LiveValuation Magazine - Septemeber 2010

Magazine >> September 2010

{ FEATURE } Customary & Reasonable Fees Who decides what is “customary & reasonable?”

Jordan Petkovski pg. 18

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Contents

{ SEPTEMBER feature }

12

“What Do I Do?” Understanding the features of a policy can help when responding

“For the first time in countless years, quality is being included in the valuation services provider selection process.

This may bode well for independent fee appraisers as they continue their quest for fees they themselves deem to be customary and reasonable. ” pg. 18

to a complaint or claim John Torvi

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Relocation Appraiser Specializing in relocation appraisals can help you diversify your career Hank Fontes

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FEATURE: Customary & Reasonable Fees Who decides what is “customary & reasonable?”

Jordan Petkovski

24

Granny on Valuation You may be overlooking a simple and pragmatic approach to valuation Roger Staiger III

28

Observations from a Home Inspector (part III) Some tips for approaching the “Site” section of the URAR Michael Connolly

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Publisher’s Note

10

Contributors

33

For What It’s Worth

The HVCC Sunsets Two Weeks Early Julie D. Friess-Johnson

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Industry Stats

32

Comments

34

Directory

June 2010

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Publisher’s Note Since the last issue of LiveValuation Magazine, President Obama has signed the “Dodd-Frank Wall Street Reform and Consumer Protection Act” into law. While aimed primarily at financial reform on Wall Street, the Dodd-Frank Act has a small section focused on the valuation industry. These 60 pages or so have the potential to change the appraisal industry dramatically. Topics in this section include BPOs, AMCs, and appraiser independence, however the most controversial and talked about issue is the concept of “customary and reasonable fees.” In our first publication since this legislation became law, we are going to lead with this hot topic.

Jordan Petkovski explores the definitions of customary & reasonable, and how these words could be interpreted in light of the new law. How will this concept be implemented and what are the potential unintended consequences? Will valuation fees be set and then move with the rate of inflation? These are a few of the questions Jordan ponders in his article. He further examines fees from the perspective of the appraiser and the AMC, acknowledging the symbiotic relationship that exists between the two.

Jordan argues we must stop sniping at each other and not sit on the sidelines while other institutions determine how these concepts will be interpreted.

As publisher, I will interject my personal opinion here. I am not sure the words “customary” and “reasonable” work well together. The “customary” fees that appraisers are paid in the current environment are not “reasonable.” Appraisers are asked to provide more and more documentation while their are fees continue to undergo pricing pressure. Simply put, appraisers have become “accustomed” to working harder for less money. From an industry perspective, the fees that are “customary” in the marketplace now cannot “reasonably” sustain a future for real estate appraisers. Customarily low fees are preventing the entrance of new appraisers into the business while at the same time causing the exit of our most seasoned professionals. We need to focus more on what is reasonable while developing a new customary fee schedule.

The Dodd-Frank Act was primarily a response to the financial meltdown that began in 2007. Roger Staiger, an Adjunct Professor at several East Coast Universities and Managing Director at Stage Capital LLC, contributes an article contending that if his pragmatic grandmother were running Fannie Mae and Freddie Mac, we would have avoided the crisis. His Granny focused on the return OF capital not the return ON capital. Granny’s concept of “the greater fool” has been borne out throughout the residential market. I have to agree with Roger;, where was she when we needed her?

Other articles this month include a focus on relocation appraisals by Hank Fontes, appraiser liability with John Torvi, and the continuation of a series by home inspector Michael Connolly. Julie D. Friess-Johnson writes on the sunsetting of HVCC in our regular column “For What it’s Worth.” Also, check out the comments we received on articles from our last issue in section “LVM Chat. ” You can comment on this month’s articles online at www.livevaluation.com.

Ernie Durbin, SRA, CRP

Publisher ernie@livevalmag.com

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Aman Makkar

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© 2010 LiveValuation Magazine.

All rights reserved. LiveValuation Magazine is a California limited liability company and is the publisher of LiveValuation Magazine. Reproductions or distribution of any materials obtained in the publication without written permission is expressly prohibited. The views, claims and opinions expressed in article and advertisement herein are not necessarily those of LiveValuation Magazine, its employees, agents or directors. This publication and any references to products or services are provided “as is” without any expressed or implied warranty or term of any kind.

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Stats

{ Highlights as of June 2010 }

+6.4% Maine

+6.9%

s.dakota

+4.3%

+5.9%

district of columbia

california

+4.7% virginia

[

The top five states with the highest appreciation in June, including distressed sales.

] -9.1% idaho

-3.4%

washington

-3.8%

alabama

-3.5%

oregon

-3.2%

new mexico

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[

]

The top five states with greatest depreciation in June, including distressed sales.

[

[]

Stats

{ CoreLogic* Data }

June HPI for the Country’s Largest Core Based Statistical Areas (CBSAs):

June 2010 12-Month HPI

“Home price volatility and collateral risk

CBSA

remain very high. The

stabilization phase and

Single Family Combined

policy intervention since the spring of 2009 has run its course. Prices

are expected to further

moderately decline as the economy remains weak

through the fall” said Mark Fleming, chief economist for CoreLogic.

Change by CBSA

Philadelphia, PA

Chicago-Joliet-Naperville, IL

Phoenix-Mesa-Glendale, AZ

Dallas-Plano-Irving, TX

New York-White Plains-Wayne, NY-NJ

Houston-Sugar Land-Baytown, TX

Atlanta-Sandy Springs-Marietta, GA

Los Angeles-Long Beach-Glendale, CA

Washington-Arlington-Alexandria, DC-VA-MD-WV

Riverside-San Bernardino-Ontario, CA

-3.4%

oregon

Single Family Combined Excluding Distressed

-2.2% -1.3% 0.1% 0.5% 1.8% 3.7% 3.9% 4.6% 4.9% 8.0%

-2.8% -3.2% -4.7% 0.9% 2.8% 0.7% -0.4% 4.7% 4.8% 4.1%

* Source: CoreLogic HPI as of June, 2010.

+6.3%

s.dakota

-6.8%

-4.8%

michigan

+2.7% maine

nevada

+6.3%

District of columbia

+4.4%

california

-5.8%

arizona

-4.0%

{ Highlights as of June 2010 }

new mexico

• Excluding distressed sales, the top five states with the highest appreciation in June were: District of Columbia,

+3.9%

mississippi

South Dakota, California, Mississippi and Maine.

• Excluding distressed sales, the top five states with the greatest depreciation in June were: Nevada, Arizona, Michigan, New Mexico and Oregon.

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Contributors { The Voice Powered By }

Hank Fontes is the

{ Jordan Petkovski }

{ Roger Staiger III}

{ John Torvi }

{ Hank Fontes }

John Torvi is the Director of Marketing

President of Fontes

Jordan Petkovski

Roger Staiger III is

& Sales at the Herbert

Appraisals, Inc. and

has worked in and

Managing Director for

H. Landy Insurance

took over the company

around the residential

Stage Capital, LLC.

Agency of Needham,

in July of 2006. Hank is

appraisal industry for

His areas of expertise

MA. John has over 20

also the President of FJ

most of his career. He

are Commercial and

years experience in the

& Associates, Inc. which

has held numerous

Residential Real Estate

insurance industry in

he has operated with

leadership roles for

portfolio investing,

sales, sales management,

a partner for the past

appraisal and settlement

corporate business,

agency administration

10 years. Hank is on

services providers

and strategic planning,

and marketing. John has

the Board of Directors

nationwide. Currently,

forecasting, valuation,

a Bachelors of Science

for RAC and has been

he is the Director of Staff

financial modeling,

Degree from Providence

appraising relocation

Appraisal Operations

asset repositioning and

College and a Masters

properties for more than

at TSI Appraisal

risk mitigation through

of Science Degree from

20 years. He also acts

Services®, a wholly

financial hedging for

Springfield College.

as the Public Relations

owned subsidiary of

physical assets.

