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Posts Tagged ‘USPAP’

Establishing A Bond With An Appraiser Is Expensive

June 24, 2008 | 7:42 am |

This post was also presented on Matrix.

In one of the more poorly thought out layers of legislation being proposed in Congress to help the housing market and credit problems pertains to the appraisal element within the Homeownership Preservation and Protection Act of 2007. This bill is being championed by US Senator Dodd. The whole concept of bonding the appraiser demonstrates a lack of understanding of how we fit into the lending process.

I’ve touched on this legislation in a previous post about how the act misses the mark because it provides no tangible solution to the appraisal element of the mortgage lending process (emphasis added: no). The legislation seems to be stuck at the moment but I am not so sure how long that will last.

Because I am familiar with the topic (it’s my profession), it really scares me to think of the thousands of pieces of legislation that are crafted in bills by Congress every year that are probably just like this one. I am sure Senator Dodd’s intentions are honorable, but the bill completely misses the issue at hand.

A key concern brought up by this bill is the cost of bonding an appraiser. As if obtaining a bond makes an appraiser suddenly ethical and/or not subject to intensive, economically incentivised pressure?

Since I have never had to obtain a bond, I am not completely confident of my thinking here, but I suspect I am on the right track:

The Dodd legislation says:

Appraisers must obtain bonds equal to one percent of the value of the homes appraised.

Ok, so if I say Miller Samuel appraises $5,000,000,000 worth of Manhattan real estate in a year, that amounts to a $50,000,000 bond (1%).

I couldn’t find any published quotes for appraisal surety bonds, but if we say the cost is 2% of face value of the bond, then $50,000,000 x 2% = $1,000,000. In other words, our firm will need to spend $1,000,000 this year in order to comply with legislation that does nothing to address the problem (insulating appraisers from pressure).

Issue 1: If appraisers wish to remain in business, they will have to pass along the costs to their clients (ultimately the consumer in most cases). Common sense says that most appraisers will be forced out of business or no longer perform appraisals for lenders if this interpretation is correct.

This means I have to pass costs of $1,000,000 to my clients (appraising is a razor thin margin business). That really means I am going to have to raise my fees many times just to break even and I am doubtful that my client base will readily absorb the significant increase in fees. As I mentioned in the prior post, I think this will actually make more good appraisers leave the profession.

Issue 2: Appraisers may have to obtain these bonds individually, not in lump sum as in the example above. Try doing this thousands of times in the course of a year. Additional staffing costs, paper work and time has costs associated with it. Total it up and the bill makes appraisals cost prohibitive and will lengthen the appraisal process.

Issue 3: Appraisers may have to violate their appraisal license when obtaining the bond for each assignment. In order to get mandated coverage, they have to provide the value before doing the appraisal (it’s called “cart before the horse”), a direct violation of the licensing law mandated by Congress in 1989 via FIRREA/USPAP. I would think the appraiser’s value estimate for the bond would error on the high side to make sure the property is covered, adding even more costs.

Admittedly I am not familiar with the cost and process of obtaining a bond so I would welcome feedback and insight on this. I am amazed how little information exists out there. Nothing of significance has been written about bonding appraisers that I am aware of.

Appraising is my profession. Lack of common sense is now my bond.

UPDATE: I have been told that the cost of the bond is based on the prior year’s valuation.


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[The Homeownership Preservation and Protection Act] Dodd Bill Places A “Hit” On Good Appraisers, With Bondage

June 6, 2008 | 5:07 pm |

This post was also presented on Matrix.

Back in September 2007, US Senator Dodd from my home state of Connecticut submitted what appears to be hastily conceived legislation to solve the mortgage crisis in response to the prior month’s credit market meltdown. I believe it was created to address subprime lending, but because it was so loosely presented, it casts a wide blanket over the lending process to little effect and likely causes more problems because it embraces conventional wisdom rather than actual practices. As far as appraisals go, it clearly doesn’t recognize the fundamental problems that New York AG Cuomo has already recognized.

The appraisal related language in the bill is sloppy and contains slang, suggesting that someone with little experience drafted it or the the bill was not understood by the Senator. I am very disappointed. It found co-sponsors because it contains buzzwords like “appraiser”, “mortgage” and “meltdown”.

In fact, the language of the bill was so vague and misdirected (the appraisal part) that most appraisers never took it seriously, instead focusing on efforts by Senator Frank and NY AG Cuomo. However, it still has life and is being taken seriously.

