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Fall 2015, Volume 39
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Fall 2015 Volume 39
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From the Publisher Readers Respond
6
Louisiana Brings Hammer Down : First to Enforce C&R Fee Provision Isaac Peck, Editor
12 16 18 24 26 28 32 35 37 38
Supporting Market Condition Adjustments Rachel Massey, SRA and Tim Andersen, MAI
Are You a Tier 1 or Tier 2 Appraiser? Richard Hagar, SRA
Calculating the Cost of an Appraisal Dustin Harris, The Appraiser Coach
Notes from an AMC Appraiser Jane Doe
Understanding USPAP: Part 3 Phil Spool, ASA
National Appraisal Regulation: Is It Working? Bob Keith, MNAA, IFA
Home Inspectors’ Closer Look
When to Report a Claim or Incident
David Brauner, Senior Broker at OREP.org
Clothes Dryer Vents: Proper and Improper
Matthew Steger, ACI
Professional Marketplace Industry News
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Your comments and letters are welcome! All stories without attribution are written by the editor. 2 Working RE Fall 2015
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To All the Stubborn So-and-So's by David Brauner, Publisher
I believe there are brighter times ahead for real estate appraisers after a very
rough patch. Lawmakers have put a lot of time and effort into creating a mountain of mind-numbing regulations concerning appraisers that, at their very heart, serve a single purpose: to assure that competent and honest appraisers are engaged in the process. The powers that be understand that the public trust depends on it and so do we. If lawmakers envision a better world where algorithms can and should replace appraisers, why bother with all the guidelines? The role of appraisers going forward may be more limited, more complicated and more narrowly focused as technolAppraisers, the ogy evolves; but appraisers, the local experts, local experts, are are a part of the plan and all the reams of regulation back that up—if you ask me. a part of the plan Regarding fees, I believe a corner has and all the reams finally been turned with the recent activity in of regulation back Louisiana and elsewhere—as states pick up that up. and run with the ball after years of watching the Feds do nothing about enforcement. The Rules and Regs acknowledge what we’ve been saying for years: something has been out of whack with the free market system for appraisers since the Home Valuation Code of Conduct (HVCC) and that something has had a negative effect on appraisal quality. Newer, tougher standards require more time and greater expertise from appraisers, and it is finally being acknowledged that someone other than the appraiser is going to have to pay for it. Having appraisers pay for it out of their fees has not worked and a new paradigm is evolving. Maybe the solution is part enforcement and part free market. Maybe it is cost plus, where lenders pay for the services they receive. In Louisiana and elsewhere, the enforcement piece has unfolded this way: first AMC regulation on the state level, then fee surveys, and then enforcement. On the individual appraiser level, those who are earning higher fees say they do so by providing higher quality reports, better customer service and by focusing on clients who will pay for better work. Call me an optimist but I don’t think the need for appraisers is going away. This should mean better times for you stubborn so-and-so’s who stuck it out. Hopefully, you are not only busier these days but also, with less competition and higher fees, enjoying a little more cushion. If you haven’t quite figured out what it takes to produce a higher quality report, how to find better clients and how to raise your fees, those are just some of the topics we cover this issue and what is always at the heart of what we publish (and market) in Working RE. We’ll keep at it as long as you do. WRE 4 Working RE Fall 2015
First Enforcement of C&R Fees: Louisiana Makes History When other states do their fee studies, they need to make an adjustment for the influence low AMC fees have had on the overall appraiser market. When low fees are no longer a factor, the industry will have lost a third of its practitioners and more work will be required than ever before. Then, fees must go up under any competitive scenario for professional work! Louisiana made a start. The rest of us need to pick up where they left off and insist on reasonable fees. —Michael F. All of the AMCs should be audited to see who is in compliance. How unfair to only fine one company in one location, when it is common knowledge that such activity is most certainly not limited to that one company, in just that one location. I’ve got the emails to prove it, and so do 50,000 other appraisers. —Jeremy H.
Bank’s Letter to Appraiser Started Off With… Excellent article. I am a retired bank and fee appraiser. We have a lot of form fillers today – appraisers are too aligned with salespeople and brokers. I recently had an appraisal done on a proposed duplex and there were many factual mistakes. It had pages of canned comments as if it relieved the appraiser of liability. CE was what sharpened my skills and kept me out of trouble. I learned to look for reasons for the range of values in similar home sales. —Richard F.
Appraisers Entitled to Overtime; Court Holds Similar things are happening to fee appraisers and bank employees. As a fee appraiser, I’m noticing an increasing disrespect from AMCs who are trying to meet unrealistic guidelines and turn times from banks. In their eyes, there are no legitimate reasons to ask for more time on a difficult appraisal. They may grant you the extension, but the computer tracking system still registers it as being late. AMC workers don’t bother to manually go in and make the correction. After all, they’re motivated by profit and that means doing as little hands-on work as possible. The end of the month report makes you look like a bad appraiser and you no longer get any assignments! —Anonymous
Clothes Dryer Vents: Proper and Improper Some builders have the dryer located in the middle of the house. I have requested
that if they are going to locate the clothes dryer in the middle, where the length is longer than 35 feet, they must increase the diameter of the duct as is required by the dryer manufacturer, or under the International Residential Codes for One and Two Family Dwellings, under #M1502. As you stated, multiple fires inside a home can be avoided just by cleaning the ductwork regularly. This should be placed on a “Checklist of Maintenance Items” that should be done every 6 months. – Tim P.
and appraiser approval is tracked alongside longer term repurchase or conflict history, the industry abuses will continue. —Jeremy H. I agree with this and have seen it firsthand. It just takes time, so readers should not be discouraged that results are slow coming. It most likely will take a couple of years of above average quality and support to get the word out, but I firmly believe the best way to survive and thrive in this business is to exceed expectations, not just meet them. —Rachel M. WRE
Are You a Tier 1 or Tier 2 Appraiser? One of the greatest challenges is working with lending clients or their AMC distributors and getting them to appreciate more detail and support. To them, a "superior product" is one which can be reviewed and processed quicker than the rest. Until we live in a time where underwriters can be in control of which appraiser is preferred and which is not,
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5
First Enforcement of C&R Fee Provision: Louisiana Makes History by Isaac Peck, Editor
Nearly five years after Dodd-Frank set
The bottom line for appraisers is that they may be finally on their way back to customary and reasonable fees.
forth rules requiring that Customary & Reasonable fees (C&R) be paid to appraisers, a recent agreement between a state board and an appraisal management company (AMC) is the first evidence of enforcement of the C&R fee provision. The bottom line for appraisers is that they may be finally on their way back to customary and reasonable fees. On June 4, 2015, the Louisiana Real Estate Appraisers Board (LREAB) issued a Stipulations and Order Memorandum (SOM) wherein Coester Appraisal Management Group, also known as Coester VMS, offers no admission of guilt but agrees to follow the current Louisiana fee schedule for a period of 12 months and pay $5,000 in administrative costs. Coester also will submit quarterly reports to the Board for a period of 12 months, which list “appraisal orders in Louisiana, the fee paid and the date payment was made to the appraiser.” (To read the memorandum in its entirety, visit WorkingRE.com; click Library, Sidebar.) In the Final Order obtained by WRE through a Public Records Act request, Coester agrees not to contest the case while simultaneously alleging that it (Coester) “complied with the federal law, and as such, was in compliance with Louisiana Law.” In contrast, the Louisiana Board alleges that “Coester Appraisal Management Group did not use established fees set by an objective
Isaac Peck is the Editor of Working RE magazine and the Director of Marketing at OREP.org, a leading provider of E&O insurance for appraisers, inspectors and other real estate professionals in 49 states. He received his master’s degree in Accounting at San Diego State University. He can be contacted at Isaac@orep.org or (888) 347-5273.
6 Working RE Fall 2015
third party or use the factors set forth” in Louisiana law, in determining fees paid to appraisers.
Working Together In an interview with Working RE, Joseph Mier, SRA, AI-RRS, RAA and President of the Louisiana Real Estate Appraisers Coalition (LREAC) stressed that it’s important for appraisers to not adopt an “us versus them” mentality with regards to AMCs. “The goal for appraisers should not be to harm AMCs. The real message is that we need to work together,” Mier said. “AMCs have a purpose, but the business models of some AMCs have hurt the entire industry. A business model that takes a significant portion of appraisers’ fees and pays non-C&R fees, as per the Dodd/Frank rules, results in high quality appraisers leaving the industry or refusing to work for AMCs altogether. It also discourages young professionals from joining the industry, which is an important consideration given that the latest Appraiser Quality Monitoring requirements from Fannie Mae have made it even more difficult to be an appraiser. Both appraisers and AMCs have an interest in compensating appraisers fairly with a minimum C&R fee,” argues Mier. Finally, Mier says that LREAC is appreciative of the Louisiana Appraisers Board for their efforts to follow up on real complaints by appraisers and for the changes that Coester VMS is making. “We appreciate Coester VMS recognizing the need to follow one of the two presumptions of compliance by utilizing the current fee schedule that’s been page 88
Fall 2015 Working RE
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7page 6
established by the third party fee survey in Louisiana. They have agreed to make several important changes and we appreciate that. These industry issues can be repaired but the current business model must change going forward. It will take all industry partners to be involved to make that happen,” Mier says.
North Carolina and Minnesota This is not the first time that Coester VMS has been a target for state boards. Besides being investigated by LREAB, Coester was also sanctioned by the North Carolina Appraisal Board for failure to pay appraisers on time. In a Consent Order signed October 13, 2014, Coester admitted that it failed to pay appraiser invoices on time. As a result of the Board’s investigation, it was discovered that 1,066 payments to appraisers were made beyond the 30 day requirement mandated by North Carolina law. Consequently, Coester was ordered to pay a civil penalty of $10,000 and had its AMC license suspended for a period of six months. However, the suspension was stayed until February 2015. (To read Coester’s North Carolina Consent Order in its entirety, visit WorkingRE.com; click Library, Sidebar.) In 2012, Coester VMS was also ordered to pay a civil penalty of $12,500 to the State of Minnesota for allegedly engaging in business as an AMC in Minnesota without being licensed. In a Consent Order signed by Brian Coester and the Minnesota Deputy Commissioner of Commerce, the allegations against Coester include: (1) operating an unlicensed AMC in Minnesota, (2) failing to respond to requests within the time period specified, and (3) falsely advertising on its website that it was compliant with all AMC requirements in Minnesota when in fact it was not licensed. Coester resolved the complaint by waiving all rights to a hearing and agreeing to pay the civil penalty of $12,500. 88 Working RE Fall 2015
Median Appraisal Fees By Type Of Appraisal (Statewide/All Locations–Louisiana C&R fee survey)
FORM 1004
FORM 1004 FHA
FORM 1025
FORM 1073
FORM 2055
Responses
4856
3680
2594
2240
3078
Median
$400
$400
$550
$425
$325
Table 1
What are C&R Fees? In Louisiana, AMCs may comply with the C&R fee legislation by selecting either the first or second presumption of compliance. Under the second presumption of compliance, AMCs must use “objective third-party information such as government agency fee schedules, academic studies, and independent private sector surveys” to develop a fee schedule. However, the Louisiana law, modeled after Dodd-Frank, also specifies that “fee studies shall exclude assignments ordered by appraisal management companies.” If an AMC decides not to use a set fee schedule based on independent fee surveys, the AMC may select the first presumption of compliance and "maintain written documentation that describes or substantiates all methods, factors, variations, and differences used to determine the customary and reasonable fee for appraisal services,” which, at a minimum, includes six elements an AMC must document and analyze for every assignment order. In its complaint against Coester VMS, LREAB alleges that Coester was using neither established fees set by an objective third party nor the factors set forth in Louisiana law. (To read the Louisiana law in its entirety, visit WorkingRE.com; click Library, Sidebar.) When Louisiana’s law first passed in 2013, LREAB commissioned a statewide survey to be conducted by the Southeastern Louisiana University Business Research Center. Because DoddFrank specifically excludes AMC-ordered
appraisals in determining C&R fees, the survey focused on fees paid by banks, not AMCs. The survey also includes appraiser input, based on their work with banks and other non-AMC clients. Table 1 represents the median appraisal fee reported in the survey paid by banks directly to appraisers. (To read the complete fee survey report, visit WorkingRE.com; click Library, Sidebar.)
