Managing In-House Real Estate Evaluations

In recent years, financial institutions have expanded their in-house real estate evaluation operations. This expansion is thanks to an increase in appraisal exemption thresholds for both commercial and residential real estate. Institutions performing in-house evaluations must follow the 2010 Interagency Appraisal and Evaluation Guidelines. One component (of many) to ensure your credit union is in compliance with the guidelines is to employ skillfully trained individuals to perform the evaluations.

Who should prepare the evaluation? The person selected to perform evaluations is responsible for the soundness of the evaluation and protecting the customer. Do they have the qualifications your credit union’s policy requires? The preparer should hold the necessary education, expertise, and experience to competently execute each evaluation. As an institution, it is in your best interest to keep a record of their credentials, in the event an examiner questions their qualifications. It is also smart to occasionally review the person’s overall performance, not only individual assignments.

In-house real estate evaluations require independence, meaning the person conducting evaluations cannot be part of, or directly report to anyone in loan production. However, absolute independence may not be possible in smaller institutions. In this case, one loan officer can perform an evaluation for another, only if they are not involved with the lending decision. To further support independence in this situation, have someone outside of loan production review the evaluation. Finally, the evaluator must not have any financial or other interest in the property. “They must be able to issue an unbiased opinion of value”, according to lending expert, Aaron Lewis of Young & Associates, Inc.

Should you always use your in-house personnel, even when the property is within the threshold for market evaluation? There are some circumstances when you should elect to use an appraiser. For instance, when the property is atypical for the area, such as an oversized, residential log cabin in an area with smaller homes. On the commercial side, a greenhouse could be considered uncharacteristic in that market. An appraisal could be more useful if a property is outside of your traditional lending area, as an appraiser is more familiar with the locale. Transactions involving borrowers with debt-service coverage below your policy requirement, limited equity, high leverage, or any other high-risk characteristics should also consider an appraisal over market evaluation. Lastly, you may choose to use an appraiser based on the credit risk culture of your credit union.