Comparables as an Appraisal?

These are lean times for many appraisers. Many of us have looked at alternative ways to bundle and market our professional services. Some appraisers have been selling comparable sales data to clients. It seemed like a good way to use data more than once, thus leverage it, thus make it into a profit center.

Here's what happened: The "client" would call the appraiser asking for comparable sales data. The client might or might not specify the subject property, but did indicate its bedroom and bathroom count, its size, its age, etc. The appraiser would then amass comparables fitting the parameters of the "client's" request but not analyze the data, nor form a value opinion based on it. The "client", then, drew its own value conclusions and the appraiser was able to make a few bucks but without doing an appraisal. Note this practice was not widespread, but it was a way some appraisers were able to sell their services providing something else other than an appraisal.

Clearly, however, many appraisers were uncomfortable with this. They were sufficiently uncomfortable with it that they felt compelled to ask The Appraisal Foundation (TAF) if this scenario of providing data (but no analysis or value opinion) was proper under USPAP. The answer to their question is on the August 2009 TAF Q&A. So as not to take anything out of context, I have included the entire quote. Note the first bullet-point:

"Question:
If an appraiser is bound by USPAP for a particular assignment, when must the appraiser comply with the USPAP appraisal reporting requirements?

"Response:
Whenever a value opinion is communicated, compliance with USPAP’s appraisal reporting requirements is required.It may seem obvious in many cases that an appraiser must abide by the appraisal reporting requirements. However, in other cases it is not as obvious, such as the following examples (I have emphasized the answer; it was not in bold in the publication):

"Selecting and providing a client with comparable sales for a known property is an appraisal assignment as defined by USPAP.
Informing a property owner that their property tax assessment is too high is an appraisal report as defined in USPAP
Providing an opinion of market rent is an appraisal report as defined in USPAP."

Therefore it appears that if a "client" were to ask an appraiser for a list of comparable sales in a specific neighborhood (but nothing more), the appraiser could provide these data, yet that would not qualify as an appraisal. However, if the "client" were to specify either the subject property or the property type in that neighborhood, TAF would consider compliance with this request to be an appraisal. Therefore, in carrying out an assignment such as this, the appraiser would need to comply with Standards ONE and TWO of USPAP.

Note that TAF has no authority to enforce appraisal law; that is the exclusive province of the individual states. However, now that this decision & interpretation has come down from TAF, it is reasonable to conclude that TAF will expect the states to enforce it.

What lesson can we learn from all of this? Perhaps it is to stay current with the Q&As TAF publishes so we do not find ourselves on the wrong end of a subpoena from the state.

(Go to http://www.appraisalfoundation.org/ to see the entire document).

A Great Summary of What Happened (and Why!) on the Way to the Bottom

Today's post is rather short since the link below is more important than what I type here. If you link to the New York Times site at http://topics.nytimes.com/top/news/business/series/the_reckoning/index.html, you will find a fascinating series (albeit long - after all it is the New York Times) of articles. These articles make it clear just what what brought the economy down, when, and why. It tends to concentrate on the business of the collapse, but it mentions a lot of the people who either brought about the collapse or failed to do anything about it.

Pay especial attention to Jason Thomas and his rent-versus-ownership analytic model. What's interesting about it is that it was so simple; no calculus, to convoluted statistics, no black-box programs. Just straightforward analytics. Just analyses that real estate appraisers should have been engaged in. Though only 29 years old a the time, he basically foresaw the collapse and warned the powers that be in the Bush Administration of what was to happen. But, by then, it was basically too late to make any serious repairs to the economy's pending implosion.

Note that these articles do not hesitate to mention that so many of the big players in the collapse, Merrill Lynch, Lehman Brothers, Bear Sterns, et al, all had significant positions in mortgages. mortgage-backed-securities and mortgage-backed- derivatives. The one step all of these Wall Street firms failed to take was that of recognizing that real estate prices do not and cannot increase forever (see reference to Jason Thomas, above). As we all now know, they didn't.

