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Winter/Spring 2012, Volume 29
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Richard Heyn, SRA and Dawn Molitor-Gennrich, SRA keep you in-the-know.
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Raising the Bar in Appraisal Technology
Working RE Serving Real Estate Professionals
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Winter/Spring 2012 Volume 29
From the Publisher Readers Respond Customary and Reasonable Assignments By Andy Anderson
10 14 16 18 24 26 28 32 34 36 38 40
AMC Bad Debt—Lenders Responsible? By David Brauner, Editor
Building Business What’s Next? By Lore DeAstra, MBA, SRA, CDEI
Making Good Adjustments by Philip G. Spool, ASA
Success Collecting AMC Debt from Lender By David Brauner, Editor
Suspension Merry-Go-Round By David Brauner, Editor
Advocacy or Independence? By Thomas J. Inserra, MBA, MAI, SRA
Industry News Professional Marketplace Closer Look for Home Inspectors: In Search of Perfect Home Inspection
By Rick Bunzel, CRI, ACI
Don’t Inspect for Pests, Sued Anyway
By Isaac Peck, Assistant Editor
Maximizing AMC Orders and Income: Common Errors to Avoid by Bryan Knowlton
Customary & Reasonable Fees Join 16,000 Fellow Appraisers!
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6760 University Ave. #250, San Diego, CA 92115 email@example.com www.orep.org Fax: (619) 704-0567 Winter/Spring 2012 Working RE
From the Publisher
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Appraiser Roast By David Brauner, Editor
At an industry gathering last fall, speaker after speaker seemed to delight
in detailing and documenting the dumbest of appraiser mistakes—from carelessness and stupidity all the way to recklessness, incompetence and fraud. The speakers, many of whom are lifetime appraisers working for lenders or AMCs, earned plenty of chuckles and approving nods from the audience of, well, mostly fellow appraisers. Admittedly, some of the slides are funny. But one wonders whether speakers place as much consistent emphasis on the shortcomings of their peers at conferences for At an industry attorneys, doctors, bankers, accountants and yes, gathering last real estate agents and brokers. It’s doubtful. And it isn’t just at conferences and not only by the fall, speaker staff of AMCs, lenders and regulators—check out after speaker any appraiser forum or blog to find appraiser-onseemed to appraiser bashing in full force. Is this profession delight in filled with more incompetents than others? Is it detailing and bereft of competent, dedicated professionals with documenting integrity, compared to other professions? This is the dumbest doubtful too but you wouldn’t know it by what is said at professional gatherings and in online of appraiser forums. mistakes— Here is another pattern I’ve noticed for 20 years at these gatherings: speaker after speaker admonishing appraisers to be better listeners, better communicators, to provide better and more thorough analysis, to utilize cutting-edge analytical tools and technology, to obtain more education, more training, to act more professionally, even to be better groomed and better dressed! And above all, to uphold the integrity of the assignment, no matter what pressures they endure. The onus is always on the appraisers to do the right thing no matter what. Oh, and be pleasant too. Yet, hardly any mention from the dais of the other, darker side of the coin that most appraisers say are the daily facts of life: a process mired by inept questions from unqualified AMC personnel, excessive (some would say ridiculous) stipulations, scope creep, requests for items already in a report, pressure to make a deal work under the guise of “two more comps,” continued blacklisting, and the bottom line issue facing the profession according to the rank and file: that at the end of the day what matters most to many lenders and their agents, despite all the lip service, is fast and cheap. And until that changes, many vetern appraisers say, nothing changes. WRE
Choosing Comps I have been fortunate to be an appraiser for 21 years. I still like being an appraiser. Judging from your articles you do also. First I want to thank you for your articles in Working RE. I find them helpful. So today I need a little help. I am fighting with an underwriter regarding substitute neighborhoods. They are insisting that there is a onemile rule. I’m saying that there is not. Now they want proof. In your article in Fall 2011, you state there is no “one mile guideline for Fannie Mae, Freddie Mac or FHA.” I would like to send them your article but underwriters don’t believe appraisers. Can you help me prove there is no one-mile rule? I appreciate any help you can give. —R. Phillip Edsall
Yes, indeed, there is no one-mile guideline from Fannie Mae, Freddie Mac, USPAP or FHA. A so-called onemile guideline can come from lenders if they choose but not from any of the above. If you want the underwriters to contact me, he or she can email me at firstname.lastname@example.org. There is no mention of a one-mile guideline because there is none. The underwriter can also go to Efanniemae.com and look it up themselves. Again, they will not find anything regarding a so-called one mile rule. Fannie Mae has a handbook for appraisers. Copies can be obtained by calling them at (800) 471-5554 and ask for publication number CT147. By the way, Fannie Mae only has a 15% net and a 25% gross adjustment guideline and not a 10% line item guideline. The 10% line item guideline is for FHA only. —Philip G. Spool, ASA (story author)
4 Working RE Winter/Spring 2012
Building Business: What’s Next? (Story first published in Working RE’s Online News Edition. See Page 16.) I think your estimating 10 appraisals per month is not a bad number considering the amount of time required to answer callbacks from AMCs. If 10 appraisals a month is the norm, the appraisal profession is not a viable business. Work the numbers to NET assuming a 40% to 50% expense ratio. This is why all the appraisers I know are effectively retired and completing appraisal from their homes/caves. — Edward M. Douglass, SRA
Edward—Your observations are correct that the appraisal profession is not a viable business if the expense ratio is over 40%. This is the reason why we have changed our business model to cut costs and vary our clients and put more money in our pockets. However, keep in mind that the appraisal profession is not the only type of business that has been affected. Every year, we analyze our income/expenses and make adjustments. For instance, this year we slashed our phone bill by over $3,000. We also made changes to save on our appraisal software. Also, I continue to drive my car with over 104,000 miles. These three suggestions have saved us at least $8,450 this year. —Lore D’Astra (story author) (D’Astra is author of FHA Appraiser Inspection Checklist pg. 33.)
Work the numbers to NET assuming a 40% to 50% expense ratio. This is why all the appraisers I know are effectively retired and completing appraisal from their homes/caves. No one is paid $350 anymore and most of your suggestions won’t pay for that service either. —Casey Tartaglino
borrower. Of course, that does not paint the entire picture, as you wisely point out; it is actually the invisible hand of the market which decides. —Dustin Harris
Casey—We realize that fees vary by region, however, our office does not accept appraisal fees under $350 at this time. To demonstrate, below is a list of the residential appraisals for properties that I personally completed within the past 30 days. Keep in mind that the types of clients varies per month depending on the assignment. Further, we review the client base periodically to look for the areas which can be developed. —Lore D’Astra (story author).
(the Appraisal Coach)
Well said, Mr. Anderson! Having begun in the appraisal field some 30 years ago, I recall thinking how fortunate to learn a profession which values integrity, experience and professionalism. While my practice is in the commercial area, I have had requests from AMCs whose contact representative can provide only a vague street address for a “drive-by” to be completed in an unrealistic time frame. page 6 8
Customary and Reasonable Assignments (Story first published in Working RE’s Online News Edition. See page 10.) Thank you for shedding a brave light on a subject that many appraisers want to ignore. The bottom line is....it is THE APPRAISER who decides what is customary and reasonable....not the AMC, not the government and not the
Total Gross Income of Appraisal Assignments
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When I take the time to qualify the client, who is most often in a faraway state, informing them that as a new client I require a retainer fee and balance paid upon completion of the report (before delivery of the report), the response is either silence or some comment like: “Oh we don’t do that.” There’s your answer. I choose
to decline. I have no intention of supporting a third-party “made-up” industry add-on fee to my credibly developed, opinion of value to which my signature is attached. While I may be one of the few left standing, I choose to be a part of the solution and to reaffirm the integrity of the independent, professionally developed and credible
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opinion of the real property valuation. —Susan C. Adams, Certified General
I agree 100 percent. The description of the industry appraiser is right on. I have seen, reviewed, and been asked to do field and desk reviews on industry appraiser assignments and all the bank or AMCs really want is a new appraisal because they know and realize that the appraiser that provided them with the original report does not have a clue about real estate values in this area and they need someone to review, i.e. correct, the appraisal before the loan can be closed. Unfortunately, I seldom get the assignment to do the review because I tell them my fee for looking over the report and then providing them with a review and a new appraisal. In the end, I assume the borrower probably has about $600–$700 added on to their loan costs because of the AMC’s unwillingness to use a competent appraiser in the area in the first place. —Marty Glaser Great article, however, it is not always possible to turn down the low-fee orders. I have stood my ground and refused to work for low fees. I went from making a six figure gross income to less than $25,000 gross for 2011. Just was taken off of a lender’s approved appraiser list via the AMC because of low values and slow turn times. I have never had an assignment for more than seven days and usually less than five. I just sent in my letter to the state board to place my license on inactive status. I just can’t make it anymore as an appraiser. For 16 years I have loved my job, now I can’t even stand to think about it. Such a sad state that we appraisers have let this come to. We can blame everyone else but we let this happen to ourselves. The AMCs formed a strong organization but for appraisers it is every man for himself. Good luck everyone. I hope you all fare better than I did. —Chris, New Jersey Certified WRE
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Winter/Spring 2012 Working RE
Customary and Reasonable Assignments By Andy Anderson
Editor’s Note: Andy Anderson looks around and ahead toward fixing a now broken appraisal profession.
The appraisal profession was not broken.
Just like other professions, there were (and are) some bad actors, but appraising was not broken and should have been allowed to do its job correctly. That is not what happened during the unrealistic property value increases of the lender-created real estate bubble and it is not what is happening today. Here’s how to fix it.
The appraisal profession was not broken. Just like other professions, there were (and are) some bad actors, but appraising was not broken and should have been allowed to do its job correctly.
Appraisal fees for an independent appraiser should not be directed or controlled by anyone except the independent fee appraiser responsible for determining the scope of work necessary to complete the assignment in a competent and credible manner. Customary and reasonable appraisal fees, a concept originated by HUD, can only be determined by accurately defining what a customary and reasonable assignment is, as determined by a local, experienced appraiser. Each and every assignment can require a different level of education, experience and competence to complete in a professional manner, dictated by many factors, including but not limited to location, population, market activity, data availability and the complexity of the property and improvements. Each and every assignment requires the adequate time necessary to complete the request in a diligent and competent manner. The turn time of the report
Mr. Anderson has been a professional, independent appraiser for 27 years, specializing in complex, mountain, agricultural and manufactured housing, expert witness for value and construction, insurance appraisals, probate, estate/tax appraisals, etc. He is a VA, FHA, Cal Vet approved fee panel appraiser. He is an author and instructor for appraiser Continuing Education and has been known to mentor any appraiser requesting his assistance. Andy is also a presenter for the OREP/Working RE Webinar Series (page 17).
10 Working RE Winter/Spring 2012
should not be dictated in a manner that compromises the appraisal, resulting in a less than credible assignment conclusion. In compliance with Title XI FIRREA of 1989, and again with Title XIV of 2010, the appraiser is responsible, per the Uniform Standards of Appraisal Practice (USPAP), to determine the necessary scope of work to produce credible results—not a client and not an AMC. While lender and client requirements need to be met, the final determination rests with the appraiser.
