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Working RE Serving Real Estate Professionals
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Winter 2013 Volume 31
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From the Publisher Readers Respond Chase Challenges USPAP by Isaac Peck, Associate Editor
10 16 18 24 26
Solution: Cost-Plus AMC Model? By Isaac Peck, Associate Editor
Appraiser Evaluations—Why Not? by George R. Mann, MAI, SRA, MRICS
Why Appraisers Get Sued By Philip G. Spool, ASA
Appraisers Talk, Congress Listens by David Brauner and Isaac Peck
Blacklisting with a Twist by Isaac Peck, Associate Editor
28
Calculating Diminution of a Contaminated Property By Francis Xavier Finigan
30
Closer Look for Home Inspectors: Examining Agent-Inspector Relationship By Isaac Peck, Associate Editor
32
Marketing Secret Weapon: Tape Measures Measure Up Big By Isaac Peck, Associate Editor
34 36 38 40
Pressure, Subtle Influence and Plausible Deniability
New Home Inspector Insurance Program
by Isaac Peck, Associate Editor
Industry News Professional Marketplace Dealing with Negative Reviews By David Brauner, Editor
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OREP/Working RE Webinar Series By David Brauner, Editor
This is one of my favorite expressions: “You don’t know what you don’t know!”
Amen to that. We learn from others and if we don’t, we may never realize what we don’t know. In this competitive business environment, that means everything. Many of you work solo with little peer interaction: it’s hard to learn and grow under these circumstances. But there are experts who are giving back— teaching and mentoring and sharing what they know. We’ve given them a platform to reach you. Can You Increase Your Appraisal Volume and the “Well worth Quality of Your Work? Some of us are technicians— we put our noses the grindstone to do the “work” the expense, that needs to get done in our businesses. Others I wish I could are big-picture folks who set up systems, leverage get the technology and people power to succeed. Not everyone can do both. If you’re more the “appraiser rest of my technician” and less the business owner, this webiappraisers nar will help you be more productive and more to invest the profitable. If you’re a little slow implementing the latest technology you will want to check out our time.” most popular webinar, also presented by Dustin —R. Hamilton, SRA Harris: Mobile Appraising: Saving Time and Money. A recent attendee says it better than I can. Lori L. Horn, SRA, writes: “I want to thank you for a very informative class. I will be buying an iPad within the week to use on inspections. This class gave me the initiative to just go out and do it.” K. Coviello writes, “The webinar was great, exactly what I needed…I loved it.” Maximizing AMC Orders and Income: Dare I say it—many of you are succeeding quite nicely working with AMCs—the ones who pay fairly and work competently and professionally. How do you find the good ones? How do you establish a win-win with them? How do you say no or decline an assignment and continue to get orders? How do you raise your fees? What’s the most efficient way to apply to the various panels? Take this webinar to find out. Maximizing AMC Orders and Income and the companion AMC Guide are investments that will pay for themselves many times over (and over and over). The modest investment more than pays for itself in the money to be gained, aggravation to be avoided and the time not wasted. Learn from someone who knows—and earn. Top 5 Questions Asked of an Appraiser and How to Answer, How to Limit Liability, Maintain Independence, and Fight Influence: Richard Hagar, SRA is the nation’s top expert page 278
4 Working RE Winter 2013
How Well Do You Know Your Rights Very informative article. In addition to keeping a copy of any request for changes or alterations in file, I also copy and paste their request directly into my report. This has made some underwriters very uncomfortable and requests for changes have dropped dramatically.
Lender’s Choice: Violate USPAP or Blacklisted I appreciate the article and my best to Mr. Dingeman in his “David vs. Goliath” battle. I would say that this is not just “his” battle, but every appraiser who works hard to do the right thing with integrity. Chase has a legitimate need for the appraisal information, BUT they went about it the wrong way. They could have relayed information requests through the original client, OR they could have provided the appraiser with the copy of the assignment whereby the client specifically authorized the appraiser to communicate with them in matters related to the appraisal. Chase has a habit of non USPAP compliance. The extra step of going through the “real” client is necessary because many lenders (including Chase) attempt to hold the appraiser responsible for conforming to THEIR appraisal policies after the fact: i.e.—“we require so many comps; or we require an income operating expense statement and rent survey on all non-owner occupied property” when that was never part of the original contracted service. The appraiser needs to file a
complaint against Chase with the new Consumer Finance Protection Bureau. —Steve Wyrick
Here’s what else is going on. In the old days, before the lender would put an appraiser on their “black list” they would send an appraiser a certified letter stating the appraisal in question and giving the appraiser an opportunity for rebuttal. Now here is how it works. A broker tells the lender not to use a certain appraiser. The lender then tells the AMC to take the appraiser off the rotation. So the lender does not have to notify the appraiser nor is there any rebuttal as the appraiser is not being taken off the lender’s list but the AMC’s. The broker has more control than before. It doesn’t have to be for any certain appraisal just because the loan officer doesn’t like the appraiser. The AMC doesn’t have to notify the appraiser because they still leave them in the rotation for other lenders who use them. Pretty tricky. This has happened to me. I have no recourse and it was not because of any particular appraisal. I know which mortgage company told the lenders not to use me. I’ve called the lenders and they tell me to call the AMC and vice versa. This is more control than ever by the loan officers. —Charlotte Dingeman is doing a great job with this elephant on his shoulders. I suggest that his attorney start a class action to resolve this and name a few other large lending institutions who have ineligible lists as they are almost all illegal. All ineligible lists should conform to requirements for appraisal removal as required by Reg Z. If responsibility was appropriately placed on the institution underwriting, as well as those purchasing loans, to conduct proper practices for identifying weakness in appraisals, these issues would be moot. Lost wages for a class action would be very large. —QA Director at an AMC
I was wondering if you have a firm you could refer to me that handles filing suits against lenders that place appraisers on an exclusionary list or otherwise known as blacklisting? I just found out today that I’m blacklisted. —Joshua Rock John Dingeman, subject of the Lender’s Choice story, answers: “Josh, you can contact Scott H. Zwillinger (szwillinger@ gzlawoffice.com) and see if he can help. He is the attorney helping me.” First they came for the socialists, and I did not speak out because I was not a socialist. Then they came for the trade unionists, and I did not speak out because I was not a trade unionist. Then they came for the Jews, and I did not speak out because I was not a Jew. Then they came for me and there was no one left to speak for me. —Martin Niemr (posted to story)
Extraction Method I am a certified residential appraiser. I want to say I got more out your article on the method to determine land value than any other article I ever read in my 36 years of appraising. You have explained it in the best, most understandable way possible. —Lawrence Fenimore
Choosing Comps In your article you make reference to a Fannie Mae handbook for appraisers, publication number CT147. I just called the number for Fannie Mae and they said this handbook has not been in circulation for many years now—and nothing has replaced that publication!! Do you have any suggestions where else to find this publication? I would be interested to read it. It is very funny because the woman from Fannie sounded frustrated as though she has repeated this information that this is out of print over and over again. I told her I was inquiring after reading an article in Working RE and
she commented that they received over 50 phone calls back when the article first came out—that sounds like “demand” to me. —Shelli Kazak Author replies: It’s interesting that after I wrote the article I find out it is out of print. Fannie Mae indicated to me that if they had enough demand they will reprint it but don’t hold your breath on that. Go to www.efanniemae.com and look up guidelines for lenders and appraisers and you will find some interesting information. For example, the guidelines for September 2009 indicate that lenders can rely on the replacement cost new that is indicated in the cost approach of an appraisal for insurance purposes, even though we put in our report that it cannot be relied upon. They also have a tutorial on the UAD. At present, I have not been able to find the CT147 publication for sale anywhere else. —Phil Spool WRE
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Working RE Magazine Winter 2013 Working RE
5
Chase Challenges USPAP
Story first appeared in WRE’s email edition Opt in at WorkingRE.com
by Isaac Peck, Associate Editor
Editor’s Note: Appraisers are well aware that their professional feet are held to the fire regarding USPAP: to know it, understand it and follow it. So what happens when a lender decides they don’t agree with the document and punishes an appraiser for only trying to abide by its guidance? So far, not much.
L
ast issue, Working RE reported the story of John Dingeman, an appraiser in Arizona, who faced a choice: violate USPAP or be blacklisted (Lender’s Choice— Summer 2012). Chase, who was not the client, demanded that Dingeman discuss his appraisal report with them (citing possible USPAP violations). Dingeman told Chase that per the Confidentiality Section of the Ethics Rule in the Uniform Standards of Professional Appraisal Practice (USPAP), he is not permitted to discuss the content or conclusion of the appraisal with anyone other than his client. Chase threatened to place him on their Ineligible Appraiser List if he did not comply. After Dingeman made it clear that he was not going to violate USPAP, Chase responded by challenging the commonly held interpretation of USPAP’s appraiser/client confidentiality standard, arguing that it is not a violation for Dingeman to discuss the appraisal with them, even though they were not the client. In defense of their interpretation, Chase appears to be referencing Certifications 21 and 23 of the Uniform Residential Appraisal Report (Form 1004), arguing that because they are in possession of the report and they are entitled to “rely” on the report, and that
Dingeman agreed that the lender may “disclose” the report to other parties, Chase meets the “information disclosure requirements” under USPAP. In a response to Dingeman, Chase writes, “We find no USPAP restriction against disclosure, even of confidential information, to persons specifically authorized by the client or any restriction against disclosure of nonconfidential information to intended users. When a client sells, assigns, and transfers a loan and delivers the loan records, including the appraisal report, to the transferee, that sale, assignment and transfer constitutes such an authorization.”
Isaac Peck is the Associate Editor of Working RE magazine and Marketing Coordinator at OREP.org, a leading provider of E&O insurance for appraisers, inspectors, and other real estate professionals in 49 states. He received his Bachelors in Business Management at San Diego State University. He can be contacted at isaac@ orep.org or (888) 347-5273.
6 Working RE Winter 2013
In short, Chase is arguing that because they are the successor or assignee of the loan, the content and conclusion of the report are no longer “confidential information” under USPAP, and even if they are, the fact that Chase was assigned the loan constitutes an authorization for Dingeman to discuss the appraisal with them. Chase’s interpretation of USPAP is at odds with how most appraisers, appraiser organizations, and even the laws in various states understand and apply USPAP. “So far every USPAP instructor I have contacted has confirmed that I cannot discuss the appraisal with Chase because they were not the client,” says Dingeman. Dingeman points out that the Illinois Department of Financial & Professional Regulation issued an FAQ on precisely this situation. In Volume 4, Issue 5, May 2012, the Illinois Appraisal Board writes: “The new twist seems to be, Client A goes belly up. Client B buys up all of Client A’s loan portfolio. Client A made dubious loans. Client B wants answers. Client B contacts the appraiser and demands a response to questions on Client A’s appraisal...or Client B will place the appraiser on their Do Not Use—Exclusionary—No More Work At All List. It is beyond ridiculous to punish an appraiser into violating USPAP. In Illinois, it’s illegal. We are taking USPAP at its word and we saw fit to make it a felony for repeat offenders back in 2009.” Richard Hagar, SRA, who has been advising Dingeman on the Chase issue, says that Chase is attempting to elevate their status from intended user to client. “The fact that Chase is the assignee or successor to the loan doesn’t change the
requirements of USPAP. Chase may very well be an intended user and they can rely on the report if they choose to, but that doesn’t remove the appraiser’s obligation of confidentiality to the client,” says Hagar. As far as the report no longer being confidential, Hagar says, “Even if someone put an appraisal report up on a highway billboard, it would still be a violation of USPAP for the appraiser to discuss that report with anyone other than the client.” Ken Verrett, appraising 25 years, also worked in commercial banking for 15 years and says that lenders should stop trying to skirt the law just because they don’t agree with it. “Interested parties can work to change USPAP if they don’t agree with it, but disdain of USPAP is not a justification for ignoring its requirements,” Verrett says.
