Be Prepared to Change

With the new expectations that are placed upon the real estate appraisal, Real Estate Appraisers are becoming very familiar with change. First of all, it generally describes the type of money found most prevalent in our wallets, purses or bank accounts. More importantly, it describes the only thing that is considered constant in this ever evolving industry.

At a certain point in time a real estate appraisal was looked at as a tool to decide if a particular property, or collateral, was appropriate to support a loan. Appraisals of course, are not just used for mortgage lending purposes, but for the purposes of this rant, I am going to focus on mortgage lending. How many reading this blog can remember when a real estate appraisal was placed on an index card with a Polaroid of the subject taped to the back? Ok, so how many people had to Google Polaroid to see what I am ranting about? I digress. Lenders once were quite careful to evaluate the capacity, character and collateral of a potential borrower to make sure the loan was sound. The collateral process was almost an after thought because the lending standards were tough and credit was a privilege of careful consistent money management and not a “right to all Americans”.  If the idea was to better the lives of Americans and provide a more equal base of opportunity, then the solution was to first educate us all to be better money managers. It is odd that we learn so many things in school, but there is no mandatory class or curriculum  to teach us how to manage our money, develop and maintain good credit and the like. Again, I digress.

In order to affect changes that are beneficial, there needs to be a unification of thought and purpose. If real estate appraisers are to act as more than the eyes and ears of the lender, then there needs to be re-education. With the introduction of the Market Conditions Addendum, as discussed in a previous post, many clients seem to believe that appraisers are now expected to forecast values and demonstrate the direction  of the market so that the lender can determine if prices will continue to decline or continue rise within a given market area.

Of course, it is possible to forecast prices using models of data to demonstrate trends and predict future happenings. The predictions are of course no better or worse than the sampling of data that was used to develop the model. The further out the forecast predicts, the less reliable the prediction becomes. Am I suggesting that appraisers should now focus on the micro-economics of the subject’s market area? No. I am suggesting that there is an indication that many clients are changing their marketplace expectations. In response, real estate appraisers need to change their ability to understand the client expectations and fulfill these expectations.

The challenge is to continue to present a report that will be easily understood and will not mislead the user. If any information is presented in the appraisal that may be less reliable because the conclusions are based upon a sampling of data or because  like with the market conditions report, as mandated by Fannie Mae, the appraiser is asked to report a portion of a cycle in real estate instead of the complete cycle the conclusions can lead to erroneous results.

We must take the time to explain the full impact not only of the information that is recent and relevant to the subject appraisal, but now we must also take the time to explain the full impact of the data that is mandated by the use of forms that by their very design are misleading to the appraisal process.

Mark my words, there will be much more to this as this saga unfolds before our very eyes.

 

Reporter, Analyst, or Consultant?

Starting out in this business, my father once told me that real estate appraisal is not merely a science but an art as well. Many people understand the science of data gathering and analysis. Some are good at reporting their findings, but few report their findings in a way that enables the user of the appraisal to understand the relevance of the information that is being presented.

As licensed objective professionals, we must make sure the information, as presented in the report,  is not only factual, but also relevant to the valuation process. Our professional obligation is to ensure that the service we provide is not misleading and will not lead the user of the report to erroneous assumptions or conclusions.

What prompted this particular soap box has been the news reports that continue to report housing trends nationwide. Many lenders have become stymied in what was once called analysis paralysis. Appraisers have been placed in a position of defending every statement that goes into their appraisals and if the news reports information about a particular marketplace that are not consistent with the data that the appraiser is presenting then the appraiser is assumed to be wrong.

My suggestion is not one that is new. I suggest that when you write an appraisal report, you write the report as if you are going to end up in court and have to defend your report before a judge. If you follow this advice, I guarantee that the instances you end up in court will be diminished by more than 98%.

The best defense is a strongly documented work file and I believe with today’s technology we can import MLS data into excel and create niffy worksheets and charts to easily document and demonstrate the market data and trend of supply and demand and the information that is relevant to the appraisal process.

