Something About a Forest and Trees LELAND TRICE, p28
will your past
u spa p leave your
ego behind p40
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* LIVEVALMAG.COM | 3
table of contents
co nten ts
| contents |
Something About a Forest and Trees Scope Creep: What lax standards caused, unreasonable standards will not cure.
LELAN D T RIC E, SRA, F RIC S
Now that Warren Buffett would have difficulty getting a mortgage, every data point must be perfect and more data points are added every day. Unfortunately, I am not convinced this makes for better appraisals. I am convinced it makes for very disgruntled and disaffected appraisers.
LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM
your monthly valuation publication
Publisher’s Note 8
Staiger on Stats 48
Voices of Valuation 49
Inside This Month
Do Short Sales Save Lenders Money?
Occupancy and attitude can make a
Appraisal is still an art, even with the
science of regression.
michael sklarz, ph . d.
Steve fergu son
patric k callison, C RA
The Law of Real Estate Appraisal
Love is Efficient!
Has real estate appraisal practice outgrown
“Relationships” from a different perspective.
R o g er Staiger III
Dennis A. scardilli, MA I
Who Needs Prior Acts Coverage?
State Appraiser Coalitions
Giving up prior acts coverage to save money
Leave your ego at the door and unite with
is risky business.
b etsy A. magnu son
ju lie friess
Geographic Competency vs. Competency
The Next Generation of AVMs
Competency is demanded, geographic or
sources beyond public records.
joe em ison
Jo rdan petkovsk i
For What It’s Worth
kri stine hu gh es
AVMs are more accurate when they use data
Something About a Forest and Trees
Something About a Forest and Trees
Scope Creep: What lax standards caused, unreasonable standards will not cure. leland trice, SRA, F RIC S
LELAND TRICE, p28
will your past
EGO BEHIND p40
* LIVEVALMAG.COM | 5
THIS WAY IN.....
Scope of work, as understood by USPAP, puts the onus on the appraiser to assure that it is “sufficient” to produce a credible result. USPAP states,
providing much more research and analysis
than is necessary to develop a credible result.
Lenders and appraisal management companies have added layer after layer of additional requirements. Enter “scope creep.”
I’m not sure who coined the phrase “scope creep,” but it has become a part of the
appraiser’s vocabulary over the past several
years. Week after week, new orders come into
broad flexibility and significant responsibility
A Letter from the Publisher
don’t think so. Nowadays, most appraisers are
in determining the appropriate scope of work.” It sounds like appraisers are in the driver’s
appraisers’ offices with longer and longer lists
of requirements. USPAP clearly states that scope of work is acceptable when it meets or exceeds “the expectations of parties who are regularly
seat when discussing scope of work with
intended users for similar assignments.”
their clients. Is that what really happens in
the typical mortgage appraisal assignment? I
Providing the additional details to meet
“expectations” would be fine if appraisers were compensated for the additional time it takes. Leland Trice addresses scope creep in his
meet the team
feature article this month. Along with proposed solutions, Lee shares a list of “war stories” that 1
exemplify inane requirements that don’t really contribute to a credible result. Unfortunately, many of our readers can join in chorus with
1. Founder | Aman Makkar
these war stories. Lee argues that lax standards
2. Publisher | Ernie Durbin, SRA, CRP 3. Editor-in-Chief | Emily Vannucci
4. Copy Editor | Kersten Wehde
the report and not the minute details. It should
6. National Sales | David Peck
all be about the soundness and reliability of the 3
Printer | Ovid Bell Press Advertising Information | P : 858.832.8900 / E : email@example.com
have some war stories to share yourself. Feel
E : firstname.lastname@example.org / W : LiveValMag.com 4
free to do so on our webpage, livevalmag.com. Be sure to redact specific client and property information!
© 2011 LiveValuation Magazine.
After reading our feature article, you might
Subscription and Editorial | P : 858.217.5332
but unreasonable standards will not get us out. We have to focus on the overall credibility of
5. Creative Director | Traci Knight
All rights reserved. LiveValuation Magazine is a California limited liability company and is the publisher of LiveValuation Magazine. Reproductions or distribution of any materials obtained in the publication without written permission is expressly prohibited. The views, claims and opinions expressed in article and advertisement herein are not necessarily those of LiveValuation Magazine, its employees, agents or directors. This publication and any references to products or services are provided “as is” without any expressed or implied warranty or term of any kind. While effort is made to ensure accuracy in the content of the information presented herein, LiveValuation Magazine is not responsible for any errors, misprints, or misinformation. Any legal information contained herein is not to be construed as legal advice and is provided for entertainment or educational purposes only. Postmaster : Please send address changes to LiveValuation Magazine, 16745 W. Bernardo Drive Suite 450 San Diego, CA 92127
may have gotten us into the real estate mess,
On a personal note, I would like to tell my wife 5
and valentine of 30-plus years: “Velina, you are my efficiency!” Sweetheart, you’ll have to read Roger Staiger’s article to understand this. 6
| Publisher |
Ernie Durbin, SRA, CRP
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Patrick Callison, CRA
Mr. Callison has been an appraiser since 1977. Currently he is the Chief Appraiser for Collateral Intelligence and performs regulatory research and data control functions as well as monitoring AVM accuracy and applications. His career history includes Owner and Chief Appraiser of the appraisal firm Callison and Associates and 12 years as a Senior Appraiser and researcher for several government agencies. He attended Portland State University and holds an M.S. degree. co-intel.com
Joe began his career by building the first Windows interface for the Apple iPod and winning the 1996 Weird Software Contest. Over the past decade, Joe transitioned from development to systems design and data analysis, creating the first BuildFax engines in 2003, the original architecture in 2007 and designing the Pragmatic Extract-Transform-and-Load (PETL) architecture that makes the current national footprint possible. Joe graduated with degrees in english and mathematics from Williams College, and has a juris doctor degree from Yale Law School. email@example.com 877.600.2329 x444
Steve Ferguson began his career in real estate as an appraiser for 20 years, starting in Cincinnati, Ohio. In 2004 he closed the appraisal chapter in his career and continued his formal education in economics where he began applying statistical tools to the field of real estate. He currently is the lead Realtor working for a medium-size firm in Indianapolis, IN where he lives with his wife and three children. firstname.lastname@example.org
Julie FriessJohnson began appraising in 1988 in Long Island, NY. She is currently the managing director of the Northern Arizona franchise for IRR Residential. Julie is Vice President of the Coalition of Arizona Appraisers and actively involved in the appraisal industry and legislation. Julie has been a consultant to the FBI and the Arizona Department of Financial Institutions.
Contr utors 8
Fred Holtsberry has over 20 years experience in commercial banking and appraisal services. He is a Certified Residential Real Estate Appraiser and has evaluated over 3,500 homes in the central Ohio region over the past 13 years. He is the owner of a small appraisal company in central Ohio.
Kristine Hughes earned her bachelor’s degree in business management from Robert Morris University. She has worked in the appraisal industry since 1990. Kristine began her career at Lender Service Inc. as a Risk Manager. In 1998, she took a position at Metro-West as Vice President of Operations. She currently serves as Chief Collateral Officer for TSI Appraisal Services®. Kristine is a member of the Appraisal Institute and is a licensed appraiser in Michigan and Nevada.
Betsy A. Magnuson
Betsy A. Magnuson is the President of the Herbert H. Landy Insurance Agency and has been involved in Errors & Omissions Insurance for more than 25 years. email@example.com | 781.292.5408
Jordan Petkovski has worked in the residential appraisal industry for most of his career. Currently, he is the Director of Staff Appraisal Operations at TSI Appraisal Services®, a wholly owned subsidiary of Title Source®. His primary focus is the successful development of operational processes based upon a greater understanding of the industry as a whole. firstname.lastname@example.org 248.312.2880
dennis A. scardilli, Esq*., MAI
Dennis Scardilli is an attorney, admitted to practice law only in New Jersey and Pennsylvania, MAI, NJ State Certified General Real Estate Appraiser, AQB Certified USPAP Instructor, NJ Professional Planner (PP), NJ Certified Tax Assessor (CTA) and NJ Civil Court R.1:40 Qualified Mediator. He has served, in various roles, at all levels of government and in the private sector. * Admitted to Practice Only in NJ & PA
Michael Sklarz, Ph.D
Dr. Sklarz, President of Collateral Analytics, has more than 25 years of professional experience in real estate research, analysis and real estate technology product development in the United States. Dr. Sklarz holds a B.S. in engineering mathematics from Columbia University and an M.S. and Ph. D. in ocean engineering from the University of Hawaii. collateralanalytics.com
ROGER STAIGER III
Roger Staiger III is Managing Director for Stage Capital, LLC. His areas of expertise are commercial and residential real estate portfolio investing, corporate business; and strategic planning, forecasting, valuation, financial modeling, asset repositioning and risk mitigation through financial hedging for physical assets. He holds positions at Johns Hopkins, Georgetown, and Loyola universities. email@example.com
Leland Trice, SRA, FRICS
Leland “Lee” Trice holds an economics degree from the University of Maryland and has been an appraiser since 1985. Lee is Owner of The Trice Group, a regional residential and commercial firm in the Mid Atlantic. He is also a Partner in LiveValuation, a technology company developing solutions for the valuation industry. Lee is active with the Appraisal Institute, RICS and the Coastal Association of Realtors. FEBRUARY 2011
* LIVEVALMAG.COM | 9
STAIGER on STATs Industry’s latest stats
Roger Staiger III
Bad! That was my one-word response at Christmas dinner when the family asked my thoughts on housing. Sure, equities rose and there is some talk of a 2011 bull, but realistically, are equities the best benchmark for
financial health? Equities are the smallest of the three main asset
classes, fixed income, real estate, and equity, and do not represent
the majority of household wealth in
America. Besides, equity performance lags real estate recoveries, e.g., Great
Depression (it took 25 years to recover from the fall). So, after the family
settled and demanded holiday cheer, I suggested I begin our discussion
with fact rather than my conjecture
(which was discounted, only because it apparently was not “merry”).
One of the main drivers for housing pricing is affordability. Given the overleveraged American culture,
this means interest rates are critical for
$200,000. For a 30-year FRM at today’s
Now, let us consider that rates increase
Rate Mortgage (FRM), 30-year conforming
(note: Points are ignored for simplicity).
to Freddie Mac, i.e., 8.93%. At this rate
housing to remain affordable. The Fixed rate for November 2010 according to
Freddie Mac was 4.30% with 0.80 point.
This is basically a 40-year low. Why is that important? Based on history, interest rates
can only go one direction: UP! This makes the payment on housing increase and makes housing less affordable.
Since 1972, the average 30-year fixed rate mortgage rate has been 8.93% and the
median 8.50%. In simple statistics, the
current rate is less than half the historic
average rate. In historic terms, the rate on
housing debt is FREE, therefore the cost of owning a home can only increase.
Let us analyze the house payment for
the median priced home, approximately
rate of 4.30%, the payment is $989.74 When considering the average
American household that in 2009 earned
approximately $50,000 and pays roughly an all-in tax rate of 30%, an 80% loan on
the typical $200,000 home at today’s rate of 4.30%, will represent 34% of a household’s net income. That, of course, is at today’s
prevailing rates. Now consider that given today’s unemployment, 9.8%, a freeze
on federal pay raises for two years, and
efficiency in industry replacing hiring, a
reasonable assumption is that household income will remain unchanged in the
short- to medium-term. Thus, exposing Americans even more to interest rate
increases which would most likely occur without a corresponding wage growth increase.
to the 40-year historic average according the payment increased by $609.44 to
$1,599.18. Now, housing for the same priced home represents 54.83% of
household net income. Further, if rates escalate to 1 standard deviation above
the mean, historically, the payment for a
$200,000 home is $2,028.02. This represents 69.53% of household net income. Clearly this would require a drastic reduction
in housing prices to compensate for the
100% rise in housing cost. When looking
at the history of interest rates from 1972 to present, 95% of all the values are greater than current rates. The Fed, by keeping
rates artificially low, has not helped the
housing industry and America, but rather
forestalled our day of reckoning. Housing Armageddon is far from over! >>
* LIVEVALMAG.COM | 11
A month-over-month analysis of November from October does not support a recovery. Nationally, housing reduced 1.32% according to the composite-20, Case-Shiller. This translates into a net loss of asset wealth (value) for the
U.S. residential market of approximately $264.0bn. With the current administrationâ€™s newly announced stimulus
part deux of $200.0bn with the Bush-era tax cut extension, Americans remain $64.0bn poorer. $64.0bn thus translates
to about $390/tax-paying person in the United States. Once again, the administrationâ€™s holiday cheer was a nicely wrapped invoice.
