Appraisal Scoop

Runt Rants - Highly Honed Powers of Observation and Analysis Make Us Different

I don’t really know where it started. Maybe born into a family of mental giants, where the only option for the runt is to observe and listen.

Maybe it’s a small town environment, lots of experience with outdoor life learning to observe, listen, drawn conclusions.

Maybe it was the years in correspondent banking traveling to those same small towns in six states, chatting with the grocer, the barber, the gas station attendant, picking up clues, signs along the way…so that when I walked into the bank president’s office I knew more about the commerce of the town than he thought I should, and because of that we could do business, help each other.

I do know that when I came late to the appraisal profession I took all the AI courses that were available in a five year span, all they offered really.

When I began those courses I was already trained to observe, to listen, to accumulate random facts and compose a picture…a hypothesis.

The AI courses built on that base and made me better at it. All appraisers taking the good courses in appraisal theory, learned those same skill and applied what they learned in the field to develop and hone those same skills.

It’s part of what sets appraisers apart, what makes them a professional, part of the skill set that brings value to business transactions. It’s part of what we are expected to provide, why we are paid.

I’ll bet you haven’t thought about that in weeks…maybe even months!

But it happens every day, even if you don’t consciously think about it. A typical sample of that in operation occurred with me the last couple of days.

The nation is in turmoil, many markets have been in recession for a couple of years. Houston hasn’t had that problem…not until recently. Houston is an oil town. It’s much less so than in years before, but still an oil town. West Texas Light at $150 last summer created a boom in the oil patch and in the oil service business. That same West Texas Light is now in the $40-50 range, and the oil services businesses are beginning to hurt.

Houston housing markets have been in balance for the last ten years…good solid value growth in the 3-5 percent range each year. But the clouds are building and it is not just what is being reported in the newspaper…that statistic that one in three Houston houses sold in January were distress sales. That’s certainly not good, but heck! It was 24 percent distress in January 2008.

I saw clouds building as I drove to an appointment recently. Established small strip centers one after the other, all with one or two suites vacant. Three closed bank branches…now vacant.

Yet big dirt is being moved…a 50 acre commercial site to the right in vacant land that I thought would stay vacant for another couple of years. To the left a 75-100,000 square foot shopping center with a large anchor…the anchor not yet announced. That’s another one I thought would be delayed another couple of years…but there it is…tilt wall already in place!

A highway overpass gave me bird’s eye views of two large businesses on either side. To the right was an equipment rental business with a yard full of equipment. To the left was an auction house with its yard also full of equipment. Good for the auction company…bad for the companies that could no longer afford that equipment. Bad for the equipment rental business…when the lot is full the equipment is not earning revenue.

Both those yard statuses mean the unemployment rate is going to tip up in a month or two…the yards are leading indicators.

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Runt Rants - I'm Back

Well, well, well. I’ve awakened from a year long nap to find a changed world. Rip Van Runt. That’s me!

When I dozed off

• We seemed a lock to elect the first woman president of the USA 
• The HVCC was going to revolutionize the appraisal industry 
• The Snake Oil Salesman were still selling bottled pig slop as perfume 
• The debate was ongoing to let troubled financial institutions fail 
• WAMU was a healthy bank 
• The DOW was down to 10,000 and there was concern in the air

When I returned 

• We have a male President 
• We have our third female Secretary of State 
• We have Senator Biden as Vice President in charge of something called Stimulus 
• The Snake Oil Salesmen have gone underground  
• The US auto industry has become a ward of the state 
• The financial industry has become a ward of the state 
• WAMU disappeared, Wachovia disappeared 
• HVCC has been so watered down that the change will be hardly noticed 
• The DOW is nearing 6,000 
• The US and the world are in a recession 

Yep, the last year has been eventful, and I missed it all. I know how Mr. Van Winkle must have felt.

