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Posts Tagged ‘Fee Simplistic’

[Fee Simplistic] Good News/Bad News: Safe Today But Who Knows About Tomorrow?

April 17, 2007 | 11:49 pm |

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. Inspired by the Beatles, Marty exclaims, “you say you want a revolution?” …Jonathan Miller


Alan Blinder, former vice chairman of the Federal Reserve Board, advisor to Democratic presidential candidates and currently professor of economics at Princeton recently noted that studies have indicated that as many as 40 million American jobs are at risk of being off-shored over the next 2 decades. Among the types of occupations listed as being “highly off-shorable” are computer programmers, data entry, actuaries, mathematicians, bookkeeping, accounting, and auditing clerks, economists, and financial analysts, Blinder, who believes that the economy is enriched by free trade, is now having second thoughts and claims that these job losses are a result of a new industrial revolution- communication technology that allows services to be delivered from afar. There is no question that the age of the internet and fiber optics has revolutionized the work place. The “good news” if we can refer to it as such is that appraisers are not on the occupational list. The “bad news” is more of a question: how long will appraisers be exempt from this job loss revolution?

The world of appraisal as it is practiced today has already witnessed the off-shoring of Argus modeling for properties with large rent rolls; the downloading of sales comps for properties that are seldom if ever visited by the appraisers; the downloading of real estate tax and assessed valuation data, zoning data and Google photos that make it virtually unnecessary for the appraiser to visit the subject property EXCEPT for one requirement: the value Certification stipulates that the appraiser inspect the property as of the valuation date. How long before virtual reality or real time inspection technology makes this obsolete is anybody’s guess. The only guarantee for appraisers to escape the off-shoring guillotine is the regulation that keeps the inspection as a requirement for value certification. Of course there is nothing to prevent the appraiser of record from just visiting the subject and then signing off on the estimated value based on analytical work performed off-shore downloaded from 3rd party databases.

It goes on everyday.


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[Fee Simplistic] The Perfect Storm: Is Appraising the New Sweatshop Profession?

March 22, 2007 | 9:01 pm |

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 chews the fat with us about the easy credit syndrome and begs the question: “Do you want fries with that?.” …Jonathan Miller


This past Wednesday the Wall Street Journal reported on how US auto parts suppliers were successfully resisting the price-cuts demanded by Detroit’s Big 3-GM, Ford & Chrysler. The article explained how attrition among the US parts suppliers through bankruptcies, consolidations, etc. had resulted in giving the remaining survivors the necessary leverage to resist Detroit in price reductions demanded by the Big 3 in their attempt to lower costs. Thus with fewer plants, smaller operations and lower overhead the suppliers did not have to take on unprofitable contracts in order to keep their plants busy as they were now more efficient than in the past.

Compare this to the current state of the appraisal industry and you will find the exact opposite in terms of the relationship between supply and demand. The appraisal world has burgeoned over the past decade as a result of the vast residential and commercial CMBS market that has sopped up the investment capital pouring into US real estate. Preceding this boom, however, the supply side of appraisers had already expanded thanks to the enactment of FIRREA in 1989 in answer to the savings and loan debacle in the mid- late 1980’s when state certification enabled every Tom, Dick and Harriet to take a core of appraisal courses, pass a test and hang out their shingle as either a residential or general property appraiser. Moreover, and equally as important, many of these newly hatched appraisal savants were single practitioners operating out of their basements with no staff and little overhead. This is not meant to belittle the capitalistic society in which we operate but merely to set the competitive scene.

To handle the growing volume of deals and the expanding need for appraisals as well as keeping their overhead costs low the financial institutions commoditized the appraisal process and resorted to on-line standardized engagement letters that gave almost no information to the appraiser as to the number of tenants on the rent roll other than being told it was an office building or single-user industrial building, along with the property’s address and a contact name and telephone number; organized the lending process into a production line so that the loan officers had little knowledge of the collateral. Anecdotally, in the large bank that I worked for I found myself fielding requests for appraisals from our out-of-state branch offices whose customer/borrower may have banked at that location but whose property was somewhere back in the New York area (when I requested information about the property, its gross building area, rent roll, leases, etc. so that I could talk intelligently to the various appraisers in order to obtain a fee quote and timing in many instances the field office had no basic property information). To handle either appraisal reviews and/or engagements (especially by the smaller institutions) banks retained appraisal management companies (AMC’s) to administer the process. And thus conditions for the PERFECT STORM in the appraisal world were set in motion:

  • growing appraisal volume
  • growing appraiser supply
  • 3rd party AMC’S under orders to obtain lowest bid fees
  • newly minted appraisers eager to obtain work
  • AMC’s & institutions able to exploit the appraiser oversupply
  • contented client-lenders able to comply with FIRREA/USPAP minimum standards where any appraisal mistakes were bailed out by geometrically rising sales prices

Fast forwarding to the present and the various SOAPBOX articles of my fellow bloggers reporting manifestations of today’s appraisal business world: lenders shopping to see if the appraiser can support the loan/value amount; a quick “verbal” value before the written report arrives and any other quirky requests to prevent the deal from being lost due to the appraisal and it is apparent that business can be rough.

There is no question that today’s appraisal world has been transformed into a high volume rush business stoked by Wall Street’s need to keep the bonfires of CMBS in ample supply to sop up the large capital flows seeking investment outlets. The vast volume of business means that the originators, lenders and underwriters are the bosses while the appraisers have become the sweatshop workers if they want the business. State certification of appraisers has raised the supply of people willing to work at sweatshop fees. As often cited in SOAPBOX commentary, appraisers have become “form filler-outers” and downloaders of web-based data, sales comps and practitioners of applying sales price or rental rate averages to subject properties. Lucky is the appraiser if Co-Star has a photo of the selected comps. If not, a trip to the field may be mandatory if the reviewer does not accept the caption: “no photo available”. Gone is the appraiser who can look his client in the eye and say-“you know what, my experience tells me that market value is not represented by the average of the sales comps and here are the reasons why”.

If I have given the impression that appraisers are being paid for their production and not for their ability to discern market value based on market dynamics you are not mistaken.


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[Fee Simplistic] Getting Primed On Sub-prime

March 13, 2007 | 10:00 pm |

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. This week, Marty explains the smoke and mirror lending process.
…Jonathan Miller


My original commitment to authoring Fee Simplistic was that it would only be written when commentary would be warranted by current events in the real estate market. And so the imploding of the sub-prime mortgage world on investors and the fallout of lenders and borrowers going into default makes it seem that the mortgage market is caving in.

The term “sub-prime” connotes a loan that is related to prime when never the twain ever met or will meet. Reading the individual anecdotes of some of these sub-prime borrowers reflect histories of people who would score exceedingly low in credit ratings; were either fraudulent in reporting income or else their broker was fraudulent in reporting on the borrower’s income and assets; executed sales contracts that had excessive sales prices where the buyer would get a kickback and use the proceeds to pay his first few mortgage payments and/or split some with the seller or broker; and finally broker “sweet talk” lulling the borrower into refinancing where mortgage payments would eventually end up higher than what was previously paid. So what prevailed was a sub-prime lending world comprised of smoke and mirrors if not outright chicanery.

This time, instead of Uncle Sam having to step in with the establishment of an RTC to keep the banking system afloat it appears that the only ones being hurt are those investors who played the high risk game of buying the bonds of the sub-prime CDO’s that were issued by Wall Street. The “invisible hand” of the marketplace so aptly described by Adam Smith is at work in culling out the bad from the good and the risky investment from the prudent one. High risk and high yield vs. low risk and low yield have always governed the marketplace and now is no exception.

It is not a far stretch to remember the principles most of us were brought up on by our parents:

* Don’t play with the bad kids, you’ll get hurt
* Don’t skate on thin ice
* It may look good now but it may give you an upset stomach later
* If it looks too good to be true it probably isn’t
* What makes you think you can get away with it?

And for those who know their Latin
* Caveat Emptor


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[Fee Simplistic] Mortgage Lending Gluttony Really Is The First Deadly Sin

January 24, 2007 | 5:05 pm |

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, after noshing, drinking and dancing in the conga line during the holidays with mortgage lenders, Marty observes what appears to be a series of quick fixes for looming foreclosure problems. “ …Jonathan Miller


A recent article in the Wall Street Journal described how lenders are dealing with mounting mortgage delinquencies through the latest plug-the -dike quick fix tools created to cope with the easy credit and underwriting gluttony of the past few years. This parallels the diet industry’s post-holiday marketing blitz where all of that rich holiday noshing and drinking has added inches and pounds that are conjuring images of the saftig pre-diet Kirsti Alley.