What is also telling about the month-over-month data is the performance of the DC-MSA relative to the nation. Once again, DC outperforms the rest of the nation by a factor of six to one. Further, the commercial performance was
actually positive month-over-month. Given the 16-month lag of commercial from residential, this is overhang from
the 2008/â€™09 stimuli and will be short-lived, as was the bear bump in residential. 12
(YoY) analysis ending
November 2010 marks an important event for
the national composite
index: The YoY is again
negative, i.e., 0.80%. The
DC-MSA posted a strong YoY gain of 3.65%, again demonstrating that the true benefactor of the
stimuli is not the nation but rather the power elite situated in the
DC-MSA. The national composite-20 index
remains only 4.3% above its low point for this
recession. The current
direction, again, supports the idea that housing
has not bottomed out
and that the stimuli have only prolonged the pain, deepened the void, and
forestalled the recovery.
The Case-Shiller futures market continues to push the bottom
further to the right on the time
scale. The capital markets have priced in a new bottom of
early 2012 with the reduction from November 2010â€™s value being approximately 5.00%.
This contradicts this authorâ€™s analysis and recent Financial Times article stating at least another 10% reduction in
housing pricing before the
true bottom is achieved. This author contends that as a
general statement, investment in physical real estate is
akin to catching a falling
knife. The prudent investor, understanding the physical
and financial side of real estate, will look to the financial and
synthetic real estate for profits in 2011. Sell with the Bears, Buy with the Bulls! 6 FEBRUARY 2011
* LIVEVALMAG.COM | 13
hort sales are a better alternative to foreclosure and REOs because they save legal and administrative costs necessary to foreclose; get someone out of a home; and then sell it, often after some repairs. But do they also result in a higher price? Most brokers suggest that occupied homes will sell at
higher prices than empty homes, especially if they are nicely furnished. Occupied homes are also more likely to be better
maintained, with grass trimmed, plants watered, swimming pools filled with clear water and broken windows repaired. Short sales are also likely to avoid the kind of destruction and desecration of properties committed by resentful
subprime borrowers. Our initial thought was that short
sales would not be as deeply discounted as REOs. Knowing in advance that, even if short sales observed the same kind of discount as REOs, most lenders would be ahead on
transaction and carrying costs and most borrowers would
feel more in control of their destiny, we decided to examine a host of metro markets and compare the various prices. Collateral Analytics used sales data from the past
several years through the present to track median home prices on a per-square-foot-of-living-area
Do Short Sales Save Lenders Money? Occupancy and attitude can make a difference. Mic hael S k l a r z PH. D. / Patrick Calliso n, CR A
basis for non-distressed residential single-family
homes and compared these to REO sales and short
sales, where the seller was engaged in the marketing
and sale transaction. The result of this analysis for a
number of major U.S. counties is as follows:
In markets that have been hit hard by foreclosures and
where many homes are underwater by a significant margin, i.e., Phoenix and Las Vegas, we find little difference in price
between REO sales and short sales. In other markets, where there are many healthier submarkets and the underwater
gap is less, we find a significant price advantage for short
sales, i.e., Palm Beach, FL; and Chicago. We also find some markets that have been hit hard by unemployment. like
Detroit, where short sales are significantly higher than REO sales. In these markets REO sales prices are much lower than short sale prices.
Another factor that could play into the difference between
short sale and REO prices could be the change in attitudes about default. Ruthless or strategic default is defined as
borrowers walking away from negative equity situations even when they can pay. Normally borrowers will not
default unless they are significantly underwater because of 14
the effects on their credit
rating, the inability to buy
a home and the loss of put options in the future as
well as the stigma attached to being foreclosed upon. But in a paper by Guiso,
Los Angeles County CA Single-Family Median Sold Price Per Living Area
Sapienza and Zingales
(2009) from the European University Institute of
Economics1, the authors
surveyed those who
were underwater on their
mortgages and found that
if you knew of others who
had strategically defaulted, you were more likely to
default. That is, the more people in your situation
who walked away when they could have paid
their mortgages, the less
social stigma attached to the default. Taking the
Maricopa County AZ Single-Family Median Sold Price Per Living Area
implications of this study
further, if borrowers knew of neighbors who had
a short sale, they may be more willing to try and avoid damage to credit ratings.
It is a sad but important fact to consider, but in communities where
economic conditions may
propel borrowers through the foreclosure process so
Palm Beach County FL Single-Family Median Sold Price Per Living Area
1 Working papers # ECO2009/27
* LIVEVALMAG.COM | 15
it may leave a volume
of vacant homes as REO
that may take months or
even years to be absorbed by the shrunken faction of qualified buyers.
Clearly, any lender will suffer less by accepting reasonable terms for a short sale rather than
allow the borrower to give up and, in a moment of
anger or retaliation, strip
or otherwise damage
Clark County NV Single-Family Median Sold Price Per Living Area
the home as they leave. Additionally, the short
sale generally does not
leave the home vacant for any significant amount of time, mitigating
Another point to
appraisers is our
Another point to consider
direct our client’s
our responsibility to direct
consider as residential
as residential appraisers is
our client’s attention to
the subject property
subject property value.
collected within the
within the subject’s
known to impact
known to impact the
value. Using data
Using data collected
subject’s market area, we may
Wayne County MI Single-Family Median Sold Price Per Living Area
market area, we may
accurately infer that if short sales and non-
that if short sales
are occurring to a greater
extent than the REO,
occurring to a greater
it is more likely the
it is more likely
well to prospective
neighborhood will present
extent than the REO,
the neighborhood will present well to prospective purchasers.
Cook County IL Single-Family Median Sold Price Per Living Area
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CA License #0764257
up front day is about “love,” real or departed.
“What is love?” For how
can we know if we are in love without being able
to define love?! Is love the
state of euphoria when our thoughts become singular
of a betrothed or when our parlance becomes garbled
from lack of clear thought?
we are happier. When we have fallen from love, we are sadder. Quantitatively, love
is the balance of return
(feelings), risk (personality
extremes), and correlation
(how two assets/people fit together in a relationship/ portfolio). Using portfolio theory to quantify love,
it can be considered the positive or negative (in the case of hate) marginal change in a person’s
“love” are more efficient than apart. Therefore love is all
have found love, as we will Efficiency, as defined by
Harry Markowitz, is any
point in a portfolio where return is maximized for any given level of risk.
Quantitatively, efficiency is
measured by the coefficient of variation (CV), which is the risk/return ratio. (Note: Portfolio risk is
quantified differently than
traditional methods of risk
quantification as it accounts for the correlation of assets, i.e., risk is reduced when
negatively correlated assets
are grouped within a single
portfolio.) Therefore, for the chosen personality extremes (risk) that
relationship. Regardless of which camp one falls within, the
one has fallen in “love” with, the return
the umpteenth time. For others, the day marks the end
persons coming together in
Valentine’s, when it is socially unpalatable to end a romantic
real estate parlance, the two
of the breakup blackout period between Thanksgiving and
greater than the twos. In
have achieved efficiency.
When we are in love,
feelings for the first time – or reconfirm our feelings for
measured by efficiency,
and quantification of love.
when it has been achieved.
a marginal happiness, as
We will know when we
quantify love, we know
many it is the time we hold others close and profess our
assets) where the one has
build greater monuments,
For when we define and
t’s February and Valentine’s is upon us. For
from two (individual
about finding efficiency!
let us focus on the definition
Roger Sta i g er I I I
one (two-asset portfolio)
Rather than author more
poems, sing more songs or
“Relationships” from a different perspective.
single person’s life. Further, love is the creation of
This begs the question,
Love is Efficient!
inclusion of another in a
maximized to be efficient.
Each point along the efficient
whom, when combined into
are equivalent to the goals of
of efficiency, i.e., maximum
person portfolio, provides a
For a person’s goals in love a portfolio manager, i.e., to maximize efficiency.
To extract this concept
further, Markowitz’s theory supports that there is not
a single soul mate for each
individual but rather many
frontier represents a point
return for any given level of
higher return than the current
risk. Therefore, there is no
relationship/portfolio. If the
single, optimally efficient
couple is euphoric but not
point, i.e., single soul mate,
efficient, this author argues
but rather a plethora of soul
they have found lust and not
mates, all having different
love, i.e., efficiency.
risk levels (personality extremes).
So, this February 14, when
found on the efficient frontier.
When one meets a person
your roses, chocolates,
personality extremes and
intention, provided lifetime
soul mates, all of whom are For all individuals whose
happiness cause the portfolio (couple) to be on the efficient frontier is therefore “in love”
as they are efficient. (This will be expanded upon in another article.)
Now that we have defined love as “efficiency” and
learned to quantify love
using efficiency measures,
i.e., coefficient of variation
(CV), which is risk/return,
we must focus on the visual
display. To truly understand a concept, I am a firm
believer that a person must
and courts them, the
is drawn graphically and
titled the “efficient frontier.”
nt F e i ic
as to whisper, “I love you!”
When one meets a
that makes your heart skip,
them, the intention,
Rather, embrace the one
the given level of risk. It
is at this point where the
look into their eyes, and
marginal contribution to happiness is maximized
understanding of portfolio
single person, and the two-
theory and love, tell them,
asset portfolio is efficient.
“You are my efficiency!”
Individuals that do not “lie” upon the efficient frontier
Note of warning to readers: I
level of risk, a greater return
very well! Good luck!!! 6
are inefficient; for the same
the efficient frontier, as
goal, is to find the individual with whom efficiency is achieved, i.e., maximize return for the given level of risk. It is at this point where the marginal contribution to happiness is maximized from being
to be with an individual and
did not fall upon
commitment is the
tried this once; it did not go
(happiness) can be achieved.
heart, and complete financial
from being a single asset, i.e.,
characteristics of the
person and courts
with the full depth of your
a single asset, i.e.,
rontier F t n cie
efficiency, i.e., layman’s love,
i.e., maximize return for
form a relationship and the
all learned from Markowitz,
you embrace, do not be so
whom efficiency is achieved,
the shape of a heart with an
arrow. However, as we have
your affection, and after
to find the individual with
As an example, were a person
jewels, or other token of
commitment is the goal, is
be able to draw it. Cupid
and Hallmark draw love in
you arrive home with
single person, and the two-asset portfolio is efficient. Individuals that do not “lie” upon the efficient frontier
the black dot,
are inefficient; for
is doomed to
risk, a greater return
the relationship failure. Efficiency/love is
the same level of (happiness) can be
not achieved because for
the chosen level of risk
(personality extreme) there is another individual with
* LIVEVALMAG.COM | 19
up front I realize that these are
of a claim, subject to your
and with the downturn
tough economic times, of the market, many
real estate appraisers are However, one of the
Let’s demonstrate how a claims-made policy works.
decisions you can make
John Smith purchased
& Omissions Insurance
policy February 1, 2000.
struggling to survive.
most important business is to continue your Errors coverage. No one ever
thinks they are going to have a claim. However, as long as homeowners continue to struggle to
meet mortgage payments
and fall short of refinance requirements due to
lowered property values,
real estate appraisals will be scrutinized and questioned. Many real estate appraisers
assume that if they paid for
Who Needs Prior Acts Coverage? Giving up prior acts coverage to save money is risky business.
bet sy A . m a g n u s o n
on’t be fooled by marketing gibberish implying that you don’t need to maintain your prior acts coverage in your Real Estate Errors & Omissions Insurance policy. YOU NEED IT. 20
policy terms, conditions and
an insurance policy, they
have coverage under that
a real estate appraiser
He renewed his policy
each year by February 1
to avoid having a lapse in his coverage. His current
policy will have a prior acts date of February 1, 2000.