Appraisal Scoop has become a must read in the Real Estate Blogosphere, regularly in the top 15 of 500 sites, often in the top 10. That’s impressive, but not a surprise. Appraisal Scoop was created by the best appraiser/marketer I know. He had a history of creating environments for others to thrive in before. He’s done it again in Appraisal Scoop. For my Heartless Editor to allow me to participate again is truly a stroke of luck!

Our business, Acorn Appraisal Associates in Houston Texas has endured a rough year; two rough years in fact. No doubt yours has also. Profits have declined. Net Income was still positive, but not nearly the required, the targeted, return. Revenues have basically been flat.

September brought Hurricane Ike, the first to directly hit Houston in decades.  Our building's power was knocked out and was one of the last to be brought on line; three weeks it took!  We’ve been able to maintain our staff and minimize the income loss to them personally, but little profit for the company remained.

That happens in business. We’ve adapted. We’ve changed. We’ll change some more. I’ll try to address those changes, those experiences in the time to come.

That’s what the Heartless Editor charged me to do when he invited me here several years ago. I’ll try to confine myself to what I know, which is my business. Not yours, but mine. For each of us business owners are experts in our own business, and no one else’s.

I’m here to share my business experiences, the successes, the not so successes.  One appraisal business owner's view of the market, the changes, and how I view their affects on my business. Take from them anything that might help you in yours.

I’m glad to be back.

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities.

Runt Rants - Veterans Day and Dog Tags

I once did a Runt Rant on the subject of Dog Tags. A friend of mine lost a son to the Iraq War. He honored me with a gift of his son's commemorative dog tag. I vowed to wear it every national holiday that honored our veterans. I hoped other veterans would do the same. Maybe they will.

One evening as I removed the Dog Tags from my neck, I wondered why I was removing them. What else would hang around my neck the next day? Nothing? If so, why? It was then that I experienced a rare creative thought....I'm not very creative. I could wear the Dog Tags around my neck permanently, wherever I go, whatever I do.

A reminder: to me, possibly to others who I come in contact with. Mine are now a fixture. The Geezer wears dog tags. Occasionally someone will notice them and comment. It sparks conversations, leaves a thought behind that might not have been there before. A reminder that we have what we have, we enjoy what we enjoy, because others have sacrificed to ensure that we can.

  This week is Veterans Day week. It's to remind us of our service men and women, past and present. The gift they give us. The one we often take for granted. Freedom. This week I'm wearing my dog tags outside my shirt. Sparking more conversations, more thoughts that might not have been there before.

Thanks guys and gals for protecting what I have, what we all enjoy!

AUTHOR: Ken Verrett is the owner of Acorn Appraisal Associates, a 23 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA

Runt Rants - Energy Crisis is Similar to the Appraisal Crisis

AUTHOR: Ken Verrett is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA

Watching the dramatic rise in the price of oil the last few weeks, the resulting rise in the price of gasoline at the pump, and the actions of our elected representatives and those seeking election is both entertaining and instructive.

• Entertaining to watch folks complain about the result but not identify or agree on causes. 
• Instructive because there are parallels to what the Appraisal Profession has experienced in the last few decades.

Neither the Democrats nor the Republicans have anything close to a policy to address the energy problem Both have had ample time and ample opportunities to do so. They certainly can’t agree on the causes. One side wants to increase the search for new oil reserves. The other worries about the environmental impact of that alternative and prefer to regulate increased mileage standards. Both want to find alternative fuels, alternative energy sources, but neither are willing to describe the costs to voters of taking bold action. There is even a lively debate about the amount of usable oil reserves left in Earth, and that debate centers around the term Peak Oil.

Peak Oil is not about running out of oil. It is about the crossing of demand and supply curves and what results when that happens.  It is about lead times to develop alternatives.  It is about the implications of such crossings of the curves as it relates to a critical commodity.

