Why should a seller get a home appraisal prior to settling on a listing price?

Written by

Woody Fincham, SRA, AI-RRS, RAA, RAC

This blog originally was written for and posted over at https://www.consumerhomevalue.com/ .   Gynell Vestal authors and posts lots of great items over on her site.

Many real estate appraisers provide pre-listing appraisal reports for sellers.  Having an appraisal done is an investment that can help save you from overpricing your home or even underpricing it.  Agent provided comparable market analysis (CMAs) can work well but often the CMAs that I see are haphazardly thrown together.  This is particularly true when dealing with custom homes and markets with few or no recent comparable sales.

 

home listing price

I cannot tell you how many times I am struggling with valuing a home that had a questionably supported CMA.  I have also seen questionable appraisals in similar situations as well.  I have been hired many times at the request of real estate agents due to the complexity of the home or complexity of the market a property may exist in.  So, let’s discuss what you should look for when hiring an appraiser for this purpose.

 

So, what should you try and find in an appraiser that will do a pre-listing appraisal for you?

 

1.       Market Competency

Is the appraiser familiar enough with your market to perform the work competently?  It is acceptable to request how many assignments the appraiser has performed recently in your market. 

2.       Property Competency

Has the appraiser ever appraised a home like yours before?  If you have unique features such as a green home (High performance home), custom built home, a swimming pool, an in-law suite, water or mountain view, or even features that may be seen as a negative such as close proximity to non-residential use (commercial property, industrial property, rail roads, busy highway) or maybe you have an utility easement running across the lot.  Maybe you have an excessively large lot for the neighborhood.  There are many things that can make your home unique in such a way that unless the appraiser has some background with that feature, they may not understand how to address it. 

3.       Assignment Type Familiarity

Does the appraiser have experience working on pre-listing appraisals?  If the appraiser has never done pre-listing work, you may want to be careful.   There are many appraisers out there that only have experience doing mortgage related work, and while that is valuable experience, trying to suggest a listing price is a nuanced assignment type.  Mortgage related work often can be extremely myopic on only retrospective sold comps.

 

While sold comps are extremely important, with a pre-listing appraisal report, there needs to be a well-supported market analysis that looks at sold comps, actively listed comps and the likelihood of how the subject property may or may not absorb in the market. 

 

Ultimately, each appraisal report that is written should be written for the client that will be using the report.  This means that the author of the report should be writing the report to the client’s understanding of the valuation process.  When writing a report for lender that looks at hundreds of reports a week, it is different than writing a report for someone that is relatively new to the valuation process.

Some words of caution should be exercised with non-residential appraisers as well.  If the appraiser normally does non-residential property types (gas stations, retail centers, medical office, etc.) they would possibly be unqualified to perform this type of work on a home.  Residential valuation is nuanced and a specialty practice that requires experience.  One would think that a certified general appraiser may be more qualified than a certified residential appraiser, but that is often not the case.  While there are some great certified general appraisers that are perfectly competent to value residential homes, it is still important o understand the background of the professional that you are hiring.  It is like trying to get diabetes advice from a plastic surgeon: they are both doctors, but you may want to speak with an endocrinologist because they have superior experience in that expertise.

That gives you a bit of background on what to look for in a professional appraiser.  Well let’s look at another list:

Now what are some of things that you should look for in the report itself?

 

1.       Report Type

The type of report that is written matters.  A pre-listing report should never be performed on a report used for mortgage financing.  This includes the Fannie Mae forms such as the 1004, the 1073, the 2055, the 1075 or any other form written to comply with mortgage regulations and loan types.  Every appraiser out there uses some type of software forms provider that has other types of forms besides mortgage use forms.  These are sometimes referred to as general purpose forms or non-lender forms.

2.       Completeness of the Report

While many residential appraisers use pre-formatted reports, the reports should be much more than checked boxes and short statements describing the property and its characteristics.  The standards that licensed and certified appraisers follow require that the reports contain summary explanations of how the conclusions are made and opinions are supported.  Many appraisals that I review have all the boxes checked but have very little commentary at all.  In the case of a listing use appraisal there should be summary comments explaining the following areas in more detail:

a.       There should be a thorough market analysis.  The reader of the report should understand exactly where the appraiser is coming from.  This should include a property productivity analysis: an explanation of what the subject property is and how it fits in the market.  This should include what are typical and ideal improvements for the market.  This explains how well the subject should compete in the market.

i.      What is the market area?  This is more than stating what neighborhood or subdivision the home is located in.  It should discuss the overall and direct competing market the subject exists within. 

ii.      There should be a cogent demand analysis that discuses the most probable end user (owner occupied or tenant), tastes of the consumers regarding housing features and styles, and an analysis of historical growth and absorption information.

iii.      There should be a supply analysis as well.  What is currently on the market competing directly and indirectly with the subject property? Is there a possibility of competition with new construction alternatives?

iv.      There should then be an analysis of how supply and demand are interacting.  Once supply and demand are identified for the competitive market, how are they working together?

v.      The final step in the market analysis is forecasting the subject capture.  This means that all the previous information used to develop an opinion of how well the subject may or may not perform if listed for sale.

