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Winter/Spring 2024, Vol. 64
INSIDE ACCESS TO FANNIE MAE’S COMPLAINT PROCESS The Do’s and Don’ts of Government Appraisals The Attack on Single-Family Zoning
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Winter/Spring 2024, Vol 64
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From the Publisher Readers Respond
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Inside Access to Fannie Mae’s Complaint Process by Isaac Peck, Senior Broker at OREP.org
The Do’s and Don’ts of Government Appraisals by Kendra Budd, Editor
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The Attack on Single-Family Zoning by Richard Hagar, SRA
Introduction to Business Valuation: Key Insights for Appraisers by Seth Webber and Casey Karlsen, Business Valuation Resources
24
A Look into PAREA by Kendra Budd, Editor
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Five USPAP Myths Dispelled in 2024 USPAP by Daniel A. Bradley, SRA, CDEI, McKissock Learning
32 36
Decoding Fannie Mae: A Deep Dive into Key Appraisal Resources by Bill Temple and Erica Deltoro, AmRock
Analyzing Bias and Answering the Charges Against Us by Timothy C. Andersen, MAI, MSc
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Working RE is published to help readers build their businesses, reduce their risk of liability and stay informed on important technology and industry issues.
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From the Publisher
Here’s to 2024 by Isaac Peck, Publisher
There’s no use sugarcoating it:
2023 was a tough year for appraisers. Not only did we see the lowest recorded appraisal volume in recent (or recorded) history, but appraisers also faced a number of regulatory and legal headwinds (see pg. 6). The low volume has been particularly painful. While the licensing numbers likely won’t show the impact for another year or two (as appraiser licenses come up for renewal), appraiser retirements definitely accelerated in 2023. We saw this firsthand in the work we do with appraisers at OREP Insurance. We’ve spoken to many experienced and long-tenured appraisers who reported going months without a single appraisal order. Many decided this was the impetus to begin their retirement. Compared to the boom years of 2020 and 2021, our internal data suggests appraisers retirements nearly tripled in 2023 (our sample size is 10,000 appraisers). In terms of appraisers as a whole, this uptick is still only a one or a two percent change— hardly an exodus of professionals. The reality is that the majority of you—boots-on-the-ground, independent appraisers—are still standing. We salute you! Here’s the good news: with a year like last year, the odds are that it can only get better from here. The Federal Reserve has telegraphed that it plans to cut rates three times in 2024 and most real estate pundits predict at least a modest rebound in real estate activity. 4 Working RE Winter/Spring 2024
There is also good news in terms of the health of the profession, with The Appraisal Foundation (TAF) reporting a 40 percent increase in the number of first-time test takers to get an appraisal license or Certification (see pg. 27). The average age of new appraiser applicants is also dropping, with the average age of a new appraiser now between 26 and 34 years old. Lastly, the craze of hybrid appraisals and property data collections (PDCs) has, thus far, failed to really pick up steam. Despite the tens of millions of dollars poured into developing hybrid and PDC “appraisal alternatives”—the latest data published by the American Enterprise Institute (AEI) indicates that alternative products currently make up less than two percent of all valuations performed on behalf of Fannie Mae and Freddie Mac each month. Things are looking up for appraisers—especially those who are willing to go the extra mile and/ or branch out into new areas. If you’ve been doing mainly residential mortgage work and want to explore non-lending appraisals this year, we have a great class taught by Joshua Walitt called Non-Lending Appraisal Assignments (7 Hours CE) on OREPEducation.org that you can check out (this class is also free to OREP Members!). Call me crazy, but I’m a glasshalf-full kind of guy. Appraisers: this is our comeback year—here’s to 2024! WRE
Readers Respond Changing the Appraisal Ordering Process: Interview with David Cedar This will cause a major crash again, as it is locally known that lenders will find appraisers to make their deal, and those that don’t will not work. The appraiser is to be independent, the only person who isn’t making a commission on the purchase or the refinance. Owners/buyers will lose a ton of protection. —Anonymous Based on these two quotes in the article, “lenders set up their own appraisal panel” and “Our software allows for the lender and appraiser to communicate with each other directly.” I see this as moving back to where things were before Dodd-Frank. This goes against the whole premise of the Act. If the lender has direct contact with the appraiser with conditions, then they have direct contact to manipulate that appraiser for future work and/or to stay on their panel. —Geoff W. This is just a reminder that though requested by most lenders, the appraiser is not required to attach a license copy to the appraisal report and, as a matter of security, probably should not. License status can always be confirmed by each state’s board, which the lender/ user can easily access. —Larry H. Anything under $400 is NOT a fair, customary or reasonable fee to pay an appraiser in any market for a 1004 appraisal. As a VA appraiser my fees are $625 in NY, as the VA has determined this is a fair fee. —John
Where is the win for the appraiser? His selling point is the lender has the lowest cost appraisals in the area. So he’s pushing a way to lower fees for the appraiser. Again, where is the appraiser’s win? More lower-cost appraisals? The fee should not be tied to how much the “Non-AMC” AMC makes. —CFTV
Appraisal Volume, Waivers and Property Data Collections
I think some people misread what he was saying. His fee for a standard appraisal is $99 and the appraiser is paid $375 for a total of $474. It’s the same thing with the $1.8 million property; under his model, the $1250 becomes $799, and the appraiser gets $700. At least, that’s how I read it. —Mel J.
This profession has pushed doom and gloom; the sky has fallen since I began in 1999. And I’ve made a TON of money. I find that my appraisal business is recession-proof. I’m needed for every transaction. I find that my business has slowed to a very manageable level. When we’re swamped, we complain. When we are slower, we complain. Goodness. Change your mindset or move on to another profession. —Cassandra V.
If appraisers were getting $625 per appraisal, they could accept fewer and meet a shorter turn time. He is just a hybrid version of an AMC. —Robert R.
My business is off 60 to 70 percent. We are running bare bones regarding expenditures. We have canceled a number of subscriptions, and are not
planning on replacing any equipment on the typical rotation we have used in the past. However, I have not laid anyone off and do not intend to. My staff has been with me a long time and deserves to be confident if they will have a job in the near future. I have been around a long time and have seen slowdowns over the years. However, this is the most severe I have seen in my almost 50 years in estimating real estate value. —Dann Cann
Extraordinary Assumption or Hypothetical Condition? Mr. Gillespie is right—to be an appraiser is a lifetime of learning and adapting to changes. I love that aspect of this career. This article was written long ago, but it is still very valid today. —Suzanne M.
Winter/Spring 2024 Working RE
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Inside Access to Fannie Mae’s Complaint Process by Isaac Peck, Publisher
For the last three years, there’s been
One question that comes to mind is, why are the GSEs filing so many complaints against appraisers?
plenty of rumors and anecdotal reporting about the flood of state board complaints filed against appraisers by Fannie Mae and Freddie Mac. Finally, we have an inside look (and some hard numbers) at how Fannie’s complaint process works and how many complaints these Government Sponsored Enterprises (GSEs) are actually filing against appraisers. In their September 2023 newsletter, Fannie Mae included a section titled “How State Tips Work,” which explains its reporting process. Instead of referring to them as state board complaints, Fannie calls them “tips,” writing that they “occasionally provide tips to state regulatory agencies” when they identify appraisals with “severe deficiencies.” Fannie reports that it filed 1,083 state board tips (complaints) against appraisers associated with its 2022 loan production—for just one year. Although we don’t have the hard data from Freddie Mac, if we assume a similar proportion and procedure, this means the GSEs combined are filing in the neighborhood of 2,000 state board complaints against appraisers every year. (Freddie’s loan volume is roughly 90 percent of Fannie’s; $684 Billion in loan acquisitions for Fannie and $614 Billion for Freddie. In fairness to Freddie, perhaps they don’t complain about appraisers with the same fervor as Fannie.)
Isaac Peck is the Publisher of Working RE magazine and the President of OREP, a leading provider of E&O insurance for real estate professionals. OREP serves over 10,000 appraisers with comprehensive E&O coverage, competitive rates, and 14 hours of free CE for OREP Members (CE not approved in IL, MN, GA). Visit www.OREP.org to learn more. Reach Isaac at isaac@orep.org or (888) 347-5273. CA License #4116465.
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That’s a lot of state board complaints! Here are some of the key details about Fannie’s process and what it means for real estate appraisers.
Not Automated Fannie indicates that it never files its tips in an automated fashion and (1) every complaint is reviewed manually, and (2) every complaint is issued as part of a loan buyback demand with the lender. This is new information for many industry stakeholders who have been watching this issue closely. It has long been assumed that Fannie’s Collateral Underwriter® (CU®) system was filing complaints in an automated manner (due to the large volume of complaints). Fannie explicitly makes this point: “LQC [Loan Quality Center] reviews are not automated. Our expert analysts validate the appraisal results by asking questions like ‘Do the comparable sale selections make sense?’ ‘Is the data accurate?’ ‘Did the appraiser make appropriate adjustments?’ and ‘Are we getting the most probable value?’ in the context of a comprehensive database of property characteristics and market transactions,” writes Fannie.
Buybacks First One of the illuminating things about Fannie’s explanation is that it indicates Fannie is pushing a significant number of buyback demands on lenders relating to appraisal deficiencies. In other words, every state “tip” Fannie is sending has been preceded by a buyback of the loan in question. This means that Fannie must have forced a buyback of a minimum of 1,083 loans specifically
for appraisal deficiencies (for 2022 alone). (Appraisers who are closer to the AMC/lender review process tell Working RE that this number is actually on the low end in terms of buybacks due to appraisals.) A “buyback” in this context is when Fannie Mae or Freddie Mac force the lender to buy back the loan because of a deficiency noted in the appraisal. Buybacks also occur due to errors in underwriting, borrower income or credit, and so on. However, for the purposes of this analysis, Fannie is specifically telegraphing that it pushed 1,083 loan buybacks specifically because of appraisal deficiencies, and then filed a state board complaint. In the GSEs’ buyback process, the lender is typically given three chances to rebut the GSEs’ critique of the appraisal. Oftentimes, the appraiser is looped into the discussion and offered the opportunity to defend their work, but not always. “Lenders then have a rebuttal period followed by an appeals process. If the lender is unable to resolve the concern by providing additional evidence in support of the appraisal, they ultimately remedy the situation either through a loan repurchase or a repurchase alternative, and only then do we notify the state of our concern,” Fannie writes. If you are an appraiser and one of your lender or AMC clients reaches out to you regarding a GSE buyback resolution request, take it seriously. Appraisers are advised to work closely with their client’s appraisal review team (if they have one) as well as consult with an experienced local appraiser or USPAP expert when writing their rebuttal.
