From Nick Reynolds, VP/Credit Services Manager
While appraisal reviews are a necessary step to ensure that the appraisal is accurate and compliant, they are also a critical component of the loan underwriting. Many of the findings that result from performing an appraisal review are key to include in the credit write-up and in making a decision on the loan.
For example, with an appraisal on a single family residential home in a subdivision, you could conceivably have hundreds of comparable properties that are from recent sales, are close by, and result in a high-level of confidence in the appraisal figure.
In the case of a unique property such as a large church in a rural location, the story is different. The comparable sales will be similar, likely also large churches in rural areas. However, there is little likelihood of recent local comparable sales. Comparables will probably be older, and won’t represent local demographics, traffic flow, employment, etc. While the appraiser may have concluded a reasonable value, there is a great deal more variability in possible values of the property. The underwriting must acknowledge the additional risk this variability in value represents, typically by lending at a lower advance rate.
Consider the residential property example above. If you know the value within +/-2%, you can use that value in your underwriting with confidence. In the church loan, you might only have confidence that the value is representative within +/-15%. As a result, it would be recommended that you limit your advance rate to the lower value, which would indicate 15% less than your usual advance rate of 80%.
Essentially, the appraisal review helps you answer this question: How confident am I in the valuation, and can I lend at 80%? This level of confidence will be different with every appraisal, and needs to be assessed as part of the underwriting process. Your appraisal review should indicate where this might be a significant issue.
Other questions the appraisal review can help with in underwriting – Is the term of the loan within the remaining economic life of the property? Are there other unique features of the property that increase the potential viability of the value? Are actual rents significantly different than market rents? All of these issues should be pointed out in an appraisal review, and are features of the appraisal that impact the underwriting, but are not typically pointed out as weaknesses by the appraiser.
Looking at the transaction from a credit perspective and commenting on features of an appraisal that may create credit or loan structure issues for credit unions is critical, and something CUBG consistently does in our appraisal reviews. CUBG also takes a conservative view of unique properties, taking into account the difficulties that can arise in working out a loan where those properties need to be liquidated or resold.