Appraisal Scoop

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

HELP WANTED: REAL ESTATE APPRAISERS

Appraisal Scoop Note: The following "Help Wanted" ad was posted as a comment to this blog.  The original author is unknown.  If anyone knows the original author or source, please let me know in the comment section so credit can be given!  Thanks.

HELP WANTED: REAL ESTATE APPRAISERS

DUTIES: Good phone and computer skills, proficient with the internet. You will be responsible for constant contact with AMCs to update your schedule, accept orders, document any fee increase requests. After the AMC's refusal, you will be responsible for documenting the date of the AMC's decline due to the fee increase, and the date of the AMC's cancellation of the order.

In addition, you will be responsible for scheduling appraisal appointments, updating the AMCs on any changes in appointment dates, do the inspection, write the report, deliver the report, produce billing statements, respond to all AMC quality control requests, and explain that the answers were already addressed in the report, and/or take the time to explain appraisal fundamentals to the AMC reviewer. Keep track of accounts receivables on monies that you are not earning interest on for the duration period from when the money was collected by AMC until received.

In addition to the tasks outlined above, any persons seeking this position are responsible for maintaining, at your own expense and time, payables/receivables accounts, budgeting, reconciliation of bank statements, creating profit and loss statements, maintaining all office services and equipment, such as the phones, utilities, and replacement of equipment; such as computers, printers, measuring devices, desks, cameras, ink, paper. You will also be required to pay all your personal insurances (E & O, medical and dental, etc.) and license costs, all costs from software providers, such as MLS, X-site, public records data services, and all your own vehicle maintenance and/or new vehicle purchase costs.

BONUS PROGRAM: We offer a great bonus program where you will be responsible for consistent solicitation of all the wonderful new business and additional income opportunities/avenues, the new regulations have allowed appraisers to seek. This includes making new contacts with AMCs for additional work, then documenting ALL the reasons why they are not accepting any additional appraisers at this time, and recording the number of months where you did sign-up with an AMC, but have received no work.

Note: Solicitation to any of your prior and new mortgage brokers/real estate agents is strictly prohibited. Any attempt to do so, will result in immediate dismissal. You must be able to bring new creative new ideas to promote additional income.

This will be a challenge, for the above reasons and because the Frank -Dodd Act and the other regulatory policies allowed the banks to hire their own staff appraisers. This section was not defined nor did they restrict it to hiring appraisers for review purposes only. As a result, there is less available appraisal work for independent appraiser.

Note: Allowing the banks to own AMCs and hire appraisers, resulted in the banks being allowed back into the appraisal ordering process. It defied the whole concept of HVCC and took away a huge portion of the independent appraiser's potential income who have be forced to work only with AMCs.

However, this is all it's OK, because the consensus of our elected representatives, who "fine tuned" the Frank-Dodd and other policies, is that the banks are more honest than mortgage brokers and by having staff appraisers doing most of the banks appraisal business keeps all the profits in-house.

Please note, in regard to creative new ideas for addtional income, that robbing a bank for the recovery of all lost income since the implimentation of HVCC, is not a NEW creatve idea. This avenue has already been explored and considered. Research revealed that it is legal for banks to rob appraisers, but an appraiser who robs a bank to get their money back, is not. It results in JAIL TIME. However, most surveys indicated that the free meals, free housing, the idea of having no overhead, and time to relax is very appealing to MOST appraisers these days.

Other noted requirements, conditions, and considerations before you apply:

1. Report turn around time is first priority. High quality appraisals is not.
2. Must be willing to lose your house and all your savings, if not already lost, and all aspirations for retirement. If you are a parent or plan to be a parent, you need not apply, because children just cost too much. 
3. Trainees need not apply, because the AMC system does not promote the growth of the appraisal industy. The banks are waiting for all current appraisers to die out, so they can take over the industry. 
4. Do not expect any fee increases for cost of living or for any increases in your operational costs. The fees are " fixed" and controlled by the AMCs. Only an act of God can change this. Just accept this, for you'll be working too many hours to waste your time in church praying and/or fighting City Hall.
5. Due to the AMC notorious bidding process, expect to see high-end and complex appraisal fees to be lower than a "fixed" survey appraisal fee. This was an issue that the writers of the Frank-Dodd and other regulatory Acts neglected to address, so it's must not be really important.

