Appraisal Scoop

The appraisal profession - Looking ahead, the current system needs some enhancements

GUEST AUTHOR: William Pastuszek, MAI, SRA, MRA heads Shepherd Associates, Newton, Mass - See more at: New England Real Estate Journal Network.

Do you remember how you became an appraiser? Did you have a friend in the business? A mentor? A family member? Perhaps someone who brought you into the business? Think about how you would get into the business today if you were starting out.

We like our profession for different reasons. Part of our fondness comes from the fulfillment of carrying out the appraisal process, the mental challenge of solving the "puzzle," the fieldwork, the variety in assignments, the people we meet, the flexibility, and the satisfaction in providing a critical service.

We work for banks, mortgage companies, lenders, the government, corporation, individuals. We work within corporate structures, lending environments, in institutional and governmental settings, in small companies, for ourselves.

We are licensed individually. We have our responsibilities under USPAP as appraisers. We have our professional opinions which take precedence over our very personal opinions.

It's a challenging, mostly fulfilling profession. At best, we are looked at as impartial, responsible providers of independent and credible opinions. At worst, we are looked at with scorn and condescension, with a lack of understanding of what we do, as order takers/numbers makers. Recent regulation and oversight has created even more work of doubtful relevance.

We take our responsibility to maintain the public trust seriously. We complain about low, slow pay, abusive clients, and difficult working environments. Nonetheless, most of us probably would not rather be doing anything else.

Is an appraiser shortage upon us? My own experience bears this out: no doubt yours may too. Studies show that expected employment of appraisers (and assessors) will rise only 7% between 2010 and 2020: this is slower than the rate of all occupations. License numbers are down. Why has this happened, as the current need for appraisers is strong?

We remember the financial meltdown. There were several years where there wasn't much demand for anything, including appraisal services. Things have changed in a very short time in real estate markets, and the need for appraisal services for lending purposes has revived significantly.

Entry level classes are once again filling up. Appraisal firms are looking for associates. Clients are looking for appraisers that can do quality work in a reasonable time frame.

There are barriers to entry to the profession. Many lenders won't accept trainees signing reports. This shuts out many potential appraisers from acquiring necessary experience. The Appraisal Qualifications Board (AQB) has created high barriers to entry into the profession with requirements to increase going forward.

Appraisal organizations provide education which is often expensive and difficult to access and which requires travel. On line primary education, as it matures and becomes accepted, will likely solve that problem, but it may not be a total solution.

As the vast majority of appraisers do residential work for lending transactions, is the system set up to serve the requirements of this system? Clearly, the real estate crash did nothing to enhance confidence in the lending system but do high entry requirements raise the quality of the applicant? Maybe so. Does requiring a college degree really advance the needs of the profession? Do we need a more realistic two-tiered system? Is the higher education system set up to train appraisers? It's not. Other professions have college training. Appraisal has been working at this for many years and has had little success in making training part of a college education, just like engineering or accounting.

Jobs are still hard to come by. Is entry into the profession being encouraged? Many young people view residential appraisal as a vocational track. Then they see the daunting requirements and the relatively poor initial prospects. Many newer entrants are job changers, second careers. Are appropriate opportunities available in the largely balkanized employment environment of mostly small, independent shops?

How do we make appraising accessible to newcomers? The current system needs some enhancements.

Assuming that appraisal demand stays steady or increases, there won't be enough appraisers coming in to replace those going out. With a shortage of bodies, users may well look to other solutions. In these scenarios, appraisers will once again not be in control of their profession and will be scrambling to react.

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GUEST AUTHOR: William Pastuszek, MAI, SRA, MRA heads Shepherd Associates, Newton, Mass. - See more at: http://nerej.com/63699 

Real Estate Appraisal in the US Industry Market Research Report from IBISWorld has Been Updated

Excerpt from the IBISWorld industry Report:

The top five firms in the Real  Estate Appraisal industry account for less than 15.0% of industry revenue  with the largest having a market share of just 6.2%. The larger participants in  the industry are generally subdivisions of large multinational property,  brokerage, and global real estate service firms. The vast majority of companies  operating in the industry are small, independent firms with few employees or  single-owner operators.

According to the US Census and IBISWorld estimates,  75.3% of establishments are nonemployers. From 2008 to 2010, the total number of  establishments in the industry was decreasing. The number of nonemployer  establishments was decreasing at a faster rate than employer firms. This trend,  however, has reversed recently.