The bill is now in the Banking, Housing and Urban Affairs Committee.

I think Senator Dodd’s introduction of the concept of bonding was to incentivize the appraiser to do good by having “skin in the game” but it does nothing to solve the current lending problem. Is this the best that can be done by Congress? It’s damaging to the lending industry and poorly written and thought out, and in my opinion, it allows Congress to say this takes care of the problem, when in fact, it makes it worse.

Here is the appraisal-related content summary provided by Senator Dodd’s web site.

V. Require good faith and fair dealing in appraisals.
– Prohibit pressure from being brought to bear on appraisers.
– Hold lenders liable for appraisals to avoid the appraisal problems created in the current climate.

Here’s the actual language of the appraisal related portion of the bill:

Title IV Good Faith and Fair Dealing In Appraisals

Requirements for Appraisers

  • Appraisers owe a duty of good faith and fair dealing to borrowers.

My comment: Generic boilerplate that probably needs to be said. On that note I propose legislation that government officials never abuse their power, the public shouldn’t commit crimes and all school kids show do their homework. In other words, its an ideal, but it has nothing to do with addressing the core systemic problem – remove the possibility of collusion from the process.

  • No lender may encourage or influence an appraiser to “hit” a certain value in connection with making a home loan. In addition, a lender may not seek to influence an appraisers work, nor select an appraiser on the basis of an expectation that he or she will appraise a property at a high enough value to facilitate a home loan.

My comment: They actually use the word “hit” in the legislation. Who wrote this? How is a lender prevented from attempting to “seek to influence an appraisers work.” These are just words.

  • A crucial cause of the current mortgage meltdown has been inflated appraisals. Many ethical appraisers complain that lenders will only use appraisers who consistently value properties at the levels necessary to allow the loan to close. Appraisers who do not cooperate simply do not get hired. This is particularly detrimental to the homeowner because it leads the homeowner to believe he or she has equity where little or none may exist.

Comment: “A crucial cause” implies appraisers initiated the problem. Wrong. They were the enabler of the lenders and the bad ones were rewarded for unethical practice. They actually use the word “meltdown” in this bill? This paragraph also infers that good appraisals are always low. You can say stuff like this all day long but that doesn’t stop it from happening.

  • Appraisers must obtain bonds equal to one percent of the value of the homes appraised.

Comment: “How do the costs of the bonding enter into this? I am not familiar with getting bonded I assume that means appraisers would file for a bond with a predetermined amount so we get enough coverage. That violates federal licensing law (USPAP). This does nothing to fix systemic fraud and burdens the appraisers that do the right thing with additional costs. How does it keep a bad appraiser from doing bad work? They charge the bond costs to their unwitting (or not) clients and it’s no skin off their back. Good grief.

  • Remedies available to borrowers

— Lenders must adjust outstanding mortgages where appraisals exceeded true market value by 10 percent or more.

Comment: Can you imagine the litigation costs that would result if this passes? Who determines whether the value is off by more than 10%? Another appraiser who is hired by the homeowner? An AMC? A real estate broker? Zillow? A lender using an Automated Valuation Model? What is “True” market value? Is this a new definition of market value and all other forms like “Fair” used by GAAP are “False”? I find it hard not to say the word “true” in this application without sounding sarcastic.

— When an appraisal exceeds market value by 10 percent (plus or minus 2 percent) or more, a borrower has a cause of action against the lender. A consumer who is awarded remedies under this section shall collect from the appraiser’s bond.

Comment: Can you imagine the the costs that will be endured by the consumer? I understand that bonding costs for the typical appraiser would be $10,000 to $40,000 per year (per appraiser). For what? Appraising is already a razor thin margin business. Two things are going to happen: appraisal services are going to probably double, and many good appraisers will be forced out of business.

— Actual and statutory damages up to $5,000.

Comment:The further destabilization of the lending industry is worth $5k?

