On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join Bruce Norris to discuss current industry regulation, head-scratching legislation, and the opportunities emerging for savvy real estate professionals. 100% of the proceeds support the Orange County Affiliate of Susan G. Komen for the Cure. This event would not be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops, Invest Club for Women and Iris Veneracion and Bobbie Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Real Wealth Networks, Frye Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.
Bruce is joined today by Sara W. Stephens. Sara is the 2011 President Elect of the Appraisal Institute. Fresh from testimony in front of Congress in July, Sara has been active at the Appraisal Institute in various capacities for 20 years. Sara graduated Magna Cum Laude from the University of Arkansas at Little Rock and has a Masters Degree from University of Arkansas at Fayetteville. She and her husband Richard own the oldest appraisal firm in Little Rock.
The Appraisal Institute is a professional association of more than 24,000 members. They provide the best and most comprehensive education, and their ethics and standards are a part of what has maintained them through the years. Their designations indicate quality and outstanding achievement on the part of those who have earned them. They are also a worldwide organization, located in about 60 countries in addition to the United States. They have members in China, Japan, Korea, Germany, and they are continuing to grow internationally as well as in the States. With several different countries, it is interesting the way people approach the idea of market value. They’re still looking at willing sellers and willing buyers, but in a lot of the countries they’re looking into working with and have contacts and relations with it’s a very different concept and therefore challenging for them to understand the nuances of each of the markets that they’re in. There are a lot of different property rights, and in some of the countries the state owns the ground and the individual owns only the improvement. But at the same time, it is very exciting to be able to expand their scope and membership past the United States boundaries.
If Bruce were an appraiser, in the last five years he would be very happy that there was an organization with access to Congress to talk about his industry and see if they could get some things not going their way to get back to normal. The Appraisal Institute is a voice for all appraisers, and while they represent their designated members and the quality they bring to the appraisers’ profession, their efforts are really for all people who are doing valuation work. Their voice is strong, and they have the only Washington D.C. office as well as lobbyists there who are working every single solitary day for appraisers and for the efforts that they need to continue to make their service to the public a continued part of the financial picture of the United States. The first time Legislation passed something that really affected the appraisal world was the HVCC and the Dodd-Frank Legislation, both of which they are still feeling the effects. The Dodd-Frank Legislation, especially, was an enormous effort and is beginning to be implemented this year. All appraisers are certainly looking at the different processes and trying to not only understand them but also understand how they impact their practice and their relationship with their clients and with the regulatory scene that they are certainly involved with them. The one thing that HVCC did was to reduce value pressure, which was very important. A lot of business at the time was refinancing, and the appraiser was asked quite often to reach for a number or there was a chance they wouldn’t get the appraisal. This was very common in a lot of situations, and the one thing HVCC did was it put a firewall between the appraiser and the person who was continually reaching for a specific number. Unfortunately, some of the good things about HVCC were overshadowed by some of the things that have become a real problem for appraisers, especially for residential folks who are finding themselves working not in concert with a particular lender or client with whom they may have developed a long-standing relationship. However, now the appraisal management companies and their interaction with appraisers are certainly different from the client/appraiser relationship that many knew in years past.
One of the things we really have to clarify is that long-standing relationships in most cases are earned because of expertise, not because of compliance with a number. You have a lot of appraisers that really deserve their status of being the first choice, and then all of a sudden they can’t be first. One of the things that has happened that the Appraisal Institute has seen more and more is that appraisers who have skills, training, professional development, and spend a lot of time with education and have concentrated in trying to be the best are now looking at valuation assignments for a much smaller fee than they had before and are often being passed over. They are often passed over because someone will agree to perform an appraisal for a cheaper fee and a quicker turn-around time. It has almost been like a rush to the bottom in some instances where timing and fee are the overriding concerns rather than professional expertise and looking for a person who really has the qualities that are needed to perform a valuation that is noteworthy.
