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A Deeper Dive Into Appraisal Reconciliations

Editor’s note: This feature originally appeared in the October issue of DS News

Data is king, we’re told. But data doesn’t always tell the whole story—in fact, too much data can make the truth harder to find, and property valuations are a prime example. Today, more than ever, there is an abundance of data available regarding real estate values. Consumers can find literally dozens of different estimates of their home’s worth from any number of websites. The type and combination of data elements used to determine home values continues to grow, along with valuation products such as automated valuation models, hybrid appraisals, and broker price opinions. 

With so much information and so many tools at our disposal, it’s no wonder appraisal reconciliation requests are soaring in number. If you’re not familiar with the reconciliation process, it’s when an individual with real estate valuation expertise reviews and analyzes one or more different valuation conclusions and provides a final opinion of value. The reviewer draws on his/her experience, expertise, and knowledge of the local market to come to a conclusion. 

At Summit, the volume of requests to review single or multiple valuation reports to understand the true value of a property has risen sharply, as lenders, servicers, and investors try to determine how to make sense of the different numbers they’re seeing. It can all be a bit overwhelming, so being able to provide clarity of value is important.

Companies investing in mortgages need values they can trust, and technology is an important component behind arriving at those values. But what companies need more than anything else are skilled experts capable of reviewing all the data in its many different forms and making some sense of it.


The Growing Need to Reconcile 

There are several reasons why reconciliations are on the rise, but the biggest by far is cost. Today’s lenders and servicers are dealing with squeezed margins and loan production costs are at their highest levels ever, according to the most recent numbers from the Mortgage Bankers Association (MBA). In their struggle to remain profitable, lenders have sought out streamlined valuation methods they can get at the lowest price point. 

Reconciliation requests are also increasingly being used to validate values in the pre-purchase stages of non-QM loans and in default servicing scenarios. During the default stage, lenders and servicers frequently encounter historical valuations that can vary significantly. As a property heads closer to the default stage or toward foreclosure, a reconciliation review that produces a supported opinion of value backed by evidence can help servicers avoid leaving money on the table. 

In most cases, companies seeking reconciliation reports do not have the valuation experts on staff who can look at differing reports and determine the right value. Take BPOs, for instance. A servicer may look at a BPO and determine that it makes sense, given their knowledge of the local market. However, if there is some confusion about how the broker arrived at the value, the servicer may order a second BPO, which might differ in value by more than 20%, for example. Both reports may look acceptable under their own merits, but which number is correct? 


Bring in the Experts

Today, more lenders and servicers are going to the experts to make sure they get the numbers right. In the typical reconciliation report, an expert valuation analyst takes two or more opinions of value, performs a review of how they were created, analyzes their conclusions, and determines a supportable opinion. The most important factor in the entire process is the person who performs the reconciliation and the collective experience, knowledge, and skill they bring to the process. 

Taking our dual BPO scenario, for instance, a company may come to us with the two reports and ask us where the value sits. The correct value may sit with one of the reports or somewhere in between. To find the answer, we’ll bring in a trained expert, sometimes an appraiser working as a valuation analyst who may pull additional data from the multiple listing service or other sources and start asking questions. What data did each broker look at? What information did they leave out? 

At the end of the day, the expert’s job is to do the research, compile all the relevant data, and uncover additional reports, and come up with findings that either support one of the reports or determine the correct value between them. 


Finding the Right Provider

Whether you are a lender, a servicer, or an investor, you should know what to expect when ordering reconciliations from your valuation provider. One of the most important questions to ask involves the type of tools, resources, and data your provider has access to. 

For example, if there have been previous valuations performed on the subject property, you’ll want to make sure the reviewer has access to those previous valuations. Without being able to look at the historical values, whoever is performing the reconciliation isn’t going to be able to get the full picture. Another important question to ask: what is the valuation expert’s local expertise? If you are a nationwide lender looking for nationwide reviews, you want to make sure your provider has access to experts in every market you serve, and not all do. 

Who is on staff? Some lenders are looking for reconciliations to be completed only by appraisers. If the reconciliation involves a secondary market or default situation, however, you may not need a licensed appraiser, but rather a trained expert with experience and knowledge in the market where the subject property is located. 


The Ability to Dig Deeper

Before ordering reconciliations, ideally you should have a discovery call with your prospective valuation provider so they can understand your scope of work. We have clients that give us two valuations and ask us to reconcile them, but often what they are really looking for is a different type of report or an approach that is different than their current provider. In such cases, we like to run a few live test orders prior to engaging a new client to make sure our reports hit all the points the client is looking for. 

A good valuation provider will also ensure that someone follows up with you and is available for phone calls to answer any questions you have about the reports. Reconciliation reports come in all different forms, and they can be configured to meet an individual client’s needs. But if you don’t ask the right questions, you’re not going to get the results you want. Your provider should be asking questions, too. It’s almost like dating—both parties need to ask a lot of questions before you start working together. 

In a quality reconciliation report, it’s usually the commentary accompanying the report that tells the real story behind the opinion of value. Getting the context behind the numbers is incredibly important. You can have cookiecutter neighborhoods in which you can pick any number of properties and the comps and values make sense. In other markets, however, a value may leave everyone scratching their heads, wondering how it was determined and the reasoning behind it. 

That’s where the human component comes into play. In a good reconciliation report, you’re going to get comments about how the value was reached and why certain comps were chosen and others were not. It’s possible that you may still disagree with the value, but at least you will fully understand how they reviewer arrived at the data. Without that context, clients are often left wondering, what gives? 

Whether you are completing a reconciliation using internal staff or a third-party provider, the key is transparency. Given all of the data that is available, it’s best to provide clarity on what similar properties were used to support and defend the ultimate value, as well as those that were not. For example, if the reconciliation is supporting a value that is different than what is provided on the report being reviewed, its best to expect some commentary as to why the data within the report was not best suited to support the value of the property. This type of transparency is also important if the loan is being sold on the secondary market because it provides the end buyer with a full understanding of how the value was determined. 

The bottom line is that reconciliation reports serve an increasingly important role in our industry, but ultimately, these reports are only as good as the experts behind them. Only humans are capable of digging deeply into the numbers and asking the right questions, which is never more important than when conflicting values are present. 

Technology certainly has its place in our evolving world, but removing all human components from the valuation process is neither practical nor safe. It’s great to have so much data about properties, and it’s wonderful to have tools such as AVMs and other technologies to use to help determine values. More than ever, however, human expertise is needed to make sense of it all—and to provide a needed level of security and certainty

About Author: Mike Albanese

Mike Albanese is a reporter for DS News and MReport. He is a University of Alabama graduate with a degree in journalism and a minor in communications. He has worked for publications—both print and online—covering numerous beats. A Connecticut native, Albanese currently resides in Lewisville.

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