John speaks nationally

Director for Relocation

Title Source®. His

He holds positions

on matters of insurance

Appraiser’s Appraisers

primary focus is the

at Johns Hopkins,

and risk management to

and Consultants and

successful development

Georgetown, and Loyola

real estate professionals

publishes a quarterly

of operational processes

Universities. He is active

and others, and has

newsletter distributed

based upon a greater

on several University

been published in

nationally. Hank has

understanding of the

Real Estate Boards, and

numerous industry

been a speaker at the

industry as a whole. His

an active contributor to

and professional

ERC convention in

responsibilities include

the NVBIA.

2006, 2009 and 2010 and

the development

was on ERC’s Editorial

and management of

Advisory Committee in

staff level appraisers

2009.

operating throughout

publications.

the country.

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Contributors { The Voice Powered By }

{ Michael Connolly } Michael Connolly has over 30 years’ experience in the real estate industry and is owner of Smart Move Inspections in Cincinnati, Ohio. He is a member of the American Society of Home Inspectors (ASHI) and holds their highest designation of Certified Home Inspector (CHI). He has evaluated over 8,000 residential homes for home-buyers, attorneys, and lending institutions. He holds licenses for Radon testing, wood destroying organisms inspections, and is a HUD fee inspector. Contact Michael by email: Mike@smartmoveinspections.com.

{ Julie D. Friess-Johnson } Julie Friess-Johnson began appraising in 1988 in Long Island, NY. She is currently the managing director of the Northern Arizona franchise for IRR Residential. Julie is a director on the Board of the Coalition of Arizona Appraisers and actively involved in the appraisal industry and legislation. Julie has been a consultant to the FBI, the Arizona Department of Financial Institutions, and until very recently, she was the West Coast press contact for NY Attorney General Andrew Cuomo’s office regarding any questions on the HVCC.

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What DO i DO? Understanding the features of a policy can help when responding to a complaint or claim

J ohn

T orvi

The target that seems to be on the back of real estate appraisers appears more real than imagined. Indeed, complaints and insurance claims against appraisers alleging an error or omission have steadily risen over the last few years, due in great part to turmoil in the real estate market. As property valuation is often at the center of many of the complaints and insurance claims, real estate appraisers have some justification in feeling that they are in “the line of fire.� Predictably, there are many cases where the appraiser has committed an error or omission (for the purpose of this discussion we will leave out intentional acts of unprofessional or unethical behavior).

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In many other cases, however, the appraiser may have committed

disciplinary or regulatory proceedings is an important one, as we

no error, yet must still respond to the complaint or demand. This

will note below. An Errors & Omissions insurance policy defines

is where confusion often develops, concerning whether a response

and responds to a regulatory or board complaint or hearing

is necessary or not, how to respond, and whether an appraiser

differently then it does for a claim. This does not mean in any

should notify their errors and omissions insurance carrier.

way, however, that an appraiser who is notified of a complaint by a regulatory body or official board does not have obligations

Letters from regulatory bodies or attorneys cannot be ignored,

under their Errors and Omissions insurance policy, or that their

yet appraisers may be hesitant to respond for a variety of reasons.

insurance might not be impacted.

Perhaps they feel there is no justification in the complaint and it will simply go away. Maybe they are concerned about being sued and losing their license, their errors & omissions insurance,

Important Policy Definitions Every Insured Should Know

or at the very least, seeing their premiums increase. While these concerns are real, a better understanding of real estate appraisers’

Most insurance policies include a major section called “Duties

errors & omissions insurance, what constitutes a possible claim,

and Cooperation of the Named Insured” and may have sub

and the obligation to report claims can help an appraiser avoid

sections entitled “Duties in the Event of an Act or Circumstance”

confusion or worse.

and “Duties in the Event of a Claim.” These sections can begin

Errors and Omissions Insurance – An Overview

to help an appraiser understand how to respond, should they receive notice of a complaint, hearing, or claim. We can start with the definition of a Claim. As defined in some policies, a Claim means “a demand for money, receipt of a request to provide a

Most appraisers are covered under an errors & omissions policy,

recorded statement, the filing of a Suit…claiming Damages and

whether they have purchased it on their own or are covered under

alleging an act, error, or omission resulting from the rendering or

a firm’s policy. E&O insurance can cover a broad range of actions

failure to render Professional Services.” It may go on to state that

or inactions relating to an appraiser’s professional obligations and

a Claim does not “include proceedings seeking injunctive or other

duties, and can be stated in a policy as “any act, error, or omission

non-pecuniary relief or administrative proceedings before any

(and, in some policies, Personal Injury) in the rendering of or

national, state, regional, or local board.”

failure to render Professional Services.” A policy may go on to state that “the Company shall have the right and duty to defend

So then, a complaint in front of a board is not a claim, and my

any suit…even if the allegations of the suit are groundless, false,

errors and omissions insurance is there to cover claims, right?

or fraudulent” and that “the Company will pay on behalf of the

So I don’t have to notify the insurance company if I receive a

Named Insured all sums which the Named Insured shall become

complaint letter because it’s not a claim, right? Wrong!

legally obligated to pay as Damages for Claims.” (It is important to note that insurance policies from different companies may offer

Remember the “Duties in the Event of an Act or Circumstance”

different wording, coverage, or features, including exclusions

section? It states that if an Insured “becomes aware of any act or

from coverage and that this information should be used as an

circumstance…that may reasonably be anticipated to give rise to

example only).

a Claim, the Named Insured must notify the Company in writing as soon as practicable.” According to Ted Gaisford, Vice President

Errors & Omissions policies also contain important information

of Professional Claims at General Star Insurance Company, an

and definitions of what and who is considered an “Insured”, what

“abundance of caution” should be used by any Insured receiving

is a “Professional Act,” what happens if the policy is terminated,

notice of a complaint or becoming aware of circumstances that

and so on. Many policies provide what are called “Supplementary

could lead to such notification. Failure to notify an insurer could

Payments” for certain expenses or fees related to disciplinary

jeopardize coverage of the complaint or potential claim. Gaisford

proceedings or regulatory hearings. Supplementary Payments

indicates there has been a marked increase in appraisers notifying

provide payment or reimbursement for expenses in addition to

insurers of complaints and hearings over the last couple of years.

or outside of a Claim and the limits of liability for the covered

He further states that 75-80% of these complaints do not result

Claim. They can also include payments for loss of earnings if the

in a formal claim, though payments from the insurer may still be

insured needs to attend a hearing or needs protection against

paid under the “Supplementary Payments” section of a policy.

discrimination or personal injury accusations.

With approximately 1 out of 4 complaints resulting in a formal claim, and supplementary payments often being made on the

The distinction of a Claim being covered under the policies

ones that are not formal claims, an appraiser must recognize

liability limit, and Supplementary Payments being applicable for

their obligation to the insurance policy as a legal contract (this >>

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includes properly disclosing information on applications for errors and omissions

{ Many claims are still being filed over appraisals done three or four years ago when property values were at a peak. }

insurance coverage).

Claims, Liability Limits, and Supplementary Payments When an appraiser purchases an Errors & Omissions insurance policy, one of the most important decisions is choosing the liability limits. Briefly, the liability limit is how much coverage is available in the event a Claim is brought against the insured appraiser. Liability limits are split, and may look like this: $1,000,000/$2,000,000.