OFFICE RULES:

• Any reference to being a professional or appraising as a profession, spoken, written or implied will result in immediate termination. It makes the office staff cry, and there really isn't any time to mourn what is dead and gone.
• Since the approval of the Frank-Dodd act and other regulatory policies, any reference or claims that you are a "small services business" will be considered a lie and result in immediate dismissal. You do not have a small service business. A small service business in America, is allowed to set their own prices, control the volume of work, and solicit anyone or any avenue for potential new clients. Appraisers are not allowed to have same rights as other Americans.
• Must be able to work 24/7. Any requests for vacation or holidays will be denied. This is in your best interest, because you really you can't afford them anyway.
• Must be able to ignore all of USPAPs regulations and standards. The AMCs and banks now dictate the rules. They are the "Higher Gods " now. This includes "value" pressure. Although the writers of the Frank -Dodd and other newly adopted regulations/policies feel the AMCs are a great firewall, they all "forgotten" and/or "ignored" the fact that AMCs compete for business, just like the appraiser used to do. If the AMC is not "HITTING" the desired values, they will lose their client base, thus income. This just cannot happen, and is not considered "value pressure" at the AMC level.   Therefore, to assist them, you must agree to change the value on any appraisal to the value the AMC or bank needs, change any subject data they don't like, ignore your selected comparables and use only their "suggested comparables" for the report. It is ok, because these type of "suggestions and AMC/bank required changes" for a appraisal report are not considered "pressure" in the Frank-Dodd Act or Fannie Mae. Failure to do this will result in being blacklisted by the AMCs and immediate termination of this position. Remember since being "FORCED" to work with AMCs, with now minimal avenues for income, getting and continued work from an AMC is MORE important, than a "silly" little push on value or false information per the AMCs requests/suggestions. We feel risking a violation of UPAPs is better avenue vs being blacklisted and losing income the AMC. We understand it is a choice between violating UPAPs vs feeding your families.
• Complaining in any form, written or spoken, within the office area regarding any AMCs failure to follow the established regulations and rules is prohibited. Any written complaint to the established reporting agencies is forbidden. This is for your safety. Although the Frank-Dodd Act and other regulatory policies provided avenues for AMCs and others to report on any fraudulent appraiser behavior, it provided no "safe" avenue for appraisers to do the same. No one bothered to provide protection for an appraiser from AMC repercussions.

Don't let this great opportunity pass you by!

DISCLOSURE: Please note that compensation for your services will be ZERO, and because you have many expenses, your income will be much less than ZERO.

2010 "Net" Annual Income from Appraisal Related Services Poll by AppraisalPort

 AppraisalPort has posted a new Weekly Poll as a follow-up to last week's.  THIS week, appraisers are asked to respond with how much Net Income they made (income after expenses & taxes).

  

Visit http://www.AppraisalPort.com to vote in the poll and be SURE to read and add YOUR comments below! 

The graph below shows last week's AppraisalPort "Gross Income" survey results (with 5,000 votes cast) from last week.  Check-out how the results compare!

2010 Gross Annual Income from Appraisal Related Services Poll by AppraisalPort

 

AppraisalPort has posted their Weekly Poll and it's generating a LOT of interest. Having watched the poll for the past couple of days the percentages haven't really changed much, whether there were 500 votes or 3,000!

• Are YOU surprised to see that over 30% of Appraisers Gross over $100k?  
• Wonder what an Appraiser "Nets" on earnings of over $100k?
• Wonder how many hours an Appraiser grossing over $100k works per week?

 Visit http://www.AppraisalPort.com to vote in the poll and be SURE to read and add YOUR comments below!

You Want It WHEN!? - How Long Does it Take To Complete An Appraisal?

How Long Does It Take to Complete the Development of an URAR USPAP Compliant Appraisal After the Assignment is Accepted?

Guest Post: The author, Edd Gillespie, is a Certified General Appraiser from Pueblo, CO that specializes in litigation support, 1031 exchanges, estate appraisals, and commercial mortgage work. 

And the answer of course is, “It depends.” Appraisers have different amounts of the necessary information needed to complete any given assignment, but let’s look at a situation where the appraiser deems it necessary to investigate and analyze everything about a non-complex assignment.

USPAP Standards Rule SR 1-4 lays out the required process to develop the appraisal. “In developing a real property appraisal, an appraiser MUST collect, verify, and analyze ALL information necessary for credible assignment results.”

It is clear there is no option for real property appraiser to do other than as SR 1-4 says. The real property appraiser MUST follow the rule with respect to ALL of the information necessary for a credible result.

1. Collection of Information: 6 hours

Where do you collect the initial information and how long does it take? The tax assessor usually describes most of what the appraiser needs to know about the subject in order to begin the development of the appraisal. That information is downloaded. The local MLS contains a wealth of information. Appraisers look there for market trend information, but most surely for comparable sales. At this point the appraiser begins to make choices since analyzing all of the sales is rarely necessary for credible assignment results. What would you do?

