Getting Appraisals Right: A Veteran Examiner’s Guide to Today’s Property Appraisal Challenges and Opportunities

Beverlea S Gardner, a retired FDIC senior examination specialist, has recently written a widely read series of ProSight articles on ideas and leading practices around property appraisal. We caught up with Gardner to talk about her articles on valuation-related risk management practices, review strategies, and managing an appraiser shortage—and to  get her insight into the latest challenges and issues facing the industry. Here’s what she had to say: 

APPRAISER SHORTAGE 

ProSight: How and why should banks start building their appraisal benches now? 

Gardner: We need to build the next generation of appraisers. We have a real shortage of younger appraisers in the industry—only 7% of appraisers right now are under the age of 35, and two-thirds of the entire appraisal workforce is over 50 with nearly a quarter of all appraisers over 65. So, I am a big advocate for banks helping to grow the next generation of appraisers and building your bench. Hire somebody who’s expressed an interest in possibly becoming an appraiser or a related field and get them started. Support internships with clear career paths. Provide well-defined milestones for promotion, so that new entrants can easily understand how they can make a living in this industry.  

You suggest using more carrots, and less sticks, when it comes to lenders working with appraisers. Can you provide some examples of how this could look, and why it would be effective?  

Use incentives and appraisal alternatives. Find appraisers who provide good quality reports, then pay them well. Focus their time and expertise on more complex or higher risk real estate where they add the most value. Banks also should stop ordering appraisals for transactions that don’t require them and use the alternatives that are already legally permitted. For example, we all know the regulations require an appraisal for a $10 million loan secured by a commercial property when it’s first coming into a bank. However, if you are planning to continue working with that borrower and renewing that transaction after it matures in three or five years, you don’t have to get another appraisal. An evaluation is permitted—or you can validate the existing appraisal. Getting an evaluation when allowed would give your appraisers more time to concentrate on the transactions that require their expertise and can command a higher fee. 

How does the appraiser shortage affect turn times and loan origination pipelines?  

Turn times are vulnerable and could jeopardize loan closings. Right now, lower loan volume is masking the problem. For commercial appraisals, LightBox data from more than 1,200 banks and credit unions put average turn times at roughly 13 to 14 business days in 2025, down from a peak of about 18 days in early 2022. Residential turn times have been running closer to seven business days. But those numbers reflect a market with spare capacity. During the 2021 volume surge, commercial turn times stretched to four to six weeks in some markets. With fewer appraisers entering the profession, even a modest loss of capacity can produce disproportionately longer delays once appraisers are fully booked. The longer it takes to get that appraisal report in, the tighter the window for closing the deal becomes. This pressure will intensify as loan volume increases. Banks may face more difficulty closing on time, may need to extend deadlines, and may encounter related legal or financial issues, such as expiring interest rate locks.   

RISK-FOCUSED REVIEW/AI 

How can financial institutions optimize their valuation review process to ensure reports provide reliable market value information in a timely manner to close the loan?  

Train your reviewers. Provide reviewers with clear guidance on what types of issues really require them to ask follow up questions with the appraiser, and which ones don’t. And remember that only material errors should go back for possible revision. When setting parameters for what constitutes a material error, there are three types of criteria to consider: first, when something is wrong with the legal information; second, any kind of issue related to bias or discrimination; and third, the aggregate amount of errors. By that, I mean that if you add up all of the minor errors in a report and you estimate their aggregate effect is 5% or less of market value, then they are not material. Reviewers may document non-substantial errors when warranted, but otherwise let them go. Reviewers need to feel free to go back to the appraisers when it really matters, but going back to ask about small mistakes that are inconsequential is a waste of everybody’s time. 

How are banks striking a balance between using human appraisers or generative AI in both appraisals and reviews?  

My conversations indicate that there are essentially three camps when it comes to generative AI. First are the organizations that are actively working hard today to implement an advanced AI tool. Second are the ones that look to what their external vendors provide relative to the use of AI. Third are the slow adopters who want to wait and see what will happen, especially as this area is evolving so quickly. Anyone using any kind of generative AI in an appraisal or in a review should understand what the tool is—and is not—doing.  

The industry has identified four types of errors that they are allocating to generative AI — hallucinations, fabrications, misalignment, and assignment drift. Whether in an appraisal or in a review process, users need to understand what information AI provided and then take reasonable steps to authenticate it.  

