Bruce Norris is joined this week by Ken Wilson. Ken is the 2014 president of the Appraisal Institute. He has helped many other offices in that organization and has been involved in the real estate appraisal profession for more than 35 years following a 12-year career with two national appraisal firms. He started his own valuation and consultant firm in Dallas named Wilson Realty Advisors.
Bruce asked what size membership the Appraisal Institute has and what service it provides its members. Ken said right now their membership is approximately 22,000, both domestic as well as international. They are also currently in about 60 countries on 6 continents. They basically hold the body of knowledge for real estate valuation and have a wealth of publications and coursework that is well respected and world-renowned. They provide their members and the general public interested in taking their courses with a wealth of knowledge on the valuation profession.
Bruce asked if there is consistency throughout the world on how properties are appraised. Ken said not really, even though there should be. In a lot of the world the valuation profession is just now evolving and coming into its own and maturing. As part of their membership drive, they also travel throughout the world. The Appraisal Institute cannot be all things to all people, so they realize they will not have members or designated members throughout the world. They only go where they are invited and when they are invited. Many times they visit with the governments of countries who are interested in their education as part of their efforts to serve the public trust. They traveled to Kuwait earlier this year to put on some education, and their valuation profession is just sending out a senior member of the Cabinet to look at a building and say how much it is worth. They would then put it on a piece of paper, and that’s it. Not a whole lot of effort or research goes into it. They are interested in evolving the profession and becoming more like the United States.
The Appraisal Industry goes to bat for an entire industry when there is a crisis like there was in 2008 and 2009. Bruce asked about the services they were involved in during the last few years and some of the things that may not have occurred in the appraisal world that might have if they had not been there. Ken said they have a staff of three plus some administrative support in Washington, D.C, who work very hard there on Capitol Hill lobbying both Congress and the Congressional aids for what is best for the valuation profession and public in general. They are constantly with the CFPB discussing homeowner and reporting issues. They are in the process of making some changes with things like the HUD manual. They are an advocate for appraisers for the public good.
Bruce said he has not heard the term appraisal management companies used before the recent history. This is probably not true as they have existed, but now they are a more dominant player. Bruce asked Ken what he thinks of them and what they have brought into the industry that is positive as well as some of the negatives being hashed out. Ken said appraisal management companies have been around for a while, although they have not been in the forefront. They were probably existent but called something different and performing that function. Just like every other industry, there is good and bad. Overall, appraisal management companies have taken negative hits on their reputation. Part of the problem is they get a fee to perform the function for a lender from start to finish, so therefore they are trying to maximize their profits. Unfortunately, in many instances they squeeze the appraiser on their fee. Appraisers are supposed to get reasonable and customary fees, but according to information they get from the market they are not. This is the bad rap, but the good thing is it separates the valuation portion of the transaction or equation from the underwriting and lending portions so you can essentially get that independence. There are reports out there that there are still pressures being applied to appraisers, so the presence of appraisal management companies have not totally eliminated that aspect of the transaction.
Bruce asked about the process of selecting an appraiser. Bruce asked if he were to randomly call up and say he wanted to refinance his home, how has the process changed from ten years ago to today on who ends up showing up at your doorstep. Ken said in terms of selecting the appraiser, the property-owner who is attempting to refinance or get their loan originated for the first time has to stay outside of the equation. The appraiser has to be selected by the lending institution and/or its appraisal management company representative. This is an attempt to eliminate pressure or coercion on the appraiser. Appraisal management companies as well as lenders who do not go through appraisal management companies have approved appraiser lists. They are typically based on qualifications and experience. Unfortunately, in most instances appraisers are being selected based on who can do it the quickest and cheapest.
It is a negative for the industry that you cannot say you can use one person who really understands this particular area and the best appraiser. However, if he is not the one who can do it fastest and cheapest then that appraiser does not get to show up. It is a rush to get the assignment done quickly and cheaply, and in many instances there is a flight from quality because you are not getting the most experienced appraiser or the one who is most knowledgeable on a particular market area. This is one of the unfortunate circumstances of the process these days. You cannot turn a blind eye to the fact that there is pressure. Bruce is in the business of buying and selling houses, so he understands that there definitely can be conversations that are attempted to be had with an appraiser that are not appropriate. In another case, there are appraisers who show up for the first time in their life to an area or county because it was the cheapest or they were promised it the fastest. They are not really serving a good function for anybody either.
Bruce asked if there is a balance that can be struck with not assuming everybody in the appraisal business is dishonest. Why would somebody not get the nod when it is appropriate? Ken said this is one thing the Appraisal Institute does lobby on the Hill. You cannot specify to hire someone based on their designation or lack thereof, but you can recommend it. To backtrack, when he said the homeowner cannot be involved in the selection process, for the most part that is true. The homeowner or borrower can suggest someone to have as your specific appraiser and to have someone with experience in your sub-division of the market area. Or it could be someone who holds a professional designation within a particular organization such as the Appraisal Institute. You do not want someone who is coming out for the first time to do their first assignment who only meets the minimum requirements of state certification.