 

b.      Highest and best use

 

An opinion of highest and best use is required by standards.  This is simply a four-step process that is carried out to develop an opinion of what the best use of the property is or is not.  The four steps include legally possible, physically possible, financially feasible and maximally productive. This is arguably the most important step of the appraisal process and one that many residential appraisers spend too little time on of at all.  In the end, it is a series of tests that will discuss if the subject property is more valuable as it is, or maybe it would be better if altered or even torn down and something else done with the land besides the current use.  For an improved property with a house on it, two sets of tests are normally done one “as is” and one is a hypothetical test discussing what could or should be done if the property were vacant.  The other thing that should appear with this step is the timing of the opinion of highest and best use.

 

c.      Approaches to value

The approaches to value will be the most read and discussed part of the report by normal consumers requesting the report.  This is where the opinion of value is discussed and supported.  There are three approaches to value:

i.     The cost approach is a series of steps that takes into account the cost to purchase the land, improvement the land and the cost to build the home. If the home is existing there is always some depreciation that then must be applied.  While this approach is not something many consumers consider when buying existing homes, it is still a required approach that must be considered by the appraiser.  The premise of the approach is why would anyone pay more for a home then they could reasonably build one just like it?

ii.      The income approach is an approach that considered the rental potential of the home in the market where it exists.  Could the home be rented if there is adequate rental demand? If the answer is yes, then the appraiser develops and opinion of market rent and uses a capitalization technique to develop and market value based on rental potential.  This is not used often in residential single- unit appraisals.  Nevertheless, it is an approach that the appraiser must at least consider and explain why it is not being used.  I do often see this approach overlooked in many markets.

iii.       The sale comparison approach is the most important approach, normally, when dealing with housing.  Most markets have adequate sales and active inventory to allow a supportable opinion of value to be developed.  This is where the appraiser compares the the subject property to other homes that have sold are on the market.  The appraiser makes adjustments to the comparable properties for inferior and superior features. Most homeowners understand this concept well enough, but where I see it fall apart is when the appraisal reports do not support what they are doing.  The adjustments made should not be manifested out of the ether.  They should each be based on a methodology or technique.  When an appraiser makes an adjustment for gross living area that adjustment should be supported by research and technique.  In other words, how did the appraiser come to the conclusion that the dollar amount used for the adjustment is the correct one?  On a typical home in my market I usually end up writing at least a page of information explaining the sales comparison adjustments, and often times it can be two or more pages if the home is complex in any way.  Appraisal standards require that at minimum, the appraisal report must have summary commentary for all opinions, conclusions and adjustments.

iv.      The last step before writing out the opinion of value is the reconciliation of the three approaches.  This does not need to be a long section, as the previous three approaches should have been discussed adequately enough that the reader of the report has a good understanding of where the appraisal report is headed.  In this section each of the approaches are discussed and weighted according to how well supported each is.

Pre-listing appraisal reports are different.  They are not the same as a report prepared for mortgage lending.  Much of what I have discussed here are really nuances that should differ from what many residential appraisers normally work with when doing lending use work.  It certainly helps to utilize an appraiser that does lending use work, because the appraiser can also consult on whether the home needs any repairs or maintenance work that would typically be required for loans underwritten by FHA, VA or USDA.  I hope this blog has offered something to take away.

Who Dat? Joe Mier Valuers Dozen

by Woody Fincham, SRA, AI-RRS, RAA Member of RAC

mier

Joe Mier, SRA, AI-RRS is well known to those of us on social media in the valuation world.  I had spoken with Joe through social media many times, but did not officially meet him until we both attended an a la mode Road Show in New Orleans. He owns a valuation firm in Hammond, LA.  One of my best memories so far of Joe is getting the chance to walk around the French Quarter with him.  We enjoyed some great food and saw some neat stuff. He really knows his way around local gastronomy. If you ever have a chance to go eat with him, listen to his advice on where to eat.  Joe has been very involved with various organizations helping appraisers in his home state of Louisiana and nationally.  So, let’s see what Joe Knows.

VN:  How long have you been in the profession?

JM:I have been in the appraisal profession for 24 years.

 

VN: What is your favorite thing about the profession?

JM: Helping people understand the enjoyment of home ownership by knowing the value of the real estate at the time of their purchase.

 

VN: Who are your mentors and idols within the profession?

JM: Wow! That is a great question. Maureen Sweeny is one of my secret idols J she is so knowledgeable and cares about people. Mentors I have several that I look towards such as Pete Gallo, Pat Turner, Lori Noble and yourself Woody.

 

VN: What are some of your passions inside the profession?

JM: That appraisers get quality education and never quit learning.

 

VN: What are some passions of yours outside of the profession?

JM:I am a true believer in taking time with family and friends and enjoying life together.

 

VN: Where do you see the profession in 3 years?  5 years?  10 years?

JM: 3- years I see more value in consumer products of buying and investing for residential appraisers. I cannot see more than 3 years right now.

 

VN: What is one thing about your personal business that you are most proud?

JM: That we will celebrate 20 years in our current location this year and we have serves thousands of clients over that time period.

 

VN: If you could change one thing about your business model what would it be?

JM: That consumers could understand the value of the appraisal process and that it’s not just about closing “the deal”.

 

VN:  What are some present goals for you and what you do are doing in the valuation space?

JM: To bring our services to a broader consumer client base. We are actively getting out into the community space educating agents and the public on how we can assist them with the evaluation process.

 

VN:   If you could change one thing in valuation, what would it be?

JM: To improve appraiser independence that has been removed by the business model that was put AMCs in place of local relationships with lenders.

