On December 2nd, the final Interagency Appraisal & Evaluation Guidelines were published. These represent the basic appraisal requirements when working for a federally regulated lending institution. The last set of guidelines were published in 1992 and only a few pages addressed appraisal requirements. This time around the guidelines are 70 pages and address everything from maintaining appraiser independence, appraiser selection, use of AVMs and BPO as well as requirements for reviewers.
A couple things of interest from the new guidelines:
BPOs can not be used as the primary basis for making a lending decision.
AVMs can not be used as the primary basis for making a lending decision.
Reviewers are expected to have sufficient eduction, experience and knowledge about appraisal methodology.
The appraiser independence requirements found in the HVCC are now part of the new guidelines.
Restricted use reports are generally not sufficient for supporting a lending decision.
The new guidelines can be found on the FDIC website at http://www.fdic.gov/news/news/press/2010/pr10261a.pdf
Thursday, December 9, 2010
Wednesday, November 24, 2010
What makes you an appraiser?
The most common answer is holding a license or certification, but that would be the wrong answer. Notice that USPAP says nothing about licensing.
The main reason for being licensed is so that you can work for banks. Granted banks are a large client base, but they are just a part of the appraisal universe, and frankly as far as clients go, they typically do not pay very well.
Believe me when I say there are clients that will pay 5 and 6 digits for your work, but it is not your license or certification they care about. It is your knowledge and skills they pay for. So what it is that makes you an appraiser?
Knowing the answer to this question will help you understand the opportunities that few appraisers realize.
The main reason for being licensed is so that you can work for banks. Granted banks are a large client base, but they are just a part of the appraisal universe, and frankly as far as clients go, they typically do not pay very well.
Believe me when I say there are clients that will pay 5 and 6 digits for your work, but it is not your license or certification they care about. It is your knowledge and skills they pay for. So what it is that makes you an appraiser?
Knowing the answer to this question will help you understand the opportunities that few appraisers realize.
Tuesday, October 19, 2010
Back to the future.
As we all know the HVCC has expired. Some appraisers thought the good old days of working for mortgage brokers and loan originators would soon return. That is not going to happen.
The rules to protect appraiser independence are here to stay. After the Dodd–Frank Wall Street Reform and Consumer Protection Act included the provisions of the HVCC, to no great surprise Fannie Mae has also implemented major portions of the HVCC in its policies. On October 15, Fannie Mae released SEL-2010-14 which describes their appraiser independence policies.
In a nut shell Fannie Mae's policy is that:
1. All members of the lender's production staff;
2. Any person who is compensated on a commission basis upon the successful completion of a Mortgage; and
3. Any person whose immediate supervisor is not independent of the lender production staff and process.
Are prohibited from:
1. Selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assignment or for inclusion on a list or panel of appraisers approved or forbidden to perform appraisals for the lender and
2. Having any substantive communications with an appraiser or appraisal management company relating to or having an impact on valuation, including ordering or managing an appraisal assignment.
For good or bad, the new appraisal business model of working for third parties such as AMCs or for bank appraisal departments is here to stay.
The rules to protect appraiser independence are here to stay. After the Dodd–Frank Wall Street Reform and Consumer Protection Act included the provisions of the HVCC, to no great surprise Fannie Mae has also implemented major portions of the HVCC in its policies. On October 15, Fannie Mae released SEL-2010-14 which describes their appraiser independence policies.
In a nut shell Fannie Mae's policy is that:
1. All members of the lender's production staff;
2. Any person who is compensated on a commission basis upon the successful completion of a Mortgage; and
3. Any person whose immediate supervisor is not independent of the lender production staff and process.
Are prohibited from:
1. Selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assignment or for inclusion on a list or panel of appraisers approved or forbidden to perform appraisals for the lender and
2. Having any substantive communications with an appraiser or appraisal management company relating to or having an impact on valuation, including ordering or managing an appraisal assignment.
For good or bad, the new appraisal business model of working for third parties such as AMCs or for bank appraisal departments is here to stay.
Friday, September 10, 2010
Cost data at a fraction of the price
If you are looking for way to trim expenses, might I suggest the National Building Cost Manual published by Craftsman Books. A friend and fellow appraiser brought this source to my attention and I thought I would try it out. It comes in both book and software format.