Many appraisers report that at this point they begin to eliminate all MLS sales that do not share some value-significant attributes with the subject. At the end of this initial research the appraiser has a handful of comparable sales identified and downloaded. I estimate the review of the MLS for collecting initial information consumes about two hours of time.

Next, additional information is collected from the public record or perhaps other proprietary sources. Assuming the subject is in one of those areas that search consumes an additional two hours. Then there is the collection of information about the subject which is most often done during inspection. The inspection of the subject consumes two hours, including driving time in inspecting the subject.

2. Verification of Information: 3 - 10 hours

Where and how does the appraiser verify the initial information and how long does it take? Even though USPAP recognizes quality, credibility and misleading in appraising it gives us no instruction about the process of verification. USPAP simply requires verification of ALL of the information that is necessary to a credible assignment result mandatory for a real property appraiser. So, what does verify mean?

In the context of the Rule, verify is a verb, it is something an appraiser MUST do. The meaning of verify is to establish the truth, accuracy, or reality of something. Although the appraiser may encounter new information while verifying, it is clear that the objective of verification is confirmation. And how is it done?

Although USPAP does not require inspection of properties employed as comparables, it is common practice for appraiser to at least drive-by, which is a form of verification. Many appraisers report that they have a standard set of questions they ask to verify the transactional and physical information they already have. Other appraisers report that if they have collected information from the MLS they verify it with the public record or vice versa.

Most likely appraisers verify information from three to five sales and that can take from three to ten hours depending on the extent of verification the appraiser completes. It takes longer to verify information with parties to the transaction or their brokers. Frequently, conflicting or additional information is collected during the verification process, which triggers the need for additional verification. Once all of the necessary information is verified and the appraiser is assured that what he or she knows actually exists or actually happened, the information is ready for analysis.

3. Analysis of Facts: 9 - 16 hours

How long does it take to analyze the necessary information? Although the principle of substitution is applied to much of appraising, real property is not homogenous and often the data is not “clean.” Because of that appraisers spend as much time analyzing the verified necessary information as they do in collecting and verifying it. Analysis in residential appraisal includes market trend study and comparison and adjustment of the information from each sale. Seldom is all of the information necessary for adjustment included in the sales selected for comparison, which creates the need to collect and verify additional information as a part of the analysis.

4. Finishing the report: 1 hour

Appraisers say that the URAR report is for the most part completed as the development proceeds. They spend additional time filling in empty blanks and proof reading and estimate that takes about 1 hour.

The amount of time spent complying with SR 1-4 ranges from 18 to 32 hours. The mid-range estimate to complete the development of a non-complex residential market value appraisal is 25 hours.

What Do YOU think?!

• Do you agree that it takes 25 hours to complete a USPAP compliant development of a non-complex market value residential appraisal?
• How long does it take to complete the development required by SR 1-4?
• Do you think the requirements of SR 1-4 are excessive?
• If it takes 25 hours to complete the development of a USPAP compliant market value residential appraisal, are clients allowing sufficient time and paying a sufficient fee?
• Should USPAP be amended to eliminate the stringent requirements of SR 1-4?
• Should appraisers be better trained to understand what collect, verify and analyze mean?

 

The author, Edd Gillespie, is a Certified General Appraiser from Pueblo, CO that specializes in litigation support, 1031 exchanges, estate appraisals, and commercial mortgage work.  Contact Info: 590 N. Matt Dr. Pueblo,CO 81007 Phone 719-252-7624 E-mail eddgillespie@yahoo.com  

HVCC gone! Now what? - Setting Goals for 2011

GUEST AUTHOR:  Ms. Lore DeAstra, MBA, SRA, CDEI, ACB, CL has been involved in the real estate industry for over 24 years as a commercial and residential real estate appraiser, instructor, investor, sales person, and property manager. She has written many articles and courses, published nationwide. Her mission is to improve the real estate industry by offering practical information for real estate professionals and consumers. To contact Ms. DeAstra, please send an email to Lore@continental-appraisal.com.

Since last spring, most appraisers have been on a roller coaster ride unlike any other.Now that the HVCC has sunset, have you thought about your next steps? After all, this is a great time to plan your goals for 2011, while thanking your current and previous customers. First, you will need a target, right?

Diversification is the key to survival and prosperity in the new real estate world. This article gives you easy ways to set measurable goals that will increase business to diverse target markets. As a result, you will keep an eye on your goals, help others, and increase your income. Start where you are, really?

Questions to ask:

How much more business do I want?  Set a realistic goal that is measurable. For instance, “I want to increase our appraisal business 20% within the next 12 months” The easiest way to accomplish a goal is to break down the task into believable steps.

 

As shown, you will need to complete two additional appraisals per month to increase your business by 20%. Breaking down the task into small increments makes a daunting task believable.