Energy Costs and Our Business

It’s not a just an interesting political problem.  It’s an appraisal business problem.  Today in Acorn I am dealing with the implications of $4.00 gasoline.  We give a mileage allowance.  Should the allowance be increased to compensate the staff?  Should Acorn encourage the demand curve change by granting increased mileage allowance for those with fuel efficient autos? Whence does the cash to achieve that arise? 

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RUNT RANTS - Mr. Big and a la mode deserve applause!

AUTHOR: Ken Verrett is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA

I was a little surprised and disappointed at the lack of appraiser response to the David Biggers, CEO of a la mode, announcement that a la mode intended to create an order assignment feature on their web site at a very low fee for the service.  The announcement was featured here.  A La Mode Announces new feature

Mr. Biggers announced something BIG.  Something that could save appraisers thousands of dollars a year.  Something that could change the landscape for appraiser marketing if they choose to use it. Yet there were only five comments to that announcement here on Appraisal Scoop!

Maybe appraisers didn’t take the time to read what Mr. Big announced?  Maybe appraisers didn’t think through the implications?  Maybe…they don’t care?

Let's Look At The Situation

Let me see if I can illustrate the proposal in a different way….stick with me here…I’ll be short and succinct for a change.  Consider the following three models.

• Green is what the Fee Appraiser receives from his local clients currently. 
• Yellow is what the Fee Appraiser receives from the typical AMC currently. 
• Blue is what Mr. Biggers proposes to offer as an alternative to the yellow.

What Those Three Senarios Mean

If the Cuomo Agreements were to survive as currently written (a debatable assumption, but still we should consider it as a possibility) local lenders will be forced to find an intermediary to order appraisals for their loan applications. The most likely intermediary is an AMC. That’s the business they are in…to order appraisals for lenders.

If the Cuomo Agreements survive, there will be pressure in the next few months for your local clients to begin moving business away from you directly and instead through an intermediary.  (The drop dead deadline in early fall….that’s to allow for the pipeline…it takes around sixty to ninety days to process a loan in many instances, so an application taken in October will likely go to the lender after Jan 1^st at which time an intermediary will be required.)

Business that you currently get under the green scenario will begin moving to the yellow scenario.  You will be doing the same appraisal, you will be doing your same quality control, you will be proving the same service that you do now…but your fee will be $105 less….30 percent less!

Got that?! The same service, the same quality, the same appraisal, but your fee will have dropped from $350 to $245. Multiply that by the number of local lender assignments you receive monthly.

If that calculation gets your attention, you should re-read Mr. Biggers announcement.

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Runt Rants - AMC "Additional Comp" Request - Pressure or Good Business?

AUTHOR: Ken Verrett is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA.  Read all Runt Rants on Appraisal Scoop.

I had an interesting discussion with an appraiser in last week regarding AMCs. I thought we'd all benefit from his situation his view of the market, and his business decisions. Robert D. Mims IV owns 30-A Appraisal group, Inc. in Florida. He sent me the following email.

Ken -

I've read your articles and actually submitted to you an email last year from a broker that was pretty nasty. I subsequently passed it along to New York District Attorney. I was mentored by an MAI, I do commercial with an MAI, and take my SRA designation class in September.

Below is an email I received from an XXX rep when I asked for an additional $50 to consider two additional sales - after gridding 3 sales, 1 pending, and 2 actives for a total of 6 comps.

What alarms me is not that XXX is willing to pay additional $$$ for the additional scope of work, but that she said SSS will pretty much request additional consideration of sales whenever the purchase price is not met. So regardless of the quality, the number of comparables, Certification #7, etc. there will be an automatic request to consider additional sales to try and meet the purchase price?

Before I respond to XXX, I want your take. Am I overreacting here by interpreting this email as pressure to influence value? And a subtle threat that if I don't they'll will simply assign the work to other appraisers?

Here's XXX's response to the fee increase request I sent. What say you?