With the invention of automated valuation models, one of the things The Norris Group always stressed in teaching people to be investors is nothing is as easy as pushing a button to determine a value. A lot of people think it’s a lot easier than it sounds and they have a real grasp on what something is worth because they can get some kind of results from pushing a button and getting a Zillow estimate. This is not really going to provide you an accurate number a certain percentage of the time. People seem to forget that an AVM is really a mathematical model that is combined with the database. The big issue with most of the AVMs is that they rely on public information, some of which might be incomplete or inaccurate. What is missing from the automatic valuation model is the personal touch, the on-the-ground person taking a look at the condition, the amenities, and all the features that contribute to value. This is where a trained professional appraiser, such as an SRA designated or an MIA designated appraiser from the Appraisal Institute makes all the difference. The automated value ignores the idea that all properties are not created equally and have the same size structure that makes it the same size lot, but that is where the differences begin. It is a quicker and better look at what you have rather than just size and a data sale.
In a recent example in Palm Springs, The Norris Group bought a custom home on a golf course, but there were definitely superior lot locations that they did not have. There was a comp for the same house, basically the same size and builder that was over $1 million and The Norris Group had their home for sale for $799,000 for 4 months before it went pending. One of the people that shouldn’t have been given the appraisal was given the appraisal assignment and came in at $1.2 million. They really did The Norris Group a favor because the buyer was thrilled to get a property that was $400 grand below what it was worth. However, it was not worth $1.2 million, and he did not have local expertise; he just had a comp he thought was a model match. The Appraisal Institute is seeing a lot of instances where the issue of geographic confidence is huge and with a lot of the instances with the rush-to the cheap and the fast, they are finding that appraisers are driving 400-500 miles to look at a market that they have no connection with whatsoever. They simply capture a comp, and that is it. Everybody will probably agree that there is no substitute for the competency that one has in a geographic area with which they are very familiar and with which the data is there for them to make the effort and the time to verify the data with a buyer, seller, or both. In this they will try to understand what happened in their transaction. You don’t get this when somebody is driving in 400-500 miles, takes a quick picture or two, picks up a comp or two, and then drives back to finish up the assignment. It is also hard for the person who is used to making a certain living to have part of their fee taken.
Most appraisal management companies are owned by large groups of people. Some of the financial institutions actually have their own appraisal management company, and the biggest problem with the appraisal management companies for their real estate appraisers is that they are asking their people to take a part of the fee, and then they’re taking a part of the fee themselves. The Appraisal Institute recently did some sampling on the idea of reasonable and customary fees, and this is one of the issues that the Dodd-Frank bill has presented. When a person acquires a loan, portfolio, or piece of property to be appraised, then they go to an appraiser and ask about doing an appraisal. However, one of the big problems and issues is that the appraiser is often forced to take much less than what their normal fee would be, and then the appraisal management company tacks on their fee. There is really no way that a consumer at this point knows how much of the fee that they pay for the appraisal goes to the management company or to the appraiser. For a HUD-1 form, that fee is lumped up in one number. There may be some instances where some of the management companies are forthcoming with the amount of fee to the appraiser and the amount of fee to the management company, but by and large this is not happening. Many of their appraisers have been forced to leave the business because they cannot support a family or a business when they are working for 50% or less of what they have been working for. This is a huge concern, and they all have invested a lot of time and effort into becoming educated and acquiring, in terms of the appraisal institute, a designation in keeping themselves current and becoming as professional and having the expertise they need to go to the market and to help consumers make the decisions they need to make on the loans and the properties that they are trying to buy. People have decided in some instances that they cannot continue to do that and be paid 50% of what they are usually paid. A lot of consumers see this when they go to close; they see a large fee for an appraisal, and they don’t really understand that part of that fee goes to the management company.
In Sara’s testimony, one of the things she said was that the appraisal institute would like to see just simply either a division of the fees or something to come forward through Congress that says the appraisal fee will be paid to the appraiser. Then the management company can pay or be paid the fee that they charged. There would be a different line item, and it would be more expensive for the consumer because this was what Dodd-Frank was supposed to take care of as opposed to HVCC. There was going to be fair compensation for appraisers that was customary before HVCC, but this did not happen. This is one of the things that she advocated for when she spoke to Congress. They must have a return-to and must compensate their people. There was not any doubt in Dodd-Frank that the Appraisal Institute was not looking to provide a reasonable and customary fee for their appraisers. Unfortunately, that fee was always considered the fee to the appraiser and not the fee to the management company and the appraiser. That was where there was a big difference.