The latest “crash diets” that the lenders have come up with are:

  • Allowing some borrowers to refinance into a different loan at no closing cost
  • Alerting those holding ARM loans months before the rate is reset
  • Allowing the property to be sold at a loss and forgiving the shortfall in proceeds or remaining debt without it affecting the borrower’s credit record

Of particular interest was a story of a borrower caught in the vise of trying to sell a house in Las Vegas where the market tanked after he bought a new house following a job transfer to Dallas. The man’s dilemma stemmed from his expected sale at $475,000 and the buyer’s bank appraisal of $419,000 compared to his present loan balance of $440,000. Now I have been around this business long enough to sniff out aberrations when I smell them so here it comes.

  • I was intrigued by the appraisal of $419,000-not $420,000, not $415,000 but exactly $419,000. I would like to meet the appraiser who is so certain that he can reconcile to a residential value at that exact amount. He/she must be very good on their adjustments or else they know how to read numbers off their Excel spreadsheet, BUT-where is their professional judgement in rounding? It reminds me of putting an asking price on a house at $499,500-you want to avoid the $500K priceline but you know you will settle for something in the high end $400’s.
  • The gap between the loan balance of $440,000 and the present appraised value of $419,000 bears some scrutiny. Let us assume that the loan is relatively recent and thus that amortization of principal is minimal. Let us further assume that LTV is 80% so the $440,000 balance would equate to an original appraised value of $550,000 at the 80% ratio. That is a 23.8% decline in market value based on the assumptions above.

And so, Dr. Phil, here is my dilemma:

  • Did the easy credit people allow too much partying and noshing ?
  • Could a declining market have wiped out the borrower’s equity in such a relatively short period or did the fault lie with the original appraisal?
  • Did the appraiser on the original loan get carried away with his adjustments in an up-market and overvalue or
  • Is the appraiser of the current market value of $419,000 so sure that maybe he has undervalued?
  • Should the owner allow the lender to sell the Las Vegas house and cut his losses?
  • Should we all join Kirsti Alley in the conga line?
  • Is gluttony the first deadly sin?


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[Fee Simplistic] Appraisal Compliance Isn’t On Their Radar

January 19, 2007 | 9:47 am |

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 opines that tightening appraisal compliance expectations not on the radar of the lending and investment community (translation: the lights are on and nobody is home).”_ …Jonathan Miller


Being a member of the Counselors of Real Estate (CREs) who primarily undertake counseling/consulting assignments provides one with a perspective that is not colored by the Wizard of Oz world of FIRREA/USPAP that binds appaisers who toil solely in the world of estimating market value. To put it simply, CREs can be more creative in servicing their clients (as long as they are not certifying to value) than appraisers who are umbilically tied to FIRREA/USPAP (although many CREs are also MAIs or certified appraisers). And so it was that a recent posting on the CRE organizations website caught my interest. It solicited insights and opinions about how changes to FIRREA and higher compliance expectations are affecting lenders and the investment community.

My initial reaction was either this CRE was kidding to think that this expectation of higher compliance was going to have any impact upon lenders and investors. Or if he was really serious he needed some immediate counseling to disabuse him of his misconceptions. Although I retired from the appraisal department of an international bank I have kept active consulting to an international organization that spans the appraisal and investment world. Relying solely on dealings and anecdotal conversations with appraisers, counselors, CMBS underwriters and packagers, and investment property brokers I can unequivocally opine that tightening FIRREA will have no impact upon the lending/investment world. It must be remembered that FIRREA was imposed to prevent fraudulent appraisals and USPAP was linked to it to insure minimal qualitative underpinnings that support estimates of value. To think that higher compliance expectations resulting from changes to FIRREA would have an impact upon lending and investments would be tantamount to implying that the fraudulent appraisals and lending practices of the late 80s was still prevailing or that the original regulations were not doing their job.

