Matrix Blog

Guest Appraiser Columnist:
Martin Tessler, CRE

Fee Simplistic is a regular post by Martin Tessler, CRE whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing both the trees and the forest. Marty has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week.
…Jonathan Miller

The Wall Street Journal article of June 9th entitled, “Appraisals Roil Real Estate Deals” should be required reading for anyone who has opined to an opinion of home value. For those who missed it, the article details the swing of the pendulum from the high flying days of pre- 2007 when appraisers could not come in with values or, should I dare say, “numbers” high enough to justify a loan. In comparison, today’s lending world has swung 180 degrees to the low end of the pendulum where no value can presumably be low enough. The article goes on to portray the “usual suspects”- house values that have plummeted from the sky high years to todays’ nadir with some added color such as:

• A Fairfield County CT appraisal that came in at $50,000 below the contract price necessitating either a new appraisal or renegotiation.
• A JPMorgan Chase home equity line of credit predicated upon a 2,650 sq ft Manhattan duplex appraised at $1.475 MM in 2005 being reduced due to the bank’s estimate coming in at $600,000. The borrower then was able to produce a new appraisal that valued the property at $1.8MM. A spokesperson for the bank said that they use “an automated appraisal system on our portfolio” and that they encourage borrowers who feel that if their valuation is too low to order an outside appraisal and will reimburse them if it supports their claim.
• Banks requiring appraisers to use sales comps that closed within the past 90 days with some asking for at least one sale within 30 days.
• Agreement by the appraisal industry and Fannie/Freddie to adopt the Home Valuation Code of Conduct intended to prevent loan officers, mortgage brokers or real estate agents from selecting appraisers. This is to shield them from pressure on coming up with pre-ordered values, a major issue raised by NY State Attorney General Cuomo and on several postings in Matrix/Soapbox last year.

A significant issue not quelled by the Code is that it allows if not encourages lenders to outsource the selection to appraisal management companies or AMC’s who will charge the appraisal firm anywhere from 30%-40% of the fee for administration, overhead and, pardon the sarcasm, quality control. Exacerbating the problem is that lenders can own stakes in AMC’s. Thus, the conflict of interest is ever present.

Reports are prevalent that AMC’s shop around for the lowest appraisal fees that frequently end up on the desks of appraisers who are geographically distant from the subject property’s market, are not fully familiar with the local market and thus present sales that are not directly relevant.

It is obvious that AMC’s are clearly conflicted if owned either partially or fully by a lender. They are recipients of profits generated by a company that is not arm’s length from their fiduciary role where they require the borrower to buy the service. As for tools such as JPMorgan Chase’s “automated appraisal system” these are only rough guides to average or ranges of value from a large data bank of properties and extreme care must be taken in applying such macro data to a specific property or micro set. It is therefore not surprising that Chase allows for an independent appraisal although I’m not sure that it allows the borrower to select the appraiser as the article implies and, if so, it’s a violation of FIRREA if not the Code.

If no reforms of the Code are made to disallow AMC’s from ownership by lenders it is my opinion that history is doomed to repeat itself in the next frenzied lending cycle. Let’s get the stake ready now.

Tags: Appraisal Management Companies, Martin Tessler, AMC, Fee Simplistic

3 Comments

Guest Appraiser Columnist:
Jim MacCrate, MAI, CRE, ASA
MacCrate Associates
Appraisal & Valuation Issues Blog

Jim has worn many hats including a Director at PricewaterhouseCoopers in New York City and Chief Appraiser at European American Bank. He is a prolific writer on valuation issues and teaches a number of the real estate appraisal classes through the Appraisal Institute and New York University. I have had the pleasure of taking a number of courses taught by Jim.
…Jonathan Miller

