Score one for the Good Guys

According to FACT, the Texas Governor signed HB 2375 into law on Friday. This legislation modifies the current occupational code that governs how a real estate appraiser conducts business within the State of TexasAmong the more significant changes are:

  • Brings the TALC Statute into compliance with current terminology and State and Federal Laws relating to the regulation of real estate appraisers.
  • Makes it mandatory that a person be certified or licensed under the act in order to perform an appraisal in Texas.
  • Allows the TALC Board to delegate to the Commissioner the authority to approve consent orders and agreements to help expedite enforcement case closure.
  • Allows the board to solicit, accept and administer gifts, grants and donations.
  • Allows for a probationary certificate, license or trainee approval under specified conditions.
  • Allows for up to a 90 day period for late renewal of a certificate, license or trainee approval with payment of 1.5 times the required renewal fee – does not allow appraisal practice during the late renewal period.
  • Requires an applicant to complete additional prescribed education after failing the licensing or certification exam three consecutive times.
  • Repeals the provisional license category.
I applaud the efforts of FACT and encourage Texas Appraisers to check out their site and get involved. It is time we engage and begin to take back our industry. 

Who is Our Client Anyway?

This post is not intended to suggest any form of legal advice. To define the client within a particular assignment the appraiser should understand the guidance as provided in USPAP.

This post is written to suggest that our client is not necessarily the intended user of the report. They are not the party that ordered the appraisal service, or the party that will “promise to pay” and sometimes even pay for the service.

My suggestion is that our client is someone who we all too often forget. Our client is someone who never actually reads the report, uses the report, or even realizes they are affected by our report. The client does benefit from an accurate report and suffers great losses from the indirect effects of an erroneous report.

The client that I am suggesting that all professional appraiser’s work for is the general public. This is  not a new concept. But this foundational precept is worthy of repetition.  It is the general public that is currently suffering that fact that appraisers failed to understand the products that they were led into producing. And, for the record, I am not suggesting that all appraisers are inept or crooked – but I am suggesting that we all share responsibility of allowing the common practice of misleading appraisals to be used to shape the destiny of the lending industry.

Appraisers are like rating agencies, or judges. We are supposed to maintain a level of expertise that allows us to understand the service that we are providing. We are supposed to cause no harm with our service. The service should be accurate and meaningful. Unfortunately, the reality is that many appraisals are none of these things. They are reports that are generated by a group of people that who either do not know, care or understand what their function in the marketplace is supposed to be.

The appraisers of earlier generations were required to be people of good reputation, who had a level of expertise to render a reliable opinion of value for the property that was being appraised. For example, my mentor was a man who had an international banking/finance degree, an engineering degree and a law degree and was a real estate broker and property manager for five years before he became a real estate appraiser. When this man stated a property was worth X it was not because he ran the MLS and grabbed three comparable sales that supported the client’s opinion of value or the sale price, it was because all the data (Cost, Income and Competing Sales and Listings) was considered, analyzed and an opinion was formed to demonstrate the findings of the analysis.

What am I suggesting? I am suggesting that those of us who do know our role in this society should take an active role in mentoring our peers, taking part in appraisal organizations, encouraging all appraisers to join an organization that will help to foster growth and professional understanding. We cannot mandate associations, but we can encourage as many appraisers as we can personally influence to take part in building a better product and providing a reliable product that our client will benefit from and can rely upon.

For those appraisers who are reading this blog entry, that are “fighting the good fight” and have always taken the necessary steps to provide professional appraisals then I personally applaud your efforts and want to encourage you that you are not alone.  For those of you who may be new, or simply never had the proper training or education from your “mentor” then I want to encourage you that if you are sincere in your desire to provide a professional service that can be used to correct the errors of previous appraisal decisions, then you can join our ranks by finding a mentor and not being embarrassed to ask. We are all in this together and we are all able to affect positive changes that can improve our industry.

But, for those who are in this industry 1) to only make money 2) without concern of how they affect others and 3) with the “moral flexibility” of a professional assassin – I hope that you will consider changing professions because there are easier ways to take advantage of people and you can make so much more money without leaving a devastating wake of destruction.

The Approach to Value

Does anyone remember why the “men of old” developed the three foundational approaches to value in the first place? Today, an “appraisal” has become a recitation of the Direct Sales Comparison Approach. Few if any, complete the Income Approach and even less complete a Cost Approach.

These approaches to value were not merely an exercise in academic prowess, they were the fundamental tools that professional appraisers used to determine the market perceptions of the various forces that affect the value of a property. Yes, I am painfully aware that lenders stopped wanting to hear about the cost approach or the income approach. Also, I realize that the “appropriateness of a given approach will depend upon the nature of the appraisal problem and the quantity of available data to develop the approach” (as taught in many textbooks); however, for the majority of single family residential properties all three approaches are reasonable and relevant to develop. “But, what about the difficulty of determining the obsolescence of the property? Or the GRM?”, I have heard this question for 28 years. The answer is simple. All three approaches to value rely on the development, analysis and understanding of competing market data; nonetheless, each approach represents a differing mindset of the prospective purchaser.

