Norris Bruce
Aug 19, 2016

Scott Robinson, President of the Appraisal Institute, Joins Bruce Norris on the Real Estate Radio Show #500

Scott Robinson

Bruce Norris is joined this week by Scott Robinson. Scott is the Appraisal Institute president and holds designations as MAI, SRA, and AIGRS in the appraisal world. He has been involved in appraising in North Carolina for most of his life and followed in the footsteps of his father who started the family business in 1960. He has been actively involved with the Appraisal Institute since joining as a candidate for the SRA designation in 1987. Including the 4-year term of the National Board of Directors and serving as chair Regional 5, he has served in all offices for the North Carolina chapter. He has been involved in the regional and national chapter since 1991. He served as national president elect and vice president of the executive committee and was chair of the National Finance Committee in 2014. Since 2014, he has served as vice-president for World Association Evaluation Organization and has been a trustee for the International Property Management Standards Coalition since 2014 and serves on the organization’s executive committee.

Episode Highlights

  • What duties does the president of the Appraisal Institute entail?
  • How wordlwide is access to information?
  • What educations is required to become an appraiser?
  • What are the different levels of certification, and what freedom does it give the appraiser?
  • When was it first required to have a license to be an appraiser?
  • Are there any areas of concern for the industry as a whole?

Episode Notes

Bruce asked what duties the president of the Appraisal Institute does as part of his tenure. He said the Appraisal Institute is an 84-year old organization that has thousands of members around the world. They are currently serving members in 60 countries and on 6 continents. Part of what he does involves traveling to places where members are practicing and other organizations are offering opportunities for diplomatic relationships and educational offerings.

Bruce asked if his duties have put him in front of Congress this year. He said not this year, although he has testified to several congressional committees relative to the fiduciary rules. Bruce asked if the appraisal process is similar worldwide. Scott said the basic similarity is there needs to be in most economies a third-party, unbiased opinion of value relative to real estate. In many countries, real estate represents a huge part of the economic base. The role of the real estate valuer is similar in the aspect where there is a need for that unbiased, third-party opinion of value for numerous reasons throughout the world.

Methodologies vary where something as simple and linear as some of methodologies in China where land is given the base tone, governmental tabular information to other parts of the world that more closely mimic our free-market based supply and demand price-driven markets. It varies between those two wildly throughout the world. The fundamental underlying need for unbiased, third-party opinion is that they are everywhere.

Bruce asked how access to information is worldwide and if it is varies a lot. Scott said it varies widely, even in the U.S. Your valuation can only be as good as the weakest data you have in the reports you are considering. To that end, the worldwide data is difficult to obtain and makes good, solid valuations difficult to produce. In the U.S, there are a number of states that still do not require disclosure of public records. Even in the U.S. it varies widely from abundant data readily available to that which someone will have to spend more time seeking out personal sources.

Bruce asked what education is required to become an appraiser in 2016. Scott said it is pretty substantial. The evaluation profession has evolved into a profession where aptitudes and knowledge and critical for the public’s trust to be maintained. The ultimate goal is to produce products that maintain the public’s trust in the evaluation and profession. Over time, educational requirements have crept up. For example, the college degree requirement as well as hundreds of hours of additional education specific to the evaluation profession that has been added over time creates the current situation where we have a fairly rigorous educational requirement. Organizations like the Appraisal Institute take it even a few steps farther than that.

Bruce asked when it was first required to have a license to become an appraiser. Scott said the license was a beginning entry-level certificate in the profession. Over time the license has been required more in favor of the certification. They require higher-level education and more time to actually doing the work. The license has been sunset gradually over time in favor of the certification. Bruce asked about the different levels of the certification, like an MAI or an SRA. Bruce asked what freedom this gives to the appraiser. Scott said entry into a profession requires some certificate. This was established in 1991 so that the state regulatory authorities had the ability to license and certify appraisers for entry into the profession.

