Appraisal Scoop

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

Appraiser Joan Trice Authors New NAHB Primer Aimed at Helping Builders Work More Effectively With Appraisers

With builders around the nation continuing to grapple with faulty appraisals that jeopardize sales of their new homes, NAHB is adding an “Appraisal Primer” to its collection of resources aimed at helping association members strive for the best possible outcome from today’s less-than-perfect appraisal process.

The newly published primer from NAHB discusses in detail the appraiser’s role in the financing of new homes.

“There is a lot behind the scenes that affects the way appraisers must conduct their business,” writes Joan Trice, an appraiser and author of the primer; editor and publisher of Appraisal Buzz, an email publication; and the host of the Alterra Group’s Valuation Expo, which is the largest annual conference for the appraisal community.

Trice is also consulting with NAHB on the association's efforts to resolve appraisal problems.

“Understanding the regulations, methodologies and task of the real estate appraiser will provide home builders with the necessary knowledge to discuss valuation issues with appraisers before they become valuation problems,” Trice says.

Beginning in 2009, NAHB has held a series of four appraisal summits at the National Housing Center in Washington, D.C., attended by representatives of federal banking regulators, the appraisal industry, the housing finance industry, the real estate and housing sectors and others for discussions of deficiencies in the current system of evaluating homes and how to address them.

While much more needs to be done to reform the system — which is expected to be a long-term undertaking stretching far into the housing recovery now beginning to materialize in specific markets across the country — NAHB has made substantial headway on key appraisal issues.

Covered in detail in the Nov. 7, 2011, issue of Nation’s Building News — which was devoted to what NAHB has been doing to fix the broken new-home appraisal system — builders have seen progress on such key concerns as their ability to communicate with the appraiser and the right to have their homes appraised by individuals who are qualified to do the job.

In conjunction with the release of the “Appraisal Primer,” NAHB has updated its “Appraisal Guidance for Builders,” which summarizes information on:

• the selection of appropriate appraisers,
• the use of comparable sales in determining the value of new homes,
• what builders can and should do to ensure accurate appraisals and
• actions they should take if an appraisal was conducted improperly or contains errors.

In a FAQ section at the end of the new primer, Trice answers some specific concerns that builders have been voicing over appraisals.

Among the questions she addresses:

• What should an appraiser do to determine the value of a new home with options and upgrades that do not appear in other homes recently sold in the local area?
• Will the appraised value support the additional costs of expensive geothermal heating and other green options?
• What are some of the problems that builders can encounter when appraisers are selected by national appraisal management companies (AMCs), which may be looking for appraisers who charge the lowest fees so they realize the highest margin on the referral?
• Is it true that under the Dodd-Frank bill builders cannot communicate with appraisers?

For more information, email Steve Linville at NAHB, or call him at 800-368-5242 x8597.

SOURCE: National Association of Home Builders (NAHB) - Nation's Building News

 

Land Valuation: Extraction Has No Traction

ARTICLE SOURCE: Vol. 4, Issue 1, January 2012 of the Illinois Appraiser newsletter from the Illinois Department of Financial and Professional Regulation.

“Land values were based upon the extraction method.” Look familiar?

If I had a nickel for every phoned‐in Cost Approach that had this sentence or one like it, I’d be Warren Buffet

The Dictionary of Real Estate Appraisal defines [the Extraction Method] as:

A method of estimating land value in which the depreciated cost of the improvements on the improved property is estimated and deducted from the total sale price to arrive at an estimated sale price for the land; most effective when the improvements contribute little to the total sale price of the property.

The underscored portion says it all. Usually this technique is used in rural settings. Perhaps when appraising some hunting shack on a couple of hundred acres of scrub.

But no, we see it in the middle of suburban Hinsdale, Belleville, Taylorville, and other places where the residence is easily a significant portion of the total value.

By definition, extraction doesn’t really work in cities and suburbs where improvements tend to drive value.