Mr. Smith’s policy would respond to a claim that is
reported during his current policy period for work
he performed between
that date and February 1,
2011, subject to the terms,
conditions and exclusions of the policy form.
policy forever. This is not
claims-made policies work.
insurance companies before
true and this is not how
If your policy is written on a claims-made basis
(most professional liability policies are), your prior
acts date is typically the
date of the first policy you purchased. Some carriers will offer what is called
“full prior acts.” This means that there is no specific date in the past by which your
If Mr. Smith were to switch his current policy expired February 1, 2011, his new
carrier should pick up his
prior acts coverage back to February 1, 2000, and the new insurance company would respond to new
claims reported during the
policy period for work done between February 1, 2000 and February 1, 2012.
prior acts are limited. Your
forward each year if you
lapse and did not renew
prior acts date is carried
If Mr. Smith let his policy
renew your policy without
it by February 1, 2011, or
a lapse in coverage. You are then covered back to your
prior acts date in the event
went with an insurance
company that did not offer prior acts - should he have
a claim for work he did
current carrier during a
time option and cannot be
and February 1, 2011 â€“ he
do not renew your policy,
reporting period expires.
between February 1, 2000 would have no coverage unless he purchased an
Extended Reporting Period Endorsement.
Most claims or complaints are reported several years after the actual appraisal
was performed. There are
statutes of limitations that
typically vary by state and by allegation, which may
protect a real estate appraiser from being held responsible
for damages. However, there is still the cost of defense,
which can far exceed the cost of your insurance contract. You can purchase an
Extended Reporting Period Endorsement from your
specified time period if you retire, or switch to another
renewed once the extended
carrier who does not provide
The long and the short
It is an extension of time to
coverage may be one of the
you with prior acts coverage. respond to a claim for work done between your prior
acts date and your policy
expiration date. Costs vary
depending on the insurance company. Some may offer
free options for retirees and
Death and Disability, as well as options you can purchase
for a one-, two- or three-year period of time. An Extended Reporting Period does not
cover any services performed in the future. It only provides
an extension of time in which to report a claim for work
done in the past. It is a one-
The terms, definitions and examples of insurance coverage are used here for demonstration only. Insurance policies and coverage can vary widely amongst insurance companies and you should consult an insurance professional and your policy for more information.6
of it: giving up prior acts
worst business decisions a
professional could make. All those years of maintaining adequate protection by
renewing each year and keeping your prior acts
coverage would be gone â€“ just when you most need coverage. Maintain your
prior acts coverage until you
are no longer performing any professional services, then
review your policy options and/or discuss with an
insurance professional your extended reporting period
Most claims or
complaints are reported several years after the actual appraisal was performed.
* LIVEVALMAG.COM | 21
up front 1919. The concern felt by the French was well founded
since the Germans – agreeing
Per USPAP, 2010-2011
sign the treaty in spite of
An appraiser must:
their disagreement with the terms of surrender.
These fortifications would become known as the
Maginot Line, named for
André Maginot, France’s
Minister of War from 1922
What the French didn’t
count on was a flanking of
the Maginot Line; Germany’s blitzkrieg attack occurred at the French-Belgian border,
which hadn’t been reinforced
French decided it would be in their best interest
to fortify the border region they shared with Germany in case of an unprovoked attack. The French were incredibly focused on defense after the Treaty of Versailles was signed June 28,
Acquire the necessary
competency to perform the assignment.
Decline or withdraw from the assignment.
prior to accepting an
the Germans from attacking.
After WWI, and during the run-up to WWII, the
of the Franco-Germanic
the best way of dissuading
1 2 3
Be competent to perform the
border, was thought to be
Jo rdan p et k o v s k i / kri stine hug hes
to 1924. This line of defense, stretching the entire length
Competency is demanded, geographic or otherwise.
to the Armistice in 1918 – were ultimately forced to
Geographic Competency vs.Competency
Competency Rule found in
with overages in the same way the French-German lines had.
At this point, you may be
wondering what any of this information has to do with
The appraiser must determine, assignment, that he or she
can perform the assignment competently.
1 2 3
The ability to properly
identify the problem to be addressed.
The knowledge and
experience to complete the assignment competently. Recognition of, and
compliance with, laws
and regulations that apply to the appraiser or to the assignment.
the modern argument about
Comment: Competency may
competency). This historical
not limited to, an appraiser’s
geographic competency (geo fact is actually analogous to what our industry is
experiencing today. So much effort has been afforded the geo competency argument that we’ve missed the
real issue: the concept of
competency in the aggregate.
The Rules As I recall, geo competency
is a derivative of a comment provided within the
apply to factors such as, but familiarity with a specific
type of property or asset, a market, a geographic area, an intended use, specific laws and regulations or
an analytical method. If
such a factor is necessary
for an appraiser to develop
credible assignment results, the appraiser is responsible for having the competency to address that factor or for following the steps
outlined below to satisfy this competency rule…
Comment: In an assignment
where geographic competency is necessary, an appraiser who is not familiar with the relevant market
characteristics must acquire
an understanding necessary to produce credible assignment
results for the specific property type and market involved.
After reading the preceding passage, one can conclude competency has many
nuances above and beyond the appraiser possessing a
requisite knowledge of the subject’s geographic area.
So why are we continually harping on one not-so-
well-defined aspect of the
competency rule? The answer is simple: It is one of the last bastions of hope for anyone contesting the results of an
appraisal assignment, most often brought about by a
borrower, broker or banker
crying foul because the value conclusion provided has
killed – or at least maimed – their deal.
After years of experience analyzing appraisals
completed throughout the
country, the need for increased educational requirements
specific to overall competency in generally accepted
becomes apparent. Our
industry has been sidetracked as a result of this argument over a small piece of the
bigger issue. This derailment of our focus is an affront
to appraisal professionals everywhere.
cause and effect in its purest
the nation’s most critical fields
Being a homeowner, I’ve
those appraisers who have
Continually educating the
process as a consumer. The
coverage area in order to
the property, drives the comps
is simply a retelling of what
form. Is this an indictment of
experienced the appraisal
been forced to expand their
appraiser shows up, inspects
survive? The answer is NO! It
and submits the report to my
many have experienced.
lender schedules a closing
At TSI Appraisal, we realized
my life. What if the lender,
afforded us by restricting our
report, realizes they will not
immediate market area. The
due to insufficient equity,
infinitum; instead they spend
value conclusion? I’ll admit
has increased the appraisers’
time reviewing appraisals
them to produce credible
the past, but this scenario
time. Another byproduct is
deep-dive into the appraiser’s
within their immediate
course of my research, I
are exposed to the same
traveled a distance of 40 miles
neighborhoods every day,
my property (in addition to
insight into areas ripe with
noted within the appraisal)?
benefits aside, the appraiser is
urban to suburban market
the necessary competencies
as the proverbial “chink in the
appraisal assignment outside
lender. Once received, the
appraisers, lenders and
AMCs is our cross to bear. Understanding:
1 2 3
Why this sale is more
competitive with the subject property than that sale.
Why regression analysis is
date and I move on with
the multitude of benefits
after receiving the appraisal
appraisers’ coverage to their
be able to refinance my loan
appraisers no longer drive ad
a result of the appraiser’s
their time appraising. This
having spent very little
overall efficiency, allowing
completed on my home in
assignment results in less
In the end, our fight may not
would immediately prompt a
their increased proficiency
client demands appraisers
report. What if, during the
market area. The appraisers
determine the appraiser
streets, subdivisions and
from their home to inspect
giving them much-needed
other perceived deficiencies
submarkets. These subsequent
That’s 40 miles in a semi-
likely competent, or can gain
area. This could be perceived
required to complete an
armor” and it would likely be
of these immediate confines.
Causa latet, vis est notissima,
the result is well known.”
It’s fair to say that most
appraisers would rather
The energy being spent on
in as localized an area as
competency is akin to the time
have faced is the degradation
Line: misguided, poorly
in the volume of assignments
ROI. Our focus must be on the
appraiser’s need to expand
profession. We have no choice
considered too distant. This is
of those participating in one of
provide appraisal services
contesting an appraiser’s geo
possible. The problem many
spent developing the Maginot
of appraisal fees and a decline
thought out, and yielding little
available, resulting in an
continued development of our
coverage into areas previously
but to insist on the betterment
a critical skill all appraisers must master.
When REO sales should be considered as comparables
when appraising a property for an arms-length
transaction, are all aspects
of competency that deserve additional focus.
yield traction. If the lender/ remain within a five-mile parametric distance from
their home address in order
to ensure geo competency, we may in the end capitulate. As a colleague and close friend said to me, “Guess how I
know [the lender] is right on
this? They send their business elsewhere!” It’s a challenge
trying to find a countervailing argument to that logic.
or “the cause is hidden, but I ask the industry to forgo
building our own Maginot Line. We know what will happen if we’re not able
to redirect our focus from
geo competency to overall
competency, even if we can’t figure out how we got so far
off course in the first place. 6
* LIVEVALMAG.COM | 23
| steve ferguson |
Analysis: Tools of the Trade Appraisal is still an art, even with the science of regression.
Valuation is seeing leaps in
and data access,
and due to
ever-increasing p r e s s u r e s ,
there is a need to be
more efficient. In 2001 I went back to school to study economics. Part math and part study of
consumer choices, it seemed like a
for my career in real estate. In the two years that followed I worked my way through another major to the capstone in my undergrad studies:
econometrics. At the time I never knew
there was such a study but it opened my eyes to a branch of work that has only
recently gained traction in the real estate valuation industry.
In this article I will explain some parts of
Regression vs. Econometrics The field of econometrics is based on the
The formula for single linear regression is similar to the formula for slope:
independent and dependent variables,
education levels and salary. Other factors
formula for the slope of a line.
development of statistical methods for
estimating economic relationships between such as gross living area and price; or
affect price and salary in this example, but by employing the correct data-generating process, all other variables can be held
constant so that the part of the gross living area that contributes to the price can be
estimated. This is called ceteris paribus, or “all other things being equal.” In
introductory appraisal classes we learn this as matched paired analysis. It is a similar principle but regression requires a larger sample. When applied correctly, it will yield statistically unbiased results.
A proper understanding of the data-
which is the same as the mathematical Econometrics uses different symbols for regression formulas. As an example, a
multiple regression formula for real estate might be:
β0 + β1* (square feet) + β2* (garage)….. + βkxk+u.
In the above formula, β is the estimator and u is the error term. Because we >>
generating process is important in
econometrics because we are using
observational data, not experimental data.
It would make appraising a lot easier if we
had a lab where we could study how much one would pay for one more square foot or one more garage. If this were the case then there would be no need for a valuation professional. This is an important
distinction between regression and a field of study that happens to use regression, among other statistics, as part of the
process. The reality is that we do not have experimental data in real estate; we have observational data, which is not perfect. This is why those who use regression as part of the process of evaluating
data should understand its limitations.
Appraisers who are now using and relying on regression output need to know how to build a good explanatory model, the
strength of the methodology, and what the data means.
the regression process, as well as the art
that is part of this mathematical tool. This article explains the ordinary least squares
assumptions that underlie any good study. FEBRUARY 2011
* LIVEVALMAG.COM | 25
cannot create a control group and an
Another assumption in OLS regression is
have an error term, which is simply all
interesting in real estate these days and
Secondly, closer examination of the 20-35
last six months. Are sales random in this
condition differences. Prior to the
experimental group, we will always
the variance in y we cannot explain in a stochastic model. It is important to
note that there are many assumptions in ordinary least squares (OLS) regression. Two of these assumptions are that there is zero correlation among the variables (xi); and zero correlation between the
variables and the error term (u). These
are important assumptions to note when selecting independent variables. For
instance, is bedroom count necessarily
independent from GLA? Some floor plans may have multiple adaptations to include a three-bedroom with a loft or a four-
random sampling. This one is particularly one I have been wrestling with for the
market? The post-tax incentive market
has brought about a real shift in demand.