Here are the Senators who think this is a good idea:

Sponsored by Christopher Dodd(D-Ct), with co-sponsors: Sen. Daniel Akaka [D-HI]
Sen. Barbara Boxer [D-CA]
Sen. Sherrod Brown [D-OH]
Sen. Robert Casey [D-PA]
Sen. Hillary Clinton [D-NY]
Sen. Richard Durbin [D-IL]
Sen. Dianne Feinstein [D-CA]
Sen. Thomas Harkin [D-IA]
Sen. Edward Kennedy [D-MA]
Sen. John Kerry [D-MA]
Sen. Amy Klobuchar [D-MN]
Sen. Frank Lautenberg [D-NJ]
Sen. Claire McCaskill [D-MO]
Sen. Robert Menéndez [D-NJ]
Sen. Barbara Mikulski [D-MD]
Sen. Barack Obama [D-IL]
Sen. John Reed [D-RI]
Sen. Charles Schumer [D-NY]
Sen. Sheldon Whitehouse [D-RI]

I’ll bet if the situation was explained to the Senators with clarity, they would have issues with the bill as written. Time is of the essence, but the solution needs to solve the problem. The problem is about self-dealing and allaying investor’s concerns with the products they are purchasing.


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[Palumbo On USPAP] USPAP 2008: is it Spring yet?

March 22, 2008 | 9:56 am |

Palumbo On USPAP is written by Joe Palumbo, SRA, 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].

Spring is nearly here, but as more people venture outside, Joe cautions against mob rules: doing things ’cause “everyone does it.” …Jonathan Miller


It must be the “economic climate” that has me a feeling as (blah) as I am. It has to beafter all we did not have a harsh winter here in the NE, although one wonders if the perpetual rains can not fall into that category.

As I prepared to teach my first USPAP class of the spring, I was surprised and pleased to see how “robust” the material is for the 2008-2009 class. Discussion problems, focus on “real-world” issues and clarification on some of those “confusing” everyday issues. this material has it all. Everything from a what is a Federally Related Transaction to Confidentiality.

Still, I wonder if bi-annual mandated 7-hour detention was enough for the masses. To me not knowing the basics of USPAP as an appraiser is like trying to become a doctor and not understanding the skeletal system.

I know.I knowthere ARE some hair splits and some confusing topics in real estate appraisal as it relates to ethical, acceptable or just plain bad practice. The thing that gets me is that no one will argue those points but they will the basics.

Case in pointspeaking of Confidentiality. I friend mine was asked about providing work samples to a potential new client. I told him “make your life easier”. Get permission to use them and put a cover letter stating such permission was granted”. If you do not get permission then you will have to redact the confidential info that is identified by the client (likely the subject) AND the assignments results. Well, in this day and age if you send me the “sample” and redact your FINAL valueI have no use for that sample. Reconciliation is key these days.

Ok more to the pointon what my friend told me happened when the “lender” called to ask for status on the samples. “Well”, he said, ” I need to get permission to use the samples and that may take some time”. “No”, “No”.. stated the lender “just send them alongyou do not need that.EVERYONE just sends them in”, “never redaction..”.

Yepeveryone just does this or thatmaybe it is just ignorance or sending out work samples is no big deal.

There is a much bigger picture here: the guy or gal sending those samples is the same guy who makes the deal, misses the sale next door or the expired listing on the subject cause that is the way he/she thinks.

Professionalism is a way of conduct..not a cap rate with sound data.

It reminds me of when I was in a sales office once and I asked for the typical absorption information. “We never get those questions asked”? “What kind of appraiser are you?” The saleswoman quipped. So I respondedlike my financial advisor”If you do not give me all the info I need to analyze this situation I will give the lender a half good appraisal” (or half- good advice).

Make the most of your 7-hours this licensing cycleeven if all you get is just the basics…….

IS IT SPRING YET?!


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[The Hall Monitor] Let’s Get The PAP Out Of USPAP!

December 22, 2007 | 7:14 pm |

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 issues.

Todd’s suggested changes for USPAP (with tongue in cheek) simply…rules…

…Jonathan Miller

As a fan of “Real Time” with Bill Maher, especially New Rules I think it’s time to rewrite USPAP into something USEFUL. Let’s start by getting rid of the term USPAP and replacing it with something simpler, like New Rules!

