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

 

Back to the basics

The more I read residential mortgage related appraisals, underwriter comments and comments from the quality assurance departments from major lenders, the more I have come to realize that it is far beyond time to get back to “preaching” about the basics of this industry. For those of you who have been in the business back when you would take the photos, pull it out of the camera, wait a few moments before you pulled the front off the photo before coating it with the “magic wand” to keep it from fading (thank you Polaroid), I would recommend moving on to another post.

But for the so-called experts of residential appraisal, the current brand of underwriters, and quality assurance “experts” that are being paid to “play appraiser, lawyer and industry regulator” please pull up a chair and let’s puzzle through a few of the basic of this business.

First of all, if you are going to challenge the appraisal report, and your basis for this challenge is UAD please understand this a Uniform Dataset that was mandated by Fannie Mae for the purposes of selling the loan packages to Fannie and Freddie. These dataset requirements are important and should be honored by the appraiser; however, there is no actionable items with regard to prosecuting the appraiser.

Secondly, USPAP has been made the law in all fifty states with regard to regulating the appraisal process and how the report should be presented; however, before you wish to challenge an appraisal report using the Standard Rules of this document it is imperative to take a few ethics courses so that you understand the proper use of this document. Standard 1 of USPAP is for the development of the appraisal. It is really difficult to determine if the process has or has not been followed by evaluating the report. Standard 2 was governs the reporting of the appraisal.

This is the first of several posts, the next series will address various sections of the report and presentation that seem to get overlooked more often than others.

See you around, the water cooler!

UncleZev

 

A world bereft of humor

A world bereft of humor is like a woman without sex. It may be full of wonder, or mystery, or agony and pain, but what’s the point really?

I have decided to take my daily rants and in express them here for all to see, appreciate, or disagree. My wife, family and close friends will no doubt be so pleased that they do not have to continually deal with my inner monologue as it spills back to the blog rather than being freely shared with anyone, in my community who will still listen.

In my position as a review appraiser I speak to appraisers across the country and have recently had the unique opportunity to speak to several “second generation” appraisers like myself. This has been refreshing and left me with a sense of hope and a new-found appreciation for the profession. Of course, for those who know me, I will never really lose my sardonic or sarcastic  approach towards this profession, but it has been refreshing to have a bit of life brought back into my inner monologue.

For instance, I was recently asked to mediate several situations where the client, who will always and forever remain nameless in my rants, believed the report appraiser to be uncooperative and almost incompetent in their presentation of their reports. The appraiser on the other hand was never really privy to the lender‘s attitude but was forced to try to understand the continual barrage of questions that would be brought to them daily, in some instances.

At first blush, I received the request from my manager to mediate this with a degree of frustration to think “What has happened to professional trust?” and “Why, the incredibility rude word starting with the sixth letter of the alphabet, am I even still working for this company that would ask to me mediate in situations like these?” Then I had an epiphany, which for a good Jewish boy is a bit odd to start with, but it was indeed a sudden realization that over took my thinking without reasonable proof, thus I don’t know what else to call it, but I digress. I realized that my current boss was the very reason that I even entertained working for the company that I choose. This man is also a second generation appraiser who very much understands the whole equation. He had selected me to mediate this dispute because he was looking for me to be prompt, professional, and objective. Not allowing either side to debase their arguments with petty dogma that has found its way into the lending community with regard to real estate appraisers.

Of course there are certain levels of detail that would be inappropriate to be revealed in this particular forum, but suffice it to say, at the end of the day, both the lender and the appraisers found a mutual respect for one another and the appraisal reports were accepted and funded without further hassle to the report appraiser.

I believe that many “old timers” like myself have to a very significant degree have lost sight of the actual reasons they choose this particular profession, or rather they found themselves “drafted” into the profession. The underlying reason is a drive to present a fair, balanced, opinion without favor or bias to any side of the transaction. Whether it is a legal, financial, or civil matter every transaction needs those who can separate themselves from each side and remain objective and present an impartial opinion that is based upon an analysis of the marketplace itself.

Lenders are not maniacal institutions that are hell-bent on the destruction of the “American Way”, for the most part. In turn real estate appraisers are not individuals who failed at every other attempt to make money so they settled for “pulling tape”, “crunching numbers”, and killing every possible deal so that lenders will not be saddled with collateral that the borrow can not afford.

The truth is that both, real estate appraisers and mortgage lenders, serve a much-needed role;  when they operate in a manner that is consistent with their design and function. When they do not operate in this way, it is at that time that mediators like myself and my boss are very much-needed to try to help each side “play fair”.

I want to encourage anyone still reading my blog, to “fight the good fight” there are literally millions of consumers who really do not understand the dynamics of what I have just said. It is for them “the public” that we continue to hold steadfast to our ethics and beliefs that have shaped the larger whole of the appraisal profession.

