On Friday, September 28, the Norris Group proudly presents its 11th 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, 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, Inland Empire Real Estate Investment Club, ThinkRealty, Wilson Investment Properties, Coach Fullerton, First Lending Solutions, PropertyRadar, the Apartment Owners Association, MVT Productions, and Realty411. Visit www.isurvivedrealestate.com for event information, and see Amazon Prime or YouTube for past events.
Bruce Norris is joined this week by Jim Murrett. Jim has a MAI SRA designation, and he is from Hamburg, New York. He is the 2018 president of the Appraisal Institute. He will serve as immediate past president in 2019. He serves this year as chair of the organization’s Executive Committee and chairs its policy-setting board of directors. He has served on the Appraisal Institute’s National Board of Directors and Strategic Planning Committee, and he is chair of the Finance Committee. This is in addition to his many chapter roles, including president of the Upstate New York chapter. He has also been Treasurer and member of the board of directors of the International Center for Evaluation Certification, an affiliate of the Appraisal Institute. He received the 2014 Appraisal Institute Edward W. Adams, SRA, Outstanding Board Service Award. He also received the 2008 President Award, which is presented by the Upstate New York Chapter of the Appraisal Institute, for ongoing commitment, dedication, and service to the chapter and its profession.
Bruce asked how long the Appraisal Institute has been serving the appraisal members. Jim said through their predecessor organizations, the Appraisal Institute, formed as a conglomerate of the American Institute of Real Estate Appraisers and Society of Real Estate Appraisers, it has been in existence over 85 years. They have been serving the entire population of appraisers, not just Appraisal Institute members.
Bruce next asked Jim when he got into the appraisal industry himself. He said he is one of the older-timers. He came right out of college in 1975 and started in the banking industry as part of the appraisal department. He was with the appraisal departments within financial institutions for 35 years. During the last ten years, he worked for a fee appraisal shop as their executive managing director of compliance. He has been a lifelong appraiser.
Bruce asked if being a full-time appraiser is a decision harder to make today than it was back in the 70s. Jim thinks it is. He had a unique path in that he worked for a financial institution that supported the appraisal department. Today, to start as a manager trainee is difficult because of licensing and the different regulations. An awful lot who join the appraisal profession today don’t really know of it as their first option. They generally fall back into appraisal. Everyone wants to be the developer and investor, then all of a sudden they realize the appraisal gig isn’t that bad and can be quite rewarding.
Bruce asked what changes took place over the last ten years and if any are ready to be unwound. Jim said the current administration in Washington is looking for less regulation than more. What has happened is the pendulum did swing too far to the overregulated side of things. This is from the standpoint that an appraiser who is new to the industry was classified as a trainee and had to have a supervisor overlooking them. It became very time-consuming and costly for a supervisor to really track the minute by minute activities of their trainees. From a cost-effective standpoint, it just wasn’t there. What has to happen now is the pendulum has to swing back a little to really simplify the regulatory environment for an individual to get into the business. It really is a bit of a fine line to make sure we don’t lower the bar. However, we do not need to have roadblocks of overregulation on the state and Federal level that is really roadblocks into the industry.
Bruce asked about when his organization wants to voice an opinion who they voice it to and how it is accomplished. He wondered if it is in person or by letter. Jim said the Appraisal Institute is the only appraisal institution with a government relations office in Washington, D.C. As the regulators and congresses mully potential changes, they have their contacts within the regulatory industry. On top of that, they still have conversations within the appraisal sub-committee, which is put together by an act of Congress to oversee different areas of the appraisal industry. As such, they certainly have their voices heard both directly in Washington and through appearances at different trade association shows and annual meetings where they are asked to speak on a national level.
Bruce asked if the changes made in the last ten years have improved the quality of the final product. Jim said it depends on which side of the fence you stand. Jim thinks from the standpoint of the educational requirements needed in licensing and certification, there is a barometer to measure one’s education background. From that standpoint, there are positives. One of the interesting things is how you measure what is a good appraisal. Since their clients do not necessarily agree with the value, it does not mean it is a bad appraisal. There are different metrics out there that can talk about client satisfaction.