Many so called real estate experts have been predicting the bottom to the real estate market will occur in late 2009 or early 2010. No one can predict with any degree of accuracy the future, much less the bottom of the real estate market in any metropolitan area. It is important for real estate professionals to remember that real estate markets vary by location. Some markets will do well while others are doing poorly. For example, the Detroit real estate market was depressed long before the recession was declared official by the federal government and the beginning of the decline in the New York real estate market. The real estate market in the New York metropolitan area has been driven low interest rates and by the growth of the financial, insurance, and real estate sectors of the economy which began in earnest in first quarter of 2004 as indicated in the following chart:

Total employment is now falling with the FIRE and construction sectors of economy taking a big hit in employment beginning with the collapse of Lehman Brothers. Real estate salespeople, brokers, and appraisers must stop listening to the noise from Washington, D.C., politicians, and others who have mislead us in the past. What we are witnessing, the economists and politicians have witnessed this before during the late 1920’s, the late 1950’s and early 1970’s. In order to properly value real estate, one must cut out all the outside noise and analyze carefully what the local real estate market data is telling you.

On a Macro Basis the Indicators are all Negative

The recent indicators reported by the government suggest that the economy is improving because the rate of unemployment is declining, consumer confidence is improving, the rate of decline in manufacturing is subsiding, etc. All of the above and other statistics still suggests that economy is not improving and real estate values will not begin to rebound until the economy turns over and employment begins to increase with an increasing payroll income and wealth. That is not bound to happen for awhile.

In the New York Metropolitan area, the leading indicators for increasing real property values are all declining, including the following:

• Population is stabilized or falling
• Number of households has stabilized or is declining
• Total employment is declining
• Total payroll/income is declining
• Consumer confidence is negative
• Businesses are still contracting including manufacturing, retail and the financial services sectors of the economy.

The results of the 2010 Census should be interesting nationwide. Listen to what the leading indicators are telling you about the macro market.

Now, on a Micro Basis

Real estate is fixed and immobile. The value of real property is driven by local indicators which impact the demand for real estate in a specific location. All the macro indicators referred to above are also negative in the New York Metropolitan area. In order to determine if the real estate market is rebounding versus stabilizing at a much lower level of activity and prices, the following factors should be analyzed carefully in addition to the factors that generate demand:

• Sale price trends
• Increase/decrease in the number of sales
• Increase/decrease in the number of listings for sale
• Increase/decrease in the number of days on market
• Increase/decrease in sales concessions
• Response to for sale or for lease advertisements
• Increase/decrease in the number of foreclosures
• Increase/decrease in the number of loan defaults.

These trends are extremely important to watch, but the trends will not reverse until consumer confidence is positive and total payroll/income, employment and the number of households is increasing. It must be remembered that real estate prices remained depressed for several years after the recessions of the 1970’s and 1980’s. Why should this time be any different, and, in fact, it is already worse in many markets.

Tags: Europe, James MacCrate, Commerce Dept, Census, Appraisal Institute, Straight from MacCrate, Lehman

3 Comments

Guest Appraiser Columnist:
Martin Tessler, CRE

Fee Simplistic is a regular post by Martin Tessler, CRE whom after more than 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. Marty has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. View his earlier handiwork on Soapbox.
…Jonathan Miller

Having recently attended the Counselor’s of Real Estate (CRE) Mid-Year Conference at the Waldorf Astoria I came away with one speaker’s astute findings on where the market is likely heading. Robert White, Jr. CEO of Real Capital Analytics wins the cigar for the most astute commentary on where we are in the marketplace and for not belaboring the obvious: * US commercial property prices are down 21% from ‘07’/08 peak to October ’05 pricing levels * Sellers are adjusting slowly to pricing changes while investors are in no hurry to buy * Banks are not dumping REO assets as it would jeopardize their capital base * Troubled assets are increasing by $6-$8 billion monthly in foreclosures but deeds are not changing hands due to capital base problem * Sales are rare but offerings are growing as sellers head toward distress

What does this mean to the appraisal world and how are we to gauge the market in the absence of sales and financing?

