Posted by Jonathan J. Miller -Sunday, June 14, 2009, 1:16 PM
Guest Appraiser Columnist:
Martin Tessler, CRE
Fee Simplistic is a regular post by Martin Tessler, CRE whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing both the trees and the forest. Marty has never been accused of being a man of few words and his commentary canâ€™t be inspired on a specific day of the week.
The Wall Street Journal article of June 9th entitled, â€œAppraisals Roil Real Estate Dealsâ€ should be required reading for anyone who has opined to an opinion of home value. For those who missed it, the article details the swing of the pendulum from the high flying days of pre- 2007 when appraisers could not come in with values or, should I dare say, â€œnumbersâ€ high enough to justify a loan. In comparison, todayâ€™s lending world has swung 180 degrees to the low end of the pendulum where no value can presumably be low enough. The article goes on to portray the â€œusual suspectsâ€- house values that have plummeted from the sky high years to todaysâ€™ nadir with some added color such as:
â€¢ A Fairfield County CT appraisal that came in at $50,000 below the contract price necessitating either a new appraisal or renegotiation.
â€¢ A JPMorgan Chase home equity line of credit predicated upon a 2,650 sq ft Manhattan duplex appraised at $1.475 MM in 2005 being reduced due to the bankâ€™s estimate coming in at $600,000. The borrower then was able to produce a new appraisal that valued the property at $1.8MM. A spokesperson for the bank said that they use â€œan automated appraisal system on our portfolioâ€ and that they encourage borrowers who feel that if their valuation is too low to order an outside appraisal and will reimburse them if it supports their claim.
â€¢ Banks requiring appraisers to use sales comps that closed within the past 90 days with some asking for at least one sale within 30 days.
â€¢ Agreement by the appraisal industry and Fannie/Freddie to adopt the Home Valuation Code of Conduct intended to prevent loan officers, mortgage brokers or real estate agents from selecting appraisers. This is to shield them from pressure on coming up with pre-ordered values, a major issue raised by NY State Attorney General Cuomo and on several postings in Matrix/Soapbox last year.
A significant issue not quelled by the Code is that it allows if not encourages lenders to outsource the selection to appraisal management companies or AMCâ€™s who will charge the appraisal firm anywhere from 30%-40% of the fee for administration, overhead and, pardon the sarcasm, quality control. Exacerbating the problem is that lenders can own stakes in AMCâ€™s. Thus, the conflict of interest is ever present.
Reports are prevalent that AMCâ€™s shop around for the lowest appraisal fees that frequently end up on the desks of appraisers who are geographically distant from the subject propertyâ€™s market, are not fully familiar with the local market and thus present sales that are not directly relevant.
It is obvious that AMCâ€™s are clearly conflicted if owned either partially or fully by a lender. They are recipients of profits generated by a company that is not armâ€™s length from their fiduciary role where they require the borrower to buy the service. As for tools such as JPMorgan Chaseâ€™s â€œautomated appraisal systemâ€ these are only rough guides to average or ranges of value from a large data bank of properties and extreme care must be taken in applying such macro data to a specific property or micro set. It is therefore not surprising that Chase allows for an independent appraisal although Iâ€™m not sure that it allows the borrower to select the appraiser as the article implies and, if so, itâ€™s a violation of FIRREA if not the Code.
If no reforms of the Code are made to disallow AMCâ€™s from ownership by lenders it is my opinion that history is doomed to repeat itself in the next frenzied lending cycle. Letâ€™s get the stake ready now.
Posted by Jonathan J. Miller -Sunday, May 17, 2009, 10:14 PM
Guest Appraiser Columnist:
Jim MacCrate, MAI, CRE, ASA
Appraisal & Valuation Issues Blog
Jim has worn many hats including a Director at PricewaterhouseCoopers in New York City and Chief Appraiser at European American Bank. He is a prolific writer on valuation issues and teaches a number of the real estate appraisal classes through the Appraisal Institute and New York University. I have had the pleasure of taking a number of courses taught by Jim.
Many so called real estate experts have been predicting the bottom to the real estate market will occur in late 2009 or early 2010. No one can predict with any degree of accuracy the future, much less the bottom of the real estate market in any metropolitan area. It is important for real estate professionals to remember that real estate markets vary by location. Some markets will do well while others are doing poorly. For example, the Detroit real estate market was depressed long before the recession was declared official by the federal government and the beginning of the decline in the New York real estate market. The real estate market in the New York metropolitan area has been driven low interest rates and by the growth of the financial, insurance, and real estate sectors of the economy which began in earnest in first quarter of 2004 as indicated in the following chart:
Total employment is now falling with the FIRE and construction sectors of economy taking a big hit in employment beginning with the collapse of Lehman Brothers. Real estate salespeople, brokers, and appraisers must stop listening to the noise from Washington, D.C., politicians, and others who have mislead us in the past. What we are witnessing, the economists and politicians have witnessed this before during the late 1920â€™s, the late 1950â€™s and early 1970â€™s. In order to properly value real estate, one must cut out all the outside noise and analyze carefully what the local real estate market data is telling you.