Also, some Cost Approaches are so poorly cobbled together that we seriously doubt the appraiser’s ability to extract anything.

Don’t just toss extraction into a report.

If you cannot demonstrate an ability to depreciate reasonably, then you certainly won’t be able to support an extraction application.

The board strongly suggests that you find a course that teaches a more reliable technique.

ARTICLE SOURCE: Vol. 4, Issue 1, January 2012 of the Illinois Appraiser newsletter from the Illinois Department of Financial and Professional Regulation.

 

You Can Write an Appraisal on a Napkin..... But you probably just didn't

Guest Author:  Ken Shure, Certified Residential Appraiser in the Los Angeles, California area.  Contact: kbshure@Yahoo.com

We've all heard the phrase - "You can write an appraisal on a napkin if you want to". And yes, USPAP does give a wide berth in terms of reporting format but it is important to recognize that other than expanding upon the scope of work in order to accommodate the appraisal process, this does not provide appraisers with the authority to deviate from an agreed upon and expected scope of work or violate the sometimes extended list of certifications that are present on many of the pre-printed appraisal forms.

The most common reporting formats for appraisals are found within the lending arena and those typically used are the forms issued by Fannie Mae. These forms have a designated intended use, a specific minimum scope of work, a set of assumptions and limiting conditions, and certifications. If the appraisal process or specific client mandated assignment conditions cannot be properly completed when following and staying true to those items then it is much better to request a different reporting format, perhaps a napkin would be one alternative, or decline to proceed with the assignment. Proceeding within the framework of the forms despite it being contrary to producing a credible report or misusing the form in a manner that could be construed as misleading could have negative consequences for the appraiser and the appraiser's client.

Appraisers need to remember that Fannie Mae and other agencies delegate the responsibility of appraisal credibility and compliance to lenders. They rely on this delegation and receive documents signed by state licensed professionals that outline a minimum scope of work and have a set of certifications. Based on this it is clear that the agencies conceivably do not have to review every aspect of the appraisal reports they receive but can limit their review to key parts that indicate the appropriateness of the collateral for the loan being applied for. The basis for making this determination could depend on any number of factors including but not limited to the opinion of market value, conformity of the subject to the neighborhood, and zoning compliance to name a few examples.

One notable and critical area of the report that would always be necessary for any user to review would be the reconciliation section of the forms where it is clearly indicated via checkbox if the appraisal is made "as is" or if it relies either on an extraordinary assumption or hypothetical condition in order to reach its conclusions. A report that indicated "as is" within this section but did in fact rely on an extraordinary assumption or hypothetical condition, even when these are written out somewhere in the body of the report, could be viewed as misleading. Appraisers that indicate otherwise within the reconciliation section but still rely on extraordinary assumptions or hypothetical conditions outlined elsewhere in the report are in danger of being accused of trying to "slip one by" the agencies and the agencies would be well within their right to claim damages in the event of a loss.

The zoning compliance box is also a very important factor that should be taken seriously by anyone that completes one of these forms. In many jurisdictions with complex zoning codes it is arguably beyond the skill level and scope of work of the appraiser to absolutely ensure that all aspects of the property are in compliance with zoning however a certain level of due diligence would absolutely be expected. Properties that have significant and readily observable discrepancies from available public records should give cause for pause to an appraiser assigned the responsibility of checking that box. An appraiser that checked "legal" with regard to a property that in fact had substantial and readily observable elements that were built without permits or had an illegally converted garage, in violation of many zoning ordinances, could be held to task if the agencies were relying on the report to determine the zoning compliance status of the property. Adding in a cost to cure or an extraordinary assumption can easily be viewed as a misleading tactic in these cases where both the "legal" and "as is" boxes are checked.