Hope to see you around the water cooler!

Uncle Zev

Signing off…

As so many have already noted… I have come to the end of my rants.

I may pick up this blog in the future, for the time being. I pass my “pen” to the younger, smarter and stronger of the Internet crowd.

I have come to believe that my “mojo” as I referenced before has ebbed because I have finally lost that one thing that has kept me sane all of these years, my sense of humor.

Take care.

Uncle Zev

Highest and Best Use

In todays marketplace, I am left wondering exactly what the highest and best use of a residential real estate appraisal really is. It would seem that I have finally reached a point in my life where I have lost my Mojo for the profession.

Intellectually I can say that the use of the real estate appraisal is as valuable today as it was back when lenders were actually lending their own money and really cared about receiving an honest opinion of value.

At that loans were sought, but only in situations of need because someone needed to buy a home or a building for a very specific reason. Entire generations of people were content to stay out of debt and save for their dream home. In a large percentage of cases, lives would be spent saving money only to have to roll to the next generation. People who were finally able to buy their homes took pride in the actual unencumbered ownership.

If an appraisal was required for tax, insurance, mortgage, estate or “God forbid” divorce purposes there was not a tendency to pressure the outcome because people genuinely wanted to know the value of the home.

In contrast today, people do not save for anything. If they do not have cash they find a way to afford the payments for what they want from clothes, to toasters, to cars, to houses. We live in an instant and disposable society and if an honest appraisal is conducted that does not meet the whim of the consumer then, the appraiser is labeled as “bad” or barraged with reconsiderations until such time as they cave in or flip off the client.   Of course when the loan goes bad, the lender is not judged, the borrower is not prosecuted. The appraiser is labeled as “bad” and if they are lucky they only lose future work. If the make too many deals, the FBI gets involved.

Am I suggesting that America has made its own brand of criminal “the appraiser” and the prosecuting them for following the pressure that was imposed upon them? Actually, yes that is exactly what I am suggesting.

For the record, I have fired more clients than I can remember and because of my sense of honor and ethics my wife and children have been deprived some of the finer things in life so that I could hold my head up without shame when I look myself in the mirror each morning.

But as I pour over file after file after file, I can not help but ask myself what exactly did all of my folderol accomplish in fighting the good fight and standing firm for my sense of right and wrong?

Lenders simply found other appraisers to make the deals. When I changed my practice to fraud investigations, all I really did was find myself surrounded by literally tens of thousands of appraisal reports that presented appraisal opinions that were gladly accepted by the lenders until things got challenged and then the “bad” appraiser caused the bank to fail.

I would like to think that this just burn out talking, but it seems to me that for the purpose of mortgage lending the highest and best use of the appraisal is to line the bottom of the loan file until they need someone to blame.

See you around the water cooler!

UncleZev

Time to reflect

As I have stated previously, reflections never quite do complete justice to the object that is being reflected. The image is altered from the original, even in the slightest degree. In fact depending upon how far away the object is will depend upon the accuracy of the reflection. This is why when a person reflects upon his or her past, the reflection can and will alter with the passage of time.

For the reason if someone wishes to learn from the past, it is crucial to reflect upon our actions and the results of these actions as often as possible. Many make new years resolutions and try to reflect upon the activities or inactivities, as the case may be, from the previous year.

For me personally this time has come, as this is the eve of Rosh HaShanah, the new year. I hope that my actions, my thoughts and my words have been such that I can take solace in their remembrance.  For all of those things that I have done wrong, I am truly sorry, but the important thing is to reflect and determine how to improve.

For my friends, and you know who you are, thank you all for being there for me and for granting me forgiveness as we move forward into the new year. L’shana Tova!

UncleZev

Isn’t there more?

As a youngster I can remember wondering, never asking, but wondering why there was not more when my mom would make dinner or cupcakes or the like. I do not believe I was raised to be a selfish child, or adult, and my parents never intended to spoil me, but I was very spoiled indeed. You see I had parents, at home, who tried to teach me right from wrong and tried to instill within me a sense of dignity, decency and integrity.

I knew that things were tight at home, but my parents never let me know how tight. My questioning for more, started out as a selfish desire for cupcakes, or cheesecake, or cookies. Today, I look at my life, the lives of my adult children and my wife, and I realize that as parents we, she and I, did ok. Our children did not grow up to be rocket scientists (yet) and may not find the cure to cancer or aids, but they did grow up. They have each learned a sense of dignity, decency and integrity. They are each learning that sense, like courtesy, is no longer common but it is worth the effort to develop and to maintain in their lives.

