Appraisal Scoop

PR: American Guild of Appraisers Petitions Federal Reserve Board and Consumer Financial Protection Bureau to Overturn Regulation that Threatens Viability of Professional Appraisal Practice

WASHINGTON, Feb. 23, 2012 /PRNewswire via COMTEX/ -- The American Guild of Appraisers (AGA), a national organization of real estate appraisers that is an affiliate of the AFL-CIO's Office and Professional Employees International Union (OPEIU), has petitioned the Federal Reserve Board ("Fed") and the Consumer Financial Protection Bureau to overturn a regulation adopted by the Fed that is contrary to the Dodd Frank Financial Reform law, threatens the viability of professional appraisal practice and undermines the legitimacy of real estate appraisals relied on by lenders in making residential mortgage loans.

In the aftermath of the national financial collapse brought on in part by badly underwritten subprime loans, Congress found that inadequate appraisals resulting from undue pressure on appraisers was a contributing factor. To address the problem, Congress enacted a series of appraisal reforms in the Dodd Frank law to ensure appraiser independence and accountability. A key component of the legislation is a requirement that appraisers be paid "reasonable and customary fees" for their work. Responding to evidence that appraisal management companies have been dominating the market and pressuring appraisers to accept assignments with unreasonable requirements and unreasonably low fees, the law specifically prohibits basing fees on the current practices of appraisal management companies.

Last year the Fed adopted a rule that allows appraisal management companies that control up to 80 percent of residential appraisals to pay appraisers a fraction of what a customary and reasonable fee would be as defined in the law, sometimes as much as 50 percent or more below the prevailing rates. As a result, industry experts report, the problems that Congress sought to address have been exacerbated. And the reliability of residential real estate appraisals is once again subject to question.

Peter Vidi, President of the American Guild of Appraisers explained, "Under the regulation we are seeking to overturn, the borrower doesn't save a penny but the appraiser gets a fee that is as much as 50 percent less than prevailing rates. What the borrower doesn't know is that perhaps less than half of the fee that they are required to pay is actually going to the appraiser who performs the appraisal. The rest goes to the appraisal management company. AMC's are often owned or controlled by lenders that make big profits without the borrower's knowledge that his fee is an additional profit center for the lender or the subsidiary management company at the expense of the borrower."

Vidi and many other leaders in the appraisal profession believe that the practices of appraisal management companies are threatening the reliability of appraisals to the detriment of borrowers and taxpayers. Vidi noted, "In addition to paying low fees, appraisal management firms are pressuring appraisers to meet unreasonable deadlines and often condition work on an appraiser's willingness to cooperate in ways that compromise the integrity of the appraisal process."

Vidi continued, "Most licensed and certified appraisers are hard working, competent and honest, and under the current circumstances, many are choosing to leave the profession. Those who remain are having to take on too many assignments just to earn a living and are dependent on the appraisal management companies that control the business."

The petition was filed on behalf of the American Guild of Appraisers by lawyers, Matt Schneider and Ben Lambiotte of the law firm, Garvey Schubert Barer. Schneider commented, "We believe that the Guild has a strong legal case that the Fed has violated the Dodd Frank law. We are hopeful that the Fed and the new Consumer Financial Protection Bureau, which is specifically charged with protecting the interests of consumers in financial transactions will reexamine this rule and make the changes necessary to carry out the intent of the law."

The petition also asserts that the Fed failed to comply with the law by not providing an opportunity for public comment on the proposed rule. In fact, after the rule was adopted, more than 1,400 comments were received by the Fed in response to the rule. Schneider claims that the Fed was obligated under the Administrative Procedure Act, to provide notice and opportunity for comment prior to adoption of the rule and that the Fed was further required to consider and address comments submitted as part of the rulemaking process.

Vidi noted that he has no illusions that getting this problem fixed will be easy. Vidi said, "For the appraisal management companies and their owners there is well over $100 million annually at stake. For the taxpayer who is left holding the bag when bad lending leads to defaults and for the borrower who often overpays for a home, this is a serious matter. For real estate appraisers, this one of several related issues that will determine the future of the appraisal profession."