Are you willing to spend ten minutes a day to increase your business? Start small so you can obtain effortless victories such as one phone call a day.  Earning new business has a 10% success rate, while referral business has a 65% success rate according to Tom Hopkins, the most successful sales trainer in the world.

Who do you contact?  Open up your database and contact everyone you know who fits your target market such as your attorney, banker, accountant, insurance agent, sales agent, or friends/neighbors.

What do you talk about?  According to Hopkins*, “Never begin any selling cycle until you have taken a few moments to put yourself in the shoes of the other person”.  (* Tom Hopkins, SELLING FOR DUMMIES. Foster City. CA. IDG Books Worldwide, Inc. p. 15.) 

For instance, ask them how they are, and how can you help them* per assignment or based on an hourly rate such as:

• Attorney: Appraise properties involved in estates and trusts.
• Banker: Appraise or review properties in their portfolio.
• Accountant: Appraisals for tax or trust purposes.
• Insurance agent: Appraise real estate via cost approach for their policies.
• Sales agent: Measure homes for their listings, complete a pre- listing appraisal, review their Competitive Market Analysis, or offer to answer questions at a sales meeting.
• Neighbors: Complete a market analysis of their home for tax and insurance purposes. If you are competent, offer to compile an energy audit for a small additional fee to help them save on utilities bills.

* Make sure you apply the competency rule according to USPAP.

Bottom line: you will receive a better reception with less effort by contacting people who are familiar with you and your work. If you are like me, rejection is demotivating.

Are there any meetings that your target markets will attend?  Search in your area for functions this year and 2011 based on your target market.  Functions might include conferences or luncheons attended by real estate sales agents, appraisers, attorneys, paralegals, bankers, accountants, government agencies, or mortgage companies.

What else can you do? 

• Deliver candy attached to your business card to everyone in office. 
• Do you blog?  Offer to mention them and their company.
• Send an eCard to those in your contact list. 
• Use the social media sites (Facebook©, LinkedIn©, MySpace©) to keep in touch, advertise or send information that interests your target market.
• Ask your target market who they can refer that will benefit from your services.

There are many books, classes, seminars and others available nationwide: many online that will help you with various topics. You may learn a new skill and earn continuing education (CE) at the same time. As your confidence and script improves, so will your pocket book. How do I know? While writing this article, I made three phone calls that took about half an hour. Within a few days, I received an appraisal assignment from a referral. Besides the extra income, it was easy and fun to re-connect.

Take a few minutes, NOW, to determine the type of clients you have, who you want to work with, and how you can diversify while developing mutually beneficial target markets. Many of the software programs used for our bank accounts compile a report in seconds. Determine a believable amount of money you want to earn and let your fingers go crazy! Who knows, you might even enjoy catching up with folks you have not connected with for awhile.

Last, if you pass along your success stories to: Lore@continental-appraisal.com , I will compile a follow-up article that is a win-win for everyone. Make sure to let me know if you would like credit, or not. Thanks!'

AUTHOR: Ms. Lore DeAstra, MBA, SRA, CDEI, ACB, CL has been involved in the real estate industry for over 24 years as a commercial and residential real estate appraiser, instructor, investor, sales person, and property manager. She has written many articles and courses, published nationwide. Her mission is to improve the real estate industry by offering practical information for real estate professionals and consumers. To contact Ms. DeAstra, please send an email to Lore@continental-appraisal.com.

A Modern "Appraiser Apprentice" Job Interview

Ever wonder what a real estate "Appraiser Apprentice" job interview, with a recent college graduate, would sound like?  The author, R. James Girardot ( aoi@oz.net) says . . . Let's see:

First - Job candidate, can you work for 2 years with no income?

Second - You won't mind setting your schedule around mine because I have to walk through all properties with you. Yes, I know doctors, attorneys, dentists, engineers, teachers, etc. don't require that stipulation, but you see, I am not sure I can tell you that you are entering a "profession" nor even a "business" in which anything from your degree is usable anyway.

Third - After 2 years of working for free and of scheduling your schedule around mine [especially since I will have 2 other apprentices in the same category plus will be doing appraisals myself so that I can financially subsist] your fees will be totally dependent on how many appraisers there are out there at that time competing for the same business that is left after the AVMs and the BPOs do their thing in government approved property valuations for mortgage purposes.  Could you gross $30,000 per year? You might. But, again, the trend currently is downward when it comes to appraiser fees.

