Bruce Norris is joined this week by Ken Wilson. Ken is the 213 president-elect of the Appraisal Institute. He was the organization’s vice president in 2012, which means he will serve as president in 2014 and as immediate past president in 2015. He also serves on the organization’s executive committee and on its policy-making board of directors. Ken has been involved in the appraisal industry for more than thirty years. He owns his own business in Dallas, and he has so many roles in the Appraisal Institute and similar organizations.
Ken has two designations after his name, MAI and SRA. Ken said the designations themselves actually do not have meaning behind them other than the fact that the MAI indicates you are a specialist in all types of real estate, more specifically commercial and industrial. The SRA designation signifies the fact that you are an expert in residential real estate. Bruce asked if the Appraisal Institute he belongs to has helped members get designations through some type of education process. Ken said it does. To become an appraiser in the business these days, you have to have a state license and/or certification. This sets the minimum requirements to get into the business and achieve a designation with the Appraisal Institute. You have to go above and beyond those minimum qualifications, take additional course work, additional subject requirements to be subject to ethics and standards. You also have to pass the extensive exam for the MAI designation.
Bruce asked how many members are in the Appraisal Institute at this point. Ken said they currently have 23,000 members in approximately 60 countries. Bruce asked if appraisal practices are similar in other countries. Ken said generally speaking they are, but there will be certain laws and regulations that will be incumbent upon certain countries, especially those with evolving economies. Here in the United States, appraisers are subject to a doctrine they have to follow called the Uniform Standards Professional Appraisal Practice. In other parts of the world, appraisers follow the International Evaluation Standards. While there are subtle differences, they are generally similar.
Ken had a recent annual meeting in July in Indianapolis, Indiana. Bruce asked about the mood of the industry there. Ken said the industry is upbeat, and there are some positive things going on. We are not in full recovery from the great recession, but there is definite improvement in the real estate world. Everybody seemed to be upbeat about that, and they had a very positive meeting.
Bruce asked what some of the challenges are the appraiser looks at as being the most important. Ken said generally speaking, everybody is looking for cheap and fast these days. Unfortunately, in all cases that is not how an appraisal is defined. You have lenders, primarily in the residential and commercial arena, who look to broker price opinions as well as AVMs and drive-by appraisals.
Bruce said as we come off of the Great Recession, which was pretty much due to large losses in real estate. All of a sudden, we have figured it is okay to short-circuit the appraisal process and just push a button. It is really not that easy. Unfortunately, people involved in the business have very short memories and don’t remember what the problems were or what caused them. As soon as you see some positives in the market, they seem to revert back to some old habits. When he first got into the business almost 30 years ago, the first things he was told was that values of real estate do not go down. He has witnessed this more than one time.
What is interesting is that he is based in Texas; and Bruce said if he looked at a price chart it has probably been among the least volatile areas over many decades. In a way, we have had the median price go from 600 to 250 and now back up to 400. You hear rumors that 90% of the comps are lender-owned properties without a kitchen, and in Texas you are appraising properties and the situation was less severe. When you are making policies for an organization, you really have to consider that all things are not equal in every part of the country. You compare California and Texas, and one reason they did not have the problems in Texas that other areas of the country did is they did not have the runaway appreciation that other markets had. Texas has always been slow and steady in terms of price appreciation. When they have had blips in the market, the downturn hasn’t been quite as severe either. What Bruce is suggesting from different parts of the country is that it is not a one size fits all type of mandate.
Bruce sat next to a guy at an auction, and it was apparent he had done what he considered complete research. He had a Google Earth picture, and he had pushed the button and gotten an evaluation by printing out the median price of the area. He felt he was fully armed, and he never had seen the property. Bruce remembered thinking that the guy was about to bid on the property with his hard-earned money, and since he did not see it he did not know that it burnt down. This could definitely be construed as being short-sighted, especially when you are making a very important investment decision. You are relying on what might not be reliable information. With AVMs and such similar products, they are relying on public data sources and information, which is not necessarily always correct.
The city of Riverside did a fly-by in a helicopter and took pictures of the square footage of homes. If something had been added that had not been done with permits, they actually added the square footage in the tax records so they could charge the extra square footage. However, if you buy a house at an auction, when you go there and measure it correctly you may have an illegal addition you have to take down. They were in the position where they were relying on the information, yet they had to take out about 1/4th of the home because it was illegally added.
There is nothing that can replace somebody’s experience and actually physically inspecting a property on sight. Appraisers are not professional inspectors, and they do not go to the same level of detail that a home inspector would. However, they have a good general knowledge of what construction characteristics are. It is irreplaceable to not have someone visit the property. There could even have been a legal addition, but the people did not know what the components were. Without having a professional go out and give a good description of the property. Otherwise, you do not know what you are getting. This is why at the Appraisal Institute they date their appraisals and inspect the properties. This way you have a basis of knowing what is there and when it is there.