Step 1 is getting the requisite amount of hours and education to get entry into the profession. Things evaluation professional organizations, such as the Appraisal Institute, pick up are to carry people from that point to as far out into the level of expertise as they want to go. If they want to diversify into more sophisticated work or do intimate or more complicated work, then the role of someone like the Appraisal Institute comes in here to carry them forward. They can also offer that entry-level education to carry them through the certification process. While the states and other educational offering entities have the ability to carry people into the profession, the Appraisal Institute does as well. It is up to the organization to then provide a conduit for some professional development beyond that entry-level into the profession.

Bruce asked if there are any areas of concern for the industry as a whole, such as major decisions that could change the industry. Scott said yes and that they are inundated right now. At their annual meeting, their theme was navigating valuations. There are a lot of obstacles for this out there right now, one of which is a decline in the number of valuers. That in itself may not sound like an issue, but it is when the markets do not have the available resources to get the answers to the questions they need in order to go elsewhere.

The last thing the evaluation profession wants is to find themselves in a position where the market demand is much higher than the supply of professionals who can give those answers. As they have seen in the past, the markets can gravitate towards an automated evaluation model or a lesser product than an appraisal. They believe this is not only bad for the profession, but it is also better for the consumer. The consumer will not have that reliable, unbiased third-party product out there that provides the protection they need to get the right answer. This is a major issue, and it is really difficult to pin down the cause. They have a number of things such as aging of the profession as well as a number of people in the country who are predominately beyond 55. This sets them up for a demographic that, within a certain period of time, begins to sunset out of the career.

They do not have a requisite number of people coming out of the bottom yet, whether coming out of college or considering it while they are in college. One of the things they are seeing that is a real issue and obstacle #2 is helping with issues that are keeping people away in order to become better at the profession and tell a story about the career you can have. They are probably the most over-regulated professional industry out there. They are regulated at the federal and state level, and the states and territories are 54 different entities doing things differently across the county. We have the banking industry, which takes the federal and state regulations and layers things on top. You also have the inundation of automated valuation models and appraisal management companies. All of a sudden, the appraisers called in and threw out this whirlwind of providing more service in less time and lower compensation levels. They would not have passed these before because the market is demanding things in real time and perceiving they can layer onto them.

Right now the markets can dictate someone’s work product, and this is the biggest problem. Work product quality has diminished in some areas because of the commoditization of the industry. This includes price and time. What they are seeing is a lot of those professionals who want to do a good job are finding it difficult to do that and leading the profession. This goes back to the fundamental issue of replacement of the diminishing back end.

One thing valuers have to embrace is technology since it gets exponentially better by the day. They need to be able to understand and use it to their benefit to create a better product. In fact, the goal of all the regulation was to end up with a better, safer, and more accurate appraisal. Bruce asked if any of this had been accomplished. Scott said this was the goal, and he thinks that unfortunately the good intention has not been realized. One of the things that happened is the unintended consequences of some of these regulations is that it forced people more able to provide a better work product out of the industry. This is because of the red tape involved with some of the issues around the appraisal products now. They were great intentions, but the blame was with credit analysis and looking at the bars. The appraisal is one part of that overall puzzle. The regulations focused in on the appraisal, and oftentimes at the cost of missing the forest through the trees.

One of the problems with a market in California in 2006 is we could have a home that is worth $50,000 that was worth $400,000 prior. There were ten comps within the last 30 days, however, that gave the previous number. The evaluation model takes a look at what a reasonable buyer and seller agree to prior to that and say what the number is. The historic part of that equation is only part of the puzzle. A true quality valuer would have recognized, and a lot did, that the demand side of the curve was getting ready to change and prices were not going to maintain the consistent slope upward they had in the past.

This was the problem with using only historic data. If you use that data, you miss the mark as to where the market is. This not only includes supply and demand, but also pricing. If you do not look at the overall curve over time and determine if you are at your uptick or getting ready to go down, then you really haven’t given the consumer or client the complete answer. Scott sees that we are at the top of the roller coaster and getting ready to head down. This is where a lender and the market would maintain caution. Buyers would slow down, and they would also become emotional. This makes it seem like there is an unlimited fuel base, but if we look at it over time the line looks like it is linearly going in an upward fashion when it is really not. Real estate cycles are much the same.