Much of the 2010 demand, at least for the
first-time homebuyer market, was brought forward to the first quarter. The intuition
is that lower demand after April 30, 2010, should bring about lower pricing in most markets. But when I recently tried to get
a glimpse of what the incentive did to the arms-length market, I was surprised on many levels.
2 sales indicated significant quality and
tax incentive deadline, average homes were selling; since then, only the cream of the crop have been selling. For the most part the comments in the MLS were not subjective in nature. The updates to these sales included new roofs, gutters, HVAC, updated kitchens and new flooring. In other words, the sales were unmistakably upper-tier condition and quality.
bedroom with the same square footage. In
First, my methodology is to try and
Of course the only true way to determine
between the value of a four-bedroom
compare homogeneous properties within a
indicator is to look at residual analysis.
these instances you may see a distinction versus a three-bedroom and it may be
more or less than the cost to change (cure). In general it is not very interesting to
control for square footage while separately attempting to address the bedroom count. Bedroom count is
somewhat of a redundant square
in all cases, but again, one must
in the art of regression
to determine the
difference). It is
minimize independent variables and
large neighborhood to estimate the impact of an event. My go-to neighborhoods,
where sales are typically abundant, were reduced significantly since May. Further,
the pricing does not reflect the theory that
would create a
drop in pricing; at least two
above the line of best fit would be worth
further investigation, possibly indicating quality or condition differences. So how random are the sales in this market? Is this representative of the market as a
whole? This brings about the next topic: qualitative information.
so with qualitative data. It is difficult in
arms-length transactions in the postincentive
not sufficient to show any
significance in the coefficient
be beneficial to look at an independent
“wrong” direction. In other words, prices
interaction between the two variables.
the observations that fall significantly
Regression analysis is really efficient at
on the tax incentive, but the coefficient,
variable that takes into account the
If you have a good functional form,
at work in this
generally hard to add a bedroom and
not add square footage. Instead it may
the quality is a site inspection, but a strong
while weak, was strongly going in the have been increasing since May in the retail sector of these neighborhoods.
looking at quantitative data, but is less
real estate to remove the subjective nature of quality and condition and one must create a metric for scoring the data. So
in order for the data to be uniform, the
scoring must be done by use of primary
information, not secondary (MLS). More observations are required due to the
advanced techniques utilized to analyze the data. Many of these techniques are
not new and are used in market research, botany, and political polling to analyze consumer ratings of a product, color
qualities of a plant or a rating of how well a candidate is performing. Again, it’s not impossible, but it’s very labor-intensive
and not very conducive to a small project 26
of estimating the value of one property.
a property: Running the model on the
square feet2 is negative, the quadratic has
qualitative data would be minimized. A
would produce a point value estimate or,
has diminishing returns is the inflection
In normal markets the value of this
market in equilibrium has more buyers
and fewer sellers than todayâ€™s market. As a result, homes along the middle and lower
end of the quality and condition spectrum would sell instead of just the upper tier. Sales of high-quality,
independent variables of the subject
with additional steps, a 95% confidence
interval could be used. Alternatively, set
up a hedonic model where the comparable independent variables can be adjusted based on the regression model output.
This method allows the
homes in good condition
appraiser to apply local
would balance out the
market knowledge and
experience using the
in the sample, thereby
of the regression. The
mirroring the real
methods could be used
population. In other
to support each other or
words, the error in the sample would be the same as the general
population, which is
another assumption in OLS regression.
Application So what is the best way to use the regression
output? It depends on
the assignment. If you
are trying to determine
the effect of an event, it
would be less interesting to look at the value of an
individual property than
the coefficient measuring the effect. One of the
first assignments where
I used econometrics was
in the background of a Alternatively, set
up a hedonic model
where the comparable
independent variables can be adjusted based on the regression
model output. This method allows
the appraiser to
apply local market knowledge and
the mathematical strength of the
methods could be used to support each other or in the background
of a typical appraisal to add strength to the
for a partial taking of
a property. Acquiring
enough relevant sales, I was able to isolate the land value per
typical appraisal to add
strength to the valuation. Of the many applications of an econometric study, one I have frequently
used is a way to calculate
can be used if looking at the value of
at which the slope is zero can solve the
inflection point. If you have not studied
calculus, this is achieved at the coefficient on square footage over twice the absolute value of the coefficient on square feet2. For example, assume your output
gives coefficient on square feet $35, and coefficient on square feet2 -.01, solution is 35/2(-.01) = 1,750. In this example
there will be a diminishing return to each square foot above 1,750. Applying this to
an appraisal with proper explanation can help reduce the number of callbacks for
additional support. It looks much better in a report and will add to your credibility if
you can show the point of marginal return empirically rather than by theory.
Proper use of regression tools can
in this article, run a
regression on the model identifying the proper
independent variables. Square footage is a
good example. If you
are looking at a neighborhood with homes ranging in GLA from 1,0001,600 square feet, at what point is there marginal return on a home with 2,000 square feet? The way to determine this
which you are interested, squared. In other
of potential value. The same method
and square feet2 and solving for the point
large sample using the
there was only one possible buyer in
interval to explain the high and low end
derivative of the variables square feet
The end users are asking for more and
is by creating a quadratic equation. Run
this transaction, I used a 95% confidence
point of the parabola. Taking the first
marginal return. In a
acre and then apply the coefficient to
the subdivided piece of land. Because
a parabolic shape. The point at which GLA
the regression again with the variable in
words, for each observation in the square footage example, add the variable square
more market support from the appraiser. increase efficiency by adding the objective substance needed for the industry. Many vendors in the industry either have or
are in the process of creating a seamless application that will sort, convert and
analyze data as a way to incorporate this
power into an appraisal. My only warning is if you have not studied descriptive
and inferential statistics, take a class or read a book and become familiar with its application and limitations. There
will be several statistics accompanying
any regression output; know what they
mean and what they measure, at the very minimum. I used a stats application in
grad school that was very powerful, but
most of the work for simple applications can be done using a spreadsheet with an
analysis pack installed. It takes a little time to clean up data but it is a good exercise. 6
feet2. When the coefficient on square
footage is positive, and the coefficient on FEBRUARY 2011
* LIVEVALMAG.COM | 27
Leland Trice, SRA, FRICS
What lax standards caused, unreasonable standards will not cure. FEBRUARY 2011
* LIVEVALMAG.COM | 29
Who had a tougher 2010: Tiger Woods or appraisers? Tiger Woods is an oversexed billionaire who can reach most par 5s with a 7-iron. Appraisers are still the whipping boys and girls of the real estate finance industry. I have a hard time weeping for poor Tiger. I now have more than 25 years – OUCH – under my belt in the appraisal industry. I am so used to being told I am wrong that I get nervous when someone agrees with
my value opinion. More often than not, I am “wrong” in both directions in the same day. I yearn for a Goldilocks scenario. This appraisal is too high. This appraisal is too low. Rarely is the appraisal “just right.”
I would cringe at having the reputation for being “too conservative.” Anyone in the real estate biz knows that “too
conservative” is just code for being honest and not rubber-stamping the desired
value. I now have Realtors who considered me too conservative, hiring me to help
convince sellers they need to be “realistic.” Now that the massive real estate bubble
has popped, our industry is often chided in drive by journalism pieces as for enabling the poor, misguided buyers. Perhaps we
as a group were not conservative enough.
But in reality we were and still are trapped by conventions. To steal a line from
All appraisers love to share
In order to drive home the point about how ineffective and unproductive this new level of appraisal scrutiny can be, I thought it would be useful to share examples from people in the trenches:
Comp 2 has 1,800 SF above grade area
I appraised a property where the
I have received a request from XXXXX
how I report it. Underwriter comes
This was a rental and one of the
report; I am not permitted to put N/A
and 800 SF of basement. So, that is
back and says that their data shows
the home has 2,600 SF. I send a note explaining that it appears that the
database she is using is combining
the above grade area and the finished area. I also send copies of the MLS
and tax card, which both show 1,800 SF up and 800 in the basement.
Response from the underwriter – OK, but how can I prove which one is correct? Yikes!
K I indicated that there were no sales
concessions for the comparable sales, no adjustments were made for sales concessions. Ummmm.
master bedroom door was padlocked. tenants was deployed to Iraq and
didn’t want anyone going into the room while overseas. The owner
didn’t have a key to the padlock. The underwriter demanded a
second inspection to photograph
the padlock. I guess the appraiser can never be trusted again for
anything they say and every single
property characteristic requires photo documentation. If there is an alarm system, take a photo. If there’s a
Underwriter wants to know why, if
During the days of property appreciation,
furnace, hot water heater, and electric panel, take those photos too; and make sure each bathroom fixture
can be seen in the bathroom photos.
Mortgage through an AMC to revise a on the 1004MC, and must write out “not available” or “not applicable”
as the case may be. The underwriter
also requires additional location maps that show the actual street name the balloon is located on, even if extra
maps are required to get the detail.
No allowance for mapping programs that may not have new streets; I had
to copy and scan pieces of ADC maps and edit with balloons in order to
comply. The whole revision process took over one hour.
If there are six and a half baths, you
Underwriter wants to know why
photos in the report.
rear patio of the house. Seriously???
better have six and a half bathroom
there is a ladder lying down on the
LiveValuation Magazine contributor Roger
that ratio remains at 3.3. That suggests
So other than stating what is now obvious,
on the “Greater Fool Theory.” The sales
needed to revert to historical benchmarks
problem is that two wrongs don’t make
Staiger, residential appraising is dependent comparison approach is quite simply a
recitation of what the last fools paid. And by 2005 things had indeed gotten quite
foolish. But what did our clients ask of us? Did they ask what those fools should be paying? No. Our clients asked what the
fools actually were paying. Everyone lost their collective minds during the bubble, and market value became a reflection of that mass hysteria.
From 1959 through 2000, the average ratio of median house price to income was
about 2.2. Even after a severe correction,
another 30% fall in housing prices are
– assuming we do not have a significant increase in median income. Another
telling index is the ratio of housing price versus rent. This speaks more to the
income approach. While most decisions to purchase a primary residence are not
rooting in income potential, the trend in rents moved parallel to housing values
until 2000, when the bubble began. The
comparison of rent to price has recovered more than price versus income, but it
still suggests more correction in price is forthcoming.
where am I going with this? As I see it, the a right. We got into this mess with lax
standards and we will not get out of it with unreasonable standards. When anyone who could fog a mirror qualified for a
mortgage (or several), the only data point on an appraisal that was examined was
the value. Now that Warren Buffett would have difficulty getting a mortgage, every
data point must be perfect and more data
points are added every day. Unfortunately, I am not convinced this makes for better appraisals. I am convinced it makes
for very disgruntled and disaffected appraisers. >>
Anyone in the real estate biz
knows that “too conservative” is just code for being honest and not rubber-stamping the desired value.
r The most insane trend is an
The appraiser needs to indicate his
justify just about every <bleeping>
document number of appraisals
expectation for the appraiser to adjustment with paired sales
analysis. Talk about fantasy land!
The underwriter asked that any view,
quality, and condition adjustments be supported by matched pair analysis or statistical regression – or those
comps should be replaced by more
similar sales not requiring adjustment.
exact mileage from the subject and done in the subject market over
the last 12 months. Shouldn’t the
appraiser’s “geographic competency”
be determined prior to completing the assignment?
be operating normally during the
appraiser’s inspection.” (Emphasis
added) Second “correction request” from AMC (six days after delivery): The statement must read exactly
“utilities were on and appeared to
be functioning properly.” (Emphasis added) Second answer (seven days after delivery): After much hair-
pulling and not a few primal screams, the appraiser complied with the pointless demand.