I compared it to Marshall & Swift and liked what I found. Granted Craftsman's data is categorized a little differently and they have a little different idea of what constitutes "average quality", "good quality" etc. But when I matched up an example cost estimate as best I could, Craftsman's result was within a few percentage points of Marshall & Swift.
And here is the best part. It is roughly one-tenth the cost. I spent a total of $53 on both the book and software. Compared to over $500 for my Marshall & Swift annual subscription. Plus the book included not only residential, but many commercial, industrial and retail improvements.
Now it is not as exhaustively detailed as M&S, but for simple RCN calculations it appears it could be a real good, and less expensive alternative.
I compared it to Marshall & Swift and liked what I found. Granted Craftsman's data is categorized a little differently and they have a little different idea of what constitutes "average quality", "good quality" etc. But when I matched up an example cost estimate as best I could, Craftsman's result was within a few percentage points of Marshall & Swift.
And here is the best part. It is roughly one-tenth the cost. I spent a total of $53 on both the book and software. Compared to over $500 for my Marshall & Swift annual subscription. Plus the book included not only residential, but many commercial, industrial and retail improvements.
Now it is not as exhaustively detailed as M&S, but for simple RCN calculations it appears it could be a real good, and less expensive alternative.
Sunday, September 5, 2010
Customary and Reasonable Fees
Is a new day dawning for residential appraisers that work for appraisal management agencies (AMCs)?
If you read the newly enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) that answer is YES. We have all been hearing about the new law that requires AMCs to pay appraisers "customary and reasonable" fees. So when should we be expecting a pay raise? October 19, 2010 is the big day.
Talk about teeth. Lenders and AMC that continue to pay appraisers "slave wages" after this date can be fined $10,000 to $20,000 PER DAY.
So who gets to decide what is "customary and reasonable." We do (the appraisers). And the kicker is that fees paid by known AMCs are excluded from setting the standard. Now there are other agencies that get to have a say as well (The V.A. as an example) but AMCs do not.
The Appraisal Institute recently published a FAQ which provides some good insight.
I personally will be keeping a keen eye on how AMCs will be responding over the next few weeks. They are no doubt going to try to find a loop hole. But if we can now expect to get "full fees" from AMCs, I will probably start responding to their e-mails and phone calls.
If you read the newly enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) that answer is YES. We have all been hearing about the new law that requires AMCs to pay appraisers "customary and reasonable" fees. So when should we be expecting a pay raise? October 19, 2010 is the big day.
Talk about teeth. Lenders and AMC that continue to pay appraisers "slave wages" after this date can be fined $10,000 to $20,000 PER DAY.
So who gets to decide what is "customary and reasonable." We do (the appraisers). And the kicker is that fees paid by known AMCs are excluded from setting the standard. Now there are other agencies that get to have a say as well (The V.A. as an example) but AMCs do not.
The Appraisal Institute recently published a FAQ which provides some good insight.
I personally will be keeping a keen eye on how AMCs will be responding over the next few weeks. They are no doubt going to try to find a loop hole. But if we can now expect to get "full fees" from AMCs, I will probably start responding to their e-mails and phone calls.
Friday, July 2, 2010
Fannie Mae Announcement
Fannie Mae released some updates to Section B4 of its Selling Guide that change your everyday appraisal process. You will want to read SEL-2010-09 in detail.
Here is a brief summary:
1. Interior photos are now required when doing an interior inspection (effective 9/1/2010)
2. Calculating the Months of Housing Supply on the 1004MC has been clarified. You now use the Total # of Active Listings as of the last day for the given 3 month time frame. (Not the total cumulative number of properties listed during the entire three month time frame.) They prefer this method in order to provide a more precise depiction of housing supply on the effective date of the report. (effective 9/1/2010)
3. Use of foreclosed or short sale homes as comparables require the appraiser to analyze the motivations of the parties involved as well as the the physical condition of the comparable to determine whether there is an adjustment needed. In many neighborhoods, bank related sales sell for a discount compared to owner-occupied sales and may need an upwards adjustment. Here in the Minneapolis area bank related sales often sell for 20% to 30% less than traditional sales.
4. Fannie Mae provides a reminder that seller concessions as well as the inclusion of personal property continue to be a source of over-valuation and need to be addressed by the appraiser.