Appraisers hold the ultimate responsibility towards determining the appropriate scope of work needed for producing a credible result. Despite this, appraisers are not free to pick and choose which portions of the lending forms they will abide by when this is the format that has been agreed upon. If these forms are modified by agreement with the client then it is best to avoid any chance of confusion and remove all reference to the publisher of the form and the form number. Should an altered form used to complete a report end up being utilized by the agencies (whether by accident or by design), the mere presence of the form number on the report gives ample cause for the final user to claim certain expectations with regard to the minimum scope of work and other items typically associated with the completion of, for example, a 1004.

Making use of the lending forms is a common and often necessary practice. It is important for appraisers that utilize these forms to be aware of the minimum scope of work they have agreed to follow and the certifications that they are signing. In addition it is important to be aware of the mechanisms within the forms designed to ensure that the agencies are making appropriate funding decisions and to make sure that these mechanisms are not bypassed, contradicted, or ignored. Inappropriate actions in this regard could result in large consequences being directed where the agencies have been sure to delegate appraisal related responsibility - on the lenders. In these cases there is little doubt as to whom the lenders would turn towards to direct their concern over the issue at hand and little doubt that it would not matter if the directive to complete the assignment in the manner in question came from the lender itself or its hired agent (AMC). While those parties would certainly have concerns and potential liability, in these cases as in all cases the appraiser would own the ultimate responsibility to the intended users and those parties able to rely on the report (per Certification #23) as to how the report was completed.

Copyright KB Shure 2011

Guest Author:  Ken Shure, Certified Residential Appraiser in the Los Angeles, California area.  Contact: kbshure@Yahoo.com

It's Time to Add 'e' to PITI and Appraisal Equations: EcoHome

EcoHome's Rick Schwolsky is his own case study on the frustrations of trying to get appraisers to add value for energy-saving features homeowners and home builders put in their houses.

Special energy-saving items should be recognized in the appraisal process. The appraiser should compare the energy-efficient features of the subject property to those of the comparable properties in the ‘sales comparison analysis’ grid to ensure that the overall contribution of these items is reflected in the market value of the subject property. (Source: Fannie Mae 2011 Selling Guide)

Schwolsky writes, "It’s been years since I had a good argument with an appraiser. So when I found myself engaged yet again a few weeks ago, making the case for my new 4.2-kW PV system, it felt frustratingly familiar. I’ve been arguing the value equation of energy improvements with appraisers since back in the 70s, when I was building super-insulated, passive solar, PV-powered homes that passed comfortably through Vermont winters on the BTUs generated by a large dog." 

To read the FULL article, click here: Source: EcoHome

APB: Exposure Draft: Adjusting Comparable Sales for Seller Concessions - 10/3/2011

The Appraisal Practices Board (APB) is seeking public comment in response to this exposure draft and based on the comments received, may make revisions to the guidance and issue subsequent exposure drafts. Once the Board believes it has received all relevant comment on this topic, it may vote to adopt the material as official guidance from the APB.

Download Adjusting Comparable Sales for Seller Concessions Exposure Draft Final

The Draft includes comments and detailed examples on:

• Verifying Concessions
• When Does an Appraiser Adjust for Concessions
• Methodology
• Concessions and Non-residential Property (other than 1-4 unit properties)
• Impact and Application of Concessions in the Cost and Income Approach

All interested parties are encouraged to comment in writing to the APB before the deadline of December 2, 2011. Respondents should be assured that each member of the APB will thoroughly read and consider all comments. Comments are also invited at the APB public meeting on December 12, 2011, in Atlanta, Georgia.

Written comments on this exposure draft can be submitted by mail, email and facsimile.

When commenting on various aspects of this exposure draft, it is very helpful to reference the line numbers, fully explain the reasons for concern or support, provide examples or illustrations, and suggest any alternatives or additional issues that the APB should consider.

Mail: Appraisal Practices Board The Appraisal Foundation 1155 15th Street, NW, Suite 1111 Washington, DC 20005

Email: APBcomments@appraisalfoundation.org  

Facsimile: (202) 347-7727

If you have any questions regarding the attached exposure draft, please contact Staci Steward, Practices Administrator at The Appraisal Foundation, via e-mail at staci@appraisalfoundation.org  or by calling (202) 624-3052.