The Appraisal Foundation (TAF), which writes USPAP and is authorized by Congress as the source of Appraisal Standards, has said that this issue is addressed in FAQ 69 (even though it addresses the borrower, the concept is the same) in the Frequently Asked Questions section of the 2012–13 edition of USPAP: 69. When does Appraiser-Client Confidentiality End? Question: I performed an appraisal assignment for a lender client who has subsequently gone out of business. Now the borrower is requesting a copy of the appraisal report from me since the company is defunct and there is no way to contact them. Does my obligation for appraiser-client confidentiality end since the client no longer exists? Response: No. USPAP has no provision for terminating appraiser-client
confidentiality. An appraiser is required to comply with the requirements of the Confidentiality section of the ETHICS RULE, regardless of the status of the client.
Paying the Price Chase, however, does not like this interpretation of USPAP and Dingeman is paying the price. In response to Dingeman’s refusal to discuss the appraisal report, Chase filed a complaint against him with the Arizona Board of Appraisal (ABOA), alleging USPAP violations. Chase’s complaint, however, was found to be without merit and was promptly dismissed by the ABOA. Chase also blacklisted Dingeman but not in the way he expected. Dingeman says that a few days after Chase filed the complaint, and after calling several of the Appraisal Management Companies
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page 88
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(AMCs) he works for, Dingeman discovered that instead of being on Chase’s Ineligible Appraiser List, he was instead placed on the Ineligible Appraiser List for the U.S. Department of Agriculture (USDA). Since Dingeman has never done any appraisals for the USDA or even completed work in rural areas, he immediately contacted the USDA to ask why he was placed on their list.
“I called the USDA office in Arizona and spoke with Katie Yager, who informed me that since Chase underwrites USDA loans, Chase manages the USDA Ineligible Appraiser List and they are the ones who put me on the list. So if I want to be removed from the USDA list I have to plead my case with Chase,” says Dingeman.
Why USPAP Matters According to Richard Hagar, SRA, the definition of the client under USPAP is a
result of the Savings and Loan Crisis of the 1980s. Prior to the first S&L bailout, Hagar says there was confusion over who the client was, and more specifically, what instructions and scope of work were given to the appraiser. “Banks were issuing loans based on appraisals completed for different clients with very different instructions/ scopes of work—many of which influenced the value conclusion and didn’t meet the banks’ needs. The losses that ensued led to Congress incorporating Title XI of FIRREA, which led to the creation of The Appraisal Foundation, and the Appraisal Standards Board and the Appraiser Qualifications Board,” says Hagar. Consequently, USPAP’s definition of the client is to prevent these practices from being repeated. “It’s meant to be a warning to the banks that because they weren’t the client, they weren’t there for the hiring of the appraiser, they don’t know what the scope of work was, so they need to treat the appraisal as suspect. The bulletins issued by Office of the Comptroller of the Currency (OCC), which regulates national banks, and the Inter-Agency Guidelines both go out of their way to tell the banks to review the appraisal and perform due diligence BEFORE funding a loan,” says Hagar. The OCC Bulletin 2005-6 states: “Regulated institutions are expected to perform a more thorough review when accepting an appraisal from another financial services institution to confirm that the appraisal complies with the regulation and has sufficient information to support the lending decision.” “This is where Chase may have failed the regulatory requirements outlined by the OCC. They may have failed in their own due diligence before they funded the loan. If there was a deficiency, Chase should have reviewed it, communicated it, or replaced it when funding the loan, not after the fact,” Hagar says. Hagar points to the Inter-Agency Guidelines which address the actions that Chase is required to take if a deficiency is recognized in the appraisal: C. Resolution of Deficiencies An institution should establish policies and procedures for resolving any inaccuracies or weaknesses in an appraisal or evaluation identified through the review process, including procedures for: • Addressing significant deficiencies in the appraisal that could not be resolved with the original appraiser by obtaining a second appraisal or relying on a review that complies with Standards Rule 3 of USPAP and is performed by an appropriately qualified and competent state certified or licensed appraiser prior to the final credit decision. In other words, Chase and other banks are required to conduct due diligence and identify deficiencies BEFORE the final credit decision. WRE 8 Working RE Winter 2013
Dingeman sees Chase’s actions as intimidation and coercion in violation of various appraiser independence laws. “Being on Chase’s internal blacklist is bad enough and can put an appraiser out of business, but the USDA list is a Federal list and it touches EVERYONE, every AMC, every broker, every bank, every lender, including Fannie Mae, Freddie Mac, and Ginnie Mae. In my opinion, placement on this list is no accident; it is intentional and with malice,” says Dingeman. Dingeman has retained legal counsel and has filed his own complaints against Chase with the ABOA, the Arizona and New York Attorneys General, the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC). The OCC, who is responsible for regulating Chase, has closed the case filed by Dingeman without comment. Dingeman is currently in the process of appealing the decision. Dingeman has reached out to various appraiser groups, the Appraisal Subcommittee and Appraisal Foundation for help. To his dismay, he says he has received little support so far. “I’ve been told that everyone in the industry is aware of the situation. So why is everyone standing idly by? I feel like I’m one little appraiser left to defend USPAP and appraiser independence alone against, arguably, the largest bank in our country, who is employing coercive tactics which are in violation of FIRREA, the Dodd-Frank, AIR, and USPAP,” says Dingeman. He believes that this issue impacts more than just one appraiser—it will affect the way every appraiser does business. “Are we to follow USPAP or are we to follow the demands of every bank that threatens or punishes us into violating USPAP?” Most appraisers know that they are held to USPAP, and they work hard to follow the law and the standards of their industry. So the question is: who is going to defend USPAP when it’s challenged? WRE
Fall 2011 Working RE
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Solution: Cost-Plus AMC Model? By Isaac Peck, Associate Editor
Some appraisers are being paid full fees
Some appraisers are being paid full fees for their appraisal work, even though the orders are coming from AMCs. Here’s how it works.
10 Working RE Winter 2013
for their appraisal work, even though the orders are coming from appraisal management companies (AMCs). Here’s how it works. It’s called the cost-plus AMC fee model. The cost-plus or “full fee” AMC model, where the appraiser receives the full fee for the appraisal and the lender/ mortgage broker pays the AMC an additional fee for its services, has been posed as a workable solution ever since HVCC made AMCs a fact of life for most appraisers. Now it appears that some lenders and mortgage brokers are beginning to see the quality advantages of the cost-plus model.
Appraiser Perspective Bill Streep, an appraiser from San Antonio, Texas, says that he has been working for AMCs on the cost-plus model for over two years. “At first I just had one client who was paying me full fees; now I have four or five clients who are paying me on a cost-plus model through an AMC— some are correspondent lenders, some are traditional lenders or mortgage brokers,” says Streep. In Streep’s case, the lender or the mortgage company picks the panel of appraisers and then pays the AMC on a per order basis to manage the appraisal process. “A loan officer from a mortgage company will call and ask if I would agree to be on their appraisal panel. If I agree, they’ll send over their fee schedule and we’ll go from there,” says Streep. “It reintroduces the client-vendor relationship that we appraisers used to have before HVCC—the mortgage companies get to pick the appraisers. If
you do a lousy job, they can go back to the AMC and say, remove this person from our panel, or if they like your work, add this person to our panel.” Streep says that he receives significantly higher fees from his clients using the cost-plus model. He describes a winnowing process over the last few years—picking and choosing whom to work for until the majority are full-fee clients. “I turn down orders all the time and refuse to work for low fees. Maybe it’s the quality of my work, maybe it’s the local environment, maybe it’s both,” says Streep. He says his sales and marketing background also are a factor—he promotes his services every chance he gets. This, plus good word of mouth referrals earned by producing consistently high-quality work, has helped him arrive at a place where he only works for fair fees—mostly in this cost-plus model. Streep says lenders are adopting the model because they want a quality appraiser panel. “This model works for all parties: appraisers get paid a fair fee, lenders get the quality they want and AMCs get paid for their role. When you pay someone a fair fee, you get a good product. You do get what you pay for,” Streep says.
AMC Perspective Chuck Mureddu, the Managing Director at Quality Valuation Services (QVS), a national, appraiser-owned AMC, says that QVS is currently working with lenders who have recently begun using a cost-plus model. In contrast to the model described by Streep, Mureddu says that at QVS the page 12 8
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lender does not select the appraiser panel. “We use our own panel. We don’t believe in utilizing a lender’s panel because there’s a risk of diluting the independence part of building a fee panel. We’re not opposed to adding appraisers recommended by our clients, but we vet all appraisers to determine competency before adding them to our panel,” Mureddu says. Mureddu sees the cost-plus model as one that benefits both the AMC and the appraiser. “Our appraisers are very happy about it. It benefits them because they get paid a full fee and are able to spend more time and do a better job. Cost-plus also allows us to pay higher fees and go out and hire competent appraisers, which increases the value we offer to our clients and makes us more competitive,” Mureddu says. Even outside the cost-plus model, Mureddu stresses the importance of paying appraisers fair fees and highlights how the appraiser fee is related to the quality of work. “Appraisal fees have been pretty stagnant over the last 20 years. But when AMCs came onto the scene, some, not all, ended up taking a significant portion of the appraisal fee. The result is that only those appraisers who are incompetent or new to the game will work for those lower fees, so the quality of the appraisal is reduced,” Mureddu says. Another effect, according to Mureddu, is that low fees have pushed many good appraisers out of the business. Consequently, the cost-plus model, and higher fees in general, are, in part, a response to the effects that low fees have had on appraisal quality. Mureddu feels strongly that appraisers must be paid fair fees. “We look at appraisers as our business partners and feel that ‘faster and cheaper’ is the wrong approach. Higher fees help capture the best and the brightest appraisers. We don’t want form-fillers—it costs us money to deal with form-fillers. We want good appraisers,” Mureddu says. 12 Working RE Winter 2013
Streep says that he receives significantly higher fees from his clients using the cost-plus model. Of course, with higher fees comes an expectation for higher quality. “The fee should not be driving quality. The quality should drive the fee,” says Mureddu. “Those lenders who adopt cost-plus will expect the highest quality of product and service. We are continually fine-tuning our panel in order to meet customer expectations. Ultimately, we are only as good as our panel and therefore score appraisers for each and every assignment.”
RESPA Concerns Some lenders express concern about the problems that might arise if they misjudge the complexity of the assignment and the appraiser requests a fee increase. The Real Estate Settlement Procedures Act (RESPA) requires a Good Faith Estimate that must be disclosed to the borrower, which typically leads to a lender disclosing the appraisal fee 7–10 days before the appraisal is even ordered. Since there is minimal tolerance for over-disclosure or under-disclosure, some lenders are hesitant about the problems that might arise when the fees to the appraiser and AMC are separated, and the appraiser then requests a fee increase. Mureddu says this typically is not a problem for QVS. “The lenders have usually already done their homework and due diligence on the property, and through their direct engagement business, they know what a reasonable fee for the assignment is,” Mureddu says. However, Mureddu admits that the problem does arise. “There are going to be certain situations where the property is that white elephant, if you will. Sometimes we go back to the lender and say, look this property is complex,
and many times the bank will pay those higher fees to us. However in some cases, we will eat those extra costs,” Mureddu says. One concern that lenders have, according to Mureddu, is that the extra fees associated with cost-plus will make their mortgage origination business less competitive and they will lose clients as a result. However, he says that so far the lenders using cost-plus haven’t seen a decline in their mortgage origination volume. “They’re not hurting with costplus; I’m sure they’ve gone through challenges with their production staff, but it’s not hurting their volume.”
Looking Ahead As far as the future, Mureddu says, “I think we’ll see more cost-plus models. When we talk to some of our clients and potential clients, they are looking into it. I can’t say whether they will change or migrate over to it but there are a few who have figured out how to do it, and they realize that they are getting a good quality product.” For appraisers who are looking for higher fees or to work with AMCs on a cost-plus basis, Mureddu stresses quality as a driving factor. “The quality of product is most important and it is important for the appraiser to present a fully usable, supportable, and defensible ‘first pass’ product. AMCs will reward those appraisers who demonstrate the best work and service levels. That is, the better and more professional appraisers become, the more they can demand. It is in our best interest to use those top-line appraisers as that will assist us in negotiating higher fees with our clients.” WRE
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Appraiser Evaluations– Why Not? by George R. Mann, MAI, SRA, MRICS
Editor’s Note: According to George R. Mann, there is lot of work appraisers cannot engage because of a USPAP restriction—unless you live in one of three states.
