Appraisal of the Industry

Of course any one who has bothered to open USPAP, or read the preface of any appraisal related book is very likely familiar with the valuation process.

Of course the application of this definition and process is where the fun begins.

Definition of the problem…

If I do not complete this report within the allotted 48 hours that has been so gracious allowed by the high pressure client I will likely never see another assignment, my children will be forced to work the street, and my wife will trade me in for someone respectable like a used car salesman or an insurance guy.

Preliminary analysis…

I could just grow “a set” and tell the client that 48 hours is entire too short of a period but then that would mean that I would not be compliant with this demands and could severely limit my ability to do the small unimportant things, like pay rent or eat.

Data Collection…

Conducting several phone calls to other real estate appraisers, I have determined that the vast majority of residential appraisers who have focused on federally related mortgage transactions have found themselves in the same boat, and not one of us realized that we have all booked passage on the Costa Concordia or the Titanic, for those of you too busy appraising to keep up with recent events.

Highest and Best Use Analysis…

Legally permissible, certainly there is nothing illegal about a lender or client asking the near impossible from an objective licensed professional so that they will be inclined to simply make the deal work not taking the actual time need to make sure all elements are properly analyzed and reported, but if I continue this line of thinking I will terribly digress… so moving on to the next test.

Physically possible, although it is physically possible to inspect a property (measuring, noting the placement of windows, doors, walking the foundation, noting the roof from each and every angle from the street, taking photographs of the subject from each angle, the mail box so the lender knows I can read the proper address at the time of inspection, the street scene so the lender can see the subject does conform to the neighborhood, photos not too close, or too far away, with the proper exposure, walking through each room, turning on light switches, noting the location and condition of electrical outlets, the window frames, the type and condition of each window, the type and condition of the floor cover, the walls and ceiling the ceiling fixtures, the door and door frame, the plumbing fixtures, turning on the water and flushing each toilet, noting any and all deferred maintenance, noting any condition that would be considered detrimental to market acceptance, and highlighting any condition that would be considered unsafe, unsound, or lacking security for the current, or future occupants, noting the functional room arrangement and making sure there is a flow to the plan allowing for privacy to the private rooms (bedrooms and baths) and the public rooms like the kitchen, dining and living have proper egress without crossing through a private room) and of course inspection the crawl space (foundation if appropriate) and the attic space to determine the type and degree of insulation, the condition of the rafters and cross beams, and make sure the mechanical system is in place and functioning. Driving through all minor arterial thoroughfares, and interior residential streets, as well as driving the neighborhood boundaries to determine the neighborhood influences so that a proper description can be provided to the ultimate user of the report. Photographing the competing sales and listings for any and all properties that are to be used in the report, and of course holding on the “best comparables” so that when the underwriter or reviewer calls and says “don’t you have any better comps?” you can say, “Why of course I do, I was hoping for you call!”

Financial feasible, since the fees are now lowered and filtered through a middleman, or should I say are now customary and reasonable the appraiser is forced to work much more efficient, and group inspections so that the bus route covers the majority comparables and the final inspection of the day is close to the Wal-Mart where he or she works a night.

maximally productive, well obviously the only way to become maximally productive is to just generate 1,000’s of reports through the appraisal management company mill, disregarding little things like full disclosure or analysis, afterall hitting the number and getting the next assignment is the only way to succeed in this game…

… Ok, I believe I the level of my frustration should be painfully obvious by now – the truth of the matter is that fact is actually much stranger than the above fiction. There are many appraisers out there who have started businesses to make money and not to keep up the purist attitude and safeguard the profession and the general public. What? An appraiser that wishes to make money and not pursue a career as a public servant to make sure that J.Q. Public is well protected? This seems unimaginable.

Now before anyone gets their nose out of joint, remember I am a second generation appraiser. I fully know that there are 100’s of us who do seek to maintain and promote the integrity of this profession and who sacrifice literally tens of thousands of dollars each year in turning down, pushing away clients, or out right rejecting proposed assignments that would compromise their level of integrity or professionalism.

