Appraisal Scoop

Reinventing the Appraisal Process: What can be done to change the market's perception of the services the professional appraiser provides?

Why do consumers prefer Toyotas or Hondas vs. Chevy's, Fords or other American cars? It would seem that most cars provide basically the same features, but year after year Toyota and Honda continue to provide reliability and value beyond that of their competitors in the eyes of buyers.

While American car manufacturers have closed the gap, the public's perception has been fashioned by years of import performance that wasn't matched by American cars. Check any of the automobile rating agencies and at the top will be a long line of “imports” with high marks for quality, performance and reliability.

The appraisal profession is faced with a similar "perception problem".

From the client’s perspective, how reliable are real estate appraisals? Are they better off by letting an AMC (Appraisal Management Company) “handle the hassle” or could they be getting something better and more reliable?

What can be done to change the market's perception of the services the professional appraiser provides? When you consider that the consumer is making perhaps the largest investment of their life with the purchase of a home, logically, they should want assurance that it is a sound investment, something a good appraisal would provide.

We all know that the purchase of a home is an emotional decision and that tends to over-shadow logic. Still, you would think that with the median price of a home in the $200,000 plus range, a $300-$400 investment by the consumer would be a cheap insurance policy and in their best interest prior to taking the housing plunge.

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1004MC – The Real “April Fools” – Part Two

How appropriate is it that the 1004MC addendum to the URAR will be required for all valuation assignments for Fannie Mae, Freddie Mac, VA and FHA, that became effective on April 1 2009 – "April Fools Day"?

Picking up where we left off in part-one, here are a few more FAQ's from my workshop on the 1004MC.

FAQ #4 – "At the effective date (mid-month or near month end) there were zero closings in the current to 3-month period however, there are 10 pending sales. Should I use zero in the grid?

This is a judgment call, but then most of what we do is based on "judgment and communication". There are reasonable arguments for both sides. Many pending sales never close. At the same time, if a high number of them do close, you'll post a "goose egg" on the effective date (along with a declining trend) and several days later (when the sales close) it may shift to "stable".

The primary objective of any valuation assignment is to inform the reader so they can make an effective business decision. I would suggest that you verify the pending sales (call the agents to see if they expect them to close), record the details and place a number with an asterisk (and footnote) that these are pending and expected to close.

The key here is not to mislead. You must verify the pending status and document the same. Wishful thinking is not going to help the client. If you ignore the pending closings (and they close) you'll look like an idiot a week or two after your report.

FAQ #5 – "Many markets are seasonal or have anomalies how do I explain this"?

Seasonality generally exists in most market due to families with school-age children and or severe weather conditions. There seems to be a tendency to have higher sales volumes between March and August as opposed to September through February.

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1004MC – The Real “April Fools” – Part One

How appropriate is it that the 1004MC addendum to the URAR was required for all valuation assignments for Fannie Mae, Freddie Mac, VA and FHA, on 1 2009 – "April Fools Day"?

The looming question on the 1004MC, who will be "the fools", those filling it out (without consideration to or analysis of the "four forces that influence value trends in the neighborhoods"), or those using the conclusions on the 1004MC that are absent (by design of the form itself) of the impact of those same forces during the time-periods specified and therefore have rendered the 1004MC Market Conditions form useless and misleading?

Introduced by Fannie Mae and Freddie Mac in November 2008 and now adopted by FHA and VA, the 1004MC has generated far more questions than answers.

Instructors have prepared courses, various individuals have offered free or low cost solutions using Excel, online programs and the MLSs are scrambling to provide 1004MC statistics via their systems, yet despite the efforts there still are disconnects and conflicting opinions vs. cut in stone answers and there is a reason for that. The instructions on the 1004MC are vague and pose a problem with respect to USPAP and Generally Accepted Appraisal Practice.

With that in mind, I'll try to cover some of the many of the issues raised in my 1004MC Workshop and provide you with my observations. At the very least, you get the idea of the tasks ahead and some suggestions on what you may have to do to meet the challenges posed by the 1004MC.

FAQ #1 – "Should we transfer the conclusions and trends on the 1004MC into the neighborhood section of the URAR"?

The instructions on the 1004MC state: "The appraiser must use the information required on this form as the basis for his/her conclusions and must provide support for those conclusions, regarding housing trends and overall market conditions as reported in the Neighborhood section of the appraisal report form".

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First Impressions of the 1004MC: Part 5 - "Closing Thoughts"

Having completed several "1004MC Workshops", read numerous forum posts and talked to many appraisers, one thing is clear, confusion reigns! Most do not see the merits of the 1004MC. They see the problems, including opposing opinions, various interpretations, and few immediate solutions given the limitations of their MLS data services.