While expressing hope that the petition will be successful, Vidi acknowledged that if the Fed and the CFPB don't do the right thing, litigation may be the only alternative. Vidi said, "Suing the Federal Reserve is not something that the appraisal industry would do lightly, but there may be no other option. This is far too important an issue to appraisers and consumers to simply walk away. We are fighting for our livelihood and for the integrity of the work that we do. We ask all appraisers to join with us in this effort."

OPEIU International President Michael Goodwin said that OPEIU and AFL-CIO and their millions of members stand firmly behind the AGA. "We support concerted action by the American Guild of Appraisers to protect the integrity of professional appraisal practice and the profession."

ABOUT THE AMERICAN GUILD OF APPRAISERS/OPEIU GUILD 44The American Guild of Appraisers/OPEIU Guild 44 seeks to represent the interests of appraisers, developing a strong presence before the U.S. Congress and each of the state legislatures. By working closely and exchanging dialog with other like-minded organizations, the AGA works to educate consumers about the appraisers' non bias, independent role in the value process, while ensuring the accountability of both the appraisal profession and the financial institutions with which the appraiser provides services.

ABOUT OPEIUThe Office and Professional Employees International Union represents more than 108,000 members in the United States, Puerto Rico and Canada. OPEIU represents employees and independent contractors in banking and credit unions, insurance, higher education, shipping, hospitals, medical clinics, utilities, transportation, hotels, administrative offices and more.

Professional organizations and Guilds affiliated with OPEIU are a diverse group that includes physicians, pharmacists, chiropractors, appraisers, podiatrists, clinical social workers, hypnotists, teachers and helicopter pilots.

 

SOURCE Office and Professional Employees International Union, AFL-CIO (OPEIU)

Copyright (C) 2012 PR Newswire. All rights reserved

Is YOUR AMC client slow to pay? Here's what can you do!

GUEST POST: Bryan Knowlton is a Certified Real Estate Appraiser in San Diego County, CA.  Author of the annual Appraisal Management Company Directory since 2007.  You can read his blog at http://www.appraiserincome.com and sign up for his FREE Appraiser Marketing System at: http://appraiserincome.com/appraiser-marketing-system/

I just happened to be doing my own appraisal invoice billing the other day and just finished up my phone calls trying to collect on some outstanding invoices.  Most of the companies that I had a problem with have very legitimate answers and checks were being mailed.

For the 3^rd week in a row I had to just leave a message for ES Appraisal / Evalonline because I couldn't speak to anyone directly in the accounting department.  I followed up with emails and was starting to get discouraged, but figured it was an isolated incident.

I got a call from another concerned appraiser that was having problems collecting from ES Appraisal / Evalonline for months.  They were owed thousands for appraisal fees and they were experiencing the same run around that I was getting.

Occasionally emails are received stating the profile has been updated and a check should be received in 2-3 business days.  But the checks are never received.  Claims are made that checks are mailed, but you can not speak to anyone directly.

The payment problems seem to have started in December.

I decided to make a post on my appraiser blog to see if any other appraisers were experiencing the same problem.  Within an hour I was flooded with calls, emails and comments on the blog.  All the appraisers were experiencing the exact same problem.  Many of them had many thousands in unpaid invoices and were getting nowhere.

 At the time of this guest post, I have yet to receive payment and I am still getting inquiries from other appraisers on how to collect this debt. 

What seems to have worked with a number of appraisers that got stuck AppraiserLoft invoices is to contact the lender directly for payment.  Other routes include contacting your state licensing agency, the BBB and of course calling daily and asking to speak with the president, manager, etc...

On Feb 15^th I talked with Lori @ Es Appraisal and she stated they pay for all their appraisals, but there sometimes might be a delay on payments.

They run their checks once a month, usually on the work 30 days since submitted. This can sometimes result in delays on some payments being received for delivered appraisals. But with many appraisers comments below, it sounds like there are numerous appraisers experiencing payment problems.

