Between a changing regulatory environment and an appraiser shortage, commercial lenders might need to consider viable alternatives to traditional commercial appraisals when appropriate.
Commercial evaluations are not yet household names within the industry, but Audrey Clearwater, vice president of operations with LRES, Orange, California, says they should be.
MBA NeiusLink recently posed questions to Clearwater. LRES is a national real estate services company providing valuations, real estate-owned (REO) asset management, homeowner association (HOA) and technology services to the mortgage and real estate industry.
Q: What is the difference between a commercial evaluation and a commercial appraisal?
A: Commercial evaluations are performed by brokers or field agents, whereas commercial appraisals are performed by appraisers.
These professionals follow different guidelines to procure values. Commercial evaluations comply with the Interagency Appraisal and Evaluation Guidelines, which are ground rules for federally regulated institutions on proper policies, procedures and practices as they relate to value conclusions outlined in a 45-page document released by the FDIC [Federal Deposit Insurance Corporation].Traditional commercial appraisals follow the Uniform Standards of Professional Appraisal Practice [USPAP], the ethical and performance standards for all types of appraisal services released by Congress.
While the processes behind generating property values are very similar and the valuation reports for both evaluations and appraisals look fairly identical, there are distinct circumstances when lenders should consider doing one over the other.
Q: So when does it make the most sense for lenders to consider using a commercial evaluation as opposed to a traditional appraisal?
A: Evaluations utilize market value versus price. Lenders can use evaluations for origination purposes when valuing a commercial property under $1 million. This means that commercial evaluations are reliable, cost-effective alternatives to procuring values for low-balance properties, while traditional appraisals are still the most appropriate option to obtain values for complex, high-dollar properties.
While evaluations are viable options to use for origination purposes when appropriate, they are more commonly used for portfolio monitoring, due diligence, loan modifications, default services and extensions of credit. They can also be used whenever a lending institution...