Over the span of the last several decades, many residential appraisers were brought into this profession to meet the demand for residential mortgage lending reports. The problem with this has become clear as many were trained with one mindset, residential lending appraisals. They became “self-proclaimed experts” at filing out forms and meeting client expectations. All in the name of doing a good job and making a living.
I hold all residential appraisers responsible for this sad state of affairs. Had more of the professional appraisers taken on one or two trainees and mentored them into producing credible reports then perhaps we could have held back the tidal waves of greed. Although even as I type this, I am already arguing with myself. The mechanism that was purposefully put in place to allow the aggressive lending decisions did and would have demolished and standard that was placed before it. However, if these standards had been in place and hammered into the industry all along, then we might have been able to avoid the debacle that continues to loom above us now.
“What am I babbling about?”, one might ask. An appraisal report is supposed to be one that is rendered in a way that is free of bias, (i.e. one that is produced independently, impartially and objectively). Enter the form filler. Once the form fill mentality came on board, professional appraisers were swept to the side. The industry took hold of the form filler and provided “three comparable sales” that made the deal. The other 40 that indicated contra-results simply “were not indicative of the subject’s value”. The cost approach was simply discarded because was deemed less than relevant, or too subjective. The income approach was also done away with because this approach was deemed irrelevant. The form filler played their part in creating a false market, because once one appraisal got through everybody else wanted on board.
How could have stopped it? Simple. The truth of the matter was that nobody wanted to hear the appraisers that were telling the truth because there were those people who helped create a false report. Once enough people began to believe these reports the lies spread like wild-fire. After all if enough people say it is so, then who am I to argue.
A marketplace becomes valuable because of the perceptions of the marketplace. Why is it that one neighborhood becomes more valuable than an adjacent one? Why one side of the tracks is “better” than the other? It is perception. Of course the reality is that there are factors that actually do contribute to market perceptions beyond subjective whims of the public, this is why fads come and go. The heat of the moment begins to fade when the purchaser is faced with the fact that they paid three times more than the cost to reproduce the same product, or they paid four times more than they can rent the property for in an open and competitive marketplace.
The founders of real estate appraisal, understood that there were three approaches to value. Granted these approaches are all driven by the same basic influence (i.e. the marketplace); but the approaches to value reflected the motivations of three distinct ways of looking at the value of the same property. When we faithfully apply these approaches to value it keeps us in check and enables us to support our proper level of objectivity. Obviously, there are property types where these approaches are not always applicable; however, this is the exception and never should have become the rule.
According to the Uniform Standards of Professional Appraisal Practice (USPAP) all appraisals must be presented in a way that is not misleading. The opinions and conclusions within the report should be supported by the factual data that is discovered during the appraisal process, furthermore this data should be either presented in the report, or at least referenced within the report, to allow the intended user an adequate understanding. Conclusions and opinions that are formulated should in fact become self-evident as the intended user reads the report. In fact if the reader is not able to draw the same conclusions as the appraiser, then the report has not been presented in a way that is useful. I am not an attorney, but if a report does not give an intended user adequate information to understand the conclusions and opinions that are provided, then it seems to me that the report has been presented outside of the requirements of USPAP and the appraiser could be liable for providing an incomplete report.
Appraisers, wake up! For those of you who have always subscribed to the philosophy that the market dictates value and each applicable approach is carefully evaluated for its merits in the presentation of value according the intended use, I salute you. For the rest of you, who were misled into believing there is only one approach to value, and that a report is good if it conforms to Fannie Mae and UAD and client requirements… I submit that an appraisal report is only good if it has been conducted in a manner that not only meets the letter of the law, but also meet the spirit of the law as well. The law (USPAP) was written so that real estate appraisers understood that certain steps must be taken by every appraiser, which included all factors that influence value and all approaches that measure it. We should use as many approaches to value as are applicable so that we have a check and balance for ourselves. In this way we cannot be as easily misled by circumstances of “odd sales” but can gain a full understanding of the influences that drive the market.
Case in point. In the late 1970’s and early 1980’s, builders were putting up homes as fast as they could pull permits. Appraisers that were asked to value these homes were carefully “coached” to use the builder sales, because they had conducted the “proper market research” and analysis and the resale market could not possibly reflect a proper alternative. Of course, this fact is not necessarily in correct. A new home does engender a certain appeal; however, this appeal must be demonstrated in the marketplace and not just by the one builder who has a financial interest in their own sales.
I will not even touch condominiums in this discussion, for those of you who have completed these appraisals (or reviews on these appraisals) you already know my frustration on this topic. For those of you who have not completed these, wait for a future rant on this subject.
The bottom line here is that a professional real estate appraiser must always strive to have independence from the source of data and the participants within a transaction. This is why we can not simply take sales from the REALTOR involved in the sale, or simply take builder sales, or simply take HUD1 closing statements as evidence of sale.
The appraiser must approach every assignment with objectivity, looking at every single appraisal problem from the perspective of the prospective buyer and seller. After all the definition of value, for mortgage related transactions “Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well-informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone”. Perhaps for a future rant I will dissect this definition even further, but for now suffice it to say the appraiser bears the sole responsibility to ensure the definition has been met not only in the development of the opinion of value, but also in the selection of the comparable sales that are presented for comparison.
Lastly, the appraiser must keep up an impartial mindset throughout the entire process. The only real interest the appraiser is allowed to have is wanting to be paid for their efforts. To meet this requirement is actually extremely simple. The appraiser should be paid in advance and be criminally liable for theft if they do not provide a professional appraisal in a timely fashion. If this were the case, some appraisers would drop out of the profession, but most of us would no longer feel the threat of will I be paid and would be able to concentrate on the task at hand… i.e. providing a credible self-evident report.
See you around the water cooler!