Here is a brief summary:
1. Interior photos are now required when doing an interior inspection (effective 9/1/2010)
2. Calculating the Months of Housing Supply on the 1004MC has been clarified. You now use the Total # of Active Listings as of the last day for the given 3 month time frame. (Not the total cumulative number of properties listed during the entire three month time frame.) They prefer this method in order to provide a more precise depiction of housing supply on the effective date of the report. (effective 9/1/2010)
3. Use of foreclosed or short sale homes as comparables require the appraiser to analyze the motivations of the parties involved as well as the the physical condition of the comparable to determine whether there is an adjustment needed. In many neighborhoods, bank related sales sell for a discount compared to owner-occupied sales and may need an upwards adjustment. Here in the Minneapolis area bank related sales often sell for 20% to 30% less than traditional sales.
4. Fannie Mae provides a reminder that seller concessions as well as the inclusion of personal property continue to be a source of over-valuation and need to be addressed by the appraiser.
Wednesday, June 23, 2010
Housing Market Pains
We all knew the housing market was being artificially supported by the housing tax credit. But no one was sure by how much.
Based on data released by the Commerce Department, sales of new homes declined 33% in May to the lowest level on record. Compared to the peak activity seen in mid 2005 demand has declined 78%. Median sale prices have declined 9.6% over the past year nationwide.
As painful as it is to say, this will likely mean continuing declines in housing values and additional foreclosure activity.
Solid market analysis is more important than ever in your appraisal process.
Based on data released by the Commerce Department, sales of new homes declined 33% in May to the lowest level on record. Compared to the peak activity seen in mid 2005 demand has declined 78%. Median sale prices have declined 9.6% over the past year nationwide.
As painful as it is to say, this will likely mean continuing declines in housing values and additional foreclosure activity.
Solid market analysis is more important than ever in your appraisal process.
Friday, June 4, 2010
To sign or not to sign
Should trainees sign the report? If they are relatively new to the industry the answer is probably not. Remember Certification #11 which states "I have the knowledge and experience in appraising this type of property in this market." By signing the report the appraisers are certifying they are competent.
Newly minted trainee appraisers likely cannot make this claim and thus should not be signing the report. Many of us also work for clients that prohibit trainees from co-signing, So, how do we properly document the trainee's involvement in the process so they can claim the experience?
USPAP (S.R. 2-3) requires that the name of each individual providing significant real property appraisal assistance be stated in the certification. The work the trainee performed should also be described in the report as well.
Here is why:
I have heard a common horror story from a few of my former students. They had been working for three to four years gaining the requisite 2,000 to 2,500 hours of experience needed to upgrade their licenses. They never co-signed the reports for the reasons described above. When the Commerce Department reviewed their experience, they found their supervisor had not named them in the report (as required by USPAP) and thus these trainees were given NO credit for their hours. They had to start over since nothing in the reports documented their involvement.
Also, as a parting gift, their supervisors were fined and sanctioned for sending out reports that did not conform to USPAP.
Newly minted trainee appraisers likely cannot make this claim and thus should not be signing the report. Many of us also work for clients that prohibit trainees from co-signing, So, how do we properly document the trainee's involvement in the process so they can claim the experience?
USPAP (S.R. 2-3) requires that the name of each individual providing significant real property appraisal assistance be stated in the certification. The work the trainee performed should also be described in the report as well.
Here is why:
I have heard a common horror story from a few of my former students. They had been working for three to four years gaining the requisite 2,000 to 2,500 hours of experience needed to upgrade their licenses. They never co-signed the reports for the reasons described above. When the Commerce Department reviewed their experience, they found their supervisor had not named them in the report (as required by USPAP) and thus these trainees were given NO credit for their hours. They had to start over since nothing in the reports documented their involvement.
Also, as a parting gift, their supervisors were fined and sanctioned for sending out reports that did not conform to USPAP.
Wednesday, May 26, 2010
Does the supervisor appraiser have to inspect the subject?
