Will the Madness Ever Stop???

Having spent the day commiserating with my fellow appraisers, I have to admit the policies and procedures of most reviewers, underwriters and lenders  have finally crossed the line from insane to inexplicable.  It was bad enough, 23 years ago when an appraiser was asked to document two independent sources of data or to provide interior photographs to show each room. Then not to long ago some appraisal management companies started to believe that when FHA asked for two photos to show an oblique view, they actually meant the appraiser had to take four photos one showing the front, one side (A), the back and one side (B).

But now appraisers are asked to provide exterior photos, interior photos, multiple views of rooms (for instance if all appliances are not shown in the view of a kitchen, take a second photo to show the dishwasher). But one appraiser called me today, because he provided the second photo of a kitchen to proactively show the dishwasher only to have the lender bounce the report because the sketch and report failed to discuss the second kitchen.

I am sorry, when does alternative view of kitchen constitute a dwelling with two kitchens. I am completely for appraisers presenting a document that is clear, well supported, and correct. I am all for having the appraiser present a detailed summary of the search criteria that was used, and perhaps even a one line listing of the alternatives that were available at the time of the report. But what was the point of the appraiser providing all of this data? Was it so that some nit-wit reviewer (like me) can then beat the appraiser about the head and neck with the extraneous data that was reported?

What happened to a time, when the clients were careful to only use real estate appraisers who had established their reputations for excellence and accuracy? Yes, I understand to find this time you are forced to go back several decades, beyond when my career started. But it used to be enough to do business with people of character, then when they said yes – it meant yes. Should they say no, it was because they were unable to find market support. This system of trust, of course is unrealistic, because there are entirely too many ways to cheat the system and hundreds of billions of dollars can corrupt the hearts of men. So this brings me full circle. We now have a system of review that forces the appraiser on the immediate defensive and without the ability to provide a detailed body of evidence the appraiser is left hanging.

Independent, impartial, and objective, wasn’t that suppose to be the mantra? Today’s legislation has forced appraisers to take all of their business and place it into the hands a few management companies. In turn, if you upset one client, the management company may take you of off their list which then means you could be excluded from the other 35 companies (or more many more) that the management company represents. The character of an appraiser is being tested more now than ever, and I believe that review appraisers need to begin to be the voice of reason within their respective companies. So what’s the problem? The problem is that appraisal management companies are not formed as buffer between the client and the appraiser. They are not formed to protect the interest of the public. They are formed because there is a very large profit to be made. The company that can successfully produce real estate appraisals that please the client will continue to get the work, and when you are representing a nationwide data base of every available appraiser it is not a problem to sift panel until you find those individuals who are willing to give you the product you seek.

Okay, time out!!!! Am I suggesting that in our attempt to make things better, we simply traded one set of task masters for another set? Well, frankly that is exactly what I am suggesting. Do not misunderstand this post, there are reputable appraisal management companies, and reputable lenders who are simply trying to make a profit and keep their employees busy and, well, employed.  There are just as many reputable real estate appraisers who are doing their jobs well and holding up the standards that is to say Uniform Standards of Professional Appraisal Practice (USPAP) with pride. The concern that I have is that we have once again set up a system where a few can dictate the livelihoods of many. This very system places pressure on those who are mandated by law to be Independent, Impartial and Objective.

Okay, so this is the system we have. How do we proceed? For some of us, it is simply time to move over and let younger, stronger, smarter leaders prevail. For others, it is time to engage and to talk and write to anyone who will listen about how systems of production and appraisal need to change so that the client has the ability to receive prompt professional appraisals and the appraiser has the flexibility to produce a well supported opinion of value without the client being able to dictate the predetermined results.

For now – suffice it to say this. Review appraisers, (whether they work for the lender, investor, auditing firm, criminal investigations (like the FBI, or IRS), or they work for an appraisal management company), need to remember that they are bound by the same laws as independent fee appraisers with regard to independent, impartiality and objectivity. At the end of the day, we are the ones who are charged:

1) to have common sense

2) to promote and protect the interest of the general public

3) to use those methods of appraisal that have been tested and proved to be reliable indicators of market reaction

4) to  accurately and objectively analyze the market data to determine value

5) and present our findings in a clear, easy to understand manner.

and as the reviewers, we should make sure the appraisal was presented in a way that reflects all of the above.

The task is daunting, yes, but if we are truly honest with ourselves this entire process is the same process that was supposed to be in place, and for a very large part was in place to start with. So why did it fail? Because key components, checks and balances if you will, were removed from the process and more importantly the character and capacity of the loan was radically changed. As appraisers we are trained to evaluate the collateral, the collateral valuation should be the same whether or not a borrower has a dollar or several million of them. The very idea of “making business decisions” should never have included the review appraiser. By design the underwriters and reviewers were kept apart in doing someone could go to the underwriting manager and say “the collateral is sound, please make an exception on this file” and at the same time go to the review manager and say “the borrower is strong, please make an exception on this file”. Pushing both sides of the deal and creating pools of non-performing loans.