Common Deficiencies In the work we do with appraisers, we serve over 10,000 appraisers and we see a board complaint filed by the GSEs
against one of OREP’s appraisers almost every week. Here is a short list of the most common issues identified by Fannie Mae as justification for buyback demands and subsequently reported to state regulators: • Failure to Adjust Comparables • Inadequate Comparable Adjustment(s) • Adjusted Value of Comparable Sale(s) Failed to Support Appraised Value • Inappropriate Comparable Sale(s) Selection – Dated Comparable Sale(s) • Inappropriate Comparable Sale(s) – Selection Due to Location • Use of Physically Dissimilar Comparable Sale(s) – Gross Living Area • Use of Dissimilar Comparable Sale(s) Due to Site Characteristics • Use of Physically Dissimilar Comparable Sale(s) – Physical Features Reported Inaccurately • Subject Physical Features Reported Inaccurately – Condition/Quality of Construction • Comparable Sale(s) – Gross Living Area
letters that Fannie sends are traditionally signed “Sincerely, Loan Quality Center Fannie Mae.” In some states, like California, this technicality meant that, at least in the early days of Fannie’s complaint reporting, some of Fannie’s complaints were categorically dismissed and not pursued further. Joe Lynch, an appraiser in California, says his understanding of the Bureau of Real Estate Appraisers (BREA) complaint process in California is that there needs to be an individual’s name associated with the complaint. The REA 4001 California Complaint form requests a Certification Statement at the bottom of the form that reads: “(Must be signed and dated to validate the complaint.)” However, Fannie has lately been taking a more rigorous approach to state board complaints. Instead of simply sending an email signed by the “Loan Quality Center,” in many cases, a Fannie Mae employee is filling out the complaint form and signing it individually. (In some states, the state board will redact the Fannie employee’s name before forwarding it to the appraiser.)
State Responses Vary
Why?
How individual state appraisal boards or regulatory agencies choose to respond to the GSEs’ tsunami of appraisal complaints varies widely by state. “State regulators have complete discretion on what to do with our tips. A tip may lead the state to investigate and can result in disciplinary action. We have seen many cases where the state required the appraiser to obtain additional education or mentorship as a result of the investigation,” writes Fannie. Some states require a complainant to sign the complaint. When Fannie was still developing its complaint process a few years ago, it was customary not to have an individual employee at Fannie sign the complaint. Even today,
One question that comes to mind is, why are the GSEs filing so many complaints against appraisers? Fannie takes this question head on. “Through this process, we aim to be responsible members of society, helping protect the public trust by giving appraisers and regulators feedback about deficient appraisals impacting the secondary mortgage market. Too often the competitive pressures on appraisers focus on turn time or price. With state tips, we hope to incentivize competition for superior quality,” Fannie writes. Here, Fannie openly acknowledges the fee and turn-time pressure that appraisers are facing and makes an page 8 8
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argument for quality. In other words, appraisers that are just focusing on doing quick work, or on competing for the lowest fees, still have to produce quality work—or face the wrath of the GSEs and the state board. Or so Fannie seems to suggest. In this respect, Fannie seems to position itself as an equalizer—their quality review and “tips” will force competition around quality, not just fees and turn-time. This is welcome news to appraisers who are being undercut on fees by their competitors, but likely provides no comfort to appraisers who are on the receiving end of a GSE “tip”— whether justified or not.
Claim Exposure There is longer-tail, larger claim potential here that goes beyond the filing of a state board complaint by a GSE. If Fannie or Freddie successfully forces a buyback of a loan due to an appraisal deficiency, the lender may then need to hold that loan on its own books until maturity or it might sell the loan for a discount on the secondary market. Either way, the lender might then bring a claim against the appraiser to recover any losses associated with the loan buyback. These types of claims do not occur on every buyback, but they do happen. The demands for these claims typically center around $50,000$60,000 but can exceed $100,000. The percentage of buybacks that turn into lawsuits or demands is relatively small, according to our internal numbers—but some do. What’s an Appraiser To Do? From a risk management perspective, there are a number of steps appraisers can take to protect themselves and minimize their exposure to these issues. 1 . Take Note of GSE Requirements: To their credit, the GSEs actively engage with appraisers at both state and national conferences. Lyle Radke, Senior Director of 8 Working RE Winter/Spring 2024
Collateral Policy, and Scott Reuter, Chief Appraiser and Director of Valuation at Freddie Mac frequently give presentations live at appraisal conferences and via online webinars on the most common red flags they see and what to do instead. If you’re an appraiser who is doing residential mortgage work, it pays to understand what the GSEs are looking for. Making appropriate adjustments, providing support for those adjustments, and selecting appropriate comparables appear to be high-priority issues for the GSEs. Focusing on professional development and taking classes centered on these particular topics may be a good way to ensure your protection. 2 . Ensure Coverage for Disciplinary Proceedings: Not all E&O insurance carriers provide coverage for disciplinary proceedings. A number of “insur-tech” and generalist appraiser E&O providers are offering policies without key coverages that appraisers need (like Discrimination Claim Coverage!). This can be a costly mistake. It’s not uncommon for appraisers to realize their policy doesn’t cover regulatory or disciplinary proceedings until they receive a letter from their state board and reach out to their E&O provider. It pays to make sure your policy covers board complaints and other regulatory investigations. 3 . Get Professional Support: Too often, appraisers tend to go it alone. If you do end up facing a buyback inquiry from your lender client or you’re defending against a state board complaint, it pays to get professional support and representation. Even if you are an expert writer and hands-down the best appraiser in your area, it pays to have a second set of eyes on your response. You want to consult with
folks who are intricately familiar with the high-stakes process you are likely experiencing for the first time. Working with another experienced appraiser, USPAP expert, and/or an attorney (depending on the circumstances) is the best way to protect your reputation and your business. OREP offers a free one-hour consultation with trial attorney Craig Capilla for all OREP Members facing regulatory complaints, as well as a free consultation with either Bob Keith, Former Executive Director of the Oregon Appraisal Board or Joshua Walitt of Walitt Solutions if the state board comes knocking. Stay safe out there! WRE
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Interview with Jessica Stokesberry: The Do’s and Don’ts of Government Appraisals by Kendra Budd, Editor
Appraisers don’t have to be strictly
If an appraiser is in need of diversifying their portfolio, then government work is a great place to get started.
limited to residential mortgage appraisals. In fact, even the Government needs appraisers! Government appraisal work can be a little difficult to understand, or even more daunting to get started with. What are the differences between residential mortgage appraisals and government appraisals? Why would an appraiser consider moving over? What exactly do government appraisals entail? Is there more job security in them? Well, Bob Hartner, Appraisal Manager with Sound Transit and Jessica Stokesberry, Chief Appraiser at Washington State Department of Transportation (WSDOT) were two of the speakers at 2023’s Seattle Chapter of the Appraisal Institute Fall Conference, where they shared some of the do’s and don’ts of government appraisal work, for those who were thinking of joining in the field. I sat down with Stokesberry to learn more about her insight on government appraisals. Here’s what we learned.
Q: What is the best way for prospective appraisers to obtain government work? Is it by contacting agencies? Applying for pre-approval? Right-of-Way firms? Local Attorneys? Or a combination? Stokesberry: Every government agen-
Kendra Budd is the Editor of Working RE magazine and the Marketing Coordinator for OREP, a leading provider of appraiser E&O insurance—trusted by over 10,000 appraisers. She graduated with a BA in Theatre and English from Western Washington University, and with an MFA in Creative Writing from Full Sail University. She is currently based in Seattle, WA.
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cy contracts appraisal works differently. The first step is to contact the agency you are interested in doing work for directly and find out about their contracting process. It may involve applying for an approval list, waiting for a public RFP process, or just letting the right person know that you are qualified and available for work. Appraisal and appraisal review work may be subcontracted through right-of-way firms, although individuals often are still required to be on the pre-approval list. Eminent domain attorneys may also directly contract with appraisers. Washington State Department of Transportation (WSDOT) has separate pre-approval lists for appraisers and appraisal reviewers. The minimum qualifications include state licensure, a minimum of two years of eminent domain experience, and passing a test. Inclusion on the list does not guarantee work but allows an individual to bid on work for WSDOT or local agencies.
Q: You said at the Appraisal Institute conference that the three sections of the “Do” category were, (1) obtaining work, (2) scoping your assignment, and (3) completing the assignment. Could you go into detail about scoping the assignment? Stokesberry: Government agencies differ in terms of the appraisal standards that must be followed when completing assignments. In the United States,
adhering to USPAP is universal, and following the Uniform Relocation Act (URA) is universal when completing assignments for acquisitions under threat of condemnation, but after that there is variance: a particular client may require adherence to the Uniform Appraisal Standards for Federal Land Acquisitions (Yellowbook), the standards of a funding partner (e.g. FHWA, FTA), or maybe even their own proprietary standards. The appraiser should ask what standards need to be adhered to in the assignment, and then familiarize themselves with those standards while scoping out the assignment. Scoping the assignment is an important step to identify the valuation problem to be solved. Often, in rightof-way appraising a partial acquisition is needed by the acquiring agency, so identifying what rights will be acquired is crucial. The type of right needed will also need to be identified—fee, easement, temporary easement, or other.