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Runt Rants - Back Talk Looks At the Sub Prime Crisis

AUTHOR: Ken Verrett is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA

Runt Rants has written several times on the Sub Prime Crisis. Its an old story now, winding down through the system, taking its toll on the various parties, some deserving, some simply caught up in the market adjustment.

We've talked about the folks that were the worst players in my view; the Investment Banking Firms. (Wow! Such a moniker! No wonder they changed it from Snake Oil Salesmen. Much better ring to that new title. However, something about a tiger not being able to change it's stripes comes to mind.)

Investment Bankers either knew what they were selling was junk and didn't care, or they didn't know what they were selling was junk and didn't care.  Same result: disaster for the buyer, disaster for the market.

Now, one of my favorite blogs, Back Talk, has taken on the Sub Prime Story and decided to research it.

I couldn't wait to read his thoughts and conclusions! I mentioned last week that I have been reading Back Talk for a number of months, and I have been impressed with his research skills, his relatively balanced assessments, his ability to back his conclusions with facts, often presented in easy to decipher charts.

Back Talk doesn't trust the media. He preaches that we shouldn't either, that it is our responsibility to do our own research, look at all sides of an issue, and decide for ourselves. That's my view of the appraisal profession, and my goal in Runt Rants. Present some facts, perhaps alternate views, and let you conclude what you will, which will then allow you to make the best decisions for your business.

I wasn't disappointed in Back Talk's assessment. Its worth your time. Here are some excerpts.

"Economic growth in the United States is expected to slow to a crawl of just 0.5 percent this year, which would mark the worst pace in 17 years, the global finance body said. The United States won't fare much better next year; the IMF projected the U.S. economy will grow by a feeble 0.6 percent in 2009, when measured by an annual average."

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Runt Rants - Making Good Business Decisions - Stupid Is As Stupid Does

AUTHOR: Ken Verrett is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA

We are in the midst of another decline cycle in our economy that inevitably follows an expansion period. "Irrational Exuberance" coined by Alan Greenspan years ago is the perfect concise phrase to describe our collective state of mind during those times of expansion.

Stupid Is As Stupid Does

We see ourselves so smart, so invincible, so impervious to risk that we make what in hindsight are stupid mistakes. Of course, we are no smarter, no dumber collectively during the good times or the bad times. We are simply caught up in the moment. We experience irrational exuberance.

The trick in both expansions and contractions as a business owner is to keep your perspective, to see the big picture, and to make decisions regarding your business and your market that are the right ones, not ones based on false perceptions. It is when we make decisions based on bad data that we threaten our future.

Just How Bad Is It Today?

Currently we read that our economy is tanking, that we have several economic crises coming together.  It is certainly true that we have some challenges ahead. The sub prime crises caught many of us by surprise. The Cuomo Agreements caught many of us by surprise.   We may even be in a recession. 

Unfortunately we are also in a major campaign period where a battle for our minds and votes is taking place between opposing sides, each vying for a short term edge, willing to twist facts and level charges that they will quickly abandon later if necessary. Confusing times!

Appraisal Markets Are in Process of Change

Amidst all of this we in the appraisal profession have to deal with the declining markets in many areas of the country, the sub prime crises, and now the Cuomo Agreements. Enough to give us all collective heartburn!

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Runt Rants - The Dodd/Crowley IVPI Proposal - A Reality Check!

AUTHOR: Ken Verrett is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA

As previously noted on Appraisal Scoop: George W. Dodd and his committee (Download DC_IVPI_Members.pdf) have developed an Independent Valuation Protection Institute (IVPI) proposal that outlines and offers an alternative to the IVPI agreed to by Cuomo and the GSEs - Fannie Mae and Freddie Mac: The Dodd/Crowley IVPI proposal dated March 17,2008 - (Download IVPI_Proposal.pdf )

This is difficult for me. I'm an entrepreneur. I'm for innovation. I'm for folks thinking about the future and attempting to make things better. I am for free speech and the discussion of new ideas. So I want to support the George Dodd and Pamela Crowley's committee efforts in creating the Dodd/Crowley IVPI Proposal.  I think the effort is worthy.  I support the effort, I support the discussion among appraisers it has generated.  I can't support the proposal.

