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Archive for May, 2007

[Curbed] Three Cents Worth: PPSF (My Left Foot edition)

May 31, 2007 | 4:54 pm | | Columns |

Its Thursday, so its that time of the week to provide my Three Cents Worth as a post for Curbed. This week I listen to my readers and chart price per square foot based on size. I kicked the tires so much when creating the chart, I hurt my right foot.

To view post: PPSF (My Left Foot edition)

Previous posts can be found here.

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Expert Witness: Fade To Black, A Second City Day In Court

May 31, 2007 | 10:19 am | | Public |

This week has been a whirlwind for me personally so my quantity of posts has been less than stellar.

I had been retained as a real estate expert for the prosecution (US Government) in media baron Conrad Black‘s federal trial, going on now in Chicago. I testified in Chicago on Tuesday.

I had the pleasure of intereacting with really sharp and energetic DOJ attorneys and FBI agents.

Obviously, I can provide no specific comments about the case, but it was a terrific experience (not even factoring in the US Department of Justice cafeteria food). I have performed court testimony in many different matters over the years but this trial was one of the highlights of my professional career. My testimony was widely covered in the media (see links below).

Normally I wouldn’t even bring this sort of event up, but I was struck by the fact that there has been so little coverage of the trial in New York, that I was surprised by the amount of media presence in the courtroom.

Here’s an excerpt from the Chicago Tribune:

Miller’s testimony bolstered the government’s charge that Black, Hollinger International’s former chairman and chief executive, received a sweetheart deal for the apartment, defrauding shareholders of millions of dollars. The apartment sale, prosecutors allege, was part of a scheme involving Black and four former executives to steal $84 million from Hollinger International, now called Sun-Times Media Group Inc.

Summary of some of the coverage:

Expert says New York apartment worth $8.5 million [Chicago Tribune]
Jury sees Black taking boxes [Chicago Sun-Times]
Prosecution drops one charge against Black [Globe and Mail – Canada]
Lord Black breaks a habit and stays silent in defence [The Times – UK]
Price for apartment low [The Province – Canada]

Ok, back to work.

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[Straight From MacCrate] And You Thought Real Estate Loan Delinquencies Would Stop with the Sub-prime Market Mess!

May 31, 2007 | 7:03 am |

Jim MacCrate, MAI, CRE, ASA, has worn many hats in his career. He taught a number of the appraisal classes I have taken through the Appraisal Institute. and I think he is one of the few people who actually understands the “J-Factor.” His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime. This week, Jim uses negative leverage to make his point. …Jonathan Miller

Reviewers and mortgage underwriters beware. I ran across the following chart and wondered if mortgage costs are higher than the cash returns on real estate, why would anyone buy? And why would anyone lend either?

Based on this chart, at the end of last year, the average capitalization rate dropped below cost debt. This phenomenon is known as negative leverage in terms of current cash flow. Negative leverage decreases return to equity and occurs when the cost of debt is higher than the unleveraged return. The yield on a real estate investment is the capitalization rate plus growth. If this situation continues, what happens if there is no growth? The return is negative.

Financial risk, in addition to market risk, is magnified when leverage (debt) is used to acquire property. When more debt is incurred, the return to the equity position decreases at an increasing rate. This escalation also becomes alarming when equity investors are attracted to the returns that real estate has produced over the last five years and utilize mezzanine financing to acquire assets. Rising interest rates may also have an adverse impact on commercial real estate loan performance as the debt service on variable rate loans increases. Investing and lending become risky business if this trend continues.

From a lender’s perspective to protect against default, the maximum loan-to-value ratios and the debt coverage ratios should be altered or additional collateral required. (But will loan officers, corporate executives, and others who are paid based on income received by making loans act responsibly to change these ratios?) Most commercial loans are relatively short term and require refinancing in five, seven or ten years.

From the investors’ perspective, they hope that their income will increase over time, which becomes uncertain if the economy slows, companies cut back space requirements, and corporate and/or personal incomes lag. Where does the growth come from to increase the income return from holding real estate properties or portfolios? Leverage is positive when investors can earn more on the property than it costs to finance the acquisition. Investors always gamble that price appreciation will bail them out. Although this gamble paid off in the past, people forget about the 1970s and 1980s cycles. Is today any different?

It is critical to remember that local economic conditions are the most important determinants of the potential cash flow that can be derived from investing in real estate. If the economic fundamentals weaken in a metropolitan area such as New York, real estate will be affected. Real estate cycles vary by market and by property type and are influenced by the cost and availability of debt.