 

APPRAISALS vs. BPOs: Can we please put an end to this insanity? (Active Rain)

GUEST AUTHOR: Patty Da Silva, CDPE - Davie REALTOR® - Certified Distressed Property Expert BROKER of Green Realty Properties® - 12555 Orange Drive, Davie, FL

Today I want to address a question that I have long wondered about and have no good answer for, and that is why are BPOs ordered by lenders for short sales instead of appraisals?

Let’s think about this, and look at a few examples. When an investor, such as Fannie Mae, "invests" in a mortgage loan, they won’t accept a loan without an appraisal. Similarly, before a lender approves a loan, they don’t order a BPO, they order an appraisal. The most puzzling and irrational example is when the buyer and seller have the same lender...which is common with the larger lenders. I have seen the same lender, in the same transaction, order a BPO on the seller’s side, and then turn around and order an appraisal on the buyer’s side. Of course the BPO is always inflated, and somehow the same property has suddenly lost $50,000 in value in the weeks it took for that lender to approve the short sale. Why do BPOs even exist as the deciding factor on a short sale transaction?? Why can’t appraisals be ordered by all sides? Some can argue because they save time and money, but do they really?

For argument’s sake let’s say it costs $100 to hire a BPO agent to do a BPO, and roughly $400 to hire an appraiser to do a proper appraisal. It costs $100 to hire someone who isn’t necessarily licensed (and definitely not regulated), to spend less than 5 minutes in a house, and to not take into account all the factors an appraiser would. I have heard BPO agents say that they do 500-600 BPOs a month. That’s impossible for ONE person to do! We have all heard that some of these BPO agents hire (unlicensed) people to drive around and take pictures of the outside of the property, and I have actually seen BPO agents recruiting these drive-by photographers on Craigslist.

Now let’s juxtapose the BPO agent against the appraiser. An appraiser is a qualified professional who goes through serious training, and then is supervised for two years before being able to work on their own. Plus the appraiser’s sole objective is to appraise the property; they don’t do it in hopes of getting REO listings from the banks. Appraisers are qualified to appraise, take the time to take all factors into consideration, and generally speaking, give fair market values. They are regulated and are subject to consequences if they don’t do their job right.

Don’t get me wrong, I know that there are bad appraisers and great BPO agents, but that’s not the norm. We are in a serious mess and its being exasperated for what? Lenders think that they are saving time and $300 per property, but in reality, thousands of hours are wasted disputing BPO values and getting nowhere. There is rarely a file that I don’t have to dispute the value on, and sometimes it takes months to resolve the issue with the lender…months that the property sits on the lender’s books, the sellers and buyers are left in limbo, and the values continue to drop.

Can’t we put an end to this insanity? Please! Lenders/Investors are losing thousands and thousands of dollars on short sales and foreclosures, yet they are worried over a $400 appraisal? Am I the only one who is confused about this lack of common sense?

Lender and Investors: PLEASE…JUST ORDER AN APPRAISAL AND HELP US HELP YOU!

Source Blog: Green Realty Properties® Blog

GUEST AUTHOR: Patty Da Silva, CDPE - Davie REALTOR® - Certified Distressed Property Expert BROKER of Green Realty Properties® - 954-667-7253 Address: 12555 Orange Drive, Davie, FL, 33330 Office Phone: 954 667-SALE

Appraisal Buzz: Anatomy of A Real Estate Bubble by Thomas J. Inserra

Thanks to Appraisal Buzz for publishing a great new article by Thomas J. Inserra.  Mr. Inserra covers the historical aspects of the Real Estate Bubble as well as his view of that should be done in the future.  Here are some of the topics he covers:

• Bubble Participants
• Bubble Participant Common Traits
• Connecting the Dots
• Advocacy Leads to Unsustainable Price Increases:Valuation Advocacy
• The Seed & Root Cause of Real Estate Bubbles
• Who “Appears” to Benefit from Valuation Advocacy?
• How Can We Eliminate Bubbles or Reduce Their Adverse Effects?
• Why Did the Check & Balance Fail?
• The Solution