Lastly, I cannot lie or mislead you, you will have expenses taken out of whatever fees you will earn: those will include:

• errors and omissions insurance,
• licensing for an appraisal software program,
• membership in a local agent multiple listing service,
• monthly fees for a reliable data source from which you can expect to get reasonably reliable property characteristics from county records,
• gas and wear and tear on your car,
• a place to work either in your home or renting a space somewhere,
• purchasing your paper supplies,
• paying telephone and internet connections,
• paying your own social security and, of course,
• paying all the local, state and federal taxes that will be based on the fees that you are paid.

You say your college buddies are getting 2 weeks vacation, medical insurance, 401(K) and more. No, no, no, you don't get any of that by being an appraiser. If there is income left from the wages you are paid for the appraisals you complete, then you might be able to take a vacation and do all those other things.

You think we should just charge more for your professional services? Sorry, again the answer is "no." There is no way you can charge what you need to in order to be an appraiser; those days are gone just like the dinosaurs. Appraisal fees today are totally beholden on how much of the appraisal fee (that the borrower pays the lender at the time of applying for a mortgage) that the lender and its appraisal agency are willing to pass on to you as the appraiser.

But appraisers are independent business people.  Don't they set their own fees? Sorry, again, there are just not enough real appraisers out there to change that situation. The reasoning that is most heard is that "if I don't accept those wages, I will have to go back to the assembly line and I would do anything rather than that. Besides, I like not having a boss."

How many appraisals would you project you could do once you become licensed or certified? THAT is a good question. The answer is really dependent on whether or not you want to have any free time for yourself, your family and your hobbies or, alternatively, whether you want to invest the time in each appraisal to do the right job. You see, while reducing the fees paid to appraisers, those who assign appraisals to appraisers today also insist on getting their reports back within 1 or 2 days.

Yes, you are independent; as I said before, you will have no bosses. However, if you do not meet their timeline requirements, you will also have not appraisal business? So what approach would you use: find out how to cut corner? take the time to do the right job? And given either situation, how many appraisals do you project you could do if you are going to do them correctly, do them within the 1-2 day requirement and still have a private life.

Weekends? No, those who assign appraisals say you do not have to work weekends. BUT remember their clocks begin to tick away time once they send an order to an appraiser.

Could you compete to obtain more business because you are good and honest? Is that your question?I feel like I am apologizing for the Gulf oil spill I am saying "I am sorry" to you so many times. No, there is no competition in the "profession" today. You simply try to find what are called appraisal management companies, otherwise known by the acronym AMCs, see if they will let you register with them, look at their wage sheet to see if you can live with the wages they are offering (keeping in mind ALL expenses and fringes of life are yours to be paid by those wages only) and then see if they actually accept your name. That is just part of the system. The next thing you do is sit and wait for them to notify you that they have an appraisal for you to do.

How many orders will you receive and how often will you receive them? Very good question indeed. You see, the answer to that is totally dependent on how many appraisers that company has approved in its rotation directory. Based on experience to date, I would rather that you plan on a minimum of appraisal orders rather than how many an ambitious, bright and hard-working person you appear to be.

Okay, if I understand what you are saying now, you saying you really do not and never wanted to be a business person who owns their own business? So you had thought you could go to work for an appraisal company, conduct as many appraisals as you were willing to commit and physically able to do and leave all the other registering, delivering of appraisals, tax withholdings, business promotion and business retention to the appraisal company itself.

Again, and I really do mean this: I AM SORRY!  Because of the wage scale the companies that assign appraisals impose on those who are willing to do their work, companies like those with regional supervision and all the other benefits of a company team are gone like the dinosaurs, too. You see, those companies used to structure their pay on the experience of the appraiser, the ability of the appraiser and the fees that they used to be able to charge lenders for appraisals which used to allow a good businessperson the ability to budget money to actually pay a staff. But that is gone now that fees charged by appraisers are gone and have been replaced by wages payed by those who order appraisals.

Yes, I am sure your spouse's parents just paid $500 to have an appraisal done on the home they just purchased. But therein is the crux of the story: ask your in-laws to see if they can find out how much of that money actually went to an appraiser to appraise their new home. While this next step might be disappointing, too, you might also suggest that your in-laws now obtain a private appraisal not using their lender's appraiser. The only reason I say that is because of the number of loan officers with banks of all kinds and all sizes apparently now telling their mortgage borrowers not to depend on the bank appraisal as the actual value of the home.

I well appreciate your questions, "So why did I go to college? Why didn't someone tell me all of this before?" Rather than answering with the same answer you have heard me say so many times during our interview, let me just say I sincerely apologize for you feeling that way. Truly, going back to how or whether you will receive appraisal orders that we discussed just a few minutes ago, there is one other thing you should be aware of:

You know how you got grades in college? Well, you will still be receiving grades.