Perhaps if clients were getting this information up front, they would be able to find some level of comfort with the information that is presented for their use and consideration.

Of course, as an appraisal reviewer and forensic fraud reviewer, I am painfully aware of the need for review. But if appraisal files were documented up front with public records and MLS records attached, it would limit the need for reviews on the same degree of work and we could then focus on those appraisals that are not as defensible.

See you around the water cooler!

Is it now necessary to confirm the verifiability of the confirmation?

It appears that we, as an industry, have finally reached that all time high of stupidity in action. I was recently instructed by  an appraisal management company to provide additional MLS sales on a grid to demonstrate market support for my opinion of value because I agreed with the origination appraisal. Had this been something other than a typical residential subdivision where the appraisal used sales from the same development, perhaps I would understand this requirement. Still, one wonders at what point have we crossed into the twilight zone of appraisal review.

I have attested to the confirmation of each section of the appraisal report. I have provided digital copies of all relevant public records, deeds, zoning maps, plat, flood, tax records, not to mention confirmation of MLS for each sale that was provided in the original report. Then a competitive market analysis for competing sales within 12 months of the date of value with a map and full printouts of each competing sale have already been provided. The appraisal was found to have been accurately reported and reasonably concluded. The value was adopted by the reviewer.

Despite all of this, now I am asked to provide additional sales to provide market support to my opinion of value? Really?! Having been a fraud investigator, forensic appraisal reviewer and review appraiser for the last 15 years, I am quite familiar with the reasoning for providing confirmation of each section and detail within the original report. I can even agree with the idea that the competing CMA data is helpful to the analyst at Fannie to determine the relevance of the data provided in the review appraisal. But at what point does the process become burdensome?

As I have stated previously, and oh so many times, sense has become like courtesy it is no longer common.

See you around the water cooler!

Market Conditions Form

Has any appraiser found this form to have changed the way in which they analyze or report the market conditions within a residential report? I have read several other blogs and forums regarding this form and it seems to me that there were several appraisers who were already considering this and report these conditions long before Fannie Mae felt the need to provide us with another form.

Still as a review appraiser for several thousand reports in the last two and a half decades, it has not been my personal experience to read more than a handful of residential reports where the appraiser ever addressed the market supply, or absorption, until they were forced to with the creation of this form in 2008.

Still, my concern is that even though Fannie has created a form to force all residential appraisers to address this issue, I am not confident that many appraisers have sought adequate training to understand the point of the information or to present their findings that are representative of the marketplace.

Of course, there have been some training classes to tell the appraiser to fill the number of sales, the number of listings, and calculate the absorption by dividing the number of sales by the number of months analyzed. And then take this absorption rate and divide the current listings to demonstrate housing supply.

But there should be more training for the appraisers and the underwriters to understand the following:

1) This is a sampling of data. Statistically speaking, a random sampling can be an effective measure if the data has been properly qualified and accurately presented; however, if the sample is not reflective of the subject or the subject’s marketplace the results can be quite misleading.

2) The form, as it was designed, only focuses on active listings and sales within a set period of time. It does not take into account the total number of properties that were exposed to the market for that same period of time. For any given neighborhood you could find 10 active listings, 12 sales within 12 months, and 78 properties that were exposed to the market for sale but were withdrawn or expired unsold. In this scenario, even though the absorption rate would show as 1 on the form with a month housing supply, the reality is that 100 properties were exposed to the market for sale and only 10% were reported as sold within 12 months and 10 are actively listed. This information is lost, if the appraiser only fills out a form and does not bother to address the actual market conditions as of the date of value.

I urge appraisers to take the time to understand the dynamics of the market areas in which they appraise and urge underwriters to look for continuity between reports.

There needs to be more extensive training of all real estate professionals to understand the dynamics of the real estate market so that we are not easily mislead and become simple form fillers. If appraisal is simply filling a form and reporting facts why do they require the education? Of course, educational standards of appraisers slipped when they did away with the requirement that an appraiser should be a real estate broker for five years, and the apprenticeship requirements were structured so that hands on training was limited and sponsoring appraisers were able to run sweatshops instead of mentoring the next generation of professionals.

