By now, almost anyone involved in the valuation industry is either sick and tired of hearing about Hybrid appraisals, consumed by fear about the risks involved, or some combination of both. For the better part of the past two years there have been monthly, and sometimes weekly, articles and presentations focusing on the subject. At the Valuation Expo in Chicago from March 18-20, there were several presentations covering the topic. Mine was one of them. As always, us lawyers are part of the problem.
So why am I compounding the problem by adding yet another article to the mix? Well, I’m giving you this article because, whether you are in any way involved in Hybrid appraisals (performing, ordering, reviewing, etc.) or not, you should understand the actual risks involved to make an informed decision. To start, a Hybrid appraisal is an appraisal. Full stop. All relevant rules and regulations apply to a Hybrid assignment just as they would to any appraisal. The Uniform Standards of Professional Appraisal Practice (USPAP) and various state license laws are in full effect for a hybrid assignment. That is usually where the problems start.
Appraisers, and most of the more sophisticated clients utilizing an appraiser’s services, understand that there are, at present (and possibly for the foreseeable future), two types of an appraisal report: the Appraisal Report as defined by USPAP Standard Rule 2-2(a), and the Restricted Appraisal Report as defined by USPAP Standard Rule 2-2(b). That’s it. There are only two options. And in most circumstances, there is only one option. Call it a 1004, Hybrid. Drive-by, desktop, narrative, 1072, etc. and you’re talking about the Appraisal Report of USPAP Standard Rule 2-2(a). The appraiser has no choice but to comply with this rule when delivering anything other than a Restricted Appraisal Report.
Somehow, the fact that a Hybrid assignment involves a subject property inspection performed by someone other than the appraiser has thrown the profession for a loop. In order to fully appreciate the potential risks involved in this type of assignment, all users must appreciate that the subject property data is not being obtained or observed by the appraiser. At its most basic level, this is absolutely no different than the appraiser relying on third party information at any other point in the appraisal process. It is up to the appraiser, and the appraiser alone, to determine whether the available information is reliable and sufficient to yield a credible assignment result. That is an individual decision and some appraisers may choose to avoid these types of assignments altogether. Other appraisers will not be able to accept these assignment orders fast enough. Same as it ever was.
An appraiser that takes on a Hybrid assignment must, as in every appraisal assignment, take appropriate steps to comply with USPAP standards. In the case of relying on third-party inspection data, this will involve making an appropriate Extraordinary Assumption and clearly identifying it in the Appraisal Report. Where the appraiser cannot comfortably make that assumption, perhaps the Hybrid appraisal is not the appropriate vehicle for that assignment. At the end of the day, the appraiser is still signing a certification that he or she takes responsibility for the conclusions rendered and the decision to rely upon the data.
An additional layer of complexity is added to the mix when various state laws also begin to impact the use and viability of Hybrid appraisals. At the time of writing, (at minimum) the states of Maryland, Illinois, and New York have all begun to ask questions or issue statements regarding the appropriateness of Hybrid appraisals and third-party inspectors. For both the appraisers considering these assignments and the clients ordering the product, it will be important to become aware of each state’s particular rules and regulations that may apply to the Hybrid assignment. If the state requires licensees to perform the inspection, does that eliminate or largely reduce the viability of the Hybrid product in the marketplace? Would an individual holding some sort of license other than that of an appraiser (such as a home inspector) satisfy the regulatory body in a particular state? Does the client and/or vendor (Appraisal Management Company?) bear some culpability for ordering a type of product that does not, or cannot, comply with state law? And finally, do all the parts of the process have appropriate liability coverage for the inevitable claims and/or license complaints? All of these questions should be carefully considered and, if an answer is unclear, perhaps it is most prudent to avoid the Hybrid product until an answer becomes available.
As always, the appropriateness of the methodology and the manner of reporting is left to the individual appraiser and his or her determination of the scope of work necessary to produce credible assignment results. This scope is identified and refined though communication with the client and an understanding of the use, and risks, associated with the assignment. There must be a symbiotic relationship between the appraiser and the user of the appraisal report in order for the scope to be adequately defined. Ultimately, the market is likely to dictate whether the Hybrid appraisal, like every new appraisal product before it, is useful or preferred. But while that question is being settled in the marketplace, the participants must be acutely aware of areas where risk and liability may creep into the discussion. One thing you can count on, the lawyers (state board prosecutors, plaintiffs’ lawyers, defense attorneys, and claims counsel) are surely watching.