Professional vs. Industry Appraisers There are substantial differences between a professional appraiser and what I call industry appraisers. The professional appraiser provides a service to the client that goes beyond the ability to fill out a form and complete the requirement for an appraisal to be included in the lender’s loan package. All “other than lender/AMC” users of valuation services desire diligent, accurate and professionally completed and credible valuation results. They seek out and compensate professional appraisers for their expertise and allow adequate time necessary to produce supportable, defendable and credible results. While there are many professional appraisers who feel they are “stuck” providing services to major banks, lenders and AMCs to stay in business, the professional appraiser does not compromise the quality and diligence because of low fees and turn time requirements. That is professional integrity. In contrast, many appraisers were and are providing a product that is dictated and controlled by lenders and AMCs to
cosmetically appear to adhere to federal regulations; the very regulations that require the lender to include an appraisal report in the loan package. The lending industry is the only user of appraisal services who desires fast and cheap appraisal reports and has come to rely primarily on a certain segment of appraisers to provide them. These appraisers—industry appraisers, are expected to complete diligent property inspections, competent research and analysis, and credible and reliable results in less than adequate time: often 48 hours or less. And they do. Many appraisers who work for less than adequate compensation were taught by supervisors who provided unfair fee splits during training. Many industry appraisers were improperly trained by supervisors who went so far as to lie about hours and experience on the trainee’s experience logs to capitalize on the opportunity to make a fast buck in the real estate bubble. The real estate crisis was fueled by greed. Some of these appraisers feel like they were done a great disservice by their “mentors” and have told me they would like to learn how to become professional appraisers.
Third-party service providers became a primary source for fast and cheap appraisals during the recent real estate bubble in an effort for more and faster profits. AMCs are utilizing industry appraisers in many cases. The result for consumers is lower quality appraisals with no cost savings. The public has not seen any savings since the fees charged by the third-party providers are similar to or higher than what professional appraisers charge in the same geographical area. The low quality of appraisals can be confirmed by the thousands of loan packages and appraisal reports being reviewed daily by the GSEs, banks and lenders, which are proving to be less than reliable, credible and acceptable. The general public deserves the protection of completely ethical, unbiased and uncompromised appraisal reports.
Free Market In an effort to protect the consumer and the investor, the professional appraiser must be allowed to openly compete with other professional appraisers in a given market area. That AMCs are able to dictate
fees and turn times, that only industry appraisers are willing to accept, results in a disservice to the public and investor. The appraisers who are required to sign contract agreements and fee schedules dictated by AMCs are being treated as though they are employees of the AMC and not independent fee appraisers. Many of the professional appraisers who will not sign AMC agreements are slowly but surely going out of business.
Protecting the Public: Transparency The consumer should never be charged more for the appraisal report than the professional appraiser is paid to complete the report. It is not the consumer or the appraiser’s responsibility to pay for the cost of locating and engaging a competent appraiser and the inclusion of a credible appraisal report in a loan package. Given this, a true “customary and reasonable” fee would be the fee charged to the buyer. The HUD One should only reflect actual fees and charges paid to the page 128
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Winter/Spring 2012 Working RE 11
appraiser under the title of “Appraisal Fees.” Any third-party fees and charges should appear on the HUD One separately and be clearly identified for the consumer to understand. The government, lenders and AMCs do not have the authority to dictate what fees and charges are acceptable and will result in services that are in the best interests of the public and the financial security of our families, communities and our nation. Paying a dictated and mandatory customary and reasonable fee does not ensure the public that only competent and diligent appraisers are completing their appraisals. The fact that an appraiser is Licensed or Certified does not by itself assure the client or consumer that the appraiser has the adequate education, experience and ability to complete the assignment correctly or at an equal level with other licensed and certified appraisers in the same geographical market. The focus needs to be the protection of the public. It is time to educate the public to the fact that the appraisal fee they are charged by most lenders is NOT what the appraiser is paid to complete the appraisal report. If I am charged $500 for an appraisal, I expect to get a $500 appraiser. So does the public.
Customary and Reasonable Fees? The Dodd-Frank Financial Reform Bill said that Licensed and Certified real estate appraisers shall be compensated at customary and reasonable fees for appraisal reports completed for federally regulated transactions. Yet, a legally enforceable definition of “customary and reasonable” has not been determined. I am not sure this is possible. “Customary and Reasonable” is arguably one of the most ill-conceived notions in the Financial Reform Bill, though there are many. Professional appraisers know what usual and customary charges are for real estate appraisal services in their area and should be able to command adequate and outlined fees in the free market. “Customary and Reasonable” fees are only 12 Working RE Winter/Spring 2012
necessary to determine profit margins for third party servicers. Precedence has been set in the medical and dental fields to determine customary and reasonable fees to be paid by a third party, such as an insurance company. Customary and reasonable fees have been determined by establishing the usual and customary charges of medical professionals located in a given market area. Usual and customary charges in the medical field are defined as follows: 1. Fee that is the most consistently charged by physicians for a particular procedure. 2. Fee that is usual for a particular procedure charged by the majority of physicians with similar training and experience within the same geographic area. Usual and customary charges for the professional appraiser might read as follows: 1. The fee that is the most consistently charged by the professional, independent, appraiser for a particular appraisal assignment. 2. Fee that is usual for a specific and particular appraisal assignment charged by the majority of appraisers with similar training and experience within the same geographic area.
VA/FHA Fees Conventional, VA and FHA appraisal assignments have distinctly different inspection, reporting and knowledge requirements. FHA appraisal charges should be higher than VA appraisal fees when the FHA-required inspection and report are completed accurately and competently. VA fees, while closer to actual usual and customary fees for FHA appraisal assignments, are not acceptable to set minimal or mandatory fees for conventional appraisal assignments. VA fees have been set by surveying the usual and customary charges by the appraisers on the VA panel and take into consideration
all of the VA requirements that need to be learned and adhered to by the VA appraisers, including the willingness to accept complex assignments at the same compensation as the less-complicated assignments. Accepting VA fees and becoming a VA Appraiser is a business decision; similar to the banks having fee panel appraisers that would accept slightly less per appraisal for volume. Also, the veteranbuyer is never charged more than the VA appraiser is paid for the completion of the appraisal report.
What Appraisers Can Do The decision to accept less than adequate compensation and to complete a report in less time than is acceptable, to adhere to unrealistic turn times dictated by AMCs and lenders, are business decisions. When an appraiser accepts compensation and turn times that are less than adequate, that appraiser has made a statement to the client and the industry that those fees and turn times are “customary and reasonable” for that appraiser. Not for me. To date I have not signed a single AMC agreement or contract. The only AMC orders I have completed were compensated at my determined charges and my turn times as determined on a case-by-case basis, based on the complexity of the assignment. Approximately 30–40 percent of my appraisal work is “other than lender,”* and that percentage is growing. The appraisal profession was not broken, but it is now. It will require diligence and dedication to rebuild what has always been the most important part of home buying: a completely unbiased and uncompromised real estate appraisal, completed by ethical and experienced real estate appraisers, to determine a credible and reliable property value at the time of purchase or refinance. WRE ___________________________________________ * See page 17 for webinar details.
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Fall 2011 Working RE 13
AMC Bad Debt—Lenders Responsible? By David Brauner, Editor
Editor’s Note: AMC bad debt—slow pay or no pay—is a growing issue for appraisers. According to one appraiser, federal guidelines may make lenders responsible.
Appraiser Kim L. Herzfeldt is mad as
Herzfeldt agreed to work for AppraiserLoft. Today he has over $10,000 in unpaid invoices from about two months’ work.
hell at being stiffed by AppraiserLoft and by the lender’s refusal to redress the loss. His course of action offers hope and possible precedence for every appraiser who is owed money by an appraisal management company (AMC). “It felt like your best friend stealing your daughter’s college fund,” says 30-year appraiser Herzfeldt, referring to the cold shoulder he got from his longtime lender/client, when he suggested they take responsibility for the monies owed him by the lender’s “agent” AppraiserLoft—the now defunct AMC. Here’s why Herzfeldt is so mad: he warned his credit-union client in advance that there was a growing body of evidence, easily found online, which cast doubt on the reputation of AppraiserLoft. But Herzfeldt says the warnings were ignored. Believing that one of Colorado’s top credit unions had done its due diligence and not wanting to lose a substantial portion of his income from one of his best clients, Herzfeldt agreed to work for AppraiserLoft. Today he has over $10,000 in unpaid invoices from about two months’ work. Herzfeldt, past chairman of the Colorado Board of Real Estate Appraisers, says he has received calls from many appraisers in Colorado who are in the same boat. He estimates outstanding fees
David Brauner is Editor of Working RE magazine and Senior Broker at OREP.org, a leading provider of E&O Insurance for appraisers, inspectors and other real estate professionals in 49 states. He has covered the appraisal profession for over 20 years. He can be contacted at email@example.com or (888) 347-5273. Calif. Insurance Lic. #0C89873.
14 Working RE Winter/Spring 2012
owed to Colorado appraisers from this one lender could be as much as $200,000.
Take It or Leave It The backstory is familiar: Herzfeldt was notified one day by his credit-union client that all their work would be going through an AMC: take it or leave it. “What hurt is that they were such a great client,” he says. “They paid full fees, were professional, no pressure, quick pay, expected quality and respected our work.” AppraiserLoft took 25 percent of the appraisal fee for “pass through” work, according to Herzfeldt. “Other top credit unions were not taking appraiser fees to pay for these services,” he says. And then there was the issue of quality. “The questions the staff reviewers at AppraiserLoft asked were obviously uninformed and showed serious ignorance of the appraisal process. They were boilerplate—follow-the-prompt-on-thecomputer-screen type of responses. All through this process we made the lender aware of our concerns. We continued to try and protect our client and our work, but we were ignored,” Herzfeldt said.
Fighting Back Based on language in the Interagency Appraisal and Evaluation Guidelines, Herzfeldt believes lenders are responsible for the “agents” they hire and that this responsibility may extend to fees. From the Guidelines (beginning page 36): “An institution that engages a third party to perform certain collateral valuation functions on its behalf is responsible for understanding and managing the risks…
including compliance, legal, reputational and operational risks.” Further: “If an institution outsources any part of the collateral valuation function, it should exercise appropriate due diligence in the selection of the third party…The process should include sufficient analysis by the institution to assess whether the third party provider can perform the services.” (To view the Guidelines, visit WorkingRE.com; Sidebar: Interagency Appraisal and Evaluation Guidelines.) “Clearly, the credit union did not do its due diligence under these Guidelines,” Herzfeldt says. “When I asked them to make good on the lost fees from the AMC they vouched for, they basically said ‘tough luck.’ Their position is that the appraisals are already paid for by them and that my contract was with AppraiserLoft, not with them. But our position is that their contract was with AppraiserLoft, which places the responsibility on them. One or both of them are likely in breach of the agreement.” According to Herzfeldt, a number of attorneys agree that there may be a basis for making the lender responsible for the monies lost. “The attorneys say that the contract between the lender and AMC may include specific requirements and protections that either or both parties breached and that since I can demonstrate monetary harm as a result of such breaches, I may have a cause of action. In other words, if the lender had a clear duty to oversee the third party and how it dealt with appraisers, which it did, then I may be able to go after the lender for failing to perform the required oversight, which resulted in my being out $10,000.”
Protection Bureau now in charge of oversight, there is a fresh and more independent set of eyes to review and revisit issues of appraiser independence, transparency, customary and reasonable fees, and the impact on consumers. Herzfeldt sees the failure of AppraiserLoft from the perspective of an independent fee appraiser. “Appraisers can’t worry about getting paid and be independent,” he says. “The protections need to be enforced; otherwise, appraisers have no recourse. I can and have gone to state authorities over local lenders who wouldn’t pay and have gotten satisfaction. But in this case, I can’t go to California (where AppraiserLoft was located) to collect from them, and they know that.” Besides the money he’s out, Herzfeldt says he is worried that this is part of a larger trend. “This (local) credit union was one of our best clients,” he said. “Historically, credit unions have provided the best services to their members and they have respected the professional relationship between lender/ appraiser. I hope this is not a dark sign of things to come.”