I blame all of us. The ones with unsupervised trainees and the those of us who either never took a trainee or have had one or two in the last several years. It is time that the remaining professional appraisers, and you know who you are, take a stand for the integrity of this profession and take on a responsibility as a teacher, a mentor, or a industry leader of one type or another. Most of us (and I blame myself as well) failed to engage with others. We “fought the good fight” with regard to our personal work, but we stayed quiet in classes, or in forums, or professional meetings when we should have dared to speak up and hold the line of professionalism.

If you agree with me, let me know. If you disagree, good, please allow others to hear your thoughts as well. Remember silence can be considered agreement.

See you around the water cooler!

New Rules or Foundational Concepts??

I just read a fascinating article regarding 5 New Rules of Real Estate. The author made some interesting points in the post, and I believe, accomplished the overall goal of inspiring a solid response. The responses are quite telling, because there seems to be an overall consensus that people are afraid of real estate.

The reality, as discussed in one of my previous blogs Opportunities Abound, is that the rules of investing are not new at all. In fact it is now that the foundational concepts of supply and demand, market motivations, and market rent versus property expenses must come into play.

Supply and demand we all understand. When the supply exceeds the demand (as it does today) buyers are placed into the driver’s seat and as long as no one is looking for a quick flip they are unlikely to get hurt at today’s prices. But the real question is not a question of value. The real question is one of financing. If someone needs to borrow money to purchase a property, they are placing themselves at risk. This factor of risk was always the case, but generally, consumers ignored this risk with the assumption that the lender is the one putting up the money and the one who would suffer the loss. The real loss is that when the consumer loses their home, their creditability and esteem, the price of this foreclosure is often more than the typical borrower can bear.

The more equity a buyer can establish when purchasing the property, the better. This statement is so very obvious and yet it is amazing how many people did not seem to understand this concept. Of course the gurus will tell you to leverage your money, by carrying a higher loan to value ratio you can hold on your cash and keep it liquid; however, anyone who followed this advice has found themselves in a world of hurt at this time.

Market motivations of course refers to the reasons that potential buyers are attracted to a particular property type or location. When a property has a particularly attractive location because of its school district, or its wealth rating, or its positive economic influences, this property will generally sell before homes without these attractions. Understanding potential purchasers and their motivations will help a buyer or investor to set a price when they purchase the home.

The concept of income analysis can become quite complex and should not be taken lightly. An experienced real estate appraiser would make an excellent advisor, as would a real estate broker or property manager. The basic idea is that the debt service of the property (i.e. mortgage + taxes + upkeep + vacancy and collection loss + management costs) should be equal to or less than the market rent a property can earn. If the market rent will not support the expenses related to the property a home owner is thinking of purchasing, then their option of renting out this home, should they lose their job, has been removed from them.

Bottom line, real estate like any other investment, needs to have a very clear purchase price that takes into account the factors noted above and a very clear exit strategy. Most people make the mistake of investing without an exit strategy and the purchase price only takes into account the competing properties without considering debt service, or market rent.

In short, now is a great time to buy property as long as the buyers do not lose their common sense along the way. A real estate purchase is not about emotion or pride, it is very much about logic and gain. KISS – Keep It Simple Stupid my father used to say (not an original saying), but this method works in life and in investing as well.

See you around the water cooler!

Oh My God – – Don’t Talk to Me!!!

I was amused at a phone message that was on my voice mail recently. A realtor spent 3 minutes apologizing for the phone call, explaining that she understood she was not allowed to speak to appraisers anymore for fear she might sway the appraisal process. The funniest part was that while she did tell me which file the message was regarding, she failed to leave her phone number.

Okay. I am sorry, but has this world lost its freaking mind? Yes, there is a world out there that tries to manipulate the decisions of licensed objective professionals, like appraisers, federal regulators, financing rating agencies and the like – and as professionals we must be hyper vigilant in our efforts to objectively approach each appraisal problem in a manner that does not favor any one side – but people, at what point did having a conversation with a Realtor or a loan officer or any other person “from the dark side” constitute pressure?

