appraiser focus NATIONAL ASSOCIATION OF APPRAISERS
Q1 2017
magazine
What’s Your
(Appraisal) Problem $
? 8 VALUATION
What you need to know when dealing with accessory dwelling units
10 VALUATION
How to choose a comp
Why this question is the first and most important step in the appraisal process
? 11 EMERGING ISSUES
The ins and outs of E&O insurance
t a h t C M A Join an e m i t r u o y s d understan able. is valu
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appraiser focus
/ FEBRUARY / 2017
CONTENTS
appraiser focus NATIONAL ASSOCIATION OF APPRAISERS
Q1 2017
magazine
6 News from NAA
Read about the association’s latest events and initiatives.
What’s Your
(Appraisal) Problem Why this question is the first and most important step in the appraisal process
$
? 8 VALUATION
What you need to know when dealing with accessory dwelling units
10 VALUATION
How to choose a comp
?
8 Valuation 11 EMERGING ISSUES
The ins and outs of E&O insurance
FEBRUARY 2017
FEATURE 15 What’s Your (Appraisal) Problem?
Why this question is the first and most important step in the appraisal process BRYAN S. R E Y NO L D S, M N A A
Valuing an Accessory Dwelling Unit Nine tips for determining an ADU’s worth RYA N LU NDQ U IST
14 Personal Property Corner
The Personal Property Committee This small group aims to grow within NAA. VA L E R IE M c A L E E NA N,
10 Valuation
How to Choose a Comp When an appraiser does his job, there’s no such thing as a good or bad comp. T IMO T HY C . A NDE R SE N, M NA A
11 Emerging Issues
Claims, Complaints and E&O Insurance Why it’s important to make sure you’re covered
M NA A
19 An Opinion of Value
The Attitude Problem Why I think this industry is missing some muchneeded optimism DU STIN HA R R IS
DAV ID B R A U NE R
STRONG SUPPORT CAN MAKE A PROJECT Talk to the Liability Insurance Specialists for the Right of Way Industry
RELIABILITY EXPERIENCE SERVICE
For more information visit www.liability.com
February 2017
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A NOTE FROM THE
NAA PRESIDENT JOHN DINGEMAN, MNAA
john@dingeman.com
THE
TEAM PUBLISHER
Teresa Walker
Change. It is constant and sometimes—most of the time—it has a significant impact on our personal and professional lives. Without even knowing if the impact is going to be positive or negative, as human beings we naturally resist change. Some people fight it with an unparalleled passion and others try to ignore it, just hoping it will pass. Every facet of our industry has faced monumental governmental and regulatory changes all in the perceived best interest of the consumer. The real estate appraisal profession is no exception.
NAA’S MISSION
1 2 3
UNITE
Bring appraisers together to advocate for positive change.
PROMOTE
Encourage continued education and high standards of conduct.
PROVIDE
Offer services designed to benefit our membership.
4 | naappraiser.org
Many appraisers, or at least those who have been in the profession for more than 15-20 years, can remind you of the trips to the onehour photo store, visiting real estate offices to review the MLS books, scratching arrows onto maps, and even using a typewriter to complete carbon forms. In the last 20 years, technology has changed the way we work, arguably for the better. Still, adapting is sometimes a challenge. The regulatory changes surrounding the HVCC and now the Dodd-Frank Act also altered the way we do business and with whom, and for many appraisers this was indeed a change for the worse. The risk we assume with every appraisal report has certainly changed. While fees are a highly sensitive topic, they were largely unchanged for quite some time and only recently have we seen a positive movement—one that is long overdue and most deserved! Over the last several years, I was fortunate enough to be invited to participate in several industry meetings and conferences with lenders/ bankers, underwriters, real estate sale leaders, educators, state regulators and appraisal organizations. The common thread among all of them is how to deal with and overcome change. It has been an eye-opening experience to say the least. When there is upheaval in your own world, it is difficult to imagine others suffering and you are far less sympathetic. The demands seem to be immense no matter which direction you turn. Consumers want more and more and they want it all faster. Lenders are competing on virtually nothing more than customer service and turn-times. Underwriters,
SENIOR EDITOR
George Harrison, MNAA NAA PRESIDENT
John Dingeman, MNAA EDITOR-IN-CHIEF
Jessica Guerin CREATIVE DIRECTOR
Traci Knight PRINTER
The Ovid Bell Press ADVERTISING INFORMATION
teresa@naappraisers.org SUBSCRIPTIONS
info@appraiserfocus.com EDITORIAL CONTENT
jessica@appraiserfocus.com
© 2017 Reverse Publishing LLC, All rights reserved. Reproductions or distribution of any materials obtained in the publication without written permission is expressly prohibited. The views, claims and opinions expressed in articles and advertisements herein are not necessarily those of Appraiser Focus, 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, Reverse Publishing LLC 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: National Association of Appraisers 7113 San Pedro Ave., #508, San Antonio, Texas 78216 210.570.4950
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like appraisers, are being asked to find ways to improve efficiencies and shorten the cycle to shave a few days off. Shortage or no shortage, our state regulators and our elected politicians are hearing from consumers and real estate sales persons that appraisals are taking too long. Appraisers at the same time are dealing with scope creep in front of every assignment and lender overlays added on the back end. While many appraisers will not believe me, I can say that a clear majority of the stakeholders involved in our industry are proactively looking for solutions to their own problems and ours and many to our benefit. I believe that some of it can be attributed to the very active state appraisal organizations that are serving as watchdogs and lobbyist for our profession. These groups are helping shape and influence change. The Coalition of Arizona Appraisers (CoAA), who with the help of the local AI and NAIFA chapters, negotiated with and found support for the AMC legislation that passed over five years ago. Like all negotiations, the appraisers lost on some and gained on others. Subsequent hard work from CoAA leadership, through collaboration with another state, opened the bill again to introduce a clause that prohibits the use of the indemnification clause not only with AMCs, but with all parties who engage appraisers in an assignment. The Coalition of Appraisers in Nevada (CAN) is diligently working with the state to secure and complete a fee study.
