Spurred on by the pandemic and the housing boom that preceded it, the rise of hybrid appraisals was an attempt to modernize the process. Here's what you need to know about this appraisal type.
Hybrid appraisals vs. desktop and traditional appraisals
First, let’s take a moment to define the purpose of appraisals. Generally, appraisals are conducted as part of mortgage lending, refinancing and loan assessment processes to determine or confirm a property’s fair market value. The three main types differ from one another in the following ways:
- Traditional appraisals, also known as 1004 appraisals, involve an appraiser physically visiting the property to assess its value (known as a field inspection) and then conducting a market data analysis using data like MLS info and public records to complete their assessment of the property’s value.
- Desktop appraisals are completed remotely, without an on-site inspection of the property. The appraisers who conduct them use data alone to prepare their property valuation.
- Hybrid or bifurcated appraisals are based on the same information as traditional appraisals but are conducted using a third party for the in-person property inspection portion. This inspector shares their outcomes with the appraiser, who can focus more deeply on the data to complete their valuation.
History of the hybrid appraisal
Until recently, hybrid appraisals were used primarily in mortgage servicing versus home sales. But long lag times in getting appraisals during the pandemic—driven by a hot housing market and a relatively small pool of appraisers—led government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac to seek alternative solutions that would modernize and expedite the appraisal process. (Between 2014 and 2018, the number of licensed appraisers declined by more than 10%, according to the Appraisal Institute). While hybrid valuations did become more widely used during the pandemic, they are still considered relatively new to the home sales side of the market.
Potential effective uses of hybrid valuations
Beyond their newer application in the home-buying or refinancing process, hybrid appraisals can be effective for mortgage servicing and loan defaults, where an updated valuation or a determination of a loan’s performance may be needed. During defaults or foreclosures, lenders can use hybrid appraisals to determine a property’s current value.
Advantages and disadvantages of hybrid appraisals
The primary driver of hybrid appraisal growth during the pandemic was speed: Appraisals that sometimes took weeks or even months to complete could be conducted much faster with a third party doing the on-site legwork for the field inspection. But accuracy is another potential advantage: an independent inspector who can offer an unbiased review of the property and then share it with the appraiser, who can focus strictly on the science of the valuation to make their determination.
Still, no solution is perfect, and hybrid appraisals also have potential disadvantages, like confusion regarding data standards—as Fannie and Freddie, use different standards. And ultimately, banks and lending institutions must adopt or accept hybrid appraisals for them to be part of the home-buying process. And as hybrid appraisals are still new to this area, lenders may have concerns about potential risks like slowing funding or a possible loss of the loan.
The outlook for hybrid appraisals
GSEs continue to permit hybrid appraisals due to the value they’ve delivered in just a few short years, in terms of removing inspector bias and modernizing the appraisal process using new digital research tools and resources, as well as efficiencies this more flexible process helps to achieve. GSEs are also developing a standardized hybrid appraisal reporting format, which will further streamline the process and lessen risks for lenders and buyers alike.
While the use of hybrid valuations has decreased somewhat in areas where the housing market has cooled (and amid the rise in mortgage interest rates), they have proven to be an effective addition to the appraisal process and earned their place for the future.
See how MCS can work with you as part of your hybrid appraisals or any inspection process, and discover the value that having accurate, unbiased reviews of a property can add to the process. Contact Jason Myers to learn more.