Herzfeldt has been contacted by numerous appraisers on this issue and directed their concerns, along with his own, to state and federal regulators, Congress, his state Attorney General and the media. “I suggest all appraisers do the same. The light of day may make the difference,” he said. “Many small, independent appraisers have been harmed. All have been damaged by the actions of this lender and the AMC. We have been patient waiting for the lender to do the right thing. We hope they will.” Contact firstname.lastname@example.org if you have been harmed in Colorado. WRE ___________________________________________ *See the OREP/Working RE AMC Rater blog at Appraisertalkback.com, for the low-down on working with various AMCs, including AppraiserLoft.
Big Picture The failure of AppraiserLoft is sending shock waves through the industry for several reasons. Many see this as a tipping point that will force the hand of regulators to step up AMC oversight. AMCs appear to be backing off a bit and in a more conciliatory mood as a result. With the new Consumer Financial Winter/Spring 2012 Working RE 15
Building Business What’s Next? By Lore DeAstra, MBA, SRA, CDEI
Editor’s Note: Diversification is one of the keys to survival and prosperity in the new real estate world. Busy or not, right now is the best time to begin laying the groundwork for future success.
For appraisers, diversification is the key to survival and prosperity in the new real estate world.
ost appraisers have been on a roller coaster ride unlike any other. Now that the Home Valuation Code of Conduct has sunset and the April 1 implementation date for Dodd-Frank has come and gone with little changed, have you thought about your next steps? For appraisers, diversification is the key to survival and prosperity in the new real estate world. This article gives you easy ways to set measurable goals that will increase business in diverse target markets. As a result, these quick tips will help you keep your eyes on your goals– helping others while increasing income. Start where you are. The first question to ask is: how much more business do I want? Set a realistic goal that is measurable. For instance, “I want to increase our appraisal business 20 percent in the next 12 months.” The easiest way to accomplish a goal is to break down the task into believable steps. Using these numbers (next page), you would need to complete two additional appraisals per month to increase your business by 20 percent. Breaking down the task into small increments makes a daunting task believable. 10 Minutes a Day Are you willing to spend 10 minutes a day to increase your business? Start small so you can obtain effortless victories, such as one phone call a day. Earning new business has a 10 percent success rate, while referral business has a 65 percent success rate according to Tom Hopkins,
Lore DeAstra is author of FHA Appraiser Inspection Checklist, see page 33.
16 Working RE Winter/Spring 2012
the most successful sales trainer in the world. Whom do you contact? Open up your database and contact everyone you know who fits your target market such as your attorney, banker, accountant, insurance agent, sales agent and friends and neighbors. What do you talk about? According to Hopkins (Selling for Dummies), one should never begin any selling cycle until you have taken a few moments to put yourself in the shoes of the other person. For instance, ask him/her how he/she is, and how you can help him/ her per assignment or based on an hourly rate such as: • Attorney: appraise properties involved in estates, trusts and divorces; • Banker: appraise or review properties in their portfolio; • Accountant: appraisals for tax or trust purposes; • Insurance agent: appraise real estate via cost approach for his/her policies; • Sales agent: measure homes for his/ her listings, complete a pre-listing appraisal, review his/her competitive market analysis or offer to answer questions at a sales meeting; • Neighbors: complete a market analysis of their home for tax and insurance purposes. If you are competent, offer to compile an energy audit for a small additional fee to help them save on utilities bills (visit WorkingRE.com to check out the Guide to Energy Auditing). Bottom line: you will receive a better reception with less effort when contacting people who are familiar with you and your work. If you are like me,
rejection is de-motivating. Are there any meetings that your target markets will attend? Search in your area for functions based on your target market. Functions might include conferences or luncheons attended by real estate sales agents, appraisers, attorneys, paralegals, bankers, accountants, government agencies, or mortgage companies. What else can you do? Deliver candy attached to your business card to everyone in the office. Do you blog? Offer to mention them and their company. Send an eCard to those in your contact list. Use the social media sites (Facebook©, LinkedIn©, MySpace©) to keep in touch or send them information that interests them. Ask them who they can refer that will benefit from your services. There are many books, classes, and seminars available nationwide. Many are online that will help you
Current Appraisals per Month.............................................................................................................. 10 Average Fee............................................................................................................................................. $350 Monthly Gross Income...................................................................................................................$3,500 Annual Gross Income..................................................................................................................... $42,00 Increase Gross Income by 20%............................................................................................ $50,400 Monthly Gross Income.................................................................................................................. $4,200 Projected Appraisals per Month..........................................................................................................12
with various topics. You may learn a new skill and earn continuing education (CE) at the same time. As your confidence and script improve, so will your pocketbook. How do I know? While writing this article, I made three phone calls that took about half an hour. Within a few days, I received an appraisal assignment from a referral. Besides, it was easy and fun to reconnect. Take a few minutes, NOW, to determine the type of clients you have, whom you want to work with and how you can diversify while developing
mutually beneficial relationships. Determine a believable amount of money you want to earn and let your fingers go crazy! Who knows, you might even enjoy catching up with folks you have not connected with for awhile. Lastly, if you pass along your success stories to Lore@continental-appraisal.com, I will compile a follow-up article that is a win-win for everyone. Thanks! WRE ___________________________________________ For a related article please read After the Boom: Surviving & Thriving (in any market), at WorkingRE.com, Library; Volume 15.
Saving You Time and Money The OREP/Working RE Webinar Series is designed to increase your bottom line and professional expertise. By bringing together experts from across the industry, OREP/WRE hopes to provide each and every appraiser with the opportunity to increase their knowledge and earning power.
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For more information and current dates and times, go to WorkingRE.com (click OREP/Working RE Webinar Series) OREP members receive priority reservations and discount pricing.
Winter/Spring 2012 Working RE 17
Making Good Adjustments By Philip G. Spool, ASA
Editor’s Note: Whether you are appraising a single family residence or a condominium unit, if your adjustments are either not supported or not reasonable, your value conclusion could be totally wrong.
This article explains how to make appropriate and reasonable adjustments for residential properties, both single family and individual condominium units.
last article discussed choosing comparable sales in a tough market. As was discussed in that article, in today’s market, it is very difficult to obtain comparable sales and listings that best reflect comparison to the subject. Some sales and/or listings might be older but more similar to the subject; others may be further away in a similar substitute neighborhood. Once you select your comparable sales, the next step is to make adjustments to them. Whether you are appraising a single family residence or a condominium unit, if your adjustments are either not supported or not reasonable, your value conclusion could be totally wrong. This article explains how to make appropriate and reasonable adjustments for residential properties, both single family and individual condominium units.
Adjustments: Fact or Opinion? Most adjustments are considered “opinion.” Therefore, anyone can have a difference of opinion as to the amount of an adjustment. However, all adjustments or lack of adjustments must be reasonable. If you choose not to make an adjustment for a lot size difference between one comparable
Philip G. Spool, ASA, is a State-Certified General Real Estate Appraiser in Florida, appraising since 1973. Formerly the Chief Appraiser of Flagler Federal Savings and Loan Association, he has been self-employed for the past 18 years. In addition to appraising, he is an instructor with Miami Dade College, teaching appraisal courses and continuing education. He is also the Vice President and Chairman of real estate programs with the Greater Miami Chapter of the American Society of Appraisers. He can be reached at email@example.com.
18 Working RE Winter/Spring 2012
and the subject and if one lot size is twice the size of the other, what support do you have for not making the adjustment? Reasonableness is also a measure with respect to the amount of an adjustment. Say your subject house has a lot size of 15,000 square feet and a comparable sale has 30,000 square foot lot or one that is twice the size. If you choose to make a $1 per square foot adjustment, that is saying that a house with a lot twice the size as the subject is worth only $15,000 more than a house with half the lot size. This is reasonable, perhaps, if the land values in that area are selling for around $2 to $3 per square foot. But would it be reasonable if lot sizes are worth $15 per square foot or more? Any adjustments you make must be considered reasonable. What adjustments are considered fact instead of opinion? The answer is any adjustment that requires a known calculation based on facts. Most percentage adjustments are factual adjustments, assuming that the percentage adjustment is based on supportable facts. A good example is a sales concession, also referred to as a seller’s contribution to the sale. Most Multiple Listing Service write-ups disclose sales concessions. If not, this is another reason why it is important to verify the sale. Another example is an adjustment for market conditions (time) where you are relying on a data source that specifically indicates the percentage decline or increase in market price.
Not All Adjustments Equal Some appraisers and reviewers are of the opinion that line item adjustments have to be consistent for each sale. This is not necessarily correct. If you are making an adjustment for either site size or gross living area differences and one sale has a small difference in size between the subject and comparable, that adjustment may be different than if the difference is large. For example, let’s say that the subject has a gross living area of 1,500 square feet, comparable sale number one has a gross living area of 1,600 square feet and comparable sale number two has a gross living area of 1,900 square feet. You might have the opinion that no adjustment should be made to sale number one as there is only a 100 square foot difference, but an adjustment might be warranted for sale number two because the size difference is 400 square feet, or 27 percent larger in gross living area than the subject. On the other hand, if your adjustments across the board are $100 per square foot, a 100 square foot difference would indicate a $10,000 adjustment and, therefore, sale number one would more than likely need to have the adjustment made. However, there is nothing requiring the appraiser to make a $100 per square foot adjustment across the board. One adjustment could be more or less than $100 per square foot while the other can be $100 per square foot. Whatever adjustment decision you make, you need to be consistent in your analysis, and it should be explained in your text addendum; otherwise the client, review appraiser or (hopefully not) an expert witness on the opposing side might consider your analysis a mistake rather than a reasoned decision.
Qualitative Versus Quantitative Adjustments Some residential appraisers follow the way commercial appraisers make adjustments. That is making qualitative instead of quantitative adjustments. Qualitative
adjustments in a grid might be just the word “positive” versus “negative” or it might be “superior” versus “inferior.” These types of adjustments do not commit the appraiser into stating a specific dollar adjustment amount. This would be good to utilize if the adjustment is not as supportable as one with an actual dollar or percentage amount. For example, if a comparable sale is located in a different neighborhood that might be slightly superior or inferior, to quantify that adjustment would be difficult. The same is true for quality of construction and many other differences. However, an appraiser should not make both quantitative and qualitative adjustments on the same grid. This results in an adjusted sales price that would need further change. An example is a $300,000 sale that after quantitative adjustments results in an adjusted sales price of $350,000. If qualitative adjustments would also be stated, either as “superior” or “inferior,” then the adjusted sales price of $350,000 would be misleading to the reader of the report, even though additional qualitative adjustments are mentioned. I don’t recommend using qualitative adjustments in a Fannie Mae grid where dollar amount adjustments are expected. But this would be perfectly acceptable in a narrative format.
Adjustments Using Paired Sales Analysis In your experience as an appraiser, how often have you actually supported an adjustment utilizing a paired sales analysis? Probably not often. While in beginning and advanced appraisal classes, and even in courses specifically about the sales comparison approach, it is always mentioned that paired sales analysis is the best method for determining how much the adjustment should be. Realistically, very few appraisers do this, especially after appraising for several years. It is wrong for a supervisory appraiser to tell a
trainee what the adjustments should be without showing or explaining to him or her how the adjustments are derived. When a trainee appraiser, who eventually becomes a Certified Appraiser, makes adjustments and states in the appraisal report that the adjustments are based on a paired sales analysis, unless there is support based on a paired sales analysis, that appraiser is misleading the reader of the report.