The Association of Texas Appraisers (ATA) is regularly asked for input from the TALCB and when they are not the ATA is there to provide their unsolicited comments. The NAA continues to work with its Board of Governors to lend its support at the state level or share its concerns at the federal level. While it does not appear that we are winning on all accounts, I am encouraged that our input is being sought after and considered with the respect that it deserves. It is too easy though for some to become angry and complain as though nothing is happening and that the appraisers are once again the whipping boy. I would encourage appraisers to take a different approach. After all, as Mark Twain said, “Anger is an acid that can do more harm to the vessel in which it is stored than to anything on which it is poured.� We need to take the lead and change the narrative using a positive approach and bringing viable solutions to the table. We cannot dismiss and ignore the noise around us because we do not believe it to be true; Kodak did that and so did Blockbuster. I love our profession like many of you. I want to ensure our legacy as a real estate appraiser and we can do it together.
John Dingman
Created by appraisers, for appraisers. We were tired of typing too, and are happy to share our solution with you!
February 2017
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appraiser focus
/ FEBRUARY / 2017
CONTRIBUTORS
RYA N LUNDQUI ST
8 | Valuing an Accessory Dwelling Unit
Ryan Lundquist is a certified appraiser and focuses on residential appraisals in the Sacramento area. His clients include homeowners, real estate agents, governmental agencies, attorneys and lenders. Lundquist runs the top-ranking site Sacramento Appraisal Blog and has written over 1,000 articles to help illustrate what is happening in the market and offer insight into how appraisers think. Lundquist is the chair of the Sacramento Association of Realtors’ Housing Opportunity Committee and is a board member of the Real Estate Appraisers Association of Sacramento. He won the Affiliate of the Year award in 2014 from the Sacramento Association of Realtors. T IM O THY C. ANDERSE N, M NA A
10 | How to Choose a Comp
Timothy C. Andersen has been a real estate appraiser and consultant since 1986. He has SRPA and MAI designations and is an AQB Certified USPAP instructor. Andersen is an active member of NAA, an affiliate member of the Association of Texas Appraisers and an adjunct instructor at the Columbia Institute. Previously, he had a real estate brokerage specializing in high-end condominiums. He earned a degree in real estate appraisal from The University of St. Thomas in Minneapolis. DAV ID BRAUNER
12 | Claims, Complaints and E&O Insurance
David Brauner is senior insurance broker for OREP.org and publisher of Working RE magazine. He has been involved in providing E&O coverage for appraisers for more than 20 years.
VAL ERI E Mc A L EEN A N , MN A A
14 | The Personal Property Committee
Valerie McAleenan is chair of NAA’s Personal Property Committee and an expert in needlearts. She is a graduate of the American Needlepoint Guild’s NeedleArts Appraisal Program and has served as vice chair and chair of the program.
LOOKING TO CONNECT WITH THE APPRAISER COMMUNITY?
B RYA N S . REYN O L D S , MN A A
15 | What’s Your (Appraisal) Problem?
Bryan S. Reynolds is a certified general real property appraiser in Kentucky and Tennessee, a registered agent with the Tennessee State Board of Equalization, and an AQB Certified USPAP instructor. He has testified as an expert before various courts, planning and zoning boards. Reynolds is the owner of Bryan S. Reynolds & Associates, Reynolds Appraisal Service and a partner in Appraiser eLearning (appraiserelearning.com). He provides residential and commercial valuations and education, mentoring, consulting and litigation support services. D U S T I N H A RRI S
19 | The Attitude Problem
Dustin Harris is a successful, self-employed, residential real estate appraiser. He has been appraising for nearly two decades. He is the owner and president of Appraisal Precision and Consulting Group, Inc., and is a popular author, speaker and consultant. He also owns and operates The Appraiser Coach, where he personally advises and mentors other appraisers and helps them run successful appraisal companies and increase their net worth. His free podcast can be listened to on iTunes and Stitcher. He and his wife reside in Idaho with their four children. He is helplessly addicted to Swedish Fish.
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NEWS FROM NAA
Brought to you by the staff of NAA
www.naappraisers.org 8
THE ASSOCIATION’S LATEST NEWS AND HAPPENINGS MEET Josh Wallit,
APPRAISAL SUMMIT
MNAA
2017
New Board Member NAA welcomes Josh Walitt as its newest board member. Walitt, who will be replacing Lori Noble, is a certified residential real estate appraiser, reviewer and educator. He is currently the compliance manager for Property Interlink, a national appraisal firm and management company. Prior to joining Property Interlink, Walitt provided independent fee appraisal and consultation services. In 2013, he was the appraiser member of Colorado’s AMC Rulemaking Taskforce. In 2015, Walitt designed the Market Machine, a market analysis and regression modeling tool used by appraisers throughout the U.S. He designs and presents continuing education courses for online and classroom delivery.Walitt holds the SRA designation with the Appraisal Institute and received his Certified Distance Education Instructor (CDEI) certificate in 2014. Walitt’s goal as a board member is to strengthen the regulatory structure that upholds sound valuation protocol in the U.S., and find and expand common ground within the appraisal profession and other industry groups. He lives with his wife and two daughters in Colorado.
The Appraisal Summit Appraiser Conference, cosponsored by NAA and Columbia Institute/Corelogic, will be held November 1-3, 2017 at Bally’s Hotel and Casino in Las Vegas. Network with peers, appraisal service providers, authors and political advisors. Earn 14 hours of continuing education credits and learn how to maintain your competitiveness.
