Of course the report is pointing out what has been an obvious problem for at least the past decade. Banks have transitioned into the view that an appraisal report is a commodity and not a professional consultation. The irony here is the same thinking applies across both commercial and residential valuation assignments for banks but with polar opposite results.
Commercial valuations are seen as “too high” and residential valuations are seen as “too low.” This probably has a lot to do with the fact that commercial real estate, especially class a office space in markets like NYC, Washington DC and San Francisco is probably in the middle of a bubble and there is clearly indirect pressure on the appraiser to make the deal work (no matter what is being said publicly).
Of course residential valuations were way too high during the housing boom so a similarity can be drawn during that period as lenders relied on mortgage brokers to deliver the majority (2/3) of loan volume by the time the market peaked.
The common thread in all this is to understand how the appraiser is engaged by the bank. In residential valuation it has morphed over to the appraisal management company process (B of A’s Landsafe is the poster child for bad appraisals) and in commercial valuation it has become a robotic automated engagement process:
John Cicero, a managing principal of the appraisal firm Miller Cicero, said: “It is a broken profession in a lot of ways. The appraisal industry has become commoditized, where lenders see appraisals as simply a commodity to be purchased by a vendor and where more emphasis is placed on the price of an appraisal than the expertise of the appraiser.”
For example, Mr. Cicero said, in the past lenders would often have long discussions about the project and the appraiser’s qualifications before hiring. Now, it is more common for lenders to use an online bidding system, where they issue a request for proposals from appraisers and often choose the least expensive. “They actually refer to us as vendors submitting a bid, not educated professionals who are providing an important service,” he said.
After a while (and it’s been a while) this becomes a self-fulfilling prophecy and the majority of appraisers used by banks are simply bad at their craft (taking liberties here) because the system attracts that “type” appraiser. As a result many of the good appraisers have either left the business or switched their client base to those who see valuations as more than the equivalent of a “title search.”
Banking’s shortsightedness illustrated
When a bank is considering lending $200M on a commercial office building, they are usually are more concerned about shaving $500 off the appraisal fee than they are contracting with a seasoned local market expert. [Commercial] high-ballers with fast turn times are thriving and their product is very weak. The same goes for a residential mortgage [low-ballers] only with commercial lending, the stakes are much higher because the exposure is so much greater – then ask yourself, who is the party that lacks competency? I’d say it’s systemic.
Posted by Jonathan J. Miller -Tuesday, March 13, 2012, 6:30 AM 3 Comments
A commercial appraiser I know passed along this press release from Bradford Technologies. We liked and used their MacAppraiser software back in the day when they were known as Bradford & Robbins and supported Macs. No disrespect meant to them specifically – I am referring to the state of the broader mortgage lending industry and their use and interaction with appraisers.
How on earth can the mortgage industry, who has successfully pushed the professional appraiser away from valuations through the use of appraisal management companies (who are more about bulk and cheap) than about professional quality, unleash a regression tool on the appraisal masses? Yes they will take a class or two to learn it, but this is way above the average skill set. The appraisal industry is still struggling with the selection of comparable sales.
Here are a few observations on this made by others on an advanced product like this:
This is just what the by-the-book residential appraiser ordered: a statistically supported valuation! A regression analysis that inputs all those hard to define variables like driving distance to a Starbucks, or economic conditions in Uzbekistan. We commercial appraisers have been stuffing reports with this garbage for years and look how much it has done for the reasonableness of our estimates.
…you can cut your overhead and staff…and sleep well at night-no doubt this is geared to the banking industry that will repeat all the mistakes of the past once the new generation of lending mavens is ensconced and they settle into their quota of what they have to lend for their P&L bonus pool (that’s the real regression analysis)
I have likened it to giving an appraiser a loaded gun.
Ok, got it?