According to Jose, the total number of  enterprises began increasing in 2010, and the number of nonemployer firms is  projected to grow at a faster rate than employer firms over the next five years.  This shift will likely result from mergers and acquisitions as well as a trend  of appraisal professionals leaving firms to become independent contractors as  demand for their services is increasingly filtered through appraisal management  companies.

For more information, visit IBISWorld’s Real Estate Appraisal in the US industry report page.

Follow IBISWorld on Twitter: https://twitter.com/#!/IBISWorld
Friend IBISWorld on Facebook: http://www.facebook.com/pages/IBISWorld/121347533189

Read more:  http://www.digitaljournal.com/pr/1134732#ixzz2NzuQ9x1V

A National Blind Order System - Has Its Time Come?

GUEST AUTHOR: Joseph Foster is a Certified Appraiser in Washington State. Joe spent eighteen years in heavy construction and cost estimating, on some of the world’s largest construction projects. A Journeyman member of the Carpenters and Joiners of America, Joseph was a delegate to the AFL-CIO National Conventions, and organizer within the Northwest District Council. His experience in the construction field, pointed the way to a private consulting practice, within six Northwest counties. Contact: [email protected] .   Blind Order PADS website

 

I started appraising in the early nineties. At that point I was told the local appraisal market hadn’t seen a fee increase in twenty years. The appraisal fee of $400 appeared to be stagnant, smothered with statements proclaiming, we need to keep the fees down, for the consumer.

The banking industry placed appraisal fees into a hard-cost category, in continued attempt to control the industry. The initial action of defining a hard-cost may not have been the original intent – however the
industry manipulated the point, resulting in “fee malaise.”

Through the decades I found it interesting that a loan officer can’t wait to lower an appraisal fee, however at the same time is making a point and a quarter, along with a rebate through the back-end of a
loan. Why isn’t the consumer crying? Because the thousands of dollars paid to the loan officer, is financed into the loan. The consumer never really feels the pain.

Oh yes, thousands of dollars are paid to loan officers, and real estate agents, while the lowly appraiser is tossed $400, and is expected to carry the full weight of liability.

I’ve practiced about twenty years in this configuration of generosity, and the appraiser that originally gave me an opportunity stated, “It’s been that way twenty years before you showed up.” I think the math equates to about forty years of flat appraisal fees.

If the real estate agent is paid 7%, and the price of real estate moves higher through the years, it’s not hard to realize monetary gain. All the creative loan products, and complex rebate opportunity, have greatly increased the wealth and riches of loan officers. The appraisal fee remained at $400 through all of this.

Stagnant appraisal fees can be directly linked to banks, and their ability to control the industry.

Dynamic growth in the 90’s, and increased volume from 2002-2008 – allowed the two largest title companies in the U.S. to amass large piles of cash. With economic riches, the title companies developed a plan to have their hands in every real estate transaction in America.

They link to the real estate agents, complete the title documents, work with the lender and control the appraisal. It’s a monopoly.

The title companies couldn’t be happy selling title insurance, and they spotted an opportunity to move in on appraisal fees. Their plan started slow, and today, they manage to monopolize the industry. In my
area, you don’t work, if you don’t work for an AMC.

Millions of dollars were sprinkled in Washington DC, changing and creating rules that work against any notion of an appraiser having a chance to expand his or her appraisal practice.

An appraisal isn’t a commodity, to be bargained for with discounted dollars. If it were a commodity, my business would be allowed to compete in an open market, where commodity abounds.

Appraisers were taken advantage of, plain and simple. Title companies, through there heavily layered partnerships with AMC’s generated billions of dollars, on the backs of appraisers.

An AMC creates no value, and devours half the fee of an appraiser. Does an attorney have an AMC taking half? Does an accountant have an AMC taking half? Your signature feeds the families of an AMC. They have insurance, vacation, and receive bonus checks for dogging you.

My state has 156 registered appraisal management companies.  At no point does one appraisal management company have full coverage. They scramble trying to get anyone to complete an appraisal. I’ve had calls to do appraisals 300 miles away from my location.

The latest trend is the AMC going broke, writing bad checks, playing games with appraisers, and generally acting like collection agencies Are You Done Yet – Are You Done Yet. Do you have an ETA? They go as far as to ask you -- ”when can we expect the appraisal” before you receive the assignment. These are people that don’t have a clue about what it takes to operate within this profession.

