On Friday, September 27, the Norris Group proudly presents its 12th annual award-winning black tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce and Aaron Norris to discuss perplexing industry trends, head-scratching legislation, massive tech disruption, and opportunities emerging for real estate professionals. All proceeds from the event benefit Make A Wish and St. Jude Children’s Research Hospital. This event is not possible without the generous help of the following platinum partners: the San Diego Creative Real Estate Investors Association, InvestClub, ThinkRealty, Coach Fullerton, PropertyRadar, the Apartment Owners Association, MVT Productions, and Realty411. Visit isurvivedrealestate.com for event information.
Bruce Norris is joined this week by Stephen Wagner. Steven is the 2019 President of the Appraisal Institute and has served in various roles within the National Who’s Your State Chapter. He teaches general qualifying education an advanced level appraisal courses and seminars for the Appraisal Institute. He is a graduate of Purdue University and has been a Chief Appraiser for a regional bank and currently is a senior appraiser in the appraisal firm in Indianapolis.
Bruce started by asking Steven if he would recognize the industry today if he were an appraiser in 2007, fell into a coma, and woke up today. He said you probably wouldn’t. There has been significant change in the regulatory areas as well as in technology, which has had an impact over the last 10 to 12 years. It definitely would be a different realm, no question.
Bruce asked what some of the things were that were implemented right after the real estate crash in 2009 that are still a part of the appraisal world. Steven said the regulations tightened up quite a bit with a focus on appraiser independence. Some of that certainly remains in terms of appraiser independence. In recent times here, the last year or so, we’ve seen some significant changes in the regulatory structure. A lot of Dodd-Frank was rolled back in terms of the financial industry. Today, the threshold levels for loan transactions that require appraisals has been raised significantly on the commercial real estate side. Last March took the threshold from a $250,000 loan transaction value up to half a million, doubling it. More recently, we’ve now seen where the agencies have taken the residential loan threshold from $250 to $400,000. In just the last month or two, we’ve seen where the NCUA, the National Credit Union Administration, made a move to go from a $250,000 loan transaction value all the way up to a million. It quadrupled that rate. Things are significantly different as far as when an appraisal is actually required. On the residential side, things are changing too in terms of what you see with Fannie Mae and Freddie Mac requirements.
Steven explained that an appraisal threshold is for the banking agencies. For a federally related transaction, if the loan amount is greater than $250,000, then an appraisal was required. Under $250,000, it could go with an evaluation. It’s significantly different now because those thresholds have been raised significantly on the residential side, $250 to $400. On the commercial real estate side, it went from $250 to $500. The commercial real estate side with the NCUA has gone from $250 to $1 million. If you have $1 million loan transaction value, then they’re required to have an appraisal. Anything below that, they would go with an evaluation. It’s similar for the $500,000 side with respect to the OCC, FDIC, and the Fed. Evaluations can essentially be done by just about anybody that has real estate knowledge. We’re definitely looking at a different stage here in terms of risk mitigation, safety and soundness, and consumer protection.
Bruce said it seems that picking a number and saying that it is a national policy doesn’t seem reasonable to him. If the median price in Florida is $250, a $400 level not needing appraisal would be a huge percentage of the transactions in California. With a median price of $600, it would be far less than half. Bruce asked why they attach it to a number as opposed to some other differentiation in a state. In San Francisco, where the median price is $2 million, you would be appraising everything. In a place like Texas, you might be appraising nothing.
In general, they will require something, whether it’s an evaluation or an appraisal, depending upon the risk profile of the property and other factors like credit concerns. He’s heard various justifications, one being that they looked at it from an inflationary perspective because the threshold levels have been in place since the early 90s. They’ve used inflation as being a justification. There are a large percentage of transactions potentially that don’t really have an appraisal, which at the end of the day is certainly the gold standard in real property valuation.
There are other things that they’re using these days, including AVMs (automated valuation models). An evaluation is not an appraisal. In terms of consumer protection, particularly in the one-to-four family bracket residential-wise, it’s the gold standard. Certainly, many commercial properties are complex and require due diligence in terms of analysis by a valuation professional. Some of the rural areas or lower density markets have significantly lower loan transaction values, but potentially the risks are big there too. A lot of smaller loans adds up to a bigger problem too. If you don’t have adequate risk mitigation in place, it’s a question of safety and soundness.