I have worked at or with several top 20
banks and estimate that the annual volume of evaluations is two to three times that of appraisals. Basically, every loan that is renewed requires at least an evaluation. Appraisals are sometimes required but in the vast majority of cases, appraisers are not getting a chance at this work because USPAP does not allow it, even though it is permitted under federal guidelines. The obvious question every appraiser should be asking today is “Why”?
Background
I have worked at or with several top 20 banks and estimate that the annual volume of evaluations is two to three times that of appraisals.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) allows true evaluations for certain loans—new loans $250,000 and under, new business loans $1 million and under, and loan renewals meeting certain criteria. The Uniform Standards of Professional Appraisal Practice (USPAP), however, which guides appraisers, says something different. Under USPAP, the minimum an appraiser can prepare is a Restricted Use Appraisal Report. This is an appraisal, not an evaluation. States have said that any service that gives an opinion of value must meet USPAP. So states require USPAP appraisals even for those loans where federal law says an evaluation will do—and where someone other than an appraiser is typically doing them. It’s safe to say that clients would prefer using licensed appraisers to perform this service. Isn’t it time for the industry to launch
George R. Mann, MAI, SRA, MRICS is President, Chief Appraiser, Collateral Evaluation Services, Inc.
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a campaign to help states pass laws allowing appraisers to perform evaluations? As it stands now, appraisers are not able to perform true evaluations except in North Carolina, Tennessee and Virginia, where it is permitted by state law.
Evaluations Defined What is an “evaluation”? A quick definition might be: An opinion of value that does not need to meet the USPAP. The term evaluation is “defined” in the December 2010 Interagency Appraisal and Evaluation Guidelines. Appendix D of this document defines an evaluation as follows: A valuation permitted by the Agencies’ appraisal regulations for transactions that qualify for the appraisal threshold exemption, business loan exemption, or subsequent transaction exemption. While this definition is not very specific, there is more in the content requirements outlined in the Guidelines. XIII. Evaluation Content: An evaluation should contain sufficient information detailing the analysis, assumptions, and conclusions to support the credit decision. An evaluation’s content should be documented in the credit file or reproducible. The evaluation should, at a minimum: • Identify the location of the property, provide a description of the property and its current and projected use. • Provide an estimate of the property’s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation
(that is, the date that the analysis was completed), with any limiting conditions. • Describe the method(s) the institution used to confirm the property’s actual physical condition and the extent to which an inspection was performed. • Describe the analysis that was performed and the supporting information that was used in valuing the property. • Describe the supplemental information that was considered when using an analytical method or technological tool. • Indicate all source(s) of information used in the analysis, as applicable, to value the property, including: external data sources (such as market sales databases and public tax and land records), property-specific data (such as previous sales data for the subject property, tax assessment data, and comparable sales information), evidence of a property inspection, photos of the property, description of the neighborhood, local market conditions. • Include information on the preparer when an evaluation is performed by a person, such as the name and contact information, and signature (electronic or other legally permissible signature) of the preparer. The Guidelines state “…appraisers, real estate lending professionals, agricultural extension agents, or foresters” can perform evaluations. The “persons who perform evaluations should possess the appropriate appraisal or collateral valuation education, expertise, and experience relevant to the type of property being valued.” Financial institutions primarily have two choices to meet the demand for evaluations: Hire internal staff, most of whom are not licensed appraisers; • Have non-appraisers (e.g. real estate brokers) perform the evaluations. • The best candidate for performing evaluations is rarely an option— i.e. licensed and certified real estate appraisers. As they did with AMC laws,
Wouldn’t it be better to pay a licensed appraiser to do an evaluation? appraisers should campaign to get state laws amended to allow licensed appraisers to perform evaluations that do not need to comply with USPAP.
Tennessee Prototype Law In Tennessee licensed and certified appraisers can perform evaluations that do not meet USPAP. Tennessee appraisers have been providing this service since 1995 and can attest that the cost to perform an evaluation is substantially less than a Restricted Use Appraisal Report. This is the reason banks in other states avoid using appraisers for their evaluation needs. Why pay an appraiser a higher fee for a Restricted Use Appraisal Report when other professionals can provide an evaluation much cheaper? The Tennessee law limits the use of evaluations to the financial institutions industry only. This product cannot be used by other users of appraisals (e.g. attorneys, government agencies, general public), nor can it be provided to anyone outside the financial institution. 62-39-104 of the Tennessee “State Licensing and Certified Real Estate Appraisers Law” addresses applicability of this law and states the following: (d) (1) This chapter does not apply to any evaluation of the value of real estate serving as collateral for a loan made by a federally regulated financial institution or to any evaluation of the value of the assets of a trust held by the institution, provided that: (A) The applicable federal regulator does not require an appraisal by a statelicensed or state-certified appraiser for the loan or trust; (B) The evaluation is used solely by the financial institutions in their records to document the collateral or asset value; (C) The evaluation shall be labeled on its
face “this is not an appraisal”; and (D) Individuals performing these evaluations may be compensated for their services. (2) Nothing in this chapter shall prevent a state-licensed or state-certified appraiser from performing the evaluation. Acts 1990, ch. 865, § 5; 1991, ch. 366, § 6; 1992, ch. 697, § 5; 1994, ch. 605, § 9. Wouldn’t it be better to pay a licensed appraiser to do an evaluation? The bank would get a more reliable product from licensed appraisers, and appraisers would get more work. Seems like a win-win for both industries. An appraisal industry campaign to get this law passed in all other states would likely be supported by state banking authorities. I encourage appraisers, bank clients, and industry leadership to begin a national campaign to get the Tennessee law passed in all states and the District of Columbia. WRE
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Why Appraisers Get Sued By Philip G. Spool, ASA
Editor’s Note: Author Phil Spool, ASA, represents appraisers, E&O insurance companies, and lenders as an expert witness for the prosecution as well as for the defense. In this story, he shares the reasons why appraisers get sued.
L
Lawsuits can be divided between those you cannot control and those that you can. Here’s what you need to know about each.
awsuits can be divided between those you cannot control and those that you can. Here’s what you need to know about each. Lawsuits that you cannot control are typically pursued by plaintiffs (filing the lawsuit) who are dissatisfied with your value more than any mistake you might have made. Even if you have taken precautionary measures to reduce your chances of being sued, in the mind of the dissatisfied person, there is good reason to sue you. Even a “correct” value doesn’t protect you. Anyone can sue you for just about any reason. A lawsuit doesn’t have to originate from the lender, Fannie Mae, FDIC or any other purchaser of the loan associated with the property you appraised. You can be sued by the buyer if you appraise the property for less than the contract price, especially if the borrower now has to put up additional money for the down payment. The seller might want to sue you if the real estate transaction falls through because as real estate agents typically say, “the property did not appraise” or “the appraiser did not come up to value.” Sound familiar? The buyer may have to put up additional money, or if the sale falls though, the seller does not get to sell the house and the real estate agent loses a commission. Who is the first to get blamed? Of
Philip G. Spool, ASA, is a State-Certified General Real Estate Appraiser in Florida, appraising since 1973. Formerly the Chief Appraiser of Flagler Federal Savings and Loan Association, he has been self-employed for the past 18 years. In addition to appraising, he is an instructor with Miami Dade College, teaching appraisal courses and continuing education. He is also the Vice President and Chairman of real estate programs with the Greater Miami Chapter of the American Society of Appraisers. He can be reached at pgspool@bellsouth.net.
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course it’s the appraiser. It’s easy to blame the appraiser. Again, this is a situation that most likely is out of your control. Another situation that is out of your control is fraud committed by the mortgage broker. In this case, there is a good chance that the lender would have a “blanket” lawsuit suing everyone involved in the loan. This includes the mortgage broker, “straw” buyer, seller, real estate agent representing the buyer, title company and the appraiser. It might be only one person or several who are in on the fraud, but everyone might be implicated. You may be implicated if the appraisal request states: “estimated market value of $...” or “call me if the value is less than $...” or something similar. Not only is it a violation of USPAP but either one of those two statements gives the appearance of your collusion with the mortgage broker.
Why Appraisers Get Sued Appraisers are sued for many reasons: value, loan default, mistake, fraud, using non-MLS comps that are not verified. And they are sued by buyers and sellers, lenders, spouses in a divorce case and the GSEs (Fannie/Freddie). In all of these cases, your only defense is a supportable appraisal report. A bad appraisal report is not supportable. A good appraisal report that has good comparable sales, reasonable adjustments and a good text addendum that explains the important aspects of your findings and conclusions is considered supportable. Having a complaint filed against you by your state appraisal board is bad
enough; being sued by the lender, Fannie Mae or other purchaser of the loan, however, can seriously affect your livelihood as well as your pocketbook. The numberone reason why a lender might sue you is if the borrower defaults on the loan. If the loan goes into default, the lender or GSE might hire an appraiser to perform a “retrospective” valuation of the subject property without going inside the house, with the date of the valuation being the effective date of your appraisal. It’s ironic, isn’t it, that the lender typically doesn’t hire a review appraiser when the loan is made but is eager to do so after the loan is in default.
Fraud, Incompetence & Bad Appraising What constitutes a valid reason to sue? One is fraud. What constitutes fraud? Fraud occurs if you falsify your comparable sales or intentionally ignore an attribute that the comparable may have that
File & Template Organization
your subject does not have or vice versa. A good example is if the comparable is on a lake or golf course but you ignore that and your subject is not on a lake or golf course. If you claim that your failure to indicate that your comp is on a lake or golf course is a “mistake,” your mistake still misleads your client and that is a valid reason to be sued, especially if you failed to make an adjustment for the view difference or if the waterfront or golf course property would appeal to an entirely different type of buyer than a house not on a lake or golf course. But fraud is hard to prove and most likely a lender will not sue you for fraud. A good reason is that your errors & omissions (E&O) insurance coverage excludes fraud.
(a) and/or (c). Standards Rule 1-1 (a) states that the appraiser must correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal. Standards Rule 1-1 (c) states that a series of errors, in the aggregate, affects the credibility of those results. Read up on appraisal theory and proper appraisal techniques. Take classes that relate to the sales comparison and cost approaches. You may have initially taken an accelerated appraisal course in order to obtain your trainee license and then were taught poorly or in too short a time to know the proper way of making adjustments or determining if the subject is an over-improvement or at its highest and best use.
Intentional or Unintentional—Oops!
What to Do When Notified of Potential Lawsuit
Instead of your appraisal being considered fraud, the report might be considered just a bad appraisal due to incompetence if it violates Standards Rule 1-1
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certified letter that puts you on notice of a potential lawsuit. It may be a form letter with generalities only, such as the property address. Or it may be specific, indicating that your selection of comparable sales or your value conclusion is in question. No matter what the situation is, if you have E&O insurance, notify the company right away once you get official notification that you are going to be sued. An angry phone call to you, even coupled with a threat, may not be sufficient reason to notify your E&O insurance company or for that matter, to engage an attorney to represent you. You should call your agent to ask. So what do you do first when you receive notification of a lawsuit? First, save all correspondence. Do not reply back immediately. Start a paper trail by recording in a journal any phone calls or letters you receive regarding the potential lawsuit, including the date, time and whom you spoke to. Second, look for your workfile on the appraisal in question. If you are diligent in keeping records, you would have arranged your workfile so that all correspondence is in the beginning of the file, followed by the appraisal report (a true copy of the report you sent to your client), followed by your selected comparable sales, analysis performed and supportive data that relates to findings indicated in your appraisal report, including land sales and/or market extraction for the site value, replacement cost, new cost figures and finally any other data that you considered but did not use (other improved sales and rental information if the property is two units or more). Once you retrieve your workfile, contact your E&O company. If you don’t have errors and omissions insurance, consider retaining an attorney on your own to represent you. Some attorneys don’t charge for the initial consultation; others might charge a flat fee to represent you, while others charge 22 Working RE Winter 2013
an hourly fee with an initial retainer to start correspondence.