Appraisers today are definitely better prepared, and there is better technology that can assist the appraiser and not replace them. An appraiser who can use the tools in the box out there to put together a more complete product will produce a credible opinion of value. There are also things such as the continuing education requirements that the appraisers take it seriously. The Appraisal Institute is known for its body of knowledge and education. An individual appraiser who takes the education courses will be well-rounded and will take a more in-depth level of continued education courses.
Bruce asked about appraisal management companies, when they came into the picture, and what their effect on the industry has been. Jim said it has been quite a few years, although he is not sure of an exact date. As much as people want to criticize appraisal management companies, it is important to know there are some good ones out there. The original intent of appraisal management companies was to really separate the appraiser from the underwriting or loan officer function and eliminate the perceived pressure on appraisers to come up with a number. This was the original intent.
Unfortunately, what has occurred and has produced unintended consequences is that appraisal manager companies are really in place to find the fastest and cheapest appraiser who can get a job done. However, fast and cheap does not equal quality; you cannot have all three. If you really want it fast and cheap, you probably won’t get the best appraiser. If appraisal management companies could monitor for the quality of the appraiser they hire, this could be certainly a better process. Now that different lending institutions are not personally owning appraisal management companies as much as they were in the past. Certain companies will rise to the top, and they can actually be an asset if they really understand the residential process and that fast and cheap does not equal quality.
Bruce asked when an appraisal management company is required in the process. He wondered if it is required when you do a Fannie, Freddie, or FHA loan. Jim said there is no absolute requirement. Appraisal management companies in many states that are required to register so states can oversee them. However, there is not a requirement that the appraisal management company must be used. Many times a lender will use it for convenience because they don’t have to staff up individuals on their own payroll to do the ordering process. They can outsource it to a third-party appraisal management company. This is a lender decision, not a requirement.
Appraisal thresholds were a recent change in the commercial threshold. Jim said as of March 2018, the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve System passed their final approval to increase the commercial real estate threshold from $250,000 to $500,000. This is where a full-blown appraisal done by a certified appraiser is not required. There was an original proposal to increase the residential threshold from $250-$500,000. Jim said the applauded the agencies for increasing that as well as the owner-occupied commercial real estate threshold. This was at $1 million, and there were talks of raising this $1.5 or $2 million. This was not increased. They do not need a full-blown appraisal, but they do still need an evaluation, which must meet the minimum guidelines of the inter-agency banking regulations.
An evaluation, in many eyes, is not an appraisal but a number. There is a valuation put on the property, but it does not have to be done by a licensed or certified appraiser. It literally could be an employee of the financial institution, a broker, or a realtor. The criteria is anyone who has knowledge of real estate. It is a product that is a down and dirty analysis; and in reality, the requirement for an evaluation needs to allow for appraisers to perform them. Currently, there is concern in the appraisal industry that the uniform standards in the professional appraisal practice are more than what an evaluation calls for, so many appraisers are shut out of doing them when the client wants the product to be solely equal to what the evaluation requirements are.
When he mentioned the residential being in place at $250,000, Bruce mentioned the homes he was building in Florida that are all under $250. He wondered if he didn’t need an appraiser. Jim said in the residential space, the government-sponsored enterprises Fannie and Freddie, despite having the ability to waive the appraisals according to requirements, they choose on their own to still get appraisals for less than the $250,000 mark. This used to be the case prior to about a year to a year and a half ago when they had started implementing plans to waive appraisals in purchase and refinance loan transactions during the summer of 2017. Fannie and Freddie are starting to go back on their self-imposed idea that regardless of the Federal regulations, they do not need an appraisal and will get one anyway. Now they are backing off on this and instead relying on proprietary models and what is, in his mind, unreliable data from MLS services and public records for their collateral risk decision making purposes.
Bruce wondered if they were referring to AVMs. Jim said all of what he talked about are forms of an AVM (automated valuation model). AVMs can be cheaper and quicker than appraisals, and that is one of the arguments that Fannie and Freddie are making. In reality, the fact of the matter is there is a clear difference in quality, and we recognize the fact that lenders face a myriad of challenges. Fannie and Freddie own over $4.5 trillion in residential mortgages. You would think it would be worth a couple bucks to make sure the loan has a basis of value.