One must take into account that we are readjusting to a frenzied market that extended over many years fueled by easy credit and low interest rates. A new market reality will be evolving over time (if it is not already underway) that will replace the mindset created by the financing bubble best summed up by an article in the Wall Street Journal of April 6th entitled, “From Bubble to Depression”.

In the article the authors note that “Bubbles can arise when some agents buy not on fundamental value but on price trend or momentum” (emphasis added). There is no question that the market through mid 2007 acted in this manner and appraisers were ethically and legally bound to implement this reportage in their valuations.

What this portends to the appraisal world is that valuations stemming from discounted cash flow analyses is that most emphasis will be placed on income in place compared to projected income based on assumptions of growth in rents or lowered cap rates.

The caveat to appraisers is: “watch those assumptions”.

It will no longer be: “tell me the value you need and I’ll tell you what assumption you need to get there”.

Tags: Martin Tessler, Fee Simplistic

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Guest Appraiser Columnist:
Joe Palumbo, SRA

Palumbo On USPAP is written by a long time appraisal colleague and friend who is also an Appraisal Qualifications Board (AQB) certified instructor and a user of appraisal services. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP] and I am fortunate to have his contributions here. View his earlier handiwork on Soapbox and his just published article in the Employee Relocation Council’s Mobility Magazine.
…Jonathan Miller

It’s been a good year so far. I have to say “hats off” to all the appraisers I work with from Maine to Oregon. In the relocation business the litmus test for quality valuations is ultimate sale price VS the appraised value as nearly every home appraised will be exposed and sold under a normal market scenario. The typical industry standard and tolerance of such comparison is 5% between the Sale Price and The Appraisal Value. A recent 1st QTR review of accuracy across the client base has me feeling better then the media has me believing I should. This achievement is especially satisfying in what continues to be challenging market. It was Yogi Berra who said…… “predicting is difficult…..especially when it involves the future”.

So while you have my sincere thanks for a job well done..as a user of appraisal services..I (appropriately) have yet another request. Not to worry…this request does not involve additional comps, adjustments to listings… addendums, or more data. Simply put: I just need to know what you are “thinking”. When I started in the appraisal business in 1986 I asked one of the appraisers who was training me at that time, “where do all these neighborhood comments come from”? “They all seem to be the same”? “What does all sales considered mean?” Enter the “canned comment” . Canned comments can actually be used quite effectively when a micro level of specificity is applied. Many appraisers have a library of canned comments for neighborhoods, scope of work, appraisal process and other areas of often repeated …”non value add” areas of the appraisal. If you really think about it the most important part of an appraisal…the “signed certification” or even the “limiting conditions” are the biggest culprits when it comes to “canned language”. So…. you get the point…and I hope you do..that canned comments are OK by me and there are as they say ‘’far worse things are going on in the industry for that matter. There is one area though that I have to say “enough is enough”…and no “canned will do”.. This area is the Reconciliation: (see 2008-2009 USPAP) Standards Rule 1-6 In developing a real property appraisal, an appraiser must: (a) reconcile the quality and quantity of data available and analyzed within the approaches used; and(b) reconcile the applicability and relevance of the approaches, methods and techniques used to arrive at the value conclusion(s)

The ASB takes a lot of heat (as do the instructors) with regard to abstract, meaningless and or confusing Standards. Issues of interpretation…while are a much better level with the current USPAP, will always exist. I can’t say that that is the case with SR-1-6 and frankly I marvel at its straight-forwardness and simplicity yet I constantly see even a “good appraisal” lack a good reconciliation. My issue lies in part SR-1-6 (a) since (b) is nothing more than a recital of which approaches were used or not used. What I mean is this: after you take me through the market and show me the “story” that each appraisal presents, the final value and how you got there in terms of the quality and quantity of the data is essential in my defense of your valuation. Many of the valuation appeals that I see center around the question…… “Why $xxx,xxx for my home and not $yyy,yyy”. For me the answer can be very simple. Within any range of value there are certain strengths and weaknesses beyond net and gross adjustments and distance and sale date of comparables. This is where your thinking plays large role in having the user understand your though process. Sadly “all sales were considered”…the often used canned reconciliation of the go-go days of the 90’s will not cut it these days. How were the sales weighted? What other factors were considered? How do they rate in terms of comparability? Were there any unverifiable pieces of information or inconsistencies that deemed an apparently good sale not so good? These are a few things I would ask myself in defending my value.