Check out, too, all of the references to the pay of the traders and executives at the big banks and banking houses. Then check out the references to the pay of those folks who oversaw risk at those firms. There is a grand canyon of a difference. Guess who got paid more?!

The articles do not mention real estate appraisers. That's a shame, since somebody had to issue an opinion that a specific piece of property had a value of $X on a specific date. Problem was, it likely did not since the value of the real estate was inflated by non-real estate considerations.

Enjoy the articles! You will find it sobering reading!

Las Vegas - Real Estate Ethics Capital of the US

Have you seen the August 24th, 2009 edition of Time magazine? If you have not gotten it yet (http://www.time.com/time/nation/article/0,8599,1915962-1,00.html), you should! Its a must-read for real estate appraisers in the current market. And it says so much about ethics, too.

It seems that the Las Vegas residential real estate market has taken an Iron Mike-style beating with literally thousands of unsold houses (both new- and used-) currently on the market. In fact, the number in the video at www.time.com is 17,000.

So, what is the real estate brokerage community doing to sell these houses? Clearly the prices have dropped considerably from their highs in 2006, but that still has not moved all of the available inventory. So as not to take out of context anything Time reported, I'm going to quote from the published article extensively. I have edited some of Time's reportage here for brevity (as well as to protect the innocent).

[Time's reporter spent] "...the day with real estate agent Brooke Boemio, a bouncy, sweet, recently remarried 31-year-old... Boemio is doing great during this recession. In fact, she's never had a job that paid as well: she made more than $100,000 last year. Even better, she's willing to show me how messed up the real estate scene is.

"Boemio specializes in short selling, in a particularly Vegas way. Basically, she finds clients who owe more on their house than the house is worth (and that's about 60% of homeowners in Las Vegas) and sells them a new house similar to the one they've been living in at half the price they paid for their old house. Then she tells them to stop paying the mortgage on their old place until the bank becomes so fed up that it's willing to let the owner sell the house at a huge loss rather than dragging everyone through foreclosure. Since that takes about nine months, many of the owners even rent out their old house in the interim, pocketing a profit.

"...[L]ast year Boemio and her new husband [went the short-sale route] themselves, paying $279,000 for a house nicer than their old one, which cost nearly twice as much. They stopped making payments on the old one as soon as they signed their new mortgage. "I make people happy all day with foreclosures. Now I want to be happy too," she says. The new house, like so many she deals with, was trashed by the previous owners, who were angry at being foreclosed on. The doorknobs, hinges and copper wiring were stolen, as were the appliances and carpet. The owners even left their dogs behind. (Abandoned pets have become a huge problem for local shelters.) "You couldn't walk into that house without holding your nose to keep you from vomiting," Boemio says. She and her husband had to spend $7,000 on appliances and carpet to qualify for a Fannie Mae loan."

(Now the broker in the article is showing a condo unit that at one time sold from the developer to a retail buyer for $600,000, but now is on the market for $179,000. In the interim, it has been trashed by squatters, despite the fact there is a security guard present and this unit is on a high floor.) "The buyer's agent — a woman in a Gucci scarf and sunglasses — is a little more freaked out, trying to figure out how much this mess will cost to clean up. Which is strange, since she's offering $250,000 on behalf of her overseas client — $70,000 more than the asking price. There are no other buyers. Boemio goes over the offer three times with the Gucci lady to make sure she understands exactly what is going on. Gucci lady, she figures out, is just trying to score an extra $2,100 in commission and is screwing over her client for $70,000."

Time's article continues...

"It is lawless right now in the Wild West. There's even a real estate agent (and the figures and details are slightly changed here to protect him) whose out-of-town investor demanded that the agent find a way to cover some of the losses he was taking on the $60,000 down payment he'd sunk into a house. So the agent created a separate contract, never shown to the bank, that said the new buyer had to purchase a $60,000 Persian carpet from the seller — a check his mortgage company, which was sucking up hundreds of thousands of dollars in losses on the short sale, would never see. When the buyer — who was happy just to get a deal on the house — asked if the Persian carpet was really worth $60,000, the agent looked at him as if he were insane. "I bought it at Wal-Mart," the agent told him. Now all the friends of the investor who got his $60,000 back are asking the agent to pull the same scam for them. And he's doing it."

