Self Evident Reports

Over the span of the last several decades, many residential appraisers were brought into this profession to meet the demand for residential mortgage lending reports. The problem with this has become clear as many were trained with one mindset, residential lending appraisals. They became “self-proclaimed experts” at filing out forms and meeting client expectations. All in the name of doing a good job and making a living.

I hold all residential appraisers responsible for this sad state of affairs. Had more of the professional appraisers taken on one or two trainees and mentored them into producing credible reports then perhaps we could have held back the tidal waves of greed. Although even as I type this, I am already arguing with myself. The mechanism that was purposefully put in place to allow the aggressive lending decisions did and would have demolished and standard that was placed before it. However, if these standards had been in place and hammered into the industry all along, then we might have been able to avoid the debacle that continues to loom above us now.

“What am I babbling about?”, one might ask. An appraisal report is supposed to be one that is rendered in a way that is free of bias, (i.e. one that is produced independently, impartially and objectively). Enter the form filler. Once the form fill mentality came on board, professional appraisers were swept to the side. The industry took hold of the form filler and provided “three comparable sales” that made the deal. The other 40 that indicated contra-results simply “were not indicative of the subject’s value”. The cost approach was simply discarded because was deemed less than relevant, or too subjective. The income approach was also done away with because this approach was deemed irrelevant. The form filler played their part in creating a false market, because once one appraisal got through everybody else wanted on board.

How could have stopped it? Simple. The truth of the matter was that nobody wanted to hear the appraisers that were telling the truth because there were those people who helped create a false report. Once enough people began to believe these reports the lies spread like wild-fire. After all if enough people say it is so, then who am I to argue.

A marketplace becomes valuable because of the perceptions of the marketplace. Why is it that one neighborhood becomes more valuable than an adjacent one? Why one side of the tracks is “better” than the other? It is perception. Of course the reality is that there are factors that actually do contribute to market perceptions beyond subjective whims of the public, this is why fads come and go. The heat of the moment begins to fade when the purchaser is faced with the fact that they paid three times more than the cost to reproduce the same product, or they paid four times more than they can rent the property for in an open and competitive marketplace.

The founders of real estate appraisal, understood that there were three approaches to value. Granted these approaches are all driven by the same basic influence (i.e. the marketplace); but the approaches to value reflected the motivations of three distinct ways of looking at the value of the same property. When we faithfully apply these approaches to value it keeps us in check and enables us to support our proper level of objectivity. Obviously, there are property types where these approaches are not always applicable; however, this is the exception and never should have become the rule.

According to the Uniform Standards of Professional Appraisal Practice (USPAP) all appraisals must be presented in a way that is not misleading. The opinions and conclusions within the report should be supported by the factual data that is discovered during the appraisal process, furthermore this data should be either presented in the report, or at least referenced within the report, to allow the intended user an adequate understanding. Conclusions and opinions that are formulated should in fact become self-evident as the intended user reads  the report. In fact if the reader is not able to draw the same conclusions as the appraiser, then the report has not been presented in a way that is useful. I am not an attorney, but if a report does not give an intended user adequate information to understand the conclusions and opinions that are provided, then it seems to me that the report has been presented outside of the requirements of USPAP and the appraiser could be liable for providing an incomplete report.

Appraisers, wake up! For those of you who have always subscribed to the philosophy that the market dictates value and each applicable approach is carefully evaluated for its merits in the presentation of value according the intended use, I salute you. For the rest of you, who were misled into believing there is only one approach to value, and that a report is good if it conforms to Fannie Mae and UAD and client requirements… I submit that an appraisal report is only good if it has been conducted in a manner that not only meets the letter of the law, but also meet the spirit of the law as well. The law (USPAP) was written so that real estate appraisers understood that certain steps must be taken by every appraiser, which included all factors that influence value and all approaches that measure it. We should use as many approaches to value as are applicable so that we have a check and balance for ourselves. In this way we cannot be as easily misled by circumstances of “odd sales” but can gain a full understanding of the influences that drive the market.

Case in point. In the late 1970’s and early 1980’s, builders were putting up homes as fast as they could pull permits. Appraisers that were asked to value these homes were carefully “coached” to use the builder sales, because they had conducted the “proper market research” and analysis and the resale market could not possibly reflect a proper alternative. Of course, this fact is not necessarily in correct. A new home does engender a certain appeal; however, this appeal must be demonstrated in the marketplace and not just by the one builder who has a financial interest in their own sales.

I will not even touch condominiums in this discussion, for those of you who have completed these appraisals (or reviews on these appraisals) you already know my frustration on this topic. For those of you who have not completed these, wait for a future rant on this subject.

The bottom line here is that a professional real estate appraiser must always strive to have independence from the source of data and the participants within a transaction. This is why we can not simply take sales from the REALTOR involved in the sale, or simply take builder sales, or simply take HUD1 closing statements as evidence of sale.

The appraiser must approach every assignment with objectivity, looking at every single appraisal problem from the perspective of the prospective buyer and seller. After all the definition of value, for mortgage related transactions “Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well-informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone”. Perhaps for a future rant I will dissect this definition even further, but for now suffice it to say the appraiser bears the sole responsibility to ensure the definition has been met not only in the development of the opinion of value, but also in the selection of the comparable sales that are presented for comparison.