New Rule: Use different size fonts and/or typeface.
Let’s face reality. When it comes to writing, most appraisers are somewhat challenged. That’s why most of the report consists of boilerplate identical to that found in every other report. So the first new rule is that the boilerplate must literally be written in fine print and the two or three statements that are actually unique to that report must be oversize. I don’t think it’s fair to ask the user of the appraisal to read something the appraiser himself didn’t proof read before he (electronically) signed the report. The fine print makes it more likely that the client won’t notice the myriad misstatements that appear in the addenda of most every appraisal. Who has not sent out a report, at least once, with the statement “this appraisal is intended for financing purposes only” when in fact it was written to settle an estate? Such oversights as “the client is ABC Bank” rather than “the client is John Q. Public” will more likely be forgiven if they’re only in the fine print. Why? Because, since you didn’t read it when you wrote it, your client shouldn’t have to read it either! After all, your clients are just as busy and stressed out as you are.

New Rule: Fewer words, more pictures.
There are way too many words, especially adjectives, in appraisals and not nearly enough pictures. Think about it words like fair, average, good, modern, updated, or deferred, are totally subjective. So instead of narrative description that doesn’t describe anything, all appraisals will have interior photographs of every room and bathroom in the house. The appraiser’s words should be limited to a caption underneath a photograph, like “kitchen”. Wouldn’t that be easier and more informative than a statement like, “The kitchen, which was renovated in 2006, has cherry wood frame and raised-panel cabinets and black granite counters?”

New Rule: Photographs will be “maximally productive” and not misleading.
Most houses have a front, rear, and two sides to them. With detached houses in suburban neighborhoods, the picture of the front of the house should illustrate – not just the front – but the front and one of the sides of the house. Ideally, the rear photo should illustrate – not just the rear – but the rear and the other side of the house. These days, when so many houses have been expanded to twice their original size and the expansion has been out the back, a front view without the context provided by the elongated side is indeed misleading. Granted, due to site conditions or topography it is not always possible to show two sides of the house with one photo. In that case, take another photo.

New Rule: The “Street Scene” is not supposed to be a picture of the street, and nothing but the street, taken by some schmuck standing on the double-yellow line in the middle of the street!
Everybody knows what pavement looks like. The focal point of the street “scene” photo should be the improvements alongside the street, and not the vanishing point.

New Rule: There must be at least one declarative sentence in every appraisal.
So much appraisal verbiage consists of what the appraiser is not. “The appraiser is not” an expert in environmental contamination, an engineer, a surveyor, etc. For reasons of building self-esteem if nothing else, every appraisal must include a declarative statement. It shouldn’t have anything to do with the appraisal. But it must say something about what the appraiser is, versus what he is not. It can be as simple as “the appraiser is tall.”

As the original USPAP was the result of a collaborative effort, so too should be its successor, “New Rules” and in that spirit I welcome reader’s suggestions.


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[Palumbo On USPAP] USPAP 2008: Be Careful What You Wish For

December 9, 2007 | 11:22 am |

Palumbo On USPAP is written by Joe Palumbo, SRA, 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].

Its holiday time, but as far as USPAP goes, Joe warns us to be careful what we wish for. …Jonathan Miller


In a few weeks the much talked about issue of the 7/1/2006 USPAP will be all but a memory. The fanfare about the elimination of the Departure Rule and the terms associated with it has fizzled out.

The Scope of Work Rule is firmly in place. The subtle but important edits to the definitions of credible and appraiser’s peers are well digested.

Funny thing about this USPAP: it may end up being as user friendly as it should (could) be. About ten years ago when I got started in USPAP instruction one of the constant grumblings (myself included) was that there was “too much” to know and worry about, not totally from a “development or communication” perspective but from and administrative angle. How do I label this thing? If I do not do an approach is that a limited appraisal? What do I tell the reader when Departingdo I quote the Specific Standards Rules I did not adhere to? At the time.. and admittedly over the years.but until a few years I would agree. A huge step in the right direction occurred with the 7/1/2006 edition. Prior to that, confused users of appraisals and appraisers often spent more time debating the “little things” than the overall validity of the conclusion.

I thought to myself would we ever have a USPAP the reflects more simplistically: ” Here is my appraisal, based on the Scope described in the report and yes it is credible for the intended use” (please note the invoice is on top).