This means that the insured has $1,000,000 per Claim, with an aggregate limit of $2,000,000; the aggregate limit is the total amount of coverage available in a twelve month policy period, should there be more than one Claim against the insured.

Note the emphasis on Claims and the way coverage is afforded for one, as we have already defined a Claim as not including “proceedings… before any national, state, regional or local board.” This is where Supplementary Payments come in to provide certain monetary payments or reimbursements outside of the liability limits. They can include payments for loss of earnings if an insured must attend a trial or hearing involving a “Claim against the Insured for Covered Damages.” As noted previously, Supplementary Payments may be available if there is no Claim, but the insured requires payment for attorney fees and other costs and expenses resulting from the investigation or defense of a proceeding before a licensing board, real estate board, or governmental regulatory body (note that commission disputes are typically excluded). Unlike the liability limits, there is usually no deductible to be paid by the insured if they receive Supplementary Payments under the policy.

What Do I Do Now? Most policy holders would know what to do if they received a letter from an attorney, a client, or another insurance company requesting damages or notification to collect damages because of an alleged error or omission on the part of the insured. Such notification would be an obvious indication of a “Claim” and the insured would be obligated to follow the notification and procedures as outlined in their policy and their insurance carrier.

What is less clear is what to do if an insured thinks there might be claim or receives notice of a regulatory complaint. The policy states that the insured must notify the insurance company once they become aware of any “act or circumstance” that may “reasonably be anticipated” to give rise to a “Claim.” As at least one out of four complaints results in a formal claim, it is clear that such a complaint can be reasonably anticipated to give rise to a claim, and an insured must report it.

The reporting is also important for an insured to benefit from the Supplementary Payments available through the policy.

With all of this, there still may be some grey areas or confusion about what an appraiser should do to handle a situation. Some insurers offer a free and confidential legal hotline to consult with real estate lawyers familiar with claim, regulatory, and policy issues for appraisers. Sometimes, the attorney might recommend a course of action that may help the appraiser avoid a claim or complaint and notifying the insurer, but if notification is suggested or required, the appraiser will have a much better understanding of the situation and be better able to work with the 14

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insurer’s claim staff to resolve the problem. With some policies, an appraiser may have the right to choose their own attorney

PRIDE.

to address a regulatory or board complaint. Mr. Gaisford from General Star suggests letting the insurer choose the attorney, however. The insurance company’s attorney may be much more

PASSION.

experienced in resolving such matters, and can be instrumental in helping to avoid a civil complaint against an appraiser as well.

Recent Claim Trends The majority of insurance claims against real estate appraisers are

PROFESSIONALISM.

based on allegations of erroneous property valuations, and the

Relocation Appraisers & Consultants

huge increase in foreclosures has put property appraisals front

RAC is a nationwide organization of

and center. Many claims are still being filed over appraisals done

Independent Appraisers who are trained

three or four years ago when property values were at a peak. A common scenario is a home that was purchased with a mortgage

professionals in relocation appraising.

made on the property and later the buyer defaults on the loan.

The lender then goes back to the appraiser for damages, stating that the appraisal value was too high. A variation of this is if the buyer, after buying at the top of the market, tries to sell after prices have softened, cannot regain their investment, and sues the

What distinguishes RAC from all other appraisal organizations l

appraising and consulting.

appraiser for the original “over valuation.”

More recently, the valuation-related claims show a new characteristic: instead of claims being made for an over-

Our exclusive focus on relocation

l

The majority of our organizational

valued appraisal, many current claims allege the property

activities are devoted to education,

was undervalued. Appraisals done in the recent past during

research, and client outreach.

the current market are showing much lower valuations and claims are being made against these “low” value appraisals as homeowners have difficulty refinancing or obtaining equity

l

Each of our select group of members

loans. An even more recent concern is a “strategic foreclosure”

is considered the relocation appraisal

– a property owner calculating the financial benefit of walking

experts in their respective markets.

away from an underwater property, as opposed to using a short sale or traditional foreclosure. As strategic foreclosures become a calculated financial move for some property owners, the effects on claims against appraisers for valuations on those properties could be substantial.

Summary An Errors & Omissions policy purchased by a real estate appraiser can provide significant peace of mind as the appraiser performs his or her professional duties, but that policy can also appear confusing, especially if an insured receives a legal notice or letter alleging an error. Understanding the definitions and features of the policy will provide an advantage to any insured appraiser in responding properly to any complaint or claim and in working with their insurance carrier to maximize the protection afforded under the policy.

For more information visit our web site at: www.RAC.net LVM |

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location

RE

Are you an appraiser? What is your specialty? Do you have a niche in the business that sets you apart from the other guy? Have you ever written an appraisal and had another appraiser do the same property, only to have the lender call you and ask why your appraisal says the market is declining and the other guy says the market is stable? Have you ever had a lender/client call you six months after you’ve appraised a home and said that your appraisal was 5% higher than the eventual sales price? Have you ever written an appraisal for anything other than market value? What about appraising a home and the client wants the Anticipated Sales Price? How would you handle that? How do you do positive or negative time adjustments? What if your client instructions ask you to forecast the market out into the future 90-120 days?

ppraiser

Specializing in relocation appraisals can help you diversify your career

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hank fontes

These are some of the issues and questions that the Relocation

member of Worldwide ERC, testing material can be obtained to

Appraiser faces on a daily basis. Sound interesting? Maybe,

become a CRP (Certified Relocation Professional). Members can

maybe not. What form do I put it on, you ask? The Relocation

also advertise in the Worldwide ERC Directory, which will allow

Appraisal is commonly known as an ERC Form. The last version

appraisers to be known in their specific marketing area.

of the form was from 2003, however a newer revised form will likely be launching before the end of 2010. The ERC Form is

What is the function of the Relocation Company? The Relocation

longer than a 1004 URAR and allows the appraiser more room

Company is working with the corporate client to facilitate

for narrative. The form is catered toward telling the truth, not

employee relocation. Typically, the Relocation Company will

only about the home, but the market conditions as well. It tells

give a list of appraisers to the transferee. The “list” is what the

a story which doesn’t conclude with Market Value. It concludes

relocation appraiser strives to be on. If you’re not on the list,

with a value described as the Anticipated Sales Price. Relocation

you won’t ever get an appraisal. Following the steps above with

companies will indicate client instructions on the order form,

Worldwide ERC will help you get started. You may also need to

which typically call for the Relocation Appraiser to forecast the

start traveling to where the movers and shakers are! Anyway,

market 90-120 days. This figure of 90-120 days is the typical

once you get a call from a transferee, you will need to know how

holding period of the Relocation Company. The Relocation

to handle it. You will be asked a series of questions: How long

Appraiser is asked for Anticipated Sales Price for this specific

have you been in the business? Have you ever appraised a home

period in the future. Why, you ask? This is the amount of time

in my development? How do you feel about today’s market?

estimated for the Relocation Company to acquire the home,

Where do you live? I have a strategy on how to make sure I get

prepare for marketing the home “as if vacant,” and hopefully get

them to choose me 99% of the time, but I can’t give away all my

it sold.

secrets. Sometimes you won’t even get a chance to take a call and the transferee will simply pick the appraisers closest to them. The