This was for a report that described
First “correction request” from AMC
in the quantity and quality of data.
was delivered): “Appraiser must
I submitted the report 10 days ago
appeared to be functioning properly
XXX Bank will not accept it unless I
in vivid detail the severe limitations Given such limited data in a non-
metropolitan or homogeneous market, how would one find either numerous sales of identical characteristics or
adequate data to statistically derive any adjustments?
(three days after original report
report whether utilities were on and during the inspection.” First reply (four days after delivery): “The
improvements section of the 1004
form (second section from the bottom of page 1 of the 1004) notes that “All
VI EW +/-; they informed me today that
add the word “View” after each photo on subject photo page. Each photo is labeled “subject front,” “subject street”...etc. Wow.
utilities were on and appeared to
* LIVEVALMAG.COM | 31
#$ On my hit parade of Idiot Underwriter Tricks is the recent fixation on whether the subject is an “Over-Improvement” or “Under-Improvement”; ill-defined
buzzwords at best with no universally accepted meaning. When asked to
provide a definition of either term,
so far every AMC has failed, but still
insisted that I must tell them whether
in the local market. In the appraiser’s
opinion, assuming the definition given above, the subject is not an over-
improvement or under-improvement
Just received a request to change
market area. The nabobs at the AMCs
property. I spelled the way it shows
relative to competing homes in the
don’t even understand the terms they are using, but as long as we include
those ill-defined buzzwords and the
word “not” in a sentence somewhere in the report, they are happy.
the subject is or is not something they cannot define. So, even though we
have already told them that yes, the
“Appraiser to comment on comp
neighborhood, we have also added
different shade for each comp.”
subject does generally conform to the the following to our boilerplate: For purposes of this report, the terms
“Over-Improvement” and “Under-
Improvement” are both defined as:
Improvements which fail to conform to established market area norms of size, quality, and/or function to the
extent that prospective buyers would
! the address spelling of the subject
on the street sign in front of the house, in addition to a street map provided,
county map provided, plat provided, public records provided, and county
records provided. But apparently I am required to change my report because the title company has it differently? Even when right, we are wrong.
photos – grass appears to be a
These were clearly high-resolution
“Appraiser to retake interior photos
original photo taken shortly after the
Family photos must be removed from
and good-quality photographs. Is the transaction less reliable than making an appraiser drive by the same
property months later to retake the same photograph?
with no family photographs visible.
the wall if necessary.” The people in these photos were indecipherable
unless the photo was significantly enlarged.
not consider the subject as a directly
competing alternative to other homes
Beyond the unanimous grumbling and frustration amongst
findings? Why not reserve requests for additional information
diligence” make for sound lending decisions. Are these the
fully supported and credible in the original submission? I don’t
appraisers, it is appropriate to ask if these examples of “due elements that identify collateral risk?
What is the solution? Thanks for asking! I would suggest the
following ... stop the horribly inefficient process of inflexible and rote protocols for quality control. First, ensure that those doing
or corrections to those appraisal reports which may not truly be think that suggests tolerating sloppiness but would inject some
common sense and also substantiate the QC process itself. In the era of mortgage repurchase risk, would that not satisfy the need to demonstrate good collateral risk management?
quality control have appraisal experience and knowledge and do
Appraisers are also constantly asked to “tell the story.” And I
like a Standard 3 Appraisal Review. Consider how an appraiser
the appraisal opinion. Unfortunately, the mortgage-lending
not simply follow a checklist. Second, treat the QC process more does such a review. Do they demand that the original appraiser correct every typo, add a 12th comparable, or get a better bath
photo? NO – a good review appraiser documents their finding
and opinions and whether the appraisal is sound and credible. Why can’t such a QC report accompany the appraisal and
document the typo, document the fact that the Subject Property Value exceeds the Predominant Neighborhood Value by 5%
and the appraiser forgot to comment, and any other non-critical 32
applaud reinforcing the need to fully and clearly communicate arena has become a “checklist” or assembly line type of process. Worlds are colliding. Appraisers now face Scope Creep – with demands for more information, more description and more
analysis than what fits on the original forms. Once outside the
box, there are no standards, no conventions, no protocols. If the quality control side of the equation is working from a checklist, why not have the production side (i.e., the appraisers) work
from that same checklist? Wouldn’t it be more efficient if every
Q Underwriter wants an explanation for
the location adjustment when multiple aerial maps are provided of the
subjects and the comparable sales, and the subject are backing an interstate.
five of those were remotely similar. I
extensive discussion of the market
narrative comment and analysis about
Despite the pre-emptive caution and
used all five in my report and included the number of sales. You guessed it: Underwriter wants “a better, more
the comparable sale on the same street
of appraisal order: “Preliminary
still don’t understand, and state they
want photos of what the comps border and what the subject borders, despite
my labeled aerial images and narrative description. What else can I do?
7 I provided a one-line report from
the MLS showing every sale in the
subject’s small town in the past year. There were only 20 sales, and only
not meet lender requirements for the
sale on the same street borders
property borders the interstate. They
the appraisal submitted, it has been determined that the appraisal does
The following was proactively
neighborhood houses and the subject
was made: “Upon underwrite of
of such sale.”
would not have the same location. The aerial map shows that the comparable
extensive discussion in the report, the following addendum request
recent sale or an explanation for lack
They say they cannot understand why
area and the limited comparable data.
following reason(s): subject is located in a declining market and we require
communicated to client upon receipt
two comparables that support the
value that closed within 90 days; and
research indicates the subject is
if not available need 3 sales that closed
located in a very small town (XXX)
within 6 months. Please review and
on YYY Bay. There are limited sales/
provide one additional comparable
listings available for use and any
to support the subject indicated
reasonably competing locations are
value within either 90 days or six
separated by long distances. It may
months. Any variation from lender
not be possible to meet all client
requirements must be fully explained
guidance regarding comparable
currency, distance, adjustments etc.
in the report.”
If this is not acceptable, please advise as soon as possible. We do not want to produce a product that will not meet your needs. Thank you.” In
the appraisal report itself there was
appraiser were prompted to address each and
Appraisers love to appraise cookie-cutter homes
am not suggesting the appraiser merely gets to
match sales within a few blocks that sold in the
every deviation from conventional guidelines? I
in tract housing communities with three model
tick off an acknowledgement that some item is
last 90 days. But alas, we also get saddled with the
out of compliance, but it would be quite easy and
assignment of the manufactured home that was
efficient to organize these items, prompt for specific
disguised with an addition, situated on 9 acres, has
analysis and commentary, and organize them in
such a manner that it is no longer necessary to flip
back and forth through pages of a report to locate a statement about whether private wells and septics were typical and accepted in the market!
Collateral risk management is a highly essential part of lending, and while we seem to be doing
more of it, we also seem, in my humble opinion, to
be far more concerned about the boxes on the form than the true risk and reliability of the appraisal professional’s opinion. And for goodness’ sake, can we all understand that “ugly” appraisals
don’t automatically equate to “bad” appraisals?!
two outbuildings, and is in a rural location with
I do think we have lost sight of the forest while cataloging every tree. Appraisers are desperately trying to fulfill our clients’ requests.
few relevant sales in the past two years. Some of the best reports I have ever read were “ugly.”
I do think we have lost sight of the forest while
cataloging every tree. Appraisers are desperately
trying to fulfill our clients’ requests. And certainly all appraisers are not created equal. However,
perhaps if we stepped back and looked at what
exactly was being asked of appraisers and how our clients are digesting and using that information, we could find a more effective way to manage collateral risk. 6
* LIVEVALMAG.COM | 33
| Dennis A. Scardilli, Esq., MAI | Admitted to Practice Only in NJ & PA
Real Estate Appraisal Has real estate appraisal practice outgrown USPAP?
In the spirit of
L i v e Va l u a t i o n ’ s m o d u s operandi of bringing you cutting-edge industry issues in
the education of real estate appraisers and an important part of real estate appraisal practice.
I started to think about this issue in 2009
after taking the USPAP instructors course sponsored by The Appraisal Foundation (TAF). As an attorney, my discussions
with other students got me thinking about
I pose the question:
“H a s
appraisa l pra
outgrown USPAP?” No, I’m not suggesting that we do away with USPAP. And no, I’m not dissing
The Appraisal Foundation, the Appraisal Subcommittee or state regulators, all of whom I hold in the highest regard.
Rather, I am merely asking what is now a rhetorical question. Real estate appraisal
real estate appraisal law and the future of
At the Appraisal Institute (AI) January
2010 Federal Update conference, it was
clear that in many ways, appraisers are
appraiser’s world. The only question was, “But, what does that mean?”
Today, there is no question that real estate appraisal practice is a regulated industry.
Under MRAPLA, it will become even more so. Everyone involved with real estate
appraisal knows that the industry is being
increasingly regulated. But few understand the relationship between that dynamic
and the law. Perhaps that is because both
fledgling appraisers and more experienced appraisers are taught only one part of the picture. That’s right, just USPAP.
increasingly dependent on government,
Yes, some states require at least a two-
under which that work is performed. The
in addition to the seven-hour USPAP
both for work and to create the regulations AI’s Washington Summit took place last
summer, days before MRAPLA was signed as part of what is popularly known as
the Financial Reform Act. Even after the
summit’s luncheon speech by MRAPLA’s
prime sponsor, Rep. Paul Kanjorski (D-PA), there was a lot of uncertainty regarding what MRAPLA meant for the industry.
hour block of state-level instruction
update. And yes, organizations such as the Appraisal Institute have a number
of courses involving appraisal and law, but those courses typically deal with
valuation litigation. No one addresses the regulatory aspects of appraisal practice,
risk management or other process-driven issues in real estate appraisal law.
practice is far from being the “cottage
The joint meeting of the Association of
As a result, I believe that it is time
I performed my first appraisal in 1980.
TAF and the Appraisal Subcommittee
educators and users of appraisal services
industry” that it was often called when The changes that may occur over the next several years could make the past few
years look relatively tame by comparison.
It’s time for real estate appraisal law to go beyond USPAP.
The Dawning of the Age of Real Estate Appraisal Law The Mortgage Reform and Anti-Predatory Lending Act of 2010 (MRAPLA) makes it clear that the law of real estate appraisal
must go far beyond USPAP.1 For the past 20 years, real estate appraisal has been a regulated industry, but the importance
of real estate appraisal law has not been
recognized. Under MRAPLA the industry
Appraisal Regulatory Officials (AARO), (ASC) brought the issue into focus.
That conference included an appraiser discipline mock trial, which was
videotaped and can now be viewed on presentations on mortgage and appraisal fraud. We were told how MRAPLA
became law and about the changes that
What does real estate appraisal law do for
Immediately after that joint meeting, the
what does it do for a lender, an attorney,
it was bringing to appraisal practice.
National Association of Realtors (NAR)
held an appraisal summit in Washington filled with industry leaders. The
a real estate appraiser? For that matter, or other users of real estate appraisal services?
presentations included how MRAPLA and
For one thing, real estate appraisal
appraisal education and regulatory
other governmental actions affected the
recognized as an important component of
appraisal law had become part of the
law that goes beyond litigation valuation.
What Is Real Estate Appraisal Law Going to Do for Me?
Virtually everyone with whom I spoke at
to start thinking about real estate appraisal
TAF’s website.2 Federal agents made
is even more regulated. The law of real estate appraisal must, therefore, be
to encourage appraisers, regulators,
these conferences agreed that real estate
11 P.L. 203 http://www.globalpres.com/mediasite/Catalog/pages/catalog.aspx?catalogId=97b75dbc-da29-4ac2-b603-caa7705cf271
law goes beyond functionally obsolete paradigms, which are currently focused
exclusively on USPAP. That’s part of what I mean when I ask if we have outgrown USPAP. >>
* LIVEVALMAG.COM | 35
The answer is yes – certainly as a means of
down into some substance. The three
in regard to regulating those currently in
appraisal law are regulation, education
training new appraisers. The same is true
most important issue areas in real estate
the field; ditto for cutting-edge regulatory
and the future of appraisal practice.
legal issues for lenders. Most users of
appraisal services, including a majority of lawyers and judges, don’t know what I’m talking about when I utter the acronym
USPAP. When I say, “appraisal regulatory
standards,” I can see that they understand.