Ok that was then, this is now. How do we keep from making these same mistakes? Simple, pull the power from the all-star sales managers. Keep the operations, underwriting and appraisal managers all on the same page so that everyone understands and knows the level of risk that is being proposed and make sure the loan is priced at a level that accurately reflects its risk.

What has not be discussed, is the investors who purchase this bad paper. There has been some kick back, but I anticipate the ramifications are yet to be felt.

Rather than a post, this is more of a ramble – or a rant. Either way, I feel better.

See you around the water cooler.

 

UncleZev

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Rotten Apples

When I was quite young my father taught me a principal that I would now like to present to my readers. “What is the value of a rotten apple?”, he would ask. The puzzlement of my lurid imagination would often take the conversation way off track. But through his patient, instructive way he would gently push and pull me back on track to properly evaluate the question.

If you consider for a moment that a rotten apple attracts bugs or worms then perhaps you could account for the possibility of selling these critters as bait; however, this certainly can not be the answer. There is a certain oder to the rotting fruit that will also detract from its appeal.

It cannot be eaten or sold, the colorants may be useful in the making of dyes, but certainly not to the extent of other more vibrant fruits. “So what is the value of a rotten apple?” I would finally ask.

The answer of course is that to wrong person, a person without the ability to look into the future, a person without basic understanding, or a person who lacks time and patience, this fruit is worthless.

However, to someone who understands the nature of fruit, who has forethought and the ability to see beyond the now, a rotten apple can be worth quite a bit. The fruit itself is useless, but it has seeds. Its seeds can be cultivated and grown into a successful orchard and over time this worth can far exceed even the most ambitious expectations for an experienced investor.

So what does this have to do with real estate appraisal? Perhaps nothing, or perhaps it helps us to understand that even the most useless property has value as long as we take the time to understand the nature of the property, its location, and its potential highest and best use which, with the proper diligence, can recognize value for future generations.

Of course this may be more applicable to real estate investors, than real estate appraisers; however, in this economy I believe it is time for appraisers to put their knowledge to work and begin to plan for their futures by purchasing and managing properties for themselves. Of course and of course, I am in no way suggesting an appraiser buy something that he has appraised. This would be completely unethical and someone who does this should go to jail.

What I am suggesting is that appraisers pay attention while they conduct research, and target properties that are good investments. Put to use the knowledge that each of us has acquired and begin to profit from our skills instead of only telling others what something is worth.

This is my two cents for today! Now go and find a few “rotten apples“!  With the right management and care, who knows what kinds of  “orchards” your future generations can enjoy.

See you around the water cooler!!

Uncle Zev

Like Type Properties

Very recently, I was presented with an appraisal report that was actually a fourth revision. The appraiser had accurately completed a report and submitted the report for consideration to the lender, then over the next six weeks apparently, was barraged with a continual flow of reconsideration requests and alternative comparables, until the report appraiser finally felt pressured enough not only to re-grid alternative comparables, but also to change the opinion of value by almost 20%. I was involved in a quality assurance review and, fortunately for the appraiser, was able to reject the revision that could have ultimately placed the lender in a very bad position and placed the appraiser in jail for a report that was very misleading.

What led to this place of dark descent? This is the question that we will be exploring in the next few paragraphs. I took the time to counsel with the appraiser and offered my personal cell number for anytime that they may be faced with a similar circumstance. “Why?”, you may ask. Because it is my belief that if appraisers did not feel alone they may have the courage of their convictions and not be pressured into a place where they really cannot defend their decisions.

The mistake made in the original report was a common one. The property was vastly over-improved, not only for its site, but also for its neighborhood market area. The appraisal did not 1) take the time to discuss the listing history of the property, showing market resistance to this being an over-improvement; 2) take the time to explain to the reader how the subject related to the surrounding competing sales;   and 3) take the time to find like/type properties with similar over-improvements and market resistance. Without finding the proper comparables, an appraiser is easily challenged even if their sense of value is correct. This is why an appraiser must follow the valuation model when conducting an appraisal; and most importantly – 4) develop friendships with other appraisal professionals. Join some social networks, read some appraisal blogs stay active and interactive.

In this way the appraiser can stand up to the “clients from hell” and not be pushed off the field of practice by making choices that they will regret in the long run. Remember this is a small industry but it is an industry that serves giants. Only if we stand together can we keep from being bullied by the giant.

