M. Lance Coyle
President of the Appraisal Institute
On Friday, October 16, the Norris Group proudly presents its 8th annual award-winning black-tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds from the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event could not have been possible without the generous help of the following platinum partners: HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, San Jose Real Estate Investors Association, InvestClub for Women, MVT Productions, Wilson Investment Properties, and White House Catering. For event information, visit isurvivedrealestate.com.
Bruce Norris is joined this week by M. Lance Coyle. Mr. Coyle is the 2015 president of the Appraisal Institute. He will serve as immediate past president in 2016. He served this year as chair of the organization’s executive committee and chairs its policy setting board of directors. He has been involved in the real estate appraisal industry for 30 years and is a principal of Coyle Realty Advisors, a Dallas based real estate services firm engaged in investment property valuation, analysis research, and an expert in witness testimony and counseling.
Bruce and Lance first discussed the Appraisal Institute, both its scope and membership. The organization is both national and international in scope. They have about 21,000 professionals in 60 countries around the world. It is believed they are the largest valuation association in the world, dedicated to just real estate valuation. Bruce asked if valuation practices remain consistent, even though they are in other countries. He said they are consistent in the U.S., but around the world valuation practices do differ depending on in-country laws and customs. You might have an entirely different market value take if you are in a different country. It all depends on the country and the laws specific to the country.
Bruce asked how the Appraisal Institute goes to bat for the industry. They have a long history of devotion to the public trust. They believe the public should be able to trust in services provided by valuation specialists. In order to do this, through the years they have devoted themselves to expanding and improving along the body of knowledge. They have educated thousands of people with what they think are the finest real estate valuation and education courses out there. They remain the largest publisher of real estate valuation text books in the world. They have about 70 titles and are making significant contributions to making appraisers better and how they perform their jobs. They maintain a full-time legislative office in Washington, D.C. where they communicate on a daily basis for not only their own members, but all the appraisers in the United States.
There was a time a long time ago when the license was not even required to be an appraiser. Lance said he remembered prior to the enactment of a law in 1989, there was no licensing or certification in place. Bruce remembered taking the classes, and part of his interest was he would be meeting appraisers at a property. He wanted to understand their evaluation process because his challenge was he would be buying a property that was vacant and dilapidated for $40,000 with the expectation to sell it for $120,000 after completely redoing it. He would meet with the person, explain this situation, and tell them he had a willing buyer, which could pose some problems. However, both could be legitimate numbers.
In the appraisal industry itself, you have broker price opinions, automated evaluation models like Zillow, and all these things that seem to indicate the future does not need an appraisal process as we know it now. Bruce asked why this thinking is flawed. Lance said there are alternative evaluation products, which includes broker price opinions, automated valuation models, and evaluations. Some of these things are valuable tools. What they do is take advantage of some of the newest techniques that are available to all kinds of evaluation professionals today. These include techniques such as linear regression and big data analysis. To that extent these are useful techniques that the Appraisal Institute embraces. On the other hand, automated valuation models have proven to be very difficult to make particularly accurate.
Everybody seems to know that a Zillow estimate or another estimate based on a computerized program does not necessarily know that you put a new patio in the previous year or finished your basement. They do not have access to the very best data, nor do they have access to the best data in all particular markets. There is a perceived accuracy problem, and that is why a human appraiser remains the standard for an accurate evaluation.
If Bruce had been on a ten-year vacation, left in 2005, came back this year, and attended his conference, he wondered if there would have been an amazing transformation in what the industry has turned into and what is expected as an appraiser. The answer was yes. First of all, the body of knowledge has really changed. The techniques and methodologies used today are much more sophisticated than they were ten years ago. Significant strides have been made in the use of big data, data science and technology, and in the area of market analysis. There is a significant emphasis today on analyzing supply and demand and where we are in the market cycle. There have been a lot of changes in the last ten years.
The other big change that would really catch your attention is the depth of the amount of regulation that has cropped up in the last ten years. Appraisers today are really heavily regulated from states to Feds, PSAs, and more. The amount of regulation and the impact of those regulations has been significant in the industry.