REGISTRATION
AND CONFERENCE DETAILS ARE AVAILABLE AT
appraisalsummit.net. FOLLOW NAA ON
NAA Chairman of the Board Named Vice Chair of TAFAC’s ASC Committee NAA’s founding member and chairman of the board, Mike Brunson, MNAA, who currently serves as NAA’s TAFAC (The Appraisal Foundation Advisory Council) representative, was selected to vice chair the council’s ASC Committee.
lations, u t a r g n Co Mike!
NAA Launches New Website NAA has just completed a new website and online database that is much more versatile, automatically adapting its format to any computer, tablet or mobile device for the best user experience possible. The new design is faster, cleaner and easier to read and navigate. The site also maintains membership information, facilitates interactive communication through multiple forums, organizes events and volunteers, and distributes email newsletters and broadcast communications. In the “back office” of the website, a very powerful, wellorganized and comprehensive database will help NAA operate more efficiently. Membership changes to the database are automatically captured, and the site now allows for online dues renewals, event registration and volunteer activities. Automated emails make it easier to promote NAA’s activities. Members can add pictures/avatars to membership records, change contact information and reset passwords at any time.
Check it out today at naappraisers.org.
Follow the association’s social networking pages for the latest appraiser news and industry updates.
February 2017
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FOCUS ON VALUATION
Valuing an Accessory Dwelling Unit Nine tips for determining an ADU’s worth
RYAN LUNDQUIST
Sacramento-area real estate appraiser
“Are we dealing with a second unit or an accessory unit? It might sound like I’m splitting hairs here, but there is actually a difference between a full-fledged second unit and something that would be classified as an ‘accessory’ unit (also known as a granny flat, mother-in-law unit or guest quarters).”
How much is that accessory dwelling worth? How do we really put a value on it? It’s not always easy to figure that out in real estate. Here are some of the issues I tend to think through as an appraiser when there is an accessory unit on a property. 1 COMPS g How much are other homes with accessory units selling for? This is a fundamental question. Since data is often limited, we might have to look through years of neighborhood sales (or in competitive neighborhoods) to try to find something that has sold with an accessory dwelling unit (ADU). Even if the sales are older or a bit different in size, we can at the least come up with a percentage or price adjustment to try to get a sense of what the market has been willing to pay. Ideally, we’d find three model match sales in the past 90 days, but that’s probably not going to happen. Remember, we might not use the really old sales as comps, but we can still use some of the older data to get a sense for how the market has behaved regarding accessory units.
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2 ADU MINIMUM g At a minimum an
accessory unit needs to have a bathroom, sleeping area and a kitchen. This means an outbuilding without a bathroom really isn’t an accessory unit. And that man cave/she shed isn’t an accessory dwelling because it’s basically a game room meant for hanging out instead of living.
3 SECOND UNIT OR NOT g Are we dealing
with a second unit or an accessory unit? It might sound like I’m splitting hairs here, but there is actually a difference between a fullfledged second unit and something that would be classified as an “accessory” unit (also known as a granny flat, mother-in-law unit or guest quarters). In short, whether something is a full second unit or merely an accessory dwelling could potentially change the way we approach valuing the unit and which comps we choose.
4 JUST A HOUSE g How much
would the property sell for if it just had a house without an accessory unit? This doesn’t help us put a value on the accessory unit, but
in a sense it helps us start gauging value for the neighborhood. It at least gives us a place to begin. 5 COMBINING SQUARE FOOTAGE g
Oftentimes an accessory unit’s square footage gets lumped into the main square footage of the house. This happens in MLS and sometimes it happens in tax records. So we might read that a home is 2,000 square feet when in reality, the main home is only 1,400 square feet and the accessory unit is 600 square feet. In this example, we don’t really have a 2,000 square foot house, but rather a 1,400 square foot house with an accessory unit. The question becomes, could the subject property sell on par with homes that are 2,000 square feet? Maybe. Maybe not. This is where we have to do research. I will say quite a few properties are priced based on a lumped square footage and then they end up sitting instead of selling. This is not always the case, but it reminds us to be careful about assuming a home with an accessory unit is always going to have the same value as a larger home.
FOCUS ON VALUATION 6 PERMITS g Was the accessory unit
permitted? If you are hoping to see more significant value recognized for an accessory dwelling, having permits is a key factor. My friend Gary Kristensen in Portland wrote a post on ADUs and he says, “Provide the appraiser and your lender with documentation that your ADU was legally permitted. Also, list information about rental income, expenses and detail construction costs (if your unit was recently constructed).” Good advice, Gary.
7 RENT g Can the accessory unit be legally rented? What is the market rent? This is where we might use the Income Approach to come up with a value. Imagine an accessory dwelling has a market rent of $1,000 per month. Now imagine an appraiser says the extra unit is worth $10,000. Does that seem reasonable? Doesn’t it seem low right away since the unit would be 100 percent paid for after 10 months? Or imagine a unit rents for $300 but it’s being given $150,000 in value. Doesn’t that seem excessive based on the low rent? Thus, sometimes when we know market rent we can begin to sniff out whether a value adjustment is even approaching reasonable.
Part of it depends on quality too. If the extra unit has a quality clearly below the main house, it’s probably not reasonable to see buyers pay the same amount for square footage outside the house. But if the quality is the same, we might be looking at an adjustment that is similar or the same to that which is given to the house. Again, there is no rule here. This is only a question I ask myself in the background when approaching an accessory unit. I would never automatically give an adjustment like this. Remember, square footage adjustments are not based on the entire value of the property divided by the square footage.