On a Macro Basis the Indicators are all Negative
The recent indicators reported by the government suggest that the economy is improving because the rate of unemployment is declining, consumer confidence is improving, the rate of decline in manufacturing is subsiding, etc. All of the above and other statistics still suggests that economy is not improving and real estate values will not begin to rebound until the economy turns over and employment begins to increase with an increasing payroll income and wealth. That is not bound to happen for awhile.
In the New York Metropolitan area, the leading indicators for increasing real property values are all declining, including the following:
- Population is stabilized or falling
- Number of households has stabilized or is declining
- Total employment is declining
- Total payroll/income is declining
- Consumer confidence is negative
- Businesses are still contracting including manufacturing, retail and the financial services sectors of the economy.
The results of the 2010 Census should be interesting nationwide. Listen to what the leading indicators are telling you about the macro market.
Now, on a Micro Basis
Real estate is fixed and immobile. The value of real property is driven by local indicators which impact the demand for real estate in a specific location. All the macro indicators referred to above are also negative in the New York Metropolitan area. In order to determine if the real estate market is rebounding versus stabilizing at a much lower level of activity and prices, the following factors should be analyzed carefully in addition to the factors that generate demand:
- Sale price trends
- Increase/decrease in the number of sales
- Increase/decrease in the number of listings for sale
- Increase/decrease in the number of days on market
- Increase/decrease in sales concessions
- Response to for sale or for lease advertisements
- Increase/decrease in the number of foreclosures
- Increase/decrease in the number of loan defaults.
These trends are extremely important to watch, but the trends will not reverse until consumer confidence is positive and total payroll/income, employment and the number of households is increasing. It must be remembered that real estate prices remained depressed for several years after the recessions of the 1970â€™s and 1980â€™s. Why should this time be any different, and, in fact, it is already worse in many markets.
Posted by Jonathan J. Miller -Sunday, May 3, 2009, 7:57 PM
Guest Appraiser Columnist:
Martin Tessler, CRE
Fee Simplistic is a regular post by Martin Tessler, CRE whom after more than 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. Marty has never been accused of being a man of few words and his commentary canâ€™t be inspired on a specific day of the week. View his earlier handiwork on Soapbox.
Having recently attended the Counselorâ€™s of Real Estate (CRE) Mid-Year Conference at the Waldorf Astoria I came away with one speakerâ€™s astute findings on where the market is likely heading. Robert White, Jr. CEO of Real Capital Analytics wins the cigar for the most astute commentary on where we are in the marketplace and for not belaboring the obvious:
* US commercial property prices are down 21% from â€˜07â€™/08 peak to October â€™05 pricing levels
* Sellers are adjusting slowly to pricing changes while investors are in no hurry to buy
* Banks are not dumping REO assets as it would jeopardize their capital base
* Troubled assets are increasing by $6-$8 billion monthly in foreclosures but deeds are not changing hands due to capital base problem
* Sales are rare but offerings are growing as sellers head toward distress
What does this mean to the appraisal world and how are we to gauge the market in the absence of sales and financing?
One must take into account that we are readjusting to a frenzied market that extended over many years fueled by easy credit and low interest rates. A new market reality will be evolving over time (if it is not already underway) that will replace the mindset created by the financing bubble best summed up by an article in the Wall Street Journal of April 6th entitled, â€œFrom Bubble to Depressionâ€.
In the article the authors note that â€œBubbles can arise when some agents buy not on fundamental value but on price trend or momentumâ€ (emphasis added). There is no question that the market through mid 2007 acted in this manner and appraisers were ethically and legally bound to implement this reportage in their valuations.
What this portends to the appraisal world is that valuations stemming from discounted cash flow analyses is that most emphasis will be placed on income in place compared to projected income based on assumptions of growth in rents or lowered cap rates.
The caveat to appraisers is: â€œwatch those assumptionsâ€.
It will no longer be: â€œtell me the value you need and Iâ€™ll tell you what assumption you need to get thereâ€.
Posted by Jonathan J. Miller -Sunday, May 3, 2009, 7:45 PM
Guest Appraiser Columnist:
Joe Palumbo, SRA
Palumbo On USPAP is written by a long time appraisal colleague and friend who is also an Appraisal Qualifications Board (AQB) certified instructor and a user of appraisal services. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP] and I am fortunate to have his contributions here. View his earlier handiwork on Soapbox and his just published article in the Employee Relocation Council’s Mobility Magazine.