Supporting Adjustments Other than a paired sales analysis, what are other ways to support an adjustment? This is probably one of the most difficult questions to answer and probably the most controversial. For this answer, I would like you, the readers of this article, to reply to me via email with your suggestions (email below). I have one suggestion that is somewhat novel and which, at the same time, can possibly bring you business. In my story, How to Increase Your Residential Income (to read this story, visit WorkingRE.com; Library; Volume 21), I suggest that you give lectures to local Realtors, either at their office or at the Realtors’ Association office where they are members. I have recently talked to Realtors about the changes in the way an appraisal report is written via the Uniform Appraisal Dataset. I have also given talks on what an appraiser looks for in a house that might warrant an adjustment in comparison to a comparable sale. I have created a survey with separate line item adjustments that I would make for a single family residence, such as one-car versus two-car garage, swimming pool versus no swimming pool, etc. I indicate the specific neighborhood for the survey but leave the answers blank. I might have two or three different locations on the same survey. Since I know what I make as an adjustment, I want to know what the Realtors’ buyers say they are willing to page 228
Winter/Spring 2012 Working RE 19
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pay for that extra garage space or swimming pool, etc. I have the manager of the office distribute the survey to all attendees the day prior to when I speak to the group (most real estate offices have a guest speaker either once a week or once a month) and they know we will be discussing their answers and my answers. I have found this to be very successful and enjoyable for both the Realtors and myself. Interesting discussions follow from this talk and, in the end, several Realtors usually ask for my business card for future business. But the primary purpose of my talk is not to get additional business, but to accumulate these surveys and to tabulate the results so that I can use them as support for the adjustments I make. This is just one way of supporting the adjustments you make. After all, the adjustments you make are supposed to be what the market is willing to pay for that extra garage space or swimming pool, etc., and not just what we were told by our supervisory appraiser.
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22 Working RE Winter/Spring 2012
Single Family Residences Most appraisers, when appraising a single family residence, utilize Fannie Mae or general purpose forms (if not for a mortgage transaction). In either case, all forms have a Sales Comparison Approach grid which itemizes what is considered information that is important enough to consider whether an adjustment is necessary. It is important to understand that it is up to the appraiser to consider if an adjustment is warranted. There is no requirement that an adjustment be made for any line item. However, if there is a difference between the comparable and the subject, either an adjustment should be made or, if not, it should be explained why an adjustment was not necessary somewhere in the report. Many appraisers utilize boilerplate statements to justify either the adjustments or lack of adjustments. I suggest that you get away from the boilerplate statements and write something that pertains to the appraisal report you are preparing. What are some of the line items that require an adjustment? That depends on what is considered most important. In some neighborhoods, location is important while other neighborhoods the land size, street frontage, versus depth of a lot, is most important and in other neighborhoods it is the gross living area. Whichever line item(s) is (are) most important, special attention should be made to those adjustments and be adequately supported.
Gross Living Area One line item I want to mention is the adjustment for gross living area. The gross living area is the air conditioned area of the house, with just a few exceptions. This square footage is typically what you measure when at the property. What about the comparable sales? Unless you have measured the comparable sale property, you don’t really know the gross living area of that house. If you are fortunate enough
to have your property assessor’s office post property diagrams or living areas online, that would be considered a supportable determination of the gross living area of the comparable. In some areas, an “adjusted square foot” size is published by the property assessor’s office. This square foot size usually takes into consideration other components of the building, such as a percentage of the garage and covered areas. If you don’t have the gross living area of your comparables, you cannot use the “adjusted square foot” size of the comparables in your grid when you use the gross living area of the subject, otherwise your adjustment would be based on two different square foot sizes. This is mostly true in condominium unit appraisals, which will be discussed next.
Condominiums One adjustment for a condominium unit would be the floor level. Floor level adjustments may be the same, no matter the number of floor level differences there are between the subject and comparable sale. Or you might consider a different amount for the adjustment, depending if the floor level difference is minimal versus a large difference. With the slow market today, there are going to be fewer sales on a floor level that is close to your subject’s, whether it is in the same building or a different building as your subject. If the subject is on the 15th floor and the comparable is on the 20th floor, the adjustment per floor level might not be the same as if the comparable is on the 5th floor or the 30th floor; a unit on the 5th floor may be less desirable or the 30th floor might be more desirable. This brings up an interesting point: Do you make the adjustment for the floor level based on the floor level difference, or do you also take into consideration that the lower levels have an inferior view compared to the higher floor levels? You might have
two adjustments to make: one for floor level and the other for view. An important adjustment made for a condominium unit is gross living area. As I stated above, within the single family residence, the appraiser must be careful when obtaining the square foot area of the comparable sales. Is the square foot area the gross living area or the “adjusted” square foot area? Are you using the measured gross living area for the subject and something else for the comparable sales? The best way to obtain the gross living area of the comparable sales is from the condominium documents. Another important issue with adjustments for condominium units is that the amount of adjustment for the gross living area for a condominium unit should be much higher than for a single family residence. The reasoning for this is that a single
But the primary purpose of my talk is not to get additional business, but to accumulate these surveys and to tabulate the results so that I can use them as support for the adjustments I make.
family residence is divided between the living area and the lot size while a condominium unit does not have an adjustment for site size. The adjustment for gross living area would take into consideration the building’s amenities, which is also reflected in the sales price per square foot. In conclusion, most adjustments are considered an opinion but still should be supported. Your support should be
documented somewhere in your office, but most importantly, you need to explain your adjustments, especially if you believe that the reader of your report would question your adjustment if you did not include an explanation. In today’s market, there are fewer sales that are similar to your subject, and adjustments are more abundant than when there were plenty of sales to choose from. WRE
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23 1/13/11RE 9:54 AM Winter/Spring 2012 Working
Success Collecting AMC Debt from Lender By David Brauner, Editor
ne appraisal company, at least, has collected monies owed by the now defunct appraisal management company (AMC) AppraiserLoft. How did they do it? They did it by citing chapter and verse of FIRREA. C. Brent Chitwood, office administrator for Phoenix Real Estate Appraisal in Irmo, South Carolina, says he was able to get a mortgage company to reimburse his appraisal firm for monies unpaid by AppraiserLoft after pointing out that FIRREA requires contracts be with licensed real estate appraisers. FIRREA, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, targets appraisal reform and includes the establishment of appraiser licensing. “Initially, the mortgage company told us they would not reimburse us because they had paid AppraiserLoft for the appraisal and that our contract was with AppraiserLoft, not with them. Therefore, they said they were not liable for payment,” Chitwood says. “Our attorney confirmed, however, what we believed. That according to FIRREA, the contract must be with a licensed real estate appraiser and AppraiserLoft is not such an entity.” According to Chitwood, the argument that a client must pay when an AMC does not is pretty clear under FIRREA and Supplemental Standards. This is from the correspondence Chitwood sent to the mortgage company: “The issue of responsibility for payment appears to be in question. We are providing you with our research to assist you in understanding our position in this matter and 24 Working RE Winter/Spring 2012
the legal precedence that we will use to pursue collection. (1) You are required under FDIC Rules and Regulations Minimum Appraisal Standards 323.4 to use a state-licensed appraiser for this loan. (2) As state-licensed appraisers, we are required to identify the client and the intended user by USPAP, the Uniform Standards of Professional Appraisal Practice. This was done by obtaining that information from your agent. The client (you) is documented in the client section of the appraisal that is part of your files. (3) You are required by law and rule to contract with a state-licensed appraiser either directly or through an agent. See 323.5 (b). You may not contract with a party that is not a state-licensed appraiser or its DBA. So AppraiserLoft, a regulated AMC, is either your agent or you have violated this provision.
(4) According to The Appraisal Foundation, USPAP Client Issue #93, payment by a party other than the client: the act of the borrower or any other entity paying the appraiser does not make them the client under USPAP. Therefore your position that payment from the borrower to your agent somehow changes the vendor/client relationship is refuted. (5) The transaction took place between Phoenix Real Estate & Appraisal, Inc. as the appraiser legal entity and xxxx Mortgage as the client. AppraiserLoft acted as your agent to order, review and assure compliance with your specific requirements. (6) You received our product and utilized it to conduct your lending business. You received an invoice stating our (the vendor) name and address, Your (the client) name and address, a description of the product, and the amount due. An invoice is a legal demand for payment.” After hearing the argument, the mortgage company promptly paid Phoenix the monies owed ($300). “It worked for us, and I’d like to see it work for the whole bunch of others who lost money working for AppraiserLoft,” Chitwood says. Find AMC Bad Debt—Lenders Responsible? (page 14) to read about another appraiser who isn’t taking no for an answer when it comes to fees owed. WRE ___________________________________________ See WorkingRE.com, sidebars: FDIC Sections 323.4 & 323.5.
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25 Working RE 25
Suspension Merry-Go-Round by David Brauner, Editor
Editor’s Note: Appraiser “abuse” is apparently alive and well but the good news is that state AMC laws may provide some relief.
Whoever believes the days of value
and other forms of pressure are behind appraisers, ought to talk to appraiser David Smith in San Diego—if they do they’ll get an earful. Appraiser abuse is apparently alive and well, but the good news is that state AMC laws may provide some relief— here’s how. What Did I Do Wrong? The story begins with appraiser Smith (wishes to remain anonymous), appraising 25 years, being notified by an appraisal management company (AMC) that he was suspended from their roster after being put on “review status” by a lender. As of this writing, three months have elapsed and Smith still doesn’t know why. “Review status” means that, by order of the lender, any appraisal Smith does must be accompanied by a field review ($250). This added expense imposed on the AMC means no more work for Smith from one of his largest vendors. Smith says at the time of his suspension he was a “level one” appraiser with the AMC—the highest ranking. The AMC, which provided Smith with a very significant volume of work, told him that any appraiser put on a review status is suspended until the status is lifted by the lender. “I asked the AMC the reason for the suspension and they said the lender wouldn’t tell them,” Smith said. “I was given a number to fax the lender, which I did within an hour. I waited a week and called to follow up and was told it could take up to 30 days to get a response. I asked to speak to a supervisor and was refused.” An email string verifies that Smith was told by the AMC that they had no information about his suspension and that he would have to contact the lender 26 Working RE Winter/Spring 2012
himself to get the issue resolved. “Call us when it’s resolved,” he remembers them saying. Smith continued to ask the AMC to intervene but they could do nothing to help. “After five weeks of not hearing and losing a large volume of work, I called the lender back and they said I was given incorrect instructions and should have sent a letter to their risk management department. I did so immediately and still have not heard back. In the meantime I lost work from a different AMC who uses the same (big box) lender. This has cost me over $15,000,” Smith says. “If I did anything wrong, I’d like to know what it is so that it can be addressed. Why does it take the lender only one day to tell the AMC I’m suspended and 30 days or longer to tell me why? And why aren’t concerns expressed to the appraiser before putting them on review status without any chance for rebuttal?” Sometime later, Smith finally did hear from the lender. They told him that appraisals of his were under review and that in order to lift the review status, they would need to see more of his current work. According to Smith, they will not say which files of his are in question or how old they are—so there is no chance for rebuttal. This AMC and others who work with the “big box” lender will not give him orders until the “review” status is lifted—an unfortunate Catch–22, since the lender needs to see more work in order to lift the status. “I have no idea which files they are questioning. One can assume they don’t suspect fraud because they will accept work from me as long as it is reviewed. I did have one incident where my signature was used without my knowledge and one where a report was altered. But I am unable to find out even
which files are in question. Without that I can’t work. If I can’t clear this up I’m getting an attorney and going to court.” Epilog: How Do You Spell Relief? Just before press time, Smith says he may finally get some much-needed relief, courtesy of the California Office of Real Estate Appraising (OREA) and the new California AMC licensing lawyes the government. “The OREA told me that the lender and the AMC are in violation of the (state) AMC law which requires them to tell me why I have been suspended,” said Smith. OREA code 3577, Section J states, “The Appraisal Management Company shall not remove an independent appraiser from their panel of approved appraisers without prior written notice that includes evidence which supports the basis of fact that the appraiser has violated the Uniform Standards of Professional Appraisal Practice or other applicable appraisal regulations or state statutes, or evidence which demonstrates substandard performance, improper or unprofessional behavior, or other substantive deficiencies.” Smith says before filing an official complaint he will make the AMC and lender aware of their responsibilities under the law to give them a chance to respond. But he wonders what role AMCs really play in the process if he is the only player sanctioned. “If I did something wrong and am being punished, what action did the lender take against the AMC, who reviews and clears every appraisal? Is the appraiser now the fall guy in every instance?” WRE ___________________________________________ Find the California AMC Regulation at WorkingRE.com, click sidebars and then OREA_Regs.