8 SQUARE FOOTAGE ADJUSTMENT
9 COST VS. VALUE g We all know the cost
g If I’m adjusting $50 per square feet for extra square footage in my report, would it be reasonable to see that same adjustment for the 600 square foot accessory dwelling? This is only a question I ask myself. There isn’t a constant where the market will pay the same amount for square footage for the main dwelling and something else (converted basement, converted garage, accessory unit).
of something doesn’t necessarily translate to the value, but cost can help us gauge quality. There might be a difference in value for an accessory unit that cost $125,000 compared with $15,000, right? This is basic logic, but let’s not overlook the importance of it. 6
February 2017
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FOCUS ON VALUATION
How to Choose a Comp
When an appraiser does his job, there’s no such thing as a good or bad comp. TIMOTHY C. ANDERSEN, MNAA
Real Estate Appraiser, Consultant
How do you choose a comp? What is a “good” comp? Therefore, what is a “bad” comp? These are questions an appraiser fields every day. This essay functions, in part, to answer those questions. (Spoiler alert: There is no such entity as a “good” comp or a “bad” comp. A comp either meets the criteria, or it does not.) First of all, appraisers need to forget DoddFrank even exists. Yes, it was supposed to end lender pressure on appraisers. It does not. That is a fact of life. We need to live with it. If you don’t make the client’s number, then the client will ask you to revisit your comps, etc. Assuming there was no error in your comp selection, there is essentially nothing to revisit (other than maybe to check the math and make sure the adjustments are going in the right direction). So the requests to revisit reports and consider new comps will continue. How to avoid these silly lender requests? The answer is to choose the right comps and the right number of comps in the first place. If the appraiser does this, the issue of the lender requiring “better comps” is really moot. So, how does the appraiser do this? SR1-4 teaches the appraiser to gather, verify and analyze all of the information necessary for credible assignment results. When the appraiser has all of the necessary data (remember, not using all of the necessary data can be construed as bias), there is no reason to ask the appraiser to consider other
10 | naappraiser.org
sales, since the appraiser has already done this. The appraiser has gathered, verified and analyzed all of the necessary information already, before sending out the report, right?!
“The appraiser’s challenge is to answer the client’s questions credibly. It is not to make the client happy, not to make the client’s deal, not to protect the client, and most certainly not to help that nice young couple purchase their dream house.”
Next in line of logic is to determine if the comps have the same highest and best use as the subject (usually this means as improved). This analysis of the comparable sales, properly done, allows the appraiser to demonstrate that he has followed the proper protocols to determine which sales are comparable and which are not. With really rare exceptions, the sale and purchase of a property does not qualify as a comparable sale unless and until the appraiser can demonstrate that the sale-property and the subject have the same highest and best use. If they do, they are comps; if not, they are not comps (no matter how loudly the client/ intended user may holler and moan to the contrary). This is the only metric by which an appraiser can measure a comp. Therefore, it is not the appraiser’s challenge to choose “good” comps, since there is no metric by which to measure a “good” comp. When the appraiser has done the multiple analyses necessary to determine that a recent sale and purchase has the same highest and best use as does the subject (and maintains the details of the analyses in the work file!), then the appraiser has demonstrated that the properties are comparable. Such an analysis is what USPAP calls for. It is also congruent with the definition of market value most appraisers use every day in their reports, and it’s what Fannie Mae expects. So, there is no such thing as a “good” or “bad” comp. Either a comp has the same highest and best use as
the subject, or it does not. That is the only metric by which an appraiser measures the reliability of a comp.
The appraiser explains these analyses within the reconciliation portion of the report. The software’s pre-printed boilerplate about scope of work and reconciliation is useless here. This is where the appraiser’s training in persuasive logic and communication comes into play. This is where the appraiser takes the client by the hand and leads the client along the logic path to the appraiser’s conclusion of value. In leading the client by the hand, nobody says the client has to agree with the appraiser’s conclusions. However, it is the appraiser’s challenge to make sure the client can follow the appraiser’s logic and reasoning that led him to arrive at that conclusion. That the client is not happy with the appraiser’s conclusion is just too bad. An appraiser needs to look closely at the engagement letter. There is nothing there about making the client happy. The appraiser’s challenge is to answer the client’s questions credibly. It is not to make the client happy, not to make the client’s deal, not to protect the client, and most certainly not to help that nice young couple purchase their dream house. It is our job to form a credible value conclusion. It is the lender’s job to underwrite the risks of making a mortgage loan. We do our part by analyzing sales to make sure they have the same highest and best use as the subject. That is how we choose comps. 6
Have something to say? Tell us what you think: jessica@appraiserfocus.com |
FOCUS ON EMERGING ISSUES
Claims, Complaints and E&O Insurance Why it’s important to make sure you’re covered
if someone were to trip and fall at your office, or losses to your business in the event of a fire or theft or even a data breach. The minimum premium for a BOP is about $500. As appraisers now shoulder an increase in liability as a result of new FHA requirements—such as testing appliances and the various systems of a house— more and more appraisers are paying for this type of comprehensive coverage. Claims Made and Coverage for Prior Acts
DAVID BRAUNER
Senior Insurance Broker OREP.org
“If you have E&O insurance, don’t worry—it’s the single best protection you can have... I have never heard of an insurance company failing to respond as they should have (it’s called a duty to defend).”