Let’s face it: Appraisal practice has changed. The present real estate appraiser regulatory and educational paradigms need to change with it. Real estate appraisal practice must deal
with certain facts of life. Its future is as an
Most users of
Perhaps the greatest regulatory issue in
including a majority of
real estate appraisal law today is how
lawyers and judges,
MRAPLA will affect the industry. That
don’t know what I’m
act brings about the greatest changes in
talking about when
appraisal regulation since the passage
I utter the acronym
of the Financial Institutions Reform,
USPAP. When I say,
Recovery and Enforcement Act of 1989
(FIRREA). MRAPLA’s Subtitle F, Appraisal
standards,” I can see
Activities, establishes a significantly
that they understand.
revised regulatory regime for real estate
increasingly regulated industry. Appraisal
appraisal practice at the state/territorial
practice is in the midst of change that has more “unknown unknowns” than even known unknowns. The issue is how to
structure that change so that it does not ruin the industry.
Those facts lead me to believe that
real estate appraisal law is a steadying influence in an uncertain world. Law
is based on precedent. The Latin term
stare diesis means “to stand by things
decided.”3 This bedrock principle of law
can be described as “intended to ensure that people are guided in their personal and business dealings by prior court
decisions through established and fixed principles…”.4
and federal levels. In addition, both judicial rejections of the Supreme Court’s
MRAPLA and the other acts in what is
instances, the “established and fixed
Act affect a wide range of real estate-
parameters of dramatic cultural change,
activities for a wide range of real estate
regulation, thereby creating a knowledge
Appraisers should embrace real estate
similar “established and fixed principles”
One area of that demand should be
cottage-industry history of appraisal
appraisal practice services. Unfortunately,
unpopular majority opinion. In both
popularly known as the Financial Reform
principles” of the law established the
related services. Thus, real estate appraisal
even when the court’s decision went
practitioners will be affected by statute or economy demand for real estate appraisal
appraisal law as a means of delineating that go beyond the common law and
among providers, and regulators, of
practice. Real estate appraisal practice has
the regulatory knowledge of most appraisers and regulators is limited to USPAP. Even more unfortunately, the lack of a body of information on state disciplinary actions and interpretations has caused USPAP’s application to essentially be anecdotal.
seen a topsy-turvy world of change over the past several years. The Government
Accountability Office (GAO) statutorily
Courts typically follow precedent,
mandated study on the valuation
except when that precedent needs to
be broken, such as in Brown v. Board of
Education5, the 1954 landmark civil rights
decision by the U.S. Supreme Court. At
industry, along with the myriad rules and regulations that will be evolving out of MRAPLA, portend even more changes
in the relatively near future. Real estate
USPAP actually evolved from what would
necessary to keep tumultuous change from
appraisal organizations created USPAP
appraisal law can provide the structure
be akin to common law. In the mid-1980s,
destroying the industry.
by meshing their individual ethics rules.
the Supreme Court’s 2005 landmark
law, just like the legal standard before the
Justice Thomas established the basis
Now that I’ve told you why real estate
the law and making written decisions of
other times, court decisions include a
dissenting opinion that creates societal
change, such as Justice Clarence Thomas’ brilliant dissent in New London v. Kelo , 6
eminent domain case. Through his dissent, for numerous political, legislative and 36
Those rules were essentially common
relatively modern practice of codifying courts available to the general public.
appraisal law is important, let’s drill
3 Black’s Law Dictionary (8th Ed.). Corby v. McCarthy, 154 Md. App. 446, 840 A.2d 188 (2003). Brown v. Board of Education, 347 U.S. 483, 74 S. Ct. 686, 98 L. Ed. 873 (1954). 6 Kelo v. City of New London, 545 U.S. 1158 (U.S. 2005). 4
USPAP was designed to be like the
participants will also need to know this
estate appraisal practice. It sets up a broad
Uniform Commercial Code, but for real general national standard that is then
information, including real estate licensees
U The Future of Appraisal Practice
applied to specific facts and circumstances
Hot Topics brings up the future of
process. This was true under FIRREA and
needs to be integration between a
by a state-level statutory and regulatory
will be increasingly true under MRAPLA.
The Appraisal Qualifications Board (AQB)
USPAP is merely a guide to be used by
criteria for both the qualification of new
regulators to make decisions, under its
standards, similar to the manner in which the UCC is employed. State legislatures
use the UCC as a general guide. Then, they draft specific state-level laws based on
has proposed a significant change in
real estate appraisers and requirements
for the upgrading of existing appraisers, with a projected implementation date of January 1, 2015.
the UCC within a jurisdiction. This is
Today’s young blood in real estate appraisal practice is going to want courses that provide credit for both academic requirements and appraiser qualification. Current appraisers
due to the lack of a publically available
certification status will similarly demand
certain provisions of that general guide.
Courts and administrative bodies look to
these specific laws, and the case law based
on them, in adjudicating matters involving virtually impossible to do with USPAP
body of law on the interpretation of that
general guide by state appraiser regulatory entities.
Litigation will inevitably develop in
regard to disputes under MRAPLA’s
provisions for appraiser independence,
mandatory complaints against appraisers and appraisal management company
regulations, and unknown issues that will arise out of the mandated GAO studies. Appraisers are not the only ones who
appraisal practice. At all levels, there real estate appraisal law curriculum
and other cutting-edge courses in real estate appraisal practice. Such course topics could include sustainable real
estate development, administration of the outsourcing of appraisal work to developing economies, and digitally
driven future valuation methodologies
exemplified by NAR’s development of a
national database of sales and listings as well as Freddie and Fannie’s mandated XML formatted 1004s.
who seek to upgrade their license or
The future is here. Now we have to deal
courses that provide both appraiser and
the future is to understand the past. Real
Nonprofit real estate education providers will have to determine the elements of
with it. But how? One way to address
estate appraisal law can help provide the
necessary structure to both understanding the past and addressing the future.
real estate appraisal laws that should be
How can appraisers rely on the law when
providers of continuing education will
How many times have you heard that
included in appraisal education. Profit
have to determine what can be profitably marketed to practicing appraisers. It will
come down to what elements of real estate appraisal law should be included, for
whom, when, and how those elements will
“the courts aren’t even enforcing USPAP”? from appraisers? I recently searched
the LexisNexis database for cases containing both the words “appraisal” and “BPO,” and found that courts routinely confused the two. What kind
of future does a regulated industry have if
soon be using appraisal concepts and,
This may surprise you, but I believe that a
between a regulated valuation and an
world-level accounting standards of Fair
could be built around the current 15-hour
need to know about real estate appraisal law. For example, accountants will
along with appraisers, will be applying Value. Lawyers and courts will need to know how appraisals are supposed to be performed and how appraisals are
regulated beyond USPAP. This need goes well beyond representation of appraisers
in disciplinary matters before state boards.
Just ask lenders about the appraisal-related conundrums they face with regulators
and investors, let alone borrower lawsuits. Numerous other real estate industry
real estate appraisal law academic course
the courts do not understand the difference unregulated one?
USPAP course. Other topics should be
Don’t think that I’m criticizing the courts.
and federal regulation. Ethics and critical
and their attorneys bring before them.
added, such as risk management and state thinking would become an important part of such a curriculum. Hot Topics should also be included. These elements could
then be mixed and matched to a variety of academic and continuing education offerings.
Judges only address issues that litigants
That’s their job. Judges are not the USPAP
police. Look to activities that are generally
considered professions. Courts understand what they do because a body of law has
been developed for each profession. That body of law combines with, and builds
upon, the body of technical information >> FEBRUARY 2011
* LIVEVALMAG.COM | 37
for each recognized
profession. The result
Wrap-up and Next Step
of competence and
Real estate appraisal practice
is a public perception
treated as professionals,
there needs to be a body of real estate appraisal law developed that is
recognized by the courts, embodied in precedent,
16, 2011. At that esteemed conclave, I
will be moderating a panel of equally
esteemed real estate appraisal industry
will never go back to being
If appraisers expect to be
Real Estate Society (ARES) April 13-
experts who will be discussing the thesis
a cottage industry. For real I recently searched the
LexisNexis database for
cases containing both the words “appraisal” and
“BPO,” and found that
courts routinely confused
and accepted by related
professions. A body of
of this article. The panel presentation
estate appraisal practice
will primarily consist of a lively and
to achieve the recognition
productive interactive discussion among
necessary to maintain the
public trust, it must go beyond relying upon its common law
tradition, recognize its nature coherently present itself to of appraisal services. Real
estate appraisal law provides the structure
“established and fixed principles” of law
changes that the industry has experienced
in this field. Such principles would then
help control the type of change that could destroy the industry.
for that process, especially in light of the and will undergo in the next few years.
I hope that you will participate in that discussion. See you in Seattle. Disclaimer:
Where can we go with the issues discussed above? Well, for one thing I’m going to
be my academic manuscript on the issues March 1, 2011, on the ARES website.
law would help create a perception of professionalism by delineating
starting point for that panel discussion will discussed in this article, to be posted by
as a regulated industry and
both practitioners and to users
real estate appraisal
panel members and the audience. The
This article is published only for educational purposes. It does not constitute the establishment of an attorney-client relationship nor does it constitute legal advice. If you need legal advice, you should establish an attorney-client relationship with competent legal counsel. 6
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| julie friess |
a p p r a i s e r co a l i t i o n s go e ur o e y v a Le
e d oo r
and unite with other appraisers.
Up in the Pacific Northwest, an ill-advised scheme was afoot.
Residential builders in Washington state were working hard
to persuade the legislature there
“ g r een ” continuing education (CE)
for all appraisers, regardless of whether an appraiser works
on such appraisals. Every appraiser there would have had to take seven hours of “green” CE credits
out of the 28 hours of instruction required for biannual license renewal. Add in the
USPAP coursework and that would have
left just 14 hours for other elective credits. Enter the Appraiser Coalition of
Washington (ACOW). Among the
pioneering industry coalition groups, ACOW went to work dispatching its
lobbyists and members to explain why such a blanket requirement would be
inappropriate and counterproductive
to the professionals who would have to adhere to it.
The residential builders and lawmakers backed down. Why? Because ACOW spoke up, organized and focused on protecting its members’ interests.
It’s the sort of unity that should exist in
every state across America, but sadly that’s not the case. In many states, appraisers
don’t have such an assertive and organized voice and, as you’re probably aware, the
results can be disastrous for the industry and the public whose interests we serve. We get scapegoated for the housing
disaster, pushed around by lenders and
regulated by legislators who have no idea how our business works.
Consider this your wake-up call. If
of pressure. What we really want is some
appraiser needs to join their state coalition.
from the lending community, and to be
you want to see serious changes, every
If none exists, get one going. The future of your livelihood depends upon it.
semblance of balance, rational behavior
treated fairly and with respect like other
professionals in the business community.
In setting out to write this piece, I shot
I’m not trying to preach; I’m one of you.
national appraisal organizations seeking
ourselves. We can be unwilling or
off emails to several credible state and information about their groups and
soliciting ideas for how to promote unity among appraisers both statewide and
nationally. Among the many encouraging
and heartwarming responses was one from Tom M. Ferstl, President of the Arkansas
We appraisers can be terrible at marketing incapable of socializing with one another or even getting to know one another. We may believe we’re doing this out of self-
preservation, but we’re actually destroying our profession with this approach.
Appraisers Association, who shared a
What we overlook is that we don’t need
steps he recommends for organizing an
together for our shared interests. Believe
document that included a laundry list of appraiser coalition.