Bruce said there was more difficulty in appraising the same property three years later in 2009. In the 70s or 80s it was worth $30 grand and went up to $400 grand. In 2009 they were buying the house for $65 grand, which was the cost of a permit. When they fixed it up, they would do it to where it was great and they would have ten offers within a week at $125 and the appraisal would come in at $85. This was because there were no other comps of a fixed house in that market, it was all REOs without a kitchen. It was a difficult market because the appraiser had the same problem. He could completely look at it as a reasonable decision to buy the house at $125. However, when the review process took a look at the comps it was easy to disagree with the conclusion.

This is frustrating and goes back to the regulatory environment they were placed in because a valuer has two tasks: One is to look at everything they can see in the market, which includes historic data, current data, listings, client interviews, market participation, and anything they can put together to see where the property will be over time. The regulations say you shall use at least three comparable within 6 months, and the valuer finds himself in a position where it is often not the best data to use. It might be better to use a listing or two, not necessarily one of the comparables but additional information. A lot of underwriters would not see that as something relevant to the appraisal since it did not fit the guidelines or the box they had to check to say yes or no. This puts the valuer in a tough spot because if you are in a market you were in and looking backwards, you will hit something.

Bruce said we have to be good at evaluating value because when you do not want to be stuck with a monthly bill of a payment or negative equity position if we do it wrong. In that market they were going out six months, and in the county they were dealing they were subtracting 3% a month. You could have appraised it for 20% more, and on that day you would have been right. However, a month later you would have been 3% wrong and following. You would rather have the appraiser have the flexibility of saying this is the incomplete story. If you look at the whole story, it will build you a better picture and you can have a safer loan.

The problem is the appraisal business is basically short-changed in credibility. The Norris Group’s appraiser spends five hours to do a really good appraisal. They hold classes to teach people to buy property and take them around one day to do the appraising of one property. They will tear it apart and study it to really understand the valuation of it. A lot of people come into the class thinking they can push a button and get the answer. When they leave, they realize how faulty that conclusion was. It is easy to be replaced by a machine if what you are doing is mechanical. This is what a valuer tries to avoid. The worst thing you can be is mechanical because the analysis is what the client should be paying for. It is important to get in the mind of a valuer and seeing how well they understand the market, where it has been and where it is going, as well as the depth of their knowledge about supply and demand and the fundamental demand.

Something that got them in trouble in 2007 to 2011 is there were sub-divisions being built with lots for sale and there was no demand for the houses. This means those sub-divisions now had things like telephone poles. If you do not look at the fundamental demand side, you can miss the mark. This is a driver that is often ignored in the mechanical process.

Something occurring in California is green improvements and figuring out how to evaluate them. Scott said they have really been fortunate to have key subject matter experts in that field who have been benchmarking some of the tools the valuers use to understand that part of the market. In parts of Europe where it is required, terminal building codes are changing to require more of the technology and energy savings needed. Markets are going into it whether they know it or not. Valuers have to be aware of how market demands are changing. Green energy efficiency is something that becomes the right thing to do on a number of layers. Part of the metric for a solid valuation is understanding what it is behind the walls that makes that property special and what the market sees as a benefit they are willing to pay for.

In the current environment, you can do a lot of things such as adding pool. However, if you happen to have it in a place like Antarctica, it is of no value. Bruce asked how to get the consumer to recognize the need to pay more for it because of what it has behind the walls. Scott said the first step is understanding. If the market understands what they are getting and why it makes a difference, then they begin to become better consumers as far as understanding the value of that. This not only means cost savings or the right thing to do for the environment, this is another example of a market where the consumer, appraiser, real estate broker, builder, and bankers all have to come to terms with this at the same time so the markets can live together.

It is very much a circular demand item, and they are starting to see this now. They have some data they have begun to gather and relationships with the department of energy from which they are gathering empirical data. This data is showing real performance based on the products and how they are influencing the market.

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