In 2003 the Appraisal Standards Board addressed the “reconciliation issue” by moving the requirement to reconcile from the lonely location of SR-1-5 (c) to a its own standard in what we have now as SR-1-6, dedicated specifically to topic of quality and quantity of data and suitability of the approaches. The ASB cited the rationale for this change in 2003 to ..“clearly demonstrate the reconciliation is a separate component of the appraisal process rather than a function of the sales history”. In my opinion this rationale validates the thought that the appraisal process is best ended with a clear understanding of not only the process but the conclusion and the result of that process. As a separate component the ideal reconciliation would leave the reader with a clear understanding of why the value opinion has landed where it has. Given the level of subjectivity in the entire appraisal process and the reconciliation as well, there may be disagreement but having the “why” could resolve part of that issue and a quick specific commentary is all it takes. Remember standards are minimum requirements not options.

Let’s put the canned comments of years past behind us….as these are different times altogether. Again it was also Yogi Berra who said….the future isn’t what it used to be.

Tags: Joe Palumbo, Palumbo on USPAP

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Friday morning I was invited to be a guest to talk about appraisers and how they are impacting the flow of housing sales. I was initially concerned that this would be an appraiser slam piece, blaming our industry for killing sales, causing global warming and low salaries of central bankers but it wasn’t and I think I covered the bases. Kinda surreal – met and spoke briefly to Dick Morris in the green room. Cavuto was very personable before the segment, we talked about the issue before we went on.

• Sellers are generally a year behind the market
• The ranks of good appraisers were decimated by the mortgage boom
• Appraisers have long been the “punching bag” of blown deals
• Lack of data is a huge issue

Connie De Groot, who was the Beverly Hills real estate agent who is a regular on FBN recommended that buyers get an appraisal when pricing their property for sale – as Cavuto commented on my neutraility point, a “Swiss Appraiser.”

Watch the clip here or you can watch it here.

Tags: Soapbox Blog, Appraisal Process, Jonathan Miller

17 Comments

John Cicero, MAI provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know.
…Jonathan Miller

The Massey Knakal Income Property Report that I prepare on behalf of the brokerage firm was just released for the second half of 2008. The report is the only one of its kind that tracks cap rates, income multipliers, price per square foot and number of sales for the New York City multi-family market. As this report included only those sales (above $500,000) that closed from July 1 through December 31, it includes sales closed before and after the market turn in mid-September, when Lehman collapsed and the credit markets seized.

An excerpt:

The number of sales dropped 45% from the second half of 2007 to the second half of 2008. Relative to the prior year the greatest declines were in Manhattan and Northern Manhattan, both down 54%, and the Bronx, down 60%. Year over year there were 37% fewer sales in 2008. This suggests a turnover rate of 1.9%, down from 3.0% in 2007 (of the categories tracked).

Massey Knakal will distribute nearly 300,000 hard copies of the report over the next few months.

Massey Knakal New York City Income Property Market Report [2H08]

Report Methodology [Miller Cicero]

Tags: Soapbox Blog, Massey Knakal, Commercial Grade

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John Cicero, MAI provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know.
…Jonathan Miller

Buried in all USPAP appraisal reports is a comment on the property’s exposure period and marketing period. Simply put, the exposure period is intended to reflect the time that the property hypothetically would have been exposed on the open market prior to the effective date of value. Alternatively, the marketing period is an estimate of the time that it would take for the property to sell after the date of value.

