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.
Posted by Jonathan J. Miller -Monday, January 30, 2012, 8:42 AM
1 Comment
One of the last pieces of the 2009 Fannie Mae/Cuomo agreement, called HVCC, that essentially (but unintentionally) destroyed the bank appraisal industry is being worked out. A consumer hotline was created to handle complaints about real estate appraisals. These calls are being be directed to the appropriate state licensing board for action.
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.
Woof.
Posted by Jonathan J. Miller -Monday, January 23, 2012, 8:55 AM
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Ok, at least it’s it’s Year of the Dragon, not the Year of the Rat but the Chinese New Year does bring to mind some other associations with housing in the post-credit crunch world.
Here are names I have associated with each year since the fall of Lehman and the impact on housing.
2008 (Rat) – Year of the return to reality. Appropriately named, the year notes the final punctuation mark on the credit boom unraveling and the fact that the entire world lost it’s mind.
2009 (Ox) – Year of the first time buyer. The first year after the September 2008 fall of Lehman Brothers that marked the beginning of a new credit environment as well as a new housing market. Mortgage rates fell to the floor and the Federal government introduced the first time homebuyer tax credit – later expanded to existing homeowners. For appraisers it was the “Year of the Appraisal Management Company” as the Cuomo/Fannie Mae agreement effectively prevented the residential appraisal industry from becoming a reliable and impartial benchmark provider.
2010 (Tiger) – Year of the short sale. Preceding the incoming flood of foreclosures, the banking industry understood that it was a lot cheaper to effect a short sale rather than go to foreclosure. Unfortunately they had no idea how to manage the process and many fell into foreclosure. Here’s some free advice to banks looking to cut losses on foreclosure activity: actually pick up the phone.
2011 (Rabbit) – Year of the foreign buyer/trophy property sale. The DC politically charged debt ceiling debate leading to the S&P downgrade of US debt and economic debt problems in Europe drove many foreign buyers to the US housing market as a safe haven. A byproduct of this trend was a surge in the sale of unique high end properties in the US. Think Candy Spelling and Sanford Weill. I had originally dubbed 2011 as “Year of the foreclosure” but the “robo-signing” scandal in late 2010 tempered servicer/lender plans of releasing foreclosures into the market until they were more confident they could prove ownership and the right to actually foreclosure (what a time we’re living in).
2012 (Dragon) – Year of the foreclosure/election year do-nothingness. Servicers/lenders will begin to ramp up the foreclosure process again as more time has passed for them to get their ducks in a row. I am doubtful there was enough time to do much of anything considering the millions of potential transactions but it’s likely to start this year and heavier than usual volume should last for at least 3 years. This is a good thing because we need to clear the market before claiming a housing recovery. We will likely see a surge in election year political promises as an attempt to help troubled homeowners such as a more streamlined shortsale process, an improved loan modification process and an expanded refinance policy, but judging from all feeble attempts so far and the stalemate in DC on economic policy and their stunning lack of understanding about what ail’s housing, we’ll probably get the status quo instead.
The next Chinese New Year will be named Year of the Snake. Uh, I’ve never liked snakes.
Posted by Jonathan J. Miller -Tuesday, January 17, 2012, 3:08 PM
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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.
Lesson?
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.
Posted by Jonathan J. Miller -Tuesday, January 10, 2012, 1:37 PM
12 Comments
Actually our birthday was last October 1st and I had grand plans to post this back then when this site was supposed to be relaunched. Well, like our 25 years, time passed quickly and I am posting 3 months later.
Miller Samuel was founded by my family including moi, my wife Cheryl, my sister Dina and my parents Donald and Ethel (who retired in 2002) it’s been fun, challenging, frustrating and rewarding but I think I speak for all of us – we wouldn’t trade the experience for anything.
My back-of-the-envelope estimate of the total market value of all properties appraised, adjusted for inflation (not for changing market conditions) is over $80 Billion, but who’s counting?
But I digress…
We were originally going to name our firm Appraisal Specialists (what were we thinking?) in 1986 and found out someone in New York State already had that name when we went to incorporate. We quickly appended the word “Group” to form Appraisal Specialists Group (another horrible name) but within the year we renamed our firm Miller Samuel with the latter name being a former partner early on. We originally worked out of our apartments and got a real office within the year. Went with Macs back in 1986, developed our own software to fill out the appraisal reports, incorporated bar code and scantron forms into our process and to top it off. I have to laugh when I think that we were the first appraisal firm to have a 2-line fax machine ’cause we were so “hi-tech” and our banking clients used to fax everything.