Board Complaints For a complaint filed against you by your state appraisal board, get an attorney who is very familiar with administrative law. For a lawsuit, get an attorney who is a good litigator. Having a good litigator representing you is more important than his/her familiarity with real estate law. Also, have the attorney obtain an appraiser expert witness who teaches appraisal courses, is knowledgeable about USPAP and has courtroom experience. An expert witness who is knowledgeable about USPAP, such as an AQB-certified USPAP instructor, but has little or no courtroom and/or classroom experience, would not be an effective expert witness. Why is classroom teaching experience important? Your expert witness has to educate the “trier of fact,” whether it is a jury or judge. If your expert witness is unable to explain the appraisal process, scope of work and how you did your research and applied appropriate methods and techniques in preparing your appraisal report, and the opposing expert witness is better at convincing the trier of fact, then no matter how correct your report is, your case becomes ineffective.
Can Insurance Company Settle? During the course of discovery and depositions, the E&O company has the right to settle even if you strongly believe you have done nothing wrong. Check with your E&O company to see if they have a consent to settle provision in your policy. This is neither an admission of liability nor an admission of wrongdoing.
Past Reasons for Getting Sued Most lawsuits by lenders based on appraisals prior to 2010 involved a property in a declining market. One potential reason for a lawsuit is that an appraiser failed to make a negative time adjustment
when there was a declining market (for most areas this was between 2007 and 2010). Sometimes the lender sues if you stated that the property values were “stable” when the One Unit Housing Trends area should have been checked “declining.” A good response to that charge is that when the appraisal was performed, evidence of a decline in value could not have been supported and was not conclusive until many months later. Another instance is using developer sales and ignoring re-sales or sales outside of the development. An appraiser who uses developer sales but fails to find out the date of the contract can cause an overinflated value in a declining market. Many developments were under construction in 2005–2007. The peak of the market was probably sometime between 2005 and 2006. If you were appraising a unit in 2007 through 2009 and the developer’s sales were the only sales in the development, did you get a copy of the contract that showed the date the contract was entered into? If the contract date was in 2005, there is a good possibility that the market had declined by the time the property closed, which may have been sometime between 2007 and 2009. Therefore, that sale would have reflected a sales price much higher than if the unit was put on the market close to the time you performed your appraisal.
Current Reasons for Getting Sued Appraisers for lending institutions follow three guidelines: (1) USPAP, (2) Fannie Mae—if the report is on a Fannie Mae form, and (3) lender or AMC guidelines. The lender might restrict the appraiser to using only sales within one mile and within three to six months. This limits comparable sales that could be more similar to the subject, even if in a substitute neighborhood but further than one mile. Or a sale could be older than six months and be more comparable to the subject than those sales that are less than six months. Consider using additional
sales that support your value even if they are outside of the lender’s restrictions, in addition to those within the lender’s guidelines. If the sales support a lower or higher value on comparables that you truly believe are better comps than the only ones allowed by your lender’s restriction, use them and give them a greater, weighted average for your concluded market value.
Liability for Bad MLS Data How many times have you found mistakes in the Multiple Listing Service (MLS) and if it weren’t for the fact that you verified that sale, which means picking up the phone and calling the listing agent, you would not have known there was a mistake. This includes sales concessions indicated in the MLS. Some questions to consider include what are the requirements for relying on third party information versus the real estate agents, buyers and sellers, who have a vested interest in the property? No matter whom you rely on, Standards Rule 1-1 (b) under the comments section states, “Diligence is required to identify and analyze the factors, conditions, data, and other information that would have a significant effect on the credibility of the assignment results.” Do you have evidence in your workfile regarding the verification of information you relied on? Perhaps you might want to consider making a statement in your appraisal report that you relied on the information from these reliable sources and if found to be incorrect, may affect your market value.
Should You Retain Workfiles Longer than Five Years? USPAP states that “an appraiser must retain the workfile for a period of at least five years after preparation or at least two years after final deposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last.” Rather than throwing out your file after
five years, consider the possibility of having it scanned and saved in an external hard drive. It won’t take up office space and in case you are notified of a potential lawsuit, even if it is after five years, at least you have the necessary backup data to support your value conclusion. In conclusion, no matter how good you think your appraisal report is, there
always is that possibility of being sued. While it may never happen, it is always good to have a plan of action just in case. If you have errors and omissions insurance, contact your insurance company and see if you can request the attorney of your choice, depending on the situation. Keep a cool head and make sure you have a good support group. WRE
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Appraisers Talk, Congress Listens
Story first appeared in WRE’s email edition Opt in at WorkingRE.com
by David Brauner and Isaac Peck
Editor’s Note: Lawmakers got an earful from appraisers at a June hearing in Washington. D.C. This time, it appears Congress is listening.
After the Congressional hearing in June,
The June 28 hearing was an opportunity for the appraisal industry to provide input on appraisal regulations and their impact on the still-lagging singlefamily real estate market.
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rest assured that Capitol Hill is well aware of appraisal industry issues, including customary and reasonable fees, unreasonable turn-time demands, geographic competency, the lack of transparency with respect to appraisal management companies’ (AMCs) fee splits, continued appraiser independence pressures, the efficacy (or lack thereof) of the Universal Appraisal Dataset, and a peek behind the curtain at internal disagreements among the industry’s power players over how best to regulate you and your business. Also underlined time and again is the importance of licensed and competent real estate appraisers to the soundness of the real estate and banking sectors of our economy. The June 28 hearing was an opportunity for the appraisal industry to provide input on appraisal regulations and their impact on the still lagging single-family real estate market. Members of the Congressional Committee (Insurance, Housing and Community Opportunity Subcommittee of the U.S. House Committee on Financial Services) included: Rep. Judy Biggert (R-IL), Chairman; Rep. Gary G. Miller (R-CA); Rep. Luis V. Gutierrez, (D-IL), Ranking Member Rep. Al Green (D-TX). The hearing, Appraisal Oversight: The Regulatory Impact on Consumers and Businesses, was addressed by two panels. The first panel included government officials from federal regulatory agencies. The second represented independent professional organizations and associations,
including the National Association of Realtors (NAR), the Appraisal Foundation (TAF), The Appraisal Institute (AI), the American Society of Appraisers (ASA), and the Real Estate Valuation Advocacy Association (REVAA).
Panel members Panel I William B. Shear, Director, Financial Markets and Community Investment, Government Accountability Office Don Rodgers, President, Association of Appraiser Regulatory Officials James R. Park, Executive Director, Appraisal Subcommittee, Federal Financial Institutions Examination Council Panel II David Berenbaum, Chief Program Officer, National Community Reinvestment Coalition David Bunton, President, Appraisal Foundation Francois K. Gregoire, 2011 Chair, National Association of Realtors, Appraisal Committee Don Kelly, Executive Director, Real Estate Valuation Advocacy Association (REVAA), on behalf of REVAA and the Coalition to Facilitate Appraisal Integrity Reform Karen J. Mann, President, Mann & Associates Appraisers, on behalf of the American Society of Appraisers Sara Stephens, President, Appraisal Institute
Highlights Astonishingly, Rep. Gary Miller (R-CA) characterized the Home Valuation Code of Conduct (HVCC) as a “disaster” and said he is equally disappointed with attempts by Congress and other government agencies to fix the problems.
He noted that the disastrous effects of HVCC were immediate, but unfortunately, attempts to redress them by government have not been as quick. He went on to say that much of the worst of HVCC is institutionalized now by Fannie Mae and Freddie Mac, and its successor Federal Finance Housing Agency (FHFA), and Federal Housing Administration (FHA). His negative assessment of HVCC is a far cry from FHFA leadership, and others in high places, who insisted over the years that the Code was/is effective at improving the quality of appraisals and the independence of appraisers. The fact that appraiser reality is now commonly accepted in Washington, D.C., despite the years of misdirection, is a clear vindication and positive development for rank-and-file appraisers.
“Low” Appraisals In his comments, Rep. Miller seemed to blame HVCC for “low appraisals,” killed deals and a stifled housing recovery—all due to the inability of parties involved in the real estate transaction to communicate freely with each other. He said that if the lender and buyer agree, they should “be able to move forward in the marketplace.” This led to a discussion on how low fees paid to appraisers by AMCs are leading to lower-quality appraisals. Regarding HVCC and its aftermath, Rep. Miller said, “We messed up. We’re not happy with what we did but we’re equally not happy with you (regulators and others) not listening to us wanting to correct what we did. We have got to fix it.” All sides were ably defended, including AMCs, by their representative Don Kelly. He made the argument that AMCs provide value to appraisers in many areas, including marketing and quality control, and characterized the position that AMCs select appraisers based on low fees and quick turnaround times as being “based on anomalies and hearsay.” In contrast, the appraiser panelists, while disagreeing over some
issues, were united in testifying that the AMC model, in its current form, is driving good appraisers out of the business and hurting appraisal quality. The Congressional Panel seemed to have the Appraisal Subcommittee (ASC) in its crosshairs, with direct questions to the panels about how well the agency is doing its job—especially as it pertains to its unfinished business of implementing appraisal provisions in Dodd-Frank. Most agree that there is a “pressing need” for speedy implementation of Dodd-Frank. Chairwoman Judy Biggert (R-IL) asked a “yes or no” question whether the Subcommittee is effective. Answers from the panel ranged from a resounding “yes,” from Bunton of TAF, to Stephens from AI, who answered, “A good look should be taken at the way the whole entire system is set up.” The rift between TAF and AI also was apparent with respect to the Appraisal Practices Board (APB), now part of TAF. Bunton defended the newly created Board. Stephens said about APB, “Appraisal practice is not aided by more rules.” Stephens charged the Board with attempting to limit the ability of the independent appraiser to exercise his/her own judgment in the appraisal process by strictly dictating appraisal methodology. The friction between the AI and TAF came to a head in Sept. 2010 when AI resigned from TAF.
Transparency There were clear calls on behalf of consumers for transparency on closing documents with respect to separating AMC and appraiser fees. Gregoire said that consumers are entitled to an appraisal report that is commensurate with the fee they pay. “Consumers should get what they’re paying for. If the lender wants to use an AMC to broker appraisals, then let the lender pay for that service. Don’t make the appraiser pay for it and don’t make the consumer pay for it: the lender is the one who benefits from that service; let the lender pay for it,” Gregoire said.
Regarding customary and reasonable fees, Kelly said appraiser fees today are market driven—a function of supply and demand and that, after all, appraisers agree to whatever fee they are paid. Berenbaum and others argued that low fees are hurting consumers because they lead to lower appraisal quality. Both Stephens and Gregoire pointed out that most AMCs prioritize low fees and turnaround time, which leads to appraisers traveling great distances, many times out of their area of geographic competence, when there are more qualified and experienced people in the area who will not accept the low fee. WRE
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Blacklisting with a Twist By Isaac Peck
L
ast issue Working RE reported on an appraiser who was given a tough choice by Chase Bank: violate USPAP by discussing an appraisal with them—an entity other than the client, or face blacklisting (Lender’s Choice—Summer 2012). This time, Chase is offering a third option to an appraiser facing the same dilemma: take a 15-hour USPAP class. Jonathan E. Whitehead, a Certified Residential appraiser working in Little Rock, Ark., was blacklisted by Chase in early 2011. Whitehead says Chase never notified him about the blacklisting, but after being dropped from several of his best AMC clients, he discovered he had been placed on Chase’s now infamous Ineligible Appraiser List for allegedly violating USPAP.
Momentum is building for making serious changes to the appraisal regulatory system. Here is some of what is being discussed and what is at stake for appraisers.