Be careful what you wish for. In 2008 the Appraisal Standards Board, becoming more liberal and practical as the years go by “promulgated” what seems to me their best work yet. No huge fanfare this time, no six-month prior release.. just a well crafted “slimmer” document that presents the minimum obligations that we professionals need as starting point. The Key change for 2008 is the elimination of the definition of the Supplemental Standards and the Supplemental Standards Rule. Basically, the obligations associated with what was contained in the Supplemental Standard Rule are embedded in USPAP elsewhere. Bottom line.. working with (GSE’s) Government Sponsored Enterprises, Government Agencies or entities that establish public policy requires knowledge of requirements any laws and regulations as they relate in the appraisal process. This is identified elsewhere in USPAP (Scope of Work, Ethics Rule, Competence ) so the Rule was deemed to be more than what was needed and somewhat redundant. The end result is in fact a less cumbersome more simplistic set of “guidelines”. I often do “graphic presentation” in classes where I literally rip apart a USPAP, and reconstruct it based on the audience area of practice. Most of these classes are for the past 13 years are (99%) practicing real property appraisers including litigators, bankers, lenders, and other institutional occupations that rely on appraisals and appraisal reviews nothing more (commercial / residential) maybe a bit of appraisal consulting. (Standard 4 and 5)…but not a whole lot. That makes it easy…you could basically tear out and throw away half the book from Standard 6 through 10, and also match that up with the concepts in Statements and Advisory Opinions that do not apply, tear them out as well. What’s the point? Well, that “Home-made” USPAP, the “practical” one you have been looking for is a about one-third the thickness of the entire USPAP. Got a scheduled flight coming up? Take it along. It is an easy read…even in a minor delay.

Okay here is the warning label: all of this reduction in paper and requirements comes with a disclaimer: Less can be more, when it comes to Standards, because when the ASB removes something that they feel was there all alongone may question if the full understanding was there to start? I commented to one of the ASB members about the changes (reduction in requirements) over the past few years: Gee, it seems like we are really adding (more) responsibility and moving to a competency driven concept. “No”, he said, “we are not adding…it is more like we are revealing what was already there”. Brilliant I say. Brilliant.

I only remember this word “promulgate” from the USPAP Instructor exam and chuckle whenever I use it in a classroom…sounds like a medical procedure…like the USPAP thing itself..Ok sorry to digress. It means “publish or proclaim” and that is what the ASB has been granted authority to do. I certainly do not consider myself one who has any such authority…but to all of my associates that sign, review , rely on or use appraisals in some way..it is time to “Proclaim”…less more in the appraisal world for 2008.

I think it was Peter Parker’s uncle in Spiderman who said “with great power comes great responsibility”. He must have been a member of the Appraisal Standards Board. How else can he be so wise?

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[Palumbo On USPAP] You Can’t Wing It

November 13, 2007 | 11:52 pm |

Palumbo On USPAP is written by Joe Palumbo, SRA, 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].

This week Joe recalls his time at WAMU. It looks like the stock price could use a wing or two. …Jonathan Miller


October 6th 2006 was my last day as a First Vice President and NE area Manager at Washington Mutual. It was bitter sweet, having attained what I desired all my professional life: a high visibility, well respected position in a major company where I could be an appraiser and a manager all in one. With the help of my staff we managed appraisers both in house and on our vendor list. We had proven efficiencies with regard to cost of service, turn around and quality. We were appraisers talking with appraisers, solving problems, getting the business done while never compromising our standards or ethics. We had the numbers to prove it and the plan “b” solution as well if “cuts” needed to be made. No one was listening, minds were made up.

Still, the bank had grown very fat over the “boom years” and the efficiencies got lost in the fact that we “cost too much”, especially since mortgage volume was way down. Hey what do you do when it stops raining? Yeathrow out your umbrella? The solution was supposed to be simple: replace 323 staff appraisers including management with two large behemoth outsource companies (that take a slice of the action on the APPRAISER Side, while charging the lender even MORE than typical). Why not? Appraisals are all the same, appraisers are all the same and as long as you can get someone to sign the form you can make a loan. Who needs management of appraisals?

Well well, now the bank is in the headlines for collusion with the very business partners that were supposed to save the day. Something about “things wrong with these values: fix it or no more work” per the New York Attorney General. As a result there were “inflated appraisals”.

Some of the appraisals I saw from the Appraisal Management Companies were a far cry from inflated but rather conservative. What happened on October 7th to change all that? Nothing. What did happen was that Washington Mutual decided to remove an integral communication piece within the banking operation that made sense out of these “value” things and replaced it with a “message service”. The AMC “clerk” leaves the appraiser a “message”: “The bank does not like the value.please call us back”. No translation of information or discussion on the complexity of the issue.