Winter/Spring 2012 Working RE 27
Advocacy or Independence? By Thomas J. Inserra, MBA, MAI, SRA
Editor’s Note: Cutting through all the clatter, it appears the bottom line for lenders remains fast and cheap.
Would any American go to a football
The use of BPOs in lending is no different than legally allowing a referee to favor one of the teams in a football game— it is just plain nuts from a regulatory perspective.
game in a league where the referees are legally allowed to be advocates for one of the teams? Football is only successful if its referees are viewed as being fair and non-advocates. They may miss a few calls, but overall, they are viewed as fair. Conversely, our real estate marketplace is not fair. Cheating is allowed. Agents, when rendering broker price opinions (BPOs), are legally allowed and, in fact, required to be advocates. Conversely, appraisers are prohibited from being advocates. Isn’t it obvious that in situations where non-advocacy is required, policies which allow and permit advocacy do not work and are not sustainable? Regulators made it clear in the 2010 Interagency Appraisal and Evaluation Guidelines (to view the Guidelines, visit WorkingRE.com; Sidebar) that BPOs are not appropriate for lending. However, I am not seeing or hearing that this has had any effect on the huge volumes still being performed for lenders. In fact, one clever solution is BPO providers are now being identified as “appraisers” and their BPOs referred to as “appraisals.” This is how lenders and appraisal management companies (AMCs) are getting around the law.
Whose Fault? In the 1990s banking crisis, appraisers were held accountable for the huge volume of fraudulent appraisals. Thousands lost their licenses and/or were subject to
Thomas J. Inserra, MBA, MAI, SRA is Chief Executive Officer, We Value America, LLC.: http://www.wevalueamerica.com/MyBlog
28 Working RE Winter/Spring 2012
civil and criminal litigation. This time around, when I dive into the details of many cases, I see fraud and abuse on the part of the lender, motivated by a desire to do more loans, with a lot less appraisal abuse. BPOs and automated value models (AVMs) are often included in the files to support poor lending decisions. Advocated BPOs are very easy to obtain, inexpensive, and come with no requirement to be independent and non-biased, so value inflation is actually legal and allowable for BPOs. If regulators are serious, they should be clamping down on advocacy and the use of BPOs in lending transactions. The use of BPOs in lending is no different than legally allowing a referee to favor one of the teams in a football game—it is just plain nuts from a regulatory perspective. The decision in 1992 to lower the deminimis level to $250,000, below which appraisals are no longer required, gave birth to the use of AVMs, BPOs, and other non-appraiser-produced valuations in lending transactions for the first time since the Great Depression of 1929. The decision was supported by lenders, Fannie Mae, Freddie Mac, Treasury, Federal Reserve and all the banking agencies, to purposely lower appraisal standards and force appraisers to compete with advocated BPOs and AVMs. This created a market climate where the message is this: the underlying collateral value and, therefore, the appraisal, is immaterial: something to put in the file but to be ignored. The belief, which persists today, is that only the credit score is relevant. page 308
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Part of the problem is that regulators continue to mistakenly believe that today’s crisis is a credit crisis only. The fact that fraud rates, loss rates and loss severity are greater in this crisis than the last crisis, demonstrates that losses have been amplified because of collateral issues and valuation issues. An AVM for example, can be used to support a subprime loan below $250,000 but an AVM can’t verify that a house is actually there. The use of AVMs, BPOs and other non-appraisal products inherently increase collateral risks. Make no mistake, today’s crisis is BOTH a credit and a collateral crisis because appraisal regulations were weakened in the 1990s to help artificially increase homeownership. Not only did the government encourage banks to make loans to people who were not credit qualified but loss rates are greater because the collateral used to secure the loan was over-valued.
Dollars and Sense BPOs don’t make sense from a lender’s perspective. I did a calculation when the deminimis regulation first
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allowed BPOs and AVMs. I calculated both the perceived benefits of AVMs and BPOs (reduced fees and short term fee reductions), compared with the longer term increase in defaults, increased credit risks and increased losses from those products. I found then, and believe it remains true today, that cost savings can be expressed in the hundreds of millions or low billions of dollars range for the entire industry. The losses, however, are much greater, calculated in the hundreds of billions and trillions of dollars. The costs will always outweigh the benefits in the long term. That is why it is hard to understand why regulators allow this to continue. The math is pretty easy to do and it is very easy to show the policies are not sustainable and do not lead to safe and sound lending. Wells Fargo was part of a $590 million settlement in 2010 to settle the securities portion of a lawsuit. Later, there was an additional $627 million settlement with 11 states, and there are likely quite a few cases still pending with Wells. That means the losses from just two suits is now up to $1.2 billion. In addition to the $1.2 billion in settlements, Wells would need to calculate the increased costs of foreclosure, loan workouts, write-offs, loan losses, required increased reserves and other increased costs as a result of their planned decision to lower appraisal standards. The appraisal abuses described in the Wells Fargo suit speak for themselves. A failed mortgage product or credit evaluation alone may drive up defaults but does not necessarily drive up losses. Losses are more a function of over-valuation and over-leveraging than of default. An over-valuation artificially reduces any equity cushion that was presumed to have existed. Thus, the magnitude of the losses is more a function of the collateral risk and valuation issues than a function of credit.
Moral Hazard The only thing that can explain this negligent behavior—the willingness to lower appraisal regulations and accept greater losses, is that top bank executives are compensated on short-term quarterly profits, so there is a huge incentive to let the next CEO and next management team worry about losses and, in order to get the fat paychecks, reduce appraisal fees to the lowest cost possible even if it latter leads to huge losses. And that conduct is now viewed as an acceptable cost of doing business without fear of investor reprisal or regulatory action. That means the focus is no longer on delivering long term shareholder value or operating in a safe and sound manner; it’s all about managing the business in a way that maximizes 30– and 90– day cash flows and increasing today’s fee income without regard to future losses or other “costs of doing business”-like litigation.
Shared Risk Fix The solution is for regulators to start issuing variable risk-based deposit insurance and variable, risk-based reserve requirements based on risk. The riskier the lender’s conduct and the more they deviate from accepted appraisal and credit regulations, the higher their reserve requirements and costs for deposit insurance should go. This allows risk-taking to occur in the market but requires a corresponding increase in capital and skin in the game to serve as a cushion for that increased risk. There needs to be a price paid for risky and unethical conduct in order to change the behavior – a price higher than even these huge settlements.
Pressure Continues Collateral based lending programs offer lower interest rates than unsecured loans because of lower risk. However, the lower risk only exists and can only be achieved if both the collateral
and appraisal are taken seriously and required as a key part in underwriting, to properly assess and mitigate risks. Safe, sound and sustainable lending practices simply cannot be restored unless and until all leaders who set and influence national policy agree that ALL loopholes and obstacles which prevent us from eliminating advocacy and all forms of pressure are removed, so that there are no negative ramifications for an appraiser to do his or her job and report accurate values. The system we have now requires appraisers to compete with advocates, compromises the independent appraiser relationship and creates an environment where cheating is actually encouraged rather than discouraged. Our lender friends don’t need better checklists, data-dump style reports or a longer lists of requirements; they need to retain truly independent appraisers. Regrettably, however, there is an inadequate incentive for an AMC or lender to pick the best-qualified appraiser. In fact, because of the fee structure, commission-based incentives from increased loan production, indemnification clauses and repurchase campaigns, which cleverly shift liability away from the AMC/Lender to appraisers and their E&O carriers, the incentives are actually the reverse in that there is an incentive NOT to hire the best quality, independent appraiser. Rather than focus on quality, nonadvocacy and independence, there is an inherent incentive for AMCs/lenders to pick the lowest-priced and lowest level of experience appraisal provider, with a particularly large incentive to select appraisers willing to make deals work, rather than the most independent and objective appraisers possible, who aren’t willing to hit values. That means appraisers compete for lender and AMC work NOT on the basis of quality or independence but rather on price and willingness to hit inflated
Our lender friends don’t need better check-lists, data-dump style reports or a longer lists of requirements; they need to retain truly independent appraisers.
values. This is particularly true because of the forced competition of appraisers with advocated BPOs and AVMs.
Bass Ackwards? I’ve seen a huge rise in requests of AMCs and lenders to explain why my non-advocated, independent and fully supported appraisal varies with an advocated and unsupported BPO or AVM of significantly lower quality and lower reliability. That is “bass ackwards.” Why aren’t they going to the BPO and AVM suppliers and asking why their advocated value varies from the more accurate appraisal? Why are lenders and AMCs even using these products for lending purposes at all in light of the new federal regulation which prohibit their use (2010 Interagency Guidelines)? The reason is because those advocated valuation products help justify more loans and more fees and help apply pressure on appraisers to hit advocated values. Conversely, accurate non-advocated appraisals have the effect of reducing loan volumes and fees. My recent experience with AMCs and lenders is that my firm’s quality and service ratings were ranked very high and we had plenty of work available. But work volume always came to an end once we appraised a property below a pending sales price. We didn’t mind losing lender or AMC clients because we didn’t want to be a part of the problem by inflating values to unrealistic levels at the peak of the
market. Like many ethical appraisers, we lost work when we were unwilling to inflate values but those appraisers who were willing to inflate values were rewarded with more work volume. Despite having high service ratings, as soon as we delivered a report with a value below a sales price, our service ratings immediately dropped. The AMC and lender secret code for the appraiser not willing to hit values was that we were not a “cooperative team player,” when a few of our appraisals were below selling prices. It amazed me that AMCs and lenders so blatantly based the service rating on the appraiser’s willingness to hit values that weren’t supported. Not being interested in being an advocate, and making a business decision that I am not interested in doing work for clients who do not value quality, independence and non-advocacy, I currently do virtually no work for AMCs and low volumes of work for lenders. And that’s fine with me. Where are the leaders with moral character in a position of influence to put an end to these games? I am not seeing anyone stepping up and only continue to see abuses despite the huge losses. It is as if lenders, AMCs and regulators are still in denial that this is both a credit and collateral crisis. Or there is an overall lender plan designed to leverage their power and that plan is not good for independent appraisers but could be very rewarding for those advocates who are willing to continue to play along. Count me out. WRE Winter/Spring 2012 Working RE 31
Industry News FNC Data Mining Lawsuit Settles Quietly According to the attorneys bringing suit on behalf of a group of appraisers against FNC/AppraisalPort for alleged false advertising and data mining, the suit has settled quietly and its terms prohibit them from comment. As you may recall, a group of appraisers accused FNC of “intentional misrepresentation, negligent misrepresentation, conversion, misappropriation, breach of bailment and breach of implied contract.” Specifically, they claim FNC built a national database of information about properties using appraisers’ information and now competes with them at their own expense. FNC denied the claim in court and in a Working RE story, Federal Suit Alleges Misuse of Appraisers’ Data by FNC, Angela Atkins, FNC Public Relations Manager, told WRE, “FNC was very disappointed and disturbed to hear of this complaint. It tries to attack FNC’s core commitment of protecting the information we transmit between appraiser and lender. As a result, we believe it is entirely without merit and will defend it vigorously” (to read this story, visit WorkingRE.com; Library; Volume 17). In February of this year, the United State Court of Appeals Fifth Circuit, reversing a lower court decision, allowed the lawsuit to continue. Recently, the suit settled. The following detail of allegations is excerpted from the February 24, 2011 Court’s Opinion allowing the lawsuit to continue: “The plaintiffs in this case have prudential standing primarily because of the zero-sum competitive relationship that exists between them and FNC in the field of real-estatevaluation services. Lenders who use the National Collateral Database would otherwise use the plaintiffs’ appraisal services, FNC was able to create the National Collateral Database only because it stole the plaintiffs’ work product, and FNC’s taking of the plaintiffs’ work product was made possible by the false advertisements FNC ran touting the confidentiality of AppraisalPort. But for the false advertisements FNC targeted at the plaintiffs, the National Collateral Database would not have been able to compete effectively with the plaintiffs’ appraisals. It is the inextricable linkage between FNC’s false advertisements and the plaintiffs’ diminished opportunity to sell appraisals that brings this case within the ambit of §43(a).” Neil Olson, FNC Chief Legal Officer said, “FNC is delighted that the lawsuit has been resolved and excited to continue to serve our clients to the best of our abilities. We are unable to comment on the terms of the suit as they remain confidential and we respect those terms for both parties involved.” The firm representing the appraisers is Marzouk & Parry, located in Washington, D.C. To read the February 2011 Court’s Opinion in its entirety, visit WorkingRE.com; Sidebars: FNC Lawsuit Settles. Editor’s Note: Story first published in Working RE’s email News Edition. Visit WorkingRE.com for more.