When a supervisor appraiser is working with a Trainee Residential Real Property Appraiser the answer is YES for Fannie Mae deals. Fannie Mae requires the appraisal to be completed by a state licensed or certified appraiser in compliance with FIREEA. Trainee appraisers do not fall into this category. Thus the supervisor is the appraiser. Fannie Mae requires the appraiser to:
1. Personally inspect the subject
2. Personally inspect the comparables
3. Perform the analysis and
4. Prepare and sign the report
This does not mean that the trainee can not help with process and even complete the majority of the work. It does mean however, that you as the supervisor have to go along for the ride.
See Section B4-1.1-03 and B4-1.1-04 of the Fannie Mae Selling Guide.
1. Personally inspect the subject
2. Personally inspect the comparables
3. Perform the analysis and
4. Prepare and sign the report
This does not mean that the trainee can not help with process and even complete the majority of the work. It does mean however, that you as the supervisor have to go along for the ride.
See Section B4-1.1-03 and B4-1.1-04 of the Fannie Mae Selling Guide.
Tuesday, April 20, 2010
The Cost Approach Myth
Does this sound familiar?
"Cost sets the upper limit of value"
Many appraisers (and underwriters for that matter) believe this to be a true statement. This leads to a belief that the cost approach should come in a bit higher than the sales comparison approach.
There are plenty of myths in our industry and this is one of them.
As we learned in Appraisal 101, cost and value are separate concepts and may or may not be related to one another. Cost is a function of production while value is a function of exchange. As a result, cost can be equal to, greater than and yes, even less than value.
The cost and sales comparison approaches should be treated as separate indicators of value. There is nothing wrong with the cost approach coming in less than the sales comparison approach. Some appraisers that believe in this myth force the cost approach to an amount higher than the sales approach. This biases the cost approach and removes its objectivity and credibility.
"Cost sets the upper limit of value"
Many appraisers (and underwriters for that matter) believe this to be a true statement. This leads to a belief that the cost approach should come in a bit higher than the sales comparison approach.
There are plenty of myths in our industry and this is one of them.
As we learned in Appraisal 101, cost and value are separate concepts and may or may not be related to one another. Cost is a function of production while value is a function of exchange. As a result, cost can be equal to, greater than and yes, even less than value.
The cost and sales comparison approaches should be treated as separate indicators of value. There is nothing wrong with the cost approach coming in less than the sales comparison approach. Some appraisers that believe in this myth force the cost approach to an amount higher than the sales approach. This biases the cost approach and removes its objectivity and credibility.
Wednesday, April 7, 2010
What the bifurcation is going on too?
Continued from the previous post
___________________________
In the end I was quite comfortable that the market value coincided with the contract price.
In my research I found that buyers were paying premiums for owner sales and in many cases paying more for an older and smaller improvement when larger and newer homes were available due to foreclosure. The reasoning came to greater perceived risk when buying a bank owned home. Banks often provide few to no assurrances or warrantees regarding the land, improvements and title. Buyers are on their own.
This market prefernce resulted in two sub-markets among properties that otherwise appear to be competitive. The nicer and larger bank owned properties were not viewed as true substitutes. They sell at a significant discount that better reflects liquidation value rather market value. Thus, making an upwards condition of sale adjustment to the bank owned sales was appropriate.
I have to admit it was fun to see this market nuance as it ultimately provided the support for the subjects purchase price.
But as it goes no good deed goes unpunished. In spite of the purchase price being supported, the underwriter hated the report due to the large adjustments used to account for the market differences and called to have a new appraisal performed.
Cheers! =)
___________________________
In the end I was quite comfortable that the market value coincided with the contract price.
In my research I found that buyers were paying premiums for owner sales and in many cases paying more for an older and smaller improvement when larger and newer homes were available due to foreclosure. The reasoning came to greater perceived risk when buying a bank owned home. Banks often provide few to no assurrances or warrantees regarding the land, improvements and title. Buyers are on their own.
This market prefernce resulted in two sub-markets among properties that otherwise appear to be competitive. The nicer and larger bank owned properties were not viewed as true substitutes. They sell at a significant discount that better reflects liquidation value rather market value. Thus, making an upwards condition of sale adjustment to the bank owned sales was appropriate.
I have to admit it was fun to see this market nuance as it ultimately provided the support for the subjects purchase price.
But as it goes no good deed goes unpunished. In spite of the purchase price being supported, the underwriter hated the report due to the large adjustments used to account for the market differences and called to have a new appraisal performed.