Appraisers, lenders, and investors must remember that high interest rates reduce the demand for real estate and liquidity. Prices must fall when this occurs until equilibrium is achieved. Since this phenomenon took about seven or eight years to recover in the 1970s and again from 1989 to 1995, we should be prepared for the next real estate market cycle. And the FDIC as always is protecting our insured deposits, while the SEC and other regulators are protecting the ultimate investor, the general public who buys Wall Street products. As long as deals have sufficient equity and the debt coverage ratio is adequate, real estate may still produce satisfactory long-term returns.

So what happens if interest rates increase, but the cash flow to the property does not? Sub-prime problems ripple through the commercial real estate markets. Some say that will never happen. But remember, they said that in the 1970s and the late 1980s too!

To quote my friend and mentor, Bill Kinnard, PhD., who would remind us that “real-estate has a ten year cycle with a five year memory.” The natural segue to Kinnard’s statement is that real estate investors may be currently in the buying high stage of the cycle, only to find themselves, most probably, selling low at the end of the cycle, which brings up the natural conflict that we have as appraisers and counselors. As appraisers, we merely report what is being experienced in the marketplace and estimate value based on empirical data (whether that data is good, bad or indifferent).

As counselors, however, we have an obligation to inculcate or impress upon our clients the inherent risk to the reversionary value of investments acquired at the apex of market value. As many have advised, the only problem with a long term discounted cash flow analysis is that one is absolutely certain to miss the correction in the marketplace if it is not correct. However, when investors sequaciously follow the market, opportunities for others are bound to materialize. Markets have a history of providing excellent learning experiences for the uninformed.

Note: a special thanks to Nancy Reiss of The Write Stuff and Max Ramsland, MAI for their help with this.

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5-Second Rule Means No Bologna Allowed In The House

May 29, 2007 | 12:01 am | |

With my four sons in my house, three of whom are 6 feet tall or more (my 4th is only 8 years old so give him time), my wife and I have realized that availability of large quanties of food is always essential. Our family has long been a proponent of the 5-second rule, that says that dropped food is safe to eat as long as its been on the ground for no more than 5 seconds (hat tip to Freakanomics). Of course, on the streets of Manhattan, the rule can be modified to 1-second.

I was thinking back a few years when we bought our current house. We knew that the house was right for us or at least in the running, within 5 seconds after entering the house. We had the same experience in our prior home purchase. There was no hard sell needed once we had that feeling.

I’d argue that buyers make up their mind almost immediately when they walk into a house, as to whether its within the realm of possibility as a future home. First impressions are everything.

It would seem to me that the broker’s skill in selling the house is made on or before that moment and not after. The need to fill the silence during the tour with statements like: “Here is the kitchen” drives me crazy.

According to a survey, Men (41%) more likely to put a premium on decor than women (30%) Here’s a useful list of items to focus on when selling a house that appeals to buyers.

[The Hall Monitor] The Eye In The Sky Doesn’t Lie

May 29, 2007 | 12:01 am |

Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Soapbox readers tongue-in-groove insight on appraisal issues. This week Todd takes a bird’s eye view which is straighter than the way a crow flies about enhancing reports with photos from sources like Google Earth as an alternative to boilerplate text. …Jonathan Miller

Appraisals that are deliberate attempts to mislead are generally effective not because of the information that is communicated in the report, but because of that which is not. The client may be in another part of the country and have no direct knowledge of the area in which the subject property is located. He is completely dependent on the appraiser in that he only “knows” what the appraiser tells him. An unscrupulous appraiser may state “the subject dwelling is part of an established residential neighborhood”, when in fact the subject is on the outside edge of the established residential neighborhood, just as it transitions to an industrial area. The client may want to know (then again, maybe not) that the subject is across the street from, say, a piggery.

If we are serious in our concern about minimizing the number of misleading, inflated and fraudulent appraisals then we should be taking greater advantage of existing technology, such as Google Earth which has the added benefit of improving the overall quality of appraisals done by reputable appraisers. Let’s face facts here and recognize that even if you don’t consider yourself a “form-filler” (as Jonathan Miller derisively refers to the lowest among us) you’ve got to admit that most of the narrative parts of any appraisal report consist of boilerplate (with only minimal deviation) starting with the Neighborhood description and going right on through to the Reconciliation, and finally – the always scintillating – Certification and Limiting Conditions. Most of the verbiage in a FANNIE MAE appraisal, even one which is well written, consists of the same insipid pabulum that few clients read even the first time they see it (and never again thereafter).