Make sure to check your profile, confirm the address on your W9 is where checks should be mailed and update with a new W9 if needed.

Lori also stated you can email her directly with your account information, including your sign-up email and she will look in to it and contact accounting. Email her at lcarter@evalonline.net

Bryan Knowlton is a Certified Real Estate Appraiser in San Diego County, CA.  Author of the annual Appraisal Management Company Directory since 2007.  You can read his blog at http://www.appraiserincome.com and sign up for his FREE Appraiser Marketing System at: http://appraiserincome.com/appraiser-marketing-system/

 

NAR Adopts Broader Valuation Policy

From Appraisal Insight Blog author Jerome Nagy on Feb. 16, 2012:

The National Associaiton of REALTORS^® (NAR) continues its holistic approach to valuing real property with the adoption of its Responsible Valuation Policy. The document is the culmination of NAR’s efforts to consider all methods of valuing real property. NAR previously hosted two valuation summits and two working groups were convened. Members from across NAR’s policy structure had input in the document and included representation from the Professional Standards, Real Property Valuation/Appraisal, Federal Housing Policy, Conventional Finance and Lending, Commercial, and Business Issues Committees. Input was also provided by RPR.

The document will serve as the foundation for NAR’s policy position on the various methods of valuing and pricing real property – including appraisals, broker price opinions (BPO), and automated valuation models (AVM). The policy document also includes language from NAR’s Code of Ethics as a reminder to members that REALTORS

SOURCE: Appraisal Insight

 

NAIHP Exposes AMC Tax Evasion

NAIHP Exposes AMC Tax Evasion / RESPA Violations

From: National Association of Independent Housing Professionals

Excerpt:
 
Washington, D.C. - February 13, 2012.   NAIHP recently discovered many Appraisal Management Companies (AMC's), are operating without authority in most states and have failed to pay state income tax.

When businesses are formed, they are required to register with their Secretary of State, for authority to conduct business. That registration alerts the State Tax Department you exist and may be responsible for certain taxes. The same holds true if you operate outside your home state, according to Marc Savitt, NAIHP President.

"Most AMC's are only registered in a handful of states, but operate nationwide. If you're not registered, you're not paying taxes," said Savitt.

My comment: when you get an appraisal request from an AMC, see if they are registered with your state (if your state has AMC regulations in effect). If not, file a complaint with your state regulator.

http://www.thenichereport.com/breaking-news-2/naihp-exposes-amc-tax-evasion-respa-violations

 

From the Forums: A Tale of Two Synergy's

A recent thread from the WinTOTAL User's Group forum started out with this question:

Has anyone had any experience with Synergy Real Estate Solutions? I received an email requesting that I complete their application to be put on their list, which includes a $39.99 fee for a background check....Any input would be appreciated.

James Morris, an employee of Synergy Appraisal Services, a subsidiary of [REAS] Real Estate Appraisal Solutions, responded with the following remarks:

Hello,

My name is James Morris and I am with Synergy Appraisal Services, or the "REAL Synergy," as you put it. I am very sorry we didn't chime in sooner, but to be honest we just weren't aware of this forum. As you might expect there are a number of appraisal forums in existence and it is hard to keep track of them.

Also, we did not know what was going on with this "other Synergy" until recently. We started receiving calls from appraisers saying they had sent in their application and check, wondering where the touted work was, and we had no clue what they were talking about. Slowly we realized there was another entity sending out emails and appraisers who responded to those emails and never received a response to inquiries at numbers provided on the emails were finding us through a Google search for "Synergy."

The more we learned the more alarmed we became, until finally I contacted Federal authorities the week before last about the situation. I honestly could not stand that it appeared appraisers were being scammed, and that they were being scammed using our name, or at least one that was similar.

We had been cautious beforehand because we did not know all of the facts, and will continue to be cautious -- as we still just don't know all the facts. But to be clear *we are not the company sending out the emails asking for money*. The individual who appears to be the owner of "Synergy Real Estate Solutions" pleaded guilty to wire fraud charges last August, and is due for sentencing tomorrow based on what I was told by an investigator. Other messages in this thread provide more details into those circumstances.