So how does a Relocation Appraiser know what is going to

transferee is usually told to choose three appraisers, two of which

happen in the future? Forecasting the market is a difficult thing

will initially inspect the property. If the first two appraisals are

to calculate. Often times, the best way to determine the future is

not within 5% of each other and their differences can’t be worked

by determining what has happened in the recent past. But wait,

out, a third appraisal will be ordered. Once a third is ordered, the

it’s not always that simple. What if the 90-120 day forecast falls

lowest appraisal will sometimes be dropped and the other two

during severe winter months or holiday seasons? How does that

combined. I have also heard that some relocation companies will

factor into the equation? This is where knowing your market can

combine all three appraisals. Either way, the averaged number is

mean everything. Is there a difference in forecasting in a declining

then offered as a possible buyout of the transferee’s home. The

or increasing market? Forecasting in a declining market will most

transferee will then have a choice to make: take the buyout or try

likely mean that the Anticipated Sales Price will be lower than

to sell it himself or herself. Selling the home himself or herself will

today’s value, as the Anticipated Sales price must be discounted

often result in a bonus from the corporate client as an incentive.

in order to sell within the 90-120 day period. Conversely, if a market is increasing, the appraised value will be higher than

As mentioned in the opening paragraph, your appraisal will

today’s market value. This is assuming there are no other

be tracked until the subject property is eventually sold. The

determining factors that might fall in that forecasting period. This

Relocation Company will check on your appraised value against

is some of the expertise needed to be able to quantify a value—not

the actual sales price and a statistical sheet will typically be

today’s, but tomorrow’s.

provided. If you can maintain a track record of values that fall within a close percentage of the actual sales price, you can start

How do you get the expertise needed to be able to complete an

building a name for yourself. You then become a valuable person

ERC Appraisal? Worldwide Employee Relocation Council (ERC)

in the process and Relocation Companies will begin looking for

governs the world of relocation appraising. They wrote the

you instead of you searching for them. Relocation Companies

form, enforce the guidelines and work with all members of the

hold good appraisers in high esteem as you can add true value

mobility workforce. Worldwide ERC brings the movers together,

to the success of their business. Relocation appraising is a niche

temporary housing companies, appraisers, brokers, agents and

that not every appraiser knows about. I believe it can make

moving professionals from literally around the world. They offer

you a better appraiser overall. Your work will be scrutinized

on-line testing, classes, certifications and yearly conventions. They

against another appraiser who is trying to outperform you. The

also work with Relocation Appraisers and Consultants (RAC)

Relocation Company will track you to see if you were right or

who offer classes and specific training at their yearly Worldwide

wrong. The market itself will challenge you when you attempt to

ERC Convention. Please visit www.worldwideerc.org or www.

forecast a value 3-4 months out. Nonetheless, knowing you got it

rac.net for additional information on both organizations. Once a

right will satisfy you!

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J ordan

P etkovski

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&

customary Reasonablefees

I

Who decides what is “customary & reasonable?”

I find a relatively

innocuous heading

near the top of page 2,215, titled “Customary & Reasonable Fee”; surprising that just one paragraph on a single page culled from the 2,319 pages that make up the reconciled Dodd-Frank Act (Dodd-Frank Wall Street Reform

and Consumer Protection Act) would create such a stir. You wouldn’t think so little information would induce the type of fervor our industry has experienced since this legislation was signed into law, but it shot to number one with a bullet. >> LVM |

19

Everyone knows the Dodd-Frank Act will supersede the HVCC

studies focused on the topic? The answer will depend greatly on

(Home Valuation Code of Conduct). Let’s face it, the HVCC was

the quality of the data obtained and the methodology employed

a sum total of six pages long; it was never intended to dictate

when writing the rules.

systemic appraisal guidelines. It wasn’t a robust agreement, but those six pages permanently changed the face of our industry for

It may seem somewhat rudimentary to include definitions of the

the better. The newest legislation - with over 60 pages dedicated

words “reasonable” and “customary” in this examination, but

to the appraisal industry - is sure to identify countless pain points

this language will likely lead to enforcement based on how the

that the regulators, AMCs, and independent fee appraisers will

associated words are defined and ultimately interpreted. The

argue out until enforcement measures have been defined, right?

agreed upon methods that will be used to ascertain if a $200 fee

Wrong! It seems there is only one aspect of the bill that has

for a URAR is unreasonable have been leveraged in other fields

captured ALL of the industry’s attention…Every conversation

for some time. For instance, the medical profession has guidelines

about the newest wave of legislative changes circles like a shiver

for fees that would be considered customary & reasonable based

of sharks around the reasonable and customary fee discussion.

on the type of procedure a given patient needs. The concept isn’t

With that level of laser like focus on the topic of fees, even with

new or revolutionary; it is in fact an old hat. That being said,

countless other major changes outlined within the legislation, one

this will be a long standing point of contention between the

starts to realize this may be a topic worthy of further analysis.

independent fee appraisers and those engaging appraisers for collateral valuation.

So we’ll explore the legislation as it has been written into law, trying to give definitive guidance on the most probable implications. How you interpret the legislation directly correlates to where you fit within the industry. As an independent fee appraiser, your interpretation of the legislation is likely to result in a conclusion that is biased towards what would most positively benefit you. AMCs will likely see it differently, giving thoughtful consideration to elements of the bill that favor their position. In order to come to a reasonable and impartial opinion, we’ll have to examine both sides of the argument. Only then will we be able to accurately define how the legislation should be enforced and what this means for all interested parties.

Concepts The word “reasonable” can be defined as an implication of appropriate behavior as it pertains to a particular situation.

A few definitions as outlined within the American Heritage®

{ The concept isn’t new or revolutionary; it is in fact an old hat. That being said, this will be a long standing point of contention between the independent fee appraisers and those engaging appraisers for collateral valuation. }

Dictionary define its meaning as “capable of reasoning; rational; being within the bounds of common sense and not excessive or extreme; fair.” Collins English Dictionary describes reasonable

Factors

as “having modest or moderate expectations; not making unfair demands; moderate in price; not expensive; fair; average.” In

Should customary & reasonable fees be considered a static

each case, the word implies the use of independent judgment.

concept, failing to move in unison with the greater economy? Is

Employing individual or even jurisdictional reason in concluding

the cost of an appraisal today going to remain the same tomorrow,

best practices is subjective by its very nature. So how will we as

once a determination of what is customary & reasonable has been

an industry ever decide on what constitutes a reasonable fee?

made? Prior to the HVCC, residential appraisal fees hadn’t been dramatically affected in the aggregate for almost as long as I’ve

Use of the word “customary” is somewhat less subjective than

been in the industry (my memory isn’t quite what it once was,

its successor in the legislation, but its intent is still open to

so weight this commentary accordingly). That being said, I’m

interpretation. The American Heritage® Dictionary defines it

certain the cost of a gallon of gas or a gallon of milk has increased

as “commonly practiced, used, or encountered; usual; based on

incrementally over that same period of time. Are we now to

custom or tradition rather than written law or contract.” Can

assume the price of an appraisal will rise in tandem with the rate

customary fees be determined by conducting academic research

of inflation? Maybe it will be based on quality in the near future.

20

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/ September 2010

The pendulum does appear to be swinging in that direction. For

real estate markets fell off a cliff, and then they got regulated

the first time in countless years, quality is being included in the

out of accepting work from broker/banker relationships they’d

valuation services provider selection process. This may bode well

developed over years.

for independent fee appraisers as they continue their quest for fees they themselves deem to be customary & reasonable.

