An Evaluation is a short format valuation report that federal regulators have
allowed lenders to order in lending situations where the loan amount is below a
threshold - for commercial properties, initially $250,000 and at present
$500,000 - since 2010. An Evaluation may be prepared by a party without an
appraisal license. Standard appraisal requirements for the valuation methods
applied and the completeness of research do not apply. An Evaluation is
allowed only in lending situations and not in others, such as valuations for
estates, government agencies, or private parties.
Evaluations are a radical departure from the heavily regulated methods of
analysis that are required under FIRREA and USPAP. With Evaluations, lenders
run the risk that low-quality, unreliable valuations will provide weak support
for loans. On the other hand, they open the door to analyses that "cut to the
chase" and forego unnecessary analyses and boilerplate, allowing quick, low
cost, and fairly reliable valuations that benefit the loan production process.
Lenders, recognizing the risks, have not fully signed on to the use of
Evaluations as substitutes for appraisals. If the lending process is to become
more streamlined, it will be necessary for appraisers to demonstrate that we are
able to provide Evaluations that are reasonably reliable.
From the point of view of appraisers, one of appraisal's main features is that
it allows us to make a living. For us, the stronger the requirements for
comprehensive and lengthy reports, the better. From the point of view of our
customers, appraisal exists to provide good valuation advice at a cost that is
proportionate to the amount of money involved in a financial decision. A level
of tension exists between these interests.
Take the case of the borrower who wants a loan of $300,000 against an office or
industrial building that is clearly worth $1,000,000 or more. The tax
assessment is $600,000, and assessments are notoriously below-value in this
community. All the comparable sales are above $100 per square foot of building,
and the building contains 10,000 square feet. The bank engages a standard
appraisal, at a cost of $2,400, with a turnaround time of three weeks. An
Evaluation, on the other hand, might cost $1,000 and take a week. The appraiser
arrives at the property only to hear the borrower's complaint that it should not
cost $2,400 to borrow $300,000 when the property's value is obviously so much
more than the loan amount. Every commercial appraiser has heard this complaint.
The appraiser's standard answer is that the appraiser is not informed as to the
amount of the loan and has only been sent to make the appraisal that was
requested. The appraiser completes the appraisal, delivering a value estimate
that substantially exceeds the $300,000 loan amount. And the appraiser is left
with a nagging feeling that the borrower has a point.
The key to a good Evaluation that would shorten the process and still deliver a
reliable value is the use of a high-quality AVM. At this office, we use Zaxia.us
as our preferred AVM. The appraiser inspects the property; gathers factual
information; inputs the information to Zaxia in a five-minute survey; obtains
an automated Zaxia Report, which includes three comparable sales and a standard
analysis through the Income Approach; and completes a Restricted Report of an
Evaluation for the lender, incorporating the Zaxia Report as part of the larger
Some are of the opinion that the AVM output itself, the Zaxia Report, qualifies
as an Evaluation. Our view is that an appraiser's attention from input to
review is necessary for reliability. For a lender, the benefits are compelling:
turnaround time and cost are both shortened by more than half.
The Restricted Report format is appropriate: the use of the report is restricted
to the lender, who has a better understanding of the process than do others.
So long as a high level of quality is maintained, the use of Evaluations opens
the door to more efficient methods of valuation.