AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, Redlands, CA, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support. All opinions expressed in this post are the author's and may not reflect those of the Appraisal Scoop blog.
During the past boom period, mistakes from unverified data were masked by market price increases. Today, many markets are experiencing steep declines in value and those types of mistakes are beginning to see the light of day!
The Motivations of the parties, the Concessions or Cash Back are not published. It requires primary research and is part of the "good appraisal procedures" that USPAP refers too. Transactional analysis is now the most important thing for the residential appraiser to verify.
Here are some clipped comments from a Florida Realtor's article on "Transaction Terms":
"Contrary to popular belief, the bottom line in contract negotiations is not always the bottom line. Obviously, how much you're going to pay for or gain from the sale of a house is on the top of the spreadsheet; however, there are a certain percentage of contracts that fall apart because of the terms or non-sales price parts of the contract, rather than the financial bottom line."
"Let's take a $350,000 offer on a house listed at $350,000. You would think that's it. Full price contract, what more is there to talk about? Well -- seller subsidies, sale of home contingency, settlement date, financing, earnest money deposit, inspections (and who's going to pay for them), appraisal, third-party approval, just to mention a few." Click here for the complete article
"As you can see, it's not always about dollars and cents. Many times, it's about dollars and common sense."
The FNMA form actually asks us for the name of the person we verified the sales comparables with, not just the source of our information. In our office we list the sources and the person with whom we verified the transaction terms and motivations as well as the Physical aspect of the property we are relying on as a comparable.
Verifying the motivations of the parties to a transaction cannot be done by using two third-party vendor sources like REDI and MLS. Having a copy of the deed will not reveal motivations. Talking with a party to the transactions, or two, or their authorized agents is what is required.
Yes, and we cannot do this for $300 fees, and come out whole, at least not over a long period of time. Well we can, and we may have to do just that at the beginning. Once we have done a dozen or two appraisals where you have actually done the hard work of Verifications on every comparable, then we can start showing new client prospects the quality of our work, along with our new Price Schedule which still includes the $300 level fee that everyone wants, but also gives them choices like this:
- URAR Reports, Conforming Tract Homes, within 15 miles, with 3 Unverified Sales Comparables: $300.
- Additional Verified Comparables, Pending Sales, and Discounted Listings: $75 each
- Rental Survey with 3 Comparables: $175 [Yes, clients are going to start to want this]
- Market Trend Analysis and Graph: $100
- Non-Conforming, Non-Tract Homes, add 50%
- White Elephants, Multiply the fee by 500%
- Comp. Checks: $5 if You provide all the parameters or filters on our Form, $150 if you want us to do the filtering. We do not search by Price but by Location and Property Characteristics.
I'll stop with those, as you can imagine, one could think of lots of things to charge for that might be being given away. I put a Price List in the Inland CA Appraisers Forum on Yahoo. It is old and out of date, but exemplifies what one might look like.
Armed with reports that include real cost approaches with land valuation analysis and economic depreciation analysis, rental surveys and GRM analysis, verified market data [closed sales, pending sales, discounted listings, offers to purchase, etc.] and a new price list that accounts for all you are capable of doing; new clients whose appraisers are getting rejected for poor quality or biased work product may welcome you now.
When the market tanked on October 6, 1979, our office went from an average of 125 reports per week, to 25 per month for the next six months. During that time, fees went down with our competitors. We decided we could not compete doing FNMA reports for loan originators. We essentially stopped doing loan broker work during this time too. Unless they paid the full fee in advance, then we deposited the check, waited a week and assigned it the the appropriate appraiser.
With less work and more time to do each job, we started including things that were not required. Dataquick came into my market and I became aware of it in 1980. We began checking to see of the Sales we were using from the then SREA books {later CMDC , then FNC} were actually closing escrow. Most were not. Imagine finding out you were using "Comps" that had fallen out of escrow and were back on the market at lower prices?
By February 1980 we were including comparable photographs, interior walls and room-flow diagrams, interior photographs and site improvement photographs. We shared samples with our existing clients and any new ones that called. Prospective clients began calling, some telling us that they were told that they HAD to us us by their Investor.