Still – the residential appraisal industry has been changed to such a degree that the largest clients out there are simply using their AMC of the month or the year, to whip the appraiser’s into shape. Exerting pressure though an agent by restricting work, is still exerting pressure. Even though it has become customary it is definitely not reasonable.

ok – rant concluded…

See you around the water cooler!

UncleZev

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Customary and Reasonable?

What if the custom has become beyond a point of reason. The change that appraisers have been asked to make is their new operating budget because their fees for one assignment is about the same amount you collect in one machine at a laundromat in the middle of the week.

Customary and Reasonable? For whom?? The consumer, unfortunately has certainly grow accustomed to paying higher appraisal fees, the management companies are certainly having no issue in taking half of the fee. Lenders certainly have not issue in charging the borrowers for the increased appraisal fees.

Yet appraisers continue to work for low fees, why? How is this reasonable? At what point was this considered customary?

I will admit that appraisers have done this to themselves. The refused to starve, refused to leave the business and refused to keep the fees in a level that would have been reasonable for their time and expertise. One you get one appraiser to lower their fees it does not take much time at all for the overall populace of appraisers to lower their fees to try to compete.

Today, the custom is no longer reasonable. The idea that appraisers bid for jobs in a matter of minutes, and the one with their finger on the chat feature of their smart phone gets the privilege of working at fees that are figuring at just above $15 per hour.

Each and every residential appraiser needs to really look into establishing a base of rental homes, where they have a passive income outside of appraisal. Then raise your fees. I remember when professionals billed their time based upon the complexity of the activity that they were asked to perform. For complex tasks the fee was higher, less time-consuming tasks rated a lower fee.

This will never change, until appraisers wise up and make the change. Create a passive income stream, hire a manager to keep that passive income active and profitable. Then appraise, because for the proud few it is in the blood, we will not ever retire, we will remeasure, rewrite and will never relent. Is anybody buying this????? Yeah, me either.

I guess I have dealt with customary and reasonable for so very long, that it felt good to be uncustomary and unreasonable even if for a few short seconds within the safety of my blog…

See you around the water cooler!

UncleZev

I got two appraisals, “Why don’t they agree?”

This question has come up so many times in the recent few months, and of course it is not a new question, but I have decided to blog about it because in truth the question has merits. In a perfect world, where people all live in homogeneous neighborhoods with no adverse influences, no functional obsolescence, two cars in every garage and 2.5 kids, ok that might be pushing it, there may be instances where you can find two appraisers that if the saw the property at the same time on the same day they might agree on the value of a home.  – ok if you are wondering how you determine 2.5 kids, I once asked my dad this question. He explained that when you are working on the farm, one boy is a boy, two boys is half a boy, and three boys is no boy at all. So using this math I figure 2.5 kids must mean 2 girls, and 2 boys – but I digress.

Remember a real estate appraisal is an opinion of value. The opinion, by law, must be reasonable and based upon techniques and principles that are well accepted and known within the industry. But at the end of the day, it is simply an opinion. When data is abundant and there are several recent closed sales of homes that are identical, then the opinion of value should be shaped by the proximate, recent sale. As the degree of uncertainty increases as to how the recent sales actual compare to the subject this is where a matter of opinion can come into play.

Still, back in the day, relocation companies use to order three appraisals. They expected the three appraisers to come within 7-percent of each other and the closest two shaped the purchase price. Then when the relocation company sold the property they expected the appraisals to be within 2-percent of the final sale price. My point is that even though appraiser‘s rarely agree on everything, the market still should dictate the final opinion of value; therefore, the opinions should be relatively close together.

See you around the water Cooler!

UncleZev

 

Back to Basics – part 2 -The Cost Approach – An approach to value, without worth, really?

The foundations of appraisal were based upon three independent approaches to value. A system, when developed correctly, presents a check and balance within the report. The idea being that when an appraiser takes the time to develop each report, the data will show three independent motivations and three separate value conclusions. Nonetheless, the conclusions will support one another because the underlying principle for each approach is the principal of substitution.

For the purposes of valuation or real estate appraisal, the principle of substitution is defined by practical application. Simply the idea that a prospective purchaser will pay no more for a property than the cost of acquisition of an equally desirable substitute  having equal utility and acquired within an equal amount of time. This principle  is accurately assumed to be the underlying principle of the direct sales comparison; however, it should be recognized that the principal of substitution is also the underlying principal for the cost approach was well.