At the Norris Group they train investors to buy properties. They think that appraising is quite easy and that you just push a button and there’s the number. When they go out into the field, the number they come up with the push of a button all of a sudden goes through the filter of reality that they only looked at comps and not what was for sale. They did not visually inspect lot situations, and there is a lot more to it than they think. The whole industry is under pressure from what seems to be a case where you can push a button and get the same results in ten minutes or ten seconds. This is something that is really not true. What you are suggesting at the push of a button would be along the lines of an ABM. They do play a certain role in the process, but it is highly dependent upon the information that is going in. Some of the inputs are not exactly accurate since the source of their information and data in many instances are public records. These are not always accurate.
Going back to what Bruce said about appraising being simple, it is the furthest thing from being simple. From a commercial standpoint, you are dealing with numbers, dollars, and cents. You are also dealing with facts and figures. The problem with residential is that you are dealing with individual emotions. Ken said he has never met a person whose home was inferior to the next person’s, so there is always that pressure. In many markets there is a lack of good data available, so that complicates the issue even further. At that point, it really comes down to an appraiser’s judgment based upon their experience and knowledge.
Bruce asked what kind of license is now required to do a residential appraisal. Ken said it will depend upon the individual state. We have what is called mandatory states and voluntary states. Even in the voluntary states where a license or certification is not required to appraise, it is required to be involved in a federally related transaction. This essentially means a federal bank making a loan and doing residential one to four family properties under those guidelines. You are required to hold a residential certification. To do anything over and above one to four residences, you have to hold a general certification.
There is a new designation that is very recent called review appraisal designation. This has actually been around for some time, but now it has become quite more fashionable and more important as a risk litigant. The new designation is actually two new designations by the Appraisal Institute and the first two new designations they have offered in twenty years. They are commonly known as AI-GRS and AI-RRS, the first one being a general review specialist and the second one being a residential review specialist. They are already licensed as appraisers, and now they have an additional designation on top of that. These designations were just rolled out at the first of this year. The qualifying education just became available late last year. Based upon that, for 2014 only currently designated members of the Appraisal Institute who either hold the MAI, SRA, or SRPA are eligible for the review designation.
Beginning next year, general appraisers who are not part of the Appraisal Institute will be eligible to achieve that designation once our additional education requirements are available. They had to have some additional coursework developed, and the commercial or general course was just rolled out in July and the residential course will be rolled out in October. Once individuals take these courses or go through the experience review and the other requirements, you will probably see non Appraisal Institute members being awarded the new designations. The new designation almost sounds like it is a senior position, or advanced designation. Using the term senior position would be problematic because while we were in the midst of discussions about creating these new designations and doing the research, there was a lot of concern amongst our membership saying the review designation would be superior to the MIA or SRA. They really aren’t, and you have to have many of the same qualities to review as you would to have to write an appraisal. These review designations signify you have an additional specialty.
This is not something that you get instead of your appraisal license. You are also required to have a license to become a member of the Appraisal Institute, take their courses, and go down the path to earn a designation. You have to be at minimum state certified. Bruce wondered what the practical affect is of having an original appraisal lowered by a review appraiser. Bruce asked about the effect on the original appraiser’s relationship for the next batch of business. Ken said it depends on the circumstances. A review appraiser will not necessarily lower or raise an opinion of value by an appraiser. It is more about checks and balances to make sure the appraisal makes sense. It will also come down to the scope of work involved for the review appraiser. It could be as simple as the review appraiser sits in his office at his desk, is provided a copy of the appraisal, and he is to determine based on the content of the appraisal if the value appears to be reasonable.
It could expand beyond that and the review appraiser could do a data check on the comparable information utilized in the appraisal. It could go even beyond this whereby the review appraiser does their own data search. It does not necessarily mean there will be a disagreement, and depending upon the circumstances and the relationship of the review appraiser and client, there could be communication pointing out errors or flaws. It would then be incumbent upon the appraiser to correct. If the relationship is not there, the review appraiser cannot talk to the performing appraiser, then they have to either accept or reject the value.
If someone in the chain really has a problem with the appraisal number, Bruce wondered what the process is to challenge an appraisal. Ken said it depends on the term “defining a problem with the appraisal.” Does it just mean you disagree with the value because you do not like it and it does not get the deal done? In that instance, you can still say there are flaws but it will probably not go far. However, if you can point out errors and omissions from the appraisal. This could mean wrong square footage or adjustments in the sales comparison approach went in the wrong direction where the comparable is inferior and should have been adjusted upward. Then you have the process where corrections can be made, but just the mere fact that somebody does not like the number is not a reason for somebody to make wholesale changes.
