Non-permitted Additions

Other the last few weeks I have noted a common theme in my conversations with appraisers across the nation. This topic seems relatively simply and yet since I have encountered endless questions I thought this post may add something to overall community.

The question boils down to “What is the big #$%^&*@! deal with non-permitted additions?”, for residential lending purposes. Of course this stems from the fact that many residential lenders are pushing back appraisals that have given value consideration to an addition which was non-permitted at the time of construction. This is not a new idea to me, but apparently it is very new to some of my colleagues.

Generally what I am finding is that if the origination appraisal report failed: to properly recognize the addition, discuss the functional utility (or inutility as the case may be), discuss the insurability; discuss the construction methods; and address the marketability, then the lender will push back and ask for the addition not to be included in the appraisal.

While that last thought ruminates for a moment, let’s break it down. There are three basic concerns that a  lender has with regard to additions. 1) Health and Safety; 2) Insurability; and 3) Market acceptance.

When a property is first built most of the time the home was built in accordance with local regulations, building permits were obtained proper inspections were made to ensure the home has met the national building codes that are designed to ensure the longevity of the structure and promote the health and safety of the future occupants; however, when the property has an non-permitted addition the lender has no way of knowing if the proper building codes were followed and the wiring, plumbing, and structural components are then in question. If the occupants of this home were injured due to a structural or mechanical flaw of this home (relating to the non-permitted addition) anyone within the chain of title, after the addition, could be considered complicit because legally the lenders are required to conduct due diligence, which includes  the collateral, prior to funding a loan.

Throughout out the course of time this premise has been tested time and time again in the court systems and when the additional non-permitted work was found to have been completed in a “workmanlike manner” the courts have generally found in the favor of the lenders because the absence of a permit does not change the degree of workmanship. Adherence to building codes is generally implied by a workmanlike manner.

All property that has a mortgage must be insurable to safeguard the financial interests of the lender and the borrower as well. Although this is not the law, it is industry standard that has been expected by Fannie Mae and other secondary mortgage investors. An non-permitted addition that was not completed in a workmanlike manner may not be insurable. Thus the lender  will require that hazard insurance will accept either the original property and the addition, or at least will accept the original property and not add any exemptions due to the presence of an non-permitted addition.

Of course even if the health and safety of the occupants are ensured by proper building methods and the home is insurable, the lender will not be happy unless the home also is readily accepted within this marketplace and could be considered a competing alternative to the surrounding homes. This is because it has become widely known that conformity is an important factor of value and acceptance therefore most lenders would prefer to lend on collateral that conforms to its surrounding neighborhood.

It this is last reason that allows the flexibility in most lender guidelines. The non-permitted addition can be considered as long as 1) the additional has been built in a workmanlike manner, 2) the addition is common for the area, 3) the appraisal report provides market data (i.e. closed sales) to show the market acceptance of similar improvements.

The bottom-line is that when the appraiser has determined that a property has had an addition. The report should address: the quality and functional utility, the conformity and acceptance within the neighborhood (illustrated by market sales when available) and the insurability of the improvements.

As far as insurability is concerned, it is my opinion that the report should contain an extra ordinary assumption that the non-permitted addition will not impede the acceptability or insurability of this property.

See you are around the water cooler!

Uncle Zev

 

It may be trite, but truth tends to get repeated…

The acting of appraising, is one that is complex but simple, commonplace and quite rare. We as appraisers should take a moment to remember that our profession was borne out of a time mistrust and calamity. Actually it has been said, that the appraisal profession is the second oldest profession in the world… that is to say, somebody had to put a price on it… but I digress.

So often we can get sucked into the practice of trying to balance the guidelines, the time restrictions, the unreasonable client demands and (a little thing I like to call) life, that we can forget that ours is a noble profession. We are the ones that people turn to when they are seeking accuracy and reliability. They want to know that value they are placing on an item is one that others would also agree with or tend to accept.

The reasons for this need vary greatly, but the basic foundational premise is that we all need someone who we can trust to make sure our thoughts on a matter are reasonable or accurate.

Of course, you can put this in the context of real estate and mortgage lending, and greed and profit, and people pushing the limits just to close a deal and once you do place your mindset into their realm, then you run the danger of being sucked into the vortex of endless attempts to satisfy unreasonable demands using antiquated methods and approaches that were designed years ago by men who understood the need to place objectivity into the world of money. They wanted to make sure that the process of lending money was backed by solid reasoning unimpeded by greed or corruption. At least that is the “truth” I choose to believe. It helps me sleep at night to believe there are still a few good men and women out there who are not only interested in lining their pockets at whatever cost necessary.