The cost approach, when completed in a serious and professional way, is not only crucial to the appraisal of residential real estate, but also crucial for an underwriter to properly understand other factors that influence the value of the subject. Additional principles that are in play within each real estate market, but few people take the time to identify  these factors or understand their effects. A few of these principals will be listed below, in an attempt to help the average user of an appraisal gain a deeper appreciation for the thought process that goes into each appraisal report.

The Principals of Anticipation, Balance, Change, Conformity, Contribution, Progression, and of course Substitution are the basic tools of analysis that go into the professional analysis of each report.

Anticipation is the underlying fountain of the Income Approach to Value, but it also reflects the motivations of prospective purchasers of residential properties and has a foundational effect within the Direct Sales Comparison Approach as well. The income approach is of course a reflection of the present worth of anticipated income. The Direct Sales Comparison (or Market Approach) reflects what competing purchasers are willing to pay for the anticipated benefits that are attributed to a particular property, or characteristic, like quality, appeal, or location. These motivations are carefully considered when understanding a property and how it relates to its market.

Balance recognizes that the value of a property reaches its greatest potential when the four agents of production achieve the state of equilibrium. The four agents, being labor, management, capital, and land. When these agents are out of balance (in residential properties) you see a loss of value due to an over or under-improvement to the land. This principal comes into play when determining the proper highest and best use and remaining economic life. All three approaches to value are affected by the Principal of Balance.

Change is inevitable – except from a vending machine.  ~Robert C. Gallagher, but I digress. Change is continual therefore an appraisal is only reliable as of the date of value. The very next day, a plant could open in the town that would employe 1,000 workers increasing the purchasing power of the community and creating a demand for immediate housing, or the opposite could happen as well. Nothing ever remains the same in this world, this is a principle that affects all things not just real estate appraisal. It is this principle that lenders today are very concerned about as they are wanting appraisers to decipher the market conditions and decide which stage of change the marketplace is in (i.e. growth, stability, or decline).

Conformity states that maximum value is generally realized when there is a reasonable degree of neighborhood homogeneity. That is to say social and economic characteristics should be harmonious, deed restrictions and/or land uses compatible and property types reflective of these factors. Generally speaking the elements of conformity are not planned, but are borne out by the market forces that shape a community over time. Successful neighborhoods that thrive and enjoy stable or increasing values are communities that have developed amenities that are supportive of the overall needs and expectations of that community.

Contribution reflects the market reaction to a physical improvement of a property, not its cost. The best and well-known example is a swimming pool that today can easily cost $50,000 to $85,000 for a pool with a heater, and filtration system, and spa, and water fall, and all the “accoutrements” relevant to the enjoyment of a swimming pool. But the market generally resists the real cost of such improvements. The amount the market is actually willing to pay is known as the contribution value, of course the loss of value (or buyers resistance) should be shown as functional depreciation, but that is for a different discussion.

Progression, this principle is a politically correct way to discuss the basis for external depreciation and reflects the marketplace today with many REO properties on the market. This principal teaches that when properties of similar quality are adjacent or associated within a particular market area, the inferior properties will benefit from the association of the superior properties. That is to say you have an equal number of inferior and superior homes, the prices of the superior homes can benefit the inferior homes. The inverse is also true. The prices of the superior homes will regress due to this association.

When these principles are understood, employed and correctly analyzed the appraiser is then able to give insight not only to “the three best comparables” but why the market behaves in the way that it does and an appraiser can then anticipate future expectations making certain assumptions about performance based upon previous trends and reactions.

Unfortunately, this material was not sexy, or alluring, but I hope that those underwriters, operations managers, lenders, regulators or even appraisers who may not have had the best training will find some benefit in the information that I have provided above. It is critical for all to you know, understand and acknowledge. Nothing I have presented in this blog, is an original thought and I take no credit for the thoughts or analysis.

I have drawn from several years of study and instruction to give this summary of some of the foundational basics of appraisal to enable the users of our reports a brief insight and hopefully, new-found appreciation of the thought and time involved in the production of a real estate appraisal.

See you around the water cooler!

UncleZev