program while the appraisal data collector for hybrid appraisals does not.
There is also the question of whether the data collector may be biased in some way. Utilizing an agent that may be a party to the transaction is not the way to sell impartiality into the process.
An agent involved in the property inspection process may overlook defects that may affect the value that the appraiser would readily pick up on. Because of issues like this, it is important for the property inspector to have adequate training and zero bias in the outcome of the transaction.
Things To Consider With Hybrid Appraisals
These types of appraisals are being used by banks and mortgage companies to determine the market value of real estate they are using as collateral in their loans. The value of the real estate that is reported in loans using hybrid products can potentially be affected so today I thought I would share with you five things to consider.
1. Is the square footage accurate? One of the most important factors to consider in real estate is square footage. If everything else is equal with two properties except for the size the larger one will always sell for more.
The price per square foot is a metric that most people ask about and understand. It is arrived at by taking the sale price and dividing it by the square footage of the home.
If the square footage is wrong the indicated value arrived at by the appraiser will most likely not be accurate. The square footage is used throughout the appraisal process for comparison to recent sales to arrive at an appraisal value.
It’s important for the person performing the inspection to be knowledgeable in how to properly measure a house and to know what types of areas can be included in the gross living area. The methods of home measurement are dictated by ANSI standards which have been around a while but most recently were made a requirement by Fannie Mae for loans they purchase.
2. Is the property data correct? Accuracy in the data collected about the physical attributes of the property is also important. Like the square footage, this information is critical in being able to properly choose the most similar sales for use in the appraisal report.
Some important things to consider with the observation of the property include the following:
- lot features such as topography,
- functional utility of the house,
- adjacent property uses, and
- property conditions including both interior and exterior
Appraisers are trained observers and it is important for anyone taking on this role to have similar observation skills. Most of the items I have mentioned have a significant impact on the physical and functional utility of the property being appraised.
The next point considers the training of the property inspector.
3. What is the training of the property inspector? Just like being aware of the training and qualifications of the appraiser, you should also be just as concerned with the training of the data collector. This is where I believe there should be accredited training programs to make sure that they have the necessary education to know exactly what should be observed and noted.
It is much more than breezing through a house and taking pictures. Appraisers go through a rigorous education and experience period where they learn the skills necessary and the observers hired by AMCs should be no different.
If what I read about utilizing gig workers is true this would be severe neglect of duty by AMCs or anyone else providing the data to the appraiser. Appraisers are putting their livelihood and licenses on the line when they accept this data as being reliable and accurate.
If the information regarding the physical attributes of the property, including its square footage and condition, is incorrect, then the comp selection process will be flawed and the opinion of value will not be reliable or credible.
4. Is there a conflict of interest with the data collector? In addition to gig workers collecting data, there is also the possibility that real estate agents may provide this information as well. If this is the case and it is an agent involved in either the listing or selling side of the transaction there could be a conflict of interest.
When listing a house the real estate agent’s main job is to help the seller make as much money on the sale as possible. On the selling side, the buyer’s agent is an advocate for the buyer and helps them save as much money as possible by advising them on what they should offer for the house.
If either of these agents is being used for the data collection there could be a conflict of interest and they may not be able to provide the information to the appraiser in an unbiased manner. In a traditional sales transaction the appraiser, who does both the property observation and the appraisal, is the only unbiased party to the sales transaction.
No matter who is hired to do the data collection they must be aware of the importance of accurate and unbiased information. The integrity of the appraisal process must be maintained so that the public’s trust is not lost.
5. Are you saving money? The last thing that I believe should be considered is whether the borrower is indeed saving money. AMCs and lenders are always seeking better ways to increase their bottom line.
One way, and one that I believe is motivating these companies, is to “streamline” the appraisal process. By mandating appraisers to accept and utilize data collected by third parties they can justify paying them less because the appraiser is not doing all of the inspection legwork.
The lower fees paid to the appraiser may not impact the fees charged to the consumer due to the lender wanting to increase their margins. Borrowers may end up paying about the same for the cost of an appraisal as they have in the past with the cost difference benefiting the lender.
Transparency in the cost of each step or phase of the appraisal process is a must so that the cost savings are passed on to the borrower.
Conclusion
As you can see, there are many things to consider when getting a hybrid appraisal. If you are offered a hybrid appraisal rather than a traditional one you will now have a better understanding of what is involved and how it may impact all parties involved.
If you have any further questions regarding hybrid appraisals or any other appraisal-related questions feel free to contact me and as always thanks for reading.
Can we get rid of these things already? Trainees cant inspect but a random person can?? huh??
Totally agree, Joseph. The powers that be are getting too involved in how appraisers operate their businesses. Trainees should be able to do this type of thing.
We’re living in a different world. I don’t have any stats as to how frequent this product is being used, but it’s being propped up as the future, so I’m anxious to understand the magnitude of value at some point.
Yes, we are, Ryan. There are a lot of things I don’t understand about the process. It appears to me that appraisers are being forced to run their business in a way that others feel is best while the actual appraisers on the street are not being given a say so in the matter. If Hybrid Appraisals do become mainstream I believe those collecting the data, if they are not already appraiser trainees, need to also be licensed and certified. As I noted in the article, the model that others want appraisers to adopt uses workers who are required to have education utilizing an accredited training program. This is not something that is currently in place to my knowledge. It will be interesting to see how all of this pans out in the future.