There is the purchaser who wants to keep up with the “Joneses” and for them, the Direct Sales Comparison Approach is relevant because it should reflect the buying and selling decisions of the predominant homes in the market. The definition of market value that was handed to us by the federal regulators requests that the value should reflect the “most probable” price, not the highest possible price. Therefore, when an appraisal reports the highs and lows of the market and then compares recent, relevant sales to demonstrate the most probable price, this approach to value is the best indicator 99% of the time. But, what if for some reason the appraiser misses the mark during the research phase and excludes a portion of relevant data, thereby skewing the numbers by not talking about 30% of the homes that were REO sales or the like? Or, by only focusing on the REO market and not taking the time to accurately assess the motivations of the buyers and sellers within the marketplace.

The Cost Approach to value, when developed appropriately, enables the appraiser to recognize physical, functional and external influences that affect value. This approach generally will set the uppermost limits to value, thus when REO markets begin to sell well below cost to reconstruct, a very large red flag should be waved by the appraiser to discuss this depressed marketplace.

The Income Approach to value, when developed appropriately, enables the appraiser to recognize the investor market that considers the anticipation of future benefits of ownership. This approach generally should set the lower limits to value because the value of the property is limited to its ability to produce income. This approach will take into consideration the competing properties in terms of competing rents, vacancy and demand.

Of course the marketplace, driven by Fannie Mae, has dictated the information that an appraiser is expected to present in an appraisal report, but does not diminish the  professional appraiser’s responsibility to develop all relevant approaches to value as required by USPAP.

I will suggest even further, had we as an industry been tougher on ourselves and our colleagues to enforce the use of all three approaches to value, it would have been more difficult to ignore the signs that were in the market that the prices were being manipulated. Yes, an appraiser’s job is to report the market data, then analyze this data and form an opinion on these findings, but when two of the three approaches were taken out of the fray, our opinions were rendered less relevant.

“But wait”, I am hearing you say already, “USPAP always required the development of all three approaches to value, when appropriate. So how could it be that the majority of residential real estate appraisers still only complete the Direct Sales Comparison Approach?”. This is an excellent question, and one that I would love an answer to myself.

Doom or Gloom?

I had an intriguing discussion the other day with regard to the prospects of our economy. The conversation took me back to the good old days when I would sit in my grandmothers living room and listen to my father, my mother and my grandpa discussing the state of the county and the economy. My grandpa would say “whew, when is this bubble going to pop?”. My mother, father and grandpa would talk into the night about the greed of the real estate industry and the odd perceptions of the marketplace.

I cannot help but smile when I remember these discussions. My father and my mother were both well-educated real estate appraisers; my father, a past national president of a prominent appraisal organization. Yet my grandpa, who finished the third grade before he started his long-standing career in the 1920′s, had the greatest understanding of the economy and the motivations of people. Sometimes we need to remember that no matter how “smart” the market analysts are, the market is still made up of people. These people have basic needs, and yes, the market prices are easily driven up by greed, or down by a glut of REO properties. But at the end of the day, when all the dust settles, the real estate economy is still primarily an open marketplace where willing buyers and sellers interact. The basic needs and motivations have not changed and as long as there are families, schools, grocery stores, parks, and centers of employment, the basic considerations of the marketplace will remain unchanged.

This blog entry is not intended to “fix anything” or even recognize anything. It is only intended to remind all of us that are in the profession that the objectivity, impartiality and independence of our analysis is paramount to the overall health of the marketplace so that buyers and sellers have a fair and open marketplace to buy or sell. Too many times I have found appraisers, loan officers and real estate brokers who are so focused on “making the deal work” that they lose focus on the fact that these deals are dependent upon people. It is the people, the general public, that we are here to protect. “How do we protect them?”, you may ask. Just keep it simple. Develop our research with an open mind, looking at all the data, analyzing the data with no preconceived notions and report our findings in a manner that is not misleading. The rest will take care of itself. And, before anyone tells me this is idealistic and naïve, I know, but every once in a while I want to believe the best of people, even regulators, lenders and attorneys. Play nice out there and I will see you around the water cooler.

