Sara W. Stephens, President of the Appraisal Institute, Joins Bruce Norris on the Real Estate Radio Show #293

On Friday, October 19, the Norris Group proudly presents its fifth annual award-winning event I Survived Real Estate. An incredible line-up of industry experts joins Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude’s Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops, Invest Club for Women and Iris Veneracion and Bobi Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Frye Wiles, MVT Productions, and White House Catering. Learn more about the panel and how to attend at

Bruce Norris is joined this week by Sara Stephens. Sara is the president of the Appraisal Institute. The Appraisal Institute is a global membership association of professional real estate appraisers with nearly 23,000 members in nearly 60 countries throughout the world. Sara has been active in the Appraisal Institute’s chapter, regional, and national levels for over 20 years. She owns an appraisal business along with her husband Richard in Little Rock, Arkansas.

This year is really proving to be an interesting year, and Sara said she is looking forward to being present for the panel discussion at I Survived Real Estate, where they will discuss what is happening in the market. It is always challenging trying to figure out how to get the maximum value out of their time together. It is an unusual panel where they have the leaders of a lot of different industries putting their heads together seeing what is next and what they can do. Bruce asked regarding the breadth of the Appraisal Institute spanning 60 countries if the definition of market value is consistent throughout. Sara said the definition of market value with the willing buyer and willing seller concept is something that they find over and over again. As the profession matures, more members become part of the Appraisal Institute, and we have the opportunity to be a part of the global economy, we will probably see more instances where that acceptance is there.

Bruce wondered if he would miss out if he were an appraiser but not a member of the Appraisal Institute. Sara said part of the wonderful opportunity that the Appraisal Institute offers their members is the opportunity to reach for a higher level of understand, expertise, and involvement in what a professional, real property appraiser does. The Appraisal Institute certainly is proud of their designations, which sets one apart from the real estate appraiser who has not taken the time to take the education and make the effort to move themselves into a position where literally their known is the best of the best.

Bruce also wondered about advocacy. He said he knows there have been a lot of issues in the last few years that have been taken up by Washington, and he wondered how important it is for an appraiser to have a group like Sara’s active on their behalf. Sara said it is extremely important; and in today’s environment for real estate appraisals and professionals, having a group like the Appraisal Institute who steps out and speaks out for the profession is very important. Sara has had the opportunity to testify in front of Congress twice. The last time she testified, one of the things that she brought to the attention of the hearing that she had the opportunity to speak before was the idea that, first, the real estate profession is very regulated. The Appraisal Institute is probably the most regulated group involved with the real estate community. One of the things that is happening right now is they have the threat coming forward to be even more regulated than they are with the announcement and going forward of the Appraisal Foundation’s appraisal practices board. Every single solitary appraiser should understand that this particular threat is huge and is going to force the appraiser to become a little more than just someone who is going to have to go look something up in a book to write it down in an appraisal. From the standpoint of being out there for every professional and representing both the Appraisal Institute and the profession, they are trying and working very hard to make the profession as good as it can be.

Bruce studied to receive an appraisers license years ago in order to understand the process more completely. When he met an appraiser, he wanted to understand and see things through their eyes. It is a profession and is being minimalized with automated valuation models. Bruce said he really disagrees that you can just push a button and figure out what something is worth. Sara agreed and said one of the things about the automated valuation model is that it is absolutely dependent on data. However, there is nothing like someone who has local expertise, geographic competency, and has the ability to go and look at a piece of property and help not only the buyer and seller but also help the lender to make an important decision. Buying a home is probably the single most important financial decision that many people make. Having someone who is professional, understands the local market, has had the opportunity to compare and contrast the property they happen to be looking at with others on the market is extremely important not only for that particular transaction but also for our financial health in this country.

Bruce asked Sara if she was an appraiser who went to sleep in 2006 and woke up in 2012 if she would recognize her industry. She simply said probably not and that she would be pretty shocked. The constant here is that the role of real estate appraisers is still to provide an objective, unbiased opinion about the property value and to provide that assistance to people who own, manage, sell, or invest in real estate. The way that they have changed the way they do business is unbelievable. The regulation and the rules that they have to play with are very unbelievable.