Q: What is in the Scope of the Assignments and the Property Title Report? Stokesberry: The Scope of the Assignment lays out the type and extent of research needed to solve the appraisal problem at hand. Understanding a property’s title report really gets down to what legal rights the appraiser is being asked to value: valuing a property with no encumbrances may be a much different appraisal problem than valuing a property’s servient estate, subject to the rights of a neighboring property. In order to complete an assignment, the appraiser needs to know how the subject property’s “bundle-of-rights” has been divided, and then which “sticks” within that “bundle” they are being asked to appraise. Q: What is it like working on properties with multiple interest
holders? How might this differ from residential appraisals? Stokesberry: Multiple interest holders in a single property can potentially change the appraisal problem at hand. For example, when completing an appraisal of a property with multiple interest holders for eminent domain purposes, the “Unit Rule” may dictate that the property being acquired be valued and treated as a single “Unit.” However, in certain cases, like when there’s an acquisition impacting appurtenant easements benefitting off-site parcels, the appraisal assignment may turn into multiple appraisals of multiple impacted “Larger Parcels.” Transportation projects sometimes require the appraisal of a home, but eminent domain appraisals differ from financing appraisals in a number of ways. For example, transportation appraisals are often reported in a narrative report format instead of as a form report, they are often “before and after” appraisals, there needs to be a determination of personal property v. real property, and oftentimes adjustments to comparables are qualitative instead of quantitative. Q: Something you said at the conference is that, “appraisers should never be afraid to ask questions.” Why is this sentiment so important? Stokesberry: Asking questions leads to better efficiency in delivering a usable valuation product to the client. A robust discussion with your client may help clarify expectations and methodologies. Different government clients may have different expectations. Asking questions can lead to the agency gaining more clarity in their own project and a better understanding of impacts on surrounding properties. Appraisals completed for government agencies are oftentimes complicated. The appraisal problem at hand is
often not as straightforward as valuing the fee simple interest in a property. Asking questions up-front is critical to having an understanding of what it is you are appraising, as well as the purpose and intended use of the appraisal. Asking questions up-front can also save the appraiser valuable time in not having to chase down answers that are already known, and also improve the quality of the work-product.
Q: What is a kick-off meeting, and what does it entail? Stokesberry: A kick-off meeting is a meeting to orient the appraiser as well as the rest of the real estate team on what the project entails. It will often allow the whole project team (including the appraiser) to talk through the details of each parcel in the project and begin brainstorming solutions to potential issues. The meeting may be high-level or may get weedy in discussing specifics. Q: What are some of the biggest mistakes an appraiser can make doing government work? What are the major “DO NOTS”? Stokesberry: One of the biggest mistakes an appraiser can make when doing government valuation work is not to be familiar with the applicable regulations. For example, the regulations informing requirements for a job with Fish and Wildlife will be significantly different than for the Department of Transportation. For eminent domain work, it is vital that you’re familiar with Federal regulations as well as state laws; not all damages are compensable— missing the mark on highest and best use and not identifying the need for lease-back fair market rent. Not asking questions of the client. The best appraisers for this type of work are oftentimes the ones that ask the most questions and not try to page 12 8
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complete the assignment in a vacuum.
Q: What are some benefits of switching to government work? Stokesberry: First, diversifying your practice. There’s a wide range of project types; right-of-way work is unique and challenging. It could be a good way to get your foot in the door if you’re seeking staff appraiser work with a public agency. There are many interesting niches in government work. It is also not as impacted by the “ups and downs” of the overall real estate market as other types of appraisal work. Q: Do you have anything else you would like our audience to know? Stokesberry: Working for government agencies is a fantastic way for appraisers to differentiate themselves from their competition, work on challenging
appraisal problems, and also to maintain a steady workload during the “ups and downs” of the real estate market.
Final Thoughts If an appraiser is in need of diversifying their practice, then government work is a great place to get started. Yes, there are many more regulations and procedures that you will need to be aware of—but imagine the boost to your business once you get the hang of it. More importantly, now more than ever it is in an appraiser’s best interest to learn other ways to get work outside of residential mortgage appraisals. With the slowdown still lingering forward, diversifying your practice and client base might be a smart move. This can help you have a “plan B” if you’ve already had the experience. Government
work very rarely slows down, but it is a competitive field. Stay safe out there! WRE Serving Real Estate Professionals
Winter 2020 Volume 52
The #1 source of real estate appraisal information and appraisal news. We Real Estate Professionals areServing committed to reporting relevant and timely appraisal news for real estate appraisers nationwide. Winter 2020 Volume 52
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The Attack on Single-Family Zoning by Richard Hagar, SRA
There are changes afoot that lenders
Two House Bills require that all towns and cities must rezone and allow multi-family zoning in all residential areas of their communities, not just multi-family zoned areas.
and appraisers should be aware of due to the impact on lending and the value of residential properties. However, these changes don’t seem to align with the type of properties Americans desire to live in. Allow me to look back at history before I explain the attack. Currently, single-family homes represent the majority of housing types all across the U.S. According to the U.S. Census Bureau, as of 2013 single-family homes (SFH) account for 73.6% of all housing units (including 6.3% mobile homes and 5.8% townhomes) while multi-family housing represents 26.2% (See Figure 1). During the pilgrimage of the 1600s to the North American continent, people clustered in small communities which provided a cooperative environment for goods, trade, and protection. Once cities expanded and became crowded, people moved to areas outside those original communities— today we call them suburbs. Today, the primary reason people live in apartment buildings within cities is to be close to jobs and businesses. Then of course, there’s the added bonus of the low cost of living. However, as families grow, they begin to desire space in the backyard for their kids to play, a garage to park cars, etc. For the most part, once people have a comfortable income, they don’t seek
Richard Hagar, SRA, is an educator, author and owner of a busy appraisal office in the state of Washington. Hagar now offers his legendary adjustments course for CE credit in over 45 states through OREPEducation.org. The 7-hour online CE course “How to Support and Prove Your Adjustments” shows appraisers proven methods for supporting adjustments. Learn how to improve the quality of your reports and defend your adjustments! OREP members save on this approved coursework. Sign up today at OREPEducation.org.
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Townhouse 5.8%
Apartment 26.2% Single-Family Home 67.8%
Figure 1: 2013 U.S. Census Bureau Report on Single-Family Housing multi-family living; they want some elbow room and are willing to pay for it even if it means moving further away from city centers. It’s the American dream. Unfortunately, this “dream” appears to bother some people and they are trying to pass zoning laws requiring high density multi-family housing throughout single-family zoned areas in cities and small towns—even if the majority of people don’t like it.
A Flash Back and Reason for Zoning In the mid-1800s, Harlem was a desirable place to live or vacation outside New York; it was synonymous with “elegant living” by the state’s wealthy. Families built numerous large and high-end homes. Due to demand and economic growth, the population increased and attached row houses and constructed apartments. Without zoning, a developer could build apartments, commercial, and industrial uses adjacent
to detached upscale residential homes. As the demand for housing continued to grow, population density increased. This resulted in increased land values and decreasing value of the existing homes (aka economic obsolescence to appraisers). Wealthy families vacated—selling their homes and allowing new owners to convert the once elegant structures into multi-family buildings. If you have an eye for architecture, today you can recognize that a few of the old brick homes are still standing. However, the most profitable use of the buildings is no longer for single-family but multifamily, which generates higher rents (perfect example of the highest and best use of the improvement). In response, New York in 1916 enacted the first zoning codes in the United States. Zoning appeared to reduce the problem, which then supported the creation of the Federal Zoning Enabling Act in 1922, which permitted cities, towns, and communities all across the United States to enact local zoning regulations. One of the original purposes of zoning was to keep incompatible uses separate from residential areas. It was found that when industrial, commercial, and multi-family uses were near residential properties, the value of the residential properties decreased along with the resulting tax dollars. Many property owners complained about the impact on property values and filed lawsuits attempting to stop unregulated construction. Cases worked their way up to the Supreme Court with court rulings supporting the establishment of local zoning regulations. The Supreme Court wrote: The serious question in the case arises over the ordinance excluding from residential districts apartment houses, business houses, retail stores and shops…The coming of one apartment house is followed by others, interfering … with the free circulation of air and monopolizing the rays of the sun which otherwise would fall upon the
smaller homes…and depriving children of the privilege of quiet and open spaces for play…until, finally, the residential character of the neighborhood and its desirability as a place of detached residences are utterly destroyed. The court went on to state: “New York ‘Set Back Ordinances’ were established to prevent streets from being darkened by the towering walls of buildings and so as to minimize the “stealing of light,” by each successive building which stood taller and taller than its preceding neighbors.” What court rulings were indicating is that it was legal to establish local zoning—i.e., industrial uses should go down by the river or railroad tracks, commercial uses along the highway, multi-family close to transportation systems and support services and residential uses far away for quiet enjoyment and kid-friendly streets. Cities that have enacted zoning that separates different uses tend to maintain their appeal more than cities with haphazard zoning. Neighborhoods found in cities such as Chicago or Detroit are perfect examples of what happens when small industrial buildings or apartments are constructed next to single-family homes. Many of these homes now look worn-down and shallowed out. History indicates that we’ve tried mixing multi-family buildings with singlefamily homes—and it didn’t work. Over the years, most small towns and cities have embraced zoning as a way of encouraging different land uses in the most appropriate areas. The overriding goal is for zoning decisions to be made at a local level, not at the Federal or State levels. The origins of democracy are also based on this premise, that decisions must be made at the most local level possible and should not be made by a separate governing body such as royalty or even a dictator. Article XI, § 11 of the State of
Washington’s Constitution also supports this local decision process: “Any county, city, town or township may make and enforce within its limits all such local police, sanitary and other regulations as are not in conflict with general laws. Because zoning regulations result from an exercise of the police power and, thus, may only be adopted in furtherance of the health, safety, morals and general welfare of the people affected.” The United States Constitution, State of Washington’s Constitution, and key Supreme Court decisions all clearly state that zoning and land use regulations (police powers) should be made at the local city and community level, not at the federal or state level. However, what we are starting to see is various state governments trying to dictate to cities and towns how their communities should develop, and single-family housing appears to be one of their targets for destruction. As an example, this past July the people in Washington’s state capital created new laws that override the local decision-making process that America was based upon. Two House Bills require that all towns and cities must rezone and allow multi-family zoning in all residential areas of their communities, not just multi-family zoned areas. House Bill 1337, requires all cities and counties to allow one or two additional housing units on a lot in all singlefamily zoned areas. While House Bill 1110, requires all cities with a population greater than 25,000 to rezone and allow a minimum of four housing units on all formally single-family zoned lots and a minimum of six housing units on all lots formally zoned single-family, in cities with a population greater than 75,000. In Washington State, this higher density zoning (three housing units) is even required for towns, regardless of size, if they are near larger cities in King, Pierce, Snohomish, Thurston, page 168
Winter/Spring 2024 Working RE 15
7page 15
Kitsap, Clark, and Spokane Counties. What they are forcing upon the owners of single-family homes is the possibility for a neighbor to construct a multi-family building on the adjacent lot. Imagine a three-to-four-story apartment building with six plus units built right next to a 1930s Craftsman house, and the owner of the Craftsman house has no say in the matter. This is exactly what the new laws allow and encourage. There will be additional problems that have not been taken into consideration which relate to water, sewer, and electrical lines all designed to service the existing number of homes per acre which now must serve many times that number. Several small towns will have to upgrade their entire water and sewer systems, significantly increasing taxes and utility bills. Due to increased living costs, housing in these small towns will become more expensive for both owners and renters alike. As housing becomes more expensive, the middle class is squeezed out, leaving a larger gap between the “have, and have nots.” I have experience valuing homes that are next to duplexes, fourplexes and apartment buildings, I see what’s happening in these neighborhoods. Once zoning is changed from singlefamily to multi-family, developers move in and start competing against families for older homes. Unfortunately, the builder always wins because they have more money and are willing to pay cash. Homes, perfect for a starter family or in need of being rehabbed will be purchased by a developer who will tear the house down to make way for a new multi-unit building on a small 5,000square-foot site. (It’s called the highest and best use of the land). The moment construction starts, the value of a nice condition single-family home next door goes down; the appraisal term is called external obsolescence. Welcome to capitalism in America. 16 Working RE Winter/Spring 2024
The lower-priced older home is gone and replaced by a higher-value building with higher rents. So, despite what the decision makers in the state government say about creating more affordable housing for lower-income people, often this process does the opposite. It creates more housing, but not what people with low incomes can afford. Maybe rent and prices will be lower in 20 years or so when these new units are older but not when they are first constructed. Once again, people with lower incomes are on the losing end of this change in zoning.