 

VN:  What advice would you give someone just getting in the profession?

JM: To get quality education and mentorship from appraisers that truly care about the appraisal process and not just filling the form.

 

VN: This last one is for you to discuss or talk about whatever you would like.

JM: Being a real estate appraiser has been a very fulfilling career for me and my family. It has allowed me to be a part of the community by giving back in many ways through service and knowledge. Remember that working hard is great but that there is more to life than just working make the time to make great memories with your family and friends. I look forward to interacting with people like you Woody and other appraisers. I would encourage appraisers to get out from their offices and make contact with appraisers from their area and don’t be afraid to share information about becoming a better business owner and at the same time a better appraiser. I wish everyone success in 2019. Thank you, Woody for allowing me to share a few words.

 

 

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I appreciate Joe for doing this.  He shares some great wisdom with us.  Proactive appraisers need to be educating and informing consumers and agents.

Cheryl Kunzler, SRA, AI-RRS One of the Thought Leaders in Residential Valuation

by Woody Fincham, SRA. AI-RRS, RAA

kunzler

 

I have known our  interviewee for over a decade.  I first met Cheryl Kunzler, SRA, AI-RRS when she came out to teach a class for my then Chapter, the Hampton Roads Chapter of the Appraisal Institute.  Since then few people have done more to help me along in my career professionally.  Cheryl has allowed me to co-teach and audit many of the classes that she teaches.  I have learned so much from her both as an instructor and as an appraiser.  Cheryl is a true leader in the professional being an outstanding appraiser.  I hope you all enjoy learning a but about one of my friends and colleagues.

VN:  How long have you been in the profession?

CK: I have been an appraiser, reviewer and consultant for 40 years.

VN: What is your favorite thing about the profession?

CK: I have always enjoyed the freedom this job has given me.  I can set my own appointments, do my research in my own way and constantly learn new thought processes and different ways of accomplishing the same thing; an opinion of value. Besides others in the profession, I have been interacting with agents, property managers and property owners to learn how to be a better appraiser.

VN: Who are your mentors and idols within the profession?

CK: My father, Lew Pollvogt, was my first mentor; when I expressed an interest in appraising, he suggested I first take some beginning courses to learn what the work entailed. I worked with him for more than 20 years and learned how to be an appraiser.

I was also influenced by some of my instructors also, for expanding my understanding and love of the profession.  Richard Lodge, MAI and John Ammon, SRA both now deceased, along with Thomas  Craddock, SRA, MAI, were very instrumental in my participation in the Appraisal Institute governance and teaching. There were other instructors; just can’t bring them all to mind.

Right now, my idol is Sandy Adomatis. She has developed and written about everything green; an influence on value that I don’t think existed before she began.  Sandy has accomplished so much for our profession in disseminating up-to-date knowledge about a very important topic, for residential and commercial appraisers. She has also encouraged me over the years to move in different directions.

And I admire you, Woody, for your excitement and dedication to appraising and teaching.  I have learned so much from teaching with you. I am so happy to have our profession populated with extremely knowledgeable, dedicated and forward- thinking appraisers such as yourself.

VN: What are some of your passions inside the profession?

CK: I absolutely love teaching appraisal courses and seminars.  Over my many years of teaching, I have been able to pass on much of my body of knowledge, which was passed on to me by other instructors and appraisers. I learn so much from the students every time I teach. Since many starting an appraisal career started out in another career, they have a wealth of knowledge to share. The other students, just starting out in the beginning courses, have so much enthusiasm and are eager to learn and test out what they already know.  It is just so exciting!

 

I have also been involved with reviewing courses and seminars for the Appraisal Institute and writing test questions for AI and others. It really expands and tests my own knowledge!

I would love to have residential appraisers receive more recognition for their abilities and expertise.  I have run across so many people (both appraisers and non-appraisers) who believe that those specializing in residential are “just” house appraisers. Though I have completed residential and commercial appraisals for years, the extent of recognition for the residential side has not changed much in 40 years. I wish I had a way to change that attitude.

VN: What are some passions of yours outside of the profession?

CK: I started traveling internationally over the past four years. I love going to other countries and see their use of wind farms, solar panels, green roofs and unique architecture. Right now, I am taking a Russian language course; I am traveling there next year, and it makes my brain think in a different way.

I also enjoy gardening, but now I must balance that with the times I am out of town!

VN: Where do you see the profession in 3 years?  5 years?  10 years?

CK: In three-to-five years, I think the demand for appraisers will continue to decline.  Lenders have always tried to find ways to eliminate the appraisers from the mortgage lending process. But as I tell my students, look outside the lending arena; attorneys will always need valuations for estates, for divorces, for property disputes. I have always enjoyed completing review appraisal work. It can be interesting to see how others solve an appraisal problem. And regardless of what many appraisers think, there is not always a problem to be discerned with an appraisal review assignment.

In five years, wholly dependent on the trends of our economy, I believe more and more clients will rely on online databases, spreadsheets, hybrid appraisals and other processes to value properties. That is not to say that appraisers will not be needed; just that other skills and areas of expertise will be needed by appraisers. Perhaps more research and analysis, and not as much physical inspections.