In a market like California and in Riverside County, it was 80% REO sales at its worst. These were closings. You could not ignore these as comps, at least some of the time, because they were definitely going to set the bar. One of the things that investors have problems with is that appraisals now are not easy. You have a really fixed up house and you might have seven offers on the house, which to Bruce is stating market value, and then you have comps where 80% of them don’t have a kitchen. It takes a little work to figure out if your house that you had seven offers on is actually a valid sale. Without compensation, it would have a hard time to spend the time necessary to come up with the right number. This speaks even more to the fact that as time passes and we see more and more of a market that is up and down, having someone working with you and having a real estate appraisal performed by a competent, qualified person who is invested in education and put themselves in a position to keep up with the trends that are in the market, has geographic competency, will take the extra time to check the comps, and catch a comp that is missing something is absolutely going to be the most important thing that you could have as a buyer. As a lender, you know this is the most important decision to buy a home and own a property that most of us make. You should want the best and desire the very best person working for you and working on that. They would like to say that kind of person is a designated member of the Appraisal Institute who has the SRA or MAI designation or the SRPA. These letters really used to mean something, but from what Bruce has heard, when you own an appraisal management company, these are completely ignored.
The overriding feature for most of the people who are working for management companies is the fee and the timing. The idea is to get it done quickly and get it done cheap. For someone who is going to continue to be a professional, completing an assignment in a tiny turnaround time without the opportunity to extend that expertise to go look at the property, understand what is happening in the market, and view the comparables, it is not possible. A lot of people think appraisal management companies are necessary because they think they are a provision that the banks have to follow, but there are other ways to get around the idea of the firewall being built. It’s a misconception.
When Sara was in front of Congress, she definitely had the sense that they understood the subject matter and took the time to read her document. She was asked three questions, which were right in tune with what she had talked about to them. On the panel that spoke that day, there were sixteen people who were invited. It was such a large panel that they had to divide them into two parts. Sara really thought they were making an enormous effort to try to understand what is happening in the market and try to help the consumer not only to protect them, but to give them the opportunity to be dealt with as fairly and expeditiously as possible. There was an article just a couple days ago that talked about appraisals now coming in too low and that about 16% of transactions were falling out because the appraisal wasn’t coming up to the purchase price that was agreed upon between the buyer and seller. This is because one of the things happening now is a real misconception of what the role of the appraiser is. We are reporters of the market; we reflect what is happening in the market and we don’t set it. The assumption that a lot of buyers and sellers have is that an appraisal is somehow wrong if it doesn’t match the listing and the sale price. There is no reason to assume that the contract price is correct simply because it might be higher than the appraiser’s values. The Appraisal Institute is a disinterested third party, and we try to reflect what is in the market. The best reflection of that market is going to come from someone who has good training and good education. What they are asking Congress to do is to refrain from legislating the appraisal process and to take a look at exactly what these bills are mandating. This would be taking away their right to report the market, and this is what they are. It would take away their right to be a disinterested third party. What is really interesting about all this is Bruce buys and resells homes, so he can say it is definitely part of the market when he puts his up for sale. You cannot ignore the fact that it is going to compete with whatever you have and therefore is a valid part of the market.
Sara is a real optimist and is hopeful that there is some reasonable thought going into this process and that a reasonable decision will be made. There are people who are extremely interested in the consumer and in trying to make sure that the consumer is protected and that we have an opportunity to allow the services that protect our financial markets and to be the best that they can. Sara really got the impression from speaking in Congress that there is a possibility that a reasonable decision will be made. Bruce is very hopeful too because this would be a very big positive for the industry.
Sara Stephens will be on the panel for I Survived Real Estate 2011, taking place on October 14th. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, and Westin South Coast Plaza. Visit isurvived2011.com for more details.