In what ways is AI failing to capture the nuances of local real estate conditions? How can banks mitigate those blind spots? 

When there’s a lot of data readily available for a particular market, especially urban and suburban areas, AI does a pretty good job most of the time when given very clear and objective instructions. Where there’s a lack of data or sufficient data, AI can create problems––like making things up––because it’s trying to complete the assignment. Banks should establish clear controls over the use of generative AI in their appraisal reports and review processes, and make sure the users understand they are responsible for the information in that report or in that review and are checking it in a reasonable manner. When introducing a new generative AI tool, I would encourage banks to use a risk-focused review process that continues to include human judgment. This is where the industry is evolving, and we need to figure out how to use it while still maintaining the reliability of both appraisals and their review. 

VALIDATING EXISTING REAL ESTATE APPRAISALS 

Which are the most important pros and cons to keep in mind when engaging in the validation process for subsequent transactions?  

Many lenders don’t realize they can validate an existing appraisal or evaluation report rather than ordering a new one. If you use an external vendor for validations, make sure that vendor actually validates the existing report. Be wary of any vendor that pulls recent comparable sales, compares them to the property, and makes adjustments. That report is effectively a new appraisal that does not comply with USPAP [Uniform Standards of Professional Appraisal Practice], and that is going to get the lender in trouble. A validation report is not a new opinion of value. Choose an external vendor who focuses on that prior existing report’s opinion of value and takes appropriate steps to comply with all the state law requirements as well as the federal regulations. 

Can you share with us how shifting guidelines are affecting internal bank valuation workflows? 

Executive Order 14393 titled “Promoting Access to Mortgage Credit,” which the president signed in March, talked about using greater automation in the valuation process. I think we are headed toward greater automation, and there’s going to be growing pains associated with it. When we talk about how it’s affecting the valuation workflows, we are already seeing appraisers using AI to generate their reports. We are already seeing some lenders using AI in the review process. I think that’s great, and there are efficiencies gained.  

These tools can improve efficiency, but banks still need a human element. We need new types of quality control methods to confirm that generative AI information in the appraisal report is credible and that AI used in the review process follows clear, objective directions and performs as expected. At this point, generative AI can make these processes more efficient, but I think it’s also going to make it more important than ever to have appropriate quality control functions in place before they are used, and ongoing human oversight monitoring it over time to ensure it continues to perform as expected. 

How should banks approach the valuation of properties with smart-building technology or green energy features, particularly when comparable sales are limited? 

These are terrific concepts, and green and energy-efficient features can add value to both residential and commercial properties. The good news is that there is a substantial body of guidance and education available on valuing sustainable buildings, on both the commercial and residential side. Organizations like the Appraisal Institute offer coursework on the subject, along with tools such as its Residential Green and Energy Efficient Addendum. The key element is verified cost savings. Appraisers need documented data showing how much a feature actually saves compared to what it costs. That evidence is what allows the appraiser to analyze how the market is reacting to these features and to support an adjustment for that market reaction. Without it, at some point a window is a window, and a door is a door, and it’s hard to say the feature supports a corresponding increase in property value. 

Smart buildings can help you with all sorts of things, such as reducing costs by maintaining constant temperatures, but we also need to think about cybersecurity for smart buildings to ensure they are not susceptible to hackers. So go ahead, upgrade your property. It may save you money and make your life easier by having these features, but don’t forget to make sure that they truly add value and have really, really good security. 

GENERAL 

In a world of rapid interest rate changes and sudden market upturns or downturns, how can bankers handle lagging comparable sales data? 

We have seen instances where interest rates change very abruptly in three or six months, and that affects real estate lending in general. Now a lender has to essentially ensure its borrower is capable of meeting all the underwriting criteria based on a higher payment, particularly if a missed closing deadline causes an interest rate lock to expire. On the commercial side, when it comes to valuations, it’s going to affect the capitalization rate because as interest rates rise, market investors’ expectations for a higher rate of return rise, so cap rates go up and market values come down. It’s just how the math works.  

In those types of situations, lenders are going to have to decide if they are going to require borrowers to contribute more funds when acquiring a new property or at renewal. Or, are they going to approve higher loan-to-value ratios? When you’ve got that kind of volatility in your marketplace, I would encourage you to not take the easy way out. Be competitive, but don’t forego sound underwriting. Requiring more borrower equity up front or at renewal is a much better outcome rather than managing a problem loan and attempting to recover your losses on the back end.