In ten years; sorry Woody, I don’t have a crystal ball! In about 2005 or 2006, I appraised a 20-acre residential parcel with three separate houses located on the site. It was for estate purposes, and the highest and best use was for subdivision development. Seven or eight years later, I was requested to complete another assignment on that property, (which by the way, was physically the same as is was at my first valuation). I was unable to take the assignment at the time. However, I looked back on my report and realized there was no way now to support the discounting I had applied originally. The recession had occurred beginning in 2008, and the original market information I had gathered was not at all appropriate. So, I really don’t have enough information to forecast ten years from now.

 

VN: What is one thing about your personal business that you are most proud?

CK: I am pleased at the way my business has evolved over the years; it provides enough variety related to the profession to allow me to expand my knowledge. I am doing review work, course and seminar review, teaching and serving on my county board of equalization.

VN: If you could change one thing about your business model what would it be?

CK: I would like to have started sooner using technology, for marketing, research and analysis. There are so many more efficient ways to complete our assignments than there were several years ago.

I would also have started specializing in litigation assignments earlier in my career; I really enjoy solving a complex problem and testifying to my results.

VN:  What are some present goals for you and what you do are doing in the valuation space?

CK: I would like to complete more review assignments; they challenge my knowledge on many levels. I am lucky to be in a position that I have not completed work for lenders for the past 8 or 9 years.  I don’t want the pressure of time and making everything fit in someone’s process. I mostly complete narratives and find I can communicate better. I am not criticizing anyone who does this type of work; I did it for more than 30 years. I was just ready for a change.

VN:   If you could change one thing in valuation, what would it be?

CK:I would really like appraisers to embrace learning; many appraisers take required seminars on topics they already know or assume that they cannot learn anything new in for instance, a USPAP course. I think we all may have encountered appraisers who assume the way they did things “back then” is sufficient for now. The profession is always evolving, and I hope everyone in the profession realizes that.

VN:  What advice would you give someone just getting in the profession?

CK: Allow yourselves to get a variety of experiences of methods of valuation and property types within your specialty. Don’t just do lender work; there are so many other uses for your services. You never know when you will find a niche not being adequately served in your market.  Get involved with the appraisal profession; find an organization that works for you. I have always been proud to be a member of the Appraisal Institute and serving on local, regional and national committees, so of course that is the one I would recommend. But get involved somewhere! Get a designation, value your expertise and don’t always reject the more complex assignments. Diversify if you are a residential specialist and maybe in commercial you can become more of an expert in one property segment.

VN: This last one is for you to discuss or talk about whatever you would like.

CK: I will have to imitate what many others have said in this blog. Enjoy life, take chances, be adventurous, don’t wait until tomorrow, grab opportunities in work and in life, spend time with your family. Life is too short to wish you had done something else!

Listen!! Amazing what you learn when you are not speaking!

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Sage advice from a respected professional and amazing insight on personal life as well. Many of us are workaholics, I know that I suffer from it.  Cheryl is doing lots of traveling now, I keep dibs on her through her Facebook page.  She is always off enjoying some awesome locations.   She also echoes some of the same advice that we see from many:  get out of the lender space if you can, or limit it’s affects on your business by doing less of it.

 

Thanks, Cheryl, for taking the time to do this.

Pat Turner, the Man with a Plan Valuer’s Dozen

by Woody Fincham, SRA, AI-RRS, RAA Member of RAC

pat turner

 

I have known Pat Turner for many years.  My first introduction to him was from attending a Virginia State Board meeting.  I had attended to give public commentary about the problems I saw with regulatory oversight in the commonwealth.  Pat and I struck up a conversation outside the meeting in the hallway where we discussed my disappointment with how the board looked at enforcement.  I explained to him that I was rather passionate about it.  To which he replied, ” Woody, if you have half the fight in you that I do about this profession, you will make some changes happen in the profession.”  If you know Pat at all, you know how true to his nature that reply really is.  Pat has led the charge in trying to advocate for the appraisal profession for many, many years. When I received my SRA designation Pat is the man that handed it to me, at my request.  That is how much think of him, and I know many that think highly of him as well.  I am proud to get the chance to share the Valuer’s Dozen with you, as Pat is one of my mentors and one of my friends.

VN:  How long have you been in the profession?

PT: 46.5 years

 

VN: What is your favorite thing about the profession?

PT:  I love the research and analyzing the actions of the market.

 

VN: Who are your mentors and idols within the profession?

PT: My mentors were:
Jim Faulconer, Chesterfield Assessor
Dick Farmer, Assessor of Henrico County and instructor for the Society of Real Estate Appraisers
Bob Barton, MAI and an instructor and friend
Woody Aaron, MAI, instructor and friend

 

VN: What are some of your passions inside the profession?

PT: My passion is to do the best I can in all that I undertake as an appraiser.  As you know, I am passionate about consumer protection and the appraisal profession as a whole.

 

VN: What are some passions of yours outside of the profession?

PT: My wife, children, grandchildren.  University of Richmond. My close friends because they know my many faults and like me anyway.

 

VN: Where do you see the profession in 3 years?  5 years?  10 years?

PT: In 3 years we will have new Fannie and Freddie reporting vehicles, if they are still viable.
In 5 years we appraisers better be getting more and better education because the mortgage part will be dissolving as we know it.  Take the best educational classes offered.  Be prepared for legal work, IRS work, work from accountants, etc.

 

VN: What is one thing about your personal business that you are most proud?

PT: Reputation and longevity, despite all the bumps along the way.

 

VN: If you could change one thing about your business model what would it be?