In order to survive, fee appraisers have been forced to expand their coverage areas and reduce their fees. These have been tough

What will be the deciding factor for those regulating appraisal

times for most, but the appraisers made the necessary changes

fees? I’ve often thought of the difficulties we as appraisal services

to ensure mitigation of their revenue losses through increasing

providers have when determining fee schedules for the lender/

their market share. This widespread reaction from a notoriously

clients of the world. There is no hard and fast way for me to grasp

amorphous group is proof positive that fee appraisers had few

the potential pitfalls our organization may encounter during the

viable options left to consider.

appraisal process. It’s very plausible that our fees, as provided to the client at the relationship’s inception, will not cover the cost

Knowing what the fee appraisers have experienced in the recent

associated with facilitating that particular assignment. Fees have

past gives us perspective. As industry leaders, we have to

been, are now, and will forever be moving targets. Appraisers will

acknowledge their concerns and support the collective. I have to

gather together and caucus on this topic long after the rules have

refer to an “Ism” that our organization (TSI Appraisal Services®)

been written, but clarification will prove to be an elusive beast.

lives by – “We are the They”. This is just one of many guiding principles that make up the DNA of our family of companies, but

It would be foolhardy of me to think lenders, AMCs, and

it is the part of our culture I find myself reflecting on most often.

independent fee appraisers will find common ground on this

It is also directly applicable to this subject. When the independent

subject. That being said, can we at least agree consideration

fee appraiser is adequately compensated, they are more likely

should be given to the product type, property location and the

to buy in to the process. I would expect the appraiser’s level

assignment complexity when deciding on what constitutes

of engagement would increase in correlation with a customary

“customary & reasonable?” That last question is probably

& reasonable fee. Might this lead to higher quality appraisal

rhetorical…

reports? Only if the industry focuses on regulating quality at a disproportionately high level compared to an appraiser’s

I was discussing this topic with a colleague recently and we both agreed there are some analogous scenarios that should be included when attempting to expound on this subject. Most

turn-time and fee structure.

AMC

of us have worked for other appraisers at some point during our careers; at the very least, we all worked with supervisory

From the AMC’s perspective, the topic will either send shivers

appraisers when accumulating the hours necessary for

down your spine or give you the warm fuzzies, depending

certification. In this environment, a fee split was customary,

on your business model. As a valuation services provider, the

the percentage oftentimes being based on the appraiser’s level

challenges are equally as daunting. The costs associated with

of seniority within the organization. Did you ever expect your

managing the appraisal process successfully are significant. For

company or supervisor to pass the entire appraisal fee on to you?

those of us that are paying a commensurate wage, the margins

I’m guessing not.

are razor thin to begin with. This is not garrulous commentary; it is in fact germane to the topic. Managing income to profitability

Not to digress in a protracted sidebar, but the same point can be

should be squarely leveled over the shoulders of an AMC’s

made for the AMCs that occupy the market space. They are in fact

leadership, not on their appraiser panel. I’m not suggesting that

providing you-the independent fee appraiser-a service. Actually,

we adhere to a minimalist philosophy. Whatever fees are decided

they are providing a number of services. AMCs market, collect,

on must make sense to all affected parties.

pay, review, and facilitate on the fee appraiser’s behalf. Sounds a lot like the services provided to you when working with/for

The fee appraisers are the lifeblood of an AMC. It’s a symbiotic

another appraiser, right?

relationship, each being mutually dependent on the other. This

Perspective - Fee Appraiser

shouldn’t have to be restated for effect, but it hasn’t always been communicated effectively from the AMC to the fee appraiser and vice versa. As a valuation services provider, I rely heavily on the

Let’s look at this from the independent fee appraiser’s point

appraisers we employ to provide feedback from their perspective.

of view. As a group, they have been dealing with some major

I expect the same collaboration when attempting to define

changes over the past couple years. First, the previously booming

what the market perceives as a customary & reasonable fee.>>

LVM |

21

Prohibiting the AMCs from participating in the academic studies

act as the gatekeeper for information and input. It could emulate

that will be used to determine appropriate fees is concerning. If

the “comment period,” during the HVCC discussion and debate.

70% of the valuation services being facilitated today are driven by

The key would be the ability to have open access to submit your

AMCs, how can we exclude them from the discussion and hope to

ideas and assemble a think tank group comprised of individuals

arrive at statistically meaningful conclusion? Can we canvas <30%

representing each of the vested industries. This group could filter

of the industry and come up with enough data to derive a fee

and synthesize both the data and questions from the masses, to

baseline and acceptable tolerances? I think not.

ultimately produce a forum for further comments, Q & A, and actions items. The key is transparency. We should all have the

Conclusion

opportunity to review the findings that will be used as guidance for those promulgating fees.

This is going to get contentious! But a little “revolution” and spirited discussion may actually prove to be a really good thing.

This is an imperfect process that is ambiguous by design. That is

Moreover, let’s take this opportunity to become more cohesive as

actually the greatest gift the legislators could have given us. As

an industry and attack this issue to the best mutual satisfaction of

an industry, we have been empowered. Collectively, “we” will

all interested parties.

drive the process. The decision of what is customary & reasonable has ultimately been left up to those participating at the ground

The first thing we must “come to grips” with is admit no perfect

level. We can all be involved, even if we begin by creating ad

solution exists. There is no proverbial silver bullet! Appraisers

hoc committees to cull through the data that will be provided to

will want to be paid more, lenders will want the lowest fees for

those responsible for writing the regulatory guidelines. This is

market competitiveness and the AMCs desire a stabilization

our chance to do the right thing. That’s our organization’s motto.

of an ever changing fee schedule. The mortal sin would be for

We focus on doing the right thing, so too should the regulators

all to sit on the sidelines and continue our fragmented sniping

that are charged with defining the indefinable. At the end of the

and do nothing at all. It is imperative we formulate a game plan

day, I will simply ask that we all take the highroad and agree on a

which affords every opportunity for input and debate. I would

reasonable and customary method for defining what is customary

propose identifying and agreeing on a central body that would

& reasonable!

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/ September 2010

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Granny

On V aluation You may be overlooking a simple and pragmatic approach to valuation

An understanding of risk is not generally the first trait one

little real risk. Granny had correctly “computed” the risk and

associates with a grandmother, however, in this financially

quantified it as negligible. Or rather, had calculated that the risk

turbulent time, perhaps we need to remember the lessons that

of her killing me as I continued to aggravate her was greater than

those two generations above have taught us.

nature’s risks of the fool’s errand. Regardless, Granny understood risk and was adept at valuing alternatives on a risk-adjusted basis.

As a child, I spent my summers on Nevis with my grandparents.

My granny had a pragmatic approach to life which still permeates

Later in life, while completing graduate school, Granny took

my own vantage points today. As an example of granny’s

interest in my studies of investments. I would regale her with

pragmatism, I remember her solution to a noisy house: she would

equations and theories on how to make money and she would

hand me a pail, point at the latest rainbow and tell me to go and

humour me and nod. While I remain confident she followed

fetch the pot of gold at the end. Later in life I asked her why she

my parlance, she never truly believed the “theory.” Granny

was not worried about me simply wandering off at such a young

understood how to make money or, rather, she understood what

age. Basically, why wasn’t she worried about the risks posed by

was most important: not to lose the money one currently had

sending her young grandson off on a fool’s errand?

saved.