Appraisers face heavy pressure.  Yes, pressure can come in many forms. If you can’t turn the appraisal out in record time, you don’t get the work. And oh-by-the-way, the before mentioned fee of $400 is now $200.  They stripped the profit portion of a fee, that hadn’t seen an increase in forty years, that’s the dirty little secret. There was never room in the fee structure for their business model, but that never stopped the two largest title companies from exploiting appraisers.

The AMC model has failed and it’s time for change. It failed the consumer, and failed the real estate appraiser. They knew it would fail the appraiser, and they didn’t give a damn. The AMC business model projects maximum profit, while oppressing the real estate appraiser. That’s the only way it can function. They must keep the appraiser isolated, in order to control the deal.

Title companies have no business in the valuation business.

I’ve started a grass-roots effort to change this dysfunctional relationship, and I’m introducing the National Blind Order System. The Professional Appraisal Delivery System (PADS) will move the appraisal industry forward, from the dark ages – into an area where the brotherhood of appraisers is paramount.

It’s not a union, and it’s not an AMC. It’s something much better than either of those models could possibly hope to achieve .  If appraisers don’t act now, the AMC’s will move into the area of regulation, and from that point their business model will create value.

Its 9:00AM, and across your portal screen comes the appraisal assignments available in your zone. Other appraisers in the same zone see a similar and filtered screen, and from within the system, you pick the appraisal, or appraisals you want to complete.

There is no need to undercut other appraisers, because the fee is generated from a master list of appraisal fees for that assignment, and for your appraisal zone.

Your portal remains open all day, and you can communicate with regional, and national system operators, who by-the-way are appraisers working directly for the PADS. Market statistics will be passed on to you, and you the appraiser will not be in the dark. You’re going to know the foreclosure rate, along with a host of generated statistical patterns for a specific zone.

The ordering system links directly with the Appraisal Foundation and ASC. The ordering system completes a circle between the Appraisal Foundation and ASC. The Foundation already has approval from Congress, and the ordering system will be funded, through the Foundation, from a vehicle currently in place.

Oh Yes, the budget will be moving up, from what is currently in place at the Foundation

If the Appraisal Foundation would consider this plan of action, they would find the missing link between the varied entities, is the ordering system. The PADS fully completes the chain. We take the regulatory, and put it to use within the ordering system. That is something an AMC can’t do, and it drives them crazy.

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Dave Towne Offers Appraisers. . . "Some thoughts to pass along"

GUEST AUTHOR: Dave Towne, Certified Real Estate Appraiser - Towne Appraisals.  16422 Britt Rd., Mount Vernon, WA  Phone: 360.708.1196   eMail: [email protected] Web: http://www.TowneAppraisals.com

 

Some thoughts to pass along:

Attorneys –

Attorneys will attempt to get you to do work for free.  They can be subtle about the way they ask for info.  I learned via the school of hard knocks this year to be extremely cautious in the future.  I strongly recommend whenever an attorney contacts you about an appraisal assignment [that is not a legitimate
engagement] or request for info (which normally requires research time), that you start with a retainer (payment in advance) prior to doing any work.  They charge their clients for similar work – you should also.

 AMC assignments –

When I was graciously accepted as a trainee by my mentor, we were paid “X” for each assignment, and
more if the property was complex.  Once AMC’s began to proliferate, we were paid ‘less than X’ for doing the same work … the AMC’s were stealing part of our customary fee to pay their overhead.

 But since the Dodd-Frank law was passed, most of the better AMC’s now pay customary fees to
appraisers.  My income per assignments is now back to “X” and in some cases ‘more than X’.  But I ABSOLUTELY REFUSE to accept assignments for less than X.’  Those clients who don’t want to pay “X” can find someone else.  That means ‘you’ who are afraid to charge more, but could earn more
if you would only ask for a higher fee.

 I know appraisers in my area who are getting ‘better than X’ … in other words, paid more now than they were just a few years ago.  This is because they stand firm on their fee.

The point of this is to evaluate your business practice.  Then go to the foundry to get some brass.  You can and should demand to be paid a fair fee today that is at least equal to or above what you were paid a few years ago before the stealing began.

 Review assignments –

Many desk and field review assignments are being placed these days.  Foreclosures on loans made in
2006+ have caused the GSE’s, FDIC and banks to re-evaluate the appraisals that were initially used to justify the mortgage loan.

Review assignments are not difficult, but they are more time consuming.  Thus, your fee for doing a
review should be AT LEAST what your “X” figure is.