Coester Responds In an interview with Working RE, Brian Coester, Chief Executive Officer of Coester VMS, explains that Coester chose to adopt the first presumption of compliance because it is consistent across the country and can be applied to all products and/or services performed. “We are certain that our C&R policies meet all federal requirements and, as a result, were in compliance with Louisiana state law. We decided to use the first presumption instead of the second as it’s easier to implement across the country in a consistent manner,” says Coester. In its written response to LREAB’s initial complaint, Coester seems to argue that the fees it pays are C&R because appraisers set their own fees and agree to the fees by accepting the orders. Coester’s Director of Operations, Jacob Guertin, writes, “Coester does not post or require appraisers to agree to fixed fee schedules, but instead Coester allows appraisers to establish their own fee schedules.” Additionally, Coester does not rely on independent fee studies
because “the appraiser must ultimately determine what they deem customary and reasonable.” Coester’s assignment methods “observe and respect the fees submitted by appraisers” and prioritize “quality metrics, rather than fees,” writes Guertin. Addressing what quality metrics Coester examines, Guertin writes that there are three primary quality and performance metrics that Coester uses to select the most qualified appraiser: 1. Revision Average per File 2. Rebuttal (Reconsideration of Value) Average per File 3. Turn Time Richard Hagar, SRA and provider of training on policies and procedures to lenders and AMCs nationwide, says that this admission may have raised an eyebrow or two at LREAB, given that the 2010 Interagency Appraisal Guidelines specifically warn against allowing “speed of delivery time” to inappropriately influence the appraisal ordering process and caution lenders (and their agents) against prioritizing methods that render “the fastest turnaround time.” Hagar also disagrees that determining an appraiser’s quality based upon the number of reconsiderations of value is a valid method. “Appraisers will rarely, if ever, get a reconsideration of value if they are at the sale price. But if they are below the sale price, they more than likely get a reconsideration of value. The idea that a reconsideration of value request indicates poor appraisal quality seems very suspect to me,” says Hagar.
Coester C&R Fees As part of the Final Order, Coester agreed to pay the fees indicated by Louisiana’s C&R fee survey for a 12 month period, beginning on July 1st, 2015. However, in regards to the fees Coester VMS had been paying prior to July 1, 2015, Coester says that all fees paid for Forms 1004, 1004 FHA, 1025,
and 1073 were within five percent of the Louisiana fee survey. “Some are higher, some are lower but all are within a five percent range. We came up with the idea to adopt the fee survey because we decided that with that particular state it was reasonable and similar to what we were already paying,” Coester says. However, in the initial complaint against Coester, obtained by Working RE through a Public Records Act request, included as evidence was an Appraisal Order for a 1004 URAR with 1004MC offering a fee of $265. According to the Board’s fee survey, the median C&R fee for that same appraisal is $400. Additionally, Working RE obtained an FHA 203K URAR with 1004MC order from Coester for $295 which was sent as late as June 2015, after Coester signed the Final Order with LREAB. The C&R fee according to the Louisiana Fee Survey for an FHA 1004 is $450. (To read the initial complaint and evidence submitted in entirety, visit WorkingRE. com, click Library, Sidebar.) Several appraisers throughout Louisiana who have spoken with Working RE, and who wish to remain anonymous for fear of reprisal, insist that this issue is not just about Coester, but about many AMCs in their state who are paying low fees. Leading up to this story, Working RE received dozens of appraisal orders submitted by anonymous appraisers which show that some AMCs are offering fees as low as $200 for a 1004 URAR in Louisiana. Sources close to LREAB reveal that the Board currently has 16 open complaints against AMCs related to failure to pay C&R fees, indicating that many AMCs may soon find themselves in the hot seat.
Looking Forward This first enforcement of C&R fee provisions is a victory appraisers have long waited for, according to Hagar, who believes it is likely that Louisiana’s example will embolden other state boards
to take action on C&R fees. "More and more states will begin looking at the issue of C&R fees, talking about the process involved in enforcing them, and starting to do something about it,” says Hagar. The Dodd-Frank Act and other federal regulations have granted the authority to license and regulate AMCs to all states, and according to Hagar, that includes enforcing C&R fee provisions. Hagar also makes a nuanced point regarding C&R requirements: “To date, 38 states have enacted AMC licensing laws. More will follow. As they enact those licensing laws, the states will have the authority to enforce C&R fees. States don’t necessarily need to write C&R enforcement powers into their AMC regulations the way Louisiana did. It’s in federal law. Once it’s in federal law, AMCs must operate under federal guidelines and their state boards have the authority to sanction them for violating those laws,” argues Hagar. Increased regulation and enforcement of AMCs will help the industry, argues Hagar. “In order to stick around, AMCs are going to need to be more businesslike and operate more ethically. As enforcement of C&R fee provisions finally catches on, we should see a decrease in lowball appraisal (email) order systems, because shopping for the fastest and the cheapest appraiser is prohibited. Appraisers, in turn, should be freed to raise their fees and provide a superior product,” says Hagar. WRE
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Supporting Market Conditions Adjustments by Rachel Massey, SRA and Tim Andersen, MAI
It’s time to understand that apprais-
ers must support their market condition adjustments. This has always been a Fannie Mae requirement. And it’s not only required by Collateral Underwriter (CU), the Uniform Standards of Professional Appraisal Practice (USPAP) also require it. In this article, we’ll cover one way to support market condition adjustments. This method is USPAP compliant, totally market-based and should satisfy even the most demanding reviewer. One caveat though. While the back-up data are from the local MLS, the appraiser must graph those data, as the exhibits herein show them. This is going to take extra work on the appraiser’s part. However, this extra time spent initially will pay dividends by saving you valuable time in the future when responding to requests for more information from lenders, underwriters, AMCs and reviewers. That sounds pretty good, don’t you think? This analysis uses median prices, rather than average or modal prices. That is the appraiser’s choice. The use of mean, median or mode prices is not what is important. What is important is that the appraiser uses the one that makes sense in a particular market. This may require the appraiser to analyze a market using all three, and then pick the one that is most reflective of what that market is doing at any given time.
Market Influences SR 1-2(3) requires appraisers to identify the “…physical, legal, and economic attributes…” which influence a property’s value and marketability. Part of the analyses behind this identification is a determination of the subject’s submarket and how it changes due to the influences behind it. Markets are not static. The market is always under influences related to supply and demand, the buyer’s ability to pay, and seller’s ability to sell. Even in stable markets there are forces at work that could unsettle the market at a moment’s notice. Think about how an increase in interest rates can quickly affect a buyer’s ability to afford a mortgage. Think about how low interest rates on an existing loan could cause a seller to pause prior to placing a house on the market. If an owner has a favorable interest rate on an existing mortgage and the mortgage is already significantly paid off, that owner might not be as eager to sell and purchase anew at a potentially higher interest rate. It might simply make more sense for that owner to remodel or add on to the existing dwelling as opposed to selling and moving on. When markets have more buyers than sellers, buyers often are at an extreme disadvantage, finding themselves competing with many others for desirable properties, resulting in “bidding wars.” From local brokers, we have
Rachel Massey, SRA, AI-RRS, is an AQB Certified USPAP instructor and has been appraising full-time since 1989. She is a Certified Residential Appraiser in Michigan, specializing in review work for various clients, as well as lake properties and other residential properties in and around the Washtenaw County market. Tim Andersen, MAI, is a commercial real estate appraiser, AQB-Certifed USPAP Instructor, USPAP consultant, author, and expert witness.
12 Working RE Fall 2015
seen contracts stating that the buyer will pay over and above any other offer, and they will make up the difference between the contract price and appraised value, realizing that in this type of inflationary period, the only way they may be able to purchase a house they want is to overpay. In markets such as these, while the price of a property is clear, its value is far less so. This is because buyers are bidding to overcome the clear shortage of housing in a particular submarket at a particular time. They are not seeking shelter only; their bids represent a non-real estate component.
Measuring Market Influences As appraisers, we need to measure the market for each and every appraisal we complete. We need to know whether prices are increasing in an undersupplied market or declining in a weak and/or oversupplied market. If the market is truly balanced between supply and demand, we need to be measuring this as well. There is more than one way to arrive at a conclusion related to market direction, as well as support adjustments related to changing market conditions. The following information is the method I use to determine both market direction as well as the dynamic that exists between supply and demand factors. It is labor-intensive from the standpoint of having to run data for multiple periods of time and in more than one market segment. However, it also provides an excellent measure of how the markets are behaving in a geographic area. For the purposes of comparison, I concluded that the boundaries of the local school district are reasonable for
Monthly data in median price $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000
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Figure 1
Monthly data in median price per square foot $180 $160 $140 $120 $100 $80 $60 $40 $20
Median PPSF Arms Length
Median PPSF Submarket
per square foot increases. This is related to the underlying site value. It is known as the law of diminishing (or decreasing) returns which is addressed succinctly in the Dictionary of Real Estate Appraisal, 14th Edition on page 32. Considering both and blending the results is a great way to analyze the change over time. In this instance, there are enough sales in each market period (minimum of 30) for reasonably credible market data. Then, if we lay out the last year’s sales in grid format, we can easily mark the time range where the comparable sold to the present submarket (See figure 3, page 14).
