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! =)

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.

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.

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.

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.