PT: Ban AMCs or at least make them more transparent regarding C & R fees.

 

VN:  What are some present goals for you and what you do are doing in the valuation space?

PT: My present goal is to assist my daughter to obtain her licenses.

 

VN:   If you could change one thing in valuation, what would it be?

PT: What would I change?  The lack of enforcement, which is due to insufficient knowledge of our profession, in my opinion.

 

VN:  What advice would you give someone just getting in the profession?

PT: Get the best education available.  Please use the LIVE classroom.  Join the American Society of Appraisers as they are rapidly becoming the representative for residential appraisers.

 

VN: This last one is for you to discuss or talk about whatever you would like.

PT:  Finally, I would recommend that people get involved.  Not only with our profession, but also social and civic activities.  Your personality and knowledge impress more people than you know.  Be a leader.  But if you can’t be a leader, then follow, or get out of the way.

ASA, AI, ASFMRA, MBREA, AGA RICS and Even NAR Step Up to the Plate for Valuers

Written by Woody Fincham, SRA, AI-RRS, RAA

Once again, we have some great news coming from the appraisal organizations. The American Society of Appraisers, Appraisal Institute American Society of Farm Managers and Rural Appraisers, MBREA|The Association for Valuation Professionals, American Guild of Appraisers, OPEIU, AFL-CIO and RICS signed off on a joint letter sent to the OCC, The Federal Reserve and the FDIC.  The organizations made a direct reference to the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) which already addressed this issue less than two years ago where the agencies replied with:

“Based on considerations of safety and soundness and consumer protection, the agencies do not currently believe that a change to the current $250,000 threshold for residential mortgage loans would be appropriate. The agencies will continue to consider possibilities for relieving burden related to appraisals for residential mortgage loans, such as coordination of our rules with the practices of HUD, the GSEs, and other federal entities in the residential real estate market.”

The letter is worth a read and all appraisers should be aware that there has been real effort put forth by the organizations to help protect the importance of having an unbiased party available to vet mortgage transactions through appraisals.

In addition to this, the National Association of Realtors also chimed in with a letter in support of the pragmatic soundness of using professional appraisers.  One notable quote from the letter addresses the misconception of appraisal delays (underline emphasis mine):

“The Agencies note that increased cost burden is often the result of delays due to the lack of appraisal availability. NAR’s own research shows that the typical wait time for an appraisal in 2018 was seven days, with 63 percent of REALTORS® reporting wait times to be seven days or less. The question is whether that wait time is burdensome. When asked about ease of obtaining an appraisal, 67 percent of REALTORS® felt it was “easy” or “very easy” to get an appraisal and only one percent noted it being “difficult” or “very difficult.” Given the vast majority of REALTORS® feel getting an appraisal in their area is not a problem, it is hard to imagine that the wait time for an appraisal is resulting in a large number of cost-inducing delays. Based on the average appraisal costs and REALTOR® sentiment regarding appraisal wait time, NAR does not believe that appraisals are creating a cost burden on a national level, but that the problem is likely restricted to specific markets.”

Today has been an interesting one in the world of valuation.  Well done to all the organizations that have stood up for the public trust.  One can only hope that the agencies will listen to common sense.

30 State Appraisal Organizations are Opposing an Increase in the Appraisal Threshold

Written by Woody Fincham, SRA, AI-RRS, RAA
teamwork

The Virginia Coalition of Appraiser Professionals and the remaining “network” of appraiser collations (30 in total) hired council to format and send a comment letter to the Board of Governors of the Federal Reserve System, the FDIC and the Office of the Comptroller of the Currency regarding the Comments in opposition to the Notice of Proposed Rulemaking (“NPRM” or “proposed rule”).  Of course, to you and I that means the collations have comments regarding the proposed de minimis increase from $250,000 to $400,000.  The letter can be viewed here.

There is some good stuff in this letter.  Here are some excerpts (underline emphasis mine):

“The Appraiser Organizations believe that the issues raised by the NPRM have broader implications for consumers and residential mortgage sector participants beyond the relatively small number of federally related transactions to which the exemption directly applies.  Rather, the outcome of the NPRM will signal to lenders and purchasers of residential mortgages the relative importance of appraisals versus evaluations in the mortgage process, leading those participants to increase their own de minimis exemptions or to increase the use of appraisal waivers.”

“While the NPRM asks a series of questions regarding the proposal to raise the existing exemption by $150,000, the NPRM’s justification for the increase is flawed in two significant ways. First, the agencies ignore the statutorily protected interests of home buyers by assessing the merits of the increase primarily in terms of the NPRM’spotential impact on financial institution safety and soundness, essentially as an exercise in portfolio risk management for individual institutions and for the mortgage sector. From this perspective, the exemption is merely an inflation adjustment that likely would have limited impact on portfolio risk.”

“This approach ignores the consumer-focused provisions added to the residential mortgage origination process by the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (“Dodd-Frank Act” or “Dodd-Frank”) amendments to the Truth-in-Lending Act (“TILA”) and related amendments to the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”).”

The next section is one of my favorite quotes from the document, as appraisers protecting the public trust is our big reason to be around. I love that mention of low-income and first-time homebuyers are highlighted as these folks have ENORMOUS risk in this kind of situation.