MAR 14 - MAR 15
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$0
JAN 11 - JAN 12
determining the larger market. These sales and listing data pertinent to the entire school district do not include any distressed and/or “to-be-built” sales or any data pertinent to a particular submarket that I have under study. The graph (figure 1) shows the school district data in blue, with the submarket data in orange. While we actually ran more data, we believe the following is sufficient to indicate market direction. The subject for this example is a hypothetical 2,500 square foot house built in 1998 on a quarter-acre site in a standard subdivision, including the townships, on the west side of Ann Arbor. The graph shows the school district as a whole, as well as the subject’s submarket. The charts also show both median sales prices and median prices per square foot for both of these markets for further comparison purposes. The two charts (figures 1 and 2) compare median sales price for the entire Ann Arbor market (sans foreclosure and distressed sales) compared to the west side of town, narrowed in size and age. The narrowed market is more the “submarket” in which the subject competes, and the wider market is the entire school district. The data presented is from one year, ran in monthly segments. Doing it this way provides a more nuanced view of market trends, rather than simply comparing one year to another. Breaking the year into months shows smaller and/ or seasonal shifts in the market. Via this division, you can actually compare the month your comparable sale went under contract to the effective date of the appraisal. Running both median price and median price per square foot is important because sometimes median sizes change over time, and smaller house sales will show the market as declining when it is not, and larger house sales will show the market increasing when it is not. As house sizes increase, normally the price per square foot decreases. Conversely, as house sizes decline, price
Figure 2
If the comparable sale went under contract on June 1st, 2014, we would use the 6/1/13–6/1/14 data to compare to the 4/1/14–4/1/15 data. That shows a median sales price change from $355,000 to $378,700 or an increase in price of 6.68%. It also shows a change of $151.39 to $161.22 per square foot or an increase of 6.49% in the median sales price per square foot. It would also make sense to compare the larger market too. The June 2014 to April 2015 data in this segment is 5% for the median price and 7.79% on median page 148
Fall 2015 Working RE 13
7page 13
price per square foot, or overall 6.93% in that time frame, very similar to the submarket data. This would be support for a positive or upward market conditions adjustment of around 6%. However, that adjustment would also need to be supported through the sales themselves. If the data do not appear correct when
Period
# Sales
1/1/13 - 1/1/14 2/1/13 - 2/1/14 3/1/13 - 3/1/14 4/1/13 - 4/1/14 5/1/13 - 5/1/14 6/1/13 - 6/1/14 7/1/13 - 7/1/14 8/1/13 - 8/1/14 9/1/13 - 9/1/14 10/1/13 - 10/1/14 11/1/13 - 11/1/14 12/1/13 - 12/1/14 1/1/14 - 1/1/15 2/1/14 - 2/1/15 3/1/14 - 3/1/15 4/1/14 - 4/1/15 Active 4/15/15 Contract 4/15/15
69 69 73 71 71 70 73 81 75 74 78 73 75 74 74 78 5 11
Med SP $350,000 $349,999 $349,999 $350,000 $350,000 $357,950 $359,900 $360,000 $374,900 $367,000 $375,000 $379,900 $379,900 $379,900 $379,900 $379,900 $375,000 $369,900
adjustments would be appropriate for the recent sales but would be for older sales. The contract-to-listing ratio is simply how many houses are under contract compared to how many of them are on the market at the time. In the sample submarket, there are sixteen houses on the market, eleven of which
Med SP $351,000 $351,000 $351,000 $352,500 $351,000 $355,000 $355,000 $355,000 $370,000 $358,750 $369,500 $375,000 $372,000 $375,000 $376,250 $378,700 $$-
LP/SP
GLA
PPSF
100.29% 100.29% 100.29% 100.71% 100.29% 99.18% 98.64% 98.61% 98.69% 97.75% 98.53% 98.71% 97.92% 98.71% 99.04% 99.68% 0.00% 68.75%
2336 2332 2332 2336 2327 2345 2332 2332 2341 2304 2304 2302 2302 2300 2323 2349 2265 2308
$150.26 $150.51 $150.51 $150.90 $150.84 $151.39 $152.23 $152.23 $158.05 $155.71 $160.37 $162.90 $161.60 $163.04 $161.97 $161.22 $$-
Figure 3
applied, then the appraiser simply has to use his/her best judgment and then explain it. When you look at the data in the grid it is obvious that there was a period of increasing prices, followed by five months or so of stability. That would indicate no market conditions
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14 Working RE Fall 2015
are under contract, or a 68.75% contract-to-listing ratio. This means the market is very active. Given there were 78 sales in the last one-year period prior to the effective date, but only five active listings, there is less than a one month’s supply of inventory. These data related to the contracted sales is also something that can be used to a degree. But because it is not a full year of sales, the appraiser must use them cautiously. Nevertheless, in this sample, the contracted sales have a lower median price from that of the previous year. But then there are only 11 compared to 78, and the median size is slightly lower. However, it is worth noting this in any explanation of the data the appraiser may include in the report. Between the time we wrote this article and when it was updated, nine days had elapsed. In that
time, and in this submarket, the contractto-listing ratio increased to 73.68%, with the median active and contract prices increasing as well. This indicates that the market is in flux and increasing as the spring buying season heats up, after a really long and bitterly cold winter.
Conclusions Both USPAP and the Fannie Mae Selling Guide (i.e., CU) require appraisers to support their conclusions, adjustments, opinions and so forth. There are many ways to support such adjustments. The two charts in this article analyze both sales and listings, necessary components of any appraisal analysis. For comparison purposes, this article used a larger market area (a macro-area analysis), as well as a submarket area (a micro-area) analysis to isolate their differences. In using both a macro- and a microanalysis of a general area, we can compare them. This comparison not only lets us read what these two markets are doing over a 12-month period (e.g., that they are indeed different markets), it also allows us to quantify that difference. That process of quantification supports, for example, a market conditions adjustment from one market to another (if it were necessary to go out of the submarket to find comparable sales). Remember that an appraiser’s analyses of a market or submarket are only as complete as the data the appraiser analyzes. Generally, the more data the appraiser analyzes, the more thorough, complete, and market-based the appraiser’s opinions and conclusions are. Notice as well that SR1-4 requires the appraiser to “…analyze all information necessary for credible value results.” In this instance, to arrive at a location adjustment, it was necessary to analyze the data in both a larger market, as well as a specific submarket. That’s what “all” means in SR1-4. WRE ___________________________________________ This story was first published in WRE’s Online edition. Subscribe today at WorkingRE.com.
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Are You a Tier 1 or Tier 2 Appraiser? by Richard Hagar, SRA
Nordstrom or Walmart? Mercedes or
I have seen that many lenders classify appraisers into two or three different tiers based on their perception of the quality of your product. Which tier are you?
Yugo? Are you a Tier 1 or Tier 2 appraiser? Appraisers have two different business models to choose from. I have seen that many lenders classify appraisers into two or three different tiers based on their perception of the quality of your product. Which tier are you? The amount of business you have and the amount you are paid is very likely based on how lenders classify you. There is a lot of appraisal business right now and lenders are begging for high-quality appraisals. Many firms are buried in business, quoting three-plus weeks out in turn time, with high fees. Here in the Northwest, we are earning $550 for a standard home. If your company is not busy or you are making far less than this, here are some tips. The two most common questions lenders ask in the training sessions I conduct for them nationwide are: “How does my institution find good appraisers? And, even though we are paying high fees, why are we still not receiving high quality work? Do you have any suggestions on how we can solve this problem?” Ouch! When I share what lenders say with a class full of appraisers, they often reply: “If lenders would pay reasonable fees, I’d provide better appraisals!” Ouch again! While we all understand the feeling, that is not how business in America works. So let’s rephrase what the lenders
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16 Working RE Fall 2015
are hearing: pay me more money and then I’ll provide a good product. Wow! Imagine a TV ad where Apple states: send us $250 for this new iPhone—it’s a super phone but if you want one that is assembled correctly and will serve its purpose, then you will have to send us $500. That sounds ludicrous, doesn’t it? But it’s exactly how many appraisers argue for increased fees. Appraisers, do you walk into a discount clothing store, pick up a suit and tell the salesperson that you are willing to pay more if only they could alter it into a high-quality suit? Probably not. More than likely, you’d skip the store with the poor merchandise and head to Nordstrom to buy the superior quality suit you want and avoid negotiating with the discount store… right!? If appraisers want higher fees, they first have to prove they are capable of providing a superior product and service. Superior product first, increased fees second, not the other way around.
Which “Tier” Are You? Are you a Tier 1 or Tier 2 appraiser? From my non-scientific analysis, Tier 1 appraisers in most every part of the country are commanding near $450 or more in fees, while Tier 2 appraisers are paid significantly less. At this moment, if you are saying: Richard, you don’t understand the pressure for low fees in my area, you’d be wrong. Our firm has the same competitive pressures and issues that you face. Believe me, from what I have heard from them, many lenders are desperate for good appraisers and are willing to pay top dollar for appraisers capable of Tier 1 work. Imagine how bumping up
your fee even $25 or $50 per appraisal might change your attitude!
Low Fee Work It’s true that certain unscrupulous lenders and AMCs use Tier 2 or 3 appraisers for simple form-filling assignments where they don’t really care about the value or quality. They consider an appraisal a mandated bucket-filler for getting the loan approved. Tier 2 appraisers are quick, cheap and disposable. Use them, abuse them, pay them as little as possible, and when their work is hard-stopped by Fannie Mae’s Collateral Underwriter system, toss them aside and find another. Tier 2 appraisers are disposable pawns in their greedy chess game. This is why some appraisers are consistently paid poorly. When good clients discover that you have a superior product, they will elevate you to Tier 1 status and will be willing to pay more. Tier 1 appraisers require fewer call-backs, need fewer corrections and provide proof of adjustments within the report. Their reports put the lender at ease, answer questions before they are asked and look professional. Now I’m not saying clients are likely to tell you that you are a Tier 1 appraiser and volunteer to pay you more. Like any shopper, they try to obtain the same product for a lower fee; it’s the American way. You need to prove you are worth it and then you need to ask for what you are worth.
Hooked on Quality Drug dealers are known for being willing to give products away for free, just to get users hooked. Once hooked, they charge the maximum and the drug users will pay or face withdrawal pain. Have you tried getting a client hooked on your appraisal product before demanding more pay, or are you just demanding more pay without proving your own value? Get the client hooked on your product. After a time, they will forget the competitor’s phone number and call you for the difficult assignments as well
as the easy appraisal work. Increasing fees is easier now because you’ve earned their trust and respect for your product. Many appraisers try to compete on price—the Walmart strategy. Trying to compete with cheap fees is a race to the bottom. How many remember White Front, Kmart, and Value Mart? These were stores that tried to compete on price. They no longer exist. There can only be one at the bottom and it’s the same for the appraisal business. There used to be roughly 159,000 active appraisers in the U.S.; today there are less than 80,000. I predict there will be fewer than 74,000 by the end of the year. Why have so many left the business? They lived in Tier 2 hell: blacklisted by lenders and Fannie Mae, disciplined by their state, drawn into lawsuits from borrowers and/or working for low-fee AMCs that eventually drove them out of business. At this point in the history of our profession, appraisers must consider their business model. Are you going to accept lower fees in a race to the bottom, where there can be only one winner, or are you going to supply a better product than most everyone else? It’s your business model and your choice as to your income.
How to Support and Prove Your
ADJUSTMENTS
Being Tier 1 My suggestion is to try to be better than average, typical, or similar to other appraisers. Shoot for Tier 1-level quality and supply a report that accurately describes the neighborhood, market, subject, and comparable. Make marketbased adjustments and include proof of the adjustments in the report. (See How to Support and Prove Your Adjustments, visit WorkingRE.com, click Webinars.) Stop using MLS photographs; it makes you look lazy. Take a live class or webinar on how to determine supportable adjustments; there are more than 25 different methods including grouped data, single-line regression, matched pair, and capitalization of rent. Have you even tried one or two different methods or are you still using some worn out adjustment sheet your trainer gave you 20 years ago? Provide a superior product with a polite, service-oriented business at a competitive rate. As appraisers continue to leave the business, now is the time to raise your quality and be the “go to” appraiser. Once you have them hooked on your product, increase your fees—you’ll be worth it and they’ll be glad to pay it. WRE
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Calculating the Cost of an Appraisal By Dustin Harris, The Appraiser Coach
Have
If you received a phone call today from a potential customer for a standard appraisal, what would your fee be?
you ever asked yourself why gasoline prices seem to fluctuate so dramatically? Maybe it is the weather. Perhaps it is a conspiracy in the Middle East. Surely the politicians are to blame. To be sure, the correct answer is complicated and multi-faceted. There is much that goes into what your card is charged at the pump, but not much the common man probably understands. However, you can bet that the oil and gas companies that buy and sell oil do indeed know and understand how it all works. Have you ever wondered why a Big Mac will set you back $3.99 at McDonald’s, yet any size soda will only cost you a buck? Rest assured, these decisions are not determined on a whim. Successful businesses understand costs and thus are able to properly determine correct prices to remain viable in the current market. What about appraisers? What do you charge for your services? More importantly: why? If you received a phone call today from a potential customer for a standard appraisal, what would your fee be? Would it make a difference if it were an attorney, a homeowner, or an AMC? Does the type of assignment or even the type of customer play into your fee decisions? As appraisers, we spend a lot of time complaining about our low fees, but where do those fees actually come from? Who determines fees and how?