On the other hand, everybody likes to look at pictures! All Yankee fans (and a lot of other people) will recognize this one as the House that Ruth Built.

A picture is worth a thousand words. Most appraisals would benefit from fewer (meaningless) words and more (insightful) pictures. By utilizing the “layering” effects available in GIS based systems like Google Earth, the appraiser can replace his generic Neighborhood Description with a uniquely specific, Neighborhood Illustration.

Appraisals should include two aerial photographs of the subject, one from 1,000 and another from say, 10,000 feet – with the subject property displayed at the center. This is easily doable with Google Earth. By looking at these photos it’s very easy to see how the subject conforms, or doesn’t, with properties around it. There’s no better way to examine externalities, changes in land use, density, size of buildings, etc. than by looking down from above. Until recently, you had to be in an airplane on its final approach to see a neighborhood from this perspective. Thanks to Google Earth, the flyover is “virtual” and you are at the controls (I know what you’re thinking. These photos are not in “real” time and therefore not necessarily accurate representations of the landscape. True enough, but unless there’s been a recent tsunami or comparable disaster, they will be plenty accurate enough to do the job for which they are intended.)

The photo addendum should include the roof top view in addition to the usual front and rear of subject, street scene and interior rooms. The same is true for the comparable sales a view from the sky taken from the same “eye level” as is used for the subject.

The list of potential applications for GIS systems like Google Earth to the appraisal profession is nearly endless and if you’re not using it yet, you should be. Best of all, the basic version is free.

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[Curbed] Three Cents Worth: Bridging the Condo-Co-op Size Gap

May 25, 2007 | 1:14 pm | | Columns |

Its Friday, so its that time of the week to provide my Three Cents Worth as a post for Curbed. This week I make the successful return from tables to charts, only to see two worlds collide: Manhattan co-ops are getting bigger as condos are getting smaller.

To view post: Bridging the Condo-Co-op Size Gap

Previous posts can be found here.

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[Commercial Grade] Better Late Than Never

May 24, 2007 | 10:24 pm |

Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. This week, John is crushed by the lack of a firewall in the commercial world of valuation.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, on Thursdays on Fridays, one of the smartest guys I know. …Jonathan Miller

I am thrilled that appraiser pressure is now in the spotlight. Articles are everywhere. The Real Deal writes Appraiser pressure at pandemic proportions and Inflated Appraisals feed mortgage meltdown and the New York Times and Bloomberg News have been reporting about the recent subpoenas issued to residential appraisal firm MMJ, appraisal management company eAppraiseIt, as well as mortgage broker Manhattan Mortgage.

In keeping with my Commercial Grade mantel, I wanted to give one commercial appraiser’s perspective. As professional appraisers, we essentially sell our opinions for a living. We don’t sell paper reports, or comps, but our expert opinion of market value. It may be an educated opinion, but it is an opinion nonetheless. And, just as in politics, sports and restaurants, there will always be some people that don’t agree with your opinion. You can have a spirited intellectual debate. That’s fine. When a client disagrees with my opinion I am open to discussion, provided that it centers around the valuation issues. If, for example, the client is able to give additional insight into the property and/or market that we may not have fully considered, then I may upon further consideration make a modification to my report. That is not appraisal pressure.

Appraisal pressure is every bit as real and sleazy as the articles make it out to be. And as my esteemed partner, Jonathan Miller said in his recent Matrix post it is a business and ethical decision whether you will work for those people. In the world of commercial lending, however, the sources of appraisal pressure are not necessarily the same as the residential appraisers. Yes, we have mortgage brokers who are clearly motivated to have the appraisal reflect a certain value, but we are not as impacted by the appraisal management companies. Actually, I think that the main source of appraisal pressure in the commercial appraisal world are the investment banks.

If I am not mistaken, the investment banks are the largest source of commercial loan origination in the country. They pool their loans and securitize then. The rating agencies rate the securities and then sell the various tranches to investors. No loans are held on the investment banks’ books.

There is no firewall between origination and appraisal at an investment bank, as required in commercial banks by FIRREA (which has proved to be ineffective, but that’s a topic for a different post!). To indulge in a stereotype, the appraisal is usually hired by a 22-year old MBA who has never seen a down cycle in real estate and needs to make the loan in order to make his 6-figure annual bonus. They are aggressive and they push hard.