Synergy Appraisal Services, my employer, is an AMC that genuinely makes service and quality top priority , as well as treating the appraisers with whom we work (and all for that matter) with kindness, respect and professionalism. We have worked with some of you in the past and I hope your experience was indicative of those priorities.

I am going to include below a statement on this situation written by our president and chief appraiser James Baumberger for an email we sent to our entire panel of appraisers last month:

"A Tale of Two Synergy's

Our parent company's name is Real Estate Appraisal Solutions (REAS) and one of our brand names is Synergy Appraisal Services. Our corporate office is in Denver, CO. It is a concern to us that Synergy Real Estate Solutions of Pittsburgh has been contacting many appraiser members already on our panel offering to sign them up for a registration fee. We do not charge any registration fees, and we value cordial professional relationships with our extended team of appraisers, so please do not confuse us with "the other Synergy." While we are not certain of accuracy, we have heard and read several very unflattering remarks about Synergy Real Estate Solutions and references to criminal activities, so caution might be prudent if they contact you.

Thanks! James Baumberger – President Synergy Appraisal Services"

Again, I am sorry it took us this long to chime in, but we are even now still trying to wrap our minds around what exactly has been happening, and now is a busy time. I hope this clears it up and that word spreads as to what is going on.

Thank you!

James Morris Synergy Appraisal Services

UPDATE 2/15/12: Video - QuickenLoans "Appraisal Advice" - Good? or Bad? Let us know your thoughts!

UPDATE!  A NEW video (with comments from Quicken) has been posted to the bottom of the original post dated 2/12/2012). 

The following is from the QuickenLoans Zing! blog:

"Appraisals seem to be a hot topic as of late, and given the fact that we happen to have a gentleman that loves to talk about appraisals, we figured it would make a good Watch-It Wednesday."

"Dan Friedberg is back with another insightful three minutes of appraisal advice. Take a look at the video to see

• what should be fixed up before an appraiser swings by,
• what appraisers are not necessarily interested in seeing, as well as
• where appraisers get their information."

"This is guaranteed to be the most informative three minutes of your day.

Informative? Maybe . . . but are all tips correct?

Here are a couple of quotes:

"FHA appraisals are much more strict . . . .If you have things like a missing handrail, a crack in the sidwalk, you know uhhhh . . .if the carpet is screwed up, or if there's water damage . . . that's ALWAYS going to need to be fixed on an FHA. They're really nit pickey about stuff."

 

On landscaping that cost $15,000. . . . "While it may [increase value] in terms of a "sale", when it comes to an appraiser that makes no difference. All they're looking at is the square footage of the home, the way that it's built, the amount of rooms that it has, in comparison to homes that have sold in the neighborhood." "So they really don't care about how nice your appliances are, or the nice fixtures that you have, or the paint, or the Man Cave in the basement, and things like that. It's really just square footage and recent sales."

Let us know YOUR thoughts after watching the video!

 

 

             UPDATE!!      UPDATE!!       UPDATE!!

From Eric Mally of QuickenLoans - 2/15/2012:

Hi Brian. The other day, you posted a video from Quicken Loans with less-than-perfect information regarding the appraisal process. That video was shot with one of our bankers, not a certified appraiser.

We have since reshot the video with a certified general appraiser with 25+ years of experience. We would appreciate if you would please post this video as well, seeing that it is more informative and correct.

How To Value New or Existing Photovoltaic (Solar) Systems for Residential and Commercial Properties

This spreadsheet tool developed by Sandia National Laboratories and Solar Power Electric™ is intended to help determine the value of a new or existing photovoltaic (PV) system installed on residential and commercial properties. It is designed to be used by real estate appraisers, mortgage underwriters, credit analysts, real property assessors, insurance claims adjusters and PV industry sales staff.

For appraisers, the inputs specific to PV in the Appraisal Institute’s Residential Green and Energy Efficient Addendum can be used as inputs to PV Value™. (click here for more information)

Valuing a PV system is done using an income capitalization approach, which considers the present value of projected future energy production along with estimated operating and maintenance costs that are anticipated to occur during the PV module power production warranty timeframe.