The Miller Samuel name stuck and we expanded, outgrowing 3 offices, launching a commercial affiliate Miller Cicero, shifting our client mix away from primary emphasis on banks and expanded our real estate market report coverage throughout the New York City region and Miami for brokerage Prudential Douglas Elliman and dabbled in report coverage in other housing markets such as Washington, DC and Baltimore. We’ve done a lot of blogging and podcasting, social media, magazine articles, research studies, data aggregation, seminars and other things to provide more transparency to the housing markets we cover.
We’ve got a really great appraisal staff, averaging 14 years of experience and it’s really a lot like an extended family.
After 25 years we have seen radical changes for the worse in our dysfunctional leaderless appraisal industry – appraisal quality for bank lending is at an historic low thanks to appraisal management companies, but yet we are well positioned for the future.
We live and die by our reputation of taking no quarter when it comes to:
providing a neutral valuation benchmark for our clients to enable them to make informed decisions.
Thanks for being there with us.
Here’s to another 25 years.
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.
My thoughts
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.
Sigh.
Posted by Jonathan J. Miller -Thursday, August 18, 2011, 9:59 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.
Conservative Appraisers Because Their Client “Likes It”
Here’s one broker’s experience:
A client…received an offer from an out of state office of their lender whose 5-year interest-only loan was soon to expire and agreed to allow an appraiser to visit the apartment; the appraiser told the client:
I measured the dimensions and also I can see from the floor plan
done by the architect in 1939 that the apartment is 950 square feet
but I am going to tell the bank that it is 850 square feet because
the bank will like that
The (My) client refused to proceed and ultimately the bank automatically converted the loan to 30-year fixed at a rate of 2 points over LIBOR at the time which turned out to be 3.75%, with no appraisal and no new application and no costs or fees.
My thoughts
Since when are appraisers supposed to take it upon themselves to modify the physical characteristics of the property? We are supposed to be the eyes and ears of lenders, not part of their sales force or underwriting team.
This appraiser’s behavior sickens me.
Posted by Jonathan J. Miller -Sunday, August 14, 2011, 3:07 PM
2 Comments
Frank L. DeFazio, Esq., a real estate broker in Philadelphia and reader of Matrix, liked my last post and shared a few photos with me that he came across – apparently someone was fed up with Bank of America.
Put up a sign…
…across the street from a branch
Gotta love our country!
(My beef with BofA is with their behemoth appraisal management company, Landsafe.)
Posted by Jonathan J. Miller -Tuesday, July 5, 2011, 12:01 AM
6 Comments
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.
Errant Email Prompts Appraisers to Say What They Really Think
For two months Landsafe begged appraisers (why some of my appraisers are on the list will be explored in a future post in this series – it’s a doozy): The revamped a multi-page legal agreement without disclosing what prompted the change. Well, The Appraisal Institute warned us about signing the agreement but basically they are shifting the risk to appraisers when they shouldn’t be (more on this in coming posts).
Here’s the intro of the Landsafe request. I should be clear that they never set a deadline for signing until later on, called us and emailed us repeated to sign it.
You received an announcement from LandSafe Appraisal Services concerning
the Appraisal Services Agreement. This must be submitted electronically
to LandSafe in order to remain active in our system.
To date, we have not received a completed ASA agreement from you. If we
do not receive one from you then this could lead to an interruption in
the work you receive from LandSafe.
Of course, we weren’t receiving regular work from them so it fell on deaf ears.
In an email error, they sent this request to hundreds of appraisers but forgot to BCC.
Here’s a sampling from the appraisers who clicked “reply all”.
More after the jump…
Posted by Jonathan J. Miller -Tuesday, June 28, 2011, 12:01 AM
12 Comments
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.
The Good Appraiser AMC Bait And Switch Technique
I believe that there are generally 1-3 good appraisal firms in most markets. A “best and all the rest” list. (Blowhard hyperbole warning: I consider our firm to be one of the “good” firms in our market.)
The proliferation of AMCs used by lenders has exploded since HVCC came to be in May 2009.
AMC’s continue to fight their poor reputation for quality – they generally only require state licensing, inconsistent reviews of sample reports, agreement to fees that are half market rate, 24-48 hour turn times irregardless regardless of valuation difficulties, etc. In order to combat this AMCs use the following marketing technique:
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