I never really understood why it the investment banks need such optimistic appraisals. Nor do I understand why the rating agencies don’t see right through them when they review the appraisals that come with the loan documents. And since the investment banks require the appraisers to include reliance language in the appraisal saying that any investor of the security can rely on the appraisal, I don’t understand why so many appraisal firms are willing to be so ethically flexible.

Maybe once these securities start to default Andrew Cuomo will take a look here as well.

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Strong As A Sequoia: Trulia Secures Additional Funding

May 24, 2007 | 9:15 am | |

Sequoia Capital provided $10M in financing which will allow Trulia to go to the next level of their vision of becoming the “go to” place for real estate listing searches.

By partnering with the real estate industry, Trulia helps consumers find information on homes for sale using custom search criteria such as price and number of bedrooms to market trends and neighborhood data at the hyper-local level.

This is already well underway with 1.5 million monthly visitors to and a growing suite of tools for consumers to use. They have remained steadfast in their focus on the quality of the data coming in to enrich the consumer’s experience on the site. They will be able to expand staffing for technology, sales and marketing to further their efforts in a big way.

Incidentally, Sequoia Captial, as an associated brand, says a lot about their belief in Trulia’s success. A who’s who of Silicon Valley success stories come from Sequoia. From the press release:

Sequoia Capital provides startup venture capital for very smart people who want to turn ideas into companies. As the “Entrepreneurs Behind the Entrepreneurs”, Sequoia Capital’s Partners have worked with innovators such as Steve Jobs of Apple Computer, Larry Ellison of Oracle, Bob Swanson of Linear Technology, Sandy Lerner and Len Bozack of Cisco Systems, Dan Warmenhoven of Network Appliance, Jerry Yang and David Filo of Yahoo!, Jen-Hsun Huang of nVIDIA, Michael Marks of Flextronics, Larry Page and Sergey Brin of Google, Chad Hurley and Steve Chen of YouTube, Steve Goldman and Sujal Patel of Isilon Systems and Dominic Orr and Keerti Melkote of Aruba Wireless Networks.

Pete Flint and Sami Inkinen, co-founders of Trulia, invited me to join their industry advisory board in 2006 when the endeavor was less than a year old. It was an easy decision because I was a big fan before they approached me. I remain in awe of Trulia’s rapid growth and continue to be impressed with the clarity of their vision, their reliance on teamwork (yes, “Internet” provides the “I” in teamwork) and the talent of the people that work for them.

Here is the official Trulia announcement in their blog.

More fun to come.

[on Matrix] Good Appraisers, If Speed Is Only What You Need

May 23, 2007 | 8:30 pm |

Here is an appraisal-related post on our other blog Matrix: Good Appraisers, If Speed Is Only What You Need that ranks the items a growing number of mortgage clients emphasize from their appraisers.

Guess where quality ranks?

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Good Appraisers, If Speed Is Only What You Need

May 23, 2007 | 8:20 pm | |

Here’s something you might have heard at some point:

“That appraisal firm is really good.”

Ok, that compliment means different things to different people. I am going to try to rank them by what I perceive to be the majority thinking on it. Although my rankings may be biased or completely wrong, the concepts are not:

  1. Speed — This is the number one priority of many consumers of appraisal services. The appraisal is often the last item to be completed on a mortgage approval. It can make or break the deal if it is done too slowly. The proliferation of appraisal management companies, who essentially are only able to rate appraisers by their turnaround time, have created a legion of form-fillers, who can’t afford, nor do they have time, to do a credible job.

  2. Cost – Keeping appraisal costs low, is perceived as a way to make the lender or mortgage broker more competitive. Of course, the assessment of collateral of a $1M mortgage can be decided by a $100 difference in fee and a world of difference in quality. Actual payment of fees to the appraiser are often used as leverage for making the number. If the fees are require in advance, less leverage is available. In the current environment, the appraiser has been relegated to a form-filler and the process is really seen as a “have to do” with little relevance to the overall objective, hence downward pressure on fees continues.

  3. Service – Overlaps speed and cost. Making appointments with sensitivity, handling the applicants professionally, client has easy access to appropriate appraisal staff to get the report turned around in a reasonable period of time. Moral flexibility (aka having business savvy) is very important. Being able to reach out to the appraiser or their superior to negotiate the value is key.