Doing 1.5 – 2x+ the work for .5 to .75 (or less) of a customary fee, and to take on the additional
liability, is ridiculous.

Too many appraisers have agreed in the past to severely low-ball the review fee, and that has rippled
through the industry.  Frankly, if you are unwilling to charge – at a minimum - what your customary “X” fee is, then let someone else do the assignment.  Only when all appraisers wake up to this will be when the review fees will move higher at the time of the initial request.

And from first-hand experience the FDIC and GSE reviews have increased reporting requirements.  So be sure to carefully read the engagement instructions before agreeing to a fee in advance.  These assignments often require extra data documents to be included within the report.

Associate with other appraisers –

Resolve this coming year – as early as possible – to get outa your bathrobe, bunny slippers and basement and actually interact with other appraisers.  They really are nice people!  Join your state appraiser association, join a national association, and try to meet with your local appraisers casually over breakfast, lunch or dinner during the year.  (I can help you learn ‘how to do that if necessary.’) 
Don’t discuss who the individual clients are, but do discuss challenging assignments and the type of work your peers do.  Your peers are your source for referrals – both in and out.  So don’t be afraid! 
Associating with your peers is really a positive experience.  Really!

 

Hope your 2013 is as productive in terms of income (or more so!) than ’12 has been for most
of us.

 

GUEST AUTHOR: Dave Towne, Certified Real Estate Appraiser - Towne Appraisals.  16422 Britt Rd., Mount Vernon, WA  Phone: 360.708.1196   eMail: [email protected] Web: http://www.TowneAppraisals.com

AMCs: Prepare for Appraisal System to Change, Fees to Rise

GUEST POST: Reposted with permission of Elizabeth Ecker of Reverse Mortgage Daily  http://reversemortgagedaily.com/ .  Click here for the original article.

Changes across the appraisal industry including a declining supply of appraisers in the market stand to put pressure on this segment of the mortgage process. Those in the industry say something has to give.

Barring change that could include an increase in fees paid to appraisers, turn times could rise substantially, making for an even longer process—application to closing, they say.

Both mortgage professionals as well as consumers need to prepare for these potential changes, says Erik Richard, CEO of reverse mortgage appraisal management company (AMC) Landmark Network.

“Supply of appraisers is low and demand is high and it will only get worse,” Richard says. “We already see a significant number of our orders get hit with fee increase requests from the field. Building this cost in upfront will speed up the appraisal process.”

The AMC fee has not increased of yet, Richard says, but others in the appraisal business agree that a rise in the cost to consumers is one very realistic outcome.

“Fees are going to go up, and we are actually switching to a flat fee model as there’s just too much going on for things to remain the same,” says Brian Coester, CEO of Coester VMS. “Appraisal fees are going up not just because of regulatory cost but the requirements that lenders have on appraisers.”

The pressure is twofold: There are not only fewer appraisers than there once were due to an aging work force, but heightened regulation is also putting some additional pressure on AMCs and individual appraisers.

Through Dodd-Frank’s implementation, states have new rules and regulations regarding appraisals, and no longer can trainees conduct appraiser work, and thus there are fewer trainees at the same time many longtime appraisers are retiring.

“If we can increase appraiser happiness with higher fees, we can start to change the narrative and squelch the appraiser complaints,” Richard says. “Higher fees also make it more likely appraisers will see [an upside] in the job and will allow current appraisers the margin to bring on trainees.”

The actual cost may remain in question, but the increase looks to be inevitable, says David Stroop, regional vice president for Mortgage Information Services.

“Prices will probably continue to rise,” he says. “There are a lot of factors for this, including new regulations and less appraisers, but there are others out there as well.”

The model is broken, Richard says, and needs a solution to prevent long-term effects.

“As an industry I think we should fix the pricing model,” he says. “It’s currently flawed and without a drastic fix we are certain to experience short term frustrations but the long view is far worse.”

Written by Elizabeth Ecker 

 

GUEST POST: Reposted with permission of Elizabeth Ecker of Reverse Mortgage Daily  http://reversemortgagedaily.com/ .  Click here for the original article.

Could Appraiser Shortage Mean Rising Costs to Borrowers?

Re-blogged with permission from Elizabeth Ecker Published in News, Reverse Mortgage

One component of the reverse mortgage—and general mortgage—business seems to be shrinking fast, in spite of rising demand: Appraisers.