This tool was created with Microsoft Excel® 2007, and works with both Excel® 2007 and 2010. Use of this spreadsheet requires activating macros, ActiveX controls and data connections. A detailed user manual accompanies this tool and can be found in the download area below. Sandia Labs hosted a webinar describing PV Value™ on December 7, 2011, which can be viewed at the source site below.

Updates will be made as necessary, with a new version released on or before September 1, 2012. The current version is 1.0.

Please contact Geoff Klise at Sandia National Laboratories with questions or comments related to PV Value™. He can be reached at: gklise@sandia.gov

PV Value™ v1.0
(zip file 360 KB)

PV Value™ v1.0 User Manual (SAND2012-0682P)
(pdf 1.3 MB)

Please contact Geoff Klise at Sandia National Laboratories with questions or comments related to PV Value™. He can be reached at: gklise@sandia.gov

SOURCE: http://energy.sandia.gov/?page_id=8047

Nice Guys Finish LAST! Clients file complaints after getting appraisers to "Second Guess" their own appraisals.

T.J. McCarthy, of T.J. McCarthy & Associates, Tinley Park, IL has the following assessment of the AMC and Lender practice of making post-closing calls to appraisers to question how some of the adjustments were made and get appraisers to second-guess their original appraisal process.  The following is being reprinted from an Illinois Coalition of Appraisal Professionals (ICAP) alert.  

Good afternoon Appraisers,

I am writing to our residential members regarding a growing problem that ICAP is concerned with regarding lenders and AMC’s filing complaints against appraisers.

THE SETUP:  You receive a call from a lender or an AMC who wants to talk to you about an appraisal assignment you recently completed for them.  The call usually comes from the QC Department at the post closing stage of the loan.  They start questioning you on your line item adjustments.  All the comparables are on smaller lots then the subject property and they feel your adjustment for lot sizes seems a bit high.  You want to be a good little appraiser and not upset your client so you agree that pe rhaps they could have been a little lower.  While they have you on the phone, they also ask you if you think your time adjustments were a little aggressive.  Again, not wanted to upset a good client, you tell them that maybe you were a little aggressive (even though you really don’t think you were…you’re just trying to appease them), and you state that you will try to find another public data source in the future that is more conservative.  Your client thanks you and even tells you to have a nice day.  You hang up the phone thinking you handled that rather well. (The following is simply a hypothetical situation used to get a point across)

FAST FORWARD:  A month later you receive a letter from the Department of Professional Regulation – Appraisal Division.  Your great client filed a complaint against you stating that you openly admitted to them in a phone conversation that you falsely inflated the value of your appraisal by using inappropriate site adjustments.  You also stated that you often use non-traditional data sources to intentionally report market trends that are lower than normal to arrive at higher value conclusions.  YIKES!!

THE REALITY OF THE SITUATION: This is really happening to appraisers and since the Dodd-Frank Act more and more lenders and AMC’s are sending in complaints on appraisers. 

MORAL OF THE STORY:  There is no question that the appraiser is getting slammed here for trying to be a “stand up” guy, attempting to clear up gray areas in their report.  They’re engaging in what they perceive to be an honest dialogue with the QC department (long after the loan has been funded). Unfortunately, at the post-closing stage, the lender isn’t looking for you to have a change of heart on your final opinion of value. There are no changes that should be made, but now you have given the QC department ammo for a state complaint.

Also, you should never change parts of your appraisal because you think it will make your client happy.  They don’t drive the process.  Perhaps you don’t even realize that you are giving someone a reason to file a complaint against you when you agree to the slightest alteration or allow someone elses opinion to dictate how you will complete your assignment.  In the meantime they are on the other end of the phone writing down everything you are saying as they prepare to turn you and your report into the state.

DISCLAIMER:  I certainly am not telling you to ignore errors and omissions on your reports when a client discovers them and asks for corrections.   Nor am I telling you to be unethical.  But, by trying to be accommodating, you could be creating a problem for yourself where one never existed.