Today as I see the WAMU stock price I can not be so naïve as to think it is ALL attributable to the demise of the in-house appraisal department. I do think that there are some things in business that you can not try to “wing”.

Like my friend, (also an appraisal manager for 17 years there) at a major national lender says. those in the ivory tower sure know the cost of everything..and the VALUE of nothing.

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[Palumbo On USPAP] USPAP 2008: Be In The “Know”, Not The “No”.

October 21, 2007 | 8:37 pm |

Palumbo On USPAP is written by Joe Palumbo, SRA, 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.

This week Joe has high hopes for USPAP 2008. Let us sit vigil …Jonathan Miller


As a AQB certified instructor and a user of appraisal services over the past 10 years I hope 2008 will be the year of the “know”, rather than the year of the “no”.

What I mean here is that those mundane, boring things we call Standards and the Ethics Rule which governs conduct, can in fact be tools of empowerment. Those days of restrictive, cumbersome requirements are all but gone. The days of multiple areas of ambiguity are gone: no more Departure Rule, no more “limited or complete” labels, no more confusion on which approaches must be included or considered, no more muddy waters on the “appraisal update” issue the “re-appraisal” or the “re-addressal” issue. In 2008 it gets even better as the Supplemental Standards Rule and definition get deleted, and the responsibility that existed there is now part of the Competency of the appraiser.

The problem is that most times as a Client seeking that a “problem” be solved I hear too often from the practitioners

“NO” we can’t do that, “NO”, we have abide by USPAP, “NO” we can not do those things, “NO” our State laws prohibit that practice.

Someone at my local State Board said to me, “a license is something that permits you to do something”. All I am asking here folks is that before we say “NO” that we say..maybe I can help you. Do some research, recall what was said in that boring 7-hour class that cost you so much, write to the ASB to that wonderful and informative group we have there, call your local USPAP instructor, go on-line anything you can so that you can sayI KNOW I can help you rather than the “NO” we do not want your business.

I can assure that I will find the appraisers who do such research, because if I can’t than those that hire me to hire you will altogether find someone else

hint hint- and that may not even be an appraiser.

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[Straight From MacCrate] Remember the Impact of Real Property Taxes on Real Estate Investments and Returns!

August 19, 2007 | 10:00 pm |

Jim MacCrate, MAI, CRE, ASA, has worn many hats in his career. He taught a number of the appraisal classes I have taken through the Appraisal Institute and I think he is one of the few people who actually understands the “J-Factor.” His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime.

As the rest of his colleagues (self included) lounge by the pool at the close of summer, Jim is hard at work thinking about the accuracy and impact of property taxes on real estate investments. His dedication is almost saint-like.
…Jonathan Miller

Just a reminder to investors and appraisers—real property taxes have a major impact on real estate valuation and investment returns and need your accurate analysis. Don’t just call the local assessor for the current real estate taxes and plug the information into a model to calculate the real property’s net operating income. Real property taxes are always volatile because of increasing government expenditures, reassessment upon sale, phased reassessments, elimination of exemptions for improvements, and tax abatement programs.

Why is such detailed analysis important? Most tenants for residential and commercial properties can only afford a specific percent of their gross income for occupancy costs (real estate taxes, rent, insurance and utilities). Once the occupancy costs exceed this percentage and the tenant risks defaulting on the lease, the real estate value can be affected. Your task is to clearly spell out any hypothetical or extraordinary assumptions about the real estate tax estimates.

What can you do to avoid being blind-sided? Start by getting the correct information. Remember real estate brokers do not always do their research. Be cautious if you analyze investments in different geographical locations. In fact, the Uniform Standards of Professional Appraisal Practice (USPAP) states that “Prior to accepting an assignment or entering into an agreement to perform any assignment, an appraiser must properly identify the problem to be addressed and have the knowledge and experience to complete the assignment competently…….” and “Competency applies to factors such as, but not limited to, an appraiser’s familiarity with”:

  • The specific type of property
  • The real estate market
  • The geographic area
  • The correct analytical methods

If you find yourself in an unfamiliar location, such as New York or Miami , investigate not only the supply and demand factors affecting the local real estate market, but also obtain sufficient information to project the real estate taxes over the investment holding period. You may need to affiliate with a qualified local real estate appraiser to develop the stabilized income and expense forecast with the correct real estate tax estimate for your direct capitalization and projected discounted cash flow analysis. Consider the following factors that can impact accurate real estate tax calculations:

  • The equalization rate may not represent the effective equalization rate or the stipulated rate in the municipality.
  • The tax rate may only be declining in the short term if new construction does not continue into the future.
  • The tax rate may increase dramatically with new government expenditures or unforeseen circumstances.
  • Reported exemptions may be inaccurate.
  • Although the property is reassessed on sale, expect a two- or three-year lag until the tax authority incorporates this reassessment.
  • The real property assessments for all the tax comparables may have calculation inaccuracies from programming or human errors.
  • Rental rates may have spiked and the taxing authority has yet to capture this increase in real property values and the assessed value.
  • Property-specific information may be inaccurate and impacts taxes until corrected.
  • Tax assessment changes are phased in over a number of years, while the taxable value increases every year.
  • Tax abatements that generally are phased out over time must be factored into the analysis.

As a final note, do not forget transfer taxes and mortgages taxes that can also affect your returns on real estate investments.

Note: a special thanks to Nancy Reiss of The Write Stuff.

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[Straight From MacCrate] Consider Review Appraisals

April 29, 2007 | 4:07 pm |

Jim MacCrate, MAI, CRE, ASA, has worn many hats in his career. He taught a number of the appraisal classes I have taken through the Appraisal Institute. and I think he is one of the few people who actually understands the “J-Factor.” His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime. This week, in his inaugural post, he dashes dogma and talks non sequitor to get to the topic of appraisal review. …Jonathan Miller

Non Sequitor cartoon strip
“A pinch of preconceived notions, a dash of dogma, mix well in a bowl of innuendo, then just say the magic word” . . . and what do you get? A real estate appraisal? Or just a quote from Max in the cartoon Non Sequitur.

With all the players in the appraisal process, it’s no surprise client pressures from all sides can create biased reports. Unfortunately, lawyers, accountants and other real estate advisors who work on a performance fee basis sometimes suffer ethical lapses. They opt for fat fees, rather than fair appraisals. Even government reinforces subtle pressure on real estate appraisers by failing to protect society with required standards (minimal licensing and limited resources to monitor unscrupulous appraisers and their clients). Without such oversight, appraisers must learn to walk away to avoid compromising their ethics and professionalism.

Thus the need for unbiased professionals to review appraisal reports for fraud, incompetence, or human error. The Uniform Standards of Professional Appraisal Practice (USPAP) defines the review function as distinct from real estate valuation/consulting, so different standards apply.

Many review appraisers are independent professionals who are educated, trained, and experienced to evaluate appraisal reports. They must know the property type, the market, the geographic area, and the correct analytical methods for an accurate analysis. They judge the quality, completeness, and adequacy of the appraisal report to determine if its information is relevant and the correct valuation techniques support reasonable conclusions.

Max also concludes

Facts are a lot more fun when you get to make them up.

That’s why appraisal reviews offer good insurance and professional appraisal reviewers make qualified industry watchdogs.

Note: a special thanks to Nancy Reiss of The Write Stuff and Max Ramsland, MAI for their help with this.

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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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[Hicks On Sticks] Comp Check Battles

November 27, 2006 | 11:32 am |

Butch Hicks is an appraisal veteran that hails from Northern Virginia. I first met him when he was the President of RAC (Relocation Appraisers & Consultants) and was struck by how he got straight to the point, and peppered it with a southern drawl. He is a leader in the appraisal industry and has an affinity for crunching housing market data like I do. In his first post for his Hicks on Sticks column in Soapbox, Butch deals with the ethics and practicality of doing comp checks (which in their pure form, completely violates USPAP). I am thrilled to have him contribute to Soapbox. …Jonathan Miller


“Bill Hicks my friend (if he was a friend, he would have called me Butch), how are you doing? My name is Slick E. Lender and I’m with AllQualify Mortgage. We have just begun an expensive ad campaign in Virginia and anticipate a lot of appraisal work for you as a result and I’d like to establish a relationship with you as the sole appraiser for our use there.”

And so begins yet another phone request for a comp check.

“Ok,” I respond, “what comp do you want me to check?” This, my ‘old’ response, usually resulted in a pained and questioning “huh” from the other end of the phone line. “You asked for a comp check,” I reply, “so which one do you wish me to check?”