Originally, Fannie and Freddie had been doing waivers for a number of years, but it was on refinances. A refinance loan at least has a loan history and you had an original appraisal in the file to use as a benchmark to see whether the value went up or down. Now they are doing it on new purchases where there is no base document to make this risk decision.
Bruce asked if these AVM models are increasing in accuracy. No one physically goes out to the location in an AVM. Jim said accuracy is an interesting word to define. He likes to use the analogy that it really depends on the intended use. However, the question is accuracy in context to what? If you are doing an 80-85% loan to value and using an AVM as the product, that may be a risky transaction to justify based on the “accuracy” of the AVM. There is no real margin of error. If you are doing a 40 or 50% LTV on a refinance, an AVM is an acceptable product because your accuracy is needed to be much less. You can still have a number that can give the lender a comfort level as to whether or not the value is there. In these transactions, real estate is not the primary source of repayment. It is the credit worthiness of the borrower. In times of need, the real estate does potentially repay the loan.
The question is whether the accuracy is improving. The answer is it depends. There are some good AVMs out there, but no one is going to physically look at the property. An AVM is the statistical analysis of a multitude of properties. On the other hand, an active appraisal done by an appraiser is very specific to a particular property in terms of not only the content, but the location as well. Is there an attribute outside the property that is very close and can enhance value or detract from value? You could have a railroad track behind the house, and an AVM would not be able to pick that nuance up. There would be a tremendous value difference. A high tension power line in back of the property that causes buzzing all night long would be another example. You don’t know what you don’t know until you have the eyes and ears of the appraiser there who is looking at the property on behalf of their client.
Bruce next asked about review appraisers and how the process of a review appraiser differs from the original appraiser. Jim said he was a review appraiser for 30+ years, so it could be a little dangerous for him to answer this question. However, the review appraiser will look at the appraisal in the context of the intended use of the report. No one writes the perfect appraisal report, but you have to ask if the stated opinion of value is credible given the intended use. The review appraiser is there to make sure the assumptions are justifiable, supportable, and to make sure the math is correct, especially with commercial real estate when you have discounted cash flows and multiple regression analysis. In residential with the sales comparison approach, you want to make sure the grid is put together properly.
Jim’s philosophy is that he is not there to challenge the appraiser but to see if they did a good job of justifying their opinion of value. This is why the Appraisal Institute started a review designation a number of years ago. One was for the general world and another in the residential world. Review appraising is really a separate skillset and art than from actually doing appraisals. They recognize this in the Appraisal Institute and have quite a few people going for those designations. Bruce saw this on his website, and it makes sense. When you are in the industry, it seems the review appraisal is 99.9%; and if it changes, it will go down. The review appraisal takes precedent over the original appraisal. However, Jim said it really depends on what the agreement is with the client. The client may say if you disagree with the value to come up with your own opinion of it. This is a lot different from saying if you disagree with it to go back to the original appraisal and reconcile it. The original appraisal and appraiser is the official appraisal on record, and this is what most clients want to do.
Bruce ended by asking Jim his opinion of appraising green improvements. He said it is very important. Collaboration among all parties involved is important and information and data is key. You need to have appraisers working with builders and realtors so they can discuss exactly what those green pictures are and how they can affect a sale, hopefully in a positive manner. Collaboration is by far the most important aspect of it.
The Norris Group would like to thank its Gold Sponsors for supporting I Survived Real Estate: Guaranteed Rate and Nathan Chabolla, In A Day Development, Inland Valley Association of Realtors, Jason Thorman with Coldwell Banker, Jennifer Buys Houses, Keystone CPA, LA South REIA, Las Brisas Escrow, Lawyers Title, Michael Ryan & Associates, New Western, NorcalREIA, NSDREI, Orange County Real Estate Investors, the Outspoken Investor, Pacific Premier Bank, Pasadena FIBI, Pilot Limousine, SJREI, Spinnaker Loans, South OC REIA, Tri-Counties Association of Realtors, uDirect IRA Services, White House Catering. See www.isurvivedrealestate.com for event information.