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

 

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

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

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

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

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!