All those trips we had made down to FNMA and FHLMC to have lunch with Underwriters and share our new style of report, ended up being required by 1982. Our fees were at the $250 level, while our competition was lowering their prices down to the $150 level. Almost 30 years later and with it being more costly to even be in the business, fees are way too cheap. Especially when one really understands the liabilities.
By early 1980, PMI companies were calling us to appraise homes in default, before they made the decision to take the property or pay the claim. All they wanted was the truth, no pressures at all.
Don't get me wrong, we do $300 reports in our office even today. We call them Desk Appraisals and tell the client what they entail, include and exclude. They are researched and the valuation analysis is drafted up by an unlicensed assistant, Muriel. She follows my instructions on Scope of Work and puts together a pretty good report, except for her English. Being from France, her sentence structure is different. I chuckle often when editing it. And, alas, she is going back to Paris. I told her it was her responsibility to find her replacement, and she has, a wonderful Swiss lady, real petite, kind of a Swiss Miss.
If we give the clients choices and let them pick, in writing, what they want, then charge them for it; we will be better off. Having SOW Discussions and agreements with clients that spell out what you are going to do and not going to do for the fee is a good thing.
Think of building a new fee schedule with as many ups and extras as one can conceive. Separate ones self from your competition by offering products that no one else does. Segregate elements that would require more time from the base costs or fees.
Transactional analysis requires skill to do well. Start practicing it before it is brought home in a heavy handed way. Read HUD's Valuation Directive 4150.8 section on Verification of Market Data and take it to heart.
Or, simply offer the $300 report with unverified market data spelled out. At least that way no one can come back and say we should have done something we were supposed to do by virtue of the USPAP Certifications and 439 Certifications we sign.
Whatever one can think of to separate themselves from the average appraiser and average product, the better it is. Good reputations are built only with a concerted effort to do more and be better than average.
Many start out trying to create a report that looks like it complies with good appraisal procedures. Now is the time to actually start compliance efforts, for self preservation reasons. Get rid of report templates and stop using the F-2 key to put in tired phrases in the various fields of the report.
Start measuring Market Conditions for real.
- Include the number of months worth of inventory in your report, and state whether is is over-supplied or not, define it or use my definitions.
- Measure value trends and make appropriate time adjustments.
- Start trying to prove 2-3 different line item Adjustments.
- Stop using the same adjustment factor in all price ranges, quality ranges and neighborhoods or locations. They vary with each.
Make positive statements in the Comments section about the Scope of Work (SOW) employed from the market analysis through the valuation analysis. State whom you talked to to verify Terms, Motivations, Concessions, etc. Do not try and create the illusion of using good appraisal procedures, use them. Those who do, will find more work in the future, that that do not may find themselves on the wrong kind of lists.
Peggy Beckstrand, the DA from L.A. said at the end of the day on Thursday at the Appraisal Fraud Prevention seminar, that she would not want to be an appraiser because there is too much responsibility for what we are paid. She knows our liabilities in a way most of us do not.
HUD’s Valuation Directive 4150.2
The appraiser must verify all market and comparable information used in the appraisal and is accountable for any information presented as fact used to develop used to develop the subject property’s value estimate. Verification insures that the information is accurate and meaningful and provides the appraiser with a firm understanding of market motivations and trends. The goal of the verification process is to ensure that only information that accurately reflects current market conditions and trends is presented and that meaningful conclusions can be reached from this information. During the verification process, it is necessary for the appraiser to gain an understanding of the motivations surrounding the sale in order to determine if the sale is arm’s length and not distressed, to understand current market conditions that influence value. . . . . . . .”
This paragraph may become the single most tool used by lawyers in civil and criminal cases to prove the appraiser failed to exercise Due Diligence.
This is the most time consuming step in the use of good appraisal procedures and is eliminated by residential appraisers due to time and fee constraints. Most residential reports are written to create the illusion of compliance, and therefore are misleading. It is introduced here in order to bring awareness to how daily activity can set up an appraiser for an indefensible situation or position later.
"Appraisal is only hard if you try to do it right, or if the market is going down, or both."
AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
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