OK, we are going to ignore the issues of broker's ethics here. In the spirit of full disclosure, I've had a real estate broker's license here in Florida since 1978 or 1979, but I don't practice real estate brokerage anymore. I'm a real estate appraiser, primarily commercial. The issue here, however, is not only appraiser ethics, but appraiser competency, as well. Both of those topics are major USPAP issues.

Now, in the case of the Gucci lady, she is "screwing" her purchaser out of $70,000 in money he or she does not need to pay to buy that particular unit, plus earning another $2,100 in commissions because of her perfidy. I would hope that, if there is an appraiser involved anywhere in this transaction, that appraiser has the intellectual and ethical chops to show the cash-equivalent purchase price of the unit is really $179,000, not $250,000.

As to the $60,000 Wal-Mart rug the broker and the seller are cheating the foreclosing lender out of, one can only hope there are fiery circles infernally reserved for them which are even lower than those reserved for fallen angels.

What's interesting is that, in both of these cases, apperantly nobody can discern there is anything wrong about what the participants are doing!

The competency and USPAP issues here are whether a real estate appraiser could figure the scams out. Then, if the appraiser can, will the appraiser demonstrate backbone and tell his/her client that the deals stink? Will the appraiser tell his/her client the market values of the properties, or merely rubberstamp the purchase and sale contracts? If the appraiser merely rubberstamps the purchase and sales contracts, will s/he claim that s/he was merely reflecting the actions of the market?

Can we stem this tide? Do we need to? What do you think?

What is a CATALYST?

From various sources we constantly hear the statement that so-and-so or thus-and-so was a catalyst. But what is a catalyst? Is that a positive or a negative? Is that an attribute to emulate or avoid? Why does anybody need a catalyst?

According to the dictionary, a catalyst is something "...that causes acvtivity between two people or forces without itself being affected." In human terms, then, a catalyst is someone who makes things happen, but who is not part of what the started the thing happening, nor is used up when whatever happens has finally taken place. Again, in human terms, a catalyst is a mentor.

Since a catalyst is a mentor (therefore a mentor is a catalyst), let's start the reactions. Sometimes the easiest way to do that among real estate appraisers is simply to ask questions. These questions are not meant to condemn anybody or in anyway to make anybody feel inferior. They are here merely to catalyze thought. So here are the catalytic questions:

When was the last time you...

...took a college-level class on a topic directly related to real estate appraisal?

...took a college-level class on a topic that had nothing to with real estate appraisal?

...took a seminar (1- or 2-day) on a real estate appraisal topic, but that was not directly related to your CE requirements?

...attended a national real estate conference to see what the innovations are in this industry?

...read a technical appraisal journal?

...read anything by Babcock or Graaskamp?

...looked up the definition of the word opinion as it relates to a professional?

...started and maintained a blog or a website (on the subject of your choosing)?

...listened empathically to the opinion of someone with whom you viscerally disagree?

...wrote a thank-you note to a really outstanding instructor or teacher?

...looked up a totally new word in the dicationary and then used it properly and in context in a report? (Consider using the word oriel).

...written a paper and then submitted it to a professional journal for possible publication?

...read the complete defintion of market value, and then related it to USPAP SR 1-2(c)(i-iv)?

Now, you rightly may be asking yourself, "why to I need a catalyst?" What a great question! What's your answer?