26 Working RE Winter 2013
Revisiting USPAP The appraisal in question was completed in 2007 when Whitehead was a trainee. Like other appraisers, Whitehead was initially told that the only way he could be removed from Chase’s Ineligible Appraiser List was to discuss the appraisal in question with Chase, who was not the client. Whitehead says Chase wanted him to explain why the report differed from the conclusions of their review appraiser. “They would not send me a copy of the review appraisal, nor tell me what qualifications the reviewer had or if he/she was even licensed in my state,” says Whitehead. After reading the blacklisting story in WRE noted above, Whitehead responded with chapter and verse of USPAP, telling Chase that because they were not the client, discussing the content and conclusion of the report with them would be a violation of USPAP. “Chase was never the Intended User or the Client of the report in discussion. Therefore,
discussing the results of the appraisal is a violation of the Confidentiality section of the Ethics Rule,” Whitehead says. He also pointed out that as a trainee his work was limited by his appraisal supervisor. “My typical duties as a trainee were pulling tax assessor records on properties, measuring houses, and taking photos of the subject and comparable sales. I was not allowed to choose comparable sales, make adjustments or conclude a value,” said Whitehead. In a change of tone compared to previous responses from Chase, this time the bank seemed to acknowledge that Whitehead did not have permission to discuss the appraisal with them. However, Chase insisted that Whitehead obtain the necessary permission from the client so the outstanding issues in his report could be addressed and reviewed further. Since the mortgage broker who ordered the appraisal was out of business, obtaining permission was not an option. Whitehead responded that since the client was no longer in business, Chase was essentially demanding him to violate USPAP.
Chase’s Alternative When confronted with USPAP’s confidentiality section and the stalemate created when proper permission could not be obtained, Chase appears to have found a softer approach to permanently blacklisting an appraiser: prescribing continuing education as a condition of reinstatement. Chase’s reply to Whitehead states: “Your appraiser status remains Ineligible for Chase Mortgage Banking, and we will not accept appraisal reports performed in whole or in part by you. However, you may apply for further consideration if you complete a state-approved Continuing Education class/course, 15
hrs USPAP, subsequent to the date of this notice. Proof of satisfactory completion must be provided to Appraiser Panel Management within six months of the date of this letter for consideration of a status change.” Working RE has heard from other appraisers who share a similar story. In the wake of the Lender’s Choice story, appraisers are not backing down when they are required to discuss a report with someone other than the Intended User. Several other appraisers report being offered the education alternative by Chase, instead of a permanent blacklisting, when they refuse to discuss an appraisal report due to USPAP’s confidentiality rules. Richard Hagar, SRA, says that it’s perfectly legal for Chase to request an appraiser to take additional continuing education. “Chase has made a business decision and it’s within their authority to require him to take a USPAP class in order to be reinstated,” says Hagar. Whitehead, who served as the Board Investigator for the Appraisal Board of Arkansas in 2012, says that he finds Chase’s position somewhat ironic, if not downright insulting. “Here I am reciting USPAP to them and telling them how their demands are asking me to violate USPAP, and their solution is to have me take a USPAP class,” Whitehead said. “The other thing I’m not sure they realize is that I already took the 15-hour USPAP class after I was involved in the appraisal in question. Since I was a trainee appraiser, I had to take 120 hours of appraisal education before getting licensed in 2009, including the 15-hour USPAP class,” says Whitehead. Whitehead says Chase was good to their word and reinstated him upon completion of the course. Whitehead is happy to be working again but said, “In the last six months I’ve lost over $20,000 worth of work from just a single client because of this issue.” WRE
7Director’s Message page 4
at understanding today’s regulatory landscape and what it means for appraisers and AMCs/lenders. He is not an advocate for AMCs nor an apologist for bad appraising. He teaches what you need to know: the real life implications of the new regulations for you and your business. It’s not dry; it’s fascinating. It’s not theoretical; it’s absolutely relevant—if you want to stay out of trouble, stay in business and understand your rights and your responsibilities under the new laws. Not knowing can be catastrophic. Hagar’s webinars are musts for appraisers and AMCs/lenders. Both parties will learn how to insulate themselves from trouble by (wait for it) doing the right thing. There are some things you must do and things you must never do because one mistake can put you out of business. Learn your rights and what is expected of you. This is the most vital information that you probably don’t know. You can learn more about these and all our webinars at WorkingRE.com (click Webinar Series). The prices are affordable and the information is presented by seasoned appraisers who like sharing what they’ve learned to help others. OREP insureds and Working RE subscribers always enjoy a discount. WRE
100% Open Rate • Working RE Print “Unfortunately I don’t have time to read the volume of e-mails that are sent during work hours. Could they be replaced by the magazine, which can be read evenings after work? If not, I’m going to have to miss out on your articles. Thanks.” —Arden Field Reach appraisers with the only 100% open rate there is: print. Email cary@orep.org for details.
Winter 2013 Working RE 27
Calculating Diminution of a Contaminated Property By Francis Xavier Finigan
If you are appraising an environmentally
If you are appraising an environmentally contaminated property, you may need to consider more than just the cost of remediation (cost to cure).
contaminated property, you may need to consider more than just the cost of remediation (cost to cure). The property may suffer from stigma associated with the contamination. Stigmatized properties can take months and even years to recover from a blighted image. The Uniform Standards of Professional Appraisal (USPAP) describe stigma in the A09 provision (20122013)... “Environmental Stigma: An adverse effect on property value produced by the market’s perception of increased environmental risk due to contamination…When the appraiser addresses the diminution in value of a contaminated property and/or its impaired value, the appraiser must recognize that the value of impacted or contaminated real estate may not be measurable simply by deducting the remediation or compliance cost estimate from the opinion of the value as if unaffected (unimpaired value).” At first glance most real estate appraisers don’t appear to be prepared for the type of assignment contaminated properties present. Every appraiser utilizes the same methodologies when he or she is developing an opinion of value. The most common and usually the most reliable method for appraising contaminated residential properties is the market approach, but we may also need to consider the cost and income approaches in developing an opinion of value. All three
Francis Xavier (Rich) Finigan is Educational Director for ACEI Calypso Continuing Education. Finigan has decades of experience in real estate appraisal, environmental science and residential and commercial construction. Since 1993 he has provided continuing education seminars to real estate appraisers in many states. Rich formerly served as President of the Indoor Environmental Standards Organization, an ANSI standard setting body. He shares this unique and court-proven methodology with appraisers at his Environmental Hazards Impact on Value seminar now available online at CalypsoContinuingEd.com.
28 Working RE Winter 2013
may come into play when calculating diminution caused by stigma. Assignments of this nature require considerably more research. To effectively complete an assignment of this sort may cost thousands of dollars. They typically cannot be priced as a flat fee but should be charged based on an hourly rate with a cost range indicated. Market Approach and Stigma Factor The most common method used for residential real estate is the market approach. The three rules of real estate value typically come into play during the market approach. They are location, location, and location, but these rules go out the window when appraising a contaminated property. The most significant factor in choosing comps lies in the type of contamination. In choosing comps you should choose those that have sold with the same type of environmental contamination. Today, mold is a very common environmental contaminant impacting the value of properties everywhere. For this reason we will use mold contamination as our example. The first question to ask is how many homes in your neighborhood are contaminated with the same type of environmental contamination? In reality, the search for properties contaminated by mold may take the appraiser to other neighborhoods or even other geographic regions. An appraiser may need to conduct as many as four different appraisals in trying to accurately derive the value of a property rendered uninhabitable by fungal contamination. All comparables may be in different geographic markets and require assistance from appraisers in those regions.
First, the appraiser will need to locate similar properties suffering from the same type of contamination. Factors to consider include but are not limited to the type of contamination, the habitability restrictions specifically attributable to the contamination and the cost of remediation to cure the defect. This is not as difficult as it sounds—as more and more contaminated homes emerge, more information regarding remediation costs becomes readily available. The next step is to establish a baseline value for each property (subject and three comparables) by performing a hypothetical appraisal and developing an opinion of value as if the properties are not contaminated. Obtain estimates for the cost to cure the contamination at the subject property. Research is necessary to determine how much buyers spend to remediate the environmental conditions. I have found that most people are quite forthcoming and willing to brag about the good deal they got on the property and what they spent to remediate. This number represents the actual cost to cure. The sale price of the comp as it sold in the contaminated state plus the new owner’s cost to cure is then subtracted from the comp’s uncontaminated hypothetical value (baseline). The resulting number is an indication by the marketplace of the stigma suffered by that property. We can call this the stigma factor. Divide the stigma factor by the hypothetical value of each comp to create a percentage ratio. This is the diminution ratio suffered by each comparable sale. A weighted average for the percentage of loss is created from the three diminution ratios derived from the three comps. The average must be weighted based on similarities in property styles, neighborhoods, or size to the subject property. You have now created a diminution factor.
Diminution Factor/Impact on Value The diminution factor is then factored against the uncontaminated theoretical value of the subject property (e.g. 30 percent of $240,000 equals $80,000). Add the dollar amount calculated by the diminution factor to the cost to cure estimates. We will call this the impact on value. Subtract our impact on value (cost to cure plus diminution factor) from the hypothetical value of the subject property and, bingo, we have a defensible opinion of value. Confirming Stigma Stigma can last for months or even years. An appraiser can confirm stigma by asking lending institutions if they would be interested in providing financing for a theoretical “virtual contaminated subject” similar to the subject property. Another way is to contact local Realtors to ask if they are interested in listing the “virtual contaminated subject” property. I have even contacted insurance companies regarding the feasibility and cost of insuring the “virtual contaminated subject.” I was appraising a mildly contaminated commercial property in Vermont. To test my belief that stigma existed, I contacted three lending institutions ask ing if they would be interested in exploring a loan with my financially sound client who wanted to buy this property.
Although the responses were polite, they all declined the opportunity and gave no indication of how much time would need to pass before they might be interested. I have used this market methodology successfully in court cases and have had it accepted by probate courts, the IRS, and heirs to property. This methodology employs sound appraisal practice in accordance with USPAP and is highly defensible in the event of litigation. The beauty of this method of calculating stigma is that it employs simple appraisal technologies that every professional appraiser is familiar with. It doesn’t rely on complex algorithms or regression tables and when presented to a layperson, judge or jury it’s easy to understand. There are assignments, especially for commercial properties, when calculating diminution may include the cost and income approach. I’ll share those methodologies with you in a future article. Of course, another way to calculate diminution is to use the SWAG theory (scientific wild ass guess). My recommendation is don’t guess; attend our Environmental Hazards Impact on Value seminar now available online at CalypsoContinuingEd.com and learn to be accurate and how to use all your options. Good luck doing good work. WRE
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Winter 2013 Working RE 29
Home Inspectors Closer Look
H o me I n specto rs
Closer Look
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Examining Agent-Inspector Relationship By Isaac Peck, Associate Editor
The home inspector’s relationship with the real estate agent
is a topic often discussed among home inspectors and agents. Some home inspectors tout strong relationships with real estate associations and agents as the best way to grow an inspection business. Others say the reliance of the home inspector on agent referrals is a key problem when it comes to keeping the home inspection profession honest, ethical, and professional.
The fact is, a large percentage of home inspectors rely on agent referrals to bring in work and keep them in business. While this is not necessarily a negative thing, many inspectors argue that there is an inevitable conflict of interest inherent in such a relationship, as ambitious and unethical real estate agents select home inspectors who aren’t thorough and don’t find problems. Some inspectors complain that on numerous occasions they’ve had realtors combatively ask them if they are “deal killers,” sometimes right in front of the buyer! Those who follow the relationship between real estate appraisers and mortgage brokers, agents, and lenders may see some similarities between the way the appraiser is pressured into meeting “value” and some home inspectors are encouraged to “sign-off” on a home after a quick hour inspection. Sean Wiens, a home inspector from Vancouver, Canada sees agent referrals as a threat to the integrity of the profession, saying that those home inspectors who are the most successful are the ones “who cater to the agents.” 30 Winter 2013 Home Inspectors Closer Look
The result, according to Wiens, is that inspectors end up not looking out for the buyer’s best interest and as a result the standards of the profession are lowered. Dennis Robitaille, Director of Independent Home Inspector’s of North America (IHINA), believes that the home inspector’s reliance on agent referrals creates a serious conflict of interest and this belief is what led him to found IHINA. Robitaille says that some agents have a list of two or three home inspectors who have been prescreened as not being deal killers. “The list, however, will be long enough to protect the agent from any referral liability should the buyer want to blame the agent for any inspection mistakes,” says Robitaille. This results in no liability for the agent for the referral— the buyer “chooses” an inspector the agent prefers but the buyer’s choice is limited to home inspectors who will not hurt the sale. On the other hand, there is a strong argument for why an ethical agent’s referral adds value to the buyer and benefits all involved. A seasoned real estate agent has years of experience and expertise in the local market and an agent who is honest and has integrity will save a buyer a lot of time, money and frustration by referring a competent and thorough home inspector. Lenn Harley, a real estate broker serving Maryland and Virginia, says that good agents have learned to recognize good home inspectors and other service providers to home buyers. “Our buyers rely on our experience for matters as important as a home inspection,” Harley says. According to Harley, there is a trend in the real estate industry for agents to avoid risk by not making referrals and not attending home inspections. But her position is that the agent referral actually adds value to the buyer. “When homebuyers ask me for a home inspector referral, I refer them to the most competent and thorough inspector I know,” says Harley.