Bruce asked if there are appraisers who look at the cumbersome situation that it has become and said they will do something else. Bruce asked if this is affecting membership and what they are able to make as an appraiser. Lance said yes and that since 2007 the Appraisal Institute does track the population of appraisers. Since 2007, 20,000 appraisers have left the business. That is equivalent to a 20% decline. There are a variety of reasons for that decline, but it is believed one of the reasons is the environment where it is becoming too difficult to comply. A lot of folks do not think it is worth it for this reason.
Bruce and Lance went on to talk about appraisal management companies and the space they have. They are likely here to stay, and Bruce wondered how this affects the assignment process. The goal will be if you go through this extra layer, the appraisal would be assigned to the best appraiser possible for that product. Bruce asked if this has been the end result. Lance said this is how they would like it to work, although they do not have any institutional or fundamental quarrel with the concept of an appraisal management company. The original idea was to reduce the amount of pressure appraisers were getting to make certain values from credit officers and others in the lending environment where they had a financial stake in the outcome of a transaction. This was very valid and constantly pressure from agents, owners, and lenders.
You have to come in at a number. They have a financial stake, so it is not a great surprise to anybody that they would want the appraiser to see things their way and help them make the deal and earn the commission. This is natural human behavior, but it does not serve the public trust very well. The idea behind an A and C was you would insulate the appraiser from those folks. The unintended consequence was there were great A and Cs out there who are very professional and do it the right way. However, there are also those who are motivated by financial considerations and do not necessarily do things the right way. We obviously need another set of people to manage the appraisal.
The assumption is that this will be done dishonestly without all these pieces in place. Bruce has a hard money loan business where they loan to investors who buy fixer uppers. They have an appraiser they want to do the appraisal not because he is going to come into the number they want. He has made a statement that of all the people he has ever dealt with, the Norris Group is the only one who has not tried to sway an appraisal. The reason Bruce assigns the appraisal job to him is he is the best person for the job since he himself has repaired 500 homes as an investor. He is doing them a favor because he has all this knowledge to put into the next appraisal. You cannot select somebody out of a box to take his place; it does not happen that way.
Lance said he too is frustrated by the way things are today. He remembered when a lot of the lenders small to medium and local lenders, and the appraiser and loan officer knew and trusted each other. That was actually a system that worked well, but we have lost it. The assumption was these two people would be dishonest with each other when it was really the opposite. They were chosen because there was not any of that. It is also true that back in those days a lender would often hold the loan instead of selling it. This is what makes the difference. When they sell this loan, they are much less worried about the long-term viability of the borrower and the credit quality. It will be somebody else’s problem.
What is interesting is that the process now may make the loan more palatable to be bought by a third party, but it does not mean it is more accurate. Most of the loans that are made today, at least on the residential mortgages, are cancelled. However, it is a process in which they believe. Bruce has sat next to people bidding at an auction and seen their research, and they will have a Google Earth picture and Zillow valuation. Bruce did not understand how they were going to look at a house based off of this. As they say in the industry, you have to wear out some shoe leather. However, they feel fully armed and confident.
Bruce used to visit HUD auctions in the 90s and physically go into every property because it was his money and he had everything at stake. He was not going to buy a house without going inside it. One of them was at a cul-de-sac, and he noticed it was fenced off with a chain-link fence that should not have been there. He got into the house and saw that it was burnt completely, half of it gone. However, this was something you could not see from the cul-de-sac. Bruce happened to be sitting next to a guy who was bidding on that property, and he showed the man his large note he made on the property labeled “burnt.” He had not gotten out of his car to see the house, and he had won the bid for $60 grand. He did not notice it was listed in the HUD list for $11 for the previous two months. He believed his process was the best, and this is almost what is happening now.