To all who continue to treat appraisal as a profession, I tip my hat.

See you around the water cooler!

UncleZev

Sense is like courtesy it is no longer common!

I dealt with an old question recently that I felt was pertinent and worthy of repeating.

The question arose in  Brooklyn, NY when an underwriter demanded that the appraiser include the basement area as part of the gross building area when comparing the subject to the comparable sales.

After all they reasoned, Fannie Mae guidelines, i.e. Property and Appraisal Guidelines,  XI 405.07 state, “Gross building area, which is the total finished area (including any interior common areas, such as stairways and hallways) of the improvements based on exterior measurements, is the most common comparison for two- to four-family properties.  The gross building area must be consistently developed for the subject property and all comparables that the appraiser uses.  It should include all finished above- and below-grade living areas, counting all interior common areas (such as stairways, hallways, storage rooms, etc.), but not counting exterior common areas (such as open stairways).

We will accept the use of other comparisons for two- to four-family properties (such as the total above-grade and below-grade areas as discussed above in Section 405.06), as long as the appraiser explains the reasons he or she did not use a gross building area comparison and clearly describes the comparisons that were made.”; however, within this definition of gross building area was the appraiser’s response. Although the “appraisal gods’ have clearly mandated that gross building area must include the area below grade, this only applies when this space is also generally included by the market area.”

The basic problem, as I see it, is that there are way too many people trying to decide how to apply the guidelines that really are very straight forward. Fannie Mae set forth guidelines because there are no hard and fast rules that would uniformly apply across all states in the Union. The guidelines attempt to address what is considered to be the norm for the country; however, attempting to find a norm for 50 states is the height of hubris in a of itself. Still it is better to have guidelines in place rather than have none at all, but not at the expense of replacing common sense. In fact if you were to actually have the benefit of interviewing a Fannie Mae review appraiser you would find that they are very down to earth and understand that their guidelines are not hard and fast. They provide a framework of acceptability but with the proper analysis and explanation Fannie is very open to appraisals that must report outside of their guidelines. On the other hand, many underwriters (especially the relatively new batch which have recently hatched out of the most recent debacle of the ongoing mortgage lending saga) simply do not understand that appraisers are given the flexibility to present an appraisal that is reflective of the subject property and its market area which may, or equally may not, conform to Fannie Mae guidelines.

My point is simple, and  fairly consistent (I believe), common sense needs to take the place of algorithms and automated valuation models. In the case of Gross Building Area versus Gross Living Area; it is imperative that lenders allow their local market experts report the market reaction to the properties that are being submitted as collateral; and not attempting to dictate a set of general guidelines that were designed to enable an appraiser to report their findings in a consistent manner.

The root of this problem, of course, is one of responsibility and enforcement. Our long honored legislators decided long ago that the lender had the ultimate responsibility to select, review and audit the real estate appraiser that was submitting the assignments to the bank. The problem is that this has never been a good idea. Then we wrap this notion in the most current legislation that dictates that the lender is able to use appraisal management companies to direct appraisers, but appraisers no longer have the ability to reach out to their actual client (the lender). This simply places the appraiser in the worst possible position. Now they must try to develop a business without any personal contact with the client and must attempt and defend their reports without any chance of actually communicating their findings except in writing.

The report is now cloaked in the use of UAD which is a format and series of codes designed to dehumanize the process of analysis and decision-making all for the purposes of making money. Personally I am all for making money, but not a the cost of disabling appraisers from promoting and growing business relationships.

There really needs to be a modification of thinking that Lenders are responsible for the appraisers conduct or performance. The thinking that a management company can solve this is naïve, because a management company has no authority or power. They themselves try to wield a “sword of authority” by controlling work flow; however, this is a quasi-legal practice and very soon you will find appraisers begin to figure out that their rights are actually be diminished by economic sanction. This type of pressure was supposed to be eliminated by the Frank Dodd Act but instead it has simply been exacerbated.

It is time that appraisal organizations actual engage in re-engineering the foundational concepts of direction and control when it deals with mortgage lending. Appraisers never should have been controlled by lenders; in fact lenders should have to deal with an appraisal report once. If the report has passed the clearing house (so to speak) then the report should be accepted once and for all and move on. Of course this is naïve because loan officers will never go quietly without a fight this how they generate their 6-figure income, while appraiser deal with ever diminished fees and are asked to provide evidentiary support for each word provided within an opinion of value (aka an appraisal).

