Negotiating a business loan can be a nerve-racking experience. Lenders want to calculate the value of assets cautiously, to reduce their risk. Borrowers jockey for optimistic numbers, to get the money to make the deal work.

Appraisers have been left with the role of umpire to determine the real value. For years, the middleman method worked well - despite fluctuating markets and nearly a dozen different ways to value property.

Then, in the 1980s, the feeding frenzy of speculation in the real estate market eventually toppled hundreds of the nation's savings and loans.

On the Overhaul Bandwagon

A ripple of reform evolved into a full-scale of the real estate appraisal process. Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act, calling for minimum standards of conduct on appraisals.

The Appraisal Foundation, comprising eight appraisal organizations, complied by developing the Uniform Standards of Professional Appraisal Practices. These standards now apply to real property, personal property, and business valuations, as well as review of appraisal reports and consulting on the value of property or businesses.

The Office of the Comptroller of the Currency added guidelines that allow individual lenders to involve their own appraisal management policies, in addition to the basic standards set out in the uniform appraisal practices.

Most lenders have adopted stringent guidelines. But their clients -- and, in some cases, their own lown officers - are unaware of the new rules.

Five Key Changes

* Lenders are now the client. Under the new standards, appraisers must be engaged and paid by lending institutions themselves.

Even though the lender collects a retainer from a loan prospect to cover the cost of the appraisal, for all practical purposes the banks is now the customer.

Now, reports must be addressed and sent directly to the lender and, in most cases, directly to the appraisal review division. Neither the loan officer, nor the lender's client, is entitled to see the report until it passes this inspection point.

* Only fully complete reports can be submitted.

Submitting a summary without enclosing the full appraisal report is a violation of the Uniform Standards of Professional Appraisal Practices.

But the law does allow an appraiser to discuss key numbers with a client verbally, as long as the firm has performed the appraisal to professional standards and has documentation on file to back the numbers given verbally.

* Reviewers cannot supply new numbers. Appraisers, like doctors, are often asked to give a second opinion. The scope of these desk-top opinions, however, is now limited to two functions.

The reviewer can concur or disagree with the original report in its entirety, or disagree with specific elements.

But if the reveiwer disagrees with the value given in the original report, he or she can no longer give an opinion of a more accurate value. To get new numbers, a lender has to request a separate's report.

* Appraisers must be licensed. Until now, appraisers have regulated their own industry. Instead of a formal education or uniform certification process, various appraisal organizations have indicated an individual is qualified to conduct appraisals by awarding "designations" - the most prestigious is the Member of the Appraisal Institute.

Now, would-be appraisers must also undergo a professional certification process akin to those required of attorneys and certified public accountants.

Applicants can opt for a Certified General License or a Certified Residential License. The general license, which requires approximately 265 hours in real estate education courses and 2,000 hours of actual experience, is mandatory for those appraising property valued at $1 million or more.

A residential license, which currently requires 105 hours of experience, is sufficient for appraising properties valued at less than a million dollars.

Technically, states were required to beging administering the exam for these licenses in early 1990. However, most states applied for and were granted six-month extensions. For the majority, the grace period expired this summer.

Surviving the Footrace

Meeting the upgraded standards presents challenges for appraisers, but they are 10-K runs compared with the marathon it takes to go the distance for individual lenders.

For example, some financial institutions now require appraisers to furnish photographs and three-year sales histories on comparable properties, even on special-use properties where only a handful of similar operations exist in the entire country.

So, here is a penny's worth of prevention for prudent loan officers: Make it a point to know your institution's appraisal policies and guidelines.

Inform applicants that, under law, the appraisal report must be submitted directly to the lending institution. Include the appraisal fee in the retainer collected to conduct the due diligence necessary to consider a loan. Engage the appraiser at the beginning, rather than the end, of the transaction to allow ample time to complete the report without holding up the closing date.

Give the appraiser a head start by requesting the loan applicant to provide documents that are readily accessible, such as current tax receipts, a current survey, a legal description of the property from the last deed of transfer, copies of building plans, any environmental studies, and audits or letters from regulatory bodies that have investigated the site.

Finally, seriously consider lobbying for full disclosure of all sales transactions. Comparable sales are the linchpin of any real estate appraisal, yet only about half the states have adopted laws requiring full disclosure. That means appraisers are often forced to rely on word of mouth for critical data. Sometimes, the line between word of mouth and rumor is razor thin.

Accurate information would not only result in more accurate appraisals, it would translate into more accurate market values for property owners and taxing authorities. Full disclosure would also aid brokers and sellers in establishing realistic list prices.

Potential buyers benefit by having access to reliable sales histories, which should result in more informed business transactions. The past five years have demonstrated that it is becoming increasingly difficult for buyers, and lenders, to beware. Given the times, full disclosure means better business all around.

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