• However, now you will be graded on whether you called the borrower within a day,
• whether you delivered the appraisal in the time frames required by the assigners of appraisal orders,
• how many spelling errors you had in the report,
• how many typos there were in the report,
• whether the AVM conducted by the company that ordered the appraisal agrees with the conclusions of your appraisal and,
• if it doesn't, how quickly you respond to a follow-up request to submit what the company demands for the appraisal and
• whether you filled out the Fannie and Freddie appraisal forms the way that each appraisal orderer demands and
• provide any and all additional information that the orderers demand regardless of what USPAP, Fannie and/or Freddie publish in their standards and guidelines.

So you don't think you needed a college education to be able to fill out a form? So you think you will be communicating that to your congressperson?

Why don't we just provide training classes on how to fill out forms as other businesses do rather than make someone think they need college education to do that? You might also ask your congressperson that question if you do write a letter.

It was a pleasure meeting you. I can tell from the interview that you are exactly the kind of new blood we need: you appear very professional, very honest, speak like you are ethical in all aspects of your life and your philosophy of life and I do believe you when you said you just wanted to provide an honest service for the benefit of those who are buying or refinancing the single largest investment they make in their lifetimes--their homes.

I would be interested in hearing what you decide to do for a career. Thank you for the opportunity to meet and chat with you.

Author: R. James Girardot [ aoi@oz.net ]

6 Reasons Appraisers Are Worth Their Salt

Placing a Value on Your Services - a Guest Post by Michael W. Armetrout of AM Appraisals

As every appraisal firm manager knows, gauging the direction of the current business environment can be a difficult task. Some may see every new trend as a time to reinvent themselves while others may simply lay low through fluctuating periods. 

One thing is for sure, the constant wave of financial fiascos and regulatory changes have made it nearly impossible to figure out what is on the horizon for our industry. Whether you subscribe to a “glass half full” or a “half empty” approach to the appraisal profession, maybe we should first take stock of the basics. What do we really have to offer? We are in the business of placing value on real estate so why can’t we place an accurate value on our services?

I don’t want to get off course with promotional tag lines or sales pitches but rather want to examine the real reasons why our potential clients utilize our services.

I have narrowed down a list of six primary areas of what I believe encompass our worth and appeal in the marketplace.

Ability to Render Value

It doesn’t get any more basic than this. Our ability to produce a determination of value is the hallmark of what we do. Today’s appraiser’s offer credentials based on licensing, education and experience and have specializations that cover a wide array of disciplines.

The word “ability” can be a subjective term but is ultimately determined by our expertise. A client may or may not desire expertise but it obviously is something we should endeavor to improve constantly.

We are not however, the only source for value determination. The increasing use of the AVM has offered potential clients a much lower cost alternative to our services and BPO’s have become a favorite product for asset management companies in foreclosure work. We may proclaim the shortcomings of these alternate valuation vehicles but their growing use indicates that end users view them as a viable option for some purposes.

Competitive Fees

What we charge for our services can vary widely based on locale, client type, volume and the scope of assignment but is still in effect set by customary fee ranges in a particular market. If the same client pool has access to a set number of appraisers, the market will obviously not lend itself to wide extremes for the same service without some attrition. Fees then become relatively competitive in that market.

Recently, fee trends have been one of the pivotal issues related to appraisal management companies in the wake of the implementation of HVCC. Many of the larger AMC’s allocate assignments to appraisers willing to work for as much as 40% less than pre-HVCC rates.

The balancing act for appraisers who work with AMC’s is now to attract new clients with attractive rates yet somehow streamline processes and implement new efficiencies to make up lost revenue. It is possible though; that shortcuts may lead to a reduction in overall report quality and further add to an already fledgling public sentiment toward appraisers.

Quality Products

If you were to ask a group of appraisers if they all produced quality products, I’m certain you would hear a resounding “absolutely” and without exception. We all want to believe that we are completing reports that are accurate and reliable but we must come to terms with the fact that not all reports are created equal.

Someone has said that an appraisal is only as good as the available data but while there is a grain of truth to that, a quality appraisal consists of many parts, not just raw data. Market expertise, academic and logical analysis, supportable conclusions, and clear presentation are just some of the components that make a quality appraisal. Making sure we are turning out the best possible quality is the key to our long term survival.

Communication

How we communicate with clients is what I believe to be one the most valuable traits of any appraisal organization. It is the bedrock of all business relationships and has historically been the factor that either keeps or loses clients.

In the past, mortgage lending relied heavily on the ability to communicate freely with appraisers. How ironic that this is also what was scrutinized by many in our profession and eventually was a contributing justification for HVCC. Regardless of the opinions on HVCC, the end result has clearly led to a decrease in communication as a growing “form-filler” role has been placed on many appraisers.