See you around the water cooler!

“Measure it in Micrometers and Cut it with an Axe”

Having grown up in an appraisal family, as have so many of my peers, we can all smile when remembering the wisdom and humor that was discussed during family dinners, and “get togethers” of all kinds. I am tempted to write a book some day dedicated to all the one line quips that my father and mother, both appraisers, use to say. My parents were the single driving force that shaped me into the kind of appraiser I am today, so if you don’t like how I do things… Blame them! (smiling).

You are wondering by now why you are continuing to read this particular post, or perhaps even this blog. Actually I am wondering the same thing, but still I have this innate ability to stretch out a punch line until it is almost painful. So what does any of this have to do with the appraisal process? Or does this post have any point what-so-ever?? Great questions. Surprisingly, the answer is that this almost meaningless post has an incredible resemblance to so many appraisals that I have read and perhaps even written over the years, that the process of writing the post is worth the effort.

“What in the heck am I talking about?!” That is my point actually. So many reports are filled with fluff and irrelevant data just so that the appraiser can fill up white space and “impress” the user of the report. Actually, an impression is made, however, I am sorry to tell you that the impression is not one that is favorable.

My father used to say, when developing an appraisal you have to take the time to identify all the relevant information and data that relates to the subject and then measure this data very carefully, very precisely, then once all the analysis is complete, you back up off of the data and take your best guess. His actual words were “measure it in micrometers and cut it with an axe“. This approach should also be used in the presentation as well.

For any of my readers who have ever used an axe, you will appreciate this saying. The use of an axe is final, you don’t hack about or you will completely destroy what ever you are attempting to cut. You plan the strike, you take the proper stand, and you let the blade fall. When you are skilled with an axe you can fell a tree, or cut a very large log to firewood in a matter of moments. Still, the use of an axe is not as precise as one might expect from a “professional appraiser”. Nonetheless, I submit for your consideration, the market data that we often have is not precise, it is often not complete and confirmation or verification is second-hand at best. Therefore, when you read a report that has exact adjustments like $5367 or $3,332 it is clear that the report appraiser did not know how to turn on the rounding feature in the appraisal software. Unfortunately some intended users are not sophisticated enough to realize that these adjustments, although taken from the market, are “best guesses” and these users can be really upset if the “guess” is wrong. Trust me, you have no desire to find yourself in court in front of a judge and have the opposing attorney ask you “So {Insert Name Here}, please share with the court the deductive reasoning that was used to prove why this gross living area adjustment should be $5367 and not $5,500 or $5,000.”  When you take a stance of being so very exacting with your presentation, you place yourself up as being this “all-knowing appraisal guru” but the reality is that the presentation is weakened because anyone who has been in the business longer than a presidential term can tell you that market data is never that detailed and never that exact.

Take time to analyze the data and measure it as precisely as possible, but at the end of the analysis when you are reporting your final conclusions, let your opinion fall where it may. Remember a professional never strives for perfection, a professional strives for excellence.

See you around the water cooler!

Was it something that I said?

How many times have you had a phone call from review appraiser, underwriter or investigator to question your work? The majority of appraisers never get these calls, then why are we so paranoid about how we write a report, what we say, and if we can give evidence to support our statements? The answer is simple, the questions that people ask are not the questions we dread. The questions that we dread are those question that linger in the mind of the reviewer, or investigator. The questions that lead to having us removed from a panel or placed under subpoena. Generally speaking, it is less than 4% of residential appraisers that find themselves in court or a very large percentage of us lose work or our professional standing because of a report that was poorly presented.

When the phone rings or you receive that ominous email, take the opportunity to glean the reviewers thoughts. Don’t waste your time with bluster or posturing, this is not a contest to see who has better control of their urinal flow. It is indeed an opportunity to make a connection with your client, possibly to help them understand your reasoning or your market area, or it is an opportunity to for the appraiser to learn and improve.

Either way, take advantage of this contact and do not waste the limited times that you actually have to interact in person with a real live client, or potential client.

Remember to properly document your work files, and stay focused. A challenge does not mean you have done something wrong, often times it is a client that did not clearly understand the report. Still, if we remember that our first job is to present a report in a way that is easy to follow and not misleading, if we are receiving too many calls it may be time to reconsider the manner in which we are presenting our appraisals.

Remember not to take yourself too seriously. Nobody else does. And for the parents, the next time you feel like you are getting too “puffed up” just spend some time talking to your pre-teens or teenagers and you will be reminded very quickly just how little you really know.

See you around the water cooler!