Itâ€™s been a good year so far. I have to say â€œhats offâ€ to all the appraisers I work with from Maine to Oregon. In the relocation business the litmus test for quality valuations is ultimate sale price VS the appraised value as nearly every home appraised will be exposed and sold under a normal market scenario. The typical industry standard and tolerance of such comparison is 5% between the Sale Price and The Appraisal Value. A recent 1st QTR review of accuracy across the client base has me feeling better then the media has me believing I should. This achievement is especially satisfying in what continues to be challenging market. It was Yogi Berra who saidâ€¦â€¦ â€œpredicting is difficultâ€¦..especially when it involves the futureâ€.
So while you have my sincere thanks for a job well done..as a user of appraisal services..I (appropriately) have yet another request. Not to worryâ€¦this request does not involve additional comps, adjustments to listingsâ€¦ addendums, or more data. Simply put: I just need to know what you are â€œthinkingâ€. When I started in the appraisal business in 1986 I asked one of the appraisers who was training me at that time, â€œwhere do all these neighborhood comments come fromâ€? â€œThey all seem to be the sameâ€? â€œWhat does all sales considered mean?â€ Enter the â€œcanned commentâ€ . Canned comments can actually be used quite effectively when a micro level of specificity is applied. Many appraisers have a library of canned comments for neighborhoods, scope of work, appraisal process and other areas of often repeated â€¦â€non value addâ€ areas of the appraisal. If you really think about it the most important part of an appraisalâ€¦the â€œsigned certificationâ€ or even the â€œlimiting conditionsâ€ are the biggest culprits when it comes to â€œcanned languageâ€. Soâ€¦. you get the pointâ€¦and I hope you do..that canned comments are OK by me and there are as they say â€˜â€™far worse things are going on in the industry for that matter. There is one area though that I have to say â€œenough is enoughâ€â€¦and no â€œcanned will doâ€.. This area is the Reconciliation: (see 2008-2009 USPAP) Standards Rule 1-6 In developing a real property appraisal, an appraiser must: (a) reconcile the quality and quantity of data available and analyzed within the approaches used; and(b) reconcile the applicability and relevance of the approaches, methods and techniques used to arrive at the value conclusion(s)
The ASB takes a lot of heat (as do the instructors) with regard to abstract, meaningless and or confusing Standards. Issues of interpretationâ€¦while are a much better level with the current USPAP, will always exist. I canâ€™t say that that is the case with SR-1-6 and frankly I marvel at its straight-forwardness and simplicity yet I constantly see even a â€œgood appraisalâ€ lack a good reconciliation. My issue lies in part SR-1-6 (a) since (b) is nothing more than a recital of which approaches were used or not used. What I mean is this: after you take me through the market and show me the â€œstoryâ€ that each appraisal presents, the final value and how you got there in terms of the quality and quantity of the data is essential in my defense of your valuation. Many of the valuation appeals that I see center around the questionâ€¦â€¦ â€œWhy $xxx,xxx for my home and not $yyy,yyyâ€. For me the answer can be very simple. Within any range of value there are certain strengths and weaknesses beyond net and gross adjustments and distance and sale date of comparables. This is where your thinking plays large role in having the user understand your though process. Sadly â€œall sales were consideredâ€â€¦the often used canned reconciliation of the go-go days of the 90â€™s will not cut it these days. How were the sales weighted? What other factors were considered? How do they rate in terms of comparability? Were there any unverifiable pieces of information or inconsistencies that deemed an apparently good sale not so good? These are a few things I would ask myself in defending my value.
In 2003 the Appraisal Standards Board addressed the â€œreconciliation issueâ€ by moving the requirement to reconcile from the lonely location of SR-1-5 (c) to a its own standard in what we have now as SR-1-6, dedicated specifically to topic of quality and quantity of data and suitability of the approaches. The ASB cited the rationale for this change in 2003 to ..â€œclearly demonstrate the reconciliation is a separate component of the appraisal process rather than a function of the sales historyâ€. In my opinion this rationale validates the thought that the appraisal process is best ended with a clear understanding of not only the process but the conclusion and the result of that process. As a separate component the ideal reconciliation would leave the reader with a clear understanding of why the value opinion has landed where it has. Given the level of subjectivity in the entire appraisal process and the reconciliation as well, there may be disagreement but having the â€œwhyâ€ could resolve part of that issue and a quick specific commentary is all it takes. Remember standards are minimum requirements not options.
Letâ€™s put the canned comments of years past behind usâ€¦.as these are different times altogether. Again it was also Yogi Berra who saidâ€¦.the future isnâ€™t what it used to be.
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