A reality check of the lending/investment world would tell anyone toiling in the world of valuation that as long as a competent appraisal supported the mortgage being requested nobody is going to be bound, unbound or rebounded by FIRREA. As the volume of investment dollars that are seeking deals expands-office building sales in New York City in 2006 totaled nearly $30 billion compared to nearly $20 billion sales already under contract scheduled to close in the first quarter of 2007-it is laughable to think that the investment community is going to lose sleep over FIRREA.

Certainly the busy appraisers will be losing sleep but not because of FIRREA but because the lenders will be keeping them ultra busy.

Semper Fee Simplisitc


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[Fee Simplistic] Trans Fat Lending

December 19, 2006 | 8:13 am |

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 chews the fat with us about the easy credit syndrome which begs the question: “Do you want fries with that?.” …Jonathan Miller


One of the points that I have been making to my younger colleagues who have been toiling in the appraisal vineyard for the past several years is that the real estate market is local and cyclical. So when one of them announced that they were doing an appraisal on a property undergoing foreclosure I asked if it was their “maiden” foreclosure appraisal to which the answer was “yes”. This was something new as most of their professional experience which is less than a decade they have only observed and experienced an “up” market-the latest euphemism of which is “cap rate compression”. Old fogeys, myself included, used to call it “money chasing deals” but “cap rate compression” is infinitely more seductive if you want some romance with a market that has yet to tank notwithstanding the media’s constant blasting of the bursting “housing bubble”.

What has recently surfaced is the subprime mortgage delinquency rate which has been going up as borrowers are defaulting on the easy credit mortgages that have been a key lending phenomenon the past several years. A startling fact is that 75% of CDO’s or collateralized debt obligation bonds are comprised of subprime mortgage securities. The fact that this represents the lowest credit-rated tranche and thus poses the highest risk should come as no surprise to the bond buyers when defaults occur and losses loom. This has been a turnaround from the heady past several years when the subprime CDO market with its high yield rate enjoyed high buyer demand from domestic and foreign investors. But, as the old saying goes, “you get what you pay for” and thus the lower yielding but higher rated bond tranches are still buffered from this easy credit syndrome which is now practically non-operative in the housing lending market.

All of this leads me to the latest fad of banning “TRANS FATS” (no he is not a pool player from Minnesota). New York City recently banned trans fats in restaurants starting in 2007 to protect the public from clogging its arteries with high cholesterol, life threatening fat. Whether this is going to have an effect on the public health is questionable considering that you can travel to New Jersey or Keokuk, Iowa and enjoy all the chicken-fried steak with white gravy to your heart’s content. Easy credit and subprime lending may be likened to the trans fat bandwagon. The lending world has gorged itself on subprime credit and now it is beginning to pay the price. Currently, it is mainly dyspeptic but who knows if chest pains will develop as we digest the past gorging on satisfying but patently unhealthy goodies.

One final thought as we head off into the new year and maybe the beginning of a new cycle. The Feds have been so punctilious since 1989 with FIRREA and the appraisal process that maybe they should start looking at the vast trans fat syndrome of the lending side. The appraisal process could be likened more to a cardiogram and blood test but the credit and underwriting ah, that is where the true gluttonous culprit lies.

Happy Holidays and Happy New Year.


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[Fee Simplistic] E Unum Pluribus

December 1, 2006 | 12:14 am |

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 translates E Unum Pluribus from latin to mean “Behind The Curve”. …Jonathan Miller


A recent interview of Sam Zell in the Wall Street Journal about the sale of his Equity Office Properties Trust REIT to the Blackstone Group posed the question as to why so many REITS are being taken private? Zell gave several reasons:

  • (1) that the private market was pricing assets higher than the public market;
  • (2) the “analytical community was continually behind in their evaluations of office assets. As each transaction occurs, they tried to catch up but they were still always behind”, and
  • (3 )that this led to the “take private transactions to a large extent because the analytic community had a different perspective on value”.

As someone with rudimentary knowledge of economics I could not fathom this duality in market pricing between private and public deals considering that the market seeks its own level playing field commensurate with risk. I also was reminded of what my fellow blogger John Cicero stated in Commercial Grade last month, namely that by the time appraisers evaluate a recorded sale several months have already passed, the market has changed and therefore you must talk to the market participants. Could Zell’s comment be on the mark about the “analytical community” a/k/a “appraisers”? Could my old friend John C. be correct in his commentary and, more frightening, would his ego get bigger if I told him so?