Cheers! =)
Sunday, March 14, 2010
What the bifurcation is going on?
I am working on an appraisal of a nicely sized 4 level split on 5 acres in northern Anoka County, MN. The appraisal is for a purchase and of more interest is the sale is not bank related; a rarely seen traditional sale.
Like many communities, the place is drowning in REO listings. In my comparable sales pool, 73% were bank related sales.
If bank sales are the vast majority of the market do they “become the market” in spite of the atypical motivation often involved? I’ve heard arguments both ways.
One argument discusses the principle of substitution. In an area where buyers see no difference between bank properties and traditional owner properties then the bank sales are comparables for owner-occupied homes.
On the other side appraisers argue that bank sales often involve atypical motivation and other factors that are more reflective of liquidation value rather than market value. Thus bank sales are not reflective of the market and are not used as comparables for a traditional sale.
Depending on which point of view you hold you either ignore 73% of the market, as in my case, and risk omitting comps a reviewer will rip you for not using or your value conclusions arguably are more akin to liquidation than market value.
I admit I lean towards substitution in my comp selection. If a bank sale is a substitute it is a comparable. This may have resulted in a disgruntled home owner here and there.
So, the subject is under contract for $205,000 in a traditional sale and most of the recent sales, which were bank related, are physically superior in terms of size, age and condition and have sold for prices between $160,000 and $190,000.
So am I on the express bus to a deal killing low value or could this contract price be supported in spite of physically superior homes selling for less?
The answer lies in a term we have been hearing about about lately - bifurcated market.
Like many communities, the place is drowning in REO listings. In my comparable sales pool, 73% were bank related sales.
If bank sales are the vast majority of the market do they “become the market” in spite of the atypical motivation often involved? I’ve heard arguments both ways.
One argument discusses the principle of substitution. In an area where buyers see no difference between bank properties and traditional owner properties then the bank sales are comparables for owner-occupied homes.
On the other side appraisers argue that bank sales often involve atypical motivation and other factors that are more reflective of liquidation value rather than market value. Thus bank sales are not reflective of the market and are not used as comparables for a traditional sale.
Depending on which point of view you hold you either ignore 73% of the market, as in my case, and risk omitting comps a reviewer will rip you for not using or your value conclusions arguably are more akin to liquidation than market value.
I admit I lean towards substitution in my comp selection. If a bank sale is a substitute it is a comparable. This may have resulted in a disgruntled home owner here and there.
So, the subject is under contract for $205,000 in a traditional sale and most of the recent sales, which were bank related, are physically superior in terms of size, age and condition and have sold for prices between $160,000 and $190,000.
So am I on the express bus to a deal killing low value or could this contract price be supported in spite of physically superior homes selling for less?
The answer lies in a term we have been hearing about about lately - bifurcated market.
Sunday, February 28, 2010
Appraisal Must Reads....
I was recently asked to post a list of must read appraisal books. So here we go...
The Appraisal of Real Estate 13th Ed. - The appraiser's bible
Appraising Residential Properties 4th Ed. - The residential appraiser's bible
Market Analysis for Real Estate
An Introduction to Statistics for Appraisers
There is a laundry list of great books published by the Appraisal Institute.
If you are looking to polish your real estate math skills see:
Real Estate Math Demystified
Also, residential appraisers need to read Section B4 of Fannie Mae's Selling Guide since these are the standard appraisal requirements used by most lenders.
The Appraisal of Real Estate 13th Ed. - The appraiser's bible
Appraising Residential Properties 4th Ed. - The residential appraiser's bible
Market Analysis for Real Estate
An Introduction to Statistics for Appraisers
There is a laundry list of great books published by the Appraisal Institute.
If you are looking to polish your real estate math skills see:
Real Estate Math Demystified
Also, residential appraisers need to read Section B4 of Fannie Mae's Selling Guide since these are the standard appraisal requirements used by most lenders.