Lastly, the appraiser must keep up an impartial mindset throughout the entire process. The only real interest the appraiser is allowed to have is wanting to be paid for their efforts. To meet this requirement is actually extremely simple. The appraiser should be paid in advance and be criminally liable for theft if they do not provide a professional appraisal in a timely fashion. If this were the case, some appraisers would drop out of the profession, but most of us would no longer feel the threat of will I be paid and would be able to concentrate on the task at hand… i.e. providing a credible self-evident report.

See you around the water cooler!
Uncle Zev

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

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

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

 

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

How big is my house?

Do you ever get those questions? “Well ABC appraised my house last year and my house was 3,726 square feet. Why do you say it only contains 3,698 square feet?”. I have always wanted to say, well as your house gets older, the wood begins to shrink… Everyone knows of course that houses come in different sizes, shapes and that walls can be built at angles other than 90, 60 or 45 degrees, thus accurate measuring can be a challenge. When you factor in roof pitch for upstairs rooms, or many shrubs, or rose bushes or other obstacles around the perimeter, any given measurement can be off by a few inches one way or another and then you take the variance of a few inches and multiply that by a run of 45 feet or more. The estimated house size can easily vary due to the different methods that are used to measure the home as well.

Many old timers, like me, still use a 100′ steel tape to measure the exterior perimeter of the home. There are, of course, several alternatives available today:  steel, fiberglass, and vinyl measuring tapes. There are also measuring wheels, and sonic and laser measuring aids. There is no one device that is better or more reliable. However, you must understand the degree of reliability that each device offers before you decide to use it to determine size. For instance, the measuring wheel can skip when it encounters rough terrain. The sonic device may give false readings if there is an obstacle between you and the wall that you are measuring. The laser sight can find interference from direct sunlight, or can give false readings if an obstacle is blocking a clear path between you and the distance you are attempting to measure. A vinyl tape will stretch over time thus 1 inch becomes more than an inch. A steel tape requires maintenance to keep it from rusting and cutting your hands or fingers. The fiberglass tape and steel tape are the most reliable, in my humble opinion.

When measuring a home, the garage, porch, patios, and any non-heated or cooled space is not included in gross living area; however, these spaces are measured so that the appraiser can account for the cost of these items. Additional flatwork, or extra concrete (i.e. driveways, parking pads and the like are also measured for the cost approach). Finished attics can be included if properly finished, including venting for heating/cooling. The pitch of the roof can inhibit the space which is counted due to clear space (overhead). Generally speaking, any space below 3′ is not considered habitable space. Also when measuring a second floor, many appraisers will measure the interior walls of each room and add the space together. This is practical for a small condominium or other type dwelling that does not have a lot of space; however, it is not a practical approach because interior walls should be included in the GLA. In other words a 12 x 12 bedroom right next to a 12 x 12 bedroom (i.e. 144sf + 100sf) will not equal 288 square feet of gross living area. Why? Because there is a 5-1/2 inch wall in between the rooms and exterior walls on each side of the room. Therefore, this span is actually 25.37 x 12 or 304 square feet. How can this space be added to gross living area?, I have been asked this time and time again. Let me ask a question though. When a home is built, do you believe these walls are simply built without cost? Of course there is a cost, and the only proper way to account for cost is to include the space at the time of measuring.

The accepted method of measuring a home is the ANSI method; however, there is no law that requires an appraiser to use this method. The law, USPAP, requires that an appraiser communicate the appraisal report in a way that is not misleading; thus as long as the sketch is presented in a way that is easy to follow, and the dimensions that are presented are reasonably accurate, the appraiser has met the intent or spirit of the law.

Keeping in mind the variables that can come into play when measuring a house, it is understandable why no two appraisers are likely to arrive at the same square footage estimate unless the house is a basic shape, with no angles, no fences, no shrubs and no pets. Any of the oddities or variables can cause appraisers to write different findings, and different findings will cause different results.

All of this being said, appraisers should be able to agree within 10% of size each and every time. If a sketch is off by more than 10%, there is a distinct possibility that someone is in error.

See you around the water cooler!

Reporter, Analyst, or Consultant?

Starting out in this business, my father once told me that real estate appraisal is not merely a science but an art as well. Many people understand the science of data gathering and analysis. Some are good at reporting their findings, but few report their findings in a way that enables the user of the appraisal to understand the relevance of the information that is being presented.

As licensed objective professionals, we must make sure the information, as presented in the report,  is not only factual, but also relevant to the valuation process. Our professional obligation is to ensure that the service we provide is not misleading and will not lead the user of the report to erroneous assumptions or conclusions.

What prompted this particular soap box has been the news reports that continue to report housing trends nationwide. Many lenders have become stymied in what was once called analysis paralysis. Appraisers have been placed in a position of defending every statement that goes into their appraisals and if the news reports information about a particular marketplace that are not consistent with the data that the appraiser is presenting then the appraiser is assumed to be wrong.

My suggestion is not one that is new. I suggest that when you write an appraisal report, you write the report as if you are going to end up in court and have to defend your report before a judge. If you follow this advice, I guarantee that the instances you end up in court will be diminished by more than 98%.

The best defense is a strongly documented work file and I believe with today’s technology we can import MLS data into excel and create niffy worksheets and charts to easily document and demonstrate the market data and trend of supply and demand and the information that is relevant to the appraisal process.

Perhaps if clients were getting this information up front, they would be able to find some level of comfort with the information that is presented for their use and consideration.

Of course, as an appraisal reviewer and forensic fraud reviewer, I am painfully aware of the need for review. But if appraisal files were documented up front with public records and MLS records attached, it would limit the need for reviews on the same degree of work and we could then focus on those appraisals that are not as defensible.

See you around the water cooler!