BRADFORD TECHNOLOGIES BRINGS REGRESSION ANALYSIS TO RESIDENTIAL APPRAISALS [Working RE]
Posted by Jonathan J. Miller -Monday, March 5, 2012, 1:58 PM Comments Off
My friend Noah Rosenblatt over at Urban Digs has been pestering me to share some thoughts on what a “comparable sale” actually is. He and I often complain about how loosely the term is thrown around in the real estate community. This is being presented in the context of a single residential unit and I deliberately avoided using dry dictionary and textbook definitions.
The use of comparable sales are the basic ingredient for real estate appraisers and agents to vet out market value – so the similarity of it to the subject property (the property being valued) is paramount.
As an appraiser, I see the term “comparable sale” often abused. Some of it can be chalked up to inexperience and some of it to fraud. An illustrated deterioration of the slippery slope goes something like this:
Comparable Sale -> Sale -> Data -> Information -> Misinformation -> Fraud
A practical definition
A “comparable sale” is a sale that would be considered an alternative choice to a buyer that might purchase the subject property.
The sale should have a similar set of amenities (ie, size, condition, location, views, configuration, etc.) to be considered as an alternative choice for the buyer. However it gets tricky when the subject property is unique and there are few “comps” to use. Unfortunately it is often the case where there are no “comps” but that will be for another post.
And don’t forget to factor in concessions that might have been part of the “comp” sale. In most cases, the concession should be deducted right from the sales price since the “net” is what the buyer actually thought it was worth. Again there is a lot more too this but I think you get the idea.
One important thing to keep in mind: One “comp” does not make a market. In other words, a market is defined by a general pattern, not one sale. The sale could be an outlier and not reasonable if it is out of sync with everything else.
Not always a “comp”
From practical experience, I have observed that a sale is not always a “comp” just because:
it was given to you by a real estate professional (i.e. appraiser/agent)
it was used in a report
it was close in proximity and recently occurred but would attract a different buyer
the “comp” provider was familiar with it (i.e. appraised it, sold it) but otherwise not similar
In real estate appraising, comparable sales are presented in the report and adjusted for their differences with the subject property (the one you are appraising). The more adjustments that are needed to be made, the less “comparable” the sale is. A reader who may or may not be familiar with the market the property is located within can should be able to use them to make a more informed personal/business decision on the asset (house) being valued.
In real estate brokerage, agents use “comps” to establish the market value of the potential listing and use the value to develop a pricing strategy (ie listings are not “comps” without considering some sort of listing discount).
Comparable sales are nearly always a closed transaction but don’t get hung up on that. They can be pending sales and listings as well.
Appraisers, especially AMC appraisers often without local market knowledge claim they are mandated to only consider “closed” sales as “comps”. Wrong. Total cop out. Lazy. Incompetent.
I like to use the word reasonable when looking at a sale being considered as a “comp” to the property being valued. While housing sales are not like snowflakes (ie no two are the same), remember to ask yourself whether a theoretical buyer for the property being valued would consider the “comp” as an alternative to purchase.
Posted by Jonathan J. Miller -Thursday, February 16, 2012, 8:30 AM Comments Off
I was invited to keynote the February 2012 dinner meeting for the Appraisal Institute: Long Island Chapter in Westbury, Long Island to talk about the Long Island, regional and US housing markets, the problem with housing finance, misdirection in the market etc. with an extended Q&A session. …90 minutes of valuation discussion bliss.
It was great to see friends and acquaintances, let alone be invited to speak on issues I am so passionate about. I generally rail quite a bit about our profession, but I am speaking about the 80%, largely enabled by the AMC industry. The 20% was represented by the meeting attendees who have local market knowledge and are striving to improve their craft.
