[Bank Appraisals] Commercial Too High, Residential Too Low

Posted by Jonathan J. Miller -Wednesday, May 9, 2012, 9:52 AM
6 Comments

Julie Satow’s New York Times ‘Square Foot’ Column Accuracy of Appraisals Is Spotty, Study Says takes a look at a study that concluded that commercial appraisals were too high when tested against what the property actually sold for. My partner John Cicero in our commercial valuation firm Miller Cicero was referenced in the piece. While he liked the article and agreed with the conclusions, he pointed out the potential flaws in the study.

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.

• Accuracy of Appraisals Is Spotty, Study Says [New York Times]
  
• John Cicero’s Bio [Miller Cicero]
  

6 Responses to “[Bank Appraisals] Commercial Too High, Residential Too Low”

1. Howard Arnoff says:

   May 9, 2012 at 10:39 AM

   Jonathan, I would think that it goes beyond shortsightedness “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”.

   We can just bail them out again for rampant stupidity.
2. Marc Kushner says:

   May 9, 2012 at 12:09 PM

   You get what you pay for.
3. Lori Noble says:

   May 10, 2012 at 11:27 AM

   @jonathan After more than a decade of defending markets against bank-owned AMCs, current events like these are bitter-sweet.

   Because AMC participation and FEES are conveniently hidden in the name of the appraisal, it’s too easy for attorneys to over analyze the surface without acknowledging or knowing the truth (even though all were forewarned).

   The bank-owned, self-policed, unregulated, AMC completely undermines the concept of credible, neutral valuation by design. The AMC business model is utterly flawed and serves zero purpose. Their only ability is to create chaos and ruin fragile but viable markets.

   “AMCs are the worst doom consumers never knew”.
   • Jonathan J. Miller says:

     May 10, 2012 at 11:29 AM

     Well said Lori.
4. Daniel Drelich says:

   May 11, 2012 at 8:14 AM

   Jonathan, Nail on the head. I first heard the expression that appraisals are a commodity by appraiser Rich Seibel three years ago (just after HVCC). I didn’t grasp the importance of his statement immediately……it took me about a year of AMC abuse to fully understand the depth of the problem. I no longer take assignments from appraisal management companies, or lenders, for that matter. The whole Fannie Mae/FHA system is flawed. I applaud efforts like yours to get the word out. Now let’s get to work to fix the system!
   • Jonathan J. Miller says:

     May 11, 2012 at 8:28 AM

     Thanks Daniel! – I really appreciate the feedback.