“This concern for harm to individual borrowers is the antithesis of the portfolio risk management approach that permeates the NPRM.  In the Dodd-Frank regulatory environment, the agencies’ analysis must assess the number and characteristics of the potential homebuyers who will be excluded from the protection of an appraisal, e.g., low-income and first-time buyers.  But the agencies’ contrary focus on portfolio-risk management is made clear in the NPRM’s statistical assessment which shows that, although the number of exempt federally-related mortgage transactions would grow by 18 percentage points to 72 percent of such transactions, only 35 percent of the cumulative dollar amount of such transactions would be exempted.  Because this number was less than the dollar-

amount volume exempted in 1994, the agencies conclude in the NPRM that the $400,000 exemption would “be less likely to impose a safety and soundness risk” than was the case in 1994.”

“Second, and just as importantly, the agencies assume that an “evaluation” of a home’s value, under Open-ended and nearly non-existent standards could somehow be a meaningful substitute for an appraisal statutorily required to be compliant with the Uniform Standards of Professional Appraisal Practice (“USPAP”)”. 

The document goes on to cut the throat of the evaluation debacle:

“Indeed, an evaluation can be completed by a “bank employee or by a third party. Given the lax requirement on who performs the evaluation, it is not inconceivable that a bank, or other interested party in the home’s valuation, could distort the value through the evaluation process.  In contrast, the regulatory oversight of the appraisal process ensures that such conflicts of interests are minimized.”

“Moreover, there is no consumer recourse for a faulty evaluation.  In the event a potential homeowner or lender receives an inaccurate appraisal, that individual or entity may file an official complaint with a state’s appraiser board.  Upon review of the complaint, the board may penalize the appraiser, and in some instances, revoke his or her license to appraise residential properties.  In contrast, there is no independent review for faulty evaluations.  Instead, consumers are left without remedy and cannot seek judgment from a state or federal agency.  Therefore, by increasing usage of evaluations over appraisals, the proposed rule diminishes consumer protection over the home purchasing process, and in particular, limits consumer protection on many middle to low-income home purchasers in favor of appraisals for only high-value residential properties.”

There is even some language in the document that addresses the added cost for Appraisal Management Companies (AMCs):

“Moreover, the true cost to the consumer is not just the cost of the appraisal but also includes the fees associated with the lender utilizing third parties —AMCs—to manage the appraisal process.  In their role as the intermediary between the lender and the appraiser, some AMCs charge consumers significant management fees for their retention of the appraiser to conduct the valuation of the home.  In fact, these fees can nearly double the cost to the consumer, even while the appraisal fee remains unchanged.”

This document is from a large contingency of appraisal organizations and it is a meaningful document hat focuses on what really matters:  the American consumer.  Public trust should be at the forefront of the discussion of valuation and whether appraisals should be required for lending purposes on residential homes.

 

Bravo to the Appraiser organizations.

The Valuer in The Mirror

Written by Woody Fincham, SRA, AI-RRS, RAA 

Maybe I am crazy, but I think all of us deserve a better profession as appraisers than what we have presently within the mortgage and lending world.  We are in an era where the profession is changing fast.  We have many players out there that want to limit or possibly eliminate real estate valuations for residential lending and to some degree on the non-residential side of things as well. The profession should be aligning itself to battle this, but we seem more fractured now than we have ever been.  There is too much in-fighting and disagreement among key players in the profession.  This ranges from the individuals that have appeared as leaders and with the organizations that make up the professional trade groups and professional membership organizations for real estate appraisers.

man-looking-in-mirror

The Valuer in The Mirror

The profession is fractured.  We need to take a long hard look at ourselves in the mirror.  We need to do it as individuals and as part of the various organizations out there.  We need to start seeing ourselves as we really are, warts and all.  There is not one organization out there that is going to save the valuation profession.  There is no one organization that is to blame for all the issues we deal with as a profession. Humans love to separate into groups and then immediately set upon the other groups out there as being somehow inferior to your group.

We have reached a point where we need to stop and take stock of what the profession needs.  We are at a point where the fractures are weakening what we can be as a profession.  When I was speaking on the leadership panel at AppraiserFest last year, that was the one thing I tried to get across.  Stop with the tribalism and fracturing into groups.  Stop trying to say your team is the only viable voice out there.  All valuation voices matter.

I think the answer is to start by being open to all the various groups out there and seeing the positives in each rather than the negatives.  Every professional group out there adds some positivity to the mix.  Whether you, as a valuation professional, are a member of a group or not we must see the value in a unified front.  Remember, that what we do for the US Economy is a thankless job.  One of our biggest user groups, lenders, are also one of the biggest groups that see what we do as an inconvenience rather than a protection of the public trust.  It seems with all the alternative valuation products that are constantly being pushed over traditional appraisals that they would rather see us replaced than to deal with us.

Within the organizations themselves the jockeying for individual position holds the organizations back from being truly great. The politics are cut throat and reward those seeking personal gain more than profession-oriented growth. Most of the long tenured organizations are a political nightmare that are more leadership driven than membership driven. I truly do not understand what one gets from hurting others in their jockeying for a position.  All this type of behavior does is make individual appraisers not want to participate, thus weakening both the organizations and the individuals.

What should we be doing?

The worst thing any of us can be doing is not participating in the profession.  Many, many folks are vocal on forums and social media yet have no membership or involvement with any organizations.  What good does it do to complain but do nothing?  There are lots of folks that want change to happen but that means you must get plugged in somewhere.  Anywhere.  Join a state coalition or one of the national organizations.  Sitting on the fence and complaining will get the profession, and you, nowhere.