It became apparent to me from attendee feedback that:
AMCs account for most residential mortgage lending
AMCs provide terrible quality valuations but bank staff are mandated to use them from above
The industry is aging – not much new blood is entering the profession (of course I am excluding AMC “form-filler” types called “appraisers” in name only but don’t actually appraise in my view
The expectation of 3-5 more years of current conditions was consensus
Banks are looking to expand but are not going to be easing credit anytime soon
Many appraisers there were busy working on distressed and refinance property assignments, not sales
I’m all for giving people a way to fix a wrong, but there are a few things wrong with the hotline concept (all bark and no bite):
The states have no additional money to manage their compliance/license departments. Usually a handful of people oversee a profession of thousands of licensees with constant turnover.
Many states have syphoned off much of the licensing fees to other departments relegating many licensing departments as merely revenue sources.
How does a state deal with an appraisal complaint effectively? Do they say your adjustments for view wasn’t high or low enough? You can see how challenging it is for them.
How are the frivolous complaints weeded out? I understand many states have advisory committees from the industry to help process the paperwork but it is a conceptual nightmare.
Our firm has had a handful of complaints directed to the state over the years by individuals who didn’t get what they wanted from our services. Here are a few representative examples:
A mortgage broker tried to use the appraisal of a property that we had appraised for both parties in a divorce and demanded we make changes to the report including change the client name so he could use it for a refinance by one of the parties (we are prevented by the licensing law to do this) and filed a complaint against us. He threatened us with a dozen phone calls to make the change he wanted and that he “knew people” of influence. The matter was dropped by the state once they received our response.
A doctor who was buying out a partner of their joint practice looked to us to appraise the real estate. We did so. We found out later from our client that we had appraised the value at a similar amount as the other partner’s appraiser did (we didn’t know the other side got an appraisal or who did it). Our client filed a complaint because he claimed the “real” value was triple (of course!) The only justification in his mind (he provided no supporting sales data) was using a square footage estimate by a real estate broker saying the space was about 75 square feet larger than we measured (it was a few thousand sq ft) so we “must” have been conservative because that 75 square feet would have tipped the scale and tripled the value [sarcasm]. The matter was dropped by the state once we explained.
There are more examples like this but you get the idea – it is the cost of doing business today for an appraiser.
I see hotlines or complaint lines as they are currently handled as a way for erroneous complaints to occur and burden the profession with excessive costs. Yet I believe this is an important function but needs to be handled much more vigorously and intelligently to protect the public but there is no money to do so. Until state governments recognize that effective oversight preserves the integrity of the profession and ultimately keeps overall financing costs lower, then nothing will change. In fact, with the onslaught of the appraisal management company phenomenon of recent years, I’d say the prospect of improvement is nearly impossible.
Case in point, the hotline concept hasn’t kept the massive appraisal management company competency fraud from entering day to day conversations i.e. the common “the appraiser came from 3 hours away and had never been in our market before”.
In America, the accused are innocent until proven guilty but in the private sector, the small business bears the unending burden of cost for frivolous actions because government generally does not have the resources or understanding of how destructive it can be.
Some observations and feedback as a result of my post were fascinating:
One appraiser in Michigan who commented on the Business Insider repost tweeted me to say he was blacklisted by Rels, the firm cited in my original post.
I was entertained by the diatribe of a couple of people who rambled about things that weren’t in or inferred by the post.
One commenter “Ken” knew of the property so well I can only assume by his arrogance he was the appraiser or review appraiser on the assignment in question and was saving his bacon by reframing the conversation.
It was interesting to see people respond to the post as if they were reviewing this as some sort of appraisal when I was simply pointing out that an AMC appraiser used a “comp” that was an outlier from other data available, that was condemned, had a notice visible from the street and would have at the minimum, raised a flag to the condition of the interior of the property.
The defensiveness of some of the comments inferred that the homeowner was unrealistic and the market had declined. Doh!
An appraiser friend of mine forwarded me this response from an AMC who saw the post to get a chuckle:
A couple of comments:
*There is no mention of what the subject collateral is, it’s condition, or if there is any improvement – or the relevance of this comp – in other words, what was the Scope of Work? An appraiser is supposed to select comps that are similar, proximate and timely.