Fred W. Holtsberry, Mid-Ohio Appraisal Services has a successful appraisal business and speaks his mind on appraisal business related issues. I've come to value his views. He has given me permission to publish for the readers a review and analysis of the D/C IVPI Proposal from his perspective. ( Click Here To: Download freds_ivpi_review.doc)

There is no need for me to be redundant. Fred makes good points, better than I could.

"There are parts of the IVPI proposal that are useful, and I'm certainly impressed with the thought and writing that went into that effort. In the end in my view, it simply proposes another new regulatory body (that is not a regulatory body, not subject to the checks and balances of regulatory bodies) controlled by folks with little experience in this complex arena. It also offers little that is not already incorporated into the "Institute" which HVCC incorporates."

The proposal also strikes me as a bit naive;

• Build from scratch a watch dog non profit which would effectively control the transactions of a major foundation of our country's economy, indeed, the global economy.
• Within twenty four months to have such a system running effectively.
• Dictate the return of appraisal product back to the 1004 days as being the sole acceptable product for lenders to use to make their lending decisions, in effect assuming responsibility for the risk evaluation function performed by national lenders.
• Create a massive appraiser approved list and reviewer approved list with IVPI and only IVPI as the gate keeper.
• Create a massive approved reviewer panel selected by IVPI with the charge to review current appraisal, and all loans which end up in default.
• Create a disciplinary court to determine individual appraisers transgressions, with the power to remove them from the "approved list", the reviewer to be the key enforcer...

That is a proposed takeover of a major foundation of our national and global financial infrastructure by a few small business entrepreneurs!

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Runt Rants - How Do Appraisal Management Companies (AMC) Fit Into The Proposed Cuomo "Home Valuation Code of Conduct" Agreements?

Author: Ken Verrett is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities. kverrett@oak-acorn.com

There are plenty of articles appearing now analyzing the Cuomo Agreements and the HVCC proposal. I’m going to focus on what I believe all that could mean to our appraisal businesses.

SETTING THE STAGE: WHO DID IT?

Appraisers complained for years about value pressure and the need to be insulated from it. A major player has used its annual surveys to highlight that issue for years. It has been a major topic at appraisal forums for years.

I've also stated for years that value pressure from Appraisal Management Companies (AMC) clients is non existent in our experience. I'm an average kind of guy with an average kind of business, which does an above average amount of AMC business. I'm guessing that other businesses that serve the AMC market have had the same experience.

I'm also guessing that as Cuomo canvassed the nation for the last year talking to appraisers about where the problems were, he and his staff detected the same patterns over and over. Value pressure comes from those who have skin in the transaction closing. Mortgage brokers and local loan officers who are judged by the loans they close have skin in the transaction. Many appraisers have reported that others are unable to resist that pressure. AMCs don't have skin in the game and weren't the source of value pressure. In fact, part of the role of major AMCs is to provide quality Control (QC) and review...functions formerly done by the lender, but now farmed out to the AMC. The skin the AMCs have in the transaction are in quality and service.

Cuomo, being the astute guy he clearly is, may have concluded local lenders and mortgage brokers were providing value pressure on the appraiser; that AMCs were a functioning reality which did not provide value pressure and those AMCs could in part solve the problem.

He therefore may have crafted his solution; the Cuomo Agreements and the HVCC. Appraisers got what they asked for, and as often is the case, the solution was not exactly what they bargained for....

It wouldn’t surprise me if the AMC solution was not a primary focus of the Agreements; an unintended consequence. The Agreements would let the market solve the problem of how to create the firewall between the folks with skin in the transaction. The AMCs, having been around for years and currently the firewall of choice for the major lenders, might be the likely winner.

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