Once a booming business, many appraisers left the industry upon the housing crash, never to reenter the market. More generally, though, changes including new regulations have led to a decline in qualified appraisers at a time when borrowers are starting to need their services increasingly once again.

“A lot of appraisers left when business volume tanked and many were frustrated with AMCs that offered very low fees,” says Erik Richard, CEO of Landmark Network. “Appraisers are an aging population and then couple that with the difficulty there is now in becoming an appraiser, and the number of appraisers are way down.”

 Today’s regulations require appraisers in training to partner with a working, certified appraiser in a sort of apprenticeship role. Historically, that process allowed a new appraiser to get the right education while logging a set number of hours before applying for a full license.

Under the arrangement, trainees were able to complete appraisals with the certified appraiser, essentially co-signing the report. But today, there are fewer certified appraisers and more importantly, very few will bring on trainees. Exacerbating the problem, few financial institutions will accept work done by a trainee.

“It really is the perfect storm when you add the rise of loan applications and the stabilization of home values in many markets,” Richard says.

Further, the industry is having a hard time recruiting new people.

“The appraisal industry is in a dire situation,” says Brian Coester, CEO of Coester VMS. “New appraisers are not coming in and old appraisers are getting out.”

“The problem is exacerbated by the inability to attract the next generation of appraisers to the profession,” wrote Michael Kleber-Diggs of Vesta Valuation in a January article in online publication Appraisal Buzz.

 

   

Source: The Appraisal Institute

With the market for appraisals beginning to show an uptick through homeowners refinancing under The Home Affordable Refinance Program (HARP) II, as well as values beginning to drive sales again in a few select areas of the country, the shortage is actually leading to longer turn times for getting an appraisal.

“A lot of appraisers that are strapped and are busy,” says Davide Stroop of Mortgage Information Services. “They’re pushing their turnaround times out a bit. Normally, we’d find another appraiser to take care of the overflow, but that’s where we’re seeing the reduction. There are not as many who are able to take that work on today. Turnaround times haven’t been impacted that greatly, but where’s the next wave of appraisers coming from? Where are they?”

Looking ahead, the lack of supply and growing demand could also lead to rising costs to borrowers. In some markets this is already the case, AMCs say.

“Appraisals will cost a lot more,” Coester says, as a result of the supply and demand. “Borrowers have a big enough problem paying for appraisals now in the reverse mortgage space.”

Written by Elizabeth Ecker - Click here to see the original article

Why AMC’s May Be Built on a Faulty Business Model

GUEST 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.

It’s hard to believe but it has been over three years since the appraisal profession was turned upside down by the Home Valuation Code of Conduct (HVCC).  While HVCC has been relegated to the ash heap of history, its primary intent is alive and well thanks to the adopted language within the Dodd Frank Act and subsequent regulation that it continues to produce.

Now that some time has elapsed, appraisers are becoming more accustomed to the realities of a post-HVCC world and can hopefully speak more rationally about the impact it has had. It is clear however that new dynamics are in play.

The use of Appraisal Management Companies (AMCs) was not directly mandated but their proliferation was the natural result of a system that redefined who appraisal clients were supposed to be.  Appraisers did not have much say in this outcome and were left struggling to find an identity and more importantly, a business model that was profitable. As appraisers strive to adapt to ever changing processes, it is unlikely to alter the fundamental flaws that remain with the AMC-based model.

An Ever-Expanding Role

AMCs may offer a perfectly viable service for outsourcing appraisal ordering and processing functions to investors, however their role could be growing far beyond that.  Lenders appear to have accepted the AMC as a kind of underwriting function.  After all, if an appraisal has two comparables under 90 days, two listings, all lines are bracketed, and it has all the required canned comments, then it must be a quality report; right? Well, as any practicing appraiser knows, every assignment may not look the same yet this is what AMCs are promising their clients.  Quality control departments routinely generate stipulations that have little to do with quality and more to with demonstrating that their place in the process is justified and beneficial. This will ultimately lead to lenders having a false sense of
security regarding collateral valuations.

The AMC Role Wrongly Defined

Generally speaking, AMCs are not really appraisal providers in the sense that independent fee appraisers are. They would more accurately be defined as appraisal facilitators. That is, a secondary party that locates and handles ordering and delivery. The local appraiser is the one who provides the market expertise, has the required tools to produce a report, has the credentials to complete assignments, pays the costs of all required expenditures, and most importantly has the liability that lenders desire. The AMC serves primarily as a transit system and yet they collect a high percentage of what borrowers think is the appraiser’s fee. This of course is easy to disguise since appraisal
invoices are often submitted separately to the AMC.  Fees to the consumer have clearly increased as
appraisers have been relegated to the wholesale end and the AMC has become a retailer.