Friday, February 26, 2010
New MN Law - Appraisal Supervisors & Trainees
As of August 1st 2009, Appraisal supervisors and trainees must register with the MN Department of Commerce. According to the law "Trainees must provide the name and address of their supervisory appraiser(s). Certified residential real property appraisers and certified general real property appraisers who intend to act in the capacity of a supervisory appraiser must provide the name and address of the trainee real property appraiser(s) that they intend to supervise. In addition, trainees must notify the Commissioner of Commerce in writing within ten days of terminating or changing their relationship with any supervisory appraiser. Supervisory appraisers must notify the Commissioner of Commerce in writing within ten days when the supervision of a trainee has terminated or when the trainee is no longer under the supervision of the supervisory appraiser. Certified residential real property appraisers and certified general real property appraisers may have no more than three trainees working under supervision at any one time."
Getting your appraisal license.
Thinking of getting your appraisal license? The Appraisal Foundation has a great write-up on the licensing process. Here in Minnesota, 75 hours of pre-licensing education is required. These courses are available from Kaplan, where I teach many of the courses. Also, the Northstar Chapter of the Appraisal Institute provides an excellent educational line up.
Feel free to contact me with any questions you may have.
Feel free to contact me with any questions you may have.
Wednesday, February 24, 2010
Hot Topic - Appraisal Fees
How much appraisers are charging is always a subject of interest. Alamode recently published their first nation wide fee survey. The median fee for a residential appraisal in Minnesota is $350 with an average of $328. This suggests to me that AMC's are not ruining the party with low fees like many of us had feared. Clearly there are many clients out there paying full fees.
Twin Cities housing market summary
The Minneapolis/St. Paul metropolitan area consists of 11 core counties. The area has a very diverse economic base and residents enjoy a quality of life among the highest in the nation. The following charts depict market trends for residential properties in the 11 county metropolitan area and are based on information from the Regional Multiple Listing Service of Minnesota, Inc. for the period 2000 through 2009.
Residential market activity in the Twin Cities began to slow between 2004 and 2005. Since approximately 2006 the market has been generally over-supplied with a wide gap between supply and demand. On a positive note, supply has been declining since 2007 and demand has recently increased. If these trends continue, market balance may again be seen in the next few years.
As a result of the slowing market, the median sale prices of homes in the metropolitan area have declined.
The Case-Shiller Home Price Index for the Minneapolis/St. Paul Metropolitan area shows that home prices have declined to an amount equal to prices seen in late 2001. In other words, gains in housing values seen over the last 9 years have been largely erased. A positive trend however, is that the index shows an increase in overall housing prices since the end of 2009.
Residential market activity in the Twin Cities began to slow between 2004 and 2005. Since approximately 2006 the market has been generally over-supplied with a wide gap between supply and demand. On a positive note, supply has been declining since 2007 and demand has recently increased. If these trends continue, market balance may again be seen in the next few years.
As a result of the slowing market, the median sale prices of homes in the metropolitan area have declined.
The Case-Shiller Home Price Index for the Minneapolis/St. Paul Metropolitan area shows that home prices have declined to an amount equal to prices seen in late 2001. In other words, gains in housing values seen over the last 9 years have been largely erased. A positive trend however, is that the index shows an increase in overall housing prices since the end of 2009.
Monday, February 22, 2010
An up tick in the demand for appraisers??
This is an anecdotal observation. But I think it is of some interest. The latest pre-licensing course I taught at Kaplan had 39 students, which is the largest number of new appraisers I have seen in about two years. The number of students taking the courses has been increasing steadily over the past 6 months.
Of more interest however is that in each of the last two offerings of the pre-licensing courses, more than half the students had an appraisal position waiting for them. This is a significant surge in the number of students with jobs in hand than in the recent past.
Clearly there are companies out there with work to be had. The trick, as always, is finding them.
If you happen to be one of these new appraisers, please post what you did to get that first job.
Of more interest however is that in each of the last two offerings of the pre-licensing courses, more than half the students had an appraisal position waiting for them. This is a significant surge in the number of students with jobs in hand than in the recent past.
Clearly there are companies out there with work to be had. The trick, as always, is finding them.
If you happen to be one of these new appraisers, please post what you did to get that first job.
Sunday, February 21, 2010
MN State Laws....
We all get caught up on USPAP and Fannie Mae guidelines. But don't forget that the State of Minnesota has something to say about how we do our jobs as well. Appraisers in Minnesota are regulated by the Minnesota Department of Commerce. They have a few rules and regulations you need to be aware of. Take a peek at Statutes 82B and Regulations 2808.
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