Dustin Harris is a super-successful, self-employed residential appraiser. He has been appraising for nearly two decades. He is the president of Appraisal Precision and Consulting Group, Inc., and is a popular author, speaker, and consultant. He also owns and operates The Appraiser Coach where he advises and mentors other appraisers, helping them run successful appraisal companies and increase their net worth. The new Appraiser Coach Podcast, talking about how to run a more effective appraisal office, is available for free every week on iTunes or Stitcher Radio for Android. Visit www.TheAppraiserCoach.com to learn more.
18 Working RE Fall 2015
Is it tradition? Are they set in stone? Maybe it is time for us as business owners to step back and get back to the basics of costs and fees.
Hard and Soft Costs Within any business, we can start by distinguishing between hard costs and soft costs, or what an accountant might call fixed and variable costs. Hard costs are basically the same every month. They include things such as your building rent, internet access charges, payroll, MLS membership fees, your standard cell phone bill, etcetera. Though they may fluctuate slightly, you can basically plan on paying the same fee for them month after month. Furthermore, these are costs you incur whether you do 1 appraisal or 100. Soft costs, on the other hand, vary based on your volume. They include such things as gasoline, print cartridges (another reason to go paperless), contract labor, taxes, and vendor portal usage fees. There are reasons to like and dislike each type of charge. Business owners like hard costs because they are predictable. They can be planned for. On the other hand, when volume is low and times are lean, hard costs are sometimes difficult to cover. Soft costs are typically driven by volume and are easier to pay when they come due. A high volume means a high income to satisfy obligations. Yet, they are not easy to budget for because they are so volatile. The big question is: do you know what your hard and soft costs are? I am not asking if you know the definitions. Rather, I am asking if you, as a business owner, know your own numbers. Do
you know how much you spend every month in hard costs? Do you know how much, per appraisal, you spend on soft costs? The answers to these questions are essential if you expect to remain in business long-term. Figuring out these numbers is not as difficult as it at first might appear. Begin by either going through your receipts from last month and or just go to your QuickBooks (or whatever financial software you use) and start putting purchases into two categories: hard and soft costs. Do that for at least two other months from earlier in the year to get an accurate picture. What? You don’t track your expenses that closely? Well, now you know where to begin. Once you have the data you need, it is now time to start analyzing.
Competition Once you have determined your hard and soft costs (as well as a realistic monthly estimate of your volume), it is now time to look at your competition. Do you know what Mary T. or John D. down the road are charging for a typical appraisal fee? It would be ridiculous to determine your fees without a working knowledge of what other appraisers doing similar work in your area are charging. The fact is, you live and work in a capitalistic society where competition matters. Charge too little and you can’t cover your expenses and still make a profit. Ask for too much and your potential clients will simply choose a comparable appraiser with lower fees. You have to find a happy medium. Though there are a lot of moving parts here, there are essentially only two main components: (1) determining costs (both hard and soft) and (2) knowing your competition. The problem here is most appraisers look only at the latter and pay very little, if any, attention to the former. It is not easy to accurately determine your soft and hard costs. It takes work. With so much else
vying for our time, this portion often gets neglected. Do not allow it to. If you need to pay an accountant or financial genius to help you out, do it! It will be well worth what you put into it.
Determining Fees It is the final step where the real magic happens. This is where you must finally
determine what your fees will be on a typical assignment. Frankly, some intuition is needed here. Though you have some hard numbers on your costs and a pretty good idea as to what your competition is doing, you still have to make the final decision. If I could offer any advice at this point, it is to aim high. You might be page 228
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surprised at what the market will actually sustain. Maybe you have always charged $350 per appraisal and you can indeed make a living at that amount. What would it mean for you and your business to raise that fee to $375? Too much? What would even $365 do for you? So, what determines your success in finding the perfect fee that allows you to run a successful business, yet not be constantly passed over for lower fees being charged by your competition? First of all, it is not all about numbers. I assume that, like me, you do not always go for the cheapest product or service out there. Being a savvy consumer usually means not picking the highest prices, but not choosing the lowest either. The old saying that you get what you pay for is usually true. Normally, I look for a mid-level product at a mid-level price. As an appraiser, there are ways to make your product
Though there are a lot of moving parts here, there are essentially only two main components: (1) determining costs and (2) knowing your competition. superior to all of your peers yet not necessarily charge the highest fees. Even in the world of AMCs, your end product does indeed matter. Your clients do care about your quality and turn time. I know what you may be thinking, but they really do. No really, they do! Over the past several years, I have been able to successfully develop a business model that allows me and my team to be increasingly more efficient, but avoid cutting corners. Sometimes it is called working smarter rather than harder, but it essentially allows us to be in a different league than our competition. We are able to keep our costs at
a minimum, our productivity high, our quality control strict, and our fees in line with our peers. My advice to you is to know your costs. Understand them intimately. Be aware of your competition. Understand not only their fees, but their strengths and weaknesses. Merge these two components and you will know exactly where your fees should be. This is a key to running a successful appraisal office in today’s environment. WRE ___________________________________________ Watch Dustin’s on-demand two-part webinar: Efficiencies & Your Bottom Line. Master mobile tools and learn to run your business like a pro. Visit WorkingRE.com; click Webinars.
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Notes from an AMC Appraiser by Jane Doe
Editor’s Note: This story evolved from a simple reader email. It said, “I seem to remember that Working RE/OREP did a survey a few years ago of appraisers across the country on Customary and Reasonable fees by area. I have a very-low paying client who I am requesting a fee increase from and I need some data to support my position.” A few weeks after pointing her to the survey, we followed up to see if we could help further. Yes, she had found the survey data but that was just the beginning of our conversation. Here’s her story in her own words. It may be typical of many. If it isn’t your story, it does provide a window into a fellow appraiser’s journey. Like many appraisers, she wishes to remain anonymous. You can find the survey data at WorkingRE.com; click Blogs/Surveys, Surveys, Customary and Reasonable Fees.
I’m turning 60 at the end of this month.
I started appraising in 1989 for a commercial appraisal company and worked for several companies as a temp apprentice for about three years. Then I quit for several years. In 1997, I came back into the business full time as an apprentice for a residential appraisal company. I got my license in early 2001 and opened my own office. I worked for several clients over a two-year period and, for a short time, as a staff appraiser. In 2003, I went to work for a large wholesale lender as an in-house review appraiser and worked there for almost three years before getting laid off in January, 2006. They reduced their staff from 160 to about 20, and closed down the company a year later. I returned to fee appraisal work but there wasn’t much from 2006 until 2010. I accepted a job as a staff appraiser for a company that paid $120 per report. They were very nice and had lots of work but the pay was very low. By the end of 2011, I was able to quit the staff appraiser job. Today I have only one client who pays below $300 per report; all the others pay
24 Working RE Fall 2015
more. Using your (OREP/Working RE) fee survey data with the one client, I raised my fee from $225 to $250. Yes, $225 per report or even $250 is lower than C&R but they have volume, are usually nice to work with and pay on time each month. All my other clients pay at least $300 and above for each report, which is still on the low end for my state but within a reasonable range. My criterion for staying with a client is not just the fee. It is also the way they treat me, the volume they offer and whether they are difficult to please and have a professional attitude. On a personal note, I grew up poor. We weren’t dirt poor but we had only the basics like food and lived in a small home that was always cold in the winter. I wore shabby clothes and hand-medowns from my sisters, and we just never had much. As an adult, my hard work and ambition has raised my living standard far above that of my parents. I mention this because when you are poor for a long time you really appreciate any opportunity to improve your situation. Being an appraiser has been the key to a better life for me. I’ve never met a miserable appraiser. I feel blessed to be in this business and truly love it.
Pricing Choices I consider myself a good appraiser but I would rather keep my fees on the lower
end than sit around demanding higher fees and getting very little work and going broke. I work out of my home and am able to keep expenses low. I had very little work from 2006 to the latter part of 2011 and lost my home, defaulted on several debts, ruined my credit, and sold most of my furniture just to keep up with my bills. I went from living in a threestory townhome with a small yard, my first purchase, to a one-bedroom condo rental that needs lots of updating and work—a big drop. I would like to see fees increase but I won’t trade the volume for a higher per report fee and risk losing everything again. Because appraisers compete with each other, we cannot band together and demand higher fees like a union. There will always be an appraiser who is competent who will work for a lower fee because he/she has bills to pay and kids to feed.
Ethics Prior to the Home Valuation Code of Conduct, I advertised on Craigslist, and on a couple of Internet sites that brought me some business, but I was a very ethical appraiser and turned down a lot of work because I was not willing to push values for unethical brokers or lenders. I had many, many calls from brokers who would say something like: “I will give you this order if you can guarantee me this value.” I made very little money during that period but I still have my license because I remained honest. Many appraisers lost their licenses due to unethical or illegal behavior and pushing values is part of that. I could have gotten a lot more work if I had been one of those appraisers, but I wouldn’t compromise. During that time period, I worked other jobs in offices or appraisal-related work here and there, even took some temp jobs just to get by. It was a difficult time and after that experience, I really value the amount of business I now have and the good clients who keep sending me work. It’s not my
winning personality they like! I think they keep coming back because of the quality of my work. I usually work six days a week, sometimes even seven. I have worked up to three months straight without a day off – you’re very tired at the end of that, I can tell you.