I can assure you that the State of IL is receiving these types of complaints.  I can’t tell you [which] lenders or AMC’s are filing these complaints.  Also, I am not saying that all lenders and AMC’s support this type of practice. 

It’s getting pretty scary out their folks.  We don’t have to make it harder on ourselves by reverting to a submissive position every time an angry client calls.  We are appraisers not pacifiers!

TJ McCARTHY AND ASSOCIATES, LTD.
Real Estate Appraisers and Consultants
7903 West 159th Street, Suite B
Tinley Park, Illinois 60477

Email: appraisal@tjmccarthy.com
Phone:  (708) 614.7200      
Fax: (708) 614.7228

Bring Back the Cost Approach

Bring Back the Cost Approach: The Cost Approach to value has been discounted and even eliminated in residential real estate appraisal in recent years. Here are some reasons why it needs to be revived.   By Harry E Davis

In the last few years there has been a trend toward a complete discounting of the Cost Approach to value in residential appraisal. For owner occupied homes, the sole technique is now the Sales Comparison Analysis, which involves selecting and comparing individual property sales to a subject property.

Many lenders and government agencies no longer require the Cost Approach technique, even on new or nearly new construction, and appraisers are often instructed to omit it completely, or not to place any reliance on the results. When a lender does require that the Cost Approach be completed, it seems that this is only so that a proper amount of homeowner insurance can be determined. This is, of course, something critically important to the lender as well as the homeowner, but should not be the only criteria for the use of a cost-depreciation analysis.

Years ago a Cost Approach was always required for an appraisal report. The basis of this approach was the Principle of Substitution, which holds that a prudent buyer will not pay more for a home than the cost to acquire an equally desirable substitute home. Accordingly, the reproduction or replacement cost new of a home set the upper possible limit on value, particularly for an existing preowned home. So this analysis served not only as an additional means of estimating value, but also as a governor on runaway home prices.

The cost approach also served an important function as an educational tool for appraisers. To perform this approach, an appraiser had to have at least a minimal working knowledge of residential construction and to carefully observe the quality and condition of the various components of the home. Cost data services, which still exist today, provide continuously updated information on the various costs of construction involved in a home and some are quite accurate.

One service publishes a manual with a wealth of good data and information, complete with descriptions and photographs that illustrate the differences in quality and appearance for different types of homes, which is a great way for new or inexperienced appraisers to familiarize themselves with these features. In recent times I have come across reports by relatively new appraisers where no cost approach was done and it was painfully obvious that the appraiser knew very little about construction or how to evaluate the differences between their subject and the comparable sales they used in the Sales Comparison Analysis. I suspect we have a new generation of appraisers out there who have this deficiency and that's a bad sign for the future. The best appraisers know something about construction and can immediately spot differences among homes as to their quality level. This ability is also critical for the appraisal reviewer.

The Cost Approach is not without its weaknesses. The primary weakness is in the estimate of depreciation, be it physical, functional or external in nature. These things are difficult to estimate, but again, the appraiser who learns how to do this becomes more knowledgeable and competent, both in the Cost and Sales Comparison methods. Another weakness is in estimating the land value. Actual sales are often not available as a means to determine what buyers are paying for a similar lot and so market abstraction (also called extraction) is used to estimate the ratio of land value to dwelling value from market sales of already built homes. Improperly done, this technique is subject to serious errors. The general rule for the Cost Approach is that it is most accurate when the dwelling is not very old and sales of nearby similar lots are available.

I am of the opinion that the majority of foreclosures involve relatively new homes and that this is where the largest amount of lending losses occur. At least, that's how it is in my local market which has always had a lot of new construction. There are many reasons for foreclosures, but certainly one is upgrades.

Builders typically offer various home models at "base" prices and offer upgrades for both the home and the lot. Buyers can choose from a wide variety of options to enhance the home and can choose lots that are different in size or that have more trees or other desirable aspects. This is great for the buyer but can become a nightmare for the lender when a foreclosure happens because so many of those nice upgrades do not hold their value in subsequent foreclosure sales, and often do not hold their value as the distressed homeowner desperately tries to sell the home to avoid foreclosure.