My mother passes away in 2002, and is greatly missed, mostly when I am trying to be comforting to my children or when I am feeling overwhelmed in life. But her sense of humor and strong sense of self stay with me even today and more importantly I can hear her speaking as my children tell me about their lives or ambitions or struggles her sense of humor and sense of dignity remain strong.

My father is well and has remarried. He and his wife Melba are happy together and even though he and I have let life slip between us, he is still the guiding force through which I live much of my life. His sense of honor, sense of ethics, sense of duty, sense of commitment and sense of self have enabled me to develop into the man that writes this blog.

Still a man gets up in the morning, exercises, prays, eats and goes to work. His day filled with solving problems for people who have generally not taken the time to develop the senses have been meticulously mentioned above, he concludes his day with prayer, exercise and a brief conversation with his wife and or children and retires with a good book and hopefully a game of chess before resting for the night. Yet with all of this activity, if he is not careful, he can still be left feeling empty and alone wondering in his small childish inner voice, “isn’t there more?”.

Literally thousands of books have been written on this subject, and depending upon the belief system one has developed there are as many answers to the same question. But when you boil it all down, I have come to the basic understanding that life is not about activity, or routine (although without either or both of these we would live a mundane existence). Life is about learning, growing, and appreciating all of the small things that come our way. It is appreciation that adds value (no pun intended… ok a little pun was intended). When we develop a true sense of thankfulness and appreciation we can see ourselves in a more realistic fashion and gain an understanding that our very existence is no more or less important than anyone else. At this point when we have or lose something we should take time to truly appreciate both the gain and the loss, because it is very process that helps us to become better people.

As my father always quoted to me, “pain makes man think, thought makes man wise, wisdom makes life endurable”. Although this statement could be examined and further analyzed to understand that it is not actually the thoughts but the process that is important, I will leave this for another time.

For those of you who made it through this post, I thank you. Remember life is what you make it, so if yours sucks, go make it something else.

See you around the water cooler!

UncleZev

Stand for What is Right

The days of right and wrong seem to have been replaced with reasonable and customary.  In a world where we are afraid to stand for what is right, for fear that someone else may disagree or feel judged, we have lost our footing. If you don’t believe me, just open your eyes and watch the world losing its mind. Am I someone who believes a religious right should rule? No.

I am someone who believes that there are fundamentals in life that should not be abandoned for fear that we may upset another culture or way of life. The reality is simple: respect, courtesy, honesty, integrity, fairness these are all attributes that people appreciate from others, but it seems that they are sorely lacking in what is quickly becoming the social norm.

What does that have to do with the appraisal of real estate? Perhaps nothing, perhaps more than anyone of us realize. If the men and women of earlier generations would or could speak to us, they would remind us that the foundational ways of behaving should be the base of all activities in life. How we present ourselves and treat others is so much more important than I can possible hope to convey in this short rant.

But I will leave you with this thought: only a truly immoral society feels the need to try to legislate morality, for if we were all acting as we should, there would be no need to impose laws to encourage correct behavior.

See you around the water cooler!

UncleZev

By the way kudos to https://mamasweekly.wordpress.com which is written by my wife. Without her looking over my posts, you would have to suffer with my continued misspellings and grammatical anomalies. Thank you sweetheart (and you know you are (winking)).

Mortgage Fraud or Misunderstood?, part two

Today – the media is on full alert for instance of mortgage fraud and many real estate professionals are looking over their shoulders and peeking into shadows to try to avoid any allegations of wrong doing.

This of course is good to help the public wake up, but any of you who have been around long enough to remember why President Carter was bad for the economy can appreciate that none of these so-called fraud schemes are new. Due diligence by a real estate professional has always been required. Appraisers who investigate the market, without bias, who report their analysis without an agenda, and who draw conclusions based upon the preponderance of market evidence have always been backbone of sound financial decisions.

The real concern should be who has taught the last several decades of people who market themselves as real estate appraisers. I can no longer count the number of people I have come across during my career who sincerely did not know that we appraise real estate, not real property. That we are to act in manner that is independent, impartial and objective, not as an advocate to any party of a transaction.

The attempt to regulate appraisers is not a bad idea, but the people that are in charge are not the answer. A recent post on the mortgage fraud blog on Linkedin suggests that Frank-Dodd only served to further buffer the lender from the appraiser, not the other way around. The appraiser is now isolated from all contact and if they wish to work they align themselves with AMC’s who are placed in a position to decide their fate. Now if an appraiser upsets a client they are facing the loss of several streams of business from one AMC instead of one lender at a time.

America is supposed to be a country where a person is innocent until proven guilty and has the ability to face his or her accusers and yet, we as appraisers are now facing AMC reviewers who have the power to decide our fate and if we are removed from a panel there is no notice, no chance for rebuttal or appeal.

This is wrong and needs to be changed… ok I have said my piece for now.

 

See you around the water cooler!