Bruce asked what USPAP stands for, to which Ken said it is the Uniform Standards of Professional Appraisal Practice. This is basically a doctrine that all appraisers within the United States that states how they have to perform their valuations in accordance with the guidelines and standards of this document.
There has been a lot of discussion in investment clubs regarding green improvements. Bruce asked what an appraiser does with these. There have been courses the Appraisal Institute created for this. Bruce said he could see when you are building a new home the valuation may be easier. In an existing structure, he would not see how you could do it if there was not a comparable value. Bruce asked how this is handled when somebody has really done a fair amount of expenditure on green improvements. Ken said right now it is a very difficult proposition since not a lot of appraisers are equipped to know what green features are and what to do with them. It is important for them to take education and understand what the green components and features are in properties and what they mean to value. The Appraisal Institute has a wealth of knowledge and information and many courses available. They came out with a new course book written by one of their members about green valuation. What it really comes down to is the fact of trying to understand what those features are in the data. This data is not always available, so there are other techniques you can measure to determine any potential impact on value. This is a residual technique through the income approach or cost approach. The actual identifiable cost savings on the energy features can then have features applied to them to come up with an adjustment.
Unfortunately, in the recent past not many people were willing to accept that. Lenders were hesitant to go in this direction, including FHA loans. Now, as part of the rewrite of their handbook they are willing to recognize and accept that methodology. Therefore, Ken said he thinks we will see some improvements in the valuation of green properties and having them valued to what the true value should be, not what somebody wants to see. Bruce thinks ultimately the customer is the one that raises their hand and says whether or not they will pay for something. In general, Bruce asked what the consumer is saying regarding new structures. Has there been a new study that says if this tract has no green features and the other does, is there a bonus for the solar feature that you can actually say exists? Ken said the market does make this determination. On newer properties where you have new homes developed in this sub-division with these features that are selling for a greater amount than a comparable property, the market is accepting those. There is a consciousness amongst the public that do want to see these features and participate. With this, we have to continue creating the data. This means having more transactions occur that show the benefits of having these green features.
Bruce said when you do an appraisal, the assumption by most people not in the business is that it is just a matter of comparable sales. There are other features that act as a check and balance. One of them is a cost approach, and the other is more like a cap rate or cash flow. The way the residential world is currently appraising is having to do with comps. In 2009, you had homes in Southern California that cost $300,000 to construct that would not appraise for $100 since this was a comp. The difficulty would be when we were rehabbing a property that did not have a kitchen and they would have 20 offers at $160 and 9 comps at $100, they were the only one that was fixed. The problem was the comp swayed the value to the lower number. People are looking for answers in the sense that there are multiple choices, but it seems like the one we always land on is the last sale.
In most instances, the sale comparables are the most appropriate to use. However, Bruce suggested with the rehab his property was superior to all of the other properties in the market that were selling at $100. In a situation like that, it is incumbent upon the appraiser to understand the data; and there is nothing wrong with them making adjustments to sales because of those improvements. You cannot get out of control whereby you are making 50-100% adjustments since this throws up red flags. In Dallas, for example, they had a downturn that was much milder, but the numbers actually occurred to where it was an interesting time where it was hard to get rewarded for improvements necessary to occupy the structure. You would have multiple offers, but you really had an appraiser in a tough spot since there was not that equally fixed house for a while. There were only houses without kitchens.
There is an interesting term called undue stimulus. Bruce thinks this is one of the biggest keys to understanding why valuations change. This can come in Fed policy by people giving someone an $8,000 tax credit. In the mood they had from 2004-2006 where they would loan anybody that is breathing money, as an appraiser you have to be aware of a lot of things other than comps. This goes for when you are thinking about if there is a stimulus for a four month old comp in this market that makes that makes that change one way or another. The appraiser has to understand the entire process, and this is why it is important to not just go to the cheapest and quickest appraiser. You have to hire somebody willing to put in the time and effort and understand the subject property, comparable data, and what is happening in the market. All of this takes time, and an appraiser has to be fairly compensated for their time.
Bruce asked about the mood of the appraiser at this point and if people are hanging in there and happy to have it as a career. Ken said the research indicates many appraisers are upbeat and see the improvement in the residential markets throughout the country. In many mortgage markets they see future increases in business, but with that being said the appraiser population has continued to decline over the past 5-19 years about 2.6% per year since it is an again profession and they are not attracting younger people to the business. People are retiring and going off to do other things and unfortunately passing away. Right now we are in a little bit of a decline, but we will probably see an increase in the foreseeable future.
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