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...".
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