E&O vs. General Liability Errors & Omissions (E&O) is malpractice insurance for mistakes in your report. General Liability (GL) covers, among other things, property damage and bodily injury while you’re working on the premises. For example, if during a walkthrough you knock over and break a vase, your GL insurance would cover the property damage; or, if you back up your car and injure a homeowner as you exit the driveway, your GL plan would cover the bodily injury. Business Owners Packages (BOPs) typically go beyond the job site, protecting you
Your E&O insurance policy is almost certainly “claims made.” This means that for the insurance company to respond to a claim, the claim must be reported while the policy is in force. This can be confusing and counterintuitive, but all appraiser policies work the same way, and in the end, here’s all you need to know: Renew your policy before it expires. As long as the policy has not expired and there is continuous coverage going back to the appraisal in question, you should be covered. How does a policy expire? It expires if you don’t renew it on or before the expiration date. You can switch carriers at renewal time and keep all your back coverage, as long as you renew before the policy
expires and the new carrier offers “prior acts” coverage. Prior acts coverage insures all your work going back to the inception date of the policy. The inception date is referred to as the retro date on most policies, which again, refers to how far back your coverage goes. You’ll find your retro date on the declarations page, which is one of the first pages of your insurance policy. Check out your own retro date to see how far back your coverage goes. Here’s an example of a prior act: A claim surfaces today from an appraisal you completed four years ago. You had E&O insurance at the time you completed the appraisal. You’ve kept your E&O policy in force and did not let it expire. That claim should be covered now and you are happy and relieved. Here’s the other scenario: You let that policy expire sometime between when you did the report four years ago and when it surfaces. In this case, that claim is not covered, even though you had insurance when you did the appraisal in question, and even though you may be covered today. This does not make anyone happy. Solution: do not let your insurance policy expire. You can switch insurance companies as long as it is before your policy expires and the company February 2017
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FOCUS ON EMERGING ISSUES you’re switching to provides prior acts. (Not all provide prior acts coverage, so ask the question.) If you let your policy expire for any reason, you lose coverage for past work. If you’re quitting appraising or retiring, see below. This is the most important information to understand about your E&O insurance. And by the way, we have seen claims recently from appraisals completed as far back as 2005. Responding to a Claim or State Board Complaint There are several reasons why you should notify your E&O insurance company immediately of a civil claim from a private source or a complaint from your state board. First, it’s wise to let the experts handle it. Many E&O providers have free, anonymous help lines and other expert assistance, some with no deductible. Don’t make things worse by responding on your own. If it’s found to be frivolous, chances are your premium will not be affected, or at least not by much. The second reason to report immediately is that most policies include “duty to report” language, which means exactly what it says: You have a duty to report the compliant in a timely manner. Reason three for getting the claim/complaint on the record is that it might save your bacon. Imagine this scenario: A seemingly frivolous claim surfaces that you report to your carrier, but hear nothing more about for eight months. In the interim, you let your E&O policy expire either intentionally or accidently. Because you got the claim/complaint on the record during the policy period when it happened, if it resurfaces later, the policy should respond to the claim/complaint even though the policy is no longer in force and regardless of whether you have current coverage. It is in your best interests to report a claim/ complaint right away. If you do not report it and let your insurance lapse, that claim will not be covered should it rise again, even though you were covered when you did the appraisal. Expert Help Seek the help of experts on USPAP and the workings of your state appraisal board before responding or signing any consent decree, as it most likely will have an adverse effect
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on your business, no matter how harmless it may seem at first. There are numerous documented instances of appraisers being charged with “USPAP violations” by their state board when in fact, the issues cited were not violations of USPAP at all. Get the help of a USPAP expert first. Next, respond to any claim or complaint professionally and cogently. Furnish a wellthought out, factual, courteous response. If you dash off an error-ridden, sloppy, disorganized reply, it will be assumed that you appraise the same way. If you’re dealing with a claims adjuster at an insurance company, you’ll receive expert help either way, but why alienate someone who is there to help you? Give yourself every chance for success by being pleasant and professional. This also is good advice when explaining a claim/complaint to a new carrier after the issue is closed. If you can explain the issues involved in the claim clearly and professionally, take responsibility where it’s merited and discuss strategies for ensuring that it does not happen again, you stand a much better chance of being offered insurance terms with multiple carriers, which gives you more choice in deciding who you want to do business with. Not everyone is a good writer, but most everyone knows someone who is—reach out for help. Try not to antagonize anyone, especially at your state board. When dealing with your board, be courteous but realize that the process is adversarial in nature. Don’t let your guard down (and seek the help of experts first). If you realize after close review that you made a mistake, admit it and cite any new procedures you’ve created to prevent a reoccurrence. The bottom line: Don’t take a board complaint or a civil claim lightly, no matter how busy you are or how frivolous it appears. It can have long-lasting effects on your livelihood. Little White Lies Please disclose claims and complaints to your insurance company. We assume that no one would intentionally conceal a claim on an insurance application, especially in this era of big data. But it is possible, if you’re not careful, to conceal something inadvertently. For example: A homeowner complains to your state board that you are incompetent
“Seek the help of experts on USPAP and the workings of your state appraisal board before responding or signing any consent decree, as it most likely will have an adverse effect on your business, no matter how harmless it may seem at first.“
because his house is obviously worth more than you appraised it for, and he lost the loan. It doesn’t get any more frivolous than this. But we see it happen. Maybe the real estate agent piles on with a complaint of their own because they also are upset over the “killed” deal. You get a letter from your state board to which you respond professionally and with the help of experts. Now you hear nothing for nine months. So far, so good. It’s time to renew your insurance and you decide not to mention it on your renewal application because it’s obviously gone away or, if you’re switching companies, you fail to mention it on the application from a new carrier. Maybe you’re busy and you want to get the renewal drudgery over with. Don’t make the mistake of not reporting it and believing that it took care of itself. It probably didn’t.
