Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He 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. In this post, he asks the profession to seize the day and take advantage of changing times by reinventing the services we offer our clients (not the wheel). …Jonathan Miller
If the art of residential appraisal is the application ofÂ comparable sales to estimating value there is no question that we are always struggling to mirror the market with sales comps that are anywhere from 3-12 months old.Â This poses a bit of a dilemma when we are on the cusp of coming out of one real estate cycle and entering another as with Federal Reserve Chairman Ben Bernanke’s recent Congressional appearance where he pronounced the end of the “housing bubble”.Â Can somewhat dated sales comps reflect this evolving trend or are we forever going to be “behind the curve” instead of on top of it?Â Perhaps this poses a unique opportunity for the appraisal profession to embark on uncharted but potentially lucrative waters.
The answer may well lie in abandoning the writing of appraisals as we know it and replacing it using appraisal technique by embarking on a new process involving consultation on comparables.Â Assume in this example that you are consulting to a seller armed with recent sales comps several months old where no downturn is yet evident but you know from professional/anecdotal feedback that a downtrend is taking place in the local market (lower listing prices, reductions, longer periods to closing, etc).Â Your role would be to help frame a listing and taking price recognizing that your older comps may well represent the top end of the market.Â The same process can be applied with a buyer in advising what similar homes had sold for in the past and framing an offering price.Â The advantage that this has over retaining a real estate agent is that sellers are often “sweet talked” by agents claiming that they can get them a great price and thus obtain an exclusive listing only to then overprice the home and come back with suggestions on dropping the asking price or accepting offers well below the agent’s original number and hence a disgruntled client. Â
For the consultant/appraiser, it frees them from filling out appraisal forms with old sales and, better yet, they do not have to worry about percentage adjustments open to second guessing of review appraisers and AMC’s.Â No need to worry about USPAP as they are no longer estimating value and signing off with a certification but merely advising the buyer or seller on how the offer stacks up against similar recent sales. When a contract of sale is executed the assignment is essentially ended and a fee collected at closing.Â The fee can be a fraction of a 4, 5 or 6% brokerage fee but it sure beats the miserly fees being offered by the financial institutions for written form appraisals.Â This would mean a change in USPAP/FIRREAÂ as it would Â allow the consultant/appraiser to use comps to advise his client. Â Â Assuming that the buyer needs an appraisal for a mortgage the revision of USPAP/FIRREA would allow the consultant to then present the array of old (or newer) comps and the narrative sequence of offers and counteroffers by buyer and seller in arriving at a sales price. Â This brief narrative report together with a physical checklist of the property would then comprise the “appraisal”. Â
Voila-we have not departed from the definition of market value (i.e. buyer and seller still haggling to arrive at a mutual meeting of the minds). However, we have now escaped the miasmic gases created in Washington that sustain a vast bureaucracy disseminating pages of directives that are creating a new specialty in law schools across the USA.Â Â Of course skeptics will say that if the consultant/appraiser’s fee is based on the sales price he will have a conflict because that is what USPAP and FIRREA preclude the answer is that it’s the sellers and buyers who are deciding and not the professional. Â
Semper Fee Simplistic