Work Variety I currently do all AMC work. When I started 17 years ago, my reports got through underwriting with rarely any requests for revisions. Now, almost every report has requests for more comparable sales (comps), closer comps, more recent comps, comps to bracket, a wide range of explanations, comments, extra data, and more. There is so much that they want. Even when I am very thorough, they always find something for me to change. They are so much harder to satisfy now than before. I try not to take it personally but yes, it does create extra work for me to revise reports. Some clients are more demanding than others and always have issues, either real or imagined. But I have received compliments about my work and take pride in knowing that I have done something worthwhile with my life. I don’t have kids and I am not married so I won’t be leaving much of a legacy behind when I die, but at least I know I did a good job and my work helped someone get a refi or buy a home. People generally treat me with respect in my work life and I always do
my best to create a good work product that will stand the test of time. I believe that each person needs something to be proud of—either that they raised children or created a good business that has thrived (like Sam Walton for instance), become president or a senator, etcetera, but I have succeeded in my career of choice and am proud of that. I usually don’t tell people but I feel that each day is a good day because I like my work. My parents never accomplished much financially all their lives, but all of us kids went on to accomplish whatever dreams we had, and each of us succeeded in our own way. I think my parents would be proud of me if they could see me now. They both died several years before I became a licensed appraiser. Postscript: This story was written about a year ago; this is what Ms. Doe has to say today: “I did raise my fees on that low-paying AMC and they have sent me less work but now I have many new clients, all AMCs, and they are competing for my time and product so I have been able to successfully raise my fees without losing any business. My biggest (AMC) client suggested to me recently that I raise my fees, so I did—twice. They suggested it both times. In speaking with clients, I have realized that for most lenders and AMCs the fee is not an object and not really an issue—it’s more about quality and turn time. Fees are much better and this makes life easier since I can work less while making enough to keep my business going and live a comfortable life. WRE
Learn More, Earn More SEPTEMBER
OCTOBER
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How and Why of Your Appraisals: How to Create a Proper Reconciliation
Two-Part Series Part 1: Getting It Right: Quality and Condition Ratings Part 2: What Banks Really Want (Besides Value)
Two-Part Series Appraisal Adjustments – Solving Common Problems (includes extended Q&A)
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Insurance Liability Town Hall Complaints, Claims and Your Teflon Suit (free) Presented by David Brauner, Senior Broker at OREP
Presented by Richard Hagar, SRA
Presented by Richard Hagar, SRA
Register at WorkingRE.com (click Webinars); Webinars are recorded, watch at your convenience. OREP members/Working RE subscribers always enjoy a discount.
Fall 2015 Working RE 25
Understanding USPAP Part Three: SR-2 by Phil Spool, ASA
Editor’s Note: This article covers the key portions of Standards Rule 2. Standards Rule 2 relates to the report itself (Standards Rule 1 relates to the development of the report). SR 2 states “In reporting the results of a real property appraisal, an appraiser must communicate each analysis, opinion, and conclusion in a manner that is not misleading.” The key word here is misleading.
Must Not Be Misleading Standards Rule 2-1: Each written or oral real property appraisal must: (a) “Clearly and accurately set forth the appraisal in a manner that will not be misleading,” (b) “Contain sufficient information to enable the intended users of the appraisal to understand the report properly,” and (c) “Clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.” Regarding SR 2-1 (a), this is one of the most important requirements of USPAP, that the report will not be considered misleading. Just about all lawsuits and state appraisal licensing board charges include this as a “violation.” For those appraisers who prepare their appraisal on a Fannie Mae appraisal report form, it would be a good idea to take advantage of the Addendum page to explain your primary reasons for the selection of comparable sales and to mention why any adjustment you made
might cause a red light in the minds of the review appraiser or client when they are looking over your report. I always tell my appraisal students to prepare their appraisal report as if they will have to defend it in court or before their state board, or to a client or review appraiser who needs to understand your selection of comparables and your rationale for coming to your conclusion of value.
Standards Rule 2-2 Standards Rule 2-2 (a) is the basis for every Appraisal Report’s content. There is a list of 11 requirements in the Appraisal Report and one additional requirement if there is a need for an extraordinary assumption and/or hypothetical condition. SR 2-2 (a) (i): “State the identity of the client, unless the client has specifically requested otherwise, state the identity of any intended users by name or type.” If the client’s name is confidential, then it has to be disclosed in the work file. Only include other intended users permitted by the client. It is also a good idea to state that “there are no other intended users.” SR 2-2 (a) (ii): “State the intended use of the appraisal.” Remember, the intended use is not to determine the market value.
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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That would be the type of value as required by SR 2-2 (a) (v). SR 2-2 (a) (iii): “Summarize information sufficiently to identify the real estate involved in the appraisal, including the physical, legal, and economic property characteristics relevant to the assignment.” You can provide the address, legal description and a brief or detailed description of the subject property. SR 2-2 (a) (iv): “State the real property interest appraised.” Typically, but not always, this would be either the fee simple interest, leased fee interest or leasehold interest. For residential appraisers it is almost always the fee simple interest. SR 2-2 (a) (v): “State the type and definition of value and cite the source of the definition.” Almost always you are appraising the market value of the property. The Fannie Mae form gives the market value definition but does not state the source of the definition. SR 2-2 (a) (vi): “State the effective date of the appraisal and the date of the report.” This addresses whether you are valuing the property for its current, retrospective (value in the past) or prospective (value in the future) value. Only Fannie Mae can state at the bottom of the conclusion of value that the date of market value “is the date of inspection and the effective date of this appraisal.” USPAP does not make this statement. Typically, the date of your inspection (visit to the property) is your effective date of value when preparing a current value. What happens if you did not
receive all pertinent information when you were at the subject property and it takes a month or so for you to receive the information in order for you to arrive at your value conclusion? Remember, the date of the report is the date you send the report to your client. The effective date is now one month or so earlier than the date of the report, yet you consider your appraisal to be a current value. All you have to do is explain in your report the reason for the lag time between the effective date and date of the report.
would be that the existing use is vacant land or that the improvements are under construction. This should be sufficient to satisfy this rule. SR 2-2 (a) (x): “When an opinion of highest and best use was developed by the appraiser, summarize the support and rationale for that opinion.” This
is important. When checking the box “highest and best use as improved” in your Fannie Mae form, you now have to explain your support and rationale for that opinion. Just stating the definition of highest and best use is not sufficient. Give an explanation for all page 408
SR 2-2 (a) (vii): “Summarize the scope of work used to develop the appraisal.” Sufficient information includes disclosure of research and analyses performed and might also include disclosure of research and analyses not performed. While you determine the scope of work, your client should be in agreement with it. (See Importance of a Good Scope of Work at WorkingRE.com; click Library, Volume 35, Spring 2014.) SR 2-2 (a) (viii): “Summarize the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions, and conclusion; exclusion of the sales comparison approach, cost approach, or income approach must be explained.” You can prepare a paragraph or two in your addendum indicating the approaches you used and why, and also the approaches you did not use and why. SR 2-2 (a) (ix): “State the use of the real estate existing as of the date of value and the use of the real estate reflected in the appraisal.” This is important when preparing a “prospective” value as the use of the real estate as it exists as of the date of value might be just vacant land or the improvements under construction. The use of the real estate reflected in the appraisal would be the end product (such as a single family residence, etc.). Therefore, a brief description of the subject property Fall 2015 Working RE 27
National Appraisal and AMC Regulation: Is It Working? By Bob Keith, MNAA, IFA
W
A question many of us have is: how effective is our national system of appraiser and AMC regulation?
hether we like it or not, rules and regulations are a necessary evil. I am reminded of this every time I hear about a food, toy or vehicle recall. I think about it when refilling my prescriptions. I think about it when I get on an airplane. After all, it is in large part because of government rules and regulations that our food, our children’s toys, and our vehicles are safe; that our drugs are safe and efficient, and our airplanes have mandatory regular maintenance. Perhaps we could all agree that government regulations are more palatable if they are fair to the relevant stakeholders and are effective in accomplishing their purpose. For the past 25 years real property appraisers have been the subject of government regulation. More recently, appraisal management companies (AMCs) have been placed into the same regulatory system as appraisers. A question many of us have is: how effective is our national system of appraiser and AMC regulation?
separation of rulemaking and enforcement responsibilities with this complex structure is problematic.
National System of Appraiser Regulation
Federal Agencies: The Appraisal Subcommittee (ASC) was established by Congress (through FIRREA) to provide federal oversight of state appraiser regulatory programs, TAF, and the Agencies in their roles to protect federal and public policy interests in real estate appraisals utilized in federally related transactions. Every two years, the ASC performs field audits on state appraiser regulatory agencies to ensure each state’s compliance with Title XI of FIRREA and ASC Policy Statements. Currently, the only enforcement action at the ASC’s disposal, which it can impose on a non-compliant state, is to “de-certify” (prohibit) that state’s
The current system is divided (some would say fragmented) between a private entity (The Appraisal Foundation), state agencies (appraisal boards), and federal agencies, which include the Appraisal Subcommittee and the Federal Financial Institutions Regulatory Agencies (the Agencies). Some argue that the Bob Keith, MNAA, IFA, is an AQB Certified USPAP Instructor, Certified General Appraiser, former Executive Director of the Oregon Appraiser Board, past President of the Association of Appraiser Regulatory Officials, past Chair of The Appraisal Foundation Advisory Council, and has served as a subject matter expert for two national appraiser exam providers. Mr. Keith currently serves as the Treasurer of the National Association of Appraisers. Keith also offers consulting to appraisers nationwide facing state board complaints. OREP Members receive a FREE 1/2 hour consultation with Bob Keith and 25% off his consulting services.
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Private Entity: The Appraisal Foundation (TAF) is a private non-profit educational organization and has been charged by Congress to set ethical and performance standards for the appraisal profession. It is the umbrella organization for the Appraisal Standards Board (USPAP) and the Appraiser Qualifications Board which sets the minimum qualification requirements for obtaining state licensed and certified appraiser credentials. State Agencies: FIRREA mandates each state to have an appraiser regulatory agency that is responsible for certifying real estate appraisers and supervising their appraisalrelated activities (as required by Federal law). In addition to enforcing USPAP and disciplining appraisers, these agencies are responsible for processing and issuing new licenses, renewals, temporary practice permits and reciprocal licenses.
appraisers from performing appraisals for federally related transactions. Additionally, the ASC maintains a national registry of appraisers, tracks appraiser disciplinary actions, maintains a national complaint hotline, provides grants to TAF and submits an annual written report to Congress.
National System of AMC Regulation The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amended FIRREA to include statemandated registration and regulation of AMCs. The deadline for states to implement AMC regulation is just under three years away, however 38 states have already enacted comprehensive legislation to provide the mechanism for the oversight and registration of AMCs operating in those states. Dodd-Frank amendments to FIRREA have vastly expanded the powers and responsibilities of the ASC which now includes authority to adopt, implement and enforce rules and impose sanctions against non-compliant state regulatory agencies. The ASC will also have authority to audit/oversee the state agencies’ regulation of AMCs, and establish a national AMC registry. They will also have a responsibility to submit an annual written report to Congress on their AMC oversight activities. The Dodd Frank amendments to FIRREA also require the Agencies to establish a “Final Rule” addressing the minimum requirements for AMCs. The Final Rule, issued in June 2015, mirrors aspects of Dodd-Frank in that it puts the onus of licensing, regulating, and disciplining AMCs on the states. Each state is required to develop a program within its state appraisal board that is empowered to regulate the AMCs that operate in the state.
Weaknesses of Current System Our current system of appraiser and AMC regulation is fragmented because distribution of regulatory
Our current system of appraiser and AMC regulation is fragmented because distribution of regulatory responsibilities is spread between private, state and federal entities. responsibilities is spread between private, state and federal entities. This fosters inefficiency, redundancy and increased cost because the functions provided by each entity are developed autonomously with no one entity having sufficient authority to effectively regulate the appraisal and appraisal management industries.