With all the rule changes, Bruce wondered what the desired effects were that the people who made the rules were hoping to change and if it worked. Sara said the biggest thing the change tried to cut back was the firewall between the lender and the appraiser. Sara said she is assuming that in a lot of cases this has worked. We now have a new group of people called appraisal management companies who do a great deal of the lending assignments that are currently being offered to appraisers. One of the downsides of this is the local expertise, geographic competency, and the fact that an appraiser who understands a local market better than someone who is coming in from 2-300 miles seems to get overlooked. Expertise and professionalism has been replaced with quick and cheap, which is sad commentary on how our lending business has progressed.

Bruce gave a case where expertise was very important. They bought a home at a trustee sale to resell. They fixed it up and had it for sale for $760,000, and they sold it for $740,000. The appraisal came in at $1.2 million, which is a little unusual. The $1.2 million comp did in fact exist. It was across on the other side of the golf course, and if you did not know the area, you would not understand that the comp was not really a comparable property because of location and size of the lot. One thing it did do was it locked in the sale. However, that was an example where an expert really needed to be local. The winning bidder of the appraisal came in and just looked at the comps that seemed to be reasonable without specific knowledge. Sara said this is something they continue to hear over and over, and in terms of the idea of the local expertise verifying that sale with a buyer and seller talking about any unusual circumstances, actually going by and taking a look at the comparable and talking to both the realtors involved and people who had some knowledge of that sale may have made the difference in them having been used or not. A local appraiser would have known that and been able to use their local expertise to come to a better conclusion for that particular appraisal.

Bruce wondered about the designations that Sara talked about regarding people who go through the effort to become that expert. Bruce said it sounds like the selection process ignores that completely. Sara said this is true in many cases, but their designated members certainly bring to the table a higher level of expertise, experience, and education. Just by having that education they set themselves apart as someone who is eager to learn, understand, and excel. Certainly if you had to pick the appraiser to perform an appraisal on a property you owned, you would want the best. This is what a designated member of the Appraisal Institute brings to the process. Bruce wondered if this was something he could request, to which Sara said in most instances would not be the case. However, it never hurts to ask.

Bruce wondered how the selection process is done if, for example, Bruce was a buyer and purchased a property. He wondered how the appraiser is selected, whether it is a bidding process that he will do it for less and more quickly. Sara said this would be true if it was the general vehicle used, but everybody has their differences and different ways to work. Most of the time an appraiser is asked for a bid as well as a monetary bid in addition. In most cases, the person who offers the smallest cash for the appraisal and the quickest turnaround time is chosen. That may not be true in all cases, but that seems to be the norm rather than the exception. Bruce said he did not really realize that this was true and wondered what has happened to the pay of appraisers. Sara said a lot of appraisers have found themselves making quite a bit less money than they did before. There are some who have worked with AMCs and are offering full fees. One of the issues that we continue to try to deal with is the customary and reasonable fee clause in Dodd-Frank. Customary and reasonable certainly does not include the fee that the AMC garners for the work. The Appraisal Institute has asked that on the HUD closing form the fee for an appraisal management company and the fee that the appraiser actually receives will be separated so that consumers will actually understand that if they are paying a certain number of dollars for an appraisal, all that is not going to the appraiser. Part of it goes to the AMC for the work they do.

Sara said they have had a lot of people who simply cannot feed their family and meet their obligations anymore in the real estate appraisal world. One of the reasons is because the fees have been pushed down by this quick and cheap mindset in many cases. People just had to find another way to make a living. The end result of all this effort is really not to end up with a better qualified appraisal, but rather cheaper and quicker ones.

In years like 2003-2006, we had prices escalating very quickly in California. Bruce wondered how an appraiser using a 3-month old comp comes to a correct evaluation when prices were going up 3% a month. A 3-month old comp would literally have been wrong by about 10%. Bruce wondered if there was a mechanism at that time to allow additions to it and if that is still possible today. Sara said the adjustment for market conditions that were prevalent prior to our latest financial crisis were always extracted from the market. In today’s market, in a lot of cases there are markets that have begun to pick up, and that kind of market condition extraction is realistically something that can be done. There is a lot of pushback for it because of the weariness accompanying some of the things that happened prior. The pushback might come from lenders in many instances, and sometimes appraisers are asked for multiple comps and more information after the assignment is turned in. There has to be a lot more scrutiny to justify what can or cannot be done. Many times it is understood in some markets that if the market conditions adjustment is made, many times the appraisers are told that it is not possible for the market to be appreciating. Having someone with local expertise who can actually set out the market conditions adjustment is extremely important. It goes right back to the competency and the professionalism of the local appraiser.