*The article states that the borrower did get the loan – which at least on the surface might indicate that the comp was sufficient for the lender’s needs.
*There is no mention of what kind of appraisal product was ordered – drive-by or other.
*The author suggests that the siding had not been removed – does that mean the hole is newer than the appraisal?
*and sometimes there are lousy appraisers
[redacted]: As candidly as possible, I receive an anecdote similar to this periodically and in almost all cases, after full review, it is an optics issue – the appraiser performed the work properly based on client instructions and the Scope of Work. Not always – but almost always.
Two final points:
*There continue to be complaints about quality but it nearly always ties back to someone not getting the value assigned that was hoped for. The market continues to slide and by nearly all estimates will continue to do so in 2012. The messenger continues to be shot and will be for another 1-2 years….
*Did you know that Freddie and Fannie have both stated publicly that appraisals that go through AMCs statistically are “better” than not going through AMCs?
Other than appraisers causing you misery, I hope all else is well in your world.
Thank you for checking in.
My favorite point made here was the comment:
As candidly as possible, I receive an anecdote similar to this periodically and in almost all cases, after full review, it is an optics issue – the appraiser performed the work properly based on client instructions and the Scope of Work. Not always – but almost always.
In other words, depending on the scope of the assignment, the appraisal may be meaningless and this type of quality would be reasonable. Throw comps denoted as “condemned” onto the report because it is a recent sale even though as a drive-by, the sale would be suspect.
Why go through the appraisal exercise if you can’t rely on it? Those entrenched in the AMC world, in terms of their business practices or quality say its just as good as non-AMC work. Given the decimated ranks of the good appraisers, it’s become a self fulfilling prophecy.
Posted by Jonathan J. Miller -Tuesday, January 17, 2012, 3:08 PM 6 Comments
My senior staff appraiser shared the following nightmare story – about a friend of his who is going through a mortgage refinance with one of the big US national banks regarding a house in Long Island, NY. Rather not say the bank name but a stagecoach comes to mind.
An appraisal was ordered through a big appraisal management company – Rels. Their appraiser used a condemned house with a big hole in the side of it – visible from the street – as a comparable sale presented in the report
Attached are the photos of the condemned house used by the appraiser in my friends appraisal…They are still fighting to have a new appraisal done. I will be honest the house was not this bad (when it was sold) as most of the siding has been removed. However, it was bought by a developer/LLC (not a person) and the condemned sign was on the door had the appraiser gotten out of the car. The hole in the side I believe was there as you can see that is the side with some siding still remaining.
The condemned house appears to have sold well under market value because a developer bought it to renovate and flip at market levels. No commentary or awareness of this was evident in the report. This condemned house is in the same neighborhood but the borrowers property happened to be updated and in good condition. Interestingly, I’m told the condemned sale was the outlier of the other sales presented in report that pulled the value well below the other “non-condemned” sales.
The slogan on the Rels web site is: Quality appraisals — and rapid turn times.
However I see the terms “quality” and “rapid” as mutually exclusive. “Quality” is more aligned with “timely” and “rapid” is more aligned with “fast and furious without review”.
The borrowers are peeved because although they can get a mortgage, the suspect report is in their file and they are worried it will haunt them later with a home equity application or something they haven’t thought of – after all – they paid for it. In fairness to Rels, it doesn’t sound like they are in the loop and the bank just wants to close the loan. The bank is making comments along the lines of “the appraisal won’t stay with your file, so just close” which seems to stray from my understanding of file documentation for lending.
Housing doesn’t recover until appraiser amateurism is eliminated from the lending process. Amazingly, large institutions still seem more interested in efficiency and a built-in “low” bias than getting valuation services that provide reliable results in order to make informed decisions to generate business with.