The key line was this:
to be in love with one another to work it or not, not all real estate agents like
each other. Agents also compete intensely, but realize that there is strength in unity;
Have a meeting with at least one representative of each group present (NAIFA, AI, etc.) … You ask them to leave their egos at home and come to the meeting with the idea that they are doing something to benefit all the appraisers in their state, not just their individual organization’s point of view.
and in through cooperation, they are
Ferstl cuts to the quick with
change the way we deal with each other or
that zinger. Appraisers, he
is acknowledging (and I am
agreeing), can be their own worst enemies. We shut ourselves up
empowered by their massive numbers.
They too may gossip about one another
behind each other’s backs or revel in petty mockery of another agent’s hairstyle or fashion sense, and may totally resent
successful or overachieving competitors. But when it comes to legislative power, they have it and we appraisers do not. However, by now it should be fairly
obvious that we need it, so we can either perish as an industry.
This means you!
in our offices, constantly afraid
The time has come for every appraiser to
by charging too little, questioning the
coalition. These groups are inexpensive to
business practices. We want independence,
to network, be proactive and, instead
independence there is pressure to hit
constantly about the state of the business,
appraisal fees and some measure of
much control as we wish to have, but we
are firewalls, AMCs with increasing
problems that we face. Get out of your
that others will steal our clients
become a member of their state appraisal
integrity of our work, and other nefarious
join but provide invaluable opportunities
yet we don’t want independence. Without
of feeling powerless and complaining
values, daily threats, but appropriate
do something about it! We all have as
freedom, but with independence there
must proactively decide to confront the
“scope creep,” reduced fees, huge time
house, office or basement and start >>
constraints and a completely different kind FEBRUARY 2011
* LIVEVALMAG.COM | 41
doing something about everything and
anything that upsets and unsettles you. I was recently elected vice president of the Coalition of Arizona Appraisers (CoAA). Last year, I was a Director to the Board. That’s a pretty quick ascent, given that
I only started attending meetings about 18 months ago and initially felt like an
Coalition of Appraisers in Nevada (CAN),
State coalitions are nonprofit and run
to the Merriam-Webster Dictionary, he
aim is to support the maintenance and
defined the word “coalition.” Pointing
said a coalition is “a temporary alliance of distinct parties, persons or states for
joint action; the act of coalescing; union.”
Very specifically, groups of people unite to become coalitions.
outsider in a group made up mainly of
When responding to my outreach about
newcomer with a loud New York voice
CAN. He said that in 2008 the Nevada
zealous Phoenix-area appraisers. I was a and opinion, who drove more than two
hours each way to appear at every meeting
I could, and no one knew who I was. Other people I knew advised me not to go or
told me that this group was dominated by cliquey industry insiders from the
coalitions, Brunson spoke openly about Real Estate Commission formed a BPO
task force to deal with the problems they were having with BPOs. Two appraisers,
Pam Kinkade and Tony Wren, put together
a committee, conducted research, and gave a presentation. This was the group that
by volunteer appraisers. Their primary improvement of the Uniform Standards of Professional Appraisal Practice (USPAP) and its effective enforcement at the state
level. As Brunson explained in Las Vegas, coalitions raise funds to carry out that mission, which also entails fostering
greater public trust and confidence in
professional appraisal practice through
nonpartisan interaction with legislative
bodies, government regulatory agencies and other related groups. The mission statement of my organization, CoAA,
specifically refers to using a “united voice” to carry out these aims.
(NAIFA), among others.
That’s all it takes to get started. Looking
That was a misconception. While some
key factors that made them successful.
What kinds of things do the state coalitions do and accomplish that benefit the appraisers in their states?
CAN and the other active appraisal
ACOW is, of course, an
supported a common position. Mike said,
most of the coalitions, ACOW
Appraisal Institute (AI) or the National
Association of Independent Fee Appraisers
CoAA members are affiliated with other appraisal organizations, many are not, and all turned out to be great, nice,
energetic, hardworking volunteers striving to improve the status and reputation of
appraisers across the Grand Canyon State. Each member takes time away from their practices to address important appraisal
issues with no compensation. There are no ulterior motives.
Certainly, some members can be highly opinionated, and some have quit or
stopped attending after failing to force
their agendas on the group as a whole. But that’s standard for any group of
professionals, and those bad apples are far fewer than the vast majority of my fellow members, whose attitudes and behaviors are uplifting, respectful and collegial.
The point is, you can sit on the sidelines or get in the game. It’s your call. At the recent Appraisal Summit in Las Vegas, Mike Brunson, President of the 42
ignited the spark that lit the fire.
back, he also said that there were several First off, they had a unified voice. organizations came together and
“I realize that not everyone is going to
agree on every point, but having multiple appraisal groups presenting conflicting
views is detrimental to the credibility of all appraisers.”
This point is very important and we all need to keep it in mind: a united voice
and a common position. If we want to be treated like professionals,
impressive example. Like advocates and lobbies for members and provides
educational programs. Last year they
managed to get a state AMC law passed, one that ACOW President Justin Slack
predicted will be a model for the nation. They also succeeded, as noted earlier, in preventing the legislature from foisting requirement that bears
we need to behave like
no relevance to many
professionals. Being a part
appraisers. Preventing bad
of a coalition is one way
laws is at least as important
to show support for your
as fostering good ones.
profession. By voicing your
opinion, paying the nominal
The Illinois Coalition
dues and supporting your state coalition, you are
Appraisers, he is
giving back to your industry acknowledging (and I am as well. The few appraisers agreeing), can be their who are presently doing the work need your help. They can’t do it all alone.
an arbitrary licensing
own worst enemies.
of Appraisers (ICAP), meanwhile, boasts a
full-time lobbyist and an extremely active
organization, says Randy
Neff, Seminar Committee
Chair for the group. It’s critical that they
property that he or she appraised within
it is at the state level that most legislation
this triumph has attracted many appraisers
work in unison across the state because
impacting appraisers passes or fails, and
120 days of doing the work. Ferstl believes
statute loopholes, among other frontburner issues.
to their association.
These are just a few examples of what
administered by state governments.
There is some dissent about what ought
States, coalitions offer encouraging stories
The Arkansas Appraisers Association was
is to unite the state coalitions, sharing
licensing and certification programs are
formed in 2005 and may have the highest percentage of statewide participation of
appraisers of any organization in the U.S. Ferstl said about 40 percent of Arkansas’ 1,000 appraisers are members. They
employ a professional lobbyist when the legislature is in session. Ferstl asserted their membership continues to grow
because they are successful and because many appraisers want a “home” in the
industry without paying exorbitant dues. The Arkansas example was particularly
fascinating because that state’s lawmakers
passed an appraiser lien law that gives the appraiser the ability to file a lien on the
to happen next. A long-term goal of ICAP information and networking across state lines. A National Appraisal Coalition is
in its beginning stages. Ferstl, however,
doubts a national coalition will be effective or practical given the diversity across the country.
I side with ICAP on this one. If the
realtors can do it, so can we! We should
never underestimate what the appraiser community is capable of!
state coalitions do. Across the United
of appraisers going to bat for appraisers. If you don’t want to be vocal or active
but still want to show your support for
the goals and work that others are doing, you’re still permitted and encouraged to join your nearby group. Some state coalitions, like ours in Arizona, allow appraisers to attend meetings via a
conference call phone line because so
many of us are spread out and time is so
valuable. Many coalitions also offer more localized meetings as well.
CoAA also employs a lobbyist who
The cost of joining is very little, but the
in April 2010 of the AMC bill and now on
for information about the coalition in your
helped us work first toward the passage its implementation. In addition, we are
working to alter Arizona’s appraisal board
support goes far. Feel free to contact me
state. Let’s get that attitude changed out there! 6
* LIVEVALMAG.COM | 43
| joe emison |
n o i t a r e n ge AVMs are more accurate when they use data sources beyond public records.
M o s t
automated valuation models (AVMs)
estimate property values
the internal characteristics of properties
as part of a “hedonic model,”
and by looking at historic sales around
“The most accurate way to value a property is to find out how much someone will pay for it. Unfortunately, sales data is only updated when a home sells.
However, building permit data allows us to take property sale values and bring
them up to date, thus giving us a newer, better way to value properties.”—Holly
Tachovsky, President of BuildFax, a national aggregator of building permit data.
as part of a “repeat sales index.” In theory, the combination of the hedonic and repeat sales evaluations captures the full range of factors necessary to value a property automatically. In practice, the
quality of the data that drives the hedonic model leads to imperfect results. This article describes a better type of AVM using building permit data.
The Structure of Automated Valuation Models Automated valuation models provide instantaneous property values using
mathematical formulas and property data.
Most AVMs consider the age of a structure, its square footage, number of bedrooms
and other characteristics that make up the property. These characteristics are used as part of a hedonic model, which is a
specialized term for a type of mathematical formula that estimates value from a list of characteristics.
However, property characteristics cannot
determine a property’s value on their own. The real estate agent mantra “Location, location, location” implies that two
structures with identical characteristics
may command different prices depending on their location. So the hedonic model is
not enough; AVMs need a way to capture
the market conditions around the property. Most AVMs achieve this through a repeat sales index, which calculates localized
market fluctuations by looking at repeat sales of the same properties over time.
is inaccurate. Property characteristic data
Market Conditions / Historic Sales (Repeat Sales Index) Property Characteristics (Hedonic Model)
comes almost exclusively from tax assessor offices and MLS listings (largely derived
from tax assessor data). Tax assessor data has a lower level of accuracy because
it must be filled out for the Computer
Assisted Mass Appraisal (CAMA) system Fig.1 - The Structure of Most AVMs
to run and calculate taxes. If a value is not known, the CAMA system can’t run, so
The Problem with Property Characteristics “Effective Year Built” is merely a term used
values—accurate, inaccurate, or guessed— are entered into the system.
in Florida mass-appraisal of properties. It does
Tax assessors are efficiently calculating
or many upgrades which may impact the
which the CAMA method enables.
built data should never be used by insurance
appeals process for correcting inaccurate
actual physical inspection of property, nor
resulting in taxes that are either accurate
constructed or the current condition.—Lori
political as well as a personal standpoint.
The problem arises when third parties take
Even with the sophisticated structure of a
it not in the proprietary and specific way
sales index, AVMs are not perfect. Zillow,
completely accurate determination of
facing AVM, says that at least 20% of the
leads to many problems with the
the sales price, and in some top metro
Why? Four Reasons:
the sales price more than 40% of the time.1
First, there is no dialogue between the
One of the main reasons that automated
the underlying values used to calculate
underlying property characteristic data
be corrected when the assessor’s office >>
NOT reflect the actual age of the property,
accurate estimates for tax purposes,
condition of a property. Our effective year
Every tax assessors’ office has a working
companies and others as a substitute for an
values (and thus the tax amount itself),
for determining the true year a property was
or underestimated, which is fine from a
Parrish, CFA, Property Appraiser, Broward
data from tax assessor offices and interpret
hedonic model weighted against a repeat
that the assessors use it, but rather as a
the provider of a widely-used consumer-
property characteristics. This practice
time, their estimate is more than 20% off
resulting hedonic models.
areas, their estimate is more than 20% off
valuation models are inaccurate is that the
hedonic estimate and the homeowner. If property tax are significantly off, they will
* LIVEVALMAG.COM | 45
and homeowner take a closer look at the
County has stopped showing “year
homeowner is not directly notified and has
are concerned about others relying on
actual home. For the hedonic estimate, the
no way of correcting the value.