Bruce said one of the concepts and one of the reasons why he received a license as an appraiser was to understand the concepts. One of the concepts is the concept of substitution. Right now in California there is less than 1 months’ supply of inventory in a lot of areas of Riverside. If there was a property for sale for $400,000, they have 25 offers in one day, and they sell it for asking price, but the comps have not caught up with the market, then the appraisal might come in $25,000 less. This is exactly what is happening in Riverside right now. The sellers are saying they are really not going to worry about it right now, but rather sell it at the price they agreed on. Buyers are now coming in with the extra cash and closing it at the price. What is happening is you have an appraiser whose hands are tied saying he is buying what they are saying but can’t prove it. Once the comp shows up, then the proof exists. Sara said this is one of the downsides of what they do. They are looking at point-in-time valuation, and Bruce is exactly right. This is where they get caught and where a lot of appraisers are having some real issues with that kind of methodology.

Bruce wondered if the methodology needs to change since this is a bigger picture question. One of the things Bruce was thinking of that happens during a downturn and during a boom is an appraisal is always going to look at past decisions as if that was a reasonable decision. This begs the question if we need the opportunity to take a look at some new techniques and new ideas in terms of evaluation. This is exactly why the practices board and the extra regulation the extra layer could bring to us is so dangerous. Bruce said what is interesting about the downturn back in 2008 was he would have a property and everything in the MLS was lender-owned, vacant, and messed up. Someone like him would go fix it up and get a lot of offers on it, but the comps could literally be at 40% short of his resell price. None of them had a kitchen, and there was not any evidence that the buyer was making a rational decision. That was a very tough environment for appraisers to come up with a right number.

Bruce wondered Little Rock had the clout of foreclosures that California had or if it was much milder. Sara said it was a much milder environment there. They certainly did not see the enormous number that California had. Their economy was a little different, and they are still not seeing the big hit. Their markets have slowed, and prices have adjusted with the market. However, they did not experience the same thing as California. No one in California liked it one bit.

There are some large buying companies coming into California and buying up everything in sight. For the first time you have large companies buying properties they are very often not even seeing. They are writing a check for the properties at about 105% of the value. There is a concept of undue stimulus in a marketplace, so Bruce wondered how an appraiser looks at what is going on and if there is an adjustment that is even possible to tell someone to be cautious since it is an unusual circumstance. Sara said first of all, the appraiser has to know and understand what is going on. This goes right back to the professional, local person with the expertise and understanding of that market to ferret out as much of the information as they can and see how it plays into what is going on in the market. Having a buyer who is not even looking at the sales tells her they are depending on someone to give them the information, so we can only hope that the person is someone who has the competency to understand how that whole entire transaction plays into the market. The information the seller or buyer has is incredible.

Bruce and Sara had also talked off air about the lot situation in Little Rock where developers had developed lots that someone had bought at $500. You have had groups coming in buying them now for $10 and $15,000, and it is the same type of buyer. If you are appraising a lot in Little Rock, you have three $15,000 comps that everyone else had bought for $500. Bruce wondered then what the appraisal would be. Sara said this is a situation where the appraiser will get on the phone and start making the calls to verify the sales and understand the motivation. This is what people do not understand. You can push a button now and receive an appraisal price, but you cannot understand why that number is popping up. You can lose a lot of money if you are a buyer who relies on this.

Sara Stephens can be heard again on the panel for I Survived Real Estate 2012, which will take place Friday, October 19.

The Norris Group would like to thank its Gold Sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Elite Auctions, FIBI, Inland Empire Investors Forum, Inland Valley Association of Realtors, Investor Experts Incorporated, Keller Williams of Corona, Keystone CPA, Las Brisas Escrow, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Personal Real Estate Magazine, Realty 411 Magazine, Rick and LeAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Westin South Coast Plaza. See for more on the event and all of the I Survived Real Estate sponsors.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

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