Mortgage Fraud

The unfortunate reality of mortgage fraud is that there has become levels of acceptability within the industry that frankly never should have been allowed. For instance, if the borrower misrepresents his income or his occupancy, as long as the loan does not go into default, the lender did not worry about the misrepresentation, even though the borrower may have lied with the intent of obtaining a loan. The problem is of course that the rules and regulations that were put into place were intended to safeguard the process to preëmpt certain individuals from being able to obtain a loan (if the income was not high enough to support the loan) or to signal the lender that the loan was for a non-owner occupant loan which has a higher risk and thus should have been priced differently. The “lender”, however, is a nebulous term because as Kevin S. Gouveia, CPC, states the Holder in Due Course changes as the paper (Discussions (1) see discussion Prevent Mortgage Fraud) is flipped, escalating the eventual investor risk as the paper is loaded down with additional fees and the risk is not properly rated. Therefore the party that is damaged by the process of fraud is the eventual investor who purchased the paper on the capital market.

How do we prevent this? Well this is the trillion-dollar (and growing) question. The original intent of the laws that governed this process was sufficient; however, the lack of due diligence in training and impressing upon each person that was involved in the lending process led to this melt down. For instance, some real estate appraisers were professional, reliable and providing adequate service to the lending community, but as the demand for jobs increased beyond the point of reasonableness, the knee-jerk reaction for many shops was to grow. The growth of these shops was to obtain appraisal trainees who may or may not have had proper supervision thus putting the original appraiser in a position of providing appraisal reports that became less professional and much less reliable. The same is true in each part of the lending process: processing, underwriting, and sales. The loan mechanism broke down from overuse. What needed to happen was that growth needed to be limited for each part of the lending process to have time to respond to the demand and each component to take on the proper responsibility for the corresponding product or service that was provided.

What has happened is that the majority of poorly trained individuals have already left the scene and the rest of us are looking around to “mop up”, as it were. Mop up from the tidal wave of greed that has drowned so many in the aftermath of this “comedy of errors.”

Under Valued Appraisers

It is ironic that the one group of people who could have held the line, kept buyers from paying too much and lenders from being over extended, was the one group that nobody wanted to listen to. Appraisers that told the truth found their work limited to forensic review or REO. All others were re-educated to enable them to “understand their part in the process”. The title wave of incompetence has brought us to this point of demise. It is an old story, but one that requires reliving, until everyone understands the significance of this debacle.

There were multiple levels of bad decisions, break downs of safe guard, and self-perpetuating myths that caused the virtual ruination of the appraisal profession.

Myth number one, if the appraiser is aware of the price that the borrower is looking for the appraiser will lose his or her objectivity. Although it is clear that there was a generation of “made as instructed” appraisals (not a reference to the highly sought after MAI designation) this does not mean that all appraisers were finding ways to make a deal work. The fact of the matter is that when the appraiser was informed up front of the clients expectations and it was clear that these expectations did not fit the market, many appraisers were enabled to let the parties down tactfully and salvage a working relationship with the lender for future work.

Myth number two, appraiser independence means that the appraiser should never speak to the client. Without client interaction the appraiser is reduced to a mere report that is supplied by a management company. This disables the client from ascertaining the level of competence of the appraisal professional who is producing this report.

Myth number three, the appraiser’s impartiality will be maintained by using appraisal management companies (AMCs) the current problem with the majority of newly formed appraisal management companies is that no significant oversight was established for the formation of or management of these companies. While individual appraisers can easily be removed for violation of State Law (i.e. USPAP has been adopted as law in most of the States), the AMC is not subject to USPAP and they are free to act as an advocate to their client base. Appraisers are finding all type of subtle and direct pressures to be more flexible in their opinions and presentations of value.

“What about the multiple levels of bad decisions?”,  you may ask. By this, I am referring to the many large lenders that created in-house appraisal companies and hundreds of staff appraisers and review appraisers to shape the lending decisions of the company. The original plan was that this department was reporting to the sales departments that generated loans, by the mid 1990’s this was changed to include an operations division which attempted to stand between sales and appraisal, but the mindset of protect the interest of the lender had already been established. The problem was simple. The appraiser’s job was never to protect the interest of anyone. The appraiser’s job was to accurately report and analyze the market and  determine how the subject fit into the market and the report this in a manner that was not misleading.

The underwriters had the job to protect the interests of the lender; however, since the appraiser was trained to think like an underwriter the underwriters were disabled because they rarely got the straight (or complete) story. Therefore lending decisions were formed based upon the desire to make loans, all possible loans, instead of all prudent loans.

“What about the safe guards that were broken down?”, good question. During the early part of the 21st century many of us were screaming that the process of out of control. Appraisals were being reported in a way that, at best were misleading, and at worse were fraudulent. Reviewers were trying to stop the flow of unreliable appraisals, but this process got out of hand quickly because the lenders created national review teams with pools of available national data to determine the adequacy of the report. And instead of slowing down and getting a local review, when the national reviewer had a question, the management would push the national review to “fix the deficiencies” of the report so a deal could be made. Once reviewers stepped here, the process was broken. The flood gates of greed had burst and the resulting damage is still being uncovered.