These requests for comp checks, whether made by phone or fax, have increased dramatically with the advent of the internet, the slowing of the realty market and rising interest rates that have all but chocked off the refinancing deals of the recent past. Like all appraisers, I assume, I take a different attitude toward such requests from my regular clients as opposed to those like Slick E. but of late my patience has worn a bit thin on all of them.

I’m not going into a discussion here of how providing comp checks in order to lasso an appraisal request might place the appraiser in jeopardy as regards USPAP; I assume all appraisers are aware of such, though the evidence might indicate otherwise (on numerous occasions, I’ve been told by requestors that I’m the first to ever have bought that issue up). Also, I must admit, it’s a little difficult to get terribly angry with those making such requests because I recognize that a primary reason they are doing so is because so many of my fellow ‘professionals’ easily accommodate them.

Worse, to some degree, are those faxed requests that eat up otherwise clean paper. I’ve begun a collection of the worst offenders (another subject for later), you know, the ones with the Appraisal in Appraisal Request crossed out and replaced with a handwritten “Comp”. Lenders, having now caught on the fact that some appraisers (like myself) do not provide comp requests, have now resorted to blast faxing such to every appraiser in a given market. Experience tells them, I suppose, that someone will bite and the chase for ‘the number’ is on.

There was a time when I would respond for such requests by simply sending all sales in a subject neighborhood to the requestor and letting them decide at that point whether or not to proceed with a formal appraisal request. It’s not that difficult to do with my current MLS system but it does take a little time. Time is money however and for that reason I eventually halted even that process. But, what the heck, I’m in the appraisal business and I earn a living by collecting a fee for such, so my new view is to take advantage of a technology that is in some fashion, competing with me.

Zillow.com is now my friend. Since appearing on the scene, I have taken to measuring its performance against mine on actual sale cases. How, you may ask, do I do that? Simple! Since I do a lot of relocation work, I have something to measure my own performance against. By capturing Zillows value, along with my own on every relocation assignment and tracking the history of the subject as it goes to settlement, I have concluded that in most cases, the Zillow value is in excess of my value estimate and the eventual sales price (in fact, of late, the Zillow value is generally higher than even the subjects initial list price).

Back to earning the fee part earlier noted (not to mention saving myself the aggravation), I have devised a new tactic. Now, when I get that call from Slick, I simply point him to the Zillow website. If, after obtaining a ‘value’ there, he wishes to proceed, fine, I can accept the assignment with no problem and a very clear conscience.

Coming in ‘low’ is not a problem; the value is what it is. I don’t worry about irate phone calls from anyone (borrower or lender) any longer; experienced appraisers learn to develop a thick skin.

Experienced appraisers also learn which battles to fight and ones involving comp checks are no longer a priority of mine.

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[Commercial Grade] Schmoozin’

September 7, 2006 | 11:13 am |

Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. Today John tries to comp some tickets.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, on Thursdays, one of the smartest guys I know. …Jonathan Miller


HUD announced yesterday that it settled a case against a property appraisal firm for paying kickbacks to a mortgage company for referrals. “Kickbacks” for settlement services are illegal for obvious reasons. While the headline suggests some sleazy backroom dealings, the facts (as presented) are that Grasso Appraisal Services of Burlington, MA sent restaurant gift certificates to East-West Mortgage Services over a three year period, totaling $4,000..

We’ve spoken frequently on Soapbox about the problems with mortgage brokers and appraisers who, with a nod and a wink, make the deals “work.” There is no such allegation made here, though. Nowhere in HUD’s release does it suggest any improper appraisal work was done and, in fact, the settlement agreement between HUD and Grasso specifies that the parties acknowledge no admission of any wrongdoing. The only allegation is that a “kickback” was made.

Don’t get me wrongI don’t condone kickbacks. When, though, does a “kickback” differ from “schmoozing?” (For the record, I don’t do either.) It is not uncommon for an appraiser to take a group of clients to an exclusive private golf course, followed by dinner and drinks. The tab for one day could be $4,000! Some appraisers have turned schmoozing into a full-time job. (Marketing, they call it.) Do golf outings and four-star dinners lead to a better client-appraiser relationship and, ultimately, more work. I suppose so, otherwise they wouldn’t do it. How about a couple of tickets to a Yankees game? Is “comping” a couple of ball-game tickets different from restaurant certificates?

The real difference, I guess, it that a kickback implicitly suggests a quid pro quo, whereas basic business schmoozing is, well, schmoozing.


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