See you around the water cooler!

UncleZev

If you want to stop crime, make it against the law!

It is this type of thinking that has made it increasing difficult for honest appraisers, while providing a buffer for the true criminal that seeks to manipulate the system. Is it really as simple as the best appraiser is the one who is always on time, always fills out the form according to UAD, and never strays from a Fannie Mae guideline? The report reads clean, passes review and never makes the slightest ripple when place in the loan pool, so how could it be wrong?

The ugly truth is that often the “prettiest” report is the one that is the best fiction. If our goal is to receive professional opinions of value, then we need to be selective of individual appraisers that are honest, industrious and able present well-reasoned arguments that are based upon verifiable information.

Of course, the real question is how do you determine that a man or woman is honest. Can we simply ask them, “Are you an honest appraiser?” The chances are they ones that answer something like, yes I am 100% honest and have never ever lied or stretched a value are the crooks of the bunch. The ones that answer something like, well I try to be as honest as possible. Sometimes over the years there may have been assignments in which I lost my objectivity and favored the cause of the client; but, I believe that was mostly from inexperience and a subconscious need to be liked. Yes, I believe I can say that I am honest. I have not purposefully ever taken an assignment, or completed one that required me to lie. This is the appraiser that I would personally do business with.

Can we stop crime by making it against the law? Well the absurdity of the question bears examination, but the short answer is best explained by two very short statements my father told me of the years. #1 – Locks just keep your friends out. and #2 – A contract is only as reliable as the parties involved in the agreement.

The gatekeepers of this industry have become machines and analytic tools, this is what has allowed the unscrupulous to thrive. It is not any more simple than that. When an experienced review appraiser, or underwriter actually reads a file and calls an appraiser on the file, this is best approach to safeguarding the process and making sure the person who is writing the report is not an advocate to the client, or a nitwit who could unwittingly mislead the process.

Points to ponder as we continue in “the good fight’…

 

See you around the water cooler!

UncleZev

For Clarity Sake

Once again I find myself harping on the original intent of USPAP. The purpose of the Uniform Standards of Professional Appraisal Practice (USPAP) is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers. It is essential that appraisers develop and communicate their analyses, opinions and conclusions to intended users of their services in a manner that is meaningful and misleading. (quoted from the Preamble of USPAP).

Why is it then that GSE’s can then dictate forms, like the MC Addendum (or affectionately known as the Market “Confusion” Addendum). Of course the “market conditions addendum” I have railed on before, the inherent difficulty of trying to suggest a trend from a very small sampling of data is that erroneous assumptions and statements are made in an attempt to try and gain an understanding from information that has now been mandated by the guardians of the industry.

It is like being asked to evaluate the ocean by analyzing a teaspoon of water under a microscope. While this may be a fascinating exercise in microbiology it could easily produce erroneous results for an oceanographer.

The ever popular UAD (Universally Audacious Development of irrelevant facts) which was published by well meaning, well educated individuals who were clearly not appraisers.

The idea of creating a system of rating condition, for example, is a good idea. The problem is that since the majority of appraisers can not handle the concept of a property that typical for its market area is rated as “average” condition, is not really going to handle the idea that a home that was built in 1950, with no updates in the last 15 years, but in market accepted condition is now rated a c4 rather than a c5.

Think of it is this way, when you want to communicate to a child you do not devise charts and graphs and hand them an appendix so that they can figure out what you are trying to say. No, instead you use commonly understood words, phrases, and concepts. You “paint the picture” and “walk them through the logic” so that at the end of your attempt at communication the point has been made and the information received and understood.

An appraiser rarely has the opportunity to be reviewed by another appraiser, but must constantly train, explain, and provide further clarification to an industry that is now filled with new players, with new rules, and new ways of communicating the information. This was all done for the sake or creating a clear and simple process?

The function and role of the appraiser has now become even more important, because now even more they need individuals who understand the process and communication of results, but also can translate the definitions and though processes that have been imposed upon the residential mortgage appraisal industry as a whole.

See you around the water cooler!

UncleZev

Thanks FHFA, for the clarification?

Pre UAD

The subject is a one-story, brick veneer residence, found to be average quality for a site-built home built in 1973. The condition was rated as average, with no deferred maintenance noted and no need for any immediate repairs.