32 Working RE Winter/Spring 2012
New Webinar Series: Information You Can Use from Industry Leaders OREP/Working RE Magazine introduces a new webinar series on important industry topics, presented in webinar format by industry leaders. The topics are useful, the prices affordable. OREP members/Working RE paying subscribers always enjoy reduced fees. Many appraisers are busy these days, so prerecorded webinars also are available on demand for your convenience. New topics are added regularly. See below for the first offerings. For the current schedule, including dates, times and pricing, please visit WorkingRE.com and click Webinar Series (left column) or scan this code with any QR Code Reader application.
Mobile Appraising: Saving Time and Money Presenter: Dustin Harris, “The Appraiser Coach” Learn the techniques and technology to make your business profitable and competitive. If you think you’ve heard it all before, you haven’t. Dustin does it successfully and enjoys showing others how.
Professional Appraiser Series: Other than Lender Work Presenter: Andy Anderson Long-time appraiser and industry sage Andy Anderson (see cover story pg. 10), doesn’t rely on lender work. In this webinar, he shares his experience on how to diversify, grow and forge your own kind of independence-financial.
Appraiser Independence: Know Your Rights Presenter Richard Hagar, SRA Nationally recognized author, instructor and fraud expert, appraiser Richard Hagar, SRA puts a spotlight on appraiser rights and responsibilities. Learn how to assert your rights and protect your practice with this valuable webinar.
Maximizing AMC Orders and Income Presenter: Bryan Knowlton, author the 2012 AMC Directory (see inside back cover). “We learned so much on Tuesday, we decided to come back today and bring our office manager.” - Lu Waara Appraiser Bryan Knowlton is busy with well-paying AMC work. How does it do it? He knows the best AMCs to work for and the techniques for being profitable. Learn proven strategies for maximizing orders and income when working with AMCs. (Read Bryan’s story pg. 40.)
Insurance: How Saving Money Can Really Cost You If you are considering letting your errors and omissions (E&O) insurance policy lapse (not renewing or canceling) to cut expenses or thinking about switching to a company that does not provide “prior acts” coverage for your past appraisals just to save money, you should think again. Appraisers are being sued in record numbers today—even the careful ones. No matter the merit, appraisers have to spend time and resources defending themselves— even if they did nothing wrong. As most claims involving appraisers take several years to surface, letting your Claims Made insurance policy lapse or willingly giving up your prior acts coverage to save a few dollars could be very costly indeed should a claim arise from the past and you have no coverage. Call your insurance agent to find out what is really at stake. For more on E&O insurance issues, see Insurance: Insight and Advice from the Inside, an interview with OREP.org Senior Broker David Brauner, who has been point of sale for appraiser E&O insurance for 20 years.
AMC Rater This blog is an information exchange by and for appraisers about working with the various AMCs— read the good but mostly the bad and ugly about which AMCs to avoid, such as the following: “Boy, are you right! I had to chase (AMC name removed for publication) for months for a check. We have friends that had to chase them for 120 days for $3,000+. They are supposed to be run by an ‘ethical’ appraiser but I think not! I did an appraisal for them, busted my rear to get it in in their turn time and then I got an email back saying they had cancelled it and utilized one of the appraisers in the area that does most of their work. I never got a cancellation email. So, I was out two days’ work and $375. Nice!” Learn what you need to know about working with AMCs at this blog. Visit WorkingRE.com and under Blogs click AMC Rater (left column).
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Customary and Reasonable Fees— Still Breathin’
Fannie Mae: Non-Arm’s Length Red Flags
The issue of Customary and Reasonable Fees may not be dead. Staff from the Federal Reserve Board recently requested survey results from the OREP. org/Working RE Customary and Reasonable Fee Survey, with over 16,500 appraisers participating. Why? Because customary and reasonable fees and other issues related to the Dodd-Frank Financial Reform Legislation are not settled, according to the Federal Reserve, who is tasked with implementing the law—sort of. The Fed was tasked with implementing Dodd-Frank initially. Its Interim Final Rule was released in 2010 but instead of finding a way to enforce the intent of the C&R fee provision in the Legislation, it rendered it impotent by way of convoluted logic that permits the status quo—appraisals to the lowest bidder. As a result, the issue of fair fees is dead in the minds of most appraisers. But maybe not quite. The Consumer Financial Protection Bureau (CFPB) took over from the Fed in July 2011—well, not exactly. According to a Fed staffer (Fed staff are not permitted to be quoted by name), “As explained in the testimony of Division Director Sandy Braunstein, in the last paragraph of the section on appraisal independence (p. 12-15), authority for issuing permanent rules to revise the Interim Final Rule is shared by the Board with several agencies, including the CFPB. The Board and the other agencies are also required under Title XIV of the Dodd-Frank Act to issue several other rules related to appraisals which must be finalized by January 2013. Thus, we are focused on those rule-makings but are also actively assessing the Interim Final Rule and will consider whether changes should be made in issuing permanent rules in the future.” Take the Working RE/OREP.org Customary and Reasonable Fee Survey and find results at WorkingRE.com (left column “surveys”). Find the Testimony by FED Division Director Sandy Braunstein at WorkingRE.com, click sidebars and FED Director Testimony (pages 12-15).
This from Kim Ellison, on behalf of Bill Brewster, Director, Mortgage Fraud Program, Fannie Mae, presented at Valuation 2010 late last year. • Purchaser has previous or current ownership of the subject property. • Purchaser address matches the borrower’s address. • Purchaser’s name is similar to the borrower’s. • Purchaser employment address matches the borrower’s employment address.
Editor’s Note: This story first published in Working RE’s email News Edition
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OREP.org/WorkingRE.com Blogs & Surveys Challenging Low Fees This blog is an information exchange by and for appraisers seeking help with the customary and reasonable fee appeal process. Visit WorkingRE. com and under Blogs click Challenging Low Fees (left column).
Filing C&R Fee Complaints This from the Appraisal Subcommittee (ASC. gov): The appropriate agency to receive your concern about a creditor’s compliance with the Truth in Lending Act (TILA), including the creditor or the creditor’s agent paying an appraiser a customary and responsible fee, is the agency that enforces TILA for the creditor. If the agent or appraisal management company (AMC) is affiliated with a federally regulated creditor, the appropriate agency to receive complaints against the AMC is the affiliated creditor’s federal regulator. If the agent (or AMC) is not affiliated with a federally-regulated creditor, the appropriate agency to receive the complaint is the Federal Trade Commission. There are two websites that you can use to find the federal regulator for a creditor: Federal Reserve System—National Information Center website: http://www.ffiec.gov/ nicpubweb/nicweb/nichome.aspx; and FDIC website at the “Bank Find” webpage: http://www2.fdic. gov/idasp/main_bankfind.asp. Questions regarding the appropriate interpretation of the Truth in Lending Act, including those on customary and reasonable fees, should be directed to the Federal Reserve Board at http://www.federalreserve.gov/ feedback.cfm. WRE
More at WorkingRE.com
Winter/Spring 2012 Working RE 33
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Please Note: Rates vary by state. Commercial rates are slightly higher. Please call or visit www.orep.org for more (888-347-5273). Zero deductible available in certain states. A standard deductible of $500 per claim/$1,000 aggregate is included with each policy. Prior acts coverage is provided free for qualified applicants (call for details). Beginning appraisers/trainees qualify. If you would like an application for this program or a quote for a multiple-appraiser firm or for sales/brokering, please call or visit OREP: (888) 347-5273 www.orep.org. Subscription to Working RE magazine included. Financing available.
Appraiser E&O Options • Combine Appraising, RE Sales and Brokering: One low premium covers both appraising/sales & brokering. • Appraisal Firm Coverage: If you are experiencing an increase in rates, a decrease in coverage or new exclusions that seem unreasonable, it pays to shop OREP when your firm’s E&O policy is expiring. Many firms are switching to OREP. Many appraisal firms are surprised to learn how much they can save by shopping OREP. • AMCs: Many appraisal management companies are forming in the wake of HVCC. If you need this coverage, OREP can help. • Retiring: If you are retiring from appraising, ask your insurance agent about purchasing Extended Reporting Period or “tail” coverage. Without it, you are exposed for any liability that may arise from past appraisals. Premiums range from one to one-and-one-half times (100%–160%) your last year’s premium and can provide coverage forever into the future for past appraisals. Each program is unique. Call your agent for details if you are planning to retire.
New 7 Hour USPAP CE Online: Convenient, Affordable Enjoy an OREP/Working RE discount on Mckissock’s new 7 Hour USPAP online continuing education course, approved in most states. Taking this mandatory continuing education coursework is affordable and convenient with this new online course. Learn and earn (CE) on your schedule! Visit WorkingRE.com and click New 7 Hour USPAP CE (left column) to learn more.
“The class was great and the price was even better. Please let me know if you have any other discounted classes.” Thanks, Eric (OREP Member) Appraisers and Agents: The online McKissock course, Essential Elements of Disclosures and Disclaimers ($79/5 hrs. approved continuing education in most states), is available to OREP Members/Affiliates for administrative costs ($15.64). The purpose of the course is to provide appraisers with the tools to meet their disclosure obligations, while at the same time protecting them from unintended liability through the use of appropriate disclaimers. How and where must an appraiser disclose prior services provided on the subject property within the prior three years? How should repair items be disclosed in an FHA appraisal report? How should significant real property appraisal assistance be disclosed? How can an appraiser protect himself or herself when there appears to be mold in the basement? This course provides the essential elements of disclosures and disclaimers in appraisal reports. Every appraiser will benefit from this course. (Visit OREP.org, click Benefits and OREP Education Network.) Inspectors: Online Mckissock course Home Inspection Safety ($45/3 hrs. ASHI, NAHI, NACHI approved and also by 15 states), is available at administrative costs to OREP Members and Affiliates (ASHI, NAHI, NACHI: $5.74; varies by state). The objectives of the course are to: identify protective clothing that should be worn, recognize safety equipment used, understand limitations and exclusions, discuss general safety issues, recognize lead paint, asbestos, etc., discuss electrical safety, understand, heating and air conditioning precautions, recognize un-permitted additions and more. (Visit OREP.org, click Benefits and OREP Education Network.)