Time Adjustments

A recent review has prompted this post. It has become painfully clear that many appraisers are still unable to justify time adjustments. It appears that many believe that the MC Addendum is the “perfect” tool to justify increasing or declining prices; however, the reality is that this form was never designed to be an economic forecast model. In order to prove trends, a solid sample is required to show the price changes. Trying to prove a trend with a hand full of sales is a lot like predicting the annual rainfall in Texas based upon the observed weather patterns in Dallas for only six weeks.

Some appraisers are using some pretty wild assumptions and, in my opinion, had better be really careful not to over-analyze the data. The danger is that someone might take them seriously and actually make a lending decision based upon the prediction that they are making; values declining or rising. Either way, if the client loses money based upon this “expert” opinion, this is a lawsuit waiting to happen.

It is every appraisers responsibility to know their individual marketplace and to report prices and the direction of prices as of the date of value; thus, to carry this out, the appraiser should be looking at market areas for a few years and establish an actual trend. Then, the data within the last 12 months can be narrowed to show the subject property. This is, of course, not the only way to show market patterns, but it is one of the safest ways, because then you allow the data to speak for itself. Any adjustments can then be developed using a trend or regression analysis that will give results that are a little more reliable than the Texas weather patterns.

Just a point to ponder. See you around the water cooler!

How big is my house?

Do you ever get those questions? “Well ABC appraised my house last year and my house was 3,726 square feet. Why do you say it only contains 3,698 square feet?”. I have always wanted to say, well as your house gets older, the wood begins to shrink… Everyone knows of course that houses come in different sizes, shapes and that walls can be built at angles other than 90, 60 or 45 degrees, thus accurate measuring can be a challenge. When you factor in roof pitch for upstairs rooms, or many shrubs, or rose bushes or other obstacles around the perimeter, any given measurement can be off by a few inches one way or another and then you take the variance of a few inches and multiply that by a run of 45 feet or more. The estimated house size can easily vary due to the different methods that are used to measure the home as well.

Many old timers, like me, still use a 100′ steel tape to measure the exterior perimeter of the home. There are, of course, several alternatives available today:  steel, fiberglass, and vinyl measuring tapes. There are also measuring wheels, and sonic and laser measuring aids. There is no one device that is better or more reliable. However, you must understand the degree of reliability that each device offers before you decide to use it to determine size. For instance, the measuring wheel can skip when it encounters rough terrain. The sonic device may give false readings if there is an obstacle between you and the wall that you are measuring. The laser sight can find interference from direct sunlight, or can give false readings if an obstacle is blocking a clear path between you and the distance you are attempting to measure. A vinyl tape will stretch over time thus 1 inch becomes more than an inch. A steel tape requires maintenance to keep it from rusting and cutting your hands or fingers. The fiberglass tape and steel tape are the most reliable, in my humble opinion.

When measuring a home, the garage, porch, patios, and any non-heated or cooled space is not included in gross living area; however, these spaces are measured so that the appraiser can account for the cost of these items. Additional flatwork, or extra concrete (i.e. driveways, parking pads and the like are also measured for the cost approach). Finished attics can be included if properly finished, including venting for heating/cooling. The pitch of the roof can inhibit the space which is counted due to clear space (overhead). Generally speaking, any space below 3′ is not considered habitable space. Also when measuring a second floor, many appraisers will measure the interior walls of each room and add the space together. This is practical for a small condominium or other type dwelling that does not have a lot of space; however, it is not a practical approach because interior walls should be included in the GLA. In other words a 12 x 12 bedroom right next to a 12 x 12 bedroom (i.e. 144sf + 100sf) will not equal 288 square feet of gross living area. Why? Because there is a 5-1/2 inch wall in between the rooms and exterior walls on each side of the room. Therefore, this span is actually 25.37 x 12 or 304 square feet. How can this space be added to gross living area?, I have been asked this time and time again. Let me ask a question though. When a home is built, do you believe these walls are simply built without cost? Of course there is a cost, and the only proper way to account for cost is to include the space at the time of measuring.

The accepted method of measuring a home is the ANSI method; however, there is no law that requires an appraiser to use this method. The law, USPAP, requires that an appraiser communicate the appraisal report in a way that is not misleading; thus as long as the sketch is presented in a way that is easy to follow, and the dimensions that are presented are reasonably accurate, the appraiser has met the intent or spirit of the law.

Keeping in mind the variables that can come into play when measuring a house, it is understandable why no two appraisers are likely to arrive at the same square footage estimate unless the house is a basic shape, with no angles, no fences, no shrubs and no pets. Any of the oddities or variables can cause appraisers to write different findings, and different findings will cause different results.

All of this being said, appraisers should be able to agree within 10% of size each and every time. If a sketch is off by more than 10%, there is a distinct possibility that someone is in error.

See you around the water cooler!