Impact on Lending The banking system of America is designed around providing loans to people who desire to purchase a home. When there’s a house on a property zoned single-family house, banks have numerous loan programs to support its purchase. Due to the way our lending system is set up, buyers can put as little as 3.5% down and purchase a house. Loan payments are spread over 30 years and interest rates are low due to the decreased risk provided by owner-occupied single-family homes. This lending system has evolved over the past 85 years and is one of the most efficient on the planet. However, once zoning is changed to allow five or more units on a lot, this is considered a “commercial” property which increases the down-payment requirements, increase interest rates plus there are tougher qualification requirements. Simply changing the zoning to multifamily (regardless of the spiffy name they give it) changes everything and increases lending costs to all homebuyers. Impact on Appraising As I explained, the lending system has issues with properties capable of being used for five or more units. One to four units are considered to be “residential” however, lots that are capable of supporting five or more units are
considered commercial. Appraiser licensing across America is similarly divided, “residential” appraisers are qualified to appraise one to four units while “commercial” appraisers are needed to appraise properties capable of supporting five plus units. 70 percent of appraisers are licensed to provide appraisals for residential properties and only 30 percent are qualified to appraise properties with five or more units. Once zoning is changed to multi-family, there will be far fewer appraisers capable of valuing these homes and appraisal fees will, at a minimum, double, again, making home buying more expensive for the very people these laws state they are “helping.”
Solutions Clearly the officials passing these state zoning laws, and their unelected bureaucrats believe that the people in towns and cities are too ignorant to make local community zoning decisions. The laws these people pass display absolute arrogance and disdain for the 76.3% of people who live in singlefamily homes. They are attacking the people who own or desire single-family homes, and they are doing it by changing the zoning to allow multi-family in single-family neighborhoods. 1. The first solution is to educate or un-elect these people; they do not understand the wide implications of their zoning decisions. They appear to be ignorant of America’s history or suffering from the Dunning-Kruger Effect (look it up). 2. The next solution is to prevent or eliminate statewide laws that force multi-family zoning into single-family areas. Zoning decisions should be made by our local communities. 3. Next, allocate more land to multifamily zoned districts. These areas should be close to existing transportation corridors allowing better access to jobs and the services they
need to prosper; not just plopped down in the middle of SingleFamily Residential (SFR) neighborhoods. As more properly zoned land is made available, there are builders waiting to jump on the opportunity to build new units; supply and demand will work. 4. Next, reduce government cost burdens. A minimum of 25 percent of housing costs are due to government fees, not counting the new upcoming increased costs due to the 100 percent electrification requirement for all new homes. 5. Cities should try and hire competent people for their building departments, people who understand history and work towards shortening
the processing time it takes to obtain building permits. I understand that good people are hard to find and firing less productive people is even tougher, especially in some West Coast states. The hiring and firing processes need to be improved. 6. People who have well-rounded knowledge in the real estate and lending industry need to get involved with their elected officials by communicating with them directly and not via their trade organizations where politics get involved. You’d be surprised how easy it is to send a short email with pertinent information to an elected official. The officials need help, so provide
it. Who knows, complaining and helping might bring about big results and allow Americans to obtain the type of housing they desire and not put up with what’s being forced upon them. 7. Appraisers need far more training on how to calculate the increased depreciation rates for homes on multi-family zoned land and understanding the extensive highest and best use analysis that will be required, all of which will become necessary if the above suggestions are not implemented. I’m trying to tell you what’s headed your way and keep you safe out there, because it won’t be easy once these multi-family zoning laws kick in. WRE
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Winter/Spring 2024 Working RE 17
Introduction to Business Valuation: Key Insights for Appraisers by Seth Webber and Casey Karlsen, Business Valuation Resources
Real Estate Appraisal
Business Valuation
Current Assets
Current Liabilities
Machinery Real Estate
Intangible Assets
Long Term Debt
Equity
Figure 1: Balance Sheet of a Company
Moving from commercial real estate
appraisal to business valuation set me up for a real shock. On my first day with the new firm, I was given a business valuation to familiarize myself with. My confusion began with a capitalization rate in excess of 20 percent. This was double or triple what I was used to from commercial real estate! My unease mounted when the market approach included dozens of transactions, rather than a tidy group of six or eight real estate comps. I began to question the credibility of my new firm and asked my old real estate boss to meet up to discuss. Over lunch, he helped me understand the differences between business valuation and real estate appraisal, which put my mind (and my career transition) at ease.
From that firm, I joined a prominent national firm for a couple of years before then settling into the business valuation group of an accounting firm headquartered in Maine. All three firms followed consistent valuation practice, reinforcing the message that these “crazy” valuation capitalization rates and multiples were actually perfectly normal in business valuation. Real estate appraisers could benefit from learning about the sister discipline of business valuation to avoid the shock factor upon one’s first exposure to business valuation. Clients of real estate appraisers may also have business valuation needs, and the ability of an appraiser to be of assistance in these matters as well may be beneficial.
Seth Webber (pictured left) is the head of BerryDunn’s valuation services group, where he helps business owners understand what their business is worth. Seth can be reached via email at swebber@berrydunn.com or by phone at (207) 541-2297. Casey Karlsen (pictured right) is a manager in BerryDunn’s valuation services group. Casey can be reached via email at ckarlsen@berrydunn.com or by phone at (207) 842-8053.
18 Working RE Winter/Spring 2024
Assets and Liabilities Included in a Business Valuation One of my clients owns a long-term care facility here in Maine. The business has debt collateralized by real estate, and recently a real estate appraisal was performed. My client then decided to gift shares in her business to her son. When filing gift tax returns, my company’s policy is to request a business valuation to substantiate the return. The owner balked at spending more money for a valuation after just having a real estate appraisal. “Can’t we just use the value from the real estate appraisal for the gift tax return?” She asked. Balance Sheet of a Company There are three primary problems with this. First, real estate appraisals may or may not capture the intangible value of a company—brand awareness, customer relationships, cultural elements, etc. Second, real estate appraisals rarely include all the assets owned by a business, such as vehicles, cash, equipment, and other assets. Lastly, business valuations for gift tax returns, as well as most other purposes, conclude on an equity value. That is, liabilities are subtracted from the asset value. (See Figure 1: Balance Sheet of a Company.) Risk and Value Business capitalization rates are often double or triple that of real estate capitalization rates. Much of this difference boils down to risk profiles. Operating businesses are a riskier investment than owning real estate. One in five businesses fail in their first year. By the end of five years, about half of all businesses close their doors. Even when they don’t fail, business cash flow can be much
Cash Returns from Investment in RE vs. Business Competitor Leaves Market
$3,000,000 $2,500,000
Vacancy for Part of Year
$2,000,000
Recovery
$1,500,000 $1,000,000 Repaved Parking Lot
$500,000 $-
2013
COVID
Invested in New Equipment
2014
$(500,000)
2015
2016
2017
Business
2018
2019
2020
2021
2022
Real Estate
Figure 2: Risk and Value Real Property Appraisal
Business Valuation
Location
Products
Square Footage
Competitor
Accessibility
Customer Concentration
Zoning
Management Team
Property Tax Records
Employee Base
Figure 3: Drivers of Value more volatile than returns from a real estate investment, as shown in the accompanying chart. (See Figure 2: Risk and Value.) Risk and value are like children on a teeter-totter. When risk goes up, value goes down. This risk is captured in business valuations through higher capitalization rates and lower multiples.
Drivers of Value (Sources of Risk) Business valuation analysts look at drivers of value different from real estate appraisers. A handful of key drivers are summarized in the chart. (See Figure 3: Drivers of Value.) Financial Statement Analysis and Adjustments Business valuation is fundamentally forward-looking. What happened in the past is irrelevant, except as it affects and establishes a company’s trajectory into the future. To that end, business
valuations typically include a review of the last five years of financial performance as an indicator of where the company is headed. Sometimes, unusual events put a crater in the financial trajectory. If this event is nonrecurring and won’t happen again in the company’s future, analysts may make an adjustment to smooth over this pothole and create a clearer picture of what the future might hold. Other common adjustments include addbacks or deductions related to owner’s compensation and rent expenses. The goal of these “discretionary” adjustments is to capture all costs and benefits of ownership within the income stream of the company.