A recent conversation with an acquaintance who deals in large CMBS packages for an international bank gave this conundrum about markets some additional perspective. I commented that I saw parallels between the late 80’s and today’s hot market in terms of money chasing deals. His comment was that today’s market not only has an excess of domestic capital but that foreign capital is plentiful and it is satisfied with low yields as long as investors do not have to fund negative cash flows and they can own “phallic” (i.e. trophy high rise) properties. This market phenomenon poses the question as to when does all this get recorded by the market? Whether its private deals buying collateralized/securitized property such as REITS or buyers of individual properties the valuation parameters of supply/emand, cap rates, discount rates, quality of income stream, etc. should all meld at the end. All of which leads perhaps to John C. maybe being correct-you’ve got to talk to the brokers and market participants which I call “market dynamics”.

“Market dynamics” is something that you will not find defined in the Appraisal Institute’s textbook but every appraiser should be instructed in Appraisal 101 as to how it should be applied. All too often appraisers will present an array of rent and sales comps and an average which then would be applied to arrive at a value. If, on the basis of market interviews the trend is up (last week’s asking price for the same property or rental space is up or down) an appraiser can correlate to the higher or lower end of the range. John’s comment that “appraisers “are impartial observers of the marketplace” and what they “think about a particular property doesn’t really matter” is mostly on the mark. But John, I must remind you that in the final analysis an appraisal of value is an OPINION and if an appraiser cannot bring that OPINION into focus in his correlation to a final value he should become an accountant.

And here, I almost thought you were the smartest guy that Jonathan knows from Mondays-Fridays.


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[Fee Simplistic] Segmenting The Market Without An Airplane

November 7, 2006 | 10:01 pm |

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 segments the ups and downs of cyclical real estate markets without buying a plane ticket. …Jonathan Miller


Two separate articles in the November 7th New York Times about forthcoming Wall Street bonuses and the state of the housing market in Phoenix warrant some real estate economic commentary from this quarter. The Wall Street story heralds “Big Bonuses Seen again for Wall Street” with the average managing director expected to pocket $1.7 MM this year, up from $1.2 MM last year. This is miniscule compared to the expected $20-$25 MM for senior investment bankers and for the traders who deal in structured products and derivatives who are expected to walk away with top-end bonuses ranging from $40-50 MM each. The article goes on to say that first year associates just out of business school can expect to receive total compensation ranging from $200,000-$270,000 with first year analysts out of college hauling in a measly $105,000-$145,000.

By way of contrast, the article on the Phoenix market states that people were walking away from their 5% deposits because they could not sell their existing home or got cold feet. Builders who raised prices almost weekly last year were encountering a cancellation rate as high as 40%. Measured against a market last year where contract flippers and investors comprised one-third of all homes sold this segment of the market this segment has all but disappeared. Builders who counted on this heated demand overbuilt and supply vastly outpaced demand. And so th glut has to be sopped up by what would be regarded as normal demand-employment growth and natural increase in population including in-migration.

This leads us to what the classical land economists would call market segmentation. Real estate market demand can be classified into markets stemming from:

  • Natural household growth fueled by employment (oh yes-also divorce)
  • Expansion from in-migration (retirement to resort areas)
  • Replacement (loss due to demolitions, fires, catastrophes)
  • Upgrading (filtering up)
  • Extraordinary stimuli (speculative plays, market frenzy, low mortgage rates)

It would seem that New York City, aside from continuous imigration, is going to experience an expansive upgrading market considering the Wall Street bonus pool. How many traders, investment bankers and managing directors are going to jump into the “Upgrading” pool from “Plain Jane Upper East Side to Upper Park/Fifth Avenue or whatever other “Swellsville” areas are developed? How many are going to jump into the second home market? And how many of the first year college analysts and business school grads are going to be first time buyers and abandon the 4 roommates renting one apartment scenario?

Phoenix, on the other hand, is going to have to content itself with the natural growth that has made it one of the fastest growing MSA’s in the US but without all of the hot buttons that were being pushed by the speculators and the low interest mortgage rates that caused supply to outpace demand.

Back to New York: The stock market like real estate is cyclical.