Serving the Client Dick Greenberg, a real estate broker from Colorado, says, “We never hesitate to make recommendations, whether they are inspectors, lenders, handymen, carpet cleaners, etc. Our reason is because what we care about most is the client’s satisfaction. Our favorite inspector has ‘killed’ several deals for us, and we and our clients were grateful.” In other words, for the ethical agents and brokers out there, it’s a question of serving the clients and building strong relationships. “Our commission comes from our clients, not a particular deal, and it has never made sense to jeopardize a client relationship by recommending an inspector who would do less than serve the client’s needs,” says Greenburg. As far as there being a conflict of interest when it comes to agents referring home inspectors, Greenburg says, “For that concern to be valid, you’d need at least two people to ignore their duty to their client—the agent and the preferred inspector. While it’s certainly not an impossibility, those are the same agents who bend or break the law and code of ethics as a matter of routine. The answer is to clean up our act by getting rid of them, not by limiting the service we provide on the presumption that we’re all like them,” says Greenburg.
In other words, for the many honest and ethical real estate agents, brokers, and home inspectors—building strong relationships and referral arrangements is a way to help all involved. It provides the home inspector with business, the real estate agent/broker with a knowledgeable, reliable, and thorough home inspector to refer to home buyers and helps home buyers by providing them access to a dependable home inspector. Of course, not all real estate agents/brokers are honest and ethical, so perhaps the best route a home inspector can take is to diversify. Work closely with and market to real estate agents/brokers and find the ones who want ethical work, while also building up other avenues of business through direct marketing to home buyers, building a presentable website and working to optimize it on search engines, and engaging in online marketing and other marketing techniques that directly target the home buyer. Building a diverse business is the best safeguard against an inspector becoming too reliant on agent referrals, and it is also a more sustainable and profitable strategy in the long run. WRE
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Home Inspectors Closer Look
Marketing Secret Weapon: Tape Measures Measure Up Big By Isaac Peck, Associate Editor
Editor’s Note: One inspector says he can directly credit over 100 inspections in the past two years from simply handing out tape measures.
Home inspection is a niche, but still a very competitive
profession where home inspectors have to stay on the lookout for effective ways to market their businesses without breaking the bank. Home inspectors take many different approaches to their marketing, but sometimes keeping it simple pays off. Raymond Wand, a home inspector from Ontario, Canada says that giving out 50-page, 4”x5” scratch pads with his company logo has been effective for him, adding that, “It’s like handing out 50 business cards.” Still others say that fridge magnets work best for them. Meanwhile, some home inspectors swear by the tape measure—saying that it’s useful, long-lasting, and not likely to be thrown away. Home inspector Dan Harris, from Arizona, says he has experimented with a variety of approaches and found the one
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that works for him. “I’ve tried giving out coffee mugs, pens, note pads, chip clips, calculators and a few other trinkets, but the most effective tool that everyone seems to appreciate is tape measures,” says Harris. Harris says he can directly credit over 100 inspections in the past two years from simply handing out tape measures. It turns out that giving out tape measures is cheaper than you might think. Shrewd home inspectors can buy tape measures for $1 each when buying in bulk, then have a small label produced with company information for about 10 to 20 cents, for a total cost per tape measure of under $1.50. Dan Harris says he can find 16’ tape measures at the dollar store for $1 each, and he’s found a place that can make stick-on company logos for .04 each, giving him a total cost of just over $1 each. Welmoed Sisson, a home inspector out of Maryland, has had similar success when it comes to using tape measures as an affordable marketing tool. Sisson says, “Tape measures are without a doubt what has worked best for us. We’ve had clients and agents call us after several years because they kept the tape measure. I think there are a couple reasons why they’re kept so long. First, they’re useful, plain and simple. Second, they feel hefty, substantial and expensive, so people are more inclined to keep them; a pen is easy to toss in the trash.” Home inspectors, as small business owners in a competitive field, understand the importance of spreading the word about their businesses and finding affordable ways to grow their clientele. On that note, Dan Harris advises home inspectors to avoid spending too much on any one item used for marketing purposes and develop a targeted marketing strategy. Harris says that if you can focus your marketing dollars on promoting your own company, instead of a local home inspector association, and limit your expenses to $1 per “promotional product,” you are well on your way to developing a marketing strategy that maximizes your budget. WRE __________________________________________________________________ David Brauner/David Brauner Insurance Services: Calif. Insurance License: #0C89873 Home Inspector approved education at cost. See page 38.
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Pressure, Subtle Influence and Plausible Deniability by Isaac Peck, Associate Editor
Editor’s Note: Appraisers report that despite tough new appraisal independence laws, lenders, AMCs and others haven’t stopped trying to influence the process—they’re just being more careful about covering their tracks. Fraud expert Richard Hagar, SRA, explains how to protect yourself and your independence.
Plausible deniability is a term coined by
Lenders and AMCs have already been fined for violations of appraiser independence, and will continue to face increasing scrutiny from state and federal authorities.
the CIA to describe the withholding of information from senior officials in order to protect them from repercussions in the event that illegal, prohibited, or unpopular activities by the CIA become public knowledge. New, tougher state and federal regulations protecting appraiser independence have most lenders and appraisal management companies (AMCs) being a bit more careful these days about how they interact with appraisers. Talk to any appraiser, however, and they will tell you that challenges to their independence persist in a variety of forms, albeit today the pressure is more subtle, with perpetrators more careful about not leaving evidence behind: plausible deniability. The same conflicts of interest exist for the major players; loan officers, underwriters, and interested parties still have a financial interest in closing the deal, making the loan, and ensuring that the appraisal meets value. For the most part, lenders and AMCs no longer include a “suggested or required value” when ordering an appraisal, but the efforts to influence the appraiser still remain—lenders and AMCs are just using different tactics to avoid being caught red-handed—in short, to give themselves plausible deniability.
Comp Requests A request for additional comparables is one of the most common ways that appraisers report they are pressured into altering the appraisal value. Sometimes the request can be an honest attempt to make sure the appraiser didn’t miss anything, but it’s also a way to implicitly suggest that the 34 Working RE Winter 2013
appraiser is being too “conservative” with his or her value conclusion. Richard Hagar, SRA, says that most of the additional comparables his appraisal firm is asked to consider appear to have been selected based on their value and are extremely biased towards a higher value conclusion. This is an issue that many appraisers immediately recognize as an attempt at influence, but the requesting party often doesn’t see it that way. In many cases, the client’s request to analyze additional comps is coming from someone who is not a licensed/certified appraiser in the state where the property is located. “We’re talking about underwriters or others who don’t have appraisal expertise and yet insist on getting involved in the appraisal process. They are attempting to perform the appraiser’s job,” says Hagar. Hagar says that it is very rare for a request for additional comps to include any properties that he hasn’t already considered, but when there is a legitimate comp that he missed, he’s happy to consider it. For the vast majority of other cases, he says he refuses to play their game. “For comp requests, I usually tell them very directly that their suggestions are not comparables so I won’t consider them. Or that they were already considered in the original scope of the assignment, and they aren’t comparable,” says Hagar. “I don’t need to write out long explanations. They ask a simple question, so I give a simple answer, in writing!” Hagar says the reason for his short responses is also to get the “influencing party” to reveal their true intentions. “I try to draw them out and get them to explain more. It ends up trapping them, as they
sometimes come back and start issuing me instructions: we want you to put these sales on a grid or we want you to start making certain adjustments,” says Hagar. The result is a clear violation of appraiser independence; that can’t be easily explained away.
Other Requests Lenders and AMCs also make other requests in an effort to influence an appraiser’s value conclusion. Sometimes these requests are obvious violations of appraiser independence, sometimes they’re harder to spot. “My office has seen requests to not mention the moss on the roof of the house, to not mention the fact that there are water marks on the ceiling, to remove the photo of the street that includes a damaged car, and the list goes on,” says Hagar. Sometimes the request is legitimate. If, for example, a photo isn’t relevant to the appraisal, then the appraiser should comply with the request to remove it. But if the appraiser thinks that it’s valid—a legitimate photo that is relevant to their report—then the response to “remove the photograph” should be no, Hagar says. “The client doesn’t get to tell the appraiser how to do his or her job. Attempting to mold the appraisal report and tell the appraiser how to alter it is in violation of state and federal law,” says Hagar. “If the lender or client has particular needs about what photos they require, then that should be made clear up front, in the scope of work agreement before the appraisal is created or delivered. However, the majority of additional requests to alter a report after the fact are clearly attempts at influence and coercion.” There are numerous examples of appraisers who have lost their licenses, been sued, or both, because they allowed their clients to influence their work. Hagar tells the story of an appraiser who submitted an appraisal valuing a property at $1.5 million. The client then requested
that the appraiser remove the mention of the wetlands and creek nearby. After agreeing to the initial request for changes, the client came back with additional corrections, and by the time the appraiser had fully complied with the client’s “requests,” the property appraised for a value of $2.5 million. When the property later went into foreclosure—the lender ended up suing the appraiser for a faulty appraisal.
Dealing with Influence Lenders and AMCs have already been fined for violations of appraiser independence, and will continue to face increasing scrutiny from state and federal authorities. The result, Hagar says, is that they are adopting a much more nuanced approach when it comes to pressuring appraisers to deliver a “favorable” report. The first thing Hagar advises appraisers to do when their independence is being openly or subtly challenged is to ask the offender to put any such request in writing and try to avoid e-mail if possible. “Ask them to put the request in a standard letter on their company letterhead or to send you the letter as a PDF and then save that
letter in your workfile. If that means printing out an e-mail and saving it, so be it,” says Hagar. “You must have an audit trail to indicate why you changed your appraisal. Who asked what and why? This way, if there is an audit of the appraiser’s workfile or a lawsuit, the appraiser can show who was influencing and coercing the appraiser. YOU need the plausible deniability!” Hagar points out that sometimes asking the lender or AMC to put the request in writing stops the issue in its tracks. Often they are ashamed or know their request is prohibited but since it’s over the phone, they have plausible deniability if a federal auditor inspects the file looking for written proof of the foolish request. “They don’t want anything in writing because that way they can deny any wrongdoing if an appraiser ever files a complaint or regulators ever audit them,” Hagar says. The point of documenting the client’s requests and the appraiser’s responses is to create an audit trail for federal auditors. It also gives the appraiser a very good case should they file a complaint with government agencies to prove that their independence has been violated. WRE
Winter 2013 Working RE 35
Visit WorkingRE.com, click Webinar Series for schedule
Industry News Editor’s Note: Last issue we reported on an important Congressional hearing on the appraisal profession. The following are the Top Ten Appraisal Reform Recommendations [NCRC] as presented at the hearing by David Berenbaum, Chief Program Officer, National Community Reinvestment Coalition. In conclusion, I reiterate that the time has come for members of Congress, the prudential regulators, the Appraisal Subcommittee and the Consumer Financial Protection Bureau to work collectively to ensure that consumers and all the industry stakeholders involved in the home buying and refinance process will benefit from a system of regulation that helps ensure the independence and integrity of the appraisal process while promoting equal access to responsible and sustainable credit and a robust mortgage marketplace that meets our nations immediate housing finance needs. To accomplish this end, it is crucial to consider the following recommendations: 1. Review and define a more modern, robust appraisal reporting process and not accept the Uniform Residential Appraisal Report form by the GSEs but rather to call on the industry to define more robust and standardized reporting that can be tailored to the lending situation. The recent changes by FHFA regarding the Uniform Appraisal Dataset have only added further confusion to the already inadequate mandated appraisal form. 2. Require professional appraisals by licensed appraisal professionals for all residential mortgages above $50,000 regardless if they are originated or insured by the private sector or Fannie Mae, Freddie Mac, or Federal Housing Agency. 3. The role and impact of Appraisal Management Companies (AMC) must be critically reviewed by the ASC to ensure that they are not negatively affecting appraisal quality and further Congress should immediately investigate the emerging practice of mortgage originators assigning or requiring that Appraisal Management Companies and/or appraisal professionals they engage for business assume the buy-back risk from the secondary market or insurer claims relating to loan origination. 4. Appraisal professionals enhance safety and soundness and protect the interests of all the parties to a mortgage transaction—including consumers—and they must be appropriately compensated under any usual & customary fee standard that is developed. 5. The banking regulators, Fannie Mae, Freddie Mac and the FHA should not escape Appraisal Subcommittee valuation safety and soundness review and enforcement. 6. While Automated Valuation Models (AVM’s) serve as a useful and cost competitive compliance tool and an effective check against fraud, they should never replace the use of an appraisal by a licensed appraiser for all mortgages that exceed $50,000.