Housing Starts and Other Related Thoughts

According to nationwide data maintained by the Federal Reserve at http://research.stlouisfed.org/fred2/series/HOUSTS/downloaddata?cid=97, housing starts are still down from their high of almost 1.2 million units in Q1 of 2006. In fact, in Q2 of 2009 the seasonally adjusted housing starts were at approximatley 225,000 units, or a decrease of approximatley 80% over that period. Note that the most recent numbers are trending upward, however, which suggests the rate of decline is slowing from past levels. While its not time to start the party yet, there may be some room for optimism. People tend not to make long-term financial committments if they are not reasonably sure they can meet them timely.

Congruent with this, the same source (http://research.stlouisfed.org/fred2/series/TDSP/downloaddata?cid=97) shows that Household Debt Service Payments as a Percent of Disposable Personal Income peaked at about 14.5% in Octpber of 2006 and has been flat or decreasing since that time. Data for Q4 2008 (the latest available) show that the current ratio is approximately 13.5%, or a decrease of 5.26% over the time period.

The two metrics are not supposed to be parallel. However, the fact that we are willing to spend less of our disposable income on housing is one reason for housing starts to drop.

I don't know if this information is going to help you be a better real estate appraiser, but it will give you something to bore your non-appraiser friends with when you go to the gym.

Where Can I Go For a Little Help?

Most real estate appraisers work out of small offices. Now, a lot of us work out of our homes to save on overhead costs! But what happens when you run into a problem with an appraisal or a reviewer asks a really difficult question? What happens when the State appraisal board comes calling!?

In these situations, an appraiser could use a mentor. A mentor is another appraiser who is experienced, well-trained and -educated, and has "...been there and done that...". If you need that help, please contact me at maitca@bellsouth.net so we can determine what help you need and for how long. I'd like to send you my resume' so you can decide if you need my help.

I've been the real estate business since 1975 and in real estate appraisal full-time since 1986. Over the years I've earned an MAI (an SRPA, too!), a state certification as a general real estate appraiser, a master's degree in real estate appraisal, and certification as a USPAP instructor. I've taught real estate for many years and am a national Instructor for the Appraisal Institute.

When you need a friendly pair of eyes to take a look at a report before it goes to the client, if you aren't quite clear yet on Highest and Best Use, if USPAP still is a lot of incomprehensible gibberish, of if the state investigators are about to come calling, I can help you. We can work by e-mail or phone and my fees are reasonable. I look forward to hearing from you!

Are You Where We're Going?

Right now, some in the real estate appraisal business are, let's say, in possession of a great deal of free time. Business may be slow, former clients may not return your calls and e-mails, and maybe you've even had to lay off some non-appraiser staff members. When will this end?

However, rather than dwell on "when will this end?", why not dwell on something we can influence? Something that will make us a buck or two when all of this does end!

The real estate business model has changed from what it was when so many of us got started in the business. Given the fact that the mortgage lending and mortgage banking industries are way larger, more influential, and more powerful than the real estate appraisal industry, it is also likely that this current business model is not going to change to the appraiser's benefit. Therefore, whatever changes are going to take place, we are they who must being them about.

Therefore, the it appears prudent to assume that the appraiser must change his/her business model to meet the times. Without such a change, we may become the buggy-whip makers of all of the real estate component-industries.

One of the most obvious changes facing us is that of "green buildings". As jurisdictions change their building codes to accept these innovations in construction, appraisers must be able to recognize how such construction impacts market value, rental values, costs of construction, capitalization rates, highest and best use analyses, supply and demand factors, and so forth. As is common with education and competency, learning about green construction systems and how they affect market value will not be inexpensive. But learning to work with, and understand, these systems appears to be part of the future of the real estate appraisal industry.

Green construction is and will continue to be a characteristic or condition of the market. In the Summer 2009 edition of The Appraisal Journal, Mark Ratterman, MAI, SRA pens an interesting and provocative article on the need for residential appraisers to focus more on market conditions as part of their analyses of a residential property. This is not the place to summarize the article. But his article begs the question of "...who is going to pay the appraiser for all of this extra work?...". Ratterman concludes the answer to this question is "nobody". He says that these analyses are those that residential appraisers should have always engaged in anyway. Be that as it may, if this is what the mortgage lending industry is going to demand in the future, then we must meet this demand, or succumb to those who do. And let's face it: the consumer is not going to pay more for an appraisal and the blood-sucking AMCs are not going to go away or pay us more.

