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Chief Appraiser Blog

Market-Tested, Appraiser-Approved

By Bill Waltenbaugh | March 9, 2010

General Mills, a large cereal manufacturer, has been using the slogan "Kid-Tested, Mother-Approved" for years. And why not? It works! It conveys the idea their product is good and desired by their target audience, kids. It also passes the scrutiny of mothers who desire to feed their children something healthy and nutritious. Why buy something good for you if you're not going to eat it, and why buy something tasty if eaten every day makes you unhealthy.

Similarly, when an appraiser considers comparable sales, they also need to find market tested properties. In other words, something offered to the open market and, through time, subject to the collective judgments of its participants. This also provides an opportunity to examine the history of each transfer and scrutinize the motivations of the market.

It seems each organization has their own slightly different variation regarding the definition of market value. However, practically all mention the importance of "reasonable exposure in an open market." This makes sense, since an opinion of market value is based on objective observations of the collective actions of the market. If a property has limited or no exposure, it's difficult to discern the market's overall motivations.

This is why MLS is a favorite data source among valuation professionals. When a property is listed in MLS it is exposed to a large portion of the subject's market. More importantly, it is targeted toward the most significant segment, people who are considering a purchase. However, just because a property is listed in MLS, it doesn't mean it is an arm's-length-transaction. These transfers need to be, if you will, "Appraiser-Approved."

One of the ways to verify the incentive of market participants is to study a property's listing history. Most MLS providers allow valuation professionals the opportunity to do just this. Given this chance, the appraiser needs to ask questions such as:

    •    What was the original list price of the property?
    •    How many price reductions have there been?
    •    How long has the property been on the market?
    •    Are there recent listings that are expired, withdrawn or canceled?
    •    How does the contract price compare to the final list price?
    •    How long was the property on the market since its last price reduction?

Answering these questions and applying a little common sense will, when needed, prompt the necessity for additional research and explanation. This can usually be accomplished by calling an agent or another participant in the transaction.

General Mills' slogan has stood the test of time because it addresses the clients' concerns. A Market-Tested, Appraiser-Approved report does the same thing. Take the time to thoroughly investigate marketing times and listing history for the subject and comparable properties (listings and sales). Doing so is a step in the right direction toward producing a well documented and supportable report.

Topics: Uncategorized | No Comments »

Knowing What It’s Not

By Bill Waltenbaugh | March 2, 2010

Sometimes, before you can tell what something is, you first need to determine what it is not.

It is common practice these days for lenders to request an appraiser to provide a couple listings in their reports. In fact, FHA requires appraisers to provide two listings when the market is identified as declining. As we all know, listings are not going to tell us what a property is worth but they can, with reasonable market exposure, assist us in estimating what the property isn't worth. This is valuable information! Especially in declining markets.

Let me explain. When current listings are included and adjusted to the subject they provide a ceiling for the subject's value. Given the principle of substitution, when several similar homes are available, the one with the lowest price will attract the greatest demand. This is the primary concept on which the cost and sales comparison approaches to value are based.

As such, similar listings (active and pending), are very beneficial in bracketing the top end of the subject's value. However, if listings bracket the top, what about the bottom? How do we bracket the lower end?

In the twenty years I've been appraising, I've never seen as many distressed sales as there are these days. In many markets, they are literally in every neighborhood and price band. I'm not suggesting these transfers be gridded and adjusted on every assignment but they shouldn't be ignored either. Take some time and study these properties. If they best represent the subject, use them. If not, allow them to provide some insight as to the bottom of the market.

Bracketing the subject, both qualitatively and quantitatively, with similar listings and recent distressed sales provides us with a ceiling and floor. After we know what the subject isn't worth, it's a lot easier to support and narrow our opinion on what it is actually worth.

Topics: Uncategorized | 4 Comments »

It Is What It Is!

By Bill Waltenbaugh | February 22, 2010

There's a phrase I hear people using a lot these days; "it is what it is".

So what does that mean? Of course things "are what they are". It's really hard to argue with that kind of logic.

I think we use this phrase when we feel like there's nothing we can do about something; but this isn't always true! My weight "is what it is" but it doesn't mean I can't do anything about it. The burger, fries, and milkshake I had for lunch "is what it is" and so is my waistline. Believe me, there was a lot of "it is what it is" to get where I am today. Truth be told, it's easier for me to complain about my knees hurting and how I feel than to do something about it.

So what does this have to do with appraisal? The appraiser is always perceived as the bad guy when things go south. What happened to our image as, per USPAP, the defenders of public trust? It seems like we're all paying for the actions of a few poorly trained and unethical appraisers. Our image has taken a beating but we don't have to surrender to "it is what it is".

