3 tips for commercial appraisal review: Avoid exam findings

The process of reviewing appraisals for commercial loans is an important aspect of due diligence that is not always given thorough consideration. Appraisal reviews can serve many important purposes, but our focus here will be on helping your institution proactively manage risk.

While the appraisal of real property is guided by the Uniform Standards of Professional Appraisal Practice (USPAP), that does not guarantee each appraiser will make identical conclusions. For this reason, USPAP also establishes the need to develop procedures regarding appraisal review.

Appraisal review is the process of forming and communicating an opinion about the quality of another appraiser’s work. Many variables affect the mathematical calculations within a report and the answers recorded for open-ended questions can alert lenders to additional risks associated with the property that might alter its value as collateral. Expertise is key in quantifying these risks. 

We understand that managing your institution’s appraisal pipeline can be time consuming and cumbersome. Combined with the regulatory requirement for separation of duties between loan origination, credit, and appraisals many teams feel that they are constantly in need of additional staff with the appropriate skills.

Consider these 3 tips for improving your commercial appraisal program:  

1. Leverage technology to automate appraisal ordering and reviews. Automating a blind bid process allows your staff to remain independent while they request work from licensed appraisers and real estate specialists. Employing technology can both drastically increase your efficiency and satisfy the separation of duties.
   • Without automation – Ordering an appraisal and review can take 2-4 hours to complete.
   • With automation – Ordering an appraisal and review can take as little as 10 minutes.
2. Implement appraisal review standards. Examiners evaluate the risk of a credit union’s real estate-related activities based on its size and the nature and complexity of the transactions. Below is a simple example of different review levels that might be appropriate for a mid-size credit union.
   • Loans $250,000 or less – Determine if the report includes the items required by USPAP
   • Loans $250,001 to $5,000,000 – Review mathematical calculations and determine if the conclusions are supported. 
   • Loans $5,000,001 or more – Develop an opinion as to whether the analysis is appropriate and conclusions are creditable within the context. Provides conclusions regarding market value. 
3. Find a vendor that can help. Partnering with a 3rd party can be less expensive than hiring additional staff and potentially invaluable as it can easily provide separation of duties along with the appropriate level of appraisal review experience.

Whether you have a seasoned book of business or are looking to begin offering business loans for the first time, Lucro Commercial Solutions can help you automate your appraisal process from orders to reviews. Plus, our dedicated business loan experts will help you establish policies based on best practices that keep you in compliance. Visit www.lucro.org/What-We-Do/Lucro-Services to learn more or contact Tami Chandler at tami@lucro.org.