Granny responded, “While there are few certainties in life, some

My holidays during graduate school were generally spent with

do exist. One is that we are on an island, where were you going

my grandparents on Nevis for obvious reasons. Inevitably each

to go? A second is that you always became hungry and returned

night, the conversation turned to the changes on the island and

home to eat.” Granny was right; we were on an island, I was

the burgeoning real estate market and property prices. The island

limited in how far I could wander and yes, I still come home at

was transforming itself from a sleepy nation forgotten by the

night when I get hungry. In reality, the fool’s errand posed me

world to a vacation favorite for Oprah and MacGyver. Several

24

| LVM

/ September 2010

{ If only Granny had been running Fannie Mae and/or Freddie Mac, the financial world would have been well served. }

Roger Staiger III

homes were being built and for the first time we had had to stop

While confident in our comparative analysis, we decided to

at an intersection in town and actually wait for several cars to

approach Granny from another angle. My grandfather and I

pass. As a result, my grandfather, a chemistry professor, always

retired in the house, and by the glow of a kerosene lamp, (even

wanted to know what his home was worth and would challenge

in the 90s, electricity on Nevis remained sporadic at best. Our

me to defend an ever increasing ‘value’ for his property. Granny, a

refrigerator was still run on kerosene.) developed a rudimentary

librarian, never believed the numbers or the methodology.

revenue/expense cash flow, which we then discounted back to produce an even bigger number. My grandfather was enjoying

My grandfather and I would talk to the neighbors during the day,

finance even more than chemistry; he was becoming wealthier

performing our own informal due diligence across the ghaut,

and wealthier with each analysis. With triumph in the air, my

and quote the prices of recently sold properties. Of course, the

grandfather exclaims, “Granny, the boy is right. I am brilliant!”

views from our porch were always superior to others requiring premium pricing for our home. We would rationalize, “if the

After explaining discounted cash flow and the assumptions used

Jones received X for their property, then clearly ours is worth X +

to quantify the revenue and expenses, Granny was unimpressed.

Y.” My grandfather would then enjoy his evening libation mulling

She correctly understood that we were ‘guessing’ at income

his “millions.” Granny, never one to be quiet, would dampen

growth and continued to refer to the reversion value as the pot of

the moment, stating, “You two are assuming there is a greater

gold at the end of the rainbow. She reminded me of my continued

fool who is willing to pay X + Y. It is not even worth ‘X’, I just

failures as a young boy to reach that pot of gold. Granny

do not see it. My money is staying in the bank! You cannot value

remained unconvinced.

anything using fool’s theory.”

Granny finally said, “When you two billionaires are finished counting your money, I would like to know the chance that >>

LVM |

25

our property is worth less than when we bought it. Tell me that

With data in hand, I once again retired to the house to complete

and I will find that useful!” In triumphant arrogance, I said,

the analysis. The annual increase in home prices was calculated

“Considering you bought the property in 1951, there is zero

for each of the past 7 years, which was as far back as my

chance!” The victory was lost on Granny. She said, “Assuming

grandfather could remember. From this data, I calculated

we purchased at the price the Jones sold their home. What is the

the average and standard deviation. The average, simply

chance we will lose money over the next year? That is what I want

the summation of the seven data points representing annual

to know!” The evening’s discussion then turned to astronomy and

increases, divided by 7, i.e. the mean. The standard deviation

counting constellations.

was quantified by taking the maximum increase, subtracting the minimum increase and dividing by six (outliers were assumed

The next night Granny asked if we had her answer. She had

nonexistent). Now I had the required information necessary to

no intention of allowing us to move on to other intellectual

answer Granny’s question, “What is the chance the house will be

curiosities. Granny was asking us to quantify the risk of the

worth less tomorrow than today?”

investment, though not in those terms; I understood the question but did not have an answer. This continued for several nights

The only thing left to do was quantify the probability of a loss,

until my grandfather said, “Kid, you realize she is not going to

i.e. no gain. Given the base distribution of pricing increase was

leave us alone until you figure this out.” I could hear the beep of

already agreed to be normal, the probability of the house being

the bus with my own grandfather at the wheel.

worth less in one year than it was currently was simply the area to the left of the z-value, where Xi is zero, i.e. no increase in value.

The key to answering Granny’s question was in quantifying the risk associated with home purchase. But how do you quantify the

That night I told Granny that the probability the house would be

risk of a home purchase? I asked my grandfather, “Do you think

worth less in a year was 11.2%. With my grandfather’s dreams

it is fair to assume that house price increases follow a normal

of billions becoming shipwrecked, Granny said, “Now that is a

distribution?” I still remember his answer, “Kid, house prices are

number I can understand. I think I will keep my money in the

like people: normal. In my 30 years of lecturing, I always have a

bank.”

freshman chemistry class of 60 students. Inevitably, 3 love me, 3 hate me, and 54 will forget me the moment the final is completed.

It took me 15 years of pondering and the current Financial

People are normal; we can assume house pricing is normal.”

Armageddon to finally understand the significance of my

Ok, this was a start; I had identified the distribution type for

grandparents’ discussions and the brilliance of Granny’s

the housing pricing. I understood from basic statistics that two

pragmatism and simplicity. My grandfather and I had been so

parameters defined a normal distribution, mean, and standard

focused on return in the absence of all else. We were blinded by

deviation. Both of these were needed to answer Granny’s

our academic credentials, simply focusing upon the Return ON

question.

Capital. Granny, the pragmatist, cared little for billions but rather focused on safety, i.e. Return OF Capital. Much like Aesop’s turtle

The next day I approached the island’s self-proclaimed expert on

beating the rabbit, I have come to understand that the librarian

all subjects, my grandfather, for the average island house prices

beat the chemist and graduate student. The most important

in recent memory. When asked, he quoted the prices for about a

question to answer when valuing anything is the probability of

dozen homes on the island and the approximate year they had

loss, i.e. probability of Return OF capital. To answer this, risk

been sold/purchased. Of course the error was his memory, which,

must be understood and quantified. Granny, while unable to

at times, had a wide range but it was the data available. This data

articulate risk in terms of the probability of Return OF Capital,

allowed me to calculate the average increase in home prices by

fundamentally understood the concept better than most. If only

year across the recent memory of my grandfather. I would not be

Granny had been running Fannie Mae and/or Freddie Mac, the

citing the data and it was the best available, so I went forward.

financial world would have been well served!

Further, with the few transactions occurring on the island, lack of homogeneity of each property, and the quality of my data source,

Sadly, Granny passed in 2009. The world lost a wonderful, loving

a correct quantification of annual growth using subsequent

pragmatist and I personally lost an intellectual barometer that

sale of same property would not be possible. The methodology

taught me more than I could ever hope to learn in school. I pen

was solid, though the bias and standard error of the resulting

this article in her memory.

answer would be large. Fortunately, Granny had not asked for an unbiased answer with minimal standard error.

26

| LVM

/ September 2010

Interested parties, please submit a resume and two current appraisal samples to recruiting@live.com (419) 255-9171 Ask for Karen

LVM |

27

e s b

28

| LVM

/ September 2010

from a

Home Inspector

Some tips for approaching the “Site” section of the URAR

part

e

s n o i t a v r

3 Michael

Connolly

how n o d e h t touc n e tions m c l l e a s t s s n s i ddre a nth’s o t port h m e g i R t s l m a La s r i Appra specto n l i ject,” a b i e t u n S m e “ o d i h e s a rm Re wed th o e i f i v n e U r s, we dy n a o e i r t of the l c a e s ood” Having h r ort. ” . o p R b e A r h R g i e e “U h t and “N n of o i ” t t c c e a s r t “Con e “Site” h t o t e continu

vements y impro n a e r o ign pically er, the Howev , and ty s . s n n io r s a n b there ime rage Site ape or d rmine if and sto h t te s n e t e d lo m to re ate d quip me whe ot evalu evaluate ound e rs do n new ho always , playgr a to s e c r d d e a n p te o s e c a s e p s, sp ou ew sa Home in of the h he hom fountain I once in n T . s e o a r. ti e m h a d c o v il h u t, s the e ele e bu home to the lo t and th ld. The ay from ent to th e lo w fi m e a y n r r a th o p te f c ddy. sing e wa ce a phy o ely mu to relea was on f surfac m t o r topogra e a e io tr h r g x a p w e f as ain tion le o uate dr k of the d and w e midd l inspec is adeq n seede and bac r a fina ilt in th e t u e fo n b b o d t n e fr e e k y e b se the ot er as the hou well as d had n and had the lend sically, the yar l space ides, as a s d B w . e n a r a d th c t, te t a g n ud ed buil situa d tha ranch o et to, I tr I notice as nicely me was g o t, w h to lo d e lt e n a th u f th fine as diffic t where raphy o looked side >> hile it w of the lo e topog W le th d l. xterior g w id e o in r m b a w e e a r ie th e v e k s e r th li rd n d In n towa cated o s shape ed dow hich wa h was lo ic w h t, w lo , lot, slop s of a ces pace ac e bottom crawl s e sat in th th to d the mu through

LVM |

29

of the house. When I looked under the house from the crawl

utilities in the home and report whether they are public or

space access, I first illuminated the floor of the crawl space.

private, and regarding their capacity.