The large AMC model makes it difficult to cultivate business relationships on a national or even regional basis due to the scale and protocols of companies that order appraisals overwhelmingly from computer databases. This is where I contend that HVCC has caused the most damage to our ability to do business as appraisers.

Turn-Around Time

Besides death and taxes, we can always count on a client’s expectation for their requests to be completed as soon as possible. After all, if they have ordered it, then they are ready to receive it. It is funny how they are not always ready to pay for it.

A quick turn-time has been the norm since the advent of appraisals began and I’m sure will continue until its demise. For all of the changes HVCC has brought, it has had no effect on the expected delivery window for appraisal reports. All clients still want it yesterday.

Liability

I have saved this one for last because it is often overlooked but I believe it has become our single largest attraction to the lending market. Our financial, legal and professional liability is what sets us apart from the alternate valuation methods noted above and may very well be what keeps us in business in the years to come. It is also one of the prime motivators for maintaining quality in our services and products.

Don’t believe for a moment that many national investors and banks would not opt for a low priced AVM or BPO if they had recourse against them upon loan defaults. This is why the use of “no appraisal” programs was utilized in some lower risk loans during the buildup to the meltdown of the financial and housing markets.

I urge appraisers not to sell their services away for cut-throat rates. If they do not properly value your professional skills for what they are, then maybe they will value the liability you offer. It’s not free to us and it should not be free to them.

So how do we parse these points? Understanding prospective clients is the key to creating a business model that works and must always be guided by ethical conduct. For instance, if our primary draw is our ability to render value, a client may want predominantly high values therefore creating a dilemma that would lower quality and increase liability which in the end should not be a decision we accommodate.

Striking a balance of these issues can be difficult but is imperative for our success in the appraisal industry. As we continue on the roller coaster ride, we must continually be evaluating a client’s perception of the services we provide.

Other Posts By Michael Armentrout:

• Properly Define “Declining Markets” - A Call To Mortgage Lenders
• Appraisal Independence at Crossroads, Again!

AUTHOR: Micheal W. Armentrout, VP AM Appraisals, Inc. Mike has been involved in full time real estate valuation since early 1992 and has experience in numerous Central Ohio markets. He served as a staff appraiser at several local firms before forming AM Appraisals, Inc. with business partner J.M. Massey. e-mail: marmentrout@amappraisals.com web address: www.amappraisals.com

Appraising a New Era - 2010: An Appraisal Odyssey

Guest post by Carol Rockman, VP and Founder of http://www.nvs.coop/

2010 and a new decade is about to begin. Upon being asked to write the first Niche Appraiser column I was delighted to learn that this venue would become a regular part of the magazine’s monthly features.  Yet I felt challenged with presenting a singular topic of interest that has not been belabored, agonized over, hashed and rehashed ad infinitum.

One of the most notorious topics that dominate financial sector discussions has been the Home Valuation Code of Conduct (HVCC) which is now a living legacy rife with ramifications and not expected to be removed from the lending business model.

Lenders, investors and government agencies involved in this seismic shift are still trying to figure out the best alternatives to sort through the chaos. Even the US Congress is befuddled.  

 Many appraisers are stunned and disenchanted about the future of their businesses as the industry changes faster than we can assimilate relative future value of the new bumper crop regulations.

There is reason for appraisers and users of appraisals to be optimistic about appraisal issues during 2010.  In taking the longer view of the appraisal profession and looking back over the last 100 years, one fact becomes apparent.   When times are good, appraisers and users of appraisals tend to focus on the business of doing business.  They focus on productivity within their respective functions, be it appraising or the various businesses that commonly use appraisals such as mortgage lending, right of way work, litigation, etc.

It is when times are bad that the appraisal profession and the users of appraisals take the time to step back and re-examine the appraisal process and issues involving appraiser performance so as to improve the quality and utility of the appraisals being used in the marketplace.

It is during the aftermath of each of the economic busts that comprise the long term trends that the appraisal profession has identified and incorporated more stringent measures of professional conduct and practice along with more sophisticated appraisal methodology and applications.  Today's appraiser has many more tools and a wider degree of access to relevant data to analyze that data than ever before.  Generally speaking, each of those advances has occurred during an economic bust, not during a boom. Looking forward to 2010, we can expect more advances.  

The appraisal profession has long acknowledged the principle of change as being one of the fundamental influences in the real estate markets, which themselves are dynamic and ever changing.  Appraisers will recognize that a market for appraisal services that widens to include more types of "appraisals" for more types of uses, means that there will be more business opportunities for the average appraiser. When times are lean, an openness to the pooling of resources, economics of scope, expanded affiliations and new partnerships are the keynotes that not only engender innovation, they are crucial to survival.