Find out the status of the complaint from your board and report it, even if it’s closed. If it’s not closed, you can expect a letter from the board eventually with possible notice that the investigation found “USPAP errors” in your work file. Many times what they find has nothing to do with the original complaint (a low value), but they find something they don’t like and now you have a corrective order that you need to report— typically a fine and continuing education. When you report it, the insurance company is going to ask you why you failed to report it when it happened and again on the renewal application. They will likely respond to the complaint—and any eventual claim that may arise from it, but they may cancel you for concealing the complaint. This makes it harder to get coverage from another carrier in the future (there is always a question on the application whether you have ever been denied coverage and why). If at renewal you switched insurance companies and did not disclose the complaint to the new carrier, they may not respond to the complaint at all because you did not disclose it on the application. After all, they insured you based on a clean record. Folks, you don’t have much to lose by disclosing—chances are a frivolous complaint will not affect the cost of your
FOCUS ON EMERGING ISSUES
ONE in FOUR appraisers who attended the webinar said they had had a board complaint; one in 10 said they had a claim.
insurance or the complexity of the renewal process. But the risk is great if you don’t disclose. As much as it hurts to be punished for something you didn’t do, it helps to remember that life is not always fair, stuff happens. One thing you can control, however, is to not make things worse by intentionally (or unintentionally) hiding the facts. If the application asks you to report any claim or complaint in the past five years, do so, even if the complaint has been formally closed and you’ve been cleared. It should not make any difference. Leaving Appraising/ Retiring If you are leaving
appraising, consider “tail coverage,” which covers your prior acts or your past work completed during the policy period on into the future. You pay for tail coverage one time to cover past work for up to three years into the future. If you’re of retirement age (65), check with your agent, you may be eligible for free tail coverage for life. State of the Industry If you have E&O insurance, don’t worry—it’s the single best protection you can have. In the 20 years I have been selling appraiser’s E&O, I have never heard of an insurance company failing to respond as they should have (it’s called a duty to defend). Rates
are down (slightly). The volume of claims we see is also down from the dark days following the financial collapse. While there are plenty of state board complaints, the frequency does not seem to be increasing. One in four appraisers who attended the webinar said they had had a board complaint; one in 10 said they had a claim. There are a couple of well-publicized “slip and fall” attorneys who have appraisers in their crosshairs these days, which is worrisome, but the truth is, if you have E&O insurance and get snared in one of these scams, report it to your carrier and go back to work. It won’t be pleasant but you should be covered. 6
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FOCUS ON PERSONAL PROPERTY
The Personal Property Committee This small group aims to grow within NAA.
VALERIE McALEENAN, MNAA
NAA’s Personal Property Committee Chair
The Personal Property members of NAA may comprise a small group, but we are committed to being an active part of the organization. During our July committee meeting, Chair Ed Bales acknowledged the departure of Committee member Judith Pearson and welcomed Charles Will of Harrisburg Home Inventory into our group. During the meeting, the committee established an agenda for the coming year and gave a report to the board.
The agenda outlined the following goals: ONE
To establish better relations and presence with our Real Property counterparts TWO
To establish guidelines for Personal Property appraiser membership within NAA IF YOU HAVE QUESTIONS or wish to become part of the Personal Property Committee, please feel free to contact me at VMCALEENAN@MAC.COM.
THREE
To establish continuing education requirements To help foster better communications throughout the NAA membership, please let me introduce myself: I am Valerie McAleenan. My expertise is in needlearts. I was educated through a three-year NeedleArts
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“The Personal Property Committee members are committed to growing our discipline within the NAA. Over the next year, we will be discussing and establishing guidelines for membership and will submit them to the board for review and approval.”
Appraisal Program (NAP) by the American Needlepoint Guild (ANG) and have fulfilled recertification requirements every two years. This program was established in the late 1990s and its first graduates were credited in 2002. After receiving my certification in 2006, I was asked to serve as vice chair of the program. I served two successive two-year terms and then two successive two-year terms as chair. Since 2014, I have maintained a position on the NAP advisory board. I have been affiliated with NAA since 2014 and in August 2016, I submitted my resume for review and was listed on the ballot for a board position. The Personal Property Committee members are committed to growing our discipline within the
NAA. Over the next year, we will be discussing and establishing guidelines for membership and will submit them to the board for review and approval. We will continue to be an advocate for the NAA, both for real property and personal property, in whatever way we can. The last item on our agenda is certainly as important as the other two, that is, the need to establish continuing education requirements for Personal Property members within their specialized field. As to how many hours of study or instruction will be required each year or every two years and who will oversee fulfillment of such requirements, those matters have yet to be determined. 6
What’s Your
(Appraisal) Problem
Why this question is the first and most important step in the appraisal process
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What’s Your
(Appraisal) Problem Why this question is the first and most important step in the appraisal process By Bryan S. Reynolds, MNAA
The first step of the appraisal process is identification of the problem. Many appraisal practitioners take this step for granted. A clear understanding of the valuation problem is needed before entering into an agreement for services. Here are a couple of reasons why. Let’s assume a property owner contacts you and wants their single-family house appraised. This property is located in a tract subdivision in which you have appraised many properties over the years. This is what is considered an easy house to appraise because there are many similar homes in the subdivision, a considerable number of closed comparable sales, and many active competing units. Supply and demand are in balance as is typical for this highly desirable neighborhood. You can’t wait to arrive at the property because the homeowner has a check waiting for you. She wants a good, honest, ethical, competent, professional, unbiased opinion of value. She has been told that you are the best and she is willing to pay for the best. The house is approximately 1,400 square feet, three bedrooms, and two full bathrooms with a one-car, attached garage. How long would it take you to inspect or observe this property? Most of my appraisal students indicate about 30-45 minutes. What if I said no one was there? You could get in and out of that sucker in about 10 minutes, couldn’t you? In this case, the owner said she will leave the front door unlocked for you and a check will be left on the kitchen table. You photograph and measure the property. Now, how long would it take to prepare the report? She’s not in a rush. So, it’s D-Day (delivery day) and you provide the homeowner with the completed report. She is quite impressed with the professional-looking appraisal report. It describes the average rainfall in the area, the traffic count, median household income and other demographics. It further reports that Daniel Boone visited the Yellow Banks along the Ohio River and describes dragoons and their activities around Daviess County, Kentucky. The homeowner is very pleased with the presentation and after looking it over, she asks, “What page is the number on?”After all, that is what interests her the most. You reply page two. She replies “$150,000! That’s wonderful! I am going to tell all my friends, family and neighbors! You will get a lot of work from this and I am sincere about that. I knew you were the best appraiser in the state. I have only one remaining question. Is that the before value or after value?” You probably gulp and say “What?” Do you suddenly feel like you just stepped in something? be solved.