Since the appraiser is not likely to be able to command more money per appraisal, then basic economics dictates that the appraiser must be able to lower the cost per appraisal, or go out of business. In other words, in the future, the residential appraiser must become more efficient in analyzing the market & subject property and then producing the report than s/he is now. How is this possible?

The first step is, to some extent, out of our hands. The first changes that will have to take place is in the MLS systems across the country. They will have to co-operate and come up with a single database format for the information it, as well as its presentation and downloadability. The reason for these is the second step: appraisers must be able to download vast amounts of data quickly, easily, and accurately. Which data? The appraiser must be able to have quick and accurate access to all of the data on the relevant sales, listings, pending contracts, expired listings, and so forth. Quick is not really a problem. Accurate is another matter. Since we do not control the MLS, those who do own it custom-design it for thier purposes, not ours.

The next step involves the software vendors. They will have to agree to conform their software to the common database language in which all MLS systems will need to be written to make this massive download of data possible and accurate. Right now they do not.

Next, appraisers will have to learn how to use these powerful tools efficiently so they can put out three or four (if not more) USPAP compliant appraisals per day, all of which have the proper quantity of data, thus the analyses, to result in a credible value opinion. This will mean the appraiser must learn how to use and interpret the results of a multi-variable regression analysis program as part of his/her daily practice. The software for such analyses exists right now. Any modern spreadsheet will carry out these analyses almost instantaneously. So the problem is not the software. The problem is (1) getting the data into the software and then (2) teaching the appraiser how to use and interpret the information the software spits out. If the appraiser puts garbage in, then the appraiser will get garbage out. Therefore the appraiser will have to be trained on how to use these powerful tools. And then the appraiser will have to use them! Daily!

Surprisingly enough, USPAP is already sufficiently flexible to fit the results of a multi-variable regression analysis into the analytical and reporting template it requires for a residential appraisal. Therefore any problems on the quantity and quality of analyses and reporting will not likely come from the The Appraisal Foundation. It will come from the lending industry since the standard 1004 form will probably be rendered obsolete. Remember, appraisers did not design the 1004 form; bankers did. It is a great summary of the data the bankers need as part of a mortgage loan submission package, but it depends on the extraction and calculation of dollar adjustments to account for differences between the various components of very different buildings.

Paired sales analysis, the commpn vehicle for this extraction, depends on what is essentially a logical impossibility: that two properties are essentially identical in all areas but one, so the differences in their sales prices (or rental rates) is the contributory value of that one item. In theory that's fine, but in practice it fails. Take an in-ground pool. There are big ones and small ones. There are ornate ones and plain ones. There are old ones and new ones. Some have solar heating systems and some have no heating sustems at all. Some, frankly, are overimprovements. Therefore extracting the dollar "value" of a pool is impossible. All that is possible to extract is a general value, or a value mid-point. As a result, the lending industry is going to have to accept the fact that a pool is not "worth" a specific dollar figure, but rather has a contributory value within a market indicated value range. In all candor, a multivariable regression analysis is better at this that an appraiser's "gut instincts", and far more market-oriented and -defensible (assuming the appraiser does the regression properly).

Finally, we appraisers will have to agree on all of these changes and innovations among ourselves. So far we haven't; indeed, appraisers have an inexplicably visceral negative reaction to the use of a multi-variable regression analysis program. Yet our inability to agree on the path our industry's future should take, our inability to stop squabbling among ourselves, are exactly what brought about FIRREA and the horrible consequences of state certification of appraisers, not to mention the travesty that is the HVCC.

There is no one group powerful enough to impose this on us for our own good; therefore we must come together and accept it as a industry. To paraphrase Benjamin Franklin, "...we must hang together or surely we will hang separately...".