One of the things about an appraisal is you usually show up to the property and actually visually see what it is you’re looking at. Bruce asked if a lot of the alternatives are not really doing that. Part of an appraiser’s job is to visually see the property, hopefully the inside. When you’re doing another method, you may not have to even do that. That’s part of the reason that we we always say that the appraisal is the gold standard. There may be some instances where actually seeing the property is of less import. There is nothing that says that an appraiser has to inspect a property. For example, you might be monitoring a portfolio on a quarterly basis. Unless there’s some substantial change in the markets and or the condition of the property, seeing it again might not be necessary, certainly on a first look basis, purchase transaction basis or a new loan basis. In general, seeing the property and understanding some of the nuances that have an impact on value relative to condition, functional concerns, and size is an awful lot better to have an appraiser’s eyeballs on the property. No question.
Bruce gave a real-life example of the necessity of seeing something. He has been in the house buying business for a long time, and he received a phone call and discussed the numbers with the gentleman. He could even see a picture of the property on the computer and got to look at the numbers. It was great. They came to an agreement over the phone, and he was in another state. Bruce went to see the property, which he intended to close a day after, and the property was no longer there. The city had demolished it. In certain segments, particularly when you have a home equity loan, just having an appraiser out on-site may be very helpful. They found properties that were literally burned down and not there anymore. If nothing else, verification that the property is still there and largely the way it was perceived to be is critical. This was a difficult phone call to give.
Bruce asked if appraisal management companies are still with us and what their impact has been on the industry. Steven said appraisal management companies are more prolific today than they were in 2007, and there are a significant number of them. In many ways, they came about with the notion of providing an extra layer, or firewall, for appraiser independence. You could go through an AMC, which took care of choosing the appraiser and possibly some of the review processes as well. Different phases of the overall appraisal process could be taken care of by the appraisal management company. In some ways, some appraisal management companies wind up being a middleman, which is probably not helpful. But, there are some good AMCs which can be helpful in that regard, particularly for smaller lending institutions that don’t have the availability of resources to have an in-house appraisal staff.
In some ways, there has been a middleman problem where appraisal fees are mixed around and what was actually showing up on closing statements as being appraisal fees were actually fees to an entire management company fee. The appraisers were only getting a fraction of this, so the impression is that appraisals are much more expensive than they actually are in some cases. There’s also the problem with AMCs in a lot of cases has been speed and price being the primary determinants of who gets an appraisal. Speed and price is not always the best way to go about choosing an appraisal or appraiser. You can have it fast and cheap, but that begs the questions of whether you are going to have it fast, cheap, and good quality. Sometimes appraisal management companies have been pretty helpful, but in some instances, it has not been the best situation.
Bruce found this sad. He has been in the industry for a long time and has done fifteen hundred transactions where they will need an appraisal for a private loan. They predominantly have relied on one appraiser for a great majority of that time. The reason they used him is he was an expert. He was familiar with rehabs, and he was familiar with the areas, and he didn’t have any agenda but to tell the truth, which Bruce wanted. He told Bruce in a letter one time that after having done 14,000 appraisals, The Norris Group was the only company who did not direct him to value. He thought this was a sad statement. Bruce said if he had to use an appraisal management company, he would not be able to direct himself to the best talent. He would have to get directed by other methodologies. Stephen said his comment about not being directed to a number is disconcerting. Appraisers provide independent, impartial, and objective opinions of value. That is the way it’s supposed to be. For a long time, there were abuses in that regard.
In the lending industry, it is required that the lending institution, who is the client, order the appraisal or have some agent thereof order the appraisal. If you’re talking about a private situation where you just want to know a value for your own edification in terms of making a buying decision, you can have direct contact with an expert. However, because of appraiser independence regulations, a borrower can’t go out, get an appraisal, take it to a bank, and say they need to get a loan. That mitigates the appraiser independence notion. If you’re interested in financing property yourself and you want to get an appraisal done on a private situation like that, you can make that kind of contact. Appraisers are a great resource in that regard as they are the experts in their particular markets. For any federally regulated lender, you cannot actually engage an appraisal and then take it into that federally regulated lender.