His 15 point solution policy would;  " . . .  would reverse the abusive, unsustainable policies adopted in the 1990’s.  The objective is to require, preserve and protect Valuation Independence and non-advocacy at the federal and state levels"

Click here to read the complete article

About the Author:   Thomas J. Inserra, MBA, MAI, SRA resides in Scottsdale Arizona and is CEO of www.WeValueAmerica.com and CEO of www.PinnaclePeakAppraisal.com 

Eliminate distressed sales as comps? Four states say, "Yes We Can!"

This just in from the Appraisal Institute:

"Four states – Illinois, Maryland, Missouri and Nevada – are considering legislation that would prohibit or restrict the use of “distressed sales,” such as foreclosures and short sales, as comparable sales as a part of a residential real estate appraisal.

Home builders and real estate sales agents are concerned that the prevalence of distressed sales, and their subsequent use as comparables, is resulting in the appraised value of residential properties not matching the contract sales price, or in the case of new construction, the cost to build." The issue is, can you legislate this in the trenches? Maybe just maybe.   Read more . . .

The Appraisal Institute article says:

If these bills were enacted into law, appraisers would be put in the difficult position of having to choose which law to violate. Appraisers are required to adhere to comply with the Uniform Standards of Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers “must analyze such comparables sales as are available.” Further, the standard cannot be voided by a state or local government.

Source: Builder On-Line

• To read the Illinois legislation, go to http://www.ilga.gov/legislation/97/HB/09700HB0092.htm .
• To view the Missouri proposal, go to http://www.house.mo.gov/billtracking/bills111/biltxt/intro/HB0292I.htm .
• To see the Maryland legislation, go to http://mlis.state.md.us/2011rs/bills/hb/hb1309f.pdf .
• And to see the Nevada proposal, go to http://www.leg.state.nv.us/Session/76th2011/BDR/BDR76_54-0532.pdf .

A common-sense way to mend the draconian appraisal process? - Washington Post

Harvey S. Jacobs, real estate lawyer in the Rockville office of Joseph, Greenwald & Laake, wrote the following in his Washington Post article - A common-sense way to mend the draconian appraisal process .

"If federal regulators are truly concerned about the quality and independence of home appraisals - a cornerstone of sound mortgage lending - why don't they simply prohibit appraisers from learning the contract price before they perform their assessment of a home's value?

Instead of this commonsense solution, regulators continue to come up with schemes that govern how appraisers are chosen - and which simultaneously drive up prices to consumers while cutting the income of appraisers.

On April 1, a new regulatory scheme called Appraiser Independence Requirements, will go into effect. This AIR replaces the much-maligned Home Valuation Code of Conduct but does little to improve it. Both AIR and HVCC were designed to ensure that the home valuation process conducted by appraisers is conducted in a strictly independent manner. Unfortunately, in practice AIR continues the legacy of HVCC, causing borrowers to pay more for their appraisals and appraisers to earn less for their work."

While the article does a very good job of chronicling the history of the HVCC, AMCs, and the AIR, I'm not so sure that his answer to the problem will solve all of the problems that he thinks it will. 

For one thing, it assumes that all mortgage appraisals done for lenders result from sales.  What about the gazillions of refinance appraisals for which there are no "contract prices"?   

Without access to the contract, how would the appraiser be able to learn ALL of the terms, conditions, and concessions involved with the sale?   Doesn't USPAP require appraisers to view and analyze the current contract?

 

Does the author REALLY think that the contract is the only place that appraisers would learn the sales price?  Even IF the sales price were to be redacted from a contract, don't you think that the buyer, seller, agent or someone involved in the transaction would let that figure "slip"?   Wouldn't it be BETTER to have something that actually documents the factual sales price?

What do YOU think of this author's fix to the "draconian appraisal process"?