Mortgage Field/Property Preservation Many appraisers and home inspectors are now providing mortgage field and property preservation services for bank-owned properties. OREP has provided E&O and GL insurance to this industry for over 8 years and is a leader in the field. If you’d like a quote, please call or visit OREP.org, (888) 347-5273.
Group Health Care—No Application/Limitations for Pre-Existing Conditions California residents qualify for programs offered through Kaiser Permanente, Allied National and United Healthcare. These plans are available to real estate professionals on a guaranteed issue basis. Eligibility is accomplished by being a member/affiliate member of a real estate association/board. Kaiser Permanente offers eleven plans including the new Tax Advantaged Health Savings Account Plans. United Healthcare offers three HMO and four PPO plans, including a Tax Advantaged Health Savings Account. Allied National offers four Limited Benefit PPO Plans that offer highly affordable first dollar coverage including doctor office and emergency room visits and prescription drugs. These plans are available to California residents only through OREP (OREP membership not required). Please visit OREP.org, click Benefits or email firstname.lastname@example.org with medical benefits in the subject. A qualified agent will call to go over the options.
New Webinar Series: Information You Can Use from Industry Leaders OREP/Working RE magazine introduces a new webinar series on important industry topics, presented in webinar format by industry leaders. The topics are useful, the prices affordable. OREP members/Working RE-paying subscribers always enjoy reduced fees. Many appraisers are busy these days, so prerecorded webinars also are available on demand for your convenience. New topics are added regularly. See page 32 for more on these webinars. For the current schedule, including dates, rates and times, please visit WorkingRE.com and click Webinar Series (left column) or scan the code at right with any QR Code Reader application. • Maximizing AMC Orders and Income Presenter: Bryan Knowlton, author the 2012 AMC Directory (see inside back cover) • Mobile Appraising: Saving Time and Money Presenter: Dustin Harris, “The Appraiser Coach” • Cultivating Non Lending Work Presenter: Andy Anderson (see cover story page 10) • Appraiser Independence: Know Your Rights Presenter: Richard Hagar, SRA
34 Working RE Winter/Spring 2012
Professional Marketplace: Insurance, Education, Information and More. Home Inspectors E&O Insurance: $1,250 Covers One or Multiple Inspectors “Thank you very much for your very efficient and professional service. I can not believe how quickly you put this together. It has been a pleasure working with you.” —Joel Kunkel, Home Star Inspection Services If you haven’t shopped OREP, chances are you are paying too much for E&O insurance. The policy is offered by an “A” Rated carrier and covers all inspectors in your company, including independent contractors. Save money and time with OREP! Coverage Includes: Additional Insured Endorsement for Agents and other referring parties, termite and radon coverage, coverage for commercial inspections, pool, septic and new construction/code compliance! Includes coverage for energy auditing. Financing is available. Prior acts for qualified applicants; low-cost Premises Liability is available. Before you write your check for E&O this year, you owe it to yourself to shop OREP. Join the hundreds of inspectors who have switched to OREP. Call or visit for details and a quote: (888) 347-5273 or www.orep.org. Agent David Brauner, Calif. Insurance Lic. #0C89873.
2012 AMC Resource Guide Updated Guide authored by an appraiser for appraisers and marketed through Working RE/OREP.org. Over 300 Verified AMCs; the first 40 listed send 90 percent of the author’s work; national management companies; verified companies that send orders. The author personally verifies and signs up to each company listed and calls to verify immediate need for appraisers. Vendor specific errors to avoid are listed so you make fewer mistakes from the beginning and get more repeat orders. Author emails customers with new companies when added. Top techniques to generate more revenue included. Appraiser Marketing Guide included: Guide lays out all the details on how to get signed up with the appraisal management companies and information on creating top ranking websites. For more and to order, see WorkingRE.com, top left column (click: AMC Resource Guide) or email email@example.com with AMC guide info in the body or subject. OREP Members/Working RE subscribers receive a discount.
Do You Need General Liability Insurance? A Business Owner’s/General Liability Policy has been compared to a homeowner’s policy for your business. Coverage includes but is not limited to Property Damage to others, Bodily Injury, Business Interruption and Loss of Income coverage, Personal Property Coverage (computers, client records, buildings) and employee dishonesty. Appraisers and real estate agents/brokers need this coverage. Minimum premium is $500. Workers Comp also available (appraisers/ agent/brokers). Call OREP.org for details and a free quote (888) 347-5273 or email: firstname.lastname@example.org with your request.
Looking for More Appraisal Orders? AMC recruiters love advertising in Working RE’s Online Edition. So do software vendors and other industry stakeholders. Find employment opportunities, the latest technology and the deals of the day in Working RE—not to mention award-winning reporting on industry matters that matter most to you. If you’re not getting Working RE delivered to your In Box (and over 80,000 of you are), then you are only getting half the story. Opt In at WorkingRE.com.
Like Ink on your Fingers? Do you still like holding this magazine in your hands? You can guarantee the delivery of every print issue by subscribing at WorkingRE.com (click subscribe) or send an email to email@example.com with subscribe in the subject. With the subscription comes many money-saving offers, such as approved education at cost (save $60) and goods and services: FHA Guide ($9 off), AMC Guide ($10 off), OREP/Working RE Webinar Series (discount pricing/free access) plus hundreds of premium content stories. For more, go to WorkingRE.com and click “subscribe.” Note: If you’re an OREP member, the subscription/benefits are included free (see page 3). WRE
Low E&O Rates, New Policy Servicing Department…and Yes, We Still Answer the Phone! Appraisers E&O Min. Prem. $501 (varies by state) Inspectors E&O Min. Prem. $1,250 Real Estate Agents/Brokers Min. Prem. $429 (varies by state) OREP has a new policy servicing department to streamline insurance requests from our clients, including renewals. Simply email your policy-servicing request to firstname.lastname@example.org to get the assistance you need, usually same day. Whether you’re an existing client or someone calling for the first time, you can reach us by phone anytime during business hours (8–5 M–F Pacific Time).
Business by the Golden Rule Our mission at OREP is pretty simple: “Business by the Golden Rule.” It means we treat you the way we want to be treated: with honesty, courtesy and efficiency. This is David Brauner, Senior Broker and Principal of David Brauner Insurance Services/OREP.org. Call us to see what you’re missing if you’re missing great rates, great service and business by the Golden Rule. Yes, with OREP you can have all three. Call toll free today: (888) 347-5273 or visit OREP. org. Policy servicing: email@example.com. OREP publishes Working RE magazine. WRE
OREP now in our 10th year! back: (L-R) Kevin, Ashley, David, Clark, Michael front: Lori, Maria, Mary, Carolynn, Cary, Chantel
“WOW! Thank you very much. You are the fastest and most efficient insurance agent I have ever done business with !!!” —Aloha, James
David Brauner Insurance Services: Calif. Lic. #0C89873
Winter/Spring 2012 Working RE 35
Home Inspectors Closer Look
H o me I n specto rs
l a ci e S p for
spec n I e m o
In Search of Perfect Home Inspection By Rick Bunzel, CRI, ACI
Editor’s Note: According to veteran inspector Rick Bunzel, business efficiencies used by the most successful corporate giants can also mean good business for inspectors.
As I approach my 10th year in business I am still learning
about homes and perfecting my trade. Our clients expect a perfect inspection that will catch 100 percent of the issues. However, few are willing to spend the time or money such an exhaustive inspection would require. Agents wouldn’t support it because a multi-day inspection would inconvenience sellers and buyers and likely nix the deal. Like all inspectors, I don’t like getting the phone call from upset clients about an issue they found in their newly purchased home that they feel I should have caught. Mike Holmes’s Show, “Holmes Inspection” doesn’t help either, as his favorite line seems to be, “The inspector should have caught that.” So the question remains, can we deliver a near-perfect inspection in the few hours we spend in a home? Companies like Boeing must have processes that produce 99.9 percent defect-free airplanes or they wouldn’t remain in business. McDonald’s is another example—they have to create a menu of items that are consistent around the world. One might say that the inspection business is different because we are not producing a standardized product. But I disagree. Our inspection report is a product and we can take some of the techniques that companies like Boeing and McDonald’s use to create a better product. Both companies thrive on certain core fundamentals: • S tandardization: a Big Mac is a Big Mac and a Boeing 737 built in 1968 can use parts from one built in 2010. • The highest levels of quality possible: planes can’t fail and the food must be pure and taste the same regardless of location. • A production process approach: different work cells combine to make the finished product. • Quality processes throughout their systems: from suppliers to management oversight, checks are built into each process. • Production systems which are reproducible and easy to teach to new employees. • Lean production: steps are broken down and analyzed to get the most from each employee. Rick Bunzel is the principle inspector with Pacific Crest Inspections and an ASHI Certified Inspector #249557.
36 Winter/Spring 2012 Home Inspectors Closer Look
Translation Please What can we learn from these companies that translates to the home inspection business? I looked at the process and broke down the components into the following: initial contact, information flow, scheduling, arrival at the property, physical inspection, report creation, report delivery, followup and after inspection issues.
Initial Contact In many areas of the country, real estate agents give their clients the names of multiple inspectors, so frequently we get calls from clients shopping for a home inspector. My business partner/wife and I share the office duties so it’s important that we are consistent in what we say and quote to the client. We have built processes into our business to ensure that every client goes through the same process, from the time they first contact us through the follow-up survey. We have a paper form that gets filled out and goes into our software. This step includes calling the agent to get access to the home and ensuring that the utilities will be turned on. A confirmation is sent out with the time, date, location, cost and a copy of the inspection agreement for their review. We have learned that setting expectations is an important part of customer satisfaction. Most home buyers are bewildered by the home buying process. The more education we can provide upfront the better they will understand the information they receive down the line.
Information Flow and Scheduling It’s important that I receive information prior to arriving at the site, beginning with the initial contact from the agent. When the client is booking the inspection, we identify his/ her concerns and issues. I usually will look over the schedule and inspection details the evening before. Since we have been performing inspections for some time in this area, I am familiar with the neighborhoods and their particular issues. We usually block out four hours for an inspection because you never know what you will find until you show up at a property. The last thing we want to do is rush through an
inspection due to a scheduling crunch. Our information forms capture cell phone numbers for both the client and agent. If we are running late we can call and let them know when we will arrive.