Instead of seeing a gravel or dirt floor covered with a poly vapor barrier, I saw a perfect reflection of the subfloor of the house.

In my area, most homes have public utilities. Some more

Like a mirror, the three feet of water that had accumulated in

rural areas will have private waste systems and/or wells.

the crawl space was reflecting the image of the wood framed

The inspection of the private systems such as wells and

subfloor of the main house! The crawl space was flooded and

waste disposal systems is outside the scope of a typical home

would continue to flood every time it rained. The entire ten acre

inspection, however, these systems are critical and a home

lot directed surface water to the very spot on which the home

inspector should always advise his client to have them evaluated

was constructed.

by a professional.

As for Zoning, many times the inspector does not have

The electric to a home usually enters in one of two ways. First,

knowledge of, nor has researched the zoning of a property, or

it could be through an overhead connection (called a service

even determined the highest and best use. However, it is not

drop) from a utility pole. But it could also be underground to

uncommon for a buyer to ask or discuss planned improvements

the home, which is referred to as a service lateral. The minimum

with their home inspector. Many new buyers are purchasing

service amperage to a home should be 100 amps, however, it

homes with the intent of immediately modifying or remodeling.

is more common in our area to have 150 and 200 amp services,

This can be a bathroom refreshing, a kitchen remodel, or as

while some older houses still have a 60 amp service. This is

extensive as a room addition or the building of a barn or other

considered inadequate by todayâ&#x20AC;&#x2122;s standards and would always

outbuilding. In these cases, if I have knowledge of specific

be identified by an inspector as an item to upgrade. It is difficult

zoning or building requirements, I may discuss possible issues

in the scope of this article to explain the many ways to determine

related to such work.

the amperage rating of the electric service supplied to the house.

One quick tip: if the home is supplied through a service drop

Not always does a buyer share his plans for the home with his

(overhead), look at the wires strung across from the utility

home inspector. I once inspected a 100 year old farm house on

pole. If there are three separated individual conductors, this

a beautiful fifty acre lot for a local doctor. The seller, Realtors,

is an older system and should be evaluated for adequacy and

and my buyer all attended the inspection. The home was

condition. If the service drop has two conductors twisted around

old and had many issues, which took a good part of a day to

an uncovered aluminum wire, then this is a more modern service

evaluate and report to my client. My client listened intently as

and may be adequate for the home. It should be noted that just

I explained every issue and asked about the methods and costs

looking at the rating stamped on the main service breaker is not

to repair these issues. A week after the inspection, I followed up

a guarantee of the actual service rating. Breakers can be installed

with the client to ask him about the inspection and to see if he

on any size service and it is common for people to install larger

was continuing with the purchase of the home. He said he was

size breakers than the actual service to the house. It is necessary

proceeding and thanked me for the great inspection. He went

to determine the size of the service conductors, the capacity of

on to say that he had negotiated over $30,000 off the original

the main panel, and the main breaker size.

purchase price due to all the needed repairs. I felt great at having served my client so well and knew he would be happy in his

If a house is supplied with natural or propane gas, it is important

new home. Six months later, I found myself on the same road

to note the location of the gas meter and equipment. Is it

doing another inspection. As I drove down the road, I could not

protected from physical damage? For example, a gas meter

find the house I had inspected for the doctor. Finally, checking

located next to a parking pad could be subject to damage if

the mailboxes, I stopped in front of a newly constructed home on

bumped by a car. Propane tanks should be adequately secured

the exact location of the old farm house. The doctor had bought

if next to a house and the gas lines should be protected from

the farm house without telling anyone, including his inspector, of

damage.

his plans to knock it down. The inspection was simply a means of negotiating more money off the purchase price! What a lesson

A municipal water supply to the home is usually metered. This

I learned that day... As an inspector, one should never think they

meter can be on the exterior of the home, in the yard or inside the

know what the buyer is thinking or what intentions they have

house. If there is no meter, the home may have a well or cistern

for a home.

and this should be mentioned in the report.

Utilities to the home are certainly within the scope of a home

Some main incoming water lines are prone to damage or leakage.

inspection. The home inspector is obligated to identify all the

One such pipe is a blue plastic (polybutylene) pipe called by

30

| LVM

/ September 2010

its trade name of “Blue Max.” This pipe is notorious for leakage

As a professional inspector, I will often turn down inspection

in the yard, or as it passes through the foundation. A large class

assignments that are not within my market area. This is not

action suit was in place (now expired) for this material. When

because I have so much work that I can afford to turn down

I note a blue colored plastic pipe entering the home as the

business. It is not because I do not want to drive far outside

main water service, I always advise my clients to have the pipe

my market. It is because I have developed a knowledge base

evaluated for leakage. Furthermore, a depression in the yard, in

of my market area. I have learned about different cities, areas,

line with where the main water line extends from the house to

neighborhoods, and even streets that have negative external

the municipal connection point at the street may be indicative

influences. Some neighborhoods have city sewers, which

of a leak in the pipe underground. Further investigation may be

chronically overflow and flood houses after a hard rain. Other

warranted.

areas have creeks or rivers, which can swell way out of their banks, flooding entire neighborhoods. One neighborhood in my

A main water line which enters the home may be PVC. While not

service area was once a gun target range and elevated lead levels

common, I do see this. PVC is generally used for waste water lines

have been discovered in the soil. To take an inspection outside

and may not be approved for potable water.

of my service area means I would have little to no knowledge of the external influences, which may be affecting the home I am

A dull silver water line entering the home with bends instead of

inspecting. This would be a disservice to my client.

angled fittings and a ball on the end of the pipe (where it connects to the main water shut off) is probably a lead pipe. Lead in

I do a Google search of the street, which may reveal any stories

drinking water can have adverse health concerns and should be

of flooding on the street or neighborhood. If I see a neighbor in

noted.

the yard or walking down the street, I will stop and talk to them about the neighborhood. I am often surprised at the information a

Sanitary sewer connections can become blocked and allow

neighbor is willing to share concerning the neighborhood and the

waste water to back up into the home. If the home is older, the

subject property.

connection pipe between the house and the public sewer can become cracked and tree roots can block the pipe. While the main

In the next installment, I will delve into the “Improvements”

sewer connection cannot be visually inspected (without a camera

section of the report. We will discuss many of the techniques used

and a sewer snake) there may be clues as to the condition of

to ascertain the condition of the subject property improvements.

this line. Chemicals designed to clean out root from sewer lines can often be seen stored in the garage or basement. The clean out plugs for the main building drain or sewer connector may be newer or show signs of prior wrenching. These may indicate recent repairs or cleaning to remove roots or blockage in the main sanitary building drain. The cost of repairs or replacement of the main sanitary drain connector are very high and any observations concerning possible blockage or repairs to the drains should be noted.