The requirements to add exposure and marketing periods to appraisals came about during the S & L crisis of 1989. Then, as now, there was a dearth of sale transactions and to a large extent the only sales taking place were under distressed conditions. The intent of these exposure/marketing time concepts was to put the value conclusion in context. A marketing period of up to 18 months says that in the appraiser’s opinion the property could sell for X dollars within the 18 months following the effective date of value. This would differentiate a property’s inherent value in a “temporarily impaired” market, and prevent banks from being required to write down loans to liquidation value.

While the exposure period/marketing time sections became part of the boilerplate over the past five years, in the current market it has taken on new meaning. When we interview brokers for our appraisals they often comment on how values are down 30%, 40%, 50%, etc. However, these discounts reflect what the broker believes that he/she could sell the property for if he had the listing today. A broker is not thinking about a 12 to 18 month marketing period. He/she wants to list the property and sell it in 3 to 6 months. To an appraiser this may represent a liquidation or disposition value; to the broker it is reality.

Like everything else in this market that has come full circle, the exposure/marketing period is once again an integral part of the appraisal. I think it’s time to dust off that section of the report and break it out from the rest of the boilerplate.

Tags: Soapbox Blog, Appraisal Process, USPAP, Commercial Grade

2 Comments

Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Soapbox readers tongue-in-groove insight on appraisal and housing issues.
…Jonathan Miller

Much of the talk these days deals with the residential real estate market and the need for it to “find its bottom” before any kind of stability can take root in the broader economy. We all know, of course, that there is not “one” residential market and what’s happened most acutely thus far, in places like Florida, California and Arizona, over the last two years or so, is very different from what has transpired in other parts of the country. It seems fair to say, however, that prices are declining at varying rates everywhere, or almost everywhere. What we all want to know is how much further prices will fall.

Consider Westchester County, a wealthy New York City suburb. The Median Sale Price chart (for single family houses) shown here is based on statistics compiled by the Westchester County Board of Realtors from 1986 – 2008. The second chart, based on data compiled by H.S.H. Associates, tracks 30 year fixed rate mortgages over the same period.

The most glaring trend, and the one that appraisers in Westchester, and other places I’m sure, are grappling with, relates to the disconnect between the conventional wisdom about how far prices have fallen, and the fact that the median sale price in 2008 was $650,000, a decline of just 5.1% from the $685,000 seen at the height of the market IN 2007! What has declined, and declined precipitously, is the volume of sales, which is down by as much as 30%. But as to a “correction” based on these numbers I can only say – What Correction? To be fair, the fourth quarter showed a steeper decline as compared with the fourth quarter of 2007. But year over year, the numbers are not that bad not yet anyway.

The 2008 median price of $650,000 roughly equals the 2004 level of $645,000. But even if this market is destined to roll back just to its 2003 level, that would require a decline of 13.2% from its current level. And if 2002 represents the bottom then we have another 19.2% to go before reaching it, and a median price of $525,000.

As to mortgage interest rates, one would expect that lower rates would correspond with higher prices, which they do with a couple of notable exceptions. From 1991 through 1996 interest rates went down yet selling prices remained flat. However, from 1998 through 2000, both interest rates and selling prices spiked. Rates went from 7.09% to 8.43% at the same time as the median price increased from $320,000 to $407,000. Go figure.

So the question remains, where is the bottom of this market? After doing all the research necessary to write this, I still have no idea. But don’t hold your breath.

Tags: Soapbox Blog, Todd Huttunen, The Hall Monitor

1 Comment

John Cicero, MAI provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC](http://www.millercicero.com) and he is, depending on what day of the week it is, one of the smartest guys I know.
…Jonathan Miller

My firm is quite busy with “updates” these days. More and more lenders are being asked to extend or renew loans for projects, or their loans are ending up in “special assets” (or whatever term the bank uses for their loan workouts.) So we find ourselves more and more being asked to “just go back and update what we did a year or two ago”.

