Hybrid Appraisals Raise Concerns in Real Estate Industry

Fannie Mae introduced “value acceptance + property data,” or hybrid appraisals, in its Appraiser Update newsletter in March, noting that they have been testing hybrid appraisals in a pilot program for several years.

Hybrid appraisals involve using a trained property data collector who visits a property in person to observe the physical characteristics of a property. They then relay the information they collected to a certified appraiser for the final review and analysis of the data in order to issue an appraisal.

In a traditional appraisal, the appraiser would create a report based on an in-person inspection involving the size, condition, floor plan and other details of a property and a review of data collected.

“Hybrid appraisals were born out of technology,” said Michelle Czekalski Bradley, a USPAP instructor and appraiser with Czekalski Real Estate in Pennsylvania. “However, Fannie Mae and Freddie Mac have said they will accept an appraisal that uses someone else to visit the property and collect the information about it. Many appraisers believe this is not the best way to conduct an appraisal for several reasons, including not knowing the level of training the data collectors have received.”

“Many appraisers aren’t comfortable with using information collected by someone else,” she added. “They want to see the property, go through looking at the details, see the quality and condition firsthand. Even factors such as pet odor, for instance, will not come through in photographs taken by a data collector. We all know that if a property has an unpleasant odor, that can have a great impact on the price.”

Bradley is concerned that property data collectors aren’t licensed and do not go through continuous criminal background checks. “There have been cases in other states where these data collectors had an initial background check, then have taken advantage of the access to a consumer’s personal residence Because the data collector is not licensed, there is no regulatory authority who can protect the public trust and discipline these individuals.”

She cautions real estate agents to ask questions about who is entering their listing, and always ask if the individual is a certified appraiser or an individual who is only collecting data. She also recommends the listing agent or their representative be present when anyone is inside the consumer’s property.

“Though there may be differing opinions, it’s always been my recommendation that listing agents should be at a property when anyone comes to the property,” Bradley said. “It’s part of your responsibility to be there to answer questions when an appraiser or anyone else are at the property. You are the gatekeeper for your client’s home, so it’s important that you know who is coming into their home.”

Bradley said in years past, often appraisal management companies were sending appraisers from several hours away to conduct appraisals. “Agents learned to ask the appraiser, ‘Where are you coming from?’ because those appraisers weren’t always familiar with the market conditions,” she said.

Some AMCs are also asking real estate agents to be the property data collector. And some have allowed the listing agent to do the data collection for their own listing, which raises a red flag for Bradley.

Bradley said, “What happens when you have a buyer who thinks they’ve overpaid for a property and finds out that the listing agent supplied the information for the appraisal? This really opens a big can of worms.”

These questions about potential liability in a new and evolving business process are what concerns Hank Lerner, PAR’s chief legal officer. “Real estate brokers and salespersons are licensed to help their clients buy, sell and lease property through a real estate brokerage,” he said, “but they are not licensed to measure properties on behalf of appraisers and appraisal management companies. Any time a licensee is asked to do any sort of ‘license-adjacent’ activity they should discuss it with their broker first, and the broker may want to check with their E&O insurance carrier to see if they would be covered if a claim was filed against the agent. Our initial discussions with some carriers suggest they might not be.”

Lisa Scoble, vice president program business with Pearl Insurance, said, “A real estate errors and omissions policy covers the insured/agent when conducting real estate professional services for a third party. Real estate appraisal activities are considered real estate services in Pearl’s policy, however, the act of selling data obtained through the appraisal is not. A claim arising from that sale of data would likely be denied by the insurance carrier.”

She added, “It is important to keep in mind that not all E&O products cover the same professional services so it’s important to confirm whether your policy includes appraisals in the definition of covered real estate professional services.”

Bradley urges real estate agents to ask questions about what type of appraisal or valuation is being completed on your listing and when someone is visiting the property, meet them at the property.

Realtor® Magazine recently published an article on hybrid appraisals.