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. 

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.

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.

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.

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.

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.

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.

 

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.

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.



 

What the bifurcation is going on too?

Continued from the previous post

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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! =)