Bruce asked if the management companies are able to direct an appraiser to the best talent if it’s their choosing or if it is a random selection that they have to make. Stephen said the answer is no since that would be what’s known as a borrower directed appraisal or borrower direction as far as obtaining an appraiser. What you can ask for as a borrower is to make sure that the lender is using someone that is qualified, and you could ask for an Appraisal Institute designated member to be the appraiser, but that that that’s about it as far as any of that kind of request is concerned. Otherwise, it impinges on appraiser independence.
There are broker-price opinions, evaluations, and other terms that are used. Bruce asked what percentage of those are used in lieu of appraisals and where they are actually allowed in place of an appraisal. Stephen said as far as lending institutions are concerned, under the threshold levels they can go with an evaluation and can do it for renewals of loans, sometimes regardless of the of the loan amount. They can use evaluations, although typically they are not able to use the BPO since it is not an actual evaluation according to the regulators. However, there is a substantial ratio of evaluations that are used greater than appraisals. It’s a broad market, and appraisers can do evaluations. Some states are actually moving toward saying that an appraiser doesn’t actually have to do an evaluation consistent with use path and are exempted from it.
There is a substantial market out there for evaluations, and making it easier for appraisers to provide evaluations does a good thing on many levels, particularly because of the demand for them. Who best to provide value opinions other than appraisers? We are at a point where it is easier for appraisers to do evaluations and they can do them right now in the form of restricted appraisal reports. There is a way, but it’s not exactly a level playing field at the moment in terms of what appraisers have to do versus others.
Bruce next asked how the emergence of iBuyers has impacted the appraisal business. Stephen said it is not entirely clear yet, but it’s definitely going to have some impact. The iBuyers don’t use any kind of valuation from an appraiser. They typically use ADMs, and they may use other tools as well. Where there will be a big impact is a lot of these transactions where the iBuyer company buys the property, the seller is going to have to pay a fee, sometimes as high as seven to 10 percent, and then typically the iBuyer companies are paying between 80 and 100 percent of market value or their perception of it. There is certainly a cost associated with it, but it may be beneficial to that particular seller. Maybe before they can buy another house they have to sell one. They’re not stuck with some of the costs associated with not having your home sold, having to move, and put things in storage. It saves them the hassle. Clearly there is a cost associated with it.
In the residential sector, the Fannie Mae requirements are that if you used the PAP requirement, you have to report the sale and transfer history of the subject property up to three years back. For the GSEs, Fannie Freddie, you to report the sale and transfer history of the comparable sales that you’re using as an appraiser. If an iBuyer transaction happens at one hundred thousand, and 30 to 45 days later they sell the house for whatever it is a $120,000, if an appraiser will use that transaction as a comparable they will have to report that it sold previously. Hopefully, they can determine that it was an iBuyer transaction. That may account for why the sale price was so low compared to the current sale price some 45 days later. Appraisers are going to have to do their due diligence to find out how discounts actually are and you know what kind of fees were involved that impacted the price. It will have an impact on valuation one way or another in terms of the appraisal process.
Bruce respects appraisers and relies on them when he is in an area that he doesn’t know. He just built a house in Florida. Before he did it, he hired an appraiser and asked him to figure what the house would be worth on the lot. He felt comfortable with somebody’s independent decision telling him what the value was. He would rather have them tell him than somebody that had a vested interest in a number coming in at a certain amount. He has a lot of respect for the industry, and he thanked Stephen for taking on the role of an industry that’s kind of taken that quite a hit in the last few years with the assumption that we need to correct everything. A great percentage of the people do a great job know exactly what they’re doing.
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Coldwell Banker Town and Country, In A Day Development, Inland Valley Association of Realtors, Keystone CPA, Las Brisas Escrow, LA South REIA, Michael Ryan and Associates, NorcalREIA, NSDREI, Orange County Real Estate Investors, Pacific Premier Bank, Pasadena FIBI, Shenbaum Group, SJREI, Spinnaker Loans, South OC REIA, uDirect IRA Services, White House Catering, Wilson Investment Properties. See isurvivedrealestate.com for event information.