Another thing that is interesting that came about in California more than it did in Texas regards the definition of market value. It contains in there the definition of buyer and seller looking out for their own best interests and being fully informed. However, the end of it says the transaction is without undue stimulus. We always think of that as transactional stimulus, but in 2004-2006 we had systemic stimulus. In California, we are looking at houses that cost $100 grand to build and were going for $400 grand. It was because there were 6 comps for $400 grand that it was worth this. However, they did not look at why it was possible. The reason was the financing that allowed the number to emerge, and the appraisal world has gotten a lot of heat for coming in at numbers where the number was based on the comps.
This is an important topic that will increase in attention as the body of knowledge emerges. This very issue is addressed in several areas today. There is a difference between what people will pay on a transactional basis and what the fundamental value of a property is worth based on market fundamentals. What is interesting about this is the actual document of an appraisal always has these elements. You are talking about the cap rate and the evaluation of the cost basis as well as the income potential of it. For residential, that is almost not paid attention to any more even though it should be.
Appraisers and appraisals are locked into what is called a point in time valuation. What this means is the value of the property as of a specific date in time. The way that you get there is you are looking at what people are willing to pay. At the top of the market in 2008, what people were willing to pay was one thing. However, it was not necessarily what the value or intrinsic worth of the properties was based upon fundamental supply and demand. This included population growth, buying power for shopping centers, and job growth for offices. This is a different kind of evaluation, and this is an important distinction and something they need to work on with regulators, lenders, and stakeholders. This would be hard because you could have a willing buyer and seller come to a very unrealistic price for a lender.
Back in 2008 when we were at the top of the market, what we know now from hindsight was the buyer and seller agreed on a price that was not sustainable by fundamental factors taking place. There are a few things in play right now and designations for appraisers. There is an appraiser trainee, a licensed real property appraiser, and certified residential. There is a discussion about raising thresholds for these. Bruce does not understand how a licensed real estate property appraiser can accomplish an appraisal on a 1-4 unit for $1 million valuation that is not complicated. Bruce wondered what all this means. Lance said this is a gray area where that is significant.
Bruce asked if this is the valuation they are attempting to bump up. He said some want to have the de Minimis raised for the appraisal thresholds, which is $250,000. Leave out Fannie and Freddie, which are obviously very big players, and you would not have to get an appraisal on a property where the loan amount was less than $250,000. They want to raise this to $500,000, which would mean you would not need an appraisal at all. After everything they have been through in 2008, the last thing we probably want to do here is abandon sound underwriting practices again. Bruce asked if this was due to the releasing of CU collateral underwriting. Lance does not think so and said Fannie and Freddie require appraisals on all their things, no matter what the de Minimis is. This would only apply to other types of loans not sold to Fannie and Freddie.
Bruce asked how the collateral underwriting has affected the appraisal world. Fannie Mae released and started to put into use a product called collateral underwriter earlier in the year. What this does is used a very sophisticated computer system that scans all the data out of millions of residential appraisals. It looks for inconsistencies in the data and red flags where adjustments are not explained. It looks for other comparables in the area that were not used in an appraisal. It tries to identify inconsistencies in the appraisal report. The goal of that is to try to alert the lender that they should maybe ask a question or two about why it exists. It does not mean the appraisal is bad or there is a flaw. It just tries to identify areas where a lender might want to ask a couple questions. How it is getting used is different from the intent, but to the extent it asks appraisers to explain what they have done and support their analysis, that is not a bad thing. They want to make sure it is not abused.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Coachella Valley Real Estate Investors, Association, Coldwell Banker Town and Country, Elite Auctions, iMortgage, In a Day Development, Inland Valley Association of Realtors, IRA Services Trust Company, Jennifer Buys Houses, Keller Williams Corona, Keystone CPA, Las Brisas Escrow, LA SouthReia, Leivas Tax Wealth Management, New Western Acquisition, North California Real Estate Investors Association, North San Diego Real Estate Investors, Pilot Limousine, Orange County FIBI, Real Wealth Network, Realty411 Magazine, Rick and LeeAnne Rossiter, Southern California Chapter of the Appraisal Institute, Sonoca Corporation, Spinnaker Loans, Tri-Counties Association of Realtors, uDirect IRA Services, Westin South Coast Plaza, FIBI Pasadena, and Scott Whaley.
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