Considering that this column will more often than not speak to the collective, I thought to seek some sage perspectives relative to past real estate cycles.  While it is true that we will be working under unprecedented economic conditions, struggling with what seems extraordinary to us now, such change will fast become the ordinary.

The consensus offered herein is from forward looking veterans I queried. Those who can most definitely see an unlimited future: 

“We are at a time of tremendous opportunity to participate in what the appraisal industry looks like moving forward.  With volatility in our industry CHANGE is the rule of the day and we can be that change or allow others to write the rules for us.  If you were your customer what would you want?  Are you meeting or exceeding their expectations? Giving them outstanding service?  We are a "service" business.  Providing outstanding service and well written, researched and communicated reports is imperative to remain relevant.  Networked communities of appraisers working toward a common goal can make a difference. Carpie Diem!  Let's seize this opportunity to be the change we want to see! Cynthia Sulamo,   Certified Residential Appraiser, CA

“FHA implemented a law that proscribed the use of licensed appraisers, allowing only certified appraisers to be on their roster of approved appraisers. The good news for the experienced appraisers remaining is that they will benefit from that tremendous shrinkage bringing supply back into balance with demand.” Randolph Kinney, Cert. Residential  Appraiser, CA

“I have a 2010 New Years Eve Resolution for the appraisal profession:

“Shake it off and step up”. I often feel like I have fallen down the same hole as Alice in Wonderland. I agree that things are more than a little skewed in the world of the appraiser. However, I continue to say that the little guy (or gal, just a figure of speech) should only worry about what they can change, and not worry about what they cannot change.”  David A. Braun, MAI, SRA, TN

Ending on a top note, I would like to thank Niche Report for providing Appraisers a medium to contribute their ideas and opinions within the framework of a broader based audience.

AUTHOR: Carol Rockman, VP and Founder of   www.nvs.coop   has been involved in the Real Estate industry since 1978 and Appraising since 1982.  National Valuation Service is a  company that provides appraisal  management services  in 50 states; an organizational  member of the NCBA in Washington, DC - utilizing the Cooperative business model principles; The Cooperative offers  reliable  valuation solutions to satisfy the Home Valuation Code of Conduct (HVCC) and FHA compliance to Mortgage  Professionals, Lenders, CPA’s, Attorneys, Credit Unions. Carol can be reached at 786-581-9171 or carol.rockman@nvs.coop

Article reprinted with permission of the author - Original Source: The Niche Report

Illinois "Appraisal Bill" HB 1015 Passes Unanimously

After three years of trying, it finally took a new Governor and a persistent ICAP to get Appraisal Bill - HB1015 passed. The Bill passed in the Senate yesterday unanimously! It will now go to Governor for signature.

This is not a new law, but an amendment to the existing law.  Brian Weaver will be covering many of the changes the new law brings to the appraisal industry in Illinois at ICAP's summer seminar.

You can read the bill as introduced here: http://tinyurl.com/oh9ec4

The following is a brief Synopsis of some of the changes.

Synopsis As Introduced Amends the Real Estate Appraiser Licensing Act of 2002.

• Makes changes throughout the Act that mark the transfer of authority to administer and enforce the Act to the Department of Financial and Professional Regulation (rather than the Office of Banks and Real Estate).
• Makes appraiser licensing/certification MANDATORY in Illinois, rather than voluntary.  Previously, licensing/certification was only mandatory in connection with federally related transactions.  It will now be mandatory for any appraisal service.
• Replaces "associate real estate appraiser" with "associate real estate trainee appraiser" throughout the Act.
• Changes the Real Estate Appraisal Board to the Real Estate Appraisal Administration and Disciplinary Board.
• Provides that a person who violates certain licensure provisions for a second or any subsequent time is guilty of a Class 4 felony.
• Sets forth additional education requirements for licensure under the Act.
• Removes a provision allowing a person who holds a valid license as a licensed real estate appraiser, issued pursuant to a predecessor Act, to convert that license to an associate real estate appraiser license.
• Removes a provision concerning licensed real estate appraiser's licenses issued pursuant to a predecessor Act and provides that an associate real estate trainee appraiser license may not be renewed more than 2 times.
• Adds a provision concerning temporary license suspension.
• Provides that an education provider may use an instructor who is a faculty member in good standing with an accredited college or university or community college or who is an approved appraisal instructor from an appraisal organization that is a member of the Appraisal Foundation. Imposes conditions on any rulemaking authority.
• Makes other changes.
• Repeals a Section concerning identifying a client. Effective Immediately

Source: http://www.ICAPweb.com

Approved Bill (Mark-up) Download IL Real Estate Appraiser Licensing Act HB1015