Separation of Powers/ Responsibilities: • TAF, a private entity, has authority to set the standards (USPAP) and appraiser qualification criteria, but it has no oversight or enforcement authority over state appraiser licensing agencies, appraisers or financial institutions. • State appraiser regulatory agencies have authority over appraisers to enforce USPAP and the qualification criteria, but they have no authority to actually set those standards or criteria. • The federal financial institution regulatory agencies have the authority to establish and enforce appraisal requirements for the financial institutions (users of appraisal services) they regulate, but they have no authority over appraisers, USPAP, or qualification criteria for those appraisers. • The ASC, a federal agency, has the authority to oversee state appraiser regulatory agencies and to hold them accountable for compliance with FIRREA, but it has no authority to establish or enforce appraisal standards or criteria. This separation of rulemaking, enforcement and oversight responsibilities
within FIRREA’s complex regulatory structure is problematic. Disparity and Duplicity of Requirements: States have the latitude to establish additional appraisal standards and qualification criteria. Each state has its own unique application forms, processes and procedures for original licenses and renewals, approvals for course providers, educational offerings and instructors, reciprocity, temporary practice permits, complaint forms, and more. Instead of a single application and process, there are 55. For example, one appraisal organization paid over $30,000 to get a national conference approved in every state for continuing education (CE) because a CE course approved in one state will not necessarily be accepted by another. Additionally, the cost of obtaining AMC registrations in all 50 states is over $300,000! Budget/Lack of Adequate Funding and Resources: State appraisal boards prepare budgets and collect fees to cover costs of operation. However, state legislatures have the ability to (and often do) “sweep” some or all of those funds to a general fund to cover other state expenditures. Lack of adequate funding was one of the reasons the Arizona legislature abolished the Arizona Board of Appraisal and transferred its functions and responsibilities to the Arizona Department of Financial Institutions. page 308
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Many state appraisal boards have struggled to maintain adequate staffing and oftentimes an appraisal board's staff, attorneys and investigators lack appraisal and/or USPAP expertise. Some states utilize a pool of investigators who conduct investigations on appraisers in addition to unrelated professions or trades such as massage therapists, hairdressers and funeral directors. USPAP frequently is not applied consistently within a state or in comparison with other state appraisal boards.
Strengths of Current System While there are definite weaknesses in the current appraiser and AMC regulatory system, there are notable strengths as well. Appraiser Qualifications: Prior to FIRREA there were no nationally recognized minimum qualifications to represent one’s
self as an appraiser. Under our current system, appraisers are required to satisfy minimum education, experience and examination requirements to demonstrate minimum subject-matter competency. Appraisal Standards: Our current system of regulation does recognize a single set of performance and ethical standards (USPAP). USPAP is not perfect and neither is its enforcement, but it’s much better than no standards or enforcement at all. Enforcement: Our current system of regulation provides a mechanism for state enforcement of those standards. It is believed that since FIRREA, well over 10,000 appraisers have been sanctioned by their state appraisal regulatory agencies (roughly 15% revocations). Federal Oversight: The ASC provides federal oversight over the enforcement
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activities of the states and the activities of the Appraisal Foundation and submits an annual written report to Congress. State Regulatory Official(s) Training: TAF, the ASC and the Association of Appraiser Regulatory Officials (AARO) have joined together to develop and provide training to state appraisal board members and investigators. To date, several hundred regulatory officials have attended this training.
Conclusion Government regulation of appraisers, and recently AMCs, is still a relatively new development and in spite of the progress achieved, there is still plenty of room for improvement. The significant fragmentation within the appraisal regulatory framework creates unnecessary complexity and is both inefficient and ineffective. Although well intentioned, the Title XI regulatory system failed to ensure the accuracy and reliability of appraisals as evidenced, in part, by our most recent housing crisis. Our current system of national appraisal/AMC regulation is burdensome and costly. Perhaps it’s time to step back and evaluate the effectiveness and efficiency of this system with an eye towards consolidation of its fragmented pieces into a single federal entity capable of maintaining, monitoring and enforcing appraisal standards. Former Acting Director of the Federal Housing Finance Agency Edward DeMarco agrees. During a recent speech at the Collateral Risk Network, he stated, “certainly the existing [appraiser] regulatory structure did not prevent widespread problems in the appraisal world in the past decade. Moreover, even more so than in the late 1980s, this is a national credit market and the regulation of appraisals in support of this market needs a clear, single, federal regulator.” WRE
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H O M E I N S P E C TO R S
Closer Look
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When to Report a Claim or Incident by David Brauner, Senior Broker at OREP.org
For many home inspectors, the anxiety ratchets up a few
notches when facing an unhappy and complaining client, but not always for the reasons you might expect. Many home inspectors are confident in their reports, so that typically is not the worry. For these inspectors, the heartburn is not that they made a mistake in the report but whether to report the complaint to their insurance agent, just “take care of it” themselves, or simply to ignore it. Most inspectors have walked in these moccasins at least once. If you do report it, the worry is that the insurance company will simply “roll over” and pay off a complaining client to save itself money and then raise your rates next year, whether the complaint had any merit or not. To a careful and competent inspector, that prospect is enough to make your blood boil. And to add insult to injury, the “settlement” is usually just under the deductible cost and comes out of your pocket! If you’re with me so far, here a few things you ought to know. 1. Most insurance policies contain language requiring the insured to report the claim or incident when it happens. A claim can usually be defined as a demand for money or simply a “demand.” Admittedly, this can be murky territory. It doesn’t hurt to take a look at your policy language. With the OREP flagship home inspector policy, a Claim means a written demand or suit you receive. In this case, suit means a civil proceeding for monetary, non-monetary or injunctive relief, which is commenced by service of a complaint or similar pleading.
While a verbal demand or complaint technically does not meet this definition of a “claim,” it can still trigger the reporting provision in your policy for reporting any incident that reasonably could give rise to a claim in the future. Most inspectors ignore verbal complaints but take written ones seriously, especially if they are delivered on a law firm’s letterhead and arrive via Certified Mail. Know that many insurance policies do not make any distinction, in the policy language itself, between a verbal and a written complaint. You usually have a duty to report. The good news is that contrary to what you might think, reporting is in your own best interests. 2. Home inspectors do make mistakes, sometimes serious ones that wind up costing tens of thousands or even hundreds of thousands of dollars to defend and settle. If you have insurance and you find yourself embroiled in a complaint, pat yourself on the back for avoiding the potential catastrophe of having to come out of pocket to defend yourself. No one likes insurance until they need it. If you don’t have insurance, get sound legal advice as soon as possible.
Why Report First, as explained above, most policies have language requiring you to report a claim or incident. Why is it so important for the insurance company to know about the claim or potential claim when it happens? Because experience shows that when an insured (you) attempts to handle a claim on their own, they are more likely to hurt their own defense rather than help it. The best advice is to let the experts handle the response, even the initial one. Too many times a polite apology or impulsive admission of responsibility is hard to undo. Secondly, if you do not report an incident when it happens, and some time goes by and the incident resurfaces as a full-blown claim, the insurance company has the right to refuse coverage if they feel the delay in reporting has compromised the defense. That’s what most policy language says. It’s rare but it can happen. Additionally, if you have completed a renewal application in the meantime and checked the box “no claims or incidents,” they are going to want to know why. If they believe you willfully page 348
32 Fall 2015 Home Inspectors CLOSER LOOK
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Home Inspectors CLOSER LOOK 7page 32
concealed facts, they can refuse coverage. They may defend the claim but won’t renew your policy. When you go to find a new carrier, one of the questions might be whether you’ve ever been denied coverage and why. You get the picture. It can get ugly.
Claims Made Most every inspector has a “Claims Made” policy. This means the claim has to be reported during the policy period. If you let your policy lapse (don’t renew), the policy period ends. If you did not report the incident when the policy was in force (or during any applicable extended reporting period), there is no coverage for that incident. Moving your policy to another company at renewal is fine, as long as the new company offers prior acts coverage and there is no lapse in coverage. But imagine this scenario: a homeowner complains about an item or two in your report a few months after moving in. You rebut it verbally and then hear nothing more. You did nothing wrong so you assume it’s resolved. In the meantime, you’ve let your policy expire because business is slow, or you hate insurance, or you went on vacation and forgot to renew it in time. Today, six months later, you receive a certified letter from the homeowner’s cousin Joey who has just opened up his
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own legal practice and now wants to practice on you. If you reported the incident when it happened, even if you did let your Claims Made policy lapse, it should be covered because it was reported when the policy was in force. If you didn’t report the claim/incident when the policy was in force and it has expired, there will be no coverage. So by reporting you are protecting yourself.
Mythbusters Finally, most of the large established insurance programs for inspectors, especially those backed by long-standing insurance carriers that have been in business for many years, like OREP’s, have a staff of adjusters whose job it is it to evaluate the merit of these claims. If the claim is frivolous, the adjusters will respond accordingly. Typically, if the issue goes away at this “first defense” point, there is no cost to the insured’s deductible and no premium increase next year. A happy ending. So, to summarize, at most insurance programs like the one at OREP, there is no downside to reporting incidents or complaints when they happen, and in fact, reporting can offer you the kind of protection you purchase insurance for in the first place. Food for thought. WRE
Home Inspectors CLOSER LOOK
Clothes Dryer Vents: Proper and Improper By Matthew Steger, ACI
I continually run into confusion from property owners and
Realtors regarding what the proper venting material should be for clothes dryers. Statistics from the Consumer Product Safety Commission (CPSC) show that over 24,000 house fires and nearly $100 million in property damage annually are related to faulty clothes dryer vent installations. House fires related to clothes dryer vents are much more common than most people believe but luckily are relatively easy to prevent. Figure 1 illustrates how dirty many dryer ducts are and most people would have no idea until they either have a fire or decide to finally clean out their dryer vent. Figure 1 During a normal drying cycle, up to a gallon of water may be drawn out of the clothes in the form of water vapor. The purpose of the dryer vent system is to transport this water vapor, and the lint that accompanies it, to a safe location outside the home. The most commonly seen improper type of dryer vent is flexible vinyl tubing. Vinyl is a type of plastic and it can easily melt and lead to a house fire. This material, most often white and ribbed, tends to allow for lint to readily accumulate. Lint is very flammable and all it takes is a small spark to ignite it, leading to a house fire. The more lint that fills a clothes dryer vent, the more energy the clothes dryer consumes to try to dry the clothes as air won’t freely flow through the clogged vent material. This, in turn, causes the drying cycle to be much longer than normal and raises utility bills. Figure 2 shows an installation of vinyl tubing. Another improper dryer vent material that I routinely see installed is mylar foil tubing (figure 3). It is a flexible, ribbed, and shiny tubing that many home owners and contractors have installed, which they wrongly assume is metal because it is shiny. Mylar foil tubing is not approved for use as a clothes dryer vent material and should not be used for this application.
A few manufacturers of mylar foil tubing have been able to obtain a UL listing; these products specifically should be used as the transition duct ONLY between the dryer and the actual rigid metal dryer vent (not Figure 2 the full dryer vent!). If the mylar transition duct is UL approved, it will have a UL sticker on it. If it has no sticker, then it should be assumed that it is not UL listed and should be replaced with a proper dryer vent material. The transition duct should be as short as possible to connect the dryer to the metal dryer vent and it should be no longer than eight feet. The transition duct must not run within a wall, floor, or ceiling covering since it will not be able to be visually inspected and can’t easily be cleaned. I also occasionally find mylar tubing venting a clothes dryer into the basement with a plastic container (see figure 3). First, the tubing is incorrect. Second, venting the clothes dryer into the basement takes the moisture out of the clothes Figure 3 that the dryer is drying and discharges that back into the home. This creates an environment that is a fire hazard (lint) and a mold hazard (moisture). Something that I’ve been running across more often lately in homes built within the past 15 years is some builders installing 4-inch PVC drain pipe as the clothes dryer duct. At one inspection from this past spring, I even saw a black corrugated plastic drain pipe (normally used for draining exterior water from downspouts) being used as the home’s dryer vent. While PVC is meant for plumbing and venting applications, page 368
Matthew Steger, owner/inspector of WIN Home Inspection, is a Certified Level 1 Infrared Thermographer and an ASHI Certified Inspector (ACI). He can be reached at: 717-361-9467 or msteger@wini.com. WIN Home Inspection provides a wide array of home inspection services in the Lancaster, PA area.
