Magazine >> October 2011
ce n pie o i n i p : a n o by bates ry bar
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OCTOBER 2011
* LIVEVALMAG.COM | 3
co nten ts | contents |
Feature
24
The 10 Appraisal Commandments USPAP UCCAP: The Uniform Commandments of Commonsense Appraisal Practice.
If we were really honest, we’d admit to being fallible and malleable human beings who need hard, understandable commandments to keep us on the straight and narrow.
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Publisher’s note
THIS WAY IN.....
An English proverb is used when two people reach the same conclusion at about the same time. One or the other
will whimsically affirm, “Great minds think
focus on the URAR, and it’s dangerous to our
future. I assure you his arguments were developed completely independent of my short rant last month. Great minds think alike!
Speaking of great minds, Barry Bates returns to
the magazine as our featured author this month.
I have followed Barry’s writings for many years. Barry is the Dennis Miller of the valuation
alike!”
space. Woven inside of his sarcasm is thoughtful
Those of you who read
my publisher’s note last month will remember
A letter from the Publisher
his thesis: residential appraisers have a myopic
(hopefully) my strong opinion that the problem
with the Uniform Appraisal Data Set (UAD) is our industry dependence on the Uniform Residential
Appraisal Report (URAR). In his article this month titled “Appraisal Myopia,” Jeff Bradford details his own strong argument along the same lines,
reflection on our industry. In this month’s
controversial piece, Barry irreverently addresses
the Appraisal Foundation and USPAP. He suggests we can replace this enormous publication with 10 appraisal Commandments he calls the “Uniform Commandments of Commonsense Appraisal practice” or UCCAP.
Certainly I want to state Barry’s opinions are his own and not those of LiveValuation Magazine or
myself. I must confess though, I agree with many
meet the team
his assertions; I just will not identify which ones. Apparently the British include a second phrase 1
with “Great minds think alike.” Often the retort
in Great Britain is “and fools seldom differ.” The second phrase applies to those items that Barry and I agree on.
1. Publisher | Ernie Durbin II, SRA, CRP 2. Editor-in-Chief | Emily Vannucci 3. Copy Editor | Kersten Wehde
2
If these two articles haven’t stirred you up enough, be sure to check out Steve Ferguson’s article on
“Redefining Most Probable Value.” Steve argues
4. Creative Director | Traci Knight
that in the context of the current crisis, accuracy is
5. National Sales Rep. & Marketing Coordinator | Kate Sheehan
not the problem; a “less accurate” appraisal may be Printer | Ovid Bell Press
3
Advertising Information | P : 858.832.8320 | E : kate@livevalmag.com
replaced by a range of value. Interestingly, Barry Bates closes his article with the same point. Well
Subscription | info@livevalmag.com
what do you know, great minds do think alike (or
Editorial | ernie@livevalmag.com | emily@livevalmag.com
maybe fools seldom differ).
Web | LiveValMag.com 4
Our pages are filled with strong opinions this
month; we want to hear yours as well. You can add
© 2011 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. While effort is made to ensure accuracy in the content of the information presented herein, LiveValuation Magazine is not responsible for any errors, misprints, or misinformation. Any legal information contained herein is not to be construed as legal advice and is provided for entertainment or educational purposes only. Postmaster : Please send address changes to LiveValuation Magazine, 16745 W. Bernardo Drive Suite 450 San Diego, CA 92127
the solution. “Point of value” estimates need to be
your comments at www.livevalmag.com. Simply find the article and submit your post below it. It 5
may be printed in next month’s magazine (see Page 46)! 6
| Publisher |
Ernie Durbin II, SRA, CRP
OCTOBER 2011
* LIVEVALMAG.COM | 5
UAD proves one thing: All technology vendors are not created equal. Other appraisal tech vendors left appraisers, lenders, and AMCs stranded with lastminute UAD solutions that crash, are costly, aren’t scalable or deployable, and don’t solve the connectivity and workflow issues of UMDP overall. Our development, support, and infrastructure superiority are obvious in times like these. You can’t solve complex workflow problems using outdated technology and a sales pitch. To roll it out effectively, support it 24x7, and prevent massive bottlenecks in the system, you have to spend the money over the long term and create a culture adept at handling exponential increases in complexity. We live that culture. With more desktop clients than all of our competitors put together, and tens of thousands of transactions every day through our appraisal management system, we don’t just “wing it”. This deadline showcases the difference that makes. Our appraisal formfilling customers, for example, have had UAD functionality since April, giving us ample time to listen, educate, and evolve. Other vendors delivered UAD features that were unbearably clunky at best, and flat-out broken at worst. Appraisers were left dead in the water and struggled to meet deadlines, while they got busy signals when they called their vendors. Those types of crippling delays and non-responsiveness put everyone’s pipelines at risk. But beyond stability, Mercury Network’s UAD/UMDP solution for lenders and AMCs stands head and shoulders over the competition for the same reason. With Native XML delivered by real workflow-centric plugins, extracting data from cranky PDFs isn’t ever necessary. And it doesn’t rely on cobbled-together solutions with converters layered on top of viewers on top of isolated websites. Data flows seamlessly from appraisers to lenders and AMCs, and vice versa, and on to the GSEs via built-in portal integration. It’s superior for every size client, and for appraisers. If you’re an appraiser, note that our forms software, including the UAD, is free with the mention of this magazine. If you’re an AMC or lender, most of our Mercury services are also free. But don’t switch to us because of short term savings. Switch because even though your technology may change over time, your tech vendor’s culture probably won’t. That’s a long term liability you can’t afford. 6
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We’re a better vendor, with better resources, and a better cultural ethic, proven over decades. Switch now. Get our solutions for free. Reap the benefits forever. 1-800-ALAMODE www.alamode.com This is a call-in offer only. Mention Live Valuation when you call .
AD CODE: MALVWT1011 a la mode and its products are trademarks or registered trademarks of a la mode, inc. Other brand and product names are trademarks or registered trademarks of their respective LVM owners. All prices, terms, policies, and other items are subject to change without notice. Copyright ©2011 a la mode, inc.
& Table of contents LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM
your monthly valuation publication
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LVM10.11
14
34
Departments 5
Publisher’s Note
8
Contributors
Up Front
Inside This Month
14 The Chief Says
24 The 10 Appraisal Commandments
The case for collaboration.
10 Staiger on Stats
kev in e. l ah r
44 Things Appraisers See
16 Redefining Most Probable Value
46 Voices of Valuation
Less accurate appraisals could be the solution.
47 Economic Outlook 48 CoreLogic Stats
ste v e fer gus on
49 Directory
20 The Hot Seat
50 For What It’s Worth
sign up for the newsletter at livevalmag.com.
sta conny ect
USPAP UCCAP: The Uniform Commandments of Commonsense Appraisal Practice. barry bates
30 Appraisal Myopia
Is it killing the industry? j ef f bradf ord
Featuring Brad Davis
34 AMC Transparency
Mo rg an stan ley/sa xon
sc ot rose
SVP o f Va l uations ,
ed
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The solution our industry seeks.
l o an serv icing
38 “Lies, Damn Lies & Statistics”
get up-to-date news and exclusive access to things appraisers see.
You’re using statistics whether you know it or not. david braun, mai, sra
LVM’s Don’t Miss This.
up close + SEE PAGE 44
for strange and unusual things appraisers see in the field.
FIND US ON:
FACEBOOK, TWITTER, LINKEDIN
This is similar to how a drunk uses a lamppost: more for support than illumination.- page 34
october 2011
cover
Magazine >> October 2011
The 10 Appraisal Commandments
USPAP UCCAP: The Uniform Commandments of Commonsense Appraisal Practice.
24
OCTOBER 2011
E ION PIEC AN OPIN BY: BATES Y BARR
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The contributors
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30
38
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Barry Bates wiretapped the Soviets in Berlin as an Army staff sergeant between 1964-68. After college, he was determined to destroy capitalism from the inside; he failed miserably for 34 years, but has finally succeeded over the last three. Bates has been chief appraiser for four national lenders and property valuation manager for two major mortgage securitizers. barry@remva.org
Jeff Bradford is the CEO of Bradford Technologies, developer of ClickFORMS, AppraisalWorld and the CVR. Prior to Bradford Technologies, Bradford was extensively involved in designing and developing computer-aided analysis systems for engineers. Today, he is focused on empowering appraisers with computer-aided valuation technology. Bradford holds three master’s degrees: an MBA and an M.S. in computer science from Santa Clara University, and a master’s in engineering mechanics from the University of Texas at Austin.
David A. Braun is President and Founder of Automated Valuation Technologies, Inc. (AVT). AVT produces unique appraisal seminars and software for the practicing appraiser. Braun has experience in both residential and commercial properties, is a licensed real estate broker, and founded and managed a 15-person appraisal firm from 1983 to 2010. Braun is also currently an approved Appraisal Institute Instructor and is certified by the Appraisal Foundation as a USPAP Instructor.
Brad Davis is SVP Valuation for all U.S. Residential Business at Morgan Stanley/ Saxon Loan Servicing. Davis has been with Morgan Stanley for seven years in his current role and has been in the industry for 28 years. Prior to Morgan Stanley, he was the Chief Appraiser for GE Mortgage Services and GE Mortgage Insurance. Prior to this, Davis was with Washington Mutual/American Savings in several different regional manager roles.
Barry bates
jeff bradford
david a. braun, mai, sra
brad davis
contr tors | contributors |
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Steve Ferguson started his career in real estate as an appraiser for 20 years, starting in Cincinnati, Ohio. In 2004 he closed the appraisal chapter in his career and continued his formal education in economics where he began applying statistical tools to the field of real estate. Ferguson currently is the lead Realtor working for a medium-size firm in Indianapolis, IN, where he lives with his wife and three children. steve.ferguson@livevaluation.com
Bob Keith graduated from the University of Texas and was a real estate appraiser for 21 years before becoming the Administrator of the Appraiser Certification and Licensure Board in July 2001. Keith is a past president of the Association of Appraiser Regulatory Officials, the immediate past chair of The Appraisal Foundation Advisory Council, holds the IFA designation from the National Association of Independent Fee Appraisers and is a nationally certified USPAP instructor.
Kevin E. Lahr is Executive Vice President, part owner, Chief Appraiser and Compliance Officer, of Vesta Valuation, LLC. Over the past 30 years Lahr has gained extensive management experience in the appraisal industry, specializing in creating startup appraisal departments and appraisal management companies and developing them into first-class operations. Lahr has appraised properties in 16 states and is a state-certified general appraiser in Colorado and Florida.
William “Bill” Pittenger is President and Chief Economist at JVI Solutions, LLC, a central Florida-based vendor management firm offering nationwide appraisal and inspection services. Pittenger began his career as an appraiser and earned the MAI and SRA designations of the Appraisal Institute. Pittenger has held senior appraiser positions at two of the nation’s federal banking agencies and was also corporate chief appraiser for a $44 billion bank holding company.
Steve Ferguson
bob keith
kevin e. lahr
William L. Pittenger, MAI, SRA
ribuscot rose
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Scot Rose is President and Chief Valuation Officer at Urban Lending Solutions Appraisals, a division of Urban Lending Solutions. Rose is a Certified Residential Appraiser with over 15 years’ experience in real estate appraisal and collateral risk management. Rose has spent the last several years providing collateral due diligence services for the capital markets and default management solutions for the nation’s largest servicers and investors.
roger staiger III
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Roger Staiger III is Managing Director for Stage Capital, LLC. Staiger areas of expertise are commercial and residential real estate portfolio investing, corporate business, and strategic planning, forecasting, valuation, financial modeling, asset repositioning and risk mitigation through financial hedging for physical assets. Staiger holds positions at Johns Hopkins, Georgetown, and Loyola universities. OCTOBER 2011
* LIVEVALMAG.COM | 9
Staiger on stats
STAIGER on STATS Industry’s latest stats
Roger Staiger III
Tim never quit! Tim was a
sophomore when I was a senior at Mercersburg and he loved running track. Every day Tim would show up to practice and try to run with the team. No one really paid much attention to Tim as he was quiet and quite honestly a horrible runner. Hell, while I never said it, the guy ran like a girl. Senior year most are self-absorbed with college aspirations and chapters turning and I was no exception. I paid Tim little attention in the beginning, certain he would quit and start recording practice times with Heather, the cute towel girl. Every race Tim suited up and ran the half-mile with me, or rather, somewhere behind me. Every race Tim came in dead last, ending without a cheer as the scores were being tallied by the time he would arrive. About halfway through the season I noticed Tim finishing the race, no fanfare, no attention, but not giving up. Tim pushed to the end, 100 percent, not for anyone but Tim. I shook his hand and congratulated him. I remember that race as I took
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second to Hill School’s champion. Knowing that victory was impossible and second was assured, I loped over the line to the ire of the coach who knew I had not pressed. Tim, on the other hand, Tim, for the never let off first time, came his throttle; in second to he pushed last, i.e., he to the end. I was NOT last. admired this Regardless of his about Tim. placement in the I admired race, Tim was the that he had winner. zero chance but he had heart, drive and desire. Finally, the penultimate meet of the season, Tim was running for all he was worth, feet bowed, arms flailing but with all heart. The entire team was screaming for Tim, “TIM, TIM, TIM …” right to the point of victory, Tim’s personal victory. Tim, for the first time, came in second to last, i.e., he was not last. Regardless of his placement in the race, Tim was the winner. We all knew this and cheered and congratulated Tim! Tim was racking up “victories” in 1988, my last year of high school, when the labor force participation was just above 66 percent. Today, labor force participation is 64 percent indicating 3.0m workers have left the labor force entirely. Unemployment has remained unchanged at 9.1 percent for August – not because jobs stabilized (there were no new
net jobs), but because individuals have left the labor force entirely, i.e., given up. The U.S. economy is not simply disgruntled; it’s simply giving up. If Tim had given up he never would have enjoyed his victory and, even worse, been relegated to be Heather’s assistant timekeeper. Is that where all of this is leading the U.S., from first to something other than first? Since July 1, 2011, the day after QE2 ended by the Federal Reserve, the S&P 500 has lost more than 10% in value. On August 5, 2011, Standard and Poor’s downgraded the U.S. from AAA to AA+, and Congress continues to “labor” over additional cuts to the deficit. Note: The initial “cuts” were not cuts at all but rather expense freezes in future spending items. The Federal Reserve announced it will keep short-term rates near zero through 2013 in an effort (thus far unsuccessful) to stimulate the economy. The federal balance sheet has more
than trebled since the start of this crisis in 2007, now near $3,000bn, and still growth remains anemic and the U.S. workforce continues to shrink to generational lows as workers simply exit. Would Tim leave the workforce due to lack of jobs? No! Tim would put his head down, flail his arms, and kick his feet wider in a grotesque display of attempted athleticism, throwing his heart and pride harder behind his resolve to succeed. Tim would not give up! Just as Tim would not give
up, neither should the U.S. The heroin injections of stimulus must cease and the U.S. must suffer the indignant withdrawal effects of the weaning, even if it means uncontrollable shakes for weeks. What does this mean for real estate prices? Nothing good! Every MSA on a year-over-year basis was negative and the spread between D.C. and the nation reduced considerably. Even the formerly positive-performing DCMSA has turned negative year-overyear, indicating an adjustment is occurring nationally. On a positive note, the month-over-month performance was positive for all Metropolitan Statistical Areas (graphic not shown). However, as with the year-over-year performance, the spread between the national composite and DC-MSA has substantially >> OCTOBER 2011
* LIVEVALMAG.COM | 11
narrowed, further supporting that D.C. price increases are being reigned in and (dare I say it? I dare!) possibly beginning their long-denied correction. The futures data continues to forecast the bottom of the residential market mid-2012. The wild card for this prediction is additional fiscal stimulus or more easing by the Federal Reserve. Additional fiscal stimulus is limited due to the debt ceiling crisis and the strong aversion by the Republicans to increase a debt limit without corresponding cuts in spending. Additional easing by the Federal Reserve is also limited by current core inflation being close to 3.0 percent given the Fed’s goal of controlling inflation at or near 2.00 percent, i.e., the Fed’s stated inflation target
of 2.00 percent. Barring additional fiscal stimulus or easing, mid-2012 is supported as a floor on national home pricing with the caveat being bank REO and the pace of the future 2.5m homes to be foreclosed. What is certain is that the floor for residential real estate prices has not been reached. What is uncertain is when the floor will be reached and how long the U.S. will remain upon the floor prior to price increases. (Note: The residential floor in the previous cycle was 1992. It was not until 1996, four years later, that prices began to increase again.) Commercial real estate has stabilized with multifamily becoming the darling of the real estate asset class. While no futures derivatives market exists for commercial real estate, several historic relationships do exist which, when extrapolated forward, foretell a bearish near-term future for commercial real estate. Historically residential has led commercial by 16 months. Further, 500.0bn in CMBS are maturing 2012 – 2014; neither is a positive buoy for
commercial real estate. Both support floor pricing for the commercial asset class for fourth quarter 2013 at the earliest. The solution seems obvious though perhaps unpalatable. Rather than inject more stimulus and/or increase additional fiscal spending that deepens the hole, perhaps no stimulus with deep spending cuts is the answer. The U.S. must spend less than it earns and relearn fiscal prudency. Cuts in spending need to be real and not fictitious. Workers need to re-enter the workforce, perhaps transformed by new skills or accepting of different positions, and push the U.S. from its anemic growth rate to a healthier 3 percent annualized growth rate. Much like Tim pushed his way to second to last, the U.S. must push forward, no matter how grotesque the short-term pain. The U.S. must find the drive that made this great nation great and accept the harsh reality that it is in a race with itself and it is losing! 6
The U.S. economy is not simply disgruntled; it’s simply giving up. 12
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* LIVEVALMAG.COM | 13
U
Up front to be (and sometimes are) in conflict with our own. Anyone who reads industry articles and commentaries can understand how difficult it might be for appraisers and AMCs, or lenders and servicers, to find a common cause. But collaboration is not only possible, it’s essential. Let’s examine AMCs for examples of how collaboration can lead to improved outcomes.
ns ig
I
The Case for Collaboration
hts
from
er Chief Apprais
A path to redemption. Kevin E . La hr
“Every sin is the result of collaboration,” or so said Stephen Crane, the
great American novelist who penned the Civil War classic The Red Badge of Courage. If Crane was right, then it might be fair to argue that the current challenges facing the housing industry are the result of a collaboration of sorts, sins divisible among many industry participants. There’s no way I’m going to apportion blame, and I won’t attempt to tackle all the issues confronting lenders, servicers, mortgage-insurance companies, investors, appraisers, appraisal management companies (AMCs), Realtors, technology providers and (most important of all) homeowners. Instead, I’d like to consider how collaboration may support improved outcomes for every valuation participant and, as a result, the housing industry overall. Leadership experts who specialize in teamwork define collaboration as “the act of joining together to make possible that which cannot be accomplished alone.” Although the different participants have unique ideas and priorities, we all share a common goal: a better valuation experience – moving toward greater satisfaction for our customers and for appraisers, AMCs, lenders, servicers and Realtors. Building from that common goal sounds simple enough, but collaboration isn’t easy. It challenges us to work with competitors and with parties whose priorities are perceived
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Let’s start with perhaps the most difficult and certainly the most obvious partner for collaboration with AMCs, appraisers. In March 2010, the website Appraisers Forum posted a poll with the simple question, “Do you hate AMCs?” Respondents were offered four choices: 48% respondents chose } “Life is too short to hate or do appraisals for $200.” 32% picked } “No, I don’t hate them, I just hate what they do.” 11% selected } “No, I love my enemy,” and 9% answered } “No, I don’t hate them, I just resent them.” I’m pretty sure this was meant to be a humorous poll, and I’ll admit that it made me laugh a little bit. Unfortunately, if you read the comments of forum members who responded to the survey, you’ll find that some of the sentiments behind the responses are not funny at all. A fair number of appraisers have strong feelings when it
comes to AMCs, but it hardly needs to be said that many AMCs and most appraisers essentially want the same thing: a better valuation experience.
greater access to product development, more latitude to innovate, and improved access to GSE initiatives when they’re in the concept and development stage. AMCs might Building seek improved from that relationships with common appraisers and goal consistency in sounds state registration simple requirements, enough, but among other collaboration things. isn’t easy. It challenges us We can all achieve to work with our desired competitors outcomes through and with collaboration. parties whose The inverse is priorities are true as well: We perceived to be cannot achieve our (and sometimes desired outcomes are) in alone. Individuals, conflict with companies, and our own. organizations must
What is a better valuation experience? For homebuyers and other customers, it might mean improved access to information about their appraisal both while it’s in progress and after it is done. It might also come in the form of increased professionalism from those appraisers who don’t give customer service as much regard as they should. Borrowers may also want details and options in those unfortunate instances when the subject property appraises for less than they anticipated. For lenders, a better valuation experience might mean resilient products that help them make sound lending decisions and minimize collateral and repurchase risk. It includes the ability to complete appraisals in a reasonable timeframe for a reasonable price. The appraiser wish list would undoubtedly include fair expectations and fair pay. Recently, there’s been increasing concern over unreasonable revision requests. We also know that appraisers would like to be compensated based on the scope of work. Technology providers may want
each do their part.
So, how might AMCs collaborate with other industry participants? Here are a few ideas. IDEA ONE AMCs can work with appraisers at every phase of appraisal production. It starts with AMCs respecting and valuing appraisers on their panel and working to attract the best-qualified appraisers. Assignments, rather than coming in the form of lengthy engagement letters, might best be accomplished through live, one-on-one conversations, which come with the added benefit of fostering the kinds of relationships that result when directives in written order assignments become dialogues. Manual
assignments also promote pricing based on the specific scope of work for the assignment and not just traditional fee schedules or the market fee. IDEA TWO Also, AMCs can continue to support appraisers with training and provide improved access to data and new industry requirements. Recent history provides many examples of how AMCs have partnered with lenders, servicers and industry technology providers to expand understanding of HVCC requirements, the Market Conditions addendum, and, more recently, the Uniform Appraisal Dataset (UAD) rules. IDEA THREE In addition to collaborating with appraisers, AMCs have opportunities to partner with lenders and servicers. AMCs have the ability to manage the unique preferences and demands of each client. These preferences can be expressed as specific appraisal form requirements. For example, a lender might prefer to have lot size reported only in square feet and not in acres. Partnership with lenders can also mean working with AMCs and appraisers to develop new forms, products that don’t exist today but are fully compliant and pair well with a lender’s specific underwriting objectives. Along these lines, one lender found that the standard desk review form fell outside of their ideal for a review product. They partnered with an AMC to build a custom review form and to communicate their specific
expectations to appraisers. IDEA FOUR Collaboration opportunities abound. AMCs can lead the charge to address the challenges potential trainees face when entering the profession. They can support efforts to revisit the expanded qualifications for licensing and training, and they can encourage financial institutions to work with trainees. In the years to come, the failure to address this issue presents real risks for the overall industry. IDEA FIVE AMCs can work with lenders and other settlement service providers to increase transparency with respect to appraisal fees, AMC fees, and application fees. They can also collaborate with technology companies and with other settlement service providers; they can partner with regulators, investors and other industry participants. Of course, other industry participants can inspire collaboration as well. I sometimes wonder what would happen if representatives from each community within our industry gathered more often to consider how to make significant progress against a specific issue. There are some great forums for these conversations, but we would do well to add a few more. If Crane was right and every sin is the result of collaboration, then perhaps collaboration can also provide the path to redemption. And maybe by working together, by collaborating, the industry can attain a new kind of passion and courage for improving the industry. 6 OCTOBER 2011
* LIVEVALMAG.COM | 15
U
Up front estate market is perfect in terms of competition. Supply and demand always meet to create an equilibrium. Real estate is a commodity. There are minimal external influences that can affect pricing in real estate. Everyone looks at things the same.
as continued education in math and economics, so I may be slightly jaded. The concept of the “most probable value” a property should bring in a competitive market is the first fail as this value is interpreted to be a point value estimate. (Even on a non-continuous distribution, a point estimate is very likely to be wrong, statistically speaking.)
Acceptable reaction to the above is disgust or laughter. If the above paragraph is more frequently Accuracy wrong than in valuation right, why are is not the point value problem; in estimates used fact a less instead of a accurate value range? appraisal may
Redefining Most Probable Value Less accurate appraisals could be the solution.
B
Ste ve Fer gus on
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uyers and sellers in real estate are rational, knowledgeable and well informed. The real
Even in the good times, in terms of real estate, there hasn’t been a time when the market be the solution. was calm Whatever the enough to call cause of the a point value and have real estate crisis in which it really mean anything. we find ourselves, there Most of the players in will surely be blame cast any real estate transaction on the real estate valuation – including the buyer, industry. Just as in 1989 seller, LO, and Realtor – when appraisers were looked at the appraisal as blamed for the S&L crisis a justification of the sales and FIRREA was enacted, price. Appraisers were and the appraisal industry is still are the gatekeepers. being blamed for the 2008 As an appraiser I always market crash. Accuracy looked at this justification in valuation is not the of the sales price as an problem; in fact a less insult. But you can see how accurate appraisal may be this has occurred. How the solution. many appraisals do you see that are spot on with the I looked over the definition transaction price? of market value set forth If you are saying, “I never in FIRREA when learning take into consideration and accepting it in 1989, the transaction price,” and and I’m looking at it again this idea of being a price now, as an outsider. Since justifier is equally offensive I started appraising I have to you, try coming up had the benefit of years with a market value on a of life experience, as well
Below is a simple chart showing the supply and demand chart for a consumer and supplier of gasoline. Downward sloping line is demand, and upward represents supply. For whatever reason the consumer below will only purchase one gallon of gas at $12 (perhaps he is an appraiser who will be forced to make a choice to only appraise homes within a small radius of his office at this price). When the price is $2 he will purchase 11 gallons. Needless to say his income will be affected by this price, just as the supplier is affected by selling at this price. It’s a pretty simple example and the most probable price where utility is maximized is obviously $6 per gallon.
home without looking at the sales contract. Most times appraisers are going to be close to the transaction price – some higher and some lower, but all within a range. Different opinions in a market will yield different prices. Relocation appraisers know this and have to deal with it daily. A relative of mine is in a situation whereby the terms of sale of the home must go through the court (estate not foreclosure) in order to complete the transaction. The court rules dictate two appraisers must value the property and come to an agreement on one price. Sorry, judge, but that is one opinion of value for the price of two, determined by compromise. My point is that individuals and appraisers will look at a property differently, use similar historical information and arrive at many possible prices they would pay within a range. A seller will do the same and react to the market forces of competition, change and scarcity.
In a real market explanation, gasoline demand in the short term is rather inelastic; the demand curve would be more vertical. In the short term we would still want the same quantity, no matter the price. That brings me to an analogy in real estate with
$ Price
Gas Demand
14 12 10 8 6 4 2 0
1
3
Gas Supply
5
7
Quantity
9
11
regard to vertical curves. Imagine a cash-only, homogeneous market with one seller (vertical supply curve) and multiple buyers. If you have any experience in today’s market you may find this to be a ridiculous assumption. I will give you a real-life example of a bank-owned property in decent condition, priced competitively. The bank has this one house to sell but may get multiple offers over a short period of time (funny how that happens). The Realtor for the bank emails the buyer’s Realtors to provide the highest and best offer. In this micro-market the supply is fixed at one but the offers could and do range due to individual demand curves. The bank will usually take the highest offer but not always (considering cash, closing timeframe, etc.). Because of unequal bundle of needs and wants, each consumer will have a different idea of maximizing utility, thereby creating a range of values. One of the buyers may have a certain skill in carpentry, and can improve the house with their own labor. One may have a relative who lives nearby who could help take care of kids. In other words, where fixed supply meets multiple demand a range of prices are expected. Add in another arm’s-length listing within that market with a simultaneous listing period of the bank-owned home and layer the same consumers. There might
not be much difference in condition, but the sellers have different motivations, creating a less vertical supply curve. I am not suggesting that the two listings are equal in terms of risk or even price; it’s just a hypothetical market. If the bank-owned home sells before the arm’s-length transaction and the same buyers, minus one, are in the market for the arm’s-length transaction, the motivations for the remaining buyers tend to change when competing for the last home in the market. Had the arm’slength transaction sold first, it may have a very different outcome in terms of price than if it sold after the bankowned home. Typically buyers, after competing for a listing and losing, will change tactics and will tend to be more aggressive on pricing and terms in order to complete a purchase. If their motivation to live in the neighborhood is strong enough, they may pay a little more for the home due to economic concepts of scarcity and change. In other words they may get a little irrational. In this case, what the arm’s-length transaction sells for in a competitive market versus a scarce market can vary and may change rather quickly. The above hypothetical situations are only based on cash terms. Now add in the idea of credit and different levels of financing. This dynamic addition has >>
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created enormous swings in both the supply of credit and investors in the credit markets over the last decade. In addition to interest rate changes, levels of underwriting can shrink or increase the demand, thereby affecting the real estate pricing. These effects can be sudden and drastic. Some of these changes are not just about a perception that interest rates will go up or down in the future. For example, FHA has recently changed the amount of upfront mortgage insurance premium to address shortfalls in its reserves. The sales market used this as a “creating urgency” tactic. Even though an increase in upfront MIP was offset by a lower monthly MIP, it took
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four to five years to break O premiums. Some of the even. Most firstvariables that time buyers in cause changes the market are in value are short on cash very overt, like and tend to be proximity to motivated by this interstate or GLA. When an change. Increased Some variables appraiser is motivation, for are less known, estimating whatever reason, like percent of market always increases a neighborhood value as a the price toward above 95 percent point value the top of a LTV. When estimate consumer’s an appraiser there is an budget constraint. assumption is estimating the appraiser market value In my past has taken into as a point value appraisal account all estimate there is experience variables that an assumption and training it may have an the appraiser has seemed to make effect on value taken into account more sense to at that time, all variables that outline a range of which is not may have an effect probable values. possible. on value at that Call it laziness time, which is or a desire to reduce E and not possible.
If real estate were a commodity then a point value estimate in time makes sense. But if real estate is dynamic, unique and also has ever-changing market forces, then a range of value seems to make more sense. Would this change have altered the outcome of the housing crash? Probably not. To explain why, refer back to the first paragraph and add a sarcastic “NOT” at the end of each sentence. The valuation industry has taken on quite a bit of risk as a result of point value estimates brought on by the lending industry’s insistence on a number. They will learn to adapt to a range. Look at how they have adapted to three FICO scores. 6
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U
Up front
THE HOT SEAT
20 questions - things you need to know or may have been wondering October 2011
the hot seat From the worst purchase he has ever made to his opinion on the most ridiculous thing about the valuation industry, we get the personal and professional facts from Brad Davis, SVP of Valuations for Morgan Stanley/Saxon Loan Servicing, in our monthly edition of The Hot Seat. 20
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brad
davis
PERSONAL
M orga n S tan l e y / S a x o n L oan S e rv i c ing SVP of Valuations
> > > >
>
You can’t always be right about everything … listen, you might learn something! Ten years from now I hope to be living in the world that I picture in my mind.
I never miss an episode of NCIS. Wish we could do some of that in our profession! When I was a kid I never realized how good I had it … now I want to go back.
I’ll never forget being in the room for the birth of our three kids. And we get uptight over the little things?
>
The best lesson I’ve ever learned was to start everyone off with the same level of respect. They can always work
>
The most memorable moment in my life was when I married my best friend.
themselves down from there.
> > >
A good friend is someone I can expect to be by my side when I least expect it. The worst purchase I’ve ever made was my first set of golf clubs ... grr … The best purchase I’ve ever made was my first set of golf clubs.
You can’t always be right about everything … listen, you might learn something!
PROFESSIONAL >
The biggest challenge to the appraisal/valuation community is earning the respect and trust they deserve to
move forward.
>
The future of real estate valuation is bright because the population in this country continues to increase and the
need for experts will be great once we work our way through these problems.
> >
The biggest technological leap for appraisers was computerized systems combined with online data sources.
The greatest setback for appraisers was when so many appraisers decided to play the game instead of standing
their ground. They had more support than they knew to push back, and because they did play, the entire profession is working to change its image.
>
My biggest pet peeve with appraisal reports is leading me all the way through with a good story line then ending
up with a surprise ending!
>
Ten years from now the valuation industry will be completely different due to the impact of this current negative
cycle: We hope that the whole industry will finally have the ability to learn from its mistakes! That’s doubtful based on short-term memory problems, but I’m hopeful!
>
The most ridiculous thing about the valuation industry is everyone on the outside wants to take a shot at us, and
of course they always do everything just right … does this mean the three little pigs were real?
>
I am optimistic about the appraisal/valuation industry because you simply cannot take out or model the human
factor in the process. Flesh-and-blood appraisers will be needed in the future so they can assess and report what they see with their powers of observation!
>
If I could change one thing about the valuation industry it would be perception. If the industry only respected the
risk in every transaction, we could all do our jobs as they were meant to be done!
>
Chief appraisers are constantly trying to drive an 18-wheel Mac truck through the Lincoln Tunnel at 5 p.m. on a
The biggest challenge to the appraisal/valuation community is earning the respect and trust they deserve to move forward.
Friday knowing they have to be at the Newark airport at 5:15 p.m. It’s frustrating, but you know you’ll eventually get there!
OCTOBER 2011
* LIVEVALMAG.COM | 21
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WAR
N
USPAP UCCAP:
monsense
The Uniform Commandments of Com Appraisal Practice.
an opi
nio p iece barr yb by:n
ates
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!
a controversial author. be construed for the None of his words shouldMa re opinion of LiveValuation pubgazlishine.theWem.we almost too scared to
IN G
Barry Bates is
USPAP? Do the Standards have the force of public law? Yes. Do I have to pay money to read the Code of Federal Regulations? No. Then why must I pay to download the Standards?
On the advice of his father, he has long since abandoned the art of appraisal, opting for architecture and engineering instead. His dad, an appraiser for 40 years, told him in his diaper days (the son’s diaper days, not the father’s), “Son, an appraiser is just someone who didn’t have enough personality to become an accountant.”(So the kid goes for engineering? Hello? Pocket protectors?) The “just pap”1 he was referring to is more popularly known as the Uniform Standards of Professional Appraisal Practice, which came into being after the last big residential mortgage greed frenzy (the failure of S&Ls in a 17 percent mortgage-rate environment during the late 1980s). Before your friendly author proceeds violently to eviscerate this not-evenvery-well-meaning document, let’s get a minor but irritating question off the table: Where does the Appraisal Standards Board get off, charging 60 bucks for an updated version of
The ASB would say, “But you don’t have to; you can read the Standards for free at uspap.org.” Yes, I suppose I can, if I have the patience of Job. I have to go back to the table of contents after reading each page, and I can’t copy and paste the text anywhere. This writer would argue that a fundamental right of law-abiding citizens is to read the law in its unbroken entirety at no cost (otherwise Lincoln could never have become a lawyer) and in a reasonably portable fashion so that the law can be followed, enforced and respected. Any civil rights attorneys awake out there? The only amusing thing about this issue is that you could sell the USPAP FAQs and Advisory Opinions SAYS without providing a free e H public source because they don’t carry the Where force of law; but then, does the of course, no one would Appraisal read them. Standards
Board get off, charging 60 bucks for an updated version of USPAP?
My central thesis today, children, is that a bunch of crusty old MAIs and soulless bank appraisers2 saw an opportunity in 1986 to create a bureaucracy that funds free trips to meetings where crusty old MAIs and soulless bank appraisers can assemble
to get pleasantly drunk. This entity became The Appraisal Foundation, an organization designed to foster high appraisal standards that are written in weasel words even Gerald Ford could circumvent. It’s hard to know where to start; there are so many things wrong with USPAP. As an overview, suffice it to say that its structure appears to be designed so that over the long haul, most responsibility for bad loans can be offloaded to appraisers making less than $100K per year.3 A few of the more obvious false assumptions in USPAP: Certain Standards are paired because appraisers develop their opinions before reporting them. Wrongamundo, Buckwheat. Most appraisals are written simultaneously with the opinion-forming process. Separating the two in a set of rules simply allows obfuscation of essential criteria and avoidance of the steps necessary to achieve a semblance of objectivity. The appraisal client is always the intended user. A lovely concept out in the ether somewhere, but hardly ever the case in practice. The client (who engages the appraiser) is a lending technician or AMC drone; the intended user is an underwriter, servicer or portfolio manager. (This assumes the fact that only 5 percent of appraisals are ever done for anybody other than a mortgage company.) Pretending that they’re the same person (based on the legal concept
Notes on Barry’s opinions 1-8
1
Pap, n., soft food for infants or invalids, as bread soaked in water or milk. 26
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In the interest of full disclosure, the author is a soulless bank appraiser who only narrowly missed getting his MAI. The sale of his pre-owned soul to Satan and his minions was recorded in Book 245, Page 21, Official Records of San Francisco County, California, on October 15, 1972. The soul has been resold several times since then, but the identity of successive assignees is not clear because the deed was deposited with MERS.
2
It’s no coincidence that the quantity of lawsuits against appraisers is rising (per Liability Insurance Administrators) although the collapse of the housing market is certainly a major contributory factor. If you think your E&O premium is too high now, wait another
year or two. Rather than spend more money on risk management to avoid another economic debacle, servicers are heaping more tasks, responsibilities and requirements on reconciliation appraisers with no change in compensation to
address the additional liability. Congress is helping them out; Gramm-Leach-Bliley declared that an appraiser is a “financial institution” because he/she provides a financial service. The updated Interagency Appraisal and Evaluation
Guidelines now state that appraisers, unlike agents and brokers, can’t get away with an estimate of price instead of value in order to decrease liability in valuation for liquidation; they offer very vague reasoning for closing this gate before the cow comes home.
The Competency Rule says: “An appraiser preparing an appraisal in an unfamiliar location must spend sufficient time to understand the nuances of the local market and the supply and demand factors relating to the specific property type and the location involved.” This turf battle is the biggest single boondoggle in the appraisal profession today; the statement was true 30 years ago, but it hasn’t been true since. I routinely challenge appraisers who drape themselves in “geographic competency” to list—in 30 seconds— “nuances” and supply/demand factors in their local markets that I could not find out online in a half-hour for free or for only a few bucks. I haven’t found one appraiser who could do it without spitting pablum all over himself. About 80 percent of real property transactions and business occur in the major metro areas these days; I no longer have to sit next to the cracker barrel with Clem to find out that the old Clampett place just sold to a chicken farmer from Porterville. Who do we think we’re kidding? If we don’t give up our 50-year-old habit of assuming the ostrich position to face every threat, our profession will not survive.4 Finally, the argument in support of USPAP that its lack of specificity is only
Here’s how I see it:
4 In 10 years or less, most
appraisal work will be done on the desktop as piecework, and an appraiser in Michigan will be looking at property in Florida. Although the current regulatory market is still buying the geo-competence argument, it will last only until the next big lawsuit in which someone tries to collect on the basis of the appraiser living in Clampettown vs. Porterville.
Finally, the argument in support of USPAP that its lack of specificity is only the result of trying to avoid “micro-management ” of the appraisal process is just what we former wire-tappers used to call “cover noise”; it screens from hearing the fact that as it stands, USPAP can be used either to exonerate or execute an appraiser on political motives regardless of the issue at hand. the result of trying to avoid “micromanagement ” of the appraisal process is just what we former wire-tappers used to call “cover noise”; it screens from hearing the fact that as it stands, USPAP can be used either to exonerate or execute an appraiser on political motives regardless of the issue at hand. Some questions from a recent online USPAP continuing education course (which attempted unsuccessfully to clarify what USPAP means by due diligence in the “normal course of business”) illustrate this point: According to the “correct” answer to the first question in a series, appraiser Judy would be skewered by her state board if she failed to find a very recent prior sale that was shown in MLS but not yet in public records; the reason offered is that her refusal to subscribe to an expensive regional MLS system was negligent if most other appraisers in her market subscribed “in the normal course of business.”5 Yet in the next question, there is no violation when appraiser Willie fails to check online sources or MLS after the property owner assures him the property is not publicly listed for sale. (This same thread of delusion seems to run throughout USPAP, undoubtedly promulgated by crusty old MAIs: If any carbon-based life form tells you something, it’s OK to believe it’s true without any further investigation.) Then in the next test
question, appraiser Ariana goes to USPAP jail for not checking MLS on a fourplex she appraised. It appears that whether there is malfeasance on the part of the appraiser or not is determined by whoever is asking the question or by whoever is making the complaint.
Appraisers are being singled out for punishment because: hey’re vulnerable. They work in a kind T of vacuum that keeps them barefoot and pregnant. And naïve. I ’ll say it again: They’re vulnerable. Their comparative isolation and state of overwork as professionals prevent them from keeping adequate tabs on organizations that are supposed to be acting in their best interest.6 On the front lines (definitely not in the general’s tent), the profession attracts rebels, renegades, weirdos and geeks (I stand with my comrades) who tend to simply ignore rules anyway. They deserve it. The honest appraiser thinks he/she’s a brain surgeon working for $350 per operation; the dishonest one makes a lot of money during a short career “in the normal course of business.”7 >>
The author will avoid a digression in which he would otherwise consider the notorious unreliability of closed sale data from MLS. Apparently, in Judy’s case, the sale cited by MLS actually occurred and was not simply the sum of a land sale and a construction loan or the optimistic advance of a sale that never closed.
> Historically, < the appraisal organizations have supported the
best interest of financial institutions (or crusty old MAIs and soulless bank appraisers), rarely the consumer, definitely not appraisers in the trenches. Of course, now that appraisers are legally financial institutions under GLB, maybe they’ll get some loving attention. (Not.)
6
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Sometimes it’s hard to tell the dishonest from the simply stupid. Any appraiser who knowingly participates in mortgage fraud for a lousy $350 has an IQ somewhere around room temperature. Why has the mortgage industry shoved the cost approach under the rug? Because if an accurate cost approach were required in every residential appraisal, it would have become inconveniently
apparent in 2005 that there was a huge unexplained gap between cost, land value, contractor O&P and reasonable developer profit on the one hand and the proposed sale price on the other. Well, duh ...
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SAYS He
of a corporation as a person, which facilitates all kinds of evil) allows the left hand, which is handing out cash, to avoid confronting the fact that the right hand is playing the piano.
The 10 Appraisal Commandments
1
Thou shalt use only comps
that are the most recent, proximate and similar from a reliable, customary and verifiable data source. Thou shalt not
2
make unsupported adjustments.
Thou shalt use no
comp situated across a Godor man-made neighborhood boundary,
especially rivers and multilane highways.
Thou shalt not estimate costs without referring to the
4
Far be it for your curmudgeonly author to rant about USPAP without offering an alternative set of rules. Here they are: cost data source (book, page or URL) and including a copy of the analysis in the report. Likewise, thou shalt not estimate land value in a cost approach context without supplying supportive valuation data in a separate sales comparison, allocation or residual analysis.8
T hou shalt always comp an over- or underimprovement within the neighborhood in which it is located.
6
Thou shalt apply, when applicable, capitalization rates supported by verified comparable sales or recognized formulae, showing all calculations in detail. Likewise, thou shalt not estimate rent or rent multipliers without citation of verifiable data source.
Thou shalt comp the subject as proposed or constructed to the specified buyer profile and to the subject’s
highest and best use (i.e., thou shalt not refer to a nine-paddock horse boarding operation as an “equestrian home”).
Thou shalt 8 disclose and describe ALL subject property physical, functional and economic defects
in the body of the report and not merely in addenda, certifications, limiting conditions or photographs.
Thou shalt get over the notion of “geographical competence.” There is no longer any such thing. Read The Emperor’s New Clothes. The only way for the appraisal profession to save itself is to reinvent itself, not hang its tattered hat on old precepts that have been eliminated by technology. (Additional rant on this subject above.)
T h o u s h a l t try not
to form an opinion of value based on a preconceived notion or on anticipated future personal benefits.
see another opinion from barry on pg 27 If we were really honest, we’d admit to being fallible and malleable human beings who need hard, understandable commandments to keep us on the straight and narrow.
Could there be more than ten appraisal commandments? Additional tablets could be inscribed to expand them to 25, but more than that would be unnecessary. The reader undoubtedly has a few to contribute. The toughest commandment to follow is No. 10. As a digressive anecdote, the writer has personally known only one billionaire in his entire career. Mr. Billionaire, a hard-money commercial mortgage guy with two Ph.D.s and a propensity for experimentation with hallucinogens, asked the writer at a cocktail party in 1984 (no play on years intended), “Do you think an appraiser can provide an unbiased opinion of value?” Your humble servant had to think about that for several seconds. “No,” offered 28
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the servant. You think about it. If an appraiser could – and did – render an unbiased opinion in every case, he/ she wouldn’t be very busy. “I’m sorry, Johnny, you can’t have a new pair of shoes this month, because Mommy is an honest woman.” If we were really honest, we’d admit to being fallible and malleable human beings who need hard, understandable commandments to keep us on the straight and narrow. It may seem old-fashioned, but perhaps a little confession, penitence and absolution are in order today in place of bombast and bluster. In the end, our goal shouldn’t be to provide an unbiased opinion, since the very phrase is an oxymoron; if it’s not
biased, it’s not an opinion. The goal is to know where to draw the lines at the top and bottom of a demonstrably reasonable range. If the commandments above were followed, setting those demarcations would still be very far from easy, but they’d be a lot less subjective – and dangerous. When a “point value” is really necessary, the appraiser’s client should be given the tools in the appraisal report to make that decision herself. At the point where an appraisal turns into an estimate of maximum loan amount, the issue is one of risk management, not the “art” of appraisal. We cranky, rebellious, nerdy appraisers are tired of doing everybody else’s job. So there. 6
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| jeff bradford |
Appraisal Myopia Is it killing the industry?
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The economic crisis has
exposed glaring flaws in the valuation processes of singlefamily appraisals. These flaws allowed rampant and extraordinary pressure to be exerted on appraisers to inflate valuations; for appraisal fraud and identity theft to be committed; and most important, for the overall credibility of real estate appraisals to be questioned. In 2009, two conferences, the Collateral Risk Network and the Appraisal Institute’s “Collateral Matters Congress,” were held to assess the state of the appraisal industry and set a new course for the industry. Each conference produced a white paper offering new directions and highlighting the problem areas. The industry was deemed to need “re-engineering” in the areas of best practices and theory, valuation technology, mentoring and training, legislation, regulation, enforcement and open data standards. Almost three years have passed since these conferences were held. During that time, the appraisal industry has been confronted with unprecedented challenges. Even today, residential appraisers are facing a level of scrutiny, competition and regulation that some have characterized as the perfect storm. How appraisers navigate this storm will determine whether the industry sees clear skies and flourishes again or whether it follows the path of so many other seemingly indispensable professions that are no longer in existence or relevant today. How is it that residential appraisers find themselves in such a precarious predicament? One can point to many factors, such as HVCC, that had a devastating effect on the industry. But at the center of this perfect storm lies one fundamental cause: the GSE’s and the mortgage industry’s reliance, and the resulting residential appraisers’ laser-like focus, on the Uniform Residential Appraisal Report format as
the definitive, “gold standard” appraisal report.
old valuation product: the URAR.
This narrow focus on a product – Appraisal books and classes have instead of the broad, long-term needs been written and developed to teach of the customer – can hurt and even appraisers how to produce this report. destroy companies and industries alike. Industry standards have been written to guide A classic example of an appraisers in performing industry that was hurt this appraisal. Legislation because of its myopia has been written to is the railroad industry. regulate and enforce its It stopped thriving Even today, use and attempts have because it focused residential even been made to define solely on the railroad appraisers are an acceptable range business and allowed facing a level of fees for this report. competitors to enter the of scrutiny, Sophisticated software transportation market competition has been developed and provide alternative and regulation to produce the URAR transportation services. that some have efficiently. PDF scrapers The railroad guys characterized as have been developed to should have thought the perfect storm. scrape the data from a of themselves as being URAR report for review in the transportation processes. It appears that every facet of business and strived to provide the residential appraising is keyed to the full range of transportation services URAR format. (air, auto, and rail) to their customers. A more recent example is Blockbuster. Most recently the GSEs, with their UAD It was in the business of renting initiative, mandated that new data videos for entertainment. It should points be included in every appraisal. have thought of itself as being in the But instead of creating a new reporting business of delivering entertainment format to accommodate this new to the consumers in a convenient way data, they insisted that the new data and taken advantage of technology to be carried within the existing URAR stream entertainment into their homes. format, further solidifying the URAR as They might still be around today if they the only acceptable appraisal report that had. Kodak’s focus on film instead of residential appraisers may produce. digital technology allowed Sony and Nikon to dominate the market. If Kodak This entire infrastructure around the would have focused on what customers URAR has resulted in a tremendous wanted instead of narrowly focusing increase in efficiencies for producing on their film products, they may have and processing millions of residential owned the market. There are countless appraisals. But this same infrastructure other examples of companies failing to has drastically limited the ability of understand their customers’ needs and residential appraisers to compete with not defining their businesses properly. anything other than another URAR. But these three are enough to illustrate the point that it is critical to understand one’s business from a much broader This is appraisal myopia. perspective. This is especially true of the appraisal business today. >> An entire multibillion-dollar industry has been built around a single, 25-yearIt appears that every facet of residential appraising is keyed to the URAR format. OCTOBER 2011
* LIVEVALMAG.COM | 31
If we look at residential appraisers, what business are they in? It’s safe to say they are in the URAR business. In fact, they have been in the URAR business for more than 25 years and their entire business infrastructure has been geared to producing this product. Unfortunately, it is now quite If residential difficult for appraisers appraisers to are to survive produce other the storm of valuation advanced products with AVMs (now the same level coupled with of efficiency.
property inspections) and increasingly more credible BPOs by “certified agents,” they
Today residential appraisers are discovering that they have left the door wide open will need to for outside jettison their competitors myopic focus to enter the on the URAR market with and commit to advanced, less providing the expensive, full range of faster valuation services valuation in a manner that services. is faster and Even more better than their disconcerting non-appraiser is the fact that competitors. the property valuation business is booming and appraisers are missing out because they cannot adequately compete using their 25-year-old product, regardless of how efficiently and cheaply it is produced. It no longer satisfies the full range of valuation needs of their clients. Appraisers are finding that the very infrastructure that was built to so efficiently produce (and protect) the URAR is now keeping them from innovating and providing other valuation services. Even slight improvements such as charts to show 32
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market trends are difficult to include in most appraisals because the systems that transport these reports do not allow for deviations from the highly standardized URAR format. One only needs to look at a new UAD-compliant appraisal with its standardized, abbreviated data to fully understand the unintended consequences our complete dependence on the URAR report format has had on this industry. If residential appraisers are to survive the storm of advanced AVMs (now coupled with property inspections) and increasingly more credible BPOs by “certified agents,” they will need to jettison their myopic focus on the URAR and commit to providing the full range of valuation services in a manner that is faster and better than their nonappraiser competitors.
q uestio n :
How does an industry go about changing its focus, reinventing itself and broadening its business scope to provide the full range of valuation services? The answer is apparent when you pose the same question to other industries. What should the railroad industry have done? What should Blockbuster have done? What should Kodak have done?
an swer:
Appraisers need to be in the valuation business, not the URAR business. Let’s be clear: What does it mean to be in the valuation business? When you are in the valuation business, it means you compete at all levels, for all types of valuation opportunities. You own the valuation market. (e.g., you do not let a real estate agent, who is licensed to sell homes, make more money than you by doing valuations, regardless of what those valuations are called).
So if we need to be in the valuation business, how do we move from our current myopic URAR focus to one that encompasses the entire valuation market? How do we start to compete at all levels? Fortunately for all of us, the two conferences held in 2009 actually specified in detail what needed to be “fixed.” In fact, both conferences arrived at similar conclusions, identifying similar areas for change and a similar course of action for the industry to follow. The recommendations, as you might suspect, centered more on improving industry weaknesses. In hindsight, I believe more time should have been devoted to identifying the strengths of the profession and how to make them even stronger and more competitive. One of these strengths is the appraiser’s desire to analyze. Since we introduced the CVR, which requires a working knowledge of statistics and regression analysis to be performed as part of the appraisal, we have found that appraisers love to analyze. The more analysis there is, the more they enjoy their work. This is a characteristic that is unique among real estate professionals and if developed and strengthened, it could be the cornerstone for building a highly competitive appraisal industry.
If we were to summarize the key conference recommendations and incorporate the idea of “appraiser-driven analytics,” the three key initiatives would be: } improve the reliability of the valuation with advanced “appraiserdriven analytics” }} improve the credibility of the
appraiser with advanced education in applied analytics }}} improve the efficiency of the
process by focusing on data and analysis and not forms
I have oversimplified the initiatives, but even these will not lead us anywhere as long as we remain reliant on the URAR as the only acceptable reporting format. We have all seen firsthand the shortcomings of the 1004 in attempting to convey a UAD-compliant appraisal. It does not work very well. But UAD did give us an opportunity. The UAD initiative standardizes the appraisal data and clearly defines what the GSEs need for validating collateral values. So as long as the GSEs get the data they need, what keeps appraisers from creating better, more credible, more transparent appraisals for their clients? What keeps appraisers from excelling and enhancing their appraisals as long as the GSEs get the data they need? UAD has presented the industry with a unique opportunity to finally break away from the URAR. It has created the opportunity for appraisers to excel unencumbered by the restrictions
TSI
of the 1004 reporting format, and to create more credible, more reliable, more transparent appraisals while still providing the GSEs the data they need. The 1004 filled out with UAD data should be a wake-up call to all appraisers that things must change. I strongly urge the appraisal leadership to consider this opportunity; to work with the GSEs to decouple the 1004 from the required UAD dataset to allow other reporting formats to be allowed; and to encourage all appraisers to work with their technology providers to create better, more credible valuations for their clients. At Bradford Technologies, we have embarked on this path. We created the CVR, a statistically supported appraisal. Recently we created the UAD worksheets that bring clarity to the UAD data. And we will continue to develop services that allow appraisers to significantly enhance the credibility of their appraisals without disrupting
either the flow of data or the UAD dataset that the GSEs mandate. As an example of what is possible when the industry is not chained to the confines of the URAR, we have created a mockup of a new singlefamily appraisal report that includes all the new UAD data points, the existing URAR data points and an enhanced market trends addendum. There are no abbreviations; UAD clarity has been restored; the credibility of the valuation has been enhanced; and the UAD dataset, required by the GSEs, remains fully intact. We believe the industry needs to move in this direction with even more innovations. This illustrative appraisal report can be found at bradfordsoftware.com. 6 Contributorâ&#x20AC;&#x2122;s note: Portions of this article have been excerpted from the white paper â&#x20AC;&#x153;Appraisal Myopia, Solutions for an Industry in Crisis: What Every Chief Appraiser Should Know,â&#x20AC;? by Jeff Bradford and Mark R. LinnĂŠ, MAI, SRA, CAE, FR.
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OCTOBER 2011
* LIVEVALMAG.COM | 33
| Scot Rose |
AMC
The solution our industry seeks.
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or more than three years,
our industry witnessed the worst downturn of our times, and now just about everyone is ready to get things back to the way they were before the crash. However, since the financial meltdown, I’m not sure we would really want to go back. What we want is to be successful now and in the future. This is true for appraisers, appraisal management companies (AMCs) and lenders. The only way we can achieve this is to come together in good faith and embrace transparency in all of our dealings. Let’s start with the appraisal industry. Before moving into the AMC world, I was a professional appraiser. Five years ago, the appraisal world looked quite different than it does today.
Those who were working in the industry at that time may remember:
1
fewer jobs were flowing through AMCs;
2
lenders were not under such intense regulatory pressure; and
3
there was a lot of volume in the market.
Those might have seemed like good times, but the reality was appraisers were mostly frustrated. There was lack of integrity in their profession due to appraisers who were willing to appraise to a predetermined value. This left appraisers anxious each night, wondering how they were going to keep their client if they refused to “meet the value” or if the appraisal report they had filed that day, the one they had to push just a bit to keep the business coming, would come back to the surface and cause them to lose their license.
Since the inception of the Home Valuation Code of Conduct (HVCC), the lion’s share of the appraisal business has been channeled through AMCs. This scenario is challenging for some appraisers. And although the HVCC reached its sunset, nothing has changed; while the biggest lenders historically always utilized AMCs, HVCC led to the majority of banks and mortgage origination channels to choose an AMC as well. For many appraisers, the result is lower fees.
appraiser’s fee. Furthermore, this comes at a time of increasing scope and challenging expectations and a market that is starved of activity, leaving minimal available comparable data and a very challenging environment for appraisers to work in. To be fair, AMCs are also being pressured to provide low fees and very rapid turn times.
I’m not sure
We have to find a way to make certain that appraisers are compensated fairly for their work in this industry. In my mind, that means answering the question of how to make the AMC model work. The benefits to all parties are significant if we can come together and solve this problem. I think most would agree that moving forward is better than going back to the way we were five years ago, without a firewall in place that can protect all parties from the significant risks of non-compliance.
I do not believe that we would a model that includes really want AMCs in itself is to go back. the source of the What we want is problems, and I know to be successful many appraisers now and in the disagree with me. future. This is true It’s hard to blame for appraisers, them. Many of these appraisal professionals were management working directly companies (AMCs) with brokers in the and lenders. The pre-HVCC days, only way we can earning full fees and achieve this is to enjoying a steady come together flow of work. Being in good faith told they would The Solution We and embrace have to work with Seek transparency an AMC and share in all of our their fees was hard So how can we make dealings. on them, particularly our industry work in when some of these appraisers had a way that both benefits and protects established legitimate business all participants? Once again, we need relationships and were able to practice to foster an attitude that indicates with integrity. However, the reality was we are all in this together and that most were recalcitrant and the need to any solution must come from all create a firewall at the time was real. participants working through this The AMC model is an effective way to problem. Everyone that plays a role mitigate the potential for bias. – lenders, appraisers and AMCs – It’s also hard to argue with those who must take part in the solution and be say that appraisers were dealt the short accountable for doing so. I believe a end of the stick and that AMCs prey large part of any solution will involve on appraisers in order to maximize bringing transparency to this part of the their own margins by squeezing the mortgage lending industry. >>
Transparency will mean that appraisers will know what an AMC is being paid by a lender for a report. It will mean that lenders will know how much appraisers are being paid by the AMC. OCTOBER 2011
* LIVEVALMAG.COM | 35
trans-par-en-cy \tran(t)s-’per- n(t)-se\ e
will mean: l
&* Appraisers will know what an AMC is being paid by a lender for a report.
&* Lenders will know how much appraisers are being paid by the AMC.
& * Lenders and appraisers should know how AMCs recruit new appraisers for their panels, how they manage them, assign them work, review their work and ultimately how they rate their work. If this were the first step the industry took to solve problems in the collateral valuation business, it would move us all closer to a full solution than anything else we could do. This is one area where AMCs could lead the charge, and as president of Urban Lending Solutions Appraisals, we are working toward implementing this transparent model today. I am a proponent of transparency in our business as a way of making it clear to industry participants and government regulators exactly what happens in our industry. This is the only way to shed more light on AMCs, which will ensure that they perform as they should in order to fulfill their role in the new market. Transparency will allow everyone in the industry to see at a glance which AMCs are acting in an abusive manner toward professional appraisers. We should not allow a sweatshop mentality to exist. The industry must take action
to shut down companies that churn and burn through hard-working appraisers in an attempt to maximize their profit margin by marginalizing appraisers and rating low cost or speed above quality. These firms are not bringing any value to our industry; they are not helping lenders mitigate buyback risk or align with regulatory intent; and they are not impacting the appraisal or lending community in a positive way.
and Consumer Protection Act and the new Interagency Guidelines deal with the requirements that lenders and their agents must ensure the quality of the property valuation. The days of a lender throwing a collateral valuation job over a fence and waiting for a quick response are over.
Lenders today need to know as much as they can about how their work is being handled, from the moment they order it until it is delivered. Quality Lenders should be the first to welcome control must be built into every order transparency. If the lender partners with and everyone along the value chain an AMC that offers full transparency by must be held accountable for the quality providing information about appraiser in the final report. For these reasons, it payment and percentage of lender is clear to me that lenders are ready for fee retained for each report, and then a more transparent process. As a once follows that up with complete reports, practicing professional appraiser and audit results and appraiser quality the president of an AMC, I know that scores, the lender will know exactly if an AMC is keeping a large share of what kinds of firms are working on the lender fee for a collateral report, their valuation reports. If it becomes that AMC will clear that the have to reach AMCs that are out to lowerabsorbing a higher paid or less percentage of the experienced fee are delivering appraisers to lower-quality The fees the AMC pays the get the job done reports, lenders appraiser should be on the by the deadline. will know at report, but that’s only the That means once that they beginning. Lenders should see quality will must discontinue a monthly review of the AMC’s always suffer. relations with entire panel of appraisers. It’s the old rule those AMCs. Appraiser selection, quality of business Lenders cannot issues and turn times should be consulting: afford to continue provided and it should be clear Between working with how all factors are weighted quality, speed AMCs that don’t in the rating of each appraiser. and low price, provide the you can only quality control have two. It is time we make the right that will effectively mitigate buyback choice. risk and pass muster with regulatory compliance. Transparency has a way of bringing issues to the surface. It will help to It’s not just the investors putting remove poorly managed AMCs and pressure on lenders. Regulators are unprofessional appraisers from the also pushing lenders in this direction. business. Furthermore, it will provide Much of the requirements built into the financial institutions with the the Dodd-Frank Wall Street Reform
Transparency will allow everyone in the industry to see at a glance which AMCs are acting in an abusive manner toward professional appraisers. We should not allow a sweatshop mentality to exist. 36
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visibility they need to provide comfort to the regulators and it will push to value quality. This level of transparency is the key to solving the majority of the problems our industry faces today, including the problem of underpaid professional fee appraisers.
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Delivering Transparently But how can we deliver this transparency? Is it even possible in our current system? I think it most certainly is. As I’ve said, we are challenged by the fact that our industry has become accustomed to lower fees and the quality is suffering. With new regulations and increased scrutiny, that may be changing. If the risk of providing low-quality appraisal information is that the lender must buy back the loan, or experience increased pressure from regulators, fewer loans will be originated with low-quality valuation information. Once the industry demands it, the only thing left is for appraisers and AMCs to deliver it.
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It will start with more thorough monthly reporting. The fees the AMC pays the appraiser should be on the report, but that’s only the beginning. Lenders should see a monthly review of the AMC’s entire panel of appraisers. Appraiser selection, quality issues and turn times should be provided and it should be clear how all factors are weighted in the rating of each appraiser. Appraisers’ ratings should consist of the highest weight applied to quality, followed by ability to meet turn times and customer service. Again, these standards should be made clear to the lender and the appraiser. If everyone in our space was fully transparent, the best companies would easily move to the top of the market and those that shouldn’t be operating here would lose the support they have. Stronger partnerships would emerge between AMCs and appraisers, who would then, together, provide the high level of service that lenders require in today’s marketplace. This is the right direction for the industry to go. If we do so, we will all reap the rewards. 6
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OCTOBER 2011
* LIVEVALMAG.COM | 37
| david braun, mai, sra |
“
“ You’re using statistics whether you know it or not.
38
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he volume of data, rather
Consider that an appraisal consists of a series of opinions and conclusions than the technique used, formed by the appraiser. These are establishes a statistical analysis. generated to help the intended user Three sales in an adjustment make a decision. An examination of grid is not considered a statistical the Uniform Residential Appraisal analysis, but put 30 or more sales on Report (URAR) including the 1004MC that same grid and the analysis would form revealed around 30 opinions or be considered statistical in nature. conclusions that could be made with Statistical analysis has been used in statistical analysis techniques. We will the mass appraisal of real property examine one of these conclusions: the for more than a quarter of a century trend in property values over time. This (typically assessor offices). By 2005 conclusion is specifically requested most appraisers could search their on most residential forms, and is a MLS, tax records, Analysis of Trending Values Over Time necessary part of a thorough market ning or private database analysis for residential or commercial for comparables Supply This article consid$300K markets. and then export ers the advantages and disadvantages of some of the analysis methods available to trend values over time. It focuses on the method in which the unadjusted sale prices are trended by use of a scatter plot and linear trend line. After reading this article, go to: AVTtools.com and click on the LiveValuation button to see the associated video ($3,000) and data set.
Here are a few recognized techniques to form an opinion or conclusion of the trend in values over time. ONE: Examine the sale and resale of properties in the market area (paired sales analysis). TWO: Trend the adjusted sale prices of properties in the market over time (where everything is adjusted for except market conditions) by using a linear trend-line on a scatter plot. THREE: Trend the unadjusted sale prices of properties in the market over time by using a linear trend-line on a scatter plot.
them directly to a $250K spreadsheet. This $200K opened the door to One-Unit Housing Trends the possibility of $150K PROPERTY VALUES: Increasing Stable Declining appraisers using $100K statistics in their DEMAND/SUPPLY: Shortage In Balance Over Supply everyday appraisal$50K H$3) work. Prior to this, $0 MARKETING TIME: Under 3 mos. 3-6 mos. Over 6 mos. many commercial 12/08 2/09 3/09 5/09 7/09 8/09 10/09 12/09 1/10 3/10 appraisers had been delving Sally, a local residential appraiser, into statistical is considering the best technique to analysis when } Q: Which of these three methods 000 determine the trend in value for the they performed a should Sally choose? Sales Price THS AGE subject’s market area. In this area, market condition } Q: What is the reasoning for that Correlation Matrix properties are very similar in terms of analysis; and choice? 1 17 CORRELATION location, style, design, etc. but have MATRIX when they would trend various data } Q: What is the main drawback to the some the gross living 1 17 by plotting it on a scatter chart and DATEvariance in GLA BR area BATHS AGE best method? (1,600 to 2,300 square feet); have one to inserting a trend-line. While appraisers } Q: What statistical technique could 2 16 DATE four 1 bedrooms, one to three baths, and continue to perform these analyses, Sally employ when performing are 10 to 20 years old. Sally found 50 2 16 the Fannie Mae requirement to fill out GLA the best method? 0.800142 1 sales that have occurred Residential in the past 12 Market the 1004MC form pushed thousands Hypothetical BR -0.24109(go to-0.12944 1 and click months AVTtools.com of residential appraisers to perform First let’s consider what we mean by on the LiveValuation button to view this statistical analysis on a daily basis. “best.” ACoefficients method would be considered BATHS 0.147734 0.037853 0.076203 1No Effect $100.00 $10,000 $5,000 ($3,000) data). Four of these represent the sale Many appraisers have been meeting this the best when it is both effective and 0.111199 0.287762 1 resale of the same two 0.118167 properties. -0.07093efficient. challenge by improving their ability to AGE and Effective means it leads AGE NO. SALES PRICE DATE GLA BR that BATHS use spreadsheet applications. the appraiser to the correct conclusion. T RANGES Efficient considers the to 17 1 $150,300 2/9/2009 1,663 3 time it takes 1 Now that they have the ability to perform the analysis. A method must $120 transfer and manipulate large amounts Statistic/Valuation Overlap be effective or its use4may result 2 $134,000 2/14/2009 1,400 1 in a 17 $15,000 of sales data, appraisers are searching misleading conclusion. This would for new analysis methods. Many deem the1,350 analysis method as not 3 $127,000 2/14/2009 3 2 being 16 o $8,000 tried and true statistical techniques credible. >> o -$3,000 are applicable to the analysis of real 4 $109,500 1,375 1 2 16 STATISTICS VALUATION 3/1/2009 property. This overlap is depicted in the illustration to the right:
6 mos.
$
Questions:
=(E5*$E$3)+(F5*$F3)+(G5*$G$3)+(H5*$H$3)
OCTOBER 2011
Set Range Limits
* LIVEVALMAG.COM | 39
Sale/Resale Method The problem with method one is that it is typically ineffective. This is partially because there are typically not enough properties that have sold and resold in a specific market. A statistician might refer to this as having an insufficient number of samples or observations. In addition, there is something called “random variance,” meaning properties do not typically sell at their intrinsic values. They typically sell in some range of plus or minus percent of their intrinsic values based the subjective motivations of human beings. If the random variance is 5 percent then a property worth $200,000 is expected to sell in a range of $190,000 to $210,000. In a stable market the property might happen to sell for $195,000 and resell a year later for $205,000 based on the expected random variance. These sales prices indicate an appreciation rate of 5.13 percent (($205,000 - $195,000) / $195,000). However, the indicated value change represents random variance, not changes in real property values.
The Test While many spreadsheets are available and effective for appraisers to use, I will be referring to Microsoft Excel. The following specific Excel features will be utilized in testing this method of analysis: } the Forecast function } the Correlation function } the Randbetween function } the scatter chart } a linear trend-line } macros } a Monte Carlo simulation
Unfortunately, many appraisers start with a preconceived idea of what the value trend is and then only report the sale and resale of a property when it confirms their preconception. This is similar to how a drunk uses a lamppost: more for support than illumination.
Trending the Adjusted Sale Prices Method
Let’s consider the effectiveness of this analysis method. The adjustment amounts are critical. If the line-item adjustment rates are applied at the wrong rate, then the analysis will be amiss. Even if the proper adjustments are made, each adjusted sale will have some amount of random variance. This can sometimes distort the actual value trend.
The 50 salesOne-Unit could all beHousing presented Trends Trending the Unadjusted on a sales grid and be adjusted for Sale Prices Stable Declining everything (GLA,PROPERTY bedrooms,VALUES: baths, and Increasing age) except the market conditions (time This method is becoming popular DEMAND/SUPPLY: Shortage In Balance Over Supply adjustment). This would typically take among appraisers when there are many some extra time, MARKETING but some appraisers sales to work than TIME: Under 3 mos. 3-6with mos.(typically Overmore 6 mos. are able to auto-load sales directly from 30 sales). This method is very efficient their MLS onto the sales grid. Modern as it does not take long to search for appraisal form software packages will sales in a market, download the sale also apply an adjustment to all 50 sales prices and dates of sale, scrub the at one time. Sales This method could be data and then plot them on a scatter Price possible with this type of automation. chart. The resulting chart appears to The partially adjusted sales prices and be very defendable. To get a feel of its =(E5*$E$3)+(F5*$F3)+(G5*$G$3)+(H5*$H$3) their associated dates would then be effectiveness, let’s test the procedure by plotted in a scatter chart and a linear applying it to the data set (Sally’s list of trend-line would be inserted. sales).
Hypothetical Residential Market components and acceptable error in the percentage change in value. SALES PRICE that THREE: Set NO. the ranges of values the random numbers can change (see 1 $150,300 table below). FOUR: Run a2 Monte$134,000 Carlo simulation which repeatedly and randomly changes the numbers for the applicable 3 $127,000 property components (variables) and 4 $109,500 their values (coefficients) many times. FIVE: Record the percentage change in value during the period in question for each simulation.
Coefficients
Determine validity$5,000 of the ($3,000) $100.00 the $10,000 technique based on the number of DATE GLA BR BATHS AGE times the analysis produced an answer greater than the acceptable error in the 2/9/2009 1,663 3 1 17 percentage change in value. SIX: No Effect
2/14/2009
1,400
4
1
17
It is important to understand that 2/14/2009 1,350are from 3 a virtual 2 16 the sales used market. This market was constructed 3/1/2009 1,375 as a “stable” market.1A stable 2market16 means that there is no relationship between the sale dates and the values. Go to AVTtools.com and click on the LiveValuation button to see the video.
Set Range Limits PROPERTY COMPONENT
VARIABLE RANGES
COEFFICIENT RANGES
Gross Living Area
1,600 to 2,300 Sq.Ft.
$50 to $120
Bedrooms
1 to 4 Units
$5,000 to $15,000
Baths
1 to 3 Units
$2,000 to $8,000
Age
10 to 20 Years
-$5,000 to -$3,000
The test is devised as follows: ONE: Develop a hypothetical residential market where the value trend is “stable.” TWO: Set thresholds for the related correlation, range of the property 40
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Analysis of Trending Values Over Time
between the sale date and the gross living area. The largest degree of correlation is 1.0 (or -1.0).
In the chart below sale prices over time are trended for the 50 sales. It clearly indicates a market where values are increasing.
A review of the market data clearly shows that the more recent sales just happened to be larger homes. In
Analysis of Trending Values Over Time $300K $250K $200K
$
$150K $100K $50K Analysis
of Trending Values Over Time
$0
12/08 $300K
2/09
3/09
5/09
7/09
8/09
10/09 12/09
1/10
3/10
$250K
this case the chart above is actually This result is disturbing as the model reflecting that the houses sold was designed so that the market is $200K tended to be larger over time and stable. How can trending the sale $150K therefore higher-priced. This fusing Correlation Matrix prices over time indicate values are of the influence of gross living area appreciating when the market is really CORRELATION MATRIX $100K onto the sales date is an example of stable? DATE GLA BR BATHS AGE multicollinearity. Multicollinearity $50K results when the correlation between â&#x20AC;&#x153;There are three kinds of lies: lies, damn DATE 1 two or more property characteristics lies, $0and statistics.â&#x20AC;? - Mark Twain GLA 0.800142 1 distorts the related individual variable 12/08 2/09 3/09 5/09 coefficients. 7/09 8/09 10/09 12/09 1/10 In this case the answer is correlation.
$ BR
-0.24109
-0.12944
1
The following correlation matrix shows 0.037853 0.076203 that BATHS there is a0.147734 0.8 correlation coefficient AGE
0.111199
0.287762
0.118167
1 Results of the Monte Carlo Simulation -0.07093 1
In each simulation the variables (property components) and the
Correlation Matrix
Statistic/Valuation Overlap CORRELATION MATRIX
DATE
GLA
BR
BATHS
DATE
STATISTICS 1
GLA
0.800142
1
BR
-0.24109
-0.12944
1
BATHS
0.147734
0.037853
0.076203
1
AGE
0.111199
0.287762
0.118167
-0.07093
AGE
VALUATION
1
coefficient (value of each component) were randomly changed within the range limits presented in the OneUnit Housing Trends chart (see page 35). Based on these random numbers, the sale prices recalculated with each simulation. The forecasted change in values for the beginning and end of the time period were monitored. The trending method was considered to give a false Unfortunately, indication many when appraisers the trend start with a in value preconceived exceeded idea of what the testing the value trend thresholds is and then of +/- 3 only report the percent.
sale and resale of a property when it confirms their preconception.
The test consists of 10,000 individual This is similar to simulations how a drunk uses run by a a lamppost: more macro. for support than The results illumination. of these 3/10 simulations demonstrate that when the market is stable, trending sale prices over time will indicate an increasing or decreasing trend in values 72.5 percent of the time. In addition, it will provide an incorrect conclusion 30.6 percent of the time even when none of the property characteristics has a correlation coefficient to the sale dates greater than 0.2. These results indicate that trending the unadjusted sale prices over time for this data Go to: AVTtools.com set is not an and click on the effective method LiveValuation button to see of forming an the associated opinion of the video and data trend in value set. over time. >> OCTOBER 2011
* LIVEVALMAG.COM | 41
Answers Q: W hich of these three methods should Sally choose? A: M ethod 2: Trending the adjusted sale prices over time.
Q: W hat are the main drawbacks to the best method (trending the adjusted sale prices over time)? A: T he line-item adjustments must be correct and random variance can distort the results.
Q: W hat is the reasoning for that choice? A: C hoices 1 and 3 – analysis of the sale and resale and trending the unadjusted sales prices over time – are not reliable, therefore not effective.
Q: W hat statistical technique could Sally employ when performing the best method? A: T he answer to this question was not presented in the material. The answer is multiple linear regression analysis.
Regression analysis identifies the correct line-item adjustments and does a good job of dealing with the random variance that is inherent in real property markets. It uses a statistical process to calculate the P-factor, which identifies the likelihood that there is no linear relationship between the sale dates and the sale prices. Some regression programs can also indicate if there is a curvilinear relationship between the sale dates and sale prices. If there is no linear and no curvilinear relationship, then by definition the market is stable. If there is a linear relationship then the related coefficient will indicate the amount and direction of the trend in
values. If a curvilinear relationship exists then “dummy fields” can be created to identify and measure the nonlinear curve. Go to AVTtools.com and click on the LiveValuation button to see the associated video.
Conclusion This article identified some of the weaknesses associated with traditional and statistical analysis techniques used to trend values over time. It revealed that there are many conclusions and opinions in an appraisal that can be formed by applying statistical analysis. When should appraisers
begin using statistical analysis? Well, many appraisers are unknowingly applying statistical techniques in their appraisals today. For example, the Excel spreadsheet places the linear trend-line on a scatter plot via the sum of least squares method. By definition, this is a regression analysis. Appraisers are employing multiple statistical analyses every time they fill out a 1004MC form. This article and video presents many statistical terms and concepts with which appraisers should become familiar. Appraisers are not expected to be able to perform Monte Carlo simulations or the macros that run it. 6
Regression Analysis
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THINGS
Gorgeous photo! a -Danny Joe Valenzuel
APPRAISERS
F
From an aircraft parked on the front lawn to a run-in with a bear, appraisers come across many photo-worthy sights on a day-to-day basis. Things Appraisers See features all your personal bear and aircraft moments.
Top floor is now occupied. -Anony mous
Thi value a s may affect t bit ... - he opin Charles ion of W. Wa tson 44 | LVM
So go on and send us your photos to info@livevalmag.com or simply log on to our website to upload them under Things Appraisers See and look for them in an upcoming issue. For even more strange photos go to facebook.com/livevaluationmagazine.
Honey, Iâ&#x20AC;&#x2122;m hoooome. -Anony mous
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| 45 CA License #0764257 * LIVEVALMAG.COM
< OCTOBER 2011 > Last month’s articles sparked a lot of debate. Here are some responses from our readers.
valuation
voices
do you have something to say?
www.livevalmag.com 8
Back to the Basics I like where this paper is going but there really needs to be better distinction between the concepts of ‘approach’ and ‘value’ What is needed is not necessarily a newly invigorated emphasis on the cost or income approaches for determination of market value but a focus on finding a proper contrast to market value. Variations of the income and cost approaches would be the obvious places to begin with this endeavor.
Livevalmag.com is your No.1 source for news. Here is feedback from the story that received the most chatter this past month.
- KB
Low Appraisals Hurting Market Recovery
FEATURE: Neutral Valuation This is the absolute truth. I have been a real estate appraiser for close to 30 years and I have never encountered more conditions adverse to providing actual neutral values than I do today. Appraisals for lenders, once the majority of my business, has become something I try to avoid. There is no neutrality in the lending business.
- Bob Stanziola
The Chief Says: Lost in Translation I find it useful to have the AMC, or even loan originators, forward the exact verbiage from the lender to me for my response, thereby reducing the likelihood of the request being misinterpreted.
As alw
ays,
find all th
e latest an
comme
d greates
nts on liv
t
evalma
g.com.
- Bsmiley
Best Practices: Maintaining Your Workfile
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Excellent article! However, I get the sense that you favor a ‘paper’ file version of the appraisal workfile? I contend that a complete electronic workfile is actually better than a paper one! The paper workfile is only an ‘image’ of your analysis. Say you have a printed copy of a spreadsheet, regression analysis, 1004MC graph, or phone message, wouldn’t it be better to actually be able to open an electronic workfile and pull up a file to SEE what the formula was used or what data was used to create the graph? - Brian Davis
“16% of sales were canceled because their contract amount was for more than the market value of the property. Not because of ‘low-ball’ appraisals. It’s not our job to make sure real estate agents and LO’s get the highest commission possible. And ultimately, that’s what their complaints are really about.” - redbeard “The problem for us as appraisers is not the content of this article. All real estate participants, buyers, sellers, lenders, etc, have complained about the function of appraisers for decades, and, they always will. Our problem is that the media is full of incorrect, erroneous and misleading articles like this one, but we (appraisers) have no one on our team to reply.” - YFA
economic The nation’s economy is drifting perilously close to recession.
Most indicators, especially those that affect capital intensive industries such as real estate, have declined in recent months or have never recovered from the Great Recession. The U.S. labor market ground to a halt in August. After several months of modest job increases, which were less than half the number necessary to crawl out of the employment hole left by the severe
recession, there were zero net jobs created. A mere 17,000 new jobs in the private sector were offset by an equal number of losses in government. Moreover, the growth estimates for the two prior months were revised down. Unemployment remains high at 9.1 percent. Equally troubling is that more than 40 percent, or around 6 million of the 14 million persons unemployed, have been unemployed long term (more than 27 weeks), and those affected most are in their prime years of productivity.
outlook Consumer spending, which is nearly 70 percent of the nation’s economy, has been battered all year as consumers are concerned about continued employment and are reluctant to spend. Both consumer and business confidence also remain at near record lows. Such lack of confidence leads to reduced spending, which leads to declining employment.
volume declines. NAR reported the number of sales to be down 4 percent in July as compared to June on a median price of $174,800. That median was down 4.5 percent from a year earlier. Case-Shiller reported prices in its 20-city composite index also down 4.5 percent in the three-month period ending in June as compared to the three-month period ending in May.
Enter housing. Both the widely watched S&P Case-Shiller Index and National Association of Realtors (NAR) reported continuing residential price and
The outlook for both housing and the broader economy remains bleak, with no short-term improvement likely. 6
Something on your mind? Need to get something off your chest? Hate something we do? Love something we do? Letters to the editor may be emailed to emily@ livevalmag.com.
Need even more LiveValuation Magazine in your life? Well, it’s at your fingertips: facebook.com/ livevaluationmagazine. Not only can you find all the latest industry news here, but you may come across some other interesting goodies!
William L. Pittenger, MAI, SRA
I take the same route to work every single day. My clients like that. Yep, I’m predictable. When it comes to property appraisals, no one likes surprises. That’s why I maintain a reliable fee schedule and consistent turn time, so that my clients know what to expect every time. And that’s what you can expect from IRR-Residential appraisers nationwide. A commitment that ensures consistency in an industry that can be full of uncertainty. At IRR-Residential, we’re working together to make sure your biggest surprise is, well, not getting one.
Predictability is a good thing. 866.538.8935 liveval@irr-residential.com irr-residential.com
1502_IRR_LiveValuation.indd 1
OCTOBER 2011
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CoreLogic stats
july highlights 2011
wyoming
+3.2%
minnesota
-8.6%
illinois
-10.0% new york
+3.3% idaho
-7.8% D.c.
+2.3%
nevada
-12.2% arizona
-11.9%
west virginia
+14.0%
Including distressed sales, the five states with the highest appreciation were: West Virginia (+14.0 percent), New York (+3.3 percent), Wyoming (+3.2 percent), Mississippi (+2.4 percent), and the District of Columbia (+2.3 percent).
wyoming
+3.8%
mississippi
+2.4%
Including distressed sales, the five states with the greatest depreciation were: Nevada (-12.2 percent), Arizona (-11.9 percent), Illinois (-10.0 percent), Minnesota (-8.6 percent), and Idaho (-7.8 percent). North dakota
+3.6%
minnesota
-5.7%
michigan
-4.7%
new york
+4.1%
delaware
-6.5% nevada
-9.6% arizona
-8.1%
west virginia south carolina
+16.8%
+5.5% Excluding distressed sales, the five states with the highest appreciation were: West Virginia (+16.8 percent), South Carolina (+5.5 percent), New York (+4.1 percent), Wyoming (+3.8 percent), and North Dakota (+3.6 percent).
48
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Excluding distressed sales, the five states with the greatest depreciation were: Nevada (-9.6 percent), Arizona (-8.1 percent), Delaware (-6.5 percent), Minnesota (-5.7 percent), and Michigan (-4.7 percent).
CoreLogic stats
july HPI for the Country’s Largest Core-Based Statistical Areas (CBSAs):
| Cbsa |
July 2011 12 month hpi changed by cbsa
single-family
single-family
excluding distressed
Phoenix- Mesa-Glendale, AZ - 10.8% - 7.9% Chicago-Joliet- Naperville, IL -10.7% - 1.3% Atlanta-Sandy Springs-Marietta, GA
-6.6%
-1.6%
Riverside-San Bernardino-Ontario, CA
-6.2%
-4.2%
Los Angeles-Long Beach-Glendale, CA
-5.7%
0.8%
Philadelphia, PA - 3.1% -2.5% Houston-Sugar Land-Baytown, TX
-2.4%
4.8%
Dallas- Plano- Irving, TX - 0.3% 2.9%
2
Washington-Arlington-Alexandria, DC-VA-MD-WV
2.0%
3.7%
New York-White Plains-Wayne, NY-NJ
2.8%
4.2%
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}
}
For What It’s worth
FOR WHAT IT’S WORTH
mandatory education, reprimands and probation.
So is our national system of appraisal
regulation working? Yes, absolutely, to the extent that before FIRREA there were no
minimum qualification criteria to become an
Is our national system of appraiser regulation working? The definitive
answer to this question is both yes and no. On September 26, 1986, the House
Committee on Government Operations
stated, “… faulty and fraudulent appraisals were an important contributor to the losses that the federal government suffered
during the savings and loan crisis …”
Congress declared appraisal inaccuracy a “serious national problem” requiring corrective measures.
These corrective measures took shape in Title XI of FIRREA that created an
unfunded federal mandate for each U.S. state and territory to certify real estate
appraisers in accordance with minimum
qualification requirements and to enforce minimum standards of professional appraisal practice.
Reliable statistics of the actual number of state sanctions against appraisers cannot
be calculated. However, most experts agree
that thousands of appraisers have had their
licenses revoked, surrendered or suspended since FIRREA was implemented.
Thousands more have received other disciplinary actions including fines,
50
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reviewed by the ASC and well over half
of those states did not resolve complaints expeditiously or did not adequately document enforcement files.
Severe underfunding and understaffing of
minimum standards of practice.
consistent and equitable enforcement of
against appraisers for failure to adhere to
On the other hand, there are some serious challenges to the effectiveness of our
national appraiser regulatory system. It is a
patchwork system resulting from distribution of regulatory responsibilities between an
independent private organization and state having sufficient authority to effectively
Bob Keith
to 2009 an average of 27 states per year were
appraiser and no state-imposed sanctions
and federal agencies with no single entity
Is Appraiser Regulation Working?
According to ASC annual reports, from 2006
regulate the entire appraisal profession.
A nonprofit private enterprise, The Appraisal
state appraiser regulatory agencies challenge USPAP. According to a GAO study, 66
percent of states say they need additional funding to conduct investigations and 75 percent state they need additional staff.
Compounding the problem is that many state legislatures “sweep” appraiser board funds (license fees collected from appraisers) for
other state budgetary needs. The mandatory reporting requirements of the Dodd-Frank
Act are likely to exacerbate the problem even more.
Foundation, has the authority to set
Consistent USPAP enforcement is hampered
minimum professional standards through the
on many states’ administrative, investigative
appraiser minimum qualification criteria and AQB and ASB. However, the Foundation has no enforcement authority over appraisers or state appraiser regulatory agencies.
State appraiser regulatory agencies have
sole enforcement authority over appraisers,
but have no authority to establish minimum qualification criteria or minimum standards of professional practice. [Note: States can
exceed minimum standards and criteria.]
by the lack of appraisal or USPAP expertise
and legal staffs. Individual state statutes vary so widely that some laws prohibit revocation or suspensions but allow fines, while others prohibit fines and allow revocations or
suspensions. Still others prohibit mandatory education and/or probation as a sanction. The Appraisal Foundation has developed a consistent enforcement matrix to assist
the states, but it is only a voluntary set of sanction guidelines for states to consider.
The federal financial regulatory agencies
Timeliness of investigations and resolution
for establishing and enforcing appraisal
Fannie Mae reports that it filed 860
(FDIC, OCC, NCUA, etc.) are responsible requirements for financial institutions, but
have no authority to regulate appraisers and state appraiser regulatory agencies, or to
establish minimum qualification criteria or standards of practice for the profession.
of complaints are often targets of criticism.
complaints against appraisers in 45 states in 2001-2002 and that a third of the states took
three years to resolve the complaints and 469 complaints remained unresolved four years later.
The Appraisal Subcommittee is a federal
So is our national system of appraiser
enforce compliance of Title XI of FIRREA on
the definitive answer to this question is no, at
agency with congressional authority to
state appraiser regulatory agencies, but has no authority over appraisers or to establish
appraiser qualification criteria or standards of practice.
The ASC conducts biannual field reviews
of each state appraiser regulatory agency to
assess every facet of its regulatory program.
regulation working? Some would argue that least not well enough.
Perhaps it is time to consider consolidation of private, state and federal responsibilities for
appraiser regulation into a single, adequately funded entity or agency! 6
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