Lack of Transparency

The HUD-1 settlement statement has historically only disclosed a singular appraisal fee but recent regulatory actions are changing this. The Consumer Financial Protection Bureau is proposing adding a line for appraisal management fees which does offer a bit more transparency but will likely not change what AMCs are paying independent appraisers. AMCs state that the fees they collect are customary and reasonable however C&R actually has nothing to do with them. The reason why the concept of customary and reasonable was fought for in the Dodd Frank Act was due to appraiser outrage over slashed fees. When these changes are finalized in the HUD-1, will AMCs charge a separate fee and support appraisers receiving the full fee that has been paid over the past few years on the settlement statement?    

Scope Creep, Slashed Fees, and Unreasonable Turn Times

The AMC model has also allowed a tremendous amount of scope creep to occur without fee increases to offset the additional work. This adds further stress to an industry that has already seen significant fee reductions from pre-HVCC rates. In order to streamline their processes, when a lender client demands a
particular requirement for an appraisal, AMCs often make it standard for all reports which increases workload across the board. This results in more hours of work to produce the same pay and the net loss of revenue gives birth to other problems.

Disgruntled Appraisers

By reading any appraisal forum, trade publication or blog post, it’s not hard to see that the vast majority of appraisers are not big fans of AMCs. Many feel they are taken advantage of or taken for granted. This is the natural outcome of a system that typically does not foster a communicative business relationship. If you are just another reference in a large national database, then you will likely be treated that way. If AMCs are to be the standard for years to come, then it is in their best long-term interest to address this
concern. Treating appraisers equitably should be their goal as well as to reduce the “fast and cheap” mentality that permeates many AMCs.

A Future Generation of Appraisers

There is a lot of talk about the difficulties of getting into the appraisal business. Since the financial collapse, HVCC and Dodd-Frank, the number of licensed/certified appraisers has dropped off dramatically. These estimates also do not take into consideration the additional numbers who might be keeping their license active yet do not actually work in the business any longer.  With the average age of an appraiserapproaching 60, AMCs and lenders will likely be a catalyst in how we address this concern.

While reduced volume, slashed fees and expanded scope of work may have contributed to a decline in the number of active appraisers, oneissue does not get discussed often. That is the difficulty in hiring and training new appraisers by local appraisal firms. Once licensed, fewer appraisers are willing to work in a fee split arrangement for a local firm when they can simply sign up for AMC work and have enough work to keep busy. This results in local firms having less flexibility to develop new services and
efficiencies.  AMCs probably benefit most from working with one-person operations that have a small pool of clients andlittle flexibility to turn their work away.

Firewall Fallacy

During the buildup to the sweeping changes, there was a lot of talk about needing a barrier between loan origination and appraisers. Regardless of the merits or pitfalls of this theory, the AMC in no way serves as a firewall. If a conflict of interest existed before, how does placing a for-profit entity in
the middle solve anything? If origination could pressure the appraiser, then surely they can pressure the AMC by threat of taking business elsewhere. If the AMC’s profit becomes at risk, then the possibility certainly exists for pressure to filter down to their appraiser contractors.

Volume Will Hurt AMCs

Refinance activity has picked up in recent months and AMCs are seeing a significant increase in the number of orders that are being declined. If the economy and housing begin to rebound, increased volume will work against AMCs. If an appraiser has so much work that affords them the luxury of choosing clients to work for, the AMC will likely be on the bottom of the list of preferred clients. The positive in this is that fees could rise and turn-time expectations might soften.

Inevitable Outcomes

With AMC legislation enacted in many States and pending in many more, AMCs are also in an ever-changing landscape. Hopefully they will realize that their survival is dependent on the health of the independent local appraiser. The concept of local appraisers doesn’t always mesh with the global view of large scale appraisal users but nonetheless is essential to a sound appraisal process.  AMCs are clearly in the driver’s seat if their relationship with appraisers is to improve. It’s really very simple; AMCs don’t even have a business without local appraisers. They must come to grips that some of these outcomes are inevitable unless they alter their business model to some degree.

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:[email protected] web address: www.amappraisals.com

 

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!