Bruce asked what percentage of the time a review appraisal is done on an original appraisal. He wondered what percentage of the time a market looks at it through another set of eyes. Ken said it is hard to peg because it is going to depend on who the lenders or investors are. With what is going on right now and the ordering of appraisals through AMCs, they are only required to look at a certain percentage from that standpoint of doing an actual review. From that consideration, the quality of work may not be there without having that extra set of eyes taking a look at it and determining that the process was performed accurately. Bruce also asked if these review appraisals are done from a desk and not in the field. Ken said it really depends on who and what is involved. From his personal standpoint, he is in the commercial industry and a good portion of his work is actually doing review appraisal work. It comes down to what the scope of the appraisal review process is. Most times it is going to be a desk job. You are looking at what the appraisal in front of you is and what the content is and not independently verifying details of it such as the veracity of the sales of any additional sales. Depending on what the intended use is, you quite well could be asked to go look at the property as well as the secure your own data.
Years ago, Bruce said we never had an appraisal management company. Bruce wondered when they came about and what purpose were they originated. Ken said it is a relatively recent phenomena, and it goes back to what the crisis was beginning in 2006-2008. It was a way to create a firewall between the lending and underwriting part of the transaction as wells as the credit part. In many cases you had loan officers and loan brokers ordering appraisals and putting them in the file. This was a way to separate that due diligence. This was basically the advent of the AMC. Like any part of the real estate industry or any other industry, you have your good, mediocre, and not so good. Some AMCs are actually owned by lenders. Bruce wondered if this was healthy, to which Ken said as long as you still have that true separation from the credit side and underwriting side, it is probably not bad.
One of the fallouts from it, which the public does not understand, when they get their closing statement and all their documentation on a real estate transaction, there is one line item that says what the appraisal fee is. Unfortunately, that is an all-inclusive fee because it is the appraisal fee as well as the fee that is paid to the appraisal management company. The appraiser could be getting $200-$300 of this $500-$800 transaction fee. The public thinks they are getting the entire fee, then they take a look at the appraisal and say they paid a certain amount for it and think they are being short-changed. There is a lot of confusion in the marketplace because of this.
Bruce asked what the effect from this is on the industry. They are still being required to do the same work, and Bruce does not think the fees were generally raised since we are involved in transactions all the time. It seems like the appraisal fee is generally a similar number. However, he has no way of knowing if only half of it is going to the appraiser. If this is true, it does not take them any less to do the appraisal. If anything, there has probably been downward pressure on the actual appraisal fee since the appraisal management company is taking a significant portion of that for their management and operation. As an appraisal management company, they have to register with the states. It is similar to what an appraiser has to do, although the key difference is it is a registration rather than a licensor. They have these expenses, and they are trying to turn a profit and run a business. There is pressure on the appraiser to accept the assignment at a lesser than normal fee. With that, it is also who can do it the quickest and who can do it the cheapest. This definitely impacts the quality of the appraisal.
You have to go back to the original intention, which was we were supposed to end up with better appraisals. However, it sounds like we have ended up with cheapest and fastest, but not necessarily. We have not even made an effort to make sure that we are dealing with the expert in an area. It goes back to the old saying, “Be careful what you wish for.” The intent was probably good, but the actual product you are getting in the end is not quite as good. Unfortunately, the appraisal process is the most heavily regulated part of the transaction, and it is working to the detriment of the process.
Bruce asked what percentage of the time the appraiser feels pressure from someone in the transaction to reach a certain value. Ken said this is a hard question to answer. You do have some anecdotal evidence, but overall we are not hearing a lot of complaints about this. More than anything else, what they are hearing is pressure to include certain data or a certain number of data in there that may or may not be appropriate for the assignment. What it really comes back to is the appraisers being paid less. However, in a lot of instances they are being asked to do more. Three comps turned into six comps, and these turned into twelve. Those six and twelve comps may not even be appropriate. If you get the quality-trained appraiser who really have the background and experience of knowing what they are doing, there is probably a good reason why that data was not being used. Unfortunately, on the Fannie Mae 10-04 there is only so much information you can put in, so what you have to do is document your file. It would be good for the appraiser to put in an addendum referencing some additional sales and saying they were not used for any particular reasons.
Bruce said what drives him a little crazy as investors is that they will have a property that has been on the market for twenty-four hours, have several offers, and it becomes a bidding war because there are only two properties available in this category. We then have a property that, by looking at comps, should sell for $300. However, because there is a lack of product it goes to $330. There are then 15 people who will pay the $330, so then the question is how an appraiser will approve this to a lender since at this point it is literally market value. Ken said it is a very difficult process, and he can understand why it is such a painful issue to an investor. This is where it comes down to the experience.