I totally believe the local, knowledgeable and ethical appraiser can't be beat when it comes to sound and supportable valuation. No other valuation method, AVM or BPO, can provide the thoroughness of a responsible, resourceful and skilled valuation professional. So, if we're going to change our reputation, commitment to detail is key!

John Wooden, former coach of the UCLA Bruins, has more NCAA championships than any other basketball coach in history–10 national titles in 12 years. What did he teach his players to ensure top-level performance? He taught them how to put on their socks. Each season Coach Wooden showed his players how to prevent sock-wrinkles around the little toe and the heel, and how to lace up their shoes with a double-knot. This helped his players avoid blisters. In the closing minutes of a close game, the player without blisters on his feet will perform better. This simple, basic detail contributed to a series of National Championships. Attention to detail, Wooden says, creates success in basketball, in business and in life.

It's frustrating when a client asks for more information or to provide additional support and comment for your conclusions. However, this is our niche in the valuation space. The ability to provide more understanding and support for our reasoning is what makes the appraiser unique. How does the client ask an AVM for more information? Our adeptness to understand and address the client's specific concerns is our strongest asset. We should embrace our ability to provide clarification and custom customer service.

If appraisers are going to gain their respect back as the valuation expert, it's going to be done by meeting the client's desire for specifics and detail they can't get anywhere else. Believe me, the "trust me" days are over. It isn't going to be easy and it's going to take a lot of hard work but we don't need to capitulate to "it is what it is".

Topics: AVM, For What it's Worth | 11 Comments »

Releases, Readdressing, and New Assignments

By Bill Waltenbaugh | February 16, 2010

Anyone who has been in the appraisal business for any length of time has had a call requesting a report be "transferred" to a new client by changing the name. This request, referred to as "readdressing" in USPAP, is not permitted. Simply changing the name does not change the original appraiser-client relationship and is considered misleading.

Most clients desire to have their own name on an appraisal because they want to establish a relationship that provides them all the rights, obligations and liabilities such a relationship places on the appraiser. However, Advisory Opinion (AO) 26 makes it very clear that once a report has been prepared for a specific client and for a specific use, the appraiser cannot "readdress" or "transfer" the report to another party. USPAP's FAQ 97, 98, and 99 provide additional information about readdressing.

Per AO 26, the best way to handle one of these requests is to consider it a New Assignment. Doing so establishes a new appraiser-client relationship. This also satisfies the reason why the client requested the appraisal to be "transferred" to their name.

Some considerations that need to be addressed in this new assignment are outlined in Advisory Opinion 27. First, per the new USPAP requirement in the Conduct Section of the Ethics Rule, the appraiser needs to disclose to the new client, if necessary, any services regarding the subject property performed by the appraiser within the past three years. The appraiser also needs to be careful not to disclose any confidential information or results that are part of the original assignment. Confidential information is defined as: those details identified by the first client as private and any particular information provided to the appraiser and not available from any other source.

A new assignment does not mean that the appraiser needs to start from scratch. USPAP's FAQ 173 addresses what an appraiser needs to consider when determining the appropriate scope of work for the new assignment. The need for a new inspection is among these considerations. A new inspection may not be required as long as the effective date, scope of work and the intended use are similar. In this case, the appraiser may accept the new assignment with a retrospective effective date that is the same as the inspection date already made. Although the results may be the same, this is not considered revealing the first client's assignment results. In fact, similar results are expected if the effective date, scope of work, and intended use are nearly identical.

In the past, USPAP suggested in AO 10 that the appraiser obtain a release from the original client before accepting the new assignment. However, this has never been a USPAP requirement and this Advisory Opinion has since been retired. In fact, AO 27 cautions the appraiser in exercising the "release" practice because informing a client about the existence of another client can result in a violation of confidentiality.

Additionally, in September 2009, HUD released Mortgagee Letter 2009-29; this letter addresses appraisal transfers and client name changes. If a borrower switches lenders before a loan is closed, the first lender must, at the borrower's request, transfer the case to the second lender. However, FHA does not require that the client name on the appraisal be changed when it is transferred to the new lender. Simply changing the client’s name is, as discussed above, a violation of USPAP. HUD will accept the appraisal from the second lender with the first lender’s name at the top. Nonetheless, HUD does say in this same letter that a name change can happen if treated as a new assignment. The FAQ released on this Mortgagee Letter indicates that both the original appraisal and the second appraisal be included in the case binder. For more information visit: http://portal.hud.gov/portal/page/portal/HUD/groups/appraisers

Although "readdressing" is never allowed by USPAP, it doesn't mean that the new client's needs can't be met. With a little effort, understanding and the proper scope of work, the new client can receive a new appraisal with their name at the top.