Eliminating certain risk-based fees for borrowers who refinance into shorter-term mortgages and lowering fees for other borrowers;
Removing the current 125 percent LTV ceiling for fixed-rate mortgages backed by Fannie Mae and Freddie Mac;
* Waiving certain representations and warranties that lenders commit to in making loans owned or guaranteed by Fannie Mae and Freddie Mac;
Eliminating the need for a new property appraisal where there is a reliable AVM (automated valuation model) estimate provided by the Enterprises; and
Extending the end date for HARP until Dec. 31, 2013 for loans originally sold to the Enterprises on or before May 31, 2009.
HARP (Home Affordable Refinance Program) was created in 2009 to help borrowers take advantage of low mortgage rates even if they had no equity in their homes. It was not effective so the restrictions have been expanded.
Of course this provides no help to borrowers with jumbo (non-conformining mortgages) in high cost housing markets who have have the same issue. I find it wildly unfair that there continues to be a bias to high cost housing markets effectively keeping a large number of middle class borrowers out of this program.
One of the big problems with HARP as initially set up was that the lenders were resistant to participating because of “buyback risk” if original underwriting was flawed (it could be argued that nearly ALL underwriting was flawed during the boom).
Posted by Jonathan J. Miller -Monday, September 5, 2011, 10:16 PM 3 Comments
Last May I gave a keynote presentation at RAC’s national conference in Las Vegas and caught up with many of the best appraisers in the country (my friends and colleagues). One of the attendees was the founder of LiveValuation Magazine, Ernie Durbin, II, SRA, CRP. He asked me to write an article on “neutral valuation”, one of the topics of the speech.
LiveValuation Magazine contains the best, most relevant content to appraisers and the appraisal industry I have come across. It is also a great resource for users of appraisal services.
For me it was an honor just to be asked to contribute to LiveValuation Magazine let alone be placed on its cover as the feature story.
And here is the article (I recommend you go to page 25 below for the full blown magazine w/graphics version) – the topic is something I am very passionate about and hope that forward looking appraisers will get something out of it.
Posted by Jonathan J. Miller -Monday, August 22, 2011, 9:14 AM 1 Comment
actual AMC (car) factory
AMC Factory For a year and a half, our firm tangled with the bureaucracy of Landsafe, the poster child for the appraisal management company (AMC) industry. While not all AMC’s are bad, their relationship to the mortgage process is fundamentally flawed. The estimation of market value of mortgage collateral to enable lenders to make informed decisions has been commoditized to the point where most mortgage appraisals are generally not worth the paper they are written on. This series is from an appraiser’s perspective, about a profession left to die by the side of the road.
Incidentally, some may view this series as providing cheap shots since it is always easy to pick out unflattering examples of misconduct in a large industry. You bet it is. After what good appraisers have observed over the past several years, the AMC industry deserves nothing more than that.
River Views Less Valuable Because of “Smelly Fish Boats”
Here’s one broker’s experience:
…client in [Manhattan] (urban market) could not buy the 10th Floor river-view apartment he wanted because his bank assigned an appraiser from Suffolk County, Long Island, (suburban market several hours away) who appraised it at less than the recent sale price of a 3rd Floor apartment in the same line, which had no river-view, and the client was short $20,000 cash which he did not have; the appraiser explained that where he comes from residences near enough to the shore to have a water-view, always have lower value perhaps because of the smelly fishboats. The bank would not do another appraisal because of the belief that all appraisers in a state are equally able to appraise any property in that state, no exceptions. So the client had to move into another rental apartment.
Local market knowledge is the primary qualification to hire a specific appraiser for an assignment. Merely having a license in the same state as the subject property to be appraised does not make someone competent.
A continuing refrain among real estate agents is that the appraiser came from another market, often 3-5 hours away. Not something that was the status quo in prior years.
I’m not quite ready to use the word “haunted” in my housing language, but I had a nice chat with Brian Sullivan and Mandy Drury of CNBC TV’s ‘Street Signs’ – 30 Rock is always quick walk from my office... Read More