If you have the time attend the meetings and add your voice to the mix.  Be opened minded when you are at these meetings and be open to changing your mind about some things.  Many of us that use social media get hard-headed about somethings and forget to listen.  What I notice with in-person meetings is that social graces tend to come back.  People are not so myopic in person (usually) and we tend to be politer in person.  On social media folks can sometimes lose their connection with manners.

Not one person reading this, or the knuckle-head writing this, knows everything.  If you are not open to discourse in a professional manner, then you may want to reassess yourself.  I have found myself feeling very strongly on certain things, only to find out later that I probably should have looked at it differently.  This is true of being a member of an organization.  No organization is perfect, and they all mess up time to time. All these organizations are run by people and people make mistakes.

Any valuation organization out there worth the cost of their membership should be doing multiple meetings with the other valuation organizations out there several times a year.  While we cannot expect them all to agree on all things, they need to be exchanging information and ideas.  Some sort of valuation congress.  Even the largest organizations have weaknesses that another organization can help with.  Some organizations are residentially focused where others are commercially focused.  That’s fine.  But each organization needs to accept that

What Should We Not Be Doing?

We are an opinionated lot.  We get paid to tell others our opinions, and we dig in like a tick when we make up our minds.  Many of us are great appraisers but we lack a true understanding of other things. We are a group of professionals that excel at market research that leads to supportable conclusions yet lack the same set of skills when it comes to the larger profession. I cannot tell you how many times I speak with colleagues that have some strong opinions about something related to the profession.  Then I find out that they have never read about or researched the topic at hand but had come to their seemingly strong opinion based on conjecture.  Often, they have heard another’s opinion on the topic and drawn a conclusion from hearsay. We must treat opinions from others like we do comparable sales data. Research it and find support for it, don’t just take the opinion as fact.

If we concentrate and expend energy on the negativity out there, we are taking energy away from doing something positive.  Those that seek to make money off us as professionals benefit form the distraction in-fighting creates.  While we spend time finding more reasons to fracture apart further, they continue making money off our work.  Some also are using that advantage to try and replace us.  It is okay to agree to disagree, it is not okay to try and attack someone just because they disagree with you.

Once you are involved with an organization do not put yourself before the whole.  Trying to earn a position at the expense of a colleague is not a good thing.  I have seen some colleagues turn into bullies and try to use politics to hurt others to gain a position or to unseat a colleague.  If that is your M.O. you are better off not getting involved.  Many need to ask themselves, “Are you trying to help out or is what you are doing going to hurt what the organization is doing?”

 

In the End

We are a small group of professionals.  There are, by my account, approximately 75,000 professionals nationwide.  We do not have the same lobbying power as the lenders out there.  To be honest, the only reason that we have lasted this long is that some legislators see the benefit that we add to protecting the national economy.  Since we are so small it is imperative that we cease the fracturing from within.  Find an organization that you can support and work with them.  Volunteer and stay involved.  Organizations cannot work against their members if the members do not become passive.  Passiveness is what has hurt the profession more than anything.  Well that and bad business practices, but that is another blog post for another time.

Find an organization, or a couple of them, to work with and volunteer to do some work.  Do not wait for someone else to try and solve your problems for you.  Sitting back and watching what others do will not work at all.  Between the different organizations out there look for ones that align with your thoughts and ones that seem open to you and your views.  Not every organization for everyone, and even after you lock into one, over time, you may find that someplace else ends up being a better place for you, for that time.

If you have limited time, find an organization that you can support and join.  Like anything, not everyone can always get really involved, but your support of the organization makes funds available to help the profession.

 

Is Smartexchange resulting in USPAP Non-Compliance?

Written by Woody Fincham, SRA, AI-RRS, RAA 

This blog is likely going to stir up controversy. It is likely going to have a few folks calling me a loyalist to a la mode, or other similar things.  Am I a loyalist?  I do not see myself as such, but a la mode has been the only software that I have used in my career for residential form reporting.  I do use ACI in the corporate setting as a reviewer and manager in my firm. I like and consider many of the staff at a la mode to be my friends, and I have had long relationships with them because of my time as a customer.  I will always have an affinity with those folks, but that does not make me a supporter of CoreLogic one way or the other.  I am agnostic when it comes to CoreLogic.  They exist and as such I have no choice but to deal with them on some level. They  are too big of a company in the real estate and valuation space to not deal with them on some level.   The whole point of this piece is to discuss the acceptability to standards when dealing with sharing comparable property data.  It is not a barometer for what CoreLogic means to valuation.

With all the social media chaos over the CoreLogic acquisition of a la mode, there has been some very loud commentary coming from appraisers. CoreLogic is not looked at in a positive light by many in the valuation profession, but that is not what this article is about.  I wanted to deal with the issue of USPAP compliance and their comparable data sharing product, SmartExchange.  I have seen and read many posts from others that claim it is not USPAP-compliant to share comparable property data among one another. I must disclose up front that yes, I did at one point receive compensation as part of the a la mode Labs group between 2007 and 2009.  I am no longer a paid employee or contractor with the company.  I am offering my opinion on the product  to discuss and look at the issue of standards compliance.