Inspections All inspectors have their own way of handling the physical inspection of a home. The key is standardization. Like McDonald’s, you want a systematic approach that allows you to adequately view the property and identify issues. Like many inspectors, I try to get to the property before the client to do a “sizing up.” This allows me to do some pre-planning on where to access the roof, the order of things to be inspected and to identify features, such as out buildings that weren’t disclosed. I also begin cataloging issues that will need further examination, such as LP siding or hazards like overhead wires. If the client and agent have not arrived yet, I will start taking pictures of the exterior. Usually I shoot the front elevation and each side of the home and roof. Photo documentation is part of my standard process. In a small home inspection I will take close to 100 pictures and use about 25 in the report. Clients will frequently forget the condition of the home but if there is a disagreement on the condition they have a hard time arguing with a picture. Master craftsmen spend hours perfecting their trade. As they learn, they build muscle memory. This muscle memory makes it easier to get the tasks right time after time. Most home inspectors already have muscle memory. For example, when I first got my telescopic ladder I looked pretty awkward opening and closing it. I have now used it more than 1,000 times and can select the height, extend the ladder, get the right climbing angle and check it while I am talking to the client. I have done it so many times I have perfected the process. Most experts will agree that to master a process you have to perform it at least a 1,000 times. Practice your
AP Now USPur 7 Ho
49 hours of CE Required for Appraiser Licensing
inspection process and be consistent. We can’t control our inspection environment but we can master the inspection process so we can perform it regardless of the environment. A critical step in my quality control process is loading information into my reporting system onsite. I have my forms set up to follow my physical inspection process. I will normally set up my laptop in the kitchen and enter data there. If it’s a large home or multibuilding complex, I will inspect an area and then enter it into the computer. If it’s a smaller home, I will enter data at the end of the physical inspection. If I am missing information, such as the size of the furnace, I can go back to get the information. Occasionally I will miss a concealed water heater or an electrical panel hiding behind a painting. My inspection software will remind me that I am missing a piece of information. I also have several check boxes at the end that remind me to verify that the oven is off and the furnace and water heater temperatures are returned to original position. The Report I will create most of my report onsite but I don’t complete it until I get back to my office. I’ve tried it other ways but have found that I had to recall and update the report more often than I wanted to. Even though I would tell customers that this could happen, I felt like I was sending out reports with potential errors. For this reason I don’t send out reports until I get back to the office. This allows me to digest the information from the inspection, do research if needed, enter the pictures and fine-tune the wording. We have reduced the number of errors that go out in the reports to less than two percent. I use pictures as one of my quality controls. If I find a defect, I take one or more pictures of it. As I am going through the report I am looking at the pictures and comparing it to the comments I have
Continuing Education Bundled Packages 3 Convenient (online) 3 Group discount through OREP/Mckissock 3 Open to all appraisers, agents and inspectors in 49 states For course information, visit OREP.org (click Benefits, Education) firstname.lastname@example.org Winter/Spring 2012 Home Inspectors Closer Look 37
Home Inspectors Closer Look
entered. Frequently, I will find a small item such as a broken sliding door latch that didn’t make it in the initial report. During this pass I will ensure that I have all the issues documented and pictures entered. My last steps are spell checking, looking at a summary of issues and creating the PDF. The final quality control check is looking at the finished report and making sure it printed as I want it.
inspection. Occasionally I get clients (and their family) who are all over the place, pulling me in different directions. In this case I gently encourage them to hold questions until the end or have the buyer/client collect the questions and ask them when I am done. This does extend the time it takes to inspect a home but the majority of our clients get more out of the inspection and feel more confident about their purchase after reading the report.
Setting Expectations Even the best, most thorough inspection can produce an unhappy client. If your customer is unhappy with your service, then you have failed at your job. In my experience, the most common reason is poorly set expectations. Most customers don’t understand what a home inspection is and what it isn’t. We all have contracts that stipulate the terms of the inspection but how many clients read the contract? For this reason, I encourage the client to attend the entire inspection. This is a business decision for each inspector and from informal polls I have taken, about 50 percent of inspectors encourage clients to attend the inspection while the rest prefer the clients show up at the end. I do a pre-inspection briefing when the client shows up as part of my process. The briefing covers what I will be doing, checking to see if they reviewed the inspection agreement, safety (please don’t follow me on to the roof) and finding out if they will be staying for the entire inspection. This briefing helps set the client’s expectations and lets them see what I am seeing. If there is an area that is not accessible, I tell them and why it won’t be part of the
Follow up In most cases, we do our inspection, collect a check, deliver the report and never hear from our clients again. Many of us take the head in the sand approach: no news means we are doing okay. But how do we know that we are doing great and that our clients are bragging about how happy they are with our services? How many of us ever check back with our clients? I would wager that less than 10 percent of inspectors have some type of formal feedback system. At this point I don’t have a formal system, but I know I should. I do encourage clients to review me on Google, Yellow Bot, Bing and Judy’s Book. I also poll the agents who refer me for feedback. I consider them a secondary client as many clients depend on the agent to recommend an inspector. In our state they are required to supply three names. The quest for perfection should never end. Our markets are changing and we must change to continue to meet the expectations of our customers. We should never get lax and think that we are delivering a good inspection and that this is good enough. WRE
Looking for Health Coverage? California Residents Health Care Solutions
Plans available to real estate professionals on a guaranteed issue basis. Kaiser Permanente offers eleven plans including the new Tax Advantaged Health Savings Account Plans. United Healthcare offers three HMO and four PPO plans. Allied National offers four Limited Benefit PPO Plans that offer highly affordable first dollar coverage including doctor office and emergency room visits and prescription drugs. Plans available to California residents only through OREP (OREP membership not required). Please visit OREP.org/Benefits or email email@example.com with medical benefits in the subject along with your name and phone number in the body of the e-mail. A qualified agent will call to go over the options.
Allied National United Healthcare
38 Winter/Spring 2012 Home Inspectors Closer Look
Don’t Inspect for Pests—Sued Anyway By Isaac Peck, Assistant Editor , WRE
Even if your inspection specifically excludes wood destroying insects/organisms (WDI/WDO),
you are not protected from an irate homeowner suing you if a problem arises. That’s why it is good to have a clear scope of work, a signed inspection agreement and a broad errors and omissions insurance policy—just in case. According to David Brauner, Senior Broker at insurance provider OREP.org, most inspectors who don’t inspect for WDI/WDO probably don’t think they need to purchase the coverage. So if a problem arises, they may be left on their own. “We see new homeowners move in and begin a remodel only to find termite damage that was hidden behind a wall, so it was unseen and unreported by the inspector,” said Brauner. “Their first instinct is to try to recover some of the expense from the home inspector—and maybe get a free remodel. The inspector responds with their scope of work and agreement, signed by both parties, which specifically excludes WDI/WDO or pest inspections and is limited to what is visible. That’s great, but if that does not stop the homeowner there, the inspector should be prepared to prove his case in court and it may be without the help of his insurance carrier if he did not purchase that specific coverage.” Brauner says that OREP’s E&O base policy provides what is known as “incidental” coverage for pests and many other services—for when a problem like this arises. “That’s why a broad policy form is so important,” said Brauner. Brauner recommends asking your agent when you’re shopping insurance about what is and isn’t covered in the base policy—whether you specifically inspect for it or not. “Obviously, if you perform pest inspections, and it’s not included in your base coverage, like it is with the OREP policy; it’s necessary to purchase that coverage. But if you don’t inspect for it, you should be aware whether the ‘incidental’ coverage is in place in case the unexpected happens,” says Brauner. “The unexpected is not so unusual in this business, unfortunately. Insurance, more than anything, is about peace of mind and having coverage when you need it.” This story first appeared in Working RE Online (Home Inspector Edition). Opt in at WorkingRE.com WRE
Winter/Spring 2012 Home Inspectors Closer Look 39
Maximizing AMC Orders and Income: Common Errors to Avoid by Bryan Knowlton
Editor’s Note: These common errors to avoid are time-saving tips excerpted from the webinar Maximizing AMC Orders and Income presented by appraiser Bryan Knowlton and offered through OREP/Working RE Webinar Series.
you are reading this, you have most likely have found that to stay in business you have to accept some work from appraisal management companies (AMCs). Some are great, some are terrible. It is just a sad fact that they are here to stay. I am not going to waste your time talking about how AMCs have dominated the industry and how many have caused its deterioration. I urge you to get involved with local and national appraiser coalitions and professional organizations. What I will do in this story and in our webinar Maximizing AMC Orders and Incomes and our AMC Resource Guide, is show you how to make the relationships as profitable and stress free as possible. Keeping a List With all the crazy requests you will get from varied AMCs it is good to keep a master list of errors you make until you stop making them. Standardize your templates and make sure to standardize your appraisal inspection procedures. These are easy ways to avoid common errors. The easiest way to avoid errors is to read each the engagement letter with each order. Make sure you study the request from a new vendor and make any changes to your templates.
Some things that I have standardized in my reports include: 1. Photos of each side of the house. 2. Street in both directions. 3. Water heater and security bar quick release mechanisms. 4. All rooms—remove any religious symbols and personal photos. 5. Views. 6. View from the front of the house (primarily needed for REO work). 7. Comment added to condition and quality of construction adjustments include—value determined by Marshall and Swift Residential Cost Handbook. 8. Comment added to views, location adjustments, appeal, etc. Value determined by paired sales analysis. 9. Always bracket your final opinion of value within final adjusted values as well as pre-adjusted values. 10. Bracket everything whenever possible to include GLA, lot size, quality, condition, bedroom/bathrooms, etc. If unable to bracket, explain why you can’t bracket and that there are similar properties in the area, but none have been listed or sold within the past # months. 11. Put your standard search criteria in your sales comparison notes. I give the criteria I use and will usually add
Appraiser Bryan Knowlton is author of the webinar Maximizing AMC Orders and Income and the AMC Resource Guide, with over 300 of the best AMCs listed (see inside back cover).
40 Working RE Winter/Spring 2012
something like: “Due to the lack of sales within the past #months, my search criteria was expanded to #months, # miles and #% GLA to bracket the subject property.” 12. Confirm any address or buyer name discrepancies—match data on order or contact AMC. 13. Confirm your PUD information— if attached, call the HOA or management company for details. 14. Condo % Owner occupancy, litigation and fees—confirm this information with the management identity. 15. FHA appraisals require you to modify to include FHA to intended users of the report. 16. It is always a good idea to include two active comparable properties to all reports. Remember, success working with AMCs begins with working with the right AMCs. For this, you need a good list. For more on this webinar and others, see page 32. WRE
Maximizing AMC Orders and Income WorkingRE.com click Webinar Series
“I purchased the AMC directory last week and am very happy. I signed up for 4 companies and already received two orders.” —Diane F.
le b a l i a v Now A
Hi all, I removed deadbeat AMCs and removed all the companies that have gone out of business, lowered the number of AMCs to under 300 - no need to waste your time applying to companies that don’t send work, and added some new clients. I updated my list so that the top 45 companies are the ones that send me over 95% of all my AMC work. I also updated the marketing information, tips and advice on my best techniques for getting more business and making more money in 2012. —Bryan Knowlton
“I have purchased your AMC directory and have been successful with obtaining new clients. Your emails are also very informative and full of excellent advise. Out of the AMC’s I have signed up with, I was able to get two solid clients with consistent work on a weekly basis. Three other AMC’s send orders on occasion. Thank you.” —Zachary Brown
Designed by an Appraiser for Appraisers
Chapters Include: n Make more money with AMCs n The Application Process n Maximize AMC Orders n Links to each AMC’s online application page or email n Common Errors to Avoid
Do you want more appraisal orders? Are you looking to
n Specific AMC Requirements
recession proof your appraisal business by getting more
n Companies that SEND ORDERS!
estate and FHA appraisal requests? Do you want the ability
Bonus Chapters Included:
to select the best paying and most desirable appraisal work from the appraisal management companies? n n n n n
Easy to get started today First 40 listed send 90% of the author’s work National Management Companies Verified Companies that send orders Marketed successfully to appraisers for over three years
n Recession Proof Your Appraisal Business n Appraisal Company Marketing n T op Revenue Generating Techniques n Maximizing Internet Orders
Scan code with any QR Code Reader app.
For more, visit WorkingRE.com, left column (click 2011 AMC Resource Guide) “Thanks Bryan, your list is worth the price. I’ve been getting good business from some of those AMCs. :) —Ray
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Published on Mar 9, 2012
Published to help readers build their businesses, reduce their risk of liability and stay informed on important technology and industry news...