So, “where do we go from here?”, this is the trillion-dollar question. There has been some legislation enacted and some proposed, but I am afraid that no one has actually touched on the original problem. We have an entire generation of appraisers who were just “doing their jobs” and few even realize that they contributed to the problem. There are a handful of battle hardened veteran appraisers who have always fought the good fight and tried to stay reasonable and accurate in their analysis and reporting of the markets. These people are generally ignored by those in control of the front end appraisals, because these appraisers are not generally people who will “play ball” or “accommodate the clients concerns”. These appraisers are generally hired on the back-end to try to figure out what happened and where do we go from here.

My suggestion? My suggestion, is one that is fairly simple. Credit policies should be form in such a way that all people have a chance to buy or refinance their homes, but the lenders should never loan above a certain Loan to Value Ratio (LTV) that can be determined by greater minds than mine. Appraisers should produce reports, that require them to show the actual sales they had to consider, and a brief description of why the sales they choose were the best in demonstrating the market reaction to the subject property. All appraisals should be reviewed by local appraisers. These reviewers should be allowed access to the property just like the appraiser was allowed. If the appraisals is later found be inaccurate the origination appraiser and review appraiser should be liable to buy the home at their recommended value.  Unrealistic? probably. But I guarantee that appraisers would no longer render an opinion of value that could not be supported in the marketplace as of the date of value.

Rehab Properties

Recently I had conversations with a relatively new real estate investor who was mystified at how an appraiser could derive a market value for a property that had been gutted.

The conversation led me to realize there may be several people, including appraisers who could be misled into believing an appraisal of such a property should be the “value as repaired” minus the cost to repair.

The reality is of course, that cost to repair does play an important part of the process, but the appraiser must also take into account the market reaction to the property, the holding time, the narrow market segment and specialty nature of the prospective purchasers.

When an appraisal is made of a home that is in pristine condition the base of prospective purchasers is open to normal market participants that are interested in the school district, distance to employment, and the like.

But when a property is in need to rehab, the typical prospective purchaser is an investor who is considering holding time, required expertise need to complete the repairs, and any market stigma attached to the needed repairs (e.g. fire damage, or extensive settlement).

Therefore the cost to repair, the holding time and stigma must be taken into consideration when a rehab property is appraised. The absolute best way to reflect the market reaction to such a property is to find sales of other properties that required rehab, track the purchase price, the price of repair, and holding time, marketing time and final sales price (upon completion of the repairs).

Unfortunately, from having reviewed literally 1,000’s of REO Rehab appraisals, I can tell you very few appraisals actually show this type of research or analysis. A few appraisals will present other REO sales and try to address similar (as is) condition. But few actually address the process or the motivations of the prospective purchasers.

The American Diabetes Association

Despite a person’s situation in life, their race, their religion, etc., we are all faced with a very stark reality. The world will only continue if we, its inhabitants, learn to help one another. I can tell you from personal experience that life is not always nice, or fair, or fun. But for as long as we draw breath, life continues. To reach out while we are living, to try to help people and  make a difference, these are the fundamentals that will improve the living conditions for all people. This is my poor attempt to remind all of us, myself included, that as a good friend of mine once said – “we all choose our charities in life”, Ron Box, SRA. Without realizing it we all can affect people positively or negatively depending on how we act or interact with society or people.

What does any of this have to do with The American Diabetes Association? Well, the answer is simple. This is an organization that reaches across all social, economic, religious boundaries to help those people in need. Diabetes affects more than 25,800,000 Americans. That is about 8.3% of the population. If we as a nation would direct some of our yearly donations towards The American Diabetes Associations think of how effective our donations would be. As for myself, I am a realist and I am Jewish. I believe that God has given man the task of helping each other, but that all we have to do is start in the process and God Himself will help us carry out our task. Please do not be distracted by my beliefs, or my statements, just think of what good can be done when a number of people give to organizations like the ADA. Please note the link on my blog is in no way connected with me personally. This link will take you to a secure site with the ADA and they will direct you about how you can offer money, time, can volunteer. Any type of help that we can give is appreciated and very much-needed.


Manage This

In an age of information and convenience it is not difficult to understand why appraisers are expected to be “cheaper, better, faster”. With the advent of iPhones and iPads it is assumed that the real estate appraiser will now be able to complete an appraisal while driving down the road, as he/she dictates the findings and conclusions into the voice activated interface that allows the appraiser instant access to the web and all proper appraisal applications.

Of course this must all be accomplished hands free, since the appraiser is driving the comparable sales and inserting the pictures taken from their phone.

“You’ve got mail” was so very cute when AOL first spoke to us. Now we are getting tweets from our clients wondering why we have yet to respond to the email that was sent almost 7 minutes ago.  I was asked recently if I twitter I paused (for effect), only when I am under stress. The poor little dear had no idea to what I was referring.