As an inspector, I always advise my client to determine if a driveway, alley or street is private (not dedicated) and to obtain all information concerning maintenance agreements with other owners. It is important to note the elevation of the street and/or alleys, and the drainage relative to the subject property’s lot and improvements.

Flood maps are not used by home inspectors, however, the inspector would always evaluate the lot for any creeks or rivers adjoining the lot, which might flood. Signs of high water marks on the foundation walls in a crawl space or basement may indicate prior flooding.

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LVM Chat

Industry Comments

{ Responses from last months’ articles } Here are some responses from last months’ issue from our readers. Do you have something to say?

1

Go to www.livevalmag.com and submit your response to be considered for next issues chat.

Appraising in the 21st Century

2

B.G. It is obvious that “humans” are being replaced by technology. After 27 years in the business, I am weary... and becoming obsolete.

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Financial Regulatory Reform, AMCs, and the Residential Appraisal Industry

John Rochester, NY Jordan, this is a well researched, well written article and I applaud you for taking the time to share this information with all appraisers. The bottom line, however, is the bottom line! With the HVCC we ushered in a new era of appraiser independence that I think was appreciated by every appraiser out there - even the bad ones ( you know who you are ). For that we gave up without a fight - the reasonable fees that we were all accustomed to….

The Life of Your Appraisal

LVM Chat

3

Barry Very interesting and enlightening article, and a certain indication that the appraiser must give every assignment his or her very best efforts. I just received a communication from the investors who bought the loan of a buyer, through the initial lender. The borrower had defaulted on the first payment and they wanted to know “how accurate did I feel my value estimate was.” “Very.” I replied, I had really worked hard on that one, as I do for all my appraisals.

4

The Fool’s Gold of AMC Licensing

Enhancing Transparency in Collateral Valuations

Bay Appraiser Its hard to find fault with the basic concept of making the data easier to parse. What I fear however is a rush for data users to embrace such a system as a purely cost savings method. Loan Prospector and Desktop Underwriter were good technology ideas until those doing the data input realized how easily these programs could be manipulated.

Moorgan States jumped on board with AMC licensing not because of some initative to protect the public trust (were that the case state appraisal board track records would show larger numbers of disciplinary actions over the years regarding crooked appraisers) but because of the monetary incentive that AMC licensing would bring to their coffers. Fools Gold to be sure....in the way of netting more taxes, registration fees, etc is the states carrot. / September 2010

For What it’s Worth { The HVCC Sunsets Two Weeks Early } What change will take place in the real estate and lending industry as we transition from the Home Valuation Code of Conduct (HVCC) to the Dodd-Frank Wall Street Reform and Consumer Protection Act? How do real estate agents, appraisers, and lenders really perceive the end of the HVCC? I made some random phone calls and first asked what people actually thought of the end of the HVCC, which will now sunset on October 18th, 2010. Then, I asked for some thoughts on the new financial regulations.

Julie D. Friess-Johnson

One of the aims of the new legislation is to make an effort to restore confidence in the United States financial system. As can be heard from the responses I received, the appraisers, mortgage brokers, lenders, and real estate agents that I spoke to were not very happy or confident with the present system. Here are some of the responses I received.

Linda Rogers, Certified Mortgage Planner and Branch Manager of Primary Residential Mortgage, Sedona, Arizona, stated “It will be great to have relief from the unintended consequences of HVCC because we regularly have appraisers drive from more than 150 miles away to an area that requires extensive and specific geographic competency. This practice has resulted in the unnecessary devastation of values in this market. It is appalling that the Appraisal Management Companies have allowed appraisers to self select zip codes for an area and have taken no responsibility to ensure that appraisers are actually competent to perform appraisals in those areas.”

Carol Anne Warren, Real Estate Agent, Cottonwood, Arizona replied with a loud and energetic “Hallelujah!” when asked about the HVCC sunsetting. She continued with, “Heard it was going and to be replaced but don’t know what with. HVCC has been one of the worst things they have ever done to us.”

Roy Torres, Certified Residential Real Estate Appraiser, Cottonwood, Arizona said, “I don’t think it will make a difference for appraisers at all. They (lenders) will still keep using AMCs. I want to know why it isn’t going back to the way it was before HVCC. The HVCC has taken good honest people and put them out of the business. I personally feel it is too late. I lost 70% of my business. When I started appraising, my standard fee was $350. Then it was increased after a few years to between $400-$450. The HVCC came around, AMCs cut the fees to $175, and increased the amount of required work by 6-8 hours per job with all their requirements. (We call that “scope creep.”) I can’t afford to keep doing this. I can’t stick around and wait for this to happen. I just can’t make a living doing this. I love appraising. I wanted to retire doing this. What kind of a licensed professional never gets a raise? How many licensed professionals do you know that go backwards in their fees?”

Robb Gordon, Branch Manager of LOANnetwork LLC, Sedona, Arizona, stated that it was his understanding that the lenders and banks are still expected to keep the same regulations.

Mr. Gordon is pretty close to being correct. As Richard Hagar, SRA, of American Home Appraisals, Seattle, Washington said, “People who think that this is a big deal and the federal government has made a big change are mistaken. What is replacing the HVCC is even stronger than the HVCC. The HVCC was always meant to be temporary until such a time that federal regulation took over. That has happened. Most of what was in the HVCC, and is in the new laws, is simply re-stating the rules and regulations that had been around for years but had not been enforced. The passage of this law will likely see more enforcement of the rules and laws that have been around for decades. That’s a good thing.”

As an independent appraiser, I encourage all appraisers to take a look at the new regulations. Appraisers have been working diligently across the country to form appraiser coalitions. They have been striving to work with their appraisal organizations by writing letters to legislators and lobbying— they’ve been yelling so loudly that they’ve become frustrated and angry. But, for the first time in history, appraisers have come together as a unified group, and their voice has been heard all the way to the top of “the Hill.”

The new regulations state that appraisers are to be paid a separate distinct fee from the appraisal management companies and that fee is to be “customary and reasonable.” “Customary and reasonable” cannot be determined by the AMCs, and appraisers should now be competing based on experience, competency and quality, not on who can complete the appraisal the fastest and cheapest. AMCs cannot touch any of an appraiser’s fee and they must pay the appropriate full fee as well as additional higher fees that are >>

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Directory

Julie D. Friess-Johnson

{ FWIW Cont’d }

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appropriate for complex assignments, assignments that require increased time, and assignments that are higher in difficulty and scope of work. They are subject to not more than a $10,000 civil penalty for the first violation of this part of the regulation and $20,000 penalty for all subsequent violations. The AMC’s fee is now completely separated from the appraiser’s fee. It does not benefit an AMC to use “lower quality, less qualified” appraisers because, now, the better the job the appraiser does, the less work the AMC has to do to deliver the final product to the client.

If AMCs have to touch each file less, there will be less cost to the AMCs themselves, which comes directly out of the AMCs’ pockets now. AMCs now have motivation to use better and more competent appraisers, or it will cost them more money to run their companies. They also can’t make appraisers sign a document that states that they agree that the fee the AMC is paying is customary and reasonable, and therefore a lesser fee is acceptable. They are not allowed to have any of the appraiser’s fee at all or reduce it for their benefit in any way.

This is all good news for honest, hardworking, diligent appraisers and for the general public who have been pretty upset with about 75% of the AMCs out there for the last 14 months. Pick your heads up! The sun is up in the sky and shining brightly!

The present outlook is a good one!

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