Nonoperating Assets In my real estate career, I had the opportunity to value an extremely overbuilt RV park. It had hundreds of spaces, despite limited market demand.
We decided the highest and best use was an RV park with less than 100 sites and vacant land to be developed in a different enterprise. In other words, we separated the operating assets from nonoperating (surplus) assets. In business valuations, the same process is done. We look for assets unrelated to business operations (boats, condos, vehicles for family members) and add them to the business value as an additional source of wealth.
Market Approach Business valuations use slightly different terminology, referring to the sales comparison approach as the market approach. Naming differences aside, the methodology used in business valuations and real estate appraisals is fairly similar. However, rather than focusing on price per square foot, business valuations use EBITDA multiples. (EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a standardized measure of business profits.) Business value is calculated on Figure 5: Market Approach, pg. 22. The first time I saw a business valuation report, I was surprised to see about 40 transactions used as comparable sales. Further, the EBITDA multiples from these transactions were all over the map, ranging from 2x to 15x. There appeared to be much less due diligence spent on each transaction than I was used to. Each of these observations has a reasonable explanation behind it. • Number of transactions: When comps are highly similar to the subject, few comps are necessary to elicit a reliable indication of value. A larger group is necessary to create an accurate picture of marketplace pricing trends when comps are dissimilar. Unfortunately for business valuation analysts, differentiation is the name of the game for businesses. page 22 8
Winter/Spring 2024 Working RE 19
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Figure 4: Income Approach
Figure 5: Market Approach •
•
Wide range of valuation multiples: Valuation multiples also vary widely from transaction to transaction as they are highly sensitive to a company’s risk profile and the circumstances surrounding a deal. Limitations on due diligence: Buyers and sellers often prefer to divulge as little information about the transaction as possible. Often, the transaction summaries available in databases have the names
22 Working RE Winter/Spring 2024
redacted. This greatly impedes an analyst’s ability to do a deep dive into each transaction. Additionally, the number of transactions utilized makes this less feasible.
Income Approach The sales comparison approach is often given primary weight in real estate appraisals, with secondary weight to the income approach. In business valuation, it has been my experience
that the inverse is true: the income approach is often the valuation analyst’s bread and butter. The discounted cash flow (DCF) method in particular is the weapon of choice. The reason for the popularity of the DCF method is its flexibility. The DCF method can accommodate anticipated fluctuations in cash flow and can be tailored to match the risk profile specific to the subject company. When applying the DCF method, analysts discount income from a discrete forecast period to present value. The length of the discrete forecast period should match the economics of the subject company, extending until growth stabilizes. Once growth stabilizes, income is capitalized in perpetuity using the Gordon Growth Model, and then discounted back to the valuation date. A simplified version of the DCF method is presented in Figure 4: Income Approach.
Asset Approach The asset approach is quite similar to the cost approach in the appraisal of real estate. In the asset approach, analysts estimate the value of a business by valuing each individual component of the business that a hypothetical buyer would have to recreate. Analysts adjust each asset and liability on the balance sheet
from book value to fair market value. Additionally, analysts value off-balance sheet, intangible, and contingent assets and liabilities. Unless a business has acquired another business, intangible assets are generally not listed on the balance sheet. The aggregate value of these adjusted assets is then reduced by the adjusted value of the liabilities, resulting in an indication of the fair market value of the equity of the subject company. The asset approach is most useful for valuing asset-intensive companies (hotels, railroads, quarries, etc.). The income and operations of these companies are largely a function of their fixed asset holdings. Accordingly, their value is primarily driven by the assets that they hold. By valuing the fixed assets that these companies hold, an analyst is well on their way to estimating the value of the entire business.
The asset approach is less useful for service-based companies. The value of service-based companies has much less to do with their fixed assets. Consider an architecture firm. On its balance sheet, the architecture firm may have some desks, furnishings, and computer software, none of which have much value. Instead, value is driven by intangible assets not reported on the balance sheet, such as customer relationships.
estimate discounts for lack of control and marketability. Simply put, a 25% interest in a business worth $1 million may be worth less than $250,000 because the owner of a 25 percent interest may be limited in their ability to take any action they choose (i.e., their interest lacks control) and sell their interest (i.e., their interest lacks marketability). When appropriate, analysts discount the indicated company values for lack of control and marketability.
Valuation Discounts Ownership of businesses is often divided among several parties rather than just one person. Valuation analysts are often retained to value a specific person’s interest (e.g., a 25 percent ownership interest) rather than 100 percent of the business. In these cases, analysts may
Conclusion Business valuations are fundamentally similar to real estate appraisals. Both use three approaches to value that are applied in a parallel manner. By educating themselves on the subtle differences between these two crafts, real estate appraisers will be able to better serve their clients. WRE
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Winter/Spring 2024 Working RE 23
A Look into PAREA by Kendra Budd, Editor
We’ve heard it time and time again—
The PAREA program allows students to become familiar with appraisals and be work-ready upon gaining licensure.
24 Working RE Winter/Spring 2024
new would-be appraiser trainees have too many roadblocks keeping them from becoming independent appraisers. One of the primary roadblocks is that many folks interested in the profession experience incredible difficulties finding an appraiser supervisor willing to take them on as a trainee. There are a variety of reasons why a practicing appraiser may not want to bring on a trainee: the time investment required in training, fear of training the competition, low appraisal fees paid by appraisal management companies (AMCs), lender requirements excluding trainees, and more lately, a slowdown in mortgage work unlike anything appraisers have seen in the last 20 years. The result is that it has been difficult for trainees to get their required training hours from the traditional supervisortrainee model. The difficulties of the supervisortrainee model, combined with the fact that appraisers as a whole are an older demographic, has fanned the flames of fear that aren’t enough new appraisers ready to replace retiring ones. Thus, the Practical Applications of Real Estate Appraisals (PAREA) was born, a new appraiser training program designed to help prospective real estate appraisers obtain their needed requirements without a traditional supervisor. For those brave souls who are passionate about becoming a real estate appraiser and have struggled with finding a mentor or a supervisor, the introduction of PAREA is a godsend. However, many practicing appraisers feel that there is no shortage of appraisers (especially now—during today’s slowdown) and that PAREA is designed
to lower the standards of the appraiser profession and drive down appraisal fees further. So, what is PAREA and how does it work exactly? Here’s what you need to know.
What is PAREA? PAREA was adopted by the Appraisal Qualifications Board (AQB) on October 16th, 2020 and became effective in 2021. The Appraisal Institute (AI) is the first organization to offer a PAREA training program to the public, receiving AQB approval in May 2023. AI reported spending over $2,000,000 on its program development and it describes its current program as “an alternative pathway for aspiring appraisers to gain their required experience hours to become a licensed or certified appraiser.” How Does PAREA Work? All participants in PAREA must complete all of their hours of Qualifying Education (QE) before starting the program—just like any other trainee situation (150 hours of QE for licensed, and 200 hours of QE for certified). Prospective students must then apply for AI’s program. Once accepted, PAREA will automatically assign trainees a mentor who will share their real-world experience, insights, and tips to help them navigate the program and have a successful career. These mentors will appraise properties virtually with their trainees, walking them through the process and letting them ask questions and share insights as they go along. Along with training on all topics, page 26 8
7page 24
PAREA provides participants access to data, research, MLS, environmental information, and much more. This will allow trainees to get actual hands-on experience. Instead of watching their mentor work by peering over their shoulder. This will enable students to absorb information more quickly and efficiently. In fact, PAREA students will be quizzed often with something called “Milestones,” once they complete one section of PAREA, they will be asked to do a quiz review to ensure that the lessons are sticking and students aren’t just rushing through their training. Additionally, PAREA students will complete ten practice assignments and immersive skill activities. This allows trainees to use the skills they’ve learned during mentorship and apply them to real-life examples, including USPAP-compliant appraisals. Once participants successfully complete PAREA, they must also pass the national licensing and certification exam for the appropriate credential level. The PAREA program allows students to become familiar with appraisals and be work-ready upon gaining licensure. It is not a simple program to throw out new appraisers into the world, but rather one that trains the next generation of competent appraisers with resources they can always look back on.
The Digital Age There are many appraisers who are skeptical that digital training of any kind will work. One appraiser commented on a Reddit thread about PAREA, stating that digital appraisals don’t work and further insinuated that it would only create lazy appraisers. “We don’t want every [average Joe] with a high school degree who did PAREA trying to bid on our work. PAREA needs to be shut down,” wrote the commenter. 26 Working RE Winter/Spring 2024
However, Dave Bunton, President of The Appraisal Foundation (TAF), said in an interview with Hal Humphreys on Appraisal Buzz, that digital training is the way of the future. “If you look at the world today, surgeons don’t operate on cadavers—they do digital operations. Pilots do flight simulations. This is kind of what this is, a flight simulator for real estate appraisers,” Bunton enlightened. In fact, Bunton continued by saying that PAREA was actually born from banks when they stopped outsourcing their valuation work. “That was the incubator for a lot of appraisers. Suddenly, we lost that and that hole could not be filled by the number of people who wanted to be supervisors. So that is why we came up with this simulated training,” Bunton explains. It’s increasingly harder for prospective students to find local appraisers to take them on as a trainee—PAREA attempts to bridge that gap by making supervisors available virtually. Not only that but the simulations are designed to help trainees think of every single possible situation when doing these virtual appraisals. For example, they’ll have students take a house and appraise it. Then, appraisers will be asked to appraise the same house again as if it’s near railroad tracks, a lake, has a garage, etc. Bunton says this is all simulated to teach students how this can all affect value—something you may not get in the traditional trainee-appraiser situation. “You have a limitless set of valuations. People that go through this may be better prepared than some people who use supervising appraisers, because their appraisals can be very narrowly defined,” Bunton says.
