Q: What information should be contained in an evaluation?
A: The agencies’ appraisal regulations require evaluations to be appropriate for the transaction and consistent with safe and sound banking practices, but do not specifically define the content to support the evaluation.37 As explained in the Valuation Guidelines,38 an evaluation should contain sufficient information detailing the analysis, assumptions, and conclusions to support the credit decision. An evaluation’s content should be documented in the credit file or reproducible. An evaluation should include sufficient information to identify the property, address the property’s actual physical condition, and detail the analysis, assumptions, and conclusions that support the market value conclusion. The level of detail documented in the evaluation should reflect the risk in the transaction. For example, in general, an evaluation for most residential properties could be less detailed than evaluations for commercial properties.
When developing policies and procedures regarding supplemental information that a financial institution will require to develop an evaluation, the financial institution should be aware that some valuation assignments, such as for properties in rural areas or non-disclosure states39 or properties that are not sufficiently similar to other properties in the local market, may be more challenging to value due to a lack of comparable sales data. Although the sales comparison approach is the most used valuation method, in areas where there have been few, if any, recent comparable sales of similar properties in reasonable proximity to the subject property, the person who performs an evaluation may consider alternative valuation methods and other information for developing an evaluation and supporting a market value conclusion.
For example, the cost approach to valuing real property might be an appropriate valuation approach, particularly if the property is newer construction. Similarly, for an income producing or rental property, the income approach could be appropriate to support a market value conclusion in an evaluation.40
37 OCC: 12 CFR 34.43(b); Board: 12 CFR 225.63(b); and FDIC: 12 CFR 323.3(b).
38 See Valuation Guidelines, section XIII.
39 Nondisclosure States do not make information concerning property transactions available to the public.
40 See Valuation Guidelines, sections XII, and XIII; Evaluations Advisory.