There seems to be an expectation amongst some lenders that since we had been out to the property within the past two years (or had previously reviewed plans for a proposed property) that we can just bang out a new appraisal in no time and at a nominal cost. They often fail to recognize that in order for the new valuation to be meaningful, the same appraisal process must be followed.

According to USPAP (Advisory Opinion 3):

regardless of the nomenclature used, when a client seeks a more current value or analysis of a property that was the subject of a prior assignment, this is not at extension of that prior assignment that was already completed-it is simply a new assignmentThe same USPAP requirements apply

Now, more than ever, focused market research is required for any appraisal. The most recent comps and/or, in the absence of empirical market data, broker interviews are critical. For new construction projects, it is imperative that the new plans (or project that was eventually constructed) are the same as what was originally submitted.

That is not to say that having some familiarity with the project won’t expedite the process, and in many cases my fee for the “new assignment” of a prior appraisal will be 25% or more below the original fee. Just as often, however, I find that because I know the complexity of the project, a discount off the original fee is not warranted.

Tags: Soapbox Blog, USPAP, Commercial Grade

1 Comment

Appraisal Contemplations is a column written by native Californian and a certified real estate appraiser, Aaron O. Thomas. He began appraising in Arizona and eventually ended up in San Diego where he owns and runs San Diego Appraisers. His firm specializes in greater San Diego County area residential properties and his clients include mortgage brokers, CPAs, lawyers, businesses and homeowners. Aaron is very outspoken and passionate about real estate appraising. Colleagues on Appraisers Forum have long known him as “Tucson Appraisals.” Good thing it’s too warm in San Diego to have the wool pulled over his eyes to the unethical business practice of the day: “comp checks.” Like me, he experienced a growing frustration in recent years with the form-filler mentality that many appraisers and users of appraisal services have embraced.
…Jonathan Miller

I received a phone call from a home owner yesterday complaining about the last appraisal that was done on his home. He didn’t think the Appraiser should have utilized all bank owned comparables and that the comparables were inferior in condition compared to his home. After complaining for several minutes, the home owner finally said that he would give my information to the new finance company since the last refinance did not go through with the previous one. I told him it would be great to have the business, but I could by no means promise that I wouldn’t use bank owned comparable sales.

The reason I tell this story is because I knew that I had to respond in a way that did not take the side of the home owner or the Appraiser. Why tear down another appraiser for a report I have not seen? After all, don’t most home owners think that their home is gold? I am by no means saying that there was nothing wrong with the appraisal. My point here is that too many Appraisers are ready and willing to tear each other down in the name of more business with little proof or no proof that what people are saying about the “other” Appraiser is accurate. Another thing I see wrong with this picture is that this information mostly comes not from another licensed Appraiser, but from someone who desperately needs the loan to go through.

I can sum up this entire situation with one word; “biased”.
 
If I am getting these types of phone calls, I am almost positive others have as well. I just hope other Appraisers return the same professional courtesies I extend to them. Our industry sure could use more people that extend a level headed approach to have the awareness of where they themselves stand in the midst of the circle of bias that we are constantly surrounded in on a daily basis.

Tags: Soapbox Blog, Aaron Thomas, Appraisal Contemplations

4 Comments

I was reading TechCrunch, an essential resource on technology. The post was about a service called “Wordle” which is described as

a toy for generating “word clouds” from text that you provide. The clouds give greater prominence to words that appear more frequently in the source text.

It takes feeds from a blog to create the graphic.

I thought it would be a good way to check out Matrix periodically to see what I am emphasizing at the moment.

Apparently my word of the day seems to be “rights”.

See the redux on Matrix.

Tags: Soapbox Blog, Jonathan Miller

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Would you like to write a column for Soapbox? Since Soapbox is a service by and for appraisers, we are always looking for input from the appraisal community. One of the ways has been to create a column for individuals who wish to provide commentary on the profession but don’t want to run a blog to be able to do it. Drop us a line if that interests you.

Tags: Soapbox Blog

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