  4. Miscellaneous. Anything can be inserted here. You name it.

  5. Miscellaneous. Anything can be inserted here. You name it.

  6. Miscellaneous. Anything can be inserted here. You name it.

  7. Miscellaneous. Anything can be inserted here. You name it.

  8. Miscellaneous. Anything can be inserted here. You name it.

  9. Miscellaneous. Anything can be inserted here. You name it.

  10. Competence in a specific market – This is a distant placement in the rankings because the person who typically orders an appraisal for mortgage purposes has a financial incentive to get a desired result in a predetermined time frame. Clients rarely ask an appraiser what their experience is in a specific market because the perception is that the process is formulaic and its simply a matter of gathering data, inserting it into a form and the result is automatically determined.

A wise appraiser I know once told me:

Everyone in a sales transaction knows the value before the appraiser does. The buyer, seller, listing agent, selling agent, seller’s attorney, buyers attorney, bank, bank’s attorney, mortgage broker, and title company already know the value. The appraiser is simply late to the party.

Here’s a sample of appraisal firms who market themselves as fast. No real discussion of quality/competance other than brochure-speak.

  • Note the frequent mention of religious background for added proof of integrity. I am not questioning a religious conviction here, but does this make up for the loss of quality that a guaranteed appraisal turn time “or your money back” could result in? I don’t see how. The clients are nearly all real estate brokers and mortgage brokers. I wonder how many have received a “low” appraisal? Its also a very large coverage area.

  • 48 Hour Appraisal More of the same but less personal and more brochure-speak. Large coverage area.

  • Next Day Appraisal Covering all of Rhode Island and parts of Massachusetts. Discounts to loan officers (why would they be speaking with them directly?) Same day service on request.

  • Aggressive Appraisals Offers 24 hour turn time. Covers most of the New York region. I have linked to them before on Matrix. I still can’t believe they use that name…Aggressive = High. So you get the best of both worlds, a high, fast appraisal.

Good grief.

Outstanding On Our Soapbox This Week: Managing To Give The Industry The Eye

May 23, 2007 | 5:13 pm |

In this week’s Sounding Bored in our other blog Soapbox post Managing To Give The Industry The Eye I muse about the latest receiver of a subpoena from New York Attorney General Cuomo and some first hand experience with a variety of appraisal management companies.


[Sounding Bored] Managing To Give The Industry The Eye

May 23, 2007 | 5:07 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week, the subpoena issued to eAppraiseIT generates some general thoughts about appraisal management companies.

New York State AG Cuomo has now added eAppraiseIT to the list. I thought it was curious that the president of eAppraiseIT was quoted saying: It’s a very good thing, what the attorney general is doing,” Merlo said. Cuomo’s office was focused on “who’s exerting the pressure” on appraisers, he said.

As an appraisal company, we made a “business” decision not to work for appraisal management firms like eAppraiseIT because their appraisal fees were roughly half that of market levels and the turnaround requirements were 2-3 times faster than the norms. It was a “business decision” on our part. I don’t see how appraisers who work for the majority of appraisal management companies don’t need to cut all corners to make it cost effective.

When Washington Mutual closed their in-house review function last year (the last national lender to do so), they went with eAppraiseIT and Lenders Service to manage the appraisal process. Unfortunately, Washington Mutual did not refer their approved appraisers to these two AMC firms and basically cleaned house after torturing all of us that were loyal to them for five years with an appraisal ordering system that did not work (remember OPTIS?). I had heard that they were having quality problems and sure enough, some of the formal panel members got calls from both firms. We didn’t bite.

US Trust Company, who is being purchased by Bank of America was a great client of ours for years. Two years ago, UST senior management decided to dump all the appraisers they worked with to save money and hired AMCO, an appraisal management company. Many firms like us, who had been working for them for 15 years since they entered the mortgage business, were talked into working for AMCO, because our same fees and turn time requirements were mandated by UST. However, AMCO eventually ignored the mandate and stopped paying our outstanding invoices. Recently, with the previous senior managers gone, UST dumped AMCO and we were eventually able to recover nearly all our accounts receivable and were back to direct ordering from UST. AMCO seems to be out of business and someone is reportedly shopping their assets. We will see if Bank of America plans to go with credible appraisers in the markets they cover. I believe they too were burned by the appraisal management company process and reverted back to in-house ordering.

With all the focus on appraisal pressure these days, I can only hope that something is done to correct the flaws in the lending system and someone actually wants an unbiased collateral assessment. Thats the goal here and hopefully the regulatory agencies won’t lose sight of that.

Until then, I’ll have to manage.

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