Semper Fee Simplistic


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[Fee Simplistic] Short Term Thinking In Long Term Cycles

October 31, 2006 | 12:01 am |

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, teaches us to be wary of short term cycles and think big picture. …Jonathan Miller


One of the advantages of having toiled in the real estate valuation world for some 30 years is that you cannot help but develop an institutional memory and particularly a conviction that the market operates in cycles. As a young analyst with an educational background in real estate economics my involvement in a variety of consulting and appraisal assignments on income producing and corporate properties was always rooted in aspects of supply and demand. Grandiose plans by developer clients did not deter our drawing negative conclusions if poor market demand resulted in long absorption periods and economic infeasibility.

My first exposure to the chasm that could develop between real estate markets and client expectations in appraised value (these were the days of pre-FIRREA/USPAP) was in the early 1970’s. At that time the then nascent world of mortgage REIT’s was a period of very aggressive lending that could be characterized as “money chasing deals”. Many of the assignments involving new development did not seem to pan out to the scenarios or expectations of clients in terms of value or anticipated time horizons. Anyway, this was not our concern and one would have to assume that any shortfall in value or other expectations would have to be addressed in the underwriting by the lender. The aggressive REIT lending cycle of the early 1970’s was exacerbated and came to an end as a result of the first Arab Oil Embargo/Energy Crisis in 1974. This led to vast double digit inflation and interest rates and the term “disintermediation” -the word coined by PhD economists to explain the vast withdrawal of deposits from passbook savings accounts that were paying single digit interest. Financing for new construction all but disappeared in light of these cyclical conditions.

Fast forwarding to the late 1980’s saw a different phenomenon develop: aggressive lending by S&L’s and fraudulent valuations by unscrupulous appraisers leading to massive loan writedowns and foreclosures. To save our banking system the FED under Mr. Greenspan drastically lowered interest rates and Washington created the RTC (Resolution Trust Corp) to package the bad loans. Not the least of these reforms was the passage of FIRREA in 1989 and the adoption of USPAP. While this did not deter the miscreants entirely it did cut down on aberrational mortgage lending supported by such fraudulence.

Today, one cannot pick up a newspaper or turn on the TV without hearing how our housing market is crashing and bringing the economy down. Lost in this reportorial rhetoric is the fact that the housing market is not one mega-market but many individual local markets with varied demand based on employment prospects. Markets that have not caved are likely to be those where employment has grown or at least not declined. Using New York State data, housing prices have appreciated 73% over the past 5 years with median price rising 11% between 2004-5. Can this hot trend continue? Perhaps in the Manhattan market where booming Wall Street activity portends huge year-end bonuses and likely to drive demand. Will this spill over to the rest of the State not likely if one takes into account that Buffalo, Syracuse, Rochester and Albany are also in New York. Any market declines are likely to be localized and cyclical rather than nationwide. Applying a long term perspective to the market can bring into focus that we have been mesmerized by a short term cycle over the past 4 years and cyclicality and real estate are not mutually exclusive.

For those who believe that markets must always be on the upswing to higher values or prices it reminds me of the joking we used to do in the earlier days when Discounted Cash Flow (DCF) analysis first came into practice. We called it the 4th Approach to Value: “you tell me the value you want and I’ll tell you the assumptions you have to use to get there”.

Semper Fee Simplistc

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[Fee Simplistic] Being Far off The Mark

September 6, 2006 | 1:40 pm |

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 waxes eloquently about the importance of having a valuation date (and a sense of humor). …Jonathan Miller


A recent article in the Wall Street Journal entitled After the Boom: Slump Proves Painful for Some Owners and Builders [WSJ] contained anecdotal accounts of some disappointed sellers caught in the vise of a market that was obviously undergoing correction. My attention was caught by a report of a seller in the Washington D.C. area who had her house on the market for several months with a $1.1 intial asking price based on a 2005 appraisal. The seller was attuned to the fact that the appraisal “appeared far off the mark” and she opted to put the property up for auction and accept the highest bid above a reserve price of $675,000. On the day of the auction, August 5th, the highest bid came in at $475,000 which was not accepted. The bidder then upped it to $525,000 and it was finally bought at $530,000.