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The homeowner now explains that she needs a before and after value because the Department of Transportation is taking a portion of her property and she needs to know the value immediately before the taking and the value immediately after the taking. “Oh, and by the way, you testify in court Monday morning at 8:00 a.m.” You have just stepped into something you were not expecting. Just because you have a credential to appraise single-family residential properties, and do so every day, and it’s a single-family house in a subdivision you have appraised for years, it doesn’t automatically make you competent to appraise the subject for any particular use. While you may be extremely competent to appraise that same residential house for a refinance, purchase, relocation assignment, foreclosure, short sale, divorce, potential marketing of the property, construction defects, insurance purposes and a whole host of other reasons, you may not be competent to appraise that same single-family house in a condemnation case.
Reset Button The first question you should ask when receiving a potential order is, “What’s Your Problem?” You might not ask it exactly like this, but make no mistake you need to ask the client to state his or her valuation problem. When you get an answer, you are ready to decide if you are competent to assist them in solving their valuation problem. When you go to a primary care doctor, what is the first thing he or she asks you? “What brings you in to see me today?” “What’s wrong with you?” “What’s going on?” In other words, the doctor asks you to identify your health problem. It is probable that if you say, “Hey doc, look at this bone sticking out of the back of my leg,” he or she might respond, “Oh my, you need to go see an orthopedic specialist at the hospital as soon as possible. I am not competent in that area of medicine.” Similarly, appraisers need to identify the intended use, which is part of step one in the appraisal process of problem identification, before accepting the assignment.
“Appraisers need to identify the intended use, which is part of step one in the appraisal process of problem identification, before accepting the assignment.”
Remember
USPAP defines ‘intended use’ as:
Standard Rule 1-2b states:
“The use or uses of an appraiser’s reported appraisal or appraisal review assignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment.”
“Identify the intended use of the appraiser’s opinions and conclusions.” Comment: An appraiser must not allow the intended use of an assignment or a client’s objectives to cause the assignment results to be biased.
Standard Rule 2-2a(ii) and Standard Rule 2-2b(ii) state: “State the intended use of the appraisal.”
USPAP defines Intended Use as: “The use or uses of an appraiser’s reported appraisal or appraisal review assignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment.” Standard Rule 1-2b states: “Identify the intended use of the appraiser’s opinions and conclusions; Comment: An appraiser must not allow the intended use of an assignment or a client’s objectives to cause the assignment results to be biased.” Standard Rule 2-2a(ii) and Standard Rule 2-2b(ii) state: “State the intended use of the appraisal.”
Lesson Learned Here’s a story about what happens when you don’t think things all the way through before you take on a new assignment. Many years ago I received a phone call from an attorney in Florida. I have no idea how he got my name and information, but he said his father owned a farm in nearby Union County. I was excited because I had recently completed several farms for the Kentucky Department of Finance. He said his father had a partial interest in a 700 acre farm and needed to know the value of his father’s interest. I was disappointed because at that time I had limited experience in the appraisal of partial interest estates. I recommended a colleague and said I would be able to assist him. The attorney said that would be good. I was now excited though, because I was going to learn something about partial interest appraising. My colleague said, “Bryan, you are going to do all of the work.” I said I know, and then he said he was going to keep all of the money from th fee, and I again said I know. Still, I was excited because I was getting more than money, I was gaining an education. I was going to become more knowledgeable about partial interest appraising. During the process, my colleague said he probably should communicate with the attorney and of course at that point it was his client. I provided the name and contact information. My colleague convinced the attorney we should do a fee simple estate appraisal instead of a partial interest appraisal and simply let the partners work it out. I could have done that! My buddy made all the money and I received no education. Wait, I did receive an education but it was not on valuing a partial interest real estate! It was about thinking things through ahead of time.
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Definition of the Problem Identify
Identify
Identify
Identify
Identify
Assignment Conditions Idnetify
g client and other intended users
g the intended use
g the type and definition of value
g effective value date
g relevent characteristics of the property
g extraordinary assumptions
Before of the 1004 Form Appraisers should beware of using the Fannie Mae 1004 form/Freddie Mac form 70 as a catch all. Many appraisers utilize this form for everything they do. Keep in mind, this form is designed for appraisals prepared on properties for the intended use of a mortgage finance transaction. Using pre-printed appraisal report forms intended for mortgage finance transactions that contain specific language in the form for any other intended use results in a misleading appraisal report. For example, if you appraise a house for a homeowner thinking about selling their home, where is the mortgage finance transaction? If you are appraising a property for a divorce case, where is the mortgage finance transaction? There isn’t one! If the appraiser is accustomed to pre-printed forms and prefers to use such forms, most appraisal software companies have provided an alternative form which is customizable. A General Purpose Appraisal Report (GPAR) or what some refer to as “gee-par” form, is an option that allows the appraiser to tailor the report for a different intended use. Appraisers should also consider the specific need of each client and not force a 1004 down everyone’s throat. For instance, does a client who engages an appraiser for their professional, unbiased, independent, expert opinion of market value of their home for potential marketing purposes really need a picture of their own house? Think about it, he knows what his house looks like. Does he need a floor plan of what he walks every day, or a copy of his deed? Heck, he has the original! Everyone has a GPS on their smart phones, so do they really need a location map with little stick-on arrows? Is it so hard to comprehend keeping all that information and just providing an opinion of value? If you tell a typical homeowner he has functional obsolescence, he likely will look at you funny, and then think he has a disease. Can you keep all of that paperwork
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and provide the client with what he actually wants? They simply want to know the market value of their homes. They are willing to pay for your opinion—an independent, unbiased, professional, expert opinion, not a massive written appraisal report containing information they don’t want or don’t understand.