36 Working RE Winter 2013
7. There is a need for more effective Consumer Protection, Transparency & Education. 8. Responsible Appraisal Practices Ensure and Expand Housing Opportunities in an Open Society. 9. Inappropriate appraisal undervaluation is equally damaging to homeowners, communities, the tax base, investors & insurers. 10. States must suspend redirecting funds intended for appraisal compliance, professional development and licensing, to their general funds.
Do You Need General Liability Insurance? Do you need general liability insurance? You just might. Business Owner’s/General Liability Policy has been compared to a homeowner’s policy for your business. Coverage includes but is not limited to Property Damage to others, Bodily Injury, Business Interruption and Loss of Income coverage, Personal Property Coverage (computers, client records, buildings) and employee dishonesty. Inspectors, appraisers and real estate agents/ brokers need this coverage. Minimum premium is $500. Workers Comp also available. Call OREP. org for details and a free quote (888) 347-5273 or email: info@orep.org with your request.
New eBook on Manufactured Housing Marketing Tool You can find a free PDF at WorkingRE.com (click sidebar information) supplied by FHA Guide author Lore DeAstra (page 37). According to DeAstra, the new eBook is a great marketing tool. “As a way to build rapport and creditability with clients, I forward to them the new 62-page booklet from the American Council for an Energy-Efficient Economy (ACEEE). Published on July 31, 2012, it is a great resource for appraisers, real estate agents, mortgage professionals or anyone else who is involved with manufactured housing,” said DeAstra. “A great sales technique is for an appraiser to quickly read the booklet for information that might help his or her clients, highlight the section in Adobe Acrobat, and send to them via email.” One example of text pulled out and used by DeAstra is: Energy-efficient manufactured homes can save consumers an estimated $4.6 billion in energy costs over the next 20 years. Mobilizing Energy Efficiency in the Manufactured Housing Sector highlights the economic benefits of energy savings for the 17 million people living in manufactured homes and offers the first comprehensive analysis of the potential for energy efficiency improvements to both new and existing manufactured homes—according to a study by the American Council for an EnergyEfficient Economy. “Ten minutes after sending this, one of our clients called to thank me for the information,” said DeAstra. “He also forwarded my name to two of his clients to see if they might want to order an appraisal. Yeah!”
FHA Utility Requirement? Also from Lore DeAstra, “In an effort to protect ourselves, allow me to relay a recent conversation between an appraiser and agent/builder, that came to me in the form of a question from a reader. The answer is also below.” The question said: “An appraiser friend commented that he completed an FHA appraisal the other day and that the real estate agent/builder was surprised when my friend asked the agent/builder to show that the property had working utilities. The agent/builder told him that he had done five previous transactions with another appraiser and had never been asked to prove that the utilities were operational. The water and elemactric were on, he said, but not the gas. The agent/builder said that they do not turn the gas on in the summer but that he would make an exception for the appraiser. The fact that the previous appraiser had not asked for this information seemed odd to my friend, since it was his understanding that confirming working utilities (water, gas and electric) is a requirement by the FHA.” Question: Was the agent/builder and previous appraiser correct in inspecting a home for FHA without utilities? DeAstra: Unless the equipment would be damaged if operated, ALL utilities must be on during an appraisal inspection. For instance, if the home had gas heat and the summer temperatures were above 90 degrees, it may damage the air conditioning unit. Solution: The appraiser would then mention the circumstances and offer to re-inspect, when appropriate, later. Question: What if the utilities (water, sewer, electric, gas) are not on? DeAstra: Make another appointment when the utilities are operational. Not convinced? For chapter and verse from FHA, visit WorkingRE.com (in the center column, under Related Stories, click: August 25: FHA Appraiser Mandates Utility Requirements). Lore DeAstra, MBA, SRA, CDEI is author of the FHA Checklist and eBook (see page 37).
OREP.org/WorkingRE.com Blogs & Surveys AMC Rater This blog is an information exchange by and for appraisers on the best AMCs to work for. Visit WorkingRE. com and under Blogs click AMC Rater (left column).
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“That was a great seminar!!! I learned some new cool ways to save time and be more efficient. Keep up the great training!” —M. Maddox
Don’t Miss Your Opportunity to Know More and Make More Industry leaders share their expertise with you at prices you can afford. The topics are useful, the costs are minimal. OREP members/Working RE paying subscribers always enjoy reduced fees. Recorded webinars also are available on demand for your convenience.
Appraisal Review and the Law Presenter: Richard Hagar, SRA “I just wanted to let you know I really enjoyed the webinar. It was very informative.” —B. Eastman Ever wonder if the “Review Appraiser” you’re talking to is behaving legally? Knowing the law will help appraisers respond properly against some of these illegal requests. Hagar tells appraisers what they need to know to stay out of trouble, respond appropriately, and protect themselves.
Environmental Hazards Impact on Value Presenter: Francis X. (Rich) Finigan, Education Director of Calypso Education As many as 85% of properties appraised in the United States have potentially sensitive environmental sites within a half a mile. Learn key strategies for conducting environmental due diligence, making the right disclosures, and dodging the inevitable liability bullet.
Mobile Appraising: Saving Both Time and Money Presenter: Dustin Harris, “The Appraiser Coach” “Wow! Wow! Wow! The seminar was very helpful and encouraging in time saving mobile applications!” —J. Weseman Learn about the technology and techniques that can keep your business profitable and competitive. If you think you’ve heard it all before, you haven’t. Dustin does it successfully and enjoys showing others how.
Dealing with a Negative Review Presenter: Andy Anderson Being negatively reviewed by an AMC or lender is a serious event that needs to be handled properly, even if the review is completely baseless. Andy Anderson helps appraisers understand how to craft a detailed, professional response, as well as take the necessary steps to protect their livelihood and career.
New 7-Hour USPAP CE Online: Convenient, Affordable
Insurance: How Saving Money Can Really Cost You
Enjoy an OREP/Working RE discount on Mckissock’s new 7-Hour USPAP online continuing education course, approved in most states. Taking this mandatory continuing education coursework is now affordable and convenient with this new online course. Visit WorkingRE.com and click New 7-Hour USPAP CE (left column) to learn more.
If you are considering letting your errors and omissions (E&O) insurance policy lapse (not renewing or canceling) to cut expenses or thinking about switching to a company that does not provide “prior acts” coverage for your past appraisals just to save money, you should think again. Appraisers are being sued in record numbers today—even the careful ones. No matter the merit, appraisers have to spend time and resources defending themselves— even if they did nothing wrong. As most claims involving appraisers take several years to surface, letting your Claims Made insurance policy lapse or willingly giving up your
prior acts coverage to save a few dollars could be very costly indeed should a claim arise from the past and you have no coverage. Call your insurance agent to find out what is really at stake. For more on E&O insurance issues, see Insurance: Insight and Advice from the Inside, an interview with OREP.org Senior Broker David Brauner, who has been point of sale for appraiser E&O insurance for 20 years. visit OREP.org.
FHA Appraising Easier, More Efficient Excellent material—will help me get to the next level—well worth the money! Thanks, J Joslin FHA work is booming. Here’s an opportunity to make your FHA appraising faster and more efficient. The FHA Appraiser Inspection Checklist and eBook are designed to get you up to speed and more efficient at FHA appraising. The Checklist serves as a field guide for completing your reports. The eBook saves you time and money by summarizing and organizing the material you need to know. Author/appraiser Lore DeAstra says, “We reviewed more than 450 pages of HUD materials and spoke with several HUD officials to compile the FHA Appraiser Inspection Form, course materials, and eBook. It will save you time and money.” The guide is updated with the following: formatting updates for improved ease of use: more concise information in an easy-to-follow eBook searchable by topic; web links to topics for easy access; symbols and pictures included by topic for at-a-glance comprehension to FHA Checklist; FAQ from appraisers and lenders by topic with detailed index by page; over 10 new ways to access information and contact FHA to check competencies and get help fast! For more, go to WorkingRE. com and click FHA Checklist, and eBook (top left column). “Differentiating yourself from others improves your business and marketing efforts,” says author Lore DeAstra. “These revised materials will help you obtain additional avenues of income pertaining to your FHA expertise now and into the future.” OREP insureds enjoy a discount.
AMC Rater This blog is an information exchange by and for appraisers about working with the various AMCs— read the good but mostly the bad and ugly about which AMCs to avoid, such as the following: “Boy, are you right! I had to chase (AMC name removed for publication) for months for a check. We have friends that had to chase them for 120 days for $3,000+. They are supposed to be run by an ‘ethical’ appraiser but I think not! I did an appraisal for them, busted my rear to get it in in their turn time and then I got an email back saying they had cancelled it and utilized one of the appraisers in the area that does most of their work. I never got a cancellation email. So, I was out two days’ work and $375. Nice!” Learn what you need to know about working with AMCs at this blog. Visit WorkingRE.com and under Blogs click AMC Rater (left column). WRE
Winter 2013 Working RE 37
Professional Marketplace Continuing Education at Cost info@orep.org (888) 347-5273 David Brauner/David Brauner Insurance Services
Individual Appraiser E&O Rates Per Claim/Annual Aggregate
Most States
$1,000,000 / $2,000,000
$650.00
$500,000 / $1,000,000
$573.00
$300,000 / $600,000
$501.00
Please Note: Rates vary by state. Commercial rates are slightly higher. Please call or visit www.orep.org for more (888-347-5273). Zero deductible available in certain states. Prior acts coverage is provided free for qualified applicants (call for details). Beginning appraisers/trainees qualify. If you would like an application for this program or a quote for a multiple-appraiser firm or for sales/brokering, please call or visit OREP: (888) 347-5273, www.orep.org. Subscription to Working RE magazine included. Financing available.
Appraiser E&O Options • Policies with no FDIC Exclusion. • Combine Appraising, RE Sales and Brokering: One low premium covers both appraising/sales & brokering. • Appraisal Firm Coverage: If you are experiencing an increase in rates, a decrease in coverage or new exclusions that seem unreasonable, it pays to shop OREP when your firm’s E&O policy is expiring. Many firms are switching to OREP. Many appraisal firms are surprised to learn how much they can save by shopping OREP. • AMCs: Many appraisal management companies are forming in the wake of HVCC. If you need this coverage, OREP can help. • Retiring: If you are retiring from appraising, ask your insurance agent about purchasing Extended Reporting Period or “tail” coverage. Without it, you are exposed for any liability that may arise from past appraisals. Premiums range from one to one-and-one-half times (100%–160%) your last year’s premium and can provide coverage forever into the future for past appraisals. Each program is unique. Call your agent for details if you are planning to retire.
