Real Estate Appraisals: Revisiting K.A.R. 17-11-21
By: James Hass, Regional Manager-Central
With the increasing cost of independent appraisals conducted by licensed or certified appraisers, many bankers elect to conduct "in-house" appraisals, hereinafter referred to as evaluations, as allowed in subsection (b) of K.A.R. 17-11-21 for certain qualifying real estate transactions. Subsection (b) states: "Two officers or directors, or a qualified individual who is independent of the bank or trust company and independent of the transaction, may complete an accurate evaluation of real estate mortgaged in the following types of real estate related transactions: (1) Real estate mortgaged securing principal debt of $250,000 or less; (2) business loans of $1 million or less secured by real estate, if the primary source of repayment is not dependent upon the sale of, or rental income from, the real estate; or (3) renewals or refinancing of loans, in any amount, secured by real estate, if either of the following conditions is met: (A) There is no advancement of new monies other than funds necessary to cover reasonable closing costs; or (B) there has been no obvious and material change in market conditions or physical aspects of the property that affects the adequacy of the real estate collateral or the validity of an existing appraisal, even with the advancement of new monies."
Some important points need to be addressed by bankers who choose to conduct evaluations. First, subsection (b) of the regulation requires the individuals performing the evaluation to view the premises, make a written statement of value, and sign and file the statement with the bank. Also, subsection (d) requires that the land and improvements of the property be appraised separately in the evaluation.
The OSBC has made some interpretations of K.A.R. 17-11-21 to more clearly state the OSBC's expectations for evaluations. Specifically, the contents of an evaluation below the FIRREA de minimis threshold of $250,000 and greater than $25,000 should include the following basic information. (1) A legal description of the property, including street address (if applicable), and its present use; (2) The owner(s) of the property; (3) The type and general condition of improvements, including their approximate age, size, and construction; (4) The date of the appraisal and the signature and address of the appraisers; and (5) The basis for the appraised value - i.e. comparable sales of similar property, cost of replacement, or income derived from the property. Generally, a brief explanation, which demonstrates the value was determined in a logical manner, is sufficient. Again, information on comparable sales is preferable, but consideration will be given to the market area and level of real estate activity. Use of comparable sales data from a multiple listing service or current tax assessment valuation may be appropriate in certain situations.
A "Real Estate Evaluation Form" is attached to RM2000-3 (available at www.osbckansas.org/DOB/DOBRegMail/RM2000-3.html) and is an example of a form that may be used to evaluate real estate between $25,000 and $250,000. Many banks have utilized county tax assessments or Inventory Content Sheets (ICS) to evaluate real estate and support the county appraisal with comparable sales. However, since county appraisals of different properties may be either overvalued or undervalued, it is important that the banker or appraiser make adjustments to the value given in the county appraisal, if they deem it to be necessary. Bankers should also ensure that the county tax assessment includes separate values for land and improvements.