PAREA’s Goal A hot button issue in the appraiser space right now is that of diversity— more so a lack thereof. Claims of appraisal bias have skyrocketed over the
past couple of years, and many experts believe that a part of the problem is the lack of diversity within the workforce itself. This includes, race, age, and gender. In fact, the U.S. Bureau of Labor Statistics (BLS) concluded that the appraisal industry was the least diverse industry in 2021, with it being dominated by 96.5% of white individuals. However, this is not to say that this is any appraiser’s fault but instead goes back to the lack of opportunities presented to prospective minority appraisers. PAREA wants to address that problem and make it easier for BIPOC, women, and younger appraisers to obtain training. By allowing training to be readily available virtually, such as PAREA, trainees living in areas where there aren’t many supervisors or appraisal businesses in general will be able to finally obtain the mentorship and training they need. At the Appraisal Institute’s 17th Annual Fall Real Estate Conference for the Seattle Chapter in November 2023, Craig Stanley discussed the benefits of PAREA. “We want the appraisal profession to reflect the population of the United States. We need a diverse new generation of appraisers, and that’s our hope,” Stanley summarized. The goal is to make the appraisal industry more diverse so that appraisers will have fewer claims of bias against them and that this seemingly continued problem will eventually taper off.
Shortage of Appraisers? Another worry that the Appraisal Qualification Board (AQB) has is that the turnover rate of appraisers is leading to a shortage of appraisers. Many appraisers don’t believe that there is no shortage happening and that appraisers entering the business are on the rise. Bunton agrees that more appraisers are joining the profession, but that isn’t going to necessarily stop a shortage.
“Over the past five years, the number of first-time test takers from the national exam has gone from 1,500 to 2,500. That’s a 1,000 person increase! Moreover, they’re on average 26 to 34 years old. Ten years ago, they were in their 40s onto their second career. Now, we’re getting younger people and more people. The question though becomes, is that the replacement rate? How many people are retiring? If it’s 2,000 we’re fine, but if it’s 5,000, then it’s not so good,” Bunton argues. PAREA would allow that number to only increase, he reiterates. Even Humphreys joined in saying, “I was shocked by how many young people are joining this business. PAREA is giving them the sense of ‘I can actually do this.’” Especially
with the rise of corporations now wanting to provide scholarships for PAREA students, Bunton believes this will only increase the number of appraisers in the industry, and cultivate more diversity.
against appraisers, or maybe they’ll continue to rise anyway. Either way, it will definitely make training more accessible to these prospective appraisers. We’ll just have to wait and see how they utilize it. Stay safe out there! WRE
Final Thoughts Whether you have positive or negative thoughts surrounding PAREA, it is clear that it is here to stay. Currently 48 states have adopted PAREA either fully, partially, or by reference. “I believe that all states will have adopted PAREA fully by September 2024,” Bunton surmises. PAREA is still fairly new, so only time will tell if it has positive or negative affects on the appraisal industry. Perhaps we’ll see fewer bias claims
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The National Society of Real Estate Appraisers, Inc. (NSREA) has been advocating for the rights of black and minority appraisers for almost 70 years. We are the old guard, or the “OG” when it comes to addressing racial valuation bias in the appraisal profession. NSREA is excited to announce our partnership with OREP. As the oldest minority professional Appraisal organization, it makes sense for us to partner with another pioneer, OREP Insurance. OREP has also been fighting for appraisers for almost a quarter century and led the charge to provide industry-leading racial valuation bias coverage for appraisers. Together, NSREA & OREP Insurance combat racial valuation bias through advocacy and protecting the rights of Appraisers.
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Winter/Spring 2024 Working RE 27
Five USPAP Myths Dispelled in 2024 USPAP by Daniel A. Bradley, SRA, CDEI, McKissock Learning
On May 5, 2023, the Appraisal Stan-
The good news is that there are no new obligations for appraisers as a result of this new section of the ETHICS RULE.
dards Board (ASB) voted to adopt changes to the Uniform Standards of Professional Appraisal Practice (USPAP), which will become effective January 1, 2024. These represent the first changes to USPAP in four years. Many of the changes will not have a significant impact on the way appraisers practice but are nevertheless important for public trust. Appraisers and the public have traditionally held several misconceptions about USPAP, and these changes should help to dispel some of those myths. Five myths and misconceptions are addressed in the changes to the 2024 USPAP.
Myth 1: USPAP Allows Discrimination as Long as the Appraiser’s Conclusions are Supported Appraisers know this is not true, but there are some regulators, fair housing advocates, and members of the public who have perpetuated and even amplified this myth. For this reason, the ASB rewrote the ETHICS RULE and added a new “Nondiscrimination” section to clarify to users of appraisal services and the public that illegal discrimination is prohibited by USPAP. There have been well-publicized accusations of bias and discrimination made against appraisers during the last
Daniel Bradley is the Appraisal Curriculum and Content Director for McKissock Learning. Dan has been a real estate appraiser since 1987, and currently holds a certified general appraiser credential in Pennsylvania. His teaching style is relaxed with clear explanations of the material complemented by broad experience. Dan specializes in USPAP, expert witness appraisal, appraisal review, and FHA appraisals. He holds an SRA designation from the Appraisal Institute and served two terms on Pennsylvania’s appraiser licensing board.
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several years. Regardless of whether these accusations have merit individually, collectively these accusations have damaged public trust in the appraisal profession. The previous language in the ETHICS RULE that prohibited an appraiser from using or relying on “unsupported conclusions” about protected characteristics had created the misconception that appraisers were permitted to engage in discrimination if their conclusions were supported. This was never the case; hence, the ASB removed this language. The new Nondiscrimination section states that appraisers must not act “in a manner that violates or contributes to a violation of federal, state, or local antidiscrimination laws or regulations.” It also references three key federal antidiscrimination laws that are relevant to appraisal practice—the Fair Housing Act (FHAct), the Equal Credit Opportunity Act (ECOA) and the Civil Rights Act of 1866. The Nondiscrimination section also introduces the concepts of disparate treatment and disparate impact—concepts that are fundamental to understanding fair housing and fair lending laws and regulations. The good news is that there are no new obligations for appraisers as a result of this new section of the ETHICS RULE. Appraisers have always been required by USPAP to be aware of, and comply with, laws and regulations that apply to the appraiser or to the assignment. Appraisers will need to comply with these laws in 2024, just as they were required to comply with them under previous editions of USPAP.
Referencing specific laws in the ETHICS RULE provides a reminder to appraisers of the importance of these laws, and it also clarifies an appraiser’s ethical obligations to comply with these laws for the benefit of users of appraisal services and the public. The Conduct section of the ETHICS RULE has retained its prohibition on performing an assignment with bias. Two new Advisory Opinions that relate to the issue of fair housing and discrimination (AO-39 and AO-40) were also adopted by the ASB, and AO16 has been retired. While Advisory Opinions do not establish any new standards and are not intended to be enforceable, they provide advice and illustrate applicability. AO-39 contains three illustrations of the applicability of anti-discrimination laws to appraisal assignments. AO-40 includes four illustrations of language in appraisal reports that could be considered discriminatory, and it also addresses the concepts of pretext and code words. These Advisory Opinions are valuable guidance that appraisers need to read and understand.
Myth 2: The Removal of the Definition of Misleading from USPAP Reduces Liability for Appraisers Many appraisers believed the inclusion of the definition of “misleading” in USPAP created liability problems for appraisers, because an appraiser could potentially be disciplined under USPAP for minor inadvertent reporting errors. The ASB heeded the feedback from the appraisal community and retired this definition from USPAP for 2024. However, appraisers need to be aware that the retirement of a definition from USPAP does not remove the term from USPAP; it merely reverts the meaning of the term to its common English dictionary definition. Misleading is defined in the Cambridge Dictionary as, “Causing someone to
believe something that is not true.” Even though the definition of misleading has been removed from USPAP, Standards Rule 2-2(a) requires an appraiser to “clearly and accurately set forth the appraisal in a manner that will not be misleading.” The communication of a misleading appraisal report is a violation under the 2024 USPAP, just as it would have been under previous versions of USPAP. The difference is now, instead of turning to USPAP for a definition of misleading, courts, state regulatory agencies, and other entities will apply their own individual definitions of this term.
Myth 3: An Inspection of the Subject Property by a Third Party is the Equivalent of a Personal Inspection by an Appraiser The ASB revised the definition of “personal inspection” to clarify that it is “the appraiser’s in-person observation of the subject property performed as part of the scope of work.” There are three important elements in this revised definition. First, a personal inspection is an inspection by an appraiser. An inspection of the property by another individual (e.g., home inspector, third-party data collector) does not qualify as a personal inspection under this definition. Second, a personal inspection is an “in-person observation”. Viewing photos, videos, or drone footage does not quality as a personal inspection. Finally, the inspection must be performed as part of the scope of work for the assignment. For example, if an appraiser had made a personal inspection of a property six months ago and is subsequently engaged to perform a new appraisal on the property, the appraiser cannot certify that they made a personal inspection of the property unless they inspected it again as part of the scope of work for the new assignment.
Edits were also made to Advisory Opinion 2, Inspection of Subject Property, to reflect the revised definition. AO-2 also clarifies that not all appraisal assignments require a personal inspection of the subject property as part of the scope of work.