Topics: For What it's Worth | No Comments »

Appraiser Independence Day

By Bill Waltenbaugh | February 9, 2010

This Sunday is Valentine’s Day but the following day, February 15, 2010 is appraisers’ independence day; at least as far as HUD is concerned. Mortgage letter 2009-28 was originally set to go into effect on January 1, 2010 but was postponed until February 15, 2010.

This Mortgagee Letter, with the subject of Appraiser Independence, outlines several new changes on how FHA appraisals are ordered, the fees that are charged and the protocol for communication between the lender and appraiser. It also reaffirms FHA's long time commitment toward the importance of appraiser independence.

Part of this Mortgagee Letter addresses FHA's desire to place a firewall between a lender's production staff and the appraiser. Come February 15th, brokers and/or any other member of a lender's staff who is compensated on a commission basis will no longer be allowed to order appraisals directly through an appraiser. In a similar fashion, communication will also be prohibited between the appraiser and any member of the lender's staff who is compensated on a commission basis and/or anyone who reports to an officer of the lender who is not independent of the loan production staff and process. However, the Direct Endorsement Underwriter is allowed to request clarifications and discuss elements of the appraisal directly with the appraiser.

Although FHA does not require the use of an AMC, they do recognize that lenders may use AMCs to help ensure appraiser independence. As such, they address how appraisers and AMCs are to be compensated for the services they provide. In both cases, the fees are to be kept separate and each should be compensated at a rate that is reasonable and customary for the services provided in the market area of the property being appraised.

Another change FHA is making on February 15, 2010 is the adoption of the 1004D/442 Form. The use of this form is another step FHA is taking to standardize the reports commonly used in the industry. This two part form allows for the appraiser to provide a Summary Update Report (Part A) and/or a Completion Report (Part B).

Completion of Part A, the Summary Appraisal Update Report, extends the validity period of an existing appraisal that is due to expire. Only the FHA appraiser who completed the original report and who is currently in good standing with HUD and the state, in which they are licensed, is allowed to provide the Appraisal Update. A drive-by inspection is required and the improvements must be observable from the street. Photos from as many angles as possible should be included in the report. The report cannot be used to extend the validity period of the property if it has declined in value or if the exterior inspection reveals deficiencies or changes that did not exist as of the effective date of the original report. The reporting requirements are very simple for this report but all of the research and analysis used to verify current market conditions and the appraiser’s opinion must be retained in the work file.

Part B, the Completion Report, will be used to report the completion of a repair and/or the satisfaction of requirements and conditions noted in the original appraisal report. This report will replace the Compliance Inspection Report (CIR) for all repairs, requirements, and conditions except for new construction and manufactured housing. In these cases, the traditional CIR report will still be required. Unlike part A, any approved FHA appraiser in good standing can complete Part B. The appraiser must review the requirements and or conditions noted in the original report and inspect the property for their satisfactory completion. If any items are incomplete, the appraiser needs to describe the impact the incomplete items or conditions have on the subject and the final value.

For more information on these two mortgage letters visit http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/2009ml.cfm

Topics: For What it's Worth, Uncategorized | 2 Comments »

My New Blog

By Bill Waltenbaugh | February 2, 2010

Well, no surprise here, I was right about the reaction you get when you mention AVMs to a group of appraisers. After sending last week’s For What it’s Worth (FWIW) on AVMs, I received a throng of email. Most expressed an interest in the new pilot, some requested more information on how to prepare and become educated on the use of AVMs, and others were skeptical, concerned or completely off topic. One was even very humorous.

For those of you who took the time to email, let me start by saying thank you. The feedback was very informative and, for the most part, encouraging. I’ve been working as an appraiser for twenty years and the last few, without a doubt, have been the most challenging given the tumultuous market and all the recent regulatory changes. It’s uplifting to know that so many of the appraisers on our panel are overcoming these challenges and meeting them head-on through education and thinking outside the “check” box.

Although I read every email that came in, I did not respond. I apologize for this and unfortunately time is something that I am greatly lacking at the time. As such, I have decided to start a blog (see link below). There I will post all the FWIW emails along with any other thoughts I want to share. This will also provide a forum for you to post your own comments and questions. Many of the questions were similar in nature. As such, this site will provide synergy, allow us to be more efficient and, what’s more important, learn from each other.

I only ask that you stay on topic or, if posting something new, keep your questions and comments appraisal related. All non appraisal related business should be addressed directly with the appropriate Appraiserloft departments. To keep things organized, I will review all new posts and approve them before they appear on the site. My desire for this blog is for it to be a place where we can all learn from one another, become better professionals, and maybe even have a little fun. Lets face it, none of us are as smart individually as we all are together.

