As more and more lenders adapt, and innovations like Value Connect's Modified Full-Inspection (ModFI) appraisal report process become widely adopted, it's important to understand the potential positive and negative impacts of reports that don't include a physical interior property inspection.

Types of Reports Without Interior Inspections

Drive-by and desktop appraisal reports have been around for decades, and used for financing purposes when the loan represents a low percentage of the property's value. The loan-to-value (LTV) requirements vary from one lender to the next. In our experience, they're often used when the LTV is 65% or less.

Modified full-inspection reports also fall into this category because the appraiser doesn't physically enter the home. Instead, they conduct an interview with the borrower or listing agent to learn details about the interior. This interview is done over the phone or using on-line video. Interior pictures are sent to the appraiser for use in their reports.

Automated Valuation Models (AVMs) use data to estimate a property's value. Machines, quite literally, are cranking out values based largely on historical data.

Benefits of ModFI, Drive-by & Desktop Reports

The biggest benefit is speed. AVMs are the fastest, and can literally produce a value in seconds.

Drive-by and desktop reports have the benefit of being faster than full reports and include current market data not yet available to AVMs. They also include an appraiser's analysis of factors like economic and local government bylaw changes that impact property values.

ModFI appraisals go further, with the appraiser visiting the property, taking pictures and measurements of the exterior. While these reports take longer than AVMs, desktop and drive-by reports, they're faster than Full reports.

Challenges

The greatest challenge (in our view at Value Connect) with these forms of reports is that appraised values are often lower than what they would have been if the appraiser conducted an on-site interior inspection.

If you think this through, it stands to reason that an appraiser will have difficulty in assuming a property's interior is better than average condition. Obviously, a ModFI gives appraisers more to work with than a drive-by or desk top report. It doesn't, however, give the appraiser the same comfort level as when they (or someone they employ / sub-contract to) inspect the interior.

It's fair to say that the market will need to adjust to this reality.

It's a Balancing Act

So, which type of report do you choose? The answer, in our opinion, largely depends on your LTV. The higher the LTV, the better off you will be if you can arrange for a Full report. You're best waiting the 6-10 business days for a full report, vs going with a speedier option only to find you need a full report after all.

Some people have remarked that it might be a good idea to just wait for things to blow over. That's a good point. But consider this: We don't know what (exactly) is going to happen to businesses and employees hit by COVID-19. Are you better holding off 2-3 months if the impact results in lower real estate values?

Parting Thoughts

I'm reminded that a bird in the hand is worth two in the bush. Maybe you're better getting your files closed rather than taking a wait-and-see strategy.

Lenders are coming to terms with the large number of customers looking for payment relief. They're looking to slow down mortgage lending while they adjust to new ways of working (from home), and a potential decrease in real estate values.

Value Connect cares about all of its stakeholders. Each and every one: Appraisers, Borrowers, Lawyers, Lenders, and Mortgage Brokers & Specialists. Let's keep the lines of communication open. Please contact me if you'd like more information or have an update you'd like me to share with others.

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