UAD Compliant

C3; No updates in the prior 5 years; no need for repairs noted.
See you around the water cooler!
UncleZev

Signed or Unsigned that is the Question

There is an interesting discussion taking place on some of the forums over the last 9 days with regard to USPAP 2012-2013. Whether or not the additional certifications require a signature. Before weighing in on an esoteric discussion, I would like to remind everyone that the first and foremost intent of USPAP is clarity. To provide an opinion in a manner that is clear, easy to understand, and professionally derived. Therefore, as long as you pay attention to the particulars of USPAP and provide your reports in a manner that is clear, easy to understand, and professionally derived you should be able to withstand the scrutiny of a peer review and or the state board.

Often times it seems as though or reaction to situations are driven by an inane desire to avoid litigation which is easily understood given the very nature of this litigious society; nonetheless, I maintain that our basic responsibility as objective professionals is to provide an opinion of value that is shaped by the foundational concepts of real estate appraisal. Over time the provision of this opinion has evolved from index cards with a Polaroid on the back to computerize forms with maps that are automatically generated with digital photos, and aerial views. Still the appraisal report of today is less clear, in many ways, that the reports of old. Why is that?

Back in the early 1980’s my father announced to me that the appraisal industry was “going to hell” because the industry was filling up with women and children. Of course that was tongue-in-cheek, because my mom and I both worked as a appraisers in his office at that time. The longer I stay in this business I understand the sentiment, of my playful father. I do believe the the ruination of the appraisal industry was allowing clients, specifically lenders, to control the content and form that an appraisal report must take. What I mean to say is that allow, USPAP has grown to provide a basic definition and structure, the revelations of USPAP were not new or earth shaking in any manner. Any old school appraiser who was “worth their salt” already provided appraisal reports that exceeded the expectations and requirements of USPAP. The foundational idea of provide a report that is clear, concise, and supported by sound reasoning was hardly a new way to think of the appraisal report.

So what was the catalyst  began the fiasco that now know and “love” to be form appraising? I personally believe it was a phenomenon that occurred during the decades that followed WWII. No one reading this blog will likely remember those days except for the stories our families told us, or what we have read. But at that point in our history America was at its strongest financially. We had a very large majority of our population returning home and rebuilding their lives. Demand and expectations of profits began to rise and escalate with each passing generation. Very soon the generations that did not work to create anything, began to wonder why can’t we make more than “the old man”. Respect for the elderly diminished, the “youngsters” of the sixties, seventies, and eighties raised their children through proxy because most of them were working and creating “bigger and better ways” to become wealthy. This hunger for more, eventually created the circumstances that lead to our biggest real estates booms and busts. The mortgage industry was born out of these times; however, due to the demands by consumers there was very little training or education required for this newly formed “experts” and rules and regulations were developed as the need arose.

We have not changed very much, we still react to issues that we have created. While it is of course most important to take evasive actions during a crisis, there really needs to be more and more understanding by those who dictate our futures with the piles and piles of “stuff” that is created in response to epic portions of greed, corruption, abuse and mistakes.

Due to the melt down of our financial sectors, many of us are looking around, doing a lot of soul searching and trying to figure out “what the hell happened?”.

My suggestion? I say it is time for each and every professional who is objective, to stay focused on providing the services we have spent our lives learning to provide. Breathe and remember that many of those in power today, believe that the 1980’s was a life time ago. There is absolutely nothing wrong with youth, and age alone does not create wisdom. But we all should develop a sense of respect and appreciation for each and every individual with whom we interact. The process of real estate appraisal is not complicated. The reporting of an appraisal should also be “easy”, but in the process of communicating we often find ourselves in the role of consultant or teacher. Because the majority of our clients are checking boxes and filling out forms and if everything fits in the box you must be a good appraiser. If everything does not, you must be bad.

We really need to “preach” the basics and provide reports that take the time to explain why we have taken the approach, why we have used the comparables we choose, or why we excluded a particular data set. I know I can already hear, I do not have time to teach. I do not make enough money to educate my clients. But my response to this I also “steal” from my father (who I am sure borrowed it from someone else). “Education always costs… but ignorance costs more.”

Back to the original question, Do additional certifications within a residential appraisal require a signature? There is case to be made on both sides of the debate, to reconcile this and move on to the next assignment. Simply make room for the certifications on page 3 of the form (above the cost approach). All the information on this six page form is covered by the signature.

See you around the water cooler.

UncleZev

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

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