Myth 4: Appraisers are not Required to Analyze Prior Non-Sale Transfers of the Subject Property Under previous editions of USPAP, an appraiser had been required by Standards Rule 1-5(b) to “analyze all sales of the subject property that occurred within the three (3) years prior to the effective date of the appraisal.” All sales are transfers, but not all transfers are sales. Some appraisers believed that, because the word “sales” was used in SR 1-5(b), they were not required to analyze other transfers of property that did not qualify as sales. For example, a deed in lieu of foreclosure is not a sale, but it is a transfer of property ownership. For 2024, the ASB revised the language in SR 1-5(b) to include the phrase “other transfers.” It now reads, “Analyze all sales and other transfers of the subject property that occurred within the three (3) years prior.” Appraisers who were interpreting the previous language of this requirement literally and were therefore not analyzing non-sale transfers of the subject property (e.g., deed in lieu of foreclosure, gift transfers within families, etc.) will need to ensure that they analyze such transfers in future assignments. The ASB also revised Advisory Opinion 1, Sale and Transfer History, to maintain consistency with the language in Standards Rule 1-5(b). As a reminder, in an Appraisal Report or a Restricted Appraisal Report, an appraiser is required to summarize the results of analyzing the sales and other transfers of the subject property. page 308
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Myth 5: The USPAP Update Course Cycle is the Same as the USPAP Publication Cycle Throughout most of the 1990s, the USPAP publication was revised annually. The length of this update cycle was lengthened to 18 months in the early 2000s and eventually became two years, beginning with the 2008 USPAP. When it was initially published, the 2020 USPAP was intended to be effective for two years but extended until December 31, 2023. The 2024 USPAP became effective on January 1, 2024, but has no ending effective date. It will remain in effect until the ASB replaces it with an updated version. This change to the USPAP publication cycle has no effect on the state-mandated requirement that an appraiser must complete the 7-hour USPAP Update Course every two years. The 2024 version of the 7-hour Update Course will be launched in late 2023, and another version of the course will be produced two years
hence, regardless of whether a new edition of USPAP has been released by the ASB. Many state appraisal regulatory agencies have established requirements that specify when the 7-hour USPAP Update Course must be taken within an appraiser’s renewal cycle. Appraisers are advised to understand and comply with those requirements. The Appraisal Standards Board has produced two “Summary of Actions” documents outlining the changes to USPAP for 2024. The “short” version (three pages) and the “detailed” version (58 pages) can be accessed at AppraisalFoundation.org. The new 2024-2025 7-hour USPAP Update Course became available in the fall of 2023. McKissock Learning is proud to be the only provider to offer The Appraisal Foundation’s official 7-hour National USPAP Update Course in three different formats—asynchronous (online), livestream (webinar), and live classroom delivery. Visit McKissock. com/appraisal/uspap/ for details. WRE
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Decoding Fannie Mae: A Deep Dive into Key Appraisal Resources by Bill Temple, Appraisal Compliance Strategist for Amrock, SRA, AI-RRS, ASA, MNAA, ACFE and Erica DelToro, Senior Business Strategist for Amrock
I
Appraisers today have access to an abundance of information right at their fingertips that was not available years ago.
n the dynamic landscape of real estate appraisals, staying informed about industry guidelines is paramount. This article serves as a comprehensive guide, directing appraisers to key Fannie Mae resources and examining three key pillars of Fannie Mae’s material: the Fannie Mae Selling Guide, the Fannie Mae Appraiser Updates, and the public-facing Fannie Mae Collateral Underwriter® (CU®) website. This piece will also discuss the upcoming new Uniform Appraisal Dataset (UAD), expected in 2025. Fannie Mae, Freddie Mac, and Federal Housing Administration (FHA) are in a constant state of change, and it is very important to keep the industry up to date. It is crucial for appraisers to stay informed of the most current guidelines and information to minimize risk. Appraisers who are not well informed may find themselves navigating challenges. Whether interacting with lenders, clients, state boards, or government agencies, the repercussions of outdated information can be significant.
Fannie Mae Selling Guide Fannie Mae’s ownership of the current appraisal forms underscores its vital role in shaping the foundation of appraisal processes for any company or Appraisal Bill Temple (pictured left) is the Appraisal Compliance Strategist at Amrock. With over four decades of experience as an appraiser, he holds licenses in multiple states and a territory. Bill is actively involved in various professional appraisal organizations and is committed to staying informed about industry standards and practices. His role as a subject matter expert and interest in exploring changing guidelines, rules, methods, and practices highlight his dedication to keeping current with developments in the appraisal profession. Erica Deltoro (pictured right) is a seasoned appraisal senior strategist at Amrock with 13 years of experience in real estate valuation. She holds a Project Management Certificate, further enhancing her skill set and contributing to her well-rounded professional profile. Known for her enthusiasm about industry advancements, Erica embraces each day as an opportunity to expand her knowledge and skill set.
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Management Company (AMC) that hires appraisers to provide appraisal services for lending purposes. The Fannie Mae Selling Guide is like the owner’s manual for the forms. It advises how to address certain appraisal situations and guides solving an appraisal problem. For example, a simple Google search using ‘Fannie Mae Selling Guide accessory units’ will pull information from the current Selling Guide on what is needed to appraise a property that may or may not have an accessory unit. As professionals in the field of real estate appraisals, appraisers’ time is precious, and the efficiency with which appraisers access information directly impacts the industry. A few minutes spent on a focused search can serve as a preemptive strike against potential issues, saving considerable time and energy in the long run.
Fannie Mae Appraiser Updates Fannie Mae has published an ‘Appraiser Update’ every quarter since 2017. The updates are generally a half dozen pages and contain articles about current appraisal topics and issues. One of the more interesting ones, for example, is the June 2023 issue. In it, there is an article about Fannie Mae using ‘image recognition technology in appraisal report reviews.’ This is used to identify inconsistencies in quality and condition ratings by comparing photos in the appraisal report with photos from other sources. Why is this important? It’s a widely recognized fact that Fannie Mae possesses the authority to issue repurchase page 34 8
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demands to lenders if they perceive the appraisal to be defective. One of the sticking points for a repurchase demand is the evaluation of the condition and quality ratings, which do not look appropriate or are inconsistent with the UAD definitions and explanations that are part of the appraisal report. Appraisers must be vigilant in keeping their software current and possess a deep comprehension of what condition and quality ratings should be employed in accordance with the latest guidelines.
Fannie Mae Collateral Underwriter® Many may not realize that there is a public-facing website for Fannie Mae’s CU® that includes links to information and training for anyone to utilize. Exploring the site and information can help an appraiser understand what happens to an appraisal when it is delivered to the Uniform Collateral Data Portal (UCDP). Currently, the only appraisal forms that are delivered through the automated review are the 1004 URAR and the 1073 Condominium Appraisal forms. Other forms, such as the 1025 2-4 Family Small Income and the 2055 Exterior Only report form, are not
scored in CU® as they are a UAD form. Fannie Mae’s website describes CU® as a web-based application that uses a database of over 50 million appraisals to help lenders manage collateral risk, underwriting, and quality control. CU® offers comparable sales data, aerial mapping, market trends, and local market conditions. It can be used to identify data discrepancies, analyze comparable sale selection and adjustments. Part of the training materials also explains that it requires a skilled reviewer or underwriter to use CU® in the manner it was designed for. Note that per Fannie Mae, no one using CU®—including an underwriter or a reviewer—should ever send an appraiser a screenshot or a copy of a CU® message showing CU® model sales or warning messages. This would violate the lender’s licensing agreement with Fannie Mae. For more information regarding CU®, the Collateral Underwriter® website houses links to videos and very informative documents.
Uniform Appraisal Dataset Forms Redesign Initiative By now, every appraiser is or should be aware that all current appraisal report
forms are being replaced by a newly redesigned form for release in 2025. It is described as a single, flexible, and dynamic report for any residential property type. Appraisers can navigate to the GSE’s websites to see the latest information. For example, appraisers can read the Partner Playbook, which provides information on “the why” behind the new forms and timelines or check out the UAD and Forms Redesign FAQs. As this evolving phase nears completion, staying informed in preparation for its release is worthwhile.
Final Thoughts Appraisers today have access to an abundance of information right at their fingertips that was not available years ago. A key to success in this field lies in the commitment to staying informed—whether it’s embracing the latest guidance from Fannie Mae, leveraging advanced tools and technology, or tapping into the insights shared by industry experts through informative videos and documents. As the industry continues to move forward, remember that staying current ensures that today’s appraisers remain at the forefront of excellence. WRE
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The Charges Against Us: A Look into Biases by Timothy C. Andersen, MAI , MSc
M
Despite what some of our friends in real estate brokerage would have us believe, it is not our job to rubber stamp their listing and contract prices.
any claiming and concluding appraisers are racist bigots is very much consistent in the news today. However, it has become clear that, while there are some appraisers who are racist bigots, this blanket accusation has no basis in fact. Those who criticize us are doing so out of their own racially and politically motivated agendas. Unfortunately, because there has been no organized and concentrated pushback from any sector of the real estate appraisal industry, the scenario of our opponents, as false as it is, is gaining traction. Therefore, the appraisal industry must begin to push back. One of the fastest and most visible ways to begin this process of bringing the truth to the public is to require appraisers to understand what bias is. This means appraisers must understand bias in all its forms, not merely the one pernicious stain of racial bias. Our opponents have carefully framed their questions to bring to the forefront any potential racial biases on the part of appraisers and real estate appraisals in general. Appraisers must, therefore, frame their response within the matrix of the avoidance of any and all types of biases, not merely racial biases. In addition, real estate appraisal must rid itself of the language and any practices that suggest bias in the appraisal process. The Cognitive Bias Codex claims
Timothy C. Andersen, MAI, MSc, USPAP instructor and CEO of TheAppraisersAdvocate. com, is the instructor of How to Raise Appraisal Quality and Minimize Risk (7 Hours CE) at OREPEducation.org (OREP Members enjoy the course at no cost). Andersen has been in real estate and consulting since 1975 and is an AQB-certified USPAP instructor, USPAP consultant, author, instructor and expert witness. Andersen can be reached at tim@theappraisersadvocate.com.
