The document discusses contemporary appraisal issues in real estate transactions, highlighting the critical need for independent ordering and review processes. Key topics include the proposal to raise the appraisal threshold for commercial real estate transactions, legal challenges with cross-state appraisals, and inconsistencies in appraisal methods for going concerns. The Credit Risk Council aims to support best practices in credit risk management, emphasizing the importance of consistent valuation methods.

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3 THINGS YOU SHOULD KNOW
ABOUT APPRAISALS
An Excerpt from “2017 Industry Insights:
Perspectives from the Front Line”
by RMA’s Credit Risk Council

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CURRENT APPRAISAL ISSUES
Appraisals continue to be a very
important and required valuation tool for
both owner-occupied and investor real
estate transactions.

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CURRENT APPRAISAL ISSUES
• Independent ordering and
review, separate from
relationship managers and
approval officers, remains
critical.
• There are, however,
ongoing discussions about
issues with appraisals and
three are outlined following.

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CURRENT APPRAISAL ISSUES
The appraisal threshold
Cross-state appraisals
Inconsistency in appraisal
methods

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The Appraisal Threshold

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Proposal to
increase the
threshold
THE APPRAISAL THRESHOLD
Banking agencies are developing a
proposal to increase the required
appraisal threshold for commercial real
estate (CRE) transactions from $250,000
to $400,000.
$250K $400K
Source: The Federal Financial Institution Examination Council’s Joint Report to Congress.

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Proposal to
increase the
threshold
The report currently
proposes to leave
the residential real
estate threshold at
$250,000.
The $1,000,000
threshold for owner-
occupied real estate
business loans is
still under review.
THE APPRAISAL THRESHOLD (CONT.)
$250K
$1M

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Cross-State Appraisals

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CROSS-STATE APPRAISALS
Another issue is the legality
of doing technical appraisal
reviews in states other than
the one(s) where the reviewer
is state certified.

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CROSS-STATE APPRAISALS (CONT.)
All states have their own requirements
for appraisal reviews.
• The reviewer is certified in some state.
• And the reviewer does not modify the value.
• If the reviewer opines to a value different
than the appraisal, he/she must be certified
in the state where the property is located.
Some states allow a review of a property
that is located in that state as long as:

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Other states’ laws dictate that in
order to complete a technical
review of a real estate appraisal
in their state, the reviewer must
be certified in the state where
the property is located in all
situations.
CROSS-STATE APPRAISALS

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This requirement would
theoretically require a reviewer that
does review work nationwide to be
certified in all 50 states even if
he/she does not opine to a value.
However, this is an issue that
needs to be resolved on the federal
level and the federal government
has remained silent thus far.
CROSS-STATE APPRAISALS

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Inconsistency in Appraisal Methods

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INCONSISTENCY IN METHODS
Inconsistency in methods to
determine the allocated
values of a going
concern is
another
controversial
subject.

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INCONSISTENCY IN METHODS (CONT.)
Typically, properties such as
hotels, convenience stores, and
senior housing sell as a going
concern.

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INCONSISTENCY IN METHODS
For loan-to-
value (LTV)
purposes, a
real estate loan
for a going
concern must
be allocated to:
• Separate “real estate value only.”
• Business enterprise value.
• Furniture, fixtures, and
equipment (FF&E) components.

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INCONSISTENCY IN METHODS
There are
several
acceptable
methods for
doing the
allocation, but
they result in
varied
conclusions.
The challenge is
how to get
consistency in
the allocation.
One thought is
to require
multiple
methods in each
appraisal that
would make it
easier for the
reviewer to
reconcile
multiple
appraisals of the
same property.

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The Credit Risk Council supports
professionals who are responsible for
establishing, maintaining, or carrying
out credit risk management policies.
The council focuses on funded and
off-balance-sheet risk management,
including capital markets activity, and
other forms of credit intermediation
and risk mitigation.
About RMA’s Credit Risk Council

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For additional information about
credit risk management,
visit
www.rmahq.org/credit-risk/
LEARN MORE

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