The homeowner finds out they are "upside down" meaning the home cannot be sold for as much as the mortgage amount, especially when the initial down payment was very low or when financing costs were included (rolled into) the mortgage, necessitating an increase in the sale price. Another problem is inflated upgrade cost where some builders mark up the prices of upgrades well beyond normal prices that consumers pay at retail stores, even with installation added on. This is similar to what many service contractors (plumbers, car mechanics, etc.) do because they want to make a profit on the "parts" as well as the labor. The problem comes when the markup is excessive.

There is little an appraiser can do about upgrades when it can be shown that buyers often do select upgrades with their new home purchase. In the absence of current resales or foreclosures to compare with, it is not possible to estimate the resale value of upgrades, and values are estimated as of a given date, not the future.

The Cost Approach long served as a reasonable basis for making adjustments to market sales in the Sales Comparison Analysis for individual items. If a home needed a new roof, the appraiser had a handy source for determining the cost for this. Likewise for appliances, HVAC equipment, a garage and the like. Removing the Cost Approach and the good data that comes with it forces too many appraisers to have to guess at these kinds of adjustments and the results can vary wildly from one appraiser to the next.

Long ago homes were valued only by a Cost Approach. The Sales Comparison Analysis (formerly known as the Market Approach) came later. I don't believe it is a coincidence that foreclosure rates and personal bankruptcies caused by unaffordable mortgage amounts and runaway home prices seem to have increased so much in recent years while the use of the Cost Approach has declined at the same time. Not do I believe it is a coincidence that the decrease in emphasis on cost minus depreciation began about the same time as tremendous inflows of capital into the marketplace encouraged every sort of easy money credit scheme that allowed so many people to buy homes they couldn't actually afford and that has severely damaged not only the US economy, but the entire world. Mountains of money to lend tend to push caution to the side.

I believe that the Sales Comparison Analysis is surely a good valuation technique, but its down side is that there are too many clever ways for market participants to smuggle hidden costs, fees and even fraud into sales contracts, which make their way silently into market data services and onto appraisal reports. The same can be true for unhidden costs like seller paid loan discount fees and other monies paid toward buyer closing costs. At a minimum, an accurate Cost Approach serves as a useful check on the results of even the most thorough and detailed Sales Comparison Analysis where the appraiser is carefully searching for and analyzing such things. Undesirable things can and do happen in real estate and some can slip past even the best Sales Comparison Analysis because they happen quietly and incrementally.

An example of this is what I call closing cost price compounding. A real estate agent provides a seller a pricing analysis where the agent has found 20 recent sales of similar homes in the area and averaged the prices to arrive at a figure he or she believes is correct for the home. The home is then marketed at that price. Along comes a buyer (perhaps from a higher cost market) who lacks cash, needs some assistance with his closing costs, and makes an offer at or very near the asking price. The seller counters with an offer in which he adds the amount of assistance the buyer asked for to the price.

But what if this type of assistance turns out to be normal for the area and is already reflected in the selling prices of those 20 homes used to set the asking price to begin with? The new sale closes at the upwardly adjusted price and is then used as a "comp" by other agents and by appraisers and the process continues with every repeat occurrence of the needy buyer, causing home prices to rise, affordability to lessen, creating more needy buyers, and setting in motion a snowball effect where prices to rise eventually to the point that they exceed even cost new. This is not unlike interest compounding on your savings account. Over time your balance goes up faster and faster. Combine this with other inflationary market tendencies and you get a nasty bubble that will some day burst to the peril of us all...again.

Obviously, this could be avoided by competent sales agents who understand that those 20 sales already included heavy seller costs and inform their clients of this, but many do not and there is a built in incentive to push prices as high as possible among people working on commission. An accurate Cost Approach would tend to catch this anomaly immediately or at least decrease its effects down the line in future sales because when home prices begin to exceed what it would cost to build an equally desirable substitute home brand new, the competent appraiser knows that something is wrong and that they need to dig deeper into the market data.