New 7-Hour USPAP CE Online: Convenient, Affordable Enjoy an OREP/Working RE discount on Mckissock’s new 7-Hour USPAP online continuing education course, approved in most states. Taking this mandatory continuing education coursework is affordable and convenient with this new online course. Learn and earn (CE) on your schedule! Visit WorkingRE.com, then scroll down and click on “Proud Partner of McKissock” Banner (center column).
“The class was great and the price was even better. Please let me know if you have any other discounted classes.” —Eric (OREP Member) Appraisers and Agents: The online McKissock course, Essential Elements of Disclosures and Disclaimers (5 hrs. approved continuing education in most states), is available to OREP Members/ Affiliates for administrative costs ($15.64). The purpose of the course is to provide appraisers with the tools to meet their disclosure obligations, while at the same time protecting them from unintended liability through the use of appropriate disclaimers. How and where must an appraiser disclose prior services provided on the subject property within the prior three years? How should repair items be disclosed in an FHA appraisal report? How should significant real property appraisal assistance be disclosed? How can an appraiser protect himself or herself when there appears to be mold in the basement? This course provides the essential elements of disclosures and disclaimers in appraisal reports. Every appraiser will benefit from this course. (Visit OREP.org, click Benefits and OREP Education Network.) Inspectors: Online Mckissock course Home Inspection Safety (3 hrs. ASHI, NAHI, NACHI approved and also by 15 states), is available at administrative costs to OREP Members and Affiliates (ASHI, NAHI, NACHI: $5.74; varies by state). The objectives of the course are to: identify protective clothing that should be worn, recognize safety equipment used, understand limitations and exclusions, discuss general safety issues, recognize lead paint, asbestos, etc., discuss electrical safety, understand, heating and air conditioning precautions, recognize un-permitted additions and more. (Visit OREP.org, click Benefits and OREP Education Network.)
AMC Resource Guide Updated Guide authored by an appraiser for appraisers and marketed through Working RE/OREP.org. Nearly 300 Verified AMCs; the first 40 listed send 90 percent of the author’s work; national management companies; verified companies that send orders. The author personally verifies and signs up to each company listed and calls to verify immediate need for appraisers. Vendor specific errors to avoid are listed so you make fewer mistakes from the beginning and get more repeat orders. Author emails customers with new companies when added. Top techniques to generate more revenue are included. The Guide lays out all the details on how to get signed up with AMCs and information on creating top ranking websites. For more and to order, see WorkingRE.com, top left column (click: AMC Resource Guide) or email subscription@workingre.com with AMC guide “info” in the body or subject. OREP Members/Working RE subscribers receive a discount.
New Webinar Series: Information You Can Use from Industry Leaders The OREP/Working RE Webinar Series features informative webinars presented by industry experts. OREP members/Working RE-paying subscribers always enjoy reduced fees. Many appraisers are busy these days, so prerecorded webinars also are available on demand for your convenience. For the current schedule, including dates, rates and times, please visit WorkingRE.com and click Webinar Series (center column) or scan the code at right with any QR Code Reader application.
“The webinar was awesome. Really informative and I recommended it to several of my colleagues.” —L. DiGregorio How to Limit Liability, Maintain Independence, and Fight Influence Presenter: Richard Hagar, SRA Can You Increase Your Appraisal Volume AND the Quality of Your Work Presenter: Dustin Harris, “The Appraiser Coach” Environmental Hazards Impact on Value Presenter: Francis X. (Rich) Finigan, Education Director of Calypso Education
38 Working RE Winter 2013
Professional Marketplace: Insurance, Education, Information and More. OREP Announces New Home Inspector Insurance Program
Group Health Care—No Application/Limitations for Pre-Existing Conditions
Cadillac Coverage: E&O + Premises Coverage (BIPD) $1,250 /$300k Limit
California residents qualify for programs offered through Kaiser Permanente, Allied National and United Healthcare. These plans are available to real estate professionals on a guaranteed issue basis. Eligibility is accomplished by being a member/affiliate member of a real estate association/board. Kaiser Permanente offers eleven plans including the new Tax Advantaged Health Savings Account Plans. United Healthcare offers three HMO and four PPO plans, including a Tax Advantaged Health Savings Account. Allied National offers four Limited Benefit PPO Plans that offer highly affordable first dollar coverage including doctor office and emergency room visits and prescription drugs. These plans are available to California residents only through OREP (OREP membership not required). Please visit OREP.org, click Benefits or email info@orep.org with medical benefits in the subject.
Home Inspectors no longer have to pay more for the complete coverage they need. A new program from OREP includes most coverages in the minimum premium ($1,250), including Bodily Injury Property Damage (BIPD/Premises coverage). The new insurance program allows inspectors to have complete coverage and save money! David Brauner Insurance Services/OREP has been servicing the insurance needs of home inspectors for 11 years. Program Highlights • Includes Errors and Omissions (E&O) and Bodily Injury/Property Damage (BIPD)/Premises coverage, as well as most incidental coverages, such as termite, radon, and commercial coverage. • “A” Rated Carrier, Prior Acts, Additional Insured for Agents and other Referring Parties. • Convenient: Fast, Self-Rating Application gets you quoted and back to work in minutes. • No policy fee, no taxes. “Home inspectors who are paying extra for ‘add on’ coverages, or worse, going without the full coverage they need just to save money, don’t need to any longer. Broad coverage is included in the minimum premium, including E&O and premises coverage,” said David Brauner, Senior Broker at OREP. OREP’s new program also includes most incidental coverages, such as termite, radon and commercial coverage. The minimum insurance premium is $1,250, which provides a coverage limit of $300,000 Aggregate/$100,000 each Occurrence for E&O/BIPD. Choice of coverage limits and deductibles are available. Find details pg. 33. Visit OREP.org for more or call toll free (888) 347-5273. Info@orep.org. David Brauner Calif. Insurance License: #0C89873
Mortgage Field/Property Preservation Many appraisers and home inspectors are now providing mortgage field and property preservation services for bank-owned properties. OREP has provided E&O and GL insurance to this industry for over 10 years and is a leader in the field. If you’d like a quote, please call or visit OREP.org, (888) 347-5273.
How to Save on Office Supplies, Telecom and more Corporate Savings is a little-known but significant cost-saving benefit of being an OREP member/paid Working RE subscriber. Members and subscribers who take advantage of the program save money with Office Depot, Staples, Dell, FedEx, UPS, Sprint, travel, and more. OREP/Working RE saves well over $1,000 a year on office supplies alone. Rod Lopez, an appraiser from New Jersey, says that he saved over $100 recently on the discounts at Staples, Office Depot and on approved continuing education from Mckissock. Cynthia Traylor, from House Calls Home Inspections, in California, responded, “YES! We are saving 19% on our Verizon bill and I order all of our office supplies through the discounted Staples portal—they provide overnight, FREE shipping, even on Sunday orders! Lastly, we are considering the Six Flags discount. So, yes, yes, and yes. We are taking advantage and truly enjoying your program. Great job!” If you’re an OREP member, ask about these savings! If you buy your insurance elsewhere, consider a paid subscription to Working RE magazine. Subscription benefits also include corporate savings, discounts on continuing education, webinars and more, in addition to the print magazine. The savings easily pay for the cost of the subscription. WRE
Thank You! Great Service...Easy, fast, affordable! —Patti Tai, Certified Residential Appraiser
Low E&O Rates, New Policy Servicing Department…and Yes, We Still Answer the Phone! Appraisers E&O Min. Prem. $501 (varies by state) Inspectors E&O Min. Prem. $1,250 Real Estate Agents/Brokers Min. Prem. $429 (varies by state) OREP has a new policy servicing department to streamline insurance requests from our clients, including renewals. Simply email your policy-servicing request to info@orep.org to get the assistance you need, usually same day. Whether you’re an existing client or someone calling for the first time, you can reach us by phone anytime during business hours (8–5 M–F Pacific Time).
Business by the Golden Rule Our mission at OREP is simple: “Business by the Golden Rule.” It means we treat you the way we want to be treated: with honesty, courtesy and efficiency. This is David Brauner, Senior Broker and Principal of David Brauner Insurance Services/OREP.org. Call us to see what you’re missing if you’re missing great rates, great service and business by the Golden Rule. Yes, with OREP you can have all three. Call toll free today: (888) 347-5273 or visit OREP.org. Policy servicing: info@orep.org. OREP publishes Working RE magazine. WRE
OREP now in our 11th year! (L-R) Michael, Kevin, Lori, Isaac, Ashley, David, Carolynn, Clark, Maria, Cary
“WOW! Thank you very much. You are the fastest and most efficient insurance agent I have ever done business with !!!” —Aloha, James
David Brauner Insurance Services: Calif. Lic. #0C89873
Winter 2013 Working RE 39
Dealing with Negative Reviews By David Brauner, Editor
Editor’s Note: Making lemonade from lemons? Yes, appraiser Andy Anderson says you can turn a negative review into an effective sales tool. He explains below, which is excerpted from his webinar Dealing with a Negative Reviews (page 37).
How do you turn a negative review into
one of your most effective sales tools? By understanding the process and learning how to handle the review properly, says veteran appraiser Andy Anderson. “If you handle a negative review professionally and unemotionally you not only learn from it to become a better appraiser but you also have the opportunity to impress the client and cement the relationship,” says Anderson. “It can turn into a positive.” Anderson says it’s important to understand the issues: there are many levels of reviews—compliance, desk and field reviews, those conducted to examine various issues, such as value, standards of compliance with FNMA/ FHA/VA guidelines, compliance with Uniform Standards of Professional Practice (USPAP) and client requirements, to name a few. He says they can be conducted by any number of personnel who have various levels of competency: underwriters, fellow appraisers, administrative personnel, loan officers and who knows who! Not all review personnel have the ability or authority to change the value indicated in the original report. The reason for reviews can be to determine if the value is supported, to raise the client confidence level, to determine if the lender requirements are met, to test the accuracy and relevance of the data used and whether the collateral meets the criteria. Reviews can also be conducted to support the original appraisal.
Two Flavors of Negative Reviews How you respond to a negative review of your work depends on one very 40 Working RE Winter 2013
important issue: is the negative review warranted or not? There are techniques, Anderson says, for checking the accuracy of a review, including going over the various components of the report—value, comps, adjustments, pictures, etc. One thing that should be constant no matter the validity of a bad review, however, is your response. Whether the negative review is justified or not you should address the review but never attack the reviewer. Anderson says the best defense is to stay professional and courteous. When personal defenses go up the process can become emotional and stressful. If the review is not justified, deal with facts and prove your case: discuss your rationale, avoid opinion comments, and submit additional information when challenged—such as when the reviewer does not agree with market trends, does not allow for condition/quality variations, presents comps which you believe are not comparable, or requests that you change your adjustments. Review, consider and write a thorough and concise rebuttal. If the negative review is justified, deal with facts and discuss them, consider additional information, discuss your rationale when needed, like when the reviewer finds better comparables or challenges your adjustments or value conclusion. Write an acceptance where appropriate. And remember, address the review where appropriate but never attack the reviewer. It is the reviewer’s job to review the quality of the report, the credibility of the data and the reliability of the results and conclusions. Not the intent of the appraiser.
Red Flags and Prevention Some red flags to watch out for that may lead to a negative review, Anderson says, are blanks, a final value above or below predominant price range, an indicated value outside adjusted sales price range or not bracketed by closed sale amounts. Other red flags are people and/or religious objects in pictures or descriptions, non-compliance with the client’s order instructions, a description of the subject as less than average, unsupported declining or increasing value trends. Anderson says that to avoid negative reviews, you should adhere to the Uniform Standards of Professional Practice (USPAP), know the guidelinesFHA, VA, FNMA and stay faithful to the original order and client requirements. It’s also recommended that you inform the client about any additional requests for information that they may add to the assignment after completion, such as requesting more comparables or asking the appraiser to consider additional sales provided by the client, etc., may require additional compensation. The bottom line is to be professional, according to Anderson, and to follow the Golden Rule. Treat the review process seriously and the reviewer respectfully and professionally and you will avoid problems and might just learn something from the experience. And you may just turn that negative review into a positive for your business. WRE