Real estate appraisers have a legal responsibility to accurately report their findings of the marketplace and to offer their opinion about how the subject relates to its marketplace. This opinion must be developed in a way that is consistent with appraisal methods that would be considered “tried and true” by the majority of our professional or industry peers.

It is time that we all employ a little known technique, with regard to community relations, known as common sense. As a very good friend of mine and I joke all the time – sense has become like courtesy it is no longer common.

Take time to smile out there, ladies and gentleman, as life is too short not to have some fun.

See you around the water cooler!

Opportunities Abound

It was in the wake of financial devastation that real estate appraisal was born. We are of course talking about “Black Monday 1929”.  This crash, which led to a 12-year Great Depression, brought about the recognition by world financial markets for the basic need of a better system that would mandate the use of objective professionals acting impartially and representing the interests of the general public.  “So what?”, you may be asking at this point. This is history, and we all have heard this bed time story time and time again.

The majority of people who are reading this post, already know the punch line. It is from history that we can learn the most important lessons. It is often mistakes that provide a long-lasting lesson, one that become indelible upon our very being. The problem is that the memory is short. Within a few short generations of success and prosperity those people who brought about the great recoveries and financial booms were quickly forgotten, but more importantly the guiding principles of integrity and honest deals have been replaced with greed and corruption.

Ok, so where do we go from here? The problems have been analyzed and rehashed to death. Residential investors and wholesalers are all running to buy properties, fix them up and sell them. But many new investors are running into the same old problems that is the money supply is all but frozen in red tape and fear. Consumers cannot purchase these renovated houses because they can not get a loan. The investors who are on short financing terms themselves generally either lose money or just break even.

This is not solving the problem or improving the marketplace, this only adds fuel to a roaring fire of marketplace destruction. Enter the experienced investors. Easily 1000 years BC (before cell phones), successful investors have pretty much been following the same guiding principles and have therefore made profits and will continue to make profits. For those of us who are in tuned to these principles the turbulence of the marketplace creates opportunities to increase our net worth. “Ok so how do I get in on this gravy train?”, “What are these closely guard secrets of wealth?”.

#1 – Stop trying to be so damned smart. – The marketplace is a relatively simple function of buyers and sellers. Understanding the motivations and desires of each market participant and placing yourself in a position to fulfill these needs or wants is key to success. Ok, “what?!” The economy right now has a plethora of available real estate therefore many buyers would say it is a buyers market and for those who have cash – they would be right. But for the rest of the world, who wish to finance a property; the marketplace is not so simple. Therefore an experienced investor will buy properties based upon the knowledge that they will be holding this property for quite some time. Therefore, the purchase price must reflect the value of the property assuming an extended holding time and assuming the market rent will support the debt service of this property.

#2 – No one can spend themselves rich, or borrow themselves rich. – If you wish to acquire wealth in this world, you have to make more than you spend. You have to borrow less than you make, or have create a system of repayment that will carry the weight of the investment. In other words, if you purchase a property will a very high loan to value then your chances of holding that property are diminished 100 times, or more. Any unexpected expense or vacancy can cause the house of cards to collapse. To invest for the long term is the key in this economy, look for those properties that can be purchased for pennies on the dollar, be willing to hold them, and maintain them and you will create a solid base for your net worth.

#3 – Be honest and deal fairly. People who try to always have the upper hand and beat their opponent in business may find a level of success in the short run, but to create a good name is while following the first two rules is to create generational wealth.

– as a caveat, this information or advice has been given to you freely – therefore the old adage “You can expect to get what you pay for” applies. But also remember that while the price is what you pay for something, the value is what you get.

See you around the water cooler.

Taking the Lead

As of late, there has been much chatter on the Internet about appraiser Independence, Customary and Reasonable Fees and Appraiser Designations. The main thrust of the conversations has been a flurry of concern expressed by appraisers that they have lost their ability to negotiate fees thereby limiting their independence and many can see no reason to keep up their professional designations since, “All licensed appraiser are equally accepted by the State” and “All certified appraisers are equally experienced”.