A Cost Approach is also a great lie detector for fraudulent appraisals. If an appraiser included a Cost Approach and is using a known cost source or manual that others can subscribe or view, then the estimated costs shown in the appraisal can be reproduced from that same source by someone reviewing the report. So if the appraiser has fudged on cost, that can be detected simply by examining the cost source and parameters the appraiser had described. Moreover, even if the appraiser showed the correct costs, the fraudulently inflated appraisal will exhibit inflated land value in the Cost Approach with little or no support as to where the land value estimate comes from or why it is so high. In fraudulent appraisals, the Cost Approach is "plugged in" with numbers to match the Sales Comparison Analysis. That's because an honest Cost Approach would have indicated a significantly lower value for the home.

There are other examples of how the Cost Approach could eliminate or reduce runaway home prices, and even detect fraud. I believe it is a foolish mistake to take away or encourage the disuse of any type of analysis or tool from appraisers that has a basis in market data. An analyst in any field of study should be willing and enabled to use as many ways as possible of looking at a problem. Focusing on just one method encourages tunnel vision. I say bring back the Cost Approach and let appraisers decide how useful or accurate it is on a case by case basis. It is not the end-all be-all solution but it is a valuable and worthwhile tool.

AUTHOR: Harry E. Davis is a Texas state certified residential real estate appraiser in business since 1975 and serving the Austin Texas metro area. His web sites are located at Austin Texas Appraiser and Round Rock Texas Appraiser.

Article Source: http://EzineArticles.com/?expert=Harry_E_Davis
http://EzineArticles.com/?Real-Estate-Appraisal---Bring-Back-the-Cost-Approach&id=2542175

Pennsylvania Gov. Tom Corbett signs AMC legislation

Originally posted by Kim Shindle On February 3, 2012 @ 6:00 am In Association News,Government Affairs- http://www.PARJustListed.com

Appraisal management companies will now be regulated in Pennsylvania, thanks to legislation signed by Gov. Tom Corbett on Thursday.

House Bill 398 [1] (Stevenson) requires appraisal management companies to be registered with the State Board of Certified Real Estate Appraisers. Pennsylvania is the 30th state to pass such legislation.

More appraisal management companies appeared throughout the country, as a result of the Home Valuation Code of Conduct [2] (HVCC). The Home Valuation Code of Conduct originated from a settlement among New York Attorney General Andrew Cuomo, the Federal Housing Finance Agency, Fannie Mae and Freddie Mac. While the HVCC was sunset, the issue of unregulated appraisal management companies remained.

“We believe this legislation is important to protect homebuyers in the Commonwealth,” said PAR President Frank Jacovini. “Research initially showed after the Home Valuation Code of Conduct was enacted, consumers were paying higher fees for appraisals that were frequently inaccurate and misrepresented the value of the property. We also saw closings being delayed as a result.”

The new law will create a level playing field for AMCs and appraisers. Appraisal management companies will now be required to work within the nationally sanctioned Uniform Standards of Professional Appraisal Practice (USPAP) [3] .

“Thanks to a collaborative group of all stakeholders providing input into this bill, this new legislation provides protection for consumers and industry participants alike,” according to Michelle Bradley, chair of PAR’s Appraisal Management Company Task Force. “Those who own or operate AMCs will be accountable to industry standards and state regulation.”

The new legislation also:

• Implements a registration and renewal fee of $1,000
• Implements a $20,000 bond or letter of credit to secure the faithful performance
• Requires all appraisal reviews to be conducted by a certified or licensed appraiser
• Requires AMCs to adopt Uniform Standards of Professional Appraisal Practice (USPAP) recordkeeping rules.

About Kim Shindle: Kim Shindle is the Manager of Media Relations at the Pennsylvania Association of Realtors®.

SPECIAL THANKS to Paul Faeder of Keystone Realty and Appraisal Service Inc. of Bushkill, PA for sending this to Appraisal Scoop!