I was particularly caught by the comment of of the appraisal being “far off the mark” as that was the guiding factor in the seller’s asking price. Unknown to the reader is what the time differential was between the date of value of the appraisal and the date that the seller put the house on the market. This leads me to the caveat that all buyers and sellers should be aware of in dealing with appraisals-to wit that all appraisals MUST contain a date of value. So if Ms. Seller had an appraisal dated sometime back in September 2005 and put her house on the market in April 2006 there would have been an obvious disconnect. Would anyone buy stock based on stock price quotes 6 months old? No? Well the same would apply to buying and selling a house based on a 6 month old appraisal. One of the best things USPAP ever promulgated was to insist that all appraisals must have a date of value. But then again, they were only belaboring what had already been an industry standard for decades ever since the canon was closed on the 3 approaches to value.

A more jocose reference in the Journal article was the profundities of a chief economist of a New York economic research firm who stated that “housing is poised for something ‘harder than a soft landing but softer than a hard landing.’ This reminded me of Harry Truman’s desire to appoint a one-armed economist as his adviser so that he could not say, “On the other hand.”

Semper Fee Simplistic


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[Fee Simplistic] Out Of Spread, Out Of Touch

August 23, 2006 | 12:01 am | |

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 faults fee spreads to the commoditization of appraisals and emphasizes he is not tipping his hat on his car preference. …Jonathan Miller


This being the dog days of summer I was carefully mulling over in my mind my next Fee Simplistic blog when my plans were altered by fellow Commercial Grade blogger John Cicero’s commentary about spreads in appraisal fees commensurate with the scope of work involved. As a retired bank appraiser who was responsible for not only hiring but, more importantly, understanding the collateral and scoping the assignment before retaining an appraiser my curiosity got the best of me and I inquired as to how a 300% spread in fees could occur. Was it possible that the various appraisers misunderstood the assignment, was the lender giving each appraiser the same report requirements or was I or John missing something? I found out that the winning “bid” or fee (for those who are indeed professionals) was awarded to an appraiser -now get this-who did it twice before over a 2 year period and hence the spread. As John would lament losing the assignment because of the ridiculous spread in fees my take on this (not that I do not agree with him) is that the lending side should be the designated culprit.

Why so? My previous role with the bank on the credit side would have caused me to inquire as to why 2 appraisals over 2 years by the same appraiser did not assuage the lending side. Was the problem with the borrower, the terms offered or with the appraisal itself? Looking at this from the credit side of appraising I would have been interested in the history as to why this borrower was still hunting for a loan. I most particularly would have been interested in the history of the 2 values by the same appraiser: did he get it right the first time, the second time and is it likely he will get right this time or was the problem in the borrower’s credit history or the terms of the loan?

Finally, I would have been also been interested in talking to the appraiser about how he saw the appraisal issues, assuming there were some, over the 2 year period. We know that falling cap rates would have produced a higher value (all other things being equal) but what was the appraiser’s thinking? Was this going to be a fast turn around because he appraised it twice before or were there new factors that had arisen in the market that he was not paying attention to because he knew the building and the resultant value range from his two previous assignments and was only interested in a quick turn around and his fee?

Unfortunately, the appraisal world today has become too commoditized where FIRREA and USPAP have fostered a lowest common denominator mentality. “Get it done, get it done fast, and get it done as cheap as possible” is the credo that has been created by the so-called “authorities”. I have always liked to think that professional fees whether for appraisers, dentists, physicians or accountants should be based on the value they bring for their service. Would you entrust your health or your tax return to a doctor or accountant who will do it for the lowest fee or are you willing to pay somewhat more for better or more competent service? Certainly, the shareholders of XYZ lending institution deserve the same consideration or has securitization of collateralized mortgages removed this concern? Of course someone will say, “what’s the difference if you drive a Honda Civic or a BMW-they’ll both get you to where you want to go”. Yes they will just as a store front drop -in-clinic will take care of your pain until it comes back again

Semper Fee Simplistic


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[Fee Simplistic] Breaking The Housing Bubble & The Appraiser: A Chance For Radical Reform

July 24, 2006 | 12:01 am |

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 of  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.  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”.  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?  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.  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).  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.  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.  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.  

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.  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.  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.  This would mean a change in USPAP/FIRREA  as it would  allow the consultant/appraiser to use comps to advise his client.   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.  This brief narrative report together with a physical checklist of the property would then comprise the “appraisal”.  

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.   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.  

Semper Fee Simplistic

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