Fall 2015 Home Inspectors CLOSER LOOK 35
Home Inspectors CLOSER LOOK 7page 35
PVC is not approved for venting a clothes dryer and should not be used for this application. PVC pipe can allow a static charge to build up; this static charge can ignite the dryer lint leading to a fire. Figure 4 is from a recent home inspection and shows vinyl tubing (left side) connected to PVC pipe (right side) with cloth duct tape. The International Residential Code (IRC) section M1501 requires that clothes dryer vents be constructed of at least 0.016″ thick rigid metal, have smooth interior surfaces, and shall not have sheet metal screws extending into the duct. The clothes dryer vent should meet the UL 2158A standard. Sheet metal screws penetrating into the material (figure 4) can allow lint to get caught on the screws and possibly clog the vent over time. Keep in mind, a home inspection is not a code compliance inspection and that the Authority Having Jurisdiction (AHJ) is the responsible party for Figure 4 determining/verifying code compliance. The home inspector is using these standards, however, as a reference to help protect his or her client from possible future hazards, such as a house fire. Figure 5 shows the proper Figure 5 rigid metal duct material. Notice how this rigid metal duct looks nothing like the mylar foil material. This material can’t easily be bent. Dryer ventilation systems should only terminate to the home’s exterior and have a proper exterior cover to help prevent water, birds, and insects from entering the duct. The exterior cover should not have a screen since it will cause lint build up and block the vent over time. Venting a clothes dryer into a garage, basement, attic, or anywhere else inside the home can lead to excessively high humidity levels, mold, and an increased fire risk. Also, a clothes dryer ventilation line should terminate to an area of the home’s exterior where it cannot be blocked by vegetation, snow, or dirt, and be at least three feet from doors and windows. The vent also should not terminate near an air conditioning compressor as the dryer lint can accumulate on the A/C compressor which can prevent proper operation of the A/C system. Flexible rigid metal ducting (this specific material is only slightly bendable) is recommended where the rigid metal duct material connects to the clothes dryer. Figure 6 36 Fall 2015 Home Inspectors CLOSER LOOK
shows flexible rigid metal ducting. Notice how different this rigid metal material looks compared to the mylar foil ducting shown in the figure 3. If the clothes dryer and exterior vent are in close proximity, a single piece of flexible rigid metal duct can often be safely used as the sole duct, assuming it does not pass behind a wall, floor, or ceiling covering (figure 6). I also sometimes find dryer vents that far exceed 40 feet. I recommend that the vent system be modified to terminate to an alternate exterior location closer to the laundry appliances to allow a shorter run. Most standards call for clothes dryer vents to be no more than 25 feet in length, have few bends, and no kinks. Gas dryers, though, are often permitted to have ducts no longer than 35 feet in length. The more bends in the line that exist, the shorter the overall length should be. For every 90 degree bend, the vent should be shortened by five feet; for every 45 degree bend, the vent should be shortened by two and a half feet. An exception exists if the clothes dryer’s manufacturer specifically permits a longer vent but, in most cases, the inspector does not have this documentation from the clothes dryer’s manufacturer. With every home inspection, I always recommend that the clothes dryer vent system be thoroughly cleaned at least twice per year as Figure 6 preventative maintenance. A home owner can take apart and clean the dryer vent’s interior him/herself. This is made easier with a vacuum cleaner with a long hose attachment. Some HVAC professionals and chimney sweeps also offer dryer vent cleaning as a service. During a home inspection, the inspector should try to determine the type of clothes dryer vent material(s) installed. In some homes, only parts of the clothes dryer vent system may be visible. Often, socks or other clothing have fallen behind the laundry appliances against the wall and these items can block the view of the dryer vent where it passes into a wall or floor. Installed insulation, ceilings, or walls as well as other stored items in a basement can also block visual access to the dryer vent material. Of course, home inspectors do not move insulation, disassemble walls/ceilings, or move appliances to perform the inspection. House fires related to improper or blocked dryer vents are easily prevented and a little bit of preventive maintenance can help save lives. When was the last time you inspected and cleaned your clothes dryer vent? The safety of your family and your clients may depend on it. WRE
Professional MARKETPLACE
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info@orep.org (888) 347-5273 David Brauner Insurance Services: Calif. Lic. #0C89873
OREP Partners with Comergence to Help Appraisers Save on Background Checks Comergence now provides appraisers an alternative to having to pay for multiple background checks for different AMCs/lenders. Appraisers now can pay one low annual fee to set up a single online profile that can be shared electronically with many AMCs and lenders (see pg. 23). OREP members enjoy a discount on these services. OREP Members/Affiliates and Working RE Subscribers who would like to receive a discount code, email isaac@orep.org.
OREP Home Inspector E&O/GL Insurance— New Environmental & Other Coverages Included FREE “Quality should never be optional,” says David Brauner, Senior Broker at OREP. “Because of all the coverages that are now included free (not optional add ons at additional expense), and the competitive pricing ($1,250), choosing the best value E&O/GL package just got very simple. Now every inspector can afford the best. Comprehensive, inclusive coverage means peace of mind, which is what insurance is supposed to be about,” Brauner said. Broad coverage includes Errors and Omissions and General Liability, Radon, Termite/WDI/WDO, Lead Paint, Pool & Spa, EIFS/Stucco, Indoor Air Quality Testing, Green Building Inspections, Infrared Thermography, Rodent inspections, and more. Mold and Septic/Water testing are available for a small additional premium. $300,000 aggregate limit/$1,250. OREP.org or (888) 347-5273. • “A” Rated Carrier, Prior Acts, Additional Insured for Agents / Referring Parties.
OREP Appraisers E&O Insurance—Save Rates lower this year for many insureds. If you’ve been with the same E&O provider for years expecting that you still have the best rates and coverages available, you may not. If your agent works with one program only, it may be that you are being offered—one program only. These days many appraisers are saving $100 or more by shopping OREP. Some appraisers who don’t want an FDIC exclusion also are finding relief with OREP (FL, GA, IL). Ask us. It pays to shop. AMC Third Party coverage available. Call us—we answer the phone! Includes Working RE magazine and other valuable benefits. Combine Appraising, RE Sales and Brokering: One low premium covers both appraising & sales/brokering. Pay for one policy instead of two. Visit OREP.org for details. Help Fighting State Board Complaints: OREP offers its insureds free consulting from USPAP expert Bob Keith, MNAA, IFA, former Director of the Oregon Appraiser Board. Put an expert on your side when facing off against your state board. OREP members also enjoy the free webinar from Keith on how to avoid and fight complaints: “Fighting Appraisal Board Complaints—An Expert’s Advice.” Contact isaac@orep.org for more. Other valuable benefits and savings include: Working RE magazine, approved CE at cost, Adjustments Webinar, 2015 FHA Checklist and eBook, 2015 AMC Guide, Expert’s Guide to a Defensible Workfile (2015), and more! AMC Coverage: Many national AMCs are finding the comprehensive and affordable E&O coverage they need from OREP. Bonds are also available. Call OREP for more: (888) 347-5273.
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Listen to David Brauner, senior broker at OREP.org, answer many important questions about E&O insurance on The Appraiser Coach podcast. Visit OREP.org, click FAQs.
• Fast application means no quoting and no time wasted on the back and forth of binding coverage. Save even more next year with automatic renewal/no application (most inspectors). Find details on pg. 33. Visit OREP.org for complete coverage details or call toll-free (888) 347-5273. Info@orep.org. David Brauner Calif. Insurance License: #0C89873.
New 2015 FHA eBook and Checklist— Avoid Mistakes, Save Time Are you ready for the new 4000.1 FHA standards? Now you can save time by finding the answers you need fast! Avoid HUD’s dry, bureaucratic legalese—get answers to your specific questions with the recently updated and easy-to-read FHA eBook and Checklist. This guide, used by thousands of appraisers, is written by veteran appraiser and instructor Lore DeAstra, MBA, MRICS, SRA, CDEI.
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The new 2015 FHA eBook and Checklist includes dozens of FAQs for important questions and shows you in simple terms how to handle the curve-balls that come with FHA appraising. Order your FHA Guide now at WorkingRE.com (click Products, 2015 FHA Guide). OREP members enjoy a discount.