In short, these statements are made by appraisers out of an extreme degree of frustration and realization that the majority of residential mortgage related clients making these decisions are wanting to safeguard the interests of the lender, but the specific interests that are being safeguarded are the bottom line, “How much will it cost?”, “How long will it take?”, “Can I sell this loan package in the Capital Markets?” But the answer to these questions does not address whether or not the appraisal will accurately reflect the subject and how it relates to its marketplace.

I recently received a phone call from an appraisal management company who could not understand how I could show a market area was stable, when the press has explicitly stated that values are continuing to decline. The fact that I had conducted a “subdivision by subdivision” analysis for all home sales within 20% of the size of the subject and extended this analysis to include the previous four-years and presented this data in a tabular and graphical format would not appease the “lord of review”. “The press stated that prices are declining, and this knowledge is common so it must be addressed”, … okay.

Professional appraisers must continually exercise their independence and use technologies at our disposal to consistently present our findings in a way that is easily understood and relevant to the subject at hand. It is us, who lead the charge and shape the expectations of the marketplace. If we simply give into the silly questions and placate reviewers, then we will not improve this industry. As for me personally, I have given much of my life to this industry and asked for very little in return.

Customary and Reasonable? From my perspective what has become customary is no longer reasonable. So we can either have fees that the AMCs will pay (which they want to believe is Customary) or we can charge the public what is reasonable for the degree of expertise, knowledge and effort that we put into the production of an appraisal report. An appraisal office is not unlike any other business we have fixed costs, variable cost and a point at which we are able to break even. This point has broken the majority of independent appraisal offices and forced us to relegate ourselves to working as one man shops in small offices or out of our homes. Is this what Customary and Reasonable means to the current administration? Somehow I want to believe that was never the intent, but it sure has become the effect.

With regard to appraisal designations, I believe that lenders should use anyone who elects to educate him or herself in their chosen field and pursues an organization that governs itself and imposes a degree of professional ethics. The rub is that professional designations are only as good as the individual appraiser who has the letters behind his or her name. There are many professional appraisers who are very good at what they do who have never had a designation. There are others who have elected to drop their designations because they saw no benefit in maintaining the additional costs. And yes, there are some appraisers who obtained designations that are now serving time.

I would like to believe that “time wounds all heals”, and that the “bad guys” will eventually be caught and removed from the game. But as a realist, I am forced to believe that the only way to deal with the appraisal industry is to increase State budgets for investigation and prosecution when it is appropriate.

Truth In Lending?

Anyone who has been in the industry for more than 10 minutes is fully aware of a little old Federal Law, commonly called Truth in Lending. This law was established in 1968 to make sure that consumers had rights and choices when it came to credit. Primarily consumer credit, but there are several provisions that specifically address real estate mortgages as well.

So what? Well, in speaking with a few REALTOR friends of mine, it came as no shock to find out that most HUD 1 closing statements do not show the appraisal fee separate from the fee that is charged by the AMC. Would consumers be concerned at all in knowing that the $450 fee they were charged for the appraisal was actually $200 (or less to the appraiser) and the rest was to the management company.

There have been a lot of discussions flying around the Internet about what is customary and reasonable for an appraisal fee, but I think this discussion is moot. Appraisers did this one to themselves by agreeing to work so very cheaply in the first place. Of course with the federal legislation that was put into place, appraisers who are conducting mortgage appraisals are forced to work with management companies of one type or another and this puts all appraisers into a boat that was not built by all appraisers. In other words, the few appraisers who agreed to work for pennies on the dollar have now set the prices that all appraisers are expected to accept. Although tragic, this is not the worst of it. Consumers are now being misled. They are being charged more and more for appraisal fees when the real fee is for management and marketing. The appraisal fee is well concealed.

Does this concern anyone other than just me? Consumers speak out. Attorneys feel free to jump on board and investigate anyone who has closed a loan since January 1, 2011. You might find you are opening a very large can of worms that no one wants opened.