At question is not the concept, but rather the execution. While many believe this to be a step in the right direction of mandating a standard for measuring trends, the format is a "time-consuming problem" versus a "problem solving solution". The unintended consequences over-shadow any potential benefit.

The 1004MC is not about medians, totals, percentages, and ratios, no more than it is about the neighborhood. The form is about "the collateral" and "the trends related to the collateral". While market conditions and neighborhood trends are important, the trends of properties similar to the subject are critical.

Lenders are not making a loan to the market area or the neighborhood; they are making a loan on the subject property, the collateral. As goes the trend for properties similar to the subject, as goes the value of the collateral securing their loan.

Highs and lows

The 1004MC gets an "A" for effort and the focus on the subject verses the neighborhood, "C" for layout and "F" for format and function. I understand the need to "standardize trend analysis", however, the format is such that the numbers may mislead more than "make transparent".

It does get a high mark for two factors, first for attempting to replace opinion with statistical fact, limiting subjectivity and secondly, it requires the analysis to focus on "competitive to the subject from the buyer's perspective", removing the influence of lesser or better properties in the neighborhood that do not compete with the subject.

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First Impressions - The 1004MC - Part Four - "House Cleaning"

I have been developing a workshop on the 1004MC and as I work through the process, every day is one of discovery. Despite having read 08-30 and the FAQ's, along with the existing appraisal guidelines, I am not certain that I have all of the answers, but I do have more than a few questions and observations.

On the plus side, reading and re-reading has provided perspective and possibilities as to what Fannie Mae wants, how we can provide it, efficiently and effectively. Still, I am no expert, and like others, I am second-guessing based on what I know thus far. With that understood, here are a few more of my observations.

First, the 1004MC is not (and I repeat not) a new appraisal form. The 1004MC, like its number-sake is an underwriting form that appraisers are required use. If appraisers designed the 1004MC, it would look different, as would the URAR    Download MCA_Appraisal_Report.pdf

Haves and Have Nots

The 1004MC requires the appraiser to provide "all of the information to the extent it is available or provide explanation if the data is not available". With the advent of multiple listing systems, computers and technology, how will you sidestep providing the data? If someone in your market area is "filling in the form", you will need to do the same.

"Use sales and listings of properties that compete with the subject, determined by the criteria the buyer would use". Your assignment, appraise a home in a new tract. What (from the buyers perspective) is competitive to the subject, only new homes? People "buy new" for a reason, often because they want to be the first ever in the home, at other times because it is the best deal. Are re-sales in the same area "competitive", from the buyer's perspective?

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First Impressions of the Fannie Mae 1004MC Marketing Conditions Addendum: Part 3 - "Medians & Misleading"

In parts one and two of "First Impressions of the 1004MC", we identified the challenges presented by the new form. While its purpose is "to provide the lender/client with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood", the "unintended consequences" may (in all likelihood), provide the opposite.

From my perspective, the 1004MC perpetuates a long tradition of two flawed premises in FIRREA (The Financial Institutions Reform Recovery and Enforcement Act); "all appraisers (by virtue of being state licensed) are qualified to appraise" and "the secondary market (by virtue of its policymaking authority) understands USPAP and the appraisal process".

From Fannie and Freddie's perspective, they want consistent application of underwriting and risk management criteria. If appraisers report the same types of information, presumably you get consistency, which is the foundation of risk management. Eliminating "subjectivity" promotes reliability, a step in the right direction. 

As I am developing a seminar and an automated solution to the 1004MC for appraisers, over the past several weeks I have been working through the form to "fill in the blanks", analyze the results and better understand what Fannie and Freddie hope to achieve with the form.

On the surface, the questions are "mere mathematics", medians and counts, products and percentages, along with the trends they foretell. However in practice, the math and the trends are neither simple nor clear. In fact, when examined from a broader perspective they can be "misleading" in terms of how they are calculated, applied and their indications of change and neighborhood trends.

"Competitive to the subject vs The Neighborhood"

How you define "competitive to the subject" will determine the "calculated results" and therefore the "overall trends". In the same dataset, a broad definition could indicate very different trends from a narrow one. How the appraiser determines "the criteria that would be used by a prospective buyer of the subject property", is the key.

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First Impressions of the 1004MC Market Conditions Addendum - Part Two

It's been a week since the announcement of the new 1004MC Market Conditions addendum. My first thoughts generated a lot of responses, so I thought I would take a closer look. The 1004MC is required for appraisals with an effective date of April 1 2009, however you can expect (and we have already heard of cases) that lenders will be requiring it long before that date.   Download MCA_Appraisal_Report.pdf

The replies to my post pointed to some of the short-comings or conflicts and raised the possibilities of even more, depending on your location Multiple Listing Service, etc. While the form is only one-page, the appraiser "must also provide support for the conclusions". Considering the questions and the limited space provided, I would expect the final product will be several pages.   New FAQ PDF from Fannie Mae regarding form 1004MC and other items.