Bruce seems to know what the process is very well, and appraisers are typically in the rear view mirror and at the closed transactions. Ideally, it would be beneficial if they could get information on pending transactions. However, we all know brokers are very reluctant and hesitant to release that information. However, what an appraiser can do is due diligence and talk to active participants in the market. They need to do their incumbent due diligence and research and get that market information that the market is appreciating, then make your case in writing in the appraisal and try to sell it to the lender. Unfortunately, that situation is probably going to create some more post-appraisal work since lenders will be more reluctant to accept that information.
There is a concept of substitution that is literally going on in California. Somebody may argue with you asking for $330 when the comps are $300, then you try to substitute it for $300 and there is literally not one for sale. This is what is going on in the market that is now moving at 30% per year. Bruce wondered if it is more difficult to be an appraiser when prices drop 3% a month or increase 3% a month. They both make it difficult. Ken said they are just about the same because you are dealing with historical information. When properties continue to drop in price, you are dealing with that 30-90 day old sale. An appraisal is an opinion of value, so they can present such information, but it has to be logical and supported.
Bruce asked if there is a lot of consideration that there is a buyer looking out for their own best interests, which is part of the definition of market value. They have made a decision to pay more than what the comps show since there is nothing else. Bruce asked if there is any validity to this statement from multiple buyers on the same property. Ken said it really comes down to in that point in time that it would be construed as market price. Until you can get evidence of multiple sales, then this is really where the difficulty of the appraisal process comes into play. It is going to come upon the experienced appraiser exhibiting that good judgment.
Another area that is coming into play for the industry when a new builder builds has to do with green improvements. Bruce wondered how the Appraisal Institute is dealing with this and if this is going to change how the appraisals are done. Ken said it should change the way appraisals are done, and it is important for the appraiser to know what the components of the property encompass and if there are green features that are going to impact value. Then it is necessary for them to impart that wisdom. Unfortunately, due to the environment we are in right now, a good percentage of appraisers are not well-versed in what green features are within houses. This is one thing the Appraisal Institute is heavily involved in these days to promote green issues. We have residential green and energy-efficient addendum, which is an optional addendum to the Fannie Mae 10-04 that is the most prominent appraisal form out there in the marketplace. It is limited in content, so the green addendum is a good addition to promote the green features.
Bruce said when you do a residential appraisal, there are three ways that the forum asks an appraiser to look at it. You look at comps, the cost to reconstruct, and you look at the math of the income approach. Bruce asked if this is lending credibility to looking at a green feature where you are saying it costs more to build a home or to improve it. You have a cost difference and a savings long-term. Bruce wondered if there was a way to calibrate this in a value, and he asked Ken if this is what he is going to be asking an appraiser to do. Ken said it is important for an appraiser to use all applicable and appropriate methodology to value a property and know the market norm. For a newer property, a cost approach is going to be germaine to the appraisal process.
One of the things involving cost is that it is not necessarily equal value in terms of valuing residential properties, specifically single-family residences. The most prevalent way to value the property is through the sales comparison approach, comparing it to similar recent properties that have sold. Ideally it is the property next door that is virtually identical that was sold yesterday that gives you the best information. Once we build up a database of properties with these green features, we can see what impact they have on home values that will be easily readable from the sales comparison approach. One thing the Appraisal Institute is promoting these days through an income approach is measuring what the cost savings are because of these green features and applying a multiplier to it. This will improve value and is something the Appraisal Institute has been promoting. They just participated in a round table with HUD suggesting it as an appropriate methodology.
What is interesting is the consumer is going to have to buy into it also and buy the house for more. This is where it is going to come down to generating the sales where one builder has a property on Lot 1 with these green features, and another builder has a similar property next door without them. The question is if he can sell it for more and if the public will buy into it.
Ken will be in front of Congress a few times in the next year. Generally when people who are very knowledgeable in an industry get in front of Congress, Bruce wondered if they are listening and if they have the capacity to clearly understand. Ken said he thinks they do in general. The way he views the Appraisal Institute is it is number one to promote their members and number two to promote the public trust. Generally when one is speaking in front of Congress in such bodies, they are doing it for the benefit of the public and the public trust. They try to listen and understand the issues. However, they are just one of a plethora of issues that are before them at any point in time, so getting their attention is sometimes difficult. However, they do have a lobby group in Washington D.C. and a very capable staff. This year alone he had been to D.C. about ten times meeting with different Congressional leaders and their staff promoting issues that are important to the appraisal industry.
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