Fall 2015 Working RE 37
Industry NEWS Final AMC Rule
How TRID Affects Appraisers
On April 21, the Federal Financial Institutions Examination Council (FFIEC), released its long anticipated Final Rule, which outlines the minimum requirements for state registration and supervision of appraisal management companies (AMCs), as required by the Dodd-Frank Act. Each state has three years to pass AMC regulations and “establish registration and supervision systems” that meet the requirements of the Final Rule, or all nonfederally regulated AMCs will no longer be able to provide services for a Federally related transaction in that state. The Final Rule states that the minimum requirements apply to any AMC that “oversees an appraiser panel of more than 15 state-certified or state-licensed appraisers in a state or 25 or more appraisers in two or more states.” Helping to settle the debate on the differences between an appraisal firm and an AMC, an appraiser panel is defined as a network of appraisers working as independent contractors (i.e., non-W2 employees) for an AMC, as opposed to working as employees, which is a common arrangement among appraisal firms. The Final Order also removes any doubt that state appraisal boards have the authority to directly enforce the law and discipline AMCs for violations of the law. Specifically, the Final Rule requires that states have a program in place “within the state appraiser certifying and licensing agency that has the authority to… conduct investigations of AMCs…and discipline, suspend, terminate, and refuse to renew the registration of an AMC that violates applicable appraisal-related laws, regulations, or orders.” The Rule also clarifies that AMCs are permitted to engage appraisal firms which use trainees to assist on appraisal orders. To read the Final Rule in its entirety, visit WorkingRE.com; click Library, Sidebar. WRE
Lenders, AMCs, and appraisers are anxiously awaiting TRID, the TILA-RESPA Integrated Disclosure rule, which will bring significant changes to how settlement service fees will be disclosed to the borrower. The Consumer Financial Protection Bureau (CFPB) recently extended the rule’s effective date from August 1st to October 3rd, 2015. The goal of TRID is to make the mortgage process more transparent to buyers and to encourage full disclosure of fees charged to the borrower. While RESPA previously allowed for a ten percent variance in appraisal fees, the new TRID rule now classifies appraisal fees in the zero-percent tolerance category. This means that a new Loan Estimate must be issued to the buyer if the appraisal fee comes in higher. Tim Shaw, President of Accurity Valuation, a nationwide appraisal firm, reports that TRID may cause some negative repercussions for appraisers. “Depending on the AMC, TRID may make it much more likely that requests for fee increases will be declined. It’s likely to suppress appraisal fees,” says Shaw. Another potential strategy that AMCs might use will be to bid out orders, similar to the way commercial appraisals are ordered, to avoid TRID violations. “We may see an increase in appraisal order bidding for rural property, outliers, and complex properties, as AMCs and lenders become wary to estimate the cost of an appraisal on atypical properties. The downside to this as a widespread approach is that it may slow the loan process down by up to an extra day,” reports Shaw. Ernie Durbin, Chief Valuation Officer at Valuation Vision, advises appraisers to examine assignments carefully and respond quickly to the client with fee changes. If it is a complex property and it requires a higher fee, the lender must know immediately. “TRID is not the appraiser’s problem. As an appraiser, you should demand the fees you need to earn a living and respond to appraisal requests with your fee, keeping in mind your Scope of Work. Let the AMC and the lender worry about TRID, but help them by responding quickly,” says Durbin. Many AMCs and lenders are urging the CFPB to issue a FAQ addressing what constitutes a “changed circumstance” so the industry can better understand when a fee increase is permitted. WRE
Appraisers Entitled to Overtime, Court Holds In May 2015, a federal judge issued a judgment in favor of a class of residential real estate staff appraisers against Bank of America (BOA), holding that BOA owes wages for unpaid overtime to in-house appraisers at its subsidiary Landsafe. According to Bryan Schwartz, the Oakland-based counsel for the plaintiffs, this is the first order deciding that appraisers are entitled to overtime and has important implications throughout the real estate appraisal industry. In a 61-page order, Judge David O. Carter of the Central District Court of California ruled that the “Federal and state administrative and professional exemptions are not applicable to appraisers.” The decision also denied the bank’s attempt to strip the workers’ claims arising from denied meal and rest periods. According to Schwartz, “This should be a wake-up call to the entire industry. If you haven’t been paying overtime to your real estate appraisers, it is time to start.” Bank of America settled for $5.8 million in a previous suit brought by review appraisers. The review appraisers recovered an average of over $10,000 each in that settlement. Schwartz estimates that BOA will owe far more to staff appraisers in this suit. In this case, the parties disagreed about the relative skill and judgment required to be an appraiser, and who argued what may surprise you. Consider this, taken from the Court Documents: “Plaintiffs (the appraisers) insist that the appraisal process simply involves plugging in numbers and other easily observable data based upon clear guidelines in order to generate an estimate as to property value. The Defendants (BOA) argue that an appraisal requires an expert eye and a keen independent understanding of market conditions, to generate a highly informed valuation opinion.” In the Court’s view, the truth lies somewhere in the middle. That is, generating an appraisal report requires strict adherence to guidelines, limiting variables that appraisers may consider, and at the same time, requires independent judgment and discretion. Amen. To read the Order in its entirety, visit WorkingRE.com; click Library, Sidebar. WRE
CFPB Ignores Appraisers’ Call for Fee Disclosure The Consumer Financial Protection Bureau (CFPB) requested comments on the effective date of the TILA-RESPA Integrated Disclosures (TRID). Hundreds of appraisers and dozens of appraiser coalitions and organizations across the country took the invitation for public comment as an opportunity to call for the separation of appraiser and AMC fees in the new disclosure documents. This has long been a major concern of appraisers. Appraisers cautioned the CFPB that including the appraiser and AMC fee into a single line item on the form misleads consumers because AMCs often take over half of the “appraisal” fee, when in fact, AMC fees are service or bank fees. The Network of State Appraiser Organizations (NSAO), which includes various state appraiser coalitions and associations, jointly sent a letter to the CFPB warning that “the result of this lumping together of the fee often leads to an appraisal report that is completed by the cheapest appraiser the management company can find; not the most qualified. Currently, (with no separation requirement), a consumer might see an appraisal fee for $600 or more with no awareness that the appraiser they met at their home, and who completed their report, is only being paid $300 or less.” The CFPB neither changed course nor offered any feedback on the issue but did extend the effective date from August 1, 2015 to October 3, 2015. In a grudging acknowledgement of appraiser concerns, the CFPB writes: “The Bureau also received a number of other comments that did not relate, even indirectly, to the effective date and therefore are not discussed in this preamble.” WRE
38 Working RE Fall 2015
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Adjustments Q&A
two-part among appraisers and Working RE’s appraisal adjustments is a hot topic d in learneste inter rs aise appr How to extract, support, and defend by ived rece well e Your Adjustments, has been very r, SRA, the webinar webinar, How to Support and Prov to them. Presented by Richard Haga lable avai s ogie odol meth nt stme in the appraisal nts stme adju ing about the different adju for n support, analysis and documentatio er prop the ide prov to how rs shows appraise e) their adjustments. Here are report and workfile. tions about how to support (and prov ques y man y, man had rs aise appr Not surprisingly, webinar. ers) that were addressed during the just a few of the questions (and answ most Q: If the subject is on a small lot and you process for every appraisal, or do there but size, lot lar simi have s sale Q: Do you repeat the adjustment of the the in area or price range and reuse ld you calculate adjustments for a certa is one sale on two acres, what wou ? area the in rts repo all for nt) stme adju land oom the bedr for a as ort h supp (suc no nts is adjustme do if there we are ss unle l, aisa appr y ever nt? for stme el adju A: My office re-invents the whe same neighborhood, in the same price is appraising a similar home, in the A: Look for proof that the market et area, neighborhood and price mark y a Ever . me time e Beco e. sam renc the t diffe abou range at paying for the et rently at different times in a mark gs, pending listin at Look . segment values components diffe ctive dete likely has a value per square foot the cycle. A new home in a neighborhood sales, and expired sales. Look in e. The sixth bedroom may have hom old if you have to go earEven 50-y . a data ty than coun rent as diffe is well that MLS as another. This is in e valu no but hood indicates what the market is payhbor that neig data high market value in one back further in time, find the an t the wha ite desp ult— diffic extremely maybe, the market isn’t paying for why mass producing appraisals is ing for the difference. Maybe, just and rent diffe is ent segm price and AMC or bank might tell you. difference in size. Each market area t t have support for an adjustment, don’ values things differently. If you don’ one than le. troub more into have you you n get to whe y ysis and is likel Q: How do you apply paired sales anal make one—that would be guessing y have four or five? If you have man adjustment to make? What if you s oppose each other, what then? ents? comps but the prices and amenitie Q: How do you prove the site improvem com the of each for pair hed matc a es to determining the value of site A: In a perfect world, you would find A: I’m assuming this question relat differences in for pair hed matc a find ponent is to determine the land ld com wou al ponents. For example, you improvements. The most critic es etim the Som on. so and s, e in bathroom the subject’s total sales price yields bedrooms, another for the differenc value. Subtracting land value from ly the e valu supp the can rt ing repo rmin the dete in is use part h for all improvements. Now the toug of the comparables you’ve selected e valu pacom ge, the foota at re s you’ll have to look ing, bedrooms, bath, squa matched paired analysis. Other time of individual components (landscap effort to discover a pair worthy an in rt way, other adjustments are smaller repo the the of in out e use ’t valu didn land you rables that etc.). But with the described in the webinar. nt. ods stme of comparing to derive an adju and easier to discover using the meth or if you are only comparing for one stment for the economic life, age Q: How is grouped analysis accurate Q: How do you determine the adju nces of sale, msta circu like s thing r othe for item without consideration condition? condition, marketing, and more? information. One quick method is to A: The market is where you find the . lable the avai od meth only the not od, version of the subject and subtract A: Again, grouped analysis is “a” meth determine the cost to build a new ). The available and land g data of udin ity (excl qual ents and unt ovem amo impr the the Accuracy is dependent upon current value (or sales price) of of age pling a large body of data. Some h will point to the adjustments for analyzed. A grouped analysis is sam difference is the depreciation whic be will s ertie prop e Som ller. sma on e the sales will be on larger lots, som or life or condition. it perfect? No, but by using an average, in better condition, some inferior. Is the median price difference between or better yet the median, it indicated versus a three bedroom home. The oom The webinar two components like a two bedr odaisers a sampling of different meth point of the webinar is to give appr rent How to Support and Prove appraisal use two or three diffe ologies that are available. On your next Your Adjustments ate. indic methods and see what they is available on-demand and includes many handoom example, you used the average outs that take you step-by-step through several Q: In the three bedroom vs. four bedr de e was much larger. Why did you deci different methods. Watch the two-part webinar difference but the median differenc at your convenience and increase your expertise. to use average and not median? Learn something new by signing up today at ity and quantity of the data. Average qual the on nds depe use you h Whic A: an extremely high with erty prop one WorkingRE.com; click Webinars, How to Support by ed skew be price is OK but it can of the midpoint with an equal ator indic and Prove Your Adjustments. A more advanced an is ian Med . price s or low sale point. It tends to reduce the problems course, Appraisal Adjustments: Solving Common number of sales above as below the If the data does not include abnormal Problems, is being offered this October. WRE associated with unusual sale prices. : aisal Institute has a book on the topic Appr The s. work age aver then s, sale aisers. An Introduction to Statistics for Appr
Fall 2015 Working RE 39
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four tests to determine the highest and best use. If you are doing a “prospective” market value, then you should also determine the highest and best use “as vacant.” (See Highest and Best Use Analysis at WorkingRE.com; click Library, Volume 36, Summer 2014). SR 2-2 (a) (xi): “Clearly and conspicuously: state all extraordinary assumptions and hypothetical conditions, and state that their use might have affected the assignment results.” Don’t get confused between an extraordinary assumption and a hypothetical condition. An extraordinary assumption is an assumption that, if found to be false, could alter the appraiser’s opinions or conclusions. A hypothetical condition is contrary to what is known to exist. For example, when preparing a “retrospective” value, you would make the extraordinary assumption that the condition of
the property as of the date of inspection (visit) is the same as of the date of value (unless you are told otherwise) or if you were not able to look at all of the rooms (or rental spaces) that the condition of those areas are similar to those areas that were looked at. If you are preparing a “prospective” value, you would make the hypothetical condition that the improvements have been completed (subject to completion of plans and specifications). SR 2-2 (a) xii): “Include a signed certification in accordance with Standards Rule 2-3.” Keep in mind that this section was revised in 2014 to include “The name(s) of those providing the significant real property appraisal assistance must be stated in the certification.” While the certification does not require the appraiser to detail what work assistance was provided, somewhere in the report you should list the work,
such as “measuring the improvements,” “researched for comparable sales,” “verifying the sales,” etc. This would give support to the assistant in their number of hours they participated in when preparing their appraisal log for certification. Standards Rule 2-2 (b) applies to Restricted Appraisal Reports. It was previously referred to as a Restricted Use Appraisal Report. The basic difference between the Appraisal Report and the Restricted Appraisal Report is stated in USPAP, page U-vi # 5: “An Appraisal Report must summarize the appraiser’s analysis and the rationale for the conclusions. A Restricted Appraisal Report might not include sufficient information for the client (no other intended users are allowed) to understand either the appraiser’s analyses or rationale for the appraiser’s conclusions.” WRE
Professional Education | Business Resources | Industry Representation
It’s Vegas, Baby! NAIFA 2015 National Conference October 19-22, 2015 Mirage Resort on the Las Vegas Strip • 2.5 days of Continuing Education (18 CE hours) • Professional Appraiser Networking • Fellowship and Fun
330 N. Wabash Avenue, Suite 2000 Chicago, IL 60611-4267 Phone: 312/321-6830 | Fax: 312/673-6652
Visit www.naifa.com for program details and to register. 40 Working RE Fall 2015
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