After a trial run, even with the availability of a "statistics feature" in my MLS, the typical user will have to make multiple searches to provide the answers. If you share my view that "competitive to the subject" isn't always reflective of "neighborhood trends", you'll need to do the job twice to get both sets of answers. What about other issues? 

Inventory Analysis

What caught my attention was the layout and time periods for the data. There are three time periods specified, the first a 6-month period, while the other two are 3-month periods. With one being twice the size of the others, logically the number of sales in the first column will be larger as compared to the others. 

Imagine the "underwriter calls" you'll get when the first column shows 18 sales and the second and third columns show 9 sales and 10 sales. Do you think someone, somewhere, will want to know why sales have dropped from 18 to 9 and 10 and why you selected stable? 

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First Impressions: Fannie Mae's New Market Conditions Addendum

If you attended my class at the "a la mode Regional Appraiser Conventions", I mentioned that Fannie Mae was working on a "one-page Market Conditions addendum" (similar to Wachovia and RELS forms). Fannie Mae has released the 1004MC form as part of Announcement 08-30, which also includes clarifications and amendments to the existing Fannie Mae Selling Guide. Download MCA_Appraisal_Report.pdf

Key Highlights of Announcement 08-30:

•  New Market Condition Addendum form 1004MC

• Supervisory appraisers must now inspect the subject property

• Reporting prior sales and listing history

• Appraising a property on sites over 5 acres

• Effective age adjustments

• Cost approach for insurance purposes

The 1004MC: "Houston, we have a problem"

My initial thoughts, I think we have some bridges to cross here, one of the reasons I started the series on URARS – Uniform Residential Appraisal Reporting Standards. While I believe this is a step in the right direction, the form and instructions appear to be in conflict with other Fannie Mae Appraisal Guidelines, The Appraisal of Real Estate and "generally accepted appraisal practice". 

As an example, the 1004MC requires the appraiser to report housing trends based upon "sales and listings of properties that compete with the subject property, determined by applying the criteria that would be used by a prospective buyer of the subject property".The conclusions for those trends (based on properties that are competitive with the subject) are to be "reported in the "one-unit housing trends" area of the URAR.

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URARS Sidebar - Focus on the "Common Ground"

The Right Start was about the "possibilities", collective action to move the profession ahead as opposed to going backwards or standing still. That led to The URARS, ways to convey the message, enlist the support of appraisers and get the process started. While I anticipated debate, I also expected a spirit of cooperation. After all, the URARS was about "improving our lot in life" so to speak something all would benefit from.

 After witnessing (and participating in) a conversation on the WinTotal User's Group regarding "effective age", I had to take a step back and rethink our course of action. While the discussion was (for the most part) constructive, a simple question prompted 80+ responses. To be honest, I don't think there was a clear consensus in the end, although I do believe most involved (and those lurking) have a far better comprehension of the issues surrounding effective age and the use of the term in the URAR.

Having watched Brian Davis, Lee Hill and others "get busy" with the topic, my observations led to a few fundamental conclusions. Appraisers are in the "opinion business", so like other things, we all have one (or more), often we are quick to give it (asked for or not) and when we do, we defend it vigorously (right or wrong). 

What starts as a simple question or observation can quickly become "sport" and in doing so, all bets are off and we lose perspective. This is a key point for the URARS and the state of the appraisal profession. At times, we are so quick to take a position that we lose objectivity and become indifferent to the views of others.

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The URARS Part 5: Making the List: Key Reference Sources of Appraisal Procedures Definitions and Techniques

Have you read a few good books lately? Perhaps all of us should read a little more. When I was teaching the Housing Market Analysis class at the "a la mode regional conventions", I would ask the audience, "how many of you have read The Appraisal of Real Estate"? To my surprise (and shock) at several locations, only a few hands were in the air.

For the many years I have been in this profession, most I know have always considered "The Appraisal of Real Estate" as the "bible of appraising" and perhaps the most definitive and authoritative source on appraising currently in print. That's not to say that there aren't other good appraisal books out there, only to make a point. Many of those in the profession have yet to read and study the most widely referenced book on appraising.

If that is the case (and I have no reason at this point to believe otherwise) would appraisers have a better understanding of the principles, techniques, applications, etc. (outlined within The Appraisal of Real Estate) if they did? If The Appraisal of Real Estate was "required reading" for appraisers, users of appraisal services, underwriters, loan offices, agents and others, would some of the issues fade away?

For the URARS addendum, should we have a section that lists key references by title and edition? If so (and given the number of books and publications available), how much is enough? Should we limit the list to several that are comprehensive or should a few specialty references be added? Listed below are a few of my choices. What other publications (they must be in print and widely available) would you suggest or is this list adequate?

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