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there are over 180 types of biases in which any researcher can engage. For simplicity’s sake, this article touches on three such biases: anchoring bias, selection bias, and confirmation bias. Again, these are not the only biases an appraiser can engage in. However, they are common biases. Once appraisers understand what they are, it may become possible to avoid them. In a recent Google search, I entered the term “bias in real estate appraisals” to see what the results would yield. There were 6.01 million hits in less than one-half of one second. Therefore, it’s clear that “bias in real estate appraisal” is a hot topic as of this article. It was interesting, however, to note that on the first three pages of the search results, almost every search result had to do with racial bias. This is potentially biased since my search was merely for bias in real estate appraisals, not racial bias in real estate appraisals. More on this later. So, while racial bias is a hot topic today, in this article, I will present information on other types of data that can pollute a credible real estate appraisal. This is not to say racial bias is trivial or unimportant. Simply, these are not true. However, in addition to racial bias, appraisers need to be aware of other biases. Unfortunately, it is far too easy to engage in them. This engagement is typically a function not of desire or intent. Instead, it is an engagement rooted in an innocent ignorance of the type of biases there are, thus the types of biases in which appraisers can engage. This innocent ignorance aside, however, appraisers must understand that bias, of
any type, at any time, for any reason, is an unacceptable part of a credible real estate appraisal and a non-misleading real estate appraisal report. One type of bias in which real estate appraisers regularly engage is known as anchoring bias, or simply anchoring. According to The Decision Lab, anchoring bias is nothing more than a “…cognitive bias that causes us to rely too heavily on the first piece of information we are given about a topic.” Note this definition does not condemn someone for the mere act of anchoring but rather states, that condemnation is oriented to someone who relies too heavily on a specific piece of information. An example of this in real estate appraisal is the purchase and sale contract. When a property goes under contract, that is an excellent sign of what the buyer and seller conclude the property is worth. However, in a larger sense, the sense with which an appraiser
must consider it, it is nothing more than another data point to be analyzed and then weighted appropriately in the appraiser’s final value opinion. Despite what some highly placed authorities in the GSEs mistakenly would have us believe, the contract price, in and of itself, is not indicative of a property’s market value. This purchase-and-sale price is nothing more than one sign of what one buyer is willing to pay and what one seller is willing to accept. In and of itself, it is not market value. Part of the problem we appraisers have when it comes to anchoring bias is that we look at the purchase and sale contract at an inopportune time in the appraisal process. If you study USPAP, the ethical requirement to analyze any recent sales of the subject, any current listings of the subject, and any contract for sale and purchase encumbering the subject, comes at the end of the appraisal process, not the beginning. If appraisers were to analyze the purchase
and sale contract toward the end of the appraisal process, it would not be possible to anchor to it. Thus, It would not be possible to engage in anchoring bias. Therefore, the easiest way to avoid anchoring bias is to view the purchase and sale contract on the subject at the proper time in the appraisal process. This is toward the end of that process. This means you do not study the purchase and sale contract until after you have formed a preliminary value conclusion based on all the other available market data. Then, the purchase & sale contract becomes a data point to analyze, not a market value to hit. Since the appraiser already has formed a preliminary value opinion, the appraiser is also able to figure out if the market supports the contract price. If the market supports the contract price, then give the purchase and sale contract on the subject the weight it deserves in the final value page 40 8
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Industry NEWS Virginia Bill Seeks to Limit Liability In a significant development for Virginia real estate appraisers, House Bill 53 has been introduced in the 2024 Virginia General Assembly. The bill proposes a statute of limitations for damages against real estate appraisers and appraisal management companies, limiting the timeframe for filing such actions to five years from the date of alleged malpractice, negligence, error, mistake, omission, or breach. The bill exempts actions alleging fraud and proceedings initiated by the Real Estate Appraiser Board from the five-year limitation. It also emphasizes that any action for damages or relief related to malpractice, negligence, or errors in appraisals that were performed before July 1, 2024, must be filed within two years of the occurrence, regardless of when it is discovered. Some appraisers in Virginia believe that the law does not go far enough, arguing that it should be consistent with state board regulations. The Department of Professional and Occupational Regulation (DPOR) maintains a three-year cap on filing complaints against any appraiser. Virginia appraisers have also raised questions about the liability of appraisers and appraisal management companies. Given the existing review processes, automated verifications, and checks conducted by clients, lenders, appraisal management companies, and government-sponsored enterprises (GSEs), some appraisers argue that their liability should be limited strictly to the amount of the fee paid. House Bill 53 was introduced into the Virginia General Assembly on January 10th and is expected to be referred to a committee. The Virginia Coalition of Appraisal Professionals (VaCAP) encourages appraisers to engage with their representatives, sharing their perspectives on the proposed legislation. WRE
Home Price Appreciation Remains Strong The AEI Housing Center’s November 2023 Home Price Appreciation (HPA) Index reveals a Yearover-Year (YoY) HPA of 5.6%, up from the
38 38 Working RE Winter/Spring 2024
previous month but down from a year ago. The analysis indicates a bottoming out of YoY HPA in April, with an expected continued rise due to well-qualified buyers and historically tight supply. Notable variations exist among the 60 largest metros, with Grand Rapids, Michigan leading at 13.7% and Austin, Texas experiencing a -3.8% decline. The Midwest continues to lead in HPA gains, while low unemployment rates and low foreclosures contribute to HPA exceeding inflation. Metros in the Midwest and Northeast showed faster HPA rates, while those in the West and South lagged. AEI experts emphasize the impact of supply-demand imbalances. Housing inventory, down 0.9% from October, appears to have plateaued, signaling low levels heading into the New Year. WRE
Supporters argue that the legislation addresses systemic disparities in appraisals, particularly affecting Black and Latino families. They believe the bill’s protections will contribute to lowering the racial wealth gap in the state. However, Republican critics express concerns about unintended consequences, suggesting that the steep fines may discourage appraisers from working in the neighborhoods the bill aims to aid. They argue that the potential uncertainty and risk of unknowing bias could deter appraisers from serving communities that have historically faced discrimination. The bill’s passage in the Senate sets the stage for further consideration in the Assembly, where it must advance through committees before reaching a floor vote. It remains to be seen if the bill will survive the legislative process and become law. WRE
NJ Senate Approves Penalties for Discriminatory Appraisals New Jersey (NJ) Senate lawmakers approved a bill in a narrow 22-11 vote aimed at penalizing real estate appraisers who undervalue homes based on protected characteristics, such as race, sex, or gender. The bill, which needed 21 yes votes to clear the Senate, imposes fines on appraisers for discriminatory practices, with penalties escalating to $10,000 for a first offense, $25,000 for a second, and $50,000 for a third. Violators would also be required to make restitution equal to the cost of the discriminatory appraisal and attend an anti-bias seminar. A second offense results in a 30-day suspension of appraisal licenses, certificates, or registrations, while a third offense leads to full revocation.
2024 Appraiser Survey: State of the Industry Calling all real estate appraisers! Shape the future of your profession by participating in our 2024 Appraiser State of the Industry Survey. Share insights on your experience, specialization, and industry challenges. Your input is vital in understanding the current state of the appraisal landscape. Don’t miss the chance to contribute to the conversation and be a part of shaping the future of real estate appraising. Participation is anonymous and results will be shared freely with all appraisers. Take the two-minute survey now and make your voice count at: WorkingRE.com/2024survey. Thanks for your participation. WRE
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conclusion. If the market does not support the contract price, then give it the proper weight it merits in the final value conclusion. In any narrative of a tender, it is perfectly acceptable to explain to the client and intended user why the market does or does not support the purchase and sale contract. Despite what some of our friends in real estate brokerage would have us believe, it is not our job to rubber stamp their listing and contract prices. Appraisers are not direct participants in the mortgage lending process. It’s our job to figure out if the purchase and sale contract on a property is one the market does or does not support. If we are merely rubber-stamping the broker’s purchase and sale contract, we have abandoned our ethical responsibilities to be independent, impartial, and objective. This abandonment, therefore, makes our value opinion impotent. In turn, this impotence gives lenders reason to go to AVMs, evaluations, and/or appraisal waivers because they will see no need for us and what we do. Another bias in which it is all too easy to engage is known as selection bias. Selection bias, according to Wikipedia, is “…the bias introduced by the selection of individuals, groups, or data for analysis in such a way that proper randomization is not achieved, thereby failing to ensure that the sample obtained is representative of the population intended to be analyzed.” One example of selection bias in real estate appraisal is the appraiser’s dependence on MLS data for rentals, sales, and statistical analysis of the data, etc. Without a doubt, the multiple listing service is probably the greatest repository of real estate listing and sales data available to the contemporary real estate appraiser. Thus, the appraiser must be able to use this data source. Nevertheless, it is not the only source for data out there. Therefore, the appraiser who is 40 Working RE Winter/Spring 2024
ready, willing, and able to employ other data sources is the appraiser who is not engaging in selection bias. It is common to hear appraisers disparage such websites as Zillow®, Open Door®, Redfin®, and so forth. This article is not to champion their use. Rather, it is to clarify that these sources of data are available to the appraiser who is willing to research data that did not necessarily pass through a multiple listing service. Some appraisers claim these data sources are unreliable. When it comes to supporting a property’s market value, this may be true. However, when it comes to providing data on properties that are available for sale, or properties that have recently sold, especially if they did not go through the multiple listing service, sites such as these supply a service to the appraiser. Then, as with any data the appraiser receives from any source, it is up to the appraiser to determine how accurate and reliable these data sources are. If the appraiser, via his or her analysis of the data, concludes they are not reliable, then the appraiser rejects them. On the other hand, after proper analysis, if the appraiser decides they are accurate and reliable, the appraiser chooses to use them. Then, as with any other data, the appraiser also chooses the proper weight to give them in the final value opinion. Therefore, using other data sources in addition to the multiple listing service is the easiest way to avoid engaging in selection bias. Another common type of bias in real estate appraisal is confirmation bias. Confirmation bias is simply looking for information that supports your thesis, while failing to look for information that may disprove your thesis. A slightly more academic description from Psychology Today shows that confirmation bias “…occurs from the direct influence of desire on beliefs. When people would like a certain idea or concept to be true, they end up believing
it to be true. They are motivated by wishful thinking. This error leads the individual to stop gathering information when the evidence gathered so far confirms the views or prejudices one would like to be true.” True, confirmation bias and selection bias are related. But this relationship does not mean the two are synonymous. They are clearly separate biases in which appraisers can engage all too easily. Unfortunately, there are those in the mortgage lending industry who, daily, actively advocate that we engage in confirmation bias. The evidence of this is that they provide us with “comparable sales,” which, after proper analysis, prove not to be the least little bit comparable. Then, when we reject them for all the logical and proper reasons, somebody in the process (the broker whose deal we showed to be bogus?) urges the borrower to file for a reconsideration of value (ROV). The claim, without any basis in fact, is that their sales are more indicative of the property’s value than are our sales. Typically, they are more indicative of the contract price. Therefore, what they are asking us to do is confirm their bias. Ethically, this is something we must avoid. Anchoring bias, selection bias, and confirmation bias are all biases appraisers can avoid. By avoiding them we take ammunition away from those who attack us. By understanding what these biases are, thus avoiding them, we accrue ammunition to ourselves to demonstrate that, indeed, we as appraisers are developing and communicating our “… analysis, opinions, and conclusions…in a manner that is meaningful and not misleading…” and that, as well, we accept our ethical “…responsibility to protect the overall public trust…” by promoting and maintaining “… a high level of public trust in appraisal practice…” by following the appraisal development and reporting requirements in USPAP. WRE
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