What is SmartExchange?  This is what a alamode posts on their site:

“SmartExchange is a nationwide appraisal network that puts property data back in your control by giving you immediate access to pure, UAD formatted appraisal data. This level of data is unprecedented and is unlike anything you’ve been able to gather from MLS systems, public records, and other sources. It’s going to improve the quality and consistency of your appraisal reports.”[1]

smaertexchange

Image Courtesy of CoreLogic

When UAD was pushed out by Fannie Mae several years ago, they let us all know that they would be monitoring and tracking what we used for condition and quality ratings to compare against other “appraisers in” the same market.  In other words, they wanted to see if appraisers were materially misrepresenting data to support bias.  a la mode has created a tool that will allow all participating appraisers using their software to share the ratings used so that one may look at what the peer group is saying in their reports.  It is possible to opt in to the program or opt out.

So, is this something that appraisers can and should use?  I have reached out to several USPAP experts and walked through a series of questions with them and with other practicing appraisers.  I have also done my own research to come to my own opinion. Much of social media is asking an important question about this type of technology:  Is comp data shareable or does it fall under assignment results which would be deemed confidential?  Let’s look at some definitions:

ASSIGNMENT RESULTS: An appraiser’s opinions or conclusions developed specific to an assignment.

Comment: Assignment results include an appraiser’s:

  • opinions or conclusions developed in an appraisal assignment, not limited to value;
  • opinions or conclusions, developed in an appraisal review assignment, not limited to an opinion about the quality of another appraiser’s work; or
  • opinions or conclusions developed when performing a valuation service other than an appraisal or appraisal review assignment.

Physical characteristics are not assignment results.[2]

CONFIDENTIAL INFORMATION: Information that is either:4

  • identified by the client as confidential when providing it to an appraiser and that is not available from any other source; or
  • classified as confidential or private by applicable law or regulation.5[3]

What we have above are two definitions central to this discussion.  The first, Assignment Results, essentially draws one to understand that assignment results are opinions or conclusions that the appraiser supports through the course of the assignment.  The obvious question is then, “Aren’t condition ratings and quality ratings assignment results?”  On the surface I felt that they may be but have further talked with others and looking at all the language in the definitions.  The reason I initially felt that the ratings might be assignment results is that assigning a property a rating requires judgment, and as such judgement is an opinion or some type of conclusion as we use the words.

After speaking with a few experts on this very issue, I changed my opinion.  Most importantly, what I was drawn to is the last line in the definition of assignment results:

“Physical characteristics are not assignment results”.

When it comes to comparable data, we are all using third-party sources to assign the condition and quality ratings for each property.  A couple of the experts, many being residential practitioners, go back to the definition for condition and quality that Fannie Mae developed.  Many felt that there is little room for opinions of even conclusions, that the ratings are -defined, and all the appraiser is doing is assigning to the most obvious tier.   So, the sharing of comparable data that is supported through MLS databases and other third-party sources, readily available to our peer group, does not violate USPAP.

Where we did get into some interesting discussions revolved around the subject property. There is certainly confidentiality involved when dealing with the subject property.  Let’s say that we are doing a refinance transaction.  There would be no way to support assigning ratings other than an onsite inspection where the information gathered was only available to the appraiser as part of the assignment.  What made the conversation interesting was that something came up that I never thought of before.  What if you find out something about the subject that could create a misleading situation to the client?

Let’s say that you do a divorce use report.  3 months later the home goes up for sale and sells.  The MLS data indicates that the home is in much better condition than you saw when you did the inspection.  Upon further research to use it as a comp, you learn that the MLS listing incorrectly indicates it is a C3 versus the C4 that you felt it should be from the previous information that you have.  Or, the square footage is wrong.  What should you do now that you are faced with what you know to be reality versus what a normal peer would be left to conclude form the data available? What I gleaned from these conversations was that we should not be using information that only we have privy to through a previous assignment.

USPAP requires that we do not mislead in our reporting, but it also says that we must stay beholden to assignment confidentiality.  This a bit of a conundrum.  If the difference in information is enough affect assignment conditions, can we take on that assignment?  If we do, how do we report what we know is contrary to what the overall market accepts as fact?  I think the correct answer is that one must recuse themselves from this situation.

Getting back to smartexchange, this led me to contact a la mode and ask the question of whether subject data was being shared or not.  What I was told is that it is only comparable property data.  That the shared database contains only the comparable properties, and that our local database (meaning available only to you and your office) contains your subject data but that is not shared with the users of smartexchnage.

Is this really any different than calling up your appraiser colleague across town and asking if they have used a comp and what they considered it?  I think the answer to that is both yes and no.  It is not different in that colleagues are sharing info, it is different in that the users have no idea where the data comes from.  When I call a colleague, it is normally someone that I respect and have a relationship with.  With respect comes trust, but without being able to see who supplies the data, it does make me uneasy.  I can see multiple uses of the data though, so I am able to see if there has been consistent codification of the comp over several users.  At least I can qualify my own rating and write something proactively if I am using a different code level.

In conclusion, is smart exchange a problem from a standards perspective?  I do not think that it is if it is simply dealing with comparable property data. It certainly can be helpful if the appraiser using it wants to compare the condition and quality ratings over a market area.  Beyond that, it could save some time with data input, but that is something that the user needs to vet carefully and fully every time, and honestly, by the time I do that I am better off just entering that myself.

[1] https://www.alamode.com/smartexchange/

[2] USPAP 2018-2019 The Appraisal Foundation

[3] USPAP 2018-2019 The Appraisal Foundation