Second, hedonic models now rely on data that is stored in many different locations,
built” on their website because they
it. Moreover, Roger Arnemann, Vice
President of Global Consulting and Data Services at Risk Management Solutions,
has examined many different commercial
Market Conditions / Historic Sales (Repeat Sales Index) last sale + Property change log (building permit data)
insurance portfolios and has found that
Fig. 2 - R eplacing the Hedonic Model with Last Sale + Property Change Log
construction information. Further, in
As the property “change log,” building
single family dwelling portfolios can have
cannot reveal the absolute or total value of
among other field-level accuracy issues.
permit data coverage starts, often no more
model part of AVMs is sound, the accuracy
effective when paired with a starting point,
data is that it happens infrequently and
at the tax assessor’s office, but not so
Correcting the Property Characteristics Problem with Building Permit Data
is where building permit data comes in.
are many cases in which the data is wrong wrong to make the homeowner notice the
changes to the property since the last sale.
error or want to go through an annoying
What can be done about this inherent
dispute process. It is in these same cases
problem with the crucial hedonic model part of AVMs? The solution is to replace the standard hedonic estimate—based
Testing an AVM Based on Building Permit Data
on square footage, number of bedrooms,
One note on pulling values from building
year built, etc—with a different formula,
permit data: Each building department
driven by more accurate data, that delivers
has its own criteria on what constitutes a
the same underlying estimate of the non-
proper valuation for a particular project.
market-adjusted value of the underlying
For many jurisdictions, permit valuation
structure. In short, use the last sales
is a measure of the cost of materials; for
amount of the property, and add to it the
some, it also includes the cost of labor.
values of the building permits issued on
For the purposes of the tests below,
the property since the last sale.
I used the permit valuation as it was
square footage values are either accurate
Building permit data is essentially a
that any professional AVM that uses
formula coefficient associated with square
work for an increase in the value of the
adjustments to permit valuation amounts
and often updated infrequently or not
at all. Thus, even if the tax assessor fixes the problem in the assessor’s data, the majority of the tens of thousands of
copies of that data in existence will not be
updated, and the inaccuracy will persist. Third, hedonic models are much more
sensitive to small inaccuracies than CAMA systems. This is largely due to the fact that they are estimating much larger numbers: home values, which are around 100 times larger than property tax amounts. There
that the hedonic estimates are far off,
because the errors are significant when
applied to estimating home value.
Fourth is the inaccurate-data feedback loop that retains a level of inaccuracy
over even accurate assessor numbers. Because the hedonic models assume
that the data is correct, the underlying
mathematical formula assigns incorrect coefficients. For example, if household or underestimated, then the hedonic
footage will be too high, as it compensates for numbers that are too low on average.
A coefficient that is too high because only some of the data points are inaccurate
will adversely affect all of the estimates generated by the model.
The quote from Lori Parrish, Broward
County’s property appraiser, shows that county’s belief that their “year built”
designation is inaccurate, and Broward 46
they can have up to 50% inaccurate
residential portfolios he has found that
permit data has one core weakness: it
up to 20% inaccurate number of stories,
a property that was built before available
While the theory behind the hedonic
than 20 years. Building permit data is only
of the underlying data is on much shakier
the sales data. The core weakness of sales is only effective right after sales, which
to date by logging all of the significant
stored by the jurisdiction. I would expect
“change log” for a home. Every permitted
building permit data would apply some
underlying property, from an addition to
on a jurisdiction-by-jurisdiction basis.
to an electrical upgrade, is logged by
I recently conducted an analysis of
through public record request. And most
capture individual property characteristics
extremely high level of accuracy. Unlike
supposed to work.2 Using a random
to estimate or guess about the presence of
different cities in Florida and sales data
a roof replacement to fire damage repair the building department and available
whether building permit data does in fact
importantly, building permit data has an
in the way that a hedonic model is
tax assessor’s data, there is never any need
sample of 10,000 properties across 10
a building permit.
from AVM data supplier Real Info,3 I
Building permit data brings sales data up
looked at those properties that had been
Full details on the analysis are available in BuildFax Internal Research Paper No. 15; email firstname.lastname@example.org to request a copy. 3 For more information on Real Info’s AVM data, please contact Jacob Garcia at email@example.com.
sold at least twice in the past 20 years to
issued, ignoring the building permit data
In particular, where extensive permitting
first sale would more accurately predict
the building permit data improves the
building permit data provides a more
see whether building permit data after the the amount of the second sale.
For example, a home in Apopka, Florida, sold for $306,000 on April 21, 2000. The
same property sold again on June 12, 2006.
leads to less accurate results. Including
repeat sales index, and may obviate the
need for the hedonic model altogether, as
it captures the underlying property value from a more accurate data source.
The repeat sales index for the local area
showed that prices of comparable homes
Enhancing Today’s AVMs with Building Permit Data
had increased by roughly 75% between
those two sale dates, which would give an
“We are continuously developing new datasets
estimate of around $535,000 on June 12,
to be on the forefront of enhancing AVMs,
and we believe that building permit data will
2006. Tax assessor data available on June
12, 2006 was unchanged from its April 21,
2000, values, and a mixed (hedonic model and repeat sales index) estimate for the home on June 12, 2006, was $522,000.
However, building permit data on the
property shows that in late 2000, an inground pool, cool deck, boat dock and boathouse were all built, for a total of
$44,861 in permit valuation. Ignoring the
be a must-have AVM data source in the near
work has been done on a property, accurate estimate.
Second, as explained above, one insidious aspect to the inaccuracies in tax assessor data is that they make the mathematical formula less accurate for all—even
accurate—property characteristic values. Building permit data can be used in the
creation of the hedonic formula to mitigate this issue.
term.”—Jim Kirchmeyer, CEO of Real Info, Inc.
Finally, last sale + property change log
It may not be necessary to discard hedonic
as a third estimate of valuation in AVMs,
models altogether. Building permit data can be used in a blended repeat sales
index/hedonic model AVM in at least three different ways. First, building
permit data can be used to establish better confidence levels on AVM estimates.
(building permit data) could be added and weighted just as both the hedonic
model and repeat sales index are weighted against each other. This could provide
significant lift to existing AVMs without
having to start development from scratch. 6
Fig. 4 – Building Permit Data-Enhanced AVM Beats the Simplified, Traditional AVM
hedonic estimate and instead adding this to the 2000 sales amount and including
the repeat sales index estimate, we get a
total of roughly $580,000. The actual sales amount on June 12, 2006 was $590,000.
In this case, the AVM based on building
permit data was less than 2% off the actual value, whereas the traditional model was more than 11% off.
To the right are two charts from my
analysis showing how building permit data increases the accuracy of a pure
repeat sales index model.4 The first shows that on properties with permits totaling more than $25,000, the building permit data AVM estimates the proper value
within 5% for around four times more
properties; the second looks at properties
that had any number of permits and finds that the building permit data AVM still
beats the repeat sales index model across the board.
In summary, in the situations where
significant building permits have been Unfortunately, it was not possible for me to get historical values from a blended repeat sales index/hedonic model AVM, although it is unlikely that such a model would have yielded significantly different values from a repeat sales index because the average time between the two sales was four years, which is very little time to expect updates in even the most up-to-date tax assessor data.
* LIVEVALMAG.COM | 47
VOICES OF VALUATION
VOICES OF VALUATION Last month’s articles sparked a lot of debate. Here are some responses from our readers.
The Appraisal “Review”
BOB Interesting story. I am a Certified Residential appraiser and have been a desk review/reconciliation specialist since 2005. I recently responded to an ad for reconcilers. A few days later I received a phone call from the company’s President. At that time I was told that part of the job was to travel to India from time to time to train people as reconcilers. I took a pass.
LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM LVM
do you have something to say?
AMCs: The Good, the Bad and the Oligopoly
GuyM1 Mr. Verrett is dead on in his opinion that hair-cut pricing will still exist. I currently do work for an AMC that recently decided to create a preferred fee appraisal panel for preferred appraisers. The rub of course is that you are only “preferred” if you’re willing to accept the lower preferred fee. It has nothing to do with quality of your work, just the dollars and cents. The writing is on the wall that this AMC is trying to create a lower fee standard in hopes that the final “reasonable and customary” definition will change and will be what the AMC was paying before the April deadline.
The Low Purchase Appraisal
Bankers1 Ken, you missed an important point, the appraisers ability to market themselves and directly solicit bankers/brokers is now so limited that it takes the “spirit” away from old timers like me to “chase” business. After 24 years in the industry, I have spent hundreds of thousand hours and countless $$$ to “land” a new client or generate an income stream. Some how we are no longer in business. Just my 2 cts.
anonymous I agree, the article is well said. I would like to add when I discuss value to Realtors I make a point that a part of establishing the value of a property is that there is a knowledgeable buyer - would that buyer make the purchase if the market indicates a lower value? Many of the buyers are not exposed to what has sold and rely on information provided by their agent, which is based primarily on what is currently on the market.
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* LIVEVALMAG.COM | 49
FOR WHAT IT’S WORTH
FOR WHAT IT’S WORTH
While the TSA pursues a “check every
detonate? Yet the TSA pursues the same
with minimally skilled and low-wage
believing that “eternal reliance on the
passenger down to their skivvies” strategy, employees empowered to do all kinds of
things that would have been unthinkable just five years ago (even after 9/11), the
AMCs pursue a strategy of “zero defects” – blasting every report, regardless of its
source, with multiple levels of overlapping and, sometimes, contradictory oversight; with minimally skilled and low-wage employees empowered to make all
kinds of demands that would have been unthinkable just five years ago. In both
cases, they are intensely focused on the
bark of a single tree instead of the health
Reactionary Insanity – Fighting the Last War
is horribly ill-suited to countering the
threat against which they are deployed. Likewise, the AMCs / lenders have
arrayed a massive arsenal of “solutions” to find every tiny little “flaw” in individual
judgment and local experience of those
It has been noted that those demands are merely a response to past failures. Such
demands may have been beneficial had
they been instituted several years ago, but they are now just a response to a threat
that no longer exists – or at least no longer exists in the same form. In short, they are
“fighting the last war.” (Google “Maginot Line” for a classic example.)
scrutiny of today’s AMCs, but if my recent review engagements are any indication, those enhanced procedures have not
accomplished much (although the reports with critical flaws do tend to include a lot of pointless gibberish designed to
“check a box” on the AMC’s enhanced QC checklist).
levers of the machine are: fairly low on assigned to an impossible task; NOT
empowered to employ any degree of
common sense, and required to employ
strategies that are ill-suited to the stated goals. The best and brightest seem to
believe that if they just write enough rules and procedure manuals, their checklists
can imitate a meaningful eyes-on review. Whatever could possibly go wrong with such a system?
“best in class” appraisers/appraisal
While there is ample evidence available
tender mercies that have encouraged
oversupply of poorly trained and/or
companies. Very much like the TSA’s those who can to pursue alternative
travel options, the enhanced QC reviews and picayune demands of the AMCs
and lenders are driving those appraisers
who can – including those with the most
experience – to abandon the AMC segment of the market.
In both cases, the chosen strategies are highly bureaucratic and needlessly wasteful, creating an adversarial
relationship between the users and
indicating an unfortunate and diminishing unethical appraisers, the AMCs/lenders would be far better served to identify
those who are reliable and afford them the respect they have earned instead
of treating all “passengers” as if they
are uniformly blank slates that can be made equal through application of
ever-more oppressive (and wasteful) QC
requirements – requirements which very
rarely have anything to do with the central purpose of the appraisal.
providers of the underlying services,
In both cases, we would all be better
in the long run. How many attacks on
for the terrorists/incompetent appraisers
and have little chance of being successful large jets have gone undetected over
the past five years – until they failed to 50
have been passed through the enhanced
the skills meter; minimally compensated;
one-size-fits-all approach – one that
a number of years, then relying on the
insane demands on appraisers.
many appraisal reports with critical flaws
The TSA, it seems, pursues a ham-fisted,
companies that have proved reliable over
between the TSA and AMCs’ increasingly
sufficient strategy. We can only guess how
In both cases, the employees operating the
engaging only those appraisers/appraisal
I realized there is a near-perfect analogy
incompetence of your adversary” is a
of the forest.
reports – instead of identifying and
A friend recently sent me some information about the manic and impotent blunderings of the Transportation Security Administration (TSA). While reading,
destined-to-fail strategies, apparently
served if the powers that be, were looking instead of assaulting the dignity of every passenger/appraiser to no avail. 6
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