Topics: For What it's Worth | 2 Comments »

Getting Along With The AVM

By Bill Waltenbaugh | January 28, 2010

Last week’s “For What It’s Worth” addressed the new year and the multitude of changes the appraisal profession has seen and will see in the future. A few years ago a somewhat hokey book called Who Moved My Cheese by Spencer Johnson, M.D. was very popular. I say hokey because the book used four fictional characters, two mice and two miniature humans, to illustrate how people deal with change differently. Some move quickly, some drag their feet, and others fight, kicking and screaming, the entire way.

I mention this book because when you introduce the conversation of AVMs among appraisers, it produces similar reactions. The reality is, the use of AVMs are here to stay. They make up a significant portion of the valuation space and, like it or not, most of your mortgage related assignments are checked against a lender ordered AVM. So what are appraisers to do with AVMs?

Let me start by saying I fully believe the AVM will never replace the expertise of the local knowledgeable appraiser. It is difficult to replace the true, boots on the ground, market expert with hard data and unemotional models. The question is, how should appraisers prepare to work with, and along side, the Automated Valuation Model?

These days, part of producing a report that satisfies the needs of the mortgage client involves being proactive and answering the questions a lender might have after they compare your report to an AVM. Is the quality of the subject above or below what is customary? Does the subject have or lack a significant amenity that differs from the norm? Maybe the view is different from the standard. These factors and more are difficult for a national AVM to account for in their modeling. Thoroughly answering these questions with comment and market data, can significantly cut back on those annoying inquiries on reports completed days ago.

Soon, AppraiserLoft will be piloting a new approach that will allow the appraiser to better address these concerns. This process will allow the appraiser to order an AVM at the beginning of the assignment. This way, the AVM becomes a part of the appraisal process and is addressed in the reconciliation section of the report. It also provides a proactive opportunity to comment on some of the possible factors noted above.

If you are interested in accepting these orders, there are a few things we recommend you do to prepare for this exciting new product. First, you will want to read and have a good understanding of USPAP’s AO-18. This advisory opinion addresses what an appraiser should know about an AVM before it is incorporated and used in an assignment. Second, taking a course in advanced statistics and valuation modeling will provide a good foundation for understanding how AVMs work. AppraiserLoft will soon be seeking appraisers who meet these requirements to develop a first tier panel for placing these orders.

Appraisers need to stop worrying about being replaced by AVMs. Preparation and understanding is key. “Pressure comes when someone calls on you to perform a task for which you are unprepared.” — Tony LaRussa, Manager of the St. Louis Cardinals. The AVM isn’t going away. I suggest we learn to understand the strengths and weaknesses of AVMs. It is another tool for the educated valuation expert – the appraiser.

Topics: AVM, For What it's Worth | 3 Comments »

Happy New Year!

By Bill Waltenbaugh | January 11, 2010

Starting a new year is always a great time to reflect on the past and look toward to the future. I think that is why so many of us enjoy January 1 and celebrating the New Year. It is a time of change, a time when we examine the last 365 days and make plans for the New Year ahead.

As for the appraisal industry, we have certainly experienced numerous changes over the past year and, no doubt, will see our fair share of changes in the future. This can be a challenge. Once we become accustomed to thinking one way, we often find it difficult to accommodate new thoughts, even when change is taking place all around us. However, if we never change the way we do things or the way we think, we can never better ourselves.

As for me, the New Year presents a change in career by becoming the new Chief Appraiser at AppraiserLoft. This is very exciting for me and I look forward to the opportunity to work with you and the AppraiserLoft team. Together I am confident we will tackle all the changes that come our way in 2010.

One way I plan to address change is by examining new industry standards, challenges and frequently asked questions and providing my thoughts on the subjects via email and making them available through a new section soon to come to our web site.

So to kick off what I believe will be a landmark year for change, I would like to bring your attention to a recent revision to USPAP. The 2010-11 publication of USPAP now requires appraisers to address prior services performed on the subject property over the past three years. Below is the specific language addressing this change in the conduct section of the ethics rule:

Prior to accepting an assignment, and if discovered at any time during the assignment, an appraiser must disclose to the client and in the report certification: any services regarding the subject property performed by the appraiser within the prior three years, as an appraiser or in any other capacity.

Providing this information gives the client an opportunity to evaluate the details and decide if they want another appraiser to complete the assignment. Quickly communicating these particulars to AppraiserLoft will go a long way in minimizing delays on our end and unnecessary work on yours. Keep in mind, when searching your database for previous assignments; the address of a newer home may reflect the legal.

With a little effort, I’m sure we can all make this year our best year yet!