Oral Reports Let’s go back to the doctor’s office. As stated earlier, he attempts to identify your health problem. They will ask questions and examine you, kind of like a physical inspection an appraiser preforms. He states he still doesn’t know what’s wrong so he orders an x-ray (the subject photos). Do you see the x-ray? Probably not, and if you do, can you understand it? He then needs further investigation and sends you to the lab for bloodwork and urine analysis (the location map). Do you see those results? What next? You are probably sent home and then a day or two later receive a call from the doctor’s office. They give you the doctor’s diagnosis, or opinoin, and you say what? “I’m not going to accept that without a 44-page written report, with the x-ray and lab results attached, and a copy of your license and, oh yeah, include a copy of your malpractice (E&O) insurance policy!” Of course you are not going to have that response. You will accept the doctor’s diagnosis, or opinion, over the phone. Appraisers can do the same thing. Consider exploring oral appraisal reports or restricted appraisal reports. Most appraisers resist these two reporting options but they are permissible under USPAP and many times provide an excellent service to clients who do not want a lengthy report as required by the secondary market. Some appraisers say it looks better with a form report or the client will want a written report to place on the coffee table as a marketing technique to show potential buyers. The fact is that you don’t really know what a client wants unless you ask them. Would the report
g hypothetical conditions
Idnetify
look better if you added the average rainfall, the traffic count, or history of the county? Most clients don’t want all that stuff or fluff, as some refer to it. Finally, are you sure she wants to place a written report on their coffee table? What if she thinks her house is worth $250,000 and your appraisal reflects $190,000. I don’t think she will place that report on her coffee table. Some would destroy that written report. An oral real property appraisal report would be more beneficial in this case. Let’s not forget that the appraisal and the appraisal report are two different things. Many appraisers and users confuse the two. Standard Rule 1 deals with the development. It is everything you have to do to get the number. Standard Rule 2 deals with the report. It is the method in which you communicate the results of the appraisal to the client. Within the report mechanism there are three different options: appraisal report, restricted appraisal report and oral real property appraisal report. One intial question that should be asked is what level of detail in communication of the appraisal does the client actual want. Do they want a written report or an oral report? You might be surprised that many just want to know what their house is worth. An oral report is perfect. If they do want a written report, ask how much detail they want. Do they want to see the anaylisis (the x-rays and lab work) or are they really just more interested in the results/diagnosis? Appraisers resist things they haven’t done before. Change is hard and we simply don’t like it. Rest assured, most things change. If you don’t believe that, look in the mirror. Think outside the check box. USPAP does not require you to even physically look at a property (inspect or observe) and provides three different reporting types to communicate your opinions and conclusions. 6 This article is taken in part from Bryan Reynold’s new course Appraiser’s Guide to CYA (Covering Your Appraisals). Learn more at appraiserelearning.com.
A OPINION OF VALUE
The Attitude Problem
Why I think this industry is missing some much-needed optimism DUSTIN HARRIS
Appraisal Precision and Consulting Group, Inc President and Owner The Appraisal Coach Owner
“What does your future look like? Are you ready to look up? Can you see the opportunities that are right in front of your face? I can. It is time to be successful again!”
When I first started teaching other appraisers, I ran into a huge wall: the wall of negativity. By nature, I am usually a pretty optimistic guy. I have been hit pretty hard by the AMC model, scope creep and the like, but my approach has always been to address what needs addressing and move on. By “move on,” I mean to think outside the box and make my business model work despite the challenges and regulations. It has not always been easy, but I have been able to create and maintain a pretty successful appraisal business, teach it to others and help them to succeed as well. The problem remains, however, that we
appraisers are too damn negative! The feeling of defeat is palpable. Okay, I’m climbing down from my soapbox now. I get it. I really do. Remember, my full-time job is not mentoring, it is appraising. More than 80 percent of my business is AMC work. I work in the field and deal with the same crap the rest of you deal with. I don’t like it either. Although I encourage all of us to be active in changing the system, we also must, in the meanwhile, find a way to make the current system work for us. There are ways to make it work, but we must first start with our
attitude. Do not misunderstand what I am saying here; I am not saying we succumb and comply. Hell no! We fight like dragons to change the system we belong to. There are a thousand things I would change about the appraisal industry if I had a magic wand and knew the right incantations. However, I am not going to throw up my hands and give up in defeat either. It is what it currently is, and I am going to be successful despite what is handed to me. I think there are far too many appraisers living in the “what if ” world of yesterday. “If I could just go back to 2008, then I would be successful.” Well, HVCC happened. Dodd-Frank happened. Regulations happened. Of course we do not live in a true free market. Over-regulation rules the financial world—a world we have chosen to try to make a living in. Now, what are you going to do about it?
Some appraisers get it. The admittedly small number of commentators on my blog who had something positive to say shared a similar message to the one I bring you today. For example, Randall said, “We appraisers really are a bunch of sensitive and grumpy dudes... This guy’s entire mission has been to promote the idea that you can have a more successful career and stress-free life if you will try and spread your wings and hire some help.” Those are the appraisal business owners who will be here tomorrow. They see themselves as the CEOs of their business, not just the technicians. What does your future look like? Are you ready to look up? Can you see the opportunities that are